Sustainable FDI in AsiaChallenges and Opportunities

International Conference on Sustainable Investment in ASEAN

Bangkok, 7 March 2002

Maryanne Grieg-Gran International Institute for Environment and

Development

Recent FDI Trends 2001

• Inflows to Asia down 13% from $144bn to $125bn

• FDI to China and India increased

• FDI to Taiwan and Thailand stable

• Decline in FDI to Hong Kong, Korea, Philippines and Malaysia

• Divestment in Indonesia continues

Source: UNCTAD World Investment Report 2001

FDI Inflows ASEAN (US$mn)

-10000

-5000

0

5000

10000

15000

Indo

nesia

Mala

ysia

Philipp

ines

Thail

and

Singap

ore

1996

1997

1998

1999

2000

Source: UNCTAD World Investment Report 2001

Distribution of FDI Flows 2000

Hong Kong/China

Republic of Korea

Singapore

Malaysia

Taiw an

Thailand

Other Asian countries

Source:UNCTAD World Investment Report 2001

FDI Inflows as % of GDP 1999

-20%

0%

20%

40%

60%

80%

HongK

ong

China

Mala

ysia

Philipp

ines

Thail

and

Indo

nesia In

dia

Cambo

dia

China Investment Report 2000

Origin of FDI Inflows to China 2000

EU

US

Asia

Free Ports

Other

Source: A Bende-Nabende and J.R. Slater 1999

Origin of FDI to Thailand 1996/7

Europe

US

Japan

AsianNIES

Other

Source:UNCTAD World Investment Report 2001

FDI Stocks in Asia by Sector

0%10%20%

30%40%50%60%

70%80%

Primary Secondary Tertiary

1988

1999

Top Sectors for FDI in Asia

• Indonesia (1995-1999)– chemicals, electricity/gas/water, paper

• China (2000)– Fastest growing sectors electronics/telecommunication

equipment and chemicals

• Thailand (2000) – chemicals and paper, agricultural products, electric and

electronic products

ECAs in Asia

• ECGD (UK) 2000/01– 25% of total exposure of EUR 41 bn is in China,

Indonesia,Hong Kong, and Malaysia

– EUR 500 mn of overseas investment insurance in Asia (Indonesia and Philippines

• Hermes (Germany) – >EUR 5 bn in 2000 export guarantee cover to Asia

– EUR 14 bn in investment insurance worldwide -China one of 5 major focus countries

European DFIs Commitments in Asia

• DEG (Germany)– EUR 903mn in Asia/Oceania by end of 2000– Indonesia, India, Philippines

• CDC (UK)– US$348 mn in South Asia and Asia Pacific

• FMO (Netherlands)– ca. US$400mn at end of 1998– Philippines, Indonesia, Pakistan

Potential Benefits of FDI

• Economic – Growth, technology transfer, foreign exchange, tax

revenue, access to expertise and markets, spillovers, stability

• Social– Employment, poverty reduction, capacity building

• Environmental– Clean technology, efficient resource use, strict

environmental standards

Potential Disbenefits of FDI

• Economic– High reliance on imports, minimal linkages, crowding

out of local enterprises, competition on incentives, rent-seeking and corruption leading to inefficiency

• Social– Use of expatriate staff, accentuation of inequality,

impacts on local community, poor working conditions

• Environmental– Race to the bottom on standards, off-loading of old

dirty technology

What is Sustainable Investment?

Investment that:

• Generates a competitive financial return for investors

AND

• Contributes to national and local economy

• Brings social benefits and reduces poverty

• Is environmentally sound

Key Factors for Sustainable FDI

• Host country policies

• Market pressures and opportunities

• Company philosophy and visibility

• Investor/finance pressure and opportunities

• Home country policies

• International initiatives

The Opportunities: The Business Case for Sustainable Investment

• Cost advantages– Eg clean technology is more efficient; good working

conditions means higher productivity

• Market advantages– Eg: Means of product differentiation; price premiums,

tapping new markets in the “survival economy”

• Reputation advantages– Social licence to operate

Challenges for Sustainable Investment

• Fending off competition from “free riders”– Requires policy coordination

• Financing public goods – Innovative approaches needed

• Dealing with long gestation periods

• Going beyond “safe projects”

Challenges in Assessing Sustainability of FDI

• Establishing standards – International versus local standards:assumption that

compliance with local legislation not sufficient or practical

– One-size fits all approach not appropriate– Need for wide stakeholder consultation

• Obtaining Information to assess FDI– >440,000 foreign affiliates in S, E and S Asia– EU has 33,249 parent companies with foreign affiliates– Reliance on information supplied by the company

Challenges for Assessing Sustainability (2)

• Assessing supply chains – monitoring codes of conduct eg apparel codes

• Assessing the indirect impact of FDI– eg impact of FDI in the finance sector

• Addressing long-term and uncertain impacts– eg in mining

Information Tools

• Certification (eg FSC, SA8000)– Proliferation of schemes causes confusion

– May not be appropriate for smaller producers

• Environmental management systems – ISO 14000 increasing takeup in Asia but lacks

credibility as not performance-related.

• Environmental and Social audits – problems of interpretation where no widely accepted

standards eg workplace standards

Conclusions

• FDI has an important role to play in sustainable development in Asia

• Sustainable FDI can involve win-wins – but this is not always automatic

• Action is needed from various stakeholders in FDI to overcome the barriers– To create an investment climate which incentivises

sustainable FDI

– To address definition of sustainability standards