Rise of Fdi in Asia

Introduction:
The past 30 decades witnessed a rapidly economic growth in Asian countries. Some countries have even made miracles in their economies, including Korea, Hong Kong and China. Most of the ‘miracle-made countries’ have conducted open-up policies to attract FDI, which in turn plays a crucial role in improving the nations’ total GDP and stimulating economic growth. While unfortunately, the 2000s global recession which was caused by subprime crisis, has caused and is going to continue cause a fall in FDI in Asian countries. In the following paragraphs, the role of FDI in the rise of Asia and the impact of global recession on future FDI in these Asian countries would be described in detail. And several examples such as Korea, Vietnam and China would be made to support the description.

1. Role of FDI in the rise of Asia:
The past two decades have witness a significant economic growth in many Asian countries with a development of their foreign investment. Beginning from 1980s, foreign direct investment flows rapidly with increasing number of multinational enterprises. There has been a significant sign that developing countries, especially the countries located in the Asia-pacific regions have shown absorption of FDI inflows. In the rise of Asian economies, foreign direct investment played an important role in increasing the GDP of a variety of Asian countries. Thus FDI has become a principal source of external capital for Asian nations. (David, Jung-Soo, 2003) And based on studies and researches conducted, we can conclude that FDI has a positive relationship with the host country’s economic growth. (Dharmendra, Saif and Kamal, 2009) Generally the most enduring effect of FDI to the host country is technology transfer. (Stephen, 1999) Besides, some other benefits include capital inflows, employment level increase, improvement of integration with the global market and total GDP increase. The role of FDI in the rise of several Asian countries including Vietnam, China, Singapore and South Korea would be explained in detail in the following paragraphs.

1.1 FDI in the rise of Vietnam:
Vietnam is one of the countries the economies of which are influenced heavily by foreign investment. FDI is one part of Doi Moi reform in Vietnam which was conducted in the mid 1980s. Before the reform, FDI in Vietnam was restrictly forhibited, the number of foreign direct enterprises was zero. Vietnam’s industrial market was dominated by stated owned enterprises, which were characterized as low-efficient and operated unprofitably because they come under an umbrella of protection that cushion from competition and renovation. After the reform, the conditions of FDI operation were effectively relaxed, and FDI slowly started flowing into Vietnam. The Law of Foreign Investment of 1987 allowed FDI to take place in the forms of Joint Venture and wholly foreign owned enterprises. (Henrik, 2002) As a result of the FDI reform, FDI companies contributed 13.1% to the GDP, 35% of the industrial output, 23% to the export, 25% of total state budget revenues. Indirectly, FDI has provided some more employment through sub-contractors or suppliers. Additionally, the significant contribution of FDI to economic growth in Vietnam has been realized through GDP growth, international trade and employment. Futuremore, the foreign direct investment has helped Vietnam to develop totally new industries for this country, such as oil, gas exploration, car and motor bicycles industries by the way of attracting foreign capital and transferring technology. Besides, the existing industries such as foods, beverage, garment and textile have also been upgraded because of the new technologies. FDI has also helped to modernize management, and hence improve the labor market. In order to adapt the cultural environment of foreign companies, over 300.000 workers have been trained or re-trained, 25.000 technicians and 6.000 managers have been trained, partially abroad. In addition, FDI has encouraged the process of international integration, deepened the cultural exchange with other nations. It in turn contributes to the boom in the domestic sector industries, because many former employees of foreign enterprises who has been trained were later become successful private entrepreneurs in the domestic private sector. By this way, it helps the improvement of efficiency of domestic enterprises. (Le Dang Doanh, 2002)

1.2 Korea:
Korean economy has been growing that was driven by development-oriented policy and Chaebols during past 30 years. But in order to achieve fast growth of economy in short time, Korean economy has been heavily depending on exports, therefore it’s no doubt that Korean economy is much exposure to high risk from external environments. (Chuang-Min, Woo-Taeck, 2008)

1.3 FDI in the rise of China:
By China is the biggest recipient of FDI, in 2004 it bypassed USA as the most populart host destination. Foreign investment has played an increasingly important role in its economic growth since the open-up policy starting from 1978. China absorbed a total of US$53.5 billion worth of foreign direct investment in 2003. FDI in China has played a positive role in the economic development during the reform by not only solving capital shortage problems but also generating a lot benefits. FDI provide better access to the technology for the local economy. Besides, FDI also contributes to increase the capital gains indirectly. Because of the competition brought from foreign investment enterprises, inefficient local and government owned enterprises have reacted by increasing capital investment for human and physical capital. Another effect of FDI through spillover is the improved product quality, which is caused by the supplies’ concentration on meeting the global standards.
Despite the positive effect brought by FDI to China, some argue there are also some detrimental influences of FDI. Because of the rising deficit of debts repayment, FDI in turn exacerbate the domestic savings. (K.C., Hitomi, Sarah, 2002)

1.4 FDI in the rise of Singapore:
Due to the specific location and limitation of resources, Singapore’s economy development has been relied upon FDI in a large degree. What FDI has done for Singapore is to help the creation of a nation with one of the highest per capita incomes, for what that is worth. The government of Singapore has a preferential treatment with regard to FDI with an open market policy though infrastructure subsidies and tax preference to the exporters. In effect, Singapore’s government hopes to attract foreign exporters to establish business in Singapore not only to provide employment but also to trickle the sophisticated technology down to the local companies. (Gray, 2000) In practice, these effects have already been achieved in the economic rise of Singapore. Foreign companies began to pour into Singapore, with cumulative investment in manufacturing rising from S$157 million in 1963 to S$995 million in 1970, and reaching S$3054 in 1974.[ And due to FDI, the unemployment rate falled from 9% in 1965 to 4% in 1974. (Gray, 2000)

1. How is the recession in late 2000s going to influence the future of FDI in Asia?
In spite of the fact that FDI plays a crucial role in Asian countries’ miracles, the global economic crisis of late 2000s has resulted in the worldwide economic recession and directly influenced FDI in Asia. Due to the recession, FDI fell dramatically. Because the rise of most Asian economies are relied heavily upon foreign investment, the global recession has hurt and has a trend to continuously impact FDI in Asia. The 2000s global economic crisis has brought a number of commendations that suggests if the liquidity crisis continues, there could be an extended recession. Because a vast sea of large international financial institutions have faced to be bankrupt, they have withdrawn or plan to revoke most of their investment or business in the global market in order to repay their debts.

