Asian Development Outlook 2004: Foreign Direct Investment in Developing Asia

Asian Development Outlook 2004: Foreign Direct Investment in Developing Asia

The 2004, 2005 and 2006 Outlooks built on the framework set out in the 2003 Outlook discussed above. Taking the theme of FDI, the 2004 edition reviewed in its familiar didactic textbook style the general arguments for and against FDI, and recent developments in such areas as international investment agreements, bilateral treaties and

TRIMs. Overall, noting areas of debate while insisting that there had been a qualitative change in its character and the implications for developing countries: 'The contemporary challenge for developing countries is to develop a new approach to managing FDI. In a globalizing world, competition for FDI is no longer about rents but instead focuses on the establishment of an enabling, business-friendly commercial environment, consistent with national development objectives (ADB, 2004: 215, emphasis in the original). It recognised that if badly managed or poorly controlled, FDI could have negative consequences, as for example when a combination of abundant natural resources and weak institutions led to excessive and uncontrolled extraction and environmental harm (ibid: 221), but insisted throughout that the proper response in all cases was for governments to develop the capacity to manage FDI well.

The centre-piece of the chapter was a comparative case study of China, India, Korea, Malaysia, Thailand and Vietnam, organized around the ideas that 'trade reform alters the incentive of production for the domestic market relative to exports, resulting in a fundamental shift in the behavior of MNEs and in the FDI cost-benefit calculation,' and that 'as economies open up, governments have to make the transition from protectionist/regulatory regimes to a new emphasis on investment promotion and efficiency,' with emphasis on microeconomic or 'second-generation' reforms, or 'competitiveness' variables (ibid: 244, and Table 3.4, p. 245). 4

According to the Bank, the key points emerging from the study were that Notwithstanding their diversity, almost all developing Asian economies have

adopted progressively more open policies toward FDI during the past decade or two, and this trend appears likely to continue. This more open posture has been accompanied by the adoption of more liberal trade regimes, a process that has had profound implications for the motives for, and impact of, foreign investment. These changes have been so rapid in some cases that the policy framework has been unable to keep pace (ibid: 259).

Whether or not benefits accrued from FDI, the Bank firmly concluded, depended upon 'host country policy regimes and institutional capacities' (ibid: 261). The seven policy recommendations were (1) maintain a flexible and adaptable regulatory environment, with particular regard for the quality of incentives, institutions and infrastructure; (2) complete the unfinished reform agenda,especially with regard to the liberalization of services; (3) tailor specific micro-interventions to the level and character of development, and extent of FDI; (4) create a unified investment regime that treats foreign and domestic firms equally; (5) beware the discriminatory effect of preferential trading arrangements; (6) encourage decentralization for its competitive potential, but ensure national

4 Published as D.H. Brooks and H. Hill, eds, Managing FDI in a Globalizing Economy, Palgrave, London, 2012.

developmental objectives are observed; (7) prefer the provision of a commercially profitable and politically stable environment to a regime of 'second-best' fiscal incentives. In short,

With efficiency-seeking FDI, a liberal trade regime, and a competitive commercial environment, FDI can remain a win-win proposition for developing Asia (ibid: 263).