Impact of Foreign Direct Investment on Exports Case for Vietnam (1988-1995).pdf

NATIONAL UNIVERSITY- HCMC
COLLEGE OF ECONOMICS
VIETNAM
INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS
VIETNAM-THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS
IMPACT OF FOREIGN DIR.EC'f INVESTMENT ON E,'{PQRTS
CASE FOR VIETNAM (1988-1995)
by
NGUYEN TO KlEU TRINH
1. KAREL JANSEN, Ph. D
2. NGUYEN TRi HUNG, M.A
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MASTtR Of ARTS lll tCOMOMICS Of DtlU.OfMUIT __ .. __
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HO CHI MINH CITY, December 19~----- ------------- ·-

CERTIFICATION
"I certify that the substance of this dissertation has not already been submitted for
any degree and is not being currently submitted for any other degrees.
I certify that to the best of my knowledge any help received in preparing this
dissertation, and all sources used, have been acknowledged in this dissertation".
Signature
Nguyen To Kieu Trinh
Date : December, 20th, 1996

I wish to express my thanks to authors whose thoughts are foundation for my
thinking in this research paper.
ABSTRACT
In the context of "'Open door" and "Doi moi" policies, Foreign Direct Investment
inflows in Vietnam have been considered, among other things, as having a significant
impact (either direct or indirect) on the development process, especially on the export
performance of Vietnam. The export increases steadily every year from 1988 at annual
average growth rate of 32.02%, especially since 1991. Average annual growth rate in
period 1988-90 was 44.0% and 44.4% in 1995.
The inflows of Foreign Direct Investment firstly concentrated in mineral and services
(mainly hotels and tourism) sector, but recently it has been shifted to industrial sector.
This trend is appropriate for the process of industrialisation and modernisation of
Vietnam. It increases every year, from only 366 million USD of investment capital
(implemented capital of 60 million USD) in 1986 up to 6,400 million USD
(implemented capital of 2,000 billion USD) in 1995. Total investment capital
approached 18,228 million USD and implemented capital approached 5,878 million
USD from 1988-95. Increase in exports in the context of 'Open-door' policy, among
other things, in period 1988-1995, reflected the response of nice achievement, not only
in short but also in long run, from the positive influence of Foreign Direct Investment
although that this influence was still modest.
Identifying the impact ofForeign Direct Investment on export performance of Vietnam
from 1988 till 1995 is the subject ofthis paper.

111
Thanks are due to my classmates Hoang Due Phu, Pham Kien Phuong and
Nguyen Anh Tuan for their helps and interests, especially, Nguyen The Minh for his
tireless assistance in providing useful data. Words of thanks are also due to my close
friend Do Dinh Nam for his tireless help in providing useful documents.
I acknowledge with thanks Ms. Dang thi Kim Chi, librarian; Ms. Dinh Thi Anh
Nguyet, Secretary of Project for their interests and material provisions; and my
classmates and all friends for their support throughout.
WorO.S of thanks are due to my family. Many are worthy of mention. To them, I
am eternally grateful. Finally, this work is devoted to my parents, Nguyen Huu Duy
and Cong Tang Ton Nu Thi Le Hong, who gently bestowed me with curiosity and
concern about the world.
Needless to say, any remaining mistakes or omissions are entirely mine.

TABlE OF CONTENTS
ABSTRACT
ACKNOWLEDGEMENTS
TABLE OF COTENTS
LIST OF TABLES
LIST OF CHARTS
Chapter 1 INTRODUCTION
1.1 General Information
1.2 Statement ofthe Problem
1.3 Objectives of the Study
1.4 Organisation ofthe Study
Chapter 2 THEORETICAL FOUNDATION AND EVIDENCES OF
FOREIGN DIRECT INVESTMENT AND ITS IMPACTS
ON EXPORTS
2.1 Definition ofFDI
2.2 Theoretical Foundation of FDI and evidences of its
Impacts on Exports
2.2.1 Theoretical Foundation ofFDI
2.2.1.1 Models and Forms ofFDI
a) Models ofFDI
a.l Export-Oriented FDI (EO FDI)
a.2 Import-Substituting FDI (IS FDI)
a.3 Market- and Technology- Accessing FDI
IV
Page
11
IV
V11
X
1
4
4
4
5
5
5
5
5
6
8
9

Cbapter3
a.4 Diversified FDI (DI FDI)
b) Forms ofFDI
*Summary
10
10
11
2.2.1.2 Flying-Geese Pattern of FDI in Asia, Globalization of 11
2.2.2
Production, Japanese-Type FDI and Sectoral
Composition
*Summary
Globalisation ofProduction
Japanese-Type FDI
Impacts ofFDI on Exports
12
12
14
16
a) Review ofTheories ofFDI 16
*Product-Cycle Theory 16
* Exchange rate FDI Themy 19
*Eclectic Theory 21
*Swnmary 22
b) Evidences about the Impact ofFDI on Exports 23
* FDI as a Source ofExport Growth 23
* More evidences 25
* Evidences from previous Studies and Surveys 36
c) Evidences from Case Studies 38
c.l Thailand- Implied Policy 38
c.2 China -Implied Policy 42
c.3 Singapore- Implied Policy 45
Summary of the Impact of FDI on Exports of the Host 49
Country and Implied Policy for Attracting FDI
FDI IN VIETNAM AND ITS IMPACT ON VIETNAM'S
EXPORTS
3.2 Impact ofFDI on Exports
51
66
'

VI
*Evidences 66
* More Evidences 73
a. Some evidences from industrial and mining sector 77
b. Hotels and Tourism 87
c. Export Processing Zones (EPZs) 88
*Remarks 91
Chapter 4 ESTIMATION MODEL
*Justification for the Use ofthe Model
Conclusion
Chapter 5 RESULTS, SUMMARY, CONCLUSION, POLICY
IMPLICATIONS AND SUGGESTION FOR THE
FURTHER STUDY
APPENDIX
5.1
5.2
5.3
4.4
REFERENCES
Results ofthe Study for the Case ofVietnam
Summary and Conclusion
Policy Implications
Suggestion for Further Study
Box 1
Box2
Table 17.2, 19.2
Table 20.2, 23.2
Table 46
93
96
97
98
98
99
100
102
103
104
105
106

01
02
03
04
05
06
07
08
UST OF TABLES
Selected Capital Flows to Developing Countries
Top-10 FDI-Received Developing Countries in 1970s and 1980s
Average Inflows of FDI to Developing Regions, by Region,
1970-79, 1980-85. 1986-90
Monthly Yen Appreciation after The Plaza Accord
Net FDI, 1982-1989
Labour Force by Region, 1950-2020
The Hourly Cost of Labour per Skilled Labour in 1993
Exchange Rate (Annual Average) and Real Exchange Rate
(RER)
Page
01
03
13
20
20
26
27
28
09 The Increase of Wage Rate (Monthly earnings) 29
10 Foreign Direct Investment in Selected Asian Countries and 29
China
11 The World's Imports from 1980-94 30
12 Growth Rate of Real GDP 31
13 Merchandise Exports of NIEs, ASEAN4, Asia and the World 32
14 Export Composition of NIEs and ASEAN4 33
15 FDI by Sector 37
16 The Share of Foreign Affiliates in Manufacture Exports, 38
Selected Years and Countries
17 Selected Data for Thailand 39
Vll

Vlll
18 Trends in FDI, Thailand 1980-89 40
19 Selected Data for China 43
20 Selected Data for Singapore 46
21 Contribution of Foreign Capital to Singapore's Manufacturing 47
Sector (1975-89)
22 Comparative Performance of Foreign and Local Establishments 48
in the Singaporean Manufacturing Sector, 1989
23 Selected Indicators for Vietnam 52
24 Average Growth Rate of Some Selected Indicators 56
25 The Top-15 Foreign Investors in Vietnam 57
26 Investment Projects by Type of Economic Activity 60
27 Allocation of FDI in Sectors of Vietnam from 1988-95 61
28 SectoralShares in GOP by Economic Sector 59
29 Vietnam's Major Exports from 1988-95 62
30 Annual GDP Growth Rate by Sector in Vietnam's Economy 64
31 Forms of FDI, on Annual Basis (by July 7, 1994) 64
32 The 15-Most-Invested Provinces 65
33 Oil Exports from 1986-95 68
34 Estimated Annual Oil Production to the Year 2000 68
35 Planned Real GOP Growth Rate from 1996-2000 69
36 Comparing Incentives for FDI in ASEAN Countries 71
37 The Contribution of FOI projects to the Merchandise Exports of 74
Vietnam, 1988-95
38 Structure of Vietnam Merchandise Exports from 1988-95 78
39 Annual Exports of Textiles and Garments, 1988-95 80
40 Upgrading Projects of Cement Plants 82
41 Cement Joint Ventures Licensed and Proposed Cement Projects 83
42 Existing Steel Joint Ventures 84

lX
43 Moto-Bike Demand in Vietnam, 1996-2000 86
44 Some Indicators of Tourism in Vietnam 88
45 Land Area of EPZs and IZs 89
17.1 Regression Estimates of the Impact of FDI on the Exports 95
Performance of Thailand, 1971-92
Performance of China, 1979-92
Performance of Singapore, 1971-93
Performance of Vietnam, 1988-95
17.2 Full Results for Thailand Case 103
19.2 Full Results for China Case 103
20.2 Full Results for Singapore Case 104
23.2 Full Results for Vietnam Case 104
46 Selected Data for United States 105

X
UST OF FIGURES
Page
01 FDI Flows to Developing Countries are Concentrated into Two Regions, 02
1990-94
02 Annual GDP Growth Rate of Vietnam, 1988-95 53
03 Trend of Annual Inflation Rate in Vietnam 54
04 Official Development Assistance (ODA) in Vietnam, 1988-95 55
05 FDI inflows in Industry, 1988 till the end of March 1996 63
06 The Proportion of Exported Processed Products 63
07 Trends in RER and Merchandise Exports 74
08 Trends of FDI (Registered and Implemented) and Exports of Vietnam, 75
1988-95
09 Market Share of Textiles and Garment Exports 81

CHAPTER!
INTRODUCTION
Foreign Direct Investment (FDI) is playing a growing role in economic development. FDI
flows to developing countries have increased at a rapid pace, quadrupled from an annual
average of 12.6 billion USD in 1980-85 to 51.8 billion USD in 1992-93 (reaching an estimated
38 billion USD in 1992, a fourfold increase since the mid-1980s, and a 50% increase over the
past two years) and rose to 70 billion USD in 1994. Developing countries received 32 percent
oftotal world FDI during 1992-94, up from 20 percent in the first half ofthe 1980s. The share
ofFDI in the gross capital formation of developing countries more than doubled between 1986
and 1992, surpassing 6 percent in 1993.(Bergsman, J. and Shen, X. 1995, p. 6). Table 01 can
tell us the story of increasing FDI inflows to the developing countries; from only 304 million
1993 USD in the 1960s to 12,988 million 1993 USD in the 1980s and up to 63,999 million
1993 USD in 1993 (net). From this table, we can also recognise the increasing important role
of FDI if being compared to other forms of capital inflows to developing countries. From
chart 01, we can see that FDI flows to developing countries are concentrated into two regions:
East Asia and the Pacific, and Latin America. In general, the FDI often concentrates in some
areas and countries with large 'emerging and active markets' or with the success in stabilising
the macroeconomic environment, reducing price distortions, deregulating investment
procedures, increasing general economic efficiency-getting the "fundamentals" right for all
private investment, domestic or foreign, ... If in the 1970s, Singapore was only in the fifth rank
in the top-10 FDI-received developing countries, and China and Thailand were not in this list.
in 1980s, Singapore in the first position and China, Thailand are in the fourth and ninth
position (table 02).
Table 01
Selected Capital Flows to Developing Countries
(million 1993 USD)
1960s 1970s 1980s 1991 1992 1993
Net FDI 304 3,024 12,988 34,475 44,868 63,999
Por. Inv 13 423 3,353 17,505 24,250 86,569
Net CBL 384 9,839 11,791 1,892 14,541 5,482
Gr.& ODF 1,466 9.854 34,366 59,301 47,383 52,336
Total 2,167 23,140 62,498 113,173 131,042 208.386
Notes: - Por. IllV.: Portfolio Investment; Net CBL: Net Commercial Bank Lending; G&ODF: Grants and
Official Debt FlO'tt·s.
-Figuresfor the 1960s, 1970s and 1980s represent the annual averagesfor those decades.
Sources: IMF, Balance ofPayments, Statistics Yearbook. Various years; and World Bank, World Debt Tables
Various years. (taken from Bergsman, J. and Shen, X (1995), Foreign Direct Investment in Developing
Countries: Progress and Problems', Finance & Development, December 1995, pp. 7).

