Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1
Japanese and Chinese FDI in South Asia: An Investigation Munim Kumar Barai and Badar Alam Iqbal Japan and China are now major investing countries in the world. In 2013, they accounted for about 16.8 percent of world’s outward FDI and 6.1 percent of outstanding investment stocks. While investing abroad, they seem to have a different focus in selecting economies. In essence, the Japanese investors invest distinctively more in the developed economies while the Chinese investors invest mainly in the developing countries. This paper, however, compares the Chinese and Japanese investment in the SAARC regions and finds that the investors from these two countries are yet to channel any significant FDI in South Asian economies, quite contrary to the investment positions they have taken in the economies of East and Southeast Asia. Again, between the two, Japan has much higher investment stocks than China’s in South Asia though the Chinese investment in the region is growing fast. They, however, slightly differ in their investment projects and forms of businesses. Thus, the challenges to their investments also differ. Nevertheless, the paper argues that both Japan and China should increase their FDI presence in South Asia as most of the countries follow a different growth model and the region has potentials to grow more quickly than many other regions in the world.
Keywords: Japan, China, South Asia, FDI, Investment Destination
Introduction South Asia1 as a geographical entity is much easier to define than drawing a common understanding on the economies as a whole. That is because of the fact that they still encompass mixed economic system that comprises economic sectors from their rudimentary to most modern levels. The primary sector of these economies is still mostly in the traditional form. Their manufacturing and service sectors are mainly based on factordriven competitiveness, which is the primary stage of industrial competitiveness (WEF, 2013). In spite of that, a small number of their industries has graduated to efficiency-driven level of competitiveness as well. However, the maturity of a particular economy is reflected by the level of innovation-driven competitiveness the industrial base has achieved. Arguably, there are some pockets of industrial development in the region
_____________________________________________________________ Munim K Barai, PhD, Professor, Ritsumeikan Asia Pacific University, 1-1 Jumajibaru, BeppuOita 874-8577, Japan, Email:
[email protected], Phone: +81-80-42860267 Badar Alam Iqbal, PhD, Senior Professor, Aligarh Muslim University, India.
In our discussion, we accept the SAARC eight members as the constituents of South Asia. They are Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. For relatively insignificant flows of FDI, some of the economies may get relatively fewer references in the discussion. 1
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 that promise a climb on the ladder of competitiveness of that level. There is, however, one commonality among these economies; they all are striving for foreign direct investments (FDI) to grow and develop. Not only that, most of the countries in South Asia adopted the market led growth approach in the 1980s and 1990s by liberalizing and globalizing (L&G) their economies. In the L&G process, they dedicated FDI a major role to play. Paradoxically, despite dysfunctional political management of some of the countries in South Asia, the efforts to open up their markets seem to have paid dividends. During the last decade, the South Asian economies have attained an impressive, though varied and sometimes less consistent, growth. In fact, this uneven growth in these economies may be because of their differences in political, institutional, and regulatory environment that affect the business climate and scope of opportunities differently (Hallward-Driemeier, 2007). But we should not miss the point that, presently, South Asia has become an economy of more than US$ 2.5 trillion as India forming the gravity center and the region now houses some of the fastest growing economies in the world. As we know, in the aftermath of the 2008 financial crisis, Indian growth dampened a bit but, since this time, it seems to have bounced back. In addition, Bangladesh, Sri Lanka, Bhutan have been growing at 6 percent or more annually for quite some time. Perhaps, this may bring into fore the question whether foreign investment has affected the growth of respective economies in South Asia or not. But this paper has a different objective to examine the flow of FDI to South Asia mainly from two economic giants, viz. China and Japan. Incidentally, they are number one and two economies in Asia. However, following their investment history, we find that Japan has become a big investor from the 1980s in Asia, North America, and Europe while China is a recent addition to the league of major investors and now occupies the third position in the world after the United States and Japan. Awkwardly, the records of their investments in South Asia is not impressive and yet to reach the level of high expectations. Without doubt, there are internal weaknesses of these economies. But if we look at the history of Japanese investment abroad, the total Japanese
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 FDI stocks South Asia look to be dismal and could have been higher. On the other hand, the Chinese trade and investment links with South Asia was relatively low in the 1990s but have been growing since the mid-2000s. This has led to a growing Chinese financial flows to the region in tandem, and the Chinese portfolio of investment in South Asia is increasing at a relatively quicker pace in the recent years. To make the point, this is a descriptive study using the secondary sources of information to analyze and compare the Japanese and Chinese investments in the eight SAARC economies. Though their levels of investment beg further pace, Japan and subsequently China have emerged as important sources of foreign investment in the region. The paper has used various descriptive tools used to analyze and explain investment data for a period of 1990 to 2012 when the South Asian economies have gathered a relatively higher pace in economic growth. The paper has four more parts. Part two reviews some of the existing literature that has tried to explain various determinants of FDI in different regions and economies in the world including South Asia. Part three describes the state of Japanese and Chinese investments particularly in South Asia. Part four makes the effort to analyze critically and compare their investments in the region. Part five concludes the paper.
