III.

THE ROLE OF FOREIGN CAPITAL IN INDUSTRIAL

AND INFRASTRUCTURE DEVELOPMENT

A. Private capital flows to developing countries

Developing countries account for 85 per cent of the world’s population but only 7.6 per
cent of global private capital flows, 1.8 per cent of global capital market flows, 19 per cent of
global FDI, 22.5 per cent of global output and one third of global trade. These shares had
generally increasing trends until the East Asian crisis in 1997, followed by declining trends in
1998-99 and a modest increase in 2000 (see table 3. 1).
Aggregate net capital flows to developing countries increased about three-fold during the
1990s, from US$ 123 billion in 1991 to US$ 358 billion in 2000 (see table 3.1). During the 1990s
the continuous fall of official development finance was overcompensated by an increasing trend
of private capital flows, including foreign investment. Long-term private capital flows to
developing countries increased almost five times from US$ 62 billion in 1991 to US$ 300 billion
in 1997 and the share of developing countries in global private capital flows increased from 11.8
per cent to 14.4 per cent during the same period. However, since the financial crises triggered in
some East Asian countries in 1997, developing countries' use of external private capital declined
as a consequence of reduced demand for external capital in some countries and constrained supply
for other countries owing to uncertainty and risk. Following their collapse during the financial
crisis period of 1998-1999, private capital flows to developing countries resumed growth in 2000
and reached US$ 319 billion (amounting to 7.6 per cent of global private capital flows) in the
wake of strong economic recovery in crisis affected countries, but they failed to keep up with
global output and trade and constituted a significantly lower share of developing countries' GDP
and exports than those in 1996-1997.
During the 1990s there was a significant change in the composition of external financial
flows to the developing countries. There was an increasing share of private capital, from 50 per
cent in 1991 to 89 per cent in 2000, and a corresponding declining share of official development
finance from 50 per cent to only 11 per cent over the period (see table 3.1). Within private capital,
flows of foreign investment comprising FDI and portfolio investment increased by more than six-
and-half times, surpassing other types of capital flows and constituting more than 80 per cent of
total private capital flows to developing countries in 2000 compared with 35 per cent in 1991. 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.
With regard to regional distribution, South Asia had a share of 9 per cent and East Asia
and the Pacific had a share of 28 per cent of total private finance to the developing economies in
1990 (see table 3.2). During the financial crisis the share of East Asia and the Pacific in private
capital flows dropped to 25 per cent in 1999 but recovered quickly and improved to 32 per cent in
2000.

49
 Table 3. 1. Total net long-term capital flows to developing countries in the 1990s
(billions of US$)
Type of flow 1991 1995 1996 1997 1998 1999 2000

Aggregate net capital flows 122.9 261.2 311.2 342.5 346.1 301.0 357.8
Official development finance 60.9 55.1 31.9 42.8 54.6 45.3 38.6
Total private flows 62.0 206.1 279.3 299.7 291.5 255.7 319.2
Capital markets 26.3 99.1 147.8 127.1 103.5 33.7 79.2
Debt flows 18.7 63.0 98.6 96.9 87.9 -0.8 31.3
Commercial banks 5.0 30.5 33.7 45.2 50.0 -24.6 0.7
Bonds 10.9 30.8 62.5 49.0 40.9 25.4 30.3
Others 2.8 1.7 2.4 2.7 -3.0 -1.6 0.3
Equity flows 7.6 36.1 49.2 30.2 15.6 34.5 47.9
Foreign direct investment 35.7 107.0 131.5 172.6 188.0 222.0 240.0
Ratios to total capital flows percentage
Aggregate net capital flows 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Official development finance 49.6 21.1 10.3 12.5 15.8 15.0 10.8
Total private flows 50.4 78.9 89.7 87.5 84.2 85.0 89.2
Capital markets 21.4 37.9 47.5 37.1 29.9 11.2 22.1
Debt flows 15.2 24.1 31.7 28.3 25.4 -0.3 8.7
Commercial banks 4.1 11.7 10.8 13.2 14.4 -8.2 0.2
Bonds 8.9 11.8 20.1 14.3 11.8 8.4 8.5
Others 2.3 0.7 0.8 0.8 -0.9 -0.5 0.1
Equity flows 6.2 13.8 15.8 8.8 4.5 11.5 13.4
Foreign direct investment 29.0 41.0 42.3 50.4 54.3 73.8 67.1
Developing country shares percentage
In global private capital flows 11.8 12.4 13.2 14.4 9.9 7.6 7.6
In global capital market flows 3.3 5.1 6.2 4.3 3.4 0.9 1.8
In global FDI flows 22.3 32.3 34.9 36.5 27.1 20.7 18.9
In global output 19.8 20.7 22.1 23.2 21.6 21.7 22.5
In global trade 26.5 29.5 31.3 32.4 30.7 30.7 33.4
In global population 84.0 84.6 84.7 84.9 85.0 85.1 85.2

