best FDI countries

The Asian region is now the growth engine for the world economy. It continues to be the favoured destination for Foreign Direct Investment [FDI] with countries in this region emerging as major consumers markets for industrial and domestic consumption.

In the following recent analysis, we examine just which are the best Asian economies to become involved with. Our analysis is brief and non-academic. It brings together some economic, social and geo-strategic factors. Some of our conclusions may be surprising.

geo-strategy

As oil politics and the influence of Peak Oil now play an important part in regional economic development, we have included a brief analysis on Energy Security - Energy Security, Planning in Unstable Times and Peak Oil.

What are the Best Asian Countries for FDI?
A Brief Economic & Geo-Strategic Perspective

Melbourne October 2005

General Outlook

Asia has become the major destination for Foreign Direct Investment [FDI], a trend that is expected to continue. Every manufacturing and trading enterprise that is concerned to reduce its cost base cannot ignore the attractiveness of this region. However, not all countries are equally attractive to FDI and some may only appear superficially attractive.

Currently China is experiencing the status of “most favoured destination”, for capital sourced from the West, including Eastern Europe, along with investment from other Asian states, notably Japan and Taiwan. Now the production centre for many household and industrial consumables, China is emerging as a source of higher technology products, to rival India, Taiwan and Japan.

Several factors support China’s attractiveness, the economy and the associated market reforms being some of them. And there are other attractions too, which include managerial and social factors that must be closely understood and carefully managed to avoid the loss of investment opportunity not infrequently experienced there. Refer our article “Succeeding in China - It's All About The Culture” published by China Biz of ShangHai.

Here we briefly examine several major and emerging Asian countries and these include, in order, South and North Korea, Taiwan, The People’s Republic of China, India, The Philippines, Indonesia, Vietnam, Singapore, Malaysia and Thailand. We think that no other Asian country currently rates as well as China, although some other countries rate favourably. Nor can one contain any meaningful analysis to the purely economic. Hence, necessitating brevity with each country analysis as the alternative would be an endless examination of scenarios, forecast and outcome possibilities, both economic and geo-political.

Republic of Korea [South Korea]

South Korea has been, and still is, an attractive place to set up manufacturing and source finished goods and parts. Like some other Asian countries, Western enterprises seeking to source parts and products may well find not several but several dozen potential suppliers of most things. South Korea has a large, educated and hard working labour force, low but rising wages and a generally stable, pro-Western Government. It is now a functioning democracy but corruption remains prevalent. Regular corporate scandals point up the deep seated belief that business leaders and industrial families with controlling interests can do whatever suits them. This tendency to avoid “normal” business conduct is not contained to South Korea and is a chronic feature of other states such as The Philippines, as discussed elsewhere.

Economically, South Korea is similar to Taiwan and Malaysia. It is moving beyond the labour intensive manufacturing stage to establish itself as a high technology manufacturing centre. The economy is strong, unemployment is low, poverty is almost non-existent and consumer demand remains strong. The South Korean telephone system is excellent with a high uptake of mobile phone and Internet users. Infrastructure is sound with adequate supplies of energy and fresh water and a good network of rail, roads and ports.

Any view taken on South Korea cannot be done in isolation from regional politics. Like some other Asian states, notably Japan and Taiwan, South Korea operates under a security umbrella created by the United States and benefits South Korea by containing the sometime belligerent conduct of North Korea. The United States maintains a large military presence in South Korea but this has declined recently. This is now being partially replaced by a large injection of armaments to balance North Korea’s massive array of weapons that are aimed at Seoul, the South Korean capital. North Korea makes military threats against South Korea and other countries like Japan probably as a counter to the perceived United States intention to act against it.

The somewhat remote possibility that the devastatingly massive arsenal above the North Korean DMZ might be launched against Seoul and South Korea cannot be entirely discounted and so this remains a source of concern, however small. Further analysis of the South Korean situation is aided by an analysis of North Korea, examined below.

Democratic People's Republic of Korea [North Korea]

North Korea is the last remaining hard line centrally planned Communist regime. Its government is an authoritarian dictatorship along Stalinist lines. Some years ago, investment in North Korea would have been viewed as a very long term business opportunity, if that. More recently, we are inclined to a more optimistic assessment.

Alliances between North Korea, China and Russia have resulted in the Korean peninsula remaining politicized for some time. Since the country is the focus of conflicting great power interests, stability has remained elusive. North Korea adopts a strong military position and threatens neighbouring US allies, South Korea and Japan. However, the publicizing of its nuclear weapons capability is seen in the context of managing to avoid serious conflict.

