Both exporters and investors would do well to read this valuable primer.
Signs of economic recovery are emerging in most Asian countries today. Economic growth is rebounding, fuelled largely by massive government fiscal stimulus packages, tax reform, infrastructure spending and international financial assistance. Regional currencies and stock markets appear to have stabilized. Export performance is improving, contributing to higher foreign exchange reserves. Interest rates are falling.
Nevertheless, Canadian businesses should not expect a full recovery in the region any time soon. Rising corporate bankruptcies, increasing unemployment, worsening labour relations, a fragile banking system and oil price hikes are the major factors in the region’s political, economic and social uncertainty. There are also several emerging threats that should concern Canadian businesses in the region and we describe each of them below.
CORRUPTION
Corruption may be defined as the use of public office for personal gain. It tends to flourish under conditions that promote opportunity as well as motive. A recent survey of business executives conducted by the Berlin-based organization. Transparency International concluded that corruption was widespread in many Asian countries, most notably Indonesia, Vietnam, Pakistan, India, Thailand, the Philippines, China and South Korea.
Corruption in Asia is rampant even among top politicians, government officials, military personnel and business tycoons. In the past few years, there have been a number of high-ranking politicians accused of or jailed for corruption, including a former mayor of Beijing, former prime ministers of India and Pakistan, two former South Korean presidents and a former Indonesian president. Time magazine recently estimated that Suharto’s clan had amassed a fortune worth between $15 and $70 billion during the 1996-1998 period (all figures are in U.S. dollars unless stated otherwise). Likewise, the World Bank recently estimated that roughly one-fifth of bank loans to Indonesia were being illegally diverted and that abuse of public office for private gain was rife among the bureaucracy, judiciary and military. In China, meanwhile some $25 billion or roughly 40 percent of the total amount set aside to purchase grain from Chinese farmers had recently disappeared. Another $87 billion in state assets remain unaccounted for.
While corruption in Asia is not new, there are greater opportunities for officials to demand payoffs, bribes, kickbacks and gifts from foreign firms. Canadian firms involved in highly competitive bidding for massive infrastructure projects and procurement programs can expect officials to step up their illegal demands. It’s not only because the temptations are greater. The recent Asian economic and financial turmoil has only increased the motives for corruption.
In the decade to come, it seems likely that the continued absence of well-functioning, independent legal and regulatory regimes will lead to further opportunities for corruption, smuggling people, money laundering and other criminal activities. If corruption continues to penetrate the region’s military and security forces, international efforts to fight weapons smuggling, drug trafficking, high-seas piracy and illegal trading in strategic materials could be undermined. Major donor countries including Canada, unilaterally or through international financial institutions such as the International Monetary Fund, export promotion and aid agencies, may well retaliate by further decreasing or withdrawing aid flows, trade credits and loan guarantees.
As crime and corruption increase across Asia, Canadian businesses in high-risk areas will need to purchase extra kidnapping and ransom insurance and security protection to safeguard their employees and property. Limited resources make small- and medium-sized enterprises (SMEs) less able to buy sufficient insurance, a handicap that could jeopardize the safety and security of their personnel. Canadian businesses should expect increased demands for bribes, protection money, extortion, detainment and the withholding of partial payments and administrative fees. It is estimated that corrupt officials demand as much as 20 percent of the value of contracts.
In early 1999, Canada enacted a new law that makes it illegal for Canadian businesses to bribe foreign officials to win or keep business. Under the new statute, Canadian offenders could face stiff jail terms and forfeit seized assets if convicted. Interestingly, Canadian business executives involved in global dealings do not view such legislation as a significant deterrent to corrupt business practices.
HIGH-TECH COMPETITVENESS
In Asia, excluding Japan, country spending on research and development (R&D) is very low. South Korea’s gross expenditure on R&D in 1997 reached 2.8 percent of GDP, the region’s second highest, after Japan’s; Taiwan, Singapore, India and China, trailed at 1.9 percent, 1.5 percent, 0.8 percent and 0.6 percent, respectively. Others in the region like Hong Kong, Special Administrative Region (SAR); the Philippines; Malaysia; Thailand and Indonesia spent a paltry 0.3 percent or less on R&D.
