Sustainable FDI in Asia Challenges and Opportunities International Conference on Sustainable Investment in ASEAN Bangkok, 7 March 2002 Maryanne Grieg-Gran International Institute for Environment and Development

Recent FDI Trends 2001 Inflows to Asia down 13% from $144bn to $125bn FDI to China and India increased FDI to Taiwan and Thailand stable Decline in FDI to Hong Kong, Korea, Philippines and Malaysia Divestment in Indonesia continues

Source: UNCTAD World Investment Report 2001 FDI Inflows ASEAN (US$mn)

Source: UNCTAD World Investment Report 2001 Distribution of FDI Flows 2000

Source:UNCTAD World Investment Report 2001 FDI Inflows as % of GDP 1999

China Investment Report 2000 Origin of FDI Inflows to China 2000

Source: A Bende-Nabende and J.R. Slater 1999 Origin of FDI to Thailand 1996/7

Source:UNCTAD World Investment Report 2001 FDI Stocks in Asia by Sector

Top Sectors for FDI in Asia Indonesia ( ) –chemicals, electricity/gas/water, paper China (2000) –Fastest growing sectors electronics/telecommunication equipment and chemicals Thailand (2000) –chemicals and paper, agricultural products, electric and electronic products

ECAs in Asia ECGD (UK) 2000/01 –25% of total exposure of EUR 41 bn is in China, Indonesia,Hong Kong, and Malaysia –EUR 500 mn of overseas investment insurance in Asia (Indonesia and Philippines Hermes (Germany) –>EUR 5 bn in 2000 export guarantee cover to Asia –EUR 14 bn in investment insurance worldwide -China one of 5 major focus countries

European DFIs Commitments in Asia DEG (Germany) –EUR 903mn in Asia/Oceania by end of 2000 –Indonesia, India, Philippines CDC (UK) –US$348 mn in South Asia and Asia Pacific FMO (Netherlands) –ca. US$400mn at end of 1998 –Philippines, Indonesia, Pakistan

Potential Benefits of FDI Economic –Growth, technology transfer, foreign exchange, tax revenue, access to expertise and markets, spillovers, stability Social –Employment, poverty reduction, capacity building Environmental –Clean technology, efficient resource use, strict environmental standards

Potential Disbenefits of FDI Economic –High reliance on imports, minimal linkages, crowding out of local enterprises, competition on incentives, rent- seeking and corruption leading to inefficiency Social –Use of expatriate staff, accentuation of inequality, impacts on local community, poor working conditions Environmental –Race to the bottom on standards, off-loading of old dirty technology

What is Sustainable Investment? Investment that: Generates a competitive financial return for investors AND Contributes to national and local economy Brings social benefits and reduces poverty Is environmentally sound

Key Factors for Sustainable FDI Host country policies Market pressures and opportunities Company philosophy and visibility Investor/finance pressure and opportunities Home country policies International initiatives

The Opportunities: The Business Case for Sustainable Investment Cost advantages –Eg clean technology is more efficient; good working conditions means higher productivity Market advantages –Eg: Means of product differentiation; price premiums, tapping new markets in the “survival economy” Reputation advantages –Social licence to operate

Challenges for Sustainable Investment Fending off competition from “free riders” –Requires policy coordination Financing public goods –Innovative approaches needed Dealing with long gestation periods Going beyond “safe projects”

Challenges in Assessing Sustainability of FDI Establishing standards –International versus local standards:assumption that compliance with local legislation not sufficient or practical –One-size fits all approach not appropriate –Need for wide stakeholder consultation Obtaining Information to assess FDI –>440,000 foreign affiliates in S, E and S Asia –EU has 33,249 parent companies with foreign affiliates –Reliance on information supplied by the company

Challenges for Assessing Sustainability (2) Assessing supply chains –monitoring codes of conduct eg apparel codes Assessing the indirect impact of FDI – eg impact of FDI in the finance sector Addressing long-term and uncertain impacts – eg in mining

Information Tools Certification (eg FSC, SA8000) –Proliferation of schemes causes confusion –May not be appropriate for smaller producers Environmental management systems –ISO increasing takeup in Asia but lacks credibility as not performance-related. Environmental and Social audits –problems of interpretation where no widely accepted standards eg workplace standards

Conclusions FDI has an important role to play in sustainable development in Asia Sustainable FDI can involve win-wins – but this is not always automatic Action is needed from various stakeholders in FDI to overcome the barriers –To create an investment climate which incentivises sustainable FDI –To address definition of sustainability standards