Though FDI remains a key factor that drives economic growth in Asia, at the same time decision makers need to prioritize growth of domestic industries and products.

Many nations in Asia are considered highly entrepreneurial, with poverty cited as the main reason for this entrepreneurial spirit. In the Philippines, small and medium-sized enterprises comprise the majority of all business establishments and about 60% of the exporting firms in the Philippines. 55% of the Philippine labor force is employed by SMEs, contributing approximately 30% to total domestic volume sales.

However, many entrepreneurs face challenges expanding their businesses in developing countries in Asia due to a lack of research and development, and inadequate access to technology. These are advantages inherent to many large multinational companies. Financing is a grave concern for most start-ups, since most entrepreneurs starting small business in competitive markets have difficulty acquiring capital and suffer from a lack of good marketing advice and various logistical problems. Governments should realize that entrepreneurial efforts help improve living standards and ignite economic growth while building a bigger market for local products. Providing incentives and support, through lowering corporate taxes, introducing sustainable loan schemes, and assisting in land ownership deals, would prompt increased domestic growth and investment in local industries, in turn expanding the market. Increased government support for microfinance and consulting programs would develop certain industries and markets and further contribute to economic growth at home.

It is often the case that antitrust laws in developing countries are not effective enough to prevent monopolies from forming, especially in the case of multinational companies. This phenomenon is particularly prevalent in the food industry, where Nestle and Unilever control large portions of market share. Government policy should be strict and clear where it wants to protect domestic business interests, especially when it comes to market penetration by larger multinational corporations with technological and technical advantages. Taxes and tariffs should be used to balance the market, while also collecting significant FDI revenue from the foreign firms.

The Role of Microfinance

Domestic microfinance schemes play an integral role in the provision of small-scale financial services not only to the poor, but also to many start-up firms that fuel domestic market growth. Aside from general consulting and advising, microfinance services can include savings, credit, insurance, and transfer and payments services. The lack of sufficient microfinance support poses problems if local businesses are to compete with the larger multinational firms. Microfinance institutions in Asia play a critical role in increasing access to capital for start-up businesses, especially those in rural areas. However, this might not be enough to stimulate local businesses, which usually require significant amounts of initial funds, depending on the industry. According to a study by the International Finance Corporation (IFC), the demand for financial services is extremely high in Asia and the supply of microfinance is estimated at only US$ four billion, which is used to serve 22 million borrowers; however, these high quality financial assets are limited and concentrated in just a few countries, such as in India and Bangladesh, with an overall market penetration rate of only 6%. Increased government support of microfinance initiatives, institutions, and banks can go a long way to ensuring that domestic businesses are adequately provided with financial options and the necessary cash for daily operations. Government implementation programs, for instance, in Malaysia and Thailand aim to alleviate poverty by empowering public banks to implement microfinance schemes that support potential local business ideas. Microfinance perhaps can be seen as a way to balance the influx of FDIs from multinational companies. These microfinance “cooperatives” may also be great tools to boost and expand the economy outside of FDIs.

The Indian National Bank for Agriculture and Rural Development (NABARD)is known as one of the largest microfinance institutions in the world. The organization notably takes an active role in facilitating credit flow for the promotion and development of agricultural and small-scale industries. For example, the Self-Help Group (SHG)-Bank Linkage program, launched by NABARD in 1992, is a major microfinance model in India; this initiative increases the availability of bank loans, which are also refinanced by NABARD, to groups needing start-up capital. Banks could be key participants in sustaining domestic businesses industries, especially when the right partnerships are formed. This linkage program is a potential model that other developing countries are Asia could emulate given its ability to secure stable and consistent financing plans. There are currently 547 banks participating in SHGs linkage program serving almost four times more local districts since 1998.

China Postal Savings Bank (CPSB) – Accessible small-scale savings products

China Postal Savings Bank plays a critical role in providing financial services to 3,000 small cities, with more than two-third of its branches targeting rural areas. In a bid to increase business awareness and initiate development in these areas, CPSB has registered 130 million Chinese, almost 10% of the Chinese population, with deposit accounts amounting to about USD 30 billion or 231 billion Yuan. The procurement of finance in the country is mostly hindered by the cost of financial services, which CPSB tries to eliminate by removing the dollar charge required by commercial banks for debit card application. The exemption of this charge when applying for a debit card with CPSB allows better access to bank accounts and basic financial services, such as remittances and savings. These measures can prove highly advantageous in the long run, as many small and medium enterprises rise and increase healthy competition in the large diverse economy of China.

In Malaysia’s globalized economy, SMEs are becoming a main force for national economic growth. The Malaysian government, working with the National SMEs Development Council (NSDC), has spearheaded the development of a microfinance framework. With key government support in the SME sector, the role of Bank Simpanan Nasional (BSN) has been expanded to provide microfinance to microenterprises and individual business operators, which also includes savings and advisory elements to enhance business models. Targeted recipients are potentially profitable industry players, with the maximum loan size reaching approximately US$ 15,000 or RM 50,000. Since 2007, BSN’s main microlending scheme is focused on some of Malaysia’s key business industries in the manufacturing, wholesale, retailing, and services sectors. Notably, BSN works on a case-by-case basis when attending to clients, and provides them with specific funding schemes to fit their needs. Government sanctioned and authorized banks such as BSN are strong monetary motivators for many rural and sub-urban business communities or groups, who form the backbone of emerging domestic industries.

