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The promise of the Pacific Rim: a look at the countries.

The promise of the Pacific Rim: a look at the countries The Pacific Rim economies are vibrant, bustling places pervaded by a high work ethic. In the last 10 years, the importance of these countries in the world of trade has soared, and, with the wealth they have accrued during this period, they have become increasingly dynamic political and economic forces.

When U.S. companies look to Asia for potential trade and investment opportunities, they must address the different motivations, business and financial practices, and political structures of Pacific Rim countries. What risks should U.S. companies be aware of before they make business commitments in these countries?

While the rewards for doing business in the Pacific Rim can be substantial, those who reap the greatest rewards will be those who have assessed these risks objectively and are trading or have invested in a way that minimizes the risks.


At Wells Fargo Bank, we are receiving an increasing number of requests from customers looking again to China for opportunities to source goods, to set up manufacturing plants, and generally to take advantage of the lower cost of labor there.

Chian is a complex country to assess. Manufacturing in China's Special Economic Zones (SEZs) was interrupted only briefly during the politically disruptive events of June 1989, and the government has continued to promote investment in the SEZs throughout the ensuing period of political turmoil.

But the future of investment opportunities in China is uncertain. The government's continued austerity program has put a squeeze on credit, and inflation and unemployment are high, which could contribute to further social unrest. The leadership is undergoing transition, and uncertainty over the direction of future government policy clouds investment decisions. Any investor exploring opportunities in China must weigh these political uncertainties in any analysis of risk and reward.


Inextricably linked with China is Hong Kong, where political issues overshadow financial issues. Hong Kong's uncertainty over China's intentions, coupled with Beijing's demands for a say in the British Colony's policies and legislation even before it becomes a Special Administrative Region of China in 1997, has resulted in a loss of confidence in the colony. One thousand Hong Kong Chinese, predominantly from the professional and managerial ranks, are emigrating each week, creating a massive brain drain.

The resulting shortage of skilled labor has led to pay increases of 10 to 15 percent, although the high rate of inflation (10 percent in 1989) is falling because of slower economic growth. The stock market remains volatile, and the withdrawal of funds by those leaving the colony has created an imbalance between domestic deposits and lending growth. At the same time, Hong Kong has just undertaken a US$16.3 billion infrastructure project, which includes a new airport, new container terminals, and new roads, bridges, and tunnels. So, for the short term, investment prospects are good, and the financial risks in Hong Kong are not any more complex than those found in the U.S. Long-term investments are inherently more risky, not because of Hong Kong itself, but because of the People's Republic of China (PRC).


In the last two years, Taiwan has begun to develop ties with mainland China, demonstrating that business pragmatism can indeed override political issues. The two countries have begun discussions about arranging direct flights (now the only way to fly between the countries is through Hong Kong), a prominent Taiwanese businessmen are already visiting China to invest.

Taiwan has seen tremendous growth in the last 15 years, but with mixed economic results. The Taiwan dollar has appreciated 56 percent against the U.S. dollar since 1985, and labor costs and land prices are now high. Taiwan's infrastructure is strained, polution is a chronic problem, and the Taiwanese are more strident in their demands for a better standard of living.

Politically, the major risk is that Taiwan may declare its "independence" from the PRC. The PRC has threatened to invade if this should happen. Although a minority party that was recently formed within Taiwan advocates independence, relations between Taiwan and the PRC continue to ease as both sides recognize the advantages of maintaining a good relationship.

The greatest financial risks in Taiwan are related first to the rapid appreciation of its currency and the related foreign exchange risk and, second, to high labor costs and labor shortages. Taiwan's labor problems can result in unreliable product quality and delays in supply. The Taiwanese have adapted by restructuring their industries to higher value-added output and have looked to other countries in Asia for investment opportunities. To accommodate these changes, Taiwan is liberalizing its financial markets to permit greater flow of capital, foreign banks are opening in increasing numbers, and the financial environment is becoming more competitive.


The Korean won appreciated 30 percent against the U.S. dollar between 1986 and 1989. Like Taiwan, Korea has responded by trying to restructure the economy from high-volume, low-quality production to high-quality, value-added, technology-intensive manufacture. Rapid wage increases and political strife have been diverting the governments attention, and the restructuring is progressing at a slower pace than Koreans wish.

Korea is nevertheless one of Asia's four economic tigers. The Korean workforce is well educated and industrious, and for this reason the country remains the focus of much attention from U.S. investors. Investors will find, however, that capital is restricted and that they need to address significant language and regulatory problems. However, Korea is slowly liberalizing its financial markets and continues to reduce trade barriers. Thus, Korea may be more attractive for exporters than for investors.


For the investor in Japan, the political risks in such a stable, homogeneous country are minimal, but the invisible trade barriers and cultural differences frequently prove frustrating to the non-Japanese investor. There are many books on doing business in Japan, and I can only recommend that you research business customs and practices before you visit.