Memo items billions of US$

Global capital market flows 794 1 928 2 403 2 929 3 033 3 910 4 324
Global FDI 160 331 377 473 693 1 075 1 271

Share in total developing country FDI flows percentage

Middle income countries 87.3 87.0 86.5 88.8 92.4 94.7 93.2
Low income countries 12.7 13.0 13.5 11.2 7.6 5.3 6.8

Ratio of FDI inflows to GDP percentage

Middle income countries 0.9 1.9 2.1 2.7 3.1 3.2 2.8
Low income countries 0.5 1.4 1.7 1.8 1.4 0.9 1.1

Sources: Global Development Finance 2001 (Washington, D.C., World Bank, 2001).
World Investment Report 2001 (Geneva, UNCTAD, 2001).
Note: Developing countries are defined as low-income countries with GNP per capita no higher than US$ 755 in 1999 and
middle income countries with per capita income between US$ 756 and US$ 9,265 in 1999.

50
 Table 3.2. Private capital flows to developing countries by country groups,
1970-2000
Country group or country 1970 1980 1990 1999 2000

Net private capital flows (billions of US$)

All developing countries 10.8 74.5 99.3 264.9 294.8
East Asia and the Pacific 2.2 11.2 27.7 65.3 92.9
Europe and Central Asia 0.6 7.1 12.5 52.5 54.9
Latin America and Caribbean 4.2 29.9 21.8 116.5 102.4
Middle East and North Africa 1.1 8.6 10.1 2.5 9.3
South Asia 1.4 6.5 9.2 7.2 16.5
Sub-Saharan Africa 1.3 11.4 18.0 21.0 19.1
Percentage shares in total private capital flows
All developing countries 100 100 100 100 100
East Asia and the Pacific 20 15 28 25 32
Europe and Central Asia 6 10 13 20 19
Latin America and Caribbean 39 40 22 44 35
Middle East and North Africa 10 12 10 1 3
South Asia 13 9 9 3 6
Sub-Saharan Africa 12 15 18 2 6
FDI inflows (billions of US$)
All developing countries 2.0 4.4 24.3 222.0 240.0
East Asia and the Pacific 0.3 1.3 11.1 92.0 120.2
Europe and Central Asia 0.1 0.0 1.1 26.5 28.8
Latin America and Caribbean 1.1 6.1 8.2 91.0 76.0
Middle East and North Africa 0.3 -3.3 2.5 1.5 4.5
South Asia 0.1 0.2 0.5 3.1 3.2
Sub-Saharan Africa 0.1 0.1 0.9 7.9 7.3
Percentage shares in total FDI flows
All developing countries 100 100 100 100 100
East Asia and the Pacific 15 30 46 41 50
Europe and Central Asia 5 0 5 12 12
Latin America and Caribbean 55 139 34 41 32
Middle East and North Africa 15 -75 10 1 2
South Asia 5 5 2 1 1
Sub-Saharan Africa 5 2 4 4 3
Portfolio inflows (billions of US$)
All developing countries 0.0 0.0 3.7 34.5 47.8
East Asia and the Pacific 0.0 0.0 2.3 21.1 28.6
Europe and Central Asia 0.0 0.0 0.2 3.5 5.5
Latin America and Caribbean 0.0 0.0 1.1 3.9 9.9
Middle East and North Africa 0.0 0.0 0.0 0.7 0.9
South Asia 0.0 0.0 0.1 1.3 2.1
Sub-Saharan Africa 0.0 0.0 0.0 3.9 0.8
Percentage shares in total portfolio flows
All developing countries 100 100 100
East Asia and the Pacific 62 61 60
Europe and Central Asia 5 10 12
Latin America and Caribbean 30 11 21
Middle East and North Africa 0 2 2
South Asia 3 4 4
Sub-Saharan Africa 0 11 2
Source: Global Development Finance 2001 (Washington, D.C., World Bank, 2001).
Note: See table 3.1.

