Comments on
“Singapore and Thailand”
Joshua Felman
IMF India
Conference on Asian FDI
April 26, 2007
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?
Key questions

What is the driving force behind this overseas
expansion?

How are these investments faring?
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
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
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
Key questions

What is the driving force behind this overseas
expansion?

How are these investments faring?
The record so far

Paper tells a cautionary tale:

Overseas expansion based on “connections” is fraught with
financial peril (Thailand)


Acquisitions by state-linked enterprises create political
risks (Singapore)


Many companies have had to restructure and scale back their
international activities
Temasek’s investment in Shin has proved a financial and political
disaster
Is this pessimistic conclusion warranted?
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
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
Conclusion

There are certainly grounds for caution




But before we draw conclusions further research will be important



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
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
12