Sử dụng các công cụ phân tích hoạt động kinh tế vào việc nghiên cứu hoạt động kinh doanh du lịch việt nam

ABSTRACT In the context of "'Open door" and "Doi moi" policies, Foreign Direct Investment inflows in Vietnam have been considered, among other things, as having a significant impact eit

COLLEGE OF ECONOMICS

VIETNAM

THE HAGUE THE NETHERLANDS

VIETNAM-THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS

IMPACT OF FOREIGN DIR.EC'f INVESTMENT ON E,'{PQRTS

CASE FOR VIETNAM (1988-1995)

by

NGUYEN TO KlEU TRINH

1 KAREL JANSEN, Ph D

2 NGUYEN TRi HUNG, M.A

.A Lhe,ris submilled in par!ialfoljilmenl if!he T()([lliremenl for !he degree if

MASTtR Of ARTS lll tCOMOMICS Of DtlU.OfMUIT

·-"I certify that the substance of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees

I certify that to the best of my knowledge any help received in preparing this dissertation, and all sources used, have been acknowledged in this dissertation"

Signature

Nguyen To Kieu Trinh Date : December, 20th, 1996

thinking in this research paper

ABSTRACT

In the context of "'Open door" and "Doi moi" policies, Foreign Direct Investment inflows in Vietnam have been considered, among other things, as having a significant impact (either direct or indirect) on the development process, especially on the export performance of Vietnam The export increases steadily every year from 1988 at annual average growth rate of 32.02%, especially since 1991 Average annual growth rate in

period 1988-90 was 44.0% and 44.4% in 1995

The inflows of Foreign Direct Investment firstly concentrated in mineral and services (mainly hotels and tourism) sector, but recently it has been shifted to industrial sector This trend is appropriate for the process of industrialisation and modernisation of Vietnam It increases every year, from only 366 million USD of investment capital (implemented capital of 60 million USD) in 1986 up to 6,400 million USD (implemented capital of 2,000 billion USD) in 1995 Total investment capital approached 18,228 million USD and implemented capital approached 5,878 million USD from 1988-95 Increase in exports in the context of 'Open-door' policy, among other things, in period 1988-1995, reflected the response of nice achievement, not only

in short but also in long run, from the positive influence of Foreign Direct Investment although that this influence was still modest

Identifying the impact of Foreign Direct Investment on export performance of Vietnam from 1988 till 1995 is the subject of this paper

Thanks are due to my classmates Hoang Due Phu, Pham Kien Phuong and Nguyen Anh T uan for their helps and interests, especially, Nguyen The Minh for his tireless assistance in providing useful data Words of thanks are also due to my close friend Do Dinh Nam for his tireless help in providing useful documents

I acknowledge with thanks Ms Dang thi Kim Chi, librarian; Ms Dinh Thi Anh

Nguyet, Secretary of Project for their interests and material provisions; and my classmates and all friends for their support throughout

WorO.S of thanks are due to my family Many are worthy of mention To them, I

am eternally grateful Finally, this work is devoted to my parents, Nguyen Huu Duy and Cong Tang Ton Nu Thi Le Hong, who gently bestowed me with curiosity and concern about the world

Needless to say, any remaining mistakes or omissions are entirely mine

Chapter 2 THEORETICAL FOUNDATION AND EVIDENCES OF

FOREIGN DIRECT INVESTMENT AND ITS IMPACTS

ON EXPORTS

2.2 Theoretical Foundation of FDI and evidences of its

Impacts on Exports 2.2.1 Theoretical Foundation ofFDI 2.2.1.1 Models and Forms ofFDI

a) Models ofFDI a.l Export-Oriented FDI (EO FDI) a.2 Import-Substituting FDI (IS FDI) a.3 Market- and Technology- Accessing FDI

Page

11

IV V11

2.2.2

Production, Japanese-Type FDI and Sectoral Composition

*Summary Globalisation of Production Japanese-Type FDI

Impacts ofFDI on Exports

b) Evidences about the Impact of FDI on Exports 23

* FDI as a Source of Export Growth 23

* Evidences from previous Studies and Surveys 36

Summary of the Impact of FDI on Exports of the Host 49 Country and Implied Policy for Attracting FDI

FDI IN VIETNAM AND ITS IMPACT ON VIETNAM'S EXPORTS

3.1 General Information 3.2 Impact ofFDI on Exports

51

66

* Evidences 66

a Some evidences from industrial and mining sector 77

Chapter 4 ESTIMATION MODEL

*Justification for the Use of the Model Conclusion

FURTHER STUDY

APPENDIX

5.1 5.2 5.3 4.4

REFERENCES

Results of the Study for the Case of Vietnam Summary and Conclusion

Policy Implications Suggestion for Further Study

Box 1 Box2 Table 17.2, 19.2 Table 20.2, 23.2 Table 46

Selected Capital Flows to Developing Countries

Top-10 FDI-Received Developing Countries in 1970s and 1980s

Average Inflows of FDI to Developing Regions, by Region,

1970-79, 1980-85 1986-90

Monthly Yen Appreciation after The Plaza Accord

Net FDI, 1982-1989

Labour Force by Region, 1950-2020

The Hourly Cost of Labour per Skilled Labour in 1993

Exchange Rate (Annual Average) and Real Exchange Rate

10 Foreign Direct Investment in Selected Asian Countries and 29 China

13 Merchandise Exports of NIEs, ASEAN4, Asia and the World 32

18 Trends in FDI, Thailand 1980-89 40

21 Contribution of Foreign Capital to Singapore's Manufacturing 47 Sector (1975-89)

22 Comparative Performance of Foreign and Local Establishments 48

in the Singaporean Manufacturing Sector, 1989

24 Average Growth Rate of Some Selected Indicators 56

26 Investment Projects by Type of Economic Activity 60

27 Allocation of FDI in Sectors of Vietnam from 1988-95 61

30 Annual GDP Growth Rate by Sector in Vietnam's Economy 64

31 Forms of FDI, on Annual Basis (by July 7, 1994) 64

34 Estimated Annual Oil Production to the Year 2000 68

36 Comparing Incentives for FDI in ASEAN Countries 71

37 The Contribution of FOI projects to the Merchandise Exports of 74 Vietnam, 1988-95

38 Structure of Vietnam Merchandise Exports from 1988-95 78

39 Annual Exports of Textiles and Garments, 1988-95 80

41 Cement Joint Ventures Licensed and Proposed Cement Projects 83

43 Moto-Bike Demand in Vietnam, 1996-2000 86

17.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of Thailand, 1971-92

19.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of China, 1979-92

20.1 Regression Estimates of the Impact of FDI on the Exports 96 Performance of Singapore, 1971-93

23.1 Regression Estimates of the Impact of FDI on the Exports 97 Performance of Vietnam, 1988-95

UST OF FIGURES

Page

01 FDI Flows to Developing Countries are Concentrated into Two Regions, 02 1990-94

04 Official Development Assistance (ODA) in Vietnam, 1988-95 55

05 FDI inflows in Industry, 1988 till the end of March 1996 63

08 Trends of FDI (Registered and Implemented) and Exports of Vietnam, 75 1988-95

INTRODUCTION 1.1 General Information

Foreign Direct Investment (FDI) is playing a growing role in economic development FDI flows to developing countries have increased at a rapid pace, quadrupled from an annual average of 12.6 billion USD in 1980-85 to 51.8 billion USD in 1992-93 (reaching an estimated