The Government controls most businesses via state trading companies. The Armed Forces also control many businesses. Getting paid is difficult and the Government does not accept the normal principles of capital exchange taken for granted in the West, which is, not paying on time or at all.

Fundamental infrastructure problems make business development difficult if not impossible in some regions. Factories lie idle due to power shortages. The country has not developed like South Korea. Its population is about one half of its southern neighbour and its per capita GDP is about one fifteenth. Foreign trade delegations are occurring and there is some potential for non-US companies as US companies are restricted under the “Trading with the Enemy” Act. However there appears to be no serious attempt to integrate the country into the world economy.

The industrial base has run down and significant trade importation occurs across the Northern Chinese border. The present North Korean approach to business is notable for its novelty. Export trade from North Korea is understood to include motor cars stolen from the West, for export into China. North Korea also exports narcotics. Casinos were established along the North Korean side of the border with China, to attract money from wealthy Chinese gamblers. Due to Chinese pressure, these may have been shut down as the money was being embezzled from Chinese Government businesses.

Just as China has normalized its economy, so too will North Korea. The ruling elite will have to face the not unapparent fact that their state dominated, centrally planned Marxist-Leninist economic model cannot work, has never worked and has failed everywhere it has been applied, as was predicted that it would as far back as the 1920's. This is considered in the light of possible normalization of relations with South Korea, wherein reunification by some analysts is considered inevitable. For Westerners, having business operations in China could make it easier to engage in a North Korean economic recovery when it eventually normalizes its governance and its economy.

Taiwan

Taiwan has a dynamic, pro-Western capitalist economy that is moving beyond being a low cost, labour intensive manufacturing economy. Those industries have or are being relocated off-shore, principally to China where over 50,000 Taiwanese businesses are now established. The Taiwanese are amongst the biggest investors in China and more industries will relocate there as restrictions on certain technology transfers are relaxed.

Taiwan is thus facing major structural adjustment challenges. The move towards an economy of high technology manufacturing, research and development and knowledge-based services has not been as attractive to investment. Economic integration with the global economy was retarded because of the government’s paternalistic, economic micro-management bureaucracy but that has been changing. Taiwan is a major exporter with China as one of its major markets.

Taiwan’s population is around 23 million, about that of a few Chinese cities or about one quarter of the southern Chinese province of GuangDong. Taiwan has excellent infrastructure but it is no longer the cheap destination for establishing manufacturing operations, as is demonstrated by the drift of Taiwanese businesses to the mainland.

As with the Korean Peninsula, any view taken on Taiwan cannot be seen in isolation from regional politics. As with Japan and South Korea, Taiwan’s security has been supported by the United States. Significantly, their unequivocal support of Taiwan has given way to a more realistic position based upon economics, which includes American investment in China and the recognition that China, a country with a population of more than fifty-five times that of Taiwan, simply matters more.

China’s intentions towards Taiwan remain a subject of consuming concern. On this matter, financial analysts are accused of ignoring history. Geo-strategists invoke theoretical historical constructions that annunciate scenarios of multi-factored complexity. And oil industry analysts see gloomy military outcomes wherever they look. Our take follows.

Should China act to reunify Taiwan with the mainland, we discount the likelihood of the United States becoming militarily engaged, thus avoiding for this region any extended serious conflict. Whatever scenarios one constructs and we note that some analysts suggest 2006 as probable; we see any reunification action as having limited regional spill over effect. A notable potentiating factor for reunification action with Taiwan is Chinese oil security and the control by China over shipping routes past Taiwan plus the corresponding removal of any disruptive potential to oil supply security directed against China at that geographical point [other geographical points also exist]. Consistent with the differences in thought and approach between the East and the West, unlike the Americans who announce large forthcoming military actions, action by China in unifying Taiwan is expected to occur without obvious warning. Therefore, any decisions concerning investment in or sourcing from Taiwan should be made with this in mind.

The People's Republic of China

In China, all the numbers are big – except costs. One may well ask if there is anything that isn’t being made in China these days. Considering current trends in global commerce and industry, all but the most advanced products of Western consumption are being made there.

Because of the economy, China has become the most popular place for foreign direct investment. Other comparatively cheap economies may not offer the same political stability, freedom from terrorist action and freedom from racial tension. China's strengths include the marketing and financial know how of Hong Kong, now extending to other major Chinese cities including ShangHai and BeiJing, a research and development capability across many industries plus the mainland's low cost manufacturing sites. Foreign banks, already active in China, will extend their banking services in a few years.

