In order to be considered a low-cost market, the cost advantage of one or more factors of production offered by a state – generally, a developing one – must be exploited by the multinational firms. Therefore, we may speak about these markets only after 19multinational company, low-cost market, foreign direct investments, developing state, location advantages

Diaconu Laura

English

Research Papers in Economics

148 
 
THE MULTINATIONAL COMPANIES AND THE LOW-COST MARKETS OF SOUTH-
EAST ASIA 
 
Diaconu Laura  
„Alexandru Ioan Cuza” University Ia i Faculty of Economics and Business Administration Carol 
I Avenue, no. 22, Ia i, 700505 E-mail: dlaura_es@yahoo.com Tel.: 0723.30.27.28  
 
In order to be considered a low-cost market, the cost advantage of one or more factors of production 
offered by a state – generally, a developing one – must be exploited by the multinational firms. Therefore, 
we may speak about these markets only after 1970-1980, when some significant political, cultural and 
technological changes allowed the multinational companies relocate their production in these countries, 
through foreign direct investments. Next to China and Central and Eastern Europe, the low-cost markets of 
South-East Asia represent another main region on which the multinationals, determined by the location 
advantages, establish their production subsidiaries. The main purposes of the present paper are to identify 
the factors that have stimulated the foreign direct investments in the South-East Asian region and, also, to 
analyze the evolution of these low-cost markets.  
 
Keywords: multinational company, low-cost market, foreign direct investments, developing state, location 
advantages  
 
JEL Classification: F21, F23 
 
1. Introduction  
The term of low-cost market refers to that region or country that has the low cost advantage of 
one or more factors of production (labor force, land etc.)
80. Generally speaking, these markets are 
located inside the developing or emergent states and are exploited especially by the multinational 
companies.  These  firms,  relocating  their  manufacture  in  the  developing  regions  or  countries 
through foreign direct investments, have the opportunity to produce, with very low costs, goods 
which  will lately  be  sold at  much  higher  prices,  due  to  the  well-known  brand  that they  are 
wearing. Consequently, in order to be considered low-cost markets, the advantages offered by 
them must be exploited by the multinational companies. Regarding this aspect, we may speak 
about the low-cost markets only after 1970-1980, when the trade and investments have been 
opened and the global markets occurred. 
We  may  notice  that,  nowadays,  the  developing  states  represent  a  great  opportunity  for 
multinational companies to grow and intensify their activities. The potential of these markets has 
already determined significant shifts in the multinationals’ actions: if in 1992 the foreign direct 
investment (FDI) inflows to the developing countries were only 18% from the total amount of 
FDI,  in  1996  this  percentage  rose  up  to  33%,  exceeding  100  billion  dollars
81.  While  these 
investments are widely interpreted as heralds of a major restructure of the global economy, the 
emerging markets are considered to be the source of the future growth.  
At a global level, next to China and Central and Eastern Europe, the low-cost markets of South-
East Asia represent another main region on which the multinationals, determined by the location 
advantages,  establish  their  production  subsidiaries.  Between  1988  and  1997,  the  recently 
industrialized states from this region attracted great amounts of foreign direct investments (FDI), 
which played an important role in compensating for some lacks of the national technology and 
organizing abilities. So, if in 1980 the proportion of the investments’ inflow in the South-East 
                                                       
80  See  PriceWaterHouse  Coopers,  „Low-cost  Country  Sourcing”,  2005, 
http://www.pwc.com/extweb/pwcpublications.nsf/docid/B038BC9F3CEB6DC9852570CE007815F5, 
accessed in June 2006.  
81 UNCTAD, World Investment Report 1996, United Nations Conference on Trade and Development, 
New York, 1996. 149 
 
Asia was about 7% of the world investments, in 1997 this percentage totaled 16%. It was not 
only about the low production costs of these states, but also the sustained economic growth rates, 
the highly skilled labor force, the large national and regional markets, as well as the possibilities 
of developing the infrastructure that attracted the FDI.  
 
