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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 143 March 16, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
*The escape motivation of emerging market multinational enterprises*
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by
Alvaro Cuervo-Cazurra and Ravi Ramamurti* <#14c33258911a9bc8__edn1>
Why have relatively poor emerging markets been able to spawn so many global
firms in the past two decades?[1] <#14c33258911a9bc8__edn2> Part of the
explanation is that some firms in these countries have honed capabilities
in their home markets that are of value in other emerging economies. But
why have these firms also made substantial investments in advanced
countries? Research suggests that “pull” factors, such as the large markets
and wealthier consumers of advanced countries, play an important role. In
this *Perspective*, we highlight some “push” factors that may have also
driven emerging-market multinational enterprises (EMNEs) to invest in
advanced countries. We label the resulting outward foreign direct
investment (OFDI) as *escape investments*, which are motivated by the
desire to escape the home country’s weak institutions and economic
underdevelopment.
Let us begin with the problem of weak institutions in emerging markets,
which results in *institutional escape *OFDI. For instance, laws may be
ambiguous in emerging markets or their enforcement in courts may be weak.
In non-democratic countries, the judiciary may be subordinate to
politicians, leaving firm owners at the mercy of unpredictable political
forces. In other cases, minority communities may own a disproportionate
share of national assets, as Chinese-Thais do in Thailand, the
Chinese-Malays do in Malaysia or whites do in South Africa. In all these
instances, private owners who feel insecure about their property rights may
conclude that it is prudent to diversify their assets by investing in
countries with more secure property rights and a stronger rule of law. This
may have played a part, for instance, in the decision of ThaiBev, owned by
a Chinese-Thai billionaire, to bid $8.8 billion for the liquor
multinational enterprise, Fraser & Neave. Similarly, Russian oligarchs are
believed to have expanded their companies’ assets in Western Europe to
avoid the expropriation hazards that befell companies like Yukos. Some of
these investments may be routed to third countries through offshore
financial centers (e.g., Channel Islands) whose primary purpose is to
reduce transparency in investments; OFDI in offshore financial centers
accounts for between one-quarter to two-thirds of the total OFDI stock of
the BRICs (Brazil, Russia, India, China). Some of these escape investments
may become later round-trip investments, with EMNEs investing at home from
offshore financial centers to benefit from incentives and regulations
available to foreign investors.
Another category of escape investments is rooted in managers aiming to
reduce the negative country image of emerging markets, compared to advanced
economies, which may negatively affect the international competitiveness of
their firms; we call these *discrimination escape*. The discrimination in
question may arise from several factors, such as: (1) the assumption by
governments and consumers in advanced countries that products from emerging
markets are produced by workers who have few rights, are paid too little
and operate in unsafe conditions; (2) that products made in emerging
markets must be inferior in quality to those made in advanced countries
because these economies are less technologically sophisticated or have
lower product-safety standards than advanced economies; and (3) that
companies located in emerging markets are riskier than firms located in
advanced countries because of higher macroeconomic volatility and poorer
corporate governance standards and should therefore incur a higher cost of
capital. In all these instances EMNEs may see value in shifting operations
or moving headquarters to an advanced country. One example of
discrimination escape is the acquisition of Western brands by EMNEs, as
Tata Tea did with the Tetley label, to overcome the negative image of their
countries of origin. Another example is the acquisition of operations in
Spain, which enabled the Mexican cement producer Cemex to lower its
borrowing cost, a significant advantage in the capital-intensive cement
business, even though much of its assets were located in emerging markets.
Yet another example is Mittal Steel, which claimed during its hostile bid
for Luxembourg-based Arcelor that it was a European company, because it was
registered in the Netherlands and run from London, even though it started
in Indonesia and was controlled by an Indian-born owner.
