The Asian Magnet

DESPITE a severe currency meltdown and economic recession that has gripped the region since July 1997, Asia continued to be the world's investment hotspot last year. And India emerged as one of the most attractive investment destinations, with a 37 per cent rise in foreign direct investment (FDI) flows.

The World Investment Report 1998, released by UNCTAD last week, says that transnational corporations (TNCs) preferred India over Asian tigers like South Korea, Taiwan, Hong Kong and the Philippines. So much so that FDI inflows into India shot up from $2.4 billion in 1996 to $3.3 billion, much higher than what went to these four East Asian countries last year.

More heartening, the report paints a bright picture for even higher investment in the region in 1998, despite slower world economic growth and the crises in financial markets. "European TNCs," says the report, "which had so far largely neglected the Asian economies, were now taking active interest in the region. As such, FDI by TNCs may reach a record of between $430 billion and $440 billion in 1998."

Proving the old adage that money flows like water to the more depressed regions, FDI in Asia and the Pacific rose by about eight per cent to an estimated $87 billion in 1997. The region accounted for 57 per cent of global FDI flows into the developing world. East and Southeast Asia, in particular, received 78 per cent of the regional flow.

The report adds: "Worldwide FDI inflows into Asia continued their climb in 1997 for the seventh consecutive year, seemingly unaffected by the Asian financial crisis." Investment increased by 19 per cent to a new high of $400 billion, while out-flows reached $424 billion.

According to UNCTAD, the current Asian crisis has provided some opportunities for European firms to enter the Asian market and expand operations, since the capacity of many Asian TNCs to invest elsewhere in the region has been curbed. FDI flows were being directed to the services sector, notably banking, insurance and telecom.

Expectedly, the investment saturation of the developed world, with over two-thirds of the global FDI inflows and 90 per cent of the outflows, has begun to show. "The forces driving globalisation are changing the ways in which TNCs pursue their objectives for investing abroad. Trade and investment liberalisation and privatisation pursued by the developing world have been driving forces to bring them to the fore," the report says. In 1997, developing nations accounted for one-third (37 per cent) of the total global FDI inflow—an enormous leap from one-fifth (17 per cent) in 1990.

Says UNCTAD secretary general Rubens Ricupero, "Traditionally, three broad factors determine where TNCs invest—host country policies, proactive measures by these countries to facilitate investment, and the characteristics of their economies. Of late, there is a shift in TNCs' considerations. Increasingly, firms are also seeking investment locations that also offer people-made advantages— the so-called created assets, from technological advantages to particular labour skills."

 Within the region, however, UNCTAD soon expects a reshuffle in destinations. China, which attracted a formidable $45.3 billion in 1997, may see investments decline this year onward due to the weakening economies of Hong Kong, Japan, Korea, Thailand and Malaysia, China's prime FDI sources so far. The other reasons: a slowing of China's economic growth and excess capacity from previous FDI inflows. Even China's price competitiveness, the factor which made it a winner in the past, has eroded.

India, on the other hand, has been a net gainer over the past few years with FDI inflows increasing steadily, while its close neighbour Pakistan stagnated for the last several years. Funds flow into South Asia (mainly India) rose to another record level of $4.4 billion in 1997 from $3.3 billion. And this trend is expected to continue.

One of the peculiar consequences of recent developments is, however, that liberal policy frameworks have lost their power to attract foreign investment. While open policies by successive governments have significantly improved India's ability to attract foreign funds, the competition and considerations in the future are likely to be stricter. This is summed up best by the report: "What is more likely to be critical in the future is a strategic combination of locational advantages—including human resources, infrastructure, market access and the created assets of technology and innovative capacity—that a country can offer potential investors."