FDI Strategy under Global and Regional Integration

First, understand FDI dynamics from the viewpoint of foreign investors (as discussed above). Too many officials think in terms of domestically set goals and requirements, and scare away potential investors. National goals and social concerns are certainly important, but they must be realized in a way that is consistent with FDI inflows.

Second, do not change rules after foreigners have already invested. Policy changes are fine, sometimes, especially for better. But for those who came earlier, the old rules should continue to apply so that they will not suddenly face an unfavorable situation ("grandfather clause"). Policy uncertainty is the biggest problem in Vietnam.

Third, do not try to have a vertically integrated industry, from raw materials to final assembly. In the age of globalization, no country can do that, not even developed ones. Target where your dynamic (i.e., future) comparative advantage is, and concentrate your effort on it.

Fourth, do not try to use domestically available natural resources unless they are highest quality and lowest cost (or nearly so) in the world. From the viewpoint of competitiveness, it is better to import best raw materials from the most efficient producers in the world.

Fifth, building supporting industries and technical transfer will take time. They must be done in proper speed and sequence. Hasty requirement of local contents not only violates WTO but also drives away foreign investors.

Six, accumulate assembly-type FDI first, without selectivity, even though domestic value-added is low. Next, as assemblers naturally desire to procure inputs domestically, promote or invite domestic and foreign parts suppliers. If successful, a virtuous circle between assembly and parts will emerge. Technology transfer will come after this, not before.

Seven, work cooperatively with foreign investors. Listen to their needs carefully (you don't have to accept all of their complaints; sometimes they are selfish). Set agreed goals for technical transfer, domestic procurement, etc. and design consistent supporting policies. Work with foreign investors toward these goals, and also solve any problems with them.

Eight, simple external opening (free trade and investment) is not enough. You must use targeted policies to create superior locational advantages and lower the costs of doing business in your country. This requires, among other things, improving domestic skills (production management, marketing, engineering--not just primary education), infrastructure, supporting institutions, efficient government services, good management of industrial and export processing zones (if any), and so on.

Nine, export-oriented FDI should be welcomed most, while domestically oriented FDI is a different story and must be treated differently. Do not attract them with high import protection. If they are already here with high protection, show them a tariff reduction schedule and give them incentive to lower costs. The final outcome (survive or exit) should be determined by global competition and efforts of individual enterprises. This is the same for protected local enterprises as well.

JBIC's survey on Japanese manufacturers, 2004

Every year, the Japan Bank for International Cooperation (JBIC) conducts a survey on Japanese multinational firms. In 2004, the number of surveyed enterprises was 595. The survey period was July-Sep. 2004 which was followed up by firm visits and telephone interviews. The sample includes a wide range of industries from food processing to automobiles, from small to large firms, etc.

The main difference in 2004, as compared with previous years, is that Japanese firms have become more aggressive in expanding business both at home and abroad. This clearly reflects a better business condition and higher profits in recent years in Japan. Moreover, Japanese firms are now seriously concerned with building an optimal global production network instead of unilaterally transferring factories abroad. In fact, some activities (small-lot and high-value production and R&D) are returning to Japan from abroad.

China remains the most popular FDI destination but ASEAN also continues to be an important production location. Some firms worry about too much concentration in China (this worry is surely accelerated by the recent power shortages and anti-Japanese demonstrations in China). Thailand, India and Vietnam are the most popular destinations to diversify the China risk. However, while many firms have actual expansion plans for Thailand, they do not have concrete ideas for India and Vietnam; they are only potentially popular. Indonesia has gone down in popularity in recent years while Russia has become a little more popular than before.

Where do you produce "popular" (low-price) products?  (Red means more than 15%)
	All manufacturing	Electronics	Automobile
Japan	19.3%	5.5%	18.6%
China	8.6%	16.5%	2.3%
ASEAN	8.0%	7.3%	9.3%
Japan & China	20.0%	17.4%	16.3%
Japan & ASEAN	8.6%	5.5%	12.8%
China & ASEAN	15.0%	29.4%	14.0%
Japan, China & ASEAN	20.7%	18.3%	26.7%
TOTAL	100.0%	100.0%	100.0%

The production locations of low-end products are spread across the region: Japan, China and ASEAN all produce them. Many firms prefer to have more than one production location.

Where do you produce high value-added products?  (Red means more than 15%)
	All manufacturing	Electronics	Automobile
Japan	73.0%	70.4%	73.6%
China	2.1%	1.9%	0.0%
ASEAN	1.9%	4.6%	0.0%
Japan & China	9.9%	10.2%	11.5%
Japan & ASEAN	5.1%	3.7%	9.2%
China & ASEAN	0.5%	0.0%	1.1%
Japan, China & ASEAN	7.4%	9.3%	4.6%
TOTAL	100.0%	100.0%	100.0%

High-end products are predominantly produced in Japan. Producing such products in China or ASEAN still remains rare.

