Multilatinas in the Global Economy: Trends and Issues

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Multilatinas in the Global EconomyTrends and
Issues
Javier Santiso Chief Development Economist
Deputy Director OECD Development Centre
OECD Expert Meeting Paris ? March 27th 2006
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The emerging multilatinas a global trend and a
global issue

• The value of outward FDI stock from developing
  countries rose from 130 billion in 1990 to 860
  billion in 2003.
• South-South FDI accounts for one third of all FDI
  going to developing countries. These flows
  increased from 15 USD billion in 1995 to 50 USD
  billion in 2003.
• In most cases, these deals involved direct
  investment in other developing countries. But
  South-North FDI is also on the rise up from 1
  billion in 1995 to 7 billion in 2003.
• In 2005, more than 50 of the MA operations in
  Latin America have been driven by local firms. In
  Argentina, 60 of the 62 MA operations conducted
  in 2005 8USD 3,5 bn) have been driven by local
  capital (36 from Brazil).

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Emerging multilatinas and emerged multinationals
more of the same?

• According to the main stream of international
  business literature on the topic of
  multinationals from emerging countries, there are
  generally five motivations for multinationals to
  invest abroad
• They seek resources, technology, markets,
  diversification, and strategic asset (e.g.,
  Dunning, 1993 Khan, 1986 Wells, 1983).
• This strategy tend to pay EMNCs on average
  perform better than their respective country
  market indices, a widely used EM benchmark,
  SP500 and, global market index (MSCI-World)
  during the period 1996-2003 (Aybar et al., 2005).
  
• These firms on average earn 13.21 return on
  assets, 8.97 return on equity, and 11.96 return
  on invested capital.

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Brazilian and Mexican Firms have started to
expand overseas only recently
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The emerging multilatinas A lonely Brazilian
and Mexican race?
The 50 more profitable firms
Number of firms in Forbes 2000
35
30
25
20
15
10
5
0
India
Spain
China
Brazil
Mexico
Chile
Source Forbes 2000
Source America Economia 2005
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Brazilian Firms have started to expand overseas
global or pure regional players?
Top 100 firms in Latin-America
50
45
40
40
30
20
8
10
3
1
1
1
1
0
Brazil
Mexico
Chile
Argentina
Ecuador
Colombia
Peru
Venezuela
Source America Economia 2005
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Why are Multilatinas expanding abroad?Risk
diversification versus market seeking

• Push factors Competition as a blessing in
  disguise.
• Between 1991 and 2001, the ownership of the 500
  largest companies in Latin America changed
  dramatically
• With non Latin multinational ownership growing
  to 39 from 27. The rising global competition
  pressured local Latin companies.
• The most ambitious are aiming to compete with the
  worlds largest companies beyond Latin America.
  However to date only a very happy few local Latin
  firms have taken on the world or tried to create
  large multinationals.

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The cost of capital

• Upon securing top positions at home, some Latin
  firms started to expand more aggressively abroad.
• Typically they followed a multilatina cycle
  starting to increase exports to neighboring
  countries then establishing alliances to obtain
  access to distribution channels and subsequently
  setting up small operations abroad or making
  acquisitions.
• But this ultimate stage hard to reach. With the
  exception of a very happy few (Cemex)
  multilatinas remain heavily constrained by the
  cost of capital to expand abroad.

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The Center and the Periphery

• Emerging Markets only represent 7 of MSCI
• and 75 of world population.
• and 40 of world GDP.
• The ratio of market capitalization / GDP is on
  average around 30 (80 in OECD countries).
• More and more OECD companies are searching for
  yield in emerging markets. Some of them became
  true multilatinas (Spanish companies).
• More and more non OECD companies are moving
  abroad and looking for MA opportunities in
  investment grade countries. Mittal is only the
  tip of the iceberg.

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The Center and the Periphery

• The biggest challenge posed by these
  up-and-coming rivals will not be in Western
  markets, but within developing nations. That's
  the arena of fastest global growth.
• Through long experience working in a Third World
  commercial environment, companies such as India's
  Bajaj Group (transportation), Egypt's Orascom
  Telecom, and Turkey's Sabanci Holdings
  (packaging, tires) will have an advantage in
  supplying goods and services that are cheaper,
  simpler to operate, and more effectively
  distributed than those of many Western rivals.
• But what about multilatinas moving ahead to tap
  the growing US-Hispanic market?
• But what about MA activity involving takeovers
  by non-OECD multinationals in OECD countries?

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The Center and the Periphery

• In recent years, South-South deals but also
  North-South and South-North deals have been
  growing in number and size.
• Examples such as the merger between South African
  Breweries and Miller (and later the takeover of
  Bavaria by SAB Miller), the takeover of
  International Steel Group by Mittal of India, or
  the acquisition of the IBM PC business by Lenovo
  of China, bear testimony to the rapid emergence
  of true global players from emerging countries.
• What are the main obstacles to increased flows of
  investment from developing to developed
  countries?

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The search for global champions a clash of
civilizations or a brave new world?
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Thank youfor your attention!