38 billion USD in 1992, a fourfold increase since the mid-1980s, and a 50% increase over the past two years) and rose to 70 billion USD in 1994 Developing countries received 32 percent

of total world FDI during 1992-94, up from 20 percent in the first half of the 1980s The share ofFDI in the gross capital formation of developing countries more than doubled between 1986 and 1992, surpassing 6 percent in 1993.(Bergsman, J and Shen, X 1995, p 6) Table 01 can tell us the story of increasing FDI inflows to the developing countries; from only 304 million

1993 USD in the 1960s to 12,988 million 1993 USD in the 1980s and up to 63,999 million

1993 USD in 1993 (net) From this table, we can also recognise the increasing important role

of FDI if being compared to other forms of capital inflows to developing countries From chart 01, we can see that FDI flows to developing countries are concentrated into two regions: East Asia and the Pacific, and Latin America In general, the FDI often concentrates in some areas and countries with large 'emerging and active markets' or with the success in stabilising the macroeconomic environment, reducing price distortions, deregulating investment procedures, increasing general economic efficiency-getting the "fundamentals" right for all private investment, domestic or foreign, If in the 1970s, Singapore was only in the fifth rank

in the top-10 FDI-received developing countries, and China and Thailand were not in this list

in 1980s, Singapore in the first position and China, Thailand are in the fourth and ninth position (table 02)

Table 01 Selected Capital Flows to Developing Countries

Notes: - Por IllV.: Portfolio Investment; Net CBL: Net Commercial Bank Lending; G&ODF: Grants and

Official Debt FlO'tt·s

-Figures for the 1960s, 1970s and 1980s represent the annual averages for those decades

Sources: IMF, Balance of Payments, Statistics Yearbook Various years; and World Bank, World Debt Tables Various years (taken from Bergsman, J and Shen, X (1995), Foreign Direct Investment in Developing Countries: Progress and Problems', Finance & Development, December 1995, pp 7)

Chart 01 FDI flows to Developing Countries are Concentrated into Two Regions

The top-1 0 FDI-received developing countries accounted for 66% of total FDI inflows in the developing countries in the 1970s and this number was up to 68% in the 1980s "FDI now is the

dominant form of resource flows to developing economies and the primary source of prtvate capital for low income countries, accounting for more than a quarter of aggregate net flows and exceeding total long term debt flows" 1 FDI is a large and growing source of equity investment that brings with

it considerable benefits: technology transfer, management know-how, and export marketing access Many developing countries will need to be more effective in attracting FDI flows if they are to close the technology gap with high income countries, upgrade managerial skills, and develop their export markets It is the increasingly important role and the existence of FDI

in the process of development of the developing countries, there are not only many theories but also many empirical studies as well as lots of controversies about FDI and its impacts on the host country There are also, particularly, many studies about the impact ofFDI on export performance of the host country In the context of the previous studies, I am, myself, interesting in studying the impact of FDI on exports of Vietnam From this study, I can draw out some implications about the policies related to FDI in order to attract much FDI contributing more for exports of the host country I do so because exports play a very important role in development for a country and this thing has been proved by related theories and studies

1

'Foreign direct investment-benefits beyond finance', Development Briet: the World Bank, Aprill993, No.4

Top-10 FDI-Received Developing Countries in 1970s and 1980s

Note: A A ln C.: Annual Average Investment Cap11al

Source: World Investment Repon I992 United Nations, New York, 1992, pp.317 (taken from 'Chinh Sach Hop Tac Dau Tu ', Tong Luan Khoa Hoc Kv Thuat Kinh Te Ministry of Science, Technolog;· and E!TVironmelll,

1.2 Statement of the Problem

In the development process of Vietnam, it is clear that FDI plays a very imponant role Beside the other influences ofFDI on Vietnam in this process such as technology transfer, managerial aspects, environment effects, its impact on export of Vietnam is of vital importance How can this impact be explained and proved by the theories of FDI and by evidence either in practical situation or in regression model? This study will bring out the some ideas behind it and so it can help policy makers in drawing out policies relating to FDI This thing is very important not only in attracting FDI but also in guiding or controlling FDI in order to make its contn"bution to the development process of Vietnam If it is true that FDI can influence the exports of Vietnam in positive way, what aspects of implied policies of Vietnam needed to attract FDI in beneficial way for exports will be recommended basing the analyses of FDI in Vietnam and experiences of some selected countries

1.3 Objectives of the Study

The specific objectives of tins study are as follows:

a/ To review the theoretical foundation ofFDI and argue its impact on export performance of the host country

b/.To estimate impact ofFDI for Vietnam case

c/ To recommend some policy options

This study is expected to be a pace further over earlier studies which have been undertaken to analyse the impact of FDI on the export performance of Vietnam Both analytical descriptive and regression model methods are used to obtain those objectives

1.4 Organisation of the Study

The rest of this paper is organised as follows:

Chapter two provides a review of the theoretical foundation and lots of evidences and then this chapter will also draw out some implied policies from these evidences Chapter three presents in details FDI in Vietnam and its impact on exports with various evidences Chapter four is to do with the details about the estimation model Finally, chapter five provides the results from regression model about the impact of FDI on exports of Vietnam, and then the summary, conclusion, some policy implications of the study and suggestion for further study

Foreign Direct Investment (FDD is considered as the flows of capital from a parent company

to a foreign affiliate or the investment by the companies domiciled in one country in companies domiciled in another It can be a complex activity consisting of four dimensions such as a transfer of capital, a control of investment, a source of funds for foreign operations, and a balance of payments flow 2

In other words, FDI is the direct investment which is made by non-residents, typically but not always by multinational corporations (MNCs), in the enterprises located in host countries; direct investment implies full or panial control of the enterprise and physical presence by foreign firms or individuals MNCs can provide a package including capital, employment, technology, managerial expertise, and access to markets,

2.2 Theoretical Foundation of FDI and Evidences of its Impacts on Exports

2.2.1 Theoretical foundation of FDI

2.2.1.1 Models and forms of FDI

a) Models of FDI

Firstly, we have to say that, unlike private bank lending, FDI does not consist simply of a flow

of finance One of the advantages for developing countries is that along with capital, FDI typically provides a unique package of other resources, including technology, know-how, management, training, and facilities for marketing the product or service Because the recorded volume of direct investment does not reflect the flow of these non-financial resources, it normally significantly understates the importance of this type of capital to the host country Although both types of foreign capital (commercial lenders and foreign investors) involve a balance of payments risk, the project risk is borne by the provider of

2

For more information, see Eng, V M, Lees, A Fr and Mauer, J L (1995), 'Direct investment: Empirical perspective, motivations, and risk dimensions', Global Finance, HarperCollins College Publishers, New York, ch.13, pp 429-430

capital in the case of direct investment but by the recipient of the capital in the case of the commercial loans In general, FDI in the Third World is undertaken for the following three

mam purposes :

aJ to develop and export minerals or other natural resources, or, to establish a base for the

export of manufactured products to the home or third country markets

b/ to manufacture products or produce services for sale in the local market

c/ to study and to take advantage the technology, marketing and managerial skills, of the host countries in order to utilise them for the production at home

Secondly, from the above three main purposes, we can have the four main broad models of FDI as follows:

a.l Export-oriented FDI (EO FDI)

