FDI flows to the developing economies of Asia and the Pacific declined 24% last year to $102 billion, down from $134 billion in 2000, reports the World Investment Report 2002(1) released today by the United Nations Conference on Trade and Development (UNCTAD). Much of the downturn was due to a 60% drop in flows to Hong Kong, China, which had recorded massive inflows ($62 billion) in 2000. If this is discounted, however, inflows last year were at the peak reached the previous decade. While they remained stagnant in North-East and South-East Asia, they increased significantly in South and Central Asia. In global inflows, the share of the region’s developing economies rose from 9% in 2000 to nearly 14% in 2001, but was still below 1993-1994 levels (figure 1).
Within these overall trends, individual economies performed unevenly. China regained its position as the largest recipient in both the region and the developing world. India, Kazakhstan, Singapore and Turkey were leading recipients in their respective subregions (figure 2).
Flows to China reached $47 billion in 2001, a 15% rise over 2000. The momentum continued in the first half of this year, with inflows rising by 19% over the same period of 2001. FDI continues to play a prominent role in China’s economy: foreign affiliates now account for 23% of the total industrial value added, 18% of tax revenues and 48% of total exports.
Elsewhere in the region, the FDI boom in North-East Asia subsided, with inflows plunging from $76 billion in 2000 to $30 billion in 2001. The growth in 2000 was largely due to a doubling of inflows to Hong Kong, China, mostly on account of a single large acquisition in telecommunications, valued at $24 billion. Nevertheless, Hong Kong’s role as a business hub for the region continued to solidify. By last year, 3,237 transnational corporations (TNCs) had established regional offices there (including 944 regional headquarters), up 8% over 2000. FDI in the Republic of Korea plummeted by two thirds, to $3 billion, as the wave of post-financial-crisis mergers and acquisitions (M&As) tailed off. Inflows to Taiwan Province of China in 2001 remained high, at $4 billion. Its accession to the WTO has increased its attractiveness for international investment, particularly in the services sector.
Flows to South-East Asia stagnated at $13 billion. Part of the reason was continued divestments ($3 billion in 2001) in Indonesia, where they have exceeded inflows since late 1998. In Malaysia, FDI remained stagnant; in response, the Government introduced a number of incentives, including the extension of the reinvestment allowance and tax measures to benefit the machinery and equipment industry and manufacturing-related services. Inflows to the Philippines climbed from $1.2 billion in 2000 to $1.8 billion in 2001. FDI in Singapore also rose by 59% to $9 billion, the first time since 1998, but this was still below the $11 billion peak of 1997. Faced with the erosion of its competitiveness in electronics vis-à-vis other countries in the region, Singapore has focused on biomedical sciences as the next pillar of its manufacturing growth, and has been improving infrastructure and targeting high-potential companies in that industry through various investment funds, including venture capital. FDI in Thailand grew by $1 billion to $3.8 billion, but remained lower than its 1998 peak. Viet Nam is entering a new era as host to FDI, strengthened by its bilateral trade agreement with the United States and the process of its accession to the WTO. Although FDI commitments in the country increased by a third last year, to $3 billion, on a balance-of-payments basis the flows remained at 2000 levels ($1.3 billion).
Inflows into South Asia reached $4 billion, a 32% hike over the previous year. Of this, $3.4 billion went to India (up 47%). This country, by far the largest recipient in the region, has been taking steps to liberalize its FDI regime further. Inflows into other economies in the subregion stagnated or declined, apparently due to perceived instability in the investment environment, particularly after 11 September.
West Asia is estimated to have received $4.1 billion in FDI in 2001, considerably higher than the previous year, with the largest inflows going to Turkey (roughly $3 billion). Apart from the petroleum sector, and despite its high potential, the subregion as a whole continues to be a marginal FDI recipient, although many countries have liberalized their regimes.
In Central Asia, FDI last year climbed by 88% to $3.6 billion, driven by the doubling of inflows (mainly in oil, gas, zinc and copper extraction) to Kazakhstan ($2.8 billion). The Pacific region remains marginal, with inflows of $200 million. However, in both subregions FDI accounted for a significant share of gross fixed capital formation (23% during 1998-2000), far higher than in other developing and developed regions.
Overall, prospects for FDI in the Asia-Pacific region remain “bright”, according to the Report. Over half the respondents in a recent survey considered those prospects to be “improved” or “significantly improved” over the next three to five years. China topped the list in Asia, followed by Indonesia and Thailand. Another survey ranks India, Malaysia and Singapore as favoured destinations. Greenfield investment will again become the preferred option by far for TNC entry into the region once the M&A boom triggered by the Asian financial crisis has subsided.
FDI outflows at lowest ebb since 1998
Outward FDI from developing Asia, at about $32 billion in 2001, hit its lowest level since 1998 (figure 3), mainly because of a massive fall in outflows from the largest traditional investor -- Hong Kong, China. The dramatic growth in its outward FDI in 2000 was largely due to a single M&A deal, valued at $33 billion. Singapore, where outflows doubled, overtook Hong Kong as the region’s single largest outward investor, boosted by two major cross-border M&A deals. Indian TNCs accelerated their outward investment, via cross-border M&As. The value of such acquisitions by Indian firms doubled, to over $2 billion. Outward FDI from the region was marked by a shift in the mode of entry over the past two years, from greenfield investment to M&As, which reached $25 billion in 2001, or about 80% of the region’s total outflows.
Firms from China have been expanding abroad rapidly. As of last year, the top 12 Chinese TNCs, mainly State-owned enterprises, controlled over $30 billion in foreign assets – close to the entire outward stock of Latin America in the mid-1990s -- with some 20,000 foreign employees and $33 billion in foreign sales. Non-State-owned enterprises are now following the State-owned ones abroad, although most of them are small and medium-sized TNCs. They now have investments in over 40 countries, including countries outside of Asia. FDI from Taiwan Province of China, by contrast, fell 18% in 2001. Much of this investment went to China, where its industries have steadily relocated. The nature of these transferred activities has changed over time, from labour-intensive in the 1980s to capital-intensive and high-technology (electronics and computer components) in the late 1990s. The trend is likely to continue, given the easing of restrictions on FDI from Taiwan Province of China into mainland China and the WTO accession of both economies. Outward FDI from the Republic of Korea last year plummeted by almost 50%, to about $2.6 billion. Korean TNCs continued the divestment pattern followed since the financial crisis, selling off non-core activities abroad and leading to a one-third reduction in foreign assets between the late 1990s and 2001.
Three of the five developing country TNCs on UNCTAD´s top 100 list are headquartered in Asia: Malaysia’s Petronas, which boasted one of the two most dynamic rises in foreign sales in 2000; Hutchison Whampoa of Hong Kong, China, which again heads the top 50 firms in developing economies; and Republic of Korea’s LG Electronics. Asian firms now represent 73.3% of assets among the top 50 developing country TNCs. Companies from Hong Kong and Singapore continue to be the most transnationalized among all developing country TNCs.