51
 Table 3.3. Composition of net resource flows to developing countries by regions,
1972-1998
(percentage)
All East Asia Latin Europe South Sub Middle East
developing and America and Asia Saharan And
Sources of flows
countries Pacific and Central Africa North Africa
Caribbean Asia
Net long-term resource flows 89 88 92 94 98 90 89
Private flows 55 60 70 55 29 27 42
FDI 20 31 29 15 9 15 15
Bank loans 20 15 28 22 10 4 6
Portfolio flows 8 10 8 10 9 2 9
Other flows 7 4 5 8 1 6 12
Official flows 34 28 22 39 69 63 47
Net short term flows 11 12 8 6 2 10 11
Uses of net flows
Net external finance 54 45 66 67 74 68 25
Current account deficit 34 22 47 66 65 67 -27
Change in reserves 20 23 19 1 9 1 52
Capital outflows and errors and 46 55 34 33 26 32 75
omissions
Source: Global Development Finance 2001 (Washington, D.C., World Bank, 2001).
Note: See table 3.1.

An analysis of the composition of external capital in different regions for a long period
during 1972-1998 (given in table 3.3) indicates the following main observations:

• Long-term capital flows constituted almost 90 per cent or more of total capital flows in
all regions.
• The share of short-term capital was highest at 12 per cent in East Asia, which was
affected most by the financial crisis in the late 1990s. The share of long-term capital
was highest at 98 per cent in South Asia, which was relatively unaffected by the
contagion effects of the East Asian crisis during 1997-1999.
• The share of FDI was highest at 31 per cent in East Asia and the Pacific.
• The share of commercial bank loans was highest at 28 per cent in Latin America and
Caribbean followed by Europe and Central Asia (22 per cent) and East Asia and the
Pacific (15 per cent).
• The share of portfolio investment was highest at 10 per cent in East Asia and the
Pacific.
• The share of official flows was highest at 69 per cent in South Asia.

An analysis of trends of private capital flows to developing countries and to the Asian
region in the 1990s leads to the following key conclusions:
• Along with the rise of capital inflows to developing countries, capital outflows also
increased during the period. Thus, despite substantial increase in capital inflows, the
contribution of foreign capital to consumption and investment fell sharply.

