The State’s Role in Emerging Economy Outward Investments: A comparison between Brazil, China and Korea



Issue NO. 24

By Anne Miroux* Lourdes Casanova**

While most emerging economies have long developed clear policies to attract Foreign Direct Investment (FDI), few have adopted proactive policies to support outward FDI (OFDI). In what follows, we examine the various phases of OFDI comparing China, Korea and Brazil and how this OFDI became one of the critical elements of economic policies.

Phase One: Latin American leadership within emerging market OFDI (1970s–1982)

The first phase of Emerging Market OFDI expansion began in the early 1970s, spearheaded by Latin America. Brazil’s activity is emblematic of this period; a number of Brazilian companies established operations in their “natural markets”—i.e., countries with a shared cultural affinity and/or a geographical proximity (see Casanova and Kassum, 2014).

The “economic miracle” of the 1960s-70s made this trend possible. During this time, expansionist policies unleashed a prosperous cycle of industrialization-focused growth. The process began during the Juscelino Kubitschek (1956-1961) administration, which promoted protectionist policies to develop local industries, but also opened up the economy to foreign companies, especially in the automobile industry.

Meanwhile, China and Korea were comparatively far behind. In Korea, from the 1970s until the mid-1980s, OFDI remained quite negligible. A number of regulations and conditions (such as pre-approval and strict foreign exchange controls) constrained outward investment. During the same period, China maintained the classic characteristics of a “closed country”. China had few state-owned foreign trade companies. The Ministry of Foreign Trade, however, only approved investment projects on a case-by-case basis. With the exception of a few projects in partnership with state-owned companies, foreign investment into China—not to mention OFDI—was rare.

Phase Two—The start of Asian OFDI and the debt crisis in Latin America (1983–1992)

Following the boom period of the 1960s and 1970s, Brazil and Latin America suffered a long period of economic stagnation triggered by the 1980s debt crisis. Hard pressed by free falling sales at home, internationalization became the only viable option for companies to grow. Foreign markets became a lifeline for construction firms, who were especially vulnerable in the face of public investment cuts. By 1984, for instance, Odebrecht which had already infrastructure projects in Chile and Peru, entered the African market with the construction of an Angolan hydroelectric power plant.

Meanwhile, swift and comprehensive institutional and political reforms signaled major changes in China. These changes included the decentralization of power, the gradual reform of the agricultural sector, the partial liberalization of certain industries and the establishment of new special economic zones. In the mid-1980s, a series of regulations established the principles and administrative processes governing the approval of Chinese enterprises’ overseas investments. OFDI remained extremely limited, barely reaching $300 million on average during the 1980s, and was almost exclusively the domain of state-owned enterprises (SOEs).

Korea, however, sought OFDI more urgently as the country faced increased production costs and a limited home market, in addition to the need to secure access to natural resources. The Korean government relaxed a number of restrictions and controls, progressively putting in place a more flexible and simplified system. Korea’s OFDI increased between 1983-1992, from $169 to $1,376 million.[i]

Phase Three: The “Washington Consensus” and integration of emerging markets in the global economy (1993-2003)

The “Washington Consensus” years marked a time of major economic changes across Latin America. In the ‘90s, the IMF and the World Bank imposed debt restructuring as well as adjustment programs that obliged these governments to abandon their import-substitution policies and adopt pro-market strategies. This restructuring caused a wave of privatizations in the telecommunications, banking, mining, energy, and transportation sectors. In Brazil, the impact of this “competitive shock” was two-fold. First, Brazilian companies restructured their operations by consolidating their domestic positions, pursuing comparative advantages and accelerating their international expansion to survive the threat of heightened competition from local subsidiaries of foreign multinationals. Second, foreign firms acquired stakes in the newly privatized companies. In Latin America, the free movement of capital and flexible exchange rates, as part of the adjustment program prescriptions, resulted in many European companies, mainly Spanish, taking leading positions in telecommunications (Telefónica and also Telecom Italia mainly in Brazil), banking (BBVA and Santander), and utilities (Endesa, which became later the Italian company Enel). This lead-shift significantly increased foreign investments in the region, but not from the region abroad. Between 1995 and 2000, FDI inflows in Brazil grew from $4.9 billion to $32.9 billion—far surpassing the growth of OFDI during the same period.

Meanwhile, China took a number of radical steps in economic policymaking. One of these steps was China’s accession to the World Trade Organization (WTO) in 2001, which marked a turning point for China’s FDI (inward and outward). This move, combined with the privatization of a number of SOEs, as well as the restructuring of the financial sector, enhanced China’s position to foreign investors, economic partners and international organizations alike. At the same time, the government enacted a number of new trade rules and regulations to support investing abroad, in line with its goal of nurturing national champions in strategic sectors. Incentives included export tax rebates or financial assistance for specifically targeted industries (IT, with Huawei a clear frontrunner) or large SOEs at the forefront of Chinese outward investment expansion (like Sinopec or China National Petroleum). The ”Zou Chuqu” (or “Go Global”) policy introduced in 1999 marked a fundamental shift in China FDI policy from attracting foreign investment to actively encouraging Chinese firms to invest abroad.

Throughout the 1990s, Korea continued implementing a number of measures to facilitate outward investment by further simplifying procedures and relaxing conditions for Korean firms investing abroad. It also provided export credit insurance and investment insurance to protect investors against non-commercial risks.

Phase Four: Emerging Markets “Golden Decade”: increasing investments abroad (2003-2014)

Investments from the South became a reality during this phase, which also saw emerging markets enhance their position in the global scene since the launch of G20 in response to the Global Financial Crisis. The BRICS (Brazil, Russia, India, China and later South Africa) became one of the most visible illustrations of this trend, launching their first Summit in 2009.