China is thus becoming the world's biggest manufacturer and consumer market combined. The central and provincial administrations have flagged that they are open for business and this distinguishes China from some other low cost but otherwise less attractive, bureaucratized third world economies. The Chinese population want to get ahead, they are keen to make money and the government is Communist in name only. Market reforms continue alongside improvements in civil, administrative, criminal, and commercial law and the maintenance of social stability is a high priority. Chinese administrations appreciate the link between the avoidance of disease crises like SARS and Avian Flu and this has reinforced the continuing drive towards bureaucratic reforms and modernization efforts necessary to ensure economic growth.

China has a large labour pool, the Chinese are committed and hard working if properly managed and there is no shortage of skilled labour. English, the preferred foreign language, is taught in schools. Infrastructure investment continues, notably in telecommunications, electric power, water, rail, roads and shipping terminals.

BeiJing, like Washington, has been active in pursuing its global energy security arrangements for the direct supply of oil and gas, thus avoiding purchases on the open market. It has forged country agreements for the long term supply of this energy, usually in exchange for infrastructure and technology exports and, in some instances, the stationing of troops abroad to protect these concessions. This also applies to mineral supply security.

At present, China’s economy is slowing but not declining as it undergoes some structural economic shifts. Former growth regions such as GuangDong Province, ShangHai and ZheJiang Province may not grow at the previous rates but will not cease to remain major economic centres. The wealth divide is understood by policy planners and these regions, already experiencing a drift towards higher labour costs, will yield their growth to other and less affluent regions to spread the economic returns. Increasingly, some multi-nationals are locating their Asian head offices in ShangHai and BeiJing, in preference to Singapore and Hong Kong.

For longer term corporate planners who can see beyond the one to three year financial planning horizon, China’s strategic trading position should be an attractive proposition to foreign investors intent on establishing operations in China rather than simply treating China as a cheap outsourcing opportunity. Presently Chinese companies are in a better position from a cost vantage to supply manufactured products and infrastructure development to its near abroad neighbours. Foreign controlled Chinese operations could do likewise, but only from a China base.

Concerning Taiwan, the view from BeiJing is that any influence exerted by the United States in resolving the Taiwan Straits issue is seen as interference in an internal matter. The position adopted by the United States of “strategic ambiguity”, lukewarm by comparison to the more muscular policy of pre-emptive first strike, seems a practical accommodation designed to avoid being forced to decide to be drawn into a conflict with China. That is, by not extending unconditional military support is Taiwan President ChenShuiBian less likely to declare independence from China. If he did, China would be obliged to act, for to not do so would be the loss of legitimacy the CCP claims in being the sole representative of the aspirations of the Chinese people. Yet, BeiJing would certainly recognize its inferior military position compared to the United States and so would seek to avoid a conflict. Unless they believed that the United States would not intervene.

A further way to understand China’s economic position is to compare it with India, which is seen as a possible equal emerging economy and competitor of China.

Republic of India

Since India and China are frequently discussed together as the two Asian economic giants, it is worth drawing a direct comparison between these two countries. Let us therefore examine at some fundamental features about India by reference to China.

Anecdotally, while working in WenZhou, the east coast Chinese powerhouse business city, several of the Indian businessmen I met there were there in China because they preferred what China offered over the business prospects in India. And they thought that the Chinese had the best attitude to work.

So just how does India compare? Some economic data gives a perspective. India’s GDP per capita is about half that of China’s. India has more people in poverty, at around 25 - 35%, more than China which is about half that. This obviously influences domestic consumer consumption spending power. India’s literacy rate is lower than China’s, a not altogether surprising fact when one recognizes the strong Chinese commitment to learning. Currently India’s electric power generation is about one third of China’s and China’s freight and container traffic is a fraction of China’s. Indian exports are still a fraction of China’s and the telephone network, both landlines and mobile phones are both a fraction of the uptake in China and are less robust.

English is taught in schools and is widely spoken by the educated class. India, like China, has to deal with social pressures. Unlike China, which is essentially a non-religious country where social unrest has economic causes and may thus be more tractably managed, India’s social unrest has a religious dimension.

A significant point of difference is the number of Internet users. India may have perhaps twenty million Internet users. China may be five times that at one hundred million. Indeed, China’s uptake of the Internet constitutes a dissertation all of its own.

India does possess some natural energy resources. They have very large coal reserves, the fourth largest globally. This is the primary source for electricity generation [about 80%] along with some hydroelectricity [about 15%] and nuclear [very small]. China, by comparison, has committed to investment in several nuclear power plants to support the growing industrial and domestic demand.

