Foreign Direct Investment
Event Report (VII):
The There and Then of FDI in Asia
Moving into the third and last of our "diamond dialectics," we now turn to the subject of Tipping Points, a concept we borrow from Malcolm Gladwell’s recent book by the same name.*
In a nutshell, we’re employing the term tipping point to mean a pinnacle moment in the adoption of a new understanding or perception (i.e., a paradigm shift), beyond which we can speak about a "new rule set" becoming thoroughly embedded in a country’s (or region’s) political and economic culture.
To illustrate this point, we employ the imagery of Sisyphus (see following slides), the legendary king of Corinth who was condemned, according to Greek myth, to roll a heavy rock up a hill in Hades only to have it roll down again as it nears the top—ad infinitum. While not wanting to insinuate that these tipping points are, by any stretch of the imagination, unachievable, we do want to impress upon the reader our sense that these "journeys" will not be easy ones.
We will propose six tipping points, corresponding—yet again—to our six global lenses (economics, politics, technology, culture, environment, security).
* Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference (New York: Little Brown & Co., 2000).
In this first tipping point, we focus in on the key economic paradigm shift that needs to occur to improve the long term climate for FDI in Developing Asia. In a nutshell, it is fair to say that the current investment environment in Asia is almost the complete opposite of that in the United States. In the U.S., most individuals have little to no personal savings (i.e., traditional bank accounts), but do have financial assets at work in various capital markets, such as stocks and bonds. In Asia, the situation is completely reversed: many individuals have substantial personal savings in traditional banking institutions, but few of their financial assets find useful employment in capital markets.
The tipping point is obviously the development of efficient capital markets that are universally accessed. At that point, the cost of money both inside and out are equalized, meaning that—all things being equal—individuals and firms should not care about where their capital comes from because all available capital adheres to the "law of one price." When Developing Asia’s capital markets reach this tipping point, the economies there become indifferent about Western versus Asian sources of FDI, giving them maximum choice opportunities and fostering competitive rates for all.
In this second tipping point, we focus in on the desired political paradigm shift. Here we highlight the issue of ownership within the economy. In the classic Asian format, exemplified by the chaebol (South Korea’s industrial conglomerates) and the keiritsu (Japan’s families of companies), complex patterns of cross-ownership and financial alliances lead to a melding of political and economic power in a system best described by the oxymoron "state-directed capitalism." The extreme closeness between public and private sectors allows for focused national economic policy, but likewise facilitates protectionist tendencies, seen most vividly in the inability of foreign investors to achieve significant levels of direct ownership in these economies.
For now, the West is largely limited to bottom feeding (buying only the most distressed firms) in the more closed Asian economies. A tipping point would therefore come when foreign firms are freely able to merge and/or acquire (M&A) not just the "losers," but the real "jewels" (meaning high-profile firms or assets, like famous chunks of real estate or signature companies in media, entertainment, energy, or finance). We know Asia reaches a tipping point when we are able to buy outright the Asian equivalents of the Chrysler Building, MGM Studios, the Los Angeles Dodgers, Pacific Gas & Electric, or J.P. Morgan.
In this third tipping point, we focus in on the desired technological paradigm shift. Here we zero in on the issue of which sector of the economy receives the most FDI attention. Right now, Asia is a collection of scattered outposts of the New Economy, or—better said—increasingly networked enclaves, but enclaves nonetheless. In other words, many Developing Asian states have a hard time integrating high technology throughout their economies as a whole, even as—collectively—Asia continues to rise as a new global center of gravity in IT (both in terms of hardware and software).*
The measure we chose to focus on here is sector shares of inward FDI flows. In developed economies, almost 60 percent of inward FDI flows go to the service sector, with just over 40 percent going to the primary and manufacturing sectors combined. In contrast, Developing Asia’s current inward flows display the opposite spread: two-thirds to primary and manufacturing and one-third to services. A tipping point that suggests Developing Asia has achieved more broadly based integration of information technology will be when FDI flows into the service sector outpace that of the manufacturing sector.
Along these lines, we asked our participants to vote on what they think the likely sector shares will be for Developing Asia in 2010. The results displayed above suggest that considerable ground can be covered within the next decade and that this tipping point is likely to be achieved within a generation.
