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Asia Business Development – Asia Business Consulting » More Than Just China: The European Challenge To Asian Foreign Direct Investment
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SpirE-Journal 2005 Q3

More Than Just China: The European Challenge To Asian Foreign Direct Investment

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Untapped European Investment Opportunities Facing Singapore Businesses 

Contrary to popular belief, the current biggest destination for global foreign direct investment (FDI) is not China but Europe. Data from the United Nations World Investment Report (UNWIR) 2004 showed that the level of FDI flowing into Europe has far exceeded the inflow into China and even the entire Asia-Pacific. USA and Belgium/Luxembourg lead the pack in FDI, followed by China, with France closely behind. Seven of the top 10 FDI recipients in the world are European countries, including Belgium, France and Netherlands. This should be an unsurprising situation, given the European Union’s (EU) present standing as the largest bloc of GDP in the world.

However a survey of export-oriented companies in Australia, China and Singapore enterprises by Spire Research and Consulting, (sponsored by the UK’s Welsh Development Agency) revealed that most Asia-Pacific enterprises either have no clear business strategy in Europe and no direct presence in that region. In terms of European presence and strategy, Singapore businesses are ahead of their counterparts in China but lagging Australia.

Corporate Strategies Towards Europe: Australia, China And Singapore, compared

Of the companies surveyed in Australia, China and Singapore, predictably the larger ones had a presence in Europe – often sales, distribution or customer service facilities but in some cases manufacturing or R&D. In Singapore, this included many of the Government-Linked Companies (GLC).

Yet only a small percentage of Small and Medium Sized Enterprises (SMEs) surveyed had a defined European strategy or interest in investing in Europe to develop business opportunities there. An even smaller number had an actual direct investment presence in Europe. Very few SMEs had visited Europe to attend trade shows or participate in overseas business missions. The criteria for recruitment of SMEs as survey respondents were based ontheir success in export markets; meaning that only the larger and more export-oriented SMEs were surveyed. Examples of Asia-Pacific companies with investment projects in Europe include:

• Laura Ashley’s garment and furniture operations in Wales UK, owned by Malaysia’s MUI
• Packaging operations across Europe owned by Australia’s Amcor
• PSA Corp’s stakes in ports in Belgium and Italy
• CDL’s hotel investments in the M&C group in the UK
• SFI’s food processing plant in County Durham, UK

Insights from senior decisions-makers in the companies surveyed revealed a number of common reasons inhibiting their investment in Europe. Among them were the small customer base their companies had in Europe, their perception of weak economic growth in the region and high business costs, especially labor costs. However, the most frequently cited factor was their view that the large, fast growing and more accessible markets in Asia should be the main focus for FDI – particularly China but also including ASEAN and India.

Global And Singapore FDI Into Europe Compared

Figures from the Singapore Department of Statistics showed that in 2003 only 6.14 percent of Singapore’s stock of FDI was in the EU while Malaysia and China enjoyed the lion’s share of Singapore’s investments at 8.66 percent and 12.39 percent respectively.1In that same year, there was a gross decline of Singapore’s direct investments in EU.By comparison, 52.75 percent of global FDI in 2003 landed in the EU, averaging 53.19 percent in the 2001-2003 period. 2Europe remained the top destination for US manufacturing FDI, attracting US$15.7 billion in 2002.3In the UK, FDI almost quadrupled in 2004, rising from US$20.4 billion in the previous year to US$78.5 billion. Even discounting Luxembourg where distortion may be created by the country’s tax policies on FDI, 31.83 percent of the world’s 2003 FDI still went to the EU compared to the 12.39 percent which China received. It should also be noted that China’s FDI figures are magnified by a phenomenon known to economists as “round-tripping” where investments by Chinese companies in their homeland are routed through overseas shell companies so as to benefit from preferential incentives for FDI.

Asian investments still account for only a small percentage of the total investments in Europe. A notable exception is Japan, especially the Japanese car manufacturers. To date, they have about 18 production bases in the 10 EU countries and have doubled their production since 1995. More investments are expected in these two years, according to JAMA.

Asian Businesses Need To Pay More Attention To Europe – Singapore has more to catch up

The data suggests that if Asia-Pacific companies want to be globally competitive, they would need to do much more to catch up with the global level of investment in Europe. The EU now represents the largest economic bloc in the world in terms of GDP. Global investors in the EU, Japan, Korea and USA are conscious of this fact and have invested significantly in the EU. Asian enterprises will need to take Europe more seriously, if they are to become globally competitive and avoid denying themselves future market opportunities in the long-term.

When considering Europe, many Asia-Pacific companies are deterred by the fact that the Europe market is seen as a high-cost, low-growth market with an aging population. However, Singapore companies should consider the following, as global investors have done:

The EU has a very high purchasing power per head, on par with the USA and Japan. With a much larger population than these two countries, Europe is in fact a crucial global market for high value-added products and services.

Growth has been more vigorous in some parts of the EU than others, such as Spain, the UK and some of the newly integrated countries of Central and Eastern Europe.
 

Unlike some Asian countries, the EU has an advanced infrastructure, stable and predictable tax rates, and an increasingly pro-FDI business climate, with government agencies competing with one another to offer support and financial incentives.
 

Asian companies from Commonwealth countries like India, Malaysia and Singapore would be in a position to leverage the advantage of a common language and legal system when investing in the UK and Ireland.

Annex 1: Leading Recipients Of Inward FDI According To UN WIR 2004

Annex 2: The Top 20 FDI Recipients For 2002, 2003 (US$ bn)

Annex 3: Breakdown Of FDI Projects, 2004 

 

 

 

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