Chinas Influence on Foreign Direct Investment in Southeast Asia - Research Paper Example

China’s Influence on Foreign Direct Investment in Southeast Asia Introduction The growth in China’s economy since the implementation of government reforms in the late 1970s has surpassed even the most optimistic predictions by economists. Much of this economic success can be attributed to very aggressive policies encouraging foreign direct investment (FDI). Data provided by the International Monetary Fund (IMF) shows that China’s total FDI in 1985 was $2.3 billion. The 2010 estimate exceeds $150 billion [IMF STATISTICS]. This paper presents some background information on the successes that China has experienced as a result of foreign direct investment. The paper argues that China’s success has created a “spill over” effect throughout Southeast Asia. Specifically, the investment climate and the policies and practices that support international investment are examined in Singapore, Thailand and Malaysia to determine what lessons they learned from the Chinese experience in employing their own investment support strategies. The paper concludes with a discussion of some of the problems associated with the remarkable growth in foreign direct investment in Southeast Asia. Overview of China’s Experience In the late 1970s and early 1980s, China began to open its borders to foreign investors as part of the country’s larger economic reform agenda. One of the first regulatory reforms established the authority for the creation of special economic development zones, often called enterprise zones. Legislation was enacted to allow joint ventures between Chinese firms and foreign companies wanting to conduct business in China. In 1985, China expanded its foreign direct investment regulations to permit the development of technology parks. In an attempt to attract foreign companies to transfer technology to Chinese firms, the Chinese Government implemented a series of laws that provided preferential tax treatment to foreign companies investing in technology intensive industries. In 1987, wholly owned foreign firms were permitted to conduct business in China. Throughout the 1990s and into the twenty first century, FDI continued to grow. The Chinese government was quite deliberate in providing industry-specific incentives for these investments. The emphasis was placed on technology transfer, export development, and infrastructure applications [FUNG IiZAKA TONG 2002]. In 2002, The International Monetary Fund published a policy paper that concluded that China’s success in attracting FDI helps to explain why other countries in the region have followed China’s lead. Specifically, the study identifies six characteristics that correlate with increased levels of FDI. These are: the development and implementation of government policies that promote private investment; the capacity to export to North American and European markets; a strong post-secondary research and development capability; a reliable and affordable supply of labor; high quality infrastructure especially in transportation; highly developed technological capacity [TSENG ZEBREGS]. Investment and Economic Development in Southeast Asia Despite the current global recession, the investment climate in many Southeast Asian countries remains positive with total direct foreign investment in the region in 2010 expected to exceed $68 billion U.S. dollars [IMF STATISTICS]. The chart below shows the share of foreign direct investment by recipient country. The data indicate that Singapore, Thailand and Malaysia represented 80% of the total FDI in the region in 2007. Singapore’s share of almost 50 %of total FDI in Southeast Asia continues to grow and the country’s success in reforming government institutions in support of private sector investment is known throughout the region. Source: International Institute for Sustainable Development, 2009. A 2009 study by the International Institute for Sustainable Development (IISD) that examined factors affecting the level of foreign direct investment in Southeast Asia, concludes that incentives alone are not a sufficient condition for attracting FDI. The business climate must be conducive to private investment and the technology and transportation infrastructure must be capable of efficiently handling the increased volume that comes with the additional foreign investment [BAUMULER]. Foreign Direct Investment in Singapore, Malaysia and Thailand The World Bank’s annual publication, “Doing Business 2010 Report” ranks countries both by region and globally on how conducive a country’s policy environment is to securing business investment. Singapore, Thailand and Malaysia rank 1, 2 and 3 respectively in Southeast Asia, and Singapore ranks number 1 in the world. These rankings are viewed favorably by potential investors because all nations with significant foreign investment have public policies that promote investment and public institutions run by competent, professional staff. China was the first in Asia to recognize this as an important part of its overall economic reform platform and invested heavily in the development of its public institutions [WORLD BANK]. The 2009-2010 Global Competitiveness Report published by The World Economic Forum produces three very useful reports that compare 134 countries around the world on three foundational factors related to business competitiveness. The first assesses and ranks a country’s technology readiness. The second measures the strength of each nation’s policies and institutions in enabling free trade. The third is an overall ranking on global competitiveness. Singapore, Thailand and Malaysia rank as the top countries in Southeast Asian on all three factors. In addition, Singapore ranks number one in the world on enabling global trade and number two in the world on technology readiness [WORLD ECONOMIC FORUM]. We can once again link these factors directly to China’s model. Recall back in the 1980s that China developed a competitive advantage in attracting foreign investment by emphasizing export capacity and technology transfer. The IMF report noted earlier, identified the emphasis on exports, investment in technology and infrastructure development as three of the key reasons why China’s FDI now exceeds $150 billion annually. Singapore, Malaysia and Thailand have all adopted policies similar to those implemented in China in these areas and the results speak highly to the success of this strategy. The analysis by several respected international organizations is pretty clear in identifying Singapore, Thailand and Malaysia as three countries in Asia that have not only benefited from China’s success in attracting FDI, they have mirrored the means by which China became the global leader in attracting outside business investment. One additional area where all three Southeast Asian countries have invested heavily is in the training and professional development of the public sector labor force. There have been several successful institutional reforms implemented in Singapore, Thailand and Malaysia. For example, in 2006 the Thai government embarked upon an exhaustive two year analysis of best practices in policy development and program administration. The culmination of this work was the Civil Service Act of 2008. The Act specifically links the need for a professional and effective public service to national economic development [THAI PRD]. Malaysia also has a strong track record on civil service reform and has made a conscious effort to link the