Literature Review Flow of investments across borders is explained by two streams of literature. One of the streams identifies two sets of motives for investing enterprises or multinational corporations (MNCs): they are cost-related and revenue-related motives (Madura, 2010). This literature argues that either the reduction of costs or an increase of revenue or achieving both of them simultaneously becomes the real motive for MNCs moves to locate the production bases and FDI. On the other hand, a majority of the second stream of literature tries to find the attractiveness of destinations, may be a particular country or
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 region, for FDI flows. The attractiveness depends on a variety of factors including size and prospects of the economy under-investment consideration, condition of its physical infrastructure, socio-political environment, technological readiness, quality of governance, functioning of FDI policies and so on. But in the ultimate analysis, both the streams seem to converge with each other to complete the same mission: finding the suitability of the investment in the host nations. In the brief review of the literature, this paper is more focused to the second stream that identifies different variables or determinants that help attract FDI in an economy. A United Nations Committee on Trade and Development (UNCTAD, 2006) study identifies five sets of variables or determinants of FDI: policy variables (trade policy, tax policy, macroeconomic policy and privatization policy), business variables (business conditions and investment benefits), market-related economic determinants (market structure, market size and market growth), resource-related economic determinants (technological base, labor cost and raw materials) and efficiency related economic determinants (productivity of labor, transport and communication costs) and so on. Unsurprisingly, empirical studies devoted to finding the association between FDI flows and their determinants do not form uniformity in findings all the time. The same variables may have worked differently in different economies. In the regional context, we find studies of Amal et al. (2010) for eight Latin American countries, Ho and Rashid (2011) for Association of Southeast Asian Nations (ASEAN) and Bhavan et al. (2011) for selected South Asian economies that try to find the determinants of FDI. Of them, Bhavan et al. (2011) apply the Arellano-Bond dynamic panel estimation method to study the determinants and growth effect of FDI on selected South Asian economies. The study finds that while population, trade openness, and infrastructure are the significant positive factors in attracting FDI in South Asia, the geographical distance affects FDI inflows negatively, and human capital bears no significance in FDI flows. An earlier study of Sahoo (2006) identified that market size, infrastructure, and the availability of cheap labor were the significant positive determinants of FDI inflows in South Asia. 4
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Unfortunately, no study seems available that looks into the Japanese and Chinese FDI in South Asia on a comparative basis. Iqbal (1997) made an effort to find out why Japanese FDI was shy to go to South Asian economies. He identified that a significant chunk of the Japanese FDI went to resource development projects in various parts of the world, but South Asia had little to offer in this regard. Further, Jain (2000) assessed that Japanese influence in the South Asian investment markets was limited. In his words, “Japan and South Asian nations remained distant to each other. The distance is not just borne of geographic location but of different history, economic, political and social experience. For Japan, South Asia is ‘other Asia’, not the intimate Asia that it associates with East and Southeast Asia” (Jain 2000: 208). In another study, Brunjes et al. (2013) report that China’s economic engagement in South Asia has grown quickly in the recent years and identify economic profit as the primary motive for that. Looking at the Chinese domestic conditions, they predict its trade and investment relations with South Asian countries to go further up. Thus, the non-availability of a similar sort of study gives the justification to this paper which compares Japanese and Chinese investments in South Asia. Japanese and Chinese Investments in South Asia To begin with, let us have an idea on how the two economies, viz. Japan and China have emerged as significant global sources of FDI over time. While Japanese investment abroad is indebted to the rapid economic growth in the 1960s, Chinese push for overseas investment is rooted in its economic progress made in the 1990s. Interestingly, both of them followed the export-led growth model for their economic development that ultimately has turned them into major sources of FDI. For Japan, both outflows and inflows of FDI in the 1960s were not that significant, and the investment gap was modest. However, the gap widened in the 1970s as outflows of FDI increased at a much faster pace. But between 1980 and 1990, Japanese outward investment increased exponentially. As a result, in 1990 the outward stocks of Japanese investment stood at $201.4 billion against the inflow stocks of $9.85 billion, a ratio of 20.5 5
