NURFATIN NAJIHA FAZAL MOHAMED

ZP04998 : GSB BANGI-UKM (FT)

MACROECONMICS OF COMPETITIVENESS

1. Compare the FDI of Indonesia with TWO other ASEAN countries for the most recent
year (2020 OR 2019 – Bonus marks if you can get for both years). How has Indonesia
performed?

FDI flows into Indonesia have grown and their base has been expanding thanks to
resilient economic growth, low government debt and prudent fiscal management.
According to UNCTAD's World Investment Report 2020, FDI investment in Indonesia
increased by 14% between 2018 and 2019, achieving USD 23.4 billion, while FDI stock
reached USD 232 billion in 2019. Based on the data from the Investment Coordinating
Board (BKPM), FDI levels grew to USD 13 billion in the second quarter of 2019, mainly
in electricity, gas and water, transportation and telecommunication. FDI growth is
attributed to a set of economic policy packages that was implemented by the Indonesian
government over the last years, mainly focusing on deregulation, law enforcement and
business certainty, interest rate tax cuts for exporters, energy tariffs cuts for labour-
intensive industries, tax incentives for investment in special economic zones and lowered
tax rates on property acquired by local real estate investment trusts. Moreover, Indonesia
lowered the minimum equity requirement for foreign investors and abolished the approval
requirement for several business transactions involving foreign investors. The policy of
liberalisation has enabled Indonesia to rank 17th among the top 20 host economies. Japan
remained the largest source of investment, followed by Singapore, the UK, Thailand and
the USA. The stock of FDI is concentrated in the manufacturing, financial intermediation,
trade and mining sectors. According to UNCTAD’s latest Global Investment Trends
Monitor released on 27 October 2020, Global foreign direct investment (FDI) flows fell
49% worldwide in the first half of 2020 compared to 2019, and 20% in South East Asia.
In this global context, Indonesia's FDI fell 24% during the same period of time, remaining
the second largest recipient in the region. The Indonesian government was able to
improve the overall atmosphere of the market in 2019 by consolidating political and
economic stability and through structural reforms that have removed some investment
risk. However, several obstacles remain, such as the rising cost of credit, excessive and
unpredictable regulation, the poor quality of infrastructure, the terrorism risk and a high
level of corruption. In the long term, however, Indonesia's current economic situation
may well be the right time to invest in the country, especially in its financial instruments.
President Widodo has announced plans to improve the country's position in the Doing
Business report published by the World Bank with the goal of reaching 40th position
globally. 

Foreign investment in Malaysia on the other hand, has been oscillating between USD 9
billion and USD 12 billion since 2010, making the country one of the highest recipients of
FDI in the region. Although, according to UNCTAD's World Investment Report
2020, FDI inflows decreased during the last two years, reaching USD 7,6 billion in 2019.
FDI stock was about USD 169 billion in 2019. Multinationals in the M&A sector, such as
those in the health and mining sectors (e.g. the acquisition of a stake in IHH Healthcare
by Mitsui & Co, Japan and in Seb Upstream by OMV, Austria) have sustained the level
of investment. Based on the data from the Malaysian Investment Development Authority
(MIDA), the majority of investments came from Singapore, Hong Kong, Japan and the
Netherlands; and were directed towards manufacturing, financial and insurance activities,
and mining and quarrying. According to the Ministry of Finance, FDI stock rose by
10.3% to USD 163.8 billion in the second quarter of 2019. According to UNCTAD’s
latest Global Investment Trends Monitor released on 27 October 2020, Global foreign
direct investment (FDI) flows fell 49% worldwide in the first half of 2020 compared to
2019, and 20% in South East Asia. In this global context, Malaysia's FDI inflow is
projected to come in at RM 16 billion (USD 3.92 billion) to RM17 billion (USD 4,17
billion) in 2020, a drop from RM 37.5 billion (USD 9,20 billion) in 2019 or a fall of
between -54.6% to -57.3% (MIDA, 2020). Despite a difficult situation in 2020, Malaysia
continues to be an attractive investment destination amid rising trade tensions across the
world. The authorities seek to position Malaysia as a gateway to the ASEAN market by
offering various incentives to foreign companies, notably the status of pioneer company
and tax reductions associated with investments. The country benefits from a high-skilled
and English-speaking workforce. As such, the country is ranked 12 out of 190 economies
by the World Bank in its Doing Business 2020 report, gaining three spots from the
previous year. However, the government maintains a large discretionary power for
authorising investment projects and uses it to obtain the maximum benefits from foreign
participation and by demanding agreements that are advantageous in matters of
transferring technologies or creating joint ventures.