Chart 01
FDI flows to Developing Countries are Concentrated into Two Regions
(1990-1994)
29%
9"A>
ID&st Asia and the Pacific
C Latin America
CSouthAsia
C Eastcm Europe and Central Asia
EllMiddle East and North America
• Sub-Saharan AfOOl
2
Sources: IMF, Balance ofPayments, Statistics Yearbook, Various years; and World Bank, World Debt Tables,
Various years. (taken from Bergsman, J. and Shen, X (1995), 'Foreign Direct Investment in Developing
Countries: Progress and Problems, Finance & Development, December 1995, pp. 7).
The top-10 FDI-received developing countries accounted for 66% of total FDI inflows in the
developing countries in the 1970s and this number was up to 68% in the 1980s. "FDI now is the
dominant form ofresourceflows to developing economies and the primary source ofprtvate capital for
low income countries, accountingfor more than a quarter ofaggregate net flows and exceeding total
long term debt flows" 1
. FDI is a large and growing source of equity investment that brings with
it considerable benefits: technology transfer, management know-how, and export marketing
access. Many developing countries will need to be more effective in attracting FDI flows if
they are to close the technology gap with high income countries, upgrade managerial skills,
and develop their export markets. It is the increasingly important role and the existence ofFDI
in the process of development of the developing countries, there are not only many theories
but also many empirical studies as well as lots of controversies about FDI and its impacts on
the host country. There are also, particularly, many studies about the impact ofFDI on export
performance of the host country. In the context of the previous studies, I am, myself,
interesting in studying the impact of FDI on exports of Vietnam. From this study, I can draw
out some implications about the policies related to FDI in order to attract much FDI
contributing more for exports of the host country. I do so because exports play a very
important role in development for a country and this thing has been proved by related theories
and studies.
1
'Foreign direct investment-benefits beyond finance', Development Briet: the World Bank, Aprill993, No.4.

Table02
Top-10 FDI-Received Developing Countries in 1970s and 1980s
(]n billions ofUSD)
Rank 1970-1979 Rank 1980-1990
Country/Region A. A. In. C. Country/Region A. A. In. C.
1 Brazil 1.3 1 Singapore 2.3
2 Mexico 0.6 2 Mexico 1.9
3 Malaysia 0.3 3 Brazil 1.8
4 Nigeria 0.3 4 China 1.7
5 Singapore 0.3 5 Hong Kong 1.1
6 Egypt 0.3 6 Malaysia 1.1
7 Indonesia 0.2 7 Egypt 0.9
8 Hong Kong 0.1 8 Argentina 0.7
9 Iran 0.1 9 Thailand 0.7
10 Uruguay 0.1 10 Taiwan 0.5
Accounting for 66% the total FDI Accounting for 68% the total FDI
capital inflows to developing capital inflows to developing
countries countries
Note: A. A. ln. C.: Annual Average Investment Cap11al
Source: World Investment Repon I992. United Nations, New York, 1992, pp.317. (taken from 'Chinh Sach Hop
Tac Dau Tu ', Tong Luan Khoa Hoc Kv Thuat Kinh Te. Ministry of Science, Technolog;· and E!TVironmelll,
No.8(90), 1995, pp. 35).
In the context of "Open door" and "Doi moi" policies, Vietnam's economy has gained the
continuous growth rate since 1987 of more than 5%, particularly steadily increasing from
1990 and with more than 8% from 1992. In addition, the inflation has been pushed from the
high level of three digits down to one digit (5.28%) in 1993 and two digits (12.7%) in 1995.
According with the increase in growth rate is the increase in the foreign capital inflow into
Vietnam and one of its component is the Foreign Direct Investment (FDI) which is considered
one ofthe contributions to the increase in the exports, especially in the manufacturing sectors,
the food - processing sectors and natural resources sectors,... Vietnam is attractive as an
investment receiving country because of low labour cost, abundant natural resources such as
oil and other minerals, and a large domestic market with more than 75 million people. From
the time of promulgating the law about foreign investment in December 1987 till 1995, there
has been more than 19 billion USD of registered FDI with nearly 6 billion USD of that
implemented. FDI can contribute much not only for the development process of Vietnam but
also for the e>..-port performance ofVietnam.

4
1.2 Statement of the Problem
In the development process of Vietnam, it is clear that FDI plays a very imponant role. Beside
the other influences ofFDI on Vietnam in this process such as technology transfer, managerial
aspects, environment effects,... its impact on export of Vietnam is of vital importance. How
can this impact be explained and proved by the theories of FDI and by evidence either in
practical situation or in regression model?. This study will bring out the some ideas behind it
and so it can help policy makers in drawing out policies relating to FDI. This thing is very
important not only in attracting FDI but also in guiding or controlling FDI in order to make its
contn"bution to the development process of Vietnam. If it is true that FDI can influence the
exports of Vietnam in positive way, what aspects of implied policies of Vietnam needed to
attract FDI in beneficial way for exports will be recommended basing the analyses of FDI in
Vietnam and experiences of some selected countries.
1.3 Objectives of the Study
The specific objectives oftins study are as follows:
a/.To review the theoretical foundation ofFDI and argue its impact on export performance of
the host country
b/.To estimate impact ofFDI for Vietnam case.
c/. To recommend some policy options.
This study is expected to be a pace further over earlier studies which have been undertaken to
analyse the impact of FDI on the export performance of Vietnam. Both analytical descriptive
and regression model methods are used to obtain those objectives.
1.4 Organisation of the Study
The rest ofthis paper is organised as follows:
Chapter two provides a review of the theoretical foundation and lots of evidences and then
this chapter will also draw out some implied policies from these evidences. Chapter three
presents in details FDI in Vietnam and its impact on exports with various evidences. Chapter
four is to do with the details about the estimation model. Finally, chapter five provides the
results from regression model about the impact of FDI on exports of Vietnam, and then the
summary, conclusion, some policy implications ofthe study and suggestion for further study.

CHAPTER2
THEORETICAL FOUNDATION AND EVIDENCES OF
FOREIGN DIRECT INVESTMENT AND ITS IMPACTS ON
EXPORTS
2.1 Definition ofFDI
5
Foreign Direct Investment (FDD is considered as the flows of capital from a parent company
to a foreign affiliate or the investment by the companies domiciled in one country in
companies domiciled in another. It can be a complex activity consisting of four dimensions
such as a transfer of capital, a control of investment, a source of funds for foreign operations,
and a balance ofpayments flow 2
.
In other words, FDI is the direct investment which is made by non-residents, typically but not
always by multinational corporations (MNCs), in the enterprises located in host countries;
direct investment implies full or panial control of the enterprise and physical presence by
foreign firms or individuals. MNCs can provide a package including capital, employment,
technology, managerial expertise, and access to markets,...
2.2 Theoretical Foundation of FDI and Evidences of its Impacts on Exports
2.2.1 Theoretical foundation of FDI
2.2.1.1 Models and forms of FDI
a) Models ofFDI
Firstly, we have to say that, unlike private bank lending, FDI does not consist simply of a flow
of finance. One of the advantages for developing countries is that along with capital, FDI
typically provides a unique package of other resources, including technology, know-how,
management, training, and facilities for marketing the product or service. Because the
recorded volume of direct investment does not reflect the flow of these non-financial
resources, it normally significantly understates the importance of this type of capital to the
host country. Although both types of foreign capital (commercial lenders and foreign
investors) involve a balance of payments risk, the project risk is borne by the provider of
2
For more information, see Eng, V. M, Lees, A. Fr. and Mauer, J. L. (1995), 'Direct investment: Empirical
perspective, motivations, and risk dimensions', Global Finance, HarperCollins College Publishers, New York,
ch.13, pp. 429-430.

6
capital in the case of direct investment but by the recipient of the capital in the case of the
commercial loans. In general, FDI in the Third World is undertaken for the following three
. 3
mam purposes :
aJ. to develop and export minerals or other natural resources, or, to establish a base for the
export ofmanufactured products to the home or third country markets.
b/. to manufacture products or produce services for sale in the local market
c/. to study and to take advantage the technology, marketing and managerial skills,... of the
host countries in order to utilise them for the production at home.
Secondly, from the above three main purposes, we can have the four main broad models of
FDI as follows:
a.l Export-oriented FDI (EO FDI)
This model of FDI will include the resource investment, and the base for export. This kind of
FDI can, in general, have the direct impact on export performance of the host country. This
model can include the following types:
* Resource-investment FDI:
This is the classical type of FDI in the Third World with the establishment of the subsidiaries
which are owned by the parent company to develop and to extract crude minerals for
processing at home (or for processing at host countries) within a network of production or for
export to third parties. The crude resource-investment FDI can only supply few links to the
local economy and it does remain an enclave in the economy. It began a long time ago, in non-
fuel minerals, has declined worldwide due to excess capacity and sagging relative prices. The
processed-resource-investment FDI is the FDI in the natural resource processing areas (such as
rubber products, canned fruits, frozen seafood products,... ). The processed-resource-
investment FDI, day by day, proves its importance in the development process of the country,
especially, in the export performance ofthe host country.
3
'Foreign investment in developing countries', Unpublished Note by Secretariat, OECD, 11 October 1984, pp. 8
(taken from 'Foreign private investment', Finance and Third World Economic Growth: A Statement by the
Research and Policy Committee of the Committee for Economic Development, Westview Press, London, 1988,
pp. 80, 81); and, The New Wave of FDI in Asia. Normura Research Institute and Institute of Southeast Asian
Studies, Tokyo Club Foundation for Global Studies, Singapore, 1995.

