East Asian Economy: FDI in East Asia

* Some parts of this note are borrowed from the references for teaching purpose only.

East Asian Economy <Lecture Note 6 > 2013.11. 14

Semester: Fall 2013 Time: Thursday 2-5 pm Professor: Yoo Soo Hong Office hour: By Appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home Page: http://yoosoohong.weebly.com

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Source: UNCTAD

Regional Foreign Investment

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- China has grown to rival the United States as the world’s largest recipient of foreign investment in recent years. However, China still trails most developed Asian countries in terms of per capita FDI inflows, signaling the FDI inflows into China have the potential to continue trending upwards in the coming years.

Reprinted from: International Strategic Analysis. 2013. p. 44

FDI Inflows into ASEAN 1993-2011

Source: Chia, S. 2013. p.14. 3

Source: UNCTAD

Foreign Investment in Northeast Asia

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- Over the past decade, only the United States as attracted more actual foreign investment than China and this will continue for the foreseeable future as the Chinese market is too attractive for foreign companies not to be present. Meanwhile, Japan and S. Korea both will see significant FDI inflows in the future.

Reprinted from: International Strategic Analysis. 2013. p. 43

Source: UNCTAD

Foreign Investment in the More-Developed ASEAN

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- Foreign investment in the more-developed regions of Southeast Asia rebounded in recent years following the downturn in 2008 and 2009. Singapore remains one of the leading recipient of foreign investment in Asia.

Reprinted from: International Strategic Analysis. 2013. p. 40

Source: UNCTAD

Foreign Investment in the Less-Developed ASEAN

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- Foreign investment in Indonesia is on the rise thanks to the expansion of that country’s domestic market. This is also the case in countries such as Vietnam, Myanmar and the Philippines, each of which has seen foreign investment inflows trend upwards in recent years.

Reprinted from: International Strategic Analysis. 2013. p. 41

Inward FDI Stock/GDP Ratios (%)* stock=accumulated quantity

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FDI in NEA and SEA

- FDI inflows have generally been higher in Southeast Asia than in Northeast Asia (except for China), especially in more recent years. FDI played a more influential role in Southeast Asia both in terms of overall economic impact and as a source of physical capital accumulation.

- Northeast Asia was less welcoming FDI than Southeast Asia because the Japanese and Korean governments justifiably feared that substantial foreign ownership interests in the economy would dilute the government’s influence and control over the economy.

- Most of these economies are highly export-oriented. The share of the agricultural sector in GDP has decreased with the increase in the shares of the industrial and services sectors over the years. In 2011, the agricultural sector accounted for about 10% of GDP in China. The share of the agricultural sector was much lower in other economies.

- The share of the industrial sector in GDP was more than 40% in China and somewhat lower in Mongolia and the Republic of Korea.

- The services sector gained in all the economies and dominated in Hong Kong, and China.

- The economy of China grew by 9.2% in 2011 but growth fell to 7.8% in 2012, with the rate of GDP growth slowing for 7 consecutive quarters and missing the Government’s target of July-September 2012, for the first time since the depths of the global financial crisis. At the end of the year, the activity indicators of China were stronger than expected, proving economic rebound in the last quarter.

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Concept of FDI

• Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country– The firm becomes a multinational enterprise

• FDI can be in the form of – Greenfield investments - the establishment of a wholly new

operation in a foreign country– Acquisitions or mergers with existing firms in the foreign country

• The flow of FDI - the amount of FDI undertaken over a given time period

– Outflows of FDI are the flows of FDI out of a country (=ODI)

– Inflows of FDI are the flows of FDI into a country

• The stock of FDI - the total accumulated value of foreign-owned assets at a given time

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Global Flows of Foreign Direct Investment

Highlights

- Despite turmoil in the global economy, global FDI inflows rose by 17% in 2011, to 1.5 trillion dollars, surpassing their pre-crisis average.

- FDI inflows increased in all major economic groupings - developed, developing, and transition economies. Developing and transition economies continued to account for half of global in FDI in 2011.

