In recent decades, the global economy has seen the rise of a number of newly emergent economies, the most prominent of which have been exemplified by the acronym BRIC (Brazil, Russia, India, and China). Other economies that are also rising can be said to include at least countries like Poland, Indonesia, Korea, and South Africa (PIKS); Mexico, Argentina, Nigeria, Turkey (MANT); and many others. As the formerly small economies rise on the global stage, they are ever more likely to project some of their economic power overseas through trade and investment. According to the Asian Development Bank (ADB, 2011), based on market exchange rates the share of the south in world GDP rose from about 25% in 1980 to 45% in 2010, of which developing Asia alone contributed two thirds.
Rise of South-South Trade
The share of south-south trade in world trade is also growing rapidly, having more than doubled in less than two decades, from 7% in 1990 to 17% in 2009 (Table 1). As Table 1 shows further, south-south trade grew more than tenfold from 1990 to 2009 and now accounts for about half of the trade of the “southern” economies. Naturally, these percentage increases in the economic role of the “south” are much higher if calculated based on purchasing power parities.
Table 1. South-South Trade in World Trade, 1990–2009 (Total Merchandise Trade)
Developing Asia now accounts for about three-quarters of this south-south trade, with the People's Republic of China (PRC) alone accounting for roughly 40%. South-south trade increasingly seems to be replacing trade with the developed countries. For example, as shown by the figures presented in Table 2, after the 2008 global financial crises there was a lot of talk of the Asian countries decoupling from the Western industrial economies. Of course, it remains to be seen if this trend continues or accelerates.
Table 2. Developing Asia Decoupling from the European Union and the United States: Percent of exports to the European Union and the United States
In fact, there is much potential for further rise in the importance of south-south trade as tariff levels and other barriers to such trade continue to decline further. Average tariffs facing south-south trade were estimated to be three times higher than tariffs on trade with the north at about 12% in 2000, having declined from three times as high in 1983 (Lourdes, 2004). As Table 3 shows, tariffs on south-south trade are consistently higher than north-south or north-north trade. It has been estimated that tariff declines in manufacturing and agriculture can each increase trade by up to $31 billion in each of these two sectors, with similar gains in the service sector (Lourdes, 2004). However, for these gains to continue it is critical to have global governance institutions dedicated to tariff reductions in south-south trade, especially as existing institutions seem to place inadequate attention to such trade and investment.
Table 3. Tariffs on South-South Trade versus Other Trade: Developing Country Tariffs Biased against Developing Countries
Further, economic theories developed when south-south economic flows were insignificant may also be hindering efforts to understand and accommodate the rise of such flows (e.g., traditional trade theories seem to have trouble explaining the observed nature of south-south trade and investment). The widely used Heckscher-Ohlin model of comparative advantage has little to say about the composition of trade when factor endowments are similar across countries. Given that a great deal of trade observed in the world is between countries with remarkably similar factor endowments, alternative models that can explain such flows are needed.
One example of such alternative explanations is Linder's hypothesis (Linder, 1961) that trade is determined by similarity in demand structures so that countries with similar levels of income per capita would trade more with one another. Therefore, one would expect south-south (and north-north) trade to flourish given similar demand structures. Empirical studies confirm Linder's hypotheses in that there is more trade among countries with similar levels of GDP per capita (e.g., Hallak, 2006), among Organization for Economic Cooperation and Development (OECD) countries, and among developing countries (McPherson, Redfearn, & Tieslau, 2001).
Second, the substantial trade flows between countries with similar relative factor endowments can also be justified by models of increasing returns to scale and monopolistic competition. In these models, increasing returns in production leads countries to trade in slightly differentiated products, even if the products' factor intensities (and the countries' factor endowments) are quite similar. Empirical studies show that exports from the least developed countries (LDCs) to other countries of the south had greater skill content than exports from LDCs to the north (Amsden, 1980). In addition, greater learning effects and technological spillovers arise from south-south trade (Amsden, 1986). South-south trade also seems to have a much greater role than trade with the north in beneficially transforming emerging market economies (Klinger, 2009). These are just some examples of the type of new thinking necessary to understand the rise of south-south trade. Clearly, much additional work in this area is still necessary.
