The Continuing Role of Foreign Investment in
East and
South East Asia


Dr Christopher Reynolds


The investment of foreign capital has been the driving force for Asia’s economic growth for many years. With the liberalising of restrictions of capital flows across the region in the 1980s, however, has come a vast increase of private capital flows in the form of portfolio investments and loans. For the five Asian economies affected most by the financial crisis (Indonesia, Malaysia, Thailand, South Korea and the Philippines) foreign direct investment was to account for only 4.5% of private capital flows with borrowings and portfolios comprising the other 95.5%. The volatility of this global private capital was exposed in the financial crisis where credit flows for the Asian-5 declined by $125bil or 150% from 1996 to 1998. The growth of foreign capital, and its decline, reveal not only a change in composition of foreign investment but also a change in the nature and purpose of foreign investment for Asia. It is the thesis of this paper that foreign investment has driven the economic and business growth of Asia over the past several decades and will continue to dominate the economic-business growth of Asia in the future. Further, that if Asia is to avoid another financial crisis as seen in 1997-98 then a new style of business and financial management is needed that aligns business practice and regulation with the demands of the global market.

The Continuing Role of Foreign Investment in South East Asia

With an average GDP growth of 8% for the previous decade and export growth from 1985 to 1990 at over

220%, (IMF Directions in Trade Statistics) investing in Asia in the early 1990s was extremely attractive. In terms

of equity growth, from 1975 to 1994, the Malaysian stock market index rose 1733%, Thailand rose1711% and

the Hong Kong Hang Seng index rose by 3000%. (Henderson 1998:20)

Indeed, the early 1990s witnessed an investment and credit boom in Asia. The euphoria that brought about rapidly

rising equity investment was, however, to be matched and outpaced by foreign borrowing. But free flowing credit

spelt large foreign debt. Indonesia, Thailand and the Philippines, all had debt in 1996 of more than 48% of GDP.

(Asian Regional Outlook 1998) External debt for Thailand, for example, increased from $54.6bil in 1994 to

$100bil by the end of 1996, with a large proportion (some 30% of corporate debt alone) in short-term loans. As

the economy continued to erode the Baht was finally devalued in July 1997. (Song 1998:38) This was the

beginning of a domino effect as foreign investments and then domestic savings were withdrawn from the region

causing currency devaluations and stimulating economic recession. The Asian financial crisis of 1997-98 was to

expose just how dependent E&SE Asia had become upon foreign capital. While foreign capital brought

spectacular growth over several decades,increasing amounts of readily available money, however, also made Asian

economies vulnerable to the volatility of global financial markets.


‘Asia’ and ‘E&SE Asia’ refer to East and South East Asia. ‘SE Asia’ refers to the ASEAN economies and especially to the ASEAN-5 economies of Indonesia, Malaysia, Thailand, Singapore and the Philippines. Japan and China are usually referred to independently.

Asian-5 Economies Private Capital Flows

In assessing the causes of the crisis there are grounds for the argument that Asia was hit by investor panic and just

as capital, in the form of equity and loans, had readily flowed into Asia it twice as quickly flowed out. At the same

time, there are grounds for the argument that it was the underlying poor financial management and regulation that

made Asian economies vulnerable to crisis. Certainly, the crisis was brought about by a combination of

both factors. Yet, it is worth examining whether the Asian economies collapsed because the Asian ‘miracle’ (World

Bank1993) was really a myth, as Paul Krugman has suggested, (Krugman 1994:62-78) built on a high inflow of

foreign capital. The issue of input-driven growth, in terms of foreign investment, remains of paramount importance

in understanding both Asia’s past as well as future growth. It is the thesis of this paper that foreign investment has

driven the economic and business growth of Asia over the past several decades of spectacular performance and

will continue to dominate the economic-business growth of Asia in the future. Further, that if Asia is to avoid

another financial crisis as seen in 1997-98 then a new style of business and financial management is needed that

aligns business practice and regulation with the demands of the global market.

