Even as India strengthens its Look East policy through free trade agreements, the most recent of which were signed with Japan and Malaysia last week, a new report has suggested that China may be beginning to lose out on foreign direct investment (FDI) from major Asian economies.
Japan, as well as Korea, may have started looking away from China after a period of strong FDI inflows into the second largest economy in the world. Instead, a report by Macquarie Research suggests, other economies in the region, including the 10-member Association of Southeast Asian Nations (Asean) may be benefitting from the change in pattern.
Recent data, Macquarie’s Chief Economist, Asia Richard Jarram wrote, “point to a shift in emphasis away from China and towards other countries in the region over the past couple of years, perhaps due to reduced tax incentives and higher labour costs in China, or perhaps because an increasing proportion of the FDI has been driven by resource-related investments elsewhere in the region.”
While Japanese FDI into the rest of Asia is on the upswing, South Korean investments in China have also fallen behind spending in other Asian countries in the last three years, despite China being a major recipient of Korean FDI between 2000-2007.
“This is also interesting because there is the concern that Japanese FDI into China is affected by fluctuations in the political relationship, which can be far more fractious than that between Korea and China,” the report added.
Last September, for instance, tensions were sparked between Beijing and Tokyo after a Chinese fishing boat collided with two Japanese coast guard vessels, an incident that led to a prolonged diplomatic row.
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But with a massive consumer base, by virtue of being the world’s most populous country, with growing income and demand, China also could be seeing foreign companies reworking operations to focus on the domestic market, rather than exports.
“The focus in China has been on local sales, rather than increasing exports to third countries.... Moreover, it appears that Japanese firms located in China have been putting a greater focus on serving the local market rather than using it as a base for exports,” the report stated.
India, however, could stand to benefit from such a shift in FDI pattern, as it already has a Comprehensive Economic Partnership Agreement with South Korea, which became operational last year, and entered into a similar agreement with Japan last week.
Moreover, South Korean steelmaker Posco’s proposed '50,000 crore integrated steel plant in Orissa, which was given conditional environmental clearance last month, is the largest FDI project in India, while Japan is the sixth largest foreign investor in the country, with actual investments of about $ 4.63 billion in the last decade.