New Voices in Investment: How Emerging Market Multinationals Decide Where, Why and Why Not to Invest

Foreign Direct Investment
Financial Economics

In the last three decades, developing and emerging economies have become an increasingly important source of foreign direct investment (FDI). Outflows from developing countries increased from 147.3 billion USD in 2000 to 454 billion USD in 20131. Indeed, one out of every three dollars invested abroad in 2013 originated in multinationals from developing and emerging countries. The impressive rise of Emerging Markets Multinationals (EMMs) has generated significant interest among scholars and policymakers. Yet, we still have a limited understanding of these firms’ characteristics, motivations, and strategies. Why do EMMs decide to invest abroad? In what markets do they concentrate their investments and why? And how do their strategies and needs compare to those of traditional multinationals from developed countries?

A forthcoming study, “New Voices in Investment’ addresses these questions using a World Bank and UNIDO-funded survey of 713 firms from four emerging economies: Brazil, India, Korea, and South Africa (Gómez-Mera et al., 2014). In contrast to previous surveys of foreign investors, the sample of the “Potential Investor Survey” includes not only investors, but also firms that considered investing and decided not to, and companies that never considered establishing a foreign presence. This novel survey design reveals differences in incentives and obstacles faced by investors, potential investors, and non-investors. This distinction matters enormously, particularly in identifying binding constraints on foreign investment among those that never managed to carry out the cross-border investment.2

A number of findings emerge from the study. First, a clear pattern of regional concentration emerges from our data, and particularly so for services sector investment. While some analysts have stressed the greater geographical dispersion of the recent wave of outward FDI flows from emerging economies, we find that firms in our sample invest more heavily in neighboring countries, where they face lower informational costs and cultural barriers. Yet, there is cross-country heterogeneity. Firms from India appear to be more globalized than their counterparts from Brazil, South Africa, and Korea, investing more heavily in East Asia and Europe than in the South Asian region (Figure 1).

Figure 1: Investment Destinations by Country of Origin
Investment Destinations by Country of Origin

Second, much like developed-country multinationals in previous waves of FDI expansion, emerging-market investors are market and efficiency seeking. For almost 70 percent of investors, accessing new markets was the main motivation for investing abroad. Instead, 20 percent of investors were motivated by lowering production costs and thus gaining efficiency, and less than 5 percent of firms invested abroad to gain access to natural resources.3

The interest of EMMs in taking advantage of opportunities for market and business expansion in developing countries is also evident when analyzing the factors that influence their location decisions. Almost 36 percent of investors selected the size of the domestic and regional markets as the top factor influencing their choice of an investment destination. For 30 percent of the firms surveyed, the presence of a variety of potential business counterparts was the most important location factor. A sizeable proportion of respondents (12 percent) worried primarily about the cost of labor. By contrast, EMMs seem less concerned about non-economic factors, such as political risk and cultural affinities, when deciding where to invest (Figure 2).

Figure 2: Location Factors by Broad Categories*
Location Factors by Broad Categories
*Percentage of investors that selected each category as a top location factor

Does this mean that EMMs are relatively immune to political risk or regulatory uncertainty? It has been argued that multinationals from EMMs have an ‘adversity advantage’ due to being exposed to those conditions in their home countries in the first place. Yet, when comparing the importance attributed to political risk by actual and potential investors, a different picture emerges. Only 6 percent of investors and 10 percent of those considering investing abroad ranked political risk and cultural factors as top location factors, more than 20 percent of non-investors identified these as the main considerations influencing the decision not to invest. Attitudes to political risk and cultural dissimilarities determine self-selection into investment, discouraging some firms from entering foreign markets. Those emerging market firms that decide to invest abroad may be those that are better endowed to cope with political risk and cultural dissimilarities.

These findings have implications for policymakers seeking to increase inflows of FDI. By deepening integration in the global marketplace through trade and investment and expanding opportunities for participation in regional production networks, governments of developing countries can help increase investment by existing firms. Yet, attracting new firms requires addressing other binding constraints, such as poor governance, a weak regulatory and legal environment, and high informational and transaction costs associated with cultural specificities. Our findings suggest that a progressive reduction of transaction costs and political risk could turn potential investors into actual investors. This is crucial, given that much of the growth of emerging markets FDI happens along the extensive, rather the intensive margin.

1. Source: UNCTAD.

2. As Hausmann and Velasco (2005) note, asking only camels (or investors) about the living conditions in the desert (or a host country) will give you a completely different idea than asking hippos (or potential investors), which however, are not readily available in the desert. Our survey addresses this problem by interviewing potential investors (“hippos”) in their countries of origin.

3. By design, firms in primary and mining sectors were excluded from the survey.


Gómez-Mera, Laura, Thomas Kenyon, Yotam Margalit, Jose Guillherme Reis and Gonzalo Varela, 2014. New Voices in Investment: A Survey of Investors from Emerging Countries. Washington DC: World Bank Publications.

Hausmann, Ricardo, and Andres Velasco. 2005. “Slow Growth in Latin America: Common Outcomes, Common Causes?” Working Paper.

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