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03 September 2003

Prospects for a rise in foreign direct investment (FDI) inflows to Asia and the Pacific this year are slim, according to the World Investment Report 2003(1), released today by UNCTAD. The region will, however, continue to be the largest FDI recipient among developing regions in 2003, and its longer-term prospects remain good. The factors that have contributed to the FDI downturn - slow global economic recovery, weak global demand, shaken corporate confidence and adjustments in industries like semiconductors/electronics - are expected to improve in 2003-2004, helping usher in more FDI in the longer term. Overall, competition for FDI within Asia and with other regions will intensify.

FDI down again in 2002, with uneven flows to different countries

FDI flows to Asia and the Pacific declined for the second consecutive year, from $107 billion in 2001 to $95 billion in 2002. The downturn was unevenly distributed by subregion, country and industry. Flows to 31 of the region´s 57 economies decreased, but several countries received significantly higher flows than in 2001 (see figure). Asia was least affected by the fall and was one of the most rapidly liberalizing regions, with more national measures, bilateral investment treaties and double taxation treaties introduced in 2002 to facilitate FDI flows.

Subregional performance varied

  • FDI flows to North-East Asia(2) fell from $78 billion in 2001 to $70 billion in 2002. Flows to Hong Kong, China; Taiwan Province of China; and the Republic of Korea declined by 42%, 65% and 44%, respectively, partly because TNC production activities were relocated to lower-cost locations. The slow economic growth of these economies was one factor contributing to the decline. The notable exception was China, where sustained economic growth and other advantages, such as lower-cost labour, led to a 13% increase in FDI inflows, which reached $53 billion in 2002. Flows to Mongolia also rose.
  • FDI flows to South-East Asia dropped marginally, from $15 billion in 2001 to $14 billion in 2002. A few economies in the subregion - such as Brunei Darussalam, Malaysia and Philippines - received larger flows than in 2001.
  • FDI flows to South Asia(3) increased, from $4.0 billion in 2001 to $4.6 billion in 2002(4). Flows to India, Pakistan and Sri Lanka also rose, while flows to other countries in the subregion fell.
  • FDI flows to West Asia declined more than those to the other subregions, from $5.2 billion in 2001 to $2.3 billion last year. Geo-political tensions were a major contributing factor. However, flows to a number of countries (e.g. Bahrain and Kuwait) expanded.
  • FDI flows to Central Asia(5) increased, due to a significant rise in flows to Azerbaijan, from $227 million in 2001 to $1 billion in 2002. Kazakhstan received 9% less FDI than in 2001 but remained the main recipient of FDI inflows in the subregion, most of them going to the oil and gas industry.
  • FDI flows to the Pacific Islands fell from $159 million in 2001 to $140 million last year. Fiji and Papua New Guinea remained the principal recipients.

As to intraregional investment within the East Asian subregion(6), it fell in 2001, the most recent year for which data are available. However, its share remained high, at 40% of inflows. This was sustained by relocations of investment, expanding regional production networks and continued regional integration efforts, among other factors.

The region´s primary sector - especially the oil and mining industries - weathered the 2001-2002 FDI downturn better than manufacturing and services. The electronics industry was most affected by the decline due to continued rationalization of regional production activities and adjustments to weak global demand.

Repayments of intra-company loans by foreign affiliates remained high in 2002 and contributed partly to the continued downturn in FDI flows. Reinvested earnings increased and continued to play an important role in the financing of FDI in the region (e.g. China; Hong Kong, China; Malaysia; and Singapore).

Outward FDI flows fell marginally more than inflows, suggesting the declining ability of Asian firms to invest during the economic downturn. Of the top 50 transnational corporations (TNCs) from developing countries in 2001 and 2000, ranked by foreign assets, 33 were from the Asia-Pacific region, as compared to 35 in 1999.

The number of national policy changes favorable to investors increased in Asia last year to 119, up from 100 in 2001. Bilateral free trade agreements and regional arrangements have also been on the rise, most of them containing specific and substantial provisions on investment, which underlines the fact that investment has become a key consideration in economic cooperation. More still are in the process of negotiation, and in many of these negotiations ASEAN is taking the lead. It is too early to assess the effects of regional integration on FDI flows to the region, but they are likely to be favorable, as such integration leads to market enlargement, reduces production costs through lower tariffs and lower transaction costs by means of trade and investment facilitation arrangements, enhances certainty and transparency, and facilitates easier access to resources by TNCs.

China, continuing magnet for FDI flows

China will remain the largest recipient of FDI flows among developing countries, and other countries in the region may have to adjust to this reality. Greater regional cooperation could be one avenue for this adjustment, as could moving up the value chain and improving competitiveness. India also has the potential to attract significant FDI flows; much, however, will depend on the country´s implementation of policy reforms and the privatization process. The other South Asian countries will continue to attract modest levels of FDI flows. Their locational advantages will be enhanced when the South Asian Free Trade Area, now under negotiation, is launched. West Asia may well experience a rapid increase in FDI flows, driven by investment in the oil and gas industries. Much will depend on political developments and economic reforms in a number of the subregion´s countries. Oil and gas will also dominate the picture in Central Asia. The Pacific Island economies will continue to receive modest FDI flows. Intraregional investment between North-East and South-East Asia is likely to climb as more TNCs relocate their efficiency-seeking FDI to lower-cost locations and expand their market-seeking FDI to the region. Regional production networks will keep on growing, partly because of the influence of bilateral and regional agreements and the regional integration process.


1. The World Investment Report 2003. FDI Policies for Development: National and International Perspectives (Sales No. E.03.II.D.8, ISBN 92-1-112580-4) is available for US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, NY 10017, USA, T: +1 800 253 9646 or +1 212 963 8302, F: +1 212 963 3489, E: publications@un.org, or Section des Ventes et Commercialisation, Bureau E-4, Palais des Nations, CH-1211 Geneva 10, Switzerland, T: +41 22 917 2614, fax: +41 22 917 0027, E: unpubli@unog.ch; Internet: www.un.org/publications.

2. Comprising China; Hong Kong, China; Macau, China; Mongolia; Taiwan Province of China; Democratic People´s Republic of Korea; and Republic of Korea.

3. Comprising Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka.

4. The figure does not include the recently revised FDI data of India. The new data were released on 30 June 2003 after the closing of data collection for this Report.

5. Comprising Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

6. Comprising ASEAN countries; China; Hong Kong, China; Republic of Korea; and Taiwan Province of China.

For more information, please contact:
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Karl Sauvant
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Ludger Odenthal
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Kee-Hwee Wee
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E: kee-hwee.wee@unctad.org.


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