Leading multinationals vote
their confidence in Asia.The Asian crisis and prospects for foreign direct investment
Full report
The UNCTAD Secretariat and
ICC conducted, jointly, a survey of large multinational corporations (MNCs),
with a view towards ascertaining the nature of major companies’ responses
to the financial crisis in Asia as far as their foreign direct investment (FDI)
in and from the region is concerned. The results are reported here, embedded
in a broader analysis of the issues. UNCTAD is continuing to work on this subject
and expects to include a more comprehensive analysis in its World Investment
Report 1998.
Short
and medium term prospects for foreign direct investment in East and South-East
Asia.
Long-term
prospects for foreign direct investment in East and South-East Asia.
While portfolio equity
investment and bank lending to affected countries have fallen sharply since
the onset of the crisis in Asia, FDI flows have remained close to pre-crisis
levels, ...
The financial crisis in
East and South-East Asia has involved a sharp decrease in private external capital
flows to some developing countries in the region. Net private foreign bank lending
and foreign portfolio equity investment are estimated to have turned negative
for the group of countries most affected by the crisis (Indonesia, Republic
of Korea, Malaysia, Philippines and Thailand) taken together.
FDI inflows in 1997 to the
five most affected Asian countries as a group, however, are estimated to have
remained close to the level attained in 1996. For developing East, South-East
and South Asia as a whole, net FDI flows are estimated to have increased from
$77 billion in 1996 to $80 billion in 1997. While data on approved FDI projects
provide only a very imperfect idea of actual investments (or likely actual investments),
the increase in approvals for the five most affected countries as a group in
1997 (including during the second half of 1997) looks promising for FDI inflows
in 1998.
This is not surprising.
After all, FDI flows are different from portfolio equity investment flows and
bank lending, and they behave differently. These three types of flows should
not be lumped together when seeking to understand the implications of the crisis.
FDI flows involve financial
capital flows, but also involve the capitalization of technology, knowledge,
skills and other resources that represent a stock of assets for production.
They are motivated by the strategic interests of MNCs that invest in enterprises
in host countries ("foreign affiliates") in their search for market
access and access to resources, to strengthen the competitiveness of their corporate
systems; this typically involves long-ter
m relationships, at the level of production,
between the investor and its foreign affiliates. Much portfolio investment,
on the other hand, is associated primarily with a search for financial gains,
often short-term gains; the time horizon for decisions regarding much bank lending
is also short-term.
Portfolio equity investment
-- one component of portfolio investment -- has traditionally been volatile,
in normal times as well as crises. For example, during 1986-1995, the volatility
index for portfolio equity flows to emerging market economies (including developing
countries and economies in transition) as a group was four times higher than
that for FDI to those countries (UNCTAD, 1997).The volatility index for portfolio
equity flows to selected individual countries (including Malaysia and Thailand)
was several times higher than that for FDI (UNCTAD, 1997). Portfolio equity
investments (as well as international bond issues and short-term bank lending)
are easily influenced by credit ratings (by, for example, international rating
agencies). This can lead to a vicious circle once a financial crisis has begun:
declines in creditworthiness, as manifested, for example, in credit ratings,
tend to amplify financial instability through their effects on these flows.
The recent behaviour of
FDI and portfolio equity investment flows to the Asian economies most affected
by the crisis is reminiscent of their behaviour during the Mexican crisis of
December 1994-1995: total portfolio investment flows to Mexico fell from $12
billion in 1994 to $7.5 billion, with portfolio equity investment flows falling
from $4.5 billion to $0.5 billion in 1995. FDI inflows, in contrast, which had
more than doubled in 1994, fell by only 13% in 1995.
... and are expected
to remain high in the long-term.
The most important locational
determinants of FDI are the economic factors that influence the prospects for
MNCs to engage profitably in production activities. These include the size and
growth of host country markets (which depend primarily on macroeconomic performance,
especially the level and growth of national and per capita real income); access
to regional or international markets for exports from a host country; the availability
of human resources, including relatively low-cost and, especially, efficient,
flexible and skilled labour; technological and innovation capabilities; natural
resource endowments; and the quality of the infrastructure. A second important
set of determinants relates to the environment for conducting business and economic
activity in the host country. This includes political and economic stability,
and efficient and encouraging policies towards industry, trade and private enterprise
activity in general, whether domestic or foreign, and institutional structures
for implementing them. A third set of determinants relates to the design and
implementation of policies specifically related to FDI.
