Foreign direct investment (FDI) flows to developing Asia as a whole have weathered the crisis, according to new data compiled by UNCTAD. A modest decline in 1998 of 7% -- the first since the mid-1980s -- was due almost entirely to sharply decreased inflows into two economies: Indonesia and Taiwan, Province of China. However, inflows last year remained higher than immediately before the crisis, and much higher than average annual inflows during the decade. The decline of FDI approvals in 1998 and during the first quarter of 1999 in a number of countries signals a further decline in FDI inflows into developing Asia this year.
FDI flows into East, South and South-East Asia in 1998 were US$78 billion, compared to US$84 billion in 1997, according to the latest data available. Although down by over 7 per cent, 1998 flows remained above the US$76 billion of inflows in 1996, and well above the average of US$44 billion recorded during 1991-1995. Had it not been for a steep decline of FDI inflows to Indonesia (which suffered disinvestment of US$1.3 billion, compared with US$4.7 billion in inflows in 1997) and Taiwan, Province of China, FDI flows to the region would have remained at the 1997 level.
Although the region as a whole experienced a contraction and a downturn in overall private capital inflows, FDI managed to weather the financial crisis. Transnational corporations (TNCs), particularly those from the United States and Europe, continued to be very active in the region. Some are restructuring their production networks in Asia to respond to changes in supply and demand patterns in light of the crisis. Further FDI liberalization, and the availability of cheap assets in some countries, have been the main driving force behind TNC decisions to expand in developing Asia.
Efforts to attract FDI have been intensified in all economies and at all levels
The shortage of capital, not only for investment but also for financing production and trade, combined with the recognition of the role that FDI can play in restoring growth and development, is leading to an even more accommodating attitude towards FDI in almost all the economies in the region.
Governments have intensified their efforts to attract FDI. Recent moves include the further opening of certain industries to FDI and the relaxing of rules with respect to ownership, mode of entry and financing. At the regional level, in October 1998 member states of the ASEAN agreed on the establishment of the ASEAN Investment Area. They have also undertaken other measures to accelerate the realisation of the ASEAN Free Trade Area and to grant special incentives and privileges to attract FDI into the region.
...to forestall declines in 1999
FDI flows in the region may further decline in 1999, especially if China does not maintain its previous high level. The decline of FDI approvals in 1998 and the first quarter of 1999 in a number of countries signals a trend in that direction. However, in the region as a whole, for 1999 FDI will remain above the average of the decade; and, in the longer run, FDI growth will resume again, based on the fundamental determinants of FDI decisions.
The increasing importance of M&As as a mode of entry for FDI
Cross-border majority mergers and acquisitions (M&As) in Asia in 1998 increased by 28 per cent in value over 1997 to US$ 12.5 billion. However, if the value of cross-border M&As in Asia is set in relation to FDI inflows into Asia, the percentage remained relatively low, at 16 per cent (compared to 46% in Latin America). Before the crisis, the figure stood at 3 per cent in 1996 and 10 per cent in 1993 (figure 1). Noteworthy is that significant increases occurred in those five countries (Indonesia, Republic of Korea, Malaysia, the Philippines and Thailand) directly hit by the financial crisis. The share of these countries in total cross-border majority-owned M&As in developing Asia jumped to 73 per cent in 1998, compared with 37 per cent in 1996 (figure 2). For these five countries, the value of cross border M&As in relation to total FDI inflows was 57% in 1998.
FDI inflows vary considerably across the region
China continued to be the single largest FDI recipient in the region. Singapore barely managed to hold its second position, followed closely by Thailand and the Republic of Korea (figure 3). The latter two economies, though among the most affected by the Asian financial crisis, enjoyed an unprecedented surge in FDI. By contrast, Indonesia, among the top four recipients in the region during the 1990s, suffered disinvestment for the first time since 1974.
While FDI in China remained buoyant, ...
FDI flows to China remained at US$45.5 billion, a level similar to that of 1997. The country´s share in developing Asia´s total FDI, however, rose to 58 per cent in 1998 (figure 4).