* On this, see Celia W. Dugger, "In India, Unwired Villages Mired in Distant Past," New York Times, 19 March 2000, p. A1.
In this fourth tipping point, we focus in on the desired cultural paradigm shift. Here we emphasize the shift from the region’s current oligarghic business culture to one more clearly based on merit. The key ingredient to a meritocracy, however, is universal access to education, and here Asia lags desperately behind the rest of the world. But more pertinently, the entire region currently lacks a graduate business school with an international reputation of a Harvard, Wharton, or University of Chicago. Instead, Asia (mostly its elite) has taken to sending large number of students to U.S. universities, where too many are lost for good to the West.
So we choose as a tipping point the development of world-class business schools in Asia, be they of Asian origin or Western export. Hopeful signs in this regard include:
* See David Leonhardt, "All the World’s a Campus: Top Business Schools
Have No Borders," New York Times, 20 September 2000, p. C1.
** See Pamela Constable, "India’s Brain Drain Eases Off: For Best and
Brightest, Staying Home Is Option to High- Tech Jobs in U.S.," Washington
Post, 14 September 2000, p. A23; and John Pomfret, "A Brain Gain for
China: Western-Trained Professionals Return," Washington Post, 16
October 2000, p. A1.
In this fifth tipping point, we focus in on the desired environmental paradigm shift. Here we explore the reality that most governments simply have not yet stepped up to the plate on environmentalism, remaining too friendly with the private sector and barely enforcing standards that are far too lax. According to Daniel C. Esty, an expert on international environmental standards at Yale University, "The worst pollution in the world is unequivocally in Asia. The statistics on China are stunning, and right behind those Chinese cities stand almost every other major city of Asia." The World Health Organization estimates that roughly 2 million people die each year from air and water pollution. Which means, as New York Times reporter Nicholas Kristof notes, that more Asians die each year of pollution than perished in the entire Vietnam conflict across the 1950s, 1960s, and 1970s.*
Asia’s historical tendency has been to treat the environment as a private good with limited public liability. What they need is a mindset that says the environment is a public good worth protecting, with private liability for those who pollute or otherwise damage it. But because the region’s development needs are so great, we believe the best route to a green future is one built on transparent capping systems employing trading regimes that allow the most responsive firms to monetize their efficiencies and the least responsive ones to purchase credits.
* The quote and World Health Organization data are cited in Nicholas D. Kristof, "The Filthy Earth," in Kristof and WuDunn, Thunder From the East, p. 295.
In this last tipping point, we focus in on the desired security paradigm shift.* Here we target the lack of genuine civil-military relations in many Asian states. What we mean by that is, in too many instances, there is civil-military identity rather than true separation and natural tension. The classic example is the military leader who also holds tremendous political power within the government, and then also controls significant private-sector assets. This situation is bad on four levels:
- It gives the military too much influence within governments
- It offers the military too much protection from both market and political forces that might otherwise stem defense spending
- It detracts from the professionalism of the military, as we have seen in China in recent years when the military was encouraged to "self-finance"
- It presents the military with too many opportunities to crowd out natural market growth due to their relatively large weight in the national economy.
When Asian generals and admirals are limited to only one title, then we will know that a tipping point has been reached—namely, the role of the military has been appropriately subsumed to a background, enabling function with regard to overall FDI climate.
* Thanks to David Harries in particular for this concept.
Shifting from Tipping Points to the There and Then, we’ll now examine a quartet of rudimentary outcome scenarios for Asia’s potential investment future. We call them "rudimentary" because we won’t present any great detail as to the alternative futures they portend. Rather, we’ll offer them up as a way to capture varying degrees of optimism/concern exhibited by workshop participants regarding the likelihood of each pathway’s unfolding.
The scenarios were framed in the following fashion:
- We constructed the X-Y axis beforehand and presented it "ready-made" to workshop participants at the beginning of the "Outcome Scenarios" session.
- The participants then spent several minutes brainstorming—via GroupSystems—notional "headlines from the future" that served as illustrations for each of the four scenarios; selections of these headlines are presented in the next section.
- Following facilitated group discussion of the four scenarios, participants nominated—via GroupSystems—titles for each of the four scenarios.
The X-Y axis is constructed of two simple questions:
- Does the U.S. remain the regional Leviathan?
- Or does an Asian-based Leviathan emerge (either singular or collective)?