Next, we illustrate how south-south foreign direct investment is difficult to fully explain using traditional theories developed to explain advanced country foreign direct investments. We illustrate these difficulties using two examples of outward foreign direct investments (OFDIs) from India and China, the two most prominent of the BRICs. The first example is based on OFDI from India and the second is based on inward FDI in Africa from India and China.
South-South Foreign Direct Investment: Indian Example
Driven by its many economic advantages, foreign direct investment (FDI) in general, and south-south FDI in particular, has been growing rapidly especially over the past few decades. According to Lipsey and Sjoholm (2011), OFDI from emerging market countries now makes up over a quarter of all global FDI—up from almost nothing two decades ago. Table 4 presents some statistics in this regard. Indeed, as shown in Table 4, while FDI from the United States still dominates FDI from any other country, the FDI share of the southern countries has been growing rapidly and in many cases now exceeds FDI from the non-US developed world such as European and Japanese FDI. In addition, the rise of outward FDI from the southern countries is particularly notable in being contrary to traditional theories of FDI that generally posit FDI flowing from the developed countries to the developing countries.
Table 4. Inward and Outward FDI Stocks, Five-Year Averages, Selected Economies ($ Billions)
It is beyond the scope of a short article to discuss the overseas activities of all of the major new economic powers. Fortunately, the overseas projection of Indian economic power discussed next is illustrative of what other rising economies, such as China and the other BRICs and PIKS, are doing. The Indian economy has been growing rapidly since the economic reforms of the early 1990s and now seems to be on the way to becoming a major global economy, perhaps eventually becoming the third-largest economy following the United States and China. As expected, India has been projecting its newfound economic powers overseas. The next section reviews briefly the nature of this nascent Indian overseas projection of economic power focusing on OFDIs by India in Africa, another developing region.
While many Indian firms are tempting acquisition targets and some have been acquired by MNCs from other countries, here we focus on outward Indian FDI.1 Based on analysis of recent trends, there are many traditional reasons for Indian firms to engage in outward FDI including the need to enter new markets to maintain growth, to gain proximity to global customers, to expand market share and customer bases, and to acquire technology, raw materials, and other valuable inputs from foreign countries (at costs lower than free-market prices). For example, Indian firms have acquired firms in other less developed countries to help them gain easier access to a target's resources and markets. These deals are profitable because of many market imperfections such as a high unmet demand for foreign investment in some of these economies. As usual, another important reason driving the “urge-to-merge” is the pressure of rapidly increasing domestic competition.
Indian firms also engage in cross-border acquisitions in countries where their technology has not yet become obsolete while others do so to save on labor and production costs. Some Indian firms, especially in the pharmaceutical sector, strive to increase their market share by enhancing their product range or to diversify the portfolio of their products or services. However, while much Indian FDI is in other developing countries in Africa,2 the Middle East, and Southeast Asia (see Accenture, 2006), in recent years, Indian FDI in the developed countries has also increased significantly.3
Many Indian firms engage in direct investments in the developed countries to gain access to new markets and to expand their overall technical capabilities and existing knowledge bases (Aggarwal, 2010). In most cases, the knowledge and technical expertise gained abroad can help the acquirers in improving their productivity in the domestic Indian market as well.4 Acquisitions in developed markets have been attractive to Indian firms also due to the opportunity to learn how to compete in highly competitive environments with advanced legal systems and sophisticated production and marketing technologies.