Accordingly, this paper will first address the issue of the role of foreign investment in Asia and then review the need

for a change in the management style, or Asian ‘way’ of management that evidently contributed to the 1997-98

financial crisis.

Foreign Investment

The significance of foreign capital to the growth of E&SE Asia is well documented. Nelson and Pack in analysing

the various theories for Asia’s growth divide them into two schools of thought: The ‘accumulation’theories and the

‘assimilation’ theories. While the assimilation theories in general emphasise the value of entreprenuership, innovation

and learning, and accumulation theories emphasise the role of capital investments.Nelson and Park indicate that

both schools of thought view investment in capital stock as central to the explanation of Asian economic growth.

(Nelson & Pack 1997). The debate over the role of exogenous factors (development originating from without) and

endogenous factors (development from within) has continued from the time Solow proposed the dichotomy in

1956 (Solow1970:3-9). But certainly the work of Alwyn Young and Larry Lau, as developed Paul Krugman and

Nouriel Roubini, on the significance of input-driven capital growth drew attention to just how important foreign

capital has been to Asia. (Krugman 1998:1, Roubini 1998:2) Krugman, in presenting the position, argues that, like

the Soviet Union in the 1950s, Asian growth was achieved by massive mobilisation of capital and low cost labour:

It was input-driven growth. Further, that this input-driven growth would not be sustainable as the law of diminishing

returns set in, implying that the Asian economies would experience a gradual slow down in growth.

While the point was to suggest that Asia’s productivity was hollow because there was insufficient technological

development and innovation, their work highlights the role of foreign capital in Asia’s growth. The proposal is

supported by the fact that, as the World Bank estimates, from 1960 to 1992 capital accumulation in East Asia

accounted for some 80% of the growth output per worker. (World Bank 1998).

Factor Contributions to East Asian Economic Growth
( Output growth as % per Year: 1960-1992)

Rather than viewing capital investment as somehow ‘hollow’ because it is foreign, the Asian miracle is seen here as

‘real’ in as much as Asia experienced spectacular economic growth albeit from foreign investment and

industrialisation for export. The fact that the economic growth was spawned by foreign capital doesn’t make it any

less real. (It also does not necessitate diminishing returns, as Krugman has suggested.) In the global finance market

with $1.5tril in currency transactions each day (Bloomberg News 1999) and $6tril of Eurocurrency on deposit

worldwide, there is now a ceaseless circulation of money that finances business growth worldwide. Accordingly, it

is perhaps a truism to suggest that all economies are now ‘input-driven’ as billions of dollars move across electronic

networks to be assembled and disassembled in financial negotiations in what seems like microseconds. This is not

to deny that ‘developed’ countries tend to have high levels of innovation and technology development but to stress

the increasing important role of global (foreign) capital in servicing every economy. As foreign capital has been

fundamental to Asian economies in the past it will be just as fundamental in the future.

The Role of Foreign Direct Investment

Historically, the vast majority of foreign investment in Asia came from Europe and the United States and focussed

on the profits to be made from the extraction and development of natural resources. The Second World War was

followed by a period where Asia was mostly closed off to foreign business. With changes in government in

Indonesia, Thailand and the Philippines and the emergence of more liberal attitudes, the late 1960s marked

the advent of a new attitude to foreign direct investment (FDI) and the beginning of substantial trade and economic

growth. “Getting the basics right”, as the World Bank phrased it in its East Asia Miracle Report, (World Bank

1993) meant essentially getting the financial climate right to both build domestic savings and investment and attract

foreign investment.


2 The IMF has defined foreign investment as “investment made to acquire a lasting interest in enterprises operating outside the economy of the investor”. (United Nations 1992) The term refers to foreign investments where the share of the investment exceeds a certain threshold, say 10% of ownership in a company. It usually consists of equity, loans from related companies, and reinvested earnings. However, in a world of ‘production systems’ and intra-firm trade and tax advantage seeking accounting, it is increasingly difficult to identify the relationship between FDI and real production as to restructuring of a firm’s liabilities or some other TNC activity. Eric Ramstetter points out that a further difficulty exists in assessing FDI against production in as much as there is no counterpart to FDI for non-TNC activity. (Ramstetter 1998:168) But as a gage of international investment and business activity, FDI continues to be a usual measure of TNC activity.

