Catalog

	Table of Contents
p. 68 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia III. Foreign Direct Investments in Developing Asia Trends Impact of Foreign Direct Investment Importance of the Policy Context International Investment Agreements Six Asian Case Studies Conclusions and Policy Implications Endnotes References

Asian Development Outlook 2004 : III. Foreign Direct Investments in Developing Asia

---

Endnotes

1 For more detailed information, see Brooks and Hill (2004). The countries studied in detail are People's Republic of China (PRC), India, Republic of Korea (Korea), Malaysia, Thailand, and Viet Nam.

2 Any analysis of foreign investment has to be heavily qualified by data constraints. Common weaknesses include the following:
First, FDI flows are poorly recorded. Investment agencies typically report approved investments, which often differ significantly from actual flows: realization rates fluctuate and may lag by several years; some agencies include domestic borrowings and even equity in their “foreign” totals.
Second, realized FDI estimates produced by central banks from balance-of-payments data are generally very approximate. Moreover, they do not include FDI in the form of reinvested earnings.
Third, disaggregated FDI flow data, by sector and source, are mostly incomplete. Often, the administrative responsibility of investment agencies does not extend to key sectors of the economy. Attempts to match source and host country FDI estimates typically reveal large discrepancies.
Fourth, accurate stock estimates of the foreign presence are rarely available. As noted, the flow data are inadequate. In addition, census estimates of foreign ownership are irregular and mostly patchy.
Fifth, data on other dimensions of the foreign presence, which may also include foreign equity, are even weaker. In some countries, there is substantial foreign ownership via the stock market, which (except during periods of crisis) may resemble FDI in its behavior. Notably, there has been a large diaspora from all six countries, but no consistent treatment of their investment activities. Associated flows of human capital and technology, which often also entail some implicit or explicit FDI, are also poorly recorded.

3 See Fan (2003), Lim (2001), and Moran (2002) for recent literature surveys.

4 See Yusuf (2003, chapter 7) for a recent analysis of this phenomenon in an East Asian context.

5 Migrant labor flows into Malaysia have been particularly large, and at the time of the Asian economic crisis these workers, many of them illegal, totaled 20-25% of the work force (Athukorala and Manning 1999).

6 The migration model of Harris and Todaro (1970) explains the persistence of rural-urban migration in developing countries with high urban unemployment as a reaction to the expected (rather than actual) high urban wage.

7 See Fan (2003) for a summary of this large literature.

8 An extreme example is the auto industry, which had high levels of protection. In 2002, 11 foreign manufacturers competed for a local annual market of less than 27,000 cars and commercial vehicles.

9 For comprehensive analyses of these issues, see the papers in Jomo and Felker (eds., 1999), and Jomo et al. (eds., 1999).

10 It is worth remembering that Malaysia was a world leader among tropical countries in pioneering high-quality agricultural research and extension programs, partly to address problems of rural Malay poverty. However, for reasons that are not entirely clear, industrial extension programs have never been developed to the same extent, with the Government preferring to adopt a more passive, MNE-led approach.

11 See Rasiah (2001) and Toh (2002) for interesting accounts of Penang’s export-oriented industrialization success and challenges.

12 The key architect of Indonesia’s dramatic FDI regime liberalization in 1967, Moh Sadli, later expressed the context as follows:

“When we started out attracting foreign investment in 1967 everything and everybody was welcome. We did not dare to refuse; we did not even dare to ask for bonafidity of credentials. We needed a list of names and dollar figures of intended investments, to give credence to our drive. The first mining company virtually wrote its own ticket. Since we had no conception about a mining contract we accepted the draft written by the company as a basis for negotiation and only common sense and a desire to bag the first contract were our guidelines” (quoted in Hill 1988, p. 28).

13 Although this may be changing. For example, Toyota has recently transferred some of its R&D activities to Thailand.

14 An important consideration here is whether fully owned foreign operations are permitted. The empirical evidence suggests that MNEs are more likely to develop strong local supply and content networks in a secure environment that permits 100%, or at least majority, foreign ownership (Moran 2002).

15 See McKendrick et al. (2000) and Wong (2003) for detailed analyses of Singapore’s upgrading strategies.

16 Efforts to protect domestic markets offer an incentive to foreign investors to reap a secondary round of oligopoly rents from older technology.

17 Voluntary joint ventures, on the other hand, to spread risk and increase market access offer fewer disincentives for technology transfer, at least for more established technologies.

18 However, the affiliates of foreign investors generally try to avoid horizontal technology transfers that may create greater competition for themselves.

