Foreign direct investment in Southeast Asia: - Regional Office China

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Theme 4FDI and the China DimensionFirst presentation summaryAdam Cross presented China’s substantial and sustained economic growth,which, since its ‘open door’ policy initiative, has helped attract considerableFDI activity since the early 1990s, as has its relatively recent entry into theWTO, gradual market liberalisation, and its deepening integration with theworld economy. China is now the world’s seventh largest exporter, its eighthlargest importer, and since 2003, holds the world’s fourth largest stock ofFDI (after the US, UK and Germany).There has been much concern within Southeast Asia as to whether exportcompetition from China and China’s substantial and rising FDI inflows arediverting foreign investment (particularly from Japan and US) away from theregion, 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 proximaterival for the attention of MNEs. If FDI flows are finite, and given the recentdecline 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 canonly be at the expense of its neighbours. This is the first concern for many inSoutheast Asia. The second is that China is single-handedly forcing a changein 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 byper capita GDP and by sector distribution) are not quite so remarkable, albeitstill fairly commendable. Secondly, a substantial proportion of the aggregateFDI inflow figures contain quasi-FDI and ‘round tripping’ activity (i.e.domestic investment capital routed through external channels, so as toqualify for privileges awarded to foreign investors), whereby domesticinvestment is incorrectly depicted as foreign investment. It should also benoted that transaction costs, as well as a number of obstacles and risks, are34
cumulatively serving to constrain FDI activity in China. These include a lackof 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 inputprices also pose a problem, such as the cost of various professional services,the relatively high prices for electricity and raw materials, and theinefficiencies still evident in logistics and bureaucracy. Fierce competition isalso creating excess production capacity in some fields, and distributionbottlenecks are raising the costs of supply chain management. [Any futurerevaluations 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 argueinstead that FDI growth in China will yield opportunities for Southeast Asia.China will see an increase in demand for raw materials, resources andservices in sectors where some Southeast Asian countries have acomparative advantage and/or complementarities. Thanks in large part tothe ‘integrated global factory’ trend of MNEs, and the ‘slicing and dicing’ ofproduction activity across national borders, the appropriate policies couldposition Southeast Asian countries well to reap some of the rewardsemanating from a rapidly expanding China. These policies include: i)absorbing new technologies, and raising indigenous technology andinnovation capacities; and ii) identifying lucrative niches within globalproduction networks. Versatility of technology is key, as is augmenting thelocal human capital stock.More specifically, Southeast Asian countries need to combat the challengeposed by China -- on a national level -- by: i) further reducing business andtransaction costs; ii) providing high quality support services for MNEs; iii)improving transport and communication infrastructure, including that withChina itself; iv) providing training to re-skill workers displaced by the shift ofsome production to China; and v) by promoting entrepreneurship andrevitalising competitiveness. On a regional level, there is utility in facilitating35
Page 3: Foreign Direct Investment in Southe
Page 7 and 8: PrefaceThis UNIDO report presents t
Page 9 and 10: PreambleWithin the constantly evolv
Page 11 and 12: IntroductionThe Changing Face of Fo
Page 13 and 14: Theme 1FDI and Multinational Enterp
Page 15 and 16: These include: i) changes in long-t
Page 17 and 18: quality of life in a country can be
Page 19 and 20: consequence, as well as in terms of
Page 21 and 22: high-technology cluster development
Page 23 and 24: Theme 3FDI, Boundaries, Hierarchies
Page 25 and 26: A second dimension is that incentiv
Page 27 and 28: industrial sector and sub-sector le
Page 29 and 30: industrial base without relying to
Page 31 and 32: socialising public goods and privat
Page 33 and 34: Typically, but not exclusively, Sin
Page 35: generate tax revenues to fund vario
Page 39 and 40: Southeast Asia as an integrated mar
Page 41 and 42: Theme 5FDI and Capital in Southeast
Page 43 and 44: Finally, there is also a need for i
Page 45 and 46: components of the integrated global
Page 47 and 48: ConclusionEmerging Policy Direction
Page 49 and 50: In conclusion, Frank Bartels sugges
Page 51 and 52: Taking the above research needs int
Page 53 and 54: Annex 1:Presenters at the EGMName P
Page 55 and 56: TIMOR LESTEMs. Warubon SUKASAMEMr.
Page 57 and 58: 14:00 - 15:30 Theme II: Intra-regio
Page 59 and 60: y Japan ITPOsCommentator: Frank L.
Page 61 and 62: This type of deep information excha
Page 63 and 64: The extent of FDI effects and their
Page 65 and 66: Appendix IV: Opening Statement by U
Page 67 and 68: only of UNIDO but also other UN spe
Page 69 and 70: LIST OF ABBREVIATIONSAFTA - ASEAN F
Page 71 and 72: in mind that host policy for attrac
Page 73 and 74: forces of competition and co-operat
Page 75 and 76: 2. BACKGROUND ISSUESAn accurate per
Page 77 and 78: economies. In contrast, Sub-Saharan
Page 79 and 80: costs, boost quality and accelerate
Page 81 and 82: Fourthly, in terms of a framework f
Page 83 and 84: in joint venturing), while retainin
Page 85 and 86: experiencing the kind of global rel
Page 87 and 88:
other hand, being predominantly nat
Page 89 and 90:
Also, the trade surplus (or deficit
Page 91 and 92:
limited [Freeman and Bartels (2000)
Page 93 and 94:
technology and innovation policy; h
Page 95 and 96:
Credit Information Index NA 0 3 0 6
Page 97 and 98:
Appendix II - Investment climate in
Page 99 and 100:
REFERENCESAlmor T., Hirsch S., 1995
Page 101 and 102:
Freeman N. J., Bartels F. L., Eds.,
Page 103:
Trigeorgis L., 1996, Real Option: M
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