Foreign direct investment in Asia: The big picture
See "FDI confidence index: The Asia story" (business, page 3)By Jon Fernquest
[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The main problem that developing countries like Thailand face is how to attract that wealth into their country in the form of investments.
These investments can range from bank loans to stock share holding to foreign direct investment (FDI) Foreign direct investment in Thailand means that the foreign company actually has control over assets in Thailand such as factories, land, and business.
Foreign ownership of businesses, land, and factories can be controversial . FDI means foreign companies own part of Thailand. Many Thais believe that Thai land and businesses should only be owned by Thais.
Even though FDI can be controversial, it also has advantages. First of all, FDI is less liquid. The foreign company can't sell it and convert it into cash as easily. This means that businesses with FDI in Thailand are less likely to leave Thailand suddenly, pulling their money out of the country and leaving the country with an economic crisis like 1997.
Second, FDI means longer term involvement in the country which means that Thai nationals can build careers in these companies and acquire knowledge about business practices and processes in developed countries. This technological transfer can help Thailand develop in the long term.
There are tradeoffs for both types investment. Today's article will help you learn about these tradeoffs.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What is the most preferred region for foreign direct investment
(FDI) in the world? Why?
2. According to the author, if Thailand wants to attract FDI
which countries should it study?
3. How is Thailand different from India and China? Give details.
(Note: This will require some internet research)
[Check back shortly]
4. In which country, India or China, is FDI more recent? Why?
5. How long has China been one of the most important countries for FDI?
6. What is the difference between FDI in China and India?
7. What kind of corporate operations are foreign companies moving overseas from their home countries?
Foreign countries are moving overseas operations such as "IT, call centres and other business processes such as HR and accounting."
8. What three factors are important in choosing a country for overseas research and development?
1. Lower R&D costs.
2. Availability and quality of R&D labour.
3. Intellectual-property (IP) protection.
9. What will the largest companies do with their fast growing cash reserves?
"The cop reasons cited for piling up cash include a desire include a desire to improve corporate balance sheets, creating a cushion for the next economic downturn and limited investment opportunities." Investment will include FDI as well as domestic investment."
10. What risks are more important than they used to be?
Microeconomic risks involving corporate governance, IT disruption, product quality, safety problems, and employee fraud.
11. Why are China and India attractive locations for FDI?
China and India are attractive for FDI due to 1. high growth rates, 2. growing populations, and 3. low cost and highly educated work forces.
Article
FDI confidence index: The Asia story
A.T. KEARNEY
Foreign Direct Investment (FDI) is on the rise again. Overall, Asia is seen as a preferred investment destination globally, driven by the attractiveness of China and India.
However, corporate savings overhang and investor pessimism about the global economy could potentially dull the recovery of cross-border corporate investment. Asian countries should study the key learning from the experiences of China and India to competitively attract this rising FDI.
Emerging market countries in Asia are among the most attractive FDI locations in the world. In 2005, Asia FDI inflows reached US$156 billion, an unprecedented $49 billion increase from 2004. While greenfield investments continue to be the dominant form of FDI for the region, mergers and acquisitions are also playing a more important role.
Investor enthusiasm in 2005 for China and India was at an all-time high, with roughly 45% of global investors more upbeat about China and India compared to 2004.
While China has been the top investment destination since 2002, strong investor interest in India is a more recent development. While China's FDI is into capital-intensive manufacturing and logistics, FDI flows into India are mostly in IT and communication centres. India has yet to build on its FDI inflows, mostly because it did not initiate investment-attracting reforms until the early 1990s.
Domestic markets in both China and India present a good opportunity for top-line growth. Along with this strong domestic market, low-cost labour, pro-FDI reforms and accelerated integration into the worldwide IT network making both countries more attractive to investors.
The move to offshore destinations continues: nearly 80% of global investors plan to locate corporate operations overseas over the next two years, compared to 66% in 2004 and 50% in 2003, especially in the areas of IT, call centres and other business processes such as HR and accounting.
About 50% of total R & D spend is expected to be in the Asia-Pacific region due to three attributes: lower R & D costs; availability and quality of R & D labour; and intellectual-property (IP) protection.
