Francesca Beausang















International corporations from the developing world

East Asian and Latin American corporations in the global















May 2002

The multinational enterprise (MNE) is one of the institutions, if not the only institution, that takes full advantage of globalization. "The defining characteristic of MNEs is their ability to plan, organise, control business activities across countries. It is a characteristic that, at present, is specific mainly to them compared to the other major players in the economic and social system such as labour, consumers, uninational companies and governments" (Ietto-Gillies, 2000, p. 31). The first objective of this paper is to examine whether MNEs from Third World countries (3WMNEs) are also in a position to take full advantage of globalization. The second one is to determine whether the outward foreign direct investment (FDI) of 3W firms is related to the development of their home and/or host country. We explore these issues in the context of Brazilian/Chilean and South Korean/Taiwanese MNEs.

We can distinguish between three waves of FDI from developing countries. The history of the 3WMNE began in the late 1950ís with a first wave of foreign direct investment by firms from Argentina, Brazil, Hong Kong, Singapore, Malaysia and India, engaged in activities such as construction or extraction (Chudnovsky & Lopez, 1999). The advantages of the investing firms were determined, especially in Latin America and India, by an import-substituting industrialization (ISI) policy, which involved very high tariffs, and meant that developing countries were virtually cut off from international trade for two decades (Chudnovsky & Lopez, 1999). Most FDI was motivated by the existence of trade barriers in host countries and was directed towards neighboring or other developing host countries which were at similar or earlier stages of development.

Throughout the 1970ís and 1980ís, the ISI model continued to prevail in Brazil and India (it was dismantled in 1973 in Chile). During this period, economic leadership was divided between three types of agents: public firms, developed country multinationals (DCMNEs) (in skill-intensive sectors---automotive, capital goods, electronics), and national private firms, including conglomerates also known as grupos economicos (GEs). Most Brazilian and Chilean GEs were formed during ISI. Until the 1980ís these conglomerates were successful due to a domestic market strategy of diversification and vertical backward and forward integration (Chudnovsky & Lopez, 2000).

During the 1980ís a second wave of FDI occurred. This wave was dominated by Hong Kong, Taiwan, Singapore and Korea, which were highly export-intensive. Many of the first wave countries (particularly Latin American ones) were unable to participate successfully in it. During the second wave, investments were larger in scale. Some investments were carried out by diversified conglomerates from Hong Kong, Malaysia and Singapore, who invested in finance, tourism, and construction. The governments of the region had an important role in stimulating the FDI of their firms. For Dunning et al (1997), the second wave was the result of the improvement of the competitive advantages of indigenous firms as a consequence of the continuous upgrading of the advantages of their home countries. Their outward FDI was destined to North America and Europe, and it gradually evolved towards a greater presence in high-technology industries. According to Dunning et al (1997), Asian MNEs which emerged during the second wave are very similar to DCMNEs, based on the criteria of technological level and host country choice.

Since the beginning of the 1990ís, there has been a significant process of FDI by Latin American firms, which has been called the third wave of Third World FDI (Chudnovsky & Lopez, 2000). Amongst the Latin American countries participating in the third wave, Chile is the country where the flows of outward FDI are the highest relative to the size of the domestic economy, while Brazil is the country where flows are the lowest. In 1996 Chile invested $1,008M abroad, while it received $4,000M in FDI, which yields a high ratio of net foreign direct investment to size of market, considering the size of its market (GDP amounts to $70.2 bn). For equivalent figures in the case of Brazil, see table 1. In our analysis of the third wave, we choose to focus on Brazil and Chile in order to identify reasons for their opposite outward investment positions.

Below we draw lessons from the experiences of some Latin American MNEs from the third wave and of some East Asian MNEs from the second wave.

