FDI and Growth Vol-1, UN-ESCAP, by Tarun Das

PROMOTING INDUSTRIAL INVESTMENT-TECHNOLOGY TRANSFER-
GROWTH
NEXUS TOWARDS GREATER REGIONALISATION AND
COMPLEMENTATION
OF MANUFACTURING PRODUCTION AND TECHNOLOGY UPGRADING
VOLUME - I
_________________________________________________________________
DR. TARUN DAS

ECONOMIC ADVISER
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
_________________________________________________________________
1
* Prepared for the Industry and Technology Division, ESCAP, United Nations,
Bangkok as a part of their Project on Regional Dialogue on Promoting Industrial
and Technological Development and Complementarities: Challenges and
Opportunities for Co-operation in Light of Emerging Regional and Global
Developments.
August, 1997.

GROWTH
COMPLEMENTATION
VOLUME - I
_________________________________________________________________
DR. TARUN DAS

ECONOMIC ADVISER
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
2
_________________________________________________________________
* The paper expresses personal views of the author and should not be attributed to
the views of the Government of India. Author would like to express his gratitude to
the ESCAP, United Nations for providing an opportunity to conduct this study as a
part of their Project on Regional Dialogue on Promoting Industrial and
Technological Development and Complementarities: Challenges and Opportunities
for Co-operation in Light of Emerging Regional and Global Developments.
August, 1997.
CONTENTS
VOLUME - I
1 Introduction and Overview
1.1 Objectives and Scope of the Study

1.2 An Overview of the Study
1.3 Profile of Regions and Sample Countries
- South Asia and SAARC
- East and South East Asia
2 Foreign Investment-Technological Transfer-

Growth Nexus
2.1 Long term capital flows to developing countries

2.2 Foreign direct investment and global integration
2.3 Foreign direct investment - growth nexus
- The top 100 TNCs in the world
- The top 50 TNCs from developing countries
- Contribution of FDI in ASEAN economic progress
2.4 Foreign Investment - Trade nexus
- Intra-firm trade
- The impact of FDI on composition of Asian exports
2.5 FDI - Trade - Technology Nexus
2.6 Macro-economic impact of FDI in Asian economies
3 Geographical and Sectoral Distribution of FDI

- Global and Country Experiences
3
3.1 Regional distribution of FDI
- Asia and Pacific
3.2 Sectoral distribution of FDI
3.3 Foreign Portfolio Investment (FPI)
- East Asia and the Pacific
- South Asia
3.4 FDI in selected countries in Asia
(a) China
(b) India
(c) Japan
(d) Republic of Korea
(e) Taiwan, China
(f) Philippines
(g) Myanmer
(h) Indo-China (Cambodia, Lao PDR, Vietnam)
(i) USA’s direct investment in Asia
4 Different Modes of Foreign Investment

and Technology Transfer
4.1 Alternative modes of capital transfer

(a) Bond lending
(b) Financing through new instruments
(c) Foreign direct investment
(d) Foreign portfolio investment
(e) Foreign quasi-equity investments
4.2 Cross border mergers and acquisitions (M & A)
4.3 Modes of foreign portfolio investment
4.4 Modes and sources of technology transfer
4.5 Technology transfer and adaption:
East Asian experience
4.6 Linkages, spillovers and market access
by transnational companies (TNCs)
4.7 Acquisition of technologies by SMIs
5 Foreign Investment and Technology Transfer

and Advances in New Technologies
5.1 Indicators of technological capability

5.2 Pattern of industrialisation in
selected Asian economies
5.3 Industrial technology development in
5.4 New Technology and its Applications
4
(a) Micro-electronics and information technologies
(b) Biotechnologies
(c) Advanced materials technology
(d) Software industry
(e) Food processing industry
(f) Textile industry
5.5 Issues relating to new technology
5.6 International R & D collaborations
in new technologies
6 Foreign Investment and Development

in Infrasructure and Services
6.1 Foreign investment and services

6.2 Infrastructure financing in East Asia
6.3 Project finance for infrastructure
6.4 Foreign direct investment and infrastructure
7 Policies and Strategies for Promoting Foreign

Investment- Technology Transfer- Growth Nexus
7.2 Macro-economic policies

(a) Host country policies for FDI
(b) Host country policies for portfolio investment
(c) Sectoral policies and regulation
(d) Miscallaneous factors
- Fiscal incentives and investment environment
- Low wages and low production costs
- Higher rates of return
- Huge domestic market
- Labour mobility
7.2 The Export-Push Strategy and
Role of Export Processing Zones
7.3 Role of Small and Medium-Sized Industries (SMIs)
7.4 Role of Natural and Human Resources
7.5 Role Research and Development Expenditures
7.6 Role of legal and institutional set up
8 Policies and Strategies for Foreign Investment:

Selected Country Experiences from Asia
8.1 India
8.2 Bangladesh
8.3 Myanmar
8.4 Nepal
8.5 Pakistan
5
8.6 Sri Lanka
8.7 Korea, Republic of
8.8 Singapore
8.9 Indonesia
8.10 Malaysia
8.11 Philippines
8.12 Thailand
8.13 Vietnam
8.14 China
8.15 Hong Kong
8.16 Taiwan, China
8.17 Japan
9 Regional Cooperation in Promoting Foreign Investment-

Technology Transfer- Growth Nexus
9.1 Regional economic zones in Asia and Pacific

9.2 Informal sub-regional economic zones
9.3 ASEAN Experience
- Industrial Co-operation
- Improvement of the Investment Climate
- Infrastructural and Resource-Based Co-operation
- Intra-ASEAN trade
- Intra-ASEAN investments
- ASEAN regional integration in automobiles
9.4 SAARC Experience
- Intra-SAARC trade and investment
- SAARC preferential trading arrangement (SAPTA)
9.5 ESCAP experience
9.6 Intra-regional flows of FDI
- Indian joint ventures in Asia
9.7 Regional co-operation by manufacturing TNCs
- Integrated international production in automobiles
9.8 Regional cooperation in technology transfer
9.9 Multilateral agreement on investment (MAI)
Selected Bibliography
VOLUME -II
1 Executive Summary and Recommendations
A. Major Conclusions
1.1 Basic Characteristics of Asian Economies
6
1.2 FDI-Technology-Growth Nexus
1.3 Geographical and Sectoral Distribution of FDI
1.4 Different Modes of FDI and Technology Transfer
1.5 FDI-Technology Nexus and Advances
in New Technologies
1.6 Foreign Investment and Development
of Infrastructure and Services
1.7 Policies and Strategies for Promoting
FDI-Technology-Growth Nexus
1.8 Foreign Investment Policy in
Selected Asian Economies
1.9 Regionalisation, Globalisation and
Foreign Investment Complementaries
B. Recommendations
1.10 General
1.11 Policies for promoting FDI-Technology-Growth Nexus
- Host country policies for FDI
- Host country policies for portfolio investment
- Economic reforms
- Home country policies
- The export-push strategy and
role of export processing zones
- The role of small and medium sized industries
- Role of R&D expenditure
- Human resource development
- Legal and institutional set-up
- Fiscal incentives
1.13 Technology development and advances
in New Technologies
1.14 FDI and development of Infrastructure and Services
1.15 Regionalisation, Globalisation and
Foreign Investment Complementaries
- Technical cooperation
- Regional cooperation in foreign investment
- Regional cooperation in technology development
List of Tables
1.1 Basic indicators of selected Asian countries: 1995
1.2 Indicators of infrastructure development in

selected Asian countries: 1992
A Electricity generation and consumption
B Telecommunications
7
C Road transport
D Railways and water accessibility
E Forest aera and irrigation
F Fresh water resources
1.3 Economic structure of selected Asian countries in 1995

1.4 GDI, GDP Growth and ICOR in Asia: 1980-1996
1.5 Average growth rates of GDP and value added in
industry in selected Asian countries: 1965-1996
1.6 Growth rates of valued added in agriculture and
services in selected Asian countries: 1965-1996
1.7 Sectoral shares of GDP in selected Asian countries
during 1965-1996
1.8 Share and structure of manufacturing in Asian countries 1995
1.9 Gross domestic savings, gross domestic investment,
exports and current account balance: 1980-1996
1.10 External trade in selected Asian countries: 1991-1996
2.1 Aggregate net long-term capital flows to developing
countries during 1990-1996
2.2 Net private capital flows to developing countries
by country groups and countries: 1990-1996
2.3A FDI inflows by host region and countries: 1984-1995
2.3B FDI inward stock by host region and countries: 1980-1995
2.4A FDI outflows by home region and countries: 1984-1995
2.4B FDI outward stock by home region and countries: 1980-1995
2.5A Share of FDI inflows in gross fixed capital formation
by region and country in 1984-1994
2.5B Share of FDI outflows in gross fixed capital formation
2.6A Share of inward FDI stock in gross domestic product (GDP)
2.6B Share of outward FDI stock in gross domestic product (GDP)
2.7 Net foreign direct investment as a share of GNP
by region and income group in 1990-1996
2.8 FDI in Asian developing countries: 1990-1995
2.9 Sales and gross product of foreign affiliates by region
in 1982, 1990 and 1993
3.1A Gross portfolio flows to developing countries by region

during 1990-1996
3.1B Composition of portfolio equity flows to developing
countries by region: 1990-1996
3.2 Top 10 home countries for FDI flows to selected

Asian economies in different period
8
A Bangladesh, Myanmer, Cambodia, China
B Hong Kong, India, Indonesia, Japan
C Laos, Malaysia, Mongolia, Pakistan
D Philippines, Singapore, South Korea, Sri Lanka
E Taiwan, Thailand, Vietnam, New Zealand
3.3 The importance of FDI in China: 1991-1995

3.4 Percentage share of international transactions of foreign
affiliates and non-equity ventures in China in 1994
3.5A Major sources of utilised FDI in China: 1979-1994
3.5B Main destinations of utilised FDI in China: 1979-1994
3.6 Inflows of foreign investment to India: 1991-1997
3.7 Sectoral distribution of FDI in 1990 and 1997
3.8 Distribution of firms by foreign equity: 1988-1993
3.9 Geographical distribution of FDI in India:
share of home countriesin 1981-1990 and 1991-1997
3.10 Proportion of foreign collaborations in India
with packaging in 1988-1990 and 1991-1993
3.11 Trends of FDI by industry in Japan: 1986-1995
3.12 FDI by industry in Japan: 1993, 1994 and 1950-1994
3.13 FDI in Japan by key countries: 1993, 1994 and 1950-1994
3.14 Trends in FDI of Japan by sector & region: 1990-1995
3.15A Sectoral distribution of inward FDI flows to
South Korea: 1962-1995 and 1994-1995
3.15B Geographical distribution of inward ad outward
FDI of South Korea: 1962-1995 and 1994-1995
3.16 FDI inflows into Korea in terms of equity ratios

in 1962-1992 and 1993-1995
3.17 Korea’s overseas direct investment by host country
and region: 1968-1995
3.18 Sectoral distribution of inward FDI in Taiwan: 1952-1994
3.19 Geographical distribution of inward FDI of Taiwan
during 1952-1994.
3.20 Sectoral distribution of outward FDI of Taiwan: 1952-1994
3.21 Geographical distribution of outward FDI of Taiwan
during 1952-1994.
3.22 Sectoral distribution of FDI in Philippines: 1980-1992
3.23 Sources of FDI inflows in Philippines: 1980-1992
3.24 Sources of FDI stock in Philippines: 1980-1992
3.25 FDI in Myanmer by sector as of December 31, 1995
3.26 FDI in Myanmer by country of origin at the end of 1995
3.27 US FDI and related indicators in selected developing
Asian countries in 1992
3.28 Performance of US FDI in the manufacturing sector
9
6.1 Infrastructure financing raised by developing countries
by type of borrower and instrument: 1986-1995
by region and type of instrument: 1986-1995
6.3 Privatisation revenues in 1988-1995

A East Asia and the Pacific
B Latin America and the caribbean
C Middle East and North America
D South Asia
6.4 Privatisation revenues by sector: 1988-1995

6.5A Foreign exchange raised through privatisation in
developing countries: 1988-1995
6.5B Portfolio investment and foreign direct investment
in privatisation: 1988-1995
6.6 Selected Direct Investment Funds for infrastructure
6.7 Measures for the liberalisation of FDI in
infrastructure in Asian economies: 1991-1995
6.8 Outward FDI in infrastructure-related industries in Asia
6.9 Inward FDI in infrastructure-related industries in Asia
6.10 Infrastructure FDI flows relative to total investment in
infrastructure in selected countries in 1992
6.11 Infrastructure privatisation in developing countries
during 1988-1995
9.1 Intraregional FDI stock among selected economies in

South, East and South-East Asia: 1980 and 1993
ACRONYMS
ADB Asian Development Bank

ADR American Depository Receipts
AFTA ASEAN Free Trade Area
APEC Asia Pacific Economic Cooperation (presently comprises
18 countries including Australia, Brunei, Darussalam,
Canada, Indonesia, Japan, Malaysia, New Zealand,
the Philippines, the Republic of Korea, Singapore,
Thailand and the United States.
ASEAN Association of South-East Asian Nations (comprises
Brunei, Indonesia, Lao PDR, Malaysia, Philippines,
Singapore, Thailand, Myanmer, Vietnam)
BOL Build, Operate and Lease
BOLT Build, Operate, Lease and Transfer
BOO Build, Operate and Own
BOOT Build, Operate, Own and Transfer
10
BOT Build, Operate and Transfer
CIS Commonwealth of Independent States
ECB External Commercial Borrowing
EEC European Economic Community
EHTP Electronic Hardware Technology Park
EOU Export Oriented Unit
EPZ Export Processing Zone
ESCAP Economic and Social Commission for Asia and the Pacific
ESTP Electronics Software Technology Park
FCCB Foreign Currency Convertible Bond
FDI Foreign Direct Investment
FERA Foreign Exchange Regulation Act
FIs Foreign Investors
FIIs Foreign Institutional Investors
FTZ Free Trade Zone
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GDRM Global Depository Receipt Mechanism
GNP Gross National Product
GSP Generalised System of Preferences
ICOR Incremental Capital-Output Ratio
ILO International Labour Office
IMF International Monetary Fund
IPR Intellectual Property Rights
M&As Mergers and acquisitions
MFN Most Favoured Nation
MIGA Multilateral Investment Guarantee Agency
NIEs Newly Industrializing Economies
NRI Non Resident Indian
OCBs Overseas Corporate Bodies
OECD Organisation for Economic Co-operation and Development
comprises Australia, Austria, Belgium, Canada, Czech
Republic, Denmark, Finland, France, Germany, Greece,
Hungary,Iceland, Ireland, Italy, Japan, Republic of
Korea, Luxembourg, Mexico, Netherlands, New Zealand,
Norway, Poland, Portugal, Spain, Sweden, Switzerland,
Turkey, United Kingdom, United States of America.
ODM Own - Design - Manufacture

OEM Original Equipment Manufacture
OPEC Organisation of Petroleum Exporting Countries
PIO Persons of Indian origin
PPP Purchasing Power Parity
R&D Research and Development
SAARC South Asian Association for Regional Cooperation
comprises Bangladesh, Bhutan, India, Maldives, Nepal,
11
Pakistan and Sri Lanka.
SMIs Small and Medium-Sized Industries
SOEs State Owned Enterprises
STP Software Technology Park
TNCs Transnational Corporations
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNIDO United Nations Industrial Developmemt Organisation
WB World Bank
WTO World Trade Organisation
Notes on Units
Million = 1000 thousand

Billion = 1000 million
Trillion = 1000 billion
Tons = 1000 kilograms
Dollar $ = US dollars, unless otherwise specified
1 INTRODUCTION AND OVERVIEW
1.1 Objectives and Scope of the Study
The present study is a part of a larger Project on Regional Dialogue on Promoting

Industrial and Technological Development and Complementarities: Challenges and
Opportunities for Co-operation in Light of Emerging Regional and Global Developments.
The basic objective of the present study is to critically analyse various modes of overseas
direct investments (ODI) and to identify for promotion those forms which lead to
depening of industrial and technological capability, forge greater linkages with domestic
economy, and contribute to sustained growth in environment characterised by free flow
of goods and services. The study focuses the following key areas :
(a) Identification and analysis of specific forms of inter-industry and intra-industry

overseas direct investments which promote technology transfer, employment genaration,
exports and overall growth. This analysis also focuses on specific industrial activities
which countries can promote for ODI.
(b) Analysis of present trends and future directions in the changing geographical spread
and sectoral composition of ODI, particularly in response to policy changes and
technological advances in informatics and micro-electronics. Possibilities and potential
for ODI in infrastructure projects with backward linkages are also analysed.
12
(c) Identification and promotion of pre-conditions to foster the industrial investment-
technology-growth nexus. This involves indepth analysis of successful policies and
programmes which led to ODI in deepening industrial and technological base, forged
greater linkages between such investments and the domestic economy, and helped
sustain long-term growth.
(d) Suggest sub-regional industrial complementation measures to overcome the constraint

imposed by limited domestic market and how ODI can be both an effective means and as
well as an end in achieving such complementations. Technological advances, allowing
segmentation of a complete production process is analysed to see how sub-regional
cooperation can be enhanced to exploit production complementarities through ODI
participation.
As the study is concerned with the impact and future issues, the time frame of the study is
confined mainly to 1980s and 1990s. For analytical purpose, Asian economies considered
in the study have been grouped into several regions, defined as follows:
South Asia comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri
Lanka.
The Newly Industrializing Eeconomies (NIEs) comprising Hong Kong, the Republic of
Korea, Singapore, and Taiwan, China.
Developing Economies in the South-East Asia comprising Cambodia, Indonesia, Lao

PDR, Malaysia, Myanmer, the Philippines, Thailand and Vietnam.
Two other major Economies in East Asia comprising Japan and People’s Republic of
China.
1.2 An Overview of the Study
This report is divided into ten chapters including this introduction which describes
objectives and scope of the study, and provides economic profiles and the extent of
industrialisa-tion of sample countries selected for the study.
Chapter 2 provides an overview of the foreign investment - technological transfer -

growth nexus in Asian economies. It also analyses the role of foreign investment for
global and regional integration and the macro-economic impact of foreign investment.
Chapter 3 deals with global and country experiences as regards geographical and sectoral
distribution of foreign direct investment and portfolio investment. Chapter 4 makes a
critical evaluation of various modes and sources of foreign investment and technology
transfer in Asian economies. It also alalyses the linkages, spillovers and market access by
the transnational companies (TNCs).
Chapter 5 deals with pattern of industrialisation and industrial technology development in
selected Asian economies. It also discusses the role of new technology, particularly micro
13
electronics, information technology, biotechnology and new materials for promoting
foreign investment and their applications in selected industries. Chapter 6 focuses on the
inter-relation-ship between foreign investment and the development of infra-structure and
service sectors.
Chapter 7 deals with broad policies, reforms and strategies for promoting foreign
investment - technology transfer - growth nexus in the South, East and South-East Asia. It
examines particularly the role of macro-economic and sectoral policies, fiscal and other
incentives, export-push strategy and the export processing zones, small and medium
sized enterprises (SMEs), human resource development (HRD), Research and
Development (R&D) expenditure, and legal and institutional set up for promoting
industrial and technology development, and their linkages with foreign investment.
Chapter 8 describes some country experiences with respect to deregulation, liberalisation

and other reforms in the spheres of trade, industry, investment, financial and public
sectors to encourage foreign investment.
Chapter 9 reviews existing regional cooperation for promoting foreign investment -

technology transfer - growth nexus under regional groups like ASEAN, SAARC and
APEC and their efficiencies and constraints. It also discusses the role of international
organisations like ADB and ESCAP to encourage technology transfer to exploit
production complementarities through foreign investment participation.
Chapter 10 summarises the basic issues and problems for promoting industrial
investment-technology transfer-growth nexus in Asian economies and recommends a set
of measures which may be taken for greater regionalisation and complementation of
manufacturing production and upgradation of technology. The report ends with a list of
selected bibliography on the subject.
1.3 Profile of Sample Countries
Selected countries for this study covering 55 per cent of the world population and 15 per
cent of areas display a number of contrasts (see Tables 1.1 to 1.10 for economic and
social profiles of the countries). The sample includes two most populous countries of the
world viz. China and India, and also a small economy like Maldives with population less
than a million and a city state like Singapore. The sample includes the world’s second
richest country Japan with per capita GNP of $39640 in 1995 on the one hand, and some
of the poorest countries of the world - Vietnam, Nepal and Bangladesh (Table 1.1).
Levels of infrastructure development and social indicators also differ widely among the
regions. While East Asia generally have higher degree of adult literacy and life
expectation, South Asian countries except Sri Lanka, Maldives and Myanmar lagged
behind.
In recent years Asian developing economies have shown remarkable economic vigor and
dynamism by outperforming by a wide margin other developing regions and industrial
countries as a group. As regards industrial growth, performance by the developing
14
countries of Asia continued to outpace that in every other developing region and even the
industrialised countries by about 5 percentage points. The continued robust growth in
Asia is attributable to a number of factors such as widespread and sustained policy
reforms in many countries and continued surge of foreign capital flows to these countries.
The mechanism that contributed the high growth of the Asian economies in these years
can be summarised as export/investment-led growth supported by extremely low
production costs. As judged by ratios to GDP, investments and exports made a much
higher contribution to growth in Asia than in the other regions. Asian economies achieved
high economic growth by introducing capital and technology from advanced countries,
while enjoying the benefits of the huge markets that these advanced countries offer. In
other words, the Asian economies are typical examples of “catch-up” type economic
growth.
Rapid growth in intra-Asian trade has been accompanied by rising foreign direct
investment. The traditional focus of overseas investment by Asian companies in financial
and real estate markets of industrial countries has been augmented by rapid growth in
investment in manufacturing, primarily in South-east Asia. The changing pattern of
capital flows is, to some extent, a reflection of the changing cost structure in the Asian
economies as wages and other costs have risen rapidly in Japan and the NIEs. It is also
indicative of the movement towards higher value added and more technologically
intensive activities in these economies.
The process of rapid growth in output and intraregional trade and investment in Asia is
sometimes referrerd to as a “virtuous circle” of economic development. Foreign capital
inflows have combined with a favourable policy environment, industrialisation and trade
expansion to achieve a sustained acceleration in economic growth. The efficient use of
resources, increased trade and rapid growth have, in turn, stimulated an increase in the
flow of intraregional foreign investment. This process is gradually helping to internalise
Asian growth and to reduce Asia’s vulnerability to external shocks.
During the past four or five years, the “virtuous circle” has evolved rapidly primarily due
to the structural adjustment process in Japan subsequent to the sharp appreciation of the
yen following the Plaza Accord. Japan’s growth has become increasingly “domestic
demand led” and it has been sustaining rapid export growth of other Asian countries, to
some extent, offsetting the impact of rising protection. More recently, such a process has
ocurrerd in the NIEs as well, fueling further intraregional trade and investment. Rapid
structural adjustment and shifting comparative advantage from Japan to the NIEs and to
the Southeast Asian countries as wages and factor prices rise have contributed
significantly to Asia’s dynamism. South Asia, which depends more on the agriculture
sector, was by and large left out of this process. But the situation is changing, albeit
slowly, as these countries liberalise gradually and cautiously.
15
South Asia
South Asia is a region full of contrasts. On the one hand, it has vast economic potential.
During 1980s it achieved an average growth rate of 5.2 per cent a year compared with 3.9
per cent by all low-income countries. Its growth was exceeded only by that in East Asia
and Pacific. Progress in reducing fertility led to annual growth in per capital income by
nearly 3 per cent during 1980s which was regarded as a “lost decade” for many other
regions of the world. On the other hand, South Asia is characterised by widespread
poverty and low levels of living. While accounting for a fifth of the world’s population,
South Asia is also home to nearly half the world’s poor. It has lower life expentancy than
in any other region except Africa, high infant mortality rates, high rates of malnutrition
and low levels of literacy (except Maldives and Sri Lanka).
While rates of growth in the 1980s were high, they were not sustainable. Growth in South
Asia slowed in 1990’s due to poor industrial growth in 1991-1993 caused by Gulf crisis
and breakdown of the former Soviet Union. The countries in the region, however,
recovered quickly and showed improvements in the external sector with increased
exports during 1992-1996. A recent development underlining the confidence of
international investors in South Asia’s growth potential is the surge in capital flows,
particularly to India and Pakistan.
Two themes have characterised until recently the development approach of most South
Asian economies: a strong economic role for the state and relatively inward-looking
development policy. The broad lessons of development during the past decades are that
countries with more market-friently policies and outward-looking strategies do better
both in generating growth and reducing poverty. While there is general agreement in
South Asia about the need of reforms, the pace has been uneven due to mainly political
economy issues. Recent progress is most visible in reforms in taxation, industrial,
external, public and financial sectors.
Income and corporate taxes and capital gains taxes were reduced in many coutries to
encourage private investment and savings. Progress continued in India, Nepal, Pakistan,
and Sri Lanka towards moving to a full-fledged value-added tax, and Pakistan made
important progress in broadening the tax base by introducing an agricultural income and
wealth tax.
SAARC has completed more than a decade of its existence, but the process of economic
cooperation in the region has been slow. Nevertheless, SAARC has established itself as
an important regional grouping due to its large market space measured by the size of its
population and its potential purchasing power. The ongoing economic reforms and
globalisation by the SAARC economies have also made the region an attractive
destination for foreign direct investment and other capital flows.
The SAARC is rich in natural resources which are not fully utilised. Its bio-diversity is an
immense wealth, and mineral and water resources are plenty. The region is endowed with
a large reservoir of skilled and semi-skilled manpower. Despite all these advantages, the
16
region is faced with the common problems of poverty and unemployment. Economic
cooperation in the region is an effective instrument for improving the welfare of the
people.
As compared to the world and other developing countries, the contribution of the
industrial sector to GDP in South Asia is rather small. During last decade, the service
sector grew at a faster rate than the industrial sector in South Asia. Within the service
sector, major contribution has come from the financial and trade sectors, and contribution
of the transport sector has improved rapidly in recent years.
The share of South Asia in world trade is negligible being less than one per cent. The
intra-regional trade of South Asian countries is also insignificant, being 3.5 per cent of
total trade, compared to the intra-regional trade of all developing countries at around 40
percent of their total trade. This implies that there is significant potential for increasing
intra-regional trade among the SAARC economies. About 35 per cent of South Asia’s
exports is destined towards other developing countries, while dependence of South Asia
on other developing countries for imports is to the extent of 46 percent. The composition
of South Asian trade reveals concentration of exports in labour-intensive products like
textiles, clothing, jems and jewellery, while imports consist of mostly crude oil,
petroleum and capital goods.
Most of the exports in intra-regional trade originates from India, followed by Pakistan,
while Bangladesh and Sri Lanka are major impoerters in intra-regional market. The
combined share of imports of Bangladesh and Sri Lanka was 70 percent in total intra-
regional trade, while the share of India’s exports in intra-South Asian trade was 60 per
cent in 1993.
The challenge facing South Asia in the 1990s is how to continue the high economic
growth of the 1980s with rapid reductions in poverty and improvement in social
indicators. A sustainable growth path for the 1990s must be based on continued economic
reforms, lower fiscal deficits, dynamic capital market, sustainable balance-of-payments,
and improvement in environment.
East Asia and South-East Asia
East Asia has a remarkable record of high and sustained economic growth and grew faster
than all other regions of the world during 1965-1996. They all relied heavily on export-
push strategy and were generally open to foreign investment and technology although
they adopted different strategies regarding industrial promotion and foreign technology.
Some depended on FDI by TNCs, others on licensing and import of capital goods. All the
countries were successful in expanding industrial base and exports, but they adopted
different industrial structures, export specialisation and technological capabilities.
China, the world’s largest developing economy, remained the fastest growing economy in
the region and the world with average growth rate of 10.4 per cent during 1980’s and
further acceleration during 1991-1996. The Chinese government continued to implement
17
fiscal, monetary and basic market reforms and transnational corporations continued to
commit record amounts of investment. As the economy was over-heated, it undertook
measures since 1993 to slow the pace of growth and to ease inflationary pressures.
East Asian countries provide very good examples of high growth rates alongwith
effective poverty alleviation. These countries are economically more egalitarian in terms
of the distribution of income, wealth, and assets, such as land. In 1960s the successful
economies of East and South East Asia were already ahead of other developing countries
with respect to human capital formation and other social development indicators.
A major study namely “The East Asian Miracle : Economic Growth and Public Policy’’
made by the World Bank (1994) concluded that “exports push” and a combination of
fundamentally sound development policy and selective interventions had been crucial to
East Asia’s success. Developing countries which want to follow the footsteps of East Asia
must limit policy interventions and focus on fundamentals. The study further concluded
that “Of the many interventions tried in East Asia, those associated with export push hold
the most promise for other developing countries”. The fundamentals focused by the East
Asian economies included the following :
* Managing monetary and fiscal policy to ensure low inflation and competitive
exchange rate.
* Concentrating public investment on education in primary and secondary levels of
schooling,
* Fostering effective and secure financial systems to encourage savings and
investment.
* Limiting protection so that domestic prices are close to international prices.
* Supporting agriculture by assisting the adoption of green revolution, technologies,
investment in rural infrastructure and limiting taxation on agricultural goods.
In both the NIEs and the fast-growing economies of Southeast Asia, exports had grown
fast, and export intensity had a strong positive correlation with income growth. The share
of imports in total domestic demand was also highly correlated with the growth rate.
Openness of trade and emphasis on competitiveness of the manufacturing sector were
important factors contributing growth. Economic policies did not penalise the traded
goods sector, and market forces were allowed to determine the real exchange rate. This
facilitated an efficient allocation of resources.
Initially endowed with abundant labour resources, they expanded their exports of low
value-added and labor-intensive manufactured goods. Subsequently, as labor costs
increased, they shifted the structure of manufacturing production and exports towards
more sophisticated and higher valued-added products. A comparatively “level playing
field” allowed both the traded and non-traded goods sectors to grow vigorously,
complementing and supplementing each other in investment, production and trade.
Economic growth in Asia correlates strongly not only with exports growth but also with
high savings and investment rates. A trinity of openness to trade, high investment and
18
high savings rates coexist in the fast-growing economies of Asia, and it is important to
stress the presence of all these three factors to achieve higher growth.
Trade has been pivotal to the economic success of the NIEs and the fast-growing
economies of Southeast Asia. The benefits of a more liberal trading environment reached
beyond the narrow efficiency gains highlighted by the theory of comparative advantage.
Other benefits include more competitive goods and factor markets,increased investment
including foreign investment, and the associated transfer of knowledge and technology.
The prospect for an improved world trading environment has been enhanced by the
conclusion of the Urguary Round of tariff negotiations under the aegis of the General
Agreement on Tariffs and Trade (GATT) and the subsequent formation of the World
Trade Organisation (WTO). But there are still legitimate concerns in a number of areas.
There is a view that the gradual nature of some of the reforms undermines their
credibility; the Uruguary Round agreement did not adequately cover investment; and
much remains to be done to reduce barriers to trade in both services and agriculture.
Some countries also fear that new obstacles to trade in the name of “social
conditionalities” and “environmental protection” will take the place of old ones. There is
also evidence that some industralised countries have bound themselves to maximum
tariffs on agricultural commodities that exceed the existing rates. “Dirty tariffication”, as
this practice is called, opens the way to reducing the potential gains from the WTO
agreement.
While overall the region performed impressively, there remain serious obstacles to
sustained development for many countries of the region. Despite recent gains, the
countries of the region have an average income of about $600 a year, which is low among
developing countries. Serious environmental damange associated with rapid urbanisation,
inadequate regulation and planning, and incorrect pricing of resources, continues to
impose major costs.
Another serious problem is the historical inadequacy of infrastructure investment relative

to rapidly growing demand. As the region’s infrastructure needs are large, the private
sector themselves and through foreign direct investment (FDI) will have to play an
increasingly critical role in developing and modernising East Asia’s infrastructure base.
In turn, governments of the region will need to estblish the appropriate regulatory and
legal frameworks to attract and secure such investment.
The need for expanding competent management across most areas of development is
emerging as a major issue in East Asia. Whether in pollution monitoring and control,
design and implementation of monetary and fiscal policies, or traffic-management
planning and deregulation, effective institutions are essential.
2 FOREIGN INVESTMENT - TECHNOLOGICAL TRANSFER - GROWTH

NEXUS
19
2.1 Long Term Capital Flows to Developing Countries
During 1990s there was a significant change in the composition of external financal flows
to the developing countries with an increasing share of private capital from 44 percent in
1990 to 86 per cent in 1996 and a corresponding declining share of official development
finance from 56 percent to only 14 percent over the period (Table 2,1). Within private
capital, flows of foreign investment comprising foreign direct investment (FDI) and
portfolio investment increased five-and-half times surpassing other types of capital flows
and constituting 54 percent of total capital flows to developing countries in 1996. In fact,
FDI was often the only source of international private capital to most least developed
countries which failed to receive the investment-grade ratings required for borrowing
from abroad or tapping international capital markets.
The private capital flows are likely to be more beneficial since they are generally
accompanied by technology transfer and market access in the case of FDI; diversified
investor base in the case of bonds; and a reduction in the domestic cost of capital in the
case of equity portfolio flows. Asian region received the major share (50 percent) of
private finance in 1996 among the developing economies (Table 2.2).
An analysis of trends of private capital flows in 1990s by the World Bank (1997) draws
the following key conclusions :
(a) Countries with sound macro-economic management and well organised money and
capital markets received large private capital inflows.
(b) Private capital flows to developing countries continued their strong growth and
reached $244 billion in 1996, a fivefold rise since 1990. The two largest low-income
countries, China and India, experienced substantial inflows, and virtually the rest had
gone to middle-income countries.
(c) Capital market finance for infrastructure projects is an important component of

international flows.
(d) Foreign direct investment continued to grow and reached a broader range of countries.
Like trade, it is an important channel of global integration and technology transfer. Many
developing countries liberalilsed their trade and investment regimes by adopting most-
favoured nation treatment, and level playing field for the foreign investors.
(e) All categories of private flows (i.e.bonds, portfolio investment, foreign direct
investment, commercial bank lending, and export credits) increased significantly during
1990-1996.
Unlike other capital flows, FDI is a “package” which contains not only capital but also
management, technology and skill. Experience in developing countries suggests that
“unbundling” the FDI package by borrowing capital from the international banks,
purchasing technology through licenses and negotiating management agreements, is less
20
efficient in terms of productivity than the FDI package which brings capital, technology
and management together. Mining operations are a notable large scale example. In
Zambia, for example, copper mines became bankrupt as a result of nationalisation which
involved replacement of equity by debt capital and use of management contracts instead
of direct transnational corporation management (Hughes 1995).
2.2 Foreign Direct Investment and Global Integration
Foreign direct investment (FDI) provides one of the most important economic links
between developing and industrial countries and among developing countries. FDI like
trade, provides an important channel for global integration and technology transfer. It also
plays an important role in privatisation and in the provision of infrastructure. There is
growing evidence of economic spillovers from FDI, such as transfers of managerial and
technological expertise to the host country. FDI not only is linked to growth in trade, it
also can promote an export orientation in host countries.
Global foreign-direct-investment (FDI) inflows increased by 40 percent in 1995 to reach

an unprecedented level of $315 billion (Table-2.3A). FDI inflows to developing countries
also reached a record level of $100 billion in 1995, although their share in globl FDI
declined from 39 percent in 1994 to 32 percent in 1995 (UN, UNCTAD 1996). As per the
World Bank estimate, net FDI flows to developing countries reached more than $110
billion in 1996 (World Bank 1997). In 1991-1995, FDI growth (12.1 percent) was
substantially higher than that of exports of goods and non-factor services (3.8 per cent),
world output (4.3 per cent) and gross domestic capital formation (4 per cent).
The average real GDP growth in the Group of Seven countries (G-7), the principal
sources of FDI, increased from 1.4 per cent in 1991-93 to to 2.9 per cent in 1994 and 2.3
per cent in 1995. Inflows of FDI are influenced not only by the growth rates of the home
countries but also by a number of factors viz. to exploit natural resource available in the
host country, to get access to the host country’s protected market, to gain access to
advanced foreign technology or to maintain international competitiveness in the face of
exchange rate fluctuations and rising cost of labour and other non-tradeables in the home
country. These different types of investments are defined as natural-resource seeking,
market-seeking, technology seeking, cost-reducing, risk avoiding and defensive
competitive FDI.
Host countries can also be classified according to four stages of development viz. factor-
driven (attracting FDI in processing, textiles and minerals exploitation), investment
driven (heavy and chemical industries, power, construction, transport and
communications), innovation-driven (electronics, information technology, bio-
technology) and wealth-driven (attracting FDI to meet domestic demand and also
encouraging outward FDI flows).
Natural resource-seeking FDI, which consists of investment in areas such as mining,

processing, textiles, oil and gas extraction is the earliest type of foreign investment.
Market-seeking FDI changed significantly in recent years. Until 1980s it was largely
21
confined to the manufacturing sector motivated by “tariff jumping” to take advantage of
the regulated and sheltered market, but due to the recent trends of greater openness of the
economy and privatisation of infrastructure in developing countries, sectors such as
power, telecommunications and financial services are attracting increasing amounts of
foreign investment. Export-oriented FDI is of relatively recent origin, and is guided by
the “product life cycle” theory of FDI, which postulates that as real wages increase due to
economic growth in a country, labour-intensive industries will relocate to countries at a
lower level of economic development.
In response to technological and competitive pressures, companies from developed and

developing economies, are becoming more active globally and seek to exploit new
markets or take advantage of factors of production to build international production
networks. Mergers and acquisitions (M&As) are their favourite route to production
abroad. This is helped by the acceptance of privatisation with foreign-investor
participation, particularly in developing countries.
Regional groups (European Union, NAFTA, APEC, ASEAN and SAARC) also facilitate
regionally integrated production networks. Geographical distribution of FDI also favours
neighbouring and ethinically related countries. As regards sectoral fistribution, FDI tends
to concentrate in industries using mature or standardised technology and management
skills.
The recent boom in flows has expanded the world’s total FDI stock, valued at $2.7
trillion in 1995 (Table-2.3B ), held by some 39,000 parent firms and their 270,000
affiliates abroad. About 90% of parent firms in the world are based in developed
countries, while two-fifths of foreign affiliates are located in developing countries. The
global sales of foreign affiliates reached $6.0 trillion in 1993 and continued to exceed the
value of goods and non-factor services delivered through exports ($4.7 trillion) - of which
about 25% are intra-firm exports. Sales by foreign affiliates in developing countries were
$1.3 trillion equivalent to 130% of imports from these countries. In 1993, $1 of FDI stock
produced $3 in goods and services abroad.
2.3 Foreign Direct Investment - Growth Nexus
Foreign direct investment has brought substantial gains to recipient economies,

contributing to physical capital formation, human capital development, transfer of
technology and know-how (managerial skills), and expansion of markets and foreign
trade. Partly because of these benefits and partly because fast-growing countries attract a
lot of foreign investment, there is a positive correlation between FDI and growth (World
Bank 1997a).
FDI promotes technological changes in developing countries in a number of ways.It has a

direct impact through its contribution to higher factor productivity, changes in product
and export composition, research and development practices, and employtment and
training. It has an indirect impact through collaboration with local R&D institutions,
22
technology transfer to local downstream and upstream products, and enhancement of
efficiency through competition with local producers (World Bank 1997a).
In 1980-1994, the ratio of global inward FDI stock to world GDP and the ratio of FDI
inflows to gross domestic investment doubled from 4.6% to 9.4% and from 2% to 3.9%,
respectively. The (Tables 2.5A to 2.6B) gross product of foreign affiliates accounted for
6 per cent of world GDP in 1991, compared with 2 percent in 1982. The share was
considerably higher for Indonesia and Malaysia at 16 per cent and 11 per cent
respectively in 1991.
The ratio of global FDI outward stock to world GDP and the ratio of FDI outflows to
gross domestic capital formation in developed countries also doubled in 1980-1994, from
4.9% to 9.7% and from 2.1% to 4%, respectively (Tables 2.5A to 2.6B). The share of
foreign sales of Japanese TNCs in their total sales in manufacturing increased from 2.9%
in 1980 to 8.6% in 1994.
The top 100 TNCs in the World
As reported in the World Investment Report 1996 (United Nations), the world’s 100
largest transnational companies (TNCs), ranked in terms of total assets, accounting for
just 0.3 percent of the TNC universe had $1.4 trillion worth of assets abroad and
accounted for a third of global FDI stock and a quarter of the estimated $6 trillion global
sales by all TNCs in 1995. They employed some 12 million people or a sixth of 73
million by all TNCs, and their affiliates employed another 5 million- also a sixth of all
workers employed by all foreign affiliates. The share of top 100 TNCS and their affiliates
remained unchanged at one sixth of global employment throughout 1990s despite
significant corporate restructuring. On contrast, labour productivity (sales per employee)
increased by 30% in 1990-1995.
Among the top 100 TNCs in the world, United States TNCs with 32 entries, constituted
the largest group in 1994. These firms are involved in a wide range of industries,
including oil and gas, chemicals, pharmaceuticals, metals, electric and electronics
equipment, motor vehicles, food and beverages and diversified services. European TNCs
in the list of the top 100 are prominent in research-and-development intensive industries,
such as chemicals and pharmaceuticals where industry consolidation has triggered a wave
of Mergers and Acquisitions (M&As).
Japanese TNCs constituted the fastest growing group among the top 100 TNCs, doubling
the number from 11 in 1990 to 19 in 1994. Japanese TNCs in electronics were amongst
the most important new entrants, expanding through large acquisitions in the United
States and new production facilities in East and South-East Asia, having the largest value
of foreign sales among the top 100 TNCs from other countries.
The top 50 TNCs from Developing Countries
23
The 50 biggest TNCs based in developing countries, ranked in terms of foreign assets,
accounted for about 10% of the combined outward FDI stock of their countries of origin.
These firms’ ratio of foreign to total sales is high (30%), compared with the ratio of
foreign to total assets (9%). In 1994, more than half of the top TNCs from developing
countries were based in Asia; the rest were based in Latin America. In 1994, Daewoo
(Republic of Korea) ranked first among the 50 largest TNCs from developing countries
on the basis of ratio of foreign total assets.
Contribution of FDI in ASEAN Economic Progress
Foreign direct investment (FDI) inflows into ASEAN, have made important
contributions to the economic development of the region. In fact the ASEAN experience
shows that FDI can promote both industrial growth and export capabilities of the host
countries through the creation of intra-regional and extra-regional linkages. During the
early sixities to the mid-eighties, investment into ASEAN countries was motivated first
by the need to secure access to petroleum and other raw materials and later by their lower
wages and lower cost locations for labour-intensive production. The import-substitution
type of industria-lisation pursued by the ASEAN countries also led the US, Europe, and
later, Japan TNCs to locate some of production centres in ASEAN countries to serve their
local markets.
The eighties saw a rapid increase in FDI flows into the East and Southeast Asian region,
particularly into the rapidly industrialising economies of Korea, Taiwan, Singapore and
Hong Kong. The single most important event which led to a sudden surge of FDI into
ASEAN was the appreciation of the Japanese yen and Asian NIEs’ currencies in 1985-86.
This, combined with rising labour costs, led many Japanese, Korean and Taiwanese
export manufacturers to seek cheaper locations in the ASEAN developing economies in
order to maintain their export competitiveness. Low transportation costs, reliable
communications network and the lower labour costs in Southeast Asia made it an
attractive location for these firms, even though their final markets were located in North
America and Europe. The investment boom has promoted economic growth in Asian
developing countries by contributing to physical capital formation and human resource
development, particularly in ASEAN, and more recently, in China.
Japanese overseas direct investment has aimed at exploiting the comparative advantage in
the region: investment in the Asian NIEs, shifted from labour-intensive industries
towards technology and service industries. In South Korea and Taiwan, over 80 per cent
of such investments were in manufacturing, mainly in chemicals, textiles, electronics and
electrical products, while in Hong Kong and Singapore, the investments have been
directed towards finance and commerce. However, even in the ASEAN-4 and China
investments shifted in line with industrial growth in these countries (Chia, 1994). For
example, the share of textiles in total Japanese FDI in ASEAN declined from 20.4% in
1985 to 11.8% in 1990; meanwhile, the share of electrical machinery rose from 4.9% in
1985 to 20.6% in 1990 (Urata, 1993).
24
The pattern of investment and production in ASEAN had thus followed the “flying
geese” pattern of evolving comparative advantage. There was a noticeable increase in
FDI in manufacturing, hotels, commerce and other services. While there were substantial
differences between the various ASEAN countries, electrical and chemical manufacturers
attracted the most FDI for exports either back to the Japanese markets or to the US and
Europe. Automobiles and automobile parts also attracted increased FDI partly due to
increased demand for automobiles within the rapidly growing ASEAN countries.
Production sharing refers to the practice of carrying out different stages of manufacturing
a product in several countries (Drucker 1992). Such production sharing became quite
common in industries involving high technology and sophisticated products. The
technical development and designing may be done in one country, the various
components may be manufactured in other countries, assembling may be done in some
country(ies) and the product may be marketed globally. For example, the parts and
components of a motor car finally assembled in the US or an European country are
obtained from a large number of suppliers in different countries. In short, what is
marketed as an American car or German car is not purely American or German but really
transnational. Most of the parts and components of the IBM personal computer sold in
the US are manufactured abroad. Nearly three-fourths of the total manufacturing costs of
the IBM PC were accounted for by parts and components manufactured overseas. US-
owned overseas plants supplied more than one-third of these foreign parts and
components. Drucker points out that the only thing really made in Japan of an electronic
calculator carrying the label ‘Made in Japan’ is the label.
FDI had not merely effected once-and-for-all change in industrial activities but also
ongoing upgrading resulting in the increasing value-added content of manufactures. This
in turn has promoted the export competitiveness of these countries by bringing in new
technologies. The success of the ASEAN countries in continuing to attract FDI and
multinationals is due largely to their economic and financial liberalisation measures.
Fiscal incentives include exemptions from import duties on intermediate goods used in
export production, accelerated depreciation allowance, and tax holidays. In addition,
export processing zones and industrial estates offer appropriate infrastructural provisions.
The creation of AFTA is intended to provide a further incentive in terms of a large single
market to foreign investors (discussed in detail in chapter-9).
FDI also helped to promote regional integration through the setting up of multiplant
production in different countries of the region. Technological advances lowered
transportation costs and improved telecommunications networks which markes location
of production more sensitive to cost differentials such as lower wages. ASEAN countries
benefited from these developments particularly in attracting foreign automobile
manufacturers through the Brand-to-Brand Complementation scheme, which provides for
a diverse production base (discussed in detail in chapter-9).
2.4 Foreign Investment - Trade Nexus
25
Trade and foreign investment go hand in hand. Even very large markets such as that of
the United States and the European Union are not large enough to enable firms to take
advantage of economies of scale, product differentiation and competitiveness. Foreign
investment has grown fastest among the countries which participated fully in the
multilateral trade negotiations.
In 1950s, foreign investment followed suppliers’ credits as the first commercial capital
flow to developing countries mainly into highly protected manufacturing industries and
associated services. Despite export performance carrorts (such as tax holidays) and sticks
(such as mandatory export quotas), the transationals could not export out of inward
oriented countries.
In the 1960s foreign investment for labour intensive exports began in a few outward
oriented developing countries. With the expansion of trade and associated fall in freight
and other transaction costs, the transnationals focused on breaking down production
processes according to labour, skill, technology and capital to take advantage of
differences in resource endowments. Hong Kong, Taiwan and Singapore were able to
take advantage of the inflows of foreign investment. In the 1970s more developing
countries followed this trend. Mauritius was among the most successful. In the 1980s
globalisation widened, with Thailand, Malaysia, Indonesia and China joining the stream.
The importance of FDI in generating exports varies from country to country. In Taiwan
and Hong Kong transnationals played a significant role at the margin, but the bulk of
exports came from local firms. Hong Kong was initially an outward oriented entrepot for
exporting manufactures from and importing raw materials to China. In the 1950s many
mainland Chinese manufacturers emigrated to Hong Kong and Taiwan, and began to
manufacture for exports. Singapore, in contrast, was an inward oriented entrepot,
importing manufactaures for its hinterland and exporting raw materials to the world.
With its separation from the Malaysian Federation in 1965 leading to disruption in raw
material supplies for processing and transhipment, and very high unemployment,
Singapore welcomed transnationals as the only way to start exporting quickly. By 1970
unemployment was wiped out and Singapore started recruiting immigrants for its export
industries. More than 75 per cent of exports of manufactures still come from wholly
owned transnationals. Foreign investment is also important but less dominant in tourism
and financial service exports. The Republic of Korea, in contrast, had almost no foreign
investment in its exports until it began to export motor vehicles. Local entrepreneurs
developed labour-intensive exports in Thailand and Indonesia.
Hong Kong, Singapore, Taiwan and Republic of Korea are moving rapidly up the skill
and productivity escalator. The phasing out of the Multifibre Arrangement as a result of
the Uruguay Round negotiations over the next decade will accelerate this movement.
Thailand, Malaysia and Indonesia are following the path towards rising skill and
remuneration, although Indonesia still has a large reserve of low productivity and low
cost labour. India’s ample resources of low cost and skilled labour could make it a major
export platform for labour intensive goods for the world.
26
The rapid build up of exports from China began in the late 1970s. Small entrepreneurs
from Macau and Hong Kong, being squeezed by rising wages, moved into the Pearl river
delta in search of low cost supplies to meet their export markets. They took over factories
and suplied second hand machines appropriate for low skilled labour. Productivity was
raised by introducing commercial hiring and firing, piece work, shift work and quality
controls. The enterprises were profitable, the workers learned skills and earned steadily
rising incomes. After 1979 Taiwan and other East and Southeast Asian entrepreneurs
joined those from Hong Kong, with many going to Fujien province just across the straits
from Taiwan. At least seven million workers were employed in Hong Kong and Taiwan
informally owned enterprises, which began to produce for the domestic market. Some
Chinese cadres followed the export lead in township, village and co-operative enterprises
which employ four million workers in exports, making a total of 11 million export
workers.
Investment in export production spread elsewhere within the region, driven by rising
wages in the rapidly growing countries. High productivity management and marketing
expertise found profitable export sites. Singapore firms moved into Malaysia, and the
Singapore Economic Development Board is developing satellite export zones in
Indonesia and China. Hong Kong, Taiwan and Korean investment spread throughout the
region, ranging from Thailand to the small islands of the Pacific. Indian entrepreneurs
also operate in the region. Mauritius exports were developed by Hong Kong, Taiwan,
Indian and Pakistan entrepreneurs.
Intra-Firm Trade
Intra-firm trade across national boundaries is an essential feature of all international

production through FDI and has reached considerable proportions relative to countries’
trade. The share of intra-firm exports by parent firms and affiliates of foreign firms
located in the country in total exports of the country ranges from 18% in Swedan to 24%
in Japan. The corresponding share of intra-firm imports in total country imports ranges
from 14% in Japan to 43% in the United States. The geographical extension of a firm
through FDI involves flows of intermediate goods and services from one or more
members of a corporate system to others. Within the traditional structures of
manufacturing TNCs generating FDI-trade linkages, intra-firm sales tend to comprise
mainly flows of equipment and services from parent firms to their affiliates. If foreign
affiliates are located downstream, intra-firm trade consists mainly of parent firms’ exports
to affiliates; if they are upstream suppliers, they generate intra-firm imports for parent
companies.
Data on trade by United States parent firms and their affiliates abroad illustrate the high
and growing importance of intra-firm trade for TNCs. During 1983-1993, the share of
intra-firm exports in total exports of United States parent firms rose from 34 per cent to
44 per cent; and the share of intra-firm imports in total imports rose from 38 percent to
almost one half. At the same time, the shares of intra-firm exports in total exports, and
that of intra-firm imports from parent firms in total imports from the United States, of
United States affiliates rose from 55 per cent to 64 per cent and 83 per cent to 86 per cent,
27
respectively. Data for TNCs based in Japan confirm the importance of intra-firm trade in
many manufacturing industries, especially those characterised by high research-and-
development intensities and firm-level economies of scale.
Data on the patterns of intra-firm trade show that the share of affiliate-to-affiliate exports
in total intra-firm trade within the same corporate systems have increased in importance
from 30 percent in 1977 to 44 percent in 1993. Trade with other foreign affiliates was
particularly striking for developed country affiliates (accounting for half of total intra-
firm exports in 1993), reflecting greater integration within the parts of TNC systems. It
was also noticeable for developing-country affiliates, although with geographical
variations.
The Impact of FDI on Composition of Asian Exports
Manufacturing exporters in Asia today export a completely different range of products

than they did 30 years ago. Initially, East Asian exporters concentrated on primary
products, which accounted for more than 90 per cent of exports in 9 of 15 Asian
economies for which data are available for 1970. Labour-intensive goods, specially
textiles and clothing, accounted for 25 percent or more of exports in only five economies
(Bangladesh, Hong Kong, India, Korea and Pakistan). Capital-and technology-intensive
products (including electronics and machinery) were uncommon and accounted for more
than 10 per cent of exports in only Hong Kong, India, Korea and Singapore.
By the 1990s the composition of exports changed dramatically. Primary products