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 (UNCTAD 2014). To put the Japanese imbalance between inward and outward investments in perspective, “it is useful to remember that, during the same decade, the OFDI/IFDI ratio was only 5.2 for Germany, 1.4 for the UK and 0.5 for the United States. In other words, in the United States inflows surpassed outflows of direct investment” (Solis 2005: 110). This trend in Japanese outflow has been continuing since then and by the end of 2013 the inward and outward stock figures stood at $170.9 billion and $992.9 billion respectively. A number of factors are considered to be responsible for a bigger Japanese outward investment. The rapid appreciation of the yen since 1985 has remained a significant influencer, in this case. And, in that instance, ASEAN countries were the main initial beneficiaries of Japanese FDI. Later, the price bubble burst in 1991 dealt a blow to the prospect of the domestic economy of Japan as it ensured a long-term economic slump in Japan and, unfortunately, that has been continuing since then. Additionally, the rise in manufacturing costs due to increase in wage and transport costs, competition in the external markets, etc. forced many Japanese investors to find lower-cost production bases in newly industrialized countries (NICs) and China. The Japanese investors also used their outward investments to foster trade. Observing the pattern of outward investments during that period, Urata (1993: 285) argues, “The main motive behind Japanese FDI in Asia is to set up an export base, while the main motive of Japanese FDI in the United States and the EC is to maintain or capture the local market.” A look at China, however, reveals that it incentivized domestic over international investment until the late 1980s, though it started setting up international firms since it began the open door policy in 1978 (Sauvant 2005). The Chinese initial disinclination to allow outward investment may be due to the apprehension of capital flight and loss of control of state assets (Buckley et al. 2008). Following the implementation of “Go Global” program in 2001, the Chinese government relaxed its foreign exchange controls, approval procedures, and investment restrictions and from 2003 onward, it allowed privately owned enterprises to apply for permission to invest internationally (Buckley et al. 2008).
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Since this time, Chinese outward investment has rapidly expanded, from $2.85 billion in 2003 to more than $101 billion in 2013 (UNCTAD 2014). In that outflows state-owned enterprises (SOEs) continue to be the largest investors—mainly in petroleum, construction, telecommunications, and shipping. But more recently, private companies such as Lenovo have started to invest abroad (Morck et al. 2008). Figure 1 gives us a comparative view on the outbound investments from Japan and China from 1990 to 2013. By 1990, Japan became a significant investor while China was yet to join the investor club in any meaningful way. But the price bubble burst in 1991 seems to have an adverse impact on the Japanese outflows. However, Japanese FDI again attained pace from 2004 to reach a pre-recession high of $128.1 billion or 6.4 percent of the world total in 2008. However, the Financial Crisis in 2008-09 put a spanner on the flow. But FDI from Japan gained momentum from 2010 and touched an all-time high in 2013 to reach $135.7 billion or 9.6 percent of the world total (UNCTAD, 2014). Overall, the investment flows from Japan seem to have maintained a kind of synchronization with the outflowtrend of the world. Figure 1: Chinese and Japanese Outward FDI Flows (1990-2013) 160
2 500.0
140
135.7
128.1
122.5
120
107.6
100
87.8 73.5
80 60
50.8
40 20
2 000.0 101.0
45.8 50.3 22.6
0.8
2.0
31.5 28.8 30.9 0.9
2.9
5.5
12.3
21.2
74.7
68.8 55.9 56.5 56.3
1 500.0
74.7
1 000.0
26.5
500.0
0
1990 1995 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Japan
China
World
Source: Constructed. Data from UNCTAD (WIR), 2014.
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 In comparison, the Chinese outward investment in the 1990s begs little reference due to an insignificant amount. But the scenario started changing in the next decade, particularly from 2003 since when outward flows of FDI from China went on increasing to reach $101 billion (7.2 percent of the world) in 2013 (UNCTAD 2014). This shows 34.8 times jump within a decade. Importantly, the financial crisis of 2008-09 seems to have affected Chinese FDI only momentarily in 2009 and then bounced back in 2010. It may be important to note that in 2013, Japan and China together contributed about 16.8 percent of world’s outward FDI and 6.1 percent of outstanding investment stocks. How do the economies of South Asia figure in the investment chart of Japan and China? Tables 1 and 2 have been prepared to show the Japanese and Chinese FDI inflow positions in the South Asian economies for a period of 2003 to 2012. Moreover, Appendix Tables A1 and A2 shows the stocks of Japanese and Chinese FDI in South Asia for the same period. Table 1: Japan – FDI Flows to South Asian Economies (Millions of US dollars) Region/Economies
World Developed Economies Developing Economies South Asia Bangladesh India Maldives Nepal Pakistan Sri Lanka
2003 28 773
2004 30 951
2005 45 781
2006 50 266
2007 73 549
2008 128 020
2009 74 699
2010 56 263
2011 114 353
2012 122 548
20 198
16 592
22 282
28 701
42 034
72 966
35 468
29 693
62 763
77 176
8 326 125 125 -
14 055 139 139 -
23 438 268 -7 270 31 - 26
21 372 512 - 26 513 24 -
31 386 1 558 1 513 - 12 51 6
54 737 5 485 398 5 253 0 116 - 282
38 782 3 718 -5 3 679 31 12
26 189 2 771 6 2 747 17 -1 5 -3
51 257 2 328 44 2 274 1 8 2
44 616 2 831 29 2 792 1 13 -4
Source: Compiled. UNCTAD FDI/TNC database, based on data from the Bank of Japan.