2.1 Future influence on FDI in Vietnam:
Since 1997 to now, the outward FDI in Vietnam has declined. Some 800 licensed projects have been withdrawn or revoked during this period, mostly from the crisis-hit Asian-economies. (Kokko, 1996) In the first seven months of 2002, no more big projects were available in Vietnam like previous years. The committed capital was only US$ 594.5 million, which was only 52% of the same period from previous years, which represents a decline of 48%. (Le Dang Doanh, 2002) This dramatic decline of badly needed FDI- inflow was partly caused the Asian financial crisis. In 1997 the committed capital was US$ 4.6 billion, in 1998 was US$ 3.8 billion (-17%), in 1999 US$ 1.5 billion only (-60%). Over 800 licensed projects have been withdrawn during this period, mostly from the Asian-economies (Kokko, 1996) The decline of FDI in Vietnam is more pronounced compared to other ASEAN-economies, while the recovery of FDI in Vietnam is slow compared to ASEAN economies and not steady, especially in 2001 and 2002. The global slowdown will likely to suppress demand for a lot of FDI-attracted industries in Vietnam, such as rubber, textile and agriculture industries. Vietnam’s FDI will be hurt in a large degree. The underlying reason is the difficulties in obtaining loans would slow down many FDI projects and even put an end to several projects.

2.2 Future influence on FDI in Korea:
The economy of Korea has been growing fast in the past three decades and the driven force of the economic growth is this country’s FDI. Therefore it is no doubt that Korean economy is exposure to high risk from external environments. (Chuang-Min, Woo-Taeck, 2009) Apparently, the currency exchange rate indicates evidence of turmoil in Korea economy due to its high dependence on external market, as showing on this figure below, the second highest point was 2009 influenced by global credit crunch from U.S. Since Korean economy recovered from impact of the Asian financial crisis, they had a suffering time again between 2008-2009. Therefore, it has a trend that Korea’s FDI would drop dramatically due to the subprime crisis.

2.3 Future influence on FDI in China:
The FDI in China source from US and European companies have dropped, as shown from the table below, a negative growth rate of FDI inflow from USA existed from 2006. Small to medium enterprises of foreign countries would change their plan with regard to investment in China or slow down the FDI growth rate, which is caused by loss of capital in the subprime financial crisis. On the other hand, there are some arguments in the global market that there is a prospective trend of foreign investment in China. Because the main force of China’s economic growth is domestic consumption, which has not influenced a lot by the subprime crisis of late 2000s. On the contrary, the crisis could be a favorable factor to FDI in China if the country conducts FDI-friendly economic policies. If China held troubled sub-prime mortgage backed securities, they would likely be included in the corporate securities category and certain U.S. equities (which include investment company share funds, such as open-end funds, closed-end funds, money market mutual funds, and hedge funds) which may have been invested in real estate. However, these were a relatively small share of China’s total U.S. securities holdings. China’s holdings of Fannie Mae and Freddie Mac securities (though not their stock) were likely to have been more substantial, but less risky (compared to other mortgage-backed securities), especially after these two institutions were placed in conservatorship by the Federal Government in September 2008 and thus have government backing. (Hong, 2009) Due to the crisis, the multinational enterprises have suffered great impact of shrinking financial market in Asia and shortage of funds in the global market. For the purpose to restructure the financial market, a lot of funds would have to be withdrawn to reverse the loans and repay debts. It would cause a decline in the profit-making capacities. The decline of FDI in China has spread across major industries. FDI flows into the developed countries fell by 29% in 2008 to US$962 billion, most remarkably in the manufacturing and service industry. After the crisis, the fist drop of FDI inflows was 2.6%. It is due to the fact the financial fluctuations would raise market risks and would jeopardize the overseas capital of Chinese enterprises. Because of the uncertainty environment, foreign investors would probably react by cancelling their investment plans in China, which would result in a great decline in capital inflow to China. However, China is the country which recovered the most rapidly. And it has a stable political environment, There is a trend that China’s overseas investment would be suffered less because of the fluctuations of the global financial market. Many indicated that their business in China dropped only by a small margin and some of them even maintained certain growth with basically no large scale downsizing during the worst period of the crisis, thus the share of the Chinese market in their global sales was stable and even increased. The need of the hour is to have a more open economy or be open to trade, attract investments, which would re kindle innovative concepts and enhance foreign direct investment. The growth has to be such that it is sustainable, only then will the impact of US subprime crisis on India and China is negligible.

Conclusion:
To make a conclusion, in the wave of global financial crisis, FDI of most Asian countries is going to be hurt with a dramatic decline. It is caused by the foreign investors’ revoke of their capital in the host countries in order to repay their debts. Through the examples made, it is found that the more a nation’s economic development is relied upon the FDI, the more it lost. Vietnam, Korea are the examples of Asian countries the economy of which is depended on foreign investment, and FDI fell sharply. While countries like China, which has a stable political economic environment would attract more foreign investors to invest their capital in this country.

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