Japan's capital markets are in flux as a result of the recent fluctuations in the Japanese stock market. The Japanese banks have seen their capital bases shrink as their portfolios have fallen in value with the drop in the Nikkei index. They may have to reduce their lending to comply with internationally accepted bank guidelines for capital adequacy. At the same time, land prices in Japan are falling, putting further strain on the banks' asset portfolios. We must wait and see if this situation is merely a stumble or an all-out fall in Japan's financial market. The wide fluctuation of the yen illustrates the importance of covering foreign-exchange exposure so that profits are not wiped out when they are translated to the home currency.


Malaysia is bouncing back from a deep recession in the mid 1980s. U.S. companies plan to invest US$687 million in Malaysia in 1990, a 37-percent increase over US$502 million in 1989. The move to Malaysia is the result in part of the high labor costs in Taiwan and Korean. But Malaysia also offers good infrastructure--roads, highways, water, and electricity--and incentives for foreign investors, such as rewards for locating regional headquarters there, fast governmental approvals, and the permission of 100-percent foreign ownership. The Malaysian ringgit is freely convertible, and English is the language of commerce.

With its multi-racial population, there are inevitably some social strains, but the Malaysian labor force is well educated, easy to train, and, as is true in most Asian countries, very industrious. Because Malaysia has developed a sound manufacturing base, the economy is not overly dependent on commodities for its growth. As Singapore to the south has developed into a service economy and as the infrastructure in Thailand to the north becomes increasingly stretched, I anticipate that Malaysia, situated between them, will receive increasing attention from international investors in the next few years.


Three years ago I would have had much the same to say about Thailand as about Malaysia. But the pace of development in Thailand has been so rapid that its infrastructure has become sorely stretched, pollution has reached high levels, and roads and communication systems are choked.

The political environment in which this fast-paced development has occurred has been mixed. Thailand has experienced a number of coups in recent years, but the economic machinery has emerged unscathed. The King of Thailand is a unifying symbol, and he has taken great personal interest in the development of his country, particularly its agricultural sector.

The Thai central bank is removing foreign-exchange barriers and is making it easier for investors to enter the economy in areas that will help the country improve its infrastructure, such as construction. In fact, the government has mapped out commuter and industrial transport links, although it is slow to provide capital for the projects.


The Philippines is currently the most obvious example of an unstable political environment, and the financial risks of investment there are high compared to those of other Pacific Rim countries.

Corazon Aquino has said she will not run for president in the next election. There are persistent rumblings of political intrigue and upheaval, and the memory of last December's coup attempt--in which the Makati financial district was the scene of the heaviest fighting--is still vivid.

The lack of an uninterrupted supply of electricity is, in the view of the Far Eastern Economic Review, as significant a risk as the political one. Any investor should ensure that a manufacturing plant has a generator on site, as power outages--a frequent occurrence in the Philippines--can damage production lines and delay manufacture.

Some argue that the Philippine economy is set for great economic growth, but, until stability is obtained politically and economically, investor confidence will remain low.


Joint ventures are the favored vehicle for investment in Indonesia. Like Malaysia, it has diversified its economy in recent years and is no longer as vulnerable to swings in commodity prices. It does, however, have a high level of poverty, which the government is taking steps to improve.

Foreign investment in Indonesia was US$5.9 billion in 1989, a rise of 34 percent over 1988. Indonesia offers investors relative political stability, a huge labor pool (best suited to labor-intensive, low-technology sectors, such as textiles, furniture, and metal goods), and a government that encourages inward investment, particularly for export-oriented industries. The generally poor infrastructure in the country will hamper expansion in the near term, but it may create an opportunity for investment in the construction industry. For example, in telecommunications, Indonesia is investing in a US$30 million switching network to improve the country's telephone network by 350,000 new lines. The total investment in the infrastructure is expected to reach US$2 billion.


Perhaps the most politically stable economy in Asia at present is Singapore. With its excellent infrastructure, incentives to invest, and industrious, talented, English-speaking workforce, Singapore is attractive to investors. The government's policy is to move the country toward services and to high-tech research and industry (with manufacturing taking place in Malaysia). A tight labor market is one of the few pressures on the economy.

This, then, is my assessment, albeit brief, of the political and financial risks of doing business in the Pacific Rim--with this caveat: the area is a dynamic, rapidly changing part of the world, and any remarks on political stability can become quickly outdated. Financial reforms can be--and often are--put in place overnight.

That's why those considering investing in this region shouldn't be discouraged from it based on the information here. Rather, you should monitor closely the political and economic environment of the country that looks most promising to your firm.
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Title Annotation:Special Report: International
Author:Hartman, Roger
Publication:Financial Executive
Date:Sep 1, 1990
Previous Article:Can American manufacturers compete outside the U.S.?
Next Article:Can your firm make it in Asia?

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