The rise of BRICS in global investment

A new UN agency report charts the growing importance of the BRICS countries as both sources and recipients of investment flows.

by Kanaga Raja

GENEVA: The BRICS countries – Brazil, Russia, India, China and South Africa – have played an important role in the current pattern of global investment, and are emerging as major recipients of foreign direct investment (FDI) as well as increasingly important outward investors, according to the United Nations Conference on Trade and Development (UNCTAD).

In a special edition of its Global Investment Trends Monitor focusing on BRICS, released on 25 March, UNCTAD said that over the past decade, FDI inflows to BRICS more than tripled to an estimated $263 billion in 2012. As a result, it added, their share in world FDI flows kept rising even during the crisis, reaching 20% in 2012, up from 6% in 2000.

The BRICS countries have also become important investors – their outward FDI has risen from $7 billion in 2000 to $126 billion in 2012, or 9% of world flows. Ten years before, that share was only 1%.

According to UNCTAD, BRICS countries are becoming significant investors in Africa, including in manufacturing and services. Although Africa accounts for only 4% of BRICS FDI outflows, BRICS countries have joined the ranks of top investing countries in Africa; in 2010, the share of BRICS in FDI inward stock to Africa reached 14% and their share in inflows reached 25%.

Inflow and outflow trends

Analyzing inward FDI patterns in BRICS, the UNCTAD report underlined that the big jump in FDI inflows to BRICS took place from 2003 to 2008, growing from $77 billion to $281 billion, with China and Russia accounting for the lion’s share of growth.

“FDI flows to BRICS remained relatively resilient to the crisis compared to other countries, with a decline in inflows by 30% in 2009 (compared to 40% for developed countries), and a much more rapid recovery to peak levels.”

As a consequence, the share of FDI flows to BRICS in the world total kept rising during the crisis and reached a record of 20% in 2012, over three times more than the 6% share registered in 2000.

Almost half (46%) of FDI flows to BRICS go to China, followed by Brazil (25%), Russia (17%) and India (10%).

With the rapid rise in inflows, the FDI stock in BRICS countries is increasing as well, standing at 11% of global FDI stock and catching up with developed economies.

As for outward FDI trends in BRICS, the report found that the rise in FDI outflows started slightly later than that of inflows, jumping from $31 billion in 2005 to $93 billion in 2006.

BRICS investors also remained resilient to the crisis, with outflows dropping by only 26% in 2009, compared to 41% for the world as a whole.

As a result, said UNCTAD, the role of BRICS as investors increased significantly, accounting for 9% of world outflows in 2012 – 10 years before, that share was only 1%.

“China and the Russian Federation account for the lion’s share of flows from the grouping, with 54% and 40% respectively.”

The report also examined the destinations for outward FDI from the BRICS countries, disregarding investment flows to offshore financial centres, which it said are significant.

From this, it observed that a significant share of BRICS outward stock is in developed economies (42%), with the bulk going to the European Union (34%).

“These investments are in large part driven by market-seeking motives, and cross-border M&As [mergers and acquisitions] are a key mode of entry with M&A purchases in developed countries amounting to $105 billion in the 2010-2012 period.”

It said that intra-regional FDI is very important for BRICS countries, with neighbouring economies accounting for 70% of outward stock in the case of China and 40% in the case of Brazil in 2011. These investments often take place in the context of regionally integrated production networks (or regional value chains).

Intra-BRICS investment

It however found that FDI between BRICS is relatively limited. FDI stock to other BRICS accounts for only 3.2% of Indian outward stock, 2.2% of Chinese stock, and 0.3% of Russian and Brazilian outward stocks.

And the share of FDI outward stock holdings by BRICS countries in other BRICS countries is only around 2.5%, compared to the 10% that BRICS represent in world inward stock.

While bilateral FDI stock among BRICS countries is limited, it has grown fast over the past decade, from $260 million in 2003 to $29 billion in 2011. BRICS outward stock in other BRICS countries increased from 0.1% in 2003 to 2.5% in 2011.

In terms of individual BRICS countries, the report found that Brazilian direct investment in other BRICS countries is modest ($0.5 billion). Bilateral economic relations are the strongest with China, but they are mainly driven by trade, amidst a boom in Brazilian exports of primary goods to China in recent years.

The presence of Brazilian companies in China is limited, and their main business activity is the provision of services (such as finance, business consulting and trading), sales and distribution of their products, and procurement.

China is the largest investor among the BRICS countries, with a total of nearly $425 billion in FDI stock worldwide. However, its outward FDI stock to other BRICS countries accounts for only 2.2% of the total.

South Africa and Russia have been important targets of outward FDI from China. With FDI stocks of $4.1 and $3.8 billion respectively by the end of 2011, the two countries were the eighth and ninth largest recipients of Chinese FDI. The services sector accounts for a major share of Chinese FDI stock in these two countries.

According to the report, at the stock level, the amounts of Chinese FDI in Brazil and India were comparably small, at $1.1 billion and $657 million respectively, but their recent flows have been high, in particular in the Brazilian M&A market, only behind acquirers from the United States.

Total outward FDI stock of India in other BRICS countries amounted to $2 billion by the end of 2011, of which Russia accounted for three-fourths. The amounts of Indian FDI stock in Brazil, China and South Africa were $74 million, $229 million and $194 million respectively.

Indian transnational corporations (TNCs) in the IT services industry, such as Infosys and Wipro, have expanded their  business  activities  into  Brazil and China through greenfield investment. Indian companies have also been active in extractive industries in Russia and manufacturing in South Africa. For example, India’s state-owned ONGC Videsh participated in various oil and gas exploration projects in Russia, and Tata Group  has  invested  in automotive and ferrochrome plants in South Africa.