2.  The  Evolution  of  the  Foreign  Direct  Investments  in  the  South-East  Asian  Low-Cost 
Markets 
The Asian area has a diversified experience with the FDI. The percentage of the sales, in the 
manufacturing sector, owned by the multinationals’ subsidiaries at the end of the ’80s was about 
40-50%  in  Singapore  and  in  the  four  ASEAN  states  (Indonesia,  Malayezia,  Filipine  and 
Thailand), in Korea and Hong Kong of 21,5% and, respectively, 17,3%; a similar situation to 
Hong Kong was in Taiwan. Yet, the aggregates in their gross dimension, such as the percentage 
of the foreign subsidiaries in the sales from the manufacturing field or the rate of the FDI in the 
national capital accumulation, do not necessary point out the global importance of the FDI in the 
industrialization process. For example, in Korea the foreign subsidiaries owned a quarter of the 
exports of manufactured products, value which is much greater than their small percentage in 
GDP or in the gross capital accumulation. In the basic field of the economy – the electrics and 
electronics’ sector – the percentage owned by the multinationals’ subsidiaries was about 63-73% 
in the ’90s
82. This is why an important role at the economic development of Korea and Taiwan 
was played not only by the national firms but also by the investments of the multinationals in 
some key-sectors of the economy.  
One of the most important features of the multinationals which invested in the low-cost markets 
of South-East Asia is that the FDI were mainly focused on the exports, compared to the FDI from 
other developing regions. This aspect reflects the political efforts of using the investments in a 
larger context of the developing strategy. The biggest economies of the first wave of the recently 
industrialized states had a restrictive approach, based on the cost-benefit analysis of the FDI’s net 
contribution to the promotion of the national enterprises and to the development of the local 
technological abilities. Singapore, that had a more open policy, also used various measures to 
direct the FDI to the strategic fields. Compared to the economies from the first industrialized 
states, the second wave of the industrialized countries had a less restrictive approach regarding 
the  FDI.  In  the  second  half  of  the  ’80s,  there  have  been  adopted  more  liberal  regulations 
regarding the FDI, which coincided with the concerted measures to accelerate the exports of the 
manufactured products and with the rapid changes in the firms’ competitive position both from 
Japan and from the states of the first industrialization wave. The most impressive investments’ 
increases occurred in Korea, Hong Kong, Singapore and Taiwan, where the exports promoting 
policies were more correlated to the FDI, fact that determined not only the rapid orientation 
towards the manufacturing products, but also the substantial growth of the high-tech exports
83. 
Yet, this phenomenon must be regarded with scepticism because the contribution of the second 
industrialized states to these sophisticated exports consisted more in assembling various imported 
equipments, which required medium or low skills.   
The strategy successfully used by ASEAN countries to attract the multinationals’ FDI consisted 
in facilitating the investments between these states. There are two explanations for implementing 
such a strategy. First of all, ASEAN has to compete alone to other regional blocks or growth 
zones, such as MERCOSUR or China, and, consequently, it is necessary “to stress its critical 
mass as a community of closely co-operating economies as opposed to a club of individualistic 
                                                       
82  Ramstetter,  E.D.  (ed.),  Direct  Foreign  Investment  in  Asia’s  Developing  Economies  and  Structural 
Change in the Asia-Pacific Region, Westview Press, 1991. 
83 UNCTAD, Trade and Development Report 1996, United Nations, Geneva, 1996. 150 
 
nation-states”
84. Secondly, ASEAN region is a developing market inside which the multinationals 
are looking for taking advantages of the regional division of labor, process that requires a close 
cooperation between these states.  
 
Table no 1 Priority Policies to Encourage Foreign Direct Investments into and within ASEAN  
Policy/measure  Applicable at the level  
Intra-ASEAN  Trans-ASEAN 
Measures  to  ensure  regional  political  and 
economic  stability 
   
