Foreign direct investment (FDI(1)) flows to and from developing Asia hit record levels last year, according to the World Investment Report 2001(2),published today by the United Nations Conference on Trade and Development (UNCTAD). Although trends are mixed, the region´s longer-term investment prospects remain "bright", WIR2001 says, citing the quality of the underlying determinants for FDI and greater economic integration. It terms North-East Asia - Hong Kong, China; the Republic of Korea; and Taiwan Province of China - "the brightest spot for FDI in the developing world".
The record $143 billion in inflows - a 44% increase over 1999 - was primarily due to an unprecedented FDI boom in Hong Kong, China. With $64 billion in inflows, it overtook mainland China as the single largest FDI recipient in Asia, and was also the top source of outward FDI, with $63 billion, although FDI from China and India is also rising (see figure 1).
As to the upsurge in inflows to Hong Kong, WIR2001 offers four explanations: First, it reflects a recovery from the economic turmoil of the recent past. Second, TNCs planning to invest in mainland China have been "parking" funds in Hong Kong, in anticipation of China´s expected entry into the WTO. Third, the increase reflects a major cross-border merger and acquisition (M&A) in telecommunications, which alone accounted for nearly one-third of Hong Kong´s total FDI inflows. Fourth, there is an element of increased "transit FDI" into, and out of, Hong Kong.
Inflows into South-East Asia (ASEAN-10) remained below the pre-crisis level. The wave of M&As in the countries hit by the recent financial crisis has now tapered off, reflecting both a slowdown in the rate of asset disposals and reduced pressure for further corporate restructuring.
The 2000 Asian FDI boom masks considerable subregional variations:
- Inflows to the three economies of North-East Asia reached $80 billion last year. Their share of total FDI in developing Asia soared from an annual average of 16% during the first half of the 1990s to over 55% in 2000.
- FDI inflows into China last year remained at a level similar to 1999, but rose by 20% during the first half of 2001 alone, as compared to the same period in 2000, to $21 billion(3). Tax contributions by foreign affiliates accounted for 18% of the country´s total corporate tax revenue in 2000 ($27 billion), harvesting some of the benefits created by average annual FDI inflows of $15 billion during the first half of the 1990s. China´s FDI portfolio has been broadening in recent years. In its effort to become a member of the WTO, the country adopted new policy measures relating to FDI. China is also devising policies to encourage cross-border M&As.
- South-East Asia´s share of total FDI in developing Asia continued to shrink, from over 30% in the mid-1990s to 10% in 2000. This was largely due to significant divestments in Indonesia since the onset of the financial crisis.
- FDI inflows into South Asia were almost unchanged in 2000, still below the 1997 peak. India, the subcontinent´s largest recipient, attracted $2.3 billion.
- Inflows into the nine least developed countries of the region(4) , which traditionally depend heavily on FDI from their neighbours, remained very low ($461 million).
A new pattern of flows in terms of source and destination economies is emerging, according to WIR2001. Transnational corporations (TNCs(5)) from Hong Kong, China; Singapore; and Taiwan Province of China have been very active the past two years, but with their investments mainly focused on North-East Asia. Other Asian TNCs, particularly those based in the Republic of Korea and Malaysia, are gradually resuming their overseas business operations. Most recently, Indian TNCs began asset-seeking investment via cross-border M&As, particularly in the software industry in the UK and the US.
Faced with growing protectionism against its exports and excess productive capacity in low value-added but export-competitive industries, Chinese TNCs engaged in "barrier-hopping" outward investment, usually in the form of "investment in kind" - by which Chinese investors use manufacturing equipment as equity to form joint ventures with local partners (who usually provide land and infrastructure) in other developing countries. The deepening economic integration of Hong Kong and mainland China also led to a significant increase of outward investment from the mainland to Hong Kong over the past two years, accounting for about 20% of total FDI inflows to the latter.
A TNC from Hong Kong, China - Hutchison Whampoa - was one of three developing economy TNCs to make the world´s top-100 list this year (see TAD/INF/PR29). And in the developing country top-50 ranking, there has been a gradual shift towards Asian TNCs, which now comprise 35 of the 50 (see table 1).
