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www.reading.edu.my.
Henley Business SchoolAlumni Celebration
Singapore
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Markus Leibrecht
www.reading.edu.my.
Extent and Patterns of Foreign Direct Investment in East and South-East Asia
• International investment by a resident entity in one economy to acquire or set up an affiliate in
a foreign country plus all subsequent capital transactions among the related companies.
– Significant degree of influence in the management of the affiliate with the objective of
establishing a “lasting interest” in the country → difference to Portfolio Investments.
– IMF/OECD: FDI in case >=10 percent of the ordinary shares or voting power.
– Greenfield FDI → Creation of a new affiliate and expansion of an existing affiliate →
expansion of capital stock in the foreign country.
– Cross-border Mergers & Acquisitions (M&As) → change in ownership of an existing
enterprise → no immediate effect on the capital stock in the foreign country.
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What is Foreign Direct Investment (FDI)?
• Simple answer: Because they want to make profits.
• But why FDI and not an alternative mode of servicing foreign markets (like licensing)?
– One answer is provided by the “Reading School of international business” (Peter Buckley,
Mark Casson, John Dunning, Alan Rugman).
• Internalisation Theory → due to market imperfections dissipation of key firm-specific
advantages (knowledge capital) likely in case of licensing.
• OLI paradigm → FDI in case of Ownership + Internalisation + Location advantage.
– Only O → Licensing.
– Only O + I → Exporting.
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Why do Multinational Enterprises (MNEs) undertake FDI?
• Indication: Competition for mobile capital is fierce among governments (e.g., tax
competition).
• Expectation: FDI as source of capital (esp. in case of Greenfield FDI), as driver of
modernisation and of economic growth.
– FDI brings a bundle of characteristics that are not necessarily available locally:
production technology, management procedures, access to foreign markets, etc.
– Spillover effects on local firms are possible but not automatic → “absorptive capacity”.
• Yet, empirically positive growth effects of FDI are rather uncertain.
– Greenfield vs M&As → manufacturing vs service sector.
– Minimum threshold of a country’s absorptive capacity required.
– Vertical linkages most promising source of spillover effects.6
Why do governments try to attract FDI?
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Extent and patterns of FDI in East and South-East Asia: FDI-inflows (US$ bn)
1902.2
1762.2
13.0
18.3
23.7
30.7
4.5 7.1
540.7
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
1800.0
2000.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World (bn of US$; left) Asia East Asia
South-East Asia Share in World: Asia (right) Share in World: East Asia
Share in World: SE Asia
• 2005-2015 average FDI-inflows (world): US$ 1,45tn.
• Asia: US$ 490bn.
• East Asia: US$ 202bn.
• SE Asia: US$ 90bn.
• Share in total world FDI is increasing.
• “Developing Asia” receives ca 1/3 of total world FDI.
• Greenfield FDI or cross-borderM&As? →
Data source: UNCTAD World Investment Report, 2016, Annex Tables.
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Extent and patterns of FDI in East and South-East Asia: Cross-border M&As (value)
• 2005-2015 average cross-border M&As (world): US$ 520bn.
• Asia: US$ 56bn.
• East Asia: US$ 28bn.
• SE Asia: US$ 12bn.
• Share in total world M&A is substantially lower than share in FDI-inflows → growth effects?
• Value of M&A volatile (depends on market valuation) → number of cross-border M&A projects relatively stable but paint a similar picture.
Data source: UNCTAD World Investment Report, 2016, Annex Tables.
1032.7
721.5
1.1 1.3
5.04.1
8.8
22.2
6.4
0.0
5.0
10.0
15.0
20.0
25.0
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World (bn of US$; left) Asia East Asia
South-East Asia Share in World: Asia (right) Share in World: East Asia
Share in World: SE Asia
Inter alia, purchases by Temasek(A.S. Watson Co.) and OCBC (Wing Hang Bank).
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Extent and pattern of FDI in East and South-East Asia: Cross-border M&As (numbers)
9 407
10 363
12 044
11 106
8 691
9 938 10 1879 630
8 990
9 944 10 044
1 560 1 567 1 702 1 7481 446 1 664 1 712 1 553 1 496 1 548 1 417
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
-
2 000
4 000
6 000
8 000
10 000
12 000
14 000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World (number) Asia East Asia
South-East Asia Share in World: Asia (right) Share in World: East Asia
Share in World: SE Asia
• “Developing Asia”: FDI inflows more of the Greenfield type.
• “Developed countries”: FDI inflows more of the cross-border M&A type.
• Cross-border M&As → service sector.
• Average 2005 – 2015 (world):
• Service sector: US$ 272 bn.
• Manufacturing: US$192 bn.
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Extent and patterns of FDI in East and South-East Asia: Country level
• Aggregated numbers hide top 10 FDI recipients world wide.
• China: country size.
• HK and SGP as financial centres and as gateways to larger markets with well-developed infrastructure.
• In addition HK and SGP “got their institutions right”.
• “Good governance” is empirically one of the main attractors of FDI.
• Ease of doing business, enforcement of property rights, political stability, low levels of corruption, etc.
Data source: UNCTAD World Investment Report, 2016, Annex Tables.
107.3 (WRk: 2)
77.4 (4)
45.4 (8)
13.0 (28)9.8 9.7
8.4 7.5 (40)3.4 2.8
1.31.2 (97)
0.4
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ch
ina
Ho
ng
Ko
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Sin
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Ind
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Sou
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Thai
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Mal
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Taiw
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Ph
ilip
pin
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ar
Cam
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dia
Lao
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2005 – 2015 average FDI inflows (US$ bn)
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Governance in East and South-East Asia
• To see a push in sustainable FDI inflows, less developed countries in SE Asia should “get their institutions right”.
• Once “good governance” is achieved, more targeted instruments to attract FDI (e.g., low tax rates on corporate income or financial incentives) may unfold their true potential to attract FDI and to make it sustainable.
• Future trends and pattern of FDI in East and South-East Asia depend not least on the capabilities of local governments to credibly signal good governance to foreign investors!
Ease of Doing Business 2017
Rank
World Bank Good Governance Indicator
2014
Singapore 2 1.6Hong Kong 4 1.5United States 8 1.2Taiwan 11 1.1Korea, South 5 0.8Malaysia 23 0.5Philippines 99 -0.2Indonesia 91 -0.2Thailand 46 -0.3China 78 -0.4Vietnam 82 -0.5Laos 139 -0.6Cambodia 131 -0.7Myanmar 170 -1.2
Sources: World Bank, Doing Business 2017 and World Bank, Worldwide Governance Indicators (-2.5 to +2.5)
www.reading.edu.my.
Thank you very much for your attention!
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Extent and pattern of FDI in East and South-East Asia
FDI-outflows (US$ bn)
818.7
1352.0
2165.2
1703.7
1098.8
1391.9
1557.6
1308.8 1310.6 1318.5
1474.2
10.9 11.1 11.0
13.2
20.220.9 20.5
23.1
27.4
30.2
22.5
6.6 6.1 5.7
7.9
12.714.1 13.7
16.517.8
22.0
15.3
2.4 2.32.9
1.8
4.4 4.4 4.0 4.2
6.0 5.7
4.5
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
0.0
500.0
1000.0
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2500.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World (bn of US$; left) Asia East Asia South-East Asia
Share in World: Asia (right) Share in World: East Asia Share in World: SE Asia