- What is the relative flow of FDI into the region?
- Does the "pie" continue to grow?
- Or does a Western economic crisis reduce it significantly?
The four resulting scenario titles are as follows:
- The Dow Rises in the East (U.S. as Levithan + Expanding Pie) reflected the optimisim of those who see Asia as still a largely untapped market for both trade and investment. In this scenario, an expanding pie keeps Asia’s great powers more focused on economic development than arms races, enabling the U.S. to retain its Leviathan status. This scenario was seen as a simple extrapolation from today.
- Asia Cries, "Uncle!" (U.S. as Leviathan + Shrinking Pie) reflected the concern of many participants that an economic slowdown in the West would not only shrink the cross- regional FDI flow, but likewise put the U.S. in the awkward position of trying to enable security in a region undergoing increasing economic and political stress—think of an "Asian Pneumonia" next time around. The worry here was that the U.S. would have a hard time avoiding the perception of being a bully/taskmaster, not just in security affairs but also in economic relations—especially as the IMF and World Bank are perceived to do our bidding.
- Bye, Bye Miss American Pie (Asian Leviathan + Shrinking Pie) reflected the opinion of most participants that, in the event of a severe economic downturn in the West, U.S. military presence in Asia could well come under pressure back home. If U.S. financial and security presence were simultaneously curtailed, Asia’s adherence to the concept of a single global economic rule set would surely decay. The danger seen in this scenario is one of Asia pursuing a competitive rule set, or one that rejects not only Western dominance in security matters, but financial ones as well.
- Chinese Carry Out (Asian Leviathan + Expanding Pie) reflected the sense of inevitability that some participants felt about a security challenge eventually rising in Asia due to China’s rapid rise in the global economy. Simply put, an economy that grows that much cannot adopt the security posture of some small trading state. But security challenge to whom exactly? Japan? India? The United States? Everyone? And what strategy does an emerging China seek to carry out once it has "arrived"?
In this section, we flesh out our long-term scenarios a bit by providing several "headlines from the future" for each quadrant. These headlines were generated by the workshop participants as a way of populating the outcome scenarios. Of the several hundred notional headlines provided, we selected two dozen that we felt captured the lion’s share of our participants’ concerns and/or desires regarding Asia’s future investment paths.
As for which headlines constitute Good News or Bad News, we leave that judgment to the reader.
First we examine the scenario that most closely resembles an extrapolation from today’s situation: The Dow Rises in the East.
Four themes emerged among the numerous entries we received for this scenario whereby the U.S. remains regional Leviathan and the FDI pie continues to expand:
- A growing military cooperation between the U.S. and China
- A rapid acceleration of mergers and acquisitions in both directions, to include real "jewels"
- An integration of financial markets
- Economic integration within Asia that did not trigger U.S. fears of being shut out.
Next we examine the scenario entitled Asia Cries, "Uncle!"
Four themes emerged among the many entries we received for this scenario, whereby the U.S. remains regional Leviathan but the FDI pie shrinks significantly:
Here we examine the scenario entitled Bye Bye Miss American Pie.
Four themes emerged among the many entries we received for this scenario, whereby an Asian Leviathan emerges under the conditions of a shrinking FDI pie:
- Within the region, major states begin allying themselves against China
- Increased xenophobia leading to active anti-Westernization measures
- Some smaller states seeking U.S. "adoption" due to heightened security fears
- Russia and the U.S. finding new reasons for cooperation.
Finally we examine the scenario entitled Chinese Carry Out.
Four themes emerged among the many entries we received for this scenario, whereby an Asian Leviathan emerges under the conditions of an expanding FDI pie:
- The most Western states seek explicit economic union with the United States
- China replaces Japan as the Asian economy we most respect and fear
- India’s emergence as an IT superpower provides some balance to China’s emergence as a manufacturing superpower
- China becomes the "France" of Asian security: always pushing for regional solutions that limit the role of the U.S., while being careful never to engage us head-on.
We wrap up our presentation of workshop output with an exploration of the concept of "connectivity," as suggested by the Internet-based trivial pursuit known as the Kevin Bacon Game (or alternately, Six Degrees of Kevin Bacon). This popular movie trivia game is based on the notion of trying to determine the shortest number of linked steps between any two points.*
After explaining how the game works and what it suggests about connectivity, we’ll show you how we used it in our workshop to get our participants to think about the "most connected" FDI targets in Developing Asia.