Vietnam's FDI inflows in 2019 amounted to USD 16,1 billion, an increase from the
previous year (USD 15,5 billion in 2018), whereas total FDI stock reached USD 161
billion in 2019, according to the UNCTAD's 2020 World Investment Report.
Traditionally directed towards light industry, FDI inflows quickly turn towards heavy
industry, real estate and tourism. Inflows are expected to continue, confirming the
country's position as one of the most attractive country in terms of FDI in Asia. The main
investor countries are Japan, South Korea and Singapore, with the manufacturing and
processing sectors attracting the most FDI followed by real estate and professional
activities/science/technology (Trading Economics). According to preliminary data from
the Vietnamese government, pledged FDI reached a ten-year high of USD 38 billion in
2019. The country's Foreign Investment Agency expects Vietnam to attract international
investors deterring or reviewing their projects in China amid growing epidemic disease
concerns. Vietnam was ranked 70th out of 190 countries by the World Bank's 2020 Doing
Business Report, having fallen one spot on the year. This was despite the country making
some progress on the ease of doing business, particularly with regards to paying taxes.
Vietnam expects disbursed foreign direct investment to continue to rise as the government
steps up efforts to attract factories into the country. The Ministry of Planning and
Investment aims to draw more FDI into areas including export-oriented, energy and high-
technology by building a more business-friendly environment.

2. Identify Singaporean clusters and explain why it is quite difficult to create new
clusters for Singapore.

Clusters are geographic concentrations of competing and collaborating firms that tend to
produce innovation and higher than average wages. Cluster-based economic development
strategies are interventions designed to improve a cluster’s performance by addressing the
common needs of businesses within the cluster. In Singapore there are 7 state of clusters.
There are, petrochemical, finance, logistic, information technology, tourism, education
and biopharmaceutical. Part of the problem could be due to narrow performance
indicators governing policymaking. For example, in the 2004 to 2011 period an excessive
emphasis was placed on generating economic growth rather than overall quality of life in
guiding the formulation of policies. Moreover, recent major policy initiatives such as the
CFE do not appear to have examined the economy holistically, reviewing the overall
structure of the economy and how it has changed. Rather, there appears to be a quick-cut
approach, focused on examining a few areas of interest to the leadership. There has also
been an unwillingness to move away from taboos and strongly-held assumptions. It could
be argued that generous state-funded infant and child care and more expansive support for
parental support such as child allowances explains why some northern European
countries have managed to reverse the decline in total fertility rates. The Singapore
Government’s initial reluctance to consider such policies and then to only do so belatedly
probably explains the failure to mitigate negative demographic trends. Many observers
would agree that to be successful in innovation, Singapore needs to address several areas.
The education system needs to be less competitive and more tolerant of late bloomers.
However, a reluctance to undertake a bold restructuring of education means the response
has been tweaks (many of which are commendable). Others would argue that a freer
media and willingness to tolerate dissent is also important for creativity. Here, too, there
has been a disappointing reluctance to change. Part of the weakness could also be traced
to problems in the working culture of the bureaucracy. Individually, Singapore’s senior
civil servants still rank among the best educated and most honest compared to those in
many other countries. However, there are growing concerns about how these individuals
behave collectively. There is a tendency to recruit and promote people who are similar to
the senior civil servants, with whom the seniors feel comfortable. Those who challenge
the views of their seniors are filtered out and do not make it to the top. Consequently,
there appears to be far less diversity in the composition of the higher and middle ranks of
the key services. The result is a greater risk of groupthink. The system of training and
rotation among different agencies and ministries may not be working as well as
previously. For example, scholars serving in the Singapore Armed Forces appear to be
parachuted into senior positions for which their training and exposure do not prepare
them adequately. There does not seem to be enough emphasis on experience and domain
knowledge. There also appears to be more of a tendency in the bureaucracy to second-
guess the wishes of senior civil servants or political leaders and to tell them what they
want to hear rather than provide dispassionate and objective advice and analysis. Such
risks are present in any bureaucracy but in Singapore the problem seems to have
worsened of late.