Many Asian countries, including
countries most affected by the crisis, have ranked high among developing host
countries in the attractiveness of several of the factors mentioned above. In
particular, they have built up fundamental strengths that make for high long-term
growth, such as high domestic savings rates and educated, skilled and flexible
human resources. These can be expected to continue to remain sound. MNCs, which
typically take a long-term view, can therefore be expected to continue to take
a positive view of the region’s investment potential.
Expectations of continued
growth of FDI flows to Asi
a are supported by the findings of the UNCTAD/ICC
survey (see box). The great majority of respondents reported that their confidence
in the region as an investment destination has remained unchanged. The pattern
of the findings in this regard is similar across firms in major sectors (primary,
manufacturing, services) and from different home regions: over four-fifths of
all respondents reported that, for them, East and South-East Asia’s longer
term prospects as a destination for profitable FDI have remained unchanged.
The vast majority of respondents from Europe (86%) and North America (84%) stated
that their long-term view of the region remains unchanged. The figures were
somewhat lower for Japanese respondents (56%) and respondents from developing
Asia (74%); but this lower "no change" response was compensated by
higher shares of Japanese and other Asian respondents indicating increased confidence
in the region in the longer term (44% of Japanese firms and 23% of Asian developing
country firms).
Firms from both within and
outside the region thus hold a very positive view of the longer term prospects
for FDI in Asia.
The
UNCTAD/ICC survey
The survey by the UNCTAD
Secretariat and ICC, conducted in February 1998, covered 500 companies. These
included the world's 100 largest MNCs (not including banking and finance companies)
in terms of foreign assets, drawn from the list of such corporations prepared
for UNCTAD's World Investment Report 1997; 200 companies that
were potential candidates for inclusion in that list; the world's 50 largest
MNCs (not including banking and finance companies) originating in developing
countries, drawn from the list of such corporations prepared for UNCTAD's
World Investment Report 1997; 50 companies that were potential candidates
for inclusion in that list; and 100 additional firms with significant operations
in Asia. A total of 198 firms responded to the survey, for a response rate of
40%. The composition of the sample in terms of countries/regions in which the
respondents are located ("home regions") and in terms of economic
sectors is contained in the following two figures:
"The economic slowdown
does not affect our investment plans in the region in a perceptible manner:
in Malaysia, for example, we are planning to build at least one new plant a
year up to 2001. If anything, we will re-examine our projects with a view towards,
in part, trying to speed them up and bring forward some of them" --
However, in the short
and medium term, the crisis will have both positive and negative effects on
FDI flows in Asia -- as well as FDI from Asia.
As Asian countries take
stock of the situation and implement measures to restore trust and confidence
and increase economic activity, the question of what immediate implications
the crisis will have for inward and outward FDI deserves attention. The
reason is that FDI plays, and has the potential to continue to play, an important
role in the growth of the Asian economies most affected by the crisis. In a
number of them, FDI provides an important supplement for domestic investment
and accounts for significant export shares in some industries (reaching more
than half of manufacturing exports and more than 40% of total exports in the
case of Malaysia, and over 40% of total exports in the case of Indonesia). Maintaining
and increasing the level and growth of FDI flows to and w
ithin the region could,
therefore, assist in the process of economic recovery in the region.
Some types of inward
FDI can be expected to increase in the short and medium term due to lower costs
for MNCs to establish, expand and operate affiliates, ...
One reason an increase of
FDI flows might be expected in the near future is that companies wishing to
establish a presence in the region, or seeking to increase the scale of their
existing operations on the basis of favourable expectations regarding the long-term
prospects of the region, find lucrative opportunities. Specifically, currency
devaluations and lower property prices reduce the foreign currency costs of
acquiring fixed assets such as land, buildings and capital goods manufactured
locally. In addition, lower valuations of many Asian firms in the aftermath
of the financial crisis reduce the costs of acquiring firms. As a result, firms
from developed countries and other unaffected countries require much lower amounts,
in terms of home country currencies, to establish (or add to) a given production
capacity. (Levels of FDI inflows to the most affected countries similar to those
in the past in terms of dollars would therefore signal increased interest by
MNCs in Asia.) Indeed, for firms already planning to invest or expand their
investments in Asia -- whether large or small (see following quote) -- the current
situation presents a unique opportunity to do so at lower than anticipated costs.