accounted for more than 70 per cent of exports in only 3 of the 16 Asian countries.
Several countries, including Bangladesh, Fiji, Indonesia, Pakistan, and Sri Lanka had
shifted their export base toward labour-intensive products. In the most advanced Asian
countries, exports moved towards skill-intensive and technology-intensive products,
including more sophisticated electronics. In Malaysia and Singapore, for example,
capital-and technology-intensive products accounted for more than 50 per cent of exports
(although labour-intensive assembly operations remained important in these high-tech
sectors). China, India and Philippines are moving in that direction, with capital-and
technology-intensive products accounting for 20 to 25 percent of exports by the 1990s.
Two manufactured product sectors - textiles and electronics, have dominated Asia’s
exports in recent decades. South Asia, of course, has been exporting textiles to the world
for centuries. In fact, textile exports have their origins in Japan. In the 19th century
Japan exported raw and spun silk, and then moved into cotton textiles. In the early years
of the 20th century Japanese entrepreneurs helped to organise the textile industry in
Shanghai. Following the 1949 Chinese revolution, much of Shanaghai’s textile industry
moved to Hong Kong, and Taiwan, China. In the 1960s, direct foreign investment from
Japan helped the Taiwan’s textile industry. Since the 1970s the textile industry, mainly
the ready-made garments moved progressively to East Asia, to Southeast Asia, and in
more recent years to China and Viet Nam. The search for cheaper labour drove these
movements initially, but they received a substantial boost as a device to overcome quota
restrictions imposed under the Multi-Fibre Arrangement.
28
More recently, an export common to the fastest growing Asian countries has been
electronics products. Electrical machinery accounted for more than 15 percent of total
exports in Hong Kong, Philippines and Thailand, and more than 20 percent of total
exports in Korea, Malaysia, and Singapore between 1990 and 1995. Electronics exports
also grew rapidly in the PRC and Indonesia. In the Philippines, electronics exports
expanded from near zero in the late 1980s to 40 percent of all exports in 1995.
In the late 1950s, the US semiconductor and electronics firms looking for low-wage
locations for product assembly established themselves in Hong Kong. This initial success
encouraged other Asian economies to copy Hong Kong’s approach. Korea, Malaysia,
Singapore, and Taipei, China all tried to establish more open trading regimes in order to
attract electronics firms. In 1971, 17 of the world’s 21 offshore electronics operations
were located in East and Southeast Asia, and in 1974 the figure increased to 51 of 53
firms.
2.5 FDI - Trade - Technology Nexus
FDI has made significant contribution to economic growth in developing countries by

promoting exports and providing access to export markets. The export propensities
(measured by the ratio of exports to output) of U.S. foreign affiliates nearly tripled in the
past two decades. This ratio more than doubled and reached 39 percent in Latin America,
while the ratio remained high in Asia, ranging from 30 percent in the Republic of Korea
to more than 80 percent in Malaysia.
The export propensities of Japanese affiliates also have been increasing, most notably in
East Asia, where their exports accounted for 34 percent of total sales in 1993. Japanese
affiliates in China exported 53 percent of their sales in 1992, up from less than 10
percent in 1986, directing 43 percent of their sales to home markets in Japan.
In 1977 foreign affiliates as a whole in developed countries exported about a third of

output and the developing countries exported 18 percent of their output, while Asian
affiliates were exporting 57 per cent of their output, led by those in Hong Kong,
Singapore, Republic of Korea and Taiwan, China, which as a group, exported 81 per cent
of their production.
Export propensities maintained an upward trend since 1977. In Asia, some countries
that were not part of the earlier export boom began to move towards higher exports, with
United States affiliates in the Philippines and Thailand approaching the export ratios of
the four newly industrialising economies in Asia and Malaysia. In contrast, affiliates in
the four NIEs in Asia shifted their focus to local markets leading to a large decline in
export propensity. It is estimated that foreign affiliates in Malaysia accounted for 46
percent of exports and 32 percent of employment in all industries, and 60 percent of
exports and 49 percent of employment in manufacturing in the late 1980s. In China
foreign affiliates’ share in total exports increased from 6 percent in 1989 to 28 percent in
1993.
29
Export propensities of the U.S. affiliates in Asia were high in selected industries, notably
electronics in which U.S. TNCs established affiliates in Asia as part of their integrated
networks of production and trade. Developing countries were able to participate in global
production and distribution systems because of their comparative advantage in labour-
intensive operations. For example, Malaysia was able to build up an electronics sector in
the early 1970s, because US manufacturers moved the labour-intensive parts of their
production process there. Malaysia could not design or produce computer chips, but it
was able to assemble and test the operations that are labour-intensive. When Intel
invested in Malaysia in 1972, the country was quickly brought into a world-class
production system.
Rapid growth in manufacturing exports requires close links with multinational firms that
provide inputs, technology, capital goods and export markets. From an early stage, East
and Southeast Asian firms brought most of their machinery and equipments from abroad.
For example, in 1970, capital goods imports accounted for 50 percent of total investment
in East and Southeast Asia, compared to 17 percent in South Asia and 35 per cent in Latin
America and sub-Saharan Africa. Imported capital goods were a primary channel through
which Asian countries gained access to leading technologies.
Although several East Asian countries went through a phase of import substitution for
consumer goods, they did not attempt to provide protection for domestic producers of
capital goods. Even today, Korea - which produces more capital-intensive exports than
any other Asian country - exports chemicals, ships, and automobiles, not machinery.
Between 1991 and 1994, imported capital goods accounted for 73 percent of all
equipment investment in Korea. This indicates the country’s continued reliance on
imported foreign technology.
FDI provided an important link to global markets for Hong Kong and Singapore, but
played a more limited role in Korea and Taiwain, China. They preferred to import
technology under licensing agreements and original equipment manufacturing
arrangements. Asian exporters started to produce goods under the brand names of US
and Japanese firms. The successful Asian firms learned quickly and developed the
acumen to manufacture a variety of designs. Some firms gained specialised knowledge
of particular markets, while others acquired skills for producing “knocks-off” copies of
samples, or higher quality niche products. These activities allowed exporting firms to
enhance their skills, adapt new technologies, and expand their production.
2.6 Macro-economic Impact of FDI in Asian Economies
Several studies have been made to estimate the emperical relationship between FDI and
savings and investment in the Asian developing countries. On the basis of time series data
from four countries (Bangladesh, Republic of Korea, Nepal and Thailand) in 1960-1980,
Fry (1984) found that foreign capital had a negative effect on domestic saving, implying
that foreign capital tended to be a substitute for domestic saving.
30
In another study coverinmg 16 developing countries for 1966-1988, Fry(1992) concluded
that (a) FDI neither increases domestic investment nor provides additional balance of
payments financing implying that FDI is used largely as a substitute for other types of
capital flows; (b) an increase in FDI flows reduces national savings; (c) FDI does not
have a significantly different effect from that of domestic financial resources on growth;
(d) FDI exerts both direct aand indirect effects on the current account, the latter apperas
to be a substantial negative effect.
A study by Gupta and Islam (1983) on the basis of cross-section data from 18 Asian
countries found that while foreign private capital had a favourable impact on the Asian
saving rate, official aid had a highly negative or a substitutive effect. When a saving
function was estimated with total financial flows (e.g., private and official flows) as the
explanatory variable, no substitutive effect was found.
Using similar methodology and pooled data from 13 Asian developing countries for
1968-1982, Go (1985) examined the inter-relationship between foreign capital and
domestic investment. It was found that foreign financial flows tended to augment
domestic investment, and that a 1 per cent increase in foreign capital inflows increases
the investment rate by two-tenths of 1 percent.
Regarding the relationship between FDI and growth, economists have also expressed
doubts about the direction of causal relationship. Singh (1988) and Hein (1992) found
insignificant relationship between FDI and growth and suggested that causality runs in
the opposite direction i.e. from growth to FDI flows. The study of Chen et al (1995)
analysing the FDI flows and their impact on the growth in the chinese economy in the
post-1978 period finds that the ralationship between FDI and growth is much weaker than
that between domestic savings and growth.
FDI activity seems to have increased industry-concentration as reported by Dunning

(1993), but the correlation between global industry concentration and participation by
MNCs is significantly different from unity. However, Graham (1996) has argued that the
correlation between the degree of industry concentration and the degree of monopoly
power or competion may be spurious because of various economic policies.
However, emperical studies generally support the view that FDI promotes economic
growth in host developing countries by stimulating domestic investment. But the macro-
economic impact of FDI varies by country and region, depending on their policy regime
and the extent of trade and investment liberalisation. Generally, benefits of FDI tend to be
greater where policy distortions are fewer.
Study by Lee, Rana and Iwasaki (1986) draws the conclusion that foreign capital has
contributed favourably to investment efficiency in the Asian developing countries.
Dowling and Rana (1990) also indicates that except for the effect of official flows on
savings the impact of foreign capital and exports on growth and saving rates had been
31
both positive and favourable. Furthermore, the negative relation-ship between official
flows and the saving rate may not necessarily indicate that the latter is reduced by an
increase in official flows. They concluded that inflows of FDI are determined by a
complex set of economic, political and social factors and foreign investors look beyond
the array of investment incentives. Performance requirements and various restrictions and
regulations act as disincentives to FDI and often offset the positive effects of fiscal
incentives.
In a more recent quantitative study, Fry (1993) found that FDI has a positive effect on
growth in eight Pacific Basin economies where distortions were low, whereas the effect
was negative in a control group of developing countries.
A study by Borenzstein, Gregorio and Lee (1995) on the basis of data from sixty-nine
developing countries draws the following major conclusions: (a) FDI contributes to
economic growth and has a larger impact on growth than does domestic investment. This
finding is also supported by a study by Blomstrom, Lipsey and Zejan (1992). (b) Beyond
a minimum threshold, higher FDI inflows are associated with higher productivity of
human capital for the economy as a whole, indicating that FDI has positive spillover
effects through the training of workers. (c) FDI does not crowd out domestic investment,
but instead seems to supplement it through vertical spillovers leading to increased capital
investment by suppliers and distributors.
These findings are consistent with another recent study by Coe, Helpman and
Hoffmaister (1995) showing that productivity tends to be higher in developing countries
that have strong links with OECD countries than in those that do not. The difference is
attributed to technology embodied in imports from OECD countries by the high-
productivity developing countries. But because FDI flows from OECD to developing
countries are highly correlated with trade flows, the productivity could be associated with
technology transfer through FDI rather than trade.
Another study by Shang-jin Wei (1997) provides evidence that FDI has produced
technology spillovers in China. Using data covering 434 urban areas in China during
1988-90, the study showed that of the three types of firms in China (state-owned,
township-and-village, and foreign-invested), the foreign-invested firms grew at the fastest
rate; and that the share of foreign-invested firms and the depreciated stock of FDI were
important factors in explaining differences in growth among urban areas.
There is a broad agreement that FDI can make an effective contribution to the
development efforts of developing countries. Its actual contribution, however, varies
from country to country depending on the importance given to it in the overall economic
strategy. FDI has traditionally been sought to supplement domestic savings in order to
finance investment and other capital requirements. The significance of FDI in domestic
capital formation can be judged from the ratio of inward FDI flows in the gross fixed
capital formation which reached the peak level of 24.5 percent in China in 1994, 26
percent in Malaysia in 1992, 47.1 percent in Singapore in 1990, 37 percent in Fiji in
32
1990, 61.3 percent in Vanuatu in 1994 and 96 percent in the Pacific least developed
countries in 1994 (Table 2.5A).
Share of FDI stock in gross domestic product was as high as 86.6 percent in Singapore in
1990, 46.2 percent in Malaysia in 1994, 36.6 percent in Indonesia in 1990, 18 percent in
China, 21 percent in Hong Kong and 36 percent in Maldives in 1994 (Table 2.6A)). FDI
flows as a share of GNP given in Table 2.7 also indicates the importance of FDI in overall
economic development. For developing countries as a whole, it reached 2 percent in
1996. Among the largest recipients of FDI on this basis are Malaysia and Vietnam, with
inflows equivalent to 6.5 percent of GNP in 1996. East Asia has sustained inflows
equivalent to more than 4 percent of GNP.
These figures, however, do not capture the full role of FDI as an agent for growth and
structural transformation. In many countries FDI was instrumental in shaping their
structure of industry, technological base and trade orientation. In general, FDI played a
central role in Latin America’s industrialisation. It was also instrumental in the industrial
transformation to a more diversified or broader-based structure in some of the more
dynamic economies of Asia.
The growing disillusionment with import substitution policies adopted by most

developing countries in the 1950s and 1960s led to a shift in orientation aimed at
promoting exports of manufactured goods. FDI was viewed as a mechanism to gain
access to internatioinal markets and to boost exports. For the dynamic Asian economies,
FDI was a driving force in their export-led growth as their take-off occurred when foreign
investment was already outward-oriented.
Perhaps the most significant contribution of FDI is qualitative in nature. FDI embodies a
package of growth and efficiency-enhancing attributes. TNCs are important sources of
capital, technology, and managerial, marketing and technical skills. Their presence
promotes greater efficiency and dynamism in the domestic economy. The training gained
by workers and local managers and their exposure to modern organisational system and
methods are valuable assets. The full potential of FDI for fostering economic
development in host countries can best be reached by strengthening domestic linkages
and upgrading flows through encouragement of investment in technology and skill-
intensive industries with higher local value-added.
3 GEOGRAPHICAL AND SECTORAL DISTRIBUTION OF FOREIGN

INVESTMENT - GLOBAL AND COUNTRY EXPERIENCES
3.1 Regional Distribution of FDI
Two developments underlie the trend of the record FDI flows into developing countries
in the 1990s : the growing importance of developing countries as sources of FDI for other
developing countries; and increase in the value and share of total outflows from the
developed countries going to developing economies. The FDI flows to developing
33
countries have grown rapidly in 1990s and reached $100 billion in 1995 and $110 billion
in 1996. The share of developing countries in global FDI flows increased from 19 percent
in 1980 to 32 percent in 1995.
In recent years developing countries also have generated substantial outflows, with the
largest shares coming from Brazil, Chile, China, and Thailand. Motivating these flows
has been the search for a supply of key raw materials (such as minerals and logs) and for
lower labour costs in less developed economies as industries in the home countries
become technology intensive.
The most dynamic foreign investors from developing countries in recent years have been
the South East Asians NIEs and ASEAN, India and Brazil. Surveys of FDI from
developing countries high-light the following general features (UNCTAD 1993a):
(a) The geographic distribution favours neighbouring and ethnically related countries.
(b) FDI tends to concentrate in industries using standardised technology and management
skills or industries based on natural resources (processing, textiles and minerals) or
export-oriented industries (food processing, automobiles, and electronics).
(c) Most TNCs from developing countries are involved in joint ventures, both to limit
their capital commitments and to obtain know-how, local managerial and organisational
skills or access to markets of their partners.
Outflows from the developing countries rose from $39 billion in 1994 to $47 billion in
1995, with an increasing share going to other developing countries. Intraregional FDI
flows accounted for 37 percent of inward FDI stock of nine Asian economies in 1993,
compared to 25 percent in 1980. The share of newly industrialised economies in the FDI
flows to the ASEAN countries increased from 25 percent in 1990-1992 to 40 percent in
1993-1994. More generally, about 57% of the FDI flows from developing countries were
invested within the same region in 1994.
The share of developing countries in the combined outflows of the world’s five largest
outward investors rose from 18 percent in 1990-1992 to 28 percent in 1993-1994. The
concen-tration of FDI in the largest 10 developing countries has increased from 69
percent of annual average FDI flows into developing countries in 1990-1992 to 76 per
cent in 1993-1995.
Asia and Pacific
The Asia and the Pacific region is the new growth centre of the global economy with
China, ASEAN and NIEs as important players in the region. It is the most important
focus of FDI by transnational corporations (TNCs) in the developing world, with more
than half of the developing country FDI inward stock being located there (Table 2.3B).
FDI flows to Asia and the Pacific reached $65 billion in 1995 accounting for 21 percent
of global FDI flows and 65 percent of FDI flows to the developing countries, compared
34
with $20 billion in 1990 accounting for only 10 percent of global FDI flows (Table 2.3A).
East and South-East Asia alone received an estimated $62 billion in 1995, while South
Asia saw a doubling of inflows to $2.7 billion in that year, mainly as a result of a tripling
of inflows into India. Inflows of FDI to four ASEAN member States (Indonesia,
Malaysia, Philippines and Thailand) increased from $8.6 billion in 1994 to $14 billion in
1995. During 1990-1996 China and ASEAN had a share of more than 80 percent in FDI
inflows to Asian countries, with Chinese share exceeding 50 percent.
FDI contributed significantly for enhancement of domestic investment and accounted for
almost one fourth of gross domestic investment in Singapore and China (Table 2.5A).
The Asia-Pacific’s sustained economic growth, in fact, led to a doubling of its share in
world FDI flows from 10 per cent in the first half of the 1980s to 20 per cent in the
1990s, although some countries (Afghanistan, Mongolia, Myanmer and and Nepal)
continued to attract a very small volume of flows.
China has been the principal driver behind the current investment boom in Asia and to the
developing world as a whole. With an inflow of $38 billion in 1995 China became the
second largest recipient of FDI after the U.S.A. in the world and the number one in the
developing world in 1995, and became the home for 38 percent of FDI flows to
developing countries and 55 percent of FDI flows to Asian developing countries. FDI
inflows to China increased further to $42 billion in 1996 (World Bank 1997). About 80
per cent of FDI inflows to China come from countries with predominantly Chinese
populations, such as Hong Kong, Macao, Singapore and Taiwan, China. Firms from
those economies have certain advantages in investing in China, e.g., better knowledge of
market conditions and reduced transaction costs owing to language advantages and
family networks. China, as a result, has a special edge in attracting FDI from these
economies compared to others.
Asian developing economies themselves are increasingly becoming outward investors,

reflected in the liberalisation of their outward FDI regimes and, in some cases, the
provision of incentives for such investments. In 1995, the region with $43 billion FDI
outflows accounted for 90 per cent of all developing-country outflows. Hong Kong was
the single largest outward investor among the developing countries.
Most outward FDI is going to other countries in the region to take advantage of cost
differentials and liberal trade regimes and to allow export-oriented FDI to flourish,
facilitated by ethnic and cultural links. Malaysian and Thai TNCs, for example, directed
more than 60 per cent of their FDI outflows to Asia in 1995; some four-fifths of Hong
Kong’s outward FDI went to China in 1995; a good part of Singapore’s outward FDI is
distributed to other Asian countries (mainly ASEAN countries and China); and about 60
percent of China’s outward FDI remained within the Asian region (United Nations,
1996).
Tables 3.2A to 3.2E present the top 10 home countries for FDI flows to selected host
countries in the Asia and Pacific (Bangladesh, Cambodia, China, Hong Kong, India,
Indonesia, Japan, Laos, Malaysia, Mongolia, Myanmer, Pakistan, Philippines, Singapore,
35
South Korea, Sri Lanka, Taiwan, Thailand, Vietnam, and New Zealand). It is observed
from the tables that intra-Asian FDI flows constitute major shares in FDI inflows to most
of these host countries (only exceptions being Japan, India and Pakistan). The share of
Asian countries among the top 10 host countries ranged from 45 percent in South Korea
to around 90 percent in China, Mongolia and Cambodia.
3.2 Sectoral Distribution of FDI
The sectoral distribution of foreign direct investment in developing countries is not well
documented, but it seems that in recent years services have increased their share to more
than one third, while manufacturing has declined to less than one-half, with the remainder
accounted for by agriculture and mining. Within services financial services are a major
component, with trade, construction, and tourism also important. Within manufacturing
the trend has been to move from lower-technology or labour-intensive industries (food,
textiles, paper and printing, rubber, pastics) to higher-technology industries (electronics,
chemicals, pharmaceuticals).
The size of dynamism of developing Asia have made it increasingly important for TNCs
to be established there, to service rapidly expanding markets or to tap the tangible and
intangible resources of that region for their global production networks. In addition, the
region’s infrastructure-financing requirements for the next decade will play a role in
sustaining FDI flows to Asia. Countries are dismantling barriers to FDI in this sector,
giving rise to new and large investment opportunities for TNCs, and privatisation, still
lagging behind other regions, is showing signs of taking off, particularly in
manufacturing industries, telecommunications, petroleum and financial sectors. European
union TNCs which neglected Asia in the 1980s are making large-scale investment in
Asian developing economies to take advantage of new opportunities in power,
petrochemicals and automobiles.
A significant portion of FDI in South, East and South-east Asia is of the market-seeking
type that is unlikely to shift as long as there are profitable opportunities for production for
a host country’ market. In particular, large-scale infrastructure-related FDI has been
picking up in response to liberalisation in power and telecommunications. Similarly,
Malaysia and Thailand have reached income levels at which it has become profitable to
establish automobile manufacturing facilities for the domestic (and foreign) markets.
Furthermore, the services sector is attracting more and more FDI flows, especially in the
newly industrialising economies. In Korea, the share of the services sector in total inward
FDI stock was 40 per cent in 1995, compared with about one quarter in 1981; in Taiwan
Province of China, the share of services in FDI stock went up from 21 per cent in 1980 to
35 per cent in 1995. In addition to resource-seeking FDI in established resource-
abundant host countries such as Indonesia, Malaysia, Papua New Guinea and the
Philippines, new entrants such as Viet Nam and Myanmar have begun to attract FDI in
the primary sector.
36
A number of Asian countries are increasingly attracting FDI in capital-intensive
industries. For example, average annual flows to the chemical industry in the Republic of
Korea increased from $91 million during 1980-1986 to $189 million during 1987-1991
and further to $230 million during 1992-1993. FDI policies of countries in the region also
reflect a recognition of this shift in locational advantages. Countries such as Malaysia
and Singapore are becoming more selective with respect to the kind of FDI and putting
an increased focus on its technological content. In Indonesia, the new regulations allow
100 per cent foreign ownership of local enterprises for 15 years and require only a 1 per
cent divestment afterwards. In joint ventures, local firms are now required to hold only 5
per cent of ownership, a substantial drop from 20 per cent in the past. Previously
restricted industries such as transportation, telecommunications and power are now open
to foreign firms. Thailand has opening to FDI some of the previously restricted industries
such as advertising, garments, construction and engineering works.
The experiences of several East and South-East Asian countries indicate that
contributions to international competi-tiveness and export performance have been
particularly high in developing economies that are open to both trade and FDI. For
example, since mid-1980s the share of foreign affiliates in exports were as high as 57% in
Malaysia (all industries), 91% in Singapore (non-oil manufacturing), 24% in Hong Kong
(manufac-turing and 17% in Taiwan Province of China (manufacturing).
Taiwan, China where FDI was allowed with some restrictions, purchases from local
subcontractors by foreign affiliates played an important factor in the building up of an
export- oriented electrical and electronics industry in the 1960s and 1970s. On the other
hand, in Malaysia, which had fewer restriction on FDI, export-oriented production by
foreign affiliates played a greater role in building up the industry. In general, some
ASEAN countries like Malaysia, Singapore, and Thailand relied more on FDI for
securing access to international markets and access to resources, while such East Asian
countries as South Korea and Taiwan, China relied more on non-equity arrangements; but
in both cases, a key factor for building up long-run competitiveness involved the
acquisition of technological and managerial capabilities as well as access to international
marketing networks and capabilities from TNC systems.
Transnational corporations in retailing, and other trading firms also played an important
role in the building up of export capabilities of several Asian economies. In addition to
linking local producers to foreign customers, they have deepened the ties of those
economies to the internatioinal market-place.
3.3 Foreign Portfolio Investment (FPI)
One important factor contributing to the private foreign investment in Asian developing
countries in recent years has been the surge of foreign portfolio investment which
includes both equity and bond investment. Portfolio flows to developing countries
increased to $81 billion in 1995 from $78 billion in 1994 but remained below the peak of
$95 billion recorded in 1993. Strong growth in equities and debt raised portfolio flows to
a record $134 billion in 1996, accounting for 30 percent of net resource flows in 1996
37
compared with only 5 percent in 1990 (Table 3.1). Equity flows at $46 billion accounted
for 34 percent of these investments. An increasing share of foreign funds was invested in
local equity markets directly rather than through depository receipts or other cross-border
private equity placements. Debt instruments - mainly international bonds - have always
accounted for most portfolio flows to emerging markets. Portfolio debt flows to
developing countries - essentially bond issues in the international capital markets -
registered a record increase by 80 percent and reached a record level of $89 billion in
1996 on top of $49 billion in 1995.
Portfolio equity flows, which include international equity issues and investment by
foreigners in local equity markets, are estimated to have rebounded from $32-33 billion
in 1994 and 1995 to a record $46 billion in 1996. Several factors which boosted investor
interest in developing country equity markets in 1996 include the following : continuing
low international interest rates; the availability of securities at low prices; relatively high
economic growth prospects in developing countries; increased liquidity as investments in
US mutual funds surged in early 1996, nearly doubling their share of funds invested
abroad; the general trend among European asset managers to diversify investments from
domestic to foreign markets; and depository receipts and direct investment in local equity
markets. Depository receipts - American (ADRs) and global (GDRs) - and privately
placed cross-border equity issues accounted for 25% of portfolio equity flows to
developing countries in 1994-96, while 75% of PFI was channeled through direct
investment in local stock markets.
Depository receipts offer some advantages over FDI. To the issuer they provide the
opportunity to tap the widest possible pool of investors and to attract the capital of new
investors and retail investors who are unwilling to go directly to the markets or are
prevented from doing so by legal restrictions. To the investor these receipts offer
convenience, liquidity, elimination of settlement risks, and safer regulatory environment.
Although ADRs have been more popular than GDRs, GDRs are becoming more popular
with developing country issuers because of their ability to reach a broader investor base
and the less stringent regulatory criteria that govern their use.
Regional Distribution of FPI
East Asia and the Pacific
Flows to East Asia and the Pacific continued their upward trend, rising to $27 billion in
1995 and $36 billion in 1996. Equity flows accounted for more than half the total in
1995, and the bond issuance increased strongly in 1996. The level of depository receipts
and private issues declined in 1996 because of smaller volumes from Indonesia,
Malaysia, and the Philippines.
Portfolio equity flows to East Asia and the Pacific reached a record $15 billion in 1995.
The region, the largest recipient of portfolio equity flows to developing countries,
increased its share of total portfolio equity flows from 32 percent in 1989-94 to 46
percent in 1995. About 38% of the region’s portfolio equity flows were raised through
38
international equity issues; the rest was raised through direct investment in local
exchanges. In 1996 funds flowing into the region reached $10 billion, about 25% of
which was generated intraregionally.
With bond issues of more than $10 billion in 1995, East Asia and the Pacific was second
only to Latin America in volume of international bond issues. Strong issues by China,
Indonesia, the Philippines, and Thailand doubled the volume of the region’s bond issues
to $20 billion in 1996. Favourable international capital market conditions, a positive
investor outlook toward regional issuers, and a scarcity of long-term funds in the Asian
domestic markets helped increase volume.
South Asia
Portfolio flows to South Asia declined from a peak of $7.3 billion in 1994 to $3.1 billion
in 1995 due to primarily lower foreign investment in local markets in India and Pakistan
and a decline in international offerings. Flows of FPI recovered to $6.9 billion in 1996
due to record level of debt at $1.5 billion and substantial rise in equity to $5.4 billion.
Bond issues from the subcontinent increased to more than $1 billion in 1996.
The volume of international equity issues to South Asia fell sharply in 1995 as depository
receipt placement by Indian issuers declined. Activity resumed in the euro-issue market
in 1996, and foreign investment in 1996 increased over 1995 levels. However, only 3
percent of market capitalisation is accounted for by foreigners. The success of the $200
million GDR by India’s industrial Credit and Investment Corporation (ICICI) highlighted
investor demand for quality borrowers from the region. A sharp pickup in activity by
Indian issuers brought the volume for the region to $1.5 billion in 1996.
Investments in Pakistan’s stock market are estimated to have declined in 1996 because of
uncertainty over the course of economic policy. Bangladesh, which accounted for less
than 2% of foreign funds flowing into regional stock markets in 1995, is seeking to attract
greater volumes through a broad economic reform programme that includes specific
measures to encourage foreign investment. Foreigners are now permitted to invest
independently in all sectors except defence-related industries; previously, foreign
investment was limited to joint ventures with local investors. The government also has
lifted the one-year holding period imposed on foreign investors in the stock market.
India continued its presence in the global bond markets in 1995, raising $770 million.
The market response to a handful of bonds issued toward the end of the year was limited,
as the outstanding international bonds from the country performed poorly in the
secondary market. In Sri Lanka the Bank of Ceylon issued a $12 million three-year bond
(with a put option) in a privately placed deal in the euro-market. Pakistan raised $100
million with its first floating-rate note issue. The note carried a maturity of four and a
half years and had put and call options attached.
3.4 Direct Foreign Investment in Selected Countries in Asia
39
(a) China, People’s Republic of
Since the opening up of its economy in 1979, and the subsequent creation of the five
Special Economic Zones (SEZs) and 14 open coastal cities, China has attracted
substantial foreign investment, especially foreign direct investment (FDI). The country’s
high growth, abundant supply of cheap labour, its huge domestic market,and the
preferential treatment given to foreign investors, have served as strong magnets for
foreign investment.
Under the new guideliines, foreign investments are “encouraged” in projects that can
raise the technological and economic efficiency of Chinese enterprises, exploit new
markets, and increase exports. Moreover, foreign investments are encouraged in
industries with insufficient domestic production capacity. The guidelines also open new
frontiers for foreign investors. For the first time, foreign investors are encouraged in the
construction and operation of projects such as nuclear power stations, civil airports and
mass transit railways. However, to protect national interests, the state will take the
majority share-holding in these projects. On the other hand, projects that exploit the
country’s rare and precious raw mineral resources are “restricted”. The guidelines also
reaffirm that foreign investments are prohibited in specific sectors such as air traffic
control, telecommunications, broadcasting and post. The guidelines also have a
geographical stress, encouraging foreign investors to invest in the central and western
parts of the country where development lags behind the coastal provinces.
Table-3.3 : The importance of FDI in China, 1991-1995

_________________________________________________________________
Item 1991 1992 1993 1994 1995

_________________________________________________________________
No.of contracts (‘000) 13.0 48.8 83.4 47.5 45.0
Contracted value of FDI 12.0 58.1 111.4 81.4 112.5

(billion dollars)
Actual FDI inflows 4.4 11.2 27.5 33.8 37.5
(billion dollars)
Average amount per project 0.9 1.2 1.3 1.8 2.5
(million dollars)
FDI as a ratio to GDI 4.5 8.0 13.6 18.3 ..
(per cent)
Exports by foriegn 12.1 17.4 25.2 34.7 ..
affiliates (bn US$)
Exports shares by foreign 17.1 20.4 27.5 28.7 31.3
affiliates in total exports
(per cent)
Share of industrial output 5.1 6.0 9.0 11.0 13.0
by foreign affiliates
40
in total industrial output
(per cent)
Number of employees in FDI 4.8 6.0 10.0 14.0 16.0
projects (millions)
Share of tax contribution .. 4.1 .. .. 10.0
in total revenues (per cent)
________________________________________________________________
Source : World Investment Report 1996, UNCTAD, UN.
During 1979-1996, under the government’s open door policy, foreign direct investment in
China reached 260,000 enterprises, overall FDI commitments were worth $400 billion,
while the inflow of FDI reached $135 billion. In 1995, China received about $38 billion
in FDI, which made China number one in the developing world. In fact, FDI already
plays a very important role in China’s economic and social development. About 50
percent of the country’s industrial turnover is due to FDI and enterprises with foreign
investment earned one-third of the country’s foreign exchange, employing 17 million
workers.
Of foreign-invested enterprises (FIEs) approved since 1979, 64% are equity joint
ventures, 15% are co-operative joint ventures, and 21% are wholly foreign-owned
enterprises. As regards sectoral distribution of FDI, 50% was concentrated in processing
industries, 24% in other industries, 14 percent in real estate, 9% in transport and
communications, and 3% for agriculture and fisheries in 1979-1994.
Although China received FDI from about 150 countries, the major proportion of athis
FDI came from Hong Kong, Macao and Chinese Taipei. Only 30 percent of FDI came
from other countries of the world. The United States accounted for 8 percent and Japan 8
percent. European countries account for less than 10 percent. The United Kingdom,
Germany, France and Italy, together only accounted for 4 percent of total FDI flows to
China, only half of the US level.
China’s opening policy has been one of gradualism. For example, China opened the
railway sector in 1992, the electric power sector very progressively in 1993 and the
aviation sector in 1994. It harmonised the two-tier foreign exchange system that often
created confusion for foreign private investors in 1994. In 1996, the Chinese government
opened insurance, retailing, accounting and consulting to FDI. Other priority sectors are
agriculture, electric power generation, main roads and highways, important raw materials,
petrochemicals, chemical industry, iron and steel industry, high-tech industry and the
export sector. In the future, more and more sectors will be opened to FDI such as civil
aviation, foreign trade, and the banking system. China provides national treatment to FDI
and is committed to make the currency fully convertible under the current account by
2000.
Although there are already new types of private foreign investment in developing
countries, such as BOT or project financing. China have only recently adopted such
procedures. The pilot BOT project was opened for bidding in May 1996 and the second
41
BOT package whose scope will be enlarged to include thermal power plants, bridges,
expressways and water treatment plants will be opened very soon.
The Chinese government is trying to accelerate its reform effort and opening further. In
1996, the Chinese government and the People’s Congress approved the next five-year
development strategy, to the year 2000. According to the strategy, annual GDP growth
target is 8 to 9 percent and exports target is 10 percent. The plan attaches priority to the
development of private and foreign investment and to optimise the sectoral distribution of
FDI by attracting more FDI into infrastructure sectors.
In principle, the Chinese government does not limit the rate of return for FDI. Some
enterprises with foreign investment already obtain very high rates of return, such as
Motorola of the United States and Volkswagen from Germany, while other companies
earned rates of return above 20%. Some processing-indstry projects earn rates of return
even higher than 100%, but in certain sectors, such as the power sector, anti-monopoly,
inflation, consumer-rights concerns require the government to negotiate tariffs with
investors. In the commercial market, the Government of China cannot guarantee the rate
of return.
China’s record of sustained reform attracted a massive increase in foreign direct

investment (FDI), which grew from a trickle in the early 1980s to $38 billion in 1995 and
to more than $42 billion in 1996. Investment was initially concentrated in tourism,
commercial and real estate, and petroleum. Close to half the FDI was in Fujian,
Guangdong, the Jiangsu, where it accounted for between 50 and 60 percent of gross
capital formation. This concentration of investment in the coastal zone was stimulated
by local governments that had taken advantage of their administrative and policy freedom
to build the infrastructure needed to attract foreign investment, to provide attractive tax
deals to foreign investors, and to refrain from intruding in businesses or overburdening
firms with regulation.
In recent years, nearly 80 percent of FDI has been in small and medium-scale export-
oriented manufacturing industries, with the average investment increasing from $0.5
million in the late 1980s to $2.5 million in 1995 (Table 3.3). Most of the investment was
by overseas Chinese who had already established strong links to the main export markets
in Europe, Japan, and the United States. As a result of this boom in export-oriented FDI,
exports became the main engine of growth for the Chinese economy, and the country
significantly increased its share of world trade.
Foreign affiliates have become major vehicles for China’s trade. On the export side,
TNCs have played a lead role in the expansion of export-oriented processing activities, in
particular in the special economic zones. Processing trade (trade under the special
customs regimefor imports for and exports after processing) has been the most dynamic
component of China’s foreign trade: exports (after processing) reached 47 per cent of
total exports in 1994. Foreign affiliates and other TNC-related firms handled more than
54% of these transactions. The massive investment by TNCs in trade-oriented production
42
in China is particularly visible from the high share of foreign affiliates and other TNC-
related enterprises in China’s exports and imports as given in (BTable 3.4 ).
The leading export items under processing trade are consumer electronics, textiles and
garments and footwear. Typically, processing exports comprise goods in which the
activities in China relate to labour-intensive production, whereas product development
and international marketing is done elsewhere by TNCs. Net exports (exports minus
imports) were 16 per cent of the export contract value under processing trade; for TNCs,
the corresponding value was lower at only 9 percent.
Foreign affiliates have also become a major vehicle for imports into China. In 1994, over
a third of China’s total imports for the domestic market (imports excluding processing
trade) were channelled through foreign affiliates and non-equity joint ventures. The bulk
of these imports consisted of investment goods: Imports of machinery represented more
than two-thirds of all TNC imports for the domestic market. In fact, TNCs were
responsible for 55% of China’s machinery imports in 1994.
Table 3.4 Percentage share of internationsl transactions

of foreign affiliates and non-equity
ventures in China in 1994
_________________________________________________________________
Type of firm Exports Imports Exports Imports Total Total
except except after after exports imports
proce- proce- proce- proce-
ssing ssing ssing ssing
_________________________________________________________________
Fully foreign 1 7 19 19 9 12
owned
Equity joint 5 23 26 30 15 26
venture
Non-equity 1 6 9 10 5 8
joint venture
Total,above 7 37 54 59 29 46
Total,all firms 100 100 100 100 100 100
_________________________________________________________________
Source: World Investment Report 1995, Unitted Nations.
Hong Kong is, by far, the largest supplier of FDI to China (Table-3.5A). Hong Kong’s
investment in China has come not only from Hong Kong-based businessmen but also
from many Taiwanese investors who have been using Hong Kong’s registration to side-
step the regulatory constraints on investments in China. Since late 1980s, Taiwan’s direct
investment in China has grown rapidly too. In 1994, Taiwan accounted for 10% of
China’s utilised FDI. In recent years, Singapore and South Korea have also expanded
their investment in China to reduce their production costs, amidst rising labour costs in
the domestic market.
43
FDI brought into China not only the much needed capital and foreign exchange, but also
new knowledge, including industrial technology, marketing know-how, managerial
expertise and entrepreneurial skills. Such transfer of funds and knowledge has
contributed significantly to the overall growth and export performance of China. Between
1979 and 1996, China’s gross domestic product (GDP) grew by an average annual rate of
10.7% in real terms. The role of FDI in China’s economic development can best be
illustrated by the experience of Guangdong, the province that has received the largest
amount of FDI, and is the host to these SEZs and two open coastal cities.
Between 1989 and 1994, Guangdong attracted US$24.9 billion utilised FDI, or 30% of
the country’s total, most of which were in export-oriented industries (Table-3.5B). Over
the same period, Guangdong’s exports expanded by 34.7% annually, while the country’s
exports grew by only 18.2% per year. In 1994, foreign invested enterprises (FIEs)
accounted for 39.5% of Guangdong’s exports, compared with 28.7% in the country. As a
result of the faster growth of the privince’s exports due to bigger contribution of FIEs,
Guangdong recorded an average real GDP growth rate of nearly 18% per year since 1989,
much faster than the national average of 10.7%.
In recent years, as a result of increased economic activities and over-heating, China has
run into infrastructure bottlenecks in ports, airports, roads, railways, telephone lines and
power plants. It is estimated that by the end of the century, China will need up to US$250
billion to develop its transporta-tion, telecommunications, power-generating capacities.
The classification of infrastructure developments as encouraged projects highlights the
government’s desire to use foreign funds to help ease the capacity constraints of the
country.
China’s attractiveness to foreign investors, however, remains bright. China’s growth

performance is outstanding. With an average annual GDP growth of 11.5 per cent in
1991-1996 China is one of the fastest growing economies in the world. The liberalisation
of FDI policies is still underway. Some industries that had been restricted to foreign
investors (such as air transport, general aviation, retail trade, foreign trade, banking,
insurance, accounting, auditing, legal service, mining and smelting of precious metals,
and the extraction and processing of diamonds and other precious non-metal minerals)
are being opened gradually. There is a significant potential for FDI participation in
infrastructure, and several build-operate-transfer projects have already been concluded.
Foreign investors are now allowed to acquire state-owned firms. Furthermore,
investments from other major source countries, such as Japan and the Republic of Korea,
are increasing. The European Union and the United States are also pursing new
initiatives to increase the presence in the Chinese market. As a result, the existing
importance of FDI for China’s economy is likely to grow.
(b) Foreign Investment in India
Since July 1991 India had undertaken credible reforms in industry, trade, financial and
public sectors to enhance globali-sation and competitiveness of Indian industries and to
44
encourage inflows of foreign investment in industrial and technology development. The
major reforms and fiscal incentives are discussed in detail in chapter-8. As the initial
reforms take root and further reforms unfold, India is emerging as a land of immence
opportunity for all.
Transnational corporations and foreign firms have shown keen interest in investing in
India. The total number of foreign collaborations approved during the post-liberalisation
period (August 1991 to March 1997) amounted to 10729 of which 6092 proposals
involved direct foreign investment amounting to $34 billion. More than 86 percent of
these foreign investments are in priority sectors such as power and oil (24%),
telecommunications (23%), financial services and hotels (10%), chemicals (7%),
automobiles (6%), electrical equipments (6%), mettallurgical industries (5%) and food
processing industries (5%). Considering the immence market potential for automobiles in
the country, almost all the major automobile manufacturers from all over the world are
setting up manufacturing plants in India, to meet the growing domestic demand and to
develop production base for meeting global demand. The number of new vehicles based
on contempory designs and lattest technology which have been introduced in the
domestic market include Suzuki, Fiat, Ford Escort, Opel Astra, Cielo, Peugeot, Toyota,
Uno, Mercedes etc. These joint ventures have already commenced their production and
the cars are available in the Indian maeket.
The average annual inflow of foreign investment to India increased from only $120
million in 1980s to $4.7 billion in 1993-1996. Total portfolio investments at $12.2 billion
in 1993-1996 (Table 3.6) comprised $7 billion in equity shares purchased by FIIs
attracted to India by the prospects of higher return, $4.5 billion by GDR/Euro equities
and $0.7 billion by offshore and other funds raised by Indian firms interested in raising
capital abroad at a lower cost than from domestic sources.
Table-3.6 Inflows of Foreign investment to India

in 1991-1997 (US$ million)
_________________________________________________________________
Type of investment 1990 1991 1992 1993 1994 1995 1996-
-91 -92 -93 -94 -95 -96 -97
_________________________________________________________________
FDI 165 150 341 586 1314 2163 2609
RBI Automatic route 0 0 42 89 171 169 135

SIA/FIPB route 165 87 238 280 701 1249 1858
NRI (40% and 100%) 0 63 61 217 442 745 616
Portfolio Investment 0 8 92 3649 3581 2214 2775
FIIs 0 0 1 1665 1503 2009 1855

GDR/Euro-issues 0 0 86 1602 1839 140 900
Offshore Funds 0 8 5 382 239 56 20
45
_________________________________________________________________
TOTAL 165 158 433 4235 4895 4377 5384

_________________________________________________________________
The sectoral distributions of FDI according to the FDI-stock before liberalisation policy
and approvals in the post-liberalisation period (1991-1997) as given in (Table 3.7 reveal
striking differences. In particular, the relative importance of manufacturing sector has
declined with the opening up of infrastructure and service sectors to foreign direct
investment under the liberalisation policy, and, within the manufacturing itself the
preference pattern of FDI is shifting away from heavy capital goods industries to light
industries.
Table 3.7 Sectoral Distribution of FDI (percent)

_________________________________________________________________
Sectors FDI outstanding FDI approvls
end March 1990 Aug.1991-March 1997
_________________________________________________________________
1. Plantation & agriculture 9.5 0.4
2. Mining 0.3 0.5
3. Petroleum and power 0.1 23.7
4. Manufacturing 84.9 42.2
Food processing 7.0 5.1
Textiles 4.0 1.9
Transport equipment 12.3 6.2
Machinery & mach.tool 15.4 3.2
Metals and its products 6.1 5.7
Electrical goods 12.8 6.0
Chemicals and allied 33.4 10.8
Others 8.8 3.3
5. Services 5.2 33.2
_________________________________________________________________
Total 100.0 100.0
_________________________________________________________________
As a consequence of the amendment of the Foreign Exchange Regulation Act (FERA)

and automatic approval of foreign equity upto 51% in 48 priority industries and upto 74%
in 9 high priority industries, many of the existing firms have raised their foreign equity
above 50%. These constitute around 50 per cent of approvals since August 1991. The
countrywise break-up suggests the increasing quest of the firms based in the United
States (accounting for 27% of companies having majority foreign owner-ship), the United
Kingdom (21%), Germany (18%) and Switzerland (6%) for acquiring foreign ownership
control in their existing associates in India. More than 80% wholly-owned subsidiaries of
foreign companies operating in India originated from United States (43%), Singapore
(17%), United Kingdom (7%), Switzerland (7%) and Hong Kong (7%).
46
The data on foreign equity range in the firms under foreign collaboration (Table 3.8) give
some insights into the pattern of foreign ownership during the post-liberalisation period
as compared with the pre-liberalisation period. The proportion of firms with foreign
ownership range of 50 per cent and above (35 percenr) in the three years of the post-
liberalisation period is seven times higher than the corresponding figure (5 percent) in the
three years in the pre-liberalisation period.
Table 3.9 presents percentage share of major country-sources in the total foreign
investment approvals during the 1981-90 (pre-liberalisation) and 1991-97 (post-
liberalisation) periods. In both the periods, the U.S.A., U.K., Japan, Germany and Non-
resident Indians (NRIs) constituted the major sources of foreign investment. In 1990s,
however, a change in the pattern of sources is observed in the sense that the relative
shares of Germany and Japan declined and Maurious and Caymon Island emerged as a
major home country due to establishment of various off-shore funds in these countries to
take advantages of tax haven. The increasing share of NICs like Singapore, Hong Kong
and Malaysia is also an interesting feature of the new pattern.
Table 3.8 Distribution of firms by foreign equity

_________________________________________________________________
Range of foreign Pre-liberalisation Post-liberalisation
equity (percent of period period
total equity) 1988-1990 1991-1993
___________________ __________________
Number Percent Number Percent
_________________________________________________________________
Up to 25 170 27,2 445 26.4
26 - 39 100 16.0 223 13.3
40 - 49 324 51.8 421 25.0
50 - 59 12 1.9 417 24.8
60 - 74 9 1.4 50 3.0
75 - 99 3 0.5 9 5.8
100 7 1.1 30 1.8
______________________________________________________________
Total 625 100.0 1683 100.0
_________________________________________________________________
Liberalisations of foreign investment policy facilitated technology transfer through the

provision of automatic approval of technology transfers in priority areas with specified
parameters (e.g. maximum limits for royalty and lump-sum payments) and the freedom
given for hiring of foreign technicians. Enterprises are now free to negotiate terms and
conditions of technology transfer according to their commercial judgements. This is
distinctly different from the earlier regime when the terms and conditions of technology-
transfer were determined by the Government using ad hoc rules and discretion, which
47
allegedly led to the transfer of outdated technologies and technological stagnation of
Indian industry.
TNCs generally prefer “packaging” of technology transfer with equity stake and the
prevalence of this practice raises the cost of technology transfer to the host country.
Therefore, the exploration of transfer of technology in less packaged forms like the
simple licensing agreement or outright purchase is often taken as a better option. An
analysis of foreign collaborations approved in the pre liberalisation period (1988-1990)
and post-liberalisation period indicates a relatively higher proportion of collaborations in
the latter in all industries except energy and textiles (Table 3.10). Further, the proportion
of agreements with provisions for lump-sum payment, which is partly the reflection of
outright purchase of technology, is also lower in 1991-1997.
Table-3.9 Geographical distribution of FDI in India :
Share of home countries (per cent)
_________________________________________________________________
Host country 1981-1990 1991-1997 1991-1997
Approvals Approvals Actual Flows
_________________________________________________________________
United States 25.5 26.0 13.5
United Kingdom 7.1 6.7 8.2
Mauritious 0.0 5.0 13.6
Korea, Rep.of 1.2 4.7 1.3
NRIs 9.7 4.4 33.2
Japan 8.4 4.2 5.3
Israel 0.0 3.6 0.1
Germany 18.0 3.4 4.6
Cayman Island 0.0 3.0 0.1
Netherlands 1.5 2.6 3.6
Australia 0.5 2.5 0.5
France 3.5 2.3 1.9
Thailand 0.0 2.1 0.5
Canada 0.9 1.7 0.1
Italy 4.7 1.7 0.9
Singapore 0.8 1.6 2.3
Switzerland 3.2 1.5 1.7
Malaysia 0.1 1.4 0.2
Hong Kong 0.4 1.1 0.8
Saudi Arabia 0.0 1.1 0.1
Sweden 1.3 1.0 0.4
Others 13.2 20.1 7.1
________________________________________________________________
Total 100.0 100.0 100.0
_________________________________________________________________
Table 3.10 Proportion of Foreign Collaborations in India

with ‘Packaging’ (percent)
48
________________________________________________________________
Industry With foreign With lump-sum
equity payment
_________________ _________________
1988-90 1991-93 1988-90 1991-93
________________________________________________________________
Energy 71.4 57.9 85.7 52.7
Chemicals 27.1 32.7 83.2 69.0
Electricals & electronics 27.5 36.1 75.2 68.0
Industrial machinery 13.9 22.6 77.7 67.9
Mechanical engineering 21.9 34.8 82.0 62.3
Machine tools 18.6 40.5 81.4 64.9
Metallurgical 12.4 38.1 85.1 72.2
Textiles 40.9 36.1 65.9 80.2
Transport 18.8 24.1 66.7 60.5
Consultancy & services 40.9 68.6 52.8 31.2
Miscellaneous 42.8 54.1 63.2 48.2
________________________________________________________________
Total 27.2 42.2 74.0 57.6
________________________________________________________________
It is also observed that the share of agreements with 100% export commitment is less in
1991-1997 compared with the earlier period. The commitments of buy-back arrangement
and export-orientation also indicate similar pattern. On the other hand, technology
agreements approved in the post-liberalisation regime have relatively larger proportion of
export-restraining clauses.
Inflows of foreign investment to India are likely to increase further over the next few
years due to several favourable factors. First, more than 85 per cent of FDI approvals are
in the core sectors like power, oil refining, food processing, chemicals and electritical
equipment and the pipeline of FDI is more than US$5 billion a year. Second, India is at
present under-represented in the portfolio of FIIs. With a market capitalization of
US$110 billion, India’s capital market is among the largest in the world, and FIIs could
own up to 30 per cent of this market. Third, Indian firms will continue to have incentives
to mobilize resources abroad so long as the domestic lending rates remain above
international rates.
(c) Japan
Japan, the United States and the European Union have been the three most important
sources (referred as Triad) of FDI stocks and flows worldwide. Inward FDI flows to
Japan increased from $940 million in 1986 to $4155 million in 1994. Share of manufac-
turing in total FDI inflows showed a declining trend, while that of non-manufacturing had
an increasing trend over the period (Table 3.11). Chemicals, machinery, commerce and
trade, banking and insurance, and service sectors accounted for almost 80% of
cumulative FDI inflows to Japan in 1950-1994 (Table 3.12). USA and Canada are the
main sources of FDI accounting for 45 percent of cumulative FDI to Japan in 1950-1994,
49
followed by Europe (30 percent) and affiliates of foreign businesses in Japan (11 percent)
(Table 3.13). Japanese outward FDI flows reached $57 billion in 1990 followed by some
decline in 1990s (Table 3.14). Major receipients of Japanese FDI flows are USA, Asian
NIEs and Asean. As regards sectoral distribution, Japanese FDI outflows are determined
mainly by comparative advantages of the host countries and tend to be concentrated in
non-manufacturing and export-oriented sectors.
(d) Korea, Republic of
Republic of Korea provides an excellent example of how a capital importing country can
turn into a capital exporting country over time by sound economic management and
judicious combination of both inward and outward looking policies. The sectoral
distribution of inward FDI flows is also illuminating. In 1962-1995, out of total FDI
inflows of $14.5 billion, manufacturing accounted for 60 percent and services the rest,
but the sectoral distribution was completely reversed in 1994-95 with services accounting
for 61 percent of FDI flows (Table 3.15A). Within services, emerging sectors are trade,
real estate, finance and insurance as contrast to hotels and construction in eralier years.
Chemicals, automobiles and electronics are the dominant areas attracting FDI in
manufacturing. Distribution of FDI inflows in terms of equity ratios ( Table 3.16) indicate
that 70% of FDI was on a joint venture basis and 30% was on 100 percent foreign equity.
Table 3.15A Sectoral distribution of inward FDI

flows to South Korea (in per cent)
_______________________________________________________
Sectors 1962-1995 1994-1995

_______________________________________________________
Manufacturing 60.0 39.4

Services 39.7 60.6
Mining 0.1 0.0
Agriculture and allied 0.2 0.0
Total 100.0 100.0

