(EGM) Foreign Direct Investment in Southeast Asia - Unido

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Theme 4 FDI and the China Dimension First presentation summary Adam Cross presented China’s substantial and sustained economic growth, which, since its ‘open door’ policy initiative, has helped attract considerable FDI activity since the early 1990s, as has its relatively recent entry into the WTO, gradual market liberalisation, and its deepening integration with the world economy. China is now the world’s seventh largest exporter, its eighth largest importer, and since 2003, holds the world’s fourth largest stock of FDI (after the US, UK and Germany). There has been much concern within Southeast Asia as to whether export competition from China and China’s substantial and rising FDI inflows are diverting foreign investment (particularly from Japan and US) away from the region, or whether they could have an FDI creation effect for Southeast Asia. Having once been perceived as the stellar performer in attracting FDI, Southeast Asia is having to adjust to the prospect of a potent and proximate rival for the attention of MNEs. If FDI flows are finite, and given the recent decline in global FDI flows from its just over US$ 1,400 billion peak in 2000, then attracting foreign investment is a zero-sum game, and China’s rise can only be at the expense of its neighbours. This is the first concern for many in Southeast Asia. The second is that China is single-handedly forcing a change in established GVCs. There are a number of weaknesses in the ‘China diversion’ hypothesis. First, given the relative size of China’s economy, its FDI inflows (as measured by per capita GDP and by sector distribution) are not quite so remarkable, albeit still fairly commendable. Secondly, a substantial proportion of the aggregate FDI inflow figures contain quasi-FDI and ‘round tripping’ activity (i.e. domestic investment capital routed through external channels, so as to qualify for privileges awarded to foreign investors), whereby domestic investment is incorrectly depicted as foreign investment. It should also be noted that transaction costs, as well as a number of obstacles and risks, are 34
cumulatively serving to constrain FDI activity in China. These include a lack of information and planning certainty for investors, stemming from: i) inadequate IPR protection; ii) a rapidly mutating policy framework; iii) various regulatory hurdles; and iv) limited market transparency. Rising input prices also pose a problem, such as the cost of various professional services, the relatively high prices for electricity and raw materials, and the inefficiencies still evident in logistics and bureaucracy. Fierce competition is also creating excess production capacity in some fields, and distribution bottlenecks are raising the costs of supply chain management. [Any future revaluations of the Yuan would increase price pressures further.] Some observers would dispute the zero-sum approach to FDI activity, particularly given WTO obligations to increase market access, and argue instead that FDI growth in China will yield opportunities for Southeast Asia. China will see an increase in demand for raw materials, resources and services in sectors where some Southeast Asian countries have a comparative advantage and/or complementarities. Thanks in large part to the ‘integrated global factory’ trend of MNEs, and the ‘slicing and dicing’ of production activity across national borders, the appropriate policies could position Southeast Asian countries well to reap some of the rewards emanating from a rapidly expanding China. These policies include: i) absorbing new technologies, and raising indigenous technology and innovation capacities; and ii) identifying lucrative niches within global production networks. Versatility of technology is key, as is augmenting the local human capital stock. More specifically, Southeast Asian countries need to combat the challenge posed by China -- on a national level -- by: i) further reducing business and transaction costs; ii) providing high quality support services for MNEs; iii) improving transport and communication infrastructure, including that with China itself; iv) providing training to re-skill workers displaced by the shift of some production to China; and v) by promoting entrepreneurship and revitalising competitiveness. On a regional level, there is utility in facilitating 35
Page 3: Foreign Direct Investment in Southe
Page 6 and 7: Abbreviations and Acronyms ADB Asia
Page 8 and 9: thinkers and writers on FDI and mat
Page 10 and 11: The realignment of structural facto
Page 12 and 13: Recent years have seen increasing c
Page 14 and 15: overlap according to production pro
Page 16 and 17: enchmark rankings should be one aim
Page 18 and 19: Theme 2 FDI and National Experience
Page 20 and 21: ‘pipeline’ of harmonising legis
Page 22 and 23: major determinant of success. This
Page 24 and 25: and viii) general foreign investor
Page 26 and 27: Investment policy craft -- creating
Page 28 and 29: policies, as they would treat forei
Page 30 and 31: It appears that the advantages and
Page 32 and 33: seeking to attract FDI? Examining t
Page 34 and 35: attractiveness of the region to inv
Page 38 and 39: greater regional collaboration, the
Page 40 and 41: The increasing significance of outs
Page 42 and 43: aise their own finance like any oth
Page 44 and 45: Notwithstanding the dynamics of ris
Page 46 and 47: The logistics of the UNIDO ITPO Del
Page 48 and 49: no longer be an appropriate indicat
Page 50 and 51: FDI lens. Consequently, some IPAs h
Page 52 and 53: Select References Bartels F.L. and
Page 54 and 55: Annex 2: Participants at the EGM Co
Page 56 and 57: Appendix I: Thematic Programme of t
Page 58 and 59: 12.30-14.0 Lunch Plenary Discussion
Page 60 and 61: Appendix II: Opening Statement by t
Page 62 and 63: Appendix III: Opening Statement by
Page 64 and 65: and practitioners in other developi
Page 66 and 67: The themes of the EGM have been car
Page 68 and 69: Appendix V: EGM Working Paper EF Un
Page 70 and 71: ABSTRACT This working paper discuss
Page 72 and 73: In recent years, we have seen incre
Page 74 and 75: usiness domestically (improving int
Page 76 and 77: intra-industry trade, which account
Page 78 and 79: The agglomeration of markets and di
Page 80 and 81: These patterns are characterised by
Page 82 and 83: etween locations and maximises the
Page 84 and 85: ecome insiders and thus avoid being
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(iv) Those that relate to the “pu
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their indicators 50 of industrial p
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evolve more rapidly to account for
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changing morphology of MNEs with a
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92 Appendix I - Doing Business in A
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94 Appendix II - ASEAN Investment C
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96 Appendix III - Ranking of Econom
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Buckley P. J., Carter M. J., 2004,
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McKinsey & Company, 2003, New Horiz
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(EGM) Foreign Direct Investment in Southeast Asia - Unido

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