INSIGHT: Developing world corporates flex muscles

19 October 2007 17:05  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The significant movement of corporate capital around the world last year looked as though it would be at least matched in 2007 until the US sub prime mortgage-driven credit crunch.

The credit meltdown may have brought merger and acquisition (M&A) activity to a virtual halt but it has not dented the ambitions of many companies to expand.

And developing world corporations are increasingly prepared to flex their muscles on the international stage.

M&A activity drove investment flows in 2006 with private equity firms acting as prime movers, the UN Conference on Trade and Development (UNCTAD) said in its latest report on world investment published this week.

But UNCTAD’s data, while charting a significant increased in foreign direct investment (FDI), show that the pattern of investment is changing

Developing world multinationals are making their moves. The large transnational corporations (TNCs) from emerging economies are internationalising particularly fast.

The numbers tell the tale. In 2005, the most recent year for which data are available, the foreign sales and foreign employment of the top 100 TNCs from developing economies increased by 48% and 73% respectively, according to UNCTAD.

The companies may not be that transnational, and certainly not as widespread as their developed world counterparts, but they tend to work in a broader range of industries. The single most important industry in 2005 was electrical and electronic equipment, especially for a large number of companies from Asia.

And not only are the larger Asia TNCs on the march but the geographical pattern of foreign direct investment (FDI) is changing.

The relationship between the UK and the US dominates but has changed.

In 2005, the largest bilateral outward FDI stock was that of the UK and the US - at $282bn (€197bn); 20 years earlier, it was the reverse.

But whereas in 1985 such bilateral relationships dominated investment flows the situation now is multi-faceted, UNCTAD says.

"While FDI inflows in developed countries rose by 45% - well over the rate of the previous two years - to reach $857bn, flows to developing countries and the transition economies attained their highest levels ever: $379bn - a 21% increase over those in 2005 - and $69bn - a 68% increase - respectively," it adds.

The US was the leading host country last year, followed by the UK and France. Among the developing economies the largest inflows went to China, Hong Kong and Singapore, and among the transition economies to the Russian Federation.

Increased cross-border M&A activity has supported the rise in global FDI.

M&A deals rose 23% in value in 2006 to reach $880bn and 14% in number to 6,974.

The growth was driven by higher stock market valuations, rising corporate profits and favourable financing conditions. By contrast with the M&A boom of the late 1990s, this time transactions have been predominantly financed by cash and debt, rather than through an exchange of shares.

As many as 172 mega deals (or deals worth omore than $1bn) were recorded in 2006, accounting for about two thirds of the total value of cross-border M&A.

The UN data show how important private equity has been to the rise in FDI but also how FDI patterns are changing. In 2006, private equity firms were involved in cross-border M&As valued at $158bn, an 18% increase over 2005, UNCTAD says.

Undoubtedly, debt has helped fuel M&A and FDI over the past year and more. Both may, however, have masked the growing influence on new TNCs from Asia and elsewhere.

The message is that global investment flows are shifting, with some developing nations playing an increasing important role in transnational investment.

($1 = €0.70)

By: Nigel Davis
+44 20 8652 3214

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