52
 • Capital outflows from developing countries have different causes and implications.
They are a matter of concern where they represent capital flight because of a weak
investment climate or where tax incentives induce “round tripping” of capital.
However, outflows also represent integration into the global economy and hedging of
investment risks.
• The worldwide boom in cross-border capital flows has been directed towards
industrial economies, particularly the United States, reflecting optimism about
technological progress. The share of developing countries declined sharply in these
flows after the crises. The increased concentration of flows within a few developing
countries emphasizes the importance of a hospitable environment climate in attracting
foreign investment.
• Countries with sound macroeconomic management and well-organized money and
capital markets received large private capital inflows.
• There is reduced market liquidity since the crises and continued investor aversion to
risk. Demand for external capital remains limited in the East Asian crisis countries,
where unutilized industrial capacity and the slow pace of corporate restructuring put
constraints on investment.
• 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, a
diversified investor base in the case of bonds and a reduction in the domestic cost of
capital in the case of equity portfolio flows.
• Capital market finance for privatization and infrastructure projects is an important
component of international flows.
• Among categories of private flows, commercial bank lending has shown a declining
trend, while bond issues increased significantly during the 1990s.
• FDI flows to developing countries remained resilient throughout the financial crisis
and reached a broader range of countries, although they have started to level off after
their rapid growth in the first half of the 1990s.

B. Relation between capital flows, economic growth and industrial progress

Private capital was implicated in the severe crisis of the late 1990s and some critics have
raised questions about its efficacy for stimulating long-term growth. Global Development Finance
2001, published by the World Bank, critically examines how private capital flows contribute to
domestic investment and productivity. The study concludes that private capital flows bear a
significant positive correlation with long-term growth and in general tends to reinforce existing
growth dynamics generated by domestic efforts and initiatives. Main observations of the study are
summarized below:
• On average, private capital inflows raise domestic investment almost one for one. The
impact is strongest for those countries, which are least integrated with international
financial markets and where FDI augments domestic savings and finances new
investment opportunities. The association between greater FDI and domestic
investment is thus strong in Africa, even stronger than that in East Asia and the Pacific
or in Latin America and Caribbean. For developing countries in general, however, the

53
 relationship has weakened since the 1980s because of a greater increase in mergers
and acquisitions relative to green-field investments.
• The potential for productivity growth through private capital flows has probably
increased because of the growing importance of knowledge as a production input.
Both benefits are available mainly to countries that have a strong capacity to absorb
flows. In East Asia, especially in Malaysia, the absorptive capacity is high, with a
consequent positive relationship with productivity and growth. In Taiwan Province of
China, FDI has been associated with higher productivity in foreign-owned firms and
with positive spillovers to domestically-owned firms (Chuang and Lin 1999). In
China, the benefits of FDI are amplified under conditions of good infrastructure and
superior human capital (Mody and Wang, 1997).
• Capital flow volatility significantly dampens economic growth. Indeed, the crisis-
ridden years of the 1990s were associated with enormous shocks to output and
consumption in some countries in East Asia. Even so, many countries appear to be
increasingly able to manage volatility and in the aftermath of the crises growth rates
have rebounded quickly in many affected countries. Adjustment was promoted by
greater exchange rate flexibility, more diversified industrial structure and better risk-
management techniques.
• There has been “no environmental race to the bottom”. FDI to developing countries is
not attracted by lower environmental standards. Countries experiencing rapid growth
of FDI have also steadily improved their environment, because communities in these
countries place increasing value on protection of the environment and foreign
investors also have a reputation to maintain it.

C. Foreign direct investment - technology - growth nexus of industrialization

Among private capital flows, FDI has emerged as the most important source of external
finance for overall development, and in particular in industrialization, and its share in total private
capital flows to developing countries increased from 29 per cent in 1991 to 60 per cent in 2000,
with a peak level of 70 per cent in 1999. Like trade, FDI is an important channel of globalization
and technology transfer. FDI adds to the capital stock of the host country in many ways, such as
greenfield investment establishing a new business, an ownership switching through mergers and
acquisitions, or raising equity in joint ventures. In most developed countries, FDI is ownership
switching, whereas it is mostly greenfield FDI or joint ventures in Asian developing countries.
However, privatisation-related FDI has also recently become an important form of ownership
switching FDI for Asian countries, although FDI to Asian developing countries accounted for
about one third of total FDI flows to developing countries in recent years
(see table 3.2).
Many developing countries liberalized their industrial, trade and investment regimes by
adopting most-favoured nation treatment and a level playing field for the foreign investors.
Unlike other capital flows, FDI is a package which contains not only capital but also
management, technology, technical skill and marketing networks in international trade and
commerce. Experience in developing countries suggests that unbundling of the FDI package by
borrowing capital from international banks, purchasing technology through licenses and
negotiating management agreements, is less efficient in terms of productivity than the FDI
package which brings capital, technology, management and international marketing together.