A closer look on Table 1 also reveals that the Japanese investors are more comfortable to invest in the developed countries, may be for historical and cultural reasons. In 2012, for example, 63 percent of its total outward investment headed towards developed economies. In a decade from 2003 to 2012, it was only in 2009 when Japan invested more in the developing countries. Evidently, the bulk of its FDI in the developing economies goes to
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 the economies of East and Southeast Asian regions. Physical nearness, relatively low cost of labor and cultural closeness may explain the heavy Japanese investment in these regions. From the table, it also appears that South Asia is yet to attract the Japanese investors, even though the 3rd largest Asian economy is located in the region. To substantiate, in 2012, only $2.8 billion (6.34 percent) of the total of $44.6 billion Japanese investment in developing economies headed towards South Asia. That too was India-centric, as it received 98.6 percent of that Japanese FDI. Bangladesh, Pakistan, and Sri Lanka are the other economies that received a little of Japanese investment during the period of our consideration. On the other hand, the Chinese investment abroad has a significant difference in this that the investors much more by directing the lion share of their investment towards the developing economies. Table 2 clearly shows that from 2003 to 2012, the share of Chinese investment in developed countries was never that high, the highest being about 18 percent in 2011. In 2012, the share of developing countries in Chinese investment increased to 84.6 percent of the total. However, the South Asian economies are yet to make noticeable places in the list of Chinese FDI destinations though China’s economic reach in the South Asian economies has grown considerably since the late 1990s. In this regard, Kelegama (2014) observes, “For now, China’s foreign direct investment (FDI) in the South Asian region has not kept pace with growing trade. However, during the last three years, Chinese investment has grown rapidly in some South Asian countries such as Pakistan, Sri Lanka, and Bangladesh.” Chinese investment figures in Table 2 supplement his observation. Table 2: China – Flow of Investment in South Asian Economies (Millions of US dollars) Region / economy World Developed economies Developing economies South Asia Afghanistan Bangladesh India Nepal
2003 2 855 211 2 605 20 1 -
2004 5 498 336 5 065 22 1 2
2005 12 261 731 11 216 29 11 1
2006 17 634 520 16 565 15 5 6 -
9
2007 26 506 2 747 22 891 947 4 22 1
2008 55 907 2 787 52 055 460 114 5 102 -
2009 56 529 7 043 48 780 204 16 11 - 25 1
2010 68 811 10 864 56 736 928 2 7 48 1
2011 74 654 13 423 60 034 1 525 296 10 180 9
2012 87 804 13 508 70 017 1 143 18 33 277 8
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Pakistan Sri Lanka
10 -
1 -
4 -
- 62 -
911 -2
265 9
77 -1
331 28
333 81
89 17
Source: Compiled. UNCTAD FDI/TNC database, based on data from the Ministry of Commerce (MOFCOM).