1 Brazilian and Chilean MNEs

Outward FDI by Brazilian and Chilean firms from the third wave can be explained by contextual factors and firm-specific globalization strategies. We start with the contextual factors. The recent context of deep structural reforms, general pro-market orientation, privatizations, and deregulation largely explains the third wave of Third World FDI. At the macroeonomic level, it generated improvements in both Brazil and Chileís performances with respect to growth and price stability in the 1990ís, although improvements were stronger in Chile. Incidentally, Chile had been a pioneer in the reforms, which began in 1973, i.e. much earlier than the 1990ís. This is an important factor behind the high level of Chilean outward investment, relative to that of Brazil, which engaged in the reform process much later.

At the microeconomic level, the introduction of structural reforms modified completely the outlook of the GEs and forced them to restructure. Indeed, greater competition from imports or entry of foreign firms forced many local firms to upgrade product quality and introduce more sophisticated marketing and financial techniques, thereby enhancing the ownership advantages which would allow them to become multinational. The GEs restructured via commercial, organizational and financial transformations, rather than technological or productive ones (Chudnovsky & Lopez, 1999). FDI was one such form of commercial and organizational restructuring: "in the context of this process of strategy redefinition, a significant part of the GEs in these countries have initiated or deepened their productive internationalization trajectory via FDI" (Chudnovsky & Lopez, 1999, p. 43).

Other factors related to structural reform which caused firms to engage in FDI were the following. Macroeconomic stability and the growing availability of international funds opened up Brazilian/Chilean firmsí access to international money markets which allowed them to finance their outward investment. Another impact of the reforms was that the experience and competencies gained in domestic privatizations (in particular by Chilean firms) built up a a key ownership advantage to be exploited in foreign countries. Last, unilateral liberalization and regional integration through the Mercosur as of 1995 created an opportunity for Brazilian/Chilean MNEs to preserve and expand their market positions.

Some additional factors leading to Brazilian and Chilean FDI which are mentioned by the literature include the limited growth perspectives in the domestic markets of the firms, the insufficient availability of raw materials in these markets, and the fact that many firms had already acquired dominant positions in their markets. Finally, for Chudnovsky, Kosacoff & Lopez (1999, p. 342), the key motives behind Brazilian and Chilean investment during the third wave were the following: i) to gain competitiveness through a location close to the consuming market; ii) to develop strategic alliances with local firms; iii) to fulfil the requirements of industrial consumers that needed suppliers to be close by; iv) to ensure market presence in the context of trade barriers and v) to increase the added value of exported products.

We now turn to the firm-specific globalization strategies which contribute to explaining Brazilian and Chilean outward FDI. Based on Dunningís (1988) categorization of investment strategies, Chudnovsky & Lopez identify two key FDI strategies which apply to Brazilian and Chilean MNEs; these are resource- and market-seeking, with market-seeking including different target markets, i.e. global, regional or neighboring. They do not find any pure strategic asset-seeking investment from Brazilian or Chilean firms, only hybrids of strategic asset-seeking with other rationales.

Most of the FDI by Brazilian and Chilean firms is market-seeking, according to Chudnovsky & Lopez. One of the interesting points made by Chudnovsky & Lopez is that there are some global market-seeking Brazilian and Chilean firms which are also involved in efficiency-seeking investment. Indeed, they argue that in the context of economies which are open to international trade, market-seeking strategies must include rationalization aspects, in order to improve the productivity and quality of the processes and products carried out at the local level.

Firms with a regional market-seeking strategy have always formed an important group within the market-seeking firms. In the 1970ís, regional strategies were based on the possession of an advantage in tropicalized technologies, i.e. technologies that were adapted to the special necessities of developing markets. This was the case of the investments of Brazilian Caloi (bycicles) and Gradiente (electronics), which operated in countries like Bolivia, Colombia and Mexico to exploit their possession of tropicalized technologies. But in the 1980ís and 1990ís, some Brazilian firms (Weg, Hering, and Artex) developed technological capabilities that allowed them to invest in Europe and the US based on non-tropicalized technologies. However, many of these initiatives ended when the firm was acquired by a DCMNE or simply when the firm had to close its foreign production unit.

Another aspect of the globalization strategy of Brazilian and Chilean firms is that investments take place in the form of acquisitions of already existing firms, which allows these MNEs to access particular market positions and commercialization channels.