While the US and Europe have continued to be dominant contributors of FDI in Asia, Japanese investments have

been increasing significant. On a worldwide scale Japanese FDI stocks have increased some 16 times from just

$19bil in 1980 to $305bil in 1995, in parallel to US FDI rising some 3 times from $213bil in 1980 to $705bil in

1995. During this period, Japanese FDI in ASEAN remained at about 25% of all their FDI stock since 1980, in

comparison with the US at 13% and Europe at 18%. As a general trend, E&SE Asia has experienced a rise in the

proportion of world-wide FDI stock from 8% in 1985 to 15% in 1997. (UNCTAD 1996,1998)

Broad Source of Stock of FDI in ASEAN
(US$ billions)

European Union





Source: UNCTAD-DTCI: FDI Database


Data from the Institute of International Finance show that FDI to the Asian region has continued to rise even

throughout the financial crisis.

For the Asia-Pacific it increased from $41.9bil in 1995 to $54.1bil in 1998. For the five Asian economies affected

most by the crisis (Asian-5) - Indonesia, Thailand, Malaysia, South Korea and the Philippines – the story is similar.

From 1995 FDI has increased from $4.2bil to $9.5bil in 1998. While Indonesia was to suffer disinvestment of

$6bil in 1998, increases in FDI for South Korea, Thailand and the Philippines tended to counteract that decline.

Surprisingly, an FDI inflow into Asia after the crisis the United Nations (UNCTAD) reports was ‘quite resilient’.

(UNCTAD 1998:15). The response by investors of FDI during the Asian financial crisis is significant because

it indicates, first, that long term investment in the form of FDI is not as volatile as other forms of private investment.

And, second, the desire by transnational companies (TNCs) to continue to develop in the region. The growth of

FDI across the world and in Asia also reflects a changing preference of investment in the form of acquisitions and

mergers (A&Ms) as companies seek to consolidate in order to strengthen their regional and global capabilities.

UNCTAD reports that M&As are the principle reason for increases in FDI. “Valued at $236bil, majority- owned

M&As represented nearly three-fifths of global FDI inflows in 1997, increasing from almost half in 1996”.

(UNCTAD 1998:10) Cross-boarder majority M&As in Asia in 1998 increased by 28% in value over 1997 to

reach $12.5bil accounting for 16% of all FDI into the region. For the Asian-5 M&As jumped to 53% of FDI

inflows. Again, this represented foreign companies taking advantage of opportunities to build affiliate businesses in

Asia and to strengthen both market contacts and regional capabilities.

Still, this trend is not only a response to the financial crisis but represents a changing rationale for FDI. Eric

Ramstetter in reviewing FDI flows for a number of Asian economies has previously suggested that there have been

structural changes in investment brought about by changes in the region’s economies, the interests of TNCs, and

the distribution of production. (Ramstetter 1991:1-7) Along the same lines, John Dunning believes that there is a

pattern to investment along a development path, and suggests that there is a renaissance of the international market

occurring as TNCs change their investment behaviour. Where it has been previously assumed that TNCs invested

in order to gain from their existing competitive advantages, in the last decade TNCs have moved to acquire new

competitive advantages through acquisitions and mergers. (Dunning 1993:285) Dunning suggests that alliance

capitalism as a strategy of working through cooperation and coordination is replacing arms-length business

(Dunning 1995:16-17).

This is born out in the continual rise and attraction of A&Ms as a form of FDI but also in non-equity forms of

cross-boarder management and production as businesses seek to increase capacity and linkage.