7
* Base for export
With the establishment of an affiliate as a base for export manufactures to home market, to
third country market, or both; among other things, cost factors and risk will influence much in
the investors' decisions. The investors is often attracted by the availability of reliable and
disciplined supply of low-cost labour. So, the parent company can gain more profits through
producing labour-intensive products, or outputs,.... in the industries such as footwear, textile,
leather goods, processed food stuffs,... (or products for the so-called traditional manufactured
exports); apparel; consumer electronics;... The FDI for export that is increasing its share
represents such vertical international specialisation between intermediate stages ofproduction,
in contrast with horizontal specialisation between different final products. By locating
different activities in various countries according to factor endowments, and by sourcing
worldwide for components or other inputs, the transnationals have played an important role
which helps developing countries to more fully realise their comparative advantage. This
process is highly dynamic one. As the pace of development has speeded in some certain
attractive locations, such as Singapore and Korea, the labour supply became more scarce and
expensive. Cheap-labours investment for exports then shifted to other places with the
availability of low-cost labour. Base-for export FDI does not sometimes result from any
inherent cost advantage but due to the performance requirements required by the host
governments. FDI that is originally to serve the local market may have to satisfy some
minimum export targets. The requirement often asks a company to compensate its imports of
inputs for comparable value of exports. Therefore, foreign enterprises may be forced into non-
beneficial exporting while compensating their losses through sales at higher prices in the
protected host country market.
In reality, the foreign investors relating to these activities, can participate in all types ofFDI as
aforementioned, especially, in recent time when the diversification in production (such as
Coca Cola Corporation, Hyundai, Samsung,... ). In deed, this can be seen from the study of
Fukushima, K. and Kwan, C.H. (1995) 4
. In their study, this model ofinvestment is mentioned
in the name of «Outsourcing ". Its goal is to secure the supply of production factors in an
advantageous way. As factors of production include labour force, infrastructure, and natural
resources, this production factor-securing FDI can be in many forms. Because the main goal of
this type of FDI is to reduce production cost rather than to find market share in the host
country, it can also be considered as concentrating on cost and risk reduction and export
orientation. Until now, it has been the most important objectives for companies in more
advanced countries to invest in developing countries in Asia. This model of investment is
4
Fukushima, K and Kwan, C.H. (1995), 'Foreign direct investment and regional industrial restructuring in Asia',
The New Wave ofFDI in Asi!b Nonnura Research Institute and Institute of Southeast Asian Studies, Tokyo Club
Foundation for Global Studies, Singapore, 1995.

8
commonly for labour-intensive products and processes such as textiles and the assembly of
electronic products. Production tends to be relocated in search of lower costs of production. In
general, its output is exported, either back to the home country or to third countries. Many
investments by Hong Kong corporations in China, and Japanese investment in Asia during the
second halfofthe 1980s are considered as this kind ofFDI.
To attract this kind of FDI, among other things (such as low cost labour v.ith appropriate
skills, rich in natural resources, ect.), the host country must have the choice of follO:ving the
Export-oriented way at least in some fields in their policy. As mentioned above, this kind of
FDI is often followed by the liberalization of the host country with the very open policy for
exports and import input for export production, exchange rate profitable for exports,...
a.2 Import-substituting FDI US FDI)
This model ofFDI is with the efforts offinding the entry into the host country's market so it is
also called as Investment-for-the local market FDI. Investment in manufacturing aimed
mainly at local markets may be undertaken for some reasons. It often sterns from the trade
barriers imposed in the context of import-substitution strategies of industrialisation (especially
in Latin American countries). In this case, in order to preserve market share, the parent
company has to establish an affiliate to produce locally. Other motivations have included the
desire to improve the ability to serve a foreign market by developing, through local
manufacturing, better relations with distributors, superior service to customers, increased
opportunity to utilise local materials and design products appropriately for the local market,
and reduce transportation costs. The decision points of producing overseas for local sale are
often the host country market size with the potential growth. An increasing proportion of the
FDI primarily for the domestic market has been in the service sector, especially banking,
insurance, trade and advertising. Normally, the service enterprises have the tendency to follow
their manufacturing clients abroad to preserve their market shares.
With the decline in growth in Latin American countries, and a reduction in protection in a
number of developing countries, the IS FDI has been somewhat discouraged in recent years.
Conversely, the EO FDI (mostly in type of base for export) has been booming as firms have
been positioning world-wide to minimise production cost and risk through globalization and
this situation has included not only multinationals but also firms with relatively small
international operations. 5
5
'Foreign private investment', Finance and Third World Economic Growth: A Statement by the Research and
Policy Committee ofthe Cornminee for Economic Development. Westview Press, London, 1988, pp. 80, 81.

9
From the study in Asia of Fukushima, K. and Kwan, C.H. (1995), this model of FDI is also
mentioned in the name of Trade-barrier circumventing. Its goal is at replacing local
production for export that encounters trade barriers in the importing country. Among other
things, market size of the host country and potential demand are the 'magnetic points' of this
kind ofFDI. For example, when facing the trade restrictions from Orderly Market Agreements
(OMA) or Voluntary Export Restraints (VER), as often having been occurred in Europe and
North America, export companies have to establish production in the country which is their
before-restriction export market. Many developing countries in Asia give preferences to FDI
and use high import tariffs as a way to protect infant industries. Therefore, it is considered
investment by Japanese, Korean, and Taiwanese corporations in the United States and Europe
as trade-barrier circumventing, and there are many Japanese investments in China being
considered as this kind ofFDI.
This model of FDI can contribute to the export of the host country indirectly through the
supply of materials, trained labour forces, the economising foreign exchange for the export
activities or in general for other economic activities (FDI in cars, beer, milk, electronics...
industries),... One will look forward to its more important role in contributing to the export
performance of host country when some IS FDI may gradually become export-oriented. For
example, some Latin American countries with import-substituting industrialization in the past
are the location of IS FDI, but these IS FDI then became EO FDI when these countries
followed outward-looking policies and this process occurred through times.
In policy's aspects, among other things, it is clear seen that IS FDI is attracted by the domestic
size of the host country with a potential level in demand, the pursuance or wholly (like in
Latin America in the past) or some parts in some areas of Import Substitution policy of the
host country, particularly with trade barriers, exchange rate policies,...
a3 Market- and technology- accessing FDI
Its goal is to create a new comparative advantage by accessing information, technology, and
marketing channels. This process is done through learning and absorbing advanced technology
from the host country or studying the art of marketing,... It will result in providing 'new
knowledge' for investing corporations. Many Japanese corporations have been building
marketing networks and Research and Development (R&D) facilities in the United States.
They have been followed by corporations in Korea and Taiwan. Recently, many Korean and
Taiwanese firms have built research centres in Japan. It is considered some of China's
investments in Hong Kong as this kind of FDI. This is a positive and expansionary investment
for both the company and the nation's economy. Contrary to FDI with the purpose of only
securing cheap labour or circumventing trade-barriers with technology stagnating at the same
level, this type of FDI, when, successful, can create new technologies, products, or services

10
and sharpen the competitive edge of the respective industry in the home country. It can also
provide further growth opportunities for the world economy. This new type ofFDI can not be
interpreted fully by the traditional theory ofFDI.
This model of FDI can be better considered and analysed more carefully when studying the
impact of FDI on the exports of home country in the long run. In other words, in my study in
the following sections, I do not have the intention to include this model ofFDI.
a4 Diversified FDI (PI FDI):
In reality, recently, especially in the 1970s, 1980s, and in the first half of the 1990s, under the
pressure of fierce competition, and the wave of globalization, the above distinction in FDI -
EO FDI, IS FDI- is weakening and even disappearing. Foreign investors, particularly l.1NCs,
often participate into the many fields which can give them more benefits with low risk and be
better for them. They do not only concentrate on a certain model of FDI, but, instead, a
combination of the models mentioned above in the advantageous ways for them. This
combination of FDI often leads to so-called 'network' of production. There are a lot of FDI
projects in Asia now producing both for local markets and foreign markets such as FDI in
textile industry in Thailand and in electronics areas in Vietnam. This combination can also be
changed over time. Many of MNCs relating to IS FDI in some countries has now gradually
shift some parts and even most of their activities in EO FDI (this shift can be appropriate for
their activities and for the wave of liberalization in many countries (for example in many
developing countries in Latin America and Asia. It is the complexity of this FDI-mode1
combination will make it more difficult to estimate and analyse the impact of FDI projects on
exports of the host countries. It is those reasons that this model of FDI can be called as
'Diversified FDI'.
b) Forms ofFDI
FDI can take a number of forms : a joint venture, licensing the import of technology or
management, 100-percent foreign ownership of an enterprise, and co-production. It is
understood that China has decided to deal with foreigners principally through joint ventures,
and that these joint ventures will have a specified, but fairly long life-20 to 30 years in many
cases. Besides, it also exists the so-called "new form" of foreign direct investment (NFDI) in
developing countries, notably joint ventures and licensing agreements. (NFDI projects are
ones that are at least 50% locally owned, with some assets supplied by one or more foreign
companies or projects show the investment not only ofthe host country participant(s), but also
of at least one of the participating foreign companies) (see Oman 1986). However, the NFDI
does not exist in areas that ask much technology, know-how, experiences,... that the host
country partners do not have or can not control, for example, in the oil industry in Vietnam.

11
*Summary
From the above classified models and forms ofFDI, we can understand more about why and
how FDI can have the impact on exports ofthe host country and why investors want to invest
abroad. In the context of models and forms of FDI, foreign investors want to reduce the
increasing production cost at home, or want to secure their production factors in a beneficial
way, or want to reduce risk. Among other motives, these three motives have driven them to
invest overseas and participated into the development process of the host country, in which it
does include the contribution to changes in the export performance ofthe host country both in
volume and composition. From the analysis above, it can be seen that the proportion DI FDI is
clearly increasing, especially from 1970s, and there are not many FDI projects relating only
100 percent in EO FDI. In addition, the foreign investment concerning in IS FDI can have the
impact on exports of the host country indirectly and this impact is either difficult to estimate
or analyse or unavailable in information and data Therefore, in my study in the following
sections, it is inevitable that I am mentioning very little to the impacts on export performance
ofhost country ofIS FDI.
In the policy's aspects, each kind of models ofFDI (of course, I do not mean the market- and
technology- accessing FDI) is affected and attracted, among other things, by some major
elements. But depending to the purposes of the host country, a certain sector in the economy
will be biased by its policy to attract what kind of FDI (IS FDI or EO FDI) as mentioned
above. As aforementioned, in the context of high competition, globalization of production,
liberalization movements of many countries, a mixture in the policies of many developing
countries, especially in Asia, with the bias towards or in favour of Export-Oriented
production, the attracted FDI is DI FDI with high proportion of EO FDI in it. Some selected
aspects in policies of host country in attracting more FDI with the purpose of increasing
exports, therefore will be mentioned more in details some where in the next sections.
2.2.1.2 Flying-geese pattern of FDI in Asia, globalization of production, Japanese-type
FDI, and sectoral composition
From the 1985 Plaza Accord, the concentration ofFDI in Asia has moved from the Asian NIEs
to ASEAN and farther to China, broadly in line with the flying-geese pattern. Economic
development in Asia can be explained by the process of less-developed countries catching up
with the more advanced ones. In this flying-geese pattern of economic development, each
country continues the industrialisation process based on its stage of industrial development,
while keeping international division of labour by exporting those industrial products in which
it has a comparative advantage. Both the "catching-up and caught-up" (Fukushima, K. and
Kwan, C.H. 1995) countries make industrial adjustments in a positive way with the purpose of

