8:03 AM Mar 21, 1996

EUROPE: BUSINESS UNDERESTIMATED ASIAN POTENTIAL

Geneva Mar 20 (Chakravarthi Raghavan) -- European companies have "underestimated" the growth and trading potential of Asia and while they preferred to invest closer to home, US and Japanese firms have built up a near-unassailable competitive edge in the region, and unless European firms make up for lost time by increasing their investments in Asia, they could lose the race for global competitiveness as well.

This assessment and warning is in a just published study, jointly prepared by the European Union's executive Commission and the UN Conference on Trade and Development (UNCTAD). Released Tuesday, simultaneously, and with much fanfare from the EU Commission, it is described as an 'Interim Report' and intended for a Europe-Asia business conference in Geneva on 1 April.

The report says that while the Asian region is the most rapidly growing developing region, and provides enormous opportunities for investors, both in terms of magnitude of new investments and the variety of investments demanded, at least since the 1980s, the European Union investors have neglected the region as compared to investors from other developed countries.

The prime responsibility for this "benign neglect" of Asia lies with European companies themselves, EU officials said.

While Japan and the United States were "aggressively" seeking to expand their presence in Asia in the 1980s and the early 1990s, European companies "appear to have underestimated" the growth potential of the region and did not seek opportunities and invest.

Rather, the European companies found opportunities nearer home, as a result of the EU integration and the successive enlargements of the Community, as well as the opportunities in east Europe (as a result of the collapse of the socialist economies and attempts by them to move rapidly towards market economics).

The study warns that European firms are lagging far behind their Japanese and American rivals in investing in the world's most dynamic economies. European companies must seek out "technological partnerships and strategic alliances" with the region's top firms.

The report also says that European firms may have made other strategic mistakes too -- relying more on direct exports to the region than on opening commercial offices and setting up their own marketing and distribution networks on the ground.

"This has frequently placed them at a disadvantage for investment because the trade channels which could have been used to explore investment opportunities were missing.", the EU said.

But Japanese and American firms have worked "more assiduously" at building lasting links as well as core networks in the region which have given them a "competitive edge" over the European businesses.

According to the report, FDI stock from Europe in the Asian region, as of 1993, was $27 billion, compared to $29 billion from Japan and $39 billion from the United States. The EU's share of the 1994 total FDI was only 13%.

Compared to the EU's total outward FDI in the whole world, its share in developing Asia was a mere 3%, compared to Japan's 11% and the United States' 7%.

The report also brings out that regulatory regimes for FDI in developing Asia has been liberalised significantly since 1980s, and any existing regulations are not specific to the EU.

The report points out that European TNCs use FDI mainly to serve the domestic markets of the host countries and FDI aimed at catering to the world market have been less significant, particularly in comparison with the Japanese FDI.

But these structural characteristics, it says, are only of minor importance to explain the lower European FDI compared to American and Japanese. It also finds that the correlation between EU FDI in developing countries, and the world market orientation of host countries is less straightforward at individual country levels.

In the past Europeans preferred the import substitution strategies of the Latin American countries (which gave them an assured protected domestic market) and neglected Asia which was more outward looking and exports grew faster than GDP. But at country level this correlation breaks down: Singapore, Hong Kong and India were, in descending order, among the ten major destinations for German outward FDI. But the three had different trade/GDP ratios, it says.

The report also rules out the 'transaction' costs of trade versus investments to explain the behaviour. Asia is closer to Japan, and thus reduced transport and other transaction costs, than Europe. The report sets out some policy instruments, to be adopted by EU and the Asians, to promote more European FDI going to Asia, including one for "a comprehensive, multilateral framework of ground rules for FDI" and for Asian countries to voluntarily submit themselves to an UNCTAD review of their investment policies.

On the MIA, the report argues that unilateral liberalisation, bilateral investment treaties or sectoral agreements are not enough in an age in which FDI flows are 'more global', and none of the current initiatives -- like the Energy Charter Treaty, or the APEC Non-Binding Investment principles or the moves in OECD for investment agreement are responses to the need to create more uniform investment rules and in an era when a substantial share of FDI flows to non-OECD countries.

It then goes on to add, and the UNCTAD press release draws pointed attention to it: "It is with these considerations in mind that the EU Commission sees compelling reasons for an agreement on FDI within the framework of the WTO as soon as possible". Trade and investment are complementary elements of the world economic system and "it makes sense to deal with both in the same forum", says the UNCTAD co-sponsored study. The WTO with its 'necessary geographic coverage' has the advantage of a strong dispute-settlement procedure, that investment related provisions are already there in the GATS, TRIMs and TRIPs, and that an investment agreement in the WTO, with rules to deal with anti-competitive practices (envisaged in GATS, TRIMs and TRIPs) would enable countries to share information on such anti-competitive practices.

UNCTAD, for its part, as well as other international organizations, it adds, can contribute to the discussions and - if and when they begin - to the negotiations on a multilateral arrangement for FDI, through analysis and consensus building, particularly regarding development issues.

This last reflects the EU view of WTO's primacy. But is it also the secretariat view?

The entire issue of WTO-UNCTAD complementarity, and whether complementarity is functional between two equals or a subordinate to promote uncritically the decisions of the WTO (and the FUND and the Bank), and whether UNCTAD focus is only micro-economics or also encompasses macro-economics is one being debated currently in the preparatory processes of UNCTAD-IX and the UNCTAD Secretary-General has been at pains to decline to prejudge these issues that can only be decided by the Conference and the UN General Assembly.

The EU, again, has been promoting its WTO-MIA idea, and the Commission's year-old paper on the elements it wants in an MIA has been widely known and published. In that paper, apart from the considerations advanced in this report, the Commission has indicated that it wants an MIA in the WTO, so that its small and medium firms could benefit from the MFN treatment.

While the home countries like the US, through bilateral treaties are trying to promote the interests of their investors, the host countries agree to these both for benefits that they see out of such investments, and often agree to the terms for other considerations of overall relationship -- political or security support visavis neighbours or even domestic opposition.

In an MIA, with an MFN principle, all such favourable conditions granted to US investors would then automatically have to be extended to the Europeans, a point found in the EU papers.

The EU position in advancing its proposal at every opportunity is thus understandable. In terms of the rivalries among the TRIAD, the EU (whose membership includes two nuclear weapon powers) is at a disadvantage: it has neither the super-Power leverage of the US nor the economic weight and advantages of Japan.

But the current study is a joint one with UNCTAD, and its major conclusions is that EU business are responsible for not investing in Asia and that unless they hurry up, EU businesses would be losing current and future opportunities to Japanese and American investors who are flocking into Asia. The report also makes clear that the Asian countries have been liberalising their investment regimes and that there are no regulatory measures that are specific to the EU and do not apply to other investors to explain the differences amongst EU, Japan and US investor behaviour.

Yet, the UNCTAD secretariat has provided no reasoning why, when US and Japanese investors are going into Asia without an MIA, EU investors need one, except for free riding?

After having clearly identified the fault as lying with European TNCs, and when their behaviour is being contrasted with those of businesses in Japan and the US, a logical recommendation would have been to bring the EU and its business community under an UNCTAD multilateral review process so that others can scrutinise and comment on particular aspects of the EU's inward-looking policies and how they need to be changed.

Instead, the report comes out with the suggestion that for promoting increased EU investment in Asia, Asian developing countries should agree to subject themselves voluntarily to the recently instituted Investment Policy Review exercise.