The policy implication of our analysis is not that governments should
forbid escape investments. Rather, they should reduce the incentives to
engage in it by improving the domestic business environment. Measures that
would help include strengthening the rule of law, improving the country’s
brand, weeding out unnecessary regulations, pursuing market-friendly
policies, strengthening incentives for innovation, and protecting
intellectual property rights. Such reforms would not only reduce escape
OFDI but also improve the general business climate and increase inward FDI,
and support the upgrading of the competitiveness of domestic firms that
enable them to expand abroad based on the skills honed in the home market.
------------------------------
* <#14c33258911a9bc8__ednref1> Alvaro Cuervo-Cazurra (
[log in to unmask]) is Professor of International Business and
Strategy at Northeastern University; Ravi Ramamurti ([log in to unmask])
is Distinguished Professor of International Business and Strategy and
Director of the Center for Emerging Markets at Northeastern University. The
authors are grateful to Victor Chen, Marjan Svetlicic and Aldo Musacchio
for their helpful peer reviews. *The views expressed by the authors of this
**Perspective** do not necessarily reflect the opinions of Columbia
University or its partners and supporters. **Columbia FDI Perspectives**
(ISSN 2158-3579) is a peer-reviewed series.*
[1] <#14c33258911a9bc8__ednref2> For a full discussion, *see* Alvaro
Cuervo-Cazurra and Ravi Ramamurti, *Understanding Multinationals from
Emerging Markets* (Cambridge: Cambridge University Press, 2014).
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Alvaro Cuervo-Cazurra and Ravi Ramamurti, ‘The
escape motivation of emerging market multinational enterprises,’
Columbia FDI Perspectives, No. 143, March 16, 2015. Reprinted with
permission from the Columbia Center on Sustainable Investment
(www.ccsi.columbia.edu <http://www.ccsi.columbia.edu>).” A copy should
kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Adrian Torres, [log in to unmask] or [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 142, Louis Brennan, “The challenges for Chinese FDI in Europe,”
March 2, 2015.
- No. 141, Sophie Nappert, “The other side of transparency,” February
16, 2015.
- No. 140, Axel Berger and Lauge N. Skovgaard Poulsen, “The
Transatlantic Trade and Investment Partnership, investor-state dispute
settlement and China,” February 2, 2015.
*All previous **FDI Perspectives** are available at
**http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/
<http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/>**. *
*Other relevant CCSI news and announcements:*
- *From January to April 2015, *CCSI will host its ninth annual
International Investment Law and Policy Spring Speaker Series. This year’s
speakers include (in the order of their talks) Josh Kallmer, Diane
Desierto, Giorgio Sacerdoti, Emmanuel Gaillard, Eloise Obadia, Claudis
Frutos-Peterson and Xavier Carim. The series will be co-sponsored by
Crowell & Moring LLP, Curtis, Mallet-Prevost, Colt & Mosle LLP and
Investmentclaims.com, with media sponsor Transnational Dispute Management
(TDM), and moderated by Ian Laird and Borzu Sabahi. Select presentations
will be webcast; please see our website
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for
the schedule and more details. *No registration is required.*
- *On July 13-17, 2015, *CCSI will host its first Executive Training on
Investment Arbitration for Government Officials
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at Columbia University. Through an intensive week-long course, government
officials involved in managing investment treaty disputes or negotiating
investment treaties will increase their knowledge of crucial procedural and
substantive aspects of investment law. Sessions will be taught by leading
academics and practitioners and will be tailored to uniquely address issues
relevant to governments. *For more information about the program,
please download the 2015 Executive Training Brochure here
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and
application here
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The application deadline to be considered for admission is April 15, 2015.*
- *On April 15, 2015*, The Minister of Finance of Norway, Siv Jensen,
will talk about the management of the Norwegian sovereign wealth fund, with
an emphasis on sustainable and ethical investing policies. The talk, with
introduction by Dean Gillian Lester, is sponsored by CCSI along with the The
Tamer Social Enterprise Program
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at Columbia Business School
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in
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The talk, followed by a Q&A, will be held in room 1501, International
Affairs Building (School of International and Public Affairs). Registration
is free, but required. *To register, please go here
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2015 Columbia Center on Sustainable Investment (CCSI), All
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