In tables 1 and 2 below we present a summary of the characteristics of Brazilian and Chilean MNEs and their forms of FDI according to Chudnovsky & Lopez (1999). Except for a number of recent cases of Brazilian FDI in the US, most Brazilian and Chilean FDI flows to neighboring countries and to the rest of the Latin American continent. Most Brazilian and Chilean MNEs primarily belong to the commodities or basic goods sectors (steel, soft drinks, agroindustry, cement, and cellulose and paper) (Chudnovksy & Lopez, 2000). The cases of multinationalization in technology-intensive sectors are few: they include pharmaceuticals, telecoms, autoparts and transport equipment in Brazil.






Stock of assets abroad

1.1% of GNP total

17.7 % of GNP total

Type of firm


Mainly institutional conglomerates or family ownership ones

Traditional diversified conglomerates and new, more specialized ones with presence of investors

Main sectors of investment

Banks, construction, food

Electrical energy, petroleum, beverages, forestry, wood

Push factors for exit abroad

Deceleration of growth

Technological, organizational factors

Limited size of domestic market

Access to capital

Early beginning of structural reform

Destination countries

Industrial sector: Mercosur

Other sectors: Mercosur, US, Latin America

Essentially Argentina and Brazil

Other characteristics

Between 1980 and 1990, there were significant investments in research and development by manufacturing firms in autoparts, textiles, metalmechanics (capital goods, durable consumer goods and auto sector). In 1990, a part of operations in research and development was dismantled, except in textiles. Many firms that had led the process were acquired by DCMNEs.

With their high competitiveness, many Chilean firms now use foreign capital to finance their FDI.


Table 1: Main characteristics of FDI from Brazil and Chile in the 1990ís.

Source: Daniel Chudnovsky & Andres Lopez, "Las empresas multinacionales de America Latina", Boletin Informativo Techint, no 297, Buenos Aires: Techint, Enero/Marzo 1999, p. 37.















Market-seeking: Regional

Firms involved

YPF and Petrobras

Bago, Brahma, Gerdau Endesa, Luksic, Matte and Chilgener


International strategic alliances and best technology.

Become a regional player to face competitors and disperse risks.


Management capacities.

Affiliation to ARPEL, club of Latin American statal oil companies.

Capturing technology and human capital.

Controlling raw materials.

Technology and human resources in research and development (in developed countries).

Mastery of process technologies. Occasionally, own technological development. Capabilities in production, management.

Difficulty to transfer own advantages tacitly.

Market power.

Regional integration (Mercosur, Free Trade Area of the Americas).

Market size.

Investment forms

Via joint ventures.

Acquisition of firms,

agreements but with majority control.

Other observations

Strategic asset-seeking (technology, human resources).

Strategic asset-seeking (channels of distribution, market position).



Neighboring countries


Global with efficiency-seeking

Firms involved

Alpargatas Santista, Pathfinder, Said and Bofill

Odebrecht. At a secondary level, Andrade Gutierrez and Sabo.


Proximity to the client.

Privatizations in other markets.

Become a global player to face competitors.


Management; lesser importance of technological assets.

Especially for Chilean firms: capacity to compete in open and deregulated economies.

Market power. Control of distribution channels.

Size of the market.

Geographical and cultural proximity.


Mastery of process and product technologies.

In some cases, innovative capacities.

Financial capacities.

Adaptation to cultures.

Market power.

Provision of complementary goods.

Market size.

Access to third markets (for example, the EU).

Investment forms

As much acquisition as greenfield.

Low presence of agreements.


Agreements but with majority control.

Other observations

Few cases of strategic asset-seeking (distribution channels).

Strategic asset-

seeking (commercialization channels).


Table 2: Forms of the internationalization process of Brazilian and Chilean firms in the 1990ís.

Source: Daniel Chudnovsky & Andres Lopez, "Las empresas multinacionales de America Latina", Boletin informativo Techint, no 297, Buenos Aires: Techint, Enero/Marzo 1999, p. 38.