_______________________________________________________
Cumulative FDI ($ billion) 14.5 3.3
_______________________________________________________
Asian economies supplied 44 percent of inward FDI flows to South Korea in 1962-1995,
while they received 46 percent of outward FDI from Korea in 1991-1995 (Table 3.15B).
Within Asia, China and Indonesia had been major destinations for Korean outward FDI
(Table 3.17). Korea has been seeking locations for its manufacturing investment in Asia.
Although much of outward FDI was linked to trade prospects, a significant share of
North America in the South Korea’s outward FDI reflects its desire to gain access to
advanced technology from developed countries.
50
Table 3.15B Geographical distribution of inward
and outward FDI of South Korea (percent)
________________________________________________________
Area Inward FDI Outward FDI
____________________ ____________________
1994-1995 1962-1995 1968-1995 1991-1995
________________________________________________________
America 30.5 31.1 35.0 30.0

Europe 27.2 24.6 14.0 16.3
Asia 41.9 43.9 40.0 46.4
Africa 0.0 0.1 3.0 2.6
Middle East 0.4 0.4 5.0 3.2
Oceania 0.0 0.0 3.0 1.5
Total 100.0 100.0 100.0 100.0

_________________________________________________________
Cumulative FDI 3.3 14.5 11.9 9.0
(US$ billion)
________________________________________________________
(e) Taiwan, China
During 1952-1994 Taiwan attracted $19.4 billion of FDI, around 86% of which was
private foreign investment from the developed industrial countries. The balance of FDI
came from oversees Chinese from different locations (Table 3.18). Electronic and
electrical products and chemicals were the dominant industries accounting for 38 percent
of the cumulative FDI inflows. In recent years, Taiwan has liberalised its service sectors
(including banking anf insurance) which attracted 30 per cent of FDI in 1952-1994.
Taiwan became a major foreign investor with cumulative outward FDI flows of $8.9
billion during 1952-1994. USA and Malaysia were major destinations accounting for 28
percent and 13 percent, respectively, of cumulative outward FDI. Taiwan’s overseas
investment provides an emperical evidence of the investment life cycle theory, in which
an investing country initially generates the capacity to export and then turns host to
foreign investment aimed at jumping the protectionist barriers. Chemicals, electronics
and electric products, and banking and insurance were the major sectors accounting for
43 percent of cumulative outward FDI in 1952-1994.
(f) The Philippines
Manufacturing, services and financial institutions are the major sectors attracting FDI
inflows to philippines (Table 3.22), while USA, Japan and Hong Kong have been the
major sources of FDI (Tables 3.24 and 3.25). Asian countries accounted for 64 percent of
FDI flows to Philippines in 1994. Foreign equity contribution to total equity ranged from
51
41% to 53% between 1986 and 1991, but the foreign equity share dropped to 26% in
1992.
There is a high degree of correlaiton between foreign equity investments and technology
transfer in the Philippines. Of the top 10 countries ranked according to size of foreign
direct investments in the Philippines, seven are also the leading sources of technology
imports: the United States, Japan, the Republic of Korea, the United Kingdom, the
Netherlands, Australia and Singapore. The energy sector received the biggest comulative
foreign investments until 1995 due to the Government’s efforts to promote energy
development. Of the many types of technology transfer available, those which involved
the actual transfer of know-how, trademarks, and patents constituted two-thirds of
collaboration contracts in 1986-1996. Majority of such technology are manufacturing-
related.
(g) Myanmer
Up to the end of 1995, Uk was the largest investor in Myanmer followed by Singapore
and France (Table 3.26). The same trends continued in 1996. Up to August 1996, UK
continued to be the largest investor in Myanmer with cumulative investments of $1
billion, closely followed by Singapore ($896 million), France ($465 million) and
Thailand and Malaysia with around $450 million each. The bulk of the funds have gone
to oil and gas, hotel and tourism (Table 3.25), while other manufacturing sectors failed to
attract much FDI, despite the SLORC’s move in recent years to open up the economy.
(h) Indo-China (Cambodia, Lao PDR, Vietnam)
Vietnam, Cambodia and Lao PDR, the three South East Asian countries generally known
as Indo-China, are on the road to economic transition at different paces and on different
scale. All of them are reshaping their policies to attract private investment including
foreign investment. Vietnam and Lao PDR have already become members of ASEAN,
and Cambodia may be admitted to ASEAN very soon. Cambodia’s corporate tax rate of
9%, the lowest in the Asia-Pacific, is a very attractive feature for investment, and the rise
in manufacturing output has been boosted by FDI, particularly from Asia. In Vietnam,
FDI has increased from $1.8 billion in 1995 to $2.3 billion in 1996. Taiwan is the largest
investor in Vietnam followed by Japan, Singapore and Hong Kong, these four countries
accounting for 60% of total FDI.
Laos is expected to attract more FDI as costs rise in Vietnam. The key attractions are low
labour costs, relative political stability, and continued commitment to economic reform.
In addition, Laos’s strategic location to the larger markets of Thailand, Vietnam, China
and Myanmer is an advantage for foreign affiliates looking for a new base for
manufacturing. However, Lao DPR will need to improve its infrastructure to realise its
full potential as a regional hub.
(i) United States Direct Investment in Asia
52
US FDI outflows and related indicators in 1992 in selected Asian countries are given in
Table 3.27 and certain performance parameters of the US FDI in the manufacturing sector
in Asia are indicated in Table 3.28. At the end of 1992, Asia and Pacific accounted for 16
percent of the US outward FDI stock and 18 percent of the US FDI outflows. Major
destinations in Asia for US outward FDI are Indonesia, Thailand, Korea and Malaysia.
These countries generally generated high returns for US FDI which was also mostly trade
related.
4 DIFFERENT MODES OF FOREIGN INVESTMENT

AND TECHNOLOGY TRANSFER
4.1 Alternative modes of capital transfer
Empirical evidence indicates that private capital contributed more to economic growth of
the Asian developing countries than official aid, the relative importance of which in total
resource inflows declined since 1980s. There was also a change in the structure of private
flows. Until 1983, bank lending was the major mode of foreign private flow to the Asian
developing countries. Subsequently, the relative significance of bank lending has
declined and that of other modalities has increased. The share of foreign direct
investment has increased the most followed by bond lending and foreign portfolio
investment.
The major alternatives to syndicated bank lending are discussed below;
(a) Bond Lending
This type of lending has flourished in recent years. International bond markets have two
components: Eurobond and foreign bond markets. Eurobonds are underwritten by an
international group of banks and are issued in several different national markets
simultaneously. They are not subject to formal controls. Foreign bond markets are
simply domestic bond markets to which foreign borrowers are permitted access.
(b) Financing through New Instruments
In recent years a plethora of new instruments and modalities has emerged in the
international financial system. Most of these are hybrid instruments between bonds and
bank lending. Some seek to achieve continued access to bank lending (such as note-
issuance facilities and transferable loan instruments), and others seek to expand the use of
international capital markets (such as floating rate notes). New modalities for conducting
international financial intermediation (such as interest and exchange rate swaps and
options and networks such as CHIPS and GLOBEX) have also emerged.
(c) Foreign Direct Investment
53
This is the traditional alternative to sovereign borrowing and entitles the investor to a
share of the distributed profits of the firm. The parent firm is typically motivated by the
return it expects to earn by making use of its existing know-how in a local operation
and/or by incorporating the local operation in its global production and marketing
network.
(d) Foreign Portfolio Investment in Equities
Like FDI, foreign portfolio investment in equity entitles the investor to a share in the
profits of a private enterprise. Unlike the direct investor, however, the equity investor
typically seeks only a share of profits and not the responsibilities of control. Indeed,
many equity investors deliberately restrict their holdings to a small percentage of the total
stock in order to maintain liquidity and avoid being forced to take responsibility. Portfolio
equity investment involves varying degrees of penetration of the domestic economy. The
least penetrating mode, popular in many developing countries, is the offshore investment
trust that is invested in a broadly diversified portfolio of domestic shares. Other more
penetrating modes involve investments in individual shares, either through offshore
listings of developing country firms or purchases of locally listed shares.
(e) Foreign Quasi-Equity Investments
A foreign quasi-equity investment opens the package of a risk-sharing and managerial

control. These new forms of inter-national investment include joint ventures, licensing
agreements, franchising, management contracts, turnkey contracts, production sharing
and international subcontracting. While bond lending and lending through new
instruments together with syndicated bank lending are forms of general obligation
finance in the sense that the lender provides money to be repaid on terms independent of
the success of investment made with the funds, financing by other alternatives (i.e., FDI,
foreign portfolio investment and foreign quasi-equity investment) involves risk-sharing
and responsibility sharing. For example, under FDI an investor is entitled to a share of
the distributed profits of a firm and an investor also shares in the responsibility of
managing the firm. Portfolio investment is similar, except that it does not encompass
sharing management responsibility.
Using criteria developed by Lessard (1989), the five alternatives to bank lending can be
assessed in terms of expected cost, degree of risk-sharing or lending, and degree of
managerial participation in the project financed (Table 4.1). The major advantages of
foreign direct investment, foreign portfolio investment and foreign quasi-equity
investment are that they involve risk-sharing, sharing of managerial responsibilities and
the promotion of a more efficient use of resources. Foreign portfolio investment, in
addition, has a favourable impact on local capital markets. The disadvantages are that
there might be misuse of control and that foreign direct investment might introduce
inappropriate technology.
Table-4.1 : Alternatives to Bank Lending
_________________________________________________________________
Modes of Expected Risk- Managerial
54
capital transfer Cost Sharing Participation
_________________________________________________________________
Bond Lending Low Low Low
Lending through New Low Low Low

Instruments
Foreign Direct High Medium High

Investment
Foreign Portfolio Medium High Medium

Investment
Foreign Quasi-Equity Medium High Medium

Investment
_________________________________________________________________
4.2 Cross Border Mergers and Acquisitions (M & A)
The recent surge in global FDI has been fueled by the cross-border Mergers and
Acquisitions (M&As) in industrial economies. Mergers and acquisitions are a popular
mode of investment for firms wishing to protect, consolidate and improve their global
competitive positions, by selling off divisions that fall outside the scope of their core
competence and acquiring strategic assets that enhance their competitiveness.
The main cross-border M&A trends are:
(a) The total value of cross-border M&As (including both minority and majority cross-
border M&As and related joint ventures) doubled in 1988-1995 and reached $229 billion
in 1995.
(b) Western Europe had the highest level of cross-border M&As ofall regions.
Japanese cross-border M&As increased three-fond in 1995, reflecting a shift from a
traditional preference for greenfield investment.
(c) Most large-scale cross-border M&As have taken place in the energy distribution,
telecommunications, pharmaceuticals and financial services industries. As a result of
ongoing liberalisation, the value of service-related M&As increased by 146% between
1993 and 1995. The value of cross border M&As in banking and finance tripled in 1995
to reach $100 billion.
(d) Small and medium-sized firms played a significant role in the growth of across-
border M&As in electronics, business services, personal services,healthcare,distribution,
construction and engineering industries.
55
(e) About one tenth of world-wide M&A sales took place in developing countries due
to growing availability and attrativeness of firms in Asia and privatisation programmes in
Central and Eastern Europe.
4.3 Modes of Foreign Portfolio Investment
Foreign portfolio investment in the emerging markets can be channelled through three
main mechanisms: direct purchases on local stock markets, country or regional funds;
and issues of depository receipts on foreign stock exchanges by the domestic companies.
The size of direct purchases in local markets depends on market developments that
facilitate and encourage such trading. In recent years, the opening of the local brokerage
and investment banking business to foreigners has facilitated such purchases. Developing
countries have also enhanced the limits of foreign equity which can be held by the
foreign institutional invetors (FIIs). In India FIIs and non-resident Indians are permitted
to hold up to 30 percent of total paid up capital of any listed or unlisted companies.
Country or regional funds, which can be open - or closed-end, provide foreign investors
with the advantages related to mutual funds. They can mobilise large resources for
effective portfolio diversification and offer specialised knowledge regarding firms,
markets and economies. Whereas open-end funds are brought and sold from the fund
managers at the same value as in originating markets, the closed-end funds have priced
on the exchange where they are traded. Typically, closed-end funds are traded with a
premium or a discount over their net asset values. The premiums and discounts also
fluctuate over time for a given fund. The investors thus face two sources of risk and
return; the first is associated with net-asset value movements and the second is related to
shifts in the discsount or premium. At the end of 1992, there were about 589 open- and
closed-end country funds in operation in the emerging markets, with over $35.5 billion in
net assets under management.
In recent years, the public offerings and listing of the emerging markets equity on
foreign markets through global depository receipts (GDRs) and American depository
receipts (ADRs) increased due to relaxations in regulatory requirements and reduced
costs. Since 1991, issues of depository receipts on international capital markets
dominated other forms of FPEI. For foreign investors, ADRs and GDRs present the
advantage of conformity to standards of developed stock markets. Moreover, ADRs
allow United States institutional investors to purchase non-US securities. For companies
from developing countries, depository receipts facilitate access to international capital
markets, at lower cost of capital and heightened visibility. This alternataive also involves
lower monitoring costs and smaller concern over foreign control as compared to direct
purchases by foreigners on local stock markets.
4.4 Modes and Sources of Technology Transfer
There are various channels of technology transfer and adaption. These include foreign
direct investment, joint ventures, licensing, Original Equipment Manufacture (OEM),
Own-design and manufacture (ODM), sub-contracting, imports of capital goods,
56
franchising, management contracts, marketing contract, technical service contract, turn-
key contracts, international sub contracting, informal means (overseas training, hiring of
experts, returnees), overseas acquisitions or equity investments, strategic partnership or
alliances for technology. Other modes of technology acquisition include minority interest
in firms with R & D programmes, contracts for R&D to other companies and research
institutes, grants consortia, bilateral cooperative technology agreements, buying
technology embedded in products, material sub-asembly or processes.
Out of the several modes of technology transfer, the three most popular among the
developing countries are: licensing, joint ventures and foreign direct investment. A
review of the last three decades of transfer of technology flows to the developing
countries reveals that till 1970s licensing and joint equity ventures were the most
preferred modes. There are quite a few reasons for this preference, namely (i) following
the import substituting industrialisation pattern and having limited foreign exchange
availability, these countries preferred licensing arrangements where they could negotitate
know-how and/or patent i.e. one or two technology elements rather than all elements of
technology in a packaged form; (ii) joint equity participation was preferred to participate
in management and to ensure domestic benefits in terms of employment and profit
sharing; (iii) 100 percent foreign direct investment was not considered as channel of
technology transfer since it was an intrafirm transfer and the host country cannot
retransfer it to any other firm, and lastly (iv) foreign direct investment was invariably by
the multinational corporations, who were discouraged in developing countries for a
variety of social and economic reasons until the middle of 1980s.
These points of view had undergone drastic changes since the middle of 1980s when the
Asian NIC’s became export oriented. It was realised that it is not sufficient to acquire
process know-how or product design. One also needs to transfer the experience of cost-
efficient production organisation, management and marketing capabilities to ensure
survival in international competitive markets. Large multinationals and transnationals
companies possess a number of technological and synergistic advantages viz. (a)
ownership of industrial property rights, such as patents, trade marks and brandnames; (b)
accumulated experience in organisation and management (unpatented know-how); (c)
product differentiation, promotion and distribution; (d) vertical and horizontal integration
of production; (e) large size and economies of scale in both host country and global
operation; (f) diversification of product and activity lines and (g) opportunities to
internationlise capital markets. FDI or joint ventures ought to be preferred as these bring
all these technological and international advantages in production.
The second reason for preference to FDI or joint venturewith MNCs/TNCs is the need
to obtain efficient technology,. Here again, South Korea provides a good example, where
initially Japan was the prime investor in the low technology and labour intensive areas
like textiles, hotels and tourism. These were supplemented by high technology sectors
like electronic, fertilizers, oil and petrochemicals from the USA. This strategy helped
Korea to increase its exports earnings.
57
The third reason favouring FDI or joint venture with TNCs/MNCs is the trend for
regionalisation and globalisation with the view to improve upon economies of scale and
take advantage of specialised skills across countries. There is a growing trend to network
and form joint ventures such that different stages of production are carried out in different
countries. There is also the need to merge and become competitive vis-a-vis larger MNCs
position. Pooling of R&D resources being another reason for a group of large companies
joining hands. Another reason for shift in FDI through MNCs is the emergence of new
technologies like computer software, CNC machinery and new materials. All of these
technologies are easily available with the firms in advanced countries and cannot be
obtained through convensional licensing.
A survey of companies operating in India carried out by the Indian Council for Research
in International Economic Relations (ICRIER 1994) comes out clearly in support of joint
ventures as a preferred mode of technololgy transfer with large foreign companies. The
current Indian Industry’s tendency for joining hands with the well known MNCs and also
turning to the top 500 companies appearing in the Fortune List is a confirmatory revealed
preference. Another Survey on foreign investors in Korea carried out by the ICRIER
(1994) revealed four key benefits, viz., increased capital formation, increased
employment, increased value added (6 percent of GNP and 20 per cent of total value
added in manufacturing) and net increase in exports.
The successful modes of technology transfer depend upon each country’s technological
needs,capabilities and market conditions. For example, in the early years of
industrialisation, Japan acquired technological capabilities mainly through licensing,
turnkey projects and reverse engineering of imported goods supported by overseas on-
the-job training and study of foreign technical literature. In the case of South Korea,
turkey plants and machinery imports were the most important modes of technology
transfer, while licensing agreements and foreign direct investment played a minor role.
For countries such as Singapore and Thailand, FDI appears to have played a more
important role than other modes of technology transfer. India and Indonesia have relied
more on licensing and technical agreements than other countries. Only recently they have
started encouraging FDI flows and automatic transfer of associated technology.
Embodied technology transfer through capital goods imports will be the most important
source of technology and the cheapest way of technology acquisition for any Asian
developing country. Japan initially acquired foreign technologies by reversing the
engineering process, that is, disassembling and reassembling imported machinery. This
mode of technology acquisition, of course, requires established engineering capabilities.
Licensing agreements are the most effective way to suit local needs and conditions.
However, this mode of technology transfer is costly and involves a process that is more
complex and time consuming than other modes. Turnkey projects are the easiest way to
establish new factories, but rarely transfer needed technologies unless the recipient makes
conscious efforts to acquire them.
FDI, however, plays a more important role than directly transferring needed technology
and capital. This is the role to stimulate local firms in technology acquisition and
58
improvement through competition. The Republic of Korea’s experience indicates that the
technological level of joint ventures are initially higher than that of local firms but the
rate of technological improvement oflocal firms is generally higher than the joint
ventures,due mainly to the aggressive management strategy of the former to catch up
with and compete with the latter in the domestic as well as international markets.
Source of technology acquisition is as important as the mode of technology transfer.

Japanese technologies are more suitable to the needs and conditions of Southest Asian
countries because they are less capital intensive, smaller in scale and easier to assimilate
than technologies from the United States and European countries. It is still controversial
whether FDI from the United States is more capital intensive than that of Japan, but it is
true that many Asian developing countries have been adopting the Japanese style of
management which definitely influences the sources of technology acquisition.
It should also be noted that the modification of technology is a costly and risky venture.
Thus, many Asian developing countries tend to adopt advanced foreign technologies
without any effort to modify them to fit in with the local needs. At the same time,
technology suppliers have no interest in modifying their technologies to match local
conditions. Instead, these suppliers quite often impose restrictive clauses.
4.5 Technology Transfer and Adaption :

East Asian Experience
At the beginning the East Asians specialised in simple assembly skills and developed
production capabilities for churning out standardised products. Over time, they moved to
improve upon quality and the speed of operation. An interesting feature of technology
absorption at this stage was what is known as “reverse engineering of products”. The
engineers and technicians began with the end-product and worked back to find the
components, their inter-relationships, and the technologies. This way they upgraded their
own technological awareness and capabilities without much risk. Ultimately, research and
development (R&D) came to ococupy an increasing share of their investment, R & D
became increasingly linked with the assessment of long term marketing needs,
capabilities for innovation and product design developed and new products were
launched. This full process took a considerable time to be completed, with inter-country
variations in experiences.
This evolution of technological competence and capability was associated with various
successive stages of market development. In the early stages, cheapter labour was
deployed for assembling and then selling to buyers for distribution. With reverse
engineering, there was a move towards higher quality production in response to foreign
buyers’ demand. As production skills and design capacities developed, companies tried to
popularise their own brands by undertaking a vigorous sales campaign. In the last stage,
emphasis was on direct marketing through their own independent channels and wide
advertising and in-house market research.
59
Out of the several modes of technology transfer as discussed in section 5.4, Original
Equipment Manufacture (OEM) and Own - Design and Manufacture (ODM) played a
major role in East Asian economies in technology adaption and upgradation, eventually
leading to independent designing and development. OEM, a specific form of sub-
contracting, evolved out of the joint operations of foreign buyers and East Asian suppliers
and become the most important channel for export marketing in the 1980s. Under OEM,
the local enterprises produced largely under the technical guidance of foreign partners
who were involved in the selection of capital equipments and in the training of managers
and technicians. ODM was a stage forward, under which the local supplier did everything
according to a general design layout supplied by the buyer, and the goods were sold
under the latter’s brand name.
South Korea’s electronic industry provides an interesting example of technological

development under different stages. It began with the production of transistor radios in
1958, under the domination of multinational corporations. In the 1960s the major players
included Motorola, Signatics and Fairchild. Even in 1972, eight foreign firms accounted
for 54% of electronic exports from South Korea. The foreign firms were not interested in
transferring technology and imported most of their inputs. In the next phase, joint
ventures with Japanese firms, e.g., Samsung-sanyo, Toshiba-Goldstar, became more
common and accounted for 15% of foreign participation in the 1970s. OEM
supplemented joint ventures and opened up new areas of production, particularly in
computers, consumer electronics and microwave ovens. Under this arrangement the
foreign buyers supplied key components, material design and capital goods, and captured
most of the post-manufacture value added, and sold those under their own brand names.
OEM accounted for 60 to 70% of electronic exports.
In the 1980s the chaebols took off and sought more independence from their patrons.
First, there was a switch from OEM to ODM. In the next stage, their marketing strategy
was to rely more on their own brand names. This strategy worked well and by the early
1990s several of them established themselves as leading firms in the global market,
occupying fifth (Samsung), 12th (Goldstar-Electron) and 13th position (Hyundai) in
DRAM (dynamic random access memories) production, with aggregate exports
amounting to $106 billion in 1992.
4.6 Linkages, Spillovers and Market Access

by Transnational Companies (TNCs)
Transnational corporations, while securing and strengthening their access to markets

through international production, can exert a powerful influence on market opportunities
for other firms in host or home economies. These effects take place through the
backward and forward linkages of TNC systems in production and distribution, through
spillovers and externalities related to market access, and through the provision of
distribution and marketing services by transnational trading corporations to domestic
firms in home or host countries.
60
Besides their linkages with customers, sourcing from suppliers is the most important
linkage established by TNCs with enterprises outside their own organisational structures.
One common mode of such relationships is subcontracting, which affords suppliers the
benefits of state-of-the-art logistics, marketing and distribution, and often, of
specifications, designs and training provided by TNCs which they supply. Established
suppliers of TNCs may in turn become managers of a second and third tier of
subcontractors, while retaining responsibility in terms of price, quality and delivery
schedule vis-a-vis a client. These networks open up markets and export opportunities for
large numbers of small and medium-sized firms.
Much of this sourcing is from producers in the domestic economies of home and host
countries. Local suppliers account for the majority of purchased inputs of both parent
firms and foreign affiliates in United States TNC systems. In the case of Japanese TNCs,
parent firms rely much more on local sourcing than do foreign affiliates. Furthermore,
during 1989 and 1992, while Japanese parent firms reliance on imports slightly
decreased, their imports from Asia increased.
Component supply through subcontracting relations with foreign affiliates has created a
major niche for domestic component producers in several host developing countries to
enter the vertically integrated production chains of TNCs geared to export markets. In
Mexico, for example, 59 per cent of a sample of 63 manufacturing affiliates surveyed in
1990 subcontracted nationally. Subcontracting in this sample of firms was concentrated
mainly among foreign affiliates in technology-intensive and export-oriented industries,
notably the automotive, computer, electrical and electronic and chemical (excluding
pharmaceuticals) industries. Assistance provided by foreign affiliates to subcontractors,
included technical, administrative and financial assistance, as well as training in quality
control, the last by 87 per cent of affiliates surveyed. Similarly, in South-East and East
Asia, networks of local producers (mainly joint ventures with TNCs) have been
established for component-supply to automobile and electronics TNCs, with
specialisation among plants in different countries to supply the regional market.
In the automobile industry, these networks mainly belong to Japanese TNCs; all major
Japanese automobile TNCs source automobile parts through their foreign affiliates and
their local subcontractors, taking advantage of ASEAN regioinal cooperation provisions.
In the electronics industry, such networks have been established by United States as well
as Japanese TNCs, beginning with labour-intensive operations and moving towards
increasingly sophisticated networks of operations with much cross-hauling of products
across national boundaries (Graham and Anzai, 1994).
Subcontracting arrangements are common for consumer goods such as consumer

electronics, footwear, furniture, garments, houseware and toys. They carry the same
advantages for the subcontractors as those mentioned earlier for component suppliers:
production is generally carried out by locally-owned producers, while the specifications
are supplied by brand name TNCs or large retailers that design the products, provide
technical assistance and manage marketing and distribution. Subcontracting relationships
are also often structured in tiers, with established primary suppliers retaining the
61
responsibility for price, qyality and delivery, while managing lower tiers of supply.
These networks open up market and export opportunities for many small and medium-
sized firms.
Linkages of suppliers with TNCs may take forms other than subcontracting and sales
through transnational trading companies. One popular form is original equipment
manufacturing , in which producers manufactaure finished products that are sold under
another company’s brand name, but not, as in subcontracting, under contract with a
commitment by the client to buy, or with the assistance and support of the client in
production. These arrangements, like subcontracting, strengthen the competitiveness of
manufactaurers by providing them access to markets, but only when the manufacturers
already possess the capabilities to meet buyers’ quality, price and delivery conditions.
For example, Japanese TNCs in the electronics industry rely heavily on original
equipment manufacturers. In some developing countries, original equipment
manufacturing has provided a useful export niche for small and medium-sized firms.
Firms in East and South-East Asia in particular have made wide use of it.
Non-equity arrangements under which producers outside a TNC system acquire from a
TNC the right to produce and market a product in return for a royalty or a fee are a
acommon mode of internationalisation of production by TNCs. Licensing arrangements
are frequently used for transferring technology to firms outside the system, but they are
also widely used for the marketing or distribution of the licensor’s products or the use of
its proprietary assets, including trade marks or brand names. Licensing and other non-
equity modes of participation (including franchising, which is especially common in
services) carry advantages as a means of market access when FDI is not permitted,
involves high risks, or is not sufficiently profitable and cross-border trade less attractive
due to transport cost, perishability of products or other factors.
4.7 Acquisition of Technologies by SMIs
The SMIs in the Asian region have been found weak in technology acquisition and
adaptation. They have been also found to rely on their own experience or the assistance
of machinery producers for their technology. Even in the labour-intensive industries,
access to the most efficient technologies is an esential element. An important conduit of
technology transfer in Japan has been sub-contracting route. Large firms that sub-
contracted the production of parts and components of SMIs saw to it that standards were
maintained.
The New Delhi Declaration on Strengthening Regional Economic Cooperation adopted

by the Economic and Social Commission for Asia and the Pacific (ESCAP) at its fiftieth
session held in April 1994 identified technology transfer as an effective means to achieve
the specific purpose of raising the standars of living of the people in Asia-Pacific
developing countries and sustaining the dynamism of the region. As firms, both local and
external have emerged as the central actors in technology transactions, their technological
capabilities have a considerable influence on the whole spectrum of technologies used
62
over time. Equally, technology transfers can contribute to the enhancement of the
technological development of local firms and SMIs.
Technology transfer arrangements may include two broad flows of technology. The
first is a combination of the flows of capital goods, operation know-how, maintenance
and repair, etc. which are usually incorporated into a new unit. The second constitutes
the broad type of flows, which contribute to the technological capability of the importing
firm. This type consists of system-related knowledge, various kinds of skills, experience,
technical and managerial knowledge that are required for controlling, modifying and
improving the system over time.
The existing technology climate of a country can be further improved through

technology transfer and, in particular, foreign direct investment (FDI) consisting of a
package combining capital, technology and access to international markets and their
contributions to economic growth and, more especially, the enhancement of endogenous
technological capabilities.
Ultimately, an effective way to achieve sustainable industrial development in

developing countries is to allow them to improve the technologies they imported and in
the long run to create their own technologies relevant to their problems. Therefore, there
is a need for technological infrastructure development including R&D institutions with
links to the production sector, standardisation and quality control and industrial
engineering design and consultancy service organisations, technology information patent
office,intellectual property rights regime mechanisms, technological education and
training institutions, and an appropriate policy-mix, etc.
In order to provide the countries of the region, and particulary their SMIs, with quality
information on environmentally sound technology opportunities, the ESCAP secretariat
through the Asian and Pacific Centre for Transfer of Technology (APCTT) has been
implementing a project entitled Mechanism for Exchange of Technology Information
(METI).
5 FOREIGN INVESTMENT AND TECHNOLOGICAL TRANSFER,

AND ADVANCES IN NEW TECHNOLOGY
5.1 Indicators of Technological Capability
Determinants of a country’s economic growth can be decomposed into three

components, viz., diffusion of technology from abroad (imitation effect), creation of new
technology within the country (innovation) and developing the country’s own capacity
for exploiting the benefits offered by available technology. Countries which are at or
near the technological frontier grow mostly by generating innovations, while the
technology followers benefit by imitation or through the diffusion of technology.
63
Manufactured goods reflect greater technological content compared to non-
manufactured goods. The share of manufactured value added in GDP shows the extent to
which a country has moved away from agriculture and allied activities and has moved up
on the ladder of industrialisation. As the technological capability grows, a country is able
to produce more capital goods, the share of machinery increases in the capital goods
sector, and the value of consumer goods imports decreases relative to the imports of
capital goods. As countries move from technologically under-developed to becoming
technologically developed, some of them start exporting consumer goods. Some others
even export the standard-modern type of technology.
Mostly, countries which have encourgaged exports have been able to stay in the race of
technology. Exception to this is (a) Japan, whose strategic protectionist policies did not
come in the way of its immense technological capabilities; and (b) India, where the
opposite is claimed. The inward looking policies have made India develop its technical
base, but at an enormous cost due to wasteful and duplicative R&D in India.
The share of exports in GDP is highly correlated with the technological capabilities of a
country. A large share of exports in GDP in countries like Hong Kong, Singapore, South
Korea, Taiwan and more recently in Malaysia, Indonesia and Thailand goes hand in hand
with the presence of a technologically oriented industrial structure. But, these countries
have not scaled similar heights on the ladder of technological capability. South Korea and
Taiwan have achieved a higher level of technological abilities than the other countries.
The volume of expenditure on research and development is another determinant of the

creation of technological capability. The fast growing technologies have high research
and development expenditures. In fields such as computers, micro electronics and
robotics, the ratio of research and development expenditures to sales surpasses that in
mature industries like metal extraction.
5.2 Pattern of Industrialisation and Technology

Development in Selected Asian Economies
In 1990s the small enterprises accounted for 90 percent of enterprises and 60 percent of
export value in Taiwan. While most of the large firms were state-owned, the government
relied on the small private sector units for the growth of the electronics industry which
was the most modern and dynamic among them. In 1990, Taiwan was the seventh largest
computer goods manufacturer in the world and worked with 700 hardwdare
manufacturers and 300 software manufacturers, accounting for 83% of the
“motherboards” and the largest number of mouses, monitors, image scanners and
keyboards produced in the world. Taiwan’s success in electronics relied on the speed,
skill and agility of hundreds of local entrepreneurs, rather than the scale and financial
power of the chaebol. Local firms overtook TNCs in domestic production in the 1980s,
but foreign firms provided technologhy through joint ventures in electronics, as also in
bicycles and footwear.
64
In contrast, in South Korea, large corporate giants, chaebols, emerged and took over
control with state support. The combined sales of the top ten chaebols increased from
one-third of GNP in 1980 to two-thirds of GNP in 1994. Chaebols were the major
vertically integrated business houses of South Korea, each with 15-20 affiliated units,
competed with each other, but colluded to keep foreign investors at bay. They borrowed
at home and abroad, brought high technology, diversified the industries and gave South
Korean industrialisation a certain continuity. Hyundai, Samsung and Daewoo are the
leading Chaebol groups that have spread their network throughout the world.
East Asian countries started with textiles, household appliances and other labour-
intensive light industries. In the second stage, they moved to capital and knowledge
intensive industries such as steel, shipbuilding, petrochemicals and synthetic rubber, to
provide basis for further industrialisation by way of forward linkages.
Another pattern, known as the “flying geese model” first developed by A.Kaname in the
1930s and then by K.Akamatsu in 1956, postulates that Japan, the leader in
industrialisation and technological development in Asia, relocated its production
facilities to East Asia as its wages and other costs increased. Later, as the Plaza Accord of
1985 and the Louvre Accord of 1986 were signed by the G7 countries to rectify US trade
imbalances, and the exchange rate of Yen further appreciated vis-a-vis dollar, Japan
further relocated production to low wage economies in order to retain its market share.
Thailand benefited from this and became a production base for Japan, receiving raw
materials and equipment and then producing finished goods for export to Japan and other
countries. Further, as US consumers turned to imports from NICs such as Taiwan and
Korea, the US pressure came on the latter to adjust and strengthen their currencies, which
forced them too to invest more in low wage foreign countries, including Thailand. This
progression from Japan to East Asia and then to Southeast Asia, took on the form of an
inverted “V”, as the economies of Pacific Asia began to fly together led by Japan. During
1986-88 the overall Japanese investment exceeded the cumulative value of FDI in
previous three and half decades, and while most of it went to North America and other
developed countries a significant share went to East Asia.
Because of its closest geographical, cultural and educational proximity to Japan, the
Republic of Korea imported most of its technologies from Japan. Japan took the lion’s
share (51.7 per cent) of technology transfer to the Republic of Korea followed by the
United States (24.9 per cent), Federal Republic of Germany (5.6 per cent) and France (4.5
per cent) in 1982-1987. As in Japan, the case of the Korean automobile industry is a
classical example of the infant industry development which was well-staged, financed
and promoted until the industry attained international competitiveness. All technology
acquisitions and adaptation by Korea were also carefully selected and sequenced.
As regards technology, Thailand pursued laiseez faire policy until recently. Firms were
free to import almost any kind of technology, although technology importers had to take
the approval of the Bank of Thailand for foreign exchange remittances. The liberal
technology policy contributed to the rapid industrialisation of Thailand through the
exploitation of its comparative advantage. Foreign investment through joint ventures had
65
been a major type of Thailand’s technology acquisition and Japan had been the most
important technology supplier to Thailand followed by the United States. Since its Fifth
National Social and Economic Development Plan (1982-1986), Thailand shifted from
laissez faire imported technology policies to the development of indigenous technologies.
5.3 Industrial technology development in

There are basically two sources of industrial technology -indigenous or local technology
and imported or transferred technology. The Asian developing countries, particularly the
newly industrialising economies (NIEs), have heavily depended upon the latter because
imported technologies are not only cheap and easy to acquire but also risk-free, tested
and standardised.
India’s industrial technology level is relatively much higher than the level indicated by
its per capita income because of its technology accumulation in capital goods and
chemical industries, its strategy of promoting heavy industries since 1955 and adopting
import substituting industrialisation until 1980s. The share of machinery, transport
equipment and chemical industries in the value added of the manufacturing sector is quite
high in India (lower than that in only three cointries viz. Taiwan, Malaysia and Japan).
The Asian NIEs adopted a strategy of export-oriented industrialisation which made use
of relatively cheap labor to compete in the international market. Consequently, the NIEs
started importing relatively labor-intensive and simple technologies. The Republic of
Korea used to produce and export low technology products such as radios and black and
white television sets in the 1960s. As these labor-intensive technologies matured and the
capital-labor ratio rose, the country shifted to more advanced technology products such as
colored televisions, tape recorders and amplifiers in the 1970s and VCRs and computers
in the 1980s.
On the other hand, Indonesia and India initially adopted import-substituting

industrialisation through various protective and incentive measures for domestic
industries. Machines, equipment, parts and components, required by import-substituting
industries, which were basically labor-saving or capital intensive, were imported from
the developed countries under a system of licences and fiscal and monetary incentives.
However, since 1980s, technology imports were liberalised to some extent by many
developing countries including India.
An important factor in East Asia’s successful productivity-based catching up was

openness to foreign ideas and technology. Governments encouraged improvements in
technological performance by keeping several channels of international technology
transfer open at all times. In contrast to most economies with import-substituting
industrialisaiton strategies, even when protection was practiced with respect to the
domestic market, the search for and absorption of foreign technology was encouraged.
While Japan and Korea set obstacles to FDI, they were hospitable to licensing. Singapore
66
always welcomed FDI and a major task of the economic planning agency was to locate
appropriate foreign investors. Malaysia has aggressively sought export-oriented FDI,
particularly from Japan.
In contrast, many other developing economies were suspicious of open policies with
respect to knowledge acquisition. Suspicion of external trade was often reflected in a
mistrust of FDI and licensing. Even where FDI was permitted in inward-oriented econo-
mies, it was not viewed as providing access to modern technology but rather as a source
of additional domestic producion. The basic difference between these economies and
Singapore, which was more heavily dependent on FDI, is that the multinational corpora-
tions locating in the latter could only do so to export, given the small internal market.
Korea and Taiwan with larger domestic markets created a similar situation by
encouraging FDI for export and other sectors which required substantial technology
transfer.
A study made by Lall (1993) concludes that the promotion of technological capabilities
(TC) is a vital part of the strategy of industrial development. Technological capabilities
include the skills - technical, managerial and institutional - which are necessary for
productive enterprises to utilize equipment and technical knowledge more efficiently. It
also suggests that, in the presence of market failures, active government involvement is
required to ensure capability development. This involvement must be based first on the
removal of irrational and inefficient interventions. It then has to address several
determinants of TC activity: the incentive framework, the supply of human capital, the
supporting infrastructure, finance for ITD, and access to foreign technologies.
The best incentive framework for ITD is to provide constant competition to enterprises
in a stable macroeconomic environment. Full exposure to world competition may,
however, have to be tempered by the fact that a new entrant has to incur the costs and
risks of gaining technological knowledge and experience, when its competitors in more
advanced countries have already gone through the learning process. This may be a case
for temporaty and limited infant industry protection. But, it has to be carefully designed,
sparingly granted, strictly monitored, and offset by measures to force firms to aim for
world standards.
The supply of human capital, technical support services, foreign technology, S&T
infrastructure and finance can suffer from market failures. They therefore require
government intervention and policy support, and their most effective use calls for
selectivity and coherence. Much of ITD support work must focus on market friendly or
functional interventions to strengthen the infrastructure, improve its relations with
enterprises, help small and medium-sized firms with their special information and support
needs, augment the supply of finance for technology investments, and build up requisite
skill needs for efficient industrial operations and growth. However, there does not exist
any universal strategy for ITD, and an optimal mix of policies for a country depends on
its stage of development, factor endowments, product-mix and relevant supporting
institutions.
67
The Repoublic of Korea has been transferring self-developed technologies in the areas
of pulp, paper manufacturing, electricity, electronics and machinery as Korean
technologies are considered to be more fitted to less-developed countries than those of
developed countries in terms of cost and factor intensity. Labour-intensive standardised
technologies, which became an engine of the Korean export drive, have already reached
maturity. These technologies could be easily imported, adapted, disseminated and
marketed. The country is now entering a higher technology stage which requires more
costly R&D activities with higher risk than before for the development of better products.
As far as technology acquisition and assimilation are concerned, developing countries

can learn much from the Korean experiences. The Korean lessons indicate that
technology can be upgraded only through conscious and steady efforts to improve
available technologies, and that the most effective way to achieve such constant progress
is through interaction with a competitive market. The Korean experience also indicates
that technologies are best learnt by workers in the workplace.
5.4 New Technology and Applications
A set of technology collectively referred to as New technology is a single most

profound source of technological progress of both of advanced and developing
economies, rapid globalisation and shifts in global trade. The term refers to innovative
development in electronics relating to informatics, computer hardware, software, tele-
communication, bio-technology and new materials. To this can be added emerging
technologies namely renewable energy technologies like photovoltaic, remote sensing,
super conductivity and photonics. New technologies are knowledge intensive in contrast
to conventional capital intensive technologies. Moreover, new technologies are process
technologies rather than product technology. Therefore, they are not only scale free but
also have a very wide range of applications.
Countries like Korea, China and India stand to gain substantially by revitalising their
economies to become internationally competitive not only in new technologies but also in
many other industries with the use of time and material saving production processes like
CNC/CAD/CAM integrated manufacturing, flexible manufacturing systems, just in time
production systems etc. Likewise, the bio-technology has a wide range of application
ranging from food processing, pharmaceuticals, chemicals, agriculture and allied sectors,
mining, soil fertility etc.
As for new materials, the sectoral range is even wider and includes material industry,
energy, automobile, semi-conductor, communications, precision machinery, air-craft/
space, medical equipment/ instruments and life technology product like heart valvle and
other synthetic human body parts. New technologies help to develop new manufacturing
location. The conventional need to look for resource base or cheap labour is no longer
required.
A. Micro-Electronics and Information Technologies:
68
With the incorporation of micro-electronics, which permits programming of user’s
instructions, monitoring usage-variables, controlling the process and projecting the status
of operation - the products have become highly sophisticated and user-friendly without
much additional cost. It is not surprising, therefore, that micro-electronics has entered
practically every sphere of daily life. Micro-electronics has entered domestic and
personal use appliances. It is being used extensively in health care and education. It has
already transformed the entertainment scenario. Transportation, Banking and Publishing
sectors see ever increasing use of micro-electronics in their operations. Even agriculture
and retain services are beginning to use micro-electronics in a substantial way. Perhaps,
the most dramatic and immediate application of micro-electronics has been in the field of
manufacturing industry where the application of automted programmable tools:
numerically controlled machines, robotics, flexible manufacturing systems and computer
integrated manufacturing have revolutionised the very basis of production.
B. Biotechnologies:
Except for a few of the more dynamic economies which have made impressive
industrial development gains, several economies in the Asia-Pacific Region continue to
remain technologically backward with 650-700 million people suffering from diseases,
malnutrition and poverty. Biotechnology assumes significance in terms of the
opportunities it offers for improved utilisation of microbes, animals and plants for
improving the food, energy and health care needs in the region.
Biotechnology is a multi-disciplinary subject combining micro biology, biochemistry,

chemical engineering and chemical technology. It can also be clasified as microbial
biotechnology, plant biotechnology and animal biotechnology etc. based on the kind of
biological agent involved. Biotechnology includes the recombinant DNA technology,
protoplastfusion, hybridoma, cell culture, tssue culture, germplasm development, embryo
transfer technology, and immobilisation of cell and cellular products. It has immense
potential for use in agricultuire, forestry, horticulture, medicine, nuclear medicine, bone-
growth, artificial limbs transplant and replacement, health, chemical industry, food
industry, pollution control and environment.
Industrial applications of biotechnology are in the area of production of fine chemicals

from agricultural wastes through microbial processes, plant cells, animal cells, production
of antibiotics, vitamins, aminoacids, steriods, biofuels and preservation of industrial
products. Another important area of application of biotechnology is in protection of
environment. Bio-degradation of man-made chemicals, plastics, polymers and synthetic
materials, management of hazardous wastes, promotion of sewage and industrial
effluents, cleaning of oil spills through bacteria, enhancement of oil recovery, biogas
generation from wastes, control of air pollution, biomass production and use of bio-
sensors for environmental monitoring are some of the more prominent applications.
As far as the status of biotechnology industry in the region is concerned, the Republic of
Korea, Singapore, Taiwan Province of China and Thailand show a comparatively stronger
69
market driven orientation and considerable efforts behind biotechnology development.
Their industrial policies are more specifically focussed on biotechnologies including
supply of credit, risk capital and support for training and process/product development. In
India, major effort has been in the creation of an R&D base and manpower training and
the development and application of new technologies. China has given actrive support of
biotechnology development and has developed a substantial biotechnology industry
which grew from almost scrach to $22 million by 1988. In Sri Lanka, traditional
biotechnology applications include the production of fermented foods, beer and alcohol
but recent activities are growing in the areas of tissue culture, bio-fertilizers and
biological waste treatment.
C. Advanced Materials Technology
Materials figure extensively as an enabling parameter for modern technologies in

almost all sectors like heavy engineering, transportation, aerospace, power generation,
micro-electronics and bio-engineering. In all these sectors, technological progress is
aided by the continuous development of critical materials with improved performance
capabilities. The shaping of these materials in the form of components or devices under
production conditions calls for development of new, expensive and complicated
processing methods. A variety of basic materials, like metals, inter-metallics, polymers,
ceramics and glasses, and their combinations in the form of alloys, blends and composites
and the related processing and manufacturing techniques are being developed at a rapid
speed. Diverse new materials are emerging as substitutes for and enabling conservation of
fast depleting materials e.g. plastics in place of wood packaging, composites in place of
conventional structural materials and optical fibres in place of copper cables in
telecommunication.
D. Software Industry
Software industry has been growing by 20 to 30 percent annually. Estimates about the
size of the industry vary quite considerably. The present size of the software industry
could be anywhere between US$ 350 and 400 billion. It is expected to expand to US$450
billion by 1998. Given that the software industry remains highly knowledge-intensive as
well as labour-intensive and the demand for software professionals is growing much
faster than the economies of the Asia-Pacific region - particularly those which have
reasonably extensive infrastructaure for education and training.
Many countries of the Asia-Pacific region enjoy a comparative advantage in terms of

the low cost of skilleld and educated labour. Software programmes in India, Malaysia, the
Philippines and Singapore, for example, cost less than their counter parts in the UK or
USA by a factor ranging anywhere from 1/10th to 1/4th. The favourable labour factor
coupled with the fact that the software industry presents relataively low barriers to entry
in terms of capital requirements and infrastructure requirements, means that software
industry can be of great value to the economies of this region.
E. Food Processing Industry:
70
The food processing industry is quite important in the economies of most Asia-Pacific
countries, notably China, India, Japan, South Korea, Singapore, Thailand, Malaysia and
Hong Kong. It is a growth industry generating exports and employment, providing food
to the millions and expanding domestic market for agriculture and marine products. The
economies of the Asia-Pacific region will need skills in the technologies in order to
realise the potential of the food processing industry. Manpower would be required at
various levels which is capable of understanding and utilising these technologies;
adopting technology to the local crops and scale of production; developing, establishing
and maintaining food processing equipment; and finally undertaking technology transfer,
technology adaptation and technology development functions in relation to the food
processing industry’s requirements.
F. Textile Industry:
Textile industry is an important part of the industrial structure of many economies in the
region. Apart from its contribution to economic develolpment, a major contribution of the
textile industry has been in terms of the employment it provides both directly and
indirectly to relatively unskilled and semi-skilled persons in the developing economies of
the region.
In recent years, major innovations in weaving have been related to the introduction of
so-called “shuttleless looms” from the rapier loom. Shuttleless looms are faster, quieter,
cleaner and considerably more labour-saving than shuttle looms. In case of knitting
technology, there have been tremendous advances in speed, quality and flexibility;
advanced machines are completely programmable and flexible.
There are growing computer applications in dyeing, finishing, fibre measurement,

colour measurement and matching, automataic control and adjustments, computer-aided
design, quality monitoring and change of style. Computers also have a great impact on
management functions, including planning, informations processing and communication,
manufacturing and maintenance records.
In general, one can identify three groups of countries in the region with different pattern
of structural adjustments in the textile industry. The first group consists of highly
industrialised countries where the adjustment led to greater reorientation to high-value
added and small batch production, increased flexibility of production, decreasing labour
intensity and improved skills of management and technical staff. The second group
consists of high-income developing countries where the textile industries are dominated
by mass production and export-orientation, growing interest in high value added products
and intensification of technological change at all stages of production. The third group
comprises a number of developing countries where the industry is geared mainly to
internal market and mass production, with high proportion of low productivity, small
scale undertakings and high labour intensity.
5.5 Issues Relating to New Technology
71
International technology markets are complex, imperfect and rapidly evolving.
However, some trends are significant. First, the pace of technological innovation is
quickening. This has been caused by both demand factors such as growing global
competition and supply factors such as breakthroughs in genetic engineering and solid
state physics. Second, life cycles of technological processes and products are shortening.
These have been caused by new electronics-based technologies and increased
participation in technology-intensive industries. Third, rapid automation is transforming
factor intensities of certain industrial processes. As a result, certain industries may be
losing their labour-intensive character.
Technological change, currency appreciation and wage increases, in addition, will lead
to the shift of industries from Japan and the newly industralising economies (NIEs) to the
Asian developing countries as the former move up the market. Japanese foreign direct
investment had, in fact, played a key role in fostering the horizontal division of labour
with the NIEs.
Because of the special characteristics, the new technologies throw-up a number of

issues for developing countries like India. Some of the issues particularly relating to
information technology and bio-technology are discussed here briefly:
(a) Most of the developing countries except South Korea, India and Malaysia are not
in a position to manufacture semi-conductors, digital tele-com switches and are at a
comparative disadvantageous position. Even in India the technological gap in these
specific areas continues to exist which adversely affects the competitiveness of the
informatics industry.
(b) Another problem which is about to manifest itself in a big way is the patents issue in
the computer software. The advocates of it ask for patent right to some of the basic
software development packages that act as engineering tools. This will create a great
hardship to the software firms.
(c) Although softwares have high export potentials for India because of its comparative
advantage in terms of cheap skilled professionals, it is not in a position to exploit fully
the potentials as it is unable to enter high value added software.
A similar set of issues cloud the future potential of bio-technology. Despite considerable
advances made in bio-technology in developed countries and selected developing
countries like Cuba, Brazil and India, serious doubts have been raised about the success
in commercialisation in the developing countries.
(a) First, as bio-technology is a science based industry, it is difficult to orient the

research scientists in the university departments and National Research Laboratories to
switch over from a pure research pursuit to a profit oriented application research. This is
true of India where emphasis is still on supply-push innovation rather than demand-pull
incentives.
72
(b) Second, bio-technology is even said to be capital intensive and not knowledge
intensive as generally believed, particularly when scaling up is involved.
(c) Third, in the areas of animal and plant genetics, there are still unresolved
environmental and ethical issues (such as patenting of seeds and animals).
(d) The real economies of scale in the bio-tech comes through the combination of bio-
technology with information technology. For instance, the use of micro processors and
computers in automatic controls for bio-reaction and DNA synthesizers or in sequencing.
Likewise in the field of bio-sensors and bio-chips, integrated circuits are being fused with
protein engineering. Bio-tech is still a factor technology for India and it lags behind in
these new technologies.
5.6 International R&D collaboration in new technologies
The high technologies are R&D intensive and their development requires large risky
investments, and it is non-viable for developing countries to make an effort to become
technologically self-reliant in all high technology sectors. A developing country like India
which is not in a position to undertake organised R&D on a high scale through its own
efforts has two options: either to license international R&D collaborations for upgrading
its technological design capability or to allow foreign direct investment and joint ventures
for state of art technology. In the Indian context the second option has been largely
accepted.
India identified high technology sectors like electronics, pharmaceutical and

engineering in 1970s. However, due to inefficient management by the public sector, it
made poor progress in electronics and engineering as compared to South Korea, and other
Asian NICs. Pharmaceutical industry is an exception, where Indian exports have gone up
substantially but credit goes to joint ventures with multinationals.
Being knowledge intensive, it appears logical to have great scope for internatiional
collaborations. But, it is unlikely that advanced countries will be willing to collaborate to
transfer new technologies. An alternative option is to allow university departments and
research institutes to take up sub-contracted work for the multinationals/ transnational
corporations who have not only resources but also the marketing network. Alongwith the
existing high technology sectors like chemicals and allied, engineering and industrial
machinery, new technology sectors hold the key for the future technological development
in developing countries like India. The latter include micro electronics, tele-
communications, informatics, bio-technology, new materials, photonics, polymers,
energy environment, liquid crystal design, super conductivity etc.
6 FOREIGN INVESTMENT AND DEVELOPMENT OF