3. Explain “Doi Moi”. How significant is it in changing Vietnam economic landscape?

Doi Moi was launched at the Sixth Party Congress in late 1986, when the country faced
economic crisis. Despite state price controls, there was a market inflation rate of more
than 700 per cent per year. Total exports at about US$500 million were less than half the
total value of imports (US$1,221 million) and per capita trade levels were very low by
East Asian standards. Government revenues were low, the fiscal deficit was large and
persistent, and some areas were on the verge of famine. There was some private economic
activity, but it was mostly black market and therefore risky. There was a growing
development gap between Vietnam and neighbouring economies. The broad thrust of Doi
Moi was officially adopted by the Sixth Party Congress in December 1986. This included
agreement on the need for policy reforms aimed at reducing macroeconomic instability
and accelerating economic growth, and that all economic levers (price, wages, fiscal and
monetary policies) were to be used to achieve these objectives. The policy directions
announced at the end of the Sixth Party Congress in December 1986 represented a
marked departure from previous policies and were the culmination of intensive internal
debate about the failure of the old system to bring tangible results to the wellbeing of the
Vietnamese people. While the Sixth Congress represented a critical turning point in
policy direction, however, only limited details were provided about the specific policy
reforms that would be implemented to bring about the desired change. In early 1987,
many of the checkpoints that had been established to limit domestic trade were reduced,
and private markets for agricultural goods developed rapidly. While some commentators
focus on the reforms implemented from 1989 onwards, important micro-level reforms
were introduced from 1986 that resulted in a strong supply response that greatly improved
the environment for the successful implementation of the subsequent macro level reforms.
In mid 1987, substantial price reforms were introduced with the official price of most
non-essential consumer goods being raised to close to market prices and the scope of
rationing being substantially reduced. At the same time there was a substantial
devaluation of Vietnam’s currency, the Dong. A key change was the different emphasis
given to the role of government in the industrialisation process. The state was to
concentrate on ‘building the necessary premises for the acceleration of socialist
industrialisation in the subsequent stage’ (Communist Party of Vietnam 1987b). The
Council of Ministers issued regulations which clarified the difference between state
ownership of property allocated to the enterprise, and the right of enterprise management
to use and directly manage this property, the relationship between the enterprise and
government agencies, the rights of enterprises regarding planning and decisions relating
to procurement, sales, pricing, financial accounting, employment and salaries and rights
regarding commercial relations between enterprises. During 1987 and 1988, the
government rationalised and reduced the number of line ministries, state committees and
other central government agencies. A Foreign Investment Law was passed by the
National Assembly in December 1987, and enacted in September 1988. It took a couple
of years for substantial foreign investment inflows to result but by 1992 inflows were
becoming an important source of investment. Reforms introduced during 1988 provided
greatly improved incentive structures, including steps towards clarifying property rights.
A Communist Party resolution, issued in April 1988, provided for a much greater role for
individuals and private enterprise in the agriculture sector. Farmers were given long-term
rights to land, centrally planned targets were abolished, and farmers could no longer be
coerced into joining cooperatives, and were allowed to sell their produce on the open
market. The Party Resolution No.10, passed in 1988, introduced a critically important
reform, greatly enhancing the rights of rural families, and diminishing the legal authority
of village cooperatives. While there were initially mixed opinions from external
commentators about the impact of Resolution No. 10, the Party Secretary-General argued
that this was a turning point in agricultural development. Indeed, some argue that it was
one of the key turning points in the whole reform process. Providing farmers with
property rights, combined with price and trade reforms, contributed to sustained growth in
agriculture from 1988. Strong agricultural growth in 1989 (6.9%) was important in
offsetting the worst impacts of the tight monetary policies that were introduced that year
to control inflation however, industrial output fell by 4.0 per cent in 1989. A month
earlier, the Council of Ministers had issued a series of decrees clarifying the rights of the
non-state sector to engage in industrial production. These policy guidelines were
reinforced by a Politburo Resolution in July 1988.These policy guidelines recognised the
important potential contribution of the non-state sector in industrial production, and
explicitly stated that the state recognises and protects the rights of the non-state sector to
the ownership and inheritance of property and lawful earnings of non-state enterprises.
Despite these developments, the World Bank argued in 1990 that there has as yet been no
clear elucidation of property rights, nor is there at present a legal framework to guarantee
and enforce these rights. Consequently, there is considerable uncertainty about what
actually is permissible and what will be permissible in the future, and that uncertainty
retards productive investment. Undoubtedly there was uncertainty given development
over the previous decade it would have been unrealistic to expect otherwise. Uncertainty
could only be expected to diminish after the evolving market institutions, including the
legal system, actually developed a track record of underpinning these rights over an
extended period of time. Strong growth in the private sector’s share of retail trade showed
that the private sector had adequate confidence that an institutional basis existed to
enforce basic contracts and to protect property rights in relation to the goods being traded.
That is, even before formal legal changes to institutions were made, changes were
gradually occurring in informal institutions that substantially affected the way economic
business was being conducted. This does not imply that the institutions were perfect.
There was an implicit recognition in the national policy agenda that more formal
institutions would need to be developed to encourage longer-term private investment in
productive capacity.
4. Assess the current business environment of Hong Kong using Diamond Model.