This model of FDI will include the resource investment, and the base for export This kind of FDI can, in general, have the direct impact on export performance of the host country This model can include the following types:

* Resource-investment FDI:

This is the classical type of FD I in the Third World with the establishment of the subsidiaries which are owned by the parent company to develop and to extract crude minerals for processing at home (or for processing at host countries) within a network of production or for export to third parties The crude resource-investment FDI can only supply few links to the local economy and it does remain an enclave in the economy It began a long time ago, in non-fuel minerals, has declined worldwide due to excess capacity and sagging relative prices The processed-resource-investment FDI is the FDI in the natural resource processing areas (such as rubber products, canned fruits, frozen seafood products, ) The processed-resource-investment FDI, day by day, proves its importance in the development process of the country, especially, in the export performance of the host country

3

'Foreign investment in developing countries', Unpublished Note by Secretariat, OECD, 11 October 1984, pp 8 (taken from 'Foreign private investment', Finance and Third World Economic Growth: A Statement by the Research and Policy Committee of the Committee for Economic Development, Westview Press, London, 1988,

pp 80, 81); and, The New Wave of FDI in Asia Normura Research Institute and Institute of Southeast Asian Studies, Tokyo Club Foundation for Global Studies, Singapore, 1995

* Base for export

With the establishment of an affiliate as a base for export manufactures to home market, to third country market, or both; among other things, cost factors and risk will influence much in the investors' decisions The investors is often attracted by the availability of reliable and disciplined supply of low-cost labour So, the parent company can gain more profits through producing labour-intensive products, or outputs, in the industries such as footwear, textile, leather goods, processed food stuffs, (or products for the so-called traditional manufactured exports); apparel; consumer electronics; The FDI for export that is increasing its share represents such vertical international specialisation between intermediate stages of production,

in contrast with horizontal specialisation between different final products By locating different activities in various countries according to factor endowments, and by sourcing worldwide for components or other inputs, the transnationals have played an important role which helps developing countries to more fully realise their comparative advantage This process is highly dynamic one As the pace of development has speeded in some certain attractive locations, such as Singapore and Korea, the labour supply became more scarce and expensive Cheap-labours investment for exports then shifted to other places with the availability of low-cost labour Base-for export FDI does not sometimes result from any inherent cost advantage but due to the performance requirements required by the host governments FDI that is originally to serve the local market may have to satisfy some minimum export targets The requirement often asks a company to compensate its imports of inputs for comparable value of exports Therefore, foreign enterprises may be forced into non-beneficial exporting while compensating their losses through sales at higher prices in the protected host country market

In reality, the foreign investors relating to these activities, can participate in all types ofFDI as aforementioned, especially, in recent time when the diversification in production (such as Coca Cola Corporation, Hyundai, Samsung, ) In deed, this can be seen from the study of Fukushima, K and Kwan, C.H (1995) 4 In their study, this model of investment is mentioned

in the name of «Outsourcing " Its goal is to secure the supply of production factors in an

advantageous way As factors of production include labour force, infrastructure, and natural resources, this production factor-securing FDI can be in many forms Because the main goal of this type of FDI is to reduce production cost rather than to find market share in the host country, it can also be considered as concentrating on cost and risk reduction and export orientation Until now, it has been the most important objectives for companies in more advanced countries to invest in developing countries in Asia This model of investment is

4

Fukushima, K and Kwan, C.H (1995), 'Foreign direct investment and regional industrial restructuring in Asia', The New Wave ofFDI in Asi!b Nonnura Research Institute and Institute of Southeast Asian Studies, Tokyo Club Foundation for Global Studies, Singapore, 1995

commonly for labour-intensive products and processes such as textiles and the assembly of electronic products Production tends to be relocated in search of lower costs of production In general, its output is exported, either back to the home country or to third countries Many investments by Hong Kong corporations in China, and Japanese investment in Asia during the second halfofthe 1980s are considered as this kind ofFDI

To attract this kind of FDI, among other things (such as low cost labour v.ith appropriate skills, rich in natural resources, ect ), the host country must have the choice of follO\:ving the Export-oriented way at least in some fields in their policy As mentioned above, this kind of FDI is often followed by the liberalization of the host country with the very open policy for exports and import input for export production, exchange rate profitable for exports,

a.2 Import-substituting FDI US FDI)

This model ofFDI is with the efforts of finding the entry into the host country's market so it is also called as Investment-for-the local market FDI Investment in manufacturing aimed mainly at local markets may be undertaken for some reasons It often sterns from the trade barriers imposed in the context of import -substitution strategies of industrialisation (especially

in Latin American countries) In this case, in order to preserve market share, the parent company has to establish an affiliate to produce locally Other motivations have included the desire to improve the ability to serve a foreign market by developing, through local manufacturing, better relations with distributors, superior service to customers, increased opportunity to utilise local materials and design products appropriately for the local market, and reduce transportation costs The decision points of producing overseas for local sale are often the host country market size with the potential growth An increasing proportion of the FDI primarily for the domestic market has been in the service sector, especially banking, insurance, trade and advertising Normally, the service enterprises have the tendency to follow their manufacturing clients abroad to preserve their market shares

With the decline in growth in Latin American countries, and a reduction in protection in a number of developing countries, the IS FDI has been somewhat discouraged in recent years Conversely, the EO FDI (mostly in type of base for export) has been booming as firms have been positioning world-wide to minimise production cost and risk through globalization and this situation has included not only multinationals but also firms with relatively small international operations 5

5

'Foreign private investment', Finance and Third World Economic Growth: A Statement by the Research and Policy Committee ofthe Cornminee for Economic Development Westview Press, London, 1988, pp 80, 81

From the study in Asia of Fukushima, K and Kwan, C.H (1995), this model of FDI is also mentioned in the name of Trade-barrier circumventing Its goal is at replacing local production for export that encounters trade barriers in the importing country Among other things, market size of the host country and potential demand are the 'magnetic points' of this kind ofFDI For example, when facing the trade restrictions from Orderly Market Agreements (OMA) or Voluntary Export Restraints (VER), as often having been occurred in Europe and North America, export companies have to establish production in the country which is their before-restriction export market Many developing countries in Asia give preferences to FDI and use high import tariffs as a way to protect infant industries Therefore, it is considered investment by Japanese, Korean, and Taiwanese corporations in the United States and Europe

as trade-barrier circumventing, and there are many Japanese investments in China being considered as this kind ofFDI

This model of FDI can contribute to the export of the host country indirectly through the supply of materials, trained labour forces, the economising foreign exchange for the export activities or in general for other economic activities (FDI in cars, beer, milk, electronics industries), One will look forward to its more important role in contributing to the export performance of host country when some IS FDI may gradually become export-oriented For example, some Latin American countries with import-substituting industrialization in the past are the location of IS FDI, but these IS FDI then became EO FDI when these countries followed outward-looking policies and this process occurred through times