19 Argentina’s request stated specifically that negotiations within the context of the MERCOSUR Common Automotive Policy were important. Mexico did not specifically mention it in its request, but it has been noted that there is an inconsistency in the phaseout periods for TRIMs between the North American Free Trade Agreement and WTO.

20 The countries were selected for the variety of their conditions and experiences with FDI. They were studied in greater detail as part of an ADB regional technical assistance study (see Brooks and Hill 2004).

21 Some special provisions will always be required in any investment law tailored specifically for foreign investors, e.g., concerning guarantees against expropriation and provision for profit remittance.

22 Numerous data sources could have been selected. One recent and very useful series, with heavy emphasis on technological capacity and learning, is presented in UNIDO (2002). Its major drawback for this section is that it does not include Viet Nam. Part III (“Competitiveness in Developing Asia”) of ADB (2003) provides a comprehensive review of various competitiveness estimates.

23 For a detailed review of these issues, see the contributors to Krueger (2000). On the reform list, major areas include fiscal imbalances, public sector enterprises, trade policy (especially in consumer goods industries), labor market rigidities, SMEs and reservation schemes, the regulatory and licensing system, and center-state relations. Many of these, of course, overlap.

24 For example, R&D expenditure rose from 0.3% of GDP in 1971 to 2.8% in the mid-1990s.

25 For example, official documents state that FDI should go to “mountainous and remote regions with difficult economic and social conditions.” MNEs are criticized for not developing greater local sourcing, and yet the policy regime inhibits the development of a vibrant SME sector.

26 See Lardy (1996) for a detailed analysis of the PRC’s trade and FDI liberalization.

27 See Wells and Wint (1991). In their sample of countries, only Singapore appeared to have an effective separation of responsibilities.

28 To quote Joshi (2003): “In practice, however, the system [i.e., the FDI regime] is more restrictive than it sounds, because there still remain numerous hurdles to jump, erected by State governments if not the Centre.” Athreye and Kapur (2001, p. 422) note that the irony that “… even in sectors where foreign investment is readily allowed, firms must secure ‘automatic approval’!” On the Indian reforms, see also Joshi and Little (1997) and Krueger (2002).

29 See Ramstetter (1999) for a detailed empirical study of the issue.

30 This debate included the assertions that Japanese and third world FDI were superior to that from the US and other developed countries respectively. Kiyoshi Kojima (e.g., 1996) was commonly associated with the former argument, while Wells wrote a major early study of the latter (1983).

31 Indonesia has of course been the principal outlier among the crisis-affected economies, in that FDI did not rise, due to its regime change and prolonged period of political uncertainty.

32 See Athukorala (2001) for a detailed examination.

33 Some caveats have to be attached to the data in Table 3.4. Trade-to-GDP ratios need to allow for country size. Average tariffs need to take account of tariff dispersion and the presence of nontariff barriers. To varying degrees, all six countries maintain dual trade regimes as between export sectors and the domestic economy. Nonetheless, the picture presented here is a reasonably plausible characterization of the country differences.

34 For contending perspectives on the impact of these interventions, see for example Amsden (1989, 2001) and Smith (2000).

35 That is, the ASEAN Free Trade Area liberalizations have almost always been multilateralized, while the South Asian Association for Regional Cooperation concessions have so far been relatively small. To the extent that these preferential trading arrangements are now being broadened (and overlapping), their benefits may increase.

36 See Hardin and Holmes (2002) for the development of a methodology to estimate FDI barriers, and some empirical estimates.

37 For example, as Stiglitz (2001, p. 521) notes, Singapore earned high marks “… when it excluded the Bank of Credit and Commerce International, which [later] succeeded in duping the US’ regulatory authorities.”

38 Much revolves around the definition of “essential,” which usually includes defense-related industries, and sometimes the media and major natural resources. Divestment requirements may also be stipulated, although these are contrary to the spirit of national treatment.

39 For example, in some cases of rapid decentralization, regional governments, in their desire to quickly expand the local revenue base, resort to the imposition of local trade taxes or sanction environmentally unsound practices (e.g., excessive deforestation).

40 A recent study of Caribbean nations’ proliferating fiscal incentives to attract FDI, especially in information technology sectors, underlined this point: “If anything, the plethora of incentives for different categories of investors in industrial parks may raise uncertainty regarding the stability of concessions and the government’s long-term plans” (Berezin et al. 2002, p. 32).

41 For example, like most countries, proposed investment per employee is one of the criteria. However, Malaysia is also actively courting advanced information technology projects, which typically have relatively low (physical) capital-to-labor ratios.

Back Conclusions and Policy Implications	Next References