  1. South Korean and Taiwanese MNEs

Although the first 3WMNE was Alpargatas, an Argentine firm set up at the end of the 19th century, currently, the majority of 3WMNEs are East Asian. Of the largest 50 3WMNEs in 1999, only 10 were Latin American and 34 East Asian (UNCTAD, 2001). To analyze East Asian MNEs, we concentrate on the cases of South Korean and Taiwanese MNEs which constitute the majority of East Asian MNEs.

If we consider outward direct investment figures, we find that South Korean/Taiwanese outward investment is larger than Brazilian/Chilean outward investment. A comparison between FDI stock/GDP ratios in 1994 highlights the gap between the Brazilian and the South Korean/Taiwanese outward FDI performances, with the Chilean ratio between the South Korean and the Taiwanese one: South Koreaís ratio was 0.020, Taiwanís was 0.086, Brazilís was 0.013, and Chileís was 0.037 (van Hoesel, 1999, p. 96). Ever since 1991, the size of Korean annual net outward direct investments has been superior to US$1 billion; similarly, Taiwanese annual net outward direct investments amounted to US$4,829 million in 1993.

South Korean and Taiwanese firms have long been intensive exporters, unlike Brazilian/Chilean firms where export-intensity is a more recent phenomenon. The question arises as to what led their managers to engage in FDI in addition to exports. The FDI of South Korean and Taiwanese MNEs can be explained by a variety of factors:

1 Macroeconomic factors

2 Firm-specific globalization strategies

Having explained the causes behind these firmsí FDI, we can now examine its characteristics, i.e. its geographical destination and sectors. In both the South Korean and Taiwanese economies, a major part of FDI is directed towards the Asian region. This is particularly true in the case of Taiwanese FDI where 61.1% of FDI went to Asia in 1995, while 46% of South Korean FDI went to this region (van Hoesel, 1999, p. 111). However, a substantial amount of South Korean and Taiwanese FDI has been targeted towards North America, and to a lesser extent, the European Union. In both the South Korean and Taiwanese cases, manufacturing is the most important target sector. 65.9% of Taiwanese FDI was in manufacturing in 1995 and 17.8% in banking and finance. Similarly, 57.3% of South Korean FDI was in manufacturing in 1995, 19% in trade, and 6.7% in mining. Overall, the most important source of outward investment for both countries is the sector of "fabricated metals", which includes electronics. Then follows basic metals, chemicals, rubber and plastic, food and beverages, textiles and clothing, and petroleum products.

  1. 3WMNEs and development: beyond the investment development cycle

Having examined MNEs from two 3W regions, we can now assess to what extent 3WMNEsí FDI is related to the development of their home/host countries. Dunningís (1988) investment development cycle attempts to link 3WFDI and development. The main idea in the investment development cycle is "that there is a relationship between net outward investment and a countryís relative stage of development as measured by GNP per capita" (Tolentino, 1993, p. 87). Throughout the development process, GNP per capita, the degree of industrialization, the nature of public policies, and trade intensity are the most important variables affecting the growth of outward investment. The cycle Dunning describes is the following. At stage one, countries have very low income levels and low inward and outward investments. Domestic firms lack ownership advantages because the market and the local resources do not offer opportunities to the DCMNEs which could transfer the minimal technological capability needed for the development of competitive 3WMNEs. To move the country out of this stage, government policies on insertion in the international specialization of trade and production are crucial. At stage two, inward investment rises as markets grow and human capital is enhanced through education and training. Outward investment is still low since few ownership advantages have been accumulated. At stage three, countries have reached an intermediate level of industrialization. Both inward and outward investment will, ceteris paribus, play a significant role in the economy. Ownership advantages are likely to have been sharpened in a specialized set of activities by exposure to world markets, investments in education and technology, and production of a relatively narrow range of products guided by comparative advantage. In addition, local firms engage in strategic asset-seeking investment. At stage four, outward investment exceeds inward investment. Strong ownership advantages of domestic firms permit them to compete effectively with DCMNEs not only in the home market, but in overseas markets as well. Their investments are a complement to the location advantages offered by immobile factors of host countries, while the outflows of FDI compensate for the location disadvantages of the home country. At stage five, there is a reconvergence of outward and inward investment. Ownership advantages become more firm-specific as countries at this stage possess similar advantages. They become more and more concentrated in the possession of assets such as management, organizational skills, advanced technology, information, etc., which can easily be transferred through FDI, and which are particular aspects of internalization advantages.