The formerly socialist government is relaxing some of its controls over the economy but the pace of reform could be quicker. India has already strongly positioned itself in the high technology and information technology industries and has wide acceptance abroad for its capabilities, particularly software. Major alliances exist between Indian and American corporations. However high technology and information technology are the same two sectors that China is applying its huge and educated labour pool to as well.

Like China, India experiences the consequences of less than sustainable environmental practices including deforestation; soil erosion with the consequent flooding; overgrazing; desertification; air pollution from industrial effluents and vehicle emissions; water pollution from raw sewage and runoff of agricultural pesticides; undrinkable water and a growing population that is overwhelming the available resources.

India has been less successful than China in controlling population growth with India experiencing a population growth rate some two and a half times that of China. The short run effect of this, taken with population growth and demand in other Asian economies is to increase the demand for resources. Since 2003, global resource prices have generally increased off a generally flat twenty year base and demand from Asian industrialization has been a driving factor.

The strategic threat posed by its northern neighbour Pakistan may be diminishing as both countries have formed closer relations with the United States, as they are currently between themselves.

Republic of the Philippines

The Philippines was regularly included in the optimistic forecasts that characterised the tiger economies of Asia, so-called. However, The Philippines has a number of features which separate it from the other countries in this region that may make them better destinations for investment. It is the twelfth most populated country in the world with a higher population growth rate than other Asian states. Infrastructure is under pressure and pollution and environmental degradation are permanent features of the landscape.

The country is strongly and conservatively religious, the Government appears to be in denial over the incidence of transmissible diseases, particularly AIDS and it remains under the control of a small number of wealthy self-interested families who are unsurprisingly well represented in government, directly and otherwise. Corruption is rampant and the country may tend towards instability. Recent political unrest has preceded a change of government leaders. Over-population and resource stress may condemn it to remain in a state of slow decline and social instability. The present administration is without a credible population policy. The rate of infrastructure and literacy improvement could be better and educated people invariably seek opportunities abroad.

The population of The Philippines is about that of China’s southern GuangDong Province, some 88 million over an area that is two thirds larger but spread across several major and thousands of minor islands. The population growth rate is high and extreme poverty is widespread and increasing.

Republic of Indonesia

Like The Philippines, Indonesia faces difficult challenges. As with The Philippines, Indonesia has a high population, spread across several large and many thousands of small islands. Poverty and corruption, a sometime absence of the rule of law, infrastructure pressures and a degree of racial tensions directed towards the Chinese minorities and occasionally Westerners have been ever present features. Even in the absence of the recent terrorist activities, one has a sense of underlying tensions. Certain foreign country nationals have had, from time to time, to exercise caution in their travel within the country.

Environmental damage is extensive, deforestation is pursued aggressively and the effects of forest fires are well known throughout the region. The entire country is located across a geologically active zone and is prone to earthquakes. In addition, there is high unemployment, weak infrastructure and significant wealth disparities. The adequacy of contagious disease control remains a concern. Unlike China, Indonesia has not acted to ensure its energy security and is a net importer of oil at the prevailing world prices. The disruptive effects of this on internal security have not escaped the attention of the government.

Socialist Republic of Vietnam

In 1975 North Vietnamese forces overran the south, uniting the country under Communist rule. Until recently, the economic reconstruction remained difficult under aging Communist Party leaders who resisted free market reforms. Vietnam had a rigid, centrally planned economy, based upon communist legal theory and French civil law. However, that has been changing, possibly as a result of changes in its nearest significant neighbour China and the Government has undertaken structural reform to improve the economy, promote exports and integrate the country into the world economy.

Like China, Vietnam has cheap labour and this has proved attractive to foreign investors. Vietnamese are hard working, reliable and, like the Chinese, desire to get ahead and improve their lot. Its population is about that of China’s southern GuangDong Province, some eighty-five million.

Vietnam can be expected to develop from the synergies coming from a developing manufacturing sector, exports and domestic consumption. Its telephone system, while improving, still lags behind. It has a small number of Internet users. Like other Asian countries, Vietnam is experiencing the problems of poor agricultural planning, deforestation and water pollution. Enterprises intending to set up operations there need to carefully examine the supply situation as material sourcing is not as good as in China and South Korea.

Vietnam is not yet a member of the WTO.

Republic of Singapore

Singapore has become a highly developed, stable and successful free market economy. However, a small labour force and high labour rates have forced foreign multi-nationals to relocate to lower cost regimes, notably China. Foreign direct investment and GDP have both contracted although recently the economy has rebounded. The Government’s attempts to revitalize the economy by establishing Singapore as an Asian financial and high-tech hub are likely to be overtaken by similar efforts elsewhere, notably China. Singapore has a population of around four and a half million, about that of many moderately sized mainland Chinese cities that would not even rate a mention in the travel guide books.

