Despite overtaking the United States to become the top destination for foreign investment in the first half of 2012, foreign direct investments (FDI) in China showed an overall trend of decline that began in November 2011, barring an exception in May 2012. For the first 11 months of 2012, FDI was down 3.6 percent year-on-year to US$ 100 billion. In the same half of the year, global FDI inflows saw a decline of 8 per cent compared with the same period of 2011.
The Chinese government has attributed the slump to weak economic growth, the on-going European debt crisis, rising costs, as well as weak domestic demand. Further, China is experiencing structural adjustments in their FDI flows, including the relocation of labour-intensive and low-end market-oriented FDI to neighbouring countries.
While developing countries (without transition economies) for the first time absorbed half of global FDI, flows to developing Asia declined by 11 percent, despite a strong recovery after the global financial crisis.
In the midst of this, Asian economies displayed an interesting dynamic and trends were not uniform. Inflows to Cambodia, the Philippines and Thailand rose in the first half of 2012, while those to Indonesia, Malaysia and Singapore declined. In South Asia, inflows to India, fell from US$18 billion to US$10 billion, partly as a result of shrinking market-seeking FDI to the country. Bangladesh however maintained a relatively high level of inflows— about US$430 million in the first two quarters- due to strong interest by foreign investors in manufacturing, especially in garments. Political risks emanating out of uncertainty in the conduct of elections later this year in Bangladesh as well as bleak economic forecast for India are over looming concerns.
Even though the slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to slowdown FDI flows, the Asia Pacific region continues to be of interest among investors. A burgeoning domestic market, cost-efficient labor force, and an improving investment environment as well as glimmers of political and economic reforms, are the driving factors for investments into Asia.
Amidst doubts about the growth story in India, the spirit of entrepreneurship that thrived ‘despite the government’ is still in place and likely to remain an important driver of economic activity in the country but multinational companies are likely to succeed if they approach investment with patience, reserve capital and a longer term perspective.
Both, the government and the opposition party- the National League for Democracy (NLD), led by Aung San Suu Kyi have made it known that they encourage investments that benefit the local economy in terms of generating jobs, skills development, technology transfer etc. It would be important for multinational countries to put in place rigorous CSR projects and incorporate business models that benefit the locals. Further US and EU multinational corporations may benefit from JVs with companies from ASEAN, India, Japan and other stakeholder countries who have experience of doing business in the country.Recommended posts:
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