The growth rate for Hong Kong’s re-exports to United States has been gaining
momentum since mid 1996 and has been around 10.8% in 1997. In reality, Hong Kong’s
economic growth was underpinned by a recovery of domestic demand despite stagnant
exports. The Hong Kong economy is highly externally orientated. In 1996, the total trade
was US$ 376 billion with total exports of US$179 billion (Re-exports US$ 152 billion
and Domestic exports US$ 27 billion). Although Hong Kong is one of the world’s largest
exporters of garments, toys and games, electronic products, watches and light industrial
products – most of them coming from re-exports (Hong and Cethbridge, 1995). The Hong
Kong Dollar is fixed at the rate of HK$7.80 to US$1.00 thus there will be no exchange
risk. Inflation rate has been increasing from 4.3% in 1995 to 6.0% in 1996 and 7% in
1997. The pick-up was mainly due to the greater amount of imported inflation as most of
the goods are imported into Hong Kong. However, there were indications that the higher
inflation rate was also partly due to the expansion of domestic demand. It is estimated that
there will be at least an 8% increase in exports of services mainly in the financial market.
Hong Kong has developed into one of the world’s leading financial centers in terms of
volume of transactions, foreign exchange transactions and in terms of stock market
capitalization. The telecommunication service sector is also another rapidly growing area
in Hong Kong. Though Hong Kong’s entrepreneurs will continue to diversify their
manufacturing base by investment in other countries around the region, the focus has
shifted to cheap and productive labour opportunities available in mainland China. As far
as the local investment is concerned, Hong Kong is definitely turning into a service
centre. It is believed that the economy will continue to grow and has to be positive for the
financial service industry. The level of fixed assets investment has been reducing over the
past few years due to the increasing rents and escalating cost; any investor will have to
reconsider whether their business will still be viable in Hong Kong. However, Hong
Kong is emerging as a center for sophisticated services, transportation and
communication rather than just relying on the manufacturing industries to drive its
economy. Looking at Hong Kong’s economic strengths and weaknesses, a business
organization should also take note of the opportunities and threats that come along in
doing business in Hong Kong. This is further illustrated in the figure below.
The ‘diamond’ framework is an interactive system which the four determinants are highly
correlated and interdependently with each other and upgrade the competitive advantage of
industry over time. Hong Kong enjoys a reputation of its own as a competitive region to
invest in business and thus create an excellent environment for international business. Hong
Kong’s competitive advantage can be explained best by using Porter’s Diamond Model.
Hong Kong’s competitiveness is very much dependent on its factor conditions. The ability of
Hong Kong to create, upgrade and deploy skilled labor, its polychronic culture, stable and
good infrastructure have made Hong Kong a competitively advantageous business location as
compared to its neighbor and other Asian countries. The demand conditions of home market
are equally competitive. Since Hong Kong is used as a hub for multinationals to penetrate
into Asia, Hong Kong’s local demand conditions are extremely competitive and thus create
an excellent environment for international business. As such, the chances for the firms to gain
competitiveness in the international environment are higher. Although the local demand may
be very competitive, its volume is low, thus Hong Kong is used as a regional hub for the
extremely high demand markets in South Asia and as an entrance into the market of China.
The close proximity to supply of resources like raw material and cheap labor from mainland
China and South Asia has advanced information technology system, constant and close
interaction through effective information flow with related and supporting industries have
become possible with good high-tech fibre-optic technologies and superior infrastructure in
Hong Kong. In order to gain competitive advantage, an organization must be able to adapt
itself and be flexible in Hong Kong’s dynamic environment with strategic missions, clear
objectives and suitable structure to overcome rivalry. There is minimal stability in Hong
Kong, thus creating chances for a firm to succeed. Since Hong Kong does not have any
natural resources of its own, Hong Kong’s global development model is geared towards
attracting foreign investment into Hong Kong to serve as a hub for the regional markets.
There are no barriers to entry, free trade, free port and laissez faire economy to pull foreign
investment to Hong Kong. With the entry of MNCs from all over the world, Hong Kong’s
market has become domestically and internationally competitive in terms of higher quality
and value, technology leadership, lower costs and greater efficiency. Hong Kong’s global
development model has managed to capitalize on these lines and had made it possible for
Hong Kong to gain a competitive edge over other countries
5. What is endowments? Why endowment itself is not sufficient to develop a country.
Give example(s).