In addition, Table 3 summarizes total inflows of foreign investment in eight economies in South Asia and shares of Japan and China of that FDI for a period of ten years – from 2003 to 2012. Among the economies, Japan has been investing in Bangladesh, India, Pakistan and Sri Lanka more. Among them, India, for obvious reason, seems to have remained at the center of Japanese investment attention where its investment has crossed the critical level of 5 percent of Indian total FDI for both 2011 and 2012. In Bangladesh, however, Japan had the highest share of investment of 8.3 percent of the total in 2003. Pakistan is also receiving some investment from Japan. But the history Japanese investment in Sri Lanka seems to have been affected by the civil war and in 2008 Japanese investment experienced a net withdraw of $282 million We see a repeat of Japanese investment withdrawals from SL again in 2010 and 2012. Among the SARRAC countries, Afghanistan and Bhutan are yet to record any FDI from the Japan. Table 3: South Asia - Total and Share of Japanese and Chinese FDI Economy Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
Total ($m) Japan China1 ($m) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%) Total ($m) Japan (%) China (%)
2003 57.8
2004 186.9
2005 271.0
2006 238.0
2007 188.7
2008 94.4
2009 75.7
2010 211.3
2011 83.4
2012 93.8
350 8.3 1.1 3.4
460 6.5
792 2.9 0.1 72.2
666 5.6
8.9
845 5.4 0.2 6.2
3.0
114 1 086 5.2 0.5 19.9
16 700 2.4 0.4 71.7
2 913 2.4 1.0 30.8
296 1 136 4.1 1.7 25.9
18 1 293 2.3 1.4 21.8
4 321 1.6 31.8 -
5 778 2.1 52.9 -
7 622 1.1 73.2 -
20 328 0.4 95.2 -
25 350 1.8 132.4 -9.1
47 139 0.6 181.3 -
35 657 2.7 158.0 -
27 431 4.6 0.01 216.5 7.9
36 190 5.8 0.2 256.5 -
24 194 5.5 0.6 284.0 -
14.8 532 2.3 1.7 229 -
- 0.4 1 117 2.9 0.7 233 -
2.5 40.0 2 200 2.0 0.1 272 -9.6 -
- 6.6 -
5.9 16.9 5 590 1.9 12.9 603 1.0 -0.3
1.0 -
38.6 2.6 2 338 1.6 -4.7 404 3.0 -0.2
86.7 -1.2 1.2 2 022 0.99 0.45 478 -0.6 5.9
95.5 1.0 9.4 1 326 1.2 7.6 981 0.2 8.3
92.0 1.1 8.7 858 3.4 8.7 941 -0.4 1.8
4 272 1.5 0.1 480 -
10
5 437 2.0 0.1 752 -37.5 1.2
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Note: 1 China’s investment figures in Afghanistan look inconsistent with the total figure and hence share not calculated. Source: Constructed. UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) for total figures, and UNCTAD, FDI/TNC database (http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx) for country specific FDI figures.
Noticeably, FDI from China in South Asia seems to be a recent phenomenon. With the exception of Bhutan and the Maldives, all other economies have registered Chinese investment during the period of our discussion. For historical reason, Pakistan has remained the largest recipient of Chinese investment in South Asia. Afghanistan, Bangladesh, Nepal and Sri Lanka have been seeing fast growth of Chinese FDI. Though India is by far the largest economy in South Asia; it is yet to receive any noteworthy Chinese investment. That again may be explained by the acrimonious past they live with. However, both Japanese and Chinese investment in South Asia may see an acceleration for a number of reasons in the near future. They include the growing economic and strategic importance of India as a partner to Japan, election of more representative government in Sri Lanka, increase in geo-strategic weight of Pakistan to China, better economic prospect of the region as a whole and so on. In essence, presence of India at the geographic center also enhances the overall expectation and importance of the regional as a whole because of the size of the market and its growth potentials. Japanese and Chinese FDI in South Asia Compared Disappointingly, the prospect for foreign investments in South Asia seems to have not been capitalized so far for a number of economic and non-economic factors. Insufficiency of infrastructure, overpopulation, corruption, disruptive political discourse, workforce that lacks required education and discipline, etc. are to name a few. But if we assess South Asia as a whole on the basis of economic growth prospects, then a higher level of inward of investment could have been expected in the region. Not only that, most of the economies in the region have a domestic consumption based growth approach, instead of exportoriented growth model, supported by a larger population. That might have played an
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 important role in achieving six-percent-plus growth rate by most of them despite having a plethora of problems in their way to economic progress. In this regard, between the two countries, Japan seems to have missed more this fundamental difference in the development approach of the South Asian economies. Keeping this point in mind, let us try to compare the Japanese and Chinese investment in South Asia. 1. As stated earlier, Japanese external investment is principally directed to the developed economies. As a result, the gap in Japanese investment between developed and developing economies was always there and has been widening since 2010. Figure 2 also shows that the Japanese FDI in developing Asia is highly focused on the East Asian countries, in particular. However, we follow an exception in 2011 when South East Asia revived more Japanese investment than any other developing regions. In South Asia, Japan has remained an important investor but that does not stand well when compared to its investment in East and South East Asia. West Asia too is largely ignored by the Japanese investors.
Figure 2: Japan- FDI Flows to Selected Regions 2001-12 (Millions of USD) 90 000
25 000
80 000
20 000
70 000 60 000
15 000
50 000
10 000
40 000 30 000
5 000
20 000
-
10 000 -
-5 000 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
East Asia
SE-Asia
South Asia
West Asia
Developed
Developing
Source: Constructed. Data from UNCTAD, 2014.
