Investment prospects for developing Asia as a whole are bright, given the quality of the underlying economic determinants of foreign direct investment (FDI)(1), the recovery of the region from the financial crisis, and the ongoing liberalization and restructuring efforts that are now widespread, says the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (2), published today by the United Nations Conference on Trade and Development (UNCTAD).
Total FDI flows by transnational corporations (TNCs)(3) into developing Asia (including Central Asia, West Asia and the countries in the Pacific) rose significantly last year to almost $106 billion (from $97 billion the previous year). This was contrary to a decline widely anticipated in the wake of the 1997-1998 financial crisis.
China´s future prospects of attracting FDI are seen as good, despite a decline of nearly 8% last year to $40.4 billion. The country can be expected to remain an attractive location for FDI, particularly over the longer term, in the light of its expected accession to the World Trade Organization, states WIR2000. The 1999 decline reflected slower economic growth in the country and excess capacity in certain manufacturing industries due to over-investment during the past decade. There was also increasing competition from neighbouring countries.
The decline in FDI to China was more than offset last year by the FDI boom in the Republic of Korea and the recovery of flows into Singapore and Taiwan Province of China. Among the five countries most affected by the 1997-1998 financial crisis, flows declined in the Philippines and Thailand, while increasing in Malaysia and doubling in the Republic of Korea. Indonesia registered another divestment of $3.3billion, after $350 million divestment in 1998. On balance, all five together gained 4%, to reach $17 billion.
Following the Asian financial crisis the Republic of Korea introduced policies to encourage FDI inflows, which led to higher mergers and acquisitions (M&As)-driven FDI growth. The Government´s public-sector reforms and its urgent need to supply financing at the time of the crisis led to large-scale privatization, which became another important attraction for foreign investors. Total FDI last year reached $10.3 billion (almost double the 1998 total of $5.2 billion and more than triple the previous highest level of just over $3 billion in 1997).
FDI inflows to Hong Kong (China) rose to over $23 billion in 1999 from $15 billion, while flows into Singapore and Taiwan Province of China climbed to $7 billion ($5.5 billion in 1998) and $2.9 billion ($222 million in 1998), respectively.
Cross-border M&As on the rise
Cross-border M&As have become an increasingly important mode of entry in South, East and South-East Asia, reaching an annual average of $20 billion during 1997-1999 (compared to an average of $7 billion during the pre-crisis years of 1994-1996). The most significant increases occurred in the five crisis-hit countries. Their share of total cross-border M&As in developing Asia jumped to 68% in 1998, compared to 19% in 1996. Cross-border M&As in the five countries as a whole reached a record level of $15 billion in 1999, with the Republic of Korea alone accounting for $9 billion. A significantly higher total is possible for this year.
The distribution of cross-border M&As by country of origin saw a significant shift. The United States, Netherlands, Singapore and United Kingdom, in that order, were the largest purchaser countries during the financial crisis, and together accounted for nearly half the total value of all cross-border M&A deals in the five crisis-hit countries during 1998-1999. They overtook Malaysia and Germany, the front-runners before the crisis during 1995-1996. TNCs from Switzerland and France also accelerated their pace of acquisition.
FDI in South Asia declined by 13% to $3.2 billion. Inflows to India, the single largest recipient, were $2.2 billion ($2.6 billion in 1998). FDI to Bangladesh declined to $150 million ($308million) after increases in the previous two years. Inflows to Pakistan remained steady at $0.5billion. WIR2000 notes: "In the longer term, the subregion has great FDI potential. Its realization will depend very much on the pace of liberalization and economic reform, as well as on domestic and regional stability".
FDI inflows to West Asia (including Israel) continued their upward trend, reaching $9 billion last year ($8 billion in 1998). Saudi Arabia alone accounted for $4.8 billion in 1999 ($4.3 billion in 1998) and Israel was in next place with inflows at $2.3 billion ($1.85 billion in 1998). Tourism, electrical and electronic plants, and various high-tech policy industries were especially attractive.
Recent improvements in the region´s macroeconomic and political environment, combined with the opening up of the oil industry to foreign investors (particularly in Kuwait and Saudi Arabia), are likely to mean larger flows to the region, says today´s UNCTAD report.
Saudi Arabia negotiated with 12 leading oil companies to develop infrastructure and gas-fuelled projects worth more than $100 billion over the next 20 years. Similarly, Kuwait is seeking to attract international oil companies to invest up to $7 billion to develop oil fields close to the border with Iraq.
WIR2000 notes that Central Asia has lost the FDI momentum it had enjoyed at its initial stage of liberalization and reforms. Inflows to the subregion, which had modestly exceeded $3billion in both 1997 and 1998, fell back to $2.8 billion last year. Oil investments dominated FDI flows into the two leading recipient countries. Kazakhstan accounted for $1.6 billion in 1999 (vs. $1.15 billion in 1998). Total FDI into Azerbaijan declined last year to $ 690 million ($1 billion in 1998). Other sectors in these countries, and the other (non-oil) economies of the region, attracted less FDI, due to problems of transition (in Uzbekistan and Turkmenistan) and to bleak economic prospects.
After subdued FDI flows to the Pacific island economies in 1996 and 1997, the last two years have seen somewhat larger volumes ($248 million in 1999 and $231 million in 1998). Papua New Guinea accounts for the bulk of FDI inflows to the subregion (more than 70% in 1999), owing to its large-scale development of mining and petroleum. The stock exchange, which opened in April 1999 for the trading of large companies, may attract some foreign investors.
Outward FDI flows recover
Outward FDI from developing Asia and the Pacific recovered significantly in 1999 to total $37 billion, compared to $22.8 billion the previous year. However, even the latest volume is well down on the record amounts registered in 1997 and 1996 ($47.4 billion and $51.9 billion, respectively). Hong Kong (China) remained the major outward investor, although its outflows to China, where it is still the largest investor, have been declining over the past few years. Divestment by Asian TNCs, particularly in the United States and Europe, continued. Such divestment does not necessarily imply that foreign affiliates are in an unhealthy state; they may be more a function of corporate restructuring and short-term financial difficulties, notes WIR2000. Even within the region, most Asian TNCs have been unable to take advantage of the assets available. The only exceptions are TNCs based in Singapore, whose cross-border M&As reached $4 billion in 1999.
Once again, by far the largest number of leading firms on UNCTAD´s latest list of the 50 largest TNCs from developing countries (measured in terms of foreign-owned assets) were from Asia. Seven of the top 10 are headquartered in Asia. Daewoo Corporation, ranked second among the TNCs of all developing economies, was the largest Asian TNC, according to the 1998 data. Among the leading Asian companies the greatest gain in the top 50 list was by PETRONAS of Malaysia, which reached fifth position last year, up from 18. The ranks of the top Asian TNCs continue to be largely dominated by companies based in the Republic of Korea, Hong Kong (China) and Singapore.