Putting it to Work in Developing Countries - Nathan Associates

Thailand, Vietnam, Philippines, and Indonesia
make up most of the balance (see text box).
While these ASEAN nations all experienced significant
FDI increases in the last couple of years,
FDI to East Asia and the Pacific 2001–2005
FDI Inflows ($mn) FDI % GDP
2005 2001–2005 2001–2005
Region Total 89,700 332,736 3.1
China 72,406 286,161 3.7
Malaysia 3,967 14,822 2.8
Thailand 3,687 11,886 1.7
Vietnam 2,020 7,580 3.7
Philippines 1,132 4,048 1.0
Indonesia 5,260 3,726 0.4
Other (17 countries) 1,228 4,512 2.3
Developing Countries 285,144 1,034,754 2.8
SOURCE: UNCTAD, WIR 2006;World Bank regional groupings.
none has regained the peak flows of the 1990s,
before the impact of the Asian Financial Crisis.
FDI to China increased twenty-fold over the
past 15 years, largely because of export-oriented
industry that benefits from China’s low labor
costs and pro-FDI special economic zones. In
2005, foreign-invested enterprises—3 percent of
all companies—generated 57 percent of the
China’s exports and 88 percent of its high-tech
exports. 10 Since joining the WTO in 2001,
China has intensified its economic liberalization
program, progressively relaxing geographical
restrictions on FDI and opening more flexible
foreign ownership opportunities in domestic
industries, including banking, insurance,
telecommunications, wholesale and retail trade,
and tourism. With an eye on China’s enormous
domestic markets, foreign investors have
responded accordingly. Their reaction has been
especially striking in financial services, where
market-seeking FDI has engaged in cross-border
M&A with state banks, megatransactions valued
at more than $12 billion in 2005 alone. At the
same time, efficiency-seeking FDI in manufacturing
continues to flow heavily to China,
although rising wages, land costs, and input
prices appear to have depressed earnings, and
may encourage some moves away from assembly
operations to higher skill, higher value-added
activities, as well as some relocation to new production
areas.
Some ASEAN nations fear that China’s success
will reduce their own FDI flows, especially with
China’s accession to the WTO. Recent research,
however, indicates that FDI in China and in
East Asia are generally complementary: China’s
rising FDI correlates with increases in FDI
inflows elsewhere in East Asia, reinforcing the
view that China and ASEAN economies operate
within common production networks. Market
size and policy variables (e.g., low corporate
taxes and FDI openness) seem to be more critical
for FDI attraction than the “China effect.” 11
In fact, in the years since the regional lull in
FDI inflows in 2002, with Indonesia, Thailand,
Malaysia, and Vietnam in the lead, East Asian
economies other than China have together generated
one-third of the growth increment in
regional FDI, well above their share of inflows.
A combination of economic reform, political
stability, aggressive incentives, high commodity
prices, and prospective WTO membership (for
Vietnam) all probably contributed to this performance.
In the medium term, given its size and momentum,
China will likely continue to attract massive
inflows and capture the largest proportion
of regional FDI, especially in services and in
higher-value, capital-intensive manufacturing.
How quickly China meets its WTO commitments
to liberalize services and improve the
business environment will be an important
determinant of regional FDI growth. Escalating
operating costs in China may encourage some
relocation of labor-intensive export manufacturing.
If so, regional economies will probably benefit
first, particularly Vietnam, which can offer
low cost labor and the dynamism of new WTO
membership. Continuing economic liberalization
and reform, and advances in ASEAN’s program
for regional economic integration, could
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