Comments on “Singapore and Thailand”

1. Comments on “Singapore and Thailand” Joshua Felman IMF India Conference on Asian FDI April 26, 2007

2. Motivation • There has been an explosion of overseas acquisitions by emerging market companies in recent years • This explosion is historically unprecedented – typically overseas investments have begun at much higher levels of development (Japan in the 1980s) • Key questions • What is the driving force behind this overseas expansion? • How are these investments faring? • Paper attempts to answer these questions by examining the experience of Singapore and Thailand • What has it found?

3. Key questions • What is the driving force behind this overseas expansion? • How are these investments faring?

4. Do “connections” provide a comparative advantage? • Standard theory suggests that MNCs need to have a comparative advantage, usually technological • Paper suggests that “connections” could provide an this advantage • What is the logic? • There are high barriers to entry: possible only if you have connections • Because entry barriers are high, you can earn monopoly rents, so profits are assured • But over time high profits attract new entrants, increasing competition • So, networking cannot provide a lasting advantage: you need a real comparative advantage

5. What about cultural affinity? • EMNCs could be better than MNCs from developed countries in dealing with emerging markets • In particular, companies run by ethnic Chinese might do better than Western firms in China • But the evidence in the paper does not support this hypothesis • Thai firms have stuck to Western-oriented Shenzen • Singapore companies have ventured out of Shenzen, but have had a difficult time, as Chinese business culture has proved very different

6. Other reasons for expansion? • Paper suggests that Thai firms expanded in neigboring countries to take advantage of free-trade agreements • But traditional theory suggests the opposite, that FDI is spurred by trade barriers, as firms try to jump over tariff walls • In contrast, when there is free trade, they can just export from the home country • Indeed, when it comes to Europe and the US, the paper says that Thai firms have invested in these regions precisely to bypass trade barriers • So, what is the driving force behind overseas expansion? • No clear conclusion: paper cannot identify any durable comparative advantage

7. Key questions • What is the driving force behind this overseas expansion? • How are these investments faring?

8. The record so far • Paper tells a cautionary tale: • Overseas expansion based on “connections” is fraught with financial peril (Thailand) • Many companies have had to restructure and scale back their international activities • Acquisitions by state-linked enterprises create political risks (Singapore) • Temasek’s investment in Shin has proved a financial and political disaster • Is this pessimistic conclusion warranted?

9. Financial peril? • Conclusions are based on a few case studies • Almost no analysis of financial data • Could examine financial statements to see whether the investments have proved profitable • Many of Temasek’s holdings are in listed companies • Temasek has earned substantial returns in Indonesia

10. Political risks? • Temasek’s investment in Shin has certainly been a disaster • But what lesson should we draw from this case? • State-linked companies can generate a political backlash or • Financial dealings with controversial politicians are risky • Temasek’s many other successful investments suggests the second lesson is more important • Experience in Indonesia with Suharto-linked firms reinforces this conclusion

11. Conclusion • There are certainly grounds for caution • The historically unprecedented expansion of overseas investment in the past few years has coincided with a surge in global liquidity: there may be an “acquisitions bubble” • Companies are leveraging up to fund these acquisitions • Record suggest many overseas acquisitions, even by developed country MNCs, do not work out • But before we draw conclusions further research will be important • To identify the theoretical comparative advantage of EMNC’s • To review the financial evidence to see how these overseas investments are faring in practice • This paper, through its careful review of some case studies, makes a valuable start