The growth of intra-regional investments from mainly overseas Chinese across the region and their subsequent

decline in the financial crisis has been responsible for most of the fall in FDI as many businesses struggle with debt:

A gap made up by Western investments. Asia’s commercial interrelatedness is demonstrated once again in the

contagion effect of business success and failure. Taiwan, for example, in suffering a decline in intra- regional exports

of 48% which has been brought on by decline in exports to Japan of some 22% and to ASEAN of 26% in 1999.

In consequence, Taiwan reduced its FDI investment into China in January 1999 by 75% from January of 1998.

(Miller 1999).

China’s recent oscillating experience with FDI also reflects the growing integration of regional business and global

interests. In 1992-93 China averaged 147% growth in FDI but this declined to just 11% by 1997. Nevertheless

this was a new overall high of $45bil, and contributed to the 9% increase of overall total flows to Asia and the

Pacific. By 1998, with FDI at approximately the same level as 1997, China’s share of developing Asia’s total FDI

rose to 58%. The trends in growing FDI are significant. First, the rise, fall and rebound of FDI in regional

investment in the 1990s indicate a growth of intra-regional investment and regional integration. A trend likely to

continue because of interest in the emerging markets of China and Indochina. Second, the growth of M&As reveal

a strategy by TNCs to divest from non-core activities and strengthen core activities in an effort to gain competitive

advantages (UNCTAD 1998:10). Third, and particularly in the financial sector, the E&SE Asian region is

experiencing a period of consolidation.

Asian banks and financial institutions in particular are seeking because of either debt burdens or capacity weakness

to associate with stronger international finance institutions.

Certainly there has been some ‘fire sales’ as foreign companies took advantage of the failure or misfortune of

others. The outcome for business and banking alike is greater concentration of resources and services in the hands

of fewer and larger global players. Naturally, there is concern for the loss of national control over enterprises that

are becoming increasingly global by nature and global by ownership. (UNCTAD 1998b:1) Yet, this period of

consolidation may well be the best medicine for a business-banking sector that has notoriously been integrated,

nontransparent and inefficient.

Foreign Indirect Investment.

The flow of FDI into E&SE Asia was not directly related to the cause of the financial crisis. With the continued

liberalisation of capital markets and the consequential increased availability of foreign capital, FDI has been

overshadowed by foreign indirect investment (FII) in the form of portfolio equity investments and debt flows

comprising bonds and loans. It is this highly mobile and highly volatile form of private capital flow that has proved

to be the dynamic force shaping the course of Asia’s boom and bust.


3 In addition to domestic finance made available savings and investments, foreign capitalisation and debt financing have become popular mechanisms to boost business growth. Businesses, banks, and occasionally governments, seek to raise foreign capital by way of equities or stock market sales - also known as portfolios, bonds, and loans through banks and other institutions or private means. In contrast to FDI, these investments - since that is what they are from the viewpoint of the foreign lender or investor - do not transfer directly to company ownership or involvement but transfer indirectly through borrowing institutions, capital markets or stock markets. They are, in effect, Foreign Indirect Investments (FII) and include as a category a variation of transfer mechanism.

Capital Flows: External Financing

In 1980, portfolio investment in Emerging Market Economies was zero. In a new era of capital growth in the

1990s, however, private capital flows into Emerging Market Economies had reached $327.7bil or 98.5% of all

external financing by 1996. Of this, portfolio investments had grown to nearly $36bil along with external bank

borrowings of $200bil. That is, FDI comprised only 28.5% of all private flows, while private borrowings and

portfolios comprised the other 71.5%. For the Asian-5 economies effected most by the financial crisis, FDI

comprised only 4.5% of private capital flows while borrowings and portfolios comprised the other 95.5%. As

specific examples, Thailand’s FDI comprised only 3.6% of it capital formation, and Indonesia’s FDI comprised

only 4.3% of its capital formation in 1993.

(UNCTAD 1996 database)


4 The figures for this chart are derived from various sources of the Institute of International Finance. Comparative categories are used here because of the problems caused by different organisations using different economies to comprise the groupings. Accordingly, ‘Asia’ will represent something different from organisation to organisation. By referring directly to the Asian-5 it is hoped to focus attention on the impact of the crisis.