12
2011
2012
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 In contrast, China maintains a diametrically opposite approach to investment internationally as the developing economies are the central to that strategy. This reflects the Chinese desire for diversification and consists with normal economic interests (Brunjis, et al. 2013: ix). Figure 3 shows that since 2003, Chinese aggregate investment in the developing economies is growing at a faster pace. Interestingly, the gap is widening since the 2009 financial crisis.
Figure 3: China - FDI Flows to Selected Regions 2003-12 (Millions of USD) 60 000
80 000 70 000
50 000
60 000 40 000
50 000
30 000
40 000
30 000
20 000
20 000 10 000
10 000
-
2003
2004
2005
2006
2007
2008
2009
2010
2011
East Asia
SE-Asia
South Asia
West Asia
Developed
Developing
2012
Source: Constructed. Data from UNCTAD, 2014.
From Figure 1 and 2, we find at least two similarities when outward investments in different regions in Asia from Japan and China are compared. First, like the Japanese FDI flows, East Asia constitutes the single largest zone for the Chinese investors followed by South East Asia, South Asia, and West Asia. Secondly, South Asia still figures insignificantly in the flows of Chinese FDI. 2. China’s initial FDI has the distinction or orientation to secure natural resources abroad to fuel the economic growth back home, quite similar to that of Japanese approach in the 1970s and 1980s. Kelegama (2014) notes, “Chinese trade and investment links have led to growing Chinese financial flows in the form of loans
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 and aid to the region since the mid-2000s. Most of these loans are associated with large infrastructure projects such as ports, highways, bridges and power plants.” Along with this sectoral focus, Chinese investments are also looking for resource extraction (for example in Afghanistan), market opportunities and manufacturing bases for regional labor division in South Asia. Having a government-led development approach and presence of state-owned-enterprises (SOEs) in fostering role of the government at home and abroad, the SOEs also become participants in the Chinese outward investment side by side the private enterprises. Japan has a slightly different strategy whereby the government Official Development Assistance (ODA) is used to help the development of infrastructural projects for assisting the Japanese businesses and their investment abroad. For example, the Delhi-Mumbai industrial corridor in India, a project estimated to be of $100 billion, is to be constructed jointly by the Indian government and the Japanese ODA Fund. Investment of this scale from Japan is designed to help the MNCs from Japan as well. But in the most the cases, Japanese businesses in South Asia invest to set up export base, as well as the business opportunities. This is contrary to the resource development focus of Chinese investment that forms a significant portion of Chinese investment in South Asia. 3. Looking at the future of FDI from these two sources, it may be assumed that China’s increasing focus on the domestic economy should create some pressure on the yuan to appreciate unless otherwise the international currency-politics and other strategic moves force the yuan to be devalued significantly. However, any appreciation of the yuan should trigger an outflow of Chinese investment, as was the case with Japan after the appreciation of yen in the 1980s. In that instance, ASEAN countries were the main beneficiaries of Japanese FDI flows. Thus, given China’s strong trading and investment foothold, and the relatively low labour costs compared to East Asia, the SAARC region is in a position to attract more Chinese FDI in the coming years (Kelegama 2014). Japan, on the other hand, is playing a different ball game at the moment. The monetary policy of quantitative easing 14
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 implemented since April 2013 has pushed the value of yen down by more than 30 percent till then. This was done to make Japanese exports competitive internationally was well as to slow down the
hollowing out of Japanese
manufacturing base. If successful, this can stifle the flow of Japanese investment in the medium to long term. But given the labor situation in Japan, the second purpose of the policy move may fail. In the ultimate analysis, this should not deter the Japanese FDI flows to South Asia as India in particular play a counter-weight role in Asia for Japan and even for the USA. 4. Given the Indo-centric geography, the South Asian economies may be much more welcoming to Japanese investment than that from China, largely because of concerns in India. In this analysis, the SAARC region is considered to be part of India’s geopolitical backyard. The recent trouble with the Chinese “Colombo Port City Project”2 in Sri Lanka may be good example of this apprehension. But Japanese or Chinese investment project in South Asia could face problems on purely business ground as well. As an example, we can take the case of Daiichi-Sankyo’s fiasco with its Indian investment in Ranbaxy.3 This may happen to them in other countries of the region as well. That is, the investment from Japan and China may face significant economic, business or political risk in South Asia. Additionally, India’s “overall policy stance toward China may impact the flow of Chinese investment in the region as well. According to Professor S.D. Muni, India’s policy towards China revolves around the 4 ‘C’s, containment, conflict, competition, and cooperation. Various groups in India
