Do emerging multinational enterprises possess South-South FDI advantages?

The apparent success of emerging market multinational (EMNE) operations in the Global South has led some to launch a claim of competitive advantage in investing in markets with higher institutional risk. However, there has not been sufficient econometric investigation into all the forces driving South-South foreign direct investment (FDI). The purpose of this paper is to investigate the claim of institutional advantage and to further our understanding of South-South FDI.

The paper employs a simple econometric model of FDI flows to investigate the differences between the factors driving FDI from developed country MNEs and EMNEs. The model is tested on a bilateral sample of FDI stock data of 21 developed and 22 emerging source economies and over 80 host countries.

Contrary to the contention of the previous literature, the empirical results find little support for the claim to EMNE institutional advantage. EMNEs are just as sensitive to institutional risk as MNEs. The relatively higher participation of EMNE FDI in the Global South may be explained by other shared similarity factors across developing markets and competitive disadvantages in entering developed markets.

The findings of this paper cast some doubts on the hope that EMNEs will improve the FDI demands of least developed countries (LDCs). Healthy institutions are an important prerequisite for attracting FDI, regardless of whether it originates from developed or emerging economies.