Takashi Shirasu


11-12 August, 2009, Ulaanbaatar, Mongolia

Organized by The Mongolian Development Research Center and The Office the President of Mongolia

Foreign Direct Investment and Export of Mongolia in Recent Years: Mongolian Economy Tends to be Integrated to China

Takashi Shirasu
Tokyo International University

1. Long-term Trend of Foreign Direct Investment in Mongolia

This paper aims to analyze an investment trend, especially, that of foreign direct investment and its relation to export of Mongolia. Figure 1 indicates the ratio of domestic capital formation, i.e., domestic investment over GDP. Right after the collapse of former Soviet Union, the ratio sharply dropped to the lowest level of about 10% in 1992, it had been gradually recovered to the level of 30~35% after 1998. This unusually high level of investment ratio was almost equivalent to that of Thailand and Malaysia around 1990’s, when those countries experienced very high GDP growth rates.

Figure 1: The Ratio of Domestic Investment over GDP at nominal price

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

Figure 2 indicates the contribution ratio of domestic capital formation over GDP. In 1988, GDP growth rate was minus, and in 2000, domestic capital formation was lower than that of the previous year, therefore, the contribution ratio of these two years were not shown in the figure. We can observe that the ratio fluctuated very much after 1993, though we can clearly see that the domestic capital formation accounted for 20~40% of GDP growth. Especially, in 2002, domestic capital formation increased by US$ 80 million as compared to previous year, and further it sharply increased by US$ 320 million in 2003. In other words, the absolute amount of domestic capital formation was around US$ 1.1 billion in 2002, yet it suddenly jumped to US$ 1.42 billion in 2003, that brings Mongolian economy to the recovery path. After 2003, the contribution ratio of domestic capital formation over GDP has been constantly improved. Therefore, the period between the year 2002 and 2003 was critical for analyzing the recent Mongolian economy.

Figure 2: The Contribution Ratio of Domestic Capital Formation over GDP 

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

By the way, if we focus only on the ratio of domestic capital formation over GDP, it gives us an impression that the domestic capital formation has been constantly increased during the past, yet it is not so. Figure 3 indicates the total amount of domestic capital formation. It remained very low level of around US$ 150 million during 1992 to 1994. After 1995, it started to increase gradually, yet it remained below US$ 300 million until 2001. As we have observed, it was the year 2002 that the domestic capital formation started to increase, and it reached to the level of US$ 1 billion in 2006. Therefore, it should be noted that it was after 2002 that the domestic capital formation stably contributed to the growth of GDP. What was the background of this sharp increase of the domestic capital formation?

Figure 3: The Amount of Domestic Capital Formation (US$ million) 

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia
Note: Domestic capital formation expressed by the Mongolian currency was converted by the annual average exchange rate to US$

Figure 4 shows the amount of foreign direct investment in Mongolia after 1990. As we see from this panel, FDI in Mongolia started to vitalize after the year 2000, and it had been increased from the level of US$ 50 million in 2000 to US$ 80 million in 2002. After the year 2002, it started to increase sharply to the level of US$ 330 million in 2007.

Figure 4: Foreign Direct Investment in Mongolia (US$ million)

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

In the background of the sharp increase of domestic capital formation after 2002 as pointed out before, we can observe this sharp increase of foreign direct investment. Figure 5 shows the trend of the proportion of FDI to domestic capital formation. This proportion was below 10% before the year 2000, yet it increased stably after 2000 and it reached to the level of 30% in recent years. Then we can ask from which countries and in what kind of areas FDI was made.

Figure 5:  Trend of the Proportion of FDI to Domestic Capital Formation (%) 
Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

Figure 6 indicates the sector-wise proportion of FDI after 1990. It should be noted that the FDI to mining sector occupied 45% of all FDI made during 1990 to 2004. The second major area of FDI went to hotels and restaurant sector which consisted of 13%. This trend was further accelerated after 2005, and mining sector occupied 67% as well as hotels and restaurant sector was around 20%. It is quite surprising that 90% of all FDI went to these two sectors. On the contrary, FDI to manufacturing sector was mere 7% up until 2005, and it was further dropped to only 0.5% after 2005. These evidences indicate that it is almost impossible to industrialize Mongolian economy by utilizing FDI, and for Mongolia, there will be no other way to seek its foundation for future development by wisely utilizing mining sector and tourism sector including hotels and restaurant sector.

Figure 6: Sector-wise Proportion of FDI after 1990(%)

Source:Statistical Office, Government of Mongolia

Major investing countries to Mongolia are shown in figure 7. During 1990 to 2004, China was the largest investing country, and its investment reached to 40% of all FDI during that period. Second largest FDI was made by Canada that was 17%, and third position was Korea, yet its amount remained only 8%. This trend remained to be same after 2005, and now, China occupied surprisingly high level of 70% followed by Canada of 20%. This unexpectedly high level of Chinese FDI in the year 2005 was equivalent to 33% of domestic capital formation in Mongolia. Now, it is not possible to analyze Mongolian economy without China that completely replaced former Soviet Union and COMECON. What can we presuppose from this fact? By the way, Japanese FDI was only 6% during 1990 to 2004, and after that, it dropped to 1.8% in 2005, and 1.5% in 2007. From the view point of countries investing to Mongolia, Japanese presence is almost none.

