The financial crisis in Asia has reduced the capacity and incentives for Asian transnational coporations (TNCs) to invest abroad, a trend accentuated by policy measures adopted by some governments to contain the crisis.
According to the latest UNCTAD figures, released today, foreign direct investment (FDI) by companies located in developing Asia and the Pacific fell during 1998 by a quarter, to US$36 billion, from the previous year. Although FDI from the region remained close to its annual average during the decade, its share in world FDI in 1998 dropped to its lowest level in the 1990s (figure 1).This decrease was paralleled by the declining value of cross-border mergers and acquisitions (M&As) undertaken by TNCs (figure 2).
Among the top 10 outward-investor countries, six experienced a sharp decline in their FDI outflows in 1998 (figure 3). The stock of FDI from developing Asia reached US$317 billion, accounting for over four-fifths of the total FDI stock from the developing world. Over half of this stock is located in other economies in the region. China alone absorbed over half of the FDI outflows, mainly from Hong Kong (SAR of China) and Taiwan Province of China.
Over the past decade, TNCs owned by overseas Chinese as well as Korean chaebols, have been two major forces for outward FDI from developing Asia. The former - headquartered throughout East and South-East Asia, and whose business has been focused largely within the region - suffered heavy losses from the financial crisis. For instance, the market capitalization of the assets owned by the top 500 overseas Chinese firms in the world was reduced by nearly half in 1998, according to Yazhou Zhoukan (Asia Weekly, the leading Chinese language business publication).
Surprisingly, FDI outflows from the Republic of Korea went against the trend, and increased by seven per cent in 1998, to a record level of US$4.8 billion. This is attributable mainly to a sharp increase in financing of existing overseas operations and ongoing investment projects, including servicing their debts. As their foreign affiliates had difficulties in raising funds in the international financial market in light of their lowered credit ratings, Korean TNCs had little choice but to channel funds from parent companies to their overseas affiliates. While engaged in divestment both at home and abroad, Korean TNCs have apparently tried to maintain some of their core international operations, out of longer-term strategic considerations.
The drastic decrease in cross-border M&As undertaken by Korean TNCs in 1998 shows that there were very few new investment projects initiated during that year. A shortage of cash induced a number of Korean TNCs to cancel some of their investment plans and to divest themselves of some of their assets held abroad, in order to raise funds. According to the records of the Ministry of Finance and Economy of the Republic of Korea, 68 overseas investment projects with a value of US$336 million were liquidated during 1998 and the first quarter of 1999.
Looking ahead, UNCTAD anticipates that FDI flows from developing Asia will further decrease this year. Furthermore, it expects that the revitalization of the outward investment drive of TNCs from developing Asia will take some time. Asian TNCs are likely to continue their focus on restructuring and the spinning off of non-core activities. In the light of past experience, they may well be more cautious in their overseas business expansion in the near future and, may also, diversify away from Asia.
Final data and a detailed analysis of worldwide FDI flows in 1998 will be contained in the UNCTAD World Investment Report 1999 to be released under embargo at 22h00 GMT on 27 September.
