LEADING MULTINATIONALS VOTE THEIR CONFIDENCE IN ASIA

Press Release
TAD/1855

LEADING MULTINATIONALS VOTE THEIR CONFIDENCE IN ASIA

GENEVA, 18 March (UNCTAD) -- Results released today of a worldwide survey of leading multinational companies find that overall confidence in East and South-East Asia as a destination for foreign direct investment remains unshaken, despite the financial crisis in the region.

One in four of the companies polled said it plans to increase direct investments over the short and medium term, while 62 per cent are continuing with their existing plans. Almost all firms covered by the survey make a positive long-term assessment, taking the view that direct investment prospects are either unchanged (81 per cent) or have improved (13 per cent).

The results are based on replies from 198 firms of 500 polled -- an impressive response rate of 40 per cent -- in a joint survey by the United Nations Conference on Trade and Development (UNCTAD) and the International Chamber of Commerce (ICC). The survey was conducted in mid-February.

Announcing the outcome of the survey at a news conference today, UNCTAD Secretary-General Rubens Ricupero said, "The results clearly show that multinational corporations are keenly interested in the region for direct investment in the production of goods and services. This augurs well for recovery in the region."

ICC Secretary-General Maria Livanos Cattaui said, "This is a resounding vote of confidence in the economic fundamentals of East and South-East Asia and the region's long-term prospects. Business still sees enormous investment opportunities to be derived from the projected growth of Asian markets in the twenty-first century."

Ms. Cattaui added, "Foreign direct investment, by its nature, requires commitment over the long haul. That commitment is fully demonstrated by the results of this survey."

Responses are remarkably consistent, both by main business sectors and also by home regions -- Europe, North America, Japan and developing Asia. An overwhelming majority of respondents from each of the regions and the main sectors -- primarily, manufacturing and services -- report that their long-term views remain unchanged.

Among European firms in particular, 34 per cent are actively seeking to increase their operations in Asia. The comparable figures for North America and Japan are 19 per cent each, and 10 per cent for developing Asian countries. Karl P. Sauvant, senior UNCTAD investment expert, said: "In the short and medium term, lower costs for multinationals in the most affected countries, including the effect of devaluations, create immediate incentives for additional direct investment. They also open up additional export opportunities, helped by the privileged access to the regional and global distribution networks of their parent firms."

Mr. Sauvant added, "Most important, however, is that the principal determinants for direct investment in Asia ensure that long-term prospects for such investment in the region remain excellent."

At the same time, he noted that a contraction in growth would reduce demand in some Asian domestic markets. In the short to medium term, that could slow down inward flows of foreign direct investment for industries oriented to domestic markets.

This is borne out by the UNCTAD/ICC survey, which shows that 12 per cent of all responding companies intend to reduce one or more of their investment projects over the short and medium term. For services companies, which in most cases are heavily dependent on domestic sales, the comparable figure is 18 per cent. Looking at the long term, only 6 per cent of companies indicate that their confidence in the profitability of foreign direct investment in Asia has diminished. Another finding is that the direct investment intentions of most Asian firms will remain focused in Asia itself. The crisis is likely to restrict the financial ability of some of these companies to invest abroad. Devaluations make it more expensive for firms from the most affected countries to finance their foreign operations.

The survey further showed that, independently of their continuing commitment to Asia, 37 per cent of the firms consulted contemplate increasing direct investments in Latin America. Some 27 per cent look to increased foreign direct investment to Central and Eastern Europe, while 18 per cent expect to step up their direct investments in South Asia. "Emerging markets, in general, continue to be viewed by large multinationals as good prospects for foreign direct investment. This is in line with a trend that began in the mid-1980s and has led to developing countries now attracting close to 40 per cent of the world's direct investment flows of some $350 billion", Mr. Sauvant commented.

ICC Secretary-General Cattaui said that the survey underlined a key distinction between the reactions of direct investors and those of portfolio investors and banks, whose decisions about international financial capital movements have so far been the centre of attention during the Asian crisis. "Capital investments by portfolio investors focus on shorter-term financial

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gains and tend to be volatile. In contrast, direct investors are mainly concerned with visible economic transactions, such as the establishment or expansion of plants, the operation of internationally integrated production systems, the international transfer of technology, and the distribution of intermediate and final products in world markets", Ms. Cattaui said.

"Their investments are motivated by strategic interests, such as market access and access to resources of various kinds, and tend to involve long-term relationships", she added.

These features of foreign direct investment underline many of the survey's findings about investors' decisions and expectations. UNCTAD figures show that, while foreign portfolio equity investment and bank lending to the most affected Asian countries reversed direction during the latter half of 1997, flows of foreign direct investment to the region are estimated to remain close to pre-crisis levels.

UNCTAD Secretary-General Ricupero pointed out that direct investment flows have a moderating effect on the volatility of total private capital flows. "In the same way that the debt crisis of the 1980s led governments to appreciate the non-debt creating nature of foreign direct investment, the current crisis may lead them to appreciate the relative stability of foreign direct investment flows, apart from the other contributions such investments can make to growth and development", he said.

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