The business models for moving corporate operations offshore will include captive and joint venture (both of which result in FDI), as well as third-party outsourcing and other non-FDI options
Concerns over quality control and IP protection mean that some business processes and functions, including R & D, knowledge management and analytic functions, will occur primarily through captive business models or joint ventures.
Nearly 70% of future R & D offshoring will be through FDI, while the remaining offshore R & D activity will occur through third-party outsourcing agreements or other non-FDI channels. The ability to protect intellectual property rights is central to whether or not the developing world can actually attract R & D investments.
Optimism concerning the global economy has waned. In 2005, 36% of executives said they were optimistic about the global economy compared to 31% who were not. In 2004, 70% were more bullish on the global economy and 12% were negative.
Since September 11 2001, 65% of global investors from the world's largest firms have indicated they are building up significant cash reserves. In fact, US companies alone have accumulated more than $1 trillion in cash reserves during this period. The top reasons cited for piling up cash include a desire to improve corporate balance sheets, creating a cushion for the next economic downturn and limited investment opportunities.
To compete for FDI, emerging countries should reduce traditional operational risk factors such as financial, political and social instability, along with government regulations.
Political and social disruptions still remain risk factors, but are seen as less threatening. This is because most executives have developed a variety of sophisticated risk hedging and sharing tools to deal with them. However, these risks are inherently unpredictable and the limits of these mechanisms mean that the traditional "macro" risks remain among the leading hazards to operations.
Micro risks, however, are becoming more threatening. Corporate governance, IT disruption, product quality, safety problems and employee fraud are among the main concerns. Nearly one-third of investors consider IT disruption as a threat to operations compared to only 19% in 2004.
China and India are attractive to CEOs worldwide due to their strong growth rates, growing consumer populations, and low-cost but highly educated labour pools. Pro-FDI reforms and accelerated integration into the worldwide IT network have made both countries more attractive to investors.
As investors face more intense competition and the lure of higher returns overseas, they will cautiously unload their accumulated war chests, albeit in a more conservative and selective manner than in previous years.
What do these trends mean for Asia? Other Asian countries need to prepare themselves to be able to raise their competitive level to attract FDI, which includes investing in quality control, controlling IP issues, investing in sophisticated IT infrastructure, improving quality of labour, and finding ways to reduce operational risks
Soo Jin Goh is an associate with A. T. Kearney Singapore, e-mail Soojin.goh@atkearney.com; Badrinath Veeraghanta is a senior manager, e-mail Badrinath.Veeraghanta@atkearney.com; Douglas Jackson is a country manager with A.T. Kearney Thailand, e-mail Douglas.jackson@atkearney.com
Vocabulary (in article)
[Check back shortly for vocabulary]
Answer Key:
1. What is the most preferred region for foreign direct investment
(FDI) in the world? Why?
Asia is the most preferred destination. The large markets of India and
China have made Asia attractive.
2. According to the author, if Thailand wants to attract FDI
which countries should it study?
Thailand should study the experiences of India and China.
3. How is Thailand different from India and China? Give details.
(Note: This will require some internet research)
[Check back shortly for answer]
4. In which country, India or China, is FDI more recent? Why?
FDI in India is more recent, because India did not "initiate
investment-sttracting reforms until the early 1990s."
5. How long has China been one of the most important countries
for FDI?
China has been an important country for FDI for about four years
since 2002.
6. What is the difference between FDI in China and India?
China's FDI focuses on capital-intensive manufacturing and logistics. Indian FDI is mostly concetrated in IT and communications centres.
7. What kind of corporate operations are foreign companies moving overseas
from their home countries?
Foreign countries are moving overseas operations such as "IT, call centres and other business processes such as HR and accounting."
8. What three factors are important in choosing a country for overseas research and development?
1. Lower R&D costs.
2. Availability and quality of R&D labour.
3. Intellectual-property (IP) protection.
9. What will the largest companies do with their fast growing cash reserves?
"The cop reasons cited for piling up cash include a desire include a desire to improve corporate balance sheets, creating a cushion for the next economic downturn and limited investment opportunities." Investment will include FDI as well as domestic investment."
10. What risks are more important than they used to be?
Microeconomic risks involving corporate governance, IT disruption, product quality, safety problems, and employee fraud.
11. Why are China and India attractive locations for FDI?
China and India are attractive for FDI due to 1. high growth rates, 2. growing populations, and 3. low cost and highly educated work forces.