54
 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 the 1980s market-seeking FDI was largely
confined to the manufacturing sector, motivated by tariff jumping to take advantage of the
regulated market, but owing to recent trends of economic reforms and privatization of
infrastructure, sectors such as power, telecommunications and financial services are attracting
increasing amounts of foreign investment. Industrial restructuring through mergers and
acquisitions 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 owing 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 ethnically
related countries.
Host countries can be classified according to four stages of development: factor-driven
(attracting FDI in processing, textiles and minerals exploitation), investment driven (heavy and
chemical industries, power, construction, transport and telecommunications), innovation-driven
(electronics, information technology, biotechnology) and wealth-driven (attracting FDI to meet
domestic demand in construction, real estate, urban development and share markets and outward
FDI flows).
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 multi-plant production in different countries. Technological
advances lowered transport 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.
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.
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 United States foreign affiliates nearly tripled in the past two
decades. This ratio more than doubled and reached 39 per cent in Latin America, while the ratio
remained high in Asia, ranging from 30 per cent in the Republic of Korea to more than 80 per
cent in Malaysia. The export propensities of Japanese affiliates also have been increasing, most
notably in East Asia, where their exports accounted for 34 per cent of total sales in 1995.
Japanese affiliates in China exported 53 per cent of their sales in 1995, up from less than 10 per
cent in 1986, directing 43 per cent of their sales to home markets in Japan.
The significance of FDI in domestic capital formation can be judged from the ratio of
inward FDI flows in gross fixed capital formation, which reached the peak level of 24.5 per cent
in China in 1994, 26 per cent in Malaysia in 1992, 47.1 per cent in Singapore in 1990, 37 per cent

55
in Fiji in 1990, 61.3 per cent in Vanuatu in 1994 and 96 per cent in the Pacific least developed
countries in 1994. The share of FDI stock in GDP was as high as 98 per cent in Singapore, 65 per
cent in Malaysia, 46 per cent in Indonesia, 31 per cent in China, 256 per cent in Hong Kong,
China and 30 per cent in Asia and the Pacific in 2000 (see table 3.8).
FDI flows as a share of GDP also indicates the importance of FDI in overall economic
development. The ratio of FDI inflows to GDP for middle-income countries increased
continuously from 0.9 per cent in 1991 to 3.2 per cent in 1999 before declining to 2.8 per cent in
2000, and that for low-income countries increased from 0.5 per cent in 1990 to 1.8 per cent in
1997, after which it showed a declining trend and reached 1.1 per cent in 2000 (see table 3. 1).
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 the 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, marketing networks and managerial 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
organizational systems and methods are valuable assets.

D. Regional distribution of foreign direct investment

Global inflows of FDI increased by 18 per cent in 2000 to reach a record level at
US$ 1,271 billion, mainly owing to a significant increase in cross-border mergers and acquisitions
by almost 50 per cent to US$ 1,100 billion in 2000. The rapid expansion of FDI makes it the main
force in globalization. A total of 63,000 transnational corporations with over 800,000 foreign
affiliates drive FDI and increasingly shape trade patterns, accounting for two thirds of world
trade, but FDI is unevenly distributed. The 30 largest host countries account for 95 per cent of
global FDI flows and 90 per cent of FDI stocks, while 30 home countries, mainly industrialized
countries, generate around 99 per cent of outward FDI flows and stocks.