There is no denying that in Asia in the early 1990s investment returns were there to be had. For both the Asia-

Pacific and the Asia-5, both portfolio equities and private credit experienced rises of approximately 30% from

1995 to 1996. Yet, the difference in the quantity of the rise between the two categories is quite outstanding. The

Asian-5 portfolio investments rose by $11bil from just $2.9bil to $13.9bil, as to private credit rising by $65bil from

$18.6bil to $83.7bil.

The volatility of global private capital flows is thrown into sharp relief with the rapid and extensive decline in credit

between 1996 and 1998. For the Asian-5, the decline amounted to some $125bil or 150%. Similarly, portfolio

equity flows declined 103% in 1997 alone.

Given these figures, the financial crisis could be better described as a financial crash or even a financial disaster.

In comparing the various movements of private capital during the ‘crash’ something of the purpose and nature of

the flows can be observed. FDI continued unabated and to even increase. Portfolio investments in the stock

markets withdrew immediately and private credit - loans and bonds –stopped flowing into the Asian-5 immediately

and continued to flow out over the next two years as loans were called in and not renewed.

The difference between FDI and FII, as defined here, lies not only in the mechanism of investment but also in their

purpose and stability. A review of the performance of FII and FDI across Emerging Economies and Asia-Pacific,

reveals their different behaviour. It is therefore reasonable to postulate that the financial crisis was not necessarily

related to TNC investment strategies or formation. On the other hand, the radical changes in FII flows demonstrate

both the volatility and the speed of money moving in and out of an economy. Indeed, FII has no direct fiduciary

relationship to the business of the end-borrower. The primary purpose of FII is maximum investment return.

Accordingly, the volatility of FII relates directly to the rate of return on investment. The movement of FII,

accordingly, can be seen as the primary cause of crisis in as much as it was withdrawn from the region so quickly.

The growth in FII in Asia has been market by a number of trends. First, foreign investment and lending have tended

to run together as businesses have sought to diversify their capital formation away from domestic bank borrowings.

Notably bond issue has become a popular mechanism for capital formation with bonds accounting for some 60%

of debt flows for emerging economies from 1990-1995.

Bond issues for Emerging Markets growing from $5.3bil in 1989 to $42.1bil in 1993 - with total stock outstanding

at $224.2bil. (Uppal 1997:64) This represents not only the increasing sophistication of international bonds available

through commercial and investment banks, but also the growing demand by Asian businesses and TNCs to finance

growth through relatively low interest credit.

Second, there has been a change in the make-up of the foreign investor. In 1989, of the shares of America’s 1,000

largest companies ranked market capitalisation, 57% were owned by individuals. By 1998, the dominance of the

individual investor had been replaced by institutional investment as 60% of shares were managed by institutions. At

the same time, in the UK, some 80% of equities were held by institutions, and the same is true for Japan. (Useem

1998: 43-45) Pension funds and mutual funds, or unit trust funds, along with other institutional investors typically

invest as collectives of individual subscribers.

Accordingly, the balance of power in the equity markets has moved away from individuals to professional fund

managers and the multi-billion dollar investments that they control. In order to keep their individual investors,

however, institutional fund managers must perform and out-perform their competition. Fund managers subsequently

look for competitive results from their listings and are quick to alter allocations to regions and industry sectors in

view of opportunities or potential loss. This pattern of behaviour tends to have a drastic impact on stock markets if

and when they fall out of favour.

Third, in parallel with the growth of institutional investment has been the growth of the international shareholder.