In policy's aspects, among other things, it is clear seen that IS FDI is attracted by the domestic size of the host country with a potential level in demand, the pursuance or wholly (like in Latin America in the past) or some parts in some areas of Import Substitution policy of the host country, particularly with trade barriers, exchange rate policies,

a3 Market- and technology- accessing FDI

Its goal is to create a new comparative advantage by accessing information, technology, and marketing channels This process is done through learning and absorbing advanced technology from the host country or studying the art of marketing, It will result in providing 'new knowledge' for investing corporations Many Japanese corporations have been building marketing networks and Research and Development (R&D) facilities in the United States They have been followed by corporations in Korea and Taiwan Recently, many Korean and Taiwanese firms have built research centres in Japan It is considered some of China's investments in Hong Kong as this kind of FDI This is a positive and expansionary investment for both the company and the nation's economy Contrary to FDI with the purpose of only securing cheap labour or circumventing trade-barriers with technology stagnating at the same level, this type of FDI, when, successful, can create new technologies, products, or services

and sharpen the competitive edge of the respective industry in the home country It can also provide further growth opportunities for the world economy This new type ofFDI can not be

interpreted fully by the traditional theory ofFDI

This model of FDI can be better considered and analysed more carefully when studying the impact of FDI on the exports of home country in the long run In other words, in my study in the following sections, I do not have the intention to include this model ofFDI

a4 Diversified FDI (PI FDI):

In reality, recently, especially in the 1970s, 1980s, and in the first half of the 1990s, under the pressure of fierce competition, and the wave of globalization, the above distinction in FDI -

EO FDI, IS FDI- is weakening and even disappearing Foreign investors, particularly l\.1NCs, often participate into the many fields which can give them more benefits with low risk and be better for them They do not only concentrate on a certain model of FDI, but, instead, a combination of the models mentioned above in the advantageous ways for them This combination of FDI often leads to so-called 'network' of production There are a lot of FDI projects in Asia now producing both for local markets and foreign markets such as FDI in textile industry in Thailand and in electronics areas in Vietnam This combination can also be changed over time Many of MNCs relating to IS FDI in some countries has now gradually shift some parts and even most of their activities in EO FDI (this shift can be appropriate for their activities and for the wave of liberalization in many countries (for example in many developing countries in Latin America and Asia It is the complexity of this FDI-mode1 combination will make it more difficult to estimate and analyse the impact of FDI projects on exports of the host countries It is those reasons that this model of FDI can be called as 'Diversified FDI'

b) Forms of FDI

FDI can take a number of forms : a joint venture, licensing the import of technology or management, 1 00-percent foreign ownership of an enterprise, and co-production It is understood that China has decided to deal with foreigners principally through joint ventures, and that these joint ventures will have a specified, but fairly long life-20 to 30 years in many cases Besides, it also exists the so-called "new form" of foreign direct investment (NFDI) in developing countries, notably joint ventures and licensing agreements (NFDI projects are ones that are at least 50% locally owned, with some assets supplied by one or more foreign companies or projects show the investment not only of the host country participant( s ), but also

of at least one of the participating foreign companies) (see Oman 1986) However, the NFDI does not exist in areas that ask much technology, know-how, experiences, that the host country partners do not have or can not control, for example, in the oil industry in Vietnam

*Summary

From the above classified models and forms ofFDI, we can understand more about why and how FDI can have the impact on exports of the host country and why investors want to invest abroad In the context of models and forms of FDI, foreign investors want to reduce the increasing production cost at home, or want to secure their production factors in a beneficial way, or want to reduce risk Among other motives, these three motives have driven them to invest overseas and participated into the development process of the host country, in which it does include the contribution to changes in the export performance of the host country both in volume and composition From the analysis above, it can be seen that the proportion DI FDI is clearly increasing, especially from 1970s, and there are not many FDI projects relating only

100 percent in EO FDI In addition, the foreign investment concerning in IS FDI can have the impact on exports of the host country indirectly and this impact is either difficult to estimate

or analyse or unavailable in information and data Therefore, in my study in the following sections, it is inevitable that I am mentioning very little to the impacts on export performance

of host country of IS FDI

In the policy's aspects, each kind of models ofFDI (of course, I do not mean the market- and technology- accessing FDI) is affected and attracted, among other things, by some major elements But depending to the purposes of the host country, a certain sector in the economy will be biased by its policy to attract what kind of FDI (IS FDI or EO FDI) as mentioned above As aforementioned, in the context of high competition, globalization of production, liberalization movements of many countries, a mixture in the policies of many developing countries, especially in Asia, with the bias towards or in favour of Export-Oriented production, the attracted FDI is DI FDI with high proportion of EO FDI in it Some selected aspects in policies of host country in attracting more FDI with the purpose of increasing exports, therefore will be mentioned more in details some where in the next sections

2.2.1.2 Flying-geese pattern of FDI in Asia, globalization of production, Japanese-type FDI, and sectoral composition

From the 1985 Plaza Accord, the concentration ofFDI in Asia has moved from the Asian NIEs

to ASEAN and farther to China, broadly in line with the flying-geese pattern Economic development in Asia can be explained by the process of less-developed countries catching up with the more advanced ones In this flying-geese pattern of economic development, each country continues the industrialisation process based on its stage of industrial development, while keeping international division of labour by exporting those industrial products in which

it has a comparative advantage Both the "catching-up and caught-up" (Fukushima, K and

Kwan, C.H 1995) countries make industrial adjustments in a positive way with the purpose of

approaching a higher stage of industrialisation which can possibly create a dynamic growth in the whole region In deed, in Asia, countries at different stages of economic development coexist, with Japan at the top of the table, followed by the NIEs, ASEAN, and the mainland of China The flows ofFDI from countries at higher stages of economic development to those at lower stages has resulted in more efficient use of production factors, attaining a higher growth and a higher level of industrialisation for both groups of countries Host countries can utilise their surplus labour and accumulate capital, technology, and management skills, so they can advance their industrialisation Home countries can redirect excessive labour from sunset industries to sunrise industries, therefore they can achieve an even higher level of industrialisation There are a lot of factors that can be listed for the high level of FDI within Asia and to Asia from the outside world Host countries such as ASEAN and China adopted a very open policy for inward FDI and for exports and imports of materials and parts for FDI firms In addition, home countries such as Japan and NIBs had no choice but to move overseas when being pressured by the global currency realignment since 1985 and the increasing cost of production at home In the context of economic development, a country's comparative advantage often moves from the primary-commodities production to labour-intensive products and later on, to capital- and technology-intensive products It can be seen that for the ASEAN countries for instance, recent FDI has concentrated in the manufacturing sector instead of the resource sector They are seizing the opportunity to reduce their dependence on the export of primary commodities, and industrialisation is accelerating International relocations of industries have taken place in this process and the major thrust of export by groups of countries have changed: for the NIBs, from labour-intensive to capital- and technology-intensive exports; for ASEAN, from primary products to labour-intensive ones Flying-geese pattern ofFDI, therefore, is one of the explanations for the increasing FDI in Asia (table 03), especially in ASEAN countries and for the obvious impact ofFDI on export of this region and area

* Summary: The flying-geese pattern of FDI in Asia with the characteristic of shifting from primary- to labour-intensive and, may be then to capital- or technology-intensive production (or from labour-intensive to capital-and technology-intensive production) can be considered as

DI FDI In the case of ASEAN, as mentioned above, DI FDI is in favour of EO FDI (with the gradual shift from primary- to labour intensive exports) With this characteristic, it is clear that flying-geese pattern of FDI have brought about much influence for the exports of Asia, particularly, ASEAN countries from the mid-1980s

Globalization of Production: This theory relates to the subcontracting practice in developed countries to the international level In this theory, the subcontract arrangement between large MNCs and suppliers has expanded In this system of production, large multinational enterprises either invest in developing countries to produce parts and components or buy parts and components from firms in other countries including those in developing countries through

Average Inflows of FD I to Developing Regions, by Region, 1970-79, 1980-85, 1986-90

(million USD} (Share of all inflows}{%) (Annual Growth Rate}{%~

Note: (1) Malta and Yugoslavia

Source: UN, 1992, Chapter I, Table 1 5, pp.2 3 (taken from Colmm1, D and Nixson, 1': (199-1}, '171e Transnaticma/ Corporation and L!Xs ', Economies q[ Change_}!'