- In this group, the 2011 increase in FDI flows was no longer driven by South, North-East and South-East Asia, but rather by Latin America and the Caribbean and by transition economies. Africa, the region with the most least developed countries(LDSs), continued its decline in FDI inflows.

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World FDI Trends

FDI Outflows 1982-2010 ($ billions)

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Global FDI Flows($ Bil.)

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Notes: *Revised

**Preliminary estimates

Average 2005-2007 and 2007 to 2011

Source: UNCTAD

World FDI Trends of Two Regions

FDI Inflows by Region 1995-2010 ($ billion)

(Bil. US$)

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FDI Inflows by Group of Economies, 1980–2008

(Billions of U.S. dollars )

Source: UNCTAD. 2009.

FDI Inflows by Region

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(Bil. Dollars, %)

Source: World Investment Report 2012.

World Financial Crisis and Global FDI

After several years of steady growth the global FDI flows were hit by the global economic crisis in 2008.

The decline continued in 2009, when global FDI inflows reached 1,114 trillion USD and were 37 % lower than in record year 2008.

All major country groups declined – but hte heaviest losses were suffered by the developed countries.

The data available for 2010 suggest a cautios optimism, ast global flows were supposed to reach 1.3-1.5 trillion USD.

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Crisis and FDI to East Asia

Relatively small decline of FDI inflows in 2009 – 233 bln. USD (-17 %)

Substantial FDI outflows – 153 bln. USD

Southeast Asia is the most popular investment destination nowadays

for greenfield FDI

China and Hong-Kong are the most popular countries with 95 bln. USD and 48 bln. USD

– Singapore – 16 bln. USD

– India – 34 bln. USD

– High concentration of FDI inflows

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Projects Utilized FDI

Number Growth (%) (US$ billion) Growth (%)

2001 26,140 17.0 46.9 15.1

2002 34,171 30.7 52.7 12.5

2003 41,081 20.2 53.5 1.4

2004 43,664 6.3 60.6 13.3

2005 44,001 0.8 60.3 -0.5

2006 41,485 -5.7 69.5 4.5

2007 37,871 -8.7 74.8 18.6

2008 27,514 -27.3 92.4 23.6

2009 23,435 -14.8 90.0 -2.6

2010 27,406 16.9 105.7 17.4

Source: NBS. 2011.

FDI Trends in China

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Emerging East Asia’s Foreign Direct Investment (FDI) Inflows, 1995–2005

Source: Unknown (Google)

Notes: Figures are measured in US Dollars at current prices and current exchange rates in millions. The UNCTAD figures include only non-financial FDI.

Source: UNCTAD. 2011.

FDI to China, 1980-2010

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Equity joint ventures 36%

Cooperative joint ventures

16%

Wholly foreign-owned

enterprises 47%

Others 1%

2000

Structural Changes of the FDI in China (2000 and 2010)

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Equity joint ventures

21%Cooperative

joint ventures1%

Wholly foreign-owned

enterprises77%

Foreign-invested shareholding

ventures1%

2010

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Contributions of FDI to the Chinese Economy

• Increase trade growth and participation in the international segmentation of production

• Increase export competitiveness

• Become important source of capital

• Create jobs, upgrade skills and raise wages of employees

• Raise factor productivity and increased technology transfer (?)

• Upgrade China‘s industrial structure

• Increase domestic competition • Increase industrial performance (?)

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Source: MOFCOM. 2010.

Chinese ODI by Region (Stock)

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Source: MOFCOM. 2010.

China’s ODI in 2009 (Stock) by Sector

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Korea’s Overseas Direct Investment Trends

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Japan’s ODI Destinations: 2011 (%)

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Japan’s Outward FDI by Country/Region (International Investment Position, End of 2009)

Total: 740 billion USD

Sources: Prepared by JETRO from Ministry of Finance and Bank of Japan balance of payment and cross-border investment statistics, and Bank of Japan foreign exchange rates. 29

Origins of FDI into ASEAN, 2008-2010 (US$ Mil.)