INFRASTRUCTURE AND SERVICES
73
6.1 Foreign Investment and Services
In general, services include transport and communications, wholesale and retail trade,
finance, real estate, insurance, public administration, defence and others. It is generally
observed that the share of primary sectors (e.g. agriculture, forestry and fisheries) in gross
domestic product (GDP) decreases and that of services increases with economic growth.
Table 1.7 indicates the expanding role of the service sector in most Asian developing
economies during 1980s and 1990s. The share of the service sector in the GDP increased
substantially during 1965 to 1996 for most of the Asian economies. The countries which
are exceptions to this trend are the People’s Republic of China, Malaysia, Myanmar,
Singapore and Sri Lanka. The decline in Singapore is due to a faster growth of industry
vis-a-vis services, although this trend is likely to be reversed in the future. The same
trend has occurred in Malaysia and Sri Lanka; in both countries, industry has grown
somewhat faster than services, leading to a slight decline in the importance of the latter in
the economy. In Myanmar the role of the service sector has declined due to faster
growth of agriculture during the period. In the People’s Republic of China, the share of
the service sector has been virtually constant. Although industry has grown, its growth
has been at the expense of agriculture.
Rapid technological developments in telecommunications and computers in the 1980s

have made some services, especially information-intensive ones, more tradable. The
affected service industries include financial services, consulting, engineering,
professional services, international reservation services in their transportation and hotel
industries, research and development, education and data services and information-
intensive operations in other industries.
The “long-distance” type of service does not necessarily require physical proximity,
though physical proximity between the provider and the user may be useful. Live
broadcasts, transborder data transmissions, and traditional bank and insurance services
fall under this category. The scope of long-distance service transactions has greatly
increased with the advance of technology. In “long-distance” services, there is no need
for any direct foreign investment or movement of labour. With technological innovations,
the traditional boundaries between telecommunications and informatics seemed to have
vanished, leading to the emergence of the so-called telematics, which greatly increased
transborder data transmission, both commercial and corporate.
6.2 Infrastructure Financing in East Asia
Efficient infrastructure is essential for rapid industrial growth. Huge public investments
have been made in infrastructure stocks, but in many developing countries these assets
are not generating the quantity or the quality of services demanded. It is estimated that, in
the 1980s, infrastructure investment in East Asia may have lagged necessary levels by 2
to 3 per cent of GDP, and the region will need an estimated $1.5 trillion in infrastrucure
investment during the 1990s. World Bank lending emphasises effective infrastructure
development across the region, with lending for transportation, power, and irrigation as
the largest component of the overall programme. Fifty-eight per cent of World Bank
74
lending to East Asia in fiscal 1994 was for infrastructure viz. transportation, power
generation, irrigation, urban development and telecommunications.
The Bank is working with its member countries to upgrade and liberalise financial
markets and institutions, to create a competitive environment for business growth and to
take steps to expose state enterprises to the discipline of the market. The Bank is assisting
countries in a range of fields to establish or strengthen regulatory authorities and legal
institutions.
In a recent study the World Bank (1994b) has explained some stylised facts and lessons
from the early experience of private provision of infrastructure services in East Asia and
Pacific. In the last few years there has been an increasing interest on the part of both
governments and private sector to enhace the role of the private sector in infrastructure
development in East Asia and Pacific, and the Latin American countries. While the
specific motivations and circumstances vary by countries, basic factors leading to
enhanced private sector investment in infrastructure include the massive investment
needs which cannot be met by the state without crowding out investments for other
priority and social sectors, managerial and capacity constraints within public sector, and
the need to raise the efficiency and quality of basic infrastructure services.
However, there is a basic difference of experiences between Latin America and East
Asia. Most countries in Latin America have started privatising public enterprises through
outright sale or tranfer of management/ majority share to private companies, while East
Asian countries have encouraged private investment for creating new capacities. Three
factors appear to explain this difference. First, unlike in East Asia, performance of
utilities was widely considered to be poor and privatisation was an important ideological
element of reforms in Latin America because of the widespread economic distress and
general dissatisfaction with the performance of public sector. Second, Latin America
needed proceeds from privatisation for reduction of foreign debt and fiscal deficit. Third,
while in Latin America the basic objective was to utilise better the existing capacity, East
Asia needed private investment to enhance capacity in order to meet the growing demand
for the sustained and faster growth of the economy.
There were major differences between sectors in terms of the extent of private sector
and the instruments used for its participation. Alongwith telecommunications, the power
sector was an early candidate for infusion of private capital and management. Private
investment was also encouraged in highways, container ports, tunnels and bridges, and
water supply and treatment projects. The methods used were generally BOT
arrangements without providing significant sovereign guarantees. In the case of highways
and water supply, other instruments like long term leases and state support (e.g.free land,
assignment of revenues from state-owned assets, land development rights etc.) were also
considered. Equity appears to be the main source of finance, and commercial bank
lending is not yet the major source of funding.
Initial experience of private power projects in East Asia and Latin America confirms
that the sponsors are able to implement them at a lower cost and on a shorter schedule
75
than public projects. Recent experience suggests that the East Asian countries are
competing with each other to attract quality investors into infrastructure. Another striking
feature is that the initial efforts of the East Asian countries have been to attract private
capital rather than to increase efficiency.
The lessons of experience in East Asia indicate that countries in South Asia are required
to have priority attention in the following five areas while formulating country strategies
to enhance private participation in the provision of infrastructure:
* Overall country objectives, strategy and priorities;

* Reform of policy, legal and regulatory framework;
* Facilitation and increased transparency of government decisions
* Unbundling and mitigation of risks; and
* Mobilisation of private term lending.
In fact, South Asian countries have already started to liberalise their policies and to
adopt competitive entry, sector unbulding and incentives regulations to encourage private
investment.
6.3 Project Finance for Infrastructure
Developing countries are increasingly financing their infra-structure projects through

external commercial borrowing and increased use of bond and equity markets. Finance
for infrastruc-ture typically comes in a package with equity, debt, commercial bank loans,
export credit guarantees, and contingent liabilities of the host government ranging from
“full faith and credit gurantees” to “comfort letters”.
Capital market finance for infrastructure has increased more than eightfold since 1990
and reached $22.3 billion in 1995 (Table 6.1). But the growth has been uneven across the
regions, countries and sectors. East Asia raised the most finance (led by China, Indonesia,
South Korea, Malaysia, Philippines and Thailand) followed by Latin America (Table 6.2).
The sectoral distribution of external financing of infrastruc-ture is dominated by power

generation, telecommunications and transport, while power transmission and distribution
and water supply lagged. In 1990s telecom became very prominent with large
investments by the Philippine Long Distance Telephone Company, PT Telekomunikasi
Indonesia, Thai Telephone and Telecommunications, Telex Chile and Indonesian- and
Chinese sponsored satellite companies. In the power sector, major investment was made
by the Indonesian Paiton.
In a reversal since the 1980s the private sector outplaced the public sector in borrowing
infrastructure funds, although with the help of substantial public gurantees. Compared
with the public sector, the private sector relied more on loans than on bonds or equity
(Table 6.1). Guarantees from host governments, multilateral institutions and export credit
agencies play an important and legal role to mitigate the policy uncertainties and
76
commercial and foreign exchange risks inherent in large-scale infrastructure financing.
But, these should not be taken as substitutes for correcting sectoral distortions.
6.4 Role of Privatisation for Infrastructure Development
Narrowly defined, privatisation is the sale or transfer of state-owned enterprises to

private investors through auction, stock flotation or distribution, management-employee
buyout, or voucher or coupon privatisation. Broadly defined, privatisation also includes
leasing, partial disinvestment, management contract or concession-type arrangements like
BOT, BOO and BOOT.
In 1988-1995 developing countries raised $130 billion through privatisation led by

Latin America and the Carribbean ($68 billion), Europe and Central Asia ($25 billion),
East Asia and the Pacific ($25 billion), South Asia ($6 billion), Sub-Saharan Africa ($3
billion) and Middle East and North Africa ($2 billion). Infrastructure related sales
accounted for 44 percent in both 1994 and 1995 (Table 6.4).
Privatisation continued to be an important channel for foreign investment (direct and

portfolio equity) in 1990s. Total foreign investment raised from privatisation in 1988-
1995 amounted to $58 billion, nearly two-thirds of which were in the form of foreign
direct investment, with portfolio investment accounting for the remainder (Table 6.5).
6.5 Foreign direct investment and infrastructure
Transnational corporations are becoming increasingly involved in infrastructure

development. Investment flows from developed countries in the early 1990s into the
main infrastructure industries (construction, communications and transport and storage)
were around $7 billion annually. Throughout the 1990s, FDI inflows and inward stocks in
infrastructure in selected major developed and developing countries increased steadily,
both in value and as a share of total investments. Infrastructure FDI outflows accounted
for 8 percent of total outflows in 1994 in the United States, and 7 per cent in 1992-1994
in Japan. Even so, FDI in infrastructure is still low compared to investments in other
industries, except for a few countries (e.g., Denmark, South Africa, Kenya and Nepal).
The financial requirements for infrastructure are vast. India needs about $400 billion
during 1997-2006 for its infrastructure development. Present growth rates in East Asia
suggest that such investment requirements will be $1.4 trillion during the next decade; for
China alone, the figure is over $700 billion. In Latin America, requirements are about
$600-800 billion (World Bank, 1995b). Another projection made by the Asian
Development Bank indicates that investment demand for infrastructure in Asia (excluding
Japan and the NIEs) will amount to about $1 trillion in 1994-2000. This includes $300-
$350 billion of investment for the power sector alone to the year 2000, $300-$350 billion
for transportation, $150 billion for telecommunications, and $80-$100 billion for water
supply and sanitation. The investment for infrastructure is projected to increase from 5
per cent of GNP per annum to 7 percent of GNP.
77
Because of the huge financial requirements of the infrastructure projects, the risks
involved and the bugetary constraints in the developing countries, external resources play
a prominent role in overcoming these bottlenecks. Transnational corporations invest in
infrastructure projects in the form of FDI (greenfield investments or acquisitions through
privatisation), BOT, BOO, BOOT, BOLT, BTO or variants of these schemes. There are
various forms of BOO and BOT schemes in the region such as those for toll roads in
China, India, Malaysia, and Thailand; telephone facilities in Indonesia, Sri Lanka and
Thailand; power generation in China and Indonesia; and energy, transportation and water
resources in the Philippines. BOT projects are estimated to account for about 53 per cent
of total committed infrastructure investments in the Philippines for the 1994-98 period.
A key element in financing infrastructure is risk, both commercial and sovereign. Risk
sharing is an important aspect of investment negotiations between governments and
private investors. Large foreign investors may have an advantage in risk pooling due to a
diversified portfolio in multiple countries, access to export credits, and access to non-
recourse loans in countries, but the limited availabililty of debt instruments with a term
structure sufficiently long to match the extended payback period of most infrastructure
projects, is one of the main constraints to infrastructure development in Asia.
Opportunities for public-private and foreign-domestic partner-ships are increasing in

Asia. While the public sector will remain responsible for a large share of infrastructure
investment, in water development, rural roads and mass transit, private investment in
infrastructure is already occurring in countries such as China, Indonesia, India, Malaysia,
and Philippines.
In particular, Singapore is developing industrial estates with partners in China, India,

Indonesia, Myanmar, and Vietnam. Private companies from Singapore, Japan, and Korea
have joined the Economic Development Board of Singapore, other state agencies, and the
Government of China to establish the China-Singapore Suzhou Industrial Park in Jiangsu
Province to penetrate the Chinese market and to transfer Singaporean technology in areas
of public administration and construction. The Government of Singapore is involved in a
partnership with India to set up a technology park in Bangalore. Manufacturing firms
from Hong Kong, Japan, Korea and Taiwan are located in technology parks and
investment areas near Manila and the Subic Bay in Philippines.
In recent years, a number of Asian investment funds have been created to mobilise
international capital to finance Asia’s infrastructure needs. These funds provide
investment in medium and long-term projects (5-10 years) for infrastructure develop-
ment through equity (usually 10% or more) or convertible debt. Funds are raised from a
diverse group such as institutional and private investors, TNCs, other private companies,
regional banks and multilateral organisations.
The Asian Infrastructure Fund (AIF), in which the Asian Development Bank was an
initial investor, was the first infrastructure investment fund in the region. The AIF is
expected to invest in utility, transportation and communications projects in the People’s
Republic of China, Indonesia, Malaysia, POhilippines, Chinese Taipei and Thailand,
78
mobilising up to $15 billion of additional resources for the region’s infrastructure. Since
then, several infrastructure investment funds, similar to international mutual funds, or
unit trusts, have been set up.
Various constraints such as high fixed or sunk costs, long gestation periods, price
ceilings and other regulations on the operations of an infrastructure facility in host
countries, and political risk (expropriation or nationalisation) have induced foreign
investors to minimise equity commitments to such projects and relying on debt
(commercial loans and bonds) and non-equity financing (technical know-how, expertise,
R&D cost sharing, trade credits and supply of capital goods).
There are also constraints that arise out of the very nature of some of the ways (e.g.,
BOT) in which infrastructure projects are financed through foreign capital. Given the
perceived risk, investors require high rates of return (which need to be backed up by
legally binding assurances). This necessarily requires user fees commensurate with the
rate of return, which, in many developing countries, are too high to be sustainable. There
are also various environmental issues associated with infrastructure projects.
Consequently, negotiations of BOT and similar schemes - in developing and developed
countries - are typically very complex and long drawn out.
Table-6.6 Selected Direct Investment Funds

for infrastructure projects
_________________________________________________________________
Fund Core investors Capital raised as

of 1994
_________________________________________________________________
AIG Asian American International Group $1-1.2 billion

Infrastructure Government of Singapore
Fund Bechtel Enterprises
Alliance Scan Equitable Life Assurance $ 22 million

East Fund,L.P. Society of American
International Group,
International Finance
Corporation, European Bank for
Reconstruction & Development
Asea Brown Boveri Asea Brown Boveri $ 500 million

Funding
The Asian Pergine Investment Holdings $ 500 million

Infrastructure Soros Fund Management
Fund (AIF) Frank Russell Company
79
International Finance
Corporation, Asian
Development Bank.
Central European Creditanstalt Bankverein $42 million

Telec Investments, International Finance
L.P. Corporaation.
Global Power GE Capital Corporation $ 0.5 - 2

Investments Soros Fund Management billion
Company, L.P. International Finance
Corporation.
Scudder Latin NRG Energy Inc. $ 100-300

America Trust for CMS Energy Inc. million
Independent Power. NRG Energy,Inc.
Corporation Andida de
Fomento,International
Finance Corporation.
_________________________________________________________________
Despite various constraints, there is considerable potential for TNC participation in

infrastructure development, given the recognition that the size of the investment
requirements is too big to be met from public sources alone. By pooling financial
resources, through new instruments, TNCs can share the cost and spread the risk
associated with infrastructure development. Insurance against political risks is provided
increasingly by bilateral or multilateral institutions such as MIGA and export credit
agencies. There is also considerable scope for TNC participation in science and
technology parks, export-processing zones and facilities for human resource
development.
Table-6.7 : Measures for the liberalisation of FDI in

infrastructure in Asian economies , 1991-1995
_________________________________________________________________
Economy Year Measures

_________________________________________________________________
China 1993 Opens construction of airports and

aircrafts to FDI
India 1997 Allows FDI in all infrastructure

on BOT basis or otherwise,
FDI permitted in mining,
80
telecommunications services,
television broadcasting, and
domestic air transport.
Indonesia 1994 Opens ports,shipping, airlines,

railways, production, trans-
mission and distribution of
energy, mass media, water
distribution,sanitation to FDI.
Pakistan 1994 Incentive package and guidelines

for private sector participation
in the power generation sector.
Philippines 1994 Authorises the financing,construc-

tion,operation and maintenance of
infrastructure projects by the
private sector.
Taiwan Province 1994 Allows FDI in major transportation

of China infrastructure projects.
Viet Nam 1993 Promulgates BOT regulations
1994 Streamlines the approval process

for infrastructure projects,
including BOT.
_________________________________________________________________
7 POLICIES AND STRATEGIES FOR PROMOTING

FOREIGN INVESTMENT- TECHNOLOGY- GROWTH NEXUS
7.1 Macro-economic Policies
(a) Host country policies for FDI
The substantial increase in FDI flows to Asian developing countries in recent years is
attributable to a large number of factors, including:
* A change of attitude in the host countries, which had welcomed FDI as an

engine of growth and a factor contributing to the transfer of technology, upgradation of
skills and overall efficiency and competitiveness.
81
* Ongoing economic reforms in almost all the countries in Asia. Favourable policies
ranged from general economic policies leading to a stable macroeconomic framework
and liberalization of industrial, trade, financial and public sector to specific FDI-related
measures such as transparent and non-discriminatory legal and regulatory systems.
* A change of attitude by multinational companies to work more closely with host

countries on a partnership basis; and an increase in global competition reinforced by the
close linkage between FDI and trade, increased intra-firm trade and trade within regional
groupings.
* Among the traditional factors influencing FDI, most important factors are domestic
market potentials and low cost of labour.
* Governments of home and host countries have adopted various measures to

encourage FDI. Widely used instruments were bilateral investment protection agreements
containing rules on fair and equitable treatment, repatriation of equity and dividends, and
international arbitration in the case of disputes.
Impediments to FDI include sectoral protection, ceilings on foreign ownership,

licensing and approval procedures, performance requirements and restrictions on
employment of foreign staff. The formation of regional trading groupings (such as
NAFTA, ASEAN, SAARC etc.) would have an important impact on the FDI pattern. In
the foreseeable future, countries outside the regional groupings might be at a
disadvantage in attracting FDI.
The diversity of experiences in Asia with respect of FDI requires different policy
approaches on the part of host countries. Those countries that have only recently been
open to FDI need to ensure that the “open door policy” is maintained and remains stable.
They should examine the possibility of a further liberalisation of FDI regimes; the
harmonisation of FDI and related policies on industry, trade and technology; and
improving the efficiency of their administrative set-up for investment approvals. In doing
so, all countries in the region should pay particular attention to the firms from
neighbouring countries, so as to capitalise the growing intra-regional investment. Special
attention needs to be given to small and medium-sized enterprises whose special needs -
dictated by their limited financial and managerial resources and insufficient information -
may call for incentives for the joint ventures. The Asian market has high potentials for
small and medium-sized TNCs.
(b) Host Country Policies for Portfolio Investment
The upsurge in the flows of FPEI to emerging markets has been driven by liberalisation
of these markets and the global factors such as low interest rates. International investors,
aiming to maximise returns and minimise risk, have found that emerging markets offer
attractive risk-adjusted returns and opportunities for diversifying portfolios. Host country
factors which have attracted portfolio investments fall into three groups: (a) the degree of
political and macroeconomic stability; (b) the commitment to the process of economic
82
and financial liberalisation and reforms; and (c) the state of development of the stock
markets and the institutional and regulatory frameork. The size of the local stock market,
number of listed companies, liquidity, number of participants, investor protection (such as
insider trading regulations), enforcement of regulations and volatility etc. are particularly
important to influence the inflow of foreign portfolio investment.
In order to sustain the inflow of FPEI, many of the Asian developing countries have
taken a number of steps including transparent economic policies and commitment to a
longer-term package of regulatory and market reforms; taxation policies which are
nondiscriminatory for foreign investors;appropriate investors protection; improvement of
the settlement system; encouraging periodic disclosure of financial information; and
improvement of accounting and auditing practices.
Most of the South Asian and East Asian countries are liberalising foreign exchange
regimes, and domestic financial sector and capital markets. Consequently, the stocks
markets in the emerging markets are expanding rapidly with increasing number and
volumes of stocks traded and higher market capitalisation.
In many countries of Asia, massive infrastructure investment requirements, coupled

with government fiscal constraints, have led to a strong interest in private financing of
infrastructure projects with special emphasis on build-operate-transfter (BOT) financing
schemes. The BOT schemes have generally been applied in the transport,
telecommunications, energy, water-treatment and waste-management sectors. Among the
main issues to be tackled are the need to restructure some utility sectors, the need for an
improved regulatory environment, and problems associated with demand risks and
foreign exchange risks.
(c) Sectoral Policies and Regulation
Locational, safety and environmental regulations are necessary for the efficient
functioning of industry, but these are a relatively small component of sectoral regulation.
India’s complicated regulations, as in most countries, have their origins to offset market
failures. The financial sector, transport and telecommunications, professional services
and media all have special regulatory requirements, but most of these regulations are
excessively detailed and outdated. The reduction, simplification and greater transparency
to reduce the need for bureaucratic intervention is needed to ensure that a country can
obtain benefits from foreign investment quickly.
Mineral industries, including petroleum and gas, create particular problems for
investment because resource rents have to be divided between local landowners, the
States and the central governments. Private firms also seek a share of such rents to
compensate them for the riskiness of mineral exploration and subsequent mine
development. The efficient and equitable apportioning of mineral rents is thus an
important aspect of the economic policy framework.
83
Indonesia and Malaysia have been among world leaders in dealing with foreign
investment in petroleum, gas and other minerals. Papua New Guinea developed mineral
resource taxes to tax mineral rents. With such policies in place, project by project
negotiation can be avoided or minimised. Forestry, fisheries and hydroelectricity also
generate rents that require special consideration. All these industries have environmental
aspects that should be taken into account on a nationwide basis rather than project by
project.
Agriculture and real estate present difficulties for foreign investment because of
complexities of landownership, and rules and taxes regarding tenancy, sale, purchase,
trasfer, lease or mortgage. Because of these problems, many countries like India donot
allow foreign investment in agriculture and real estate. In the case of plantation, foreign
investment in nucleus estates and processing facilities can provide a market for farmers
and at the same time enable them to improve their productivity.
Investment in minerals, including petroleum, has retained its share of total foreign
investment. Indonesia led the way in devising agreements that gave an equitable share in
mineral “rents” to the host country while satisfying investors. Forestry has attracted
investors, mainly within the region, but with growing policy difficulties as the socio-
economic costs of forestry become evident and had to be funded. The mainstream of
investment has been in manufacturing, ( in protected markets and for export), and in
service industries such as tourism, financial sectors and, on a smaller scale, in
professional services. Investment in infrastructure is now beginning to take place.
(d) Miscellaneous factors affecting foreign investment
Fiscal incentives and investment environment
In 1960s the International Chambers of Commercve argued strongly that developoing

countries should attract foreign investment with tax ‘holidays’ and other incentives such
as subsidised credit and privileged access to preotected domestic markets. The
International Monetary Fund (IMF) favoured the suggestions, but advised that incentives
should be extended to all investors. Many developing countries began to compete for
foreign investment with various incentives. But, a considerable body of evidence showed
that these incentives failed to attract foreign investment. Only those ‘fly-by-night’ firms
that move from country to country, exploiting tax holidays, are attracted by these
incentives, but they exit as soon as fiscal incentives expire or are withdrawn. An efficient
and equitable tax system with internationally competitive taxes and duties is far more
conducive to long run investment inflows than incentives.
Inflows of foreign direct investment are determined by a complex set of economic,

political and social factors and that investors look beyond the array of investment
incentives (in particular fiscal incentives) offered. Performance requirements and various
restrictions and regulations act as disincentives to foreign direct investment and often
serve to offset the positive effects of investment incentives. What should be determined
in evaluating the policy impact of foreign direct investment is the net incentive effect,
84
taking into account all policies which directly indirectly affect business risk, profitability
and ability to repatriate capital and investment income.
Foreign investors are also attracted by market opportunities (domestic and

international), a clear legal and institutional set up, administrative speed and efficiency,
efficient infrastruc-tural services and above all by liberal economic policies and stable
economic situation..
Although some transnational firms prefer wholly or majority owned branches or

subsidiaries in their foreign operations, it is widely held that some form of joint venture
with a host country partner is advisable because of the experience and insights local
partners bring. Local partners are particularly effective in managing labour and dealing
with regulatory issues. Some form of joint venture investment is becoming increasingly
prevalent.
Foreign investors are also moving into joint ventures with public enterprises, preferring
corporatised ones. Foreign investment with its capital, technology and management
package can make a considerable contribution to the vast investment required in
infrastructure in developing countries like India. Existing plants can be made more
productive and new facilities can be provided, often on the BOT/ BOO principles, but
governments and investors are still at the process of learning and experimenting.
Low wage rates and low production costs
From the view point of the advanced countries, Asia is still an extremely attractive place
for estabilishing production bases because of its extremely low production costs. China,
India and countries of ASEAN have large, low-income farming populations, implying the
existence of a potentially huge supply of labour for the manufacturing sector. This reserve
should enable manufacturers to secure an adequate labour force. Moreover, since younger
people make up a larger proportion of the population of Asia, they can be expected to
play a major role in ensuring a smooth supply of labour in the future. Besides low labour
costs, various other production costs such as real estate rents, transport, communications
and electricity charges are all substantially lower in Asia than in the advanced countries.
Higher Rates of Return
An important factor that determines the influx of direct investment into Asia is the
ongoing globalisation of companies from the advanced countries to take advantage of low
costs in the developing countries. Another factor that encourages Japanese companies to
continue shifting their production bases into Asia is the generally high profitability of
their overseas affiliates in the region. Compard with production bases in North America
and Europe, production bases in Asia are far more profitable.
Huge domestic market
85
Furthermore, in addition to their original role in producing goods for export, these
production bases are now expected to play a growing role in producing goods for rapdily
expanding consumer markets within the region. In a recent survey conducted by the
Export-Import Bank of Japan in 1995, Japanese manufacturers were asked their reasons
for investing overseas. In the case of China, the NIEs and ASEAN, a great deal of
importance was attached to investments designed to ‘maintain and expand local markets”.
In fact, overseas Japanese affiliates substantially increased their sales within the Asian
region.
Expanding regional consumer markets are expected to provide an impetus for further
economic growth. Consumption of Asia continues to expand at a healthy rate. Compared
with the developed countries in the world, the relative share of labour in GDP is still low
in Asia. Even in more advanced economies in Asia such as South Korea and Hongkong,
labour relative share is almost 10 percentage points lower than in Japan, the United States
and Germany. This suggests that there is ample scope for an expansion in consumption as
labor relative share rises.
Labour mobility
Labour reform is another area of concern, particularly in large organised sectors.

Though detailed information on labour markets is not available formany low-income
countries, government regulation generally reduces labour mobility. Large firms bear the
brunt of rigid labour laws that constrain them from restructuring atheir operations, force
smallercapacity expansions than othjerwise, and reduce employment creation by
encouraging capital-intensive modes of production.
‘
Rigid labour laws have slowed the pace of economic reforms, privatisation, and state
enterprise reforms. In India, where the organised industrial sector accounts for 80 percent
of industrial value added, constraints on rationalising the labour force act as the heavy
drag on industrial growth. In China, the competitiveness of a the state-owned sector has
been adversely affected by the need to maintain high employment and provide workers
with housing, medical care, schools, transport, and other social services not usually
provided by other firms. Their labour costs are more than twice those of collectively-
owned enterprises. The challenge is to unbundle these services and transfer them to
municipalities or commercial entities so that firms can operate on a commercial basis and
labour is free to seek opportunities elsewhere.
7.2 The Export-Push Strategy and

Role of Export Processing Zones
Of the many policies tried by the East Asian countries for accelerating growth, those
associated with their export push hold the most promise for other developing economies.
The export-push approach provided a mechanism by which industry moved rapidly
toward international best practice and technology. Export-push strategies were, however,
implemented in different ways by the High Performing East Asian countries (World Bank
1994).
86
(a) Hong Kong and Singapore estblished free trade regimes, linking their domestic
prices to international prices; the export push was an outcome of the limited size of their
domestic markets alongwith neutral incentives for domestic and external markets. Both
economies made export credits available, although they did not subsidise it, and
Singapore focussed its efforts on attracting foriegn investment in exporting firms.
(b) In Japan, Korea, and Taiwan, China, incentives were essentially neutral between
import sustitutes and exports. Export incentives, however, were not neutral among
industries or firms. There was an effort in Japan, Korea, Singapore, and Taiwan China, to
promote specific exporting industries. In Korea, firm-specific exports targets were
employed; in Japan and Taiwan, China access to subsidised export credit and
undervaluation of the currency acted as an offset to the protection of the local market.
One of the major factors for success of the export push in some countries like Japan and
Korea, was the government’s ability to combine cooperation with competition. Export
targets provided a consistent yardstock to measure the success of market interventions.
The more recent export-push efforts of the Southeast Asian newly industrialising
economies (NIEs) relied less on specific incentives and more on gradual reductions in
import protection, coupled with institutional support to exporters and a duty-free regime
for inputs into exports. Recent strategies to attract direct foreign investment in Indonesia,
Malaysia, and Thailand have also been explicitly export-oriented.
The rapid expansion of export processing zones (EPZs) in developing countries during
the last two decades represents a significant development in the world economy. Ireland
is credited with establishing the first modern EPZ in the world with the establishment of
the Shannon Export Free Zone in 1955. The success of the Shannon experiment led to the
rapid growth of EPZs in developing countries. The first developing country to set up an
EPZ was India with the creation of the Kandla Free Trade Zone in 1965. Today there are
more than 200 EPZs in 60 developing countries compared with just eight EPZs in 1970
and 55 EPZs in 1980. Nearly half of EPZs is located in Asia.
The emergence of EPZs reflects a shift in the industrialisation strategy of developing

countries, which in the 1950s and 1960s favoured import substitution policies to reduce
dependence on the outside world. The inward-looking policies were supported with high
tariff rates, generous subsidies and foreign exchange restrictions. Since the late 1960s,
there has been a gradual shift in emphasis towards an outward-looking industrialisation
strategy through the promotion of non-traditional exports. This was accompanied by a
more liberal attitude towards FDI in an effort to attract it not only to acquire much needed
capital but also to promote the transfer of new technologies, upgrade skills and acquire
access to markets and distribution channels. EPZs were a means of fostering export-
oriented industrialisaion, and in some countries, they assumed a prominent role in the
strategy.
There is undeniable evidence that the EPZ sector, although still small, has been among
the most dynamic sctors in attracting FDI. EPZs accounted for more than 85 percent of
87
FDI in Mauritous and over 70 percent in Mexico. FDI inflows to the oldest four special
economic zones in China amounted to more than 30 percent of FDI inflows in 1989.
Foreign investors account for a major portion of investment and employment in EPZs,
which are characterised by the dominance of the textiles, garments or the electronics
industry. There is also evidence that EPZs were successful in promoting exports of
manufactures and in generating foreign exchange earnings.
One of the striking features of EPZs is the tendency to breed a distinct type of industrial
monoculture, either in textiles and garments or in the electronics industry. An analysis of
the structure of employment by product group in EPZs of selected countries indicate that
there is one dominant industry in each country: textiles and garments industry in
Bangladesh, China, Dominican Republic, Egypt, Jamaica, Mauritius and Sri Lanka; and
the electronics industry in Barbados, Brazil, Republic of Korea, Malaysia, Mexico and
Taiwan, China. Concentration rates vary among countries and zones. In Jamaica,
Mauritius and Sri Lanka, the leading industry, textiles and garments, accounts for almost
90 percent of total employment, whereas for the electronics industry, EPZs in Malaysia
have the highest concentration rate of over 74 percent.
EPZ’s effectiveness as an instrument for the long-term development of industries

depends on the degree of linkages created with the domestic industries and on the extent
to which they provide avenues for the transfer of technology and the upgrading of skills.
In this regard, EPZs seem to have fallen short of expectations. A major limiting factor to
the transfer of technology and skills is the nature of the production processes typically
undertaken in EPZs, which involve low technology and/or simple skills (UNCTAD
1993).
Success of EPZs depends on a favourable investment climate, skilled labour force and
an active local business community and government’s support for the EPZs, while
failures may be attributable to poor locations, inadequate infrastructure, insufficient
promotion, excessive costs and mismanagement. The long-term viability of EPZs also
requires that their operations should be properly integrated with the overall economic and
industrial development strategy of the country.
Results of a cost-benefit analyses of a few Asian EPZs have shown that incentives,
subsidies and infrastructure expenditures entail considerable costs for the host countries.
These costs are sometimes difficult to justify, from both the financial and economic
viewpoints. However, stiff competition among EPZs of developing countries to attract
investors has exerted pressure to offer increasingly generous incentives, thus eroding
their net benefits (UNCTAD 1993).
7.3 Role of Small and Medium Sized Industries (SMIs)
Small and medium industries predominate output in a number of industrial sectors in

many Asian countries such as Bangladesh, India, Pakistan, China, Korea, Indonesia and
Philippines. Even they played a significant role in the economic development in Japan
and Singapore (Chowdhury 1990). They are mainly in the textiles, garments, wood and
88
furniture, food processing, leather products, fabricated metals, machinery and
equipments, rubber and plastic products, pottery, printing and publishing. In 1990 they
accounted for 95 per cent of establishments in Bangladesh, 70 per cent in Indonesia and
80 per cent in the Philippines.
The importance of these industries in India may be gauged from the fact that the SSI
sector accounts for 40 per cent of the total turnover in manufacturing and 35 per cent of
total exports. It is the second largest employer after agriculture, providing employment
opportunities to 15 million persons.
Many East Asian economies supported small and medium enterprises (SMEs) with
preferential credits and specific support services. Rapid growth of labour-intensive
manufacturing in these firms absorbed large numbers of workers reducing unemployment
and attracting rural labour. As firms shifted to more sophisticated production, efficiency
rose and workers’ real incomes increased.
Support for SMEs has been most explicit and successful in Taiwan, China. SMEs
comprise at least 90 percent of enterprises in each sector and also dominate the export
sector, producing about 60 percent of the total value of exports. Japan directed enormous
financial resources towards developing SMEs. Public financial institutions have allocated
an average of 10 percent of lending towards SMEs. During the rapid growth period of the
1950s, about 30 percent of their total lending for fixed investments went to SMEs. The
SME sector has become a cornerstone of Japan’s economy. In 1989, SMEs accounted for
about 52 percent of both manufacturing value added and sales, and their share of
employment in various manufacturing subsectors ranged from 41 percent in transport
machinery to 100 percent in silverware.
Korean development has been largely driven by the expansion of conglomerates. But in
the 1980s, the SME sector began to grow rapidly. SMEs share in total manufacturing
employment rose fom 37.6 percent in 1976 to 51.2 percent in 1988, while that in
manufacturing value added rose from 23.7 percent to 34.9 percent.
Like Japan, Korea established an exensive support system for SMEs such as export
financing system and credit guarantee programmes.
In China, rural industries dominated production in cement, iron and steel, fertiliser,
hydro-power and agri-machinery and contributed about 25 per cent of total industrial
output in China and 20 per cent of rural employment in 1990. Initial focus of rural
industry in China was on primary processing of farm produce, handicrafts, manufacturing
and repairing of simple farm tools, developing and processing local industrial resources.
The industries were small and used primitive techniques. Reforms in China have
encouraged rural industrialisation alongwith entry of multinationals in export-oriented
sectors.
The SPARK programme on rural industrialisation approved by the Chinese Government

in 1986 aims at vitalising and modernising the rural economy of China through Science
and Technology. The SPARK programme works at three levels - county, province and
89
central government. In general, units under SPARK include (i) village and township
enterprises having R&D units in cooperation, (ii) R&D units which have village or
township units for cooperation and (iii) scientific and production consortium. SPARK has
adopted a mechanism of setting up technology development and extension network that
interlinks local sectors and central departments and institutions for continuous flow of
technology.
China’s experience in providing 100 million jobs in rural enterprises under non-farm
sector during 1986-1993 and plan to provide similar number of employment
opportunities by the end of this century, reveals that its rural non-agricultural enterprises
owe their success to a market-orientation, availability of infrastructure, stress on higher
technology, incentive-linked wages, competitiveness, diversity in products and
community cooperation.
Sub-contracting and ancillarisation have helped the dispersal of industry and growth of
the small and medium industries and rural non-farm sector in many countries. The most
successful example of sub-contracting from large urban areas to small rural entrepreneurs
is Japan. The division of responsibility and resources, in keeping with its economic
popensity, has given Japan an unparalleled global edge. Its success is attributed to
expanding demand, limited capital of large companies, low basic skills required by small
units and paternalistic relationships. Big business houses shares the production process,
technology and innovation with small/medium industries.
Thailand, Malaysia and Indonesia have adopted Japanese model with variations to suit
each nation’s cultural and social environment. In Thailand large companies are allowed to
develop ancillaries which can operate within the same factory premises and yet entitled to
have independent recruitment, wage structure and service conditions.
In Pakistan, sub-contracting has been in practice over a long period in traditional

products such as carpets, garments and footwear. Sub-contracting is also strong in the
labour intensive activities of rattan in Indonesia and for garments in Philippines.
“Bapakangkat” (parent Unit) and “Anakangkat” (related units) of Indonesia are good
examples of networking. Under the scheme, in addition to contractual networking, the
Bapakangkat provides technical and financial assistacne, leases plant and equipment and
trains people which leads to higher employment and lowering of cost of production.
In India, Indonesia and Philippines, about 50 per cent of the small enterprises now in
existence were established within the past decade. Most of these began as household
industries, but subsequently grew into the small and medium categories, and into larger
enterprises in a number of cases. The experiences of Japan, Republic of Korea and
Singapore suggest that given appropriate program and policy assistance, small and
medium industries can make substantial contributions not only to output and employment
but also to exports. In all these countries, small and medium units received a number of
fiscal and monetary benefits such as tax holidays, concessional excise duty and lending
rate, priority lending, purchase and price preference by the public sector and reservation
of items for exclusive production by them.
90
In brief, a dynamic small and medium industries sector serves not only to generate
employment but also to earn foreign exchange, upgrade the quality of the labour force,
expand the base for indigenous entrepreneurs, help in dispersal of industries, and diffuse
technological know-how throughout the economy. The location of small and medium
enterprises in rural areas helps to utilise rural savings, surplus labour and local raw
materials that may otherwise remain idle and unutilised. It helps to reduce the migration
to urban areas by providing livelihood opportunities to rural labour. Small enterprises
also provide a source and training ground for the development of entrepreneurship and
business management skills for medium and large undertakings.
Against these positive aspects, there have been criticisms regarding the ability of small
industries to realise economies of scale in production, procurement and marketing.
Consequently, they may experience larger unit costs despite low labour costs and other
advantages due to their proximity to the local markets. In many branches of
manufacturing, small units exist on the strength of the costly government support
programmes in terms of reservation, price and purchase preference, priority lending and
fiscal concessions.
A wide range of opportunities can be seized by small-scale, labor-intensive industries in

the Asian region where horizontal division of labor through trade and joint-venture
projects has been increasing sharply in recent years. The following issues need to be
given due consideration while formulating policies for the SSI sector :
* Adequate backward and forward linkages need to be established between small and
large units in terms of sub-contracting, manufacture of components etc.
* Suitable measures may be taken to enhance the access of the SSI sector to
information particularly relating to external markets, foreign investment and better
technology.
* Vertical expansion of the small scale industries may be limited due to reservation of
items for the small scale. A review of the reservation policy is necessary.
7.4 Role of Natural and Human Resources
Many studies have found an inverse relationship between natural resource endowment
and the level of industrial technology (Kakazu 1990) for the following reasons :
(a) The first is the “Dutch Disease” hypothesis which maintains that overconcentration
on resource-based production and exports may create an adverse environment for the
introduction and diffusion of advanced technology. For example, rich mineral and forest
resources for exports in Indonesia seem to have adversely affected its technological
assimilation and improvement.
(b) Second, India and Indonesia, relatively resource-rich countries in terms of the size
of land and population, have been tempted to adopt more inward or domestic market-
oriented policies compared with the Republic of Korea and Thailand. Import-substituting
91
industrialisation has discouraged the adoption and dissemination of industrial
technologies appropriate for labor surplus economies such as India and Indonesia.
(c) The third explanation is that a resource-rich economy can sustain its growing
populatin by exploiting extensively its natural resources and may not feel the pressure or
need to adopt advanced technology to utilise given resources more efficiently.
The availability of well-educated human resources is more important than the

availability of natural resources in industrial technology development. Various case
studies made recently by the Asian Productivity Organisation (APO) also found that a
shortage of skilled and technical manpower is the major constraint to the digestion of new
technologies in Asian developing countries.
Indonesia’s institutional capability for technology development is limited due to several

cultural and policy factors. The diversified geography with more than 6,000 inhabited
islands and 2,000 ethno-cultural groups creates problems for institutional development in
education, communications and administration. Recently Indonesia is attaching special
importance for the development of basic infrastructure including human resources.
In the Republic of Korea, scientists, engineers and skilled workers are the main actors
who made it possible for the country to achieve such a remarkable progress. Korea
broadened its educational base to increase technical manpower and thereby trained the
required manpower within a relatively short span of time. Even the poorest of the Korean
families do not spare any efforts to provide the kind of education which the economy
would consider necessary. Formal education is important to all Koreans. The
government’s investment in education has expanded several times. But, the government
expenditure on education represents only 30 percent of the total expenditure on
education; the remaining being borne by the private sector.
7.5 Role of Research and Development (R&D) Expenditures
There is a high correlation between R&D expenditure and technological capability

because a new technology, which depends upon R&D activities, must be developed
domestically as a country attains technological maturity. The NIEs spent more and more
on their own technology development as imported technologies became more costly and
increasingly difficult to obtain from developed countries due to growing technology
protectionalism. The R & D expediture in India at 0.9 percent of GNP and in Thailand at
0.5 percent of GNP in 1992 were considerably lower than that in U.S.A. (2.7%), Japan
(3%), Germany (2.9%), and South Korea (2.8%). In USA the Federal government
provided 43% of total R & D funds in 1992 and the remaining 57% was provided by the
industry, state governments, Universities and other non-profit institu-tions. In Japan,
while the government provided only 16% of R & D expenditure, the rest was provided by
industry. In Germany, 35% came from government sources and the remaining 65% was
borne by the industry. In South Korea, the ratio of govwernment and private investment
in R & D changed significantly from 97:3 in 1963 to 15:85 in 1992. In contrast R&D
expenditures are mostly funded by the public sector in Thailand, Indonesia and India.
92
India has built a wide array of institutions to support the development and diffusion of
industrial technologies since the inception of planning in 1951. It has virtually all basic,
applied, hardware and software and R&D institutions, some of which have world-class
standards. But, these institutions have failed to commercialise R&D activities as these are
virtually financed and controlled by the public sector without any linkage with the private
sector. Since 1993 Government had encouraged private sector funding of research
institutions by providing tax reliefs on R&D expenditure.
The Indian government adopted a progressively more restrictive policy of technology

imports from the mid-1960s due mainly to foreign exchange constraints. Imports of
capital goods were liberalised to some extent during 1980s, but the import duties were
high and irrational. Since July 1991 as a part of structural reforms in industry and trade,
India has liberalised completely the import of capital goods and technology transfer with
significant reduction of import duties on capital goods.
7.6 Role of Legal and Institutional Set up
Many of the difficulties faced by governments in handling foreign investment, and by

the foreign investors setting up in a host country, derive from the absence of a clear civil,
commercial and criminal legal system. Given a set of laws, it is esential that foreign
investors are treated equally with domestic investors. Not only is this a moral issue, but
there are strong practical arguments against giving foreign investors privileges that
domestic firms do not enjoy (and vice versa). Domestic firms will launder money to
become foreign investors if this will give them subsidies that they cannot otherwise
receive. Chinese publicly owned enterprises use transfer pricing at other than arms’
length to become foreign investors in China, or they form joint ventures within foreign
firms to benefit from subsidies to foreign investors. Giving entrepreneurs of Indian origin
special privileges by India are also inequitable and inefficient. Continued reforms will
attract the worthwhile investors among them without incentives.
In open economies, such as Singapore, Hong Kong or Mauritius, only minimal special
foreign investment laws and regulations are necessary and administrative costs are
negligible. Most developing countries like India are faced with a transition period. The
experience of countries such as Indonesia, Malaysia, Taiwan and Thailand suggests that
the transition can be managed well. The faster an economy is reformed, the easier the
management of foreign investment. Regulations can be simple and their administration
transparent.
8 POLICIES AND STRATEGIES FOR FOREIGN INVESTMENT :
SELECTED COUNTRY EXPERIENCES FROM ASIA
8.1 India
Since July 1991 India had undertaken credible reforms in trade, industry, financial and
public sectors to enhance competitiveness of Indian industries and to strengthen the role
of the private sector including foreign investment in industrial and technology
93
development. The major reforms included wide-scale reduction in the scope of industrial
licensing, simplification of procedural rules and regulations, reduction of areas reserved
for the public sector, disinvestment of equity in selected public enterprises, enhancing the
limits of foreign equity in domestic companies, liberalisation of trade and exchange rate
policies, reduction and rationalisation of customs and excise duties, and personal and
corporate income tax. Specific policy packages were taken for the small and cottage
industries, 100% Export Oriented Units (EOUs) and Units located in the Export
Processing Zones (EPZs), Electronics, Software and Hardware Technology Parks.
Industrial licensing has been abolished except for 9 industries (accounting for less than
10 percent of value added in manufacturing) which are strategic on considerations of
defence, health, safety and environment. Scope of the public sector is reduced to only six
industries viz. defence products, coal and lignite, petroleum products, railways, atomic
enery and minerals used for it. Entry of foreign investment and technology has been
liberalised with automatic approval of foreign investment up to 51% of equity in 48
priority industries, upto 74% in 8 high priority industries in metallurgical and
infrastructure industries and upto 100% in power, EPZs, 100% EOUs, export/ trading/
star trading houses, and electronics, software and hardware technology development
parks. Even in sectors still reserved for the public sector (petroleum, coal, railways and
postal services) government has taken a more liberal stance towards private investment
including foreign investment. Permissible levels of foreign equity for different sectors
are indicated in Table-8.1.
Indian firms are allowed to raise funds abroad through Global Depository Receipts
(GDRs), Foreign Currency Convertible Bonds and off-shore fund. Foreign Institutional
Investors (FIIs) and Non-resident Indians (NRIs) are allowed to operate in India’s capital
markets subject to an individual holding of 10% (1% for NRIs) and collective holding
upto 30% (5% for NRIs) of total paid up capital of a company. Foreign investors are
permitted to pick up disinvested shares of public enterprises. The Foreign Exchange
Regulation Act was amended, and FERA companies (having foreign equity exceeding
40% of total equity) can operate like any other Indian Company, can own real estate, use
their trade marks and brand names for domestic sale. India has become a member of the
Multilateral Investment Guarantee Agency (MIGA) and signed treaties for avoidance of
double taxation with 45 countries.
Table 8.1 Extent of permissible foreign equity by NRIs/OCBs/FIs
_________________________________________________________________
Areas of Investment NRIs/OCBs/PIOs Foreign Investors
_________________________________________________________________
1a)48 priority 100%, repatriable, 51%, repatriable,
industries automatic approval automatic approval
b) 9 high priority 74%, repatriable, 74%, repatriable,
industries automatic approval automatic approval
c)Export/Trading/ 100%, repatriable, 51%, repatriable,
StarTrading Houses automatic approval automatic approval
2.100% EOUs & Units 100%, repatriable, 100%, repatriable,
94
in FTZ,EPZ, automaticapproval automatic approval
Technology Parks
3.Sick industries 100% private placement 100% private placement
prior approval by RBI prior approval by RBI
4. Mining 50%,automatic approval 50%,automatic approval

5.Tele- 49% in basic,cellular 49% in basic,cellular
communications mobile,paging,wireless; mobile,paging,wireless
51% in other services. 51% in other services.
6.Entertainment 51%,automatic approval 51%,automatic approval
electronics
7.Power 100% with approval 100% with approval
8.Medical clinics, 100% with approval 100% with approval

Hospitals,Shipping,
Oil exploration,
Deep-sea fishing
9.Industries 24%,with approval, 24% with approval,
reserved for SSI 100% for 50% exports 100% for 50% exports
10.Housing, real 100%, repatriable, Not allowed except
estate,business automatic approval for company property.
11.Domestic air 100% with approval 40% with approval

taxi operations
12.Banking services 40% with approvaal 20% with approval
13.Non-banking fin. 100% with conditions 100% with conditions
companies(NBFCs) 51% otherwise. 51% otherwise.
14.Portfolio individual ceiling 1% individual ceiling 10%

Investment collective ceiling 5% collective ceiling 30%
(Inv.in shares relaxable to 24% by Allowed to invest in
& debentures) General Body Resolu. dated govt.securities.
15a)Disinvested Allowed,repatriable, Allowed, repatriable

govt.shares through both primary/ through both primary/
b)Units in UTI secondary markets. secondary markets.
c)Public/Private
sector mutual funds
_________________________________________________________________
NRIs= Non-resident Indians, PIOs= Persons of Indian origin
OCBs= Overseas Corporate Bodies, FIs = Foreign Investors
FIIs= Foreign Institutional Investors.
The rupee is fully convertible on the current account, and almost fully convertible on
the capital account for the non-residents. India permits free repatriation of profits and
equity capital. Import controls are virtually abolished except for some consumer goods.
95
Almost all items of capital goods, raw materials and intermediates are on open general
license (OGL). Export trading houses are provided special import licenses which permit
them to import certain consumer goods and other restricted items. Most recently, the
export-import policy for 1992-1997 has widened the list of such items. Government
intends to liberalise fully the imports of consumer goods and to introduce full converti-
bility of rupee in near future.
Personal income tax rates have been reduced to 10 - 30 percent with various
exemptions. Corporate tax rates have been reduced to 35% for domestic companies and
48% for foreign companies. A comparative picture of personal income tax and corporate
income tax rates in India and selected Asian countries is presented in (Table 8.2). India
has comprehensive agreements on avoidance of double taxation with 45 countries.
India provides various tax exemptions for the development of industry, infrastructure
and technology (Table-8.3) and these fiscal and other incentives are equally applicable to
both domestic and foreign companies. It allows tax exemption for exports income,
exemption or refund of customs duties on imported inputs and duty drawback on
domestically procured inputs for the manufactured exports. Producers are allowed duty
free imports of capital goods subject to export obligations. Exporters are granted Special
Import Licenses for restricted consumer goods. EOUs/EPZ units are allowed to sell upto
25% of general goods and 50% of agro-based output in the Domestic Tariff Area (DTA).
Supplies from DTA to the EPZ/EOUs are regarded as deemed exports. In keeping with
India’s federal structure, a number of investment incentives such as capital investment
subsidy, tax breaks, exemption of state duties, concessional power and utility tariffs etc.
are provided by the state governments.
Infrastructure Development
Major improvements in India’s infrastructure are necessary to achieve its medium-and

longer-term objectives of higher and sustained rates of growth and export expansion.
Inadequate power supply is a major constraint to industrial growth. Not only generation
capacity is in short supply, there is also under-investment in transmission and distibution
which exacerbates imbalances in the sector. At 50 per cent, the share of India’s paved
roads is lower than it was in 1971 in Malaysia (85 per cent) and Thailand (67 per cent).
At present, teledensity in India (1 per 100 persons) is lower than what was in Korea (4)
and Malaysia (2.5) in 1975 and well below its needs.
Table 8.2A Personal income tax rates in 1996 :

Comparison for selected Asian countries
________________________________________________________________
Country Corporate Personal Personal deduction
income income as percent of
tax rate tax rate per capita 1994 GDP
(per cent) (per cent) ___________________________
Single member Family of
household 3 children
96
________________________________________________________________
India 35 - 48 10 - 30 200 275

China 15 - 33 5 - 45 260 260
Indonesia 10 - 30 10 - 30 87 261
Malaysia 0 - 30 0 - 32 52 108
Philippines 10 - 40 0 - 35 35 128
South Korea 30 - 45 5 - 45 15 75
Thailand 30 5 - 35 147 245
_________________________________________________________________
Table 8.2B Comparative fiscal indicators: 1994-1996

Revenue collections as per cent of GDP
________________________________________________________________
Country Personal income tax Corporate income tax
________________________________________________________________
India 1.4 1.5

Indonesia 2.5 5.4
Malaysia 3.8 2.5
Philippines 2.6 6.5
South Korea 2.0 2.9
Thailand 2.1 3.9
_________________________________________________________________
Table 8.2C Comparative fiscal indicators: 1994-1996

Revenue collections as % of total tax revenues
________________________________________________________________
Country Personal income tax Corporate income tax
________________________________________________________________
India 13.8 14.7

Indonesia 18.7 40.0
Malaysia 21.8 14.1
Philippines 13.0 32.5
South Korea 12.3 17.8
Thailand 11.8 22.9
________________________________________________________________
Source : Information based on country embassies in India.
Table 8.3 Fiscal Incentives for Industrial, Infrastructural

and Technological Development in India
97
_________________________________________________________________
Category % of profit exempt from tax Period