* The discussion of the Kevin Bacon Game that follows is based on Malcolm Gladwell’s description of the same in his chapter, "The Law of the Few: Connectors, Mavens, and Salesmen," pp. 46-49, The Tipping Point.
According to the Oracle of Bacon, the most comprehensive version of the Kevin Bacon Game on the Internet, "The object of the game is to start with any actor or actress who has been in a movie and connect them to Kevin Bacon in the smallest number of links possible."* Two actors are linked if they've been in a movie together, but links through television shows, made-for-TV movies, or through production staff (e.g., writers, producers, directors) do not count. Most actors can be linked in 4 steps or less, meaning a typical "Bacon number" for any actor is 2 or 3, meaning it takes 2 or 3 movies to link the subject in question to Kevin Bacon.
According to the University of Virginia’s School of Engineering and Applied Science (Department of Computer Science), which maintains the Oracle of Bacon web site, the average Bacon number for all actors is roughly 2.8, based on a combined pool of approximately 450,000 actors.**
The example we use here is Kevin Kline, who can be linked to Kevin Bacon in as few as 2 steps, but we use 3 movies here, to make it a little easier.
Spend a minute to contemplate which two actors appearing across three movies will link Kevin Kline to Kevin Bacon. The process would go something like this:
- Kevin Kline + Actor A in Movie #1
- Actor A + Actor B in Movie #2
- Actor B + Kevin Bacon in Movie #3.
Then check out our
preferred answer on the next slide.
* The Oracle of Bacon is found at <http://www.cs.virginia.edu/oracle/>.
The Oracle uses data from the Internet Movie Database <http://us.imdb.com/>.
** Cited at <http://www.cs.virginia.edu/cgi-bin/oracle/center-cgi?who=Kevin+Bacon>.
Here’s how we do it:
- Kevin Kline appears with Meg Ryan in French Kiss (1995), a romantic comedy. That’s movie link #1.
- Meg Ryan appears with Tom Hanks in Sleepless in Seattle (1993), another romantic comedy. That’s movie link #2.
- Tom Hanks appears with Kevin Bacon in Apollo 13 (1995), a space adventure based on a true story. That’s movie link #3.
So Kevin Kline is easily linked to Kevin Bacon in three steps.*
Of course, so long as movies are being made, any actor’s Kevin Bacon number can rise or fall, depending on who appears in movies with them (especially if that person is Kevin Bacon).
Who is the actor who currently holds the lowest Kevin Bacon number at 2.599102? Turn the page and find out.
* According to the Oracle of Bacon, Kevin Kline actually has a Bacon Number of 2 (he appears with Diane Lane in Chaplin (1992) and she appears with Kevin Bacon in My Dog Skip (2000). When Kevin Kline finally acts in a movie with Kevin Bacon, he will join the exalted ranks of actor who possess a Kevin Bacon number of one (approximately 1,500 actors currently enjoy this recognition), according to the Oracle site. The only actor with a Kevin Bacon number of zero is—of course —Kevin Bacon himself.
The current holder of the lowest Kevin Bacon number is Christopher Lee, who recently edged out the long-time reigning champion, Rod Steiger.
What makes Christopher Lee the most connected actor of all time?
These characteristics are what make him the most connected Hollywood movie actor of all time. Does this make him the most powerful or most famous movie actor of all time? Obviously not, but it does mean that—compared to actors in general—he is extremely well-known within the industry. In short, if you wanted "inside information" on the widest array of industry players over time, he would be your best source among actors—your quickest link.
What makes for a well-connected player in direct investment flows to a particular region?
- That country would have a long-established reputation as both a target and source of investment flows. It would be considered a gateway to other economies.
- It would be a high-volume player. When measured as a percent of GDP, its inward and outward stock would register a relatively high percentage, meaning more than 50 percent.
- It is more than likely not a huge industrial state, but rather a smaller, trading state with strong financial markets.
- It would deal in a broad array of sector investments, demonstrating great versatility in its partnerships both within the region and throughout the world.
Our version of the Kevin Bacon Game was to ask our participants to construct a variety of Free Trade Areas linking Developing Asia to the three main sources of global FDI—the Triad members.*
Here is how we did it:
- We presented the participants with a list of states in Developing Asia (note that we did not break Hong Kong out as a separate player).