30Source: ASEAN

Global Production Sharing

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Break-up of the production process into geographically separated stages.

Increasingly important facet over the past three decades.

This transformation of world trade has been underpinned by three mutually reinforcing developments.

- Rapid advancement in production technology- Technological innovations in communication and transportation- Liberalization policy reforms

Production Network in East Asia

Network Development

- East Asia has been leading the world in sustained economic growth for the past three decades. The strength of the East Asian economies is its international production networks.

- The international division of labor is not by industry, but by production process, which differs from a standard reading of comparative advantage models.

- Machines typically consist of a large number of parts and components, each of which is produced by diversified technologies and inputs. Machinery industries are particularly suited to the fragmentation of production.

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Market Integration through Production Networks

• China, Japan and South Korea are home countries of production networks, with China as major assembly hub. Malaysia, Philippines, Singapore and Thailand are major producers of electronic parts and components, while Thailand also assembly hub for automobiles. CLV countries are new to production networks.

• Growth in production network trade in parts and components and final assembled products –by 2006/7 accounted for 66.1% of ASEAN exports and 64% of ASEAN imports.

• Over 70% of intra-East Asian trade comprises parts and components which are then assembled into final goods and exported to ROW. Over 60% of East Asian exports eventually destined for ROW, mainly US and EU.

• FTAs can facilitate production networks in ASEAN by attracting MNC investments and facilitating intra-regional trade flows.

The Fragmentation Theory: Production Blocks and Service Links

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Source: Fukunari and Ayako

Fragmentation and Agglomeration

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Production Networks: The US-Mexico Nexus versus East Asia

Source: Ando and Kimura (2009a)

Global production sharing has evolved through three distinct phases.

- Formative stage : small fragment in low-cost country and re-importing to assemble

- Production network : assembly process at different stages, engaged many countries

- International network : move final assembly to overseas to take advantage of cheap labor

Proportionately larger in East Asia, in particular in ASEAN

Rapid integration of the PRC into regional production networks brings international specialization.

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Rregional Production Fragmentation and Integration

Fragment the production process, decide best location for each unit, and link them through efficient logistic service.

Gains from division of labor

Intense intra-regional trade of intermediate goods

FDI and outsourcing

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Background of RPI

Regional production integration (RPI) incurs fixed cost for operating geographically dispersed production units. Economic distance

should be short (infrastructure, logistic service, information and communication, border procedure).

To compensate the fixed cost, scale economy is necessary. It requires sufficiently large regional market or exports to the global market.

Diversified resource endowment within the region enables larger gains from division of labor (specialization).

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Fast Growing Intra-regional Trade in East Asia

0%

10%

20%

30%

40%

50%

60%

70%

1980

1985

1990

1995

2000

2005

EU25 East Asia NAFTA

Source: METI, Japan. 2007. White Paper of International Trade .

(1980-2005)

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Directions of Trade

• Formation of the triangular trade scheme

• Intra-regional trade growth is

bi-directional.

• Trade between China and

ASEAN is increasing.

• Intra-regional exports （ 229b.to 1520b. ） has grown faster than

exports to EU and US (265b. To 1116b.).

Source: IMF. Directions of Trade.

Unit: billion US$

(1990 and 2007)

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Driving Forces of Production Fragmentation and Integration in East Asia

Diversified income level of countries, allowing finer specialization.

Linkage through efficient logistics, realizing higher productivity.

Driven by the global market. It has been a natural process, firms’ searching for competitiveness.

Aided by national policies such as establishment of special economic zones, speedy custom clearance, and provision of good infrastructure for international transportation and communication.

Formation of a number of industrial agglomerations where not only final assemblers but parts suppliers are also concentrated. Regional policies have a key role.

FTAs are being sought recently.

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Achievements of Production Integration in East Asia

Big firms are achieving higher productivity, gaining competitiveness in the world market.

