The worst appears to have passed for emerging markets. 2016 may have been the most difficult year of the decade, but for most E20 countries,* short-term forecasts are on the way up for 2018. Even for countries that experienced declines in growth in the past two years, for example, Brazil, Turkey, Nigeria and Russia, short-term prospects have improved.

The E20 countries now account for almost half of global GDP—48 percent in 2017 on a GDP at purchasing power parity basis, compared to 30 percent in 2000. This surge illustrates the impressive shift in the world economy in less than two decades, as EMs (Emerging Markets) became drivers of global GDP growth.

Today, the E20 countries not only serve as centers of production or trading hubs for advanced economies, but also as massive consumer markets.

The increasing clout of EMs—and their growing promise in the post-2008 crisis era—has manifested itself in the realm of multilateral institutions, wherein EMs have shown unprecedented leadership. Even during the post-2015 slowdown observed in a number of E20 economies, two new multilateral financial institutions of consequential size and scope were created by emerging economies: the Asian Infrastructure Investment Bank, a Chinese initiative; and the New Development Bank, an effort championed and owned by the BRICS nations—Brazil, Russia, India, China and South Africa—to strengthen cooperation among themselves and beyond.

The advent of new multilateral development banks is emblematic of a decentralization of power from the Bretton Woods system. The formation of these institutions is a sign of the shift in soft power distribution beyond the G-7.

Outward Investment: Key for Emerging Multinationals

A detailed analysis of the composition of foreign direct investment (FDI) flows from emerging economies by geography and industry, in particular outward foreign direct investment (OFDI), is difficult due to the lack of relevant and readily available data.

However, detailed information for announced greenfield projects and mergers and acquisitions (M&As) offers insight into the evolution of emerging market multinational corporations’ (eMNC) overseas expansion:

• While eMNCs engage in both greenfield and M&As to enter overseas markets, the former has long been the preferred mode of entry. Since the global financial crisis, however, M&As have grown in importance, in particular for two of the largest E20 outward investors, South Korea and China, where the amount of announced M&A deals tripled between 2014 and 2016.

In today’s integrated global economy, competition in emerging markets—the new centers of middle-class growth—is likely to become more intense.

• Both in greenfield FDI and outbound M&As, Latin America is receding in relative terms, just as Asia—driven by China—gains prominence. Meanwhile, the U.S. and other major developed countries have not kept up with the dynamic pace of growth in outward M&As relative to Asia.
• Greenfield FDI by emerging economies is predominantly of a South-South nature: About 70 percent of their greenfield FDI projects is still directed toward developing and emerging economies in Asia, Africa and Latin America. The share of developed countries in the E20 greenfield FDI portfolio, however, has increased, especially since the global financial crisis.
• In contrast to greenfield FDI, outbound M&As by eMNCs had long been largely directed toward Europe and North America (about 60 percent of the value of M&A deals) and have remained so over the years. The volume of M&A deals by E20 firms targeting these regions has increased remarkably in value terms since the global financial crisis. In the process, Europe has taken the lead as the primary target of M&As by eMNCs (36 percent), followed by North America.
• Overall, both in greenfield FDI and M&As, available data suggests the growing attractiveness of service-based and consumer-related industries for eMNCs, while heavy or more traditional industries, such as energy (oil, coal and gas) or materials (such as metals), either stagnate or decline in importance.

Beyond Size

In today’s highly integrated global economy, competition for the consumer markets of EMs—the new centers of middle-class growth—is likely to become even more intense in the future as established multinationals, often from developed economies, eye these large and increasingly prosperous markets.

In this context, outward investment is not only a way for eMNCs to access overseas markets, but also to develop new products and acquire global brand recognition. This is important for consumers in these markets as they are gaining purchasing power and aspiring to higher value-added products.

Therefore, OFDI is becoming key for eMNCs seeking to protect or enhance their domestic or regional market positions. While eMNCs are still competing largely based on prices, they are also gaining global brand recognition, which will stand them in good stead.

*E20 countries comprise China, India, South Korea, Saudi Arabia, Mexico, Indonesia, Poland, South Africa, Argentina, Brazil, Russia, Turkey, Nigeria, Iran, Egypt, Philippines, Malaysia, Thailand, Colombia and Chile.