Singapore has remained an attractive place for the location of Western multi-national Asian head offices, given the excellent infrastructure and a lifestyle unlikely to be matched by most other Asian countries any time soon. However, ShangHai and BeiJing are proving equally attractive for the location of the Asian head offices of Western multi-nationals.

Singapore is essentially a one party state that limits freedom of expression. One factor intruding into the ambitions of the Singaporean Government to transform the country into a centrepiece of innovation is its arguably over-controlling and intolerant treatment of non-conformist thinking, a precondition for innovation.

Singapore’s close relationship with some Western states has made it a continuing target for anti-Western terrorists, despite action by security forces. Singapore is reliant upon Malaysia for the supply of fresh water.

By way of a practical example that demonstrates Singapore’s changing position, we were involved in the purchase of a Singaporean company food label. Assets were not purchased and the production was located offshore, with import of the brand to satisfy domestic demand.

Malaysia

<< forthcoming >>

Kingdom of Thailand

<< Forthcoming >>

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Energy Security, Planning in Unstable Times and Peak Oil

Energy security is now a principal foreign policy objective of the United States and China. Concern over energy security has spread to other states.

Intensified interest by American administration officials in the oil rich region of Central Asia and elsewhere is a direct indication of this. Both China and the United States are heavy users of oil; they are net importers and their future demands will rise. Oil security is a national security objective. And so is the price. BeiJing and Washington are active in securing oil and gas supply arrangements from oil rich states around the globe. This also reduces their costs, avoiding purchases on the open market. As global demand for oil increases, against a supply that cannot keep up and against a backdrop of diminishing new oil reserves and a Peak Oil event perhaps around 2010 to 2015 [where demand exceeds supply and not loss of supply], conflicts between major oil consumers cannot be ruled out.

Eastern analysts see events differently to popular Western analysts. Current military interventions principally by the United States into Iraq and Afghanistan satisfy several objectives. Eastern analysts also see several objectives being satisfied. But these objectives are different objectives to those cited in the West.

From a more forthright Eastern standpoint, these American interventions are not principally to extend democracy and stability, implement Western values and counter terrorism, such motives being written off as subterfuge. The real motives include the control of oil from the second largest known reserves, directing demand away from Persian Gulf supplies and ensuring that China is denied access where the United States exerts direct control over oil assets. In the pursuit of its global oil security arrangements, BeiJing believes that Washington has sought to impede its plans.

Eastern analysts also see these American interventions as the implementation of a policy of containment of China, with American influence spreading across Central Asia, West Asia and parts of East and South East Asia.

Given its vastly superior capabilities with force projection, the United States can interrupt China’s oil supply but China is unable to interfere with America’s supply. This all too evident fact must be a commanding reason behind the modernization of the PLA and a source of concern for Washington planners, committed to maintaining American unilateral supremacy.

The Asian region has numerous potential points of conflict over energy, involving China, Taiwan, The Philippines, Indonesia, Vietnam, Japan and Brunei. To keep this analysis short, I’ll examine just one - the gas rich region at China’s near abroad, beneath the East China Sea and a reserve that both China and Japan lay claim to. China does not recognize the geographic median line between it and Japan, having extended its EEZ [exclusive economic zone] beyond the median line and close to Japan. Japan asserts its EEZ up to the median line and not beyond. The likelihood that these undersea gas resources are all connected across the median line complicates resolution because extraction from one side extracts from the other.

A solution based around the median line seems even less logical when one considers that China’s population is over ten times that of Japan’s. China’s energy needs must be greater than Japan’s. Why should China accept an equal siphoning off of this jointly contested reserve? After all, from their perspective, the United States has used its military supremacy to secure its energy security in the Middle East.

Just how this possible source of conflict between China and Japan will be played out cannot be forecast. It may well be that some flexing of military muscle will occur before both countries seriously negotiate across the table. Both countries are strongly nationalistic, anti-Japanese sentiment in China is palpable and Japanese revisionist history plus visits by Prime Ministers to the Yasukuni Shrine, which includes several Class A war criminals, is humiliating to the Chinese. It is difficult for either country to give ground in this matter which is why negotiations have not worked thus far.

One solution is joint development and agreement over who gets what, measuring extraction consistent with whatever agreement is struck. Whether these two Asian neighbours can strike any agreement or one they can adhere to remains to be seen.

Asia is likely to become a region of increasing tensions. Foreign enterprises wishing to trade in Asian markets will have a range of choices. The successful ones will find ways to manage in times of increasing tension by normalizing risks rather than amplifying risks.