For more than three decades, Asia has been a focus for foreign direct investment, but as the region’s outbound investment increases, the tide is shifting.
For more than three decades, Asia has been a focus for foreign direct investment (FDI), but as the region’s outbound investment increases, the tide is shifting. According to the 2013 United Nations Conference on Trade and Development’s World Investment report, Asia’s emerging economies accounted for 22.2% of the world’s $1.39 trillion FDI outflows in 2012, a 3.3% increase from 2010.1 Asia economies accounted for 20% of the top 20 global investor economies, according to the report.
Asian corporations are not new to overseas investments, but the scope has broadened.
“Asian corporations are at the cusp of transformation,” said Pravin Advani, J.P. Morgan’s global trade and loan products head of global sales and the Asia-Pacific region. “Their risk appetite has increased, and they are keen to accelerate growth by capitalizing on the experience they have gained from previous intra-regional expansions and from working with their international business partners. They are also more sophisticated and global in reach and aspiration, and they are likely to be more cash rich than their counterparts in the U.S. and Europe.”
Asia Pacific continues to be the fastest growing region in the world, with J.P. Morgan projecting gross domestic product (GDP) growth of 4.4% and 4.7% for 2014 and 2015, respectively. This compares with estimates of 2.6% and 2.9%, respectively, for the U.S. and 1.5% and 1.9% for Western Europe.2 Asia Pacific's GDP expansion is likely spurring its corporations to seek growth internationally, as the availability and pricing of overseas assets grow more attractive relative to domestic investments.
Heretofore, most Asian corporations sought to expand organically, but it is now increasingly common for companies to enter new markets through strategic acquisitions of assets such as technology, intellectual property and brand names. A growing number of Chinese3 and Indian4 corporations are engaged in M&A, and this is in line with the World Investment Report's mid-term projections, which rank China, Japan, India and Korea as the most promising investor economies in Asia.5
As Asian corporations shift their focus from domestic to international markets, their cross-border trade will most likely grow in size and complexity, as will trade finance requirements and exposure to trade-related risks. However, Asian corporations have historically placed less emphasis on mitigating exposure to trade risk Europe and the U.S., observed Sonam Kapadia, J.P. Morgan’s head of global trade and loan products in the Middle East and North Africa.
“Asian corporations often focus on relationships and trust, which may not be ideal when they are operating in a new and unfamiliar market,” Kapadia added. “Each jurisdiction has its unique set of legal and regulatory requirements. The benefits of partnering an international bank with a local presence are significant, and the right approach could result in a globally coordinated trade finance arrangement that is centrally managed by their head office in Asia – and yet still meets the needs of their overseas entities.”
For the sixth consecutive year, Asia Pacific accounted for the lion’s share of companies on the 2013 Forbes’ Top 2000 list with 715, compared with 606 from Europe and 543 from the U.S.6
Yet it is usually the more established multinational corporations that set the bar for operating structure and financial performance, which necessitates that Asia’s corporations move swiftly to adopt best practices – or develop their own – to compete more effectively.
“Besides optimizing working capital and risk management, Asian corporations also need to focus on innovation,” said Advani. “Initiatives like export credit agency-backed finance and supply chain finance – widely employed in the U.S. and growing in EMEA – are still underutilized in APAC. It can help companies strengthen relationships with their suppliers, as well as improve their own working capital,” he added.
As Asia’s multinational companies continue their growth trajectory, expansion into developed and emerging markets will continue to rise. Asian outbound investment strategies are no longer a temporary trend; rather, they are reshaping global markets, providing new competitive considerations and disrupting traditional patterns of investment execution worldwide.