Catalog

	Table of Contents
p. 62 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

---

Trends

Cross-border trade in developing Asia has grown rapidly since 1970. Global exports of goods and services rose by an annual average of 5.6% in real terms and 9.5% in nominal terms from 1970 to 2001. As a share of output, exports increased from less than 14% in 1970 to more than 29% in 2001 (Figure 3.1). While South Asia has more or less followed the world trend, East Asia has seen increasing exports relative to output, surpassing the world average since 1979. Southeast Asia has consistently achieved a higher ratio of exports to gross domestic product (GDP) since 1970 than the world average.

Relative to world output and exports, FDI outflows have risen tremendously since the early 1990s (Figure 3.2). World FDI outflows increased about five times from 1993 to 2000 before falling beginning in 2001, while world trade and output grew at a more modest pace, not even doubling in value between 1990 and 2002.

From only $53.7 billion in 1980, annual FDI outflows reached $1.2 trillion in 2000. (Since then, however, the weaker global economy has considerably reduced outflows, which dropped by 44% in 2001, a further 9% in 2002, and remained flat in 2003.) The upsurge in FDI substantially changed the international economic landscape. From 1980 to 2000, the growth rate of world FDI outflows surpassed that of world exports (Figure 3.3). This swift expansion in FDI was more pronounced during 1986-1990, when many host countries began to relax regulations to attract FDI, and 1996-2000, when companies undertook scores of mergers and acquisitions (M&As) in the wake of privatization programs in Latin America and the 1997-98 Asian economic crisis.

As trade has been liberalized, the old “tariff factory” model of FDI has given way to a new FDI-led, export-oriented paradigm. This is sometimes characterized as a switch from “rent-seeking” to “efficiency-seeking” FDI. This transformation has profound implications for host countries’ management of FDI. The regulatory apparatus that was constructed to manage (and frequently siphon off) rents under the old regime is generally still present in most countries. Yet it has become largely irrelevant, and has usually been bypassed in the reform process, which has typically been driven by other parts of the bureaucracy. The contemporary challenge for developing countries is to develop a new approach to managing FDI. In a globalizing world, competition for FDI is no longer about rents but instead focuses on the establishment of an enabling, business-friendly commercial environment, consistent with national development objectives. In this context, a useful paradigm is the so-called “three Is”: incentives, institutions, and infrastructure. That is, as economies open up, these three factors (examined in greater detail in the section The Commercial Environment, below) are key determinants not only of the overall rate of economic growth but also of the magnitudes and productivity of capital flows.

The geographic pattern of FDI outflows has changed only slightly in recent years. Europe and North America continue to be the largest sources of FDI flows in the world, supplying at least 75% of the total since 1991. In contrast, the share of developing Asia in total FDI outflows fell significantly beginning in 1998 due to the declining importance of Japan as an FDI supplier.

While Europe and North America continue to be major recipients of FDI, the People’s Republic of China (PRC) has emerged as another favored destination. Economies in developing Asia received increasingly larger shares of world FDI inflows beginning in the 1990s, but the Asian economic crisis temporarily reversed this trend. FDI flows soon recovered, particularly in the wake of M&As after the crisis. M&As in developing Asia rose more than 128 times by value between 1987 and 2001, from only $256.1 million to $32.9 billion. In descending order of size, Hong Kong, China; Republic of Korea (Korea); Philippines; Singapore; and PRC were the top five recipients of M&A flows between 1997 and 2001. This has made East Asia the top subregional recipient in developing Asia, followed by Southeast Asia (Figure 3.4).²

All subregions in Asia experienced a sharp increase in the average ratio of FDI inflows to gross fixed capital formation during the 1990s, with South Asia seeing a fivefold increase, although from a low base (Figure 3.5). FDI inflows to developing Asia grew from only $694 million in 1970 to a huge $138.6 billion in 2000, before declining to $90.1 billion in 2002, representing an average growth rate of 15.2% per year.

There have been shifts in the preferences of foreign investors for individual country destinations over the last decade. Malaysia, Singapore, and Thailand, which were among the 20 largest FDI recipients during 1991-1993, were replaced by Brazil, Finland, and Ireland during 1998-2000. In addition, Japan and Korea became preferred locations for FDI in the post-Asian crisis era (JBICI 2002).

Among the favored Asian destinations for FDI, there has not been as much change. Indonesia and Kazakhstan, two of the top 10 FDI destinations in the early 1990s, dropped from the list primarily due to uncertainties in their domestic economies and were replaced by India and Viet Nam in the late 1990s. Meanwhile, Hong Kong, China; Singapore; Korea; and Thailand overtook Malaysia as preferred FDI destinations. Among the countries in developing Asia, the top 10 recipients of FDI inflows in 2002 accounted for over 97% of total FDI in the region, with the top three recipients alone accounting for 81% (Table 3.1). Azerbaijan, however, which is not even in the top 10 developing Asian FDI recipients, had the highest ratio of FDI to GDP, reflecting the importance of FDI in its hydrocarbons development. On the other hand, four out of the top 10 FDI recipients in developing Asia have FDI-to-GDP ratios lower than the average of 2.6% of GDP. This means that FDI to developing Asia is somewhat concentrated-only 10 out of 36 economies for which data are available have FDI shares equal to or exceeding their GDP shares in developing Asia.

While the total value of FDI inflows to the top 10 Asian destinations surged during the last decade, developing Asia’s share in the world total dropped significantly. Average FDI inflows per capita showed remarkable increases in some Asian economies. In Hong Kong, China, for instance, per capita inflows increased 7.5 times to $5,006 between the early and late 1990s. The total annual inflow there was greater than three quarters of gross fixed capital formation by the end of the decade. In other Asian economies, FDI amounts to over 30% of gross fixed capital formation (Table 3.2).

Among the subregions in developing Asia, East Asia and Southeast Asia have the highest levels of accumulated FDI inward stock (Figure 3.6), with Hong Kong, China traditionally the largest. In 2002, however, it was overtaken by the PRC as the largest holder of FDI inward stock (Figure 3.7).

Back III. Foreign Direct Investments in Developing Asia	Next Impact of Foreign Direct Investment