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SpirE-Journal 2007 Q4

The Rising Tide of Asian Investment in Asia

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The Rising Tide of Asian Investment in Asia

The role of Asian economies in global foreign direct investment (FDI) is changing. Asia is attracting a larger share of global FDI while at the same time accounting for a larger share of FDI outflows to other countries. More of Asia’s inward FDI is originating from the Asian region itself, as are more of Asia’s imports. This article examines these trends and what they mean for business in the region.

Surge in global FDI

Capital throughout the world has become increasingly mobile in recent decades and international trade has been exploding. Until the recent past, FDI and trade mainly flowed from the developed countries into the developed countries: in particular, the Triad – Western Europe, the United States, and Japan. Until the mid-1980s, the role of developing and transitional Asian economies as sources of investment was negligible.

Between 1995 and 1998, however, the Multilateral Agreement on Investment (MAI) was negotiated between members of the Organization for Economic Co-operation and Development (OECD). Its purpose was to develop multilateral rules that would ensure international investment was governed in a more systematic and uniform way between states.The improvements that followed stimulated global FDI flows and eventually led to a rising share of global FDI for Asia.

More bilateral investment treaties and double taxation treaties are now in force between developing countries, rather than between developed and developing countries. Asia has, in fact, been the most active developing region in terms of concluding preferential trade and investment agreements (PTIAs) – Asia concluded 38 percent of a total of 14 PITAs in 2005, followed by Latin American with a quarter of that percentage share.

Partly as a result of these developments, global FDI quadrupled from US$ 2,766 billion in 1995 to US$10,129 billion in 2005.

Asia’s growing share of FDI

World FDI stock was estimated to be US$10,129 billion in 2005, of which South, East and Southeast Asia received 18 percent, with the East Asian sub-region accounting for three-quarters of that share3. An upsurge in FDI inflows into Asia was witnessed for the second consecutive year in 2006, rising from US$158 billion in 2004 to US$230 billion in 2006.

A regional pattern of FDI flows has emerged, with investors’ attention shifting away from traditionally important locations in developed countries in favor of emerging markets, especially Asia and South-eastern Europe (Annex 1). A survey by the United Nations Conference on Trade and Development (UNCTAD) found prospects for Asia and the Pacific to be most positive, with over 85 percent of experts, multinational corporations (MNCs) and Investment Promotion Agencies (IPAs) expecting significantly increased FDI flows to the region.

From Table 1, we can see that China and Hong Kong currently top the list of largest recipients, absorbing approximately half of the total FDI inflow into Asia in recent years. The Southeast Asian sub-region received approximately half of China and Hong Kong’s FDI inflow level, with Singapore as the greatest beneficiary. Investment into South Asia was much lower although it grew considerably in several countries, especially India which recorded its highest level of inward FDI ever at US$6.6 billion in 2005.

In particular, South, East and Southeast Asia have increasingly attracted manufacturing FDI and specific locations have evolved as countries move up the value chain. For example, Thailand has been successful in attracting FDI in automotive, IT and food manufacturing, while the same is true for IT assembly in the Philippines, pharmaceutical and chemical manufacturing in Singapore and general manufacturing in China.

China and India are predicted to be the top FDI destinations in the Asian region in the longer term, while Thailand, the Republic of Korea, Malaysia, Indonesia, Vietnam and Singapore are all expected to perform well. The high ranking of these countries by both experts and MNCs suggests a general consensus on individual country prospects.

Industry-wise, the automotive, electronics, steel and petrochemical industries tend to draw the largest values of manufacturing FDI. Vietnam, for example, has become a new choice location, attracting investment from multinational companies (MNCs) like Intel which is investing roughly US$1 billion in the country’s first semiconductor assembly plant. China, too, is moving to more advanced manufacturing technologies with businesses such as Airbus planning to set up an assembly operation for its A320 aircraft.

A shift toward services in Asia’s inward FDI is also visible, especially in the banking, telecommunications and real estate sectors. Singapore-based DBS bank, for example, has set its sights on becoming the local bank of choice in Hong Kong as well as Singapore.

