Factors contributing to the increased role of Asian TNCs in Global FDI

By | May 24, 2013

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1.        Factors contributing to the increased role of Asian TNCs in Global FDI

 

1.1    Increased international cooperation

In the past two decades, many countries in Asia have started to liberalize their economies and increase their involvement in the international arena in term of increased participation in the political and economic cooperation. One of the most significant events marking this trend is  China’s entry into the World Trade Organization on December 11, 2001, since then China’s economy development continues to envy the world together with a trend of increasing inward and outward  foreign direct investments (McGee 2004). Besides the WTO framework, Asian countries also join number international organizations, free trade zones and other treaties, these accessions together provide an excellent platform and opportunities for the local large or even medium sized companies to get access to the oversea resources such as talents and market and become transnational corporations (TNCs) by expanding their business oversea.

 

1.2    Government policy

The role of the government policy in is believed to be even stronger than that in the western economies because the governments in Asia tend to play a more important role in directing and planning the national economies. Take China as an example, as early as 2001, the then Chinese premier Zhu Rongji encouraged the Chinese companies to carry out a going-out strategy the expand their business oversea by investing in the foreign market to increase the external involvement. By  the end of 2002, under the guidance of this strategy, some seven thousand businesses abroad were set up by the Chinese companies and the amount of the contractual investment reach US 16 billion (Wesley 2007, p.60). Another typical example is from Korea. Since 1991, the Korean government started to significantly remove the restriction of outward foreign direct investment (FDI). Since 1999, project of any size prior notification and approval from a foreign exchange bank is the only condition for a company to engage in the oversea business (United Nations 2006, p.208).

 

1.3    Rapid economy growth in major Asian countries

The Asian economy has experienced a rapid growth in the past two decade, and such growth can be seen from the rapidly increased economy data in the major Asian countries. For example, according to the Morgan Stanley Report in 2010, during the past two decades the economies of the two largest and most vivid Asian countries, India and China have been expanding twice as fast as the other parts of the globe, as a result, projected 40 percent of the world trade (Welfens, Ryan & Chirathivat 2008, p.178). With a fast economy growth in the home countries, the local Asian local transnational corporations (TNCs) are able to develop and grow in a relatively stable local market with fewer competitions and their products could be sold more easily as the market is growing and the power of purchasing of the customers is also increasing. Supported by a promising and fast growing home country economy, the local Asian local transnational corporations (TNCs) would be entitled with more bargaining power while doing business with the foreign multinational corporations and also they are enabled to look for opportunities outside of the home countries.

 

1.4    Advantage of low labor cost

Low labor cost has been widely accepted as a major motivator for the strong economy growth in the Asian countries, in particularly the developing countries such as China and India. While it is generally believed that low labor cost is a major reason why many Asian countries become popular destinations for international investment funds contributing to the increase of these countries inward foreign direct investment, in my understanding, the low labor cost also in the home countries could also contribute to the rapid expansion of the local transnational corporations (TNCs) in the oversea market. For example, Huawei, one of the leading global information and communications technology (ICT) solutions providers, last year Huawei’s foreign market sale had accounted for 65% of the company’s avenue and one key factor that supports the faster oversea market growth is the low labor cost that it enjoys in China. As of 2010, Huawei had more than 110000 employees, 51000 of which are working in the oversea markets (Bjreview.com.cn 2010). Though Huawei pays high salary for its staffs who work oversea, it is believed that the salary level is still much lower than that of those who are hired by the western MNCs. Similar cases could be found in many other Asian TNCs as the low labor cost provides these companies with competitiveness compared to the western counterparts.

 

1.5    Technological Spillover effects

Spillover effects could be defined as the externality of an economic activity or processes to those who are not directly linked internally (Monsma 1986, p.115). Spillover effects could be both positive and negative and cover areas such as trade and diffusion of technology (Metz 2001, p.719). The technological spillover effects are obvious in the Asian countries and the Asian local transnational corporations (TNCs) could be using some of the advanced technologies without paying. And because the Asian TNCs had enjoyed such advantages and added them as part of their competitiveness and it is believed that such effects had helped speed up the Asian local transnational corporations’ (TNCs) rise because the majority of them tend to be less resourceful in the owning the world leading technologies.

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