Table 3.4. Foreign direct investment inflows by regions, 1998-2001

FDI inflows
Percentage share
Regions (billions of US$)
1998 1999 2000 1998 1999 2000

World 693 1 075 1 271 100 100 100

Developed countries 483 830 1 005 69.7 77.2 79.1

Developing countries 188 222 240 27.1 20.7 18.9

Africa 8 9 8 1.2 0.8 0.6
Latin America and the Caribbean 83 110 86 12.0 10.2 6.8
Asia and the Pacific 96 100 144 13.9 9.3 11.3
South, East and South-East Asia 21 96 137 3.0 8.9 10.8
Central and Eastern Europe 22 25 27 3.2 2.3 2.1
Source: UNCTAD, The World Investment Report 2001: Promising Linkages.

Nearly all of the 10 largest home and host economies were developed, except China and
Hong Kong, China. The developed countries accounted for more than three fourths of global FDI

56
in 2000 with over US$ 1,000 billion, an increase of 21 per cent over 1999. FDI flows to least
developed countries increased somewhat, but they constituted only 0.3 per cent of global FDI
flows.
FDI flows to developing countries have grown rapidly in the 1990s and reached US$ 173
billion in 1997, compared with US$ 36 billion in 1991. The share of developing countries in
global FDI flows increased from 22.3 per cent in 1991 to 36.5 per cent in 1997. Thereafter, FDI
flows to developing countries showed some deceleration during 1998-1999 owing to the financial
crisis in East Asia and reached US$ 240 billion in 2000, accounting for 19 per cent of global FDI
flows.
With regard to sources, more than 80 per cent 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 the 1990s. The main
suppliers of FDI to Latin America remain the 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 TNCs from the “triad” in building up regionally integrated networks of affiliates. In 2000 the
triad of the European Union, the United States and Japan accounted for 71 per cent of inward
flows and 82 per cent of outward flows, mainly because of cross-border mergers and acquisitions.
The United Kingdom and France have now replaced the United States as the principal outward
investors. The United States is still the leading recipient of FDI, although its inflows and outflows
dropped by 5 per cent and 2 per cent respectively in 2000.

Table 3.5. Ten largest home and host economies of foreign direct investment in 2000

Ten largest home economies Ten largest host economies

Billions of % in Billions of % in
Economies Economies
US$ global FDI US$ global FDI
1. United Kingdom 250 19.7 1. United States 281 22.1
2. France 173 13.6 2. Germany 176 13.9
3. United States 139 10.9 3. United Kingdom 130 10.2
4. Belgium, Luxembourg 83 6.5 4. Belgium, Luxembourg 87 6.8
5. Netherlands 73 5.7 5. Hong Kong, China 64 5.0
6. Hong Kong, China 63 5.0 6. Canada 63 5.0
7. Spain 54 4.3 7. Netherlands 55 4.3
8. Germany 49 3.9 8. France 44 3.5
9. Canada 44 3.5 9. China 41 3.2
10. Switzerland 40 3.1 10. Spain 37 2.9
Total 968 76.2 Total 978 76.9

Source: UNCTAD, The World Investment Report 2001: Promising Linkages.

Asia and the Pacific is the new growth centre of the global economy with China; Hong
Kong, China; the Republic of Korea and Taiwan Province of China as the brightest spot of FDI in
the developing world. FDI flows to and from the developing countries of Asia were at record
levels in 2000 as the region recovered from the crisis in 1998-1999. Inflows to the region
increased by 44 per cent and reached US$ 144 billion in 2000, accounting for 21 per cent of
global FDI flows and 60 per cent of FDI flows to the developing countries, compared with US$

