The International Herald Tribune (IHT) has an excellent article on the new foreign direct investment (FDI) strategies being employed by large multinational corporations (MNC). Many of these corporations, in all manufacturing intensive industries and at all points in the value chain are exposed to the same country risk inherent with FDI.
Here we have blogged occassionally about Taiwnese investments in China and the alternative destination, Vietnam. The IHT article highlights how other MNC from other countries are also doing this and outlines some of the dangers to the MNC and the global economy as a whole. The article is long, but here is a teaser:
China remains the most attractive destination for industrial investment in the world, drawing almost $83 billion last year. But, in a strategy that companies are calling "China plus one," multinationals - worried about soaring costs in China and about becoming overly dependent on factories in one country - are increasingly establishing or expanding bases elsewhere on the continent, particularly in Vietnam.
The long list of worries about China includes inflation, rapidly rising labor costs, shortages of workers and energy, a strengthening currency, dwindling tax breaks for foreign investors and the possibility of civil unrest. With wages in China now rising close to 25 percent a year in dollar terms in many industries, the vaunted "China price" for a growing list of goods, particularly low-tech products, is no longer such a bargain.
Multinationals "should be thinking about all the world and keeping a balance," and they are doing so by encouraging suppliers to diversify out of China, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory sells to Wal-Mart and Kohl's in the United States, and it is building a factory in Vietnam to supplement its three factories in China.
There is one troubling issue about the article. Towards the end we get this quote:
Vietnam's biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes any hint of political opposition, keeps the military under control and changes government policies and leaders slowly.
"Communism means more stability," Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and other instability that has scared foreign investors.
Last I checked Taiwan is a democracy (has been for a decade), Japan is a democracy, Korea is a democracy and India is a democracy. While true India is not as stable as one thinks, the economy is expanding quickly and they do seem to have a relatively stable political structure. India aside, it seems ridiculous to assert that communism is a neccessity for stability. One could argue North Korea is communist and Zimbabwe is not prone to political coups, but both countries are certainly not havens for investments for obvious reasons. Actually, one could argue a case for ethical investments and investing only in countries that have a basic respect for human rights and freedoms. Ask the Montagnaards and the Tibetan's about human rights and how the enjoy the political stability and the fruits of investments. I am sure the story will be very different.
Enough said. This is not meant to be a political blog.
Article: As Chinese costs soar, manufacturers expand elsewhere in Asia
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