South Korea and Taiwan provide supporting evidence for the investment development cycle at many levels. As predicted by the model, they have successfully gone through the first three stages of the cycle and are proceeding towards the fourth stage. They have reached an intermediate level of industrialization. Both inward and outward investment play a significant role in the economy. Ownership advantages have been sharpened in mid- to high-tech activities by exposure to world markets, public investments in education and technology, and production of a relatively narrow range of fabricated metals (electronics). The strength of these ownership advantages was increased by the South Korean/Taiwanese governmentsí policies both indirectly and directly. They stimulated the upgrading of national technological capabilities through educational and technology policies, which had an indirect impact on the MNEs. The governments also directly championed the firms engaging in FDI: FDI was supported by these governmentsí investment promotion agencies through efficient information networks on investment opportunities. In addition, while South Korean/Taiwanese investments in the industrialized world are, to a large extent, market-seeking or -retaining in nature, strategic asset-seeking investment is common. Overseas research and development centres enable South Korean and Taiwanese companies to scan the latest technological developments and local consumer demands. This "reverse technology transfer", as well as the acquisition of high-tech companies or firms with strong brand names or distribution channels are the essence of strategic asset-seeking investment.

The existence of such strategic asset-seeking investment in the South Korean/Taiwanese cases is key. It points to the fact that through the process of globalization, 3WMNEs can access external sources of development. However, such an opportunity cannot be seized by any firm: strategic asset-seeking investment requires a minimal amount of technological capability in order to absorb the contents of "reverse technology transfer". Consequently, instead of demonstrating that globalization can fuel development, the existence of strategic asset-seeking investment in the South Korean/Taiwanese cases only provides evidence for the thesis that a minimal development level creates the ability to take advantage of globalization. However, these two cases also show that once the minimal development level has been reached, globalization can feed back into development as strategic asset-seeking outward investment strengthens the home countryís technological capability.

If we now turn to Brazilian/Chilean MNEs, we find that they also confirm the investment development cycle in two ways. On the one hand, the growth of FDI from Brazil and Chile (which can be described as being between stages 2 and 3 of the cycle) can be explained by the level of development reached by these countries and by the adoption of more open economic regimes as of the 1990ís/70ís. On the other hand, in the absence of technology and educational policies, whose presence largely explained South Korea and Taiwanís transition from stage 2 to stage 3 of the development cycle, it is not surprising that there be few investments in skill-intensive or high-tech areas. Brazilian/Chilean MNEs are constrained to operate in low-tech sectors and other developing countries, and are unlikely to engage in strategic asset-seeking investment.

The Brazilian/Chilean cases imply that we are still missing a theory of how globalization can create opportunities for development in countries with low initial levels of technological capability. However, on the basis of the Brazilian/Chilean and South Korean/Taiwanese lessons, we can make some suggestions as to the pre-requisites for a globalization cum development. These are first the stateís active involvement in technology and educational policies, which can support the competitiveness and development of the 3WMNEsí home and host countries. Second, because development remains a national pursuit (whether it be that of the home or host country), 3WMNEs should be strongly linked to their home and host economies so that the benefits reaped by these global actors be diffused to national ones. Such links could be promoted for example through supplier networks, which could increase the competitiveness of small and medium enterprises, or through the creation by 3WMNEs of a demand for a labor force which is highly qualified and technologically able. These would constitute some solid bases for development, which could in turn render the competitive advantages of 3WMNEs much stronger in the global context.





















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