Studying trends key to good policy

By Tu Jenn-hwa 杜震華  / 

Tue, Jan 14, 2014 - Page 8

According to the Ministry of Economic Affairs’ Investment Commission figures, foreign investment — including investment from overseas Taiwanese — last year until November was the equivalent of US$4.24 billion. Worryingly, this is less than any year in the past eight, with the single exception of 2010, and less than a third of the figure for 2007.

Foreign investment is generally considered to be a positive force, bringing essential funds, technology, management, talent and networks that no country can do without.

By understanding trends in foreign investment, it is possible to increase how much the nation attracts.

According to UN figures obtained in various countries, there have been some dramatic changes in global foreign investment in recent years. It peaked in 2007, just before the financial crisis struck, at US$2 trillion.

Two-thirds of this was channeled into countries with advanced economies, the remainder going into developing nations and countries with transitional economies.

This situation was turned on its head with the start of the financial crisis and the subsequent EU sovereign debt crisis.

These not only led to a large drop in the amount of foreign investment as a whole — to only US$1.35 trillion in 2012 — but the percentage of this going to the advanced economies fell to 40 percent, with the rest finding its way into developing countries and transition economies.

Foreign investment in developing countries in 2012 — US$700 billion — exceeded the figure for 2007 when it stood at US$600 billion.

This increase was mainly seen in the developing regions of Africa, Asia, the Caribbean and transition economies.

The increase could also be seen in countries attracting investment from Asian countries such as China, Hong Kong, South Korea, Singapore or neighboring Southeast Asian countries, all known for their aggressive investment policies.

Taiwan, on the other hand, was conspicuous in the way it put the brakes on investment in these areas during this period, as investments decreased from US$7.8 billion to US$3.2 billion.

Recently, several main characteristics have been observed in foreign investment globally.

First, foreign investment in the service sector — approximately US$900 billion annually — far exceeds that of the manufacturing sector.

Second, in advanced countries, the most important investment in the service industries has been in finance.

However, in developing countries and transition economies, it has been in business and commerce, the two accounting for two-thirds of total foreign investment, with the trade sector trailing.

Third, in manufacturing, the most important sector was the chemical industry — including pharmaceuticals — followed by food and drink, petroleum, metals and automobiles and transportation, in that order. These sectors came before electronics, the sector in which Taiwan most excels.

There were two significant developments in foreign investment in Asia over the period from 2007 to 2012.

The first is an increase in foreign investment in Asia, from US$365 billion to US$407 billion, increasing the global figure from 18 percent to 30 percent.

The second is a significant reduction in greenfield investment coming to Asia.

While previously all investment entering Asia was greenfield, investment in new initiatives has dropped to less than 60 percent.

In addition, Japan, China and Hong Kong have emerged as the second, third and fourth major sources of foreign investment globally respectively.

In 2012, they were responsible for US$123 billion, US$84 billion and US$84 billion respectively in foreign investment, although Taiwan benefited very little from this.

The 21 economies most likely to attract foreign investment in the period from this year to 2015 are: China, the US, India, Indonesia, Brazil, Germany, Mexico, Thailand, the UK, Japan, Russia, Vietnam, Australia, Poland, South Africa, Canada, France, Malaysia, Hong Kong, the Philippines and Turkey, in that order.

Taiwan is facing serious competition from emerging economies in Europe, Asia and Latin America in terms of attracting foreign investment, and holding a handful of investment fairs or signing an investment letter of intent or two is likely to fix it.

The jury is still out on whether the free economic pilot zone initiative will actually attract investment.

If the cross-strait trade agreement can exempt chemicals, foods, metals and automobiles from import tariffs, major international manufacturers could be falling over themselves to set up plants in Taiwan to avoid the customs tariffs in China.

Studying foreign investment trends and using this data to inform government policy on attracting such investment, together with the Economic Cooperation Framework Agreement, may give the nation a chance of running with the big boys.

Tu Jenn-hwa is director of the Commerce Development Research Institute’s business development and policy research department.

Translated by Paul Cooper