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| World Marketplace |
The South-South Axis
Philip Poole
01/01/2007
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The impact of rising outward FDI on home markets in the South
will depend on a range of factors, including whether the outward FDI is a
substitute for, or complement to, domestic production, and whether the economies
can leverage technological and managerial transfers from abroad. When the
process is complementary, the home market is likely to gain on the employment
front, and there should also be some positive spillover to fiscal performance.
The reverse will be true for FDI that substitutes for domestic production. It is
still too early to assess fully the implications of the upsurge in outward
FDI.There have been a number of investments in R&D in the North to access technologies to strengthen
competitiveness. |
Japan’s experience provides some insight, although it is not
fully comparable due to the large difference in cost structures between Japan
and the emerging markets in which it invests. In most instances, its outward FDI
has substituted for domestic production. The so-called hollowing out of Japan’s
manufacturing sector began after the first Plaza Accord in 1985, when the yen
shot up in value against the dollar, undermining the profitability of domestic
manufacturing. Since then, there has been a steady rise in the share of
manufacturing produced overseas as a result of Japan shifting lower value-added
activities abroad while keeping those with higher value-added and intellectual
property content at home. This process has generally been good for corporate
profitability and the real purchasing power of Japanese residents, but it has
had negative implications for employment and domestic demand. There has been a
declining trend in manufacturing employment since the early 1990s, and the share
of manufacturing in total employment has dropped sharply. There have also been
knock-on effects as the advantages of industrial clustering are lost.Korea is another case in point. Inflexible labor laws make it
particularly attractive for companies there to build new capacity in China
rather than at home, and its domestic fixed capital formation grew slowly last
year despite a rebound in overall economic growth. As in Japan, the strength of
the currency is also an important driver of capital reallocation in Korea. In Taiwan, the government has adopted what has been called a
"go slow, be patient" investment policy toward China. Taiwan enforces quite
strict rules on how much a company can invest on the mainland and requires
approvals for any investment in advanced or tech-heavy sectors. Even so, it is
inevitable that Korean and Taiwanese manufacturing will continue to shift to
China, facilitating further progress on cost reduction and boosting South-South
flows. Philip Poole is head of research and chief economist for Global
Emerging Markets at HSBC in London.
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