Flows of foreign direct investment (FDI) into the five countries most seriously affected by the Asian crisis (Indonesia, Korea, Malaysia, Philippines, and Thailand) declined by about $2 billion in 1998, according to updated information gathered by the United Nations Conference on Trade and Development (UNCTAD) (see also IMF Survey, November 16, 1998, page 358). Within the group, however, individual countries turned in strikingly different performances (see table).
Flows into Korea and Thailand almost doubled over the 1997 level, while flows into the Philippines remained stable. Indonesia and Malaysia, hardest hit by the Asian crisis, also fared less well than their neighbors in FDI terms. In a press release issued on March 4, UNCTAD reported that flows to Malaysia had declined from $5.1 billion in 1997 to $3.6 billion in 1998, while Indonesia had suffered divestment for the first time since 1974. Total inflows to the region in 1998 amounted to $15.4 billion, substantially more than the average of flows recorded during 1991-95 ($10.8 billion) and only $2.1 billion less than the peak of $17.5 billion recorded in 1996 and 1997.
In reporting its findings, UNCTAD discussed the incidence of cross-border mergers and acquisitions—used by transnational corporations for investing abroad—to gauge the level of FDI inflows to the five countries. Cross-border mergers and acquisitions in Indonesia, Malaysia, and the Philippines declined in 1998, but rose in Korea and Thailand. The remarkable increase in Korea, from $1.4 billion in 1997 to $6.3 billion in 1998, represented, among other things, substantial changes in regulations related to mergers and acquisitions. The UNCTAD press release noted, however, that because mergers and acquisitions can be financed domestically or from international capital markets, their relationship to FDI inflows is not straightforward.
FDI flows to the five countries as a group were more resilient than either foreign bank lending or foreign portfolio equity investment before and during the financial crisis. UNCTAD offered a number of explanations for this: (1) corporate networks of integrated international production that already existed in Asia allowed some transnational corporations to off set declining domestic sales through increased exports spurred by devaluations; (2) some transnational corporations took advantage of cheaper asset prices; (3) in some cases, parent firms increased investment stakes in their existing affiliates, either to buy some or all shares of distressed joint-venture partners or to alleviate affiliates’ financial difficulties in the wake of the crisis; and (4) some transnational corporations increased their capital investments in response to the relaxation of FDI regimes that occurred as a result of the crisis.
|Country||Annual average 1991-95||1996||1997||1998|
Estimates as of February 26, 1999.
Estimates as of February 26, 1999.
Transnational corporations, encouraged by other recent events, have remained active in four of the five most affected Asian countries. In October 1998, the Association of Southeast Asian Nations (ASEAN), to which four of the five crisis countries belong, concluded an agreement to create a competitive investment area within ASEAN in the hope of attracting investment to the region. The agreement creates a more liberal and transparent investment environment and allows a freer flow of capital, skilled labor and professionals, and technology among the members. ASEAN has also granted special incentives and privileges to investors.
UNCTAD projected that FDI flows to the region would be about the same in 1999 as during the rest of the decade, but noted that individual country performances would be likely to vary. The investment climate in Indonesia, it predicted, would probably require more time to recover. Overall, UNCTAD concluded that measures to address the impact of the crisis would continue to be necessary.