- Then we asked them to construct a Free Trade Area from the direction of NAFTA. Specifically, we asked them to choose the ten "best" countries for a NAFTA-led Free Trade Area that linked North America with Developing Asia.
- Then we did the same for both the European Union and Japan.
- Finally, we combined the top-ten rankings from all three Free Trade Areas to determine those Developing Asian economies with the lowest Kevin Bacon-like number, meaning the countries most easily connected to other countries in the region though FDI flows, as estimated by our diverse group of participants.
In each vote, we instructed the participants to consider:
* For some examples of countries currently moving in this direction, see Agence France-Presse, "China Outlines Need For Free-Trade Zone," New York Times, 26 November 2000, p. NE9; Joseph Kahn, "Practicing What Free Traders Preach," New York Times, 3 December 2000, p. WK6; and Elizabeth Olson, "Regional Trade Pacts Thrive As the Big Players Fail to Act," New York Times, 28 December 2000, p. W1.
Our first vote on a NAFTA-led Free Trade Area for Developing Asia yielded the following top-5 candidates:
- Singapore: former British colony, like the U.S. and Canada; following loss of U.S. military base in Philippines, security relationship with U.S. blossoms rapidly
- Philippines: former "possession" of the U.S.; until recently, long-time site of U.S. military facilities; member of U.S.-dominated South East Asia Treaty Organization (SEATO) during Cold War
- South Korea: strong security alliance with U.S.
- Taiwan: strong security relationship with U.S.
- Thailand: good military ally of the U.S. in the region; member of SEATO.
Note that none of these states has had anything close to an adversarial security relationship with the U.S. since the Second World War.
Our second vote on an EU-led Free Trade Area for Developing Asia yielded the following top-5 candidates:
- India: past colonial ties to Portugal, France and UK
- Malaysia: past colonial ties to Portugal, Netherlands, and UK
- Singapore: former British colony
- China: past colonial ties to several European powers over the centuries
- Indonesia: past colonial ties to Portugal, Netherlands, and UK.
Note that—at one time or another—all five states were colonized in some portion by European powers. It must have been that sort of colonial hubris that pushed our participants to envision a FTA that includes both India and China. Then again, China just joined the so-called Bangkok Agreement that reduces tariffs on over 600 products among the following countries: India, South Korea, Laos, Sri Lanka and Bangladesh.*
*The Bangkok Agreement was formulated in 1975
Our third vote on a Japan-led Free Trade Area for Developing Asia yielded the following top-5 candidates:
- Singapore:occupied by Japan during WWII
- Taiwan: former Japanese colony
- Malaysia: occupied by Japan during WWII
- Thailand: occupied by Japan during WWII; later Japan’s ally during the conflict
- Indonesia: occupied by Japan during WWII.
Note—yet again—the linkages between past security-based relationships and current financial relationships.
In this slide we present the top-ten lists for all three Free Trade Areas constructed by our participants. Note first how they all selected the same ten states, just not in the same order. The line across the middle separates the top five from the bottom five. Combined rankings (an average of the three ranks) appear on the far right.
Based on this process, we declare Singapore to have the lowest Kevin Bacon-like score on FDI connectivity. This should not be surprising. Singapore has the second largest inward and outward FDI stock totals in Developing Asia (after China/Hong Kong). The global average for FDI as a percentage of GDP is approximately 14, both inward and outward. Singapore’s outward stock percentage is 56, while its inward share is 86 percent.
Singapore has had strong past/current political-military relationships with all three global pillars of FDI. It is a well-known and much trusted player. It is the closest thing in Asia to a pure trading state (now that Hong Kong has joined China).
In sum, it was the collective judgment of our participants that, if you wanted your investments in Developing Asia to have the greatest flexibility and reach—or the most connectivity—Singapore was the best place to start. For once your money enters Singapore, it can move elsewhere around the region in the fewest number of steps.
Not surprisingly, a recent Economist survey cited Singapore as having the highest ratings for quality of corporate governance, transparency, and rule of law —all characteristics you would expect from the Kevin Bacon of Asian FDI flows.*
* See Kluth, "A Survey of Asian Business," pp. 4 & 16. The source of the survey data is Political and Economic Risk Consultancy.