Asian officials fully recognize that to narrow the technological gap with most industrialized countries, R&D spending in the region must equal or exceed that of the industrialized countries. However, slower economic growth, slumping export prices, lower corporate earnings and the intense pressure to reduce corporate debt make it highly unlikely that the region will reach these spending levels over the next decade. In fact, cash-strapped Asian governments and enterprises can be expected to make even fewer resource allocations to R&D as budget and financing problems arise.
Over the next decade, it seems likely that most Asian countries and enterprises will remain heavily dependent on foreign expertise and imports of modern plant equipment and advanced technologies. They will continue to acquire emerging technologies through traditional business channels such as reverse engineering, licensing accords, turnkey projects, technical agreements, science and industrial technology parks and direct investments.
At the same time, the massive Asian currency devaluations have made it very expensive for many enterprises in the region to acquire new plant, equipment and technologies. The region’s access to foreign technologies and know-how will not come cheap. Payments of royalties and license fees to foreign owners of technologies will rise. In the face of rising costs, rapidly changing technologies, shorter product life cycles and skilled-labour shortages, many Asian firms will continue to feel the pressure to cooperate with foreigners. As a result, many Asian countries will experience high and rising deficits in their service accounts, and larger trade deficits in high-tech manufactured products. This will help swell their current account deficits.
INTELLECTUAL PROPERTY THEFT
The threat to intellectual property rights (IPR) will remain a serious problem in Asia. Widespread official corruption, lax legal and regulatory regimes, the ease of relocating pirate factories and strong global consumer demand suggest that Asia will remain a major source of illegal production and distribution of high-tech and entertainment products. In 1998, the Washington-based International Intellectual Property Alliance (IIPA) estimated that U.S. Industries lost almost $12.5 billion in revenues to IPR pirates globally. Of this amount, countries in Asia accounted for over $5.3 billion or 43 percent.
In Asia, China is the largest manufacturer of illegal products. For instance, Chinese pirate factories produced almost $2.6 billion in counterfeit motion pictures, compact discs, software and books for domestic and export markets. Japan, with $645 million, was the next largest manufacturer of pirated goods.
The protection of IPR will remain a hot issue between Asia and most industrialized countries. In the absence of stronger IPR protection and enforcement regimes, trade frictions between Asia’s major IPR violators and the United States, the EU and IPR-intensive industries are likely to mount. This will also fuel protectionist pressures. The region’s fragile economic and financial conditions and a global economic slump will likely accelerate this trend. Threats of sanctions, including the removal of trade preferences and the withdrawal of soft loans, export credit guarantees and official aid, and counter threats of retaliation will likely follow. This could undercut enthusiasm for greater trade and investment liberalization in the region, making it difficult to establish a free-trade area for developed economies by 2010 and for developing ones by 2020.
Canadian companies doing business in IPR piracy-prone Asian countries will need to be increasingly vigilant. Canadian SMEs are more vulnerable to IPR theft because of their limited financial resources and international business experience; they are also less likely to seek legal remedies.
Weak legal and regulatory regimes suggest that Canadian businesses should expect the resolution of commercial disputes and non-payment problems to be long, complex and costly. For instance, India’s court system is believed to have a backlog of more than 3 million cases; breach-of-contract cases take more than 10 years to resolve. The situation is equally distressing in China where the number of criminal, civil, economic and administrative cases heard by the People’s Court increased from more than 2.92 million cases in 1990 to more than 5.31 million cases in 1996. Canadian SMEs think about this reality when considering their entry-mode strategies.
Continued weak and perhaps weaker IPR protection and enforcement will contribute to lower projected earnings for IPR-intensive Canadian operations in the region. Likewise, accelerating counterfeiting should be a cause of great concern for Canadian exporters of high-value-added, technically sophisticated products.
IPR owners who refrain from transferring energy-efficient, environmentally sound technologies, will only impede rapid enterprise restructuring and modernization, thus slowing Asia’s recovery. Furthermore, delays in adopting more energy-efficient technologies will result in greater greenhouse gas emissions by the region’s heavy polluters.
ENVRONMENTAL DEGRADATION
Chronic poverty, outdated industrial technologies, increasing motorization and exploding urbanization will result in higher fossil-fuel consumption throughout Asia. At the same time, Asian countries will continue to give top priority to economic growth and job creation. This does not bode well for the local, regional and global environments.