Nevertheless, significant outward FDI from India is still in its early stages and faces a number of challenges (Pederson, 2008). For example, it has been widely contended that some overseas acquisitions by Indian companies have been driven by other than purely commercial reasons. A case in point is the criticism of Tata Motors for being driven by national pride to overpay for its acquisition of the marquee brands, Jaguar and Land Rover. Attempts by Indian companies to acquire MTN, the South African multinational wireless phone company (first by Reliance Communications and then by Bharti Airtel), have not been successful, with the latest 2009 offer by Bharti Airtel nixed by the South African government.5
Bases for Indian OFDI
One of the primary questions in understanding global expansion of firms is how they overcome the limitations of foreignness when they cross borders.6 The reason for cross-border expansion is that, in the presence of market imperfections the gains from cross-border activity, generally in the form of lower-cost inputs such as inexpensive raw materials or not otherwise available technology, are greater than the costs of foreignness. A second explanation is that FDI brings certain advantages, developed domestically or elsewhere in the firm network, to the new host country to overcome the limitations of foreignness. These explanations have been widely explored mainly in the context of MNCs from the highly industrialized countries. However, it remains to be seen if these traditional explanations work for firms from India—a relatively poor and underdeveloped country but where services are already the largest sector.
We consider three theoretical explanations for FDI, two traditional and one designed to accommodate emerging market OFDI, and examine how they apply to Indian OFDI. We start with the two main modern theories of FDI, the OLI paradigm (Dunning, 1993, 2000) and the Process Theory of Internationalization (PTI) Uppsala model (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975). Finally, we also examine a hybrid theory based on home government–directed comparative advantage developed especially for FDI from emerging economies (Aggarwal & Agmon, 1990).
The eclectic OLI paradigm of Dunning (1993, 2000) combines the insights of industrial organization, international trade, and market imperfection theories to explain the internationalization process as governed by three general factors: the ownership advantages of the firm (O), the location advantages of the market (L), and the internalization advantages of conducting transactions within the firm rather than on open markets (I). The ownership advantages include the firm's asset base and knowledge power, such as management knowhow, international experience, and ability to develop differentiated products. Traditionally, these were considered to be directly related to size, which helps the firm achieve scale economies, absorb the resource costs of international competition, and enforce contracts while protecting its patents (Buckley & Casson, 1976). The location advantages refer to the earnings potential and risks associated with specific markets; the premise is that firms will first seek to enter the larger and least risky markets with the best growth potential (Herring, 1983). The internalization advantages relate to the relative costs of integrating the assets and skills of the firm with a foreign counterpart. Shallow modes of entry (such as exports or licensing) tend to minimize these costs, while deeper modes of engagement (such as FDI) involve higher costs. Agarwal and Ramaswami (1992) note that the optimal entry mode usually becomes a compromise between the firm's available resources, risk-adjusted expected net returns, and desired degree of control. While the transaction costs–based OLI paradigm is sufficient to explain many instances of emerging market OFDI, it is often deficient and other explanations have to be sought.
The Uppsala model, also known is the PTI theory (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975), differs from the transactions costs based approach of the OLI eclectic paradigm by focusing on the process through which firms incrementally engage in foreign markets via a learning process. At the early stages of internationalization, firms have little knowledge or experience of doing international business or of specific foreign market conditions, implying these firms face a great deal of uncertainty and risk. They respond to this challenge by gradually building their international involvement and learning along the way as they build their knowledge, experience, and commitment to internationalization. The PTI predicts that firms will initially enter markets that are close to their home base (in terms of geographic, legal, cultural, or other economic measures of distance) because the costs, uncertainties, and risks are lowest there, and that they will further internationalize over time as they gain experience—thus, the preference of emerging market firms investing at least initially in other developing countries.
While the OLI paradigm focuses on discrete rational decision making and the PTI emphasizes organizational learning, both imply that the internationalization process likely will be a sequential one, a process where firms initially internationalize into geographically, culturally, and psychically close markets at shallow levels of entry modes. As their OLI advantages increase over time, or as they learn and gain experience and confidence, according to the PTI, firms will reach further afield at deeper levels of engagement. Aharoni (1971) described this process in life-cycle terms with firms servicing foreign markets with increasing commitment, starting with exports and leading eventually to overseas manufacturing. Aggarwal (1984) and Dunning (1993) also outline life-cycle stages of a firm's internationalization: from exporting to direct sales, to initial foreign part production, leading over time to new foreign production that deepens and widens the value-added network, and finally to regional or global integration.