Institutional investors increasingly represent clients from across the world as clients and firms have become more

willing to make cross-boarder investments. US mutual fund investment in foreign equities increased from $28bil. in

1990 to $300bil in1997. (Umseen 1998:45) This trend adds to the volatility of investments as investors are less

likely to be concerned about the welfare of the economy of business they have invested in. They simply want


These trends are particularly evident in the Asian stock markets. In a study by Kim and Wei of the Korean Stock

market in 1998 for the OECD, it was shown that of the 8,584 investors listed for June 30, 1998, on the Korean

Stock Exchange, 31 were individuals and 8,554 were institutional investors. Of the total number of investors, only

24 were resident investors, and 8,560 were non-resident investors. Of these, 472 were Asian investors and 5261

were US investors with 5,259 of these being US institutions. (Kim & Wei 1999:19) Quite clearly, foreign

institutional investors influence the Korean Stock Market. Korea is representative of other emerging equity markets

as they have become increasingly driven by international investments.

This synopsis provides the backdrop for Asian financial crisis of 1997-98. Callum Henderson, working for

Standard & Poors in Hong

Kong during the period of the crisis, says that in the early 1990s fund managers sought to create new investment

opportunities for their clients and moved billions of dollars into Asia. He suggests that one well-known trust fund

(although not revealed) in Hong Kong rose 8000% from 1971 to 1994. (Henderson 1998:19) Particularly for

ASEAN economies, portfolio investment in 1995 and 1996 were almost 3 times greater than FDI, and the size of

FII totally dwarfed FDI.

The capital flows for Thailand serve to illustrate the rapid rise in the availability of finance. Portfolio investments in

Thailand jumped from 14 billion Baht 1992 in one year to reach to 123bil Baht in 1993. Similarly, bank loans

jumped from less than 30bil Baht in 1993 to over 300bil Baht in 1995. From 1992 to 1996, total loan business

rose from 2.7tril Baht to 5.5tril Baht while the capitalisation of the stock exchange doubled in 1992 and doubled

again in 1993. However, with an emerging over capitalisation of the stock exchange, by 1996

some 57% of all transactions were in banking and another 22% went to property and telecoms. The vast majority

of activity was in some 30 companies of some 400 companies listed.

(Phongpaichit 1998:99-102).

The extent of the dependency upon FII, particularly by ASEAN economies, became obvious by October 1997

with the financial crisis and the difficulty Asian borrowers, mainly banks, had with servicing their foreign debts.

While Thailand, for example, had a foreign debt of $90bil, which amounted to some 49% of its GDP, other

ASEAN countries were equally exposed. By the end of 1996, Indonesia had accumulated foreign debt of over

$113bil, or almost 50% of its GDP, while Malaysian foreign debt totaled only $38bil, or 39% of its GDP.

Deutsche Bank has estimated that some $93bil flowed into Indonesia, Malaysia, the Philippines and Thailand in

1996, but in 1997, $105bil flowed out. This outflow was equivalent to 10% of these countries’ joint GDP. (Templeman 1998:22) The Institute for International Finance statistics for the Asian-5 indicate that the flows are even higher: In 1996, $102bil flowed in and in 1998 $41.3bil flowed out. A net difference of $143bil.

The crisis and the ensuing review of bank borrowings and loans has revealed that banks in Indonesia, Malaysia,

Thailand, the Philippines and Singapore had accumulated approximately US$73 billion in bad debts. This was

about 13% of those countries’ economic output.

Josephine Jimeney, Senior Portfolio Manager for Montgomery Emerging Funds, estimates that Asian companies

accumulated some $700bil in debt from1992 to 1997.(Bleck 1993:33)

In the post crisis period on 1999, as the Asian economies appear to be improving, net private flows to Asia-

Pacific were approximately $29bil, up from their 1998 low of just $7.8bil. Throughout the crisis FDI slowed but

has continued to rise appearing as a major source of capital inflow in this period. Of course, inflows were offset by

outflows, and while Korea, for example, saw as much as $11bil in equity investments, outflows and repayments

balanced net inflows to just $7bil. Overall, it is estimated by the Institute of International Finance that commercial

banks alone withdrew nearly $30bil from Emerging Markets in 1998 and while total private capital flows were

some $143bil for 1998, this was an overall decline of 56% from $327bil in 1996. (Institute for International

Finance 1999:1)

While FII has been the financial driving force behind the extraordinary growth of Asian economies during the

1990’s, and in the process linked Asia to the world’s capital markets, FII also brought the volatility to Asia’s

economies that has come to characterise global finance.

