Despite overtaking the United States to become the top destination for foreign investment in the first half of 2012, foreign direct investments (FDI) in China showed an overall trend of decline that began in November 2011, barring an exception in May 2012. For the first 11 months of 2012, FDI was down 3.6 percent year-on-year to US$ 100 billion. In the same half of the year, global FDI inflows saw a decline of 8 per cent compared with the same period of 2011.
The Chinese government has attributed the slump to weak economic growth, the on-going European debt crisis, rising costs, as well as weak domestic demand. Further, China is experiencing structural adjustments in their FDI flows, including the relocation of labour-intensive and low-end market-oriented FDI to neighbouring countries.
While developing countries (without transition economies) for the first time absorbed half of global FDI, flows to developing Asia declined by 11 percent, despite a strong recovery after the global financial crisis.
In the midst of this, Asian economies displayed an interesting dynamic and trends were not uniform. Inflows to Cambodia, the Philippines and Thailand rose in the first half of 2012, while those to Indonesia, Malaysia and Singapore declined. In South Asia, inflows to India, fell from US$18 billion to US$10 billion, partly as a result of shrinking market-seeking FDI to the country. Bangladesh however maintained a relatively high level of inflows— about US$430 million in the first two quarters- due to strong interest by foreign investors in manufacturing, especially in garments. Political risks emanating out of uncertainty in the conduct of elections later this year in Bangladesh as well as bleak economic forecast for India are over looming concerns.
Even though the slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to slowdown FDI flows, the Asia Pacific region continues to be of interest among investors. A burgeoning domestic market, cost-efficient labor force, and an improving investment environment as well as glimmers of political and economic reforms, are the driving factors for investments into Asia.
- Despite clamour of policy paralysis and public outcry over corruption and weak governance, UNCTAD’s World Investment Report 2012 considered India to be the third most favoured destination for investment after China and the US for major global companies.
- The main drivers for FDI into India, market seeking FDI-mainly to take advantage of the huge demographic dividend- a rising middle class and huge domestic market continue to be an important factor that makes India an attractive destination for FDI. The middle class is expected to grow to 267 million in 2016.
- Low cost labour that is yet high in quality and conversant in English is a unique mixture that investors are finding difficult to find elsewhere. This will be an important consideration for multinational corporations looking to continue FDI in back-office operations and those looking to open their Research & Development centers. While India’s labour laws and union actions have often been suggested to be a factor against FDI flowing into the country, there is a perception that this is not a deciding factor.
- The last couple of decades have also shown that despite periods of tardiness, reforms in the economic sector are by and large irreversible. It is unlikely that even a change in government would reverse major policies, including that of FDI in retail, though minor changes can be expected. Regulatory and policy changes, has been gradual and largely been without unexpected surprise, notwithstanding the proposed retrospective tax.
- Yet, there are challenges and risks that face investors looking at India. In the background of a bleak global economic outlook, growth is likely to remain modest (5-5.5%) and inflation is expected to remain elevated. There are also concerns of increasing fiscal deficit and in 2013, a year preceding general election, this may deteriorate should the government decide to increase ‘pro-poor’ public spending. India’s dependence on imported, then subsidized energy adds to the pressure on this front.
- Infrastructure development backlog and power/ energy shortages and mismanagement continue to pose operational risks. And, the threat of credit rating downgrade by Fitch and S&P is likely to adversely affect the cost of raising finance for investors.
- While regulators and the judiciary have increasingly shown signs of independence and a disposition that is not necessarily antagonistic towards private and foreign business, governance and implementing agencies continue to lack capacity and the will to act. The inability to implement and fulfill contracts remains a serious risk for foreign investors. Political and bureaucratic attitudes towards foreign and private businesses continue to be discouraging. And, the challenges of finding Joint Venture partners (which is still necessary) can add to additional costs.
- Sectors that involve land acquisition remain at particularly high risk as the proposed new law related to it is likely to increase costs even as there is yet uncertainty over when it will be passed in parliament. Divergent interests within the different ministries/ departments of the government continue to stall projects and delay investments. This is also an area where multinational companies remain vulnerable in terms of reputational risks and charges or actual incidents of corruption.
Amidst doubts about the growth story in India, the spirit of entrepreneurship that thrived ‘despite the government’ is still in place and likely to remain an important driver of economic activity in the country but multinational companies are likely to succeed if they approach investment with patience, reserve capital and a longer term perspective.
- The other Asian economy that has attracted unprecedented attention is Myanmar/ Burma. With abundant natural resources it is likely to mainly attract natural resource seeking FDI in the coming years. Given its sizeable population, there is an expectation that it could also become an efficiency seeking FDI destination as low end manufacturing centers move out of China.
- With its unique geographical location at the cusp of China, India and Southeast Asia, Myanmar may be considered as a strategic investment destination. It is likely to be in the interest of investors to make an early entry to establish first mover’s advantage to take long term benefits of investment in the region. Some of the areas where businesses can look for opportunities include – oil and gas, mining, agro-commodities, hydro and infrastructure development, tourism sectors, telecommunication and the healthcare sectors.
- The embrace by the international community- particularly US, UK, Japan, India and members of ASEAN- of the reforms is a welcome development as greater integration into the international economy raises the cost of reversing the reforms process. The move to shift away from the overwhelming dependence on China for business and investments has also been welcomed by the local population.
- Considerable risks still exist, however, for businesses looking to operate or invest in the country. Myanmar’s political reforms are still a work in progress and the country remains a long way from being fully democratic. The country’s years of isolation and military rule have also meant that infrastructure (particularly health, education, transport, and communications infrastructure), capital markets and institutions are underdeveloped. Corruption, a weak legal system and judiciary, continuing human rights abuses and a lack of protection for investors are also significant risks that may take some time for Myanmar to fully address.
- Ethnic tension, that may result in civil war or violence continue to threaten operations and safety of lives for people working in different parts of Myanmar. Any escalation will have an adverse impact on the reforms process and economic growth.
- Large scale investments (mainly Chinese) have created limited employment and have had considerable environmental and social costs. This has led to a number of local protests against big infrastructure project. There are also reports of forced and child labour as well as weak environmental regulations which investors, particularly from the US and EU, will have to look out for as these could have an adverse bearing on their reputation and cause legal problems.
- The continuing reports of the military’s involvement, particularly through the two military conglomerates, the Union of Myanmar Economic Holding Limited and the Myanmar Economic Corporation, poses risk for US and EU companies as human rights organizations and international NGOs are likely to keep a close watch on their dealings and the extent of their relationships.
Both, the government and the opposition party- the National League for Democracy (NLD), led by Aung San Suu Kyi have made it known that they encourage investments that benefit the local economy in terms of generating jobs, skills development, technology transfer etc. It would be important for multinational countries to put in place rigorous CSR projects and incorporate business models that benefit the locals. Further US and EU multinational corporations may benefit from JVs with companies from ASEAN, India, Japan and other stakeholder countries who have experience of doing business in the country.
Latest posts by Editorial Team (see all)
- Consider This When Choosing Your Next Chief Information Security Officer - July 11, 2014
- Catchy Brand Names and the Karate Kid - July 4, 2014
- Finally, A Book on Leadership Worth Reading - June 25, 2014