_________________________________________________________________
New power projects set up 100% 5 years

anywhere in India 30% Next 5 years
New industrial undertakings 100% 5 years

set up in any underdeveloped 30% Next 5 years
states or areas identified
by the government
Companies created exclusivey 100% 5 years

for research and development 30% Next 5 years
Enterprises carrying on 100% 5 years

business of developing, 30% Next 5 years
maintaining and operating
infrastructural facilities*
Newly established industrial 100% Consecutive

undertakings in 100% EOUs,FTZs, 5 years of
electronics, hardware and first 8 yrs
software technology parks
Profits from exports 100% Unlimited

of merchandised goods no.of years
and computer softwares
Profits on projects 50% Unlimited

outside India no.of years
Foreign exchange earnings 50% Unlimited

of hotels/tour operators no.of years
Royalties, commissions or 50% Unlimited

fees from foreign enterprise no.of years
_________________________________________________________________
* Infrastructural facilities which are eligible for five year tax holiday include power,
roads, highways, bridges, sea ports, new airports, rail systems, rapid mass transit system
(RMTS), telecommunications, water supply, irrigation, sanitation, and sewarage systems.
India needs massive financing requirements to meet the growing demand for
infrastructure in the future. For instance, power requires $60 billion in the next decade
and national highways and expessways need $50 billion. The total demand for telephone
98
services is estimated at 40 to 50 million by the end of the decade and the investment
needed is $40 billion.
While such funding needs may not be affordable, experience worldwide shows that the
private sector would respond once the investment climate is favourable and the requisite
legal, regulatory, institutional, and macroeconomic conditions are fulfilled. First, a stable
macro-economic environment conducive to faster growth, low inflation and sustainable
fiscal deficit is a pre-requisite for balanced expansion of capital markets and their
capability to provide finances for the infrastructure. Secondly, sectoral reforms and
appropriate institutional and regulatory framework are necessary to encourage efficient
private sector investment. Thirdly, the task requires evolving appropriate legal
mechanisms and market instruments for risk sharing.
8.2 Bangladesh
During 1980s the Government initiated steps for industrial deregulation, trade
liberalisation, promotion of the private sector, and the divesting of state-owned
enterprises. The notable reform measures included privatisation of 33 jute mills and 37
textile mills, agricultural reforms, replacement of positive import list with negative list, a
significant reduction of quantitative restrictions on imports and liberalisation of interest
rates. In 1991 Bangladesh, building on the experiences of the 1980s and with the
financial support of multilateral and bilateral donors, launched a more comprehensive
reforms programme to establish a market- and private sector-driven economy.
The Industry Policy of 1991 and its subsequent amendments relaxed the regulations for
both domestic and foreign investment, reduced the scope of the public sector and opened
telecommuni-cations, power generation and domestic air transport to the private sector.
Except 5 sectors viz. defence products, security printing, mining, forest plantation and
atomic energy, all other industries are now open for private investment. Foreign equity
participation is encouraged in export-oriented industries and for projects involving
advanced technical know-how or where the investment outlay is large. However, the
legal/ regulatory framework and appropriate pricing policies still need to be worked out
for active participation of private and foreign investment into the infrastructural sectors.
The 1980 Foreign Private Investment Act provides foreign private investment an equal
treatment and protection against nationalisation and expropriation. Since April 1994,
Bangladesh rupee is fully convertibile on current account. Foreign investors can
undertake projects in all but 5 reserved areas with 100% ownership and are permitted to
reptriate equity and dividends.
Imports are liberalised by reducing the coverage of QRs from 315 tariff headings (25
percent of the total tariff headings) in 1990 to 104 commodity categories in 1995. Of
these, only 26 categories (mainly textiles) are now kept in the Control List for trade-
related reasons. There has been also a considerable reduction of import tariffs from the
maximum tariff rate of 509 per cent in 1991 to 40 per cent in 1997 for general goods.
99
Several fiscal incentives as indicated below are granted to investment including foreign
investment in Bangladesh since 1989.
(a) A tax holiday for 5 years for developed areas, 7 years for less developed areas, 9
years for least developed areas and 12 years for the Special Economic Zones.
(b) A 20 per cent import duty on capital goods for industries in developed areas, 7.5 per
cent for less developed areas and 2.5 per cent for least developed areas. A 2.5 per cent
import duty on capital machinery for export oriented industries and for selected industries
using 70 per cent or more of indigenous raw materials.
(c) Tax exemptions on interest on foreign loans, royalty, technical know-how and
technical assistance fees.
8.3 Myanmar
The Union of Myanmar is in a transition from a centrally planned economy to a market-

oriented economic system.It undertook several reforms in trade and industry since 1988
to encourage foreign and local investment. Major measures include decentra-lising
economic control, abolishing price control and subsidies, allowing foreign direct
investment, restructuring of banking system, rationalising taxes and duties, restructuring
wages, prices, regularising the border trade, streamlining exports and imports procedures,
improving infrastructure support and allowing farmers to cultivate crops at their own
choice.
In the process of drawing up the Foreign Investment Law in 1988 particular care was
taken to make it as conducive to foreign investment as possible. A key element of the
Foreign Investment Law is the establishment of the Foreign Investment Commission
(FIC) which has broad authority to approve foreign investment. Approval of the FIC is
also required for termination of any investment before the expiry of terms and contracts.
The Law provides for two types of foreign investment - wholly owned foreign
enterprises and joint ventures with a Myanmar partner. The Law guarantees that foreign
investments under taken shall not be nationalised. It also guarantees the repatriation in
foreign capital after the termination of the business. Foreign investors may hire Myanmar
labour or foreign technical staff without any restriction. The Foreign Investment Law
also provides special tax incentives for foreign investors and allows Foreign companies to
lease land and immovable property at reasonable rates from the Government.
8.4 Nepal
The savings and investment rates are relatively low in Nepal. However, it has gradually
started picking up with increase in private sector activities in the country. In 1991-1996,
the average Gross Domestic Investment as percentage of GDP was 22.6 percent per
annum while the average Gross Domestic Saving was only 12 percent. Almost two third
of the total fixed capital formation was contributed by the private sector while the
remaining by the public sector.
The Eighth Five Year Plan (1992-1997) set a policy of sustainable economic growth
through market-oriented policies. A comprehensive programme of public enterprise
100
reform was initiated by the government. The role of private sector was encouraged in all
economic activities for the enhancement of output growth and emloyment generation,
while the government sector is mainly concerned in providing infrastructure, basic health
and social services. The public policy aims to encouraging private and foreign capital in
core economic sectors such as hydro-electric power where positive developments have
been observed.
The industrial policy greatly simplified industrial licensing procedures. The Industrial
Enterprises Act 1992 graded the industries into 4 categories according to the investment
pattern: cottage industry, small scale industry, medium-sized industry and large scale
industry. Cottage, small and medium-sized industries with fixed assets up to Rs.2 million
are open to technology transfer, and foreign investors have ample scope for investing in
large-scale industries with fixed capital of Rs.5 million or US$1 million. The Foreign
Investment and Technology Transfer Act 1992 provides for legal support to parties
entering into joint ventures and technical collaborations. In order to promote rapid private
sector response to the on going reforms, regulations on opening new commercial banks
and financial institutions have been liberalised and interest rate controls have been
eliminated.
Since 1993 major changes in the trade and exchange system moved Nepal from a highly
distorted, inward-looking economy to one of full de facto convertibility on current
account. In 1993 the import license auction system was abolished; all quantitative trade
restrictions, except for security and environmental reasons, were eliminated and the tariff
structure was rationalised with significant reduction in the basic rates, abolition of
additional duties and reduction of the peak tariff rate from 200% to 110%. The benefits of
more open trade links with the rest of the world are being reflected in strong export
growth and a strengthening of the balance of payments.
Foreign investment approvals increased significantly in 1990s. Recently introduced

one-window system has favourable impact on industralisaion of the country.
Liberalisaiton of trade and unification of the exchange rate contributed to a major rationa-
lisation of a highly distorted set of incentives. Capital goods are now imported virtually
duty free. Foreign investment policy issued in 1992 helped to establish a more outward
orientation for the manufacturing sector. Over the medium term, Nepal envisages to
pursue the policy of low and non-discriminatory import tariffs and qualification of WTO
membership. The Government’s aim is to reduce further the number of tariff bands, and
to cut the level and dispersion of tariff rates.
8.5 Pakistan
Pakistan allows foreign investment in many infrastructural industries including power,

natural gas, pipelines, port facilities, expressways, mass transit system etc. Pakistan offers
various incentives to foreign investors in infrastructure, power generation, railways,
highways, airport construction etc. and in export processing zone or 12 special industrial
zones.
101
Fiscal incentives for exports and high levels of protection for domestic industry featured
prominently in the trade policies of the past. The new trade policy announced on July 25,
1994 liberalised imports with a shorter negative list and reduced import duties. Pakistan
declared its currency fully convertible w.e.f. July 1, 1994. Export promotion was
encouraged by sales tax exemptions, continuance of concessional tariffs for imports of
capital goods by export-oriented industries, and freight subsidy of 25% to exporters of
fruits, vegetables, cut flowers, ceramics confectionery, processed fish products, etc.
A new industrial policy embodying extensive incentives and concessions aimed at

accelerating industrialisaiton had been introduced. The whole country had been given tax
holiday for three years, and still more tax concessions had been provided for the rural and
backward areas. Substantial concessions had been given on customs duty, import
surcharges, sales tax and import license fee. There is no ban on establishing any industry
except security-oriented and those producing alcoholic beverages.
During 1990s many new measures have been taken to attract foreign and domestic
investment. Multiple government agencies, such as the National Investment Council, the
Pakistan Investment Board and the investment Promotion Bureau, dealing with
investment decisions were merged into a single institution viz. the Board of Investments
(BOI). A number of investment funds have been set up abroad for either exclusive
investments in Pakistan or investments in emerging markets including Pakistan.
In March, 1994 a package of liberal incentives was announced to attract foreign

investment in power generation. These incentives include guaranteed 25% return on the
capital, tax holidays and exemption from import duties on generation machinery, and the
sovereign guarantee by the Pakistan government. Further fiscal incentives for the
promotion of engineering industry announced in 1995 include withdrawal of sales tax on
new plants and for balancing, modernisation and replacement (BMR), use of zero-rated
tariff for raw material and component, accelerated rate of depreciation and reduced
withhold-ing tax for components and raw materials. With a view to attract foreign
investment, the Board of Investment (BOI) announced in May 1995 a package of
incentives for the pharmaceutical raw materials producing industry. The package includes
10 per cent reduction in import duty for the related equipment and machinery, exemption
of duty on import of raw material, withdrawal of sales tax on the finished material, an
increase of debt-equity ratio from 60:40 to 70:30 and tariff protection for locally
produced material against the imported raw material and finished products.
8.6 Sri Lanka
Since 1977 Sri Lanka adopted credible trade reforms which included a sharp reduction
in quantitative restrictions (QRs). The 1977 tariff system consisted of 8 bands, ranging
from zero duty on certain essential consumer goods to 500 per cent on luxury goods.
Basic raw materials, machinery, and spare parts faced duties of 5 per cent, while
intermediate goods faced duties ranging from 12.5 per cent to 25 per cent. Subsequently
during 1980s and 1990s the tariff bands and the peak tariff rates were reduced
significantly.
102
During 1993-94 the Government removed export licensing restrictions on all but four
items, most justified for reasons of environmental protection. A large number of import
licensing restrictions were also removed, with the remaining restrictions justified for
reasons of national security, public health, public morals, or environmental protection. Sri
Lanka accepted the obligations of Article VIII of IMF for full convertibility on current
account in March 1994.
Sri Lanka is a member of the Bangkok Agreement, which is intended to promote

regional economic development through trade expansion among members of the
Economic and Social Commission for Asia and the Pacific (ESCAP). Under the Bangkok
Agreement, Sri Lanka offers concessional tariff rates to Bangladesh, India, Lao P.D.R.
the Republic of Korea, and Papua New Guinea. The product coverage is about 300 items.
8.7 Korea
The performance of Korean economy over last 3 decades is a constant reminder to the
developing world that industrialisation-export based development straegies can be
implemented to achieve two objectives of development viz. growth and equity. The
stabilisation and recovery were the Government’s top priorities in the early reform
period. Stability was attained through exchange rate adjustments, which restored export
competitiveness and reduced the import demands. To dampen inflationary pressures,
officials tightened fiscal policy and initiated tax reform programmes. External trade was
liberalised significantly except selected import restrictions. Foreign investment rules were
liberalised to encourage inlow of foreign capital.
Entry of foreign investment to the Korean economy has been significantly liberalised
over the years. There is no specified limits on foreign equity participation except in the
case of industries on the restricted list. There is no minimum cash requirement and
Foreign Direct Investment may be entirely in the form of patents or technology transfer.
In 1960’s when the foreign investment began to be introduced, investments centered in
labour-intensive industries such as electricity, electronics, fibre and garments. As the
economy began to make progress,foreign investment was gradually shifted to technology
or capital-intensive industries such as chemicals and transportation means.
In July 1984, Korea adopted the negative list system. Consequently, the foreign
investment liberalisation ratio rose to 66% compared with 61% under the positive system.
Since March 1993 the approval oriented system was changed to the notification oriented
system, which covers 91% of the total businesses eligible for foreign investment
regardless of foreign equity ratio(except for few industries such as retail business and
hotels).
Manufacturing sector has been opened to FDI more rapidly than other industries, as
indicated by the higher liberalisaiton ratio at 97.8 percent for it in 1993. Though the
service sector has a far lower liberalisaiton ratio than manufacturing, those services
103
which are of interest to foreigners such as finance, wholesale trade, and marine
transportation are at least open to FDI.
Korea has 1148 distinct business sectors. Of this 64 sectors are currently either
restricted or banned for FDI. Restricted sectors include agriculture, finance, telcom and
broadcasting. The banned sectors include rice farming, cattle breeding etc.
All foreign companies in Korea enjoy a National status and get the same incentives
which are available to domestic companies. Mergers and Acquisitions of foreign
enterprises are allowed subject to prior approval and the condition that thay do not violate
the norms of the restricted and banned sectors. Since the early 1980s, Korea has
implemented a comprehensive program of trade liberalisation, and has achieved a
significant reduction of quantitative controls and tariffs. By 1992, the import
liberalisation ratio for manufactured products had risen to 99.9 percent, and that for
agricultural products has increased to 87.1 percent.Korea successively reduced import
tariffs since 1980s.
The Korean Stock Exchange gradually expanded market access for foreign portfolio
investments through introduction of various instruments such as investment funds for
foreigners, issuances of equity-related overseas securities, opertions of foreign securities
companies through branch offices and joint-ventures, and direct investment in the
Korean stock market by the foreigners. Ongoing refornms may enhance the current 10%
ceiling on foreign holdings of a domestic firm’s stocks.
Foreign investors are provided with many incentives such as repatriation of earnings,
protection for intellectual property rights such as patents and trade marks, Investment
Guarantee Agreement and Double Taxation Avoidance Agreement, tax exemptions and
deductions, a favourable business environment for investors by constructing free export
zones, facilitating the use of financial resources, and establishing a one-stop service
center where government officials from relevant ministries worked together.
The Korean tax system is composed of national taxes and local taxes. The national tax
system includes corporate tax, income tax, value-added tax and special excise tax as its
highest revenue sources, while local tax is dividend into provincial tax and city and
country tax. In step with the current international economic trend of liberalisation and
globalisation, the corporate tax rate has been reduced from 32% to 30% and the
depreciation and tax accounting systems have been improved. In the case of large-sized
utilised companies (including domestic companies having net worth of over 10 billion
won), a 15% tax rate is levied on the excess accumulatedd earnings. However, the excess
accumulated earnings used for reinvestment is exempted from the payment of the tax.
There are six income tax rates depending on the income slabs (Table 8.4), and various
exemptions relating to basic reduction, spouse, dependents, handicapped, female houise-
holder and labour income are available for the taxpayers.
Table 8.4 Income Tax Rates in Korea (in per cent)

_________________________________________________________________
104
Income tax Base Income Tax Rate
_________________________________________________________________
Under 4 million won 5
4 million - 8 million won 9
64 million won and above 45
_________________________________________________________________
The Foreign Capital Inducement Act has stipulated a wide range of tax support systems
that can facilitate the transfer of advanced technology and the introduction of foreign
capital. The foreign companies receive various fiscal incentives such as exemption or
reduction of income tax and corporate tax; exemption or reduction of acquisition tax,
property tax and aggregate tax; and exemption or reduction or customs duty, special
surtax and value added tax when introducing capital goods.
Foreign investors receive exemption or reduction of income tax and corporate tax on
dividends, royalties and other investment income. Foreign companies transferring
advanced technology receive exemption or reduction of income tax and corporate tax for
providing technology. Lenders of public loans get exemption or reduction of tax and
public charges on loan interest. Foreign technical service providers related to public loans
get exemption or reduction of income tax and corporate tax for providing services.
Employment of foreigners in industry and trade is allowed. Taiwanese firms are

importing labour from Bangladesh and Philippines to carry out low end jobs while
upgrading Korean labour to higher skill levels. Companies are free to close down
operations provided they are able to compensate the labour according to a formulaset by
the government.
The Government is currently planning to open up more and more sectors such as
wholesale and retail trade of grains, mutual credit companies, air and land freight hndling
services, inter-city bus transportation, hospitals, vocational schools, offset and
commercial printing, employment agencies, manufacture of lubrication oil and gases,
legal services, real estate, insurance brokerage, publication of newspapers etc. A New
Foreign Direct Investment Act passed in January 1, 1997 announced that additional 28
sectors will be liberalised from June 1997, 11 sectors from Jan 1998, 6 sectors from Jan
1999 and another 6 sectors from Jan 2000. Investment related regulations are being
brought in line with international standards. Conditions and procedures are being
formulated for friendly Mergers and Acquisitions. Investor protection and establishment
of an investment related dispute settlement procedure is an important part of this law.
8.8 Singapore
Singapore is one of the most open economies in the region and allow foreign
investments in almost all sectors of the economy. It is relatively open to foreign
105
investment in banking and other related institutions, energy, services and trading firms. It
has no limits on foreign investment except in public utilities, media, transport and
telecommunications. The Singapore government initially introduced quotas for protection
of infant industries like textiles, and used import licensing to regulate the trade of a
limited range of goods (such as films, publications, live animals, food, ornamental fish,
fresh or frozen meat, arms and explosives, medicines and drugs) for social or security
reasons.
Free trade zones which facilitate entrepot trade and promote the handling of
transshipment cargo have been in operation since 1969. The country has presently six
free trade zones. Tariff levels in Singapore are the lowest compared to its ASEAN
neighbours with 70% of its tariff lines set between 0-10%. The government aims to
reduce tariff bound rates for 2480 tariff lines under the Uruguay Round (UR) standard of
10% to 6.5% and bind additional 291 tariff lines at a maximum rate of 6.5% thus
extending UR tariff binding coverage from 70% to 75% of all tariff lines.
Legal system in Singapore is highly developed, fair and efficient. Singapore readily
interacts with foreigners, encouraging multinationals to set up shops in the country.
However, foreigners are required to obtain work permits, limited in duration, and
restricted for certain categories.
An important characteristic of foreign investment in Singapore, not shared by other
ASEAN countries and Asian NIEs, is the overwhelming dominance of FDI over portfolio
investments. More than 95% of net long-term capital inflows into Singapore is in the
form of FDI which has been the driving force behind Singapore’s phenomenal growth
over the last three decades. It brought capital, technology, management expertise and
access to world markets. It transferred Singapore from a labour surplus economy to a
labour tight economy.
The foreign share of total investment in Singapore has been about 70 percent in
manufacturing and more than 80% in services in recent years. Foreign investment is
dominated by 100% foreign or majority foreign owned companies which account for
more than 60 percent of the companies with foreign equity capital. The USA leads the
foreign investors in both manufacturing and services, followed by Japan and Europe.
While Japan’s share has increased over time and Europe’s share has declined. Foreign
investment is highly export oriented, with 85% share in manufacturing exports.
Singapore’s latest strategy has been to promote outward FDI aggressively to develop an
external “wing” with strong linkages with the domestic economy. It has introduced
various incentives schemes to encourage local companies to go abroad. The most popular
destination for local companies has been Asia which had a share of about 65 percent of
Singapore investment in 1994.
8.9 Indonesia
Indonesia promotes foreign investments that increase non-oil exports, encourage

procesing of raw materials into finished goods, use local products or components, transfer
106
technology and skills and save foreign exchange. Most foreign investments are structured
as joint ventures to foster the development of domestic industries.
In May 1989 the minimum size of foreign investment was reduced from US$1 million
to $0.25 million for certain sectors. In 1994 Government shortened the negative list for
foreign investors to 34 industries and relaxed ownership of foriegn investors by allowing
95 percent of equity owned by foreigners in business ventures in Indonesia. The sectors
opened for foreign capital in 1994 were seaports; the generation, transmission and
distribution of commercial electricity, telecommunications, civil aviation, shipping,
drinking water supply, railways, nuclear power generation and mass-media. The negative
list for foreign investors now consists of 34 sectors, including domestic distribution and
retailing and sectors reserved for small scale firms.
Foreign ownership is limited to 80% for total investment of at least US$1M. 100%
foreign ownership for a maximum period of 15 years is granted if the total paid-up capital
is at least US$50M; the company is located outside Java or in a bonded area and it is a
100% export-oriented unit. Indonesia has 2 duty-free zones at Batam Island and
Surabaya. Projects in free trade zones are allowed 95% foreign ownership. Foreign
ownership for commercial production is reduced to 49% or less within 20 years.
Foreign investors who issue more than 20% of their equity through the capital markets
are allowed to maintain up to 55% of shareholdings to qualify as a domestic market
enterprise: this allows them to distribute goods at retail level and obtain credits from the
state banks.
Negative list defines areas restricted to foreign investments and includes retailing and
advertising. In 1989, a new list replaced the Investment Priority List and opened more
than 300 sectors to foreign investors, and only nine sectors remained closed. Since 1988,
foreign investors have been allowed to set up joint ventures in services like banks,
finance, insurance and securities companies. Foreign investors are also allowed to enter
shipping, civil aviation, telecommunications, media and energy sectors.
The “strategic” commodities such as agriculture products, palm-oil based products,

paper products, plastics, and automotive sectors and machinery are still subject to either
non-tariff barriers or high import duties or export taxes. The imposition of export tax with
escalated base and rates on crude/semiprocessed palm oil not only discourages exports
but also creates economic rents for domestic producers of fatty alcohol at the expense of
labour intensive, mainly state-owned, palm oil planters.
Tariff levels have considerably fallen since 1985 when the government announced an
across-the-board reduction in the range and level of import duties. At present, tariff levels
range in between 0 to 100% with an average rate of 20% compared with an average rate
of 37% before 1985. In an effort to promote an open economy, the reforms in the tariff
structure have ensured that over 50% of the domestic output from import competing
sectors have tariffs of 10% or less.
107
Since 1986, the government has moved to dismantle the complex import licensing
system. The share of imports subject to non-tariff barriers (NTBs) decreased from 43% in
1986 to 13% in June 1991, and the share of domestic production protected by NTBs
declined from 41% to 22% over the same period. Nevertheless, some important
subsectors in manufactruring such as engineering goods, tires, paper products, glass,
man-made fibres, textiles, iron and steel, plastics and food processing and most of
agricultural goods remain subject to NTBs. Imports of restricted goods, such as essential
agricultural commodities like rice, sugar, soybeans, fresh fruits, milk products, batik
goods, garlic, some steel items and strategic minerals like coal, are permitted only when
there are shortfalls in domestic production.
Indonesia allows foreign investors to appoint own management, but they must use
Indonesian labour except in positions where suitable nationals are not available. There is
no restriction on repatriation of profits. Indonesia has bilateral agreements with a number
of countries and is a signatory of MIGA protecting investments against political risk.
However, Indonesian judiciary system is very weak with unclear legal rights.
The tax bills of 1994 to 1996 broadened value added tax and property tax, reduced the
highest income tax rate from 35 percent to 30 percent, and improved tax administration
bu giving greater authority to tax offocials to check tax returns. The list of objects of the
value added tax now includes a wide range of services, including franchising. The income
tax bills reintroduce various forms of incentives for investment in remote locations,
particularly in the Eastern part of Indonesia, pollution abatement and development of
human resources.
The fiscal incentives include reduction of the highest marginal tax rate from 30 percent
to 25 percent; accelerated depreciation and amortisation; a longer period for
compensation of loss and a lower tax on dividends; exemption from import duty, import
surcharge, excise and income tax for trade zones; drawback of import duty and VAT for
export manufacturers; and general exemption from import duties on capital goods and
raw materials for two years production.
8.10 Malaysia
Malaysia prioritises investments in capital-intensive, value-added and high-technology

industries, and encourages joint ventures for the development of domestic industry in
almost all the manufacturing sectors with 60%-40% ownership in favour of local
enterprises. Promotion of Investments Act of 1986 contains the principal incentives for
investment in agriculture, manufacturing, tourism and other commercial undertakings.
Foreign ownership is allowed if investment in fixed assets (excluding land) is at least

RM50M or has at least 50% value added; products do not compete with existing domestic
production; and for projects in extraction or mining or processing of mineral ores. No
equity limit is imposed on manufacturing projects that export 80% or more of total
production. 100% foreign ownership is allowed for high-technology projectrs and other
108
priority products for the domestic market. Maximum foreign equity of 60% is prescribed
for sales to the domestic market,
Although investment is promoted in all areas, certain targeted sectors and activities such
as agriculture & agro-processing, forestry, manufacturing, hotel & tourism projects and
the film industry are promoted by the government. The Free Trade Zone Act of 1972
established FTZs designed for establishments producing or assembling goods for export.
Lubuan island is being promoted as an international offshore financial centre.
From 1994-95, Malaysia further liberalised foreign investment in its financial services
and increased entry of foreign banks, enhanced equity participation in insurance, and
liberalised the shipping, telecommunications, and transport sectors. It has also opened 64
service sectors including computers, audio-visual, transport and business services.
The government enforces import controls through a system of import licensing to

protect domestic producers from imports and to ensure adherence to sanitary, safety,
security, environmental and copyright requirements.Import duties in Malaysia are
relatively high ranging from 0% to 300% though most goods fall within the 15% to 25%
tariff range. In implementating the Uruguay Round commitments for market access,
Malaysia has unilaterally accelerated the tariff cuts on a number of items.
Malaysia allows free repatriation of profits and capital, and provides bilateral protection
against nationalisation and expropriation. Based on British model, legal system and
company laws are generally well developed in Malaysia and provide investors protection
and fair arbitration disputes. Malaysian society is not generally anti-foreign, but its New
Economic Policy (NEP) extends preferential treatment to ethnic Malaysians and limits
foreign control over the economy. The government allows the employment of technical
and skilled foreign personnel in areas where there is shortage of local talent. But it
requires a training programme to transfer skills to locals.
Fiscal incentives include tax exemptions for 5 years for 85% of income for pioneer
industries; lower income tax at the rate of only 30 percent of income for 5 years for the
potential pioneer status industries; full exemption from import duty on raw materials or
components used for export production or for production in a promoted zones for both
domestic and export markets; partial import duty relief for goods produced for the
domestic market; and full drawback of import duty and sales tax on parts, components or
packaging materials used in the manufacture of goods exported.
8.11 Philippines
Philippines encourages investments in sectors that provide significant employment

opportunities, increase the productivity of resources, improve technical skills and
strengthen inter-national competitiveness. Under the 1987 Omnibus Investments Code, a
60% - 40% equity rule prevails in favour of local enterprises. The Foreign Investment Act
of 1991 allows 100% foreign equity in any business except those in the Negative List
without any incentives. The Negative List restricts foreign participation to a maximum of
109
40% and prohibits foreign equity in areas mandated by the Constitution such as mass
media, engineering and accountancy.
The Special Economic Zone act of 1995 created ecozones or selected areas which are
found in highly developed regional growth centres with adequate infrastructure, industrial
capacity and availability of labour. These zones have the potential to be developed into
industrial, tourist/recreational, agro-processing, commercial, banking, investment and
financial centres. This includes the Subic Bay Freeport, Clark Special Economic Zone
and three major EPZs with plans for expansion.
Philippines liberalised recently its financial sector to promote more innovation in terms
of products, services as well as technology. Since 1994, foreign banks have been allowed
entry and further liberalisation of the sector is planned. Foreign banks are also allowed to
establish subsidiaries and enter into joint ventures. The insurance, financing and
securities industry is generally open to foreign firms. Recent policies are also being
adopted to liberalise and deregulate the telecommunications, shipping and energy sectors.
However, the media and retail trade remains closed under the negative list.
Generally, all merchandise imports are freely allowed. However, the government
prohibits the imports of some products for reasons of health, morality, balance of
payments and national security.The Philippines likewise sets technical standards and
regulations. In 1990 import tariffs ranged between 10 to 30% with four-tiered bands. In
1991, a more gradual tariff reduction was adopted with 95% of the tariff lines set in the
range of 3% to 30% with four layers: 3%, 10%, 20% and 30%. Beginning 1996, the four-
tiered tariff system was narrowed furtheer to two tiers in preparation for a uniform tariff
rate of 5% by 2004.
The country is generally open. Its strong relationship with the US and the widespread
use of English make Filipinos more open to foreigners. Philippines has a well-established
judicial system, but enforcement is rather non-effective and lax. The constitution limits
foreign ownership of property and so-called strategic industries. Foreigners need to
obtain work permits and are required to train local counterparts. Foreigners may retain
top management positions if the majority of capital stock is foreign-owned. But, the
foreign nationals employed in supervisory, technical or advisory positions cannot
comprise more than 5% of total workforce.
The government also allows the full and immediate repatriation and remittance
privileges for all types of investments. The foreign investment policies provide the basic
rights and guarantees for the protection of foreign investments such as repatriation of
equity and profits; the right to foreign loans and contracts; freedom from expropriation of
property; and non-requisition of investment. Foreign investments are treated equally as
domestic investments, except in the areas listed in the Foreign Investment Negative List.
The package of incentives, which are competitive with those provided by other ASEAN
countries, take the form of income tax holiday for four to eight years; duty free imports of
capital goods and components, breeding stocks and genetic materials; provision of tax
110
credits on capital goods bought locally and raw materials, supplies and semi-
manufactured products used in the manufacture of products and/or forming parts thereof
for export; additional deduction for labour expense; exemption from the payment of
contractor’s tax, wharfage dues and any export tax.
Additional incentives such as tax holiday for 6 years and exemption of major
infrastructural costs and wages from the taxable income etc. are provided for projects
located in less-developed areas as categorised by the National Economic Development
Authority (NEDA). During 1981-1992 foregone revenue through the grant of fiscal
incentives represented 0.64 percent of GDP.
8.12 Thailand
The Thai policy makers had always held the view that the government should play a
limited role in the economy and the private sector should be the engine of growth.
Thailand’s public enterprise sector is small and more profitable than in many developing
countries. Over time, public sector activity shifted away from direct involvement in
industrial production toward the provision of public infrastructure and services. This,
together with the pro-business orientation in tax laws and industrial policy, has served to
create a dynamic private sector.
Thailand’s adjustment experience since 1980 has, in general, been impressive. Despite
having been subject to adverse external shocks in the late 1970s and early 1980s,
Thailand, unlike many developing countries, did not experience a major “investment
pause”. Since 1986-87, Thailand experienced an unprecendented economic boom led by a
surge in private investment and manufactured exports. Factors that contributed to this
rapid growth include a sustained improvement in external competitiveness, a relatively
high degree of labour mobility, lower labour costs relative to its trading partners, the
elimination of export taxes and the introduction of other incentives aimed at export
promotion and providing a favourable environment for private investors. The fiscal
consolidation since the mid-1980s also resulted in substantial surpluses and made it
possible to accommodate the surge in capital inflows and the investment boom without
high inflation or a real appreciation of the baht.
Thailand prefers foreign investments in activities that are labour-intensive, export-

oriented, raw material-intensive, and import substituting. It also encourages investment
for construction and infrastructure, R&D services, agro-industries, and
telecommunications.
The Alien Business Law of 1972 allows foreign participation in certain enterprises
provided that Thai ownership is more than 50%. Presently the Law is under revision to
further liberalise trade and industry. Currently, any firm that exports at least 80% of its
production may be completely foreign owned, although full ownership may be negotiated
on a case by case basis for lower levels of export obligations. For projects in agriculture,
fishery, mining and services, foreign investors may hold majority or all shares if capaital
investment is over 1M Baht. However, Thai nationals must acquire at least 51% control
111
within 5 years of operation. Foreign equity participation cannot exceed 49% in
manufacturing projects for the domestic market, although majority foreign ownership is
allowed for enterprises that export at least 50% of its total sales.
Thailand has a Negative List of areas closed to foreign investments. The Thai
government has divided the country into 3 zones for the purpose of decentralisation. Zone
3 or the Investment Promotion Zone allows full foreign ownership for manufacturing.
Thailand plans to transform its economy into a strong regional financial centre by 2000
and has recently allowed more foreign banks to set up branches in the country.
The Thai Government uses import licensing mainly for protection of infant industries.
There are local content rules on dairy products, tea and motor vehicles as a way of aiding
local producers. The government also regulates imports to meet certain technical
regulations and standards for health and safety reasons. Around 100 product categories
are subjected to import licensing and about one-fourth of these are agricultural
commodities such as rice and sugar. Industrial products covered by import licensing
include certain textile products, machinery items, motor vehicles, motorcycles, paper
products, chemicals, porcelain items and building stones.
The Thai economy has traditionally been outward-oriented and at the same time there
was a fair degree of government intervention in the trade system. The main instrument of
intervention has been tariffs. The system of protection was biased against the agricultural
sector, agro-based and labour intensive products and favourable towards capital-intensive
and import substituting industries such as automobiles and pharmaceuticals. The labour-
intensive textile industry was also heavily protected.
After a period of heavy protectionism in the late 1980s when relatively high tariff rates
were adopted, Thailand has recently embarked on a tariff reduction programme in
compliance with its commitment under AFTA. Tariffs on fast-track products will be
reduced from 25% to 0- 5% by 2000. Normal-track traffis are subject to 30% taxation. In
the case of 3908 items, which now attract rates up to 100%, tariffs will be reduced to 30%
or less.
Thailand is a relatively open society and does not vigorously oppose foreign influence.
Although it has an independent judiciary system, enforcement is rather arbitrary and lax.
Foreign employment is subject to the Alien Occupation Law which requires all aliens to
obtain work permits.
Thailand allows free repatriation of profits and capital. Fiscal incentives include tax
holiday for 3-8 years depending upon zone; exemption or 50 percent reduction of import
duties and business taxes on imported machinery; reduction of import duties and business
taxes of up to 90 per cent on imported raw materials and components; and additional
incentives for investments in outlying areas and export firms.
8.13 Vietnam
112
The Vietname is in a transitional stage of moving to a market oriented economy and
implementing the development policies with an accelerated pace. The expansion of
foreign cooperation and mobilisation of FDI funds are among the most important
objectives of the Vietnam’s present macro policies. Foreign direct investment has played
a major role in developing the Vietnamese economy by utilising fully and raising the
production capacity of vairous existing units and creating new production capcities in
industry, transport, post, communication and hotels. International telecommunications
and domestic telephone services have been greatly improved, creating favourable
conditions for economic development. Through FDI, the Vietnamese have received some
advanced techniques and technologies in various economic areas such as
telecommunicaiton, oil and gas, electronics, motorcar assembling, hotels and agriculture.
Beginning 1986, foreign investments are encouraged in high technology and labour-
intensive production and infrastructaure to strengthen the country’s industrial
development. The Law on Foreign Investment provides for 3 forms of foreign
investment: contractual business cooperation ventures, joint ventures and wholly owned
foreign enterprises. In joint ventures foreign participation should be at least 30% of
prescribed capital. In 1993, the government adopted the BOT scheme which allows 100%
foreign capital for infrastructure and energy projects. Since 1991, foreign investors are
prohibited from doing business in the following areas : exploitation of rare minerals,
large-scale supply of power and water, communications, shipping and aviation, tourism
and trade services.
Foreign-owned or joint ventures are allowed in EPZs devoted to light manufacturing

industries such as garments, textiles, leather, footwear, paper, packaging and printing
products, food and beverage, home appliances, plastic products and electronics. Special
areas for foreign investments include services such as banking, insurance, construction,
auditing, fuel and gas supply and import/export related sectors. The government has
allowed the entry of foreign banks to modernise its financial system.
Until 1990, foreign investment was mainly concentrated in oil and gas (32.2%) and
hotels (20.6%). At the end of 1993, foreign investment was concentrated in industry
(36.8%), tourism and hotels (18.6%) and oil and gas exploitation (15.3%). An appraisal
of FDI fund implementation in recent years shows that the realised funds of FDI
accounted for about 30 per cent of the total committed value of FDI becaue of various
factors such as delays in project implementation, legal procedures and complex rules and
procedures.
The government regulates external trade through the administration of quotas and the
issuance of import and export licences. Import duties in Vietnam is relativiely high
ranging from 3% to 100%. The lowest rates are levied on imports of raw materials and
capital equipment, while the highest are levied on imports of luxury goods. Upon its entry
into ASEAN, Viet Nam has agreed to join the Common Effective Preferential Tariff
(CEPT) Scheme for AFTA beginning January 1996 and complete implementation of the
CEPT Agreement by the year 2006.
113
In its desire to catch up with the globalisation, local enterprises are allowed to enter
foreign paratnerships to assimilate product, market, management and technological
knowledge. Employment of expatriates is permitted, although there is a priority for local
employment and foreign firms should provide training programmes for locals for trasfer
of skill.
The state guarantees ownership of invested capital and provides favourable conditions
and simple procedures for foreign investments. However the legal system is not well
developed and there is a lack of uniform commercial code to protect private sector
against government seizure.
8.14 China
Reforms in China started in 1979 when the Chinese government adopted an open-door
policy which recognises the need for foreign capital and technology to accelerate the
growth rate and to build up infrastructure. Areas promoted are agriculture, energy,
electronics and manufactures. Generally, it promotes labour-intensive and high
technology industries. Nearly $140 billion of FDI had came into China between 1979 and
1996. Most of this has been in high tech areas such as automobiles/ digital exchanges.
China identifies four categories of foreign investment: Encouraged sectors, Allowed

sectors, Limited sectors and Prohibited sectors. In the limited sectors, the foreign equity
participation should be minimum of 25% and a maximum of 50% whereas in encouraged
sectors the equity participation could be up to 100%. Limited foreign ownership is
allowed in civil aviation industry including airport facilities. Joint ventures are allowed in
energy and infrastructure projects. Restricted areas include public utilities, transport, real
estate, trust and investment leasing.
Foreign investment can take place in the form of equity joint ventures, contractual joint
ventures and wholly owned foreign enterprise. In wholly owned foreign entprises, the
following conditions apply: it must utilise advanced technology & equipment: develop
new products or improve existing ones, and must export more than 50% of output.
Several foreign banks, financial and insurance institutes are opening their branches and
business in larger areas in China. In special economic zones and the coastal development
areas, many foreign investors are investing substantial amounts of money on land
exploitation, capital intensive and long-term cost-recovery infrastructure projects, such as
railways, highways and harbours, or even the projects of airport construction and civil
airlines.
China’s open door policy began in isolated areas or special economic Zones (SEZ) with
considerable autonomy for attracting foreign investments. The SEZs are designed to
encourage foreign capital and technology by offering various incentives such as duty-free
imports, lower taxes and administrative autonomy in order to boost the development of
China. In the SEZs, foreign banks are generally allowed entry and this is also extended to
insurance and securities firms.
114
Special Economic Zones (SEZs) play an important role in the overall economic
development of China by generating forward and backward linkage and generating
employment. The first SEZ came up in 1980 and initially processing industries which
were highly labour intensive set up their bases in SEZs (1980-85). During 1985-90, more
hi-tech processing industries were set up. During 1990s emphasis was shifted on high
tech areas.
Most of the investment in these areas came from overseas Chinese natioinals who were
attracted by market economy operating in these zones, efficient infrastructure and other
support services, various tax exemptions and concessional credits applicable to these
areas. Visas are not difficultto get for the expatriates working in SEZs. China plans to
upgrade the SEZ’s to international standards, to accord national treatment to all foreign
enterprises, to standardise the legal system, and to create SEZs in the interior.
China’s tariff regime is characterised by a relatively high average tariff and a large
number of tariff bands with wide dispersions. In 1993, the average unweighted tariff rate
stood at approximately 40%. Rates tend to be lowest for raw materials and higher for
finished consumer goods. The structure of tariffs provided very high rates of effective
protection for some finished goods. Since the APEC Bogor Meeting in 1994, China has
reduced the regulatory tariff on some products. In 1996, China promised to slash
substantially the tariff on 4994 tariff lines. The average tariff rate will be cut from 35.9%
to 23%.
Several levers of state control over Chinese foreign trade activity have remained: such
as export and import licensing, restrictions on foreign exchange retention and use;
commodity inspection, customs regulation and protective duties; and state pricing of
traded goods, especially imports. Beginning 30 June 1995, China removed quota,
licensing and other non-tariff measures from 367 tariff lines. In 1996, China eliminated
the quota, licensing and other import control measures on about 170 tariff lines,
accounting for over 30% of the commodities subject to import quota and licensing
requirements.
Since the adoption of open-door policies, China has become more receptive to foreign
business. The government is, however, opposed to certain foreign cultural influences and
strictly regulates the flow of information. Mergers and Acquisitions are difficult as most
enterprises are state owned. Land is also state owned and is only given on lease.Chinese
legal system is not well established and enforcement is lax and arbitrary. In recent years
there has been significant increase in commercial disputes due to an imperfect legal
system and ineffective government supervision. Process of legal reform is currently being
undertaken to make the system more professional and independent.
Some 11 categories of tax apply to foreign companies in China. These are : Income Tax,
Value Added Tax, Business Tax, Natural Resources Tax, Vehicle Tax, Land Tax, Real
Estate Tax, Tax on slughter of Animals, Consumption Tax, Customs Duties, and Urban
115
Property Tax. The basic corporate tax rate for foreign companies with offices in China is
33% (30% belongs to the centre and 3% to local governments). If the company has no
office in China the rate is 20% of the basic rate. A 10% reduction is given to companies
whose country of origin has a tax treaty with China. VAT is 17% and 13% for
infrastructure and agriculture industries respectively and business tax ranges between 3-
5%.
There are various preferential tax rates depending on the location of a project as well as
the sector it operates in. Basic policy is to encourage the setting up of EOU’s, stepping up
the growth of exports, and to promote hi-tech industries in the SEZ’s as well as the
backward regions. The country is divided up into various zones. These include :
— Coastal open Cities

— Economic and Technical Development Areas
— Sp[ecial Zones
— Coastal open Areas
— Hi-Tech open Development Areas
— Tax Havens
— Other special areas such as Hainan area in Shanghai.
The various fiscal incentives include a tax holiday for 2 years followed by 50%
reduction of income tax for the next 3 years; a 5 year tax holiday followed by a rebate of
50% for the next five years for the construction of ports; a reduced tax rate of 24% in
coastal cities for businesses over 10 years old; a reduced tax rate of 24 per cent for those
engaged in energy, transportation, port and harbour or other state-encouraged projects in
the economic and technological development zones, in the coastal areas or in other areas
as approved by the State Council; a reduced income tax rate of 15 per cent in
technological and special areas for enterprises over 10 years old and in coastal areas for
technology-intensive companies; reduced local income tax rate of 10% for activities in
SEZ; 50% reduction in income tax each year for export-oriented units exporting more
than 70 per cent of output; 50% reduction in income tax for a three year period for
technology enterprises; a tax rebate of 40% for reinvestment of profits in China; a tax
rebate of 100% in the case of EOU units, Hi-tech units and Hainan SEZ; duty free
imports of inputs for export industries; and duty free import of capital goods in
technology development and special areas.
These tax incentives will soon be done away with and a national treatment will be given
to all FDI investors. China’s Patent Law and Trademark Law protect the patent rights and
trademarks registered in the country by foreign businessmen. The retail sale business,
which was long forbidden for FDI, has opened its door to foreigners. Supermarkets
operated by Japanese have appeared in Beijing and Shanghai. However, there continues
to be ban on foreign firms in information services.
8.15 Hong Kong
116
Hong Kong has been a free port and has been open to FDI for several decades.
Favourable impact of its liberalisation policy is evident from its economic progress. In
spite of a lack of natural resources, it ranks third in Asia in terms of per capita GDP (US $
21,700 in 1996) after Japan and Singapore, and seventh in the world in terms of total
asets.
FDI is allowed in all sectors. Japan, USA & UK are the major investors in Hong Kong.
Restrictions on FDI exist only in banking where a license is required and in broadcasting
where only a Hong Kong based company can operate. There is no discrimination amonng
overseas and domestic investors and no special conditions are attached to overseas
investment.
Government follows a free enterprise and free trade policy based upon a philosophy of
minimum interference with market forces and maximum support for business. Hong
Kong Productivity Council provides a wide range of support, services and facilities to
industry such as training, design, consultancy, strategic alliances for technology transfer,
joint product development etc. Hong Kong Industrial Technology Centre Corporation
facilitates technology development and application in Hong Kong’s industry by the
technology based business incubation, technology transfer services and product design
and development support services.
A strong financial base exists in Hong Kong, and there is no exchange control or
restriction on capital overseas. There is no restriction on employment of foreign labour
provided there is a need to import labour from overseas. No local content or technology
transfer requirements are imposed on the foreign companies. Comprehensive laws exist
for protection of IPRs. Government supports industry with the provision of technical
training facilities, consultancy, technology transfer, R & D etc.
A low, simple, non-discriminatory and practicable taxation system exist in Hong Kong
without any provision for tax holidays and other incentives for overseas investors.
Corporate tax rate for unincorporated business is 15% and that for incorporated business
is 16.5%. Property tax is charged on the owners of land and buildings in Hong Kong at a
rate of 15%.
There are no customs or excise duties except on cigarettes, alchohol, petroleum and
automobiles. Cigarettes carry a tax of 100% while the rate on alchohol varies according
to the type. This tax is imposed only to discourage consumption of these two products for
health considerations. Automobiles face an initial registration tax of about 100% and
petroleum attract tax of about 40-50%. This is done to discourage the use of private cars
and ease the pressure on Hong Kong congested roads for environmental considerations.
With labour costs in Hong Kong rising a huge chunk of Hong Kong’s manufacturing
base has been shifted to Guangdong province of China. 75% of the total investment in
Guangdong Province in China is from Hong Kong. Labour intensive industries are being
shifted out and the hi-tech areas are being retained in Hong Kong. The aim is to convert
Hong Kong into a Science & Technology island. By July 1997, sovereignty over Hong
117
Kong have been transferred to China from the U.K. This will strengthen the existing
linkages between China and Hong Kong.
4.16 Taiwan, China
Taiwan has always followed a relatively liberal policy over the past 30 to 40 years. FDI
up to 100% of total equity is welcome in most areas except for a restricted list and the
prohibited list. Prohibited industries include those industries which violate good public
morals, are highly polluting, and are legal monopolies or legally prohibited. Restricted
industries include public utilities, banking and insurance, news media and publishing, and
other industries for which investment is restricted by law. There are equity caps on the
restricted industries which vary from sector to sector.
All FDI applications must be submitted for approval to the Investment Commission (IC)
which grants licenses for these comnpanies to operate. Foreign companies enjoy the same
incentives as the domestic companies of the same type. There is no restriction on the
repatriation of profits. Equity is also repatriable at any time after completion of the
project.
There is no restriction on mergers and acquisition by foreign companies so long it does

not violate the norms prescribed in the restricted list. There is no restriction on importing
labour from other countries subject to grant of Visa. Taiwan companies are free to exit
provided they compensate the labour according to a formula set by the government.
The duty structure in Taiwan by and large confirms to OECD regulations and the
average tariff rate is around 6% in nominal terms and 4.6% in real terms. Automobiles
attract the highest duty rate of 35%. Raw materials, machinery, oil seeds and grains etc.
attract zero duty. There is a 5% VAT imposed in Taiwan.
Foreign companies are subject to a withholding tax of 15% and corporate tax at the rate
of 20%. Companies in high tech areas or those with a lower investment can choose
between 5 year tax holiday or a 20% investment allowance against their income tax.
R&D or production equipment not produced in Taiwan is exempted from import tariffs. A
2-year depreciation is allowed for instruments and equipments for R&D quality
inspection and energy conservation. Investment tax credits are given for investment in
backward areas, procurement of at least NT$0.6 million worth of automated production
equipment and pollution control equipment within a single year, an expenditure of NT$ 3
million or more on R&D and of NT $0.6 million or more on personnels training within a
single year and for the promotion of the “Made in Taiwan” label.
Preferential loans are given at reduced interest rates and longer repayment periods for
the following purposes: upgrading, procurement of domestically produced automated
machines and equipment, procurement of imported automated machinery and equipment,
economic revitalisation programme, encouraging private participation in infrastructural
118
projects, and re-accommodation of foreign exchange funds. Subsidies at the rate of 50-
60% of investment upto certain limits are given for the development of a new product,
turnkey automation, product upgradation, improvement of the process technology, and
for strategic technology applications.
Over time, labour has become expensive thus causing Taiwan to turn towards modern
technology-intensive industries. Traditional industries have shifted their production base
to China, and are now looking at other markets like the ASEAN countries and India.
Till now the Taiwanese concentrated on Trade as an Engine of Growth. 75% of their
GDP originate from trade. Resigned to the fact that the Taiwanese will have to
restrictthemselves to that island and cannot return to the mainland, they are now investing
in their infrastructure. Their aim is to convert the island into a science & technology
island as well as a Asia Pacific regional operations centre for sea and air transport,
manufacturing, financial services, telcom and media.
8.17 Japan
Foreign Direct Investment contributed to structural reforms of the economy, such as

enhancement of Japanes economy, reduction of the disparities between international and
domestic prices, import expoansion, through introduction of new technology,
managewment knowhow and various kinds of competition among domestic and foreign
firms.
Deregulation of the Japanese Economy carried out in phases since 1967 with the
following major landmarks : In 1984 the Japan Development Bank began a programme
of finance to promote FDI in Japan. In 1991 the Foreign Exchange and Trade Control
Law revised various procedures including those relating to FDI in Japan. In 1992 the Law
on Promotion of Imports and Facilitation of Inward Investment was passed to provide tax
incentives, loan guarantees and other forms of support for foreign affiliates in Japan. In
1993 the Foreign Investment in Japan Development Corporation (FIND), a joint project
of the govwernment and the private sector, is set up to provide comprehensive support
services to the foreign affiliates planning operations in Japan. In 1994 the Japan
Development Council was set up to promote FDI in Japan.
FDI is welcome in most sectors except a few sectors related to defence and
environment-protection. Japan now allows ex-post facto notification as against prior
notification earlier. Mergers and acquisition have no restrictions so long as they are not
anti competition and are not carried out in the restricted sectors. There is no restriction on
repatriation of profits and capital by companies. There is no local content requirements
by the foreign enterprises. Companies are free to bring in their own management as well
as their workforce provided that they obtain visas. Companies are free to close down
operations whenever they want. Unemployed labour are entitled to support from the
government for 10 months, which is financed by a contributory fund created by the
employers, employees and the government.
119
Customs duties in Japan fall mainly in range of 0-5%, although some sectors like
textiles and leather attract higher duties as they need protection. The corporation tax rate
is around 52%. Japan provides various fiscal incentives for FDI which include the
following : (a) Tax Incentives - carry forward of losses up to 10 years for Foreign
Companies as against 5 years for other companies; (b) Loan Guarantees - Industrial
Structure Improvement Fund guarantees loans taken by Foreign companies to help them
set up operations in Japan; (c) Japanese SMEs doing business with foreign companies are
given credit guarantees to expand ties between the foreign companies and SMEs; (d)
Japan Development Bank and North East Finance of Japan give preferential loans to the
Designated Inward Investors (DIIs) for start up of projects, R & D etc. in manufacturing
production and wholesale and retail trade and services. (e) Local Governments offer tax
incentives to DIIs to attract them to their areas. These include Prefectural and Municipal
level tax at reduced or zero rate of tax, subsidies and loans.
Impediments to FDI include very high cost of real estate, high wages and labour cost,
fluctuating exchange rates for yen, and complex distribution channels and strong linkages
between companies, distributors, retailers etc. As the Yen started to climb and Japan
became a high cost economy, Japanese firms shifted their production base to China. This
was so as the Chinese had embarked on an early reform process, had a large domestic
market, was growing at a fast pace and was geographically and culturally close to Japan.
However, as the political uncertainty in China rose, Japanes firms turned to ASEAN
countries like Thailand, Malaysia and Indonesia.
These countries had virtually no local industry but provided better incentives to foreign
companies vis-a-vis domestic companies, allowed 100% equity by foreign companies,
offered various fiscal incentives and, with the formation of AFTA, their customs duties
were likely to fall. Now the Japanese firms have expanded their frontier to India and
Myanmer.
Japanese firms operate basically in 2 ways: (a) as a sourcing operation and (b) as a
company looking at the domestic market. When they operate a sourcing affiliate, they
prefer to have 100% equity, retain management control for maintaining the quality of
goods and services, and import all machinery and raw materials. When they operate a
company which caters to the domestic market, they prefer the joint venture route so that
they have a local partner who knows the market. They hire local labour and import only
the crucial machinery, components and raw materials. They try not to differentiate
quality. However, if the domestic country is willing to accept lower technology, and
afordability, this is permitted by the Japanese Company.
Japanese outward FDI stock stood at US$ 306 billion amounting to 6.5 percent of GDP
in 1995 as against its FDI inward stock at $17.8 billion amounting to only 0.4 percent of
GDP in 1995. The average annual FDI inflows to Japan amounted to $720 million
(having a share of only 0.1 percent in gross domestic investment) in 1984-1995 compared
with the average annual outflow of FDI from Japan at $24.4 billion (having a share of 3.1
percent in GDI) in the same period.
120
9 REGIONAL COOPERATION FOR PROMOTING FOREIGN
INVESTMENT-
TECHNOLOGY TRANSFER- GROWTH NEXUS
9.1 Regional Economic Zones in Asia and Pacific
Regional economic cooperation facilitates the free flow of goods, services, capital and
labor across national boundaries and acts as an effective instrument for securing
efficiency in the use of resources and thereby enhancing growth of all member countries.
However, regional trading arrangements need to conform to the requirements of Article
XXIV of the General Agreement on Tariffs and Trade (GATT). Asia is the least
regionalised of the world’s regions in terms of the coverage of economic and trading
arrangements. The only regional economic grouping in East Asia is ASEAN, and the only
one in South Asia is SAARC, and the corresponding trading arrangements are AFTA and
SAPTA.
Like the second generation agreements in Europe (the EU), North America (NAFTA)
and Australia/New Zealand (Closer Economic Relations (CER), ASEAN covering most
of the economies of Southeast Asia, has now evolved into a comprehensive regional
trading arrangement, the ASEAN Free Trade Area (AFTA), with an explicit time table for
eliminating tariffs within the group by the year 2003 and for introducing its Common
Effective Preferential Tariff (CEPT). Viet Nam has now joined ASEAN and there are
plans to include the remaining Southeast Asian economies, i.e., Cambodia, Laos PDR,
and Myanmar.
Under the Framework Agreement on Enhancing ASEAN Economic Cooperation,