Less Develo{l.ed Co!Jntrie.~ Jlan't!ster Wheatsheaj Great Britain, Ch 10, pp 356, 7'ahle 10 7.)

vJ

,•;·

subcontract arrangements These parts and components, then, are sent to processing centres to produce either finished products or more advanced intermediate products This process is considered as the Globalization of PrOduction It is believed that the recent increase of FDI flows from Japan and the NIE's to developing countries in Southeast Asia (flying-geese pattern of FDI) is the result of appreciation of currencies and increases in the wage rates of those countries As aforementioned, these factors can significantly raise the costs of production in home countries As a result, their multinational corporations, as well as suppliers, decided to relocate their production to countries to the Southeast Asia in order to overcome the above disadvantages It is clearly seen FDI stemming from this process (Globalization of Production) can create eXJX>rts of parts and components, or relative less-

advanced final products from the host countries That creation is the impact of FDI on host country's exports Therefore, this theory is very useful in explaining the upsurge of export phenomenon in active regions in the world It can be seen that in a certain report of the value

of eXJX>rts of some countries, the exports' value can be higher than GDP (such as Singapore),

it is due to the phenomenon of re-export, or due to intra-firm trade in MNCs FDI in this case characterise mostly or more biased in export oriented

Japanese-type FDI: It is considered that there are two types of FDI in developing countries: traded-oriented (Japanese FDI) and anti-trade-oriented (U.S FDI) Therefore, this description

is to explain more clearly the so-called "flying geese" phenomenon

Kojima (1973, 1975, 1985),in Japanese environment and experience, proposed a economic model for explaining Japanese finns in international operations He classified motives ofFDI into four types The first one is the exploitation of natural resources of a host country The second one is to take advantage of the cheap labour of the host country The third one is market expansion in order to avoid trade barriers such as tariffs and quotas The last one

macro-is oligopoly which means that foreign investors can gain market power in a host country because of their specific knowledge about technology and management Japanese FDI tend to concentrate on the first two and US FDI more on the last two He argued that the so-called trade-oriented FDI implied investment in fields that the home country did not have comparative advantage and the so-called anti-trade FDI meant that home country had comparative advantage Japanese FDI had the tendency to develop natural resources that Japan had a comparative disadvantage and to pay attention to some fields that Japan or some firms lost comparative advantage Japanese FDI, therefore, can be implemented by small, medium sized firms at a smaller scale in developing countries abundant with labour and natural resource Due to those reasons, Japanese FDI can boost trade linkages and international production among home and host countries through relating activities and so may create export for the host country Japanese FDI can, therefore, increases the volume of global trade (it is totally different from IS FDI-U.S FDI-which tends to replace trade) More

over due to its trade-oriented, it can also strengthen and complements the comparative advantage of the host and home country On the whole, Japanese FDI can be considered as export-oriented FDI

Although there were many controversies about Japanese-type FDI description such as Mason (1980), Dunning (1988), , it is clear that one can see from it the possibility ofFDI can have the influence in the host country's exports through its activities, especially, with export-oriented FDI such as in Japanese-type FDI case

From the above description from globalization of production and Japanese-type FDI, one can draw out some main characteristics of the host country in attracting FDI with high share of export-oriented component, those are:

+ Abundance with natural resources and labour with low cost

+ Very open policy for exports and importing inputs for export activities

+ Clear related-FDI policies

In summary, flying-geese pattern of FDI, Globalization of production, Japanese-type FDI can explain the general impression that FDI has become more export oriented from the mid 1980s

in Asia, especially, in ASEAN countries and mainland of China This phenomenon has exposed the important role of FDI in creating trade between host and home country, particularly, in contributing to the export performance of the host country

There is a widely observed tendency for FDI in developing countries, through times, to concentrate increasingly on manufactures and related financial services, rather than traditional sectors such as agriculture, mining, oil, retailing, and public utilities Still, tviNCs will continue to be of great importance in petroleum and in variety of strategic minerals-for example, oil, iron ore, copper, and bauxite (Colman 1994, pp.359) In addition, in the agricultural sector, so-called agribusiness MNCs are of significance for variety of products-for example, pineapples, sugar, vegetable oils, tea, soya beans and beef This reflects, in large part, the preference of governments in the host countries The trend is evident both for countries which have become significant exporters of manufactures or services (Malaysia, Singapore, Sri Lanka) as well as others for which FDI has been attracted into manufacturing of

an import substituting kind (Kenya) For many open, small island economies, however, the 'traditional structure' ofFDI remains (Trinidad, Papua New Guinea and Fiji-also in Zimbabwe for different historical reasons).(Commonwealth Secretariat 1991, London) Further more, as mentioned above, due to the increasing proportion of DI FDI plus the characteristics of the host country's economy, it is easily to understand why the traditional sectors are still receiving the attention of foreign investors, sometimes these are being paid more attention to in the some developing countries, especially, in Asia such as Thailand, Vietnam,

2.2.2 Impacts of FDI on exports

This part will be mainly review the main points of selected FDI theories, and through these theories, it can be seen the possibility of the impact of FDI on export of the host country I will, in order, review the main points of Product Cycle Theory, Exchange Rate FDI Theory, Eclectic Theory

* Product Cycle Theorv

Vernon (1966, 1979) has emphasised that a firm tends to become multinational at a certain stage in its growth

In the first stage, there is an introduction of a new product In this stage, the country with a new product has monopoly power over the market due to technological knowledge Also in this stage, the country with the new product begins exporting the product to other countries due to the appearing and rising demand in foreign markets The rate of growth of exports of this product depends on differences in technological knowledge of the new product among the exporting country, importing countries and other countries In deed, with the purpose of serving the domestic market, in this stage, firms with its new products establish factories closely to its domestic market due to, among other things, the need for frequent feedback from market to factory and demand for the high share of skilled labour relative to the demand for unskilled labours It means that, in this stage, the new product needs continuous improvement and adaptation to the market demands This asks for production at home where technical capacity and skilled labour are available When the feedback from market is less frequent due

to the past amendment in products, the need for skilled labours will decrease (in order to reduce cost while the distance between factory and market can be increased According to this thing, the demand of this product is increasing in overseas markets, therefore, it can explain why in this stage, the firms can export these products and other countries can import the product

In the second stage, once the product has evolved in a standard form and competing products have been developed, the firm may decide to invest in importing countries due to lower-cost locations and increasing demand It is not only that factor inputs may be less expensive abroad but that considerable scale economies from longer production runs may be obtained through the allocation of component production and assembly to different plants On the demand side, new markets can be established by price reductions, or more typically by the firm operating in

an oligopolistic market situation by means of product differentiation In general, the decision

to invest and amount of the investment, among other things, depends on many factors including market size, scale of production, tariff and non-tariff barriers and other trade policies of importing countries, and the cost of production in importing countries In this stage, the product is established and does not need constant change Therefore, this is the stage where production in other countries can start, but mainly for the domestic market In addition, the MNC that developed the product to serve the market may have to adjust the product to be appropriately for the local preferences Host country, then, no longer import the product, but may import parts or components for the product More over, in this stage, due to the cost of production, the MNC may start the production of parts and components (globalisation of production) and then export them from the host country