professionalization of the public sector to the economic and social development of the nation. A United Nation’s report on comparative civil service reform commends the Malaysian government for grounding these reform efforts in the overall national strategic plan, “Vision 2020.” The report notes that civil servants in Malaysia are viewed as “agents of change” and that the private sector has responded favorably to the reforms by assuming additional responsibility for the country’s economic growth and development. The U.N. report concludes that “the Malaysian Civil Service has played a significant role in the country’s achievement of economic growth [UNPAN]. Singapore has taken a slightly different approach by being highly targeted in its training and development investments. In describing the earlier strategies behind Singapore’s efforts to secure foreign investment, Tan [1999] identifies three primary sectors within the Singapore economy where the government chose to invest; biotechnology, health systems and electronics. As a result of those early investments, Singapore has a trained professional staff along with the export infrastructure that make it a global leader in all three of these industries. The connection between a professional civil service and a nation’s ability to increase prosperity by fostering positive economic growth is clear. A United Nations report sums it up best when it states that: “Civil Service Reforms aimed at strengthening administrative capacity to perform core government functions and to raise the quality of services to the population are essential to the promotion of sustainable economic development [UNPAN]. The Organisation for Economic Co-operation and Development (OECD) provides a global forum for governments to meet the challenges and opportunities of the global public policy environment of the 21st century. In 2007, the OECD published a comprehensive report that established a set of principles that guide private sector investment and economic growth [OECD POLICY FRAMEWORK]. In describing how specific policy areas directly support private investment, the report emphasizes that successful countries all demonstrate the following core characteristics: 1. a government committed to regulatory quality and public sector integrity, 2. a sound infrastructure development plan that supports private investment, 3. a comprehensive strategic development plan, and; 4. a policy climate that supports competition and innovation. China made a conscious decision back in the 1970s and early 1980s to undergo massive regulatory reform in support of its economic platform. China’s political and business leaders not only recognized the need to improve the nation’s transportation and technology infrastructure, they invested billions of dollars in research and development through the country’s post-secondary education system [CHINA STATISTICAL YEARBOOK 2009]. As a result, today China boasts some of the best universities in the world who are engaged in leading research initiatives in partnership with business and industry. The Chinese have also established key partnerships with the best universities in the United States. The joint MBA program with the Sloan School of Management at MIT emphasizes technology transfer for research and development purposes [VAN FLEET 2010]. Thailand, Singapore and Malaysia have followed China’s example with Singapore poised to become a world leader in the research and development associated with emerging technologies. Thailand and Malaysia have invested huge sums of money to develop and expand their highways, airports and ports so that goods manufactured there can reach export markets in a timely and efficient manner. Potential Pitfalls Associated with Foreign Direct Investment As with any initiative implemented on the scale seen in countries such as China, Thailand, Singapore and Malaysia, FDI has a potential downside as well. First, the economic benefits that accrue from FDI tend to create or exacerbate regional disparities. Much of the economic growth has taken place in the major centers and rural areas for the most part, have not enjoyed the benefits that economic growth brings. As a result, we see a significant migration of rural populations into the urban centers in search of the type of employment that brings higher wages. This has created a host of social problems in all of the nations discussed in this paper. A second factor is that the beneficiaries of the new economies in these countries tend to be those who controlled the majority of the wealth in the first place. The old adage that the rich get richer and the poor get poorer certainly applies here. The concentration of wealth derived from the economic growth has gone to the rich, while the poor continue to see little benefit. Third, China and Singapore have seen multi-national corporations enter the market and gain a monopoly by forcing emerging local firms out of business. Coke and Pepsi have been accused of doing this in China, for example. Fourth, there is a potential for foreign companies to deplete the natural resources through activities such as mining, forestry and fishing leaving little in the way of long term benefits for local residents. There is also the threat, of course, of environmental degradation. It is clear that FDI is not without its potential problems. However, the benefits that foreign investment brings to local economies can far outweigh the social costs if government has the foresight to implement programs that address the issues discussed above. Conclusion This paper identified the strategies employed by China in its efforts to actively engage in economic reform through the support of foreign direct investments. The conclusion reached here and supported by a considerable body of literature on the subject, indicates that Singapore, Malaysia and Thailand have enjoyed much success in attracting FDI precisely because they have followed the lead set by China. In retrospect, borrowing from China’s experience was definitely a wise strategy. Bibliography BAUMULER HEIKE 2009 Sustainable Development Impacts of Investment in Southeast Asia International Institute for Sustainable Development Retrieved from http://www.iisd.org. China Statistical Yearbook 2009 Retrieved from http://www.stats.gov.cn Doing Business 2010 World Bank Retrieved from: http://www.worldbank.org FUNG H. C. IiZAKA HITOMI TONG SARAH 2002 Foreign Direct Investment in China: Policy, Trend and Impact Retrieved from http://www.hku.hk. The Global Competitiveness Report 2009-2010 The World Economic Forum Retrieved from http://www.weforum.org. OECD Policy Framework for Investment 2006 Organisation for Economic Cooperation and Development Retrieved from http://www.oecd.org. OECD Principles for Private Sector Participation in Infrastructure 2007 Organisation for Economic Cooperation and Development Retrieved from http://www.oecd.org. TAN AUGUSTINE 1999 Efforts to Attract FDI: Case of Singapore’s EDB Retrieved from National University of Singapore at http://www.fas.nus.edu.sg. Information on Thailand’s personnel reforms retrieved from http://www.thailand.prd.go.th. TSENG WANDA ZEBREGS HARM 2002 Foreign Direct Investment in China: Some Lessons for Other Countries International Monetary Fund Retrieved from http://www.imf.org. Data from the United Nations were retrieved from http://www.unpan.org. VAN FLEET JOHN D 2010 Technology Transfer-from an Institute of Technology China Economic Review May 10. World Bank Data and Statistics Retrieved from http://www.worldbank.org Read More