Why isn’t something profound being done?
Let’s start with the good news. Developing Asia received a record US$212 billion in foreign direct investment (FDI) in 2006, an increase of 22% over 2005. Now, the not-so-good news. Regional FDI as a percentage of global FDI was down close to two percent last year from 2005, and growth in FDI is expected to slow sharply this year to just 2.7%.
These findings are provided in World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk (WIP), released last week. The report was produced by the Economist Intelligence Unit (EIU) in cooperation with the Columbia Program on International Investment (CPII), and charts FDI trends over the next five years. Among other factors, it is based on a global survey of more than 600 direct investors, according to a statement by CPII.
“Although FDI inflows into Asia will remain robust over the medium term, a combination of global and domestic factors means that the fast pace of growth in FDI inflows of recent years will not be sustained,” said Laza Kekic, who is director of Country Forcasting Services for EIU and one of the report’s editors. Other prominent editors and authors include Jeffrey D. Sachs, Director of the Earth Institute at Columbia University, and Karl P. Sauvant, executive director of the Columbia Program on International Investment.
To put the Philippines into context for what comes next, the report ranks the Philippines number 55 among 82 countries. In Asia, only Bangladesh and Sri Lanka rank lower. Last year, it received $2.3 billion in FDI, about 0.16 percent of the world total. By comparison, Thailand received $9.7 billion; Malaysia, $6.1 billion; Indonesia, $7.5 billion; and, Vietnam, $4.1 billion. Pakistan took in $4.3 billion. China was the number three global recipient of FDI after the U.S. and U.K., raking in a stunning $78.1 billion.
For the period 2007-11, on average, the Philippines is expected to take in $2.4 billion annually in FDI. That’s nice, except when compared to its potential, as evidenced by its regional competitors. China will increase its annual take to $86.8 billion, and retain its number three rank for the same period. Thailand will fall somewhat, but still receive $8.9 billion; Malaysia will rise to $6.8 billion, while Indonesia drops to $6.6 billion. Vietnam will experience a solid increase in FDI, to $6.5 billion.
There are a number of reasons for these FDI disparities. For example, the report notes that India, despite its relevant parity to China in terms of population and thirst for investment, lags far behind its somewhat more populous neighbor in terms of FDI ($20.4 billion annually 2007-11, less than Singapore at $27.1) because FDI mostly targets the services sector in India while in China manufacturing is the magnet.
According to the WIP report, FDI inflows into India will remain well below potential in part because of “persistent business environment problems, among which inflexible labor laws and poor infrastructure feature prominently.” It is worth noting that inflexible labor laws, poor infrastructure, and a dearth of manufacturing FDI are also prominent features of the Philippines’ investment climate.
The FDI gap between China and the Association of Southeast Asian Nations (ASEAN) countries, however, will narrow according to the report. “FDI inflows into China were in 2002-06 80% higher than inflows into the ASEAN ten; in 2007-11 the difference is projected to narrow to 45%.” While still substantial, that’s close to a 50% drop. But as we’ve already seen, unfortunately, not much of the gap will be made up by the Philippines.
What of political risk and its impact on investment decisions? Although the report notes substantial rising risk of FDI protectionism in Asia as a whole, it appears to be “less salient” than in other regions. “However,” the report noted, “the experience of companies operating in Asia suggests that they face a host of regulatory and political risks, which partly mar the abundant business opportunities.”
According to respondents, those risks include the inability to transfer currency, contract cancellations or official requests for renegotiations, payment defaults by governments; asset expropriation; blocked M&A deals and cancellation of import or export licenses. Moreover, “some 40% of the survey respondents believed that Asia would experience during the next five years a major political crisis that will disrupt business. China was rated among the riskiest countries.
”Which is why it’s interesting that only 20% of respondents agreed with the statement that “the fact that China is an autocracy and India a democracy helps explain why China attracts so much more FDI than India; the vast majority of respondents disagreed.” So democracy perhaps isn’t the excuse for comparatively low levels of FDI into the Philippines, either, as some suggest. Then what is? And why isn’t something profound being done about it?