The region’s oil demand might reach almost 20 million barrels per day by the year 2000 and nearly 27 million barrels by 2010. Estimates also suggest that Asian countries may represent over two-thirds of global coal consumption by the year 2010. If Asia’s projected energy demand rises as expected, it will result in higher greenhouse-gas concentrations in the earth’s atmosphere. Global warming and worsening land, air and water damage will result. Slower economic growth, greater unemployment and mounting fears over increased social and political instability suggest that the implementation and enforcement of international environmental accords, including the Kyoto Protocol, will be haphazard.
Rising emissions of carbon and sulphur dioxide will contribute to increased pollution-related illnesses, including heart disease and respiratory problems. This will result in higher health-care costs. Poor air quality will reduce living standards for the majority of people in Asia and make the region less attractive as a destination for tourism and investment.
In Asia, the uncertainty of legal liability for past pollution and environmental damage will continue to pose additional risks for foreign investors. Environmental damage laws and enforcement regimes also represent obstacles by their increasing tendency to shift the cost of clean-ups to unsuspecting foreign enterprises.
HEALTH THREATS
By 2001, according to the World Health Organization (WHO), one-quarter of the world’s HIV-infected people will be from Asia. This compares to almost 22 percent or 7.3 million HIV-infected people in 1998. Around the world, some 20 million people suffer from full-blown tuberculosis (TB), with about two-thirds of them in Asia. Health care experts predict that in the next decade, the region’s already limited healthcare delivery system will be taxed even more. Access to medical care facilities and treatments will get tougher and health expenditures will swell.
Treating AIDS victims with triple drug, anti-retroviral therapy in developing countries is very costly. In Thailand, for instance, drug-cocktail treatments cost between $9,000 and $13,000 per patient annually. This makes treatment prohibitively expensive and well beyond the budgets of the majority of HIV-infected Asian people. Without additional health care investment, halting the rapid transmission of infectious diseases will become tougher.
Canadian SMEs are least able to provide comprehensive health coverage for their workers in the region. An unhealthy Asian labour force will deter Canadian SEMs and other firms from investing in high-risk countries, further reducing their industrialization and modernization and slowing per capita income growth and social progress.
Canada is home to a growing number of people from Asia. Recent data from Citizenship and Immigration Canada show that Asia was by far the principal source of new arrivals in 1998. Of the 174,100 newcomers to Canada in 1998, Asia accounted for 48.3 percent or 84,036 immigrants. China, at 19,749 new arrivals, or 11.3 percent of the total, was the largest single source of immigrants, followed by India (8.8 percent), the Philippines (4.7 percent), Hong Kong, SAR (4.6 percent) and Pakistan (4.6 percent). Taiwan and South Korea were also major source countries of newcomers to Canada. Higher unemployment, weaker economic performance and declining living standards in many Asian countries will likely contribute to increased illegal immigration to Canada and elsewhere.
There is also a real danger that increased travel and business from high-risk areas in Asia might fuel the rapid transmission of infectious diseases such as AIDS and TB to Canada. In 1998, over 1.02 million Asian tourists (leisure and business) entered Canada, Japan, Hong Kong, SAR, Taiwan, South Korea, India and China were the largest source markets. The cost of treating new and resurgent diseases is very high in Canada. It costs about CDN$90,000 annually to treat a person with AIDS and between CDN$4,000 to CDN$18,000 per patient for TB treatments, to over CDN$37,000 to CDN$450,000 for drug-resistant TB.
In today’s fiscal and social climates, the majority of Canadians are likely to be less welcoming to newcomers, especially if they pose heavy burdens on public coffers. Without adequate health and sanitation infrastructures to combat communicable diseases, public health in Canada could be endangered. Better screening of new arrivals from high-risk countries will significantly decrease health- and crime-related threats to Canada’s interests and security.
The scale and scope of Asia’s political, economic, social and environmental problems are enormous. The operating environment in many Asian countries will likely get riskier and the costs of doing business will escalate. Addressing these problems will take many years, if not decades. Canadian businesses with existing and future exposures to Asian countries will thus need to assess the situation carefully and realistically. Less-than diligent exporters and investors risk suffering huge financial losses.
