Foreign Capital and Sovereignty: A Comparative Study of Malaysian and South Korean Experience during the Asian Financial Crisis

Abstract

The impact of foreign capital on a country's sovereignty is a subject of continuing debate. However, most discussions fail to differentiate between the different forms of investments — whether they are in the form of foreign lendings, portfolio investments or foreign direct investments. This paper discusses this issue by comparing the experiences of Malaysia and South Korea during the Asian financial crisis.

Prior to the crisis, the two countries adopted very different attitudes towards FDI. Whereas South Korea discouraged it, relying instead on foreign loans to develop indigenously owned corporations to protect its economic sovereignty, Malaysia on the other hand actively sought FDI. Ironically, when the Asian financial crisis struck in 1997, South Korea was forced to seek the help of the IMF for additional sources of finance to prevent the country from going bankrupt, thereby leading to a significant loss of sovereignty. On the other hand, Malaysia was able to avoid borrowing from the IMF. The most important lesson that can be learnt from comparing the experiences of the two countries is that a country's reliance on foreign capital is not necessarily bad for its ‘economic sovereignty’, as long as it is in the form of FDI rather than loans.