The Strength of intra-Asian FDI

A large share of the FDI inflows into Asia originated from other Asian countries. Of the US$138 billion of FDI inflows into South, East and Southeast Asia in 2004 (see Table 1 above), approximately 40% is estimated to have originated from other Asian countries. China, Hong Kong, Indonesia, Philippines and Thailand stand out as having inward FDI that is dominated by Asian investors.

Inward FDI stock figures reflect great growth in the share of Asian source countries, with a corresponding fall in the share of Western sources. Furthermore, “disguised” FDI routed through tax havens such as the BVI account for a small and shrinking share.

To cite specific examples of prominent source countries, Asia is the destination for over 70% of total FDI outflows from Taiwan, over 50% (90% if outflows to British Virgin Island and Bermuda are excluded) from Hong Kong and Korea, and over 30% from Japan.

Numerous factors have driven the increasing levels of intra-Asian FDI:

Need for global presence – MNCs are undergoing an attitudinal change, realizing that they operate in a global economy where Asia is a rising force. In addition, developing country MNCs are investing in other countries to reduce the risk of overdependence on the home market. Offshore centres of excellence, such as India’s data recovery centres in Singapore, are examples of this trend.
Costs of production – Labor costs are of concern to most MNCs, especially those from more developed nations. Production has increasingly been relocated to developing economies where costs are lower. This practice is commonplace in industries such as electrical & electronics, and garments & textiles – FDI in the electrical and electronics industry is strongly regionally focused while FDI in the garments industry is more geographically dispersed.
Market access – Production and distribution centres are eventually set up close to consumer markets. This benefits the transportation of perishable goods such as agri-food and processed food. Indonesian-owned Indofood Corporation, for instance, has located production in China where a large part of its market resides.
Favourable FDI regulatory trends in Asian host countries – Changes in government policy have facilitated FDI through creating greater openness to foreign investors, reducing taxes, simplifying procedures and enhancing incentives. In host economies,liberalization policies have created many investment opportunities, such as the privatization of state-owned enterprises and assets. As competition for FDI intensifies, countries are becoming more proactive in their investment promotion efforts. Dedicated bodies such as the IPAs are markedly being established to attract FDI. IPAs now consider developing Asia as a key FDI source region.
The rise of outward investment from Asia

A growing number of host countries are beginning to appreciate that the spectrum of inward investors world-wide is becoming more diverse. This is reflected in the increasing activities of Investment Promotion Agencies or IPAs across the world (and even in the West) seeking to attract FDI from developing and transitional economies, such as China and India (Figure 2).Potentially, IPAs expect the United States to be the largest source of global FDI flows, followed by the United Kingdom and Germany. However, China was ranked next, followed by other developing Asian countries featured in the top 15 source countries, namely India, Malaysia, and the Republic of Korea.

Developed countries may remain the chief source of contributions but their share has fallen slightly, largely due to a scale-back from the United States. Conversely, a large increase in outward FDI flows from developing economies has been seen, led by Hong Kong and China (see Table 2).

Indeed, Asia excluding Japan is becoming an increasingly important source region for global FDI, increasing its outward FDI stock from US$68 billion in 1990 to US$874 billion in 2005. In addition, the amount of intra-regional FDI has risen significantly with the average annual intra-Asian flows amounting to an estimated US$48 billion in 2002-2004.

In light of this new dimension of FDI, MNCs have more good reasons to pay special attention to Asian countries as locations for world-scale investment.

Although the MNC universe continues to be dominated by firms from the Triad, the number of MNCs from developing countries, especially Asia, has increased dramatically. Out of the top 100 MNCs from developing countries, 77 come from South, East and Southeast Asia – 25 originating from Hong Kong, 15 from Taiwan, 14 from Singapore, and 10 from China (Annex 2).

Interestingly, Asian MNCs from developing countries have become important investors in many least developed countries (LDCs). In fact, FDI from developing countries accounts for more than 40 percent of total FDI inflows into some LDCs. Countries with the highest dependence on FDI from other developing and transitional economies include the LDCs Myanmar and Laos.

