Foreign direct investment and corporate restructuring in East Asia

One trend in East Asia has been an emergence of East Asian countries, most notably newly industrializing countries often called first-tier tigers, as sources of FDI in the region. In ten developing economies in East Asia, four first-tier tigers (Hong Kong, Singapore, Taiwan and South Korea) together emerged as almost equally important as Japan or the United States as sources of FDI in the 1990s. Active overseas investment by East Asian firms could give an impression that these firms have gained competitive advantages comparable to more established multinational corporations from the United States, Europe or Japan. FDI by East Asian firms in neighboring countries can be described as 'border investment', meaning extension of their domestic business strategy to the familiar business environment nearby. The border investment does not require firms to possess so-called monopolistic or competitive advantages to overcome the cost of foreignness, because the business environment is not so foreign to investing firms. By investing in neighboring countries, NIE-based firms do not fundamentally change their business structure which is providing low-cost assembly operations to the global value chain controlled by Western and Japanese corporations. At the same time, FDI by East Asian firms is dictated by domestic economic conditions of NIEs, namely increased production costs at home. Driven-out FDI by East Asian firms may simply buy some time for them to prolong their activity until lesser developed countries learn to compete directly with them. Thus border investment by East Asian firms does not solve a fundamental issue of their management, that is developing core competence to survive in global industries. It is argued that East Asian firms are faced with some structural and institutional barriers in making necessary corporate restructuring and emerging as worthwhile competitors. Family business nature of East Asian firms makes it difficult for them to develop into modern enterprises. Given the current portfolio of business and organizational structure, East Asian firms are vulnerable to external shocks and do not provide a sound and efficient corporate structure to the region. In addition, economic integration based on private initiatives as witnessed in East Asia can be vulnerable to international political and economic instabilities. The current economic crisis in East Asia is revealing these fundamental weaknesses of East Asian firms.