Asian Inward and Outward FDI

New Challenges in the Global Economy

C. Alvstam, H. Dolles, P. Strom, C. Alvstam, H. Dolles, P. Strom

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781137312204
• eBook ISBN: 9781137312211
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Asian Inward and Outward FDI brings together both works from researchers in international business and economic geography. The book is aimed for both scholars with interest in macro and micro economic impact of new flows of FDI.

1

Asian Inward and Outward FDI: New Challenges in the Global Economy – An Introduction

Claes G. Alvstam, Harald Dolles, and Patrik Ström

1.1 Trends and developments in Asian inward and outward FDI

It has long been conventional wisdom that the re-entrance of Asia has been one of the most remarkable events in the international economy during the last half century. Asia today contains almost 28 per cent of the global GDP in nominal values and 33 per cent when measured in purchasing-power parity terms.¹ It is less commonly discussed, though, that we presumably have only witnessed the first chapters in this massive global shift, and that the increasing influence of Asian nations in general and of Asian firms in particular will take many new features and forms in the foreseeable future.² The Asian realm was the dominant economic powerhouse in ancient times, with an estimated two-thirds of the global GDP five hundred years ago, but was thereafter pushed into relative insignificance during the eras of Arab, Portuguese, Dutch, French and British colonial expansion.³

The continent as a whole hit its all-time economic low during the years after the Second World War. The spectacular turnaround we have witnessed since then commenced with the rapid recovery of the Japanese economy in the 1950s and 1960s, and the subsequent growth of foreign trade and outward foreign direct investment related to Japan. The outward foreign direct investment (OFDI) from Japan followed initially the classical gradual dispersal of resource-seeking, in parallel with market-seeking, investment, beginning with the East Asian neighbouring region, and now, a few decades later, has circumvented the globe, with iron ore exploitation in Brazil and automotive manufacturing ‘transplants’ in North America and Europe, to take a few examples. Since the Japanese OFDI was not balanced by an equal expansion of inward foreign direct investment (IFDI), the country built up a huge surplus stock of OFDI during the following decades. This development ran in parallel with an equally massive surplus in Japan’s trade balance.

The Asian ‘tiger’ nations, on the other hand, followed a different internationalization pattern, characterized by an initially higher trade intensity, built on a limited home base, and a more aggressive export-oriented growth, built mainly on imported capital in massive flows of IFDI in subsequently more advanced manufacturing sectors. In both Japan and the ‘NIE-tigers’, the development followed generally the well-established ‘Investment Development Path’ (IDP) model, which stipulates a certain level of economic development, together with a certain level of firm-specific advantages in the home market to commence an increase of outward investment (Dunning, 1986; Dunning and Narula, 1996; UNCTAD, 2006). While the ratio of outward/inward FDI stock ratio has now declined to about 4 (2011 figure) in the case of Japan, compared to 20 in 1990, Singapore’s O/I-stock ratio amounted to about 0.6 in 1980, and fell to around 0.25 in 1990, and thereafter, with the rise of OFDI, grew to around 0.65 in 2011.⁴

A similar development of initially growing IFDI, followed by rising OFDIs at a certain level of economic development and domestic firm-specific advantages, has been recorded in Hong Kong, Taiwan and South Korea. The new development of rapidly growing OFDI flows from these economies was furthermore complemented by a gradually changed composition of both the geographical destinations and the sectorial content of the OFDI stock. In all cases, geographic dispersal of the OFDI continued in parallel with continuous upgrading of the composition of exports. The larger countries in Southeast Asia – Malaysia, Thailand, Indonesia, the Philippines and Vietnam – have thereafter, with some variations of individual path-developments, subsequently followed the same pattern in a ‘flying-geese’-stylized way.⁵ A new phenomenon, however, that has become even more obvious during the last decade is a return to a more concentrated geographic pattern of their OFDI as a consequence of the emergent Asian regionalization process, manifested by rapidly growing intra-Asian trade as well as direct investment patterns (Baldwin, Kawai and Wignaraja, 2013).

A major change that pushed the ‘Asia-turn’ of the 1960s and 1970s into a new phase was the opening up of Mainland China from 1978 to economic and cultural exchanges with capitalist countries to learn from and draw on ‘advanced’ capitalist management methods, in order to connect China economically to international markets (the open door policy). Those reforms were based on plans of the four modernizations (namely, to modernize Chinese agriculture, industry, science/technology and defence). This development was even more remarkable, given the rapid shift from one extreme to another – from an almost non-existent foreign trade turnover three decades ago to becoming the world’s largest exporter of goods today; this was in parallel with a rapid growth of IFDI from a virtual zero-level, since the early 1980s, followed by an equally rapid growth of OFDI, from 2005 and onward. Still, it is of a modest size, due to its late start. China’s IFDI stock is today roughly 10 per cent of GDP, to be compared to Singapore, where it exceeds 200 per cent of GDP. Looking at China’s O/I stock ratio, it amounted to about 0.14 in the year 2000, grew to around 0.25 in 2006, and at the time of writing is about 0.5. The spectacular re-emergence of China as the major economic power in Asia has, through its sheer extent, also overshadowed the successful transition of composition of trade and investment in the neighbouring economies. Even though the previously dominant Japan has recently been surpassed in economic terms by the population-wise eleven times larger China, it is crucial not to underrate the strength of Japan’s continuing economic power and influence in the region, despite two decades of relative stagnation, although at a high level.

The Japanese industrial organization, i.e. organization of companies to large industrial groups (keiretsu) with their linkages upstream and downstream in the value-chain, has been frequently described during the 1980s as complex, cumbersome, costly, confusing, inefficient, archaic and as a major obstacle to FDI in Japan (see e.g. Dolles, 1997; Dolles and Kumar, 1996; Hemmert, 1993 for a comprehensive overview). Although it was possible to build up wholly owned subsidiaries in Japan after a change in Japanese legislation in 1980, foreign firms doing business in Japan faced extraordinary difficulties during the period of high economic growth in that country. These hardships were attributed to intangible market barriers such as a lack of understanding of the Japanese industrial system (particularly distribution and manufacturing). In the 1990s, after the end of the ‘bubble economy’, the following ‘lost decade’ was experienced by Japanese corporations as an economic crisis, in conditions of persistently low economic growth, continuously declining asset prices and the holding up of household consumption during this period (cf. Horioka, 2006; Ishizaki et al., 2010). Initially this has also deterred many foreign companies from expanding FDI in Japan, but soon the Japanese government recognized that FDI not only brings capital to Japan, but can also exert a positive influence in technology, management, on the labour market and as a supporting factor in Japan’s efforts to reform (Dolles, 2010).

Since 1995 IFDI in Japan has increased, whereas Japanese OFDI peaked at the end of the bubble economy and since then has never reached those levels again. The Japan External Trade Organization (2012) reported a outflow of Japanese FDI of US$ 115.7 billion in 2011, reflecting large-scale M&A deals, a string of new business bases established and investments to support existing operations abroad. As of the end of 2000, North America, Europe and other developed economies accounted for 70 per cent of the total Japanese OFDI stock. With the fast growth of investment in emerging countries, however, the share of developed countries declined at the end of 2011, with Asia and Central and South America increasing their shares. In the figure reported for 2011 the Asian region was setting a new all-time high with US$ 39.5 billion OFDI, with a focus on China and the ASEAN countries (ibid.). It is also stated that the rate of return on Japan’s OFDI to Asia is higher than that to Europe and the US, an indicator that the ‘era of profiting from Asia has begun for Japan’ (ibid.: 6). This development lies behind, for instance, Japanese automakers setting up new production plants or investing in new equipment one after another in a race to capture fast-growing demand in emerging countries.