The new frontiers of intra-Asia investment

Traditionally, the main Asian source countries for FDI have been Japan, Korea, Taiwan, Hong Kong and Singapore. However, in recent years, the developing countries of Asia are beginning to pull their own weight.

China and India, for instance, are two giants on the move towards securing a greater share of energy assets overseas. Their strategy to control oil and natural gas reserves has led to rising FDI outflows. China National Oil Company, for instance, has made major investments in the offshore oil and gas industry in Indonesia.

The range of other companies invading nearby Asian shores is expansive as well. For example, Malaysia-based Lion Group, whose main businesses are steel, motor, retail, computer, plantation and property development, has extended its operations to China, Hong Kong, Singapore, Taiwan and Vietnam. Chaoren Pokphand Group, a Thai conglomerate with businesses in agriculture, poultry, telecommunications and logistics, has invested heavily in developing nations in Asia such as Malaysia, Cambodia, Myanmar, India, Taiwan, Vietnam and Indonesia.

Intra-Asian Trade – the harbinger of intra-Asian FDI

Over the past two decades or so, the flow of imports and exports between Asian economies has also risen exponentially, reflecting the rising interdependence among these economies. This trade pattern has mirrored that of FDI and explains why intra-Asian FDI growth is so healthy – companies exporting heavily to their Asia neighbors eventually tend to set up sales offices, distribution centers and manufacturing in the export markets.

Intra-Asian trade is still skewed towards a handful of countries in East and Southeast Asia. Annex 3 reflects that China and Hong Kong dominate intra-regional trade and are absorbing huge and increasing volumes of imports from the rest of Asia, though ASEAN’s performance is respectable.

Figure 3 shows the amount of imports flowing into the specific countries from other Asian economies. As of 2004, China received the largest amount of imports from the region, followed by Hong Kong, Singapore, the Republic of Korea, and Taiwan. The amount of imports flowing into China and Hong Kong has grown explosively, around the inflexion points of 1985 and 2001.

Figure 4 shows the amount of exports flowing from specific source countries into other Asian economies. As of 2004, China produced the largest amount of exports into the region, followed by Hong Kong, the Republic of Korea, Taiwan and Singapore.

Intra-Asia trade looks set for a bright future and is poised to pull intra-Asian FDI along with it.

Conclusion

With all the growth in intra-Asian FDI and trade flows, it is not surprising that talk of an Asian economic bloc keeps recurring. The concept of an Asian regional institution – starting with trade and economic policies, then maturing to address deeper issues like security – is not new. Malaysia’s former Prime Minister Mahathir Mohammed’s dream of an East Asian Economic Caucas based on the yen and Japan, with capital controls as a regional management tool, was widely seen to have been thwarted by US opposition a decade ago.

In 2006, however, Mahathir’s vision surfaced yet again at the East Asian Summit. There, the Southeast Asian nations and Japan agreed to consider establishing a 16-nation Asian trade bloc. Japan proposed a new trade zone that would embrace half the world’s population. It would consist of the 10-member Association of Southeast Asian Nations, or Asean, plus Australia, China, India, Japan, New Zealand and South Korea.

But with critics saying that such a bloc is decades away from reality, the Japanese minister of economy, trade and industry, Toshihiro Nikai, concluded that there was “no need to make any haste” in pushing the integration of the 16 nations.

If the international climate continues to favor open trade and investment, and if the WTO is able to maintain and enhance its role as an honest arbiter of the international trading system, there is no reason why Asian countries will seek to form an economic bloc. Asian nations are too dependent on exports to and imports from the rest of the world, in particular energy imports. In short, Asia has too much of a vested interest in trade and FDI linkages with the rest of the world.

If, however, the Doha round of WTO talks collapses and the international trading climate deteriorates down the slippery slop of protectionism, Asian countries will be well-positioned to forge an economic union which generates much of its own trade and FDI.

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