12
approaching a higher stage of industrialisation which can possibly create a dynamic growth in
the whole region. In deed, in Asia, countries at different stages of economic development
coexist, with Japan at the top ofthe table, followed by the NIEs, ASEAN, and the mainland of
China. The flows ofFDI from countries at higher stages of economic development to those at
lower stages has resulted in more efficient use ofproduction factors, attaining a higher growth
and a higher level of industrialisation for both groups of countries. Host countries can utilise
their surplus labour and accumulate capital, technology, and management skills, so they can
advance their industrialisation. Home countries can redirect excessive labour from sunset
industries to sunrise industries, therefore they can achieve an even higher level of
industrialisation. There are a lot of factors that can be listed for the high level of FDI within
Asia and to Asia from the outside world. Host countries such as ASEAN and China adopted a
very open policy for inward FDI and for exports and imports of materials and parts for FDI
firms. In addition, home countries such as Japan and NIBs had no choice but to move overseas
when being pressured by the global currency realignment since 1985 and the increasing cost of
production at home. In the context of economic development, a country's comparative
advantage often moves from the primary-commodities production to labour-intensive products
and later on, to capital- and technology-intensive products. It can be seen that for the ASEAN
countries for instance, recent FDI has concentrated in the manufacturing sector instead of the
resource sector. They are seizing the opportunity to reduce their dependence on the export of
primary commodities, and industrialisation is accelerating. International relocations of
industries have taken place in this process and the major thrust of export by groups of
countries have changed: for the NIBs, from labour-intensive to capital- and technology-
intensive exports; for ASEAN, from primary products to labour-intensive ones. Flying-geese
pattern ofFDI, therefore, is one of the explanations for the increasing FDI in Asia (table 03),
especially in ASEAN countries and for the obvious impact ofFDI on export of this region and
area.
* Summary: The flying-geese pattern of FDI in Asia with the characteristic of shifting from
primary- to labour-intensive and, may be then to capital- or technology-intensive production
(or from labour-intensive to capital-and technology-intensive production) can be considered as
DI FDI. In the case of ASEAN, as mentioned above, DI FDI is in favour of EO FDI (with the
gradual shift from primary- to labour intensive exports). With this characteristic, it is clear that
flying-geese pattern of FDI have brought about much influence for the exports of Asia,
particularly, ASEAN countries from the mid-1980s.
Globalization of Production: This theory relates to the subcontracting practice in developed
countries to the international level. In this theory, the subcontract arrangement between large
MNCs and suppliers has expanded. In this system of production, large multinational
enterprises either invest in developing countries to produce parts and components or buy parts
and components from firms in other countries including those in developing countries through

Table 03
Average Inflows of FDI to Developing Regions, by Region, 1970-79, 1980-85, 1986-90
Host region and economy 1970-79 1980-85 1986-90 1970-79 1980-85 1986-90 1970-79 1980-85 1986-90
(million USD} (Share ofall inflows}{%) (Annual Growth Rate}{%~
All countries 22 50 150 100 100 100 16 -1 24
Developing Countries 5 13 26 24 25 17 21 4 22
Latin America and the Caribbean 3 6 9 13 12 6 20 -5 17
West Asia 0.3 0.4 0.5 t t 0.4 - 53 37
East, South and South -East Asia I 5 14 6 9 9 16 7 28
Oceania 0.02 0.1 0.1 0.1 0.3 0.1 28 -1 -5
Africa 1 1 3 3 3 2 22 52 6
Other (1) 0.03 0.04 0.05 0. t 0.1 0.03 15 -8
Least DeveloEed Countries 0.1 0.2 0.2 0.5 0.4 0.1 27 -16 116
Note: (1) Malta and Yugoslavia
Source: UN, 1992, Chapter I, Table 1.5, pp.23 (takenfrom Colmm1, D. and Nixson, 1': (199-1}, '171e Transnaticma/ Corporation and L!Xs ', Economies q[Change_}!'
Less Develo{l.ed Co!Jntrie.~. Jlan't!ster Wheatsheaj. Great Britain, Ch. 10, pp. 356, 7'ahle 10. 7.).
....
vJ
,•;·

14
subcontract arrangements. These parts and components, then, are sent to processing centres to
produce either finished products or more advanced intermediate products. This process is
considered as the Globalization of PrOduction. It is believed that the recent increase of FDI
flows from Japan and the NIE's to developing countries in Southeast Asia (flying-geese
pattern of FDI) is the result of appreciation of currencies and increases in the wage rates of
those countries. As aforementioned, these factors can significantly raise the costs of
production in home countries. As a result, their multinational corporations, as well as
suppliers, decided to relocate their production to countries to the Southeast Asia in order to
overcome the above disadvantages. It is clearly seen FDI stemming from this process
(Globalization of Production) can create eXJX>rts of parts and components, or relative less-
advanced final products from the host countries. That creation is the impact of FDI on host
country's exports. Therefore, this theory is very useful in explaining the upsurge of export
phenomenon in active regions in the world It can be seen that in a certain report of the value
of eXJX>rts of some countries, the exports' value can be higher than GDP (such as Singapore),
it is due to the phenomenon of re-export, or due to intra-firm trade in MNCs. FDI in this case
characterise mostly or more biased in export oriented.
Japanese-type FDI: It is considered that there are two types of FDI in developing countries:
traded-oriented (Japanese FDI) and anti-trade-oriented (U.S. FDI). Therefore, this description
is to explain more clearly the so-called "flying geese" phenomenon.
Kojima (1973, 1975, 1985),in Japanese environment and experience, proposed a macro-
economic model for explaining Japanese finns in international operations. He classified
motives ofFDI into four types. The first one is the exploitation of natural resources of a host
country. The second one is to take advantage of the cheap labour of the host country. The third
one is market expansion in order to avoid trade barriers such as tariffs and quotas. The last one
is oligopoly which means that foreign investors can gain market power in a host country
because of their specific knowledge about technology and management. Japanese FDI tend to
concentrate on the first two and US FDI more on the last two. He argued that the so-called
trade-oriented FDI implied investment in fields that the home country did not have
comparative advantage and the so-called anti-trade FDI meant that home country had
comparative advantage. Japanese FDI had the tendency to develop natural resources that
Japan had a comparative disadvantage and to pay attention to some fields that Japan or some
firms lost comparative advantage. Japanese FDI, therefore, can be implemented by small,
medium sized firms at a smaller scale in developing countries abundant with labour and
natural resource. Due to those reasons, Japanese FDI can boost trade linkages and
international production among home and host countries through relating activities and so
may create export for the host country. Japanese FDI can, therefore, increases the volume of
global trade (it is totally different from IS FDI-U.S. FDI-which tends to replace trade). More

15
over. due to its trade-oriented, it can also strengthen and complements the comparative
advantage of the host and home country. On the whole, Japanese FDI can be considered as
export-oriented FDI.
Although there were many controversies about Japanese-type FDI description such as Mason
(1980), Dunning (1988),... , it is clear that one can see from it the possibility ofFDI can have
the influence in the host country's exports through its activities, especially, with export-
oriented FDI such as in Japanese-type FDI case.
From the above description from globalization of production and Japanese-type FDI, one can
draw out some main characteristics of the host country in attracting FDI with high share of
export-oriented component, those are:
+ Abundance with natural resources and labour with low cost
+ Very open policy for exports and importing inputs for export activities
+ Clear related-FDI policies.
In summary, flying-geese pattern of FDI, Globalization of production, Japanese-type FDI can
explain the general impression that FDI has become more export oriented from the mid 1980s
in Asia, especially, in ASEAN countries and mainland of China. This phenomenon has
exposed the important role of FDI in creating trade between host and home country,
particularly, in contributing to the export performance ofthe host country.
There is a widely observed tendency for FDI in developing countries, through times, to
concentrate increasingly on manufactures and related financial services, rather than traditional
sectors such as agriculture, mining, oil, retailing, and public utilities. Still, tviNCs will
continue to be of great importance in petroleum and in variety of strategic minerals-for
example, oil, iron ore, copper, and bauxite (Colman 1994, pp.359). In addition, in the
agricultural sector, so-called agribusiness MNCs are of significance for variety of products-for
example, pineapples, sugar, vegetable oils, tea, soya beans and beef. This reflects, in large
part, the preference of governments in the host countries. The trend is evident both for
countries which have become significant exporters of manufactures or services (Malaysia,
Singapore, Sri Lanka) as well as others for which FDI has been attracted into manufacturing of
an import substituting kind (Kenya). For many open, small island economies, however, the
'traditional structure' ofFDI remains (Trinidad, Papua New Guinea and Fiji-also in Zimbabwe
for different historical reasons).(Commonwealth Secretariat 1991, London). Further more, as
mentioned above, due to the increasing proportion of DI FDI plus the characteristics of the
host country's economy, it is easily to understand why the traditional sectors are still receiving
the attention of foreign investors, sometimes these are being paid more attention to in the
some developing countries, especially, in Asia such as Thailand, Vietnam,...

16
2.2.2 Impacts of FDI on exports
a) Review ofTheories ofFDI
This part will be mainly review the main points of selected FDI theories, and through these
theories, it can be seen the possibility of the impact of FDI on export of the host country. I
will, in order, review the main points of Product Cycle Theory, Exchange Rate FDI Theory,
Eclectic Theory.
*Product Cycle Theorv
Vernon (1966, 1979) has emphasised that a firm tends to become multinational at a certain
stage in its growth.
In the first stage, there is an introduction of a new product. In this stage, the country with a
new product has monopoly power over the market due to technological knowledge. Also in
this stage, the country with the new product begins exporting the product to other countries
due to the appearing and rising demand in foreign markets. The rate of growth of exports of
this product depends on differences in technological knowledge of the new product among the
exporting country, importing countries and other countries. In deed, with the purpose of
serving the domestic market, in this stage, firms with its new products establish factories
closely to its domestic market due to, among other things, the need for frequent feedback from
market to factory and demand for the high share of skilled labour relative to the demand for
unskilled labours. It means that, in this stage, the new product needs continuous improvement
and adaptation to the market demands. This asks for production at home where technical
capacity and skilled labour are available. When the feedback from market is less frequent due
to the past amendment in products, the need for skilled labours will decrease (in order to
reduce cost while the distance between factory and market can be increased. According to this
thing, the demand of this product is increasing in overseas markets, therefore, it can explain
why in this stage, the firms can export these products and other countries can import the
product.
In the second stage, once the product has evolved in a standard form and competing products
have been developed, the firm may decide to invest in importing countries due to lower-cost
locations and increasing demand. It is not only that factor inputs may be less expensive abroad
but that considerable scale economies from longer production runs may be obtained through
the allocation of component production and assembly to different plants. On the demand side,
new markets can be established by price reductions, or more typically by the firm operating in
an oligopolistic market situation by means of product differentiation. In general, the decision