"We were already thinking
about making an investment in Asia before the crisis began. Now that the price
is right, we are ready to move ahead rapidly" -- Jean-Marie Bernard, President,
Wheelabrator Allevard, France.
Moreover, the restructuring
of firms faced with large debt repayments and interest-rate hikes, and their
urgent need for funds, combined with lower stock prices, provides opportunities
for MNCs to undertake direct investments in the region through mergers and acquisitions
(M&As) involving host country firms, including firms that otherwise might
go bankrupt. Interestingly, however, the value of M&As in the five countries
most affected by the crisis taken as a whole decreased (by 13%) during the second
half of 1997 as compared with the first half of the year. This was largely a
result of a decline in M&As in the Philippines (the country that was the
least affected by the crisis among the five). The Republic of Korea and Malaysia,
on the other hand, saw significant increases of the value of M&As in the
second half of 1997, while the value of M&As in Indonesia remained at the
same high level as in the first half of the year. MNCs from the United States
and Singapore led the field in acquiring firms in the five countries, followed
by firms from Germany. Other firms from the region (especially from Hong Kong,
China; Taiwan Province of China; and China), are beginning to use this opportunity
as well.
Currency devaluations also
increase the attractiveness of Asian economies to foreign investors due to lower
costs of production in terms of home country currencies. As wages and other
operating costs decrease, efficiency-seeking, mobile foreign investors might
find it advantageous to invest in the affected economies to take advantage of
cost differentials, even if they are small, and inflation, if it occurs, could
reduce their impact.
The region "should
provide us with a unique opportunity to make the strategic moves that will increase
our presence and our participation in what we know will be one of the world’s
gr
eat markets of the 21st century" -- Jack Welch, Chairperson, GE, Annual
Report
...increased competitiveness
of exports from Asian countries due to devaluations,...
Costs of production are
particularly important for export-oriented activities. Devaluations, too, make
it easier for firms, foreign as well as domestic, to export from the countries
concerned.
Foreign affiliates in Asia
have high export propensities. MNCs can build on this, both in terms of increasing
exports and using their existing networks to reach markets. Indeed, as the experience
of the automobile industry in Mexico in the 1990s suggests, exports by foreign
affiliates could increase dramatically following a currency crisis.
For MNCs, a fair amount
of exporting takes place within the context of integrated international production
networks established with a view to strengthening competitiveness by distributing
value-added activities among locations in such a way as to maximize global corporate
profits. In these networks, intermediate goods or tradable services produced
by an affiliate in one country are exported to the parent firm, or to affiliates
of the same parent in another country or countries; indeed, about one third
of world trade consists of such "intra-firm" trade. "Privileged"
access by affiliates to the MNC system -- a market in itself -- and advantageous
access to national firms linked to MNC systems through subcontracting or other
arrangements -- facilitates exporting, making it easier for firms that are part
of MNC networks to take advantage of the lower costs (of exported items) due
to devaluation (UNCTAD, 1996).
Being part of -- or linked
to -- MNC networks also makes it easier for firms -- foreign affiliates or domestic
enterprises -- to switch from domestic sales to exports. This was demonstrated,
for example, during the Mexican crisis of December 1994-1995. In the case of
the Mexican automobile industry, a number of foreign affiliates reacted to the
slump in domestic demand by switching -- sometimes within a few months -- a
part of their production to foreign markets: exports increased both in absolute
terms and as a percentage of total production, from 58% in 1994 to 86% in 1995.
Naturally, market access for exports to the large North American market in the
context of NAFTA and buoyant demand conditions in that market also helped, as
did the fact that foreign automobile affiliates in Mexico were already producing
at internationally competitive quality standards.
Many corporate networks
of integrated international production exist in Asia. This should facilitate
the process of coping with the crisis for the firms involved. Japanese MNCs,
in particular, have the opportunity to use their regional and global corporate
networks in this respect. Increasingly, these include also small and medium-sized
firms which, in the case of Japan, account for a substantial share of the country’s
outward FDI. As in the case of Mexico, the result may well be that, in the end,
the export orientation of foreign affiliates in Asia may reach new record highs.