Finally, the Aggarwal and Agmon (1990) model emphasizes the supportive role of the state in explaining outward FDI especially from developing countries. In this model, the fixed natural comparative advantage of a developing country is modified by government intervention and investment in non-tradable capital goods such as education and/or technology. This creates a dynamic long-term home government–directed comparative advantage for firms based in a country which encourages them to move forward in the product “life cycle of firm multinationality,” where shallow modes of foreign entry such as exports by firms are followed by deeper modes such as FDI, starting in countries with low cultural, political, economic, or psychic distances (Aggarwal, 1984).
Many Indian firms invested overseas based on their location advantages (L) such as having a low production cost base in India to support foreign sales; (O) serving export markets with FDI thus internalizing the cost advantage (I). However, the fact that much Indian FDI started with neighboring regional and culturally similar countries before expanding further afield clearly indicates consistency with the PTI theory and a commitment to learn and gain experience before taking greater risks. Finally, Indian FDI would have been much lower and occurred later, but for the heavy investments made by the Indian government in research and development (R&D) and world-class technical education (e.g., the Indian Institutes of Technology). This moved the comparative advantage available to Indian firms to favor outward FDI earlier than it might have been possible otherwise—FDI from developing countries being a later stage than FDI from the developed countries in the life cycle of multinational firms (Aggarwal, 1984; Aggarwal & Agmon, 1990).
While the discussion above is useful and illuminating, the core question that FDI theories must address concerns the mechanisms of how a company overcomes its liability of being foreign when it engages in cross-border expansion. It is the contention here that Indian and perhaps other multinational corporations (MNCs) from the poorer countries may enjoy a number of advantages developed in their home markets that they can use overseas to overcome the liability of foreignness. These include managerial abilities developed while working in their home countries in poor cultural, ethical, legal, and institutional environments with weak infrastructures and limited availability of external finance so that such Indian firms are preadapted to succeed in other poor institutional environments. Firms from other developing countries may also reflect these advantages in their outward FDI activities. Some examples of a few of these special skills developed at home available to Indian firms when they go overseas include:
Low-cost production/design bases: Indian companies can and do use the lower cost domestic production, R&D, and design bases as a strength to extend their businesses internationally. This strategy likely played an important role in the recent acquisition of European and US steel and auto companies by Indian companies. Many contend that this is also the model that has been used by Indian information technology (IT) companies to very successfully expand globally. Another developing example of this strategy are the Indian mass-production-style medical procedures (like open heart operations at Narayana Hrudayalaya Hospital and cataract and eye operations elsewhere in India), which are designed for low-income Indian consumers that have been modified by Indian hospitals for foreign medical tourists from overseas.7
In general, it has been noted recently that Indian companies are able to create low-cost versions of advanced-country products for the poorer consumers at the “bottom of the pyramid,” which can and often are then modified and adapted appropriately to recompete successfully back in developed markets. There are many examples of the latter including the inexpensive Little Cool refrigerator with only 20 moving parts (no compressor) and the Mac400 heart monitor developed by GE India. As another example, an Indian company now has the largest fleet of electric cars on the road, giving it an unequalled edge to export electric cars overseas and license its technology to GM for the Chevy “Spark” built for the US market.8 Similarly, another example is the “Nano” automobile developed by Tata for the Indian market and now being exported to Africa, Southeast Asia, and Europe.9 In many cases, low-cost versions of many products developed for a poor market can be augmented and introduced in developed markets and still be priced lower than similar products developed in the rich countries.
