INVESTMENT FROM DEVELOPING ASIA ON THE RISE IN EUROPE, UNCTAD REPORT SAYS
Press Release
TAD/1839
INVESTMENT FROM DEVELOPING ASIA ON THE RISE IN EUROPE, UNCTAD REPORT SAYS
19970227 ADVANCE RELEASE GENEVA, 27 February (UNCTAD) -- Investors from Asian developing countries are discovering Europe: foreign direct investment (FDI) flows from that region into Europe increased from an average $100 million during 1989-1991 to an average $860 million during 1992-1994. While North America remains their main investment location beyond Asia, their activities in the European Union have gathered momentum, both in manufacturing and services. Evidence and analysis of this phenomenon is provided in a report released today by THE United Nations Conference on Trade and Development (UNCTAD) entitled Sharing Asia's Dynamism: Asian Direct Investment in the European Union.The share of the European Union in the total FDI stock from developing Asia reached about 5 per cent in 1995. Though this is still relatively low, UNCTAD observes that this does "not reflect neglect, but rather the fact that Asian firms are just at the beginning of their entry into Europe".
Many firms of the Asian newly industrializing economies (NIEs) increasingly see need for a direct presence in the European Union in order to serve this large and rich market. Others are seeking access to advanced technology and skills, research and development programmes, the report says. Approximately 40 per cent of FDI stock held by Asian NIEs in the European Union is located in the United Kingdom, around 30 per cent in Germany, and about 20 per cent in the Netherlands.
More recently, Asian transnational corporations have began investing in central and eastern Europe, taking advantage of privatization programmes. They find in this region a low-cost production base, and a good platform for relatively unrestricted entry in the European Union internal market. Moreover, local demand for manufactured consumer goods in central and eastern Europe is projected to rise strongly, providing further encouragement for them to invest in the region.
The UNCTAD anticipates a continuing upsurge in FDI from developing Asia into the European Union. The report reviews various measures that could be taken to increase Asian FDI in Europe, to the benefit of both investors and host countries.
Asian Investors Attracted Equally by Manufacturing and Services
Data suggest that manufacturing and services are of similar importance in the outward investment of Asian NIEs. From the sectoral distribution of
recent FDI projects by the Asian NIEs in European countries emerges the following picture:
-- FDI in manufacturing is heavily biased towards the electronics industry, which accounted for three quarters of all manufacturing projects of the four Asian NIEs -- Hong Kong, Republic of Korea, Singapore, and Taiwan Province of China -- in the European Union. Projects in textiles, clothing, leather and footwear, as well as in chemicals and the production of toys, follow by a wide margin.
-- The distribution of projects within the services sector is much less concentrated than in manufacturing. Investment in trade figures most prominently, but FDI in financial institutions was only slightly less important. In addition, Asian NIEs engaged in quite a number of projects in other services industries such as sea transport, hotels and telecommunications.
-- Projects in both manufacturing and services were primarily located in the United Kingdom and Germany, followed by France and the Netherlands. The same ranking of European Union host countries prevailed with regard to the most important manufacturing industry, which is electronics.
-- Major host countries in the European Union attracted a similar number of FDI projects from Asian NIEs in both manufacturing and services. The only exception was France, where manufacturing projects (all but one in electronics) accounted for two-thirds of the total number of projects.
-- The United Kingdom hosted Asian FDI projects in all major services industries. In the services sector of Germany, the focus of investors from Asian NIEs was clearly on trade and, to a lesser extent, finance and sea transport.
Future Trends
Four distinct groups of investment patterns are likely to emerge:
-- Investment from the technologically advanced NIEs, with advanced skill and research bases and large indigenous firms capable of setting up state-of-the-art facilities in complex industrial activities and undertaking global production. These investors would focus on large-scale manufacturing and trading, and originate mainly from the Republic of Korea and, to a lesser extent, from Taiwan, Province of China. Over time, investments in the services sector are also likely to emerge as banks, insurance companies, construction firms and infrastructure providers develop the necessary capabilities.
-- Investment from the smaller NIEs (Singapore and Hong Kong), with capabilities in high value-added services and some manufacturing niches
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(advanced ones for Singapore and simpler ones for Hong Kong). Their investments in services would range from trade and finance to tourism.
