CHAPTER 1

1.0 INTRODUCTION

Foreign Direct Investment (FDI) nowadays is very important elements that are needed in order to improve the economic situation especially among the developing countries. The expansion and rapid growth of technologies, telecommunications, infrastructure and transportation for instance has encouraged more Multinational Corporation (MNCs) to take the opportunities to expand their businesses. The investments can be either locally or cross borders. Developed countries for instance have increased their FDI activities by investing more and find new opportunities in other countries especially among developing countries such as ASEAN. ASEAN countries which consist of Malaysia, Brunei, Singapore, Philippines, Thailand and Indonesia are among the favourable destinations of FDI by investors all over the world. The presence of FDI in ASEAN region started in 1980s and now become one of the important factors of economic growth among member countries.

The decision why more investors seeking for new investment in Asia countries is due to the countries advantages in terms of supply of labor force at lower cost and rich of natural resources that can be exploited. The increasing trends of FDI among these countries will encourage more competition in order to secure FDIs in their countries. It will also help the SMEs create new businesses with joint venture and sharing partner with the MNCs to expand the businesses (T.Khine, 2008).

Global foreign direct investment (FDI) flows have been risen steadily over the past 30 years with some declines in the early 1980s, 1990s and 2000s. For the year 2006, global FDI inflows rose for the third consecutive year in order to reach at &1.306 trillion. The increment and growth of FDI occurred in all regions and was driven by increasing corporate profits worldwide and resulting higher stock prices that raised the value of cross-border mergers and acquisition (M&As) (UNCTAD, 2008).

1.1 FDI IN EAST ASIA

The effect from the global growth on FDI also can be seen in the foreign direct investment (FDI) in East Asia which has increased significantly since 1990s. It is reported that the rose is almost over 6 times from US$21 billion in 1990 to US$156 billion in 2005 notwithstanding some large falls during and after the 1997-1998 Asian financial crisis. China for instance is the largest recipient of FDI flows in Asia with inward FDI flows rising by 22 times from merely USD3.5 billion in 1990 to USD79.1 billion in 2005 which accounting half of the total inward FDI flows in Asia (Liu, Chow and Li, 2006).

However, if we look at the trends of FDI inflows to developing Asia countries especially in ASEAN countries, in 1995 it is recorded FDI inflow to ASEAN is amounting USD28,164.3 million and keep on increasing until the year 1997. However, due to financial crisis in 1997 the figure has fall until the year 2002.

The year 1997-1998 are the year where the world economy have facing a financial crisis or some economies called it as modern – styled capital account crisis which characterized by a boom of international capital inflows followed by a sudden withdrawal of funds due to the loss of confidence by investors all over the world in the country’s currency (Anthukorala, 2003). Several countries, Malaysia, Thailand, Indonesia, the Republic of Korea and the Philippines, were hit directly while others such as Taiwan Province of China, Singapore and especially Hong Kong, China were badly affected. The speculative attack on the Thai baht in July 1997 was quickly spread out to the other countries. Over a three-month period between July and October 1997, the baht fell nearly 40 per cent, the Malaysian ringgit and Philippine peso by about 27 per cent, the Indonesian rupiah by about 40 per cent and the Korean won approximately 35 per cent against the United States dollar (Ismath Bacha, 2004).

However, after the financial crisis, the investors are more confidence to invest in ASEAN. The FDI inflows in ASEAN countries started back by showing in increasing trend until 2008 (ASEAN Statistical Yearbook, 2008). Besides that, according to World Investment Report 2008, it is reported that FDI flows to ASEAN sub region which consist of Malaysia, Singapore, Indonesia, Thailand, Brunei, Philippines, Vietnam has increased by 18% in 2007 which amounting to USD$61 billion compared to 2006. The largest recipients of FDI countries are from Singapore, Thailand, Malaysia, Indonesia and Vietnam. However, the newer ASEAN member’s countries such as Myanmar, Vietnam, Cambodia and the Lao People’s Democratic Republic recorded the strongest FDI growth exceeding 70%.

FDI inflows among ASEAN countries are unequally distributed. From the graph below, it showed that Singapore is the largest recipient of FDI among ASEAN countries since 1995 until to date. It is followed by Thailand, Malaysia, Philippines and Indonesia. However, the figure has showed a decreasing trend in 2008.

Source: ASEAN Statistical Yearbook, 2008

Singapore are still remained as the most attractive country in the region for FDIs by gaining US$22.8 billion in 2008 which is much lower than the US$31.6 billion in year 2007. It is followed by Thailand which took the second position with US$9.83 billion and Malaysia which earned US$8.053 billion compared to US$8.4 billion in 2007. For Indonesia, they only received US$7.9 billion in 2008, the Philippines US$1.5 million and Brunei US$239.2 million. However, in 2008 it is reported that FDI flows to newly member of ASEAN such as Vietnam is US$8.05 billion, Laos received just US$227.8 million, Myanmar US$714.8 million and Cambodia US$815.2 million.

Most of the FDI flows in Asian countries come from developed countries where the major investors are from European Union (27.3%), Japan (14.1%) and United States (10.2%) for the period from the year 2000 – 2008. It is shown in the graph below. It is the same situation of main investors to Asian countries for the period 1990-2002. The largest investors in the Asian countries particularly in Singapore and Taiwan are come from United States. In contrast, Japan is the largest developed country investors in ASEAN (excluding Singapore) especially in Thailand and Indonesia. However, in the case of China, Hong Kong is the largest investor. As a whole, Japan, the United States and the European Union are among the important investors in East Asia with Japan being the most significant in ASEAN.

The increasing trend is due to numerous improvement and innovation among the ASEAN member countries. It is reported that the factors contributed to the increasing trend is due to favourable regional economic growth, an improved investment environment, higher intraregional investment and strengthened regional integration. All these factors are the main contributor to the increasing flows of FDI in ASEAN countries (World Investment Report, 2008).

FDI also allows the transfer of technology in various form of capital which cannot be achieved through financial investments or trade in goods and services. A