17
to invest and amount of the investment, among other things, depends on many factors
including market size, scale of production, tariff and non-tariff barriers and other trade
policies of importing countries, and the cost of production in importing countries. In this
stage, the product is established and does not need constant change. Therefore, this is the stage
where production in other countries can start, but mainly for the domestic market. In addition,
the MNC that developed the product to serve the market may have to adjust the product to be
appropriately for the local preferences. Host country, then, no longer import the product, but
may import parts or components for the product More over, in this stage, due to the cost of
production, the MNC may start the production of parts and components (globalisation of
production) and then export them from the host country.
In the third stage, when the product has become fully standardised and therefore does not ask
for any more skilled labour and when producers in the host country have learned how to
produce the product efficiently, the production in host country can be cheaper as the cost of
labour is cheaper there. Some importing countries become producers of the new product.
Some of them even start to export the product to other countries. The trade of the second
group of countries will reduce market share for the first country. In addition, due to the cost
advantage of the new exporting countries, the country which firstly invented product will
commence importing the product from those countries. The former importing countries catch
up with the former exporting countries as technological knowledge becomes readily
standardised and available.
It can be seen from main points in Product Cycle Theory that this theory can explain the
impact ofFDI on exports performance of the host country. In deed, from the second and the
third stage of product development, the host country (importing country) can begin exporting.
In the second stage, FDI can influence the export performance of the host country through
exporting the product's components or parts (like in globalization of production
aforementioned). Also from this stage, due to the increasing competition (of competing
products), the rising cost and risks at home, and, the demand in the host or in third country
market, FDI will, therefore, relate or to IS FDI, or, EO FDI, or DI FDI. Further more, this
theory also mention about the impact of FDI in the meaning of long run impact. In deed, FDI
can help the host country to speed up the product-standardisation or product-knowledge-
getting process. The importing country (host country) then begins to export the products that it
has to import in the past to the former export country or to the third country. It is clear that this
process can influence on export of the host country in the positive way. According to these
explanations, FDI can have the impact on export of the host country in the short as well as
long run with the direct or indirect impact tendency. In general, the product-cycle theory does
indicate how FDI may move from, first IS, and then to EO. It also explains why FDI goes to
the large countries, for example in the stage two, the size of the local market is important and
investment will mainly take place in countries with large market These FDI enterprises may
r--:-:--~--·
I '·'-•_,::::.·.. .
!1 1'1r '' f'·. . ' '... ·· '· ·. ·.
, ,t ~- '-" ~ ,,.• u.~: ;:c;;.·
t -~ (~ .. ·,
...·-·----~----------· --'

18
gradually shift to exports. One limitation of this theory is that it does not fully explain FDI in
the context of Globalization of production or the new wave of liberalisation happening in the
world. It means that even in the first stage of product development in this theory, FDI can
exist and imposes its impact on export of the host country, due to the high cost in production
at home, some parts and components of products are better produced in other countries,... ~
especially in the period of multimedia This theory also does not adequately explain FDI due
to other reasons such as currency realignment since 1985, political problems,...Another
important point is that this theory did not explain successfully why firms choose to invest in a
country which did not have the lowest labour cost (there may be another country with lower
cost). In addition, Lizondo (1991)
6
reported on work of Vernon (1979), who argued that now
many multinationals had better knowledge ofmarkets in the world, so the assumption that the
multinationals first develop the new products in the home market is no longer tenable. Further
more, when the gap in income and technology decrease, the multinationals can invest even in
the first stage of product development Although due to those problems, Vernon (1979) stated
..,.·that "the hypothesis is likely to remain important in explaining FDI carried out by small firms and in
developing countries ".
On the whole, it can be summed up by quoting the conclusion from Sodersten, B. and Reed,
G. (1994): "The Product Cycle hypothesis is usefol on several counts. It offers an explanation ofthe
concentration ofinnovation in developed countries, and an integrated theory oftrade and FDJ. It also
provides an explanation of the rapid growth in exports of manufactured goods by the new~v
industrialised countries... "
7
and it, therefore, can also be used to explain the influence of FDI
on export of the host country through explaining the causes ofFDI and its models. In order to
attract more FDI from the second stage in the product cycle with the high share of export-
oriented component, among other things, some main characteristics of host country need to
have are:
+Low cost of production, particularly, low-cost labour (and better with rather-skilled labours).
+ Potential capacity in producing and potential ability oflabour force in learning by working.
+ Very open policy for exports and importing the inputs for export activities.
+ Transparent related FDI policies.
On the supply side, one can derive some main factors that make FDI become more export
oriented as follows:
+ Increasing cost ofproduction at home.
6
Lizondo, J. S. (1991), 'Foreign direct investment', in IMF (1991), Determinants and Systemic Conseauences of
International Capital Flows, IMF Occasional Papre No. 77.
7
Sodersten, B. and Reed, G. (1994), 'Direct investment and the multinational enterprise', International
Economics, Third Edition, Macmillan Press Ltd, chapter 22, pp. 471, paragraph 3.

19
""'- The increase ofdemand for products in the world.
+There are many concessionary conditions for the export activities and FDI in host country
such as export tax, import tax of input for production for exports, documents for
investments,...
*Exchange rate FDI theorv:
This theory is explained in the argument ofDas, D. K. (1993). He gave the explanation for the
case of Japan. After the appreciation of the yen (after Plaza Accord in 22 September 1985-
table 04), FDI flows recorded a dramatic spurt and by the end the 1980s, in terms of net flows,
Japan became the largest investing economy in the world (table 05). "Other than the rising
cu"ent account surpluses, the wealth e.ffoct ofthe yen appreciation and the changes brought about by
it in the comparative advantage ofthe Japanese industry were responsiblefor the spurt"
8
. In the :five
years (1985-1989), new FDI flows world wide rose at an annual rate of 29 per cent, taking the
total stock of FDI in the world to 1.5 trillion USD. FDI flows to Asia increased from 2.3
billion USD in 1986 to 8.2 billion USD in 1989. The appreciation of Yen has made the
Japanese enterprises (which had to make investment overseas) lose the comparative advantage
in terms of production cost at home. According to this explanation, the appreciation is one of
the main reasons for the increase of Japanese FDI. In his surveys, he found out that Japanese
FDI in Asia was in favour of export oriented than those in other LDCs. FDI, in general, tends
to promote manufactured exports from LDCs and this tendency, of course, is not limited to
Japanese FDI. He confirmed that the manufacturing sector in post-appreciation period gained
the large proportion of FDI and "most of it went into export-oriented sectors and influenced the
exportperformance ofthe host countries favourably" (Das, D. K. 1993).
From the exchange rate theory aforementioned, one can see that this theory is the complement
for the Product Cycle theory in the context of explaining the spurt of FDI in Asia or in
ASEAN from the mid 1980s (especially FDI from Japan and NIEs). It can also explain better
the phenomenon of flying geese pattern of FDI. It is from the explanation of Das, D. K.
(1993), one can see that FDI in Asia and ASEAN is one of the elements contributing to the
exports of the host country in this region. So, from this theory, one can draw out one of the
main elements inducing the supply side of FDI is the appreciation of exchange rate in the
home country (in general, the increase ofproduction cost at home).
From the above considerations the main points in the Exchange Rate FDI Theory, it can make
it understandable the process that leads to the recent increasing FDI in the world, or more
specific, in Asia. It is the efficiency of investment in terms of reducing cost and risks. This
theory, like the Product Cycle theory, can be used to explain more specific the impact ofFDI

20
on expons of the host country through explaining FDI in different aspects. However, unlike
the Product-Cycle Theory, this theory can be used to explain the flying-geese pattern ofFDI in
Asia and explain clearer the phenomenon ofGlobalization ofProduction FDI.
Table 04
Monthly Yen Appreciation after the Plaza Accord
{Yen per Dollar)
1985 Sept. Oct. Nov. Dec.
236.95 214.73 203.72 202.82
1986 Jan. Feb. Mar. Apr. May June July
200.07 184.64 178.93 175.62 166.83 167.95 158.60
Source: The Bank of Japan, Balance of Payments Monthly (Fokyo, various issues). (taken from Das, D. K.
(1993}, "The Yen appreciation and the Japanese economy", The Yen Appreciation and the International
Economy. The Macmillan Press Ltd., Hong Kong, Ch. 1, pp. 8, table 1.3)
Table 05
Net FDI, 1982-1989
(in billiom ofUSD)
1982 1983 1984 1985 1986 1987 1988 1989
Japan 4.10 3.19 5.98 5.81 14.25 18.35 33.72 43.08
us 12.83 5.26 13.80 5.87 15.40 15.85 42.24 40.50
UK 1.75 3.00 8.27 6.47 9.39 16.98 20.62 -0.23
Netherlands 2.22 2.37 3.37 1.79 0.31 5.63 -0.24 4.22
Note: Minus sign implies net iTTWardflows.
Source: International Monetary Fund, Balance ofPayments Statistics, 1990 Yearbook, Part I (Washington DC,
1990). (taken from Das, D. K. (1993), "Acceleration inforeign direct investment", The Yen Appreciation and the
internationalEconomy, The Macmillan Press Ltd., Hong Kong, Ch. 4, pp. 120, table 4. 1)
In summary, although the above theories can explain FDI and its impact on the host country
and from these explanations, one can draw out some main aspects and characteristics of the
host country need to have to attract more FDI with high share of export-oriented component
and the factors which influence the supply side ofFDI, particularly, FDI with the high share of
export-oriented component, these theories still have many limitations in adequately explaining
the choice of activities (FDI, NFDI, technology contracts,... ),... In order to be better in
explaining FDI in general and to have a broader picture of characteristics that the host country
need to have to attract FDI, it is useful to consider the eclectic theory ofDunning (1977, 1979,
1988).
8
Das, D. K. (1993),'Acceleration in foreign direct investment', The Yen Appreciation and the International
Economy. The Macmillan Press Ltd., Hong Kong, Ch. 4, pp. 141, Paragraph One.

21
* Eclectic Theorv
Dunning (1977, 1979, 1988) suggested three conditions must be satisfied if a firm is to engage
in FDI as follows:
Firstly, the firm must have some ownership advantages with respect to other firms: these
advantages usually arise from the possession of firm-specific intangible assets. This means
that the firm can have activities abroad (and successfully compete with the firms of host
country which have more advantage in this market) if it has ownership advantages such as
advantages in technology such as in the case emphasised in the product cycle theory, or in the
case ofUS FDI, in management and organisational skills. The other ownership advantages of
firms can also be mentioned as the size and diversification, access to or control over mw
materials, the ability of asking for the support from its government, access to finance on
concessional terms in domestic as well as in foreign markets, the ease in shifting production
between countries,... In this case, it can be considered the possibility in which some of firms'
ownership advantages and this thing subsequently make the firm have more chance to expand
its activities overseas. It is clear that ownership advantage ofDu.nn!ng is the explanation more
general than the explanation in the product cycle in explaining FDI. According to this
explanation, the FDI activities stemming from this condition can be in EO FDI, IS FDI or DI
FDI. This condition only means the ability that a firms can relate to FDL it does not consider
clearly the elements that influences the decision of concerning to which model of FDI. This
problem is resolved in the second condition ofDunning: locational consideration.
Secondly, it must be more profitable to use these advantages in combination with at least
some factor inputs located abroad The factors that lead to FDI can comprise such things as
transport costs facing both finished products and raw materials, import restrictions, the ease
with which the ownership advantages may be combined with factor endowments in other
countries, the wage cost, size ofthe market, exchange rate, the tax policies in both source and
host countries, and political stability in the host country,... Dunning has considered all above
factors as locational considerations. This condition clearly influences the decisions of the
firms in choosing the model of FDI: IS FDI, EO FDI or DI FDI. It can be seen that some of
local considerations have been discussed above such as the consideration of cost, exchange
mte, policies,... in product cycle theory, Japanese type FDI, or exchange mte theory.
Locational consideration can explain not only the phenomenon of flying-geese pattern ofFDI
but also the FDI from globalization of production in the context of liberalization and this
explanation is mixture ofthe former explanations ofFDI in aforementioned theories.
Finally, it must be more profitable for the firm to use these advantages rather than to sell or
lease them to other independent firms. This profit is so-called internalization gains. Those
gains can stem from avoiding uncertainty, problems of control,... The existence of

