The Future of Russian Outward Foreign Direct Investment and the Eclectic Paradigm: What Changes After the Crisis of 2008-2009?

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The Future of Russian Outward Foreign Direct Investment and the Eclectic Paradigm: What Changes After the Crisis of 2008-2009?
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  See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/228119973 The Future of Russian Outward Foreign DirectInvestment and the Eclectic Paradigm: WhatChanges After the Crisis of...  Article  · June 2010 DOI: 10.21845/comp/2010/1/2 CITATIONS 6 READS 75 1 author:Some of the authors of this publication are also working on these related projects: Analysing patterns of emerging sources of outward foreign direct investment   View projectKalman KalotayUnited Nations Conference on Trade and Development 60   PUBLICATIONS   517   CITATIONS   SEE PROFILE All content following this page was uploaded by Kalman Kalotay on 24 December 2016. The user has requested enhancement of the downloaded file. All in-text references underlined in blue are added to the srcinal documentand are linked to publications on ResearchGate, letting you access and read them immediately.  Electronic copy available at: http://ssrn.com/abstract=1702829   1 The future of Russian outward foreign direct investment and the eclectic paradigm: What changes after the crisis of 2008–2009? Kálmán Kalotay 1   This article explores the future of Russian outward foreign direct investment in the aftermath of the crisis of 2008–2009. As it is too early to analyse the full impact of the crisis, it develops hypotheses about the degree of slowdown in the foreign expansion of Russian transnational corporations. It uses an extension of the eclectic paradigm to home country advantages (competitive environment, business environment, development strategy, State involvement) applied to a comparison of the Russian Federation with other economies in transition as an analytical tool. Systematic differences between transnationals from the Russian Federation (global firms, based on natural resources, aiming for vertical integration of assets) and from new European Union member countries (regional firms, based on downstream activities or services, aiming for horizontal integration) allow us to formulate more solid conclusions about the future of the Russian firms facing lower export prices, lower market capitalizations and higher debts. In turn, this article argue that a comparison with the large emerging economies of Brazil, China and India, under the acronym of BRIC can be less useful in the current context, as these economies are significantly less affected by the crisis of 2008–2009 than the Russian Federation; hence they can not expect a slowdown in their outward foreign direct investment similar to that of Russian transnationals.  JEL : F23; F21; O52; P29 Keywords : Russia; Outward FDI; Eclectic paradigm; Home country; Crisis; Economy in transition Introduction Over a historically brief period (a decade and a half), the Russian Federation has become a major outward investing country on a global scale. According to data from the United Nations Conference on Trade and Development (UNCTAD), registered outward foreign direct investment (FDI) stock of the Russian Federation’s increased from U.S.$ 2 1  Economic Affairs Officer United Nations Conference on Trade and Development Palais des Nations, CH-1211 Geneva 10, Switzerland Tel.: +41 22 907 50 99; fax: +41 22 907 01 94. E-mail address: kalotayk@gmail.com. The view are those of the author and do not necessarily reflect the opinion of the United Nations.  Electronic copy available at: http://ssrn.com/abstract=1702829   2 billion in 1993 to U.S.$ 255 billion in 2007 ( UNCTAD, 2008  ), making it the 15th most important source economy of investments worldwide, and the second largest among emerging economies (defined as developing and transition countries together), behind Hong Kong (China) only, and ahead of Brazil, China, India and South Africa, to mention a few. However, with the onset of a major financial crisis in the second half of 2008, which affected the Russian economy deeply, questions are raised about the immediate future, as well as the long-term sustainability of those large outward investments. This article argues that questions about the future of Russian outward FDI are particularly acute because the timing of crisis coincides with a change in the business cycle of Russian transnational corporations (TNCs): after a stage of very fast foreign expansion, time has come to consolidate the foreign assets, resulting in a slower growth abroad (and even a retreat in some cases). The future is thus uncertain to predict with exactness. However, if a right analytical framework is applied to the Russian outward FDI phenomenon, certain trends can be predicted. This article applies two of them: one is a business case study methodology, in which the most salient current problems of Russian TNCs are analysed; the other is a more theoretical one: an extended version of the eclectic paradigm (extended to a separate home-country factor) applied to the Russian Federation in comparison to other economies in transition (acknowledging that the two methods can partly overlap). In turn, this article