Extension of AFTA block  ++  + 
Reduction in restriction on foreign investors     
Removal  of  all  barriers  on  participation  of 
foreign corporations 
+++  +++ 
National treatment for the foreign firms  +  ++ 
Creation of an enabling environment for FDI     
Establishing a good quality industrial support   +++  ++ 
Establishing  a  good  physical  and  commercial 
infrastructure  
++  +++ 
Predictably and transparency of all the laws and 
regulations  
+++  +++ 
Stimulating highly skilled labor force   +  + 
Harmonization of FDI policies in all the ASEAN 
states 
+++  +++ 
Harmonization of all the ASEAN corporate laws 
and regulations  
+++  ++ 
Source:  Adapted  from  Mirza,  H.,  „Reviving  FDI  Inflows  in  Southeast  Asia”,  Institute  of 
Southeast Asian Studies (ISEAS), Singapore, 2001, pp. 8-10 
 
In order to stimulate both the FDI in ASEAN region and the investments between these states, 
there were adopted some measures and policies, showed in the table no. 1. The importance of 
implementing the measure/policy is indicated by the number of the pluses, where „+++” means a 
high  priority,  „++”  a  medium  one  and  „+”  suggests  a  low  priority,  that  decision  being  less 
necessary. 
The Asian crisis from the end of the last century highlighted some macro-economic weaknesses 
of the low-cost markets, fact that significantly influenced the attracted FDI. In order to indentify 
the attractiveness degree of the South-East Asian countries for the FDI, before and after the crisis 
of the ’90s, Bartels and Freeman conducted a study on 110 multinationals, according to which the 
states were classified in four main categories: “winners”, “survivals”, “laggards”, “underdogs”
85. 
In the “winners” category have been included those countries regarded by the multinationals as 
attractive before the crisis and very attractive after the crisis. Among the ten Southeast Asian 
countries,  only  Singapore has  improved  its  position  from  this  point  of  view,  after  the  crisis 
                                                       
84 Mirza, H., „Reviving FDI Inflows in Southeast Asia”, Institute if Southeast Asian Studies (ISEAS), 
Singapore, 2001, pp. 6-7, http://www.gapresearch.org/finance/publications.html, accessed in July 2008. 
85 Bartels, F.L., Freeman, N.J., „Multinational Firms and FDI in Southeast Asia. Post-Crisis Changes in 
the Manufacturing Sector”, ASEAN Economic Bulletin, vol. 17, no. 3, 2000, pp. 324-340. 151 
 
(despite the fact that it has no longer the labor low-cost advantage, due to the fact that it confronts 
with a labor force deficit), Thailand maintaining its attractiveness for the foreign investors. So, 
these two states can be considered “winners”. At the time of the survey, 48% and, respectively, 
42% of the multinationals investigated were about to implement their FDI plans in Singapore 
and, respectively, in Thailand.   
The  “laggards”  are  those  states  which,  before  the  crises,  were  considered  attractive  by  the 
multinationals  but,  after  that  moment,  their  attractiveness  diminished.  Malayezia,  Filipine, 
Vietnam  and  Indonesia  are  included  in  this  category  but,  of  all  these,  only  Indonesia  was 
considered to be unable, until recently, to project effectively the economic and business policies, 
having a volatile political environment.  
The  “underdogs”  category  includes  those  states  which  did  not  show  a  high  degree  of 
attractiveness for the multinationals, either before or after the Asian financial crisis. There are 
states such as Brunei, Cambodgia, Laos or Myanmar which, generally, prior to 1997 did not 
encompass factors attractive for FDI, with the exception of some location specific advantages in 
Brunei (oil and gas reserves). Moreover, Cambodgia, Laos and Myanmar are considered to be 
unstable from the economic and political point of view.       
The “survivors” category refers to those countries regarded by the multinationals as unattractive 
before 1997, but which managed to increase their attractiveness after the financial crisis. The 
Asian reality showed that no country is included in this category: none of the Indochina’s four 
members are considered to have a location specific disadvantage, able to be translated, through 
exogenous shocks, into a location specific advantage.      
Yet, even after the crisis, the South-East Asian region was considered an important low-cost 
market for 68% of the 110 multinationals surveyed. Moreover, 84% of the respondents indicated 
strong or very strong investment commitments to South-East Asian region as a whole; 61% of 
these companies have planned big future corporatist investments. According to the survey, at the 
beginning of the XXI
st century, no other region seemed to compete with the low-cost markets of 
South-East Asia, from the point of view of the possibilities to attract the FDI, excepting China. 
The multinational companies had a global perspective that prioritized, after China and South-East 
Asia, the low-cost markets of the Central and Eastern European Union (55%), the North-East 
Asia  (52%),  the  NAFTA  states (48%),  South  Asia  (45%),  the  attractiveness  of  the low-cost 
markets of South America being of only 29%. From all the South-East Asian countries, the 
ASEAN  ones  -  Indonesia,  Malayezia,  Filipine,  Singapore  and  Thailand  –  were  generally 
preferred by the multinationals, compared to the Indochina states – Brunei, Cambodgia, Laos, 
Vietnam and Myanmar.  
The reason for which the multinational companies preferred these countries of South-East Asia 
has changed during the time: if in the ’60s the desire to have access to the great potential offered 
by the host market prevailed, at the beginning of the XXI
st century the multinationals were firstly 
attracted by the availability of the cheap, highly skilled labor force, by the low distribution costs, 
by the financial aid of the governments, as well as by the local reliable partners. Yet, there are 
some risks that threaten the multinationals with subsidiaries on the South-East Asian market, 
such as the political instability, ambiguous governmental regulations and the problems related to 
the  infrastructure.  Due  to  all  these  difficulties,  many  of  the  110  multinationals  surveyed 
considered that the South-East Asian region was not fully able to respond to the requirements of 
the “new economy”. 
At all the inconveniences mentioned above may also be added the increase, from the last five 
years,  of  the  operational  and  production  costs,  with  a  higher  rate  than  the  efficiency  and 
productivity growth. This is one of the reasons for which, nowadays, it can be noticed a decrease 
in  the  amount  of  the  foreign  direct  investments,  attracted  especially  by  the  ASEAN  region. 
Correlating the evolution of the FDI from this area with its specific features and analyzing the 
consequences of the entrance of the multinationals on the low-cost markets, we can estimate that 152 
 
