|image by Stuart Miles/
In a recent paper in International Business Review, Elisa Giuliani, Sara Gorgoni, Christina Günther and Roberta Rabellotti explore the local impact of investment from Rising Power firms in Europe. This post summarises some of the findings.
As more and more firms from Rising Power countries invest in Europe, worries abound over the impact of such investment on the local economies. Some fear that Chinese, Indian or Brazilian companies will simply take over local companies, exploit their technology – and leave without creating lasting benefits for employment or economic growth in Europe. But are these concerns justified, or should foreign direct investment (FDI) from emerging economies be seen in a more positive light?
Looking at examples from Italy and Germany, we find that ‘predatory’ behaviour of Rising Power firms exists in some cases, but we also identify another type of FDI from these companies that creates mutual benefits for investors and for the economies they invest in. Moreover, multinational enterprises (MNEs) from emerging economies investing abroad are more likely to engage in local innovation networks and create win-win situations of mutual learning than MNEs from advanced economies.
Studying investment of emerging economy MNEs in Europe
The impact of investment from emerging economy MNEs in Europe is difficult to grasp within conventional analytical approaches in international business, which have focused on advanced economy MNEs investment in developing countries, assuming that multinationals investing abroad have superior technology. Therefore, the study develops a new typology of MNE subsidiaries, according to the direction of knowledge flows between headquarters and the subsidiary, and the extent to which subsidiaries participate in local innovation networks.
This typology is applied to 23 local subsidiaries of emerging economy MNEs in the industrial machinery and equipment sectors in Italy and Germany, comparing them to 24 subsidiaries of MNEs from advanced economies.
Three types of subsidiaries
Overall, we find that MNE subsidiaries can be divided into three main types, with significant differences between subsidiaries of advanced economy and emerging economy MNEs:
‘Passive subsidiaries’ of advanced economy MNEs
‘Passive subsidiaries’ are mainly interested in accessing local markets. Decision-making tends to be centralized in the MNE’s headquarter and subsidiaries engage little in innovation activities. Within the sample studied, this category includes significantly more subsidiaries of advanced economy MNEs than subsidiaries of emerging economy MNEs.
‘Predatory subsidiaries’ vs. ‘dual subsidiaries’ of emerging economy MNEs
‘Predatory subsidiaries’ come close to the negative picture of emerging economy investment described earlier. Significantly more subsidiaries of emerging economy MNEs than advanced economy MNEs fall into this category. Put simply, they are seeking to acquire advanced technology by taking over companies in advanced economies, transferring knowledge to their headquarters without contributing much to innovation in the local economy. An important source of knowledge are local employees in the subsidiary, and learning takes place through personnel exchanges or joint product development projects between the subsidiary and the headquarter. While this seems to confirm some of the worries about Rising Powers’ investment in Europe, there is another type of FDI from emerging economies that has so far been overlooked in the debate.
‘Dual subsidiaries’ are similarly interested in acquiring advanced technology, and they are significantly more common among emerging economy MNEs than advanced economy MNEs. However, they differ from predatory subsidiaries because they actively engage in local innovation activities and cooperate in this with local firms and universities. These local networks allow mutual learning: On the one hand, local employees, supplier firms and universities are sources of knowledge for the MNE headquarters, but on the other hand, these local actors learn from new perspectives and experiences in emerging economy markets brought in by the investors. Hence, such cooperation is perceived as a win-win situation for the MNE and for local actors, rather than as an exploitation of local knowledge by the foreign investor in a ‘take and leave’ manner.
Giuliani, E., Gorgoni, S, Günther, C. & Rabellotti, R. (2014) Emerging versus advanced country MNEs investing in Europe: A typology of subsidiary global–local connections. International Business Review, 23(4), 680-691.