Many countries participating in the high-tech products export

More people participating in more productive modern sector, earning higher salary and expanding the middle income consumer class

Growth of urban economy

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Clustering of local

suppliers (multinational and local firms)

Exchange of parts and components among clusters

Industrial Agglomerations: East Asian Industrial Belt

Trade and Investment Integration

Source: ADB, Emerging Asian Regionalism (2008)

Export-led MNCs’ FDI created supply chains—forming a regional hub of global production networks

Trade and investment facilitation should support further expansion of the region’s trade and investment

Rise of “Factory Rise of “Factory Asia”Asia”

Source and Destination of Outward and Inward FDI Flows, Selected Asian Economies, 2005-2009

Notes: Inward FDI refers to data for seven economies namely, People’s Rep. of China; Hong Kong, China; India; Rep. of Korea; Malaysia; Taipei, China; and Thailand. Outward FD I excludes India and Rep. of Korea.Offshore financial centers comprise Bermuda, British Virgin Islands, Cayman Islands, Labuan Island, and Panama. Sources: ADB estimates based on data from CEIC Data Company; Bank of Thailand. http://www.bot.or.th; UNCTAD stat. http://www.unctad.org; Directorate-General of Budget, Accounting and Statistics, National Statistics. http:// eng. dgbas.gob.tw

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Ease of Doing Business: Rank 2011

 

Overall Ranking

Starting a

Business

Dealing with

Const-ruction Permits

Register-ing

Property

Getting Credit

Protect-ing

Investors

Paying Taxes

Trading Across Borders

Enforc-ing Contracts

Closing a Business

China 79 151 181 38 65 93 114 50 15 68

Japan 18 98 44 59 15 16 112 24 19 1

Korea 16 60 22 74 15 74 49 8 5 13

Hong Kong 2 6 1 56 2 3 3 2 2 15

Taipei,China 33 24 95 32 72 74 87 17 90 10

Brunei Darussalam 112 133 74 183 116 120 22 52 159 42

Cambodia 147 170 146 117 89 74 57 118 142 183

Indonesia 121 155 60 98 116 44 130 47 154 142

Lao PDR 171 93 115 163 152 182 116 170 110 183

Malaysia 21 113 108 60 1 4 23 37 59 55

Philippines 148 156 156 102 128 132 124 61 118 153

Singapore 1 4 2 15 6 2 4 1 13 2

Thailand 19 95 12 19 72 12 91 12 25 46

Vietnam 78 100 62 43 15 173 124 63 31 124

India 134 165 177 94 32 44 164 100 182 134

Australia 10 2 63 35 6 59 48 29 16 12

New Zealand 3 1 5 3 2 1 26 28 9 16

United States 5 9 27 12 6 5 62 20 8 14

Fragmentation of production: the example of the Boeing 787 Dreamliner

Made in the world

Source: Meng & Miroudot

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References

ADB. 2010. key Indicators for Asia and the Pacific 2010.

ADB. 2011. Asian Development Outlook 2011.

Athukorala, Prema-chandra. 2010. “Production Networks and Trade

Patterns in East Asia: Regionalization or Globalization?”. ADB

Working Paper Series No. 56.

Hamaguchi, Nobuaki. 2008. “Production Integration in East Asia” (PPT). RIEB. Kobe University.

Kawai, Masahiro. 2011. “ East Asia’s Trade and Investment

Facilitation: NEAT 2011 “ Asian Development Bank Institute.

Hamaguchi, Nobuaki. 2008. “Production Integration in East Asia” (PPT).

RIEB. Kobe University.

Kawai, Masahiro. 2011. “ East Asia’s Trade and Investment Facilitation:

NEAT 2011 “ Asian Development Bank Institute.

Kimura, Fukunari and Ayako. 2011. “Production Networks in East Asia”.

Asian Development Bank Institute.

Michitaka Nakatomi. 2010. “Global Value Chain” in East Asia. Japan

External Trade Organization (JETRO).

Tananka, Kiyoyasu. 2012. “FDI Outlook in Asia”. (Google).

UNCTAD. 2012. World Investment Report.

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