East Asia Offers Range of Opportunities

Vietnam, Indonesia and the Philippines are among the countries expected to thrive over the next decade.

Even without the powerhouse that is China, East Asia has many of the world’s most promising emerging economies for multinationals looking to grow their businesses. But the East Asian nations are a varied lot, and each presents its own challenges.

When considering the key factors for multinationals, such as ease in shifting funds in and out of the country and the efficiency of the payment system, Hong Kong, Singapore and Malaysia rest at the top of the pyramid, with South Korea, Taiwan and the Philippines a notch below.

South Korea and Taiwan are hard to classify as traditional emerging markets, given that they have healthy middle classes and homegrown multinationals.

Nevertheless, companies doing business in East Asian economies can expect to encounter some sticky wickets. Larry Harding, president of High Street Partners, which specializes in setting up and supporting clients in overseas locations, says South Korea remains a relatively closed society, with few English speakers. Plus, “it’s a hard market to sell into,” Harding says. “It’s intensely price-competitive and it’s hard to sell value there; without the cheapest price, it’s hard to gain market share.”

The next level of countries in East Asia, including Vietnam, Indonesia and Thailand, displays more of the factors associated with emerging markets, such as less developed infrastructures and poorer populations. Multinationals are looking to those countries as possible destinations as production and labor costs rise in China and India, and some companies are looking ahead to when these markets will become vibrant in their own right.

The Economist Intelligence Unit has identified Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—the CIVETS countries—as desirable business destinations because of factors that include relatively low labor and production costs, growing domestic markets, reasonable financial systems and manageable inflation and public debt. The CIVETS’ combined population of 580 million pales next to that of China or India, with Indonesia and Vietnam making up more than half of that total.

Big multinational banks also have weighed in on this topic. In a report earlier this year, Citibank defined global growth generators, or 3Gs—countries it expects to thrive in a globally integrated economy and exhibit high growth rates and returns on investment in the coming decade. Vietnam, the Philippines and Indonesia were among Citi’s 11 3Gs, as were China, India, Bangladesh, Egypt and Nigeria.

Citi points to Indonesia’s rapidly growing working-age population, as well as its per capita income of just $4,362 in 2010, which leaves it plenty of room for catch-up. Vietnam displays similar traits, as well as a relatively high investment rate, or the share of gross domestic capital formation in gross domestic product. However, the country’s shabby infrastructure and one-party political system “impart a certain fragility in Vietnam’s outlook,” according to authors Willem Buiter, Citi’s chief economist, and Ebrahim Rahbari.

Harding says Vietnam and Thailand recently have improved their payment systems, making it easier for multinationals to move funds in and out of the countries—something that’s still a struggle in China and India. Moving funds is much easier in South Korea and the Philippines, which has been a major beneficiary of multinational outsourcing.

“What tends to happen is that some element in the economy really begins to take off and pulls everything else with it,” Harding says. “In the cases of India and the Philippines, that’s led to hyper-growth in their economies, whereas Thailand, Vietnam and Indonesia have not had that.”

Nevertheless, prosperity in East Asia has lifted all boats, and most countries have growing middle classes. Vacationers from Hong Kong, for example, bring money into Thailand, helping it improve its infrastructure.

The infrastructures of Thailand, Vietnam and India still can pose difficulties, Harding says, but companies that arrive early will benefit from low costs.

In addition, “you’ll get the best of the best in terms of local talent, and you’ll be the special person in town, which may result in favorable taxes or regulatory approvals,” he says. “It’s an opportunity to be a big fish in a small pond.”

 

See more stories here about countries where multinationals have spotted opportunities.

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