22
internalization gains obviously depends to some extent on the existence of ownership
advantages. This condition is the element that influence the choice of a firm about the form of
FDI (FDI, NFDI,... ).
To sum up, for FDI to take place, the firm must have Ownership advantages, Locational
considerations, and Internalization gains (OLI paradigm).
It is clear that Eclectic Theory of Dunning is useful to explain FDI in general, according the
OLI paradigm way. FDI, in his explanation, seems to include IS FDI, EO FDI or DI FDI. One
more time, one can see the essence of FDI. As aforementioned, this essence comprises the
want to reduce the increasing production cost at home, or want to secure their production
factors in a beneficial way, or want to reduce risk. This theory of Dunning is not only the
mixture of explanation of FDI in former theories but also the general explanation of FDI. It
can explain why some FDI activities relates to EO FDI (or DI FDI with the high share of EO
FDI) while others to IS FDI (or DI FDI with the high share of IS FDI). It is the general
explanation ofthis theory plus the aforementioned analysis from other theories (Product-cycle
theory, Japanese type FDI theory, or Exchange rate theory of FDI), with the purpose of my
study, I can draw out some main elements or characteristics of host country or factors that
make FDI become more export oriented and in that case FDI of course has the strongest and
more direct impact on exports ofthe host country as follows:
+ Abundance with natural resources and labour
+ Low cost of production, particularly, low-cost labour (and better with rather-skilled labours).
+Potential capacity in producing and potential ability of labour force in learning by working.
+ Increasing demand in the world
+ The appreciation of exchange rate in the home and devaluation of exchange rate in the host
country make it become the destination for EO FDI.
+ Very open policy for exports and importing the inputs for export activities.
+ Transparent and stable related FDI policies.
+ Stable political environment
Summary
When profit is considered as the main and final purpose of investors, most ofthe explanations
of economic theories about the economic phenomenon are based on this consideration. FDI
theories are not exceptional. Investors who relate to FDI are mostly having, at least, the want
to reduce the increasing production cost at home, or want to secure their production factors in
a beneficial way, or want to reduce risk. From the above review the main points of some
selected FDI theories basing on the aim of this study, it can be seen that from each of
aforementioned FDI theories in which eclectic theory of Dunning can be considered as a

23
summary of the explanations of FDI, one can see the possibility about its impact on export
performance of the host country. From the review of these theories, I can draw out some
factors that make FDI more export oriented. Some of these factors therefore will become my
considerations in next parts.
b) Evidences about the impact ofFDI on exports
*FDI as a source of Export growth
Being affected by the external financing crisis and the currency realignment, many developing
countries have appreciated the important role of FDI in development process, particularly in
providing trade in which exports is the kernel point. Some countries, as Korea, have little FDI
involvement in the export sector; others such as Singapore and Taiwan, have much more.
Due to many reasons, some governments consider FDI as the motive force for the export
sector. MNCs can have many advantage over indigenous firms due to their scale, specific
market knowledge, established distribution chains, ability for managing and organising
production, and experience in creating markets for all kinds ofgoods (and services), especially
for non-standardised goods requiring marketing expertise,... More over, MNCs can have many
experiences in circumventing the trade barriers. These factors are very necessary for many
developing countries, especially for Asian countries. In addition, as aforementioned, in the
context of the liberalisation wave, the Globlisation of production with the phenomenon of
subcontract arrangements (as in clothing and consumer electronics), are all the motive forces
leading to FDI which can push up the host country's exports (such as in case of Haiti,
Singapore, Thailand,... ). It can be shown by many evidences of different attitudes of many
developing countries towards the role of FDI in export growth. For example, non-traditional
products originating in FDI enterprises (three-quarters of the investment in export-processing
zones belongs to foreign investors) can be considered the main contribution for the export
growth in Sri Lanka since 1978. With governments that have restriction on FDI, in general, are
now granting more priority to FDI in the export sector. Kenya's 1981 guidelines for investors,
for example, give a higher priority for new private investment in resource-based, export-
oriented industries, and in export-oriented industries basing on imported inputs. The
expansion of export-processing zones (EPZs) in many African countries and in India has the
same basic motivation. Therefore, under the wave of liberalisation that influences FDI, there
is a tendency in favour of export-oriented enterprises, particularly in manufacturing. It is
tendency resulting in some requirements, for instance, in performance requirements, that
make it more careful considerations for both companies and capital-exporting countries. For
companies, such a tendency can give suggestion a direction of capital toward relatively high-
risk and possibly low-profit activity~ for industrial country governments, it can mean a
presumption that they will adjust by accepting competing goods produced in overseas

24
subsidiaries of multinationals. Thus a broad consensus on the desirability of more FDI has to
be qualified to the extent that host countries and investors may approach it with quite different
and possibly conflicting expectations.
"The proportion ofexports which are directly or indirectly related to multinational enterprise activities
has not been quantified adequately, but it is believed to be significant"
9
. Indeed, MNCs in
developing countries are still playing a certain role in primary exports including mineral
exports. Even if MNCs do not have any involvement in exploitation stages, they can be the
direct purchasers or users of many kinds of mineral and primary products. They can also be
important in export of primary products in marketing, distributing these products of
developing countries. It can be seen the very important role of MNCs in mineral or primary
exports from the case ofVietnam in exports ofoil for instance. More over, MNCs still play its
important role in traditional manufactured exports such as clothing, textiles and footwear,
leather goods and processed food stuffor processed seafood,... that is ofvery vital importance
in many developing countries such as Thailand, China, Vie1nam,... in Asia In traditional
manufactured exports, like primary or mineral exports, the indirect impact that FDI imposes
on export performance of the host country is the managerial or marketing skills, or distributing
ability,... in which the ability of accessing to the markets, even to the far and difficult-
disposition-customer markets such as industrial-country markets in Europe, North
America,... is very important. It can be seen this indirect impact from the cases of continued
exports of countries such as Singapore, Malaysia, Korea, from the late 1970s till now. In the
exports of other manufactured products, especially, those products with a greater proportion of
product differentiation and (or) technology characteristics, MNCs expose directly more its
important role. "The role ofmultinational enterprises in the production and exports ofdifferentiated
manufactured products, both finished products and components, in developing countries is clearly
recognised "
10
. The role of MNCs in exports of differentiated manufactured products in
developing countries in Asia can be easily seen through the countries such as Hong Kong,
Singapore, Taiwan, Korea, Thailand, Malaysia, Philippines, ect. Indeed, in primary or
traditional manufactured production (either for export or not), the technology is often
standardised (the third stage in the Product Cycle Theory), it is possible that large proportion
ofthis production is in the hand of indigenous firms. MNCs is possible for the transportation,
marketing, packing,... Therefore, they will have more indirect than direct impact on exports
performance of the host country. In the other manufactured exports, the technology content in
products is often higher and this thing will result in the MNCs will have more direct role on
9
UNCTAD 1978~ Keesing 1979. (taken from Parry, Th. G. 1990, 'The role of foreign capital in East Asian
industrialization, growth, and development'. In Hughes, H (ed.), Achieving Industrialization in East Asia.
Cambridge Universtiy Press, Great Britain, Ch. 4, pp. 112).
10
UNCTAD 1978; ECEIUNCTC 1983. ((taken from Parry, Th. G. 1990, 'The role of foreign capital in East
Asian industrialization, growth, and development'. In Hughes, H (eci.), Achieving Industrialization in East Asia.
Cambridge Universtiy Press, Great Britain, Ch. 4, pp. 113).

25
exports ofthese products.
*Summary
Although, the direct or indirect impact of FDI on exports of the host country can vary
according to each country due to the characteristics of each country in economy as well as
political point of view, due to the situation ofeach country,... ; on the whole, it is clear that the
possibility of the contribution of FDI to the export performance of the host country is large
and vital. It can be considered as one of the source of export growth for the host country,
especially for the developing countries in the fierce competition in present time.
*More evidences
+ The abundance oflabour force in Asia and Pacific. and China
From table 06, it can be seen that labour force of the LDCs has increased so much from 1950
from only 821 million to 1,823 million in 1990 and this number will be about 2,960 million in
2020. This table also shows the evidence that labour force in mainland of China, and Asia and
Pacific get the high proportion of world labour force in the world. If looking back from
chapter 1, it can be seen that this evidence is suitable for the fact that this region (Asia and the
Pacific) and mainland of China are two of the destinations of FDI to developing countries. As
being aforementioned, the abundance of labour (often with low wage rate) is the attractive
point for FDI in foot-loose industries or in general in labour-intensive industries such as in
footwear, textile, leather goods, consumer electronics,... Although that the productivity and
quality of labour are also important for the given wage rate, but the products of these
industries are often standardised, therefore in some extent, in these industries the cost of
labour will play more important role. Often, the abundance of labour force in Asia comes
from rural area so the wage rate is commonly low. This thing is described more clearly in the
following table 07:

Table 06
Labour Force by Region, 1950-2020 a
Estimated labour force {million} 1:
1950 1960 1970 1980 1990 2000
Sub-Saharan Africa 83 100 124 159 203 264
(48) (47) (45) (43) (40) (38)
North Africa and West Asiah 35 41 49 64 85 113
(37) (34) (3 I) (31) (32) (33)
China 317 346 428 547 680 761
Asia" and Pacified
(57) (53) (52) (55) (61) (61)
328 379 453 556 697 858
(44) (41) (39) (38) (38) (40)
Latin America and Caribbean 58 71 91 123 158 200
(35) (33) (32) (35) (35) (37)
Total 821 937 1,145 1,449 1,823 2,196
Notes: a Figures in brackets are labourforce participation ratesfor the whole population.
h Westem Asia includes countries that would often be referred tom in the Middle l'nst.
c Excluding China and Japan.
2010
354
(37)
148
(35)
809
(60)
1,030
(41)
246
(38)
2,587
2020
477
(39)
185
(37)
824
(57)
1,185
(42)
289
(39)
2.960
d Melanesia andMicronesia-even in 2020 these are pn?jected to have a Jahourforce c!fonlyfive million.
Estimated chanse in labour force ~mil.} _
1960-80 1980-2000 2000-20
59 lOS 213
23 49 72
201 214 63
177 302 327
52 77 89
512 747 764
Source: UN, /988 (taken from Colman, D. and Nixson, F (1994), 'Population, employment, urbanisation', Economics ofChange in Less Developed
Cotmtr_i~ ch. 4, pp. 116, table 4.4).
t~
0