Inflows from within the region declined by over 9 per cent, while FDI from the United States and Europe increased by 21 per cent and 3 per cent, respectively. Faced with a number of adverse factors, including the negative consequences of the Asian financial crisis and the slow-down of growth, China intensified its investment promotion efforts. At the beginning of 1998, the Government revised its industrial guidelines for FDI. A portion of the incentive scheme for foreign investors abolished earlier, such as exemption of import duties and value-added tax on imports of equipment, was resumed, particularly for those industries listed as having high priority for attracting FDI.
... inflows to Hong Kong (SAR of China), Singapore and Taiwan, Province of China declined and those into the Republic of Korea soared...
Inflows to the four newly industrializing economies in 1998 as a group decreased by 12 per cent over 1997 (figure 5). Among the four, only the Republic of Korea performed better than the year before, thanks to sweeping liberalization measures and the availability of cheap assets. In fact, it received its largest-ever volume of FDI inflows in 1998 (US$ 5.1 billion), a four-fold increase over its average performance during the first half of the 1990s. The slowdown of their domestic economy and the regional economic situation prompted the decline of FDI flows to Hong Kong, China; Singapore; and Taiwan, Province of China in 1998. Taiwan, Province of China suffered from disinvestment in the fourth quarter of 1998, leading to a sharp decline of FDI (-86%) for the year as a whole (US$ 222 million), while Singapore experienced a reduction of inflows by 15 per cent to US$ 7.3 billion. In response to a slowdown in its domestic economy, the Government of Singapore adopted stimulatory measures, such as tax concessions, to reduce business costs and undertook additional spending for infrastructure projects.
Major ASEAN FDI recipients, as a group, suffered the largest decrease in FDI inflows in 1998
FDI in the five countries (Indonesia, Malaysia, the Philippines, Thailand and Viet Nam) as a group declined by 26 per cent over 1997, in large part because of the disinvestment in Indonesia. As a group, the share of these countries in total FDI in developing Asia continued to decline, from an annual average of 24 per cent during the first half of the 1990s to 17 per cent in 1998 (figure 4).
FDI in Malaysia and Thailand showed resilience. Flows into the Philippines started slowing down from the fourth quarter of 1997. However, they regained momentum in the fourth quarter of 1998, when inflows were higher than the total of the three previous quarters, pushing FDI to a record high of US$1.8 billion for the year. The distinctiveness of the Philippines compared with other most affected countries was manifested by its continuing strong export performance and its relatively sound financial sector, factors which were slowly recognised by foreign investors. Viet Nam, although not directly hit by the financial crisis, experienced a decline in inflows, largely due to its heavy dependence on other countries in the region for investment (ASEAN, Japan and the Republic of Korea) and the loss of export competitiveness as a result of the sharp currency depreciations in neighbouring countries. FDI approvals dropped by 8 per cent to US$4.1 billion in 1998, which included a US$1.3 billion joint-venture oil refinery with Russia.
The financial crisis did not affect FDI significantly in South Asia, but inflows lost their growth momentum...
The growth momentum of FDI into most of South Asia (India, Pakistan, Sri Lanka) was not maintained in 1998, although the share of the subregion of total FDI inflows in developing Asia has been increasing during the 1990s. Inflows to India, the single largest recipient in the sub-region, were US$3.4 billion in 1998, a level similar to that of the previous year. Measures to encourage private investment and foreign participation in the domestic market were strengthened later in the year. In the medium and longer term, India still has considerable potential to attract FDI. FDI flows into the other economies in the sub-region remained low.
Most LDCs in the region declined dramatically
Except for Bangladesh (which experienced an energy sector-driven growth of FDI inflows), LDCs in the region (Cambodia, Lao People´s Republic, Myanmar and Nepal) experienced a substantial decline in FDI flows in the second half of 1997 and in 1998. Inflows into the LDCs as a group decreased by about 14 per cent in 1998.
The share of LDCs in total FDI in Asia declined from 0.8 per cent in 1996 to a tiny 0.5 per cent in 1998 (figure 4). The heavy dependence on investment from Asian TNCs, whose capacity to invest abroad had weakened, and the effect of currency depreciations in the most affected countries, have had negative implications for FDI flows into these countries (figure 6). The current financial crisis in Asia has indeed led to a slowdown of the process of TNC-assisted restructuring in the region which had previously extended to LDCs along the lines of the Aflying-geese@ pattern.