Natural endowment driven technologies/abilities: Indian companies may have comparative advantage in certain technologies useful for global expansion, such as nonfading dyes that stand up successfully to bright sunlight, which can best be developed in a country with India's natural endowments. Other examples are the foreign distribution of materials such as rubber, palm oil, spices, and tea and IT service companies staffed by lower-cost English-speaking Indians, as well as cultural products such as Bollywood movies.10
Leveraging cultural and institutional understanding: Indian MNCs can reduce the costs of foreignness by taking advantage of cultural and institutional similarities between the home and host countries as they engage in OFDI. Institutional structures in many developing countries, especially in Asia and Africa, are underdeveloped and similar to the Indian institutional structure reducing the costs and risks of operating in these countries for Indian MNCs. The parents of these Indian MNCs have much experience adapting to their home governments' demands and doing business in a poor institutional environment with inadequate infrastructure—experience that is useful in adapting to doing business in similar host environments overseas. In addition, in many of these countries, Indian diasporas are widespread, providing an initially friendly and familiar consumer base for Indian companies (e.g., Indian banks initially expanded overseas mainly to serve overseas Indian populations).
While there is considerable and high profile Indian investment in the developed countries, foreign investment by Indian firms seems to favor other developing countries. There can be many reasons for this. One reason may have to do with Indian firms' experience and ability to work with the underdeveloped institutional and infrastructural environments common in developing countries. Indian firms have the opportunity to develop these abilities working in their home environment and so are better preadapted to work in other developing countries. Indeed, in developing countries, these abilities may provide Indian firms with an advantage over firms from the developed countries who may not have experience working in countries with poor institutional and infrastructure environments. Of course, similar factors may account for the success of south-south FDI from other developing countries.
Leveraging government support:
Many developing country governments may encourage outward FDI by their firms in order to support national goals that have significant positive externalities, such as the acquisition of new technology and market knowledge, foreign projection of economic power, employment of highly educated citizens, and other economic advantages of globalization. To achieve these goals, home country governments may offer tax breaks, subsidized human capital and financing, and other inducements to their firms undertaking outward FDI (Aggarwal & Agmon, 1990
As this brief review of the nature and drivers of Indian OFDI shows, OFDI from the newly ascendant economies share some similarities with OFDI from the developed economies, but they are also quite different in many ways. Studies of OFDI from other emerging markets also reinforce this conclusion. For example, compared to OFDI from the developed countries and reflecting their home country characteristics. OFDI from emerging market countries has been found to be less capital intensive, with plants that are smaller, less productive, and have fewer local spillovers in the host country (Lipsey & Sjoholm, 2011). Next, we examine more closely another example of the changing nature of emerging market OFDI, the Indian and Chinese OFDI in Africa.
India and China in Africa: Contrasting Approaches
Though Africa accounts for only 4% of the world economy, it is home to one of every seven people on our planet. With a population of over a billion people in 54 diverse countries, Africa has both some of the poorest and some of the fastest-growing economies. The traditional image of Africa popularized by Conrad's Heart of Darkness could not be more outdated for large parts of Africa. While parts of Africa remain dominated by intractable wilderness, many African countries are resource rich and some are hotspots with dynamic economies and double-digit rates of economic growth.
Africa is a diverse continent, and it can best be considered as having two subregional categories (North versus sub-Saharan Africa), each with distinctly different characteristics with regards to GDP, integration in the world economy, and political stability. Compared to sub-Saharan Africa, the five North African countries are wealthier and more integrated with the world economy. While average 2009 purchasing power parity (PPP) GDP per capita for Africa is $2,800, the five North African countries average $8,400, and South Africa at $9,700 is the highest (African Economic Outlook, 2009). With the exception of Algeria, North African countries had until 2011 enjoyed relative political stability, contrasting with violent conflicts in some sub-Saharan African countries. In contrast, South Africa is the richest African economy having maintained political stability after decolonization and is now the African economy most integrated with the world.
Africa's share of global trade and investment declined steadily until about 2000 and then reversed course and started to go back up. Over the past decade, real economic growth in Africa has averaged about four and a half percent per annum—a fairly high rate of growth, though not as high as that of China and India. However, this overall rate of real economic growth also included countries with double-digit growth rates. The better economic performance witnessed since the early 2000s also translates into the slow emergence of an African middle class that could number as many as 300 million out of a total population of one billion. This rising African middle class is likely to trigger more market-seeking and efficiency-seeking FDI in the future (Mahajan, 2009).