-- Investment from other dynamic Asian countries such as Indonesia, Malaysia, Philippines and Thailand, that are developing indigenous specialized capabilities in industries like components, resource-based activities including food, wood, rubber and petrochemicals and labour-intensive activities like textiles. Investment from these countries may also develop in some service activities.
-- Investment from the economies of China and India, which have broad and diversified industrial bases but need to upgrade their technologies in several major industries. These economies may catch up in a range of industries to the level of undertaking FDI in Europe, in both labour and skill-intensive industries. However, they are unlikely to become major investors in Europe in the foreseeable future; rather, they can be expected to concentrate on other developing countries for some time to come.
Asian FDI in Europe Needs to Be Nurtured
Asian FDI in Europe is on the rise, but it is still incipient and needs to be nurtured, the report says. It is Asian firms that must spearhead any drive to increase FDI in Europe. However, most Asian firms have little or no experience with investing in Europe. Governments have a role to play.
A review of recent changes in legislation and national policies on outward FDI in developing Asia shows a clear trend towards further liberalization. The UNCTAD anticipates that a reversal of this trend is unlikely as Asian governments now increasingly see outward FDI as a strategic option necessary to establish a presence in foreign markets, access foreign resources and increase the competitiveness of national firms. This liberalization takes into account national development objectives and various constraints. In this respect, the UNCTAD report suggests procedures and criteria that can be used by Asian governments for approving outward FDI in situations characterized by balance-of-payments constraints.
Beyond liberalization, a number of Asian governments have also started promoting outward investment through pragmatic measures in the areas of education, training and orientation programmes; the provision of various information services; the promotion of partnerships and contacts; and the rendering of financial assistance.
Many countries have set up government/private sector agencies and associations aimed at encouraging outward FDI. The latest example is the establishment of the Thailand Overseas Investment Promotion Board in 1996, chaired by the Prime Minister.
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A Europe-Invest Programme?
The UNCTAD sees great potential for joint action by Asian countries on outward FDI, notwithstanding the diversity of their economies. First, Asian governments could benefit from an exchange of national experiences with pragmatic measures for promoting outward FDI. But they could go a step further and set-up a "Europe-Invest Programme" as an umbrella for their activities, UNCTAD suggests. It could be established by interested countries, with offices in the participating countries. The brief of each national Europe-Invest office could differ, depending on circumstances and needs; and each could link back to national institutions, including export-import banks and other agencies involved in outward investment.
For Asian economies such as Japan and the Republic of Korea, which already possess well-developed outward promotion policies and institutions, a Europe-Invest Agency might act mainly as a gateway, specifically channelling Europe-related corporate requests to the appropriate institutions, making firms aware of the opportunities available, helping promotion institutions adapt their policies so that they can target European countries more effectively, and coordinating Europe-related activities domestically and with Asian partners. On the other hand, for countries newly establishing, or restructuring, their outward FDI support institutions, a Europe-Invest Agency could take on the full range of functions and activities of such an agency. This would effectively make them "one-stop shops".
A Europe-Invest Programme would complement the Asia-Invest Programme, already put in place by the European Commission. A common roof would help to coordinate the two programmes, reduce duplication and enhance synergies. Such an approach could build on existing successful measures and instruments and apply them in either direction.
Partnership with European Union Authorities
There is also a role to play for public authorities in the European Union. As most laws, regulations and administrative procedures governing inward investment are established by the Union's individual governments, the framework facing a foreign investor is sometimes complex. In spite of some progress in this area, there is scope for further harmonization. And perhaps a more comprehensive European Union-wide treatment of FDI could be considered as well, the report says. It argues that, from the viewpoint of Asian investors, such an approach would be beneficial because it would be comprehensive, increase transparency and reduce transaction costs.
This publication, undertaken at the request and with the financial support of the Government of Thailand, complements a study published jointly by the UNCTAD secretariat and the European Commission last year on direct investment of the European Union in Asia. Both reports were prepared within the context of a working group on investment in the ASEM (Asia-Europe Meeting)
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forum that was established at its first summit meeting in Bangkok in March 1996, bringing together governments and the private sector on investment issues. This working group met in Bangkok from 7 to 9 July and in Paris on 14 October 1996. (The ASEM countries include Brunei Darussalam, China, Indonesia, Japan, Republic of Korea, Malaysia, Philippines, Singapore, Thailand and Viet Nam in Asia and all European Union member States.)