members have agreed to eliminate quantitative restrictions and nontariff barriers on trade
in products in the CEPT, to cooperate in some areas of service trade and to explore
cooperation in some non-border issues such as harmonisation of standards, reciprocal
recognition of tests and certification of products, and removal of bariers to foreign
investments. Another unusual feature of this Agreement is the intent to free the movement
of capital and to increase investment, industrial linkages, and complementarity among
members.
South Asia’s counterpart to ASEAN is SAARC (the South Asian Association for
Regional Cooperation) comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka. It is more recent, having been formed only in 1985. SAARC countries are
committed to step-by-step liberalisation of trade in a such a manner that all countries in
the region share the benefits of trade expansion equitably. In 1992, member countries
agreed to form a SAARC Preferential Trading Arrangement (SAPTA) and to complete all
formalities for operationalising the SAPTA, including the finalisation of schedules of
concessions, before 1995. The end-1994 deadline was not met. By middle of 1995, most
countries forwarded their “request list” to all contracting states, which will form the basis
for negotiations on national schedules of concessions.
121
SAARC, too, has a broader mandate than the GATT-notified regional trading
arrangements. It aims to promote active cooperation and mutual assistance in socio-
economic fields among its seven South Asian members. An action plan has been prepared
which includes a strategy for social mobilisation, empowerment of the poor, promotion of
agriculture and small-scale industry, and the development of human and financial
resources.
AFTA and SAPTA are the only two regional trading agreements in Asia. The other
economies of the region, including those such as the People’s Republic of China; Korea;
Japan and Taipei, China, which account for a very large share of total Asian trade, are not
part of any formal trading arrangements.
In addition to encouraging intra-regional trade, the facilitation of capital flows within

the region is an important goal of regional cooperation in Asia. Such intraregional capital
flows, particularly foreign direct investment (FDI), have grown very rapidly over the past
decade. They have also entailed an increasing flow of technology associated with
individual projects and embodied in the flow of capital equipment and intermediate
inputs arising from projects. Japan and the NIEs are the source of much of this
intraregional FDI. The share of intraregional FDI rose to about 36 percent in 1993. About
two thirds of this now comes from the NIEs. The destination of most of this capital flow
is China and Southeast Asia. South Asia began opening up to external capital flows from
the early 1990s and is only now beginning to attract FDI. However, much of it is from
sources outside the region.
Another aspect of regional cooperation that is of growing importance is the sharing of

information. Cooperation can reduce the transaction costs of gathering information, and
through economies of scale, can reduce the research and development costs of generating
information. The sharing of information may be embodied in the form of technology
transfers within a region. It may also encourage capital flows into or within a region by
lowering perceived risks.
9.2 Informal Sub-Regional Economic Zones
While there are only two formal regional trading arrangements in Asia, there are
economic cooperation of a more informal nature among countries in the region. These
sub-regional economic zones (SREZs) are popularly referred to as “growth triangles”,
“growth polygons”, or simply “growth areas”. The main focus of the SREZs is on the
transnational movement of capital, labour, technology, and information and on the inter-
country provision of infrastruc-ture rather than on trade in goods and services. SREZs
generally constitute provinces or states of the nations involved. However, in the case of
Singapore, as a member of the Indonesia-Malaysia-Singapore (IMS) growth triangle, the
zone applies to the whole of the national territory. This growth triangle (also known as
SIJORI) comprising Singapore, the south Malaysian state of Johor and the west
Indonesian province of Riau, including the island of Batam, was recognised in 1989 as a
trilateral agreement by the Governments of Singapore, Malaysia, and Indonesia. Labor-
122
intensive industries are being shifted from Singapore to Johor and the Riau Islands
because of rising real wages in Singapore.
Since 1989, a number of other SREZs have been formed in Southeast Asia and
Northeast Asia. Some of the zones, such as the Brunei Darussalam-Indonesia-Malaysia-
Philippines East ASEAN Growth Area (BIMP-EAGA) and the Tumen River Area
Development project in China are intended to hasten economic growth in areas where are
less developed than other parts of the pariticipating countries. The Indonesia-Malaysia-
Thailand Growth Trinagle (IMT-GT) and the Greater Mekong Subregional (GMS)
Economnic Cooperation project are also intended, inter alia, to pay increased attention to
lagging subnational areas. The experiences of these “growth areas” can lead to multiple
and overlappling growth triangles in ASEAN and their eventual merger under the wider
AFTA (Chia and Lee, 1994).
Other forms of subregional cooperation that mix private sector ventures and multi-
government cooperation are emerging. For example, after an initiative by the
Government of the Peoples’s Republic of China in 1992, the Governments of Singapore
and China have cooperated in the establishment of the China-Singapore Suzhou
Industrial Park Development in the town of Suzhou in Jiangsu Province.
The Singapore-led consortium of investors includes the Economic Development Board

of Singapore, other state agencies, private companies from Singapore and some
participation from Japanese and Korean companies. This cooperative effort is developing
a Singapore-style township. This is a flagship project to penetrate the large Chinese
market and to transfer Singapore technology to China in areas of public administration
and private activities. The Singapore Government, in partnership with India, is also
setting up a technology park in Bangalore, and planning investments in infrastructure-
related projects in Myanmar and Viet Nam which combine government and private sector
inputs.
The most comprehensive form of multi-government cooperation in terms of both

countries and the scope of issues addressed is the Asia Pacific Economic Cooperation
(APEC). This organisation was established in 1989 and currently has 18 member
countries in Asia and the Pacific including the Unites States. The APEC forum is of
special significance, as it is not founded on a formal agreement in accordance with the
GATT. The member countries have agreed by consensus on a program of action to
achieve a state of “free and open trade and investment” by the year 2010 for industrial
country members and 2020 for developing country members. Many of the members have
already made significant unilateral tariff reductions before the target date. There is an
agreement on a set of APEC Nonbinding Investment Principles for investment flows in
the region. These are intended to reduce restrictions on the international flow of portfolio
investments.
APEC discussions have gone well beyond traditional border trade measures to the
consideration of other measures of trade and investment facilitation, such as visa-free
123
travel for business people, standards and harmonisation, and the possibility of
implementing an open skies policy.
There are also nongovernmental forms of linkage in the region as well. The sharp
increase in intra-Asian FDI has led to the development of Japanese and “overseas
Chinese” production networks throughout all the countries of East Asia. These are an
important vehicle for spreading market information, new products, and new technologies
of production.
The most common form of subnational zones are export processing zones. A feature of
these zones is the establishment of some subnational customs area that gives a preferred
customs treatment to goods entering the area compared with goods entering non-zone
parts of the country. These preferences are normally restricted to export activities. Export
processing zones also give preferences or privileges relating to the establishment of
foreign-owned enterprises and to nontrade-related instruments of government policies
such as tax holidays, reduced rates in taxes and duties or preferences in government
loans.
A closely related form of subnational zone is the financial service zone, such as a
financial offshore center. These zones essentially provide preferences for the finance
service industries, analogous to those provided for manufactured goods in export
processing zones. There are other subnational zones which are not international trade-
related, such as science and technology parks. The number of these parks has increased
rapidly in many Asian countries since 1980. Most science and technology parks in Asia
have concentrated primarily on attracting foreign investors. Subnational zones are,
therefore, an integral part of the wider pattern of intra-Asian trade development.
Subnational and sub-regional zones have increased the intraregional share of total trade in
goods and services and intraregional flows of FDI.
9.3 ASEAN Experience
ASEAN encompasses the nations of Brunei, Malaysia, the Philippines, Singapore,

Thailand, and Vietnam which joined the grouping in 1995. Launched in 1967, ASEAN, in
addition to its political goals, was intended “to accelerate economic growth” through
cooperation in trade, industry, technology, commodities, services and infrastructural
development among themselves, and co-operation with its extra-regional “Dialogue
Partners”.
Industrial co-operation
The ASEAN-sponsored industrial cooperation took place within the framework of three
instruments viz. ASEAN Industrial Projects (AIPs), ASEAN Industrial Complementation
(AICs) and ASEAN Industrial Joint Ventures (AIJVs). The AIPs are large-scale
government to government projects, while AICs are designed to avoid duplicaiton in
industrial capacities by assigning specific industrial processes to each ASEAN country on
a time-bound basis and AIJVs are government-approved private sector ventures. Some
124
specified investment incentives such as margin of tariff preferences (MOPs) as well as
provisions on equity participation favourable to encourage intraregional joint ventures are
also built into these ASEAN industrial cooperation programmes. Some positive results
were achieved in the ASEAN Brand-to-Brand complementation (BBC) in the automotive
industry. BBC schemes envisage manufacturing different components of a vehicle in
different countries, as described latter in this section.
Improvement of the investment climate
To promote and protect intra-ASEAN investment, the ASEAN countries since 1976
have an Agreement providing (i)most-favoured nation treatment to intra-ASEAN
investment; (ii) safeguards against nationalisation; (iii) adequate compensation against
expropriation; (iv) generous repatriation of profits, dividends, interests, royalties,
technical fees and other income; (v) repatriation of capital and proceeds from total or
partial liquidation of any intra-ASEAN investment. Moreover, separate arrangements on
avoidance of doubble taxation and involving regional financial institutions in supporting
regional industrial and commercial endeavours were also included. Besides facilitating
intra-ASEAN investment, all the ASEAN members adopted several incentive packages to
attract more foreign investments from any available source. As a result, the largest
country in the ASEAN region, namely, indonesia, attracted foreign investments of $22.5
Billion over 1967-1994 from diverse sources. The foremost among athem were Japan,
Hong Kong, the former Federal Republic of Germany, United States of America,
Netherlands, United Kingdom, Taiwan, Province of China, and Singapore. Investment
incentives included provision for foreign ownership for exort-oriented investment,
permission to export-oriented firms to distribute domestically, and allowing joint ventures
to participate in government exports.
Infrastructural and resource-based cooperation
Other important ASEAN integration efforts related to their efforts towards joint
resource mobilisation and intra-ASEAN infrastructures. For instance, the “ASEAN
Minerals Cooperation Plan” was designed to develop downstream industries. Similarly,
different ASEAN subsectoral programmes in energy cooperation, including those in
petroleum security, promoted efficient use of coal in the subregion and the gas pipeline
projects across the member States also proved useful for the subregion.
The ASEAN initiatives in shipping and ports included those on bulk pool system, point-
to-point shipping services, foreign booking and cargo consolidation centres. In posts and
telecommunications, inter-country remittance services made possible an efficient money
order service and telegraphic money order services. An ASEAN capital fibre submarine
cable network was one of the projects in the telecommunicaiton field. Similarly, a multi-
modal project to strengthen the existing modes of transportation and the establishment of
new road, rail, sea, ferry and air links was initiated with the assistance of the World Bank.
One of the striking features within the ASEAN region is the high propensity to save
which continued unabated since the mid-1960s. This enabled them to maintain high
125
domestic investment rates and growing exports, thus expanding and diversifying indus-
trial capacities with a shrinkage of the agriculture sector in their domestic outputs.
Following the Japanese model, Singapore, Thailand and Indonesia, in evolving their
Governments’ economic policies, laid emphasis on their private sectors and taken them
into their confidence. As the situation permitted, private-sector Government mutual
consultaiton was institutionalised, which favoured the adoption of realistic and pragmatic
economic policies. Similarly, the more important ASEAN Governments adopted
measures and policies surrendering their control and facilitating the emergence of a
vibrant private entrepreneurship.
Intra-ASEAN Trade:
The share of intra-regioinal trade of ASEAN is quite small. Over the past two decades,
intra-regional tradehas hovered around 15-20 percent of the region’s total trade
(compared with the EC range of 55-60 per cent).
Higher value-added manufacturers are gradually becoming a growing component in

ASEAN countries exports. By 1991 the share of manufacturing in ASEAN exports had
risen - to 71 per cent in the Philippines, 67 per cent in Thailand, 61 percent in Malaysia
and 41 per cent in Indonesia.
This rapid industralisation has increased intra-industry trade in manufacturing, making

trade more complementary than competitive. Exports have shifted from primary
products to textiles and clothing, chemicals, basic metals, machinery and electronics.
The main markets for these goods have been North America and Western Europe, but the
sources of capital and intermediate goods are largely from the East Asian region.
Intra-ASEAN Investments
Intra-regiional investments in ASEAN are also increasing. Singapore is the major

investor from within the region. The development of “growth triangles” has promoted
intra-regional investments and economic cooperation and complementation between
geographically contiguous regions. An example is the SIJORI growth triangle,
(described in section 9.2). Singapore provides the investment, entrepreneurial and
managerial skills from both domestic sources and the large concentration of multinational
companies based in SIJORI. It also provides ready access to financial services, and
efficient entrepot facilities and air, sea and telecommunications links with the rest of the
world. Johor and Riau have land, natural resources and relatiavely lower-wage labour
supply. These complementary resources are directed towards promoting industry,
resource development and tourism as well as skill formation. New investments have
been directed at infrastructural projectrs and property development.
ASEAN Regional Integratuin in Automobiles
Auto makers from around the world are boosting their investments in ASEAN
countries. Japanese car companies, which have a 90% share of the markets in the four
126
ASEAN countries of Thailand, Malaysia, Indonesia, and the Philippines, are increasing
their production capacity even further, primarily in Thailand. Three auto makers, Honda,
Toyota, and Nissan, have already launched “Asiacars”, models developed specifically for
Asian markets in preparation for market expansion.
Though slower than the Japanese companies to get going, the American Big Three and
such South Korean firms as Hyundai, Kia Motors, and Daewoo have also made ASEAN a
priority investment region. GM stands out for its efforts to increase its ASEAN presence,
and is investing $750 million to build a factory in Thailand with a capacity of about
100,000 cars a year.
The remarkable growth of ASEAN, combined with the fact that the three big markets of
North America, Europe, and Japan have very little growth potential, and with the high
business risks associated with China (even though it has greater market size and higher
growth rates than even ASEAN), has made the ASEAN a favourable destination for the
world’s auto makers.
ASEAN markets are generally in the range of 100,000-500,000 cars and, with more
than 10 auto makers competing in each country, they are each only producing between
10,000 and 30,000 units a year. With parts companies also moving into these markets,
basic parts will end up being produced locally.
Although local content rates are currently not high, the influx of parts makers will
continue and ASEAN countries will gradually gain the ability to produce higher value
added parts. For example, Aisin Seiki Co. Ltd., an auto parts maker with ties to the
Toyota group, has set up its first ASEAN operations in 1996 in Indonesia, where it will
produce clutch covers, cluch disks, and other parts for transmission systems. Zexel, a
Nissan-affiliated parts company, also plans to produce the air-conditioner compressors
for its cars locally. From the US side, GM-affiliated Delphi plans to have a local factory
for steering parts up and running by 1997. These companies and others like them will
enable ASEAN countries to begin putting in place the parts industries that are at the core
of the automotive sector.
The use of the “brand to brand complementation” (BBC) scheme waives some duties
for automotive parts produced within the ASEAN regioin and considers them as
domestically produced. If each country tried to produce a full complement of auto parts,
an unavoidable limit would be placed on lot sizes, even as production volumes increased.
The basic idea behind the BBC scheme is therefore to secure economies of scale by
allowing the production of specific parts to concentrate in specific countries and then
sharing them with each other. This scheme took effect in 1994 and most Japanese
manufacturers have qualified for it.
9.4 SAARC Experience
The countries of SAARC (i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka) have formulated an agreement to establish and promote regional
127
preferential trading arrangement for strengthening intra-regional economic cooperation
and the development of national economies, generally known as SAARC Preferential
Trading Arrangements (SAPTA). It consists, inter alia, of arrangements on tariffs, para-
tariffs, non-tariff measures and direct trade measures. The negotiations for liberalisation
are conducted through (a) product by product basis, (b) across-the-board tariff reduction,
(c) sectoral basis, and (d) direct trade measures. Primary products, agricultural and
extracted raw materials, marine products, scrap metals, other manufactuers with more
than 50 percent of domestic content are being considered in first phase. The negotiated
concessions among contracting States are incorporated in the national schedule of
concessions. A list of initial concessions agreed by contracting States is given in the
SAPTA document adopted at Colombo. A number of other provisions like special
treatment for least developed countries, balance of payments measures, safeguard rules,
“rules of origin”, dispute settlement, etc. have also been formulated in the initial
proposal.
In order that SAPTA becomes an effective instrument for intra-SAARC trade and
investment expansion, many supporting steps are required. These include steeper
reduction in the trade barriers than that provided under the WTO agreement, increase in
supply capabilities for additional exports, expansion of investment flows in the region,
replacement of product by product approach by across the board concessions and bolder
steps to move
Intra-SAARC Trade and Investment
Neither the political nor economic climate within the region has been conducive to
promoting intra-regional trade and investment linkages. Intra-regional trade has been
almost stagnant in the 1980s, averaging a little over $1 billion dollars. The share of intra-
regional trade to global trade declined from 3.2 percent in 1980 to 2.7 per cent in 1990.
The share of SAARC countries intra-regioinal exports to their global exports declined
from 4.9 per cent in 1980 to 3.2 per cent in 1990, while their share of intra-regional
imports to global imports over the same period remained at around 2 per cent.
These figures , however, do not reflect the high share of intra-regional trade for the
smaller SAARC economies. For Bhutan, which trades almost exclusively with India, 90
per cent of imports and 96 per cent of exports are intra-regioinal. In 1990, the region
accounted for about 20 per cent of Nepal’s total exports and about 36 per cent of its
imports. At the other end of the scale, the intra-regional share of Pakistan’s exports and
imports were about 4 per cent and less than 2 per cent respectively, while for India intra-
regiional exports and imports represented only 2.6 per cent and less than 1 per cent
respectively of its global trade (IMF, Direction of Trade Statistics, 1991).
The dominant constraint to intra-regional exports of various minerals and industrial raw
materials is the limited absorptive capacity and lack of user industries. The ASEAN
experience shows that trade liberalisation measures tend to favour the economically
stronger members of the grouping. In South Asia the pattern is similar. India, and to a
lesser extent, Pakistan are in a better position to take advantage of market opportunities
128
created by the opening up of the region as they are relatively more advanced industrially
and possess more advanced technological skills and know-how.
The larger SAARC members have large domestic markets and a diversified economic
base which makes them less dependent on trade for economic growth. On the other hand,
the smaller economies like the Maldives, Sri Lanka and Bhutan have to rely on external
markets to stimulate expansion of their industrial base.
Several areas of cooperation which might have an marginal impact on India, the major
SAARC partner, could have far-reaching effects on the smaller partners such as the
Maldives, Nepal, Bhutan and Bangladesh - e.g. regional promotion of tourism,
establishment of linkages in the service and infrastructural sectors, a regional clearing
union arrangement and joint research and development schemes. Also, rather than their
competing in certain commodities such as rubber, jute,tea, and textiles, the SAARC
members may consider cooperation in the production, marketing and transportation of
these commodities. Similarly, there would be an advantage in intra-regional transfer of
technologies through the creation of regional joint ventures and joint or sub-regional
training schemes.
Compared with ASEAN’s share of 30 per cent and China’s share of 57 percent, SAARC
received only 4.2 percent of all FDI flows to developing countries in Asia in 1995 (Table
9.3).
SAARC Preferential Trading Arrangement (SAPTA)

Like the ASEAN’s initial tariff reductions under PTA, SAPTA’s tariff reductions are
also being implemented on a product-by-product basis, rather than on sectoral or across-
the-board basis. This is a slow process implying that the small level of reductions
achieved is not likely to have a noticeable impact on intra-regional trade. As with the
ASEAN PTA, there is a tendency to restrict the offer list to items of little trade
significance in order to avoid erosion of the market by liberalising trade in major
products. Even if the scheme were to be widened, it is unlikely to improve intra-regional
trade unless other schemes of regional cooperation are also introduced, aimed at creating
greater complementation among the economies of the region, improving their supply
capabilities (i.e.investment and production partnerships, such as regional/ bilateral joint
ventures), and creating efficient infrastructural linkages, especially in terms of transport,
communications and information exchange. Moreover, for SAPTA to be effective,
members’ tariff reduction offers would neeed to be greater than those made under
multilateral trade agreements including their WTO commitments.
In order to accelerate the pace of regional trade liberalisation, it might be preferable to

adopt two tracts - one being the region-wide slower track, and the other, a series of
bilateral agreements between the more advanced countries within the group. There are
already some bilateral initiatives between India and Pakistan, India and Sri Lanka, India
and Bangladesh and India and Nepal. Sectoral cooperation such as a SAARC Textile
Council can also boosot economic and trade relations within the region.Textile is a
priority sector as developing countries will no longer benefit from preferential quotas
129
when the Multi-Fibre Arrangement is disbanded in the year 2005, and it is an important
component of SAARC country exports. In order to rise to the challenge of open
competition, SAARC producers need to pool their design, marketing and technological
resources.
With rapid growth in the ASEAN economies, wages and labour costs have been rising
considerably. SAARC countries need to adopt policies which would favour the
relocation of some investments and labour-intensive production from ASEAN to SAARC
countries particularly as the NIEs and Japan and even some ASEAN countries such as
Malaysia and Thailand have become important sources of FDI. All these Southeast Asian
countries have a common interest with SAARC countries in creating trade-generating
joint ventures. India became an ASEAN ‘dialogue partner’ in 1992-93 and a ‘sectoral
dialogue partner’ in 1996, the ASEAN countries view India as long-term potential
market. India can exploit this opportunity by facilitating and encouraging private sector
contacts with ASEAN entrepreneurs.
With a much longer history, ASEAN has developed better intra-regional and extra-
linkages than has SAARC. Only recently SAARC has included activities trade and
investment as a part of its regional cooperation. ASEAN economies are far more open
than those of SAARC due to long-followed policies of export promotion and
international competitiveness. Foreign investment inflows into ASEAN have been far
more significant and instrumental in raising the productivity and competitiveness of the
private sector through the introduction of newer technologies and marketing know-how.
ASEAN is much more integrated into global economy than SAARC and its members,
particularly Malaysia, Singapore and Thailand have contributed significantly to the
process of globalisation by promoting export competitiveness.
SAARC, on the other hand, has so far made little contribution to either regionalism or
globalisation. There is, however, hope that as a first step SAARC members, having
agreed on a free trade area, will promote regional trade cooperation as a building block
towards globalisation. For its success, SAARC will need to agree on a clear policy
towards foreign investment as a vehicle of technology upgradation and overall growth.
9.5 ESCAP Experience
From its inception ESCAP has done much to promote economic co-operation in the
Asian and Pacific region. ESCAP has conceived the integrated communications
infrastructure for the Asian region and promoted regional cooperation in shipping, ports
and technology tranfer. Several financial and developmental institutions like the the Asian
Development Bank (ADB), The Asian and Pacific Centre for the Transfer of Technology,
Asian Clearing House (ACU), the Asian Reinsurance Corporation (ARC) etc. were
established at the initiative of ESCAP in order to promote economic co-operation within
Asia. However, ADB has had a wider impact on the region through supply of finance and
technical assistance.
130
Although regional economic cooperation in Asia and Pacific is being worked out at
various levels as indicated above, actual achievements had been limited due to a number
of reasons (ESCAP 1992). First, all the subregional groupings, with the exception of
ASEAN and the South Pacific Forum, are about a decade old and it takes much time to
build up the confidence and trust among the members. Second, regional groupings in
Asia and Pacific are merely intergovernmental institutions and unlike the EC, do not have
any supranational authorities. Third, there is hardly any linkage or even dialouge among
the subregional or regional groupings with the exception of ASEAN and APEC. In
fact,inter-regional trade links are dominated by selected bilateral flows. For example,
India accounts for most of SAARC trade with ASEAN, while Singapore accounts for
most of ASEAN trade with SAARC.
The major benefits will come from removing restrictions that impede flows of people,
capital, and goods, and that segment geographically contiguous markets. In addition,
there is considerable untapped potential for regional cooperation in power, transportation,
and distribution ( particularly petroleum products), which would reduce the costs of
doing business. There will be an important pull effect on growth throughout Asia if the
remaining impediments to local and foreign investors removed. Such regioinal
cooperation and integration should be seen not as a substitute for opening up to the global
economy, but as a way of assisting firms to connect to global markets at lower cost.
9.6 Intra-regional Flows of FDI
The on-going liberalisation of investment policies, including privatisation programmes,

has created new opportunities for foreign investment in developing countries. The value
of FDI and portfolio investment from privatisation at $10.5 billion accounted for nearly
8 per cent of total investment inflows to developing countries in 1995. Share of Asia and
the Pacific region in total FDI and portfolio investment from privatisation in developing
countries increased from almost nil in 1990 to 20 percent in 1995 (table 9.1).
FDI from developing countries has become an important source of capital for other
developing countries. Outward FDI stock from developing countries at $214 billion
constituted 8% of the global outward stock; while inward FDI stock to developing
countries at $693 billion constituted 26% of the global inward stock at the end of 1995. In
1993, the share of Asian countries in the inward FDI stock amounted to 32% in Thailand,
38% in Malaysia, 26% in Indonesia and 80% in China (Table 9.2).
Asia and the Pacific, and particularly the East and South-east Asian subregion, have
emerged as the most dynamic region worldwide in terms of economic performance, with
large and growing markets and profitable investment opportunities in manufacturing and
services. This led to an increase in the region’s FDI share: (inward) FDI stock in the
Asia-Pacific region rose from 8% to 15% of worldwide stock during 1980-1995, and
from 35% to 58% of developing country FDI during the same period. The Triad - Japan,
United States and European Union - has played the most important role in this build-up
of FDI, but the importance of the Triad as a whole declined, reflecting the increasing role
of the developing-country TNCs in intra-regional FDI flows.
131
More than 80 percent of FDI implemented in China in 1985-1995 originated in Hong
Kong, Singapore, Macao and Taiwan, China. Also in Indonesia, Malaysia, Philippines
and Thailand, more than one quarter of FDI inflows came from these economies in 1985-
1995. Taiwan, China and Hong Kong were the largest two home countries for FDI in
Vietnam in 1988-1995 and Singapore became the largest investor in Myanmer with 25%
of the total FDI in 1988-1995.
Like TNCs based in developed countries, developing country TNCs in manufacturing

undertake international production to minimise costs, improve efficiency, access large
markets, acquire natural resources, technology and expertise and improve their export
performances. Firms from Taiwan Province of China invest in China, Thailand and
Vietnam in labour-intensive, low-skill operations. Similar investments by the Republic of
Korea in China’s northern provinces aim at reducing the cost of producing traditional
exports, such as textiles and shoes, and improving efficiency. Geographical proximity and
cultural affinity also play a role for FDI flows as examplified by the investments of ethnic
Chinese in Asia. A number of TNCs from such developing countries as India, the
Republic of Korea, Mexico and Taiwan Province of China have also developed
significant technological and innovation capabilities and production experiences,
comparable to those of firms from developed countries.
Indian Joint Ventures in Asia
India, Thailand, Bangladesh and Sri Lanka, having a coastline on the Bay of Bengal,
has formed a regional trade group on June 6, 1997, called the Bangladesh, India, Sri
Lanka, Thailand Economic Cooperation (BIST-EC). Trade between these countries
currently totals only $1 billion and is expected to improve substantially in the next decade
due to predicted economic boom.
Attemps are also being made to form a sub-regional economic group through the
Bangladesh, Bhutan, Nepal and India “growth quadrangle” (BBNI-GQ). Under BBNI-
GQ each country has been allocated responsibility for specific sectors in Phase-I which is
to last a year. Apart from overall coordination Nepal will chair the working groups in the
sectors of multi-modal transport, communications and tourism. Bangladesh will
coordinate project evolution in the areas of natural resource endowments and energy.
Bhutan will coordinate projects relating to the environment, and India will be responsible
for projects in the area of investment promotion. Both the World Bank and the ADB are
vying with each other to get into act and fund a comprehensive programme of studies.
The ADB has in fact been fomenting polygons of various description in the Asian region
for several years (for example hexagon in the Greater Mckong sub-region) to take
advantage of the “economies of neighbourhood” by building on incipient growth
impulses in parts of the countries contiguous to each other.
132
The number of overseas investment ventures by Indian companies, including joint
ventures (JVs) and wholly owned subsidiaries (WOS) has shot up dramatically, crossing
the 1000 mark by the end of 1995 with nearly $400 million worth investment. Out of
this, about 55 percent were investments for setting up manufacturing units abroad. The
regional break-up of the Indian joint ventures (JVs) and Wholly-owned subsidiaries
(WOS) at the end of 1995 is indicated in Table 9.4. The preferred locations for JVs were
Europe, East and South Asian countries, while those for WOSs are Europe and USA.
Despite the trend of a steady growth in Indian direct investments abroad, the total
quantum of such investment is quite small.
Tablele 9.4 Regional Distribution of Indian Joint Ventures

_________________________________________________________________
Home Country Number of Joint Number of Wholly Total
Ventures Owned Companies
_________________________________________________________________
East Asia 141 90 231
South Asia 82 16 98
Oceania 14 3 17
America 58 105 163
Europe 164 152 316
Africa 55 45 100
West Asia 78 10 88
_________________________________________________________________
Total 592 421 1013
_________________________________________________________________
9.7 Regional Co-operation by Manufacturing TNCs
Japanese affiliates, particularly in Asia, are establishing affiliates abroad. For example,
47 per cent of Japanese affiliates in Hong Kong, and 43 percent in Singapore, had already
established foreign affiliate networks in the region by 1993. Although only 4 percent of
the Japanese affiliates in Thailand and Malaysia have invested in other Asian countries to
date, 35 per cent of the affiliates in Thailand and 28 per cent in Malaysia are planning to
do so within the next five years.
The recent increases in Japanese FDI have taken place in manufacturing and some
services industries, unlike the late 1980s when most FDI went into financial services and
real estate. Japanese FDI in such traditional industries as food, textiles and iron and non-
ferrous metals established many small and medium-enterprises in South, East and South-
East Asia. By 1994, chemicals became the second largest destination of FDI after
electrical machinery. Investment in transport equipment in developing countries (mainly
in Latin America and South, East and South-East Asia) increased fourfold in 1994,
reflecting a rising demand for automobiles.
The following developments indicate that Japanese manufacturing TNCs, especially in

electronic machinery and transport equipment, are leading in the establishment of
133
regional or global integrated production systems and networks since the late 1980s to
maximise efficiency: (a) Five percent of Japanese affiliates in the world was a regional
headquarters by 1993, indicating the emergence of multi-layered networks. (b) One fifth
of foreign affiliates specialising in research and development were conducting R&D for
their entire TNC systems by 1993, implying that there is inter-industry transfer of R&D
activities. (c) Intra-firm transactions among Japanese affiliates within the same TNC
systems accounted for 48% of the exports of these affiliates in Asia, 23% in the European
Union and 28% in the United States in 1992. (d) Japanese small and medium-sized
enterprises account for about 15% of Japan’s outward FDI stock and about 50% of
Japan’s equity investment, and these firms have established affiliates mainly in Asia.
Integrated International Productionin Automobiles
Exports of motor vehicles from Japan amounted to nearly four million vehicles in 1995.
About 32% were by the Toyota Motor Company, which exported almost 38% of domestic
production. Toyota’s overseas production increased to more than a third of its total
automobile production in 1995 and exceeded, for the first time, its exports from Japan.
At the end of 1995, Toyota had some 143,000 employees with more than 70,000 outside
Japan.
Toyota established integrated manufacturing systems in all of its main markets- North
America, Europe and Asia.In January 1996, Toyota had 35 overseas manufacturing
affiliates in 25 countries, more than a third of which were located in Asia. Plants in
China, Indonesia, Malaysia, Philippines, Thailand and Taiwan accounted for a third of the
company’s overseas production in 1995. Toyota produces specialised models in its Asian
affiliates, both for local sales and exports. These include Toyota’s all purpose-vehicle (the
Kijang) in Indonesia and a compact car in Thailand for possible exports in Asia, South
America and the Middle East.
Although Toyota’s vehicle production in the region partly results from Asian countries’
restrictions on imports of autombiles, the company responded to the regional industrial
cooperation policies of the ASEAN countries by establishing a network of affiliates for
parts supply to local and regional markets. Toyota’s intra-firm trade of parts and
components in the region is coordinated by the Toyota Motor Management Company,
Singapore. Toyota exports diesel engines from Thailand, transmissions from Philippines,
steering gears from Malaysia and engines from Indonesia. In 1995, intra-firm exports
among these affiliates accounted for 20 per cent of exports of parts and components of
the company’s manufacturing affiliates worldwide. Exports of these affiliates to other
destinations outside the ASEAN market accounted for another 5 per cent.
9.8 Regional Cooperation in Technology Transfer
Increasing levels of intraregional trade and investment are gradually shaping a truly
interdependent regional economy in the Asia-Pacific region, based on the linkages of
production structure the region and through regional division of labour. They succeeded
significantly in utilising the technological revolution to enhance their national
134
comparative and competitive advantages. First, Japan and then the advanced countries of
the region have become critical growth centres supplying FDI and technology to other
economies of the region. Regional industrial and technological development has created
a fertile ground for cooperation in technology transfer, which need to be supported by
incentives and policy measures for strengthening technological capabilities by the
recipient countries.
The opportunities for regional cooperation in the endogenous technological capability-

building of ESCAP member countries are enormous. While advanced developing
countries such as the NIEs have adequate domestic resources to attract technology and
capital and to expand their technological capacity, a number of developing countries in
the region (LDCs, island developing countries and disadvantaged traditional economies)
remain outside the mainstream of economic development primarily because of poor,
inappropriate or unfavourable local conditions in terms of skills, market size,
technological and physical infrastructure etc. These countries also suffer from a lack of
information and knowledge and financial resources to attract adequate volumes of
technology and foreign capital. Concerted regional cooperation is necessary to assist
them to develop local industrial and technological capabilities.
The ESCAP at its fiftieth session in April 1994 adopted an Action Programme for
Regional Economic Cooperation in Investment-related Technology Transfer. The
programme was inspired by the realisation that the growing interdependence of
production structures, high growth and liberalisation of regional economies, coupled with
the expansion of regional trade and investment, provide an impetus to greater regional
cooperation in science and technology. It was also realised that as technology transfer
remained the main avenue for developing countries in their quest for technology-led
industralisation and product competitiveness in the world market, the ability of such
countries to adopt foreign technologies and maximise the benefits greatly depended on
their endogenous technological capabilities. The higher the level of such capabilities, the
greater will be these countries’ ability to adopt foreign technologies.
For technological partnerships, the presence of basic scientific and technological

capacities and a cluster of small and medium-sized enterprises is essential for both
backward and forward integration. Technology partnership initiatives at the regional
level, and bilaterally and multilaterally need to be complimentary and supplementary to
each other. The experiences of successful countries emphasise the need for promoting
and providing incentives for direct firm-to-firm partnerships, training and the adoption of
environmentally sound technologies.
With regard to technology partnership, countries should formulate policies for

strengthening human resource development and training capabilities, for creating an
infrastructure and an environment conducive to entrepreneurs and for establishing
mechanisms for mobilisation of financial resources. Foreign investors should be
encouraged to engage in partnerships with local enterprises from developing countries to
increase their scientific and technological capacity. Support institutions for technical
135
information services and programmes sponsored by the international community are
essential to strengthen entrepre-neurship in developing countries.
9.9 Multilateral Agreement on Investment (MAI)
One of the arguments put forward in support of MAI is that trade and foreign
investment are mutually complementary activities and hence a suitable liberalised foreign
investment regime should be established to supplement the new liberalised trade regime.
They contribute not only individually and directly to the development process, but also
jointly and indirectly, through linkages with one another. Consequently, governments are
increasingly establishing national policy frameworks within which FDI and trade can
flourish (UNCTAD 1996).
They reduce restrictive investment measures; strengthen standards of treatment; provide

investment protection; and pay more attention to ensuring the proper functioning of the
market. In 1995 alone, 106 of 112 regulatory changes in 64 countries that altered
investment regimes were in the direction of greater liberalisation or the promotion of
FDI. The vigorous growth of bilateral and regional investment agreements, the inclusion
of certain FDI-related issues in the Uruguay Round agreements and the beginning of
negotiations on a Multilateral Agreement on Investment in the OECD clearly indicate that
both the developed and developing countries are moving towards liberalised trade and
investment regime.
As the bilateral level, key investment concepts, principles and standards have been
developed through the conclusion of bilateral investment treaties (BITs) for the protection
and promotion of FDI. Their distinctive feature is their exclusive concern with
investment. They contain mostly general standards of treatment after entry and
establishment and specific protection standards on particular key issues, and generally
recognise the effect of national laws and policies on FDI.
The network of BITs is expanding constantly. Some two-thirds of the nearly 1,160
treaties existing in June 1996 were concluded in the 1990s (172 in 1995 alone), involving
158 countries. Originally concluded between developed and developing countries,
recently more BITs are between developed countries and economies in transition,
between developing countries, and between developing countries and economies in
transition.
At the regional level, the mix of investment issues covered is broader than that found at
the bilateral level, and the operational approaches to deal with them are less uniform.
Most regional instruments are legally binding. Issues typically dealt with at the regional
level include the liberalisation of investment measures; standards of treatment; protection
of investments and disputes settlement; and issues related to the conduct of foreign
investors, (e.g., illicit payments, restrictive business practices, disclosure of information,
environmental protection, and labour relations).
136
At the multilateral level, most agreements relate to sectoral or to specific issues.
Particularly important among them are services, performance requirements, intellectual
property rights, insurance, settlement of disputes, employment and labour relations,
restrictive business practices, competition policy, incentives and consumer protection.
It is at the multilateral level that concern for development is most apparent. This is
particularly so in the case of the GATS, TRIPS and TRIMs agreements, as well as the
(non-binding) Restrictive Business Practices Set, where special provisions are made that
explicitly recognise the needs of developing countries.
The Uruguay Round of Multilateral Trade Negotiations was the first time that some
investment issues were directly introduced as part of the disciplines of the multilateral
trading system. This occurred most markedly in the negotiatijons of GATS which defines
trade in services as including the provision of services through commercial presence.
The TRIMs Agreement, in fact, focuses on one aspect of the policy inter-relationship
between trade and investment (performance requirements).
Although multilateral rules on FDI could be established in an independent agreement,

recent proposals aim at the negotiation of such rules in the framework of international
organisations with global, or potentially global, membership. In particular, the WTO has
been mentioned as an appropriate forum for such negotiations. An important
consideration underlying this suggestion is that the interwining of investment and trade
requires a more integrated approach to international rule-making. This has already
manifested itself in the work of the GATT and of the WTO. Thus, the WTO already deals
with certain aspects of investment isues in the context of the agreements on trade in
services, trade-related investment measures and trade-related aspects of intellectual
property rights, and an agenda exists for the expansion and deepening of these rules.
Negotiations on liberalisation through the expansion of the GATS schedules of
commitments are scheduled to take place before 1999, and the TRIMs Agreement
provides for consideration of competition and investment isues by the same year.
The question of a possible future multilateral framework on investment was addressed

at the 1996 UNCTAD IX Conference at which it was agreed that UNCTAD should
identify and analyse implications for development of issues relevant to a possible
multilateral framework on investment, taking into account the interests of developing
countries. The areas of policy analysis and consensus-building, with a particular focus on
the development dimension, are, indeed, areas in which UNCTAD can make a valuable
contribution.
Investment issues are currently the subject of discussion or negotiation in a number of

regional and interretional fora. One important recent initiative was the launching, in May
1995, of negotiations aimed at the conclusion of Multilateral Agreement on Investment
among the members of the OECD in time for the Organisation’s ministerial meeting in
1997.
137
Three lessons can be drawn from past developments on FDI policies. First is that
progress in the development of international investment rules is linked to the convergence
of rules adopted by individual countries. Second is that an approach to FDI issues that
takes into account the common advantage, is more likely to gain widespread acceptance
and to be more effective. Third is that in a rapidly globalising world economy, the list of
substantive issues entering international FDI discussions is becoming increasingly
broader and complex and include the entire range of questions concerning factor
mobility.
Agrawal, C. (1996). Human Resource Development for Assimilation of New

Technologies, World Association for Small and Medium Enter-prises (WASME), New
Delhi.
Ali, Ifjal (1990). Strategies and policies for structural transfor-mation, Asian
Development Review, Vol.8,No.2, pp.1-27, Asian Development Bank, Manila.
Anayiotos, Andrea (1994). Infrastructure investment funds, Private Sector, December,

pp.29-32.
Asian Development Bank (ADB) (1995). Asia : Development Experience and Agenda,
ADB Theme Paper 3, ADB, December 1995.
______(1996). Asian Development Outlook 1996 and 1997, Oxford University Press,
Hong Kong.
______(1997a). Asian Development Outlook 1997 and 1998, Oxford University Press,
Hong Kong.
______(1997b). Emerging Asia- Changes and Challenges, Asian Development Bank,

Manila.
ASSOCHAM (The Associated Chambers of Commerce and Industry in India) (1995).
Foreign Direct Investment Status and Prospects, August 1995, New Delhi.
Bhalla, A. and P. Bhalla. (1995). ASEAN and SAARC, RIS Digest, Vol.13, nos.2-4,
December 1996, pp.55-90, Research and Information System (RIS) for the Non-Aligned
and Other Developing Countries, New Delhi.
Blomstorm, Magnus (1990) Transnational Corporations and Manufacturing Export from

Developing Countries, Document no. ST/CTC/101, United Nations, New York.
_______and Robert E. Lipsey (1993) Foreign firms and structural adjustment in Latin
America: lessons from the debt crisis, Working paper no.1856, National Bureau of
Economic Research.
138
_______and Lipsey, Robert E., and Zejan, Mario (1992). What explains developing
country growth ?, NBER Working Paper no. 4132, National Bureau of Economic
Research, Cambridge, Mass.
Borenzstein, E., Gregorio, J.de, and Lee, J. (1995). How does foreign direct investment
affect growth ?, NBER Working Paper no. 5057, National Bureau of Economic Research,
Cambridge, Mass.
Brooks, D.H. and Leuterio, E.E. (1997). Natural resources, economic structure and
Asian infrastructure, in Investing in Asia, ed. C.P. Oman et. el. 1997, OECD.
Cantwell, J.A. (1995) The globalisation of technology : what remains of the product
cycle model?, Cambridge Journal of Economics, Vol.19, no.1, pp.155-174.
Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for
investment, in Investing in Asia, ed. C.P. Oman et. el. 1997, OECD.
Chia, Siow Yue (1994). Trade and Foreign Direct Investment in East Asia, in Pacific
Trade and Investment: Options for the 90s, ed. Wendy Dobson and Frank Flatters,
Proceedings of a Conference, 6-8 June 1994, Toronto.
Chia, Siow Yue; and Tsao Yuan Lee (1994). Economic Zones in Southeast Asia, in Asia
Pacific Regionalisation: Readings in International Economic Relations, ed. R. Garnaut
and P. Drysdale, Pymble, Haeper Educational Publishers.
Chung, Cheng., Chang, Laurence and Zhing, Yimin (1995). The Role of Foreign Direct
Investment in China’s Post-1978 Economic Development, World Development,Vol.23,
no.4, pp.691-703.
Chowdhury, A. H. M. Nuruddin (1990) Small and medium industries in Asian

developing countries, Asian Development Review, Vol.8, No.2, pp.28-45.
Coe, David.,Helpman,Elhanan., and Hoffmaister, Alexzander (1995). North South R &

D spillovers, Discussion Paper no.1133, Centre for Economic Policy Research, London.
Confederation of Indian Industry (CII) (1996). Foreign Direct Investment: Policy and
Procedures - Select Countries, New Delhi.
Das, Tarun (1993a). Structural Reforms and Stabilisation Policies in India - Rationale
and Medium Term Outlook, in Economic Liberalisation and its Impact, ed. S.P.Gupta,
pp.20-56, MacMillan India Ltd, New Delhi. 1993.
______(1993b). Macro-economic Framework, Special Economic Zones and Foreign

Investment in India, Ad-Hoc Workong Group on Investment and Financial Flows,
UNCTAD,Geneva, pp.1-75,June 1993.
139
______(1994). India’s Recent Economic Development and Policies and Prospects for
1995-1996, paper presented at the Seventh Workshop on Asian Economic Outlook,
October 1994, Asian Development Bank, Manila.
______(1996). Policies and Strategies for Promoting Private Sector’s Role in Industrial
and Technological Development, Including Privatisation in South-Asian Economies,
paper presented at the Regional Dialogue on Privatisation, organised by the Industry and
Trade Division, ESCAP, United Nations, Bangkok.
Dasgupta, Biplab (1996). New Political Economy and the East Asian Development
Experience, mimeo, December 1996, New Delhi.
Dean, J.,S. Desai and J. Riedel (1994). Trade Policy Reform in Developing Countries
since 1985, Discussion Paper No.267, World Bank, Washington, D.C. 1994.
Drucker, P.F.(1992). Managing for the Future, Butterforth,Oxford.
Dunning, John H. (1994). Re-evaluating the benefits of foreign direct investment,

Transnational Corporation, Vol.3, no.1, February, pp.23-52.
______(1996). The changing geography of foreign direct investment, paper presented at

international workshop on Foreign Direct Investment, Technology Transfers and Export
Orientation in Developing Countries, Maastricht, the Netherlands, November 1996.
ESCAP (1992). Economic and Social Survey of Asia and Pacific 1991, Part 2,
Challenges of Macroeconomic Management in the Developing ESCAP Region, United
Nations, New York.
______(1993). Economic and Social Survey of Asia and Pacific 1992, Part 2,
Expansion of Investment and Intraregional Trade as a vehicle for Enhancing Regional
Economic Co-operation and Development in Asia and Pacific, United Nations, New
York.
Estanislao, Jesus (1977). The institutional environment for investments in Chin and
ASEAN: current situation and trends, in Investing in Asia, ed. C.P. Oman et. el. 1997,
OECD.
European Commission (1995) A level playing field for direct investment world-wide,
COM (95), 42, Brussels, mimeo.
Fry, Maxwell J. (1984). Domestic resource mobilisation through financial development,

Asian Development Bank, manila, mimeo.
______(1992). Foreign Direct Investment in a Macro-Economic

Framework,Finance,Efficiency, Incentives and Distortion, International Finance Group,
Birmingham University, mimeo.
140
______(1993). Foreign Direct Investment in a Macro-Economic
Framework,Finance,Efficiency, Incentives and Distortion, Policy Research Working
Paper, no.1141, International Economics Department, International Finance Division,
World Bank.
Go, E. (1985). The impact of foreign capital inflow on investment and economic growth
in developing Asia, Economic Office Report Series, no.33, Asian Development Bank,
Manila.
Graham, Edward M. (1996a). Global Corporations and National Governments, Institute

for International Economics, Washington.
______(1996b) Foreign Direct Investment in the World Economy, OECD Background

Paper.
______(1996c) Investment and the new multilateral trade context, in OECD, Market
Access after the Uruguay Round: Investment, Competition and Technology Perspectives,
pp.35-62, OECD, Paris.
Gupta, K.C. and Islam, M.A. (1993). Foreign Capital, Savings and Growth, D. Reidel
Publishing Company, Dordrecht, Holland.
Haley, Geoff; Payne, Helen and Falconer, Jeffrey (1994). Private Financing of
Infrastructure Projects in Developing Countries, Build-Operate-Transfer (BOT)
Arrangements, No.UNCTAD/GID/DF/5, UNCTAD, Geneva.
Hein, Simeon (1992). Trade Strategy and Dependency Hypothesis: A Comparison of

Policy, Foreign Investment and Economic Growth in Latin America, Economic
Development and Cultural Change, Vol.40, No.3, pp.495-521.
Hu, Zulia and Khan, M.S. (1997). Why is China growing so fast ?, International
Monetary Fund, Economic Issues 8, April 1997.
Huges, Helen (1995). Foreign investment experience in developing countries: costs and
benefits, a paper presented in the Seminar on Structural Adjustment and Policy Reforms:
Perspectives from International Experiences, organised by the International Council for
Research on International Economic Relations, New Delhi.
International Monetary Fund (IMF) (1995). Balance of Payments Statistics Year Book
1995, Part 1, Washington, D.C.
______(1996). Direction of Trade Statistics Yearbook, 1996, Washington, D.C.
______(1997). World Economic Outlook - Globalisation, Opportuni-ties and

Challenges, May 1997, Washington, D.C.
141
Joshi, B. (1993). Macro policy analysis of technology transfer issues, mimeo., Indian
Council for Research on International Economic Relations, New Delhi.
Julius, DeAnne (1994) International direct investment: strengthe-ning the policy

regime, in Managing the World Economy: Fifty years after Bretton Woods, Institute for
International Economics, pp.269-286, Washington, D.C.
Kakazu, Hiroshi. (1990). Industrial Technology Capabilities and Policies in Asian

Developing Countries, Asian Development Review, Vol.8, No.2, pp.46-76, Asian
Development Bank, Manila.
Kumar, Nagesh (1966) Foreign Direct Investment and Technology Transfer in

Development: A Perspective on Recent Literature, UNU/ INTECH Discussion Paper
no.9606, Maastricht, UNU/INTECH.
Lall, Sanjaya (1993). Policies for Building Technological Capabilities : Lessons from
Asian Experience, Asian Development Review, Vol.11, No.2, pp.72-103, Asian
Lee, J.S., Rana, P.B. and Iwasaki, Y. (1986). Effects of foreign capital inflows on
developing countries in Asia, Economic Staff Paper, no.30. Asian Development Bank,
Manila.
Lessard, D.R. (1989). Beyond the debt crisis: alternative forms of financing growth,
Working Paper of the Alfred P.Sloane School of Management, Massachusetts Institute of
Technology, Feb.1989.
Lim, Chee Peng. (1993). Flows of Private International Capital in the Asian and Pacific
Region, Asian Development Review, Vol.II No.2, pp.104-139, Asian Development Bank,
Manila.
Lipsey, Robert E. (1995) Outward direct investment and the U.S. economy,Working
paper 2020,National Bureau of Economic Research.
Naya, Seiji (1990). Direct foreign investment and trade in East and Southeast Asia, in
the Political Economy of Intwernational Trade: Essays in honour of Robert E. Baldwin,
edited by Ronald W. Jones and Anne O. Kruegger, Cambridge, Mass: Basil Blackwell.
Oman, C.P., Brooks, D.H. and Foy, C. (1997). Investing in Asia, Development Centre,
The Organisation for Economic Co-operation and Development (OECD).
Panchmukhi, V.R. (1995). Economic Cooperation in South Asia: The Crisis of

Perception, in Emerging South Asian Order: Hopes and Concerns,ed.S.Ghosh and S.
Mukherjee, Media South Asia, Calcutta.
142
______(1996). Multilateral Agreement on Investment - What should be the response of
the developing countries?, RIS Digest, Vol.13, nos.2-4, Dec.1996, pp.7-54, Research and
Information System (RIS) for the Non-Aligned and Other Developing Countries, New
Delhi.
Puri, Ashwani and Mathew, Jacob (1994). Investment promotion zone schemes - A
regional context, Price Waterhouse, India, New Delhi.
Rana, P.B. and Dowling, J.Malcolm (1990). Foreign capital and Asian economic
growth, Asian Development Review, vol.8, No.2, pp.77-103, Asian Development Bank,
Manila.
Research and Information System (RIS) for the Non-Aligned and Other Developing
Countries (1995). SAARC Survey of Development and Cooperation 1995, New Delhi.
Reza, Sadel (1994). Policy reform for promoting trade in developing countries, Asian
Development Review, Vol.12, No.12, pp.85-112, ADB, Manila.
Shirazi, Javed K. (1995). Private Financing of Infrastructure: A Broad Perspective,

Keynote Address at SCICI’s Seminar on The Role of Capital Markets in Financing
Infrastructure Services, Bombay.
Singh,I.J. and Jefferson,Gary (1993). State Enterprises in China: Down from the
Commanding Heights, Transitions. Vol.4 No.8.
Singh, Ram D. (1988). The multinationals’ economic penetration, growth and industrial
output and domestic savings in developing countries: Another Look, Journal of
Development Studies, Vol.25, No.1, pp.55-82.
Subrahmanian, K.K., Sastry, D.V.S., Pattanaik, Sitikantha and Hajra, Sujan. (1996).
Foreign Collaboration under Liberalisation Policy: Pattern of FDI and Technology
Transfer in Indian Industry since 1991, Reserve Bank of India, August 1996, Mumbai.
Tang, Min. (1996). Recent development on capital flows to the Asian and Pacific
Developing Countries, Discussion Paper, ADB, Economics & Development Resource
Center, Manila.
United Nations (1996). World Investment Report - Investment, Trade and International
Policy Arrangements, New York and Geneva.
United Nations Centre on Transnational Corporations (UNCTC) (1992a). World

Investment Report 1992: Transnational Corporations as Engines of Growth, United
Nations, New York.
______(1992b). The determinants of Foreign Direct Investment: A Survey of Evidence,

United Nations, New York.
143
______and United Nations Conference on Trade and Development (UNCTAD) (1991)
The Impact of Trade-related Investment Measures on Trade and Development, United
Nations, New York.
United Nations, Transnational Corporations and Managemant Division (UN-TCMD)

(1993) Foreign Direct Investment and Trade Linkages in Developing Countries, United
Nations, New York.
United Nations Conference on Trade and Development (UNCTAD), (1992). Exchange

of experiences among groupings of developing countries - An evaluation of the ASEAN
experience, No.UNCTAD /ECDC/331, September 1992, United Nations, Geneva.
______(1992). World Investment Report 1992: Transnational Corporations as Engine of

Growth, United Nations, Geneva.
______(1993a). Foreign Direct investment in developing countries: Recent trends and

policy isues, Report by the UNCTAD secretariat, TD/B/WG.1/7, April 1993, United
Nations, Geneva.
______(1993b). World Investment Report 1993: Transnational Corporations and

Integrated International Production, United Nations, Geneva.
______(1993c). Export processing zones: Role of foreign direct investment and

developmental impact, No.TD/B/WG.1/6, April 1993, United Nations, Geneva.
______(1993d). Ad Hoc Working Group on Investment and Financial Flows; Non-
Debt-creating Finance for Development; Country Reports on (a) The Republic of Korea,
No.TD/B/WG.1/Misc.3/Add.2, (b)Philippines,No.TD/B/WG.1/Misc.3/Add.4,
(c)China,No.TD/B/WG.1/
Misc.3/Add.5, and (d) Myanmar, No.TD/B/WG.1/Misc.3/Add.10, May-June 1993,
United Nations, Geneva.
______(1993e). Report of the Ad Hoc Working Group on Investment and Financial

Flows; Non-Debt-creating Finance for Development; No. TD/B/40(1)/12 and
TD/B/WG.1/8, July 1993, U.N., Geneva.
______(1993f). Host country policies and measures to promote foreign direct

investment : a synthesis of eight case studies - Report by the UNCTAD secretariat,
No.TD/B/WG.1/10, October 1993, United Nations, Geneva.
______(1993g). Portfolio Equity Investment and New Financing Mechanisms - Foreign

portfolio equity investment in developing countries: current issues and
prospects,No.TD/B/WG.1/11,Oct.1993, United Nations, Geneva.
______(1994). World Investment Report 1994: Transnational Corporations,

Employment and Workplace, United Nations, Geneva.
144
______(1995a). Country and Regional Experiences in Attracting Foreign Direct
Investment for Development- Foreign Direct investment in developing countries,
No.TD/B/INTC/3, February 1995, United Nations, Geneva.
______(1995b). Recent Developments in International Investment and Transnational

Corporations - Trends in foreign direct investment, No.TD/B/ITNC/2, Feb.1995, United
Nations, Geneva.
______(1995c). National Legislation and Regulations Relating to Transnational

Corporations - Volume VIII, United Nations, Geneva.
______(1995d). Technological Capacity-Building and Technology Partnership: Field

Findings, Country Experinces and Programmes, United Nations, Geneva.
______(1996). World Investment Report : Investment, Trade and International Policy

Arrangements, United Nations, Geneva.
UNCTAD, Division on Transnational Corporations and Investment (UNCTAD-DTCI)

(1993). World Investment Report 1993: Transnational Corporations and Integrated
International Production, United Nations, New York.
______(1995). World Investment Report 1995: Transnational Corporations and

Competitiveness, United Nations, New York.
______(1996). International Investments Instruments: A Compendium, Vols.I, II and III,

United Nations, Geneva.
Urata, S. (1993). Changing pattern of direct investment and the implication for trade
and development, in Pacific Dynamism and the Interntional Economic System, ed.
C.F.Bergston and M. Noland, Institute for International Economics, Washington D.C.
Wei, Shang-jin (1997). Foreign direct investment in China: sources and consequences,
in Takatoshi Ito and Anne O. Kruger. ed., Financial Deregulation and Integration in East
Asia, Chicago University Press, Chicago.
World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy,
Oxford University Press.
______(1994a). World Development Report - Infrastructure for Development,

Washington, D.C.
______, 1994b. Private provision of infrastructure services in East Asia and Pacific -
Some stylized facts and lessons from early experience, Staff Discussion Paper,
Washington, D.C.
145
______(1994c). Infrastructure Development in East Asia and Pacific: Towards a New
Public-Private Partnership, Washington,DC.
______(1995a). Global Economic Prospects and Developing Countries, Wachington.