However, the structure of this renewed trade is quite different. In recent years, African trade with other emerging economies has overtaken not just trade with the United States, but also the larger trade with its traditional partner, the European Union (FRB Dallas, 2011). As the examples in Table 5 show, African trade with China and India has been growing faster than trade with Europe. Interestingly, in this new century, African trade with Europe has been growing at a fairly high rate, but its trade with China and India has been growing at much faster rates.
Table 5. African Trade with China, Europe, and India
As with trade, south-south FDI in Africa has also been rising but changing in nature. The overall performance of Africa in attracting FDI had been weak but it picked up and changed after 2000. Through the 1990s, Africa accounted for only about 5% of cumulative FDI inflows to developing economies compared to a share of 22% and 17% for South America and Southeast Asia. Further, inbound FDI has been distributed very unequally within Africa with the lion's share going into South Africa. It has been suggested that during the 1990s FDI inflows to Africa were hampered by a number of factors including political instability, macroeconomic mismanagement, lack of transparency, unfriendly regulatory frameworks, poor GDP growth, lack of infrastructure, a high degree of protectionism, excessive reliance on commodities, and weak governance standards (Aggarwal & Ayadi, 2012). Historically, as with trade, European countries and other advanced economies had been the key economic players in Africa, but the past decade has seen a significant increase in the economic involvement of other developing countries, especially China and India (hereafter alternatively referred to as Chindia).
In addition, the sectoral distribution of inward FDI to Africa has also changed. Traditionally, investments from the OECD countries were driven by resource acquisition. For instance, with the aim to reduce oil dependency on the Middle East, American companies have actively engaged in exploration ventures in the continent. EU-based FDI follows the same trend: after years of sanctions toward Libya, EU-based companies have turned to the country for its hydrocarbon reserves. Colonial and historic ties are still strong so that since the 1990s France has been the leading investor in Morocco; United Kingdom's companies have important stakes in South Africa, Madagascar, and Zambia; Italy takes the lead in Tunisia; and Egypt sources a significant share of its foreign capital in the United States.
Overall, one-third of FDI in Africa in recent years has been for natural resource extraction. The remaining two thirds of foreign capital has been invested in manufacturing, services, and telecommunications (UNCTAD, 2010) with a recent slow but steady rise of off-shoring activities (Kearney, 2010). While data limitations and differences in FDI definitions make it difficult to assess accurately the importance of Asian-based investors in the continent, since 2000 Asian investors originating from China, Singapore, Malaysia, and India have become key players in African economies, accounting for an FDI stock of $30 billion in 2008 (UNCTAD, 2010).
Since 2000, Chinese OFDI to Africa has increased substantially, reaching an average level of $326 million per annum between 2003 and 2006 (OECD, 2008). However, Indian OFDI in Africa has been more important than the Chinese. As with Chinese FDI in Africa, it increased rapidly in recent years (at a compound annual growth rate of 43% per annum since 1997). Indian FDI in Africa grew from a pedestrian $205 million in 1997 to over $11 billion in 2007, while Chinese FDI stocks in 2008 in the continent amounted to $7.8 billion (Freemantle & Stevens, 2009).
However, there are important differences between Chinese and Indian FDI in Africa. Reflecting China's political system, a large number of Beijing companies operating in Africa are state owned. State-owned enterprises (SOEs) are almost exclusively responsible for all the Chinese deals in extractive industries while small and medium-sized companies (SMEs) are active in the other sectors (Kaplinsky & Morris, 2009). Among the 800 Chinese companies reported to have activities in Africa, 100 large SOEs operate in extractive industries (UNCTAD, 2007). In addition, managers of Chinese companies, especially larger ones, are often connected to provincial governments and, in addition, follow guidelines from the Party and central government (Wang, 2007). Consequently, it is not easy to state to what extent the corporate governance structure of Chinese businesses is independent from the state (Burke et al., 2008).