The impact of the current
crisis could therefore be mitigated somewhat for a number of the most affected
Asian countries because international integration at the level of production
allows MNCs (and firms linked to them), to compensate for declining domestic
sales through increased exports spurred by devaluation. As the experience of
foreign firms in the Mexican automobile industry during th
e December 1994-1995
crisis shows, if major international markets are open to exports, and production
by affiliates is of world standards, restructuring sales towards exports can
potentially help sustain FDI operations in the face of decreasing domestic demand
-- to the benefit, too, of the host countries involved. Whether and to what
extent this potential is realized depends, of course, upon the strategies of
firms.
The extent of the cost advantages
enjoyed by export-oriented firms varies, of course, among industries and firms,
depending upon the extent to which foreign affiliate activities in the region
depend upon imports (the foreign currency prices of which will not be directly
affected by devaluations). This underlines further the importance of integrating
foreign affiliates into their host economies: such integration not only contributes
to the building up of local capacities; but the more foreign affiliates can
draw on backward linkages with local enterprises, the less import-dependent
they are.
There are, however, important
preconditions that need to be fulfilled if increased export competitiveness
is to be effectively exploited, be it by export-oriented foreign affiliates
or by domestic firms: the principal export markets in other parts of the world
need to remain open to exports from Asia, and, equally important, demand in
those export markets needs to remain strong enough to absorb additional imports
from Asia. This is particularly important since demand in the Asian regional
market, which has been absorbing increasing shares of exports from within the
region, is likely to be affected adversely by the crisis and its immediate impact
on incomes and growth, as well as by the current economic slow-down in Japan.
It would be in the interest of all involved -- host, home and third countries
and firms -- that these conditions are fulfilled to the maximum extent possible.
"We are completely
convinced that the region will recover very quickly, and we continue to act
on this basis. The way we are developing, even with this year’s crisis,
we expect an increase in our sales in Asia of at least 20%" -- Lindsay
Owen-Jones, Chairperson and Chief Executive Officer, L’Oral.
...and helped by more
liberal attitudes and policies towards FDI, ...
The shortage of capital
for enterprises in the region, combined with a recognition of the role that
FDI can play in maintaining growth and development, is leading to a more flexible
attitude towards FDI. As a result, some countries in the region have, in recent
months, further lowered barriers to FDI.
There are, however, concerns
regarding loss of control over national firms, as governments weigh the costs
and benefits of tackling potential bankruptcies by allowing a sharing of control
of increasing numbers of domestic enterprises with MNCs. Foreign control of
large portions of any industry -- or even small portions of key industries --
can of course become a sensitive domestic issue (in developing as well as developed
countries). This is particularly the case if "fire sales" are seen
to occur during a period of national economic stress at relatively low prices.
Restrictions on hostile takeovers in some countries are in place partly for
these reasons.
The findings of the UNCTAD/ICC
survey show that more than one quarter of the responding firms expect to increase
their FDI in East and South-East Asia as a whole in the short-to-medium term.
North American and Japanese
firms are close to this average (19% each), while
firms from Europe are distinctly above it (34%) and those from developing Asia
distinctly below it (10%). In the case of European firms, this may well reflect
that, after having largely neglected Asia until recently (UNCTAD and European
Commission, 1996), they are now taking an active interest in this region. In
the case of the developing Asia MNCs, the low proportion may reflect the impaired
capacity of some MNCs to undertake outward FDI (most of which has traditionally
gone to other Asian developing countries); however, they remain committed to
the region as 69% expect to maintain their investment at the pre-crisis level.
Predictably, firms in manufacturing, from all regions, have the highest proportion
of responses that indicated they expected expansion of their FDI in Asia, with
over one-third of them providing this response, as compared with one-fifth of
service firms and less than one-tenth of primary sector firms.
... although some types
of domestic market-oriented FDI can be expected to decrease in the short and
medium term due to a contraction in domestic demand.