The turn of the 21st century marked a period of soaring commodity prices, high growth rates, and the aggressive global expansion of emerging market multinational corporations (eMNCs), notably through the acquisition of foreign firms and assets. This phase benefitted natural resource-based companies, whose strong cash position permitted large-scale acquisitions in both advanced and emerging markets.

In Brazil, the government facilitated outward investment by giving tax cuts and other incentives for companies to become “national champions”, especially in high-value sectors. The Brazilian Development Bank (BNDES), for instance, provided direct financial support to the OFDI projects of Brazilian firms. In addition, Brazilian companies (especially in sectors considered as strategic such as energy, transportation and telecommunications) could have access to financing at a subsidized rate. While these loans were not primarily targeted for outward investment, they facilitated the internationalization by making financial resources more easily available to firms. By the end of the period, however, BNDES’s general financing support for Brazilian enterprises came under criticism. Beginning in 2014, political turmoil that would lead to the 2015 impeachment of Brazilian President Dilma Rousseff further affected OFDI policy support.

During this same period, Chinese political and economic institutions faced a turning point over sustainable growth rates. Against this backdrop, the role of private business in the transformation of China’s economy began to be progressively recognized, as illustrated by the 2004 amendment to the Constitution (to include guarantees on private property) and the private property law enacted in 2007. China’s massive foreign reserves, accumulated since the early 2000s, represented another significant driving force behind China’s OFDI revolution. China further developed its “Go Global” policy launched just before the end of the century (see above) through improvements to OFDI support policies, including streamlined approval procedures and relaxed restrictions on foreign exchange. Assistance also included easier access to finance, interest-subsidized loans for investment in priority industries, subsidies in the context of aid programs, tax incentives, and active investment diplomacySuch support and promotion of OFDI resulted in dramatic increases in OFDI flows: in 2014-2015, OFDI flows were ten times their 2005 level, making China the third-largest investor in the world.[ii]

During the “Golden Decade” Korea experienced an OFDI surge: its outflows increased more than six-fold from 2003 to 2014. The government lifted remaining restrictions on overseas investment such as the maximum amount per investment project and further developed the financial support, the information and administrative services provided to Korean firms investing abroad. It paid particular attention to assisting small and medium enterprises in their overseas expansion, helping them, for instance, to prospect for potential foreign acquisitions and facilitating their access to government co-investment funds.[iii]

Phase Five: Changing times, China continues going global: Belt and Road Initiative, new emerging market-led multilateral organizations (2015-present)

With the collapse of commodity prices towards the end of 2014, emerging markets have faced more political and economic uncertainty. Economic growth in these economies, while still quite high for many, has been less buoyant relative to the previous period. Still, the BRICS summits continue and in 2015 launched a new institution, the New Development Bank, aimed at financing infrastructure and sustainable development projects in BRICS and other emerging economies.

In Brazil’s case, the government’s support for OFDI became somewhat unclear following economic difficulties related to political crisis and corruption scandals that involved some major Brazilian enterprises, including some of its national champions, such as Petrobras and Odebrecht.

In Korea, the government has continued its strong support and promotion policy to encourage the outward FDI expansion of its enterprises. Korean expansion in China however, suffered in 2017 from the Chinese boycott to Korean products following Korea’s agreement the previous year to host a U.S. anti-missile system. This boycott seemed to have eased at the end of 2017 and beginning of 2018.

In China, the situation has been different: while overall the government policy remained very supportive of outward FDI expansion, the remarkable outflows of capital and M&A surge in 2015-2016 led authorities to rein in the phenomenon. In the fall of 2016, the government announced stricter approval requirements for M&A deal and also restricted SOEs real estate purchases abroad. Then in In August 2017, the State Council issued “guidelines on overseas investment” that, inter alia, classified overseas investments into three main categories: 1) prohibited investments 2) restricted investments and 3) encouraged investments while in December 2017 a code of conduct for private companies investing abroad was announced.

At the same time, the China-led One Belt One Road (OBOR or BRI) – the largest initiative in history for infrastructure development, first announced in 2013 – is becoming a reality while the two new development banks set up by emerging economies, the Asian Investment and Infrastructure Bank (AIIB), and the New Development Banks have begun rolling out operations.

What now?

While Brazil (and Latin America) pioneered OFDI, the government’s OFDI policy has been less pro-active and less consistent than that of China and Korea. Since 2014, a new phase of OFDI development has surfaced, which (to date) is marked by heightened uncertainty, a turn towards inward-looking policies and growing protectionism. In the meanwhile, China and Korea are leading a globalization push among emerging markets and Brazil is taking and may continue to take in the future a more inward-looking approach.

Regarding growth performance more specifically, both China and Korea have experienced high level of economic growth over the past decade. By contrast, growth in Brazil and Latin America has been more volatile. While it may be too early for a definite answer, it is nonetheless important to start having a closer look at the contribution of outward investments to China’s and Korea’s economic performance and explore the policy implications this may have for emerging economies.


Anne Miroux, Visiting Faculty, Emerging Markets Institute at the Johnson School of Management, Cornell University*

Lourdes Casanova, Senior Lecturer, Director, Emerging Markets Institute at the Johnson School of Management, Cornell University**


[i] Based on data from UNCTAD, accessed by April 2018.

[ii] Source: UNCTADfdi statistics accessed by April 2018.

[iii] ASEAN Investment Report, 2016.

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