57
20 billion in 1990 accounting for only 10 per cent of global FDI flows. Outflows from the Asian
region increased by 140 per cent to US$ 85 billion in 2000. East and South-East Asia alone
received US$ 134 billion in 2000, while South Asia received only US$ 3 billion in 2000, mainly
owing to sustained inflows into India. The overwhelming majority of inflows were to Hong Kong,
China, rising 160 per cent to US$ 64.4 billion, and China, US$ 40.8 billion. One of the reasons
that Hong Kong, China overtook China as the single largest recipient of inflows in Asia was that
FDI flows entered Hong Kong, China as “parking funds” for the purpose of being invested in
China, in anticipation of China’s expected entry into WTO. The increase of FDI inflows to China
partly reflects major cross-border mergers and acquisitions in telecommunications, which alone
accounted for nearly one third of total FDI inflows to Hong Kong, China. Other large recipients
of FDI in Asia in 2000 were the Republic of Korea (US$ 10.2 billion), Singapore (US$ 6.4
billion) and Malaysia (US$ 5.5 billion).

Table 3.6. Ratio of foreign direct investment inflows to world foreign direct investment
in selected Asian economies
(percentage)
Economies 1990 1994 1995 1996 1997 1998 1999 2000

India 0.08 0.52 0.65 0.79 0.77 0.38 0.20 0.24

China 1.71 13.33 10.91 11.37 9.53 7.06 3.60 3.21
Hong Kong, China 0.85 0.67 2.71 3.00 2.31 1.57 1.52 5.07
Republic of Korea 0.39 0.32 0.54 0.65 0.61 0.80 0.87 0.80
Malaysia 1.14 1.71 1.27 1.42 1.10 0.58 0.14 0.43
Philippines 0.26 0.63 0.45 0.43 0.19 0.27 0.05 0.12
Singapore 2.74 1.68 2.17 2.38 1.71 0.79 0.65 0.35
Thailand 1.20 0.53 0.63 0.66 0.80 1.08 0.58 0.38

Asian developing economies themselves are increasingly becoming outward investors,

reflected in the liberalization of their outward FDI regimes and provision of incentives for such
investments. In 2000, the region, with US$ 85 billion FDI outflows, accounted for 86 per cent of
all developing country outflows, with Hong Kong, China the largest outward investor with FDI
outflows of US$ 64 billion. 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 per cent of their FDI outflows to Asia; some four fifths of
Hong Kong, China’s outward FDI went to China; a good part of Singapore’s outward FDI was
distributed to other ASEAN countries and China and 60 per cent of China’s outward FDI
remained in the region.
Surveys of FDI in Asian developing countries highlight the following general features:
(a) The geographic distribution of FDI favours neighbouring and ethnically and
culturally related countries;
(b) FDI tends to concentrate in industries using standardized 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 to limit their capital commitments and to
obtain local managerial and organizational skills or access to markets of their
partners.

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 Table 3.7. Foreign direct investment inflows as percentages of fixed capital formation,
1985-1999

Regions/economies 1984-1989 1990 1994 1997 1998 1999

South, East, South-East Asia 2.6 3.7 8.2 0.1 10.4 11.2
Asia and the Pacific 2.3 3.1 7.2 9.3 9.5 9.6

Developing countries 2.8 3.2 7.5 10.9 11.7 13.8

World 3.1 4.0 3.9 7.5 10.9 16.3

China 1.8 2.6 24.5 14.6 12.9 11.3
Hong Kong, China 12.2 8.5 8.2 19.8 29.9 60.2
India 0.2 0.2 1.1 3.8 2.9 2.4
Indonesia 1.6 2.8 3.6 7.7 -1.6 -11.0
Republic of Korea 1.4 0.8 0.6 1.7 5.7 9.3
Malaysia 8.8 23.8 16.1 15.1 13.9 20.1
Philippines 5.1 5.2 9.6 6.2 12.7 5.1
Singapore 28.3 47.1 23.5 35.3 20.6 26.1
Taiwan Province of China 3.3 3.8 3.5 3.4 - 4.4
Thailand 4.4 7.1 1.1 7.2 20.7 13.7
Sources: World Investment Report 1996 (Geneva, UNCTAD).
World Investment Report 2001 (Geneva, UNCTAD).
Note: A hyphen (-) indicates that the item is not applicable.