In the short and medium-term,
the Asian crisis will affect adversely some foreign affiliates producing for
sale in local markets. Several Asian countries have revised downwards their
forecasts of economic growth in 1998. A contraction in growth will reduce demand
in domestic markets for certain goods and services, and this is likely to lead
to some cancelling, scaling down or postponement of investment in the most affected
countries in some industries, particularly those that already have excess capacity
due to substantial investments in the recent past. Loss of asset values (in
terms of foreign currency) on investments already established may also diminish
MNCs’ desire to expand production facilities in some industries. Not only
affiliates geared to local markets, but also parent firms exporting to Asian
markets may see their earnings shrink, dampening plans for expansion in the
region.
In addition, reduced earnings
affect the financial position of host-country market-seeking affiliates and
might induce them to put on hold plans for re-investment. In Mexico, for example,
income on United States FDI fell by 45% in 1995 (though it rose again
in 1996 to a level higher than in 1994); in some industries (such as
transport equipment), affiliate income turned negative in 1995.
This being said, foreign
affiliates, being able to draw on their parent systems for financing, are often
in a better position than domestic firms to have continuous financing (including
for importing necessary inputs and providing export finance). More generally,
they are in principle in a better position than domestic firms to weather difficulties
-- another example of the protective influence that belonging to transnational
corporate systems can have. On the other hand, the likelihood of financial difficulties
arising from reduced earnings is greater for affiliates of smaller MNCs with
limited financial capacities to withstand low earnings or losses.
Indeed, a number of the
respondent MNCs in the UNCTAD/ICC survey (12%) indicated that they expect to
reduce their investment in East and South-East Asia in the short and medium
term. This is most evident for MNCs based in Asian developing countries (21%)
and, to a lesser extent, for Japanese (13%), European and North American MNCs
(11% each). As foreign affiliates in the services sector are particularly susceptible
to local demand conditions, due to the non-tradability of most services, it
is not surprising
that such negative expectations were reported most frequently
among them (18%). Of course, even in normal times, some firms are contracting,
even as others are expanding their facilities.
It is also revealing to
compare the percentages of firms expecting, in the short and medium term, increases
in FDI with those of firms expecting decreases. The percentage of firms in both
manufacturing and services reporting an expected increase in their investments
in Asia is higher than the percentage reporting an expected reduction in their
investments. The predominance of expansion plans over retrenchment plans was
evident among MNCs from Europe and North America as well as Japan. Only among
MNCs originating in developing countries in Asia did the number of firms expecting
retrenchment exceed the number expecting expansion.
The bulk of firms surveyed,
however, expects to maintain the level of their FDI in the short and medium-term.
While it is difficult to
assess on balance the effects of the diverse factors exerting an upward or downward
influence on FDI flows, the UNCTAD/ICC survey suggests strongly that the majority
of MNCs operating in the region are likely not to change their planned investments
even during the short and medium term, regardless of sector, but with some differences
across home regions. However, if the number of respondents who expected an increase
of FDI in Asia in the short to medium term are
added to the number of respondents indicating "no change", the response
rate is about four fifths or more for all home regions.
Much will depend, of course,
upon whether efforts to stabilize the financial markets and external financing
positions of the crisis-affected Asian economies are broadly successful, and
how soon the rates of growth of these economies are restored to satisfactory
levels.
Outward FDI from Asia
will also be affected in the short and medium term by the crisis,...
The Asian crisis most likely
will seriously affect the financial capabilities of MNCs originating in the
affected countries to invest abroad. Furthermore, devaluations make it more
expensive for MNCs from these countries to finance their operations abroad.
At the same time, their foreign affiliates may confront difficulties in raising
funds in their host markets (or other foreign markets), due to the fact that
foreign banks are reluctant to lend to them. Thus, it may become difficult for
the Asian MNCs concerned not only to make additional greenfield investments,
but also to continue some ongoing projects or to expand existing ones. Shortage
of cash may also induce Asian firms to sell their assets in Europe and the United
States for funds in strong currencies because that might be preferable to selling
domestic assets at cheap rates. There are signs that such sales of assets are
being made, particularly by Korean MNCs in the United States.
