Globalization’s Reverse Investment Trend

Stephen DeAngelis

January 25, 2008

The Economist points out a trend that critics of globalization might find surprising — companies founded in emerging market countries aggressively acquiring companies in richer nations [“Wind of change,” 12 January 2008].

“Last month Hansen Transmissions International, a maker of gearboxes for wind turbines, was listed on the London Stock Exchange. Nothing noteworthy about that, you might say, despite the jump in the share price on the first day of trading and the handsome gain since: green technology is all the rage, is it not? But Hansen exemplifies another trend too, which should prove every bit as durable: the rise of multinational companies from emerging economies. Its parent is Suzlon, an Indian firm that began life as a textile manufacturer but is now among the world’s five leading makers of wind turbines. Along the way, Suzlon has acquired not only Hansen, originally Belgian, but also REpower, a German wind-energy firm, spending over $2 billion on the pair. The world is now replete with Suzlons: global companies from emerging economies buying businesses in rich countries as well as in poorer places. Another Indian company, Tata Motors, looks likely to add to the list soon, by buying two grand old names of British carmaking, Jaguar and Land Rover, from America’s enfeebled Ford. As a symbol of a shift in economic power, this is hard to match.”

Critics have insisted that globalization is all about the rich exploiting the poor and economists teach that globalization is about capital moving from rich nations to poorer ones, but this trend bucks those notions.

“Economic theory says that this should not happen. Richer countries should export capital to poorer ones, not the other way round. Economists have had to get used to seeing this turned on its head in recent years, as rich countries have run large current-account deficits and borrowed from China and other emerging economies (notably oil exporters) with huge surpluses. Similarly, foreign direct investment (FDI)—the buying of companies and the building of factories and offices abroad—should also flow from rich to poor, and with it managerial and entrepreneurial prowess.”

Economic theorists, however, can take a sigh of relief. The Economist does report that, for the most part, economic theory still holds.

“According to the UN Conference on Trade and Development (UNCTAD), in 2006 the flow of FDI into developing economies exceeded the outflow by more than $200 billion. But the transfer of finance and expertise is by no means all in one direction. Developing economies accounted for one-seventh of FDI outflows in 2006, most of it in the form of takeovers. Indian companies have done most to catch the eye, but firms from Brazil, China and Mexico, in industries from cement to consumer electronics and aircraft manufacture, have also gone global. Up to a point, emerging-market multinationals have been buying Western know-how. But they have been bringing managerial and entrepreneurial skill, as well as just money, to the companies they buy: British managers bear grudging witness to the financial flair of Mexican cement bosses; Boeing and Airbus may have learnt a thing or two from the global supply chains of Brazil’s Embraer.”

The article reports that although this sounds surprising, it shouldn’t be. This is only the latest wave of poor countries gaining a foothold in globalization and then climbing their way up the economic ladder.

“Perhaps no one should be surprised. Half a century ago, Japan was a poor country: today Sony and Toyota are among the best-known and mightiest companies on the planet. South Korea and Taiwan are still listed as developing countries in UNCTAD‘s tables, but that seems bizarrely outdated for the homes of Samsung and Taiwan Semiconductor. Now another generation is forming. To its critics, globalisation may be little more than a licence for giant Western companies to colonise the emerging world, yet more and more firms from poorer economies are planting their flags in rich ground.”

This week’s bleak economic developments, brought on by America’s credit woes, seems like a strange backdrop to be talking about economic prosperity; but the rest of the world is beginning to realize that basing their economic fortunes on American consumerism makes them vulnerable. Even Secretary of State Condoleezza Rice’s assurance in Davos, Switzerland, that the U.S. will remain an engine of economic growth, is likely to change how many nations see the future [“Rice touts U.S. ‘engine of growth’,” Associated Press, Washington Times, 24 January 2008]. Like any good portfolio manager, they will continue to diversify their customer base because it is in their best interests to do so. To build that customer base, emerging market countries must also become consumers as well as suppliers. The article notes, however, that the liberalization of free trade necessary to make this happen is meeting resistance — even among those it could help the most. The Economist continues:

“The Doha round of global trade talks has been bogged down, partly in squabbles about farm trade but also over industrial tariffs in the emerging world. The services negotiations are half-hearted and direct talks on FDI were ruled out long ago, largely because of developing countries’ fears about rich invaders. And the gains forgone are considerable: a new book by the World Bank estimates that reforming services in developing countries could raise their growth rates by a percentage point. Were OECD countries to allow temporary immigration of skilled workers in service industries, the global gains might exceed $45 billion. A few emerging-market giants—notably India’s software firms—have been prepared to stand up for liberalisation. But most have not made their voices heard. How sad for free trade: such companies would provide much better illustrations of the success of globalisation than the familiar Western names do (unless you think Coca-colonisation sounds really cool). And how short-sighted of them. Even if some of these adolescents grew up behind tariff barriers, that represents their past: their future will surely lie in global markets. If the Doha round fails, the next opportunity may be a long time coming.”

As I have stressed before, globalization will only continue to benefit the world’s economy if the relatively free movement of capital, resources, and people is permitted. Such freedom of movement is by no means inevitable. There are debates about immigration taking place throughout the developed world. And legislatures and parliaments are now concerning themselves with investments being made by Sovereign Wealth Funds, mainly controlled by oil rich nations. With dark economic clouds gathering on the horizon, now is not the time to put the brakes on globalization.