D.C.
______(1995b). Private Sector Development in Low-Income Countries, Washington

D.C.
______(1996). World Development Indicators, Washington, D.C.
______(1997a). Financial Flows and the Developing Countries - A World Bank

Quarterly, May 1997, Washington, D.C.
______(1997b). Global Development Finance, Washington, D.C.
______(1997c). World Development Report 1997, June 1997, Washington, D.C.
World Economic Forum (WEF) (1996). The Global Competitive Report 1996, Geneva,
Switzerland.
Xiaoqiang, Zhang (1997). Investment in China’s future, in Investing in Asia, ed. C.P.
Oman et. el. 1997, OECD.
Yam,T.K.,and L.Low (1992). ASEAN and Pacific Economic Cooperation, ASEAN

Economic Bulletin, March 1992.
Yamazama, Ippie (1997). APEC and investment, in Investing in Asia, ed. C.P. Oman et.
el. 1997, OECD.
Yifu, Lin Justin (1996). China’s economic reforms: implications for India and other
economies, paper presented on Seminar on India’s Economic Reform and Structural
Adjustment: Perspectives from International Experience, ICRIER, New Delhi.
146
GROWTH
COMPLEMENTATION
VOLUME - II
EXECUTIVE SUMMARY AND RECOMMENDATIONS

_________________________________________________________________
DR. TARUN DAS

ECONOMIC ADVISER
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
_________________________________________________________________
* Prepared for the Industry and Technology Division (ITD), ESCAP, United
Nations, Bangkok as a part of their Project on Regional Dialogue on Promoting
Industrial and Technological Development and Complementarities: Challenges &
Opportunities for Cooperation in Light of Emerging Regional and Global
Developments.
147
* Author would like to express his gratitude to the ESCAP, and the Industry and
Technology Division, United Nations, for providing an opportunity to write this
Report, and the Government of India, Ministry of Finance for granting necessary
permission. However, the paper expresses personal views of the author and should
not be attributed to the views of the Government of India.
Update: August 31, 1997.
CONTENTS
Contents Paragraps
1 Executive Summary and Recommendations 1-164
A Major Conclusions 2-116
1.1 Basic characteristics of Asian economies 2-8

(a) South Asia and SAARC 4-5
(b) East Asia and South East Asia 6-8
1.2 FDI - Technology - Growth Nexus 9-25
1.3 Geographical and Sectoral Distribution of FDI 26-56

(a) Regional distribution of FDI 26-31
(b) FDI in selected countries of Asia 32-51
1 China 32-34
2 India 35-39
3 Japan 40-41
4 Republic of Korea 42-43
5 Taiwan, China 44-45
6 Philippines 46-47
7 Myanmer 48
8 Indo-China (Cambodia, Lao PDR, Vietnam) 49-50
9 USA’s direct investment in Asia 51
(c) Sectoral distribution of FDI 52-55
(d) Foreign Portfolio Investment (FPI) 56
1.4 Different Modes of FDI and Technology Transfer 57-67

(a) Modes of foreign capital 57-62
(b) Modes of foreign portfolio investment 63
(c) Modes of technology transfer 64-67
1.5 Advances in New Technologies 68-74
148
(a) Pattern of industrialisation in East Asia 68-71
(b) New Technology and Applications 72-74
1.6 Development of Infrastructure and Services 75-84
1.7 Policies and Strategies for Promoting 85-102

FDI - Technology - Growth Nexus
(a) Macro-economic policies 85-91
(b) Fiscal and financial policies 92-93
(c) Role of Special Economic Zones 94-95
(d) Role of Small and Medium-Sized Industries 96-98
(e) Role of Research & Development Expenditures 99-100
(f) Infrastructure and human resource development 101-102
Contents Paragraps
1.8 Regionalisation and FDI Complementarities 103-116

(a) ASEAN Experience 104-106
(b) SAARC Experience 107-108
(c) APEC Experience 109
(d) ESCAP experience 110-113
(e) Multilateral agreement on investment (MAI) 114-116
B. Recommendations 117-164
1.9 General recommendations 117-118
1.10 Policies and strategies for promoting 119-140

FDI-Technology-Growth Nexus
(a) Host country policies for FDI 119-126
(b) Host country policies for 127-128
foreign portfolio investment
(c) Home country policies 129-131
(d) The role of special economic zones 132
(e) The role of small & medium sized industries 133-134
(f) Role of R&D expenditure 135
(g) Infrastructure & human resource development 136-137
(h) Legal and institutional set-up 138-139
(i) Fiscal and financial incentives 140
1.11 Different Modes of FDI & Technology Transfer 141-143
1.12 Advances in New Technologies 144-149

(a) Industrial technology development 144-146
149
(b) New technology and applications 147-149
1.13 Development of Infrastructure and Services 150-152
1.14 Regionalisation and FDI Complementaries 153-164

(a) Technical assistance 155-157
(b) Regional cooperation 158
(c) Regional cooperation in SAARC 159-164
Selected Bibliography :
List of Tables
1.1 Basic indicators of selected Asian countries: 1995

1.2 Average growth rates of GDP and value added in
industry in selected Asian countries: 1965-1996
1.3 Share of FDI inflows in gross fixed capital formation
1.4 Share of inward FDI stock in gross domestic product (GDP)
1.5 Net foreign direct investment as a share of GNP
by region and income group in 1990-1996
1.6 FDI inflows by host region and countries: 1984-1995
1.7 Top 10 home countries for FDI flows to selected

Asian economies in recent years :
A Bangladesh, Myanmer, Cambodia, China
B Hong Kong, India, Indonesia, Japan
C Laos, Malaysia, Mongolia, Pakistan
D Philippines, Singapore, South Korea, Sri Lanka
E Taiwan, Thailand, Vietnam, New Zealand
1.8A US FDI and related indicators in selected developing

Asian countries in 1992
1.8B Performance of US FDI in the manufacturing sector
1.9 Gross portfolio flows to developing countries by region

during 1990-1996
by region and type of instrument: 1986-1995
1.11 Privatisation revenues by sector: 1988-1995
1.12A Foreign exchange raised through privatisation in
150
developing countries: 1988-1995
1.12B Portfolio investment and foreign direct investment
in privatisation: 1988-1995
1.13A Comparative statement on Foreign Investment Regime in

selected countries in Asia.
1.13B Comparative statement on Foreign Investment Regime in
selected countries in Asia.
1.14 Potentials of South-Asian Sectoral Cooperation.
EXECUTIVE SUMMARY AND RECOMMENDATIONS
1. The basic objective of the present study is to critically analyse various modes of
overseas direct investments (ODI) and to identify for promotion those forms which lead
to deepening of industrial and technological capability, forge greater linkages with
domestic economy, and contribute to sustained growth in environment characterised by
free flow of goods and services. This chapter summarises the main conclusions drawn
from other chapters and present a set of recommendations covering overall issues for
promoting the nexus among foreign investment, technology transfer and overall
economic growth.
A. Major Conclusions
1.1 Basic Characteristics of Asian Economies
2. In recent years Asian economies exhibited remarkable economic vigor and dynamism
(Tables 1.1 and 1.2) and outperformed by a wide margin other developing regions and
industrial countries. As judged by ratios to GDP, investments, savings and exports made a
much higher contribution to growth in Asia than in the other regions. A trinity of
openness to trade, high investment and high savings rates coexisted in the fast-growing
economies of Asia. They achieved high economic growth by introducing capital and
technology from advanced countries, while enjoying the benefits of huge markets of
these advanced countries. In other words, the Asian economies are typical examples of
“catch-up” type economic growth. It is also indicative of the movement towards higher
value added and more technology-intensive activities.
3. The process of rapid growth in output and intraregional trade and investment in Asia is
sometimes called a “virtuous circle” of economic development. Foreign capital inflows
combined with a favourable policy environment, industrialisation and trade expansion to
achieve a sustained economic growth. The efficient use of resources, increased trade and
rapid growth have, in turn, stimulated an increase in the flow of intraregional investment.
This process gradually helped to internalise Asian growth and to reduce Asia’s
vulnerability to external shocks.
151
(a) South Asia and SAARC
4. Two themes characterised the past development approach in South Asia: a strong
economic role for the state and relatively inward-looking development policy. The broad
lessons of past development are that countries with more market-friently and outward-
looking policies do better in generating growth and reducing poverty. While there is
general agreement in South Asia about the need of reforms, the pace has been uneven due
to mainly political issues. Recent progress is most visible in reforms in taxation,
industrial, external, public and financial sectors.
5. SAARC has completed more than a decade of its existence, but the process of
economic cooperation in the region has been slow. Nevertheless, SAARC has established
itself as an important regional grouping due to its large market space measured by the
size of its population and its potential purchasing power. The ongoing economic reforms
and globalisation by the SAARC economies have also made the region an attractive
destination for foreign direct investment and other capital flows.
(b) East Asia and South-East Asia
6. East Asia has a remarkable record of high and sustained economic growth and grew
faster than all other regions of the world in 1965-1996. They are also economically more
egalitarian in terms of the distribution of income, wealth and land. Although initially
called “the East Asian Miracle”, various World Bank studies concluded that there was no
“miracle” or “myth” for the outstanding performance of East Asia in the past three
decades, which can be explained fundamentally by efficient macroeconomic
management, investment in human capital and a judicious combination of sound
development policies and selective interventions based on twin pillars of “outward
orientation” and “market friendly environment”. There was no single or uniform “East
Asian model” or “a distinct East Asian path”. Although the “basics” of their development
policies were more or less uniform and they were quick to respond to macroeconomic
disequilibria with success, they adopted “heterodox approaches” regarding the “specifics”
of industrial, trade and technology development.
7. Openness of trade and emphasis on competitiveness of the manufacturing sector had

been pivotal to the economic success of the NIEs and the fast-growing economies of
Southeast Asia. Economic policies did not penalise the traded goods sector, and market
forces were allowed to determine the real exchange rate. A comparatively “level playing
field” allowed both the traded and non-traded goods sectors to grow vigorously,
complementing and supplementing each other in investment, production and trade. This
facilitated an efficient allocation of resources. The benefits of a more liberal trading
environment reached beyond the narrow efficiency gains highlighted by the theory of
comparative advantage. Other benefits include more competitive goods and factor
markets,increased investment including foreign investment, and the associated transfer of
knowledge and technology.
8. While overall the region performed impressively, there remain obstacles to sustained
development. Serious environmental damage associated with rapid urbanisation,
152
inadequate regulation and planning, inadequacy of infrastructure and incorrect pricing of
resources, continue to pose threats to sustained growth and impose major costs for
development in East and South East Asia.
1.2 FDI - Technology - Growth Nexus
9. In 1990s there was a significant change in the composition of external capital flows to
the developing countries with an increasing share of private capital from 44% in 1990 to
86% in 1996 and a corresponding declining share of official development finance. Asian
region received 50% of private finance in 1996 among the developing economies. Within
private capital, flows of foreign investment increased five-and-half times surpassing other
types of capital flows and constituting 54% of total capital flows to developing countries
in 1996.
10. The private capital flows are likely to be more beneficial since they are generally
accompanied by technology transfer and market access in the case of foreign direct
investment (FDI); diversified investor base in the case of bonds; and a reduction in the
cost of capital in the case of portfolio flows. Unlike other flows, FDI is a “package”
which contains capital alongwith management, technology and skill. Experience in
developing countries suggests that “unbundling” the FDI package by borrowing capital
from the international banks, purchasing technology through licenses and negotiating
management agreements, is less efficient in terms of productivity than the FDI package.
11. FDI, like trade, provides an important channel for global integration and technology
transfer. FDI also promotes export orientation and plays an important role in privatisation
and the provision of infrastructure. The ASEAN experience shows that FDI can promote
both industrial growth, technology upgradation and export capabilities of the host
countries through the creation of intra-regional and extra-regional linkages. As regards
sectoral distribution, FDI tends to concentrate in industries using mature or standardised
technology and management skills.
12. There are different types of FDI such as natural-resource seeking, market-seeking,
technology seeking, cost-reducing, risk avoiding, export-oriented and defensive
competitive FDI. Natural resource-seeking FDI, which consists of investment in mining,
processing, textiles, oil and gas is the earliest type of foreign investment. Until 1980s
market-seeking FDI was largely confined to the manufacturing sector motivated by “tariff
jumping” to take advantage of the regulated market, but due to the recent trends of
economic reforms and privatisation of infrastructure, sectors such as power,
telecommunications and financial services are attracting increasing amounts of foreign
investment. Industrial restructuring through mergers and acquisitions (M&As) have
emerged as a favourite route to FDI. Export-oriented FDI is guided by the “product life
cycle” theory of FDI, which postulates that as real wages increase due to economic
growth in a country, labour-intensive industries will relocate to countries at a lower level
of economic development. Regional groups (such as the European Union, NAFTA,
MERCOSUR, APEC, ASEAN and SAARC) also facilitate regionally integrated
production networks. Geographical distribution of direct foreign investment also favours
neighbouring and ethinically related countries.
153
13. Host countries can be classified according to four stages of development viz. factor-
driven (attracting FDI in processing, textiles and minerals exploitation), investment
driven (heavy and chemical industries, power, construction, transport and tele-
communications), innovation-driven (electronics, information technology, bio-
technology) and wealth-driven (attracting FDI to meet domestic demand and also
encouraging outward FDI flows).
14. Global FDI reached $315 billion in 1995, and the FDI growth (12.1%) in 1991-1995
was substantially higher than that of exports of goods and non-factor services (3.8%),
world output (4.3%) and gross domestic investment (4%). The recent boom in flows has
expanded the world’s total FDI stock, valued at $2.7 trillion in 1995 held by some 39,000
parent firms and their 270,000 affiliates abroad. About 90% of parent firms in the world
are based in developed countries, while two-fifths of foreign affiliates are located in
developing countries. The global sales of foreign affiliates reached $6.0 trillion in 1993
and continued to exceed the value of goods and non-factor services delivered through
exports ($4.7 trillion) - of which about 25% are intra-firm exports. Sales by foreign
affiliates in developing countries were $1.3 trillion equivalent to 130% of imports from
these countries. In 1993, $1 of FDI stock produced $3 in goods and services abroad.
15. Between 1980 and 1994, the ratio of global inward FDI stock to world GDP and the
ratio of FDI inflows to gross domestic investment doubled from 4.6% to 9.4% and from
2% to 3.9% respectively. The ratio of global FDI outward stock to world GDP and the
ratio of FDI outflows to gross domestic capital formation in developed countries also
doubled between 1980 and 1994, from 4.9% to 9.7% and from 2.1% to 4% respectively.
16. The pattern of investment and production in ASEAN followed the “flying geese”
pattern of evolving comparative advantage, and promoted regional integration through
“production sharing” which involved the setting up of multiplant production in different
countries. Technological advances lowered transportation costs and improved
telecommunications networks which made location of production more sensitive to cost
differentials such as lower wages. ASEAN countries particularly attracted foreign
automobile manufacturers through the Brand-to-Brand Complementation scheme, which
provides for a diverse production base.
17. Trade and FDI go hand in hand. FDI has grown fastest among the countries which
participated fully in the multilateral trade negotiations. Within the traditional structures of
manufacturing TNCs generating FDI-trade linkages, intra-firm sales tend to comprise
mainly flows of equipment and services from parent firms to their affiliates. If foreign
affiliates are located downstream, intra-firm trade consists mainly of parent firms’ exports
to affiliates; if they are upstream suppliers, they generate intra-firm imports for parent
companies.
18. Data on trade by United States parent firms and their affiliates abroad illustrate the
high and growing importance of intra-firm trade for TNCs. During 1983-1993, the share
of intra-firm exports in total exports of United States parent firms rose from 34 per cent
to 44 per cent; and the share of intra-firm imports in total imports rose from 38 percent to
154
almost one half. Data for TNCs based in Japan confirm the importance of intra-firm
trade in many manufacturing industries, especially those characterised by high research-
and-development intensities and firm-level economies of scale.
19. FDI has made significant contribution to economic growth in developing countries
by promoting exports and providing access to export markets. The export propensities
(measured by the ratio of exports to output) of U.S. foreign affiliates nearly tripled in the
past two decades. This ratio more than doubled and reached 39 percent in Latin America,
while the ratio remained high in Asia, ranging from 30 percent in the Republic of Korea
to more than 80 percent in Malaysia. The export propensities of Japanese affiliates also
have been increasing, most notably in East Asia, where their exports accounted for 34
percent of total sales in 1993. Japanese affiliates in China exported 53 percent of their
sales in 1992, up from less than 10 percent in 1986, directing 43 percent of their sales to
home markets in Japan.
20. Several emperical studies generally support the view that FDI promotes economic
growth in host countries by stimulating investment, and benefits of FDI tend to be greater
where policy distortions are fewer. Studies also conclude that (a) FDI has a larger impact
on growth than does domestic investment; (b) higher FDI inflows are associated with
higher productivity of human capital for the economy as a whole, indicating that FDI has
positive spillover effects through the training of workers; and (c) FDI does not crowd out
domestic investment, but instead seems to supplement it through vertical spillovers
leading to increased capital investment by suppliers and distributors.
21. FDI adds to the capital stock of the host country in many ways viz. green-field FDI
(establishing a new business), or ownership switching (through mergers and acquisitios)
or raising equity shares in joint ventures. In developed countries, most FDI is ownership
switching whereas it is mostly greenfield FDI or joint ventures in the developing
countries. However, privatisa-tion related FDI has recently become an important form of
ownership-switching FDI for developing countries, although such FDI accounted for less
than 10% of cumulative FDI inflows to the developing countries in 1988-1993.
22. The financial capital generated, mobilised, transmitted and invested by the TNCs is
one of the FDI’s major contribution to a country’s growth and investment. For all the
countries that report such data to the UNCTAD, total profits of foreign affiliates
(reinvested and repatriated) amounted to $99 billion in 1993 or 8% of the global FDI
stock (UN-UNCTAD 1995). Over 50% was reinvested by the foreign affiliates and the
remainder was either repatriated or paid as dividends or circulated via equity flows and
intra-company loans. The net equity capital of TNCs for 40 countries that report such
data was $80 billion in 1993 amounting to 70% of the total FDI inflows in these
countries. Inter-country loans for 41 countries were $51 billion in 1993 (amounting to
37% of total FDI inflows in these countries). Repatriated profits for 27 countries for
which such data are available were $56 billion in 1993.
23. The significance of FDI in domestic capital formation can be judged from the ratio
of inward FDI flows in the gross fixed capital formation which reached the peak level of
155
24.5% in China in 1994, 26% in Malaysia in 1992, 47.1%% in Singapore in 1990, 37% in
Fiji in 1990, 61.3% in Vanuatu in 1994 and 96% in the Pacific least developed countries
in 1994 (Table 1.3).
24. Share of FDI stock in GDP was as high as 86.6% in Singapore in 1990, 46.2% in
Malaysia in 1994, 36.6% in Indonesia in 1990, 18% in China, 21% in Hong Kong and
36% in Maldives in 1994 (Table 1.4). FDI flows as a share of GNP (Table 1.5) also
indicates the importance of FDI in overall economic development. In 1996 it reached 2%
for developing countries as a whole, and 6.5% for Malaysia and Vietnam. East Asia has
sustained inflows equivalent to more than 4% of GNP in the 1990s.
25. These figures do not capture the full role of FDI as an agent for growth and
structural transformation. In many countries FDI was instrumental in shaping industrial
structure, technological base and trade orientation. Perhaps the most significant
contribution of FDI is qualitative in nature. FDI embodies a package of growth and
efficiency-enhancing attributes. TNCs are important sources of capital, technology, and
managerial, marketing and technical skills. Their presence promotes greater efficiency
and dynamism in the domestic economy. The training gained by workers and local
managers and their exposure to modern organisational system and methods are valuable
assets.
1.3 Geographical and Sectoral Distribution of FDI
(a) Regional distribution of FDI
26. The FDI flows to developing countries have grown rapidly in 1990s and reached
$100 billion in 1995 and $110 billion in 1996. The share of developing countries in
global FDI flows increased from 19% in 1980 to 32% in 1995 (Table 1.6). As regards
sources, more than 80 percent of global FDI inflows originate in OECD countries and the
major home countries are the United States, United Kingdom, Germany, Japan and
France which accounted for two-thirds of global FDI outflows in 1990s. The main
suppliers of FDI to Latin America remain United States and Europe, while Japan has
emerged as the predominant partner in Asia. The dominant role of FDI from the United
States in Latin America and the Caribbean, from Japan in Asia and from Europe in Africa
underline the tendency of the TNCs from the “Triad” in building up regionally integrated
networks of affiliates.
27. The Asia and the Pacific is the new growth centre of the global economy with
China, ASEAN and NIEs as important players. FDI flows to Asia and the Pacific reached
$65 billion in 1995 accounting for 21% of global FDI flows and 65% of FDI flows to the
developing countries, compared with $20 billion in 1990 accounting for only 10% of
global FDI flows. East and South-East Asia alone received $62 billion in 1995, while
South Asia saw a doubling of inflows to $2.7 billion in 1995, mainly due to tripling of
inflows into India. Inflows of FDI to ASEAN-4 (Indonesia, Malaysia, Philippines and
Thailand) increased from $8.6 billion in 1994 to $14 billion in 1995. In 1990-1996 China
156
and ASEAN had a share of more than 80% in FDI inflows to Asian countries, with
Chinese share exceeding 50%.
28. Asian developing economies themselves are increasingly becoming outward

investors, reflected in the liberalisation of their outward FDI regimes and provision of
incentives for such investments. In 1995, the region with $43 billion FDI outflows
accounted for 90% of all developing country outflows with Hong Kong as the largest
outward investor. Most outward FDI is going in the region to take advantage of cost
differentials, liberal trade and FDI regimes and to allow export-oriented FDI to flourish.
Malaysian and Thai TNCs directed 60% of their FDI outflows to Asia in 1995; some
four-fifths of Hong Kong’s outward FDI went to China in 1995; a good part of
Singapore’s outward FDI is distributed to other ASEAN countries and China; and 60% of
China’s outward FDI remained in the region.
29. Surveys of FDI from developing countries high-light the following general features
(UNCTAD 1993a): (a) The geographic distribution of FDI favours neighbouring and
ethnically and culturally related countries. (b) FDI tends to concentrate in industries using
standardised technology and management skills or industries based on natural resources
(processing, textiles and minerals) or export-oriented industries (food processing,
automobiles, and electronics). (c) Most TNCs are involved in joint ventures, both to limit
their capital commitments and to obtain local managerial and organisational skills or
access to markets of their partners.
30. An analysis of the FDI flows to selected host countries in the Asia and Pacific
(Bangladesh, Cambodia, China, Hong Kong, India, Indonesia, Japan, Laos, Malaysia,
Mongolia, Myanmer, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan,
Thailand, Vietnam, and New Zealand) indicate that intra-Asian FDI flows constitute
major shares in FDI inflows to most of these host countries (only exceptions being Japan,
India and Pakistan). The share of Asian countries among the top 10 host countries ranged
from 45 percent in South Korea to around 90 percent in China, Mongolia and Cambodia
(Table 1.7A to 1.7E). The share of newly industrialised economies in the FDI flows to the
ASEAN countries increased from 25% in 1990-1992 to 40% in 1993-1994. More
generally, about 57% of the FDI flows from developing countries were invested within
the same region in 1994.
(b) FDI in selected countries in Asia
1 China, People’s Republic of
31. China is the principal driver behind the current investment boom in Asia. With an
inflow of $38 billion in 1995 China became the second largest recipient of FDI after the
U.S.A. in the world and the number one in the developing world, and became the home
for 38% of FDI flows to developing countries and 55% of FDI flows to Asian developing
countries. FDI inflows to China increased further to $42 billion in 1996. About 80% of
FDI inflows to China come from countries with predominantly Chinese populations, such
as Hong Kong, Macao, Singapore and Taiwan. Firms from those economies have certain
157
advantages in investing in China, e.g., better knowledge of market conditions and
reduced transaction costs owing to language advantages and family networks.
32. In 1979-1996, under the government’s open door policy, total FDI commitments in
China reached $400 billion and FDI inflows $135 billion by 260,000 enterprises, of
which 64% are equity joint ventures, 15% are co-operative joint ventures, and 21% are
wholly foreign-owned enterprises. About 50% of the country’s industrial turnover is due
to FDI and enterprises with foreign investment earned one-third of the country’s foreign
exchange, employing 17 million workers. As regards sectoral distribution of FDI, 50%
was concentrated in processing industries, 24% in other industries, 14% in real estate, 9%
in telecommunications and transport, and 3% for agriculture and fisheries in 1979-1994.
33. In recent years, nearly 80 percent of FDI has been in small and medium-scale
export-oriented manufacturing industries, with the average investment increasing from
$0.5 million in the late 1980s to $2.5 million in 1995. Most of the investment was made
by overseas Chinese who had already established strong links to the main export markets
in Europe, Japan, and the United States. As a result of this boom in export-oriented FDI,
exports became the main engine of growth for the Chinese economy, and the country
significantly increased its share of world trade.
34. In 1989-1994, Guangdong attracted $25 billion utilised FDI, or 30% of the country’s
total, most of which were in export-oriented industries. Over the same period,
Guangdong’s exports expanded by 34.7% annually, while the country’s exports grew by
only 18.2% per year. In 1994, foreign invested enterprises (FIEs) accounted for 39.5% of
Guangdong’s exports, compared with 28.7% in the country. As a result, Guangdong
recorded an average real GDP growth rate of nearly 18% per year since 1989, much
faster than the national average of 10.7%.
2 India
35. The total number of foreign collaborations approved in post-liberalisation period

(August 1991 to March 1997) amounted to 10729 of which 6092 proposals involved FDI
amounting to $34 billion. More than 86% of these FDI are in priority sectors such as
power and petroleum (24%), telecommunications (23%), financial services and hotels
(10%), chemicals (7%), automobiles (6%), electrical equipments (6%), metallurgical
industries (5%) and food processing industries (5%).
36. The average inflow of foreign investment to India increased from only $120 million
per annum in 1980s to $4.7 billion per annum in 1993-1996. Total portfolio investments
at $12.2 billion in 1993-1996 comprised $7 billion in equity shares purchased by FIIs
attracted to India by the prospects of higher return, $4.5 billion by GDR/Euro equities
and $0.7 billion by offshore and other funds raised by Indian firms interested in raising
capital abroad at a lower cost than from domestic sources.
37. The U.S.A., U.K., Japan, Germany and Non-resident Indians (NRIs) constituted the
major sources of foreign investment in India. In 1990s, however, Maurious and Caymon
158
Island emerged as a major home country due to establishment of various off-shore funds
in these countries to take advantages of tax haven. The increasing share of NICs like
Singapore, Hong Kong and Malaysia is also an interesting feature of the new pattern.
38. As a consequence of the amendment of the Foreign Exchange Regulation Act

(FERA) and automatic approval of foreign equity upto 51% in 48 priority industries and
upto 74% in 9 high priority industries, many of the existing firms have raised their
foreign equity above 50%. These constitute around 50 per cent of approvals since August
1991. An analysis of FDI approvals in 1990s also indicates a relatively higher proportion
of joint ventures in all industries except energy and textiles. Further, the proportion of
agreements with provisions for lump-sum payment, which is partly indicative of outright
purchase of technology, is also lower in 1990s.
39. Inflows of foreign investment to India are likely to increase further due to several
favourable factors. First, more than 85% of FDI inflows are in the core sectors, and the
pipeline of FDI is more than $40 billion. Second, with a market capitalization of $150
billion, India’s capital market is among the largest in world, and FIIs could own up to
30% of this market. Third, Indian firms have incentives to mobilize resources abroad so
long as the domestic lending rates remain above international levels.
3 Japan
40. Inward FDI flows to Japan increased from $940 million in 1986 to $4155 million in
1994. Share of manufacturing in total FDI inflows showed a declining trend, while that of
non-manufacturing had an increasing trend over the period. Chemicals, machinery,
commerce and trade, banking and insurance, and service sectors accounted for almost
80% of cumulative FDI inflows to Japan in 1950-1994. USA and Canada are the main
sources of FDI accounting for 45% of cumulative FDI to Japan in 1950-1994, followed
by Europe (30%) and affiliates of foreign businesses in Japan (11%).
41. Japanese outward FDI flows reached $57 billion in 1990 followed by some decline
in 1990s. Major receipients of Japanese FDI flows are USA, Asian NIEs and ASEAN.
Japanese overseas direct investment has aimed at exploiting the comparative advantage in
the region: investment in the Asian NIEs, shifted from labour-intensive industries
towards technology and service industries. In South Korea and Taiwan, over 80% of
Japanese investments were in manufacturing, mainly in chemicals, textiles, electronics
and electrical products, while in Hong Kong and Singapore, the investments have been
directed towards finance and commerce. Even in the ASEAN-4 and China, Japanese
investments have shifted in line with industrial growth in these countries (Chia, 1994).
For example, the share of textiles in total Japanese FDI in ASEAN declined from 20.4%
in 1985 to 11.8% in 1990; while that of electrical machinery rose from 4.9% to 20.6%
over the period.
4 Korea, Republic of
159
42. Republic of Korea provides an excellent example of how a capital importing
country can turn into a capital exporting country over time by sound economic
management and judicious combination of both inward and outward looking policies.
The sectoral distribution of inward FDI flows is also illuminating. In 1962-1995, out of
total FDI inflows of $14.5 billion, manufacturing accounted for 60% and services the
rest, but the sectoral distribution was completely reversed in 1994-95 with services
accounting for 61% of FDI flows. Within services, emerging sectors are trade, real estate,
finance and insurance as contrast to hotels and construction in eralier years. Chemicals,
automobiles and electronics are the dominant areas attracting FDI in manufacturing.
Distribution of FDI inflows in terms of equity ratios indicate that 70% of FDI was on a
joint venture basis and 30% was on 100 percent foreign equity.
43. Asian economies supplied 44% of inward FDI to South Korea in 1962-1995 and
they received 46% of its outward FDI in 1991-1995. Within Asia, China and Indonesia
are major destinations for Korean outward FDI. Korea has been seeking locations for its
manufacturing investment in Asia. Although much of outward FDI was linked to trade
prospects, a significant share of North America in the South Korea’s outward FDI reflects
its desire to gain access to advanced technology from developed countries.
5 Taiwan, China
44. In 1952-1994 Taiwan attracted $19.4 billion of FDI, 86% of which was private
foreign investment from the developed industrial countries. The balance of FDI came
from oversees Chinese from different locations. Electronic and electrical products and
chemicals were the dominant industries accounting for 38% of the cumulative FDI
inflows. In recent years, Taiwan has liberalised its service sectors (including banking and
insurance) which attracted 30% of FDI in 1952-1994.
45. Taiwan became a major foreign investor with cumulative outward FDI flows of $8.9
billion in 1952-1994. USA and Malaysia were major destinations accounting for 28% and
13%, respectively, of cumulative outward FDI. Taiwan’s overseas investment provides an
emperical evidence of the investment life cycle theory, in which an investing country
initially generates the capacity to export and then turns host to foreign investment aimed
at jumping the protectionist barriers. Chemicals, electronics and electric products, and
banking and insurance were the major sectors accounting for 43% of cumulative outward
FDI in 1952-1994.
6 The Philippines
46. Manufacturing, services and financial institutions are the major sectors attracting
FDI inflows to philippines, while USA, Japan and Hong Kong are the major sources of
FDI. Asia accounted for 64% of FDI flows to Philippines in 1994. Foreign equity
contribution to total equity ranged from 41% to 53% between 1986 and 1991, but the
foreign equity share dropped to 26% in 1992.
160
47. There is a high degree of correlaiton between FDI and technology transfer in the
Philippines. Of the top 10 countries ranked according to size of FDI in the Philippines,
seven are also the leading sources of technology imports: USA, Japan, South Korea, UK,
Netherlands, Australia and Singapore. The energy sector received the biggest comulative
foreign investments until 1995 due to the Government’s efforts to promote energy
development. Of the many types of technology transfer available, those involving the
actual transfer of know-how, trade marks, and patents constituted two-thirds of
collaboration contracts in 1986-1996. Majority of such technology are manufacturing-
related.
7 Myanmer
48. Up to the end of 1995, Uk was the largest investor in Myanmer followed by
Singapore and France. The same trends continued in 1996. Up to August 1996, UK
continued to be the largest investor in Myanmer with cumulative investments of $1
billion, closely followed by Singapore ($896 million), France ($465 million) and
Thailand and Malaysia with around $450 million each. The bulk of the funds have gone
to oil and gas, hotel and tourism, while other manufacturing sectors failed to attract
much FDI, despite Myanmer’s move in recent years to open up the economy.
8 Indo-China (Cambodia, Lao PDR, Vietnam)
49. Vietnam, Cambodia and Lao PDR, the three South East Asian countries generally
known as Indo-China, are on the road to economic transition at different paces and on
different scale. All of them are reshaping their policies to attract private investment
including foreign investment. Vietnam and Lao PDR have already become members of
ASEAN, and Cambodia may be admitted to ASEAN very soon. Cambodia’s corporate
tax rate of 9%, the lowest in the Asia-Pacific, is a very attractive feature for investment,
and the rise in manufacturing output has been boosted by FDI, particularly from Asia. In
Vietnam, FDI has increased from $1.8 billion in 1995 to $2.3 billion in 1996. Taiwan is
the largest investor in Vietnam followed by Japan, Singapore and Hong Kong, these four
countries accounting for 60% of total FDI.
50. Laos is expected to attract more FDI as costs rise in Vietnam. The key attractions are
low labour costs, relative political stability, and continued commitment to economic
reform. In addition, Laos’s strategic location to the larger markets of Thailand, Vietnam,
China and Myanmer is an advantage for foreign affiliates looking for a new base for
manufacturing. However, Lao DPR will need to improve its infrastructure to realise its
full potential as a regional hub.
9 United States Direct Investment in Asia
51. US FDI outflows and related indicators in 1992 in selected Asian countries are
given in Table 1.8A and certain performance parameters of the US FDI in the
manufacturing sector in Asia are indicated in Table 1.8B. At the end of 1992, Asia and
Pacific accounted for 16 percent of the US outward FDI stock and 18 percent of the US
161
FDI outflows. Major destinations in Asia for US outward FDI are Indonesia, Thailand,
Korea and Malaysia. These countries generally generated high returns for US FDI which
was also mostly trade related.
(c) Sectoral Distribution of FDI
52. The sectoral distribution of FDI in developing countries is not well documented,
but it seems that in recent years services have increased their share to more than one
third, while manufacturing declined to one-half, with the remainder accounted for by
agriculture and mining. Within services financial services are a major component, with
trade, construction, and tourism also important. Within manufacturing the trend was to
move from lower-technology or labour-intensive industries (food, textiles, paper and
printing, rubber, pastics) to higher-technology industries (electronics, chemicals,
pharmaceuticals).
53. Sectoral distribution differs among regions depending on their level of development.
In most countries in Asia, FDI went primarily to the secondary sector (mainly
manufacturing), although investment in the tertiary sectors was of major importance for
some Asian countries. Some resource-rich countries like Indonesia, Papua New Guinea
and Viet Nam also attracted FDI into the primary sector (mainly oil production). In Latin
America, new investment flows to the natural resources and services sectors have now
surpassed that in the manufacturing sector. In Africa, the bulk of FDI went to primary
sector.
54. The size and dynamism of developing Asia made it a favourable base for TNCs to
service rapidly expanding markets or to tap the tangible and intangible resources for their
global production networks. In addition, the region’s infrastructure financing for the next
decade will play a role in sustaining FDI flows to Asia. Countries are dismantling
barriers to FDI in infrastructural sectors, giving rise to large investment opportunities for
TNCs. Privatisation, although lagging behind other regions, is showing signs of taking
off particularly in manufacturing, mining, power, telecommunications, petroleum and
financial sectors. European union TNCs which neglected Asia in the 1980s are making
large-scale investment in Asian developing economies to take advantage of new
opportunities in power, petrochemicals and automobiles.
55. Transnational corporations in retailing, and other trading firms also played an
important role in the building up of export capabilities of several Asian economies. In
addition to linking local producers to foreign customers, they deepened the ties of those
economies to the internatioinal market-place. Asian experiences also indicate that
contributions to international competitiveness and export performance are particularly
high in developing economies that are open to both trade and FDI.
(d) Foreign Portfolio Investment (FPI)
56. Portfolio flows to developing countries increased to $81 billion in 1995 but
remained below the peak level of $95 billion in 1993. Strong growth in equities and debt
162
raised portfolio flows to a record $134 billion in 1996, accounting for 30% of net
resource flows in 1996 compared with only 5% in 1990. Equity flows at $46 billion
accounted for 34% of these investments. An increasing share of foreign funds was
invested in local equity markets directly rather than through depository receipts or other
cross-border private equity placements. Debt instruments - mainly international bonds -
have always accounted for most portfolio flows to emerging markets. Portfolio debt
flows to developing countries - essentially bond issues in the international capital markets
- registered a record increase by 80% and reached a record level of $89 billion in 1996
(Tabe 1.9).
1.4 Different Modes of Foreign Investment

and Technology Transfer
(a) Modes of Foreign Capital
57. Empirical evidence indicates that private capital contributed more to economic
growth of the Asian developing countries than official aid, the relative importance of
which in total resource inflows declined since 1980s. There was also a change in the
structure of private flows. Until 1983, bank lending was the major mode of foreign
private flow to the Asian developing countries. Subsequently, the relative significance of
bank lending has declined and that of other modalities has increased. The share of
foreign direct investment has increased the most followed by bond lending and foreign
portfolio investment.
58. The major alternatives to syndicated bank lending are bonds, financing through new
instruments, foreign direct investment, foreign portfolio equity investment, and foreign
quasi-equity investments (such as joint ventures, licensing agreements, franchising,
management contracts, turnkey contracts, production sharing and international
subcontracting). Out of these the most popular modes are FDI, portfolio investment and
foreign quasi-equity investment as they involve risk-sharing, sharing of managerial
responsibilities and the promotion of a more efficient use of resources. Foreign portfolio
investment, in addition, has a favourable impact on local capital markets. The
disadvantages are that there might be misuse of control and that foreign direct investment
might introduce inappropriate technology.
59. Country experiences indicate that the majority ownership was preferred mode of
FDI in capital intensive industries like chemicals, equipments, electronics and
automobiles, whereas joint ventures were preferred in traditional and primary industries
like textiles, food processing, paper products and metals.
60. TNCs generate technology through innovation and disseminate it within their
corporate system and business partners, and other firms in both home and host countries.
TNCs supply a mutually reinforcing package of resources consisting of capital, R&D,
technology skills, organisational and managerial practices and expansion of markets.
TNCs play their role through equity and non-equity investments which range from
wholly owned foreign affiliates through joint ventures to licensing, subcontracting and
163
franchising agreements. Although TNCs retain control on key assets and key posts of
production and distribution, they have a great deal of flexibility regarding the contents of
the package.
61. TNCs help in industrial restructuring in both home and host countries. Japan, South
Korea and Taiwan are the text book cases of successful industrial restructuring and
development with the help of the country’s own TNCs. At the initial stage of
industrialisation, they needed some FDI to build their automobiles, electronics, textiles
and apparel industries, but at a latter stage, these economies gave rise to their own TNCs
for further technological upgrading and industrial restructuring; and relocated production
abroad to take advantage of new markets.
62. The recent surge in global FDI has been fueled by the cross-border Mergers and
Acquisitions (M&As) in industrial economies. Mergers and acquisitions are a popular
mode of investment for firms wishing to protect, consolidate and improve their global
competitive positions, by selling off divisions that fall outside the scope of their core
competence and acquiring strategic assets that enhance their competitiveness. About one
tenth of world-wide M&A sales took place in developing countries due to growing
availability and attrativeness of firms in Asia and privatisation programmes in Central
and Eastern Europe. Most large-scale cross-border M&As have taken place in the energy
distribution, telecommunications, pharmaceuticals and financial services industries. As a
result of ongoing liberalisation, the value of service-related M&As increased by 146%
between 1993 and 1995. The value of cross border M&As in banking and finance tripled
in 1995 to reach $100 billion.
(b) Modes of Foreign Portfolio Investment (FPI)
63. FPI in the emerging markets can be channelled through three main mechanisms:
direct purchases on local stock markets, country or regional funds; and issues of
depository receipts on foreign stock exchanges by the domestic companies. The size of
direct purchases in local markets depends on market developments that facilitate and
encourage such trading. In recent years, the opening of the local brokerage and
investment banking business to foreigners has facilitated such purchases. Developing
countries have also enhanced the limits of foreign equity which can be held by the
foreign institutional invetors (FIIs). In India FIIs and non-resident Indians are permitted
to hold up to 30 percent of total paid up capital of any listed or unlisted companies.
(c) Modes of Technology Transfer
64. There are various channels of technology transfer and adaption. These include
foreign direct investment, joint ventures, licensing, Original Equipment Manufacture
(OEM), Own-design and manufacture (ODM), sub-contracting, imports of capital goods,
franchising, management contracts, marketing contract, technical service contract, turn-
key contracts, international sub contracting, informal means (overseas training, hiring of
experts, returnees), overseas acquisitions or equity investments, strategic partnership or
alliances for technology. Other modes of technology acquisition include minority interest
164
in firms with R & D programmes, contracts for R&D to other companies and research
institutes, grants consortia, bilateral cooperative technology agreements, buying
technology embedded in products, material sub-assembly or processes. Out of these, the
most popular modes are licensing, joint ventures and foreign direct investment.
65. Original Equipment Manufacture (OEM) and Own - Design and Manufacture
(ODM) played a major role in East Asia in technology adaption and upgradation,
eventually leading to independent designing and development. South Korea’s electronic
industry provides an interesting example of technological development under different
stages. In the 1980s the Chaebols took off and sought more independence from their
patrons. First, there was a switch from OEM to ODM. In the second stage, their
marketing strategy was to rely more on their own brand names. This strategy worked well
and by the early 1990s several of them established themselves as leading firms in the
global market, occupying fifth (Samsung), 12th (Goldstar-Electron) and 13th position
(Hyundai) in DRAM (dynamic random access memories) production, with aggregate
exports amounting to $106 billion in 1992.
66. Component supply through subcontracting with foreign affiliates helped domestic
component producers in several host countries to enter the vertically integrated
production chains of TNCs geared to export markets. Subcontracting arrangements are
common for consumer goods such as electronics, footwear, furniture, garments,
houseware and toys. In South-East and East Asia, networks of local producers (mainly
joint ventures with TNCs) have been established for component-supply to automobile
and electronics TNCs, with specialisation among plants in different countries to supply
the regional market.
67. The networks in automobiles mainly belong to Japanese TNCs which source
automobile parts through their foreign affiliates and their local subcontractors, taking
advantage of ASEAN regioinal cooperation provisions. In the electronics industry, such
networks have been established by United States as well as Japanese TNCs, beginning
with labour-intensive operations and moving towards increasingly sophisticated networks
of operations with cross-hauling of products across national boundaries.
1.5 Advances in New Technology
(a) Pattern of industrialisation in East Asia
68. East Asian countries started industrialisation with textiles, household appliances and
other labour-intensive light industries. Then they moved to capital and knowledge
intensive industries such as steel, ship-building, petro-chemicals and synthetic rubber for
further industrialisation by way of forward linkages.
69. Another pattern, known as the “flying geese model” first developed by A.Kaname
in the 1930s and then by K.Akamatsu in 1956, postulates that Japan, the leader in
industrialisation and technological development in Asia, relocated its production
facilities to East Asia as its wages and other costs increased. This progression from Japan
165
to East Asia and then to Southeast Asia took on the form of an inverted “V” as the
economies of Pacific Asia began to fly together led by Japan.
70. Because of its closest geographical, cultural and educational proximity to Japan,
South Korea imported most of its technologies from Japan. Japan took the lion’s share
(52%) of technology transfer to Korea in 1980s followed by the USA (25%), Germany
(6%) and France (5%). As in Japan, the case of the Korean automobile industry is a
classical example of the infant industry development which was well-staged, financed
and promoted until the industry attained international competitiveness. All technology
acquisitions and adaptation by Korea were also carefully selected and sequenced.
71. The Asian NIEs adopted a strategy of export-oriented industrialisation which made
use of relatively cheap labor to compete in the international market. In contrast, Indonesia
and India initially adopted import-substituting industrialisation through various protective
and incentive measures for domestic industries. An important factor in East Asia’s
successful productivity-based catching up was openness to foreign ideas and technology.
Governments encouraged improvements in technological performance by keeping several
channels of international technology transfer open at all times.
(b) New Technology and Applications
72. A set of technology collectively referred to as New technology is a single most

profound source of technological progress of both of advanced and developing
economies, rapid globalisation and shifts in global trade. The term refers to innovative
development in electronics relating to informatics, computer hardware, software, tele-
communication, bio-technology and new materials. To this can be added emerging
technologies namely renewable energy technologies like photovoltaic, remote sensing,
super conductivity and photonics. New technologies are knowledge intensive in contrast
to conventional capital intensive technologies. Moreover, new technologies are process
technologies rather than product technology. Therefore, they are not only scale free but
also have a very wide range of applications.
73. As for new materials, the sectoral range is even wider and includes material
industry, energy, automobile, semi-conductor, communications, precision machinery, air-
craft/ space, medical equipment/ instruments and life technology product like heart valve
and other synthetic human body parts. New technologies help to develop new
manufacturing location. The conventional need to look for resource base or cheap labour
is no longer required.
74. International technology markets are complex, imperfect and rapidly evolving.
However, some trends are significant. First, the pace of technological innovation is
quickening, led by both demand factors such as growing global competition and supply
factors such as breakthroughs in genetic engineering and solid state physics. Second, life
cycles of technological processes and products are shortening as a result of new
electronics-based technologies and increased participation in technology-intensive
industries. Third, rapid automation is transforming factor intensities of certain industries
which are losing their labour-intensive character.
166
1.6 Development of Infrastructureand Services
75. Rapid technological developments in telecommunications and computers in the

1980s have made some services, especially information-intensive ones, more tradable.
The “long-distance” type of service does not necessarily require physical proximity
between the provider and the user. Live broadcasts, transborder data transmissions, and
traditional bank and insurance services fall under this category. The scope of long-
distance service transactions has greatly increased with the advance of technology. In
“long-distance” services, there is no need for any direct investment or movement of
labour.
76. In the last few years there has been an increasing interest on the part of both
governments and private sector to enhace the role of foreign investment in infrastructure
development in East Asia and Pacific, and the Latin American countries. However, there
is a basic difference of experiences between Latin America and East Asia. Most countries
in Latin America encouraged outright sale or tranfer of management/ majority share of
public enterprises, while East Asian countries encouraged private investment for creating
new capacities (World Bank 1994).
77. Because of lumpiness of huge capital, risk involved and the budgetary constraints,
developing countries are increasingly financing their infrastructure projects by external
commercial borrowing and increased use of bond and equity markets. Finance for
infrastructure typically comes in a package with equity, debt, commercial bank loans,
export credit guarantees, and contingent liabilities of the host government ranging from
“full faith and credit gurantees” to “comfort letters”.
78. Capital market finance for infrastructure increased more than eightfold since 1990
and reached $22.3 billion in 1995 (Table 1.10). The private sector outpacd the public
sector in external infrastructure finance although with the help of substantial government
guarantees. Compared to the public sector, the private sector relied more on loans than on
bonds or equity. But the growth has been uneven across the regions, countries and
sectors. East Asia raised the most finance (led by China, Indonesia, South Korea,
Malaysia, Philippines, Thailand) followed by Latin America. Power generation,
telecommunications and transport attracted the most external finance, while power
transmission and distribution and water supply lagged behind.
79. In 1988-1995 developing countries raised $130 billion through privatisation led by
Latin America and the Carribbean ($68 billion), Europe and Central Asia ($25 billion),
East Asia and the Pacific ($25 billion), South Asia ($6 billion), Sub-Saharan Africa ($3
billion) and Middle East and North Africa ($2 billion). Infrastructure related sales
accounted for 44 percent in both 1994 and 1995.
80. Privatisation continued to be an important channel for foreign investment (direct

and portfolio equity) in 1990s. Total foreign investment raised from privatisation in 1988-
1995 amounted to $58 billion, nearly two-thirds of which were in the form of foreign
167
direct investment, with portfolio investment accounting for the remainder (Tables 1.12A
and 1.12B).
81. TNCs invest in infrastructure projects in the form of FDI (greenfield investments or
acquisitions through privatisation), BOT, BOO, BOOT, BOLT, BTO or variants of these
schemes. There are various forms of BOO and BOT schemes in the region such as those
for toll roads in China, India, Malaysia, and Thailand; telephone facilities in Indonesia,
Sri Lanka and Thailand; power generation in India, China, Pakistan and Indonesia; and
energy, transportation and water resources in the Philippines.
82. Various constraints such as high fixed or sunk costs, long gestation periods, price
ceilings and other regulations on the operations of an infrastructure facility in host
countries, and political risk (expropriation or nationalisation) have induced foreign
investors to minimise equity commitments to such projects and to rely on debt
(commercial loans and bonds) and non-equity financing (technical know-how, expertise,
R&D cost sharing, trade credits and supply of capital goods).
83. There are constraints that arise out of the very nature of some of the ways in which
infrastructure projects are financed. Given the perceived risk, investors require high rates
of return. This necessarily requires user fees commensurate with the rate of return, which,
in many developing countries, are too high to be sustainable. There are also
environmental issues associated with infrastructure projects. Consequently, negotiations
of BOT/BOO and similar schemes - in developing and developed countries - are typically
very complex and long drawn out.
84. In recent years, a number of Asian investment funds have been created to mobilise
international capital to finance Asia’s infrastructure. These funds provide medium and
long-term finance (5-10 years) for infrastructure projects through equity (usually 10% or
more) or convertible debt. Funds are raised from a diverse group such as institutional and
private investors, TNCs, regional banks and multilateral organisations. The Asian
Infrastructure Fund (AIF), in which the Asian Development Bank was an initial investor,
was the first infrastructure investment fund in the region. The AIF is investing in utility,
transportation and communications projects in China, Indonesia, Malaysia, Thailand,
Philippines and Taiwan. Since then, several infrastructure investment funds, similar to
international mutual funds, or unit trusts, have been set up.
1.7 Policies and Strategies for Promoting