2
This is $1.4 billion infrastructural project under which China is to build a skyline on land reclaimed from the Indian Ocean. Under the port plan arrangement, China Communications Construction Co Ltd would take over 108 hectares of land next to the main commercial port of Colombo. This includs 20 hectares on an outright basis and the rest on a 99-year lease. In 2008, Daiichi-Sankyo of Japan had acquired a 63.9 per cent stake in Ranbaxy Laboratories, an Indian pharmaceutical, for $4.2 billion. But the value of its investments halved over the years, as Daiichi was not been able to restore compliance at Ranbaxy factories supplying to the US. Daiichi had to sell the venture at $4.00 billion in 2014. 3
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 support different ‘C’s: the Indian business community supports competition, while part of the military supports containment, the bureaucracy calls for cooperation, and so on” (Kelegama 2014). 5. Finally, Appendix Table A3 has been constructed to give a comparative view on the ranks Japan and China have had with their FDI in the individual South Asian economies from 2010 to 2012. In Afghanistan, according to the available data, China seems to have remained the only major investor. During the same period, the significant players in Bangladesh are Singapore, Egypt, and China. For Bhutan and Sri Lanka, India has remained the top investor while for Sri Lanka China is an important player too. Interestingly, India, the single largest destination for FDI in South Asia, has Mauritius as the top investing country for all those years. Singapore, Japan, and the Netherlands are important investors too. For the same period, Japan is a tiny but number one investor in the Maldives. Meanwhile, Nepal is the only country where the names of both the countries have propped up as top investors. But Pakistan is mostly a beneficiary of investments from USA, UK, some Middle Eastern countries and China. Conclusion There is an apprehension that China may end up in the peculiar Japanese no man’s land between growth and non-growth in the not too distant future. But we have the following possibilities for China at the moment: unless forced otherwise, the yuan will appreciate and an extra-rich class of entrepreneur will look for overseas bases for their business and production. So the Chinese economic presence in the South Asian region may be inevitably growing as most of the economies require China’s financial assistance and benefit from deepening trading and investment links. Moreover, India is developing into an openmarket economy. A number of factors are playing in India’s favor –a young population and corresponding low dependency ratio, remittance from a burgeoning Indian diaspora, healthy savings and investment rates, increasing integration into the global economy and so on. The assumption of power by the Modi government in May 2014 has accelerated the
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 process of economic integration and has raised the growth expectation for the economy. That is why the outlook for India's medium-term growth is looking very positive at the moment. The surrounding economies of Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka have the promise to grow as well. In fact, the Indo-centric South Asia is showing a much better economic prospect than the past, making the whole region an attractive destination for future investment. This makes further ground for Japanese and Chinese investment in the region and the investors from both the countries may not miss the signal. References Amal, M., Tomio, B.T., & Raboch. H. (2010). Determinants of Foreign Direct Investment in Latin America. Revista 4(3):116-133. Bhavan, T., Xu,C., & Zhong, C. (2011). Determinants and Growth Effect of FDI in South Asian Economies: Evidence from a Panel Data analysis. International Business Research 4(1):43-50. Brunjes, Emily, Nicolas Levine, Miriam Palmer, Addison Smith. 2013. China’s Increased Trade and Investment in South Asia (Spoiler Alert: It’s The Economy), Workshop in International Public Affair at Robert M La Follette School of Public Affairs. (Spring) Buckley, Peter J., Adam R. Cross, Hui Tan, Liu Xin, and Hinrich Voss. 2008. “Historic and Emergent Trends in Chinese Outward Direct Investment.” Management International Review 48 (6): 715-748. Hallward-Driemeier, Mary C, 2007, “Improving the Climate for Investment and Business In South Asia,” in Sadiq Ahmed and Ejaz Ghani (ed.)SOUTH ASIA: Growth and Regional Integration, The World Bank, Washington, D.C. Ho, C. S. F., & Rashid, A.H.M. (2011). Macroeconomic and Country Specific Determinants of FDI. The Business Review 18(1): 219-226. Iqbal, Badar Alam. 1997. Japanese Direct Investment in South Asia: A Case of India, Mittal Publications, New Delhi. Jain, Purnendra. 2000. Will the Sun Ever Shine in South Asia,” in Marie Soderberg and Ian Reader (eds), Japanese Influences and Presences in Asia,” Routledge, London, pp.187-212. Kelegama, Samam. 2014. China’s growing reach in South Asia, The East Asia Forum, 25 June. Madura, Jeff. 2010. International Corporate Finance, 10th Edition, South-Western Cengage Learning, China. (397-414). Morck, Randall, Bernard Yeung, and Minyuan Zhao. 2008. “Perspectives on China’s Outward Foreign Direct Investment.” Journal of International Business Studies 39 (3): 337-350. Sahoo, P. (2006). Foreign Direct Investment in South Asia: Policy, Trends, Impact and Determinants. ADB Institute Discussion Paper, No. 56.