Table 07
The Hourly Cost of Labour per Skilled Labour in 1993 (in French Franc)
Taiwan 23 Maurice 5.8
China 9.0 Hungary 11
Thailand 5.5 Poland 5
India 2.6 Rumania 2.5
Vietnam
Morocco
1.5
10
Tunis
France
15
81
27
Source: Mathieu, C. and Sterdyniak H. (1994) (taken from Ouverture Economique, Pubplication du Centre
Franco-Vietnamien de Formation a Ia Gestion, Hoc/Timing City, January 1996, pp. 28).
Although there is another aspect that a country with large population often becomes a
destination for IS FDI, here I just mention about the labour force that is available for the
production process as being mentioned in the part above.
+ The appreciation exchange rate from mid-1988s and the increase of labour cost in NIEs
(Newly Industrialised Economies) and Japan
As aforementioned, due to the currency realignment in September 1985, it has been seen
about the FDI boom from Japan and NIEs from 1986. The appreciation of Japanese, Korean
(from 1987), Taiwanese (from 1986), Hong Kong (from 1986) and Singaporean (from 1987)
currencies bas made these country pour more FDI into other countries in Asia, especially in
ASEAN cmmtries (table 08).(Although that RER for Taiwan is not available but due to the
low inflation rate; for example, only 3.8% in 1994; it is expected that the direction ofNER
can tell the situation ofexchange rate in Taiwan).
The appreciation of currency of NIEs also made it more expensive for investment costs,
especially wages in terms of USD. For instance, the hourly manufacturing wage in Korea
almost doubled from 1.7 USD in 1987 to 3.3 USD in 1989 (Kagami, M., 1995). This thing
also shift industrial countries' foreign investment from NIEs to ASEAN where wage remained
low and exchange rates still remained benign or can be even depreciated in the case of
Indonesian rupiah, Philippines peso or China Yuan (table 08). The increase oflabour cost was
not only due to the appreciation of currency in NlEs, but also due to: firstly, the standard of
living and the overall educational level rose, younger labourers were increasingly
disenchanted with mundane, hard work. Secondly, the labour force was getting older.
Therefore, it was much difficult to find a new generation of young, low-wage workers, and
this thing would lead to higher wages. Thirdly, the introduction of knowledge- and capital-
intensive technology has created more work in high-tech and services sectors and this thing
would drive wages to higher level. As being mentioned above, the real industrial wages of

28
unskilled labour remained static in developing countries due to the inflow of labour from rural
areas, but it is not the case for NIEs from 1980s. For example, in Korea the inflow of rural
labour stopped during 1970s (Kagami, D., 1995, pp.29, reported on work by Chen Chun-Shun
1984). In addition, the long-run promotion of heavy and chemical industrialisation has led to
labour shortage, particularly in skilled labour, then this thing make a pressure to increase
wages and salaries. In general, Taiwan, Korea, Hong Kong, Singapore, Japan were also in
tight and high cost labour condition. Labour cost increase made the relocation of
manufacturing, especially, the assembly processes, to other countries, for example to
Malaysia, Thailand, mainland of China, Philippines, Indonesia, Vietnam... (table 09 and 10).
One more clear example is that these countries have opened their doors for foreign labours
and began investing intensively in developing countries, especially in Asia, by transferring
less-sophisticated, labour-intensive processes. Of course, NIEs, themselves, also received a
large and increasing FDI with the high share ofEO FDI (as being aforementioned in table 02
and mentioned later in the case study of Singapore and particularly, FDI from Japan).
Table08
Exchange Rates (Annual Average) and Real Exchange Rate
(RER) (per USD)
Currency 1985 1986 1987 1988 1989 1990
Hong Kong HK$ 7.79 7.80 7.80 7.81 7.80 7.79
RER 8.01 7.92 7.80 7.56 7.22 6.92
Korea Won 870.02 881.45 822.57 731.47 671.46 707.76
RER 871.78 875.57 822.57 710.05 646.42 661.41
Singapore S$ 2.11 2.18 2.00 1.95 1.89 1.75
RER 1.97 2.11 2.00 1.99 1.99 1.86
Taiwan NT$ 39.85 37.84 31.85 28.59 26.41 26.86
RER n.a n.a. n.a n.a. n.a n.a
Japan Yen 238.54 168.52 144.64 128.15 137.96 144.79
RER 227.41 162.63 144.64 132.39 146.08 156.79
Malaysia Ringgit 2.48 2.58 2.52 2.62 2.71 2.70
RER 2.37 2.49 2.52 2.66 2.80 2.87
Thailand Baht 26.65 26.13 25.07 25.24 25.69 25.29
RER 26.318 25.809 25.07 25.28 25.60 25.07
Indonesia Rupiah 1,110.58 1,282.56 1,643.85 1,685.70 1,770.10 1,842.80
RER 1215.41 1350.98 1643.85 1622.76 1678.54 1708.34
Philippines Peso 18.61 20.39 20.57 21.10 21.74 24.31
RER 18.42 20.40 20.57 20.17 19.42 20.06
China Yuan 3.20 3.72 3.72 3.72 4.72 5.22
RER 3.53 3.90 3.72 3.21 3.67 4.22
Source: Asian Development Bank, Asian Development Outlook 1991. (taken from Kagami, M (1995), 'Trade
and investment: East Asian strategies for economic growth ', The Voice of East Asia-Development Implications
for Latin America. Institute ofDeveloping Economies, Tokyo, ch. 1. pp. 30, table 1-7).

29
Table 09
The Increase ofWage Rates (Monthly Earnings) (1990=100)
1986 1987 1988 1989 1990 1991 1992 1993 1994
Korea 49.8 55.6 66.5 83.2 100.0 116.9 135.2 149.9 173.1
Japan 88.4 90.2 93.4 96.3 100.0 103.4 105.6 107.8 na.
Source: International Monetary Fund, Imemational Financial Statistics Yearbook, I995.
Table 10
Foreign Direct Investment in Selected ASEAN Countries and China
(Million USD)
From Hong Korea Singapore Taiwan Japan U.S.A World
To Kong Total
Indonesia 1987 134.0 23.0 1.0 12.0 524.0 91.0 1,467.0
1988 258.0 206.0 250.0 912.0 255.0 671.0 4,409.0
1989 406.8 466.1 166.1 158.2 768.7 348.0 4,718.8
Malaysia 1987 35.3 1.3 102.6 96.4 283.8 64.6 817.5
1988 113.9 16.0 160.2 316.8 428.4 204.4 1,862.5
1989 130.0 69.7 337.7 797.3 963.2 118.4 3,194.1
Philippines 1987 27.7 0.0 0.5 9.0 28.7 36.0 166.6
1988 26.7 0.9 3.8 109.3 94.6 152.5 451.4
1989 90.2 4.6 23.0 135.7 157.8 111.3 804.2
Thailand 1987 125.0 12.9 64.0 299.2 965.3 172.2 1,949.1
1988 451.3 109.0 273.7 849.9 3,045.0 673.2 6,249.1
1989 561.4 188.2 411.2 867.8 3,523.8 549.5 7,995.3
China 1987 1,809.1 21.6 266.6 271.3 2,646.6
1988 2,428.1 30.2 598.4 244.4 3,739.7
1989 2,341.8 86.5 404.7 288.2 3,773.5
Note: Approval basis ofthe host country.
Source: Institute of Developing Economies, imemal data base. (taken from Kagami, M (1995}, 'Trade and
investment: East Asian strategies for economic growth', The Voice ofEast Asia-Development Implications for
Latin America, Institute ofDevelopingEconomies, Tokyo, ch. 1, pp. 34, table 1-9).
+ Increase of demand in the world and the high potential capacitv in production of some FDI-
received countries in Asia
Table 11 shows that the demand in the world from mid 1980s continued to increase after the
depression from the beginning of 1980s. After the decrease of world's imports from 1,986.3
billions ofUSD in 1980 down to 1,781.6 billions ofUSD in 1983, this number increased to
2,089.3 billions of USD in 1986 and to 4,3249 billions of USD in 1994. The recovery of
world's import is a positive sign for the EO FDI activities in Asia. especially in ASEAN.
At the same time with the recovery in demand ofthe world, the potential ability of production
ofthe FDI-received has been proved through the table 12.

Table 11
The World's Imports from 1980-94 (In Billion USD)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
1,986.3 1,970.0 1,840.5 I,781.6 1,898.2 1,907.7 2,089.3 2,443.9 2,788.1 3,023.3 3,455.4 3,578.3 3,815.5 3,780.9 4,324.9
Source: lntemationa/ Monetary fimd, /ntemational Financial Sl£Jiistic:s fearbQ(Jk, /995.
w
0

31
Table 12
Growth Rate of Real GDP
(%per annum)
Average Average 1985 1986 1987 1988 1989 1990
1971-80 1981-90
NIEs 9.2 8.7 4.5 11.3 12.3 9.6 6.2 6.6
Hong Kong 9.5 7.1 -0.1 11.9 13.9 7.9 2.3 2.3
Korea 8.7 9.9 6.9 12.4 12.0 11.5 6.1 8.7
Singapore 9.0 6.3 -1.6 1.8 9.4 11.1 9.2 8.3
Taiwan 9.7 8.5 4.9 I1.6 I2.3 7.3 7.6 5. I
ASEAN4 7.9 5.4 0.9 4.1 6.1 8.4 8.6 7.4
Indonesia 7.9 5.5 2.5 5.9 4.9 5.7 7.4 7.0
Malaysia 8.0 5.2 -l.O 1.2 5.2 8.9 8.8 9.4
Philippines 6.2 1.2 -4.3 1.4 4.7 6.3 5.6 2.5
Thailand 9.9 7.8 3.5 4.5 9.5 13.2 12.0 10.0
China 6.5 10.0 12.7 8.3 11.0 10.8 4.0 5.0
Asia 5.7 6.8 6.8 6.5 7.7 9.2 5.7 5.7
World 3.8 3.1 3.8 3.4 3.9 4.6 3.2 2.7
Notes: NI& comprises Hong Kong, Korea, Singapore, and Taiwan; ASEAN4 comprises Indonesia, Malaysia, the
Philippines and Thailand
Sources: Asian Development Bank, Asian Development Outlook 1991 (Manila: Asian Development Bank, 1991)
(taken from Kagami, M (1995), 'Trade and investment: East Asian strategies for economic growth', The Voice
q[East Asia-Development Implications for Latin America, Institute ofDeveloping Economies, Tokyo, ch. 1, pp.
24, table I-5) and International Monetary Fund, International Financial Statistics Yearbook. 1995.
The average annual growth rate of real GDP in 1970s and 1980s of NIEs is 9.2 and 8.7 per
cent; the ASEAN4 is 7.9 and 5.4 and for Asia of 5.7 and 6.8 per cent; while the average
annual growth rate of real GDP of the World calculated by only 3.8 and 3.4 percent in 1970s
and 1980s. These numbers do not only imply the active characteristics of Asia but also the
high capacity in production ofAsia, or especially in NIEs and ASEAN.
The abundance of natural resources, labour (with low cost); the appreciation of exchange rate
which made higher production cost, the increase in demand in the world or the potential
capacity in production of FDI-received countries in Asia from the mid 1980s, do not
adequately explain the fact that although all models and forms of FDI continue to exist, the
share EO FDI in total FDI inflows in Asia, particularly NIEs and ASEAN4, increased if the
outward looking policies (or open policies, liberalizing policies) are not mentioned. The high
growth in Asia (especially in NIEs and ASEAN4) was associated with high investment.
Indeed, for the last twenty years NIEs have maintained a significantly high investment
coefficient (gross fixed capital formation as a share ofGDP) ofover 30% and around 25% for
ASEAN4 (Kagami, M. 1995, pp. 23) and this high investment ratio was a result of outward
oriented policies. Export industries were aimed as priority sectors and given fiscal and
financial preferences. It is clear that export-oriented strategies encouraged investment, and
that this investment contributed to the base for gaining more export earnings which were, in
turn, invested again to further exports. It is considered as the virtuous circle between exports