One-fifth of the outward FDI stock of South Africa was located in the “BRIC” in 2011, mainly in China. Russia is the second largest, followed by India and Brazil which have attracted marginal volumes of investment from South Africa.

With the 20% BRIC share in 2011, this share was only slightly less than the country’s outward stock in other African countries, which stood at 23%.

“In terms of sectoral distribution, South African outward FDI in BRIC is concentrated in mining, infrastructure and construction, and finance and business services.”

Recently, said UNCTAD, Russian TNCs have found their way to the BRICS countries, increasing their stock to $1.1 billion.

“In contrast to TNCs from other BRICS countries, the main aim of Russian TNCs is not simply to secure the supply of raw materials to their home country, but also to expand their control over the value chains of their own natural resources, to build sustainable competitive advantages vis-a-vis other firms, and to strengthen their market positions in key developing countries.”

For example, Rosneft formed a joint-venture with CNPC (China) to develop oil extraction projects in Russia and downstream operations in China.

Investments in Africa

The UNCTAD report emphasized that BRICS countries are significant investors in Africa. Their share in the continent’s FDI stock and flows reached 14% and 25% respectively in 2010.

“This trend is likely to be reinforced in the future. The rapid economic growth and industrial upgrading currently taking place in BRICS countries provide ample opportunities for their firms to seek opportunities to invest in Africa, including in manufacturing and services sectors.”

Indeed, said UNCTAD, the rise of FDI in manufacturing, which has positive consequences for job creation and industrial growth, is becoming an important facet of South-South economic cooperation.

Data on greenfield investment – the main mode of investment in Africa – confirm the significance of BRICS countries to investment projects in Africa. The share of this group of countries in Africa’s total value of greenfield projects rose from 19% in 2003 to more than a quarter in 2012.

Four of the BRICS countries – South Africa, China, India and Russia – have grown to rank among the top investing countries in Africa on FDI stock and flows.

When measured in value, one-fourth of the investments in the region from BRICS are in the primary sector, and often involve state-owned enterprises such as CNOOC (China) and ONGC (India).

The largest numbers of investment projects undertaken by Chinese and Indian investors, however, are in the services and manufacturing sectors; 80% of Indian investments in eight East African countries, for example, are in these sectors.

UNCTAD said: “While labour costs in Africa may not differ significantly from those in the firms’ home economies, the duty-free, quota-free access of African countries through initiatives such as the United States’ African Growth and Opportunity Act (AGOA), the European Union’s Everything But Arms (EBA) and China’s zero-tariff measures for African LDCs (least developed countries) or selected African countries have generated some manufacturing or efficiency-seeking investment.”

Highlighting patterns for individual BRICS countries, UNCTAD said that although relatively limited, Brazilian FDI to Africa has been on the rise in recent years, with public financial institutions playing an important role in bringing the country closer to Africa.

“Among these, the Brazilian Development Bank (BNDES) deserves special mention as its incentives and disbursements to Sub-Saharan Africa have strongly increased over the past decade. It has played a key role in the expansion of Brazilian businesses in the new African ethanol industry, in countries like Angola, Ghana and Mozambique, which became important players in the expansion of worldwide biofuel supply.”

Chinese FDI stock in Africa stood at $16 billion by the end of 2011. South Africa is the leading recipient of Chinese FDI in the continent, followed by Sudan, Nigeria, Zambia and Algeria.

“China has joined the ranks of top investing countries in some LDCs, such as Sudan and Zambia. Apart from resources-seeking FDI, rapid industrial upgrading currently taking place in China provides opportunities for these countries to attract FDI in manufacturing.”

With $18 billion, South Africa was the fifth largest holder of FDI stocks in Africa in 2011 and the second-largest developing country after Malaysia.

The majority of this outward stock could be attributed to reinvested earnings in the private non-banking sector.

Most of the outward FDI stock in Africa is held in Mauritius. A significant amount of FDI stock is also present in Nigeria and in two of South Africa’s neighbours, Mozambique and Zimbabwe.

According to UNCTAD, mining is the sector in Africa that has attracted the largest volumes of FDI in terms of value, but the sectoral distribution of the outward investment has been more diversified from the perspective of number of projects.

Indian FDI in Africa has traditionally been concentrated in Mauritius, taking advantage of the latter country’s offshore financial facilities and favourable tax conditions; as a result, the final destinations of these investments have often been elsewhere.

Indian investors have, however, been investing in other countries in the region too, such as Cote d’Ivoire, Senegal and Sudan.

India’s total FDI stock in Africa stood at about $14 billion, making the country the seventh-largest investor in the continent.

The expansion of Russian TNCs in Africa is fairly recent but rapid, reaching $1 billion in 2011.

“The arrival of Russian TNCs has been motivated by a desire to enhance raw-material supplies and to expand to new segments of strategic commodities, as well as a desire to access local markets,” said UNCTAD, noting, for example, that RusAl, the world’s largest aluminium producer, has operations in Angola, Guinea, Nigeria and South Africa.

Russian banks are also moving into Africa. Vneshtorgbank, for instance, opened the first foreign majority-owned bank in Angola, and then moved into Namibia and Cote d’Ivoire, while Renaissance Capital owns 25% of the shares in Ecobank, one of the largest Nigerian banks.

According to UNCTAD, another perspective on BRICS FDI to Africa is provided by examining the relative importance of FDI in the continent in the total outward FDI of the BRICS.

“While in the early 2000s, FDI from the BRICS countries to Africa only accounted for a negligible share of the group’s total outward FDI flows, by 2009-2011, it rose to 4%, which is higher than the share of Africa in the outward investment of TNCs from the United States and EU,” it said. (SUNS7554)   

Third World Economics, Issue No. 542, 1-15 Apr 2013, pp 10-12