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Sauvant, K. 2005. “New Sources of FDI: The BRICs. Outward FDI from Brazil, Russia, India and China.” Journal of World Investment and Trade 6 (October): 639–709. Solis, Mireya. 2005. From iron doors to paper screens – The Japanese state and multinational investment, in Saadia M. Pekkanen and Kellee S. Tsai .2005. Japan and China in the World Political Economy, Routledge, Oxon, UK, pp.108-129. UNCTAD. (2006). World Investment Report, FDI from Developing and Transition Economies: Implications for Development, UN: New York and Geneva. ________.2014. UNCTAD, FDI/TNC database, www.unctad.org/fdistatistics ________.2014. UNCTAD FDI/TNC database, http://unctad.org/en/Pages/DIAE/FDI%20Statistics/ FDI-Statistics-Bilateral.aspx ________. (2014). World Investment Report, UN: Geneva. Urata, Shujiro, (1993), Japanese Foreign Direct Investment and Its Effects on Foreign Trade in Asia” in Takatoshi Ito and Anne O. Krueger (eds), Trade and Protectionism, NBER-EASE, Vol.2, pp. 273304. World Economic Forum. (2013). The Global Competitiveness Report 2013-14, Geneva.
Appendix Table A1: Japan – FDI Stocks in South Asia (Millions of US dollars) Region/Economies World Developed Economies Developing Economies South Asia India
2003
2004
2005
335 504
370 541
386 585
242 987
262 255
259 634
90 391 1 510 1 505
106 701 1 755 1 750
125 188 1 799 1 795
2006 449 567 296 166 152 264 2 319 2 315
2007 542 618 346 371 193 914 4 190 4 185
2008 680 330 416 451 261 568 9 398 9 391
2009 740 927 451 621 286 684 8 995 8 989
2010 831 076 488 882 332 740 13 575 13 568
2011 962 790 556 944 394 821 15 394 15 387
2012 1 037 698 606 418 421 480 15 073 15 067
Source: UNCTAD FDI/TNC database, based on data from the Bank of Japan.
Table A2: China – FDI Stocks in South Asia (Millions of US dollars) Region / economy World Developed economies Developing economies South Asia
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
33 222
44 777
57 206
75 026
117 911
183 971
245 755
317 211
424 781
531 941
1 523
2 116
2 815
3 948
8 268
10 799
18 175
29 701
46 651
73 148
31 592
42 454
53 563
69 643
107 264
169 289
222 975
281 597
370 117
445 739
68
107
311
337
1 371
1 833
2 169
3 348
4 901
6 285
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Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 Afghanistan Bangladesh India Nepal Pakistan Sri Lanka
-
-
-
1
1
115
181
169
465
483
8
9
33
40
43
48
60
68
77
117
1
5
15
26
120
222
221
480
657
1 169
2
3
3
4
9
9
14
16
25
34
27
36
189
148
1 068
1 328
1 458
1 828
2 163
2 234
73
163
179
7 7 15 8 8 17 16 Source: UNCTAD FDI/TNC database, based on data from the Ministry of Commerce (MOFCOM).
Year 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011
Table A3: Dominant Investors in South Asian Economies (FDI Inflows in millions of US Dollars) Country FDI Country FDI Country Afghanistan China 2 China 296 China 18 Bangladesh Singapore 317 UK 106 China Egypt 152 China 132 Korean R. Egypt 127 Korean R. 98 China Bhutan India 16 EU 7 Germany Singapore 21 India 20 Germany India 14 EU 3 France India Mauritius 5616 Singapore 1540 Netherlands Mauritius 8142 Singapore 3306 Japan Mauritius 8059 Netherlands 1713 Singapore Maldives Japan 17 Italy 7 Mauritius Japan 1 NA NA NA NA NA Nepal China 1 NA NA China 9 Japan 1 NA China 8 Japan 1 NA Pakistan US 386 UK 310 UAE UK 283 US 245 UAE
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FDI
81 113 86 6 7 2 1418 2089 1605 1 297 174
Proceedings of 13th Asian Business Research Conference 26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-93-1 2012
China
258
US 218 Italy 218 Sri Lanka 2010 India 1262 China 28 Switzerland 24 2011 India 260 China 81 Italy 37 2012 India 157 China 17 Switzerland 15 Source: Compiled. UNCTAD FDI/TNC database, http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-StatisticsBilateral.aspx
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