Where do you plan to expand business in the next three years?   (Multiple answers; red means China)
1	China (Central Coast)	68.9%	8	Taiwan	21.3%
2	Thailand	47.8%	9	Eastern Europe	17.4%
3	China (Southern Coast)	47.6%	10	Vietnam	15.9%
4	North America	44.3%	11	India	15.5%
5	China (Northern Coast)	35.0%	12	Malaysia	15.5%
6	EU15	31.5%	13	China (Northeast)	13.7%
7	Korea	24.2%	14	Singapore	12.0%

China remains a very popular FDI destination in the near future, but Thailand is also very popular as the ASEAN production base.

Do you plan to withdraw from any countries?  (Number of companies out of 595)
Hong Kong	11
Taiwan	10
Indonesia	10
Malaysia	10
Singapore	9
Philippines	8
EU15	8
North America	7
Other	14

A small number of firms want to withdraw from these areas with relatively high cost. These cases can be classified into three types: (i) closing operation entirely (38 cases); (ii) moving to another country (37 cases, mainly to China); and (iii) moving back to Japan (10 cases).

What is (will be) the risk of doing business in China?  (Multiple answers; red means more than 20%)
	At present (within 1 year)	In future (within 5 years)
Shortage of electricity supply	56.5%	33.4%
Price increase in energy & materials	36.5%	38.2%
Violation of intellectual property rights	29.3%	32.5%
Logistic and transportation problem	11.8%	17.0%
Frequent changes in FDI policy	9.2%	40.9%
Appreciation of Yuan (Chinese currency)	8.5%	67.7%
Shortage of industrial water supply	3.5%	13.4%
Business downturn, market shrinkage	1.8%	33.8%

Power shortages, input cost inflation and IPR violation are big headaches now and in the future. In addition, policy instability, RMB revaluation and recession loom large in the future.

What are the greatest merits and demerits of the following countries?  Do you have any concrete business expansion plans for them?
	Top 3 merits	Top 3 demerits	Have concrete plans  (# of firms)
(1) China	-Future market potential  -Cheap labor  -Supporting industries	-Ambiguity of laws  -Violation of IRP  -Unrecoverable receivables	318
(2) Thailand	-Future market potential  -Cheap labor  -Stable politics & society	-Competition with other firms  -Rising labor cost  -Lack of managers	83
(3) India	-Future market potential  -Cheap labor  -High-quality human resource	-Lack of infrastructure  -Lack of information  -Crime & social instability	23
(4) Vietnam	-Cheap labor  -Future market potential  -High-quality human resource	-Undeveloped legal system  -Ambiguity of laws  -Lack of infrastructure	30
(5) USA	-Current market size  -Future market potential  -Good infrastructure	-Competition with other firms  -Rising labor cost  -Labor problems	58
(6) Russia	-Future market potential  -Cheap labor  -High-quality human resource	-Crime & social instability  -Lack of information  -Undeveloped legal system	9
(7) Indonesia	-Cheap labor  -Future market potential  -Export base for third market	-Crime & social instability  -Competition with other firms  -Lack of managers	23

Japanese firms are generally attracted by market size and low labor cost. On the demerit side, legal uncertainty is a big problem in China and Vietnam; and lack of infrastructure is a problem in India, Vietnam and Russia. Social instability and personal safety is a problem in India, Russia and Indonesia.

 

<References>

Ohno, Kenichi, "The East Asian Experience of Economic Development and Cooperation," chapter 4, East Asian Growth and Japanese Aid Strategy, GRIPS Development Forum, 2003.

Ohno, Kenichi, "Designing a Comprehensive and Realistic Industrial Strategy," Vietnam Development Forum Discussion Paper no.1 (June 2004). Presented to the Vietnamese Ministry of Industry in February 2004. paper  slides

Ohno, Kenichi, and Nguyen Van Thuong, eds, Improving Industrial Policy Formulation, Vietnam Development Forum, published by the Publishing House of Political Theory, Hanoi, 2005.

Ohno, K., "Supporting Industries: Some analytical points for consideration," draft, April 2005.  paper

Ohno, Kenichi, The Economic Development of Japan: The Path Traveled by Japan as a Developing Country, GRIPS Development Forum, 2006 (see box "The road ahead for Japanese enterprises," pp.213-216).

T. Marukami, T. Mimura, H. Saito and M. Suzuki, "The Survey Report on the Overseas Business Expansion of Japanese Manufacturing Firms: The Results of the 16th FDI Questionnaire Survey," Kaihatsu Kinyu Kenkyushoho (Journal of JBIC Institute), no.22, February 2005 (Japanese).

Satake, Takanori, Eiichi Sekine, and Mayumi Suzuki, "The Survey Report on the Overseas Business Expansion of Japanese Manufacturing Firms: The Results of the 17th FDI Questionnaire Survey," Kaihatsu Kinyu Kenkyushoho (Journal of JBIC Institute), no.28, February 2006 (Japanese).

VDF Report, "Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms," draft, April 2006.  draft report