However, once again, a distinction
needs to be made between FDI in production for export and FDI for servicing
foreign markets directly, in order to understand the effects of the crisis on
outward FDI from the region. To the extent that currency devaluations make exports
from some Asian home countries more competitive internationally than before,
some MNCs originating within the region would not be expected to increase their
outward FDI. This could be the case, for instance, in some manufacturing industries
in which firms from countries such as the Repu
blic of Korea and Thailand had
expanded labour-intensive activities abroad following the so-called "flying
geese pattern" of restructuring, by shifting those activities to other
Asian countries at a lower level of development and lower labour-costs (UNCTAD,
1995).
In any event, the consequences
for outward FDI in the region as a whole may not be that significant. Although
37 % of FDI stock in developing Asia as a whole is from other Asian developing
economies (as compared to 21% from Japan, 14% from the United States and 13%
from the European Union) (UNCTAD and European Commission, 1996), the five most
affected countries account for less than one-fifth of FDI outflows from Asian
developing countries. The major FDI sources within the region -- Hong Kong,
China; Singapore; Taiwan Province of China; and China -- have not been severely
affected by the crisis. The consequences for intra-regional FDI as a whole may
therefore not be too severe. At the same time, some firms from the region may
draw the lesson that they should, in the longer term, look for investment opportunities
outside the region, in order to diversify risk.
"We have been on a
growth course for some time at Hang Lung. The present financial turmoil is likely
to be short-term and I do not expect it to affect our strategic plans to build
regional production networks. To the contrary, it shows the importance of geographic
diversification" -- Ronnie C. Chan, Hang Lung Development Company Limited,
Hong Kong, China.
Among the second tier of
Asian economies most likely to be affected by a fall in intra-regional FDI are
Viet Nam and the least developed Asian countries (such as Cambodia, Lao People’s
Democratic Republic and Myanmar) that rely more heavily on some of the most
affected countries for such investment. This would set back some of the progress
being made by these less developed countries to put their economies on a growth
track.
... while competition
for FDI between Asia and other emerging market regions is increasing.
One could expect that, in
light of the crisis, MNCs may find other sites more attractive for new investment
projects in the short to medium term. Indeed, some of the firms surveyed by
UNCTAD/ICC are looking, in the short to medium term, towards expansion in Latin
America, Central and Eastern Europe and Africa (37%, 27% and 11% , respectively).
But this finding should not necessarily be interpreted to indicate a switch
of FDI towards these regions in response to the crisis, for two reasons:
- An overwhelming majority
(90%) of the survey respondents who indicated that they expect to increase
their investments in Latin America and the Caribbean and Central and Eastern
Europe do not intend to reduce their investments in East and South-East Asia
in the short-to-medium term. Furthermore, nearly 50 per cent of those who
indicated that they expect to increase their investments in Latin America
and the Caribbean and Central and Eastern Europe also indicated that they
expect to increase their investments in East and South-East Asia. In other
words, firms see profitable investment opportunities in emerging markets in
general.
- FDI flows to Latin America
and the Caribbean already showed a substantial upward trend before the crisis
in Asia (with annual growth rates of 31% during 1995-1997). FDI has also picked
up in Central and Eastern Europe, a region which, in any event, offers much
potential fo
r further increases.
Because of good prospects
outside Asia, Asia’s share in the total of FDI to all developing countries
would decline in any case, even though the prospects for FDI in Asia remain
excellent. In other words, the relative FDI position of Asia attained during
the past two decades or so is being re-adjusted as Latin America and the Caribbean
have emerged from their "lost decade" and Central and Eastern Europe
have opened themselves to FDI. This shift would occur even without any inter-regional
diversion of FDI flows. Be that as it may, however, Asia now faces more competition
in the FDI world market in general.
In conclusion, there
are good reasons to believe that long-term prospects for FDI in Asia remain
excellent...
In spite of the variety
of factors influencing FDI and the differentiated picture with respect to different
kinds of investments, the most important thing to note is that most MNCs typically
take a long-term view with respect to their locational decisions and, given
the region’s past performance and solid fundamentals in a number of respects,
this leads them to remain bullish about FDI in Asia. Hence, many of the more
specific factors outlined above may have only short-to-medium term implications
and, in any event, are somewhat mitigated by the protective influences enjoyed
by foreign affiliates through their membership in transnational corporate networks
(an advantage domestic firms do not enjoy). Indeed, in the longer-term, the
attractiveness of the region is likely to be enhanced as Asian countries overcome
their problems and reassert their economic dynamism on the basis of improved
fundamental strengths.