It was not the availability or the even the quantity of FII, however, that caused Asia’s financial crisis. It was a

matter of financial management, or mis-management, and inadequate regulation of foreign borrowings resulting in

debt accumulation that was disproportionately large compared to foreign capital stocks.

Crisis Management

In addressing the issue of the role of foreign capital in Asia there is no doubt that it was the source of Asia’s

economic growth for the past 30 years.

There should also be no doubt that during the current period of correction and returning growth, providing the

means to attract foreign capital back to Asia is of paramount importance in order to hasten the economic recovery.

In this process, however, it is important to acknowledge that the vast inflows of foreign capital had previously

created financial management problems for Asian economies that need to be addressed in order that the Asian

economies don’t continue to be crisis prone.

In assessing the causes of the financial crisis there have been two predominant lines of argument. The first allocates

blame squarely with domestic policy and mismanagement and addresses issues such as infrastructure, capacities

and weaknesses in banking and government regulation. (Rubin1998:2, Aghevli 1999:1, Sugisaki 1999:1) Amartya

Sen, the 1998 Nobel Prize winner in economics, for example, has commented that “The recent problems of East

and Southeast Asia bring out the penalty of undemocratic governance”. (Sen 1999:52) In sum, the main aspects of

the structural and domestic management problems are seen to be:

- Ineffectual prudential regulation leading to excessive bank foreign capital liabilities.

- Over-reliance on banks and bank-like intermediaries for corporate finance leading to over exposed and vulnerable financial positions for many firms.

- The lack of transparency and nondisclosure of true reserves or total liabilities of banks and businesses made financial and corporate management that much more difficult.

- The moral hazard of implied government assurance for the financial sector of a number of Asian economies created a false sense of security in banking that led to high risk loans and high risk, short term borrowing. (Taniuchi 1999)

The second argument allocates blame to the growth and power of the global financial system emerging from the

combination of deregulation and liberalisation across the world. (Thompson 1998:95, Garten 1999: 85) This

argument also speaks of inadequate financial management, or more accurately, the inability to properly manage

global finance without strengthening domestic systems.

As Asia, along with the rest of the world, moved to financial liberalisation to allow the unhindered flow of global

funds, so in the 1990s the power of financial control moved away from finance ministers and central banks to

institutional investors. The new bread of fund managers, however, have no alignment with domestic economy

welfare or even with the welfare of a global economic system. (Garten 1999:80) Indeed, Peter Drucker would

question whether control of global finance was at all possible in the context of emergence of the global information

era. He says conflict is inevitable as governments and society desire stability and the new organisations and

business relationships will want autonomy and flexibility. He points out that “Today’s world money flows have

become the great destabilisers.”

(Drucker 1995:127) Asian economies in liberalising their financial management systems become subject to the very

volatile and very demanding forces of global markets and global customers. Richard Hu, Singapore’s Financial

Minister, in acknowledging these problems and commenting on the crisis said in January 1998, said succinctly,

“The only way to avoid [crisis] is to properly manage [your] economy”.

(Sprague & Saludo 1998:43) In becoming part of the global economy, Asian financial management styles will need

to become compatible with global market dynamics.

A review of some of the Asian economies reveals that there are efforts being made to improve capabilities and

create better management systems. In both Korea and Thailand, with changes in government leadership and a

public commitment to reform, IMF prescriptions have led to considerable progress in banking and corporate

reforms. While Thailand passed several key economic bills, including amendments to the Bankruptcy Act, (Goh

1999) Korea launched into a program of financial reform. Of Korea’s 27 commercial banks, the Financial

Supervisory Commission ordered the closure of 5 and restructuring of another 7. (Kyung 1999)

Malaysia’s initial response to the crisis was to reject IMF orthodoxy and to impose exchange and capital controls.

But after taking time to stabilise the economy and restructure the affected banks and corporations, Malaysia

relaxed the capital controls to try to win back investor confidence.

