Multinational Corporations and Foreign Direct Investments

By Atty. Juris Bernadette M. Tomboc

I. Introduction
Multinational corporations provide foreign direct investments that may contribute a significant portion of a host country’s gross domestic product (GDP). This report contains a summary of the economic successes and experiences of Singapore, China, Pakistan, Malaysia, Thailand, and the Philippines. It aims to identify the factors that influence the level of foreign direct investments (FDIs). The said factors may be helpful to developing countries, such as the Philippines, in achieving greater economic growth.

This report was prepared in partial fulfillment of the requirements of the course on Multinational Enterprises and Philippine law (private law aspect) under Prof. Francis Ed. Lim of the San Beda Graduate School of Law, Manila, Philippines.

II. Country Case Studies
A. The Case of Singapore
Professor Chalmers Johnson in 1982 described the economically successful Japan as a developmental state. A developmental state is one where the government undertakes an active role in nurturing, guiding and intervening in a market-oriented economy when necessary. Developmental states are led by “goal-oriented, purposive and determined elites whose principal commitment is to national well-being, not personal aggrandizement.” It has been observed that Singapore’s political leaders exemplify these characteristics in their resolute commitment “to root out corruption” as an essential aspect of good governance. (Bellows 2006)

Thus, former Prime Minister Lee Kuan Yew described the government’s goals in 1992 as follows: “a government which is honest, effective, and efficient in protecting its people and allowing opportunity for all to advance themselves in a stable and orderly society where they can have a good life and raise their children to do better than themselves.”

Singapore’s economic reform began in 1960 when the government decided that Singapore’s then widespread slum housing had to be replaced in order to provide the foundation for the country’s political and social development. During the first ten years, the provision of housing facilities was limited to lower household income brackets. Subsequently, with the expansion of eligibility, better design and accommodations, use of government-built apartments extended to all economic strata, from lower income to upper-middle income households. Thus, in the past ten years, government-built apartments housed from eighty-five to eighty-six percent of Singapore’s population and had an occupancy rate of eighty-two percent. (Bellows 2006)

With a land area of less than 240,000 square miles (approximately 528,000 square kilometers), manufacturing and export were the best chances for Singapore’s survival. Multinational corporations (MNCs) give high priority to a host country’s socioeconomic stability in making investment decisions. Thus, the next objective of the Singaporean government was to bring its procommunist labor unions, then the principal threats to the government’s stability, under control in order to achieve industrial peace to attract foreign investments, reduce unemployment, and raise living standards. In 1961-62, politically motivated strikes organized by the left wing trade union movement were blamed for the shut down of Singapore’s only textile mill at that time. Thus, the government set up the Pioneer Industries Union allied to the existing National Trades Union Congress, a pro-government federation. The Pioneer Industries Union adopted a more reasonable approach in collective bargaining thus giving pioneer industries a chance to develop. (Bellows 2006)

A principal advantage of Singapore is its location, infrastructure and clean and safe environment making it an ideal haven for foreign professionals and business elites. There are 6,000 MNCs currently located in Singapore, some as manufacturing companies while others as regional headquarters. MNCs account for more than sixty percent of Singapore’s manufactured exports. (Bellows 2006)

The Singaporean government has extensively used government-linked companies (GLCs). A GLC is a company wherein the government has a stake of not less than twenty percent. The use of GLCs also started in the 1960s with the government adopting a proactive entrepreneurial role to assist in expanding employment. Since then, the government has invested in a wide range of activities including manufacturing, financial securities, shipping and transportation for strategic reasons. GLCs now contribute thirteen percent of Singapore’s GDP. The minister of finance is the sole shareholder of Temasek, the government’s holding company. (Bellows 2006)

Although Singapore strives to remain competitive in the international economy it has also been challenged by globalization factors causing unemployment to rise to 4.9 percent in 2003 and 3.3 percent in September 2005 (4.4 percent among the resident labor force). Unemployment affects workers above age forty and mostly those who only have primary education. (Bellows 2006)

B. The Case of China
China’s interior region is less attractive to foreign investment than the country’s coastal belt because of its inadequate physical infrastructure and human resources. However, in 2001, there were 32,993 foreign enterprises in the interior region with an investment value of $11 billion. (Ying 2005)

A survey conducted in the Shaanxi province suggests that personal networks and institutional involvement play essential roles. Personal networks encourage investments by smaller foreign parent firms while active government involvement facilitate investments by larger foreign parent firms. Medium-sized firms are aided by a combination of personal networks and institutional involvement. The study suggests that cultural and political factors influence investment decisions since they provide “extra guarantee” for the success of projects. (Ying 2005)

