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The 'Asianisation' of global FDI
Publication Date : 27-08-2013
Through the postwar era, the US, Western Europe and Japan dominated global foreign direct investment (FDI) inflows. Today, these inflows are entering an era of "Asianisation."
The global foreign direct investment (FDI) inflows peaked at more than US$2 trillion in 2007, before the global financial crisis. As the US subprime market collapsed, the crisis spread to other major advanced economies and global FDI inflows shrank to $1.2 trillion in 2009.
During a brief rebound, global FDI was driven by stimulus packages and recovery measures in the advanced world. But as these policies expired, so did the rebound. Global FDI inflows plunged again to less than $1.4 trillion in 2012.
Currently, observers anticipate a gradual rebound to almost $1.8 trillion around 2012-2015, but their forecasts presume a return to "business as usual." In view of present realities in the West, that is optimistic.
By 2012, the FDI inflows into developing economies had surpassed those of the developed economies for the first time. In the process, global FDI is becoming increasingly Asian.
Historically, FDI in Asia has steadily increased, but there are great differences within Asia and between countries. While FDI stocks illustrate historical trends, FDI flows describe current realities. In Asia, FDI stocks grew slowly until the 1990s. But they have soared since the early 2000s, not least because of China's entry into the World Trade Organisation.
In the past three decades, FDI in Asia has been a game of three groups of economies. First, Hong Kong, the Chinese mainland and Singapore accounted for more than 70 per cent of FDI stocks in East and Southeast Asia in 2012. These FDI leaders are followed by another group, which comprises the Republic of Korea (ROK) and the ASEAN tigers, including Indonesia, Thailand and Malaysia. The third group includes Taiwan and Macao, Vietnam, the Philippines, Brunei, Myanmar, Cambodia and Laos.
In terms of FDI stocks, Hong Kong, in the past three decades, has been the most attractive FDI destination. FDI stocks have soared in Hong Kong since the late 1990s, except for the 1997-98 bump, the early 2000s and the pre-2008 boom periods, amounting to more than $1.4 trillion by 2012.
Since the late 1990s, FDI stocks in Singapore have soared as well, but not as strongly. Moreover, after the global recession, FDI stocks in the Chinese mainland have surpassed those in Singapore.
among other Asian nations, FDI stocks in Indonesia have accelerated dramatically since the global recession. In the process, the country has surpassed FDI in both Thailand and the ROK, which Malaysia has almost caught up with.
among the remaining nations, FDI in Vietnam has surpassed that in Taiwan, while FDI in the Philippines, Southeast Asia's current growth leader, has potential to grow a lot more in the future.
In terms of FDI flows, the big picture is very different. China has attracted most of these flows since the late 1990s. While FDI flows in the Chinese mainland and Hong Kong have soared during the past 15 years, there has been a significant divergence since 2011.
Last year, FDI flows in the mainland amounted to $121 billion, whereas those in Hong Kong plunged almost $20 billion to $75 billion. Despite negative forecasts in the West, FDI flows have actually accelerated in the mainland. In the first-tier cities, FDI flows increasingly into services; in less prosperous regions, increasingly into manufacturing.
In relative terms, FDI flows in Singapore, after a severe contraction during the global recession, are catching up with those in Hong Kong, amounting to $57 billion in 2012.
Other Asian countries are minor players in FDI inflows. Since the global recession, they have been led by Indonesia, followed by Malaysia, the ROK, Thailand and Vietnam.
In 2012, global FDI flows plunged dramatically, by a whopping 18 per cent. They are no longer unaffected by the gloomy and uncertain environment. Most importantly, FDI flows into developed economies declined by 32 per cent to a level last seen almost a decade ago. Europe alone accounted for two-thirds of the global FDI decline.
In the past, the bulk of FDI in East and Southeast Asia used to come from the advanced economies, that is, the US, Europe and Japan. Today, these nations cope with stagnation or lingering recovery. Moreover, since 2008, FDI flows from advanced economies have been supported by liquidity-driven growth, that is, record low interests and the use of non-traditional monetary instruments.
Starting in the fall, this growth will be reset as the US Federal Reserve Board is likely to start the gradual unwinding of quantitative easing, which will be followed by rising interest rates by the middle of the decade.
There are also new downside risks, especially if the anticipated unwinding of monetary policy stimulus in the US leads to sustained capital flow reversals. In that case, those Asian economies that depend on FDI from the US will take a hit, just as they did in 2008-09. The same goes for those nations that rely on FDI from Europe as long as the sovereign debt crisis continues, or from Japan when Tokyo begins the proposed tightening of its monetary and fiscal policies.
While Asian economies will and should continue to seek FDI from advanced economies, it is time they considered alternative sources, especially from large emerging economies that have sustained growth potential, such as China and the other major BRIC and "mini-BRIC" nations.
What is certain is that, in the near future, the rivalry for FDI is about to become a lot tougher, more complex and potentially disruptive. In East and Southeast Asia, these scenarios will make investment from China and other large emerging economies in Asia increasingly attractive, because global FDI has entered an era of "Asianisation."
The author is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies.