Benefits of FDI for Asian countries in the 21st century

Foreign direct investment (FDI) means a business organization or a person invests their funds in another country’s business. FDI outflows mean the total value of the outward overseas direct investment that is made by residents of a country (FDI India, 2019). FDI inflows mean the total value of the inward overseas direct investment that is made by non-residents (World Bank, 2009). In this article, we investigate benefits of FDI for asian countries in the 21st century.

When we consider about last century, globalization has played a significant role in the global economic system, international trade, and finance by improving international integration among the countries of the world. One of the major outcomes of globalization is the enablement and improvement of foreign direct investment.

Foreign Direct Investment (FDI) of Asian countries in 21st century

Especially when we consider about 21st century, we can see that high-income western nations have invested their funds in developing and emerging nations (Summerfield, 2015). Since the majority of the Asian countries are developing and emerging countries, the Asian region could attract many foreign direct investments. As mentioned in the ‘World Investment Report 2014’ at the UN conference on trade and direct, Asian region is the world’s major recipient of foreign direct investment. According to this report, other than West Asian countries such as Bahrain, Kuwait, Iraq, Oman, Jordan, Qatar, Lebanon, and so on, other sectors of Asia could inflow foreign direct investment of totally $382 billion in 2013. This was higher than from 4 percent when compared with the 2012 (United Nations, 2014).

Asian region could achieve a higher level of FDI thanks to the growth of local and regional markets, export-oriented economies, natural resource abundance, and so on. These inflows from foreign direct investment are almost comprised of funds from western countries. So, Asian countries could achieve higher economic growth as a result of the increase of FDI in the early part of the 21st century, and in this essay, under the main body sector, I will discuss that how Asian countries have benefitted from the Foreign Direct Investment in the 21st century. After that, I will conclude the major findings and discuss the future FDI capability of the Asian region.

How Asian countries got benefits from FDI in the 21st century?

According to past data, the Asian region has benefitted from foreign direct investment (Summerfield, 2015). Asia region comprises with few sub-regions. They are South Asia, Central Asia, East Asia, Southeast Asia, and West Asia (Asia Society, n.d.). So, in this sector, I will discuss that how three subsectors of the Asian region (East Asia, South Asia, and Southeast Asia) have benefitted from the Foreign Direct Investment. In these Foreign Direct investments a major important trend was “Intra-regional FDI contribution”. So, FDI inflow and outflow trends and their benefits to Asian region can be discussed as follows.

Benefits of FDI for East Asia

As the East Asian countries we can identify Japan, China, Taiwan, South Korea, North Korea, and Mongolia. Countries in East Asia could raise foreign direct investment inflows from 3 percent in the year 2013.

Especially china could inflow the FDI of $124 billion to the Asian region (United Nations, 2014). This was helpful to reduce the power gap between China and America. Also, China has invested its funds in other countries (FDI outflows). In the year 2013, China has increased its FDI outflows from 15 percent. Companies in China have created big deals with other countries, For example, we can say the Shuanghui-Smithfield deal in the United States which is worth $5 billion, and the CNOOC-Nexen deal in Canada which worth $15 billion (United Nations, 2014). FDI inflow and outflow improvement of China benefitted not only China but also the whole Asia region. Because it increased the political and economic power of the whole region and decrease western dominance.

Japan also plays a major role in FDI practices. FDI inflows of the country approximately valued $10.25 billion in the year 2020 (Statista, n.d.). Also, we can see that East Asian countries have invested their funds in other countries within this sub-region. In other words, there is an Intra-regional FDI contribution.  As examples we can say, Japanese companies have invested their funds in Chinese, Korean, and Taiwanese companies. These foreign direct investments benefitted to stimulate the economic growth of the East Asian countries and improve the economic power of the sub-region.

Benefits of FDI for South Asia

As the South Asian countries, we can identify India, Pakistan, Bangladesh, Nepal, Maldives, Sri Lanka, Bhutan, and Afghanistan. FDI inflows to South Asia have been increased from 10 percent and M&A sales surged from 70 percent in the year 2013 (United Nations, 2014). FDI of this sub-region has been increased by 4 percent in the year 2018. The total FDI of the South Asia region was $54 billion and India accounted for $42 billion (United Nations, 2019).

Within the finance year 2019-20, US$ 49.97 billion of the total equity of FDI has inflowed to India. The service sector of the country was most attractive for the FDI. As the major benefits from the FDI for India, we can identify increase the employment opportunities, technological improvement, human capital development, and stimulation of the economic growth (Ahlawat & Associates, 2020).

When we consider Bangladesh, it could increase the FDI up to 2650 USD Million in the year 2019. This was the highest FDI performance of Bangladesh for the 21st century. The manufacturing sector of Bangladesh accounts for the higher FDI inflow of the country. The garment sector has obtained lots of benefits by significantly contributing to the job creation of the country.

In Pakistan mainly, the telecommunication industry received the benefits from the FDI inflows (United Nations, 2014).

Benefits of FDI for Southeast Asia

As the Southeast Asian countries we can identify Thailand, Malaysia, Vietnam, Singapore, Brunei, Myanmar, Cambodia, Indonesia, East Timor, Laos. In the year 2007, the Inflows of the FDI of the Southeast region were equal to 3.52 percent from the total global FDI amount (Diaconu (Maxim), 2014). In the year 2013, it was equal to roughly 8 percent of the total world FDI inflows (Sjöholm, 2013). The Figure 1 will show the amount of FDI inflows in USD by the countries of the Southeast region in the year 2019. Many Southeast Asian countries could inflow FDI from other Asian countries.

As examples, we can say, Vietnam could attract more Japanese companies. So, Vietnam could achieve well-positioned and stable economic growth in the 21st century.

Also, several Japanese companies have established their manufacturing firm in Thailand and Completed M&A deals within Thailand. Especially many automobile and electronic companies have been established in Thailand within the 21st century. As a result of it, very sophisticated technology has been transmitted to Thailand. (Summerfield, 2015).

According to the past evidence, FDI has given a great contribution to the economic growth of the Southeast Asian region. Because of the inflow of FDI, most countries have applied forms of liberalization and improved the technology, skills, knowledge, and experience of the human capital (Sjöholm, 2013).

Theoritical concepts and arguments

I will explain the above-mentioned benefits of FDI as follows using more theoretical concepts and arguments.

Multinational companies can access the global market easily than domestic firms. So, products of the multinational firms can be well established. When multinational companies invested in Asian countries they could earn more income by obtaining the advantage of the high reputation of the MNEs.

The second factor is the high standard technology. The majority of the sophisticated product and process technologies have been introduced by MNEs. Also, MNEs have a higher capability to spend on research and development expenses. So, the inflow of FDI means enables the new technology to the Asian countries. As examples, we can say MNEs in the southeast countries have superior technology. These technologies have stimulated economic growth.

The next one is FDI (including MNEs) gives a higher level of benefits to the people. Because FDI can generate employment opportunities.  According to a study “employment growth in MNEs and local firms in Indonesia” was conducted by Lipsey & Sjöholm in 2004, employment growth of the MNEs are higher than domestic firms, and if MNEs acquire local firms, employment growth of these firms higher than 11 percent than these firms are owned by the local owners. Also, MNEs have the capability to pay higher wages to the employees than local firms.

Although FDI has given higher benefits to the Asian region, there are some criticisms for them. FDI, especially including MNEs is a threat to the growth of domestic firms. Domestic firms in some countries have closed since they are not able to compete with foreign firms. So, the foreign firms are dominant. The best example is Singapore.

Conclusion

As mentioned in the ‘World Investment Report 2014’ at the UN conference on trade and direct, Asian region is the world’s major recipient of foreign direct investment. Other than West Asian countries, Asia could inflow foreign direct investment of totally $382 billion in 2013. This was higher than from 4 percent when compared with the 2012. In the main body sector, I have discussed that three subsectors of the Asian region (East Asia, South Asia, and Southeast Asia) have benefitted from the Foreign Direct Investment by reaching global product market, achieving sophisticated technology, creating new job opportunities at higher wage rates and so on. In these Foreign Direct investments, a major important trend was “Intra-regional FDI contribution”.

Although there was an increase in FDI Inflow to Asia, total FDI outflow from Asia has decreased by 19% percent in the year 2018. As the major reasons for the decline in outward FDI, we can identify China’s decrease in commodity prices, higher restrictions for outward FDI, geographical tensions, and so on. Also, FDI outflows from East Asia have recorded a 21 percent annual decline three times. Further investment from West Asia and Southeast Asia has declined from respectively 30 percent and 11 percent in the year 2019. However, FDI outflows from South Asia have b increased from 6 percent as a result of the higher FDI outflow from India (United Nations, 2020).

Also from the year 2020, there is a considerable level of decrease in FDI inflows of the Asian region. Because COVID 19 pandemic has seriously damaged the global supply chain and production processes. As examples, we can say, production of Nissan, Mitsubishi, and Mazda automobiles has been halted in Thailand. Production of Ford automobiles has been slowed in Vietnam and Thailand. Also, projected earnings from MNEs in Turkey and India will be respectively decreased from 27% and 25%. At the same time, the value and number of the Greenfield projects have been decreased from 52% percent in the year 2020 (United Nations, 2021). So, although the Asian region could achieve higher FDI outcomes in the early part of this century, these outcomes will be decreased in the coming years.

References

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