Newly released data gathered by UNCTAD reveal that, in 1998, the five Asian countries most affected by the crisis experienced an overall decline in FDI of some $2 billion, or 12 per cent (table 1). However, individual national performances varied greatly. Inflows into the Republic of Korea and Thailand showed dramatic increases - almost doubling; inflows into the Philippines remained stable; Malaysia showed a decline; while Indonesia suffered divestment for the first time since 1974. In the perspective of the decade, the 1998 inflows to the region stood up well. At $15.4 billion, these were substantially above the average of flows recorded during the 1991-1995 period ($10.8 billion), and a modest $2.1 billion below the peaks of $17.5 billion recorded in 1996 and 1997.
Examining in detail the various performances of the five countries in focus, the contrasting performances are striking. The Republic of Korea recorded the highest increase last year, five fold, compared with its average performance during the first half of the decade; Thailand followed with an almost four-fold jump to $7 billion over the same period. Malaysia’s performance remained resilient, recording inflows of $3.6 billion in 1998, compared with $ 4.5 billion during the first half of the decade; Indonesia, by contrast, turned negative in 1998, compared to average inflows of $2.3 billion during the first half of the decade and an average of $5.5 billion in 1996-1997. The Philippines remained broadly stable throughout the decade.
As cross-border mergers and acquisitions (M&As) are frequently used by transnational corporations (TNCs) as a mode of investing abroad, their incidence in 1998 is of interest because it can be used to gauge the level of FDI inflows in the crisis affected countries. Indeed, cross-border M&As in Indonesia, Malaysia and Philippines declined in 1998, but rose in the Republic of Korea and Thailand -- remarkably so in the former country (table 2), reflecting, among other things, substantial changes in regulations related to M&As. However, as M&As can also be financed domestically or from international capital markets, the relationship between FDI inflows and cross-border M&A is not straightforward. Indications are that FDI has been flowing into a wide range of industries in the most affected countries in 1998. Systematic data on FDI flows by industry are however only available for Thailand (until September).
In the Thai services sector, FDI flows into financial institutions were about 10 times higher in 1997 than in 1996, and continued at a similar level in 1998; this reflected significant buy-outs by foreign firms in this industry which now accounts for nearly one-fifth of total FDI inflows, becoming the single largest recipient among all industries. Inflows into the machinery and transportation equipment industry increased both in relative and absolute terms: during the first three quarters of 1998, they already exceeded the whole of 1997, becoming the largest industry within the manufacturing sector, surpassing electrical appliances (the largest manufacturing recipient until 1997).
FDI flows to the five countries as a group are remarkably resilient when compared with foreign bank lending and foreign portfolio equity investment before and during the financial crisis (table 1). There are several reasons for this: corporate networks of integrated international production that have already existed in Asia allowed some TNCs to compensate for declining domestic sales through increased exports spurred by devaluations; some TNCs took advantage of cheaper asset prices; in some cases, parent firms increased investment stakes in their existing affiliates, either to buy some or all shares of distressed joint venture partners or to alleviate affiliates’ financial difficulties in the wake of the crisis; and some TNCs have increased capital investments in response to the relaxation of FDI regimes that has taken place after the financial crisis. Furthermore, at the regional level, the member states of the Association of South-East Asian Nations (ASEAN), to which four out of these five countries belong, concluded in October 1998 an agreement on the ASEAN Investment Area (box 1). They have also undertaken other measures to accelerate the realization of the ASEAN Free Trade Area and to grant special incentives and privileges to attract FDI into the region. As a result TNCs continued to display a high degree of activity in all but one of the five most affected Asian countries.
Barring an unforeseen worsening of the crisis, FDI inflows in 1999 are likely to remain within the range of those during the 1990s ($10 - $17 billion), although the performance of individual countries is likely to differ. The investment climate in Indonesia may require more time to recover. On the upside, the value of manufacturing FDI projects approved in Malaysia -- the largest FDI recipient among the five during the 1990s (table 1) -- registered a 14 per cent increase in 1998. Measures to deal with the severity of the impact of the crisis continue to be necessary.