Thus, although many regions in China do not possess the advantages of successful regions, social and economic networks and strong institutional involvement assist at the initial starting point by introducing, coordinating and reinforcing the growth of foreign investment. However, there is a danger that extensive reliance on personal networks as well as institutional involvement may cause neglect in the creation of a fair investment environment that is also important to encourage FDIs by firms who have no links within the region. (Ying 2005)

C. The Case of Pakistan
President Musharraf appointed now Prime Minister Shaukaf Aziz an international banker in 1999 as economic minister and gave the latter a free hand in reviving the economy. However, the country’s turnaround has been attributed to the September 11 attack. Immediately after the said attack, Washington forgave $1.6 billion of Pakistan’s debt, gave the country another $600 million to pay urgent obligations and together with other creditor nations rescheduled the country’s debt payments over a period of thirty to thirty-five years. Further, the United States pledged $3 billion of economic and military assistance to Pakistan, plus $100 million for education. The European Union also lifted its quota restriction on the importation of textiles -- Pakistan’s major export product. (Moreau 2006)

The government earned almost $600 million in its sale of two cellular-phone licenses to United Arab Emirates and Norwegian companies. The country expects to receive at least $3 billion in foreign investments in 2006 mostly in the telecom and gas and oil exploration. The Karachi Stock Exchange also boomed as investors bid on the telecom licenses and other government privatizations. (Moreau 2006)

The country’s GDP growth rate of 8.4 percent in 2005 was the world’s second highest after China. The economic reforms helped the government raise money for health and education. The country had nearly zero GDP growth rate in the late 1990s being the world’s most-sanctioned nation next to Libya because of its pursuit of nuclear weapons. The government was already burdened with a $38 billion debt and was forced to borrow at high interest rates for short-term spending. (Moreau 2006)

Pakistan still needs to improve its tax collection and modernize its infrastructure. Moreover, the economic boom has not yet benefited the country’s poor who comprise one-third of its one hundred sixty million population. Inflation due to increased spending by the rich and middle-class hit an average of eleven percent last year and increased the prices of basic commodities such as sugar by twenty-six percent and wheat and potatoes by fifteen percent thus further diminishing of the purchasing power of the poor. (Moreau 2006)

D. The Case of Malaysia, Thailand and the Philippines
In the study by Ismail and Yussof (2003), they found that the ASEAN-3 (comprised of Malaysia, Thailand and the Philippines) has to improve on technology, marketing, and international networking. These economies thrived through export strategies based on the use of inexpensive but relatively skilled labor. However, their competitive advantage has been eroded by cheaper labor in Bangladesh, India, China and Vietnam. In addition, China has a large domestic market.

Thus, although liberalization policies adopted by the Philippines and Malaysia, which offers extra incentives for companies exporting most of their products, facilitate export, the ASEAN-3 should concentrate on higher value goods, train more workers for higher skills and maintain competitive wages. (Ismail and Yussof 2003) The Philippines also needs to improve tax collection and stabilize its economy to encourage more FDIs.

III. Conclusion
Many factors influence the level of foreign direct investments in a country. The case of Singapore highlighted the importance of good governance, socioeconomic and political stability, and infrastructure in attracting and maintaining FDIs. On the other hand, the case of China showed the importance of personal networks and active institutional involvement. Further, the case of Pakistan illustrated how the quality of a country’s international relations may affect its economy.

Finally, the study by Ismail and Yussof (2003) on Malaysia, Thailand and the Philippines show the need to encourage long-term FDIs in strategic industries and train workers for higher skills. The Philippines needs to strengthen its financial position by improving its tax collection and to enhance and maintain stability in its socioeconomic and political environment to attract more FDIs.

Sources:
Bellows, T.J. (2006). “Economic Challenges and Political Innovation: The Case of Singapore.” Asian Affairs, an American Review. Washington: Winter 2006. Vol. 32, Issue 4, page 231.

Ismail, R. and Yussof, I. (2003). “Labour Market Competitiveness and Foreign Direct Investment: The Case of Malaysia, Thailand and the Philippines.” Papers in Regional Science. Malaysia (University of Kebangsaan): May 24, 2003. Vol. 82, pages 389-402.

Moreau, R. (2006). Promise in Pakistan. “What’s behind one of the world’s most surprising economic success stories?” Newsweek International Edition. New York: March 27, 2006.

Ying, Q. (2005). “Personal Networks, Institutional Involvement, and Foreign Direct Investment Flows into China’s Interior.” Economic Geography. Worcester: July 2005. Vol. 81, Issue 3, page 261.