the  problems  the  ASEAN  states  confront  with  in  attracting  the  foreign  investors  are  mainly 
caused  by  their  success.  Representing  an  important  pole  of  attraction  of  the  FDI,  not  only 
between 1988 and 1997, but also at the beginning of the XXI
st century, the ASEAN members 
have rapidly developed, fact that determined the increase of the incomes’ level. This proves that 
the  advantages  pursued  by  the  multinationals  inside  the  emerging  countries  will  gradually 
disappear  because  these  economies,  while  developing,  are  loosing  their  low-cost  markets’ 
characteristics.    
 
3. Conclusions 
Considering all the aspects mentioned above, we can argue that, on short term, the low-cost 
markets of South-East Asia are very attractive for the multinationals due to the fact they offer not 
only the advantage of the low-cost of the factors of production, but also some other fiscal and 
legislative facilities. Yet, on long term, the advantages may become disadvantages if there is no 
strict  control  of  the  products’  quality  made  in  these  states,  any  mistake  having  a  negative 
influence on the reputation of the firm involved. 
Another conclusion that results from analyzing the case of the South-East Asian region is that, on 
long term, the  advantage  of the low  cost of the factors  of  production  will  disappear, these 
markets loosing their low-cost characteristic. The explanation consists in the fact that the foreign 
direct investments, attracted by a state, significantly influence the economic development of that 
country,  aspect  that  will  lead  to  an  increase  in  living  standards  and,  consequently,  of  the 
production’s costs.  
In a future research it will be interesting to determine the impact that the nowadays financial 
crisis will have on the FDI inflows in these countries. Moreover, it could be of a great importance 
to analyze the measure in which the South-East Asian low-cost markets will still represent, after a 
few years,  a pole of attraction for the multinationals. This future study could start with the 
identification of the economic progress made by the low-cost markets and of its impact on the 
costs’ evolution of the factors of production.  
 
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THE MULTINATIONAL COMPANIES AND THE LOW-COST MARKETS OF SOUTH-EAST ASIA

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THE MULTINATIONAL COMPANIES AND THE LOW-COST MARKETS OF SOUTH-EAST ASIA

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