When it comes to Japanese IFDI, for 2011 the Japan External Trade Organization (2012) calculated a net outflow (withdrawal) of US$ 1.7 billion, the second consecutive net outflow, affected by massive net outflows (US$ 4.11 billion, mostly by the US) in the non-manufacturing sector, such as telecommunications and finance/insurance. However, this is claimed to be only a short-term effect as at the beginning of 2012, a net inflow of US$ 920 million was posted in increased investment from Asia (mainly Singapore and Taiwan), Switzerland and the US. While North American and European firms remain the main actors in IFDI in Japan, the presence of Asian firms is rising steadily. Particularly noteworthy are moves of Taiwanese and Chinese firms to buy in resources of Japanese companies and strengthen their business bases by acquiring equity stakes and/or setting up joint ventures. This might in turn enable Japanese companies to expand business operations in China and other parts of Asia.

The likewise impressive development and transformation of the South Korean economy, and the immense potential of ASEAN-10, with its half a billion inhabitants, should also be given better prominence, and not only be viewed in China’s shadow. South Korea, compared to Japan, has received relatively little attention by foreign scholars (Hemmert, 2012: 4), which is remarkable, given the fact that the relatively small Korean home base, compared to Japan, makes it a more suitable model for export-oriented industrialization than Japan. Of particular interest is the analysis of Japan’s economic transformation as an early model for South Korea, and its later ambition to define its own strategy, using lessons from Japan’s economic stagnation since the early 1990s. Hemmert (2012: 21) has summarized the Korean business model in terms of four elements: Confucianism, the Japanese influence, the American influence and military-led industrialization. It is evident that the mix of American influence, symbolized by the high number of Korean senior decision-makers with an American educational background, and the military influence, represented by a ‘command culture’ and a quick execution of plans, has been a decisive explanation behind the more rapid transformation of the Korean economy, and the success of Korean companies in the global market (Hemmert, 2012: 18–21).

The even larger challenge when it comes to the interpretation of the internationalization processes of Asian economies is inbuilt in the future scenario of South Asia, where India, Pakistan and Bangladesh together record a volume of foreign trade in goods amounting to US$ 922 billion, slightly larger than that of Singapore (US$ 792 billion) and with a trade volume per capita amounting to US$ 580, to be compared with US$ 148,000 in Singapore, US$ 22,000 in South Korea, US$ 14,500 in Malaysia, US$ 13,500 in Japan and US$ 3,000 in China.⁶ The shares of foreign trade in services in relation to the total turnover of trade in goods and service are usually below world average in the larger Asian countries, with the notable exception of India. This underrepresentation constitutes another important challenge and opportunity, and it is likely that the service industry in its diverse representations will be the next great engine of change in Asia. Both the Southeast Asian and South Asian countries moreover feature a more favourable demographic composition, measured by the dependency ratio, and on this perspective are better positioned for future economic growth and transition than China.

Foreign trade in goods and services, and FDI, should be viewed as two sides of the same coin, in a dialectical relationship, and as mutually leveraging each other in a global economy characterized by increasingly fragmented patterns of division of labour and specialization, and the transformation from ‘trade in products’ to ‘trade in tasks’. This gradual change, which has very accurately been labelled ‘globalisation’s second unbundling’ (Baldwin, 2012, has even more emphasized the importance of the long-term ‘global shift’ of production of goods and services from Europe and North America to Asia (Dicken, 2011). The use of the concept of global production networks should rather be viewed in a regional context in the sense that these networks in reality comprise a limited number of countries of production, and that the majority of new entrants in the GPNs have been situated in Asia (Baldwin et al., 2013; Inomata, 2013). This is not to overlook the likely possibility that production networks in the future will become more global, but the main part of the dispersal of economic activities is hitherto in reality concentrated in a few regions, making the term ‘semiglobalization’ appropriate to illustrate the processes of global shift during recent decades (Ghemawat, 2008).