Foreign Direct Investment: Going Multinational or Local?

Below are some key statistics that show the net FDIs for each country in the ASEAN region:

Political economy research has only recently begun to focus on the complexity of FDI, since FDI plays a central role in many aspects of international economic integration and can be considered the single largest source of global capital. FDI drives other types of economic flows, such as intrafirm trade, trade between subsidiaries of a single multinational firm that constitutes over one-third of total world trade. FDI can also foster economic development by creating jobs and introducing new technologies, qualities that are beneficial to developing countries like the Philippines. Firms usually retain main business headquarter functions, like research and development, in the home country and relocate and invest production to foreign countries abundant in necessary inputs with typically cheaper labor. As international business grows, however, many multinational companies choose to place regional headquarters to monitor these business interests and trade; these hubs usually hold valuable production and storage assets, and may make substantial use of outsourcing companies within that particular country.

In general, FDIs and multinational corporations coupled with business process outsourcers are mutually beneficial; but when one side dominates, typically due to government incentives or subsidies, significant market presence is developed. Local partners may lose out or receive significantly less of the income, as opposed to their larger foreign counterparts, who have achieved greater market penetration. Such a big advantage in terms of these incentives can become counterproductive to the intention of outsourcing, which is to create a relationship wherein the outsourcing company stands to gain a profit and learn technical expertise from their foreign partners. Government control is thus paramount to maintain the shared values of both the local businesses and the multinationals, and to prevent any opportunism from potentially alienating and stunting the domestic relationship.

Through FDIs, host economies have rapidly been transformed from predominantly agricultural and raw material processors to major producers and exporters of manufactured goods. Balance in terms of market share is essential, considering both the case of multinational penetration into a country and the general interest for protecting the local or domestic markets. Similar to business process outsourcing, a possible entry requirement for multinational companies may be established; any international firm wishing to set-up or infuse funds into a business project must do so as part of a joint venture with a local company. However, the laws as well should be in place to enforce these provisions effectively within the industry and the market. Governments cannot allow any entity to compromise the competitiveness of the Philippine domestic market, which is kept stable by continuous domestic investment. Furthermore, these cuts and subsidies may cost already heavily indebted states possible future revenue to financially strengthen their own local markets, such as through microfinance or loan contributions. As a consequence, some distinctly local products lose out to foreign products, albeit produced in the country. In many cases, the presence of these multinationals discourages smaller businesses from expanding within their industries, which can be detrimental in significant cases of capital flight when these multinationals decide to pull out their assets and money from the economy.

In terms of employment, a decrease in unemployment rates due to multinational companies may prove to be a fluke. While multinational companies can account for a large rise in employment rates due to their relatively large capital investment, employment may not be very sustainable in the long run, especially if the head office chooses to close down major manufacturing centers in a country to cut overall expenditure during an economic crisis. This move can be extremely catastrophic, especially when these multinational companies already capture a significant portion of the working population, since mass unemployment can result. Multinational companies pulling out of developing countries can leave behind negative labor circumstances, such as the inability of the firm to give separation pay or similar contractual benefits. Key domestic industries have less of this risk, as national governments may be able to support them financially or the industry as a whole in times of financial downturn. Employees, as well, can be sure that company labor policies are aligned with and accountable to the national government, instead of being mixed with the system of a head office on another continent.

A Potential Counter-Argument

It is possible that FDI promotes and strengthens domesticindustries more than it undermines it. In order to successfully export to international markets, foreign investors have to purchase inputs from abroad or from local businesses in the host country. It must be noted that many of the most successful export sectors in ASEAN (Association of Southeast Asian Nations) are also highly import dependent; this relationship has limited the impact of devaluations in these economies on exports. Many experts have pointed out that the primary interest of these exporters in the economy is as a source of low cost labor, instead of inward market penetration. As stated before, foreign investors gearing towards the domestic market usually have close ties with local firms; their competitive advantage is used improve these sectors, as they can provide useful technical and technological information for these local firms. And since foreign companies produce quality goods and certain services for the local market, they may indirectly help domestic firms become more competitive in other markets, enhancing the export potential of indigenous entrepreneurs. The intention is not to argue for FDIs as a primary means of economic progress, but in an environment where there is high private sector activity, foreign investment can make a valuable and very unique contribution to sustainable economic growth and development. A recent study of sixty-nine developing countries found that FDI stimulates national economic growth more, also in terms of GDP, than investments from domestic firms.

The promotion of FDI may be a good means, during and post-financial crisis, to bring in more cash inflows into the economy, due to multinationals wanting to profit from cheaper inputs. Compared to other forms of capital flows, FDI has proved remarkably resilient during financial crises, like the Asian fiscal crisis in 1997. Ultimately, governments can identify certain business sectors that can benefit from multinational FDI, and encourage these multinationals to partner with already established local companies to expand the market. Foreign firms stand to increase the level of competition in the economy and create ideas, expertise, and innovations that the domestic economy could not have necessarily developed on its own. This strategy would enable both parties to reap the financial and technical benefits of their cooperation, and the biggest prize: the massive Asian consumer base.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.