In the third stage, when the product has become fully standardised and therefore does not ask for any more skilled labour and when producers in the host country have learned how to

produce the product efficiently, the production in host country can be cheaper as the cost of labour is cheaper there Some importing countries become producers of the new product Some of them even start to export the product to other countries The trade of the second group of countries will reduce market share for the first country In addition, due to the cost advantage of the new exporting countries, the country which firstly invented product will commence importing the product from those countries The former importing countries catch

up with the former exporting countries as technological knowledge becomes readily standardised and available

It can be seen from main points in Product Cycle Theory that this theory can explain the impact ofFDI on exports performance of the host country In deed, from the second and the third stage of product development, the host country (importing country) can begin exporting

In the second stage, FDI can influence the export performance of the host country through exporting the product's components or parts (like in globalization of production aforementioned) Also from this stage, due to the increasing competition (of competing products), the rising cost and risks at home, and, the demand in the host or in third country market, FDI will, therefore, relate or to IS FDI, or, EO FDI, or DI FDI Further more, this theory also mention about the impact of FDI in the meaning of long run impact In deed, FDI can help the host country to speed up the product-standardisation or product-knowledge-getting process The importing country (host country) then begins to export the products that it

has to import in the past to the former export country or to the third country It is clear that this process can influence on export of the host country in the positive way According to these explanations, FDI can have the impact on export of the host country in the short as well as long run with the direct or indirect impact tendency In general, the product-cycle theory does indicate how FDI may move from, first IS, and then to EO It also explains why FDI goes to the large countries, for example in the stage two, the size of the local market is important and investment will mainly take place in countries with large market These FDI enterprises may

gradually shift to exports One limitation of this theory is that it does not fully explain FDI in the context of Globalization of production or the new wave of liberalisation happening in the world It means that even in the first stage of product development in this theory, FDI can exist and imposes its impact on export of the host country, due to the high cost in production

at home, some parts and components of products are better produced in other countries, ~

especially in the period of multimedia This theory also does not adequately explain FDI due

to other reasons such as currency realignment since 1985, political problems, Another important point is that this theory did not explain successfully why firms choose to invest in a country which did not have the lowest labour cost (there may be another country with lower cost) In addition, Lizondo (1991) 6 reported on work of Vernon (1979), who argued that now many multinationals had better knowledge of markets in the world, so the assumption that the multinationals first develop the new products in the home market is no longer tenable Further more, when the gap in income and technology decrease, the multinationals can invest even in the first stage of product development Although due to those problems, Vernon ( 1979) stated

,.·that "the hypothesis is likely to remain important in explaining FDI carried out by small firms and in

On the whole, it can be summed up by quoting the conclusion from Sodersten, B and Reed,

G (1994): "The Product Cycle hypothesis is usefol on several counts It offers an explanation of the

concentration ofinnovation in developed countries, and an integrated theory of trade and FDJ It also

on export of the host country through explaining the causes ofFDI and its models In order to attract more FDI from the second stage in the product cycle with the high share of export-oriented component, among other things, some main characteristics of host country need to have are:

+Low cost of production, particularly, low-cost labour (and better with rather-skilled labours) + Potential capacity in producing and potential ability of labour force in learning by working + Very open policy for exports and importing the inputs for export activities

+ Transparent related FDI policies

On the supply side, one can derive some main factors that make FDI become more export oriented as follows:

+ Increasing cost of production at home

""'- The increase of demand for products in the world

+There are many concessionary conditions for the export activities and FDI in host country such as export tax, import tax of input for production for exports, documents for investments,

* Exchange rate FDI theorv:

This theory is explained in the argument ofDas, D K (1993) He gave the explanation for the case of Japan After the appreciation of the yen (after Plaza Accord in 22 September 1985-table 04), FDI flows recorded a dramatic spurt and by the end the 1980s, in terms of net flows, Japan became the largest investing economy in the world (table 05) "Other than the rising cu"ent account surpluses, the wealth e.ffoct of the yen appreciation and the changes brought about by

it in the comparative advantage of the Japanese industry were responsible for the spurt" 8 In the :five years (1985-1989), new FDI flows world wide rose at an annual rate of 29 per cent, taking the total stock of FDI in the world to 1.5 trillion USD FDI flows to Asia increased from 2.3 billion USD in 1986 to 8.2 billion USD in 1989 The appreciation of Yen has made the Japanese enterprises (which had to make investment overseas) lose the comparative advantage

in terms of production cost at home According to this explanation, the appreciation is one of the main reasons for the increase of Japanese FDI In his surveys, he found out that Japanese FDI in Asia was in favour of export oriented than those in other LDCs FDI, in general, tends

to promote manufactured exports from LDCs and this tendency, of course, is not limited to Japanese FDI He confirmed that the manufacturing sector in post-appreciation period gained the large proportion of FDI and "most of it went into export-oriented sectors and influenced the export performance ofthe host countries favourably" (Das, D K 1993)

From the exchange rate theory aforementioned, one can see that this theory is the complement

for the Product Cycle theory in the context of explaining the spurt of FDI in Asia or in ASEAN from the mid 1980s (especially FDI from Japan and NIEs) It can also explain better the phenomenon of flying geese pattern of FDI It is from the explanation of Das, D K (1993), one can see that FDI in Asia and ASEAN is one of the elements contributing to the exports of the host country in this region So, from this theory, one can draw out one of the main elements inducing the supply side of FDI is the appreciation of exchange rate in the home country (in general, the increase of production cost at home)

From the above considerations the main points in the Exchange Rate FDI Theory, it can make

it understandable the process that leads to the recent increasing FDI in the world, or more specific, in Asia It is the efficiency of investment in terms of reducing cost and risks This theory, like the Product Cycle theory, can be used to explain more specific the impact ofFDI

on expons of the host country through explaining FDI in different aspects However, unlike the Product-Cycle Theory, this theory can be used to explain the flying-geese pattern ofFDI in Asia and explain clearer the phenomenon of Globalization of Production FDI

Table 04 Monthly Yen Appreciation after the Plaza Accord

{Yen per Dollar)

Source: The Bank of Japan, Balance of Payments Monthly (Fokyo, various issues) (taken from Das, D K

(1993}, "The Yen appreciation and the Japanese economy", The Yen Appreciation and the International Economy The Macmillan Press Ltd., Hong Kong, Ch 1, pp 8, table 1.3)

Table 05 Net FDI, 1982-1989

(in billiom ofUSD)

Note: Minus sign implies net iTTWard flows

Source: International Monetary Fund, Balance ofPayments Statistics, 1990 Yearbook, Part I (Washington DC, 1990) (taken from Das, D K (1993), "Acceleration in foreign direct investment", The Yen Appreciation and the international Economy, The Macmillan Press Ltd., Hong Kong, Ch 4, pp 120, table 4 1)