Indonesia’s problems were most daunting for its banking system had virtually collapsed. While Indonesia has been

working on reforms for the past two years, the change of government promises to bring further reform and

restructuring in order to find international favour. (Goh 1999) Singapore was in a far better position to withstand

the onslaught of the financial crisis but, given its economic interrelationships with its neighbours, it also experienced

currency value declines and recession. In 1999, with a focus on developing new capabilities, its growth has

returned to positive figures and stock market share prices are generally rising.

Still, as the source of much of Asia’s investment and the responsible for driving much of Asia’s trade, the role of

Japan in restoring economic prosperity to Asia is crucial. As the largest investor into ASEAN by the mid- 1990s,

the IMF reports Japanese banks recorded $260.6bil in international bank lending to East Asia in 1996. This was

only second to European bank loans and amounted to 35.4% of total international banking lending for East Asia.

(Hagiwara 1999:12) In accounting for two thirds of the entire Asian regional economy, recovery for crisis-ridden

Asia will not be possible without Japanese economic leadership. Fred Bergsten echoes this opinion and says “it

is virtually impossible to resolve the Asian economic crisis without a substantial pickup in Japanese growth”.

(Bersten 1998:2)

Finance market liberalisation has changed the nature and composition of foreign capital coming into Asia. Managing

global money in the form of equities and private credit is, however, far more demanding than was regulating FDI in

the 1970s and 1980s – and even regulating FDI is now more demanding. Accordingly, Asia’s economic wellbeing

is dependent on both exogenous factors such as the state of foreign markets and the flow of foreign capital but is

also dependent upon its own good management.


The Asian financial crisis says as much about the nature of global finance in the 1990s as it does about Asian

banking and business, and even government, in the 1990s. Indeed, the Asian financial crisis can not be understood

outside of global commercial activity. The need for continued foreign/global capital is undisputed as is the role of

foreign capital in providing the means for Asia’s economic prosperity. In acknowledging this, governments are

currently involved in a process of ‘getting the basics’ fixed in order to attract, again, essential foreign capital.

While the financial crisis has obviously been a major political concern bringing political unrest and change to a

number of economies, in general, the inability of ASEAN to effect or even coordinate change has weakened the

organisation (Goh 1999). At the same time, with APEC now representing more than 50% of the world’s trade it is

in a stronger position than ASEAN to continue deliberations on the financial crisis and to address the need for re-

structuring and capacity building. It is also the leading international organisation to initiate some needed international

agreements. (Bergsten 1997: 4) The APEC Meeting in Brunei in 2000 promises to take this process further with

a focus on the four agenda topics of E-Commerce, IT- Communication, Human Resource Development, and Finance.


In many ways, however, business will take care of itself. This review of the continuing role of foreign capital in Asia

reveals, first, that there is an increase of TNC – FDI in Asia. The large increase in M&As, while reflecting both

consolidation and buy-outs, speaks of alliance building. Asian businesses, and banks, either through desire or need,

have sought to increase their international capabilities and links through mergers with Western companies.

Second, that with the inevitable changes to financial management in Asia brought on by increased Western bank

participation, will come increased borrowing options and more prudent regulation. As firms are able to raise finance

through a number of mechanisms they will become less reliant on bank borrowings and more individually

responsible for their own debts.

And third, that large institutional investors will naturally continue to dominate the equity markets. Their participation

will, of course, be dependent upon their perception of economic growth factors and economic management. But

this aspect of foreign capital investment will always be volatile and market sensitive.

For much of this discussion, Asia or E&SE Asia has been referred to as a region experiencing similar patterns of

economic and financial movement.

This common character has emerged from the regions economic interrelatedness but also its common experience of

economic growth as caused by the exogenous factor of foreign capital. While the nature of foreign capital flows has

changed over the past ten years, culminating in crisis, there is no doubt that foreign capital will continue to be the

dominant factor in Asia’s future growth affecting the very nature of Asian business and financial practice.


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