An endowment is a donation to a non-profit organisation of money or property, which for

a particular reason uses the resulting investment profits. An endowment may also refer to
the total investable assets of a non-profit entity, also known as its principal or corpus,
intended to be used for activities or services that are consistent with the donor's wishes.
Many endowments are structured to keep the principal amount unchanged for charitable
activities by utilising the investment profits. There are four different types of
endowments, unrestricted, term, quasi, and restricted. Unrestricted endowments. These
are assets that can be spent, saved, invested and distributed at the discretion of the
institution receiving the gift. Term endowments usually stipulates that only after a period
of time or a certain event can the principal be expended. A quasi-endowment is a
donation by an individual or institution, given with the intent of having that fund serve a
specific purpose. The principal is typically retained while the earnings are expended or
distributed per specifications of the donor. These endowments are usually started by the
institutions that benefit from them via internal transfers or by using unrestricted
endowments already given to the institution. Restricted endowments have their principal
held in perpetuity, while the earnings from the invested assets are expended per the
donor’s specifications. A factor endowment represents how many resources a country has
at its disposal to be utilized for manufacturing--resources such as labor, land, money, and
entrepreneurship. Countries with large or diverse factor endowments are typically more
wealthy and able to produce more goods than countries with small factor endowments.
Factor endowments also affect the opportunity cost of specializing in producing certain
goods relative to others. Endowments are not static. With education, for example, the
characteristics of the labor force can change. The same holds true for investments in
capital and infrastructure. Over time, both can affect a country's sources of comparative
advantage. As a country develops more complex transportation systems, buildings, and
public services, a labor force may be more available to take on complex jobs. Therefore it
will be completely not sustainable to develop a country on just the basis of endowments
solely.