At the same time as trade in goods and services can be seen as a twin to foreign direct investment, it is relevant to note that the rules and regulations that comprise these activities are entirely different. While international trade in goods early became subject to a multilateralized regime of supranational regulations and mutually binding liberalization of tariffs and non-tariff barriers to trade within the GATT-based system, trade in services was a laggard, and it was not fully integrated into the multilateral order until the mid-1990s with the creation of the World Trade Organization and the General Agreement of Trade in Services (GATS). Nonetheless, after almost two decades in operation, the progress of a complete implementation of cross-border transactions of services in the multilateral system lags behind trade in goods, despite unanimous commitments by the almost 160 member-strong WTO, comprising more than 95 per cent of world trade. Economies in Asia are rapidly being transformed into becoming more dependent on production and consumption of services. Advanced economies such as Japan and Singapore generate more than two-thirds of their total value-added within service production (Jensen, 2013). Emerging economies are rapidly following their development path. The ability to develop and upgrade the Asian service economy is one of the most important challenges for the region, according to the Asian Development Bank (2012). Further liberalization of trade and FDI is necessary, but also to deregulate and integrate markets. A successful shift of the economy to generate bigger incomes from the service industry is vital not to risk ending up in the so-called middle-income trap for emerging economies (Noland, Park and Estrada, 2012; Park and Shin, 2012). Accordingly, the further internationalization of service activities, and the creation of new forms of service concepts within the global value-chain, as well as a more visible and transparent measure of the service content in the value-chain, will constitute a crucial challenge for Asian economies in the future. Services should therefore be given a more prominent role in international business research than has so far been the case (see also, among others, Kirkegaard, 2012; Merchant and Gaur, 2008). The lack of service-related research within international business has also been put forward as a challenge for the future. This development has consistently been labelled ‘the second global shift’ (Bryson, 2007), and will be an important feature in this volume.

Even more striking is the gap between trade and investment when it comes to attempts to create common rules and regulations at the supranational level. Investments have generally been looked upon from a bilateral perspective, and the ambitions to convergence of rules in the, in many respects, mutually contradictory bilateral investment agreements into a more coherent and transparent general global framework have so far enjoyed limited success. Bilateral investment agreements between nations are furthermore affected by the different attitudes and policies towards FDI – inward as well as outward – between the parties involved. The ongoing project within UNCTAD to coordinate and consolidate international investment policy-making has until now resulted in a number of regional International Investment Agreements (IIAs), comprising the same type of problems as regionalism within trade in goods and services (UNCTAD, 2013a). The commonplace, but nevertheless often overlooked, observation to be always kept in mind is that decisions to commence cross-border activities, exports/imports as...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Foreword
• Preface and Acknowledgements
• Notes on Contributors
• 1 Asian Inward and Outward FDI: New Challenges in the Global Economy – An Introduction
• 2 Changing Faces of MNCs in China: Subsidiary Strategy in Corporate Strategic Reorientation
• 3 Sponsoring as a Strategy to Enter, Develop, and Defend Markets: Advertising Patterns of the Beijing Olympic Games’ Sponsoring Partners
• 4 Global Innovation and R&D for Knowledge Creation: The Case of P&G, Unilever and Kao
• 5 The New Face of Talent Management in Multinational Corporations: Responding to the Challenges of Searching and Developing Talent in Emerging Economies
• 6 Preferences and Intercultural Networking for Globalizing Practices of Successful Leaders in the Intercultural Workplace
• 7 Foreign Direct Investment and Economic Revitalization in Japan: The Role of the Foreign Firm in Niseko
• 8 Exploring Thick Description in Business System Analysis: The South Korean Business System from a European Corporate Perception
• 9 Samsung Electronics: From ‘National Champion’ to ‘Global Leader’
• 10 A Business Tale on Marriage, Divorce and Remarriage in the Corporate World: A Conceptual Framework of Firms’ Disintegration Process
• 11 The ‘Hybrid’ Emerging Market Multinational Enterprise – The Ownership Transfer of Volvo Cars to China
• 12 Concluding Remarks on Asian Inward and Outward FDI; New Challenges in the Global Economy
• Index