India’s Tata group was putting the final touches on a proposed $2.5 billion investment in power, steel, fertilizer and coal projects in Bangladesh as Global Finance went to press. The company warned that it may move the projects elsewhere if its terms are not accepted, but regardless of the outcome, the proposed deal highlights a growing trend in foreign direct investment in emerging markets. An increasing share of the FDI is coming from countries in other emerging markets, often neighboring nations.
So-called south-south FDI now accounts for one-third of all FDI going to developing countries and is growing much faster than north-south FDI, according to a study by Dilek Aykut and Joseph Battat of the World Bank. This is good news, they say, because south-south FDI typically reaches very poor and remote developing countries.
Multinational companies based in emerging markets are more familiar with the often-difficult local conditions and practices. They also like to invest close to home, although some of the larger multi-nationals from the south have become global and have made significant south-north investments. Mexico’s Cemex, for example, acquired British construction-materials company RMC last year in a $4.1 billion cash transaction that included the assumption of debt.
Overall FDI flows to developing countries continued to rise in 2005, gaining 13% to a record $274 billion, according to UNCTAD data released in January. For the first time since 1999, however, FDI to China, the largest recipient of any developing country, did not increase. FDI to South Korea and Malaysia fell last year. In Latin America, such major economies as Mexico, Brazil and Chile all registered smaller inflows of FDI than in 2004. In Russia, FDI more than doubled, however, to $26 billion last year, as high oil prices stimulated inward investment.