More generally, and in comparison
with other private capital flows, FDI flows have a moderating effect on the
volatility of total private capital flows. This is a side effect of the deep
international integration of the Asian economies at the level of production
that FDI brings about. In fact, in the same way in which the debt crisis in
the 1980s led governments to appreciate the non-debt creating nature of FDI,
the current crisis may lead them to appreciate more the relative stability of
FDI flows, apart from the other contributions such investment can make to growth
and development.
... which could be helped
further by policy efforts to mitigate short- and medium-term negative effects
of the crisis on FDI flows and to help restore growth.
Because there are some short
and medium-term problems, and because continued FDI flows could contribute towards
restoring economic growth and maintaining exports at high levels, some policy
measures addressing these problems ought to be considered:
- Governments of the affected
countries could make an extra effort -- perhaps helped by regional and international
institutions -- to provide information about greenfield and joint venture
investment opportunities, especially in (new) activities designated by them
as priority areas. Such an effort could be of particular interest to MNCs
from developing countries, as well as small and medium-size enterprises.
- Countries might also
pay greater attention to providing assistance to dynamic and innovative small
and medium-sized enterprises whose role as potential partners in international
networks and technology alliances would thus be enhanced.
- In this connection, Asian
countries may wish
to review their regulatory frameworks for FDI, with a view towards making
them as appropriate as possible in light of their development objectives.
UNCTAD’s Investment Policy Reviews could be of relevance here, as would
be the Investment Guides for least developed countries initiated by UNCTAD
in cooperation with the ICC.
- Where appropriate, Asian
MNCs could consider adopting international accounting standards as soon as
possible.
- Within the framework
of regional integration arrangements and other fora for cooperation -- such
as the ASEAN Investment Area -- Asian countries could formulate jointly measures
that could encourage FDI and its contributions to the economies of member
countries.
- Home countries that allow
the use of optional reserves and grant tax deductions for the depreciated
value of their firms’ foreign affiliates as features of their tax policies
could consider recognizing the present circumstances in Asian countries as
meeting the criteria for such reserves and deductions.
- Home country political
risk insurance programmes for investors could consider expanding their coverage
of foreign affiliates to sudden, steep and debilitating foreign exchange devaluations.
- Countries that are host
to foreign affiliates of Asia-based MNCs in financial distress could consider
temporary measures of assistance to help sustain existing affiliates, where
this is warranted. This would be akin to investment incentives for new inward
FDI projects, but adapted to the present special circumstances in the post-investment
stage in host countries.
Naturally, such efforts
would have to be embedded in more general policies aimed at restoring macro-economic
stability and economic performance, as well as strengthening institutional capabilities
to advance the process of development. While specific efforts aimed at maintaining
and increasing FDI flows can make a contribution to the process of overcoming
the impact of the crisis, much more will, indeed, depend on the quality of those
more general policies.
References:
UNCTAD (1997). World
Investment Report 1997: Transnational Corporations, Market Structure and Competition
Policy (United Nations publication, Sales No. E.97.II.D.10).
UNCTAD (1996). World
Investment Report 1996: Investment, Trade and International Policy Arrangements
(United Nations publication, Sales No. E.96.II.A.14).
UNCTAD (1995). World
Investment Report 1995: Transnational Corporations and Competitiveness (United
Nations publication, Sales No. E.95.II.A.9).
UNCTAD and European Commission
(1996). Investing in Asia’s Dynamism: European Union Direct Investment
in Asia (Luxembourg: Office for Official Publications of the European Commission,
1996).
For further information,
please contact
Karl P. Sauvant, Chief, International Investment, Transnationals and Technology
Flows Branch
Tel. +41 22 907 57 07
Fax +41 22 907 01 9
4
E-mail Click here to send a mail
Tom Brewer
Tel. 41 22 907 58 89
E-mail Click here to send a mail
Masataka Fujita
Tel. +41 22 907 62 17
E-mail Click here to send a mail
Padma Mallampally
Tel. +41 22 907 56 31
E-mail Click here to send a mail
James Zhan
Tel. +41 22 907 57 97
E-mail Click here to send a mail
UNCTAD Press Unit
Tel. +41 22 907 58 16
Fax +41 22 907 00 43
E-mail Click here to send a mail