Profile of Main Investors
Hong Kong is the most important investor among Asian developing economies in the European Union, both in terms of FDI stock ($1.3 billion in 1994) and of FDI outflows ($340 million on average during 1992-1994).
Hong Kong was in 1995 the fourth largest international direct investor ($25 billion) in the world, after the United States, United Kingdom and Germany. It must be noted, however, that perhaps as much as 30 per cent of Hong Kong's outward FDI is indirect investment as it actually originates from other economies.
Most of Hong Kong FDI in the European Union is in wholesale and retail trade. For example, Dickson Concepts Ltd. acquired in 1991 a London-based department store, Harvey Nichols, and in 1992 an ailing shoe company, Charles Jordan Holding AG, in France.
The Republic of Korea ranks second among the Asian "tigers" in terms of FDI stock in Europe. About one tenth ($1 billion in 1995) of Korean FDI is now located in this region. The overwhelming bulk of Korean outward FDI is undertaken by large industrial conglomerates, chaebols, which are among the most globalized transnational corporations from Asian developing economies. Their primary motive in investing beyond Asia has been to gain market shares in host countries or access to new technologies and skills.
Sectorally, Korean investment has shifted over the past couple of years from trading activities to specific manufacturing industries. In Europe, nearly three quarters of it is in electrical and electronic products. However, the most remarkable investment in central and eastern Europe is the acquisition of car manufacturing plants in Romania, Poland and the Czech Republic by Daewoo, taking advantage of privatization programmes in these countries.
Taiwan Province of China ranks second among Asian developing economies in terms of FDI inflows into the European Union. As in the case of other Asian NIEs, investors of this economy are also attracted mainly by the United Kingdom. More than half of its FDI stock in the European Union (over $250 million in 1994) is located there.
Taiwan, Province of China is the second largest source of international direct investment from developing Asia in the world, holding $500 million of
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FDI stock in the European Union in 1995. Its FDI is dominated by small and medium-sized enterprises which contribute the greatest part of domestic manufacturing value-added. Their FDI is motivated by rising costs in the domestic economy, currency appreciation and risk diversification. Strong growth of Taiwanese FDI in the European Union during the late 1980s was induced by the Single Market Programme. The FDI by larger companies has focused on electrical equipment and chemicals industries.
Unlike Hong Kong, more than one half of total Taiwanese FDI is in manufacturing. Tatung, the Taiwanese electric and electronic company, started production of electric fans and colour televisions in the United States in the 1970s and in the United Kingdom in the early 1980s. Leading Taiwanese investors in the European Union include also electric and electronic firms, especially computer manufacturers such as Acer Computer, CMC Magnetics Co. and Kuman.
Singapore's economic growth is dependent on its ability to access foreign markets. Traditionally this was achieved through exports. Rising costs of labour and perceived threats of protectionism in its export markets have encouraged Singapore's firms to invest abroad.
The domestic economy of Singapore is dominated by foreign affiliates. It is estimated that these account for up to 50 per cent of the country's outward FDI. More than half of Singapore's total FDI abroad is in financial services; only 20 per cent was invested in the manufacturing sector. In the case of the European Union, manufacturing (mainly electronics) accounted for only 1 per cent of Singapore's outward stock of FDI in 1994, and financial institutions for as much as 90 per cent.
The European Union hosts nearly 8 per cent of Singapore's FDI stock, with the United Kingdom absorbing more than half of it. The other most important destination in the European Union is the Netherlands (almost exclusively in finance). An example of Singapore's FDI in manufacturing in the United Kingdom is the establishment by Mayor PTE of a plant for the production of electronic components in Wales. Singapore's participation in the British hotel business received another push in the past few years.
Singapore is the largest Asian investor in the Russian Federation ($37 million FDI stock in 1995).
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For more information, contact Karl P. Sauvant, Chief, International Investment, Transnationals and Technology Branch, Division on Investment, Technology and Enterprise Development, UNCTAD, tel: 41 22 907 57 07, fax: 41 22 907 01 94, or e-mail: karl.sauvant@unctad.org