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Sustainable FDI in Asia Challenges 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 $125bn • FDI to China and India increased • FDI to Taiwan and Thailand stable • Decline in FDI to Hong Kong, Korea, Philippines and Malaysia • Divestment in Indonesia continues FDI Inflows ASEAN (US$mn) 15000 10000 1996 5000 1997 1998 0 po r e nd Si ng a ila ilip pi Th a ne s a al ay sia si Ph -10000 M In d on e -5000 1999 Source: UNCTAD World Investment Report 2001 2000 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 80% 60% 40% 20% am bo di a ia In d C hi n a M Source:UNCTAD World Investment Report 2001 C H on g Ko ng -20% al ay si Ph a ilip pi ne s Th ai la nd In do ne sia 0% Origin of FDI Inflows to China 2000 Other Free Ports EU US Asia China Investment Report 2000 Origin of FDI to Thailand 1996/7 Other Europe AsianNIES US Japan Source: A Bende-Nabende and J.R. Slater 1999 FDI Stocks in Asia by Sector 80% 70% 60% 50% 40% 30% 20% 10% 0% 1988 1999 Primary Secondary Tertiary Source:UNCTAD World Investment Report 2001 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, rentseeking 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