and investment in NIEs and ASEAN4. In the next part, I will present the outcomes of expons
and give some insights about policies of these countries.
+ Outcomes in exports and insights ofliberalisation policies
Table 13
Merchandise Exports ofNIEs, ASEAN4, Asia and the world
(Billion USD)
1970 1980 1990
World 293.4 1,895.6 3,334.4
Asia 16.975 163.673 451.912
(5.79D/o) (8.63%) (13.55%)
NIEs 6.333 76.425 267.07
Hong Kong 2.515 19.752 82.160
Korea 0.836 17.512 65.016
Singapore 1.554 19.376 52.752
Taiwan a 1.428 19.785 67.142
ASEAN4 4.545 47.113 86.228
Indonesia 1.108 21.909 25.674
Malaysia 1.686 12.958 29.416
Thailand 0.710 6.505 23.070
Philippines 1.041 5.741 8.068
China 2.307 18.099 61.269
Note: Data in parenthesis is the per cent of World exports
Source: International Monetary Fund, International Financial Statistics Yearbook. 1995
It is clear that Asia, especially, NIEs and ASEAN, shows more and more the nice results about
the exports performance. In 1970, Asia contributed only 5.79% of the world exports, this
number increased, year by year, to 8.63% in 1980 and 13.55% in 1990. This number can also
imply a stable and high growth rate of this area even in the period of economic depression in
the world from the beginning of 1980s. Table 13 can also indicate that the most active
contributors in exports of Asia. 8 countries (4 in NIEs and 4 in ASEAN) contributed up to
more than 78.18% per cent in the total exports of Asia in 1990. Except for Indonesia and
Philippines with a increase in exports but not so high, all the other countries have showed
rapid and high increase in exports from 1980 till1990.
As being mentioned in the first part of this chapter, two of the characteristics of flying-geese
pattern ofFDI is Asia, are the concentration on manufactured exports and the change in major
thrust of export by group of countries: for the NIEs, from labour-intensive to capital- and
technology- intensive exports; for ASEAN from primary products to labour-intensive ones. In
deed, from table 14 the characteristics ofhigh concentration on manufactured exports in these
countries and this change has been confirmed. For NIEs, the industrial products in exports

--~
~-.,
Table 14
Export Composition of NIEs and ASEAN4
Primary Semi- Manufact High-Tech Industrial Other Total
Products manufact ured Products in Products Products
ured Products Total (2)+(3) 100-(1)-
Products (5)
{1} ~21 {3} {41 ~5) ~6} F}
Hong Kong 1962 1.5 5.8 91.2 4.1 97.0 1.5 100.0
1970 1.1 2.2 95.9 11.5 98.1 0.8 100.0
1980 1.2 1.9 95.3 18.0 97.2 1.6 100.0
1989 0.4 3.2 94.3 24.0 97.5 2.1 100.0
Korea 1962 71.9 ll.S 16.4 2.1 27.9 0.2 100.0
1970 20.1 15.5 64.0 6.7 19.5 0.4 100.0
1980 6.0 10.4 83.3 13.2 93.7 0.3 100.0
1989 3.3 5.8 90.6 24.4 96.4 0.3 100.0
Singapore 1962 43.4 28.8 24.3 2.7 53.1 3.5 100.0
1970 33.6 37.7 25.4 5.6 63.1 3.3 100.0
1980 12.4 39.9 40.2 19.2 80.1 7.5 100.0
1989 5.1 25.6 67.8 40.2 93.4 1.5 100.0
Mean• 1962 38.9 15.4 44.0 3.0 59.3 1.7 100.0
1970 18.3 18.5 61.8 7.9 80.2 1.5 100.0
1980 6.5 17.4 72.9 16.8 90.3 3.1 100.0
1989 2.9 11.5 84.2 29.5 95.8 1.3 100.0
Indonesia 1962 70.5 29.1 0.3 0.1 29.4 0.1 100.0
1970 86.9 11.6 0.9 0.3 12.5 0.6 100.0
1980 86.4 11.7 1.8 0.5 13.5 0.1 100.0
1989 52.0 29.8 18.2 0.8 48.0 0.0 100.0
Malaysia 1962 59.2 32.0 4.2 0.5 36.2 4.6 100.0
1970 57.4 37.0 4.7 0.7 41.7 0.9 100.0
1980 52.7 29.9 17.1 10.9 47.0 0.3 100.0
1988 35.3 23.5 40.6 25.0 64.1 0.6 100.0
Philippines 1962 59.2 39.6 1.1 0.1 40.7 0.1 100.0
1970 56.6 39.8 3.4 0.1 43.2 0.2 100.0
1980 29.3 37.9 17.0 1.6 54.9 15.8 100.0
1988 17.2 26.3 27.1 9.3 53.4 29.4 100.0
rhailand 1962 53.6 43.4 1.7 0.0 45.1 1.3 100.0
1970 56.1 36.2 3.4 0.1 39.6 4.3 100.0
1980 36.2 35.4 23.0 5.6 58.4 5.4 100.0
1988 22.9 23.7 49.3 13.0 73.0 4.1 100.0
~ean 1962 60.6 36.0 1.8 0.2 37.9 1.5 100.0
1970 64.3 31.2 3.1 0.3 34.3 1.5 100.0
1980 51.2 28.7 14.7 4.7 43.5 5.4 100.0
1988 c 31.9 25.8 33.8 12.0 59.6 8.5 100.0
Notes: a and :The simple average three andfour countries.
c Figures usedfor Indonesiafrom 1989.
' Source: United nation, El comercio de Manu(gcruras de Amenca Latina: Evolucion 3: estructura 1962-89. Santiago: United
Nations, Economic Commission for Latin America and the Caribbean, 1992. (taken .from Kagami, M (1995), 'Trade and
investment: East Asian strategies for economic growth ', The Voice of East Asia-Development Implications {Or Latin
America. Institute ofDeveloping Economies, Tokyo, ch. 1,pp. 11&12, table 1-3-1 & 1-3-2)

34
comprises more than 90% in 1989 and for ASEAN4, this number is nearly 60 per cent (in
which Thailand had the highest level with 73.0%). The high-tech products in expons of NIEs
was increasing more and more with the largest contribution ofthis products in exports is noted
in Singapore (40.2% in 1989. Even in the countries which are considered as primary exports
can also have an increasing proportion of the exports of this kind of products (Malaysia only
10.9% in 1980 to 25.0% in 1988; Thailand: 5.6% to 13.0%; Philippines: 1.6% to 9.3%;
Indonesia: 0.5% to 0.8% in 1989).
The outcomes in exports as well as the direction ofFDI more to the export sectors of the host
countries in Asia are clearly resulted from a shift from inward-looking strategy to an outward-
looking one (or liberalizing policies) that will be the main considerations in the following part
Indeed, it can be seen from, for example, the case of Korea and Taiwan during 1960s. These
policies have led to economic success, to high inflows ofFDI, especially EO FDI.
If NIEs, at the same time, implemented export promotion with import substitution. It is a
combination of sectors which are characterised by capital-intensive with strong forward-
linkage (steel or chemical fibres) and those by labour-intensive with strong backward-linkage
(shipbuilding or apparel). While ASEAN4 countries followed and export drive, in which the
processing of primary products was emphasised at the same time with primary export
diversification. Thailand applied this policy to silk and processed foods such as tapioca,
maize,... Malaysia did the same for rubber, palm oil, and tin products,... ; Philippines with
coconut oil, banana,. .. and Indonesia with timber products,... As aforementioned, in general,
beside the institutional reforms and the strengthening of export infrastructure, export
promotion measures were mainly in three kinds: fiscal incentives, credit incentives, and
infrastructure investment which comprised the establishment offree trade zones.
Fiscal incentives might comprise income tax holidays, permission of special allowances and
accelerated depreciation. Duty-free import or tariff exemption and other indirect-tax
exemption were sometimes allowed for the import of intermediate and capital goods which
are used for export activities.
Financial incentives included the things such as the special allocation of funds for export
investment and financing, financing at preferential rates, and export credit insurance.
Financing at preferential rates (interest subsidies) for export industries; either investment
assistance or pre- and post-shipment financing; was often used in these countries (NIEs and
ASEAN4)
Free trade zones were established in which bonded warehouses and factories were allowed to
import machinery, equipment, and manufacturing components. These imports were duty free
when were used for processing and assembly operations, provided that all input imported were

35
finally exported. This invited EO FDI, and the success of the zones provided a spread effects
for further manufactured exports. It can be seen that many countries such as Taiwan, Korea,
Malaysia, Thailand, Indonesia, China and India have set up 'Export Processing Zones' where
MNCs are allowed to operate relatively freely and to import any inputs and machinery free of
customs duties. When well managed, with efficient bureaucracy and productive labour along
with good infrastructure, these zones have become havens of intense industrial activity,
providing a large nmnber ofjobs and exports. Kaohsiung in Taiwan (established in 1966) and
Masan in Korea (established in 1970) are the nice examples.
In fact, the policy of trade liberalization was accelerating during 1980s on a large scale in
these countries. The Philippines and Thailand initiated trade reform, focusing on tariff
reduction as well as on removal of non-tariff barriers. The Phillipines began a five-year trade
reform programme in 1980 which had the intention to reduce average nominal tariff rates,
remove import restrictions, and introduce export incentives. Thailand launched trade reform
in 1982 which emphasised tariff reductions. Indonesia followed in the mid-1980s liberalizing
its trade through the reduction ofanti-export biases. Korea accelerated reform from the end of
the 1970s. It begun an important trade liberalization program between 1984 and 1988. Tariff
rates were substantially reduced, and the import restrictions, such as prior import-approval
requirements, were notably reduced. For instance, the average nominal tariff decreased from
41 per cent at the end of the 1970s down to 18 per cent in 1988. With trade liberalization
policies and massive FDI (especially, with the high and increasing share of EO FDI) inflows,
the exports ofthese countries expanded significantly.
In summary, as being mentioned in the part of review of the FDI theories, some of the main
factors that will make FDI become more export oriented are the abundance of natural
resources, labour (with low cost)~ the appreciation of exchange rate which made higher
oroduction cost, the increase in demand in the world or the potential capacity in production of
FDI-received countries and the very open policies for exports and importing inputs for export
activities. In deed, these factors are, one more time, proved in Asia by the cases of NIBs,
ASEAN4 and China, especially from the mid 1980s. Therefore, it can be said that although all
models and forms of FDI still coexist in Asia, the share of EO FDI which has the direct and
strong impact on export performance ofthe host country may increase and the share of IS FDI
which has the indirect and decent impact on export of the host country may fall. It is clear that
ifthe capacity in production ofthe host country, plus the open policies (for exports) and other
related regimes (which are beneficial to export activities and of course for FDI) along with the
of low cost of production (labour cost), the abundance in labour (and in natural resources if
any), in Asia, will certainly attract more FDI (with the high share of EO FDI) and it
subsequent influences more strongly the exports of the host country in a positive way. The
policies of the countries analysed before can be considered as the policy implications which
will be selected and smnmarised in some main aspects with the purpose of this study at the

Impact of Foreign Direct Investment on Exports Case for Vietnam (1988-1995).pdf

Impact of Foreign Direct Investment on Exports Case for Vietnam (1988-1995).pdf

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