Table 3.8. Foreign direct investment stock as percentages of gross domestic product,
1985-1999

Regions/economies 1980 1985 1990 1995 1999

South, East, South-East Asia 23.4 21.2 18.4 19.7 34.4

Asia and the Pacific 2.9 17.5 15.5 17.3 30.2
Developing countries 4.3 14.1 13.4 15.6 28.0

World 6.0 7.8 9.2 10.3 17.3

China 3.1 3.4 7.0 19.6 30.9
Hong Kong, China 487.0 413.6 217.5 135.4 255.6
India 0.7 0.5 0.6 1.7 3.6
Indonesia 14.2 28.6 34.0 25.0 46.2
Republic of Korea 1.8 2.3 2.0 2.1 7.9
Malaysia 21.1 23.7 24.1 32.9 65.3
Philippines 3.9 8.5 7.4 8.2 14.9
Singapore 52.9 73.6 76.3 70.0 97.5
Taiwan Province of China 5.8 4.7 6.1 6.0 8.0
Thailand 3.0 5.1 9.6 10.4 17.5
Sources: World Investment Report 2001 (Geneva, UNCTAD).

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 E. Sectoral distribution of foreign direct investment

In recent years services have increased their share to more than one third of total FDI
flows, while the share of manufacturing declined to one-half, with the remainder accounted for by
agriculture and mining. Within services financial services, information technology and
telecommunications are emerging as major FDI recipients, with trade, construction and tourism
also becoming important. Within manufacturing the trend was to move from lower-technology or
labour-intensive industries (food, textiles, paper and printing, rubber, plastics) to knowledge-
based and higher-technology industries (such as electronics, including computer hardware,
chemicals and pharmaceuticals).
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, such as Indonesia and Viet Nam, also attracted FDI into the
primary sector (mainly oil production).
The size and dynamism of developing Asia made it a favourable base for TNCs to service
rapidly expanding markets or to tap 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 infrastructure sectors,
giving rise to large investment opportunities for TNCs. Privatization, although lagging behind
other regions, is showing signs of taking off, particularly in the manufacturing, mining, power,
telecommunications, petroleum and financial sectors. European union TNCs that neglected Asia
in the 1980s are making large-scale investments in Asian developing economies to take advantage
of new opportunities in power, petrochemicals and automobiles.
TNCs in retailing and other trading firms also played an important role in building up
export capabilities of several Asian economies. In addition to linking local producers to foreign
customers, they deepened the ties of those economies to the international 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.
The sectoral composition of FDI has changed significantly in China during the 1990s.
Inflows in the 1990s were mostly concentrated in capital-intensive and technology-intensive
productive compared with dominance of labour-intensive sectors in the 1980s. Today, the world’s
leading manufacturers of computers, electronics, telecommunications equipment,
pharmaceuticals, petrochemicals and power generating equipment have extended their production
networks in China. Most recently R&D activities have also expanded. The trend is giving way to
the so-called flying-geese formation, with China at the low end of the value chain comprising
technology transfer from newly industrializing economies to China (UNCTAD, 2001).
The prominence of FDI in technology intensive industries is also manifested in China’s
foreign trade. Foreign affiliates’ exports of new and high-tech products increased from US$ 4.5
billion in 1996 to US$ 29.8 billion in 2000, accounting for one fourth of all exports by foreign
affiliates and 81 per cent of China’s total high-tech exports. In parallel with these trends, the share
of FDI flows to traditional industries such as footwear, travel goods, toys, bicycles and electrical
appliances has been declining. Driven by the country’s excess productive capacity and
encouraged by their increased export competitiveness, Chinese firms in these industries are now
expanding to set up processing or assembly plants overseas.

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