FDI - Technology - Growth Nexus
(a) Macro Economic Policies
85. Inflows of FDI are determined by a complex set of economic, political and social
factors and foreign investors look beyond the array of fiscal incentives offered. In recent
years FDIs have been encouraged by economic reforms and particularly by liberal FDI
regimes (in terms of currency convertibility, free repatriation, less performance criteria,
tax holidays and other incentives, relaxation or abolition of screening requirements and
168
limits on foreign equity etc.). Major policies and liberalisations on foreign investment
regimes in 18 selected Asian countries are summarised in Tables 1.13A and 1.13B.
86. Other major factors that influence FDI flows include low wage rates and low
production costs, higher rates of return, hugh domestic market, labour mobility, efficient
infrastructure, an established legal and institutional set-up, administrative speed and
efficiency, and above all liberal economic policies and stable economic situation. The
formation of regional trading blocks such as NAFTA, ASEAN, APEC, SAARC etc. had
also an important impact on the FDI pattern. In future, countries outside the regional
blocks might have disadvantages in attracting FDI.
87. Foreign investors dislike any screening of investment except for national security,
public health, individual safety, and environmental protection. They also dislike
performance requirements such as export orientation, local content, value addition and
foreign exchange requirements. Such requirements distort and discourage trade and
investment, and result in diminished returns to both investors and host countries.
88. Foreign invetors like to have better of national treatment and most favoured nation
treatment, as it maximizes the free flow of capital. Other key factors attracting FDI
include free transfer of profits and dividends, adherence to international law standards on
expropriation, international arbitration, protection of intellectual property rights (IPR), ,
and the right of the investor to employ management of its choice, regardless of any
nationality. Since 1980, countries that guaranteed that profits could be repatriated
attracted 93% of foreign investment flows. and countries adhering to the Convention of
Settlement of Investment Disputes attracted 85% of foreign investment.
89. In recent years there has been a surge of foreign portfolio investment which includes
both equity and bonds. Host country factors which are crucial for portfolio investment
fall into three groups viz. the degree of political and macroeconomic stability and
prospects for growth; the host country’s commitment to the process of economic and
financial liberalization and reform; and the state of development of the host country stock
exchange and the institutional and regulatory framework.
90. Developing countries have established investment promotion programmes which are
often organised as a government department or as a quasi-government agency with
private participation. In a few cases such as Mexico, Costa Rica, Vevezuela and
Honduras, the promotion agency is funded and run by the private companies. Ironically,
as developing countries liberalise FDI and trade regimes, multilateral companies
appeared in many cases to have improved their bargaining power vis-a-v-s host countries.
91. The macro-economic policy framework and reforms constitute only some of the
factors, albeit vital ones, for encouraging foreign investment. The country’s economic
potential, human and natural resources and political stability and other factors that affect
the risk and profitability of investment are equally important. Membership in bilateral tax
treaties, and multilateral and regional investment guarantee arrangements are also seen as
169
an important element in providing a stable and attractive framework as it could reduce
perceived risks.
(b) Fiscal and Financial Policies
92. Fiscal, financial and other incentives remained an important part of a country’s
investment promotion package. When all other factors are equal, incentives can tilt the
balance in investors’ locational choices. This appears particularly true for “footloose
industries” which choose among production sites with comparative costs; automobiles
and food processing industries, for example, seem to be sensitive to a package of fiscal,
tariff and financial incentives given by host countries.
93. Fiscal and monetary incentives play, however, only a minor role in the locational
decisions of TNCs, and attract only those “fly-by-night” firms which exist on exploitation
of incentives. This is not surprising since investment decisions are typically made
because they promise to be profitable on the basis of market conditions alone; if
incentives are offered, they become “icing on the cake”. While the effects of incentives
on stimulating new investments are difficult to measure, they nevertheless represent
substantial economic costs. Where incentives already existed, their sudden removal
might produce negative effects; where they did not exist, their introduction might not
produce net gains. A rational, efficient, equitable and internationally competitive tax
system is more conducive to FDI than fiscal incentives.
(c) The Role of Special Economic Zones
94. Of the many policies tried by the East Asian countries for accelerating growth,
those associated with their export push hold the most promise for other developing
economies. The export-push approach provided a mechanism by which industry moved
rapidly toward international best practice and technology. Export processing zones are the
most common form of subnational zones. A feature of these zones is the establishment of
some subnational customs area that gives a preferred customs treatment to goods entering
the area compared with goods entering non-zone parts of the country. These preferences
are normally restricted to export activities. Export processing zones also give preferences
or privileges relating to the establishment of foreign-owned enterprises and to nontrade-
related instruments of government policies such as tax holidays or deferments, duty
drawbacks or exemptions for raw materials, reduced rates in taxes and duties for capital
goods, investment subsidy, preferences in government loans. EPZs and other economic
zones are generally equipped with good infrastructure and support facilities.
95. A closely related form of subnational zone is the financial service zone, such as a
financial offshore center. These zones essentially provide preferences for the finance
service industries, analogous to those provided for manufactured goods in export
processing zones. There are other subnational zones which are not international trade-
related, such as science and technology parks. The number of these parks has increased
rapidly in many Asian countries since 1980. Most science and technology parks in Asia
have concentrated primarily on attracting foreign investors. Subnational zones are,
170
therefore, an integral part of the wider pattern of intra-Asian trade development.
Subnational and sub-regional zones have increased the intraregional share of total trade in
goods and services and intraregional flows of FDI. Despite some failures, special
economic zones have largely met their objectives by attracting FDI, creating employment
and increasisng exports.
(d) Role of Small and Medium Sized Industries (SMIs)
96. SMIs constitute a rather dynamic force in the economic development; they provide a
sound market environment for the economic growth; reduce rural-urban disparities; and
can swiftly adapt relatively simple but advanced technology. A dynamic SMI sector helps
not only to generate employment but also to earn foreign exchange, upgrade the quality
of the labour force, diffuse technological know-how, and utilise rural savings, surplus
labour and local raw materials that may otherwise remain idle and unutilised. Small
enterprises provide a source and training ground for the development of entrepreneurship
and business management skills for medium and large undertakings.
97. Small and medium industries predominate output in a number of industrial sectors
in many Asian countries such as Bangladesh, India, Pakistan, China, Korea, Indonesia
and Philippines. Even they played a significant role in the economic development in
Japan and Singapore (Das 1996, ESCAPE 1996). They are mainly in the textiles,
garments, wood products, food processing, leather products, fabricated metals, machinery
and equipments, rubber and plastic products, pottery, printing and publishing. In 1990
they accounted for 95% of establishments in Bangladesh, 98% in Thailand, 93% in
Malaysia, 70% in Indonesia and 80% in the Philippines. In India the SSI sector accounts
for 40% of the total turnover in manufacturing and 35% total exports. In China, SMEs
accounted for 99% of the number of enterprises, 78% of employees, 64% of industrial
turnover, 52% of corporate profits and 52% of fixed assets held by industry in 1990. In
Japan, SMEs accounted for 99% of all business establishments, 74% of total work force,
52% of manufacturing exports, 62% of wholesale business sales and 7% of retail sales in
1991. In Taiwan, SMEs accounted for 90% of enterprises and 60% of exports in 1990.
98. On the other hand, there have been criticisms regarding the ability of small
industries to realise economies of scale in production, procurement and marketing. So,
they may experience larger unit costs despite low labour costs and advantages due to their
proximity to the local markets. In many sectors, small units exist on the strength of the
costly government support programmes in terms of reservation,price and purchase
preference, priority and concessonal lending and fiscal concessions.
(e) Role of Research and Development (R&D) Expenditure
99. There is a high degree of correlation between R&D expenditure and technological
capability. Product design and manufacturing techniques have become interlinked and
this interation has been fascilitated by computer-assisted techniques and technological
innovations in semiconductors, electronics and robotics. This process requires continuous
efforts in R&D in order to adapt to market demands by product innovations and
171
differentiations. TNCs engaging in intensive R&D activities acquires a technological
advantage over their competitors; and will be unwilling to share sophiscated production
techniques through licensing. Korea provides a good example that an appropriate degree
of interaction between industry and R&D institutions can generate tangible benefits to all
concerned, while at the same time provide a substantial boost to research and
development. Korea has also been successful in attaining reverse brain drain through the
development of high technology.
100. Although heavy investment has been made in technical education, equipment,
infrastucture and modern computers by many countries, it is observed that the technical
institutions are inclined to do basic research devoid of practical needs of the industry. For
example, India has virtually all basic, applied, hardware and software and R&D
institutions, some of which have achieved world-class standards. But, these institutions
failed to commercialise R&D activities, remain as isolated products of excellence without
direct link with production. Since 1993 Government had encouraged private sector
funding of research institutions by providing tax reliefs on R&D expenditure.
(f) Infrastructure and Human Resource Development
101. Foreign investors need adequate local support facilities including capital markets,
efficient physical, technological and human capital structure. The experiences of the East
Asian countries indicate that success in absorbing, deploying and deepening industrial
technology depends on efforts to develop local capabilities, particularly skill upgrading
and local R&D efforts, which often require government intervention to overcome market
failures in investment on R&D, and general and higher education. Active policies to
upgrade human capital formation through provision of a high quality educational and
training system are, therefore, priorities for the host countries.
102. Efficient supply of power, telecommunications and transport services are important
in creating cost competitiveness. In this regard, attracting foreign investment and private
management into infrastructure is particularly crucial. The legal/regulatory and
institutional framework should be developed to pave the way for foreign investment.
Improvements in rural infrastructure are also necessary to facilitate diversification and
intensification in farm production and the expansion of off-farm activities.
1.8 Regionalisation and FDI Complementarities
103. Regional economic cooperation facilitates the free flow of goods, services, capital
and labor across national boundaries and acts as an effective instrument for securing
efficiency in the use of resources and thereby enhancing growth of all member countries.
Intraregional capital flows, particularly FDI, have grown very rapidly over the past
decade. They also entailed an increasing flow of technology associated with individual
projects and embodied in the flow of capital equipment and intermediate inputs arising
from projects. Japan and the NIEs are the source of much of this intraregional FDI.
(a) ASEAN Experience
172
104. ASEAN covering most of the Southeast Asian economies, has evolved a
comprehensive regional trading arrangement, the ASEAN Free Trade Area, with an
explicit time table for eliminating tariffs within the group by the year 2003 and for
introducing its Common Effective Preferential Tariff (CEPT). Members have agreed to
eliminate quantitative restrictions and nontariff barriers on trade in products in the CEPT,
to cooperate in some areas of service trade and to explore cooperation in some non-
border issues such as harmonisation of standards, reciprocal recognition of tests and
certification of products, and removal of bariers to FDI. An important feature of this
Agreement is the intent to free the movement of capital and to increase investment,
industrial linkages and complementarity among members.
105. As regards industrial cooperation, some positive results have been achieved in the
ASEAN Brand-to-Brand complementation (BBC) in the automotive industry, which
envisage manufacturing different components of a vehicle in different countries. ASEAN
Industrial Cooperation (AICO) Scheme is the latest industrial cooperation program in the
ASEAN, under which two participating companies from two different ASEAN countries
should involve not only in the physical movements of goods but also in resource sharing
and industrial complementation. Outputs of these companies enjoy a preferential tariff
rate in the range of 0-5%.
106. To promote and protect intra-ASEAN investment, the ASEAN countries since
1976 have an Agreement providing most-favoured nation treatment to intra-ASEAN
investment. Other important ASEAN integration efforts related to their efforts towards
joint resource mobilisation and intra-ASEAN infrastructures. For example, the “ASEAN
Minerals Cooperation Plan” was designed to develop downstream industries. Similarly,
different ASEAN subsectoral programmes in energy cooperation promoted efficient use
of coal in the subregion. The gas pipeline projects across the member States also proved
useful for the subregion.
(b) SAARC Experience
107. ASEAN is far more open than SAARC due to long-followed policies of export
promotion and foreign investment. FDI inflows into ASEAN have been far more
significant and instrumental in raising the industrial linkages and complementarities in
the region. SAARC, on the other hand, has so far made little contribution to either
regionalism or globalisation. Only recently SAARC has included activities on trade and
investment as a part of its regional cooperation. There is, however, hope that as a first
step SAARC members, having agreed on a free trade area, will promote regional trade
cooperation as a building block towards globalisation. For its success, SAARC will need
to agree on a clear policy towards foreign investment as a vehicle of technology
upgradation and overall growth.
108. While there are only two formal regional trading arrangements in Asia (AFTA and
SAPTA, there are economic cooperation of a more informal nature among countries in
the region. These sub-regional economic zones (SREZs) are popularly referred to as
173
growth triangles, growth polygons, or simply growth areas. The main focus of the SREZs
is on the transnational movement of capital, labour, technology, and information and on
the inter-country provision of infrastructure rather than on trade in goods and services.
India, Thailand, Bangladesh and Sri Lanka, having a coastline on the Bay of Bengal, have
formed a regional trade group on June 6, 1997, called the Bangladesh, India, Sri Lanka,
Thailand Economic Cooperation (BIST-EC). Trade between these countries currently
totals only $1 billion and is expected to improve substantially in the next decade due to
predicted economic boom. Attemps are also being made to form a sub-regional economic
group through the Bangladesh, Bhutan, Nepal and India “growth quadrangle” (BBNI-
GQ).
(c) APEC Experience
109. The most comprehensive form of multi-government cooperation in terms of both

countries and the scope of issues addressed is the Asia Pacific Economic Cooperation
(APEC). This organisation was established in 1989 and currently has 18 member
countries in Asia and the Pacific including the Unites States. The APEC forum is of
special significance, as it is not founded on a formal agreement in accordance with the
GATT. The member countries have agreed by consensus on a program of action to
achieve a state of “free and open trade and investment” by the year 2010 for industrial
country members and 2020 for developing country members. Many of the members have
already made significant unilateral tariff reductions before the target date. There is an
agreement on a set of APEC Nonbinding Investment Principles for investment flows in
the region. These are intended to reduce restrictions on the international flow of portfolio
investments.
(d) ESCAP Experience
110. From its inception ESCAP has promoted economic co-operation in the Asian and
Pacific region. ESCAP conceived the integrated communications infrastructure for the
Asia and promoted regional cooperation in shipping, ports and technology tranfer.
Financial and developmental institutions like the the Asian Development Bank, Asian
Clearing House, The Asian and Pacific Centre for the Transfer of Technology, the Asian
Reinsurance Corporation etc. were established at the initiative of ESCAP in order to
promote economic co-operation in Asia.
111. Increasing levels of intraregional trade and investment are gradually shaping a truly
interdependent regional economy in the Asia-Pacific region, based on the linkages of
production structure and regional division of labour. They succeeded significantly in
utilising the technological revolution to enhance their national comparative and
competitive advantages. First, Japan and then the advanced countries of the region have
become critical growth centres supplying FDI and technology to other economies of the
region.
112. Although regional economic cooperation in ESCAP is being worked out at various
levels, actual progress is limited due to a number of reasons: (a) All the subregional
174
groups except ASEAN and the South Pacific Forum are about a decade old and it takes
much time to build up confidence and trust among the members. (b) Asian regional
groupings are only intercountry institutions and donot have supernational powers like the
EC. (c) There is hardly any linkage or dialouge among the regional or subregional
groups.
113. The opportunities for regional cooperation in the endogenous technological

capability-building of ESCAP member countries are enormous. While advanced
developing countries such as the NIEs have adequate domestic resources to attract
technology and capital and to expand their technological capacity, a number of
developing countries in the region (LDCs, island developing countries and disadvantaged
traditional economies) remain outside the mainstream of economic development
primarily because of poor, inappropriate or unfavourable local conditions in terms of
skills, market size, technological and physical infrastructure.
(e) Multilateral Agreement on Investment (MAI)
114. The vigorous growth of bilateral and regional investment agreements, the inclusion
of certain FDI-related issues in the Uruguay Round agreements and the beginning of
negotiations on a Multilateral Agreement on Investment in the OECD clearly indicate that
both the developed and developing countries are moving towards liberalised trade and
investment regime.
115. At the regional level, the mix of investment issues covered is broader than that
found at the bilateral level, and the operational approaches to deal with them are less
uniform. Most regional instruments are legally binding. Issues typically dealt with at the
regional level include the liberalisation of investment measures; standards of treatment;
protection of investments and disputes settlement; and issues related to the conduct of
foreign investors (e.g. illicit payments, restrictive business practices, disclosure of
information, environmental protection, and labour relations).
116. At the multilateral level, most agreements relate to sectoral or to specific issues.
Particularly important among them are services, performance requirements, intellectual
property rights, insurance, settlement of disputes, employment and labour relations,
restrictive business practices, competition policy, incentives and consumer protection. It
is at the multilateral level that concern for development is most apparent. This is
particularly so in the case of the GATS, TRIPS and TRIMs agreements, as well as the
(non-binding) Restrictive Business Practices Set, where special provisions are made that
explicitly recognise the needs of developing countries.
B. Recommendations
1.9 General recommendations
117. The SAARC is rich in natural resources which are not fully utilised. The region is
faced with the common problems of poverty and unemployment. Economic cooperation
175
in the region is an effective instrument for improving the welfare of the people. A
sustainable growth path for the region must be based on continued economic reforms,
dynamic capital market, human resource development and improvement in infrastructure
and environment.
118. As regards East Asia, future development strategy must focus on the development
of efficient infrastructure, flexible and responsive financial system and competent
management. As the region’s infrastructure needs are large, the private sector themselves
and through FDI will have to play an increasingly critical role in developing and
modernising infrastructure base. In turn, governments will need to estblish the
appropriate institutional, regulatory and legal frameworks to attract and secure such
investment.
1.11 Policies for promoting FDI-Technology-Growth Nexus
(a) Host Country Policies for FDI
119. For host countries, the policy agenda for increasing FDI inflows and for drawing
maximum beneits from them includes the following priorities: ensuring a stable
economic environment conducive to sustained economic growth, encouraging the
development and upgrading of local industrial and technological capabilities,
strengthening infrastructure and human resource development, and providing requisite
legal, regulatory and institutional set up. Those countries that have only recently been
open to FDI need to ensure that the “open door policy” is maintained and remains stable.
They should examine the possibility of a further liberalisation of FDI regimes; the
harmonisation of FDI and related policies on industry, trade and technology; and
improving the efficiency of their administrative set-up for investment approvals. To the
extent possible, host countries should seek to avoid competitive bidding, enhance
exchanges of information and promote transparency in order to reduce unnecesary
transactions costs.
120. All countries in the region should pay particular attention to the firms from
neighbouring countries, so as to capitalise the growing intra-regional investment. Special
attention needs to be given to small and medium-sized enterprises whose special needs -
dictated by their limited financial and managerial resources and insufficient information -
may call for incentives for the joint ventures among the small and medium-sized TNCs.
121. Successfully enticing one important TNC to locate in a country can trigger a chain
reaction that leads to substantial sequential and associated investment. The most obvious
targets are firms already established in a country. Governments can strive to encourage
sequential invest-ment (including reinvested earnings), which can provide positive
demonstration effects for potential new investors: a satisfied foreign investor is the best
commercial ambassador a country can have. Policy makers should be concerned when
foreign investors leave the host country due to deteriorating local conditions. Emphasis
on after-investment and investment-facilitation services for current investors is therefore
crucial. This may involve the creation of joint committees consisting of representatives
176
of government, foreign affiliates and local employees to avoid conflicts and to resolve
problems that can lead to relocation. Also, an Ombudsperson can be appointed to handle
complaints about unreasonable delays and undue demands by government officials on
business people.
122. Free, promt and unrestricted transfers in any freely usable currency should be
permitted for all funds related to an investment. The bottom line to a business is the
ability to make profits and to distribute funds to partners and shareholders.
Expropriations should only occur in accodance with international law standards and be
subject to due process. An expropriation should be for public purpose and
nondiscriminatory, and promt, adequate and effective compensation must be paid.
123. Firms must be confident that they can obtain a fair hearing in the event of a
dispute, and must have reciprocal ability to seek international arbitration. Investors
should have full access to the local court system, but also have the choice to take the host
parties directly to third party international binding arbitration to settle investment
disputes.
124. One of the most important determinants of a foreign affiliate’s impact on the
technology and skills in a host country is the extent of its forward and backward linkages
with local firms. Foreign-direct-investment policy should therefore have a trade
component as TNCs are interested in whether a country is suitable for inclusion in their
intra-firm division of labour. At the same time, trade policy should have an FDI
component, to take advantage of the market access that TNC systems provide. Generally,
FDI should not be encouraged either entirely for import substitution (e.g. tariff
incentives) or completely for export-promotion (e.g. export-processing zones). Since FDI
is a package, it should be treated as such. The composition of the package that can be
attracted very much depends on a country’s characteristics, including its level of
development.
125. The developing countries should focus more intensely on the goverance issues and
accelerate efforts aimed at improving the efficiency of the public sector enterprises in the
provision and quality of services, cost recovery, regulatory oversight, and in the
establishment of a facilitating business environment. They should also undertake bold
reforms at the local governments and micro levels to promote efficient decentalisation for
timely implementation of infrastructure and social sector programs.
126. The legal framework governing labor markets must be reformed to institute a
market-based bargaining process that is free from interference by the government or trade
unions, and a system of severance liabilities that conform free market conditions and
developing country norms. De-politicisation of industrial relations will benefit both the
workers, businesses, and the economy by eliminating the costly economy-wide
agitations, with positive impact on private investment.
(b) Host Country Policies for Portfolio Investment
177
127. The strengthening of local capital and stock markets is essential for the
development and broadening of the domestic investor base and the establishment of a
healthy private sector. In this respect, privatization has a role to play in broadening the
investment base. A prudent regulatory framework alongwith transparency and efficiency
of price dissemination are also necessary to ensure investors’ confidence in the stock
market.
128. Among the main issues to be tackled for BOT financing schemes in infrastructure
are the need to restructure some utility sectors, the need for an improved regulatory
environment, and measures to reduce demand risks and foreign exchange risks.
(c) Home Country Policies
129. With domestic outward FDI policies liberalised, developed home countries must
supplement their domestic policies with international instruments aimed at protecting and
facilitating outward FDI. They should improve FDI liberalisation standards generally and
encourage level playing field among themselves.
130. Few developing countries and economies in transition have paid due attention to
outward FDI policies; typically these are subsumed under general capital-control policies
which, in turn, are quite restrictive. There is a need to liberalise further capital markets
and foreign exchange rules and regulations so as to move towards full convertibility on
capital account.
131. As regards portfolio investment, the enormous potential represented by the pool of
savings held by institutional investors in the OECD countries may increasingly seek
investment outlets other than those offered by the mature markets. However, home
country regulations concerning outward portolio investments can be a major constraint on
outward portfolio investment. In most developed countries, savings institutions such as
insurance companies and pension funds face ceilings on the share of foreign assets in
their portfolio and are usually subject to prudent investment and diversification norms. As
the investment managers become more familiar with emerging markets, a relaxation of
home country policies concerning portfolios of institutional investors could lead to a
multiple increase of portfolio investment to developing countries.
(d) The Role of Special Economic Zones
132. Deveoping countries must focus on export-promotion and development of EPZs or

special economic zones. Success of EPZs depends on a favourable investment climate,
skilled labour force and an active local business community and government’s support for
the EPZs, while failures are attributable to poor locations, inadequate infrastructure,
excessive costs and mismanagement. EPZs of developing countries should try to avoid
stiff competition among themselves to offer increasingly generous incentives for
attracting foreign investors, as this will erode their net benefits in the medium and long
term (UNCTAD 1993). The long-term viability of EPZs also requires that their operations
178
should be properly integrated with the overall economic and industrial development
strategy of the country.
(e) Role of Small and Medium Sized Industries (SMIs)
133. A wide range of opportunities can be seized by small-scale, labour-intensive

industries. It is particularly so in the Asian region where horizontal division of labour
through trade and joint-venture projects are increasing sharply. For example, the latest
venture by Japanese automakers in South-east Asia suggests that specialised components
can be produced at factories in several countries for use in a single, shared final product.
134. The following measures need to be given priority for strengthening the SMI sector
:
* It is necessary to fascilitate the transfer of technology to the SMEs by suitable

arrangements such as regional information networks and provision of timely and
adequate finance to SMEs.
* Adequate backward and forward linkages need to be established between small and
large units in terms of sub-contracting, production sharing, manufacture of parts and
components etc.
* Suitable measures may be taken to enhance the access of the SMI sector to
information particularly relating to external markets, foreign investment and better
technology.
* Vertical expansion of the SMEs may be limited due to reservation of items and limits
on investment for the SMEs. A review of the reservation policy and investment limits is
necessary to fascilitate capacity expansion, technology upgradation and economies of
scale.
* Much of the existing growth of SMEs has taken place in and around the metropolitan
areas, but the balanced regional growth requires that the process of industrialisation needs
to be extended to the countryside. In this respect, the experience of China in setting up
Township Enterprises on a large scale may be particularly relevant for other developing
countries.
* SMEs are most vulnerable to trade protectionism. Undesirable tariffs and non-tariff
restrictions on their products must be removed to enhance the export potentials of SMEs.
(f) Role of R&D Expenditures
135. The R&D expenditure in many developing countries like India (0.9% of GNP),
Pakistan (0.6%), Philippines (0.7%) and Thailand (0.5% of GNP) are considerably lower
than that in USA (2.7%), United Kingdom (2.3%), Japan (3%), Germany (2.9%) and
South Korea (2.8%). Asian developing countries must allocate more resources on R&D
179
and encourage private sector funding of research institutions engaged in R&D. For
effective role of R&D in the generation, development, adaption, assimilation and
diffusion of industrial technologies, public research institutions must try to commercialise
R&D activities with necessary linkages with the private sector and production activities.
(g) Infratructure and Human Resource Development
136. Efficient physical infrastructure and human capital are critical overheads that
investors seek. For the more dynamic traded goods and services, telecommunications are
the most important fascilitator of FDI, and technological and organisational innovations
drive FDI into those countries which have trained and skilled workforce and fairly high
educatonal standards. This points to the overriding importance of developing countries to
invest more in the development of human resources, infrastructure and services. It also
highlights the risk of being marginalised for the least developed countries with a low
level of skilled labour force and infrastructural constraints.
137. The existence of a dynamic local business sector creates a supportive environment
through efficient networks of local suppliers, service firms, consultants, partners or
competitors. It is, therefore, necessary to concentrate efforts on the development of local
entrepreneurship. Equally important is the availability of high quality
telecommunications and transport systems, energy supply and other utilities.
(h) Legal and Institutional Set-up
138. Many of the difficulties faced by governments in handling foreign investment, and
by the foreign investors setting up in a host country, derive from the absence of a clear
civil, commercial and criminal legal system. Given a set of laws, it is esential that foreign
investors are treated equally with domestic investors. Not only is this a moral issue, but
there are strong practical arguments against giving foreign investors privileges that
domestic firms do not enjoy (and vice versa). Domestic firms will launder money to
become foreign investors if this will give them subsidies that they cannot otherwise
receive. Chinese publicly owned enterprises use transfer pricing at other than arms’
length to become foreign investors in China, or they form joint ventures within foreign
firms to benefit from subsidies to foreign investors. Giving entrepreneurs of Indian origin
special privileges by India are also inequitable and inefficient. Continued reforms will
attract the worthwhile investors among them without incentives.
139. In open economies, such as Singapore, Hong Kong or Mauritius, only minimal
special foreign investment laws and regulations are necessary and administrative costs
are negligible. Most developing countries like India are faced with a transition period.
The experience of countries such as Indonesia, Malaysia, Taiwan and Thailand suggests
that the transition can be managed well. The faster an economy is reformed, the easier the
management of foreign investment. Regulations can be simple and their administration
transparent.
(i) Fiscal and monetary incentives
180
140. The competition among the host countries to attract FDI has intensified the use of
incentives to such an extent that the situation is often referred as an “investment war”.
Host countries get trapped in the “prisoner’s dilemma” leading to competitive bidding in
which all participants are left worse off than the situation of no bidding. It will be
beneficial for the host countries to arrive at a harmonisation of policies, to ensure more
transparency on FDI regime, and to exchange information about their regulatory regime
and other FDI-related policies and to share their experiences on the impact of FDI on the
costs and benefits to the economy.
141. An important reason favouring FDI or joint venture with TNCs/MNCs is to

improve upon economies of scale and take advantage of specialised skills across
countries. There is a growing trend to network and form joint ventures such that different
stages of production are carried out in different countries. There is also the need to merge
and become competitive vis-a-vis larger MNCs position. Pooling of R&D resources is
another reason for a group of large companies joining hands. Another reason for shift in
FDI through MNCs is the emergence of new technologies like computer software, CNC
machinery and new materials. All of these technologies are easily available with the firms
in advanced countries and cannot be obtained through convensional licensing.
142. Embodied technology transfer through capital goods imports will be the most
important source of technology and the cheapest way of technology acquisition for any
Asian developing country. Japan initially acquired foreign technologies by reversing the
engineering process (disassembling and reassembling imported machinery). The
engineers and technicians began with the end-product and worked back to find the
components, their inter-relationships, and the technologies. This mode of technology
acquisition required established engineering capabilities. Licensing agreements are the
most effective way to suit local needs and conditions. But, this mode of transfer is costly
and involves a process that is more complex and time consuming than other modes.
Turnkey projects are the easiest way to establish new factories, but rarely transfer needed
technologies unless the recipient makes conscious efforts to acquire them.
143. As far as technology acquisition and assimilation are concerned, developing

countries can learn much from the Korean experiences. The Korean lessons indicate that
technology can be upgraded only through conscious and steady efforts to improve
available technologies, and that the most effective way to achieve such progress is
through interaction with a competitive market. The Korean experience also indicates that
technologies are best learnt by workers in the workplace.
1.12 Technology Development and Advances in New Technologies
(a) Industrial technology development
181
144. If the industrial or technological catch-up process follows the so-called “flying
geese” pattern of development, with Japan leading the way in Asia followed by the NIEs,
ASEAN and South Asia, it is essential to establish a regional mechanism which will
facilitate the division of labor in transferring appropriate technologies. For example,
Japanese technologies may be modified to fit into the needs of the NIEs, which in turn,
may be modified to suit the needs of ASEAN and South Asian countries.
145. The best incentive framework for ITD is to provide constant competition to
enterprises in a stable macroeconomic environment. Full exposure to world competition
may, however, have to be tempered by the fact that a new entrant has to incur the costs
and risks of gaining technological knowledge and experience, when its competitors in
more advanced countries have already gone through the learning process. This may be a
case for temporaty and limited infant industry protection. But, it has to be carefully
designed, sparingly granted, strictly monitored, and offset by measures to force firms to
aim for world standards.
146. The supply of human capital, technical support services, foreign technology, S&T
infrastructure and finance can suffer from market failures. They therefore require
government intervention and policy support, and their most effective use calls for
selectivity and coherence. Much of ITD support work must focus on market friendly or
functional interventions to strengthen the infrastructure, improve its relations with
enterprises, help small and medium-sized firms with their special information and support
needs, augment the supply of finance for technology investments, and build up requisite
skill needs for efficient industrial operations and growth.
(b) New Technology and Applications
147. Countries like Korea, China and India stand to gain substantially by revitalising
their economies to become internationally competitive not only in new technologies but
also in many other industries with the use of time and material saving production
processes like CNC/CAD/CAM integrated manufacturing, flexible manufacturing
systems, just in time production systems etc. Likewise, the bio-technology has a wide
range of application ranging from food processing, pharmaceuticals, chemicals,
agriculture and allied sectors, mining, soil fertility etc.
148. The high technologies are R&D intensive and their development requires large
risky investments, and it is non-viable for developing countries to make an effort to
become technologically self-reliant in all high technology sectors. A developing country
like India which is not in a position to undertake organised R&D on a high scale through
its own efforts has two options: either to license international R&D collaborations for
upgrading its technological design capability or to allow foreign direct investment and
joint ventures for state of art technology. In the Indian context the second option has been
largely accepted.
149. Being knowledge intensive, it appears logical to have great scope for internatiional
collaborations. But, it is unlikely that advanced countries will be willing to collaborate to
182
transfer new technologies. An alternative option is to allow university departments and
research institutes to take up sub-contracted work for the multinationals/ transnational
corporations who have not only resources but also the marketing network. The
establishment of a regional technology network system will no doubt accelerate
technological capabilities and industrial development in these countries. This is an area
where private sector efforts should be supported and coordinated jointly by the public
sector and regional development organisations.
1.14 FDI and development of infrastructure and services
150. The financial requirements for infrastructure are vast. India needs about $400
billion during 1997-2006 for its infrastructure development. Present growth rates in East
Asia suggest that such investment requirements will be $1.4 trillion during the next
decade; for China alone, the figure is over $700 billion. In Latin America, requirements
are about $600-800 billion (World Bank, 1995b). Another projection made by the Asian
Development Bank indicates that investment demand for infrastructure in Asia (excluding
Japan and the NIEs) will amount to about $1 trillion in 1994-2000. This includes $300-
$350 billion of investment for the power sector alone to the year 2000, $300-$350 billion
for transportation, $150 billion for telecommunications, and $80-$100 billion for water
supply and sanitation. The investment for infrastructure is projected to increase from 5
per cent of GNP per annum to 7 percent of GNP.
151. The private sector participation in management, financing or owership will in most
cases be needed to ensure a commercial orientation in infrastructure. Public-private
partnership has promise in financing new capacity. Guarantees from host governments,
multilateral institutions and export credit agencies play an important and legal role to
mitigate the policy uncertainties and commercial and foreign exchange risks inherent in
large-scale infrastructure financing. But, these should not be taken as substitutes for
correcting sectoral distortions or removal of market imperfections.
152. The lessons of experience in East Asia indicate that South Asian countries are
required to have priority attention in the following five areas while formulating country
strategies to enhance private participation in the provision of infrastructure:
* Overall country objectives, strategy and priorities;

* Reform of policy, legal and regulatory framework;
* Facilitation and increased transparency of government decisions
* Unbundling and mitigation of risks; and
* Mobilisation of private term lending.
1.14 Regionalisation and FDI Complementarities
153. Major benefits will come from removing restrictions that impede flows of people,
capital, and goods, and that segment geographically contiguous markets. In addition,
there is considerable untapped potential for regional cooperation in power, transportation,
and distribution ( particularly petroleum products), which would reduce the costs of
183
doing business. There will be an important pull effect on growth throughout Asia if the
remaining impediments to local and foreign investors are removed. Such regioinal
cooperation and integration should be seen not as a substitute for opening up to the global
economy, but as a way of assisting firms to connect to global markets at lower cost.
154. Three lessons can be drawn from past developments on FDI policies. First is that
progress in the development of international investment rules is linked to the convergence
of rules adopted by individual countries. Second is that an approach to FDI issues that
takes into account the common advantage, is more likely to gain widespread acceptance
and to be more effective. Third is that in a rapidly globalising world economy, the list of
substantive issues entering international FDI discussions is becoming increasingly
broader and complex and include the entire range of questions concerning factor
mobility.
(a) Technical Assistance
155. Industrial and technology development depends crucially on the development of

basic infrastructure. Multilateral agencies including the International Development
Association (IDA) can help the developing countries by providing financial and technical
support and investment guarantees for the development of infrastructure and human
resources. They can also play a more catalytic role in mobilising funds from a wide range
of private sources using all the available means.
156. Multilateral financial and development institutions and bilateral donors have
played an important role by providing financial and technical assistance to the countries
of South Asia in the areas of improved education, health services and family planning.
External assistance should further be increased and continued to be provided on
concessional terms, given the long term nature of investment in human capital and its link
to poverty alleviation, skill formation and enhancement of industrial productivity and
efficiency.
157. The World Bank, IFC, ADB, ESCAP, UNIDO and UNCTAD are engaged in the
provision of technical assistance, consultancy and advisory services with regard to the
development of the private sector, human resoure development, and promotion of non-
debt-creating financial flows, and FDI in particular. Although the experience with
technical assistance received from these institutions have been found to be very valuable,
there is scope for improvement in the following fields:
* Promotion of regional cooperation in human resource development, R&D, S&T

development, technology blending, use of information technology, and computer training
and facilities.
* Studies on public sector enterprises reforms, privatisation and industrial restructuring

to promote industrial relocation and diversification in accordance wth the changing
comparative advantages of the countries and regions.
184
* Consultancy and training aimed at technology upgrading and skill improvement for
the growth and globalisation of SMEs with special attention to entrepreneurs from rural
areas, ethnic minority areas, economically backward areas, ethnic and backward classes,
and women and young entrepreneurs.
* The promotional efforts in favour of SMEs cannot be entirey undertaken by

government agencies alone. Multilateral agencies must accord a much greater role to
private sector business confederations, chambers of commerce and industry, and relevant
non-governmental organisations (NGOs) to enable them to provide SMEs with training,
consultancy and information services.
* Regional technical assistance programmes on harmonisation of national and regional

policies and plans for private sector development and foreign investment.
* Promotion of technology management, evaluation, assessment and enterprises

cooperation for the blending of indigenous technology and imported technology.
* Improvement of the institutional machinery, administrative and legal framework with

a view to facilitating foriegn investment flows and improving the data base on FDI and
portfolio flows.
* Advisory services for developing countries to strengthen capital markets and to attract
foreign portfolio investment.
* Technical support for developing countries and countries in transition to upgrade their
institutional capacity to identify, design, negotiate, and implement schemes on
BOT/BOO/BOLT.
* Promotion of a regional collective R&D efforts in specific industries which have

general applicability in most countries (like textiles, automobiles, electronics and
informatics etc.).
(b) Regional Cooperation
158. Asian countries are going through a phase of economic liberalisation which
provides a solid foundation for the success of intra- and inter-regional cooperation. They
need to make greater efforts to create a more liberal trading and investment environment
for reduction of wide disparities in the levels of income and market size, and to have
cost-sharing and distribution of benefits. The economic exchange and cooperation among
the Asian economies can be strengthened by the following measures:
(a) At the regional level, since the FDI has increasingly become market driven, host
country would increase their locational attraction if closer linkages are established with
neighbouring countries in order to generate larger markets and complementary locational
advantages.
185
(b) Since almost all countries in the Asian and Pacific region are trying to attract foreign
direct invstment, a lot of competitive overbidding and unnecessary loss of resources
could be avoided through some harmonisaion of policies of different governments at
national, bilateral, regional and global levels.
(c) Instead of competing for foreign capital, the countries should undertake appropriate
policy reforms which will not only encourage more savings and investment internally but
also help the return of flight capital to the Asian region.
(d) At the regional level, countries should cooperate with one another to modernise
their financial systems to cope with the increase in trade and cross-border capital flows.
They should try their best to facilitate intraregional funding and to reduce the impact of
any global credit crunch.
(e) Another aspect of regional cooperation that is of growing importance is the sharing
of information. Regional cooperation can reduce the transaction costs of gathering
information, and through economies of scale, can reduce the research and development
costs. In this respect, the Regional Investment Information and Promotion Service for
Asia and the Pacific (RIIPS) and the Asia Pacific Centre for Transfer of Technology
(APCTT) have made significant contributions. But, there is scope for improvement in
their databanks and regional information networks on FDI opportunities in the region,
technological breakthroughs in industries, TNCs operations, profiles of FDI and
investment laws in various countries.
(f) National governments as well as regional and interregional organisations must

facilitate contacts, cooperation and mutually business relations among enterprises and
entrepreneurs for building up internal strength of industries.
(g) The sheer magnitude for investment required for technological R&D needs
subregional pooling of limited resources (financial, physical and human) to obtain the
best possible leverage.
(h) It may be desirable to establish a regional investment guarantee facility. A major

problem in attracting investment funds to the developing countries is the perceived risk of
confiscation, civil strife, and political turmoil.
(i) For the least developed countries which lack the capacity to undertake
comprehensive efforts to develop local capacity, there is an urgent need for more active
support by the donor community in such areas as strengthening the private sector and
local entreneurship, building institutional capacity, improving physical infrastructure and
enhancing human resource development.
(j) At a broader level, the Asian Development Bank, can play a complementary role in
enhancing regional cooperation to attract more private international capital into the Asian
and Pacific region. The Asian Development Bank should expand its catalytic role in
186
private sector financing which started in 1987 and should also augment its resources for
the Asian Infrastructure Fund.
(k) Other multilateral financial institutions will also have to strenthen their catalytic
role through co-financing and guarantee with a view to encouraging participation of
private capital in the development process, particularly in South Asia.
(c) Regional Cooperation in SAARC
159. South Asia has much to learn from the experience of successful regional
endeavours such as ASEAN, EU, NAFTA and APEC. A new concept of open regionalism
which seeks not only to reduce intra-regional barriers in economic interaction, but also to
lower external barriers which are not part of the cooperation arrangement has emerged in
the post-GATT world trade scenario.
160. In order that SAPTA becomes an effective instrument for intra-SAARC trade and
investment expansion, many supporting steps are required. These include steeper
reduction in the trade barriers than that provided under the WTO agreement, increase in
supply capabilities for additional exports, expansion of investment flows in the region,
and replacement of product by product approach by across the board tariff and non-tariff
concessions. SAARC countries will need to agree on a clear policy towards foreign
investment as a vehicle of technology upgradation and overall growth.
161. Several areas of cooperation which might have an marginal impact on India, the
major SAARC partner, could have far-reaching effects on the smaller partners such as
the Maldives, Nepal, Bhutan and Bangladesh - e.g. regional promotion of tourism,
establishment of linkages in the service and infrastructural sectors, a regional clearing
union arrangement and joint research and development schemes. Also, rather than
competing in certain commodities such as rubber, jute,tea, and textiles, the SAARC
members may consider cooperation in the production, marketing and transportation of
these commodities. Similarly, there would be an advantage in intra-regional transfer of
technologies through the creation of regional joint ventures and joint or sub-regional
training schemes. Confederation of Indian Industries (CII) has identified many other
areas of South Asian Sectoral Cooperation which are summarised in Table 1.14.
162. SAPTA alone is unlikely to improve intra-regional trade unless other schemes of
regional cooperation are introduced, aimed at creating greater complementation among
the economies of the region (e.g.investment and production partnerships, such as
regional/ bilateral joint ventures), and creating efficient infrastructural linkages,
especially in terms of transport, communications and information exchange.
163. In order to accelerate the pace of regional trade liberalisation, it might be

preferable to adopt two tracts - one being the region-wide slower track, and the other, a
series of bilateral agreements between the more advanced countries within the group.
There are already some bilateral initiatives between India and Pakistan, India and Sri
Lanka, India and Bangladesh and India and Nepal. Sectoral cooperation such as a
SAARC Textile Council can also boost economic and trade relations within the region.
Textile is a priority sector as developing countries will no longer benefit from preferential
187
quotas when the Multi-Fibre Arrangement is disbanded in the year 2005, and it is an
important component of SAARC country exports. In order to rise to the challenge of
open competition, SAARC producers need to pool their design, marketing and
technological resources.
164. With rapid growth in the ASEAN economies, wages and labour costs have been
rising considerably. SAARC countries need to adopt policies which would favour the
relocation of some labour-intensive production from ASEAN and NIEs to SAARC
countries as the NIEs and Japan and even some ASEAN countries such as Malaysia and
Thailand have become important sources of FDI. All these Southeast Asian countries
have a common interest with SAARC countries in creating trade-generating joint
ventures. India became an ASEAN ‘dialogue partner’ in 1992-93 and a ‘sectoral dialogue
partner’ in 1996, the ASEAN countries view India as long-term potential market. India
can exploit this opportunity by facilitating and encouraging private sector contacts with
ASEAN entrepreneurs.
Asian Development Bank (1995). Asia : Development Experience and Agenda, ADB
Theme Paper 3, Asia Deelopment Bank, Manila.
______(1997a). Asian Development Outlook 1997 and 1998, Oxford University Press,
Hong Kong.
______(1997b). Emerging Asia - Changes and Challenges, Asian Development Bank,

Manila.
Brooks, D.H. and Leuterio, E.E. (1997). Natural resources, economic structure and
Asian infrastructure, in Investing in Asia, ed. C.P. Oman et. el. 1997, OECD.
Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for
investment, in Investing in Asia,ed.C.P.Oman et.el.1997.
Chia, Siow Yue; and Tsao Yuan Lee (1994). Economic Zones in Southeast Asia, in Asia
Pacific Regionalisation: Readings in International Economic Relations, ed. R. Garnaut
and P. Drysdale, Pymble, Haeper Educational Publishers.
Das, Tarun (1993a). Structural Reforms and Stabilisation Policies in India - Rationale
and Medium Term Outlook, in Economic Liberalisation and its Impact, ed. S.P.Gupta,
pp.20-56, MacMillan India Ltd, New Delhi. 1993.
______(1993b). Macro-economic Framework, Special Economic Zones and Foreign

Investment in India, Ad-Hoc Workong Group on Investment and Financial Flows,
UNCTAD,Geneva, pp.1-75,June 1993.
188
______(1996). Policies and Strategies for Promoting Private Sector’s Role in Industrial
Report prepared for the Industry and Technology Division, ESCAP, United Nations,
Bangkok; and published by the United Nations, New York, 1996.
ESCAP (1993). Economic and Social Survey of Asia and Pacific 1992, Part 2,
Expansion of Investment and Intraregional Trade as a vehicle for Enhancing Regional
Economic Co-operation and Development in Asia and Pacific, United Nations, New
York.
______(1994) Proceedings of the Regional Seminar on Investment Promotion and

Enhancement of the Role of the Private Sector in Asia and the Pacific, United Nations,
New York.
______(1996) Policies and Strategies for Promoting Private Sector’s Role in Industrial
U.N.,New York.
______(1997) Economic and Social Survey of Asia and the Pacific 1997- Asia and the
Pacific into the Twenty First Century: Development Challenges and Opportunities, U.N,
New York.
Estanislao, Jesus (1977). The institutional environment for investments in Chin and
ASEAN: current situation and trends, in Investing in Asia, ed. C.P. Oman et. el. 1997,
OECD.
International Monetary Fund (1997). World Economic Outlook - Globalisation,

Opportunities and Challenges, May 1997, Washington, D.C.
Lall, Sanjaya (1993). Policies for Building Technological Capabilities : Lessons from
Asian Experience, Asian Development Review, Vol.11, No.2, pp.72-103, Asian
Oman, C.P., Brooks, D.H. and Foy, C. (1997). Investing in Asia, Development Centre,
The Organisation for Economic Co-operation and Development (OECD).
Research and Information System (RIS) for the Non-Aligned and Other Developing
Countries (1995). SAARC Survey of Development and Cooperation 1995, New Delhi.
UNCTAD (1992). World Investment Report 1992: Transnational Corporations as

Engine of Growth, United Nations, Geneva.
______(1993a). World Investment Report 1993: Transnational Corporations and

Integrated International Production, U.N.
189
______(1993b). Report of the Ad Hoc Working Group on Investment and Financial
Flows; Non-Debt-creating Finance for Development; No. TD/B/40(1)/12 and
TD/B/WG.1/8, July 1993, U.N., Geneva.
______(1994). World Investment Report 1994: Transnational Corporations,

Employment and Workplace, United Nations, Geneva.
______(1995). World Investment Report 1995: Transnational Corporations and

Competitiveness, United Nations, New York.
______(1996). World Investment Report : Investment, Trade and International Policy

Arrangements, United Nations, Geneva.
World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy,
Oxford University Press.
______(1994a). World Development Report - Infrastructure for Development,

Washington, D.C.
______(1997a). Global Development Finance, Washington, D.C.
______(1997b). World Development Report 1997, Washington, D.C.
Xiaoqiang, Zhang (1997). Investment in China’s future, in Investing in Asia, ed. C.P.
Oman et. el. 1997, OECD.
Yamazama, Ippie (1997). APEC and investment, in Investing in Asia, ed. C.P. Oman et.
el. 1997, OECD.
190

FDI and Growth Vol-1, UN-ESCAP, by Tarun Das

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FDI and Growth Vol-1, UN-ESCAP, by Tarun Das

Uploaded by

Copyright:

Available Formats

PROMOTING INDUSTRIAL INVESTMENT-TECHNOLOGY TRANSFER-

DR. TARUN DAS

PROMOTING INDUSTRIAL INVESTMENT-TECHNOLOGY TRANSFER-

DR. TARUN DAS

1 Introduction and Overview

1.1 Objectives and Scope of the Study

2 Foreign Investment-Technological Transfer-

2.1 Long term capital flows to developing countries

3 Geographical and Sectoral Distribution of FDI

3.4 FDI in selected countries in Asia

4 Different Modes of Foreign Investment

4.1 Alternative modes of capital transfer

5 Foreign Investment and Technology Transfer

5.1 Indicators of technological capability

6 Foreign Investment and Development

6.1 Foreign investment and services

7 Policies and Strategies for Promoting Foreign

7.2 Macro-economic policies

8 Policies and Strategies for Foreign Investment:

9 Regional Cooperation in Promoting Foreign Investment-

9.1 Regional economic zones in Asia and Pacific

1 Executive Summary and Recommendations

1.1 Basic Characteristics of Asian Economies

1.1 Basic indicators of selected Asian countries: 1995

1.2 Indicators of infrastructure development in

1.3 Economic structure of selected Asian countries in 1995

3.1A Gross portfolio flows to developing countries by region

3.2 Top 10 home countries for FDI flows to selected

3.3 The importance of FDI in China: 1991-1995

3.16 FDI inflows into Korea in terms of equity ratios

6.3 Privatisation revenues in 1988-1995

6.4 Privatisation revenues by sector: 1988-1995

9.1 Intraregional FDI stock among selected economies in

ADB Asian Development Bank

ODM Own - Design - Manufacture

Million = 1000 thousand

1 INTRODUCTION AND OVERVIEW

1.1 Objectives and Scope of the Study

The present study is a part of a larger Project on Regional Dialogue on Promoting

(a) Identification and analysis of specific forms of inter-industry and intra-industry

(d) Suggest sub-regional industrial complementation measures to overcome the constraint

Developing Economies in the South-East Asia comprising Cambodia, Indonesia, Lao

1.2 An Overview of the Study

Chapter 2 provides an overview of the foreign investment - technological transfer -

Chapter 8 describes some country experiences with respect to deregulation, liberalisation

Chapter 9 reviews existing regional cooperation for promoting foreign investment -

1.3 Profile of Sample Countries

East Asia and South-East Asia

Another serious problem is the historical inadequacy of infrastructure investment relative

2 FOREIGN INVESTMENT - TECHNOLOGICAL TRANSFER - GROWTH

(c) Capital market finance for infrastructure projects is an important component of

2.2 Foreign Direct Investment and Global Integration

Global foreign-direct-investment (FDI) inflows increased by 40 percent in 1995 to reach

Natural resource-seeking FDI, which consists of investment in areas such as mining,

In response to technological and competitive pressures, companies from developed and

2.3 Foreign Direct Investment - Growth Nexus

Foreign direct investment has brought substantial gains to recipient economies,

FDI promotes technological changes in developing countries in a number of ways.It has a

The top 100 TNCs in the World

The top 50 TNCs from Developing Countries

Contribution of FDI in ASEAN Economic Progress

2.4 Foreign Investment - Trade Nexus

Intra-firm trade across national boundaries is an essential feature of all international