argues that the analysis of the future of Russian outward FDI has to be detached from the “BRIC” Group (Brazil, Russian Federation, India and China), as the three other economies do not share any common characteristics with the Russian Federation. The rest of the paper is organized as follows: First, a business case study analyses briefly the periods of boom and halt in Russian outward FDI, with a special reference to its natural resource base. It is followed by an argument about by the analytical framework of the BRIC group is no longer valid. The subsequent section applies the extended eclectic paradigm to the Russian Federation in comparison to other economies in transition. The conclusion formulates some general hypotheses about the future of Russian outward FDI.    3 Boom and slowdown According to official statistics, in the late 1990s and till 2007, the growth rate for Russian outward FDI stocks was by far the fastest among emerging markets, faster than other newly emerging source countries such as India, or rapidly expanding offshore centres such as the British Virgin Islands. However, the three-digit growth rate of the outward FDI stock of The Russian Federation is partly a statistical artefact. It may well be that in the 1990s, the outward investment position of the country was largely underreported. After 1999, the Bank of Russia started receiving increasingly accurate information but was not fully in a position to revise its previous reporting. That is partly confirmed by a look at the difference between outflows and outward stock data over the period 1999–2007: the cumulative outflows of that period reached U.S.$ 117 billion, while the outward FDI stock rose by U.S.$ 245 billion. 2  Naturally, part of the discrepancy may be due to changing valuations or the fact that not all the private sector outflows of that period were correctly recorded under FDI. Nevertheless, the dynamics of flow data too indicates fast growth. The main salient feature about the period of take off (especially 2000–2007) is that fact that lower middle-income The Russian Federation became mostly unexpectedly a net capital exporter, and some of its firms, such as Gazprom, Lukoil, Norilsk Nickel, and Severstal, for example, have already leapfrogged to a global status, due to their aggressive strategies of foreign expansion and leveraging of their natural-resource-base (expansion financed by borrowing). While Russian corporations that expand internationally constitute a mostly diverse group of firms in terms of ownership structures, motivations, and strategies, the most important and the largest ones of them (Gazprom, Lukoil, Norilsk Nickel, United Company of Rusal, etc.) are strongly linked with the natural resources of their home base. Of the 25 largest Russian TNCs of 2007 ranked by foreign assets ( Skolkovo and VCC, 2008  ), there were 3 oil and gas firms, which occupied the top 2 positions), 6 iron and steel companies, 2 mining companies, and one metals company. These firms together account for U.S.$ 72 billion in foreign assets (figure 1), of which two companies (Lukoil and Gazprom) were responsible for more than half (U.S.$ 34 billion). This means that natural-resource-based firms accounted for four-fifths of the foreign assets of the top 25. Setting aside the 2  See the data of the UNCTAD FDI/TNC database.    4 methodological differences between FDI and foreign asset data, a rough estimate can be made to compare the foreign assets of the top 25 (U.S.$ 72 billion) against the total outward FDI stock of the Russian federation at the same year (2007) (U.S.$ 255 billion). The former amounts for 35% of the latter, and given the fact that the top 25 list may exclude certain non-reporting large companies, this ratio is an indication of a very high concentration of outward FDI by a few firms. Figure 1 Foreign assets of the top 25 Russian TNCs and outward FDI stock of the Russian Federation, 2007(Billions of U.S. dollars) Foreign assets of the other natural resource based top 25; 34Foreign assets of the non-natural resource based top 25; 18Foreign assets of Lukoil and Gazprom; 38Outward FDI stock outside the top 25; 166   Source  : Author's calculations, based UNCTAD FDI/TNC database and Skolkovo and VCC 2008.   The crisis that started in 2008 affected all business around the world negatively, including Russian TNCs. The general negative fallout of the crisis includes reduced access to finance; a sharp deterioration of perceptions about business prospects by TNCs; and a strong risk aversion of all businesses ( UNCTAD, 2009 ). Indeed, the financial crisis of 2008 3  has reached the Russian Federation quickly and in many senses augurs badly for outward investing Russian TNCs. There are certain circumstances that make the impact of the crisis particularly strong on Russian firms. For example, greenfield investments  (new investments and expansion of existing facilities) which seem to be so far been quite resilient to the crisis ( UNCTAD, 2009 ) represent a small portion of outward FDI by Russian TNCs, as the latter have preferred M&As in their vision to leapfrog to global status ( Kalotay, 2008  ). This is so because cross-  3  By 2009, this financial crisis had become a general economic crisis.
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