Figure 7: Major investing Countries to Mongolia (%)

Source:Statistical Office, Government of Mongolia

Figure 8 shows the country-wise number of enterprises newly established by FDI.
Again, the largest number was recorded by those established by Chinese FDI, and it reached around 3800 during 1990 to 2007. Following this number was recorded by Korea that reached 1400 during the same period. On the other hand, newly established enterprises by Canadian FDI were very small of 69 until 2007. Japanese FDI related enterprises were 335 during 1990 to 2007, and both the year 2006 and 2007, around 60 enterprises were newly established.

Figure 8: Country-wise Number of Enterprises Newly Established by FDI

Source:Statistical Office, Government of Mongolia

From the data shown in figures 7 and 8, the amount of FDI per enterprise was computed and shown in figure 9 . These data clearly indicate that Canadian investment per enterprise was far the largest reached around US$ 5 million, and mostly concentrated to the mining sector. On the other hand, that of China was rather small of US$ 0.3 to 0.4 million. However, Chinese investments seem to be divided to two different sectors, one seems to be large scale investment into resource mining related sector, and the other seems to be small scale and large number of investment to trade and restaurant related sectors. In case of Japanese investment, an average size was around US$ 0.4 million until 2004, yet it became extremely small size of US$ 84,000 in 2006 and of US$ 41,000 in 2007.

Figure 9: The Amount of FDI per Enterprise (xUS$ 1000)

Source:Statistical Office, Government of Mongolia

2.  Long-term Trend of Mongolian Export 

Figure 10 indicates ratio of Mongolian export to GDP. It reached to 60% of GDP in 1993, yet after that year, it declained to 36% in 1996, and again it rose to the level of 50% after 1997. It shows that Mongolian economy is heavily dependant on export. If export and domestic capital formation are combined, it accounts for 70% of Mongolian GDP. However, Mongolian export has not expanded stably as the case of domestic capital formation as we have already seen.

Figure 10: Ratio of Mongolian export to GDP (%)

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

The amount of Mongolian export in US$ is shown in figure 11. Export amount was long remained to be US$ 5 million until 2002. However, in 2003, it started to rise, and after that, it expanded at a very high pace. As a result, export increased 5 times during five years between 2002 and 2007, and the export reached to US$ 2 billion in 2007. What are the causes of this sharp increase of Mongolian export?

Figure 11: Export of Mongol (US$ Million)

Source:ADB, Key Indicators for Asia and the Pacific 2008、Mongolia

Needless to say, major export items of Mongol are mining products such as copper, and hides and skins as well as cashmere products. Yet if we see the composition of export items in figure 12, it started to change fundamentally in the year of 2003 or 2004. Until 2003, mineral products account for 35%, followed by textile products of 30%, and precious metal of 20%, and these three major items accounted for 85% of export. Also the composition was rather stable. However, in 2004, the ratios of textile products as well as and hides and skins started to decline, and the ratios of mineral products and precious metal started to increase. Although export ratio of precious metal such as gold became smaller after 2005, export ratio of mineral products constantly expanded and reached to the level of 70% of Mongolian export in 2007.

Figure 12: Composition of major Export Items (%)

Source:Statistical Office, Government of Mongolia

Now we can ask to which countries these commodities exported. Figure 13 shows major exporting countries and export amount, and figure 14 indicates major exporting countries and export ratio. It is China that became the largest exporting country after 2000. Next is USA, and the use-to-be the largest trading partner, Russia, only account for 10% until 2002, yet the ratio constantly declined only to 3% in 2007. The export to USA remains at the level of US$ 1.5 million, yet its share declined from 28% in 2001 to 5% in 2007.

Figure 13: Major Exporting Counties and the Export Amount (US$ million)

Source:Statistical Office, Government of Mongolia

Canada that occupied number two position in terms of FDI quickly expand its import from Mongolian, and the amount reached to US$ 17 million in 2007. Yet, as we can see from figure 14, Canadian share in Mongolian export remained as low as 10%.
Figure 14: Major Exporting Counties and Their Share (%)

Source:Statistical Office, Government of Mongolia

3. Mongolian Economy Tends to be Integrated to China

Seventeen years have already passed since the collapse of former Soviet Union. During this period, Mongol experienced the transition to democracy in politics and the difficult transition to market economy in economics. It was the year 2002 that the sign to economic recovery appeared. This essay intended to oversee the fundamental trends of FDI to Mongol and Mongolian export after 1990. What we can point out throughout this simple analyses are;

1)    The most important factor that revitalized Mongolian economy was the large inflow of FDI after 2002, and it is worthwhile to note that China made about 40% of FDI;
2)    Majority of these FDI was invested for the development of mineral resources;
3)    As a result, Mongolian export expanded at a very rapid pace after 2003;
4)    And, if we carefully watch the major export counties, China occupies 70% of Mongolian export, and around 70% of export items are the mineral resources.

Mongol that seceded from the Soviet/COMECON regime seems to be quickly integrated to Chinese economy in recent years.

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