In contrast, Indian companies tend to be privately owned and are more likely to follow profit- and market-seeking motives. For example, according to Aguiar and colleagues of the Boston Consulting Group, while only one privately owned Chinese company makes the list of the top 100 FDI source companies from rapidly developing economies, only one Indian company in the list is state controlled (Aguiar et al., 2009). Overall, the Indian FDI share has more or less equal numbers of private and public companies.
There are also significant variations as regards the entry of Chinese and Indian investors. Differences in ownership structures translate into different business strategies and to commercial risks being perceived differently. Chinese firms tend to enter new markets in Africa by building new facilities, creating business entities that are vertically integrated, buying labor and supplies from China rather than local markets, and selling in Africa mostly to government entities. They rarely facilitate the integration of their workers into the African socioeconomic fabric. Such nonrecourse to local labor creates increased social tensions, especially in countries where the unemployment rates are high.
However, Indian firms are generally market driven and so are more integrated locally. Most Indian companies in Africa acquire established businesses, are less vertically integrated, prefer to procure supplies locally or from international markets (rather than from Indian suppliers), engage in far more sales to private African entities, and encourage the local integration of their workers. As cited in Broadman (2007), in a 2006 survey of 450 business owners in Africa, almost half of the respondents who were ethnically Indian had taken on African nationalities, compared with only 4% of firm owners who were ethnically Chinese (the other 96% had retained their Chinese nationality). This finding suggests that, reflecting their long history in Africa, Indian businesspeople are substantially more integrated into the African business community than are the relatively new Chinese business managers and owners (Broadman, 2008).
More than a century ago, Mohandas Gandhi found his calling in South Africa, and today many Indian companies find South Africa the perfect gateway to the rest of the continent (Walker, 2008). As a case example of this strategy, the Tata Group is present in 11 African countries. Its investments in Africa are closing in on the half-billion-dollar mark, and it plans on taking that close to a billion dollars over the next few years, with a base in South Africa as the gateway for Tata's operations in the entire continent (Mahajan-Bansal & Suri, 2009).
Indian investments in Africa are believed to be more transparent and socially beneficial than Chinese investments in Africa. Allegations about corruption, nontransparent practices in bidding, lack of respect of social standards, nonrecourse to local labor, and nonintegration of Chinese workers are often cited as some of the main drawbacks associated with Chinese FDI in Africa. India is arguably a more collaborative and sustainable partner, while China is considered more opportunistic but more willing to work even with failed states (Halper, 2010).
In general, it seems that Indian companies in Africa are more integrated with the local economy, whereas Chinese companies operate almost as free-standing enclaves (Nanji, 2010). The main reason for this collaborative approach is that India has been trading with the African continent for hundreds of years. In the British colonial period, thousands of Indians were taken to Africa to work. Today, about two million people of Indian descent live in Africa, many of them running their own businesses. On the whole, India has a far better reputation in Africa than China, which has been criticized for using predominantly imported Chinese labor in its African projects (now over a million strong), and for a tolerant attitude toward the poor human rights records of many African regimes (Jenkins & Edwards, 2006).
As this brief review of India and China as the new major investors in Africa shows, the modes and processes used by these newly ascendant economic powers are likely to vary greatly from the past and is likely to include a heavier role for state directed entities.11 The nature of global capitalism in the modern era is likely to veer away from a primary dependence on market driven entities for the past three quarters of a century since World War II. Again, there is still much work to be done in understanding the nature of these new modes of FDI by the rising new economies.
Interestingly, the accommodation of the rising new economic powers into the global economy has to take place in an environment of major upheaval in the developed economies. We next examine how the recent global projection of Indian and Chinese and, more generally, southern economic power fits in with, and is likely to be influenced by, the larger overall trends and forces in the advanced industrialized countries.