Ryan S. Gifford and Dr. Stanley Fawcett, Business Management
One of the driving forces behind the tremendous growth that Southeast Asia has experienced throughout the past decade is foreign direct investment (FDI) from multinational corporations in industrialized nations. Southeast Asian countries have been receiving several billion dollars in FDI annually since the mid 1980s. FDI is thus largely responsible for the economic transformation that has occurred in Southeast Asia and has made it among the fastest growing regions in the world.
Foreign direct investment is the process whereby a firm in a home country obtains and manages an asset in a host country (1). Ideally, it is mutually beneficial for both the multinational corporation (MNC) and for the recipient country. MNCs invest in Southeast Asia to benefit from low-cost input factors, to establish market presence, and to access the region’s abundant natural resources. Southeast Asian countries are then able to derive benefits in the form of capital infusions, transfer of technology or managerial talent, and an expanded infrastructure.
While these factors are clearly favorable to both parties involved, FDI in Southeast Asia does introduce some challenges. MNCs must face a greater degree of uncertainty and risk due to the political instability and economic volatility of the region. Southeast Asia is confronted with an increasing economic dependence, and some officials have cited foreign investors as strictly pursuing corporate interests in a manner that only ostensibly assists the host country.
The objective of my research was to explore the implications of foreign direct investment for both the investing corporation and for the Southeast Asian nations. My hypothesis was that the MNCs are positioned to gain the most from FDI, and will thus continue such investment in great volume. Also, I believed that the implications for Southeast Asia are predominantly negative. I felt that the high social and environmental costs, coupled with the risk that investing firms would keep technology and know-how proprietary, would far outweigh the benefits previously mentioned.
Concerning the MNC’s justifications for FDI, my research supported my hypothesis, but for different reasons than I had expected. I discovered that a company’s transition to global competition is more incremental than I had realized. As a company’s domestic growth opportunities dwindle, they begin to seek out new markets internationally. Besides simply exporting to these markets, firms may initiate FDI-related joint ventures or licensing agreements with companies in the targeted country. As competitive pressures tighten, FDI becomes more of a tool for capturing cost advantages in labor, raw materials, transportation, and distribution. My hypothesis did not consider the most recent development in FDI, however. Contemporary business strategy suggests that in highly competitive situations, a diversified MNC is in a superior competitive position because of the ability to exploit strategic fit benefits by transferring corporate resources across national borders as dictated by low costs, expertise, or some other competitive advantage the country possesses. The aim is to achieve economies of scale at the firm level rather than the plant level (2). In many cases this entails combining support activities or cross-subsidizing weaker operations in hopes of a turnaround. In Southeast Asia, some MNCs have accomplished this by setting up research and development or employee training facilities near those who are closest to the to day-to-day operations (3). FDI has thus become the primary mechanism for taking advantage of opportunities to create a strategic fit.
Regarding the implications of FDI for Southeast Asia, my hypothesis was not generally supported by my research. While many of the implications for Southeast Asia are indeed negative, by magnitude they do not compare with the benefits the region reaps from the receipt of foreign capital. These countries not only tolerate FDI, they compete for it, as manifested by their favorable tax policies and fiscal incentives. Several Southeast Asian governments have also subsidized investment centers and have encouraged the development of support industries.
Incoming FDI is seen as a channel for new product and process technologies that increase productivity and potentially spill over to domestic companies and to related industries. Southeast Asian leaders have increasingly seen that FDI does not crowd out domestic investment but supplements it and opens up an exponential number of new niches for domestic firms to pursue. As such, Southeast Asian policy trends favor a reduction in limitations on foreign ownership and fewer protectionist restrictions on indigenous industries seen as critical to national interests.
A country’s production frontier is a combination of available land, labor, capital, technology, and entrepreneurial ability that serve as an upward limit on what the country’s economy can achieve. Foreign direct investment in Southeast Asia has brought in billions of dollars in capital and has expanded the capabilities of the nations’ human capital, thereby transferring new technology and entrepreneurial ability. It is by this mechanism that FDI has helped Southeast Asia by contributing to the region’s prolific growth rate.
One element that I did not consider in framing my hypotheses was intense pressure that is constantly placed on foreign direct investment by the inherent instability of the Southeast Asian region. Since I began my research, the region has had to deal with major currency problems, the bankruptcy of dozens of financial institutions, multiple changes in political leadership, and riots in Indonesia. All of this serves to dismantle investor confidence and increases the risk associated with FDI. Such events allowed me to continually test my hypothesis that Southeast Asia is and will continue to be a vibrant location for foreign investment. Such events also make it clear that the conclusions of my research are not final, but must be continually updated as the Southeast Asian environment evolves.
References
- Barrell, Ray and Nigel Pain.1997. “The growth of foreign direct investment in Europe,” National Institute Economic Review 160: 63-72.
- Ibid.
- Craig, Tim. 1997. “Location and implementation issues in support function FDI: The globalisation of Matsushita Electric Industrial Co., Ltd.” Asia Pacific Journal of Management, 14: 143-163.