The Asian Crisis

For the three decades before Asia's financial crisis, Indonesia, Korea, Malaysia, and Thailand had an
impressive record of economic performancefast growth, low inflation, macroeconomic stability and
strong fiscal positions, high saving rates, open economies, and thriving export sectors. It is therefore not
too surprising that no one predicted the Asian crisis. Now that the crisis has unfolded, it is, of course,
much easier to identify the problems that led to it. In fact, there is a consensus on the causes of the
crisis, in sharp contrast to the diversity of views on the remedies.

The financial crisis can be described as having been a "perfect storm": a confluence of various conditions
that not only created financial and economic turbulence but also greatly magnified its impact. Among
the key conditions were the presence of fixed or semi-fixed exchange rates in countries such as
Thailand, Indonesia and South Korea; large current-account deficits that created downward pressure on
those countries' currencies, encouraging speculative attacks; and high domestic interest rates that had
encouraged companies to borrow heavily offshore (at lower interest rates) in order to fund aggressive
and poorly supervised investment. Weak oversight of domestic lending and, in some cases, rising public
debt also contributed to the crisis and made its effects worse once the problems had begun.

The underlying causes of the Asian crisis have been clearly identified. First, substantial foreign funds
became available at relatively low interest rates, as investors in search of new opportunities shifted
massive amounts of capital into Asia. As in all boom cycles, stock and real estate prices in Asia shot up
initially, so the region attracted even more funds. However, domestic allocation of these borrowed
foreign resources was inefficient because of weak banking systems, poor corporate governance, and a
lack of transparency in the financial sector. These countries' limited absorptive capacity also contributed
to the inefficient allocation of foreign funds. Second, the countries' exchange rate regimesexchange
rates were effectively fixedgave borrowers a false sense of security, encouraging them to take on
dollar-denominated debt. Third, in the countries affected by the crisis, exports were weak in the mid1990s for a number of reasons, including the appreciation of the U.S. dollar against the yen, China's
devaluation of the yuan in 1994, and the loss of some markets following the establishment of the North
American Free Trade Agreement (NAFTA).

Thailand
Thailand's story is very telling in this regard. The problems in Thailand started in 1996. The IMF warned
the authorities in early 1997 of the impending foreign exchange crisis, but it was difficult to convince
them of the seriousness of the emerging problems. The warning was not made public, of course, given
the strong risk that such a move could precipitate the very crisis it was intended to avoid.
Moreover, the IMF was not aware of the full extent of Thailand's problems at the time, because the baht
was initially supported by heavy intervention in the forward market. Not knowing that virtually all of
Thailand's international reserves had already been committed in the forward market, the IMF believed
they were adequateuntil mid-1997, when the country's usable reserves were nearly depleted and the
authorities came to the IMF for help.

FDI
The period 1992-97 witnessed an even sharper rise in Thai outward investment, with an average annual
rate of about 45 per cent throughout the period. The industrial and geographical spread of Thai FDI
outflows also diversified. From basic manufacturing industries, outward investment activities were
increasingly undertaken in more technologically intensive industries such as chemical and petrochemical
products. Moreover, non-manufacturing industries, such as services, hotel management, and real
estate, began to internationalize from 1993 to 1997. Together, these sectors accounted for more than
60 per cent of total outflows during 1991 to 1997. Similarly, the geographical diversity of Thai outward
investment during this period also deepened. Thai investors increasingly concentrated their activities in
nearby developing countries, such as Indonesia, Malaysia, the Philippines, Singapore, Cambodia, Laos,
Vietnam, and China.

Based on the BOT data, the rising trend took a sharp downturn after the economic crisis struck Thailand
in 1997. The baht flotation and its subsequent depreciation increased the cost of foreign operations and
almost doubled the amount of foreign currency debts of most Thai firms that had been borrowing
heavily to finance both their domestic and international expansions. The slowdown in the economy of
many countries in the region following the crisis further aggravated the difficulties faced by domestic
entrepreneurs. It was thus not surprising that many aborted or shelved plans for outward investment
activities. The third stage of Thai outward investment was therefore characterized by a sharp decline.
Investment outflows dropped drastically from 20 billion baht in 1996 to 12.4 billion baht in 1997 and 4.3
billion baht in 1998. Most Thai firms that had been enjoying international expansion were forced to
focus on their domestic survival.

Despite the spectacular setbacks in the aftermath of the 1997 crisis, some promising trends have
emerged in a few sectors. For example, after a sharp 80 per cent drop in 1998, equity outflows in food
and sugar industries have been on the rise again since 1999. Although the amount is still far from its
peak in 1997, the trend offers some hope that the opportunities are still there for some Thai
multinationals. The areas that are notably showing signs of recovery are in services sector, such as
trading, construction, mining and quarrying, and agriculture. These are likely the sectors that benefited
from Thailand's weakened currency (i.e. food), a rebound of the regional economy (i.e. construction,
real estate), and strong government support (i.e. restaurants). This paper discusses in further details the
post-crisis reactions of selected Thai multinationals in these sectors in Section IV although there are
some signs signifying the resurgence of Thai investment outflows;

In other words, the competitive advantages of Thai multinationals were derived not only from their
accumulated industry-specific technological skills, but also from their networking capabilities. Unlike
multinationals from developed economies, whose competitive advantage was strongly based on
proprietary technological skills, Thai multinationals employed a combination of these two types of
capabilities in their domestic and international expansion. This argument is figuratively presented in
Figure 2, which suggests that competitive advantage of multinationals can be derived from two key
sources technological and networking capabilities. Equipped with superior technological skills,
conventional multinationals, or those originated from developed economies, build their competitive
advantages around their technological expertise and are less prone to rely on networking capabilities.
On the contrary, Thai multinationals, whose competitive advantages are rarely based on technological
expertise, have relied more on the networking capabilities to facilitate their domestic and international
expansion.