In summary, although the above theories can explain FDI and its impact on the host country and from these explanations, one can draw out some main aspects and characteristics of the host country need to have to attract more FDI with high share of export-oriented component and the factors which influence the supply side ofFDI, particularly, FDI with the high share of export-oriented component, these theories still have many limitations in adequately explaining the choice of activities (FDI, NFDI, technology contracts, ), In order to be better in explaining FDI in general and to have a broader picture of characteristics that the host country need to have to attract FDI, it is useful to consider the eclectic theory of Dunning (1977, 1979, 1988)

8

Das, D K (1993),'Acceleration in foreign direct investment', The Yen Appreciation and the International Economy The Macmillan Press Ltd., Hong Kong, Ch 4, pp 141, Paragraph One

Secondly, it must be more profitable to use these advantages in combination with at least some factor inputs located abroad The factors that lead to FDI can comprise such things as transport costs facing both finished products and raw materials, import restrictions, the ease with which the ownership advantages may be combined with factor endowments in other countries, the wage cost, size of the market, exchange rate, the tax policies in both source and host countries, and political stability in the host country, Dunning has considered all above factors as locational considerations This condition clearly influences the decisions of the firms in choosing the model of FDI: IS FDI, EO FDI or DI FDI It can be seen that some of local considerations have been discussed above such as the consideration of cost, exchange mte, policies, in product cycle theory, Japanese type FDI, or exchange mte theory Locational consideration can explain not only the phenomenon of flying-geese pattern of FDI but also the FDI from globalization of production in the context of liberalization and this explanation is mixture of the former explanations ofFDI in aforementioned theories

Finally, it must be more profitable for the firm to use these advantages rather than to sell or lease them to other independent firms This profit is so-called internalization gains Those gains can stem from avoiding uncertainty, problems of control, The existence of

internalization gains obviously depends to some extent on the existence of ownership advantages This condition is the element that influence the choice of a firm about the form of FDI (FDI, NFDI, )

To sum up, for FDI to take place, the firm must have Ownership advantages, Locational considerations, and Internalization gains (OLI paradigm)

It is clear that Eclectic Theory of Dunning is useful to explain FDI in general, according the OLI paradigm way FDI, in his explanation, seems to include IS FDI, EO FDI or DI FDI One more time, one can see the essence of FDI As aforementioned, this essence comprises the want to reduce the increasing production cost at home, or want to secure their production factors in a beneficial way, or want to reduce risk This theory of Dunning is not only the mixture of explanation of FDI in former theories but also the general explanation of FDI It can explain why some FDI activities relates to EO FDI (or DI FDI with the high share of EO FDI) while others to IS FDI (or DI FDI with the high share of IS FDI) It is the general explanation of this theory plus the aforementioned analysis from other theories (Product-cycle theory, Japanese type FDI theory, or Exchange rate theory of FDI), with the purpose of my study, I can draw out some main elements or characteristics of host country or factors that make FDI become more export oriented and in that case FDI of course has the strongest and more direct impact on exports of the host country as follows:

+ Abundance with natural resources and labour

+ Low cost of production, particularly, low-cost labour (and better with rather -skilled labours) + Potential capacity in producing and potential ability of labour force in learning by working

+ Increasing demand in the world

+ The appreciation of exchange rate in the home and devaluation of exchange rate in the host country make it become the destination for EO FDI

+ Very open policy for exports and importing the inputs for export activities

+ Transparent and stable related FDI policies

+ Stable political environment

Summary

When profit is considered as the main and final purpose of investors, most of the explanations

of economic theories about the economic phenomenon are based on this consideration FDI theories are not exceptional Investors who relate to FDI are mostly having, at least, the want

to reduce the increasing production cost at home, or want to secure their production factors in

a beneficial way, or want to reduce risk From the above review the main points of some selected FDI theories basing on the aim of this study, it can be seen that from each of aforementioned FDI theories in which eclectic theory of Dunning can be considered as a

summary of the explanations of FDI, one can see the possibility about its impact on export performance of the host country From the review of these theories, I can draw out some factors that make FDI more export oriented Some of these factors therefore will become my considerations in next parts

b) Evidences about the impact of FDI on exports

* FDI as a source of Export growth

Being affected by the external financing crisis and the currency realignment, many developing countries have appreciated the important role of FDI in development process, particularly in providing trade in which exports is the kernel point Some countries, as Korea, have little FDI involvement in the export sector; others such as Singapore and Taiwan, have much more

Due to many reasons, some governments consider FDI as the motive force for the export sector MNCs can have many advantage over indigenous firms due to their scale, specific market knowledge, established distribution chains, ability for managing and organising production, and experience in creating markets for all kinds of goods (and services), especially for non-standardised goods requiring marketing expertise, More over, MNCs can have many experiences in circumventing the trade barriers These factors are very necessary for many developing countries, especially for Asian countries In addition, as aforementioned, in the context of the liberalisation wave, the Globlisation of production with the phenomenon of subcontract arrangements (as in clothing and consumer electronics), are all the motive forces leading to FDI which can push up the host country's exports (such as in case of Haiti, Singapore, Thailand, ) It can be shown by many evidences of different attitudes of many developing countries towards the role of FDI in export growth For example, non-traditional products originating in FDI enterprises (three-quarters of the investment in export-processing zones belongs to foreign investors) can be considered the main contribution for the export growth in Sri Lanka since 1978 With governments that have restriction on FDI, in general, are now granting more priority to FDI in the export sector Kenya's 1981 guidelines for investors, for example, give a higher priority for new private investment in resource-based, export-oriented industries, and in export-oriented industries basing on imported inputs The expansion of export-processing zones (EPZs) in many African countries and in India has the same basic motivation Therefore, under the wave of liberalisation that influences FDI, there

is a tendency in favour of export-oriented enterprises, particularly in manufacturing It is tendency resulting in some requirements, for instance, in performance requirements, that make it more careful considerations for both companies and capital-exporting countries For companies, such a tendency can give suggestion a direction of capital toward relatively high-risk and possibly low-profit activity~ for industrial country governments, it can mean a presumption that they will adjust by accepting competing goods produced in overseas

subsidiaries of multinationals Thus a broad consensus on the desirability of more FDI has to

be qualified to the extent that host countries and investors may approach it with quite different and possibly conflicting expectations

"The proportion of exports which are directly or indirectly related to multinational enterprise activities has not been quantified adequately, but it is believed to be significant" 9 Indeed, MNCs in developing countries are still playing a certain role in primary exports including mineral exports Even if MNCs do not have any involvement in exploitation stages, they can be the direct purchasers or users of many kinds of mineral and primary products They can also be important in export of primary products in marketing, distributing these products of developing countries It can be seen the very important role of MNCs in mineral or primary exports from the case of Vietnam in exports of oil for instance More over, MNCs still play its important role in traditional manufactured exports such as clothing, textiles and footwear, leather goods and processed food stuff or processed seafood, that is of very vital importance

in many developing countries such as Thailand, China, Vie1nam, in Asia In traditional manufactured exports, like primary or mineral exports, the indirect impact that FDI imposes

on export performance of the host country is the managerial or marketing skills, or distributing ability, in which the ability of accessing to the markets, even to the far and difficult-disposition-customer markets such as industrial-country markets in Europe, North America, is very important It can be seen this indirect impact from the cases of continued exports of countries such as Singapore, Malaysia, Korea, from the late 1970s till now In the exports of other manufactured products, especially, those products with a greater proportion of product differentiation and (or) technology characteristics, MNCs expose directly more its important role "The role of multinational enterprises in the production and exports of differentiated manufactured products, both finished products and components, in developing countries is clearly recognised " 10 The role of MNCs in exports of differentiated manufactured products in developing countries in Asia can be easily seen through the countries such as Hong Kong, Singapore, Taiwan, Korea, Thailand, Malaysia, Philippines, ect Indeed, in primary or traditional manufactured production (either for export or not), the technology is often standardised (the third stage in the Product Cycle Theory), it is possible that large proportion

of this production is in the hand of indigenous firms MNCs is possible for the transportation, marketing, packing, Therefore, they will have more indirect than direct impact on exports performance of the host country In the other manufactured exports, the technology content in products is often higher and this thing will result in the MNCs will have more direct role on

9

UNCTAD 1978~ Keesing 1979 (taken from Parry, Th G 1990, 'The role of foreign capital in East Asian industrialization, growth, and development' In Hughes, H ( ed ), Achieving Industrialization in East Asia Cambridge Universtiy Press, Great Britain, Ch 4, pp 112)

10

UNCTAD 1978; ECEIUNCTC 1983 ((taken from Parry, Th G 1990, 'The role of foreign capital in East

Asian industrialization, growth, and development' In Hughes, H (eci.), Achieving Industrialization in East Asia Cambridge Universtiy Press, Great Britain, Ch 4, pp 113)

exports of these products

*Summary

Although, the direct or indirect impact of FDI on exports of the host country can vary according to each country due to the characteristics of each country in economy as well as political point of view, due to the situation of each country, ; on the whole, it is clear that the possibility of the contribution of FDI to the export performance of the host country is large and vital It can be considered as one of the source of export growth for the host country, especially for the developing countries in the fierce competition in present time

* More evidences

+ The abundance of labour force in Asia and Pacific and China

From table 06, it can be seen that labour force of the LDCs has increased so much from 1950 from only 821 million to 1,823 million in 1990 and this number will be about 2,960 million in

2020 This table also shows the evidence that labour force in mainland of China, and Asia and Pacific get the high proportion of world labour force in the world If looking back from chapter 1, it can be seen that this evidence is suitable for the fact that this region (Asia and the Pacific) and mainland of China are two of the destinations of FDI to developing countries As being aforementioned, the abundance of labour (often with low wage rate) is the attractive point for FDI in foot-loose industries or in general in labour-intensive industries such as in footwear, textile, leather goods, consumer electronics, Although that the productivity and quality of labour are also important for the given wage rate, but the products of these industries are often standardised, therefore in some extent, in these industries the cost of labour will play more important role Often, the abundance of labour force in Asia comes from rural area so the wage rate is commonly low This thing is described more clearly in the following table 07:

Labour Force by Region, 1950-2020 a

Estimated labour force {million} 1:

(35) (33) (32) (35) (35) (37)

Notes: a Figures in brackets are labour force participation rates for the whole population

h Westem Asia includes countries that would often be referred tom in the Middle l'nst

c Excluding China and Japan

2010

354 (37)

148 (35)

809 (60) 1,030 (41)

246 (38) 2,587

2020

477 (39)

185 (37)

824 (57) 1,185 (42)

289 (39) 2.960

d Melanesia and Micronesia-even in 2020 these are pn?jected to have a Jahourforce c!f only five million

Estimated chanse in labour force ~mil.} _

Table 07 The Hourly Cost of Labour per Skilled Labour in 1993 (in French Franc)

15

81

Franco-Vietnamien de Formation a Ia Gestion, Hoc/Timing City, January 1996, pp 28)

Although there is another aspect that a country with large population often becomes a destination for IS FDI, here I just mention about the labour force that is available for the production process as being mentioned in the part above

+ The appreciation exchange rate from mid-1988s and the increase of labour cost in NIEs (Newly Industrialised Economies) and Japan

As aforementioned, due to the currency realignment in September 1985, it has been seen about the FDI boom from Japan and NIEs from 1986 The appreciation of Japanese, Korean (from 1987), Taiwanese (from 1986), Hong Kong (from 1986) and Singaporean (from 1987) currencies bas made these country pour more FDI into other countries in Asia, especially in ASEAN cmmtries (table 08).(Although that RER for Taiwan is not available but due to the low inflation rate; for example, only 3.8% in 1994; it is expected that the direction ofNER can tell the situation of exchange rate in Taiwan)

The appreciation of currency of NIEs also made it more expensive for investment costs, especially wages in terms of USD For instance, the hourly manufacturing wage in Korea almost doubled from 1.7 USD in 1987 to 3.3 USD in 1989 (Kagami, M., 1995) This thing also shift industrial countries' foreign investment from NIEs to ASEAN where wage remained low and exchange rates still remained benign or can be even depreciated in the case of Indonesian rupiah, Philippines peso or China Yuan (table 08) The increase oflabour cost was not only due to the appreciation of currency in NlEs, but also due to: firstly, the standard of living and the overall educational level rose, younger labourers were increasingly disenchanted with mundane, hard work Secondly, the labour force was getting older Therefore, it was much difficult to find a new generation of young, low-wage workers, and this thing would lead to higher wages Thirdly, the introduction of knowledge- and capital-intensive technology has created more work in high-tech and services sectors and this thing would drive wages to higher level As being mentioned above, the real industrial wages of

unskilled labour remained static in developing countries due to the inflow of labour from rural areas, but it is not the case for NIEs from 1980s For example, in Korea the inflow of rural labour stopped during 1970s (Kagami, D., 1995, pp.29, reported on work by Chen Chun-Shun

1984 ) In addition, the long-run promotion of heavy and chemical industrialisation has led to labour shortage, particularly in skilled labour, then this thing make a pressure to increase wages and salaries In general, Taiwan, Korea, Hong Kong, Singapore, Japan were also in tight and high cost labour condition Labour cost increase made the relocation of manufacturing, especially, the assembly processes, to other countries, for example to Malaysia, Thailand, mainland of China, Philippines, Indonesia, Vietnam (table 09 and 10) One more clear example is that these countries have opened their doors for foreign labours and began investing intensively in developing countries, especially in Asia, by transferring less-sophisticated, labour-intensive processes Of course, NIEs, themselves, also received a large and increasing FDI with the high share of EO FDI (as being aforementioned in table 02 and mentioned later in the case study of Singapore and particularly, FDI from Japan)

Table08 Exchange Rates (Annual Average) and Real Exchange Rate

(RER) (per USD)

Table 09 The Increase of Wage Rates (Monthly Earnings) (1990=100)

Note: Approval basis of the host country

Source: Institute of Developing Economies, imemal data base (taken from Kagami, M (1995}, 'Trade and investment: East Asian strategies for economic growth', The Voice of East Asia-Development Implications for

Latin America, Institute of Developing Economies, Tokyo, ch 1, pp 34, table 1-9)

+ Increase of demand in the world and the high potential capacitv in production of some received countries in Asia

FDI-Table 11 shows that the demand in the world from mid 1980s continued to increase after the depression from the beginning of 1980s After the decrease of world's imports from 1,986.3 billions ofUSD in 1980 down to 1,781.6 billions ofUSD in 1983, this number increased to 2,089.3 billions of USD in 1986 and to 4,3249 billions of USD in 1994 The recovery of world's import is a positive sign for the EO FDI activities in Asia especially in ASEAN

At the same time with the recovery in demand of the world, the potential ability of production

of the FDI-received has been proved through the table 12