AEC unlikely to lift intra-regional investment in Asean much beyond
current levels, as most businesses lack outward-looking strategy.
The free flow of investment is a
cornerstone of regional integration under the Asean Economic Community (AEC),
but investments by Asean businesses in other Asean countries are unlikely to
expand much beyond current levels, most experts believe.
Southeast Asia is already a
powerful magnet attracting funds from across the world, thanks to its central
location and various trade agreements, notably with China and India. This trend
is likely to continue for many years to come.
But even after the AEC takes
effect in 2015 – whether on Jan 1 or Dec 31 is now a matter of conjecture –
there will still be a limited number of Southeast Asean businesses with the
strategic need or financial resources to invest in neighbouring countries.
As well, more changes in the rules
and regulations of individual countries, beyond their governments’ pledges to
uphold the goals of the AEC, will be required if intra-regional investment is
to take off.
Foreign direct investment (FDI)
into Asean has been rising steadily as the region’s attractiveness and
infrastructure improve. FDI inflows to Indonesia in the first half of this year
totalled 107.6 trillion rupiah, up 28.1% from a year earlier. Despite the blow
to confidence delivered by severe floods in Thailand last year, FDI in the first
seven months of this year was up 62% year-on-year at 332.2 billion.
Even in countries where FDI
declined, such as Vietnam (down 33.1% to $8 billion through July 31), the
figures in some cases reflected the high base of the previous year when
high-value projects were announced.
Meanwhile, the passage of a new
investment law (pending presidential approval) in Myanmar opens up a brand-new
frontier for businesses.
Historically, Asean has received
most of its investments from developed economies including the United States,
Europe and East Asian countries such as Japan, South Korea and Taiwan. Interest
from Asean countries in each other’s markets has been low.
According to the Asean
Secretariat’s FDI database, intra-regional FDI as a share of total FDI inflows
into Southeast Asia was 15.98% in 2010, a five-fold increase from 3.23% in
2000. Getting that number to move much higher than 20% will not be easy, says
Dr Pavida Pananond, associate professor at Thammasat University.
She said the similar economic
structure of Asean countries was the main constraint on outward FDI in this
region. Whatever they want to produce, they will do in their home countries.
The desire to expand a business is driven by different factors.
“The decision to expand
investments in other Asean countries is likely to be because they want to
penetrate new markets, not to really have a presence such as when European or
US [investors] come to the region,” she said.
As well, she said, Asean
countries for a long time have relied heavily on FDI from outside the region.
Because a lot of these non-Asean investors come to the region for cheap labour,
Asean countries are competing against each other and not acting as a group to
attract inflows.
Asean in 2010 attracted a record
US$75.8 billion in FDI, of which $12.1 billion was intra-regional investment, a
figure that surpassed $10 billion for the first time since the financial crisis
in 1997.
Forty-seven percent of total FDI
into Asean, or $35.5 billion, went to Singapore in 2010, followed by Indonesia
($13.3 billion), Malaysia ($9.1 billion) and Vietnam ($8 billion).
Singapore is also by far the
largest Asean investor in other Asean countries, according to a research paper
by Dr Pavida titled “Intra-regional Investment: The Neglected Aspect of Asean
Integration”.
Between 1995 and 2007, she wrote,
investment from Singapore represented 65% of all intra-regional FDI, followed
by Malaysia (17.7%), Indonesia (9%) and Thailand (4.9%).
Dr Pavida said Thailand had been
a latecomer in the past few years, led by a handful of its largest companies
seeking to create a global supply chain to increase competitiveness.
Dr Bunluasak Pussarungsri, head of
research at CIMB Thai Bank, expects Singapore and Malaysia will remain the main
investors in Asean. However, he foresees more Thai businesses looking abroad,
especially to low-cost Cambodia as the 300-baht daily minimum wage in Thailand
makes some sectors uncompetitive. As well, the land transport network between
the two countries keeps logistics costs manageable.
Dr Bunluasak said Laos and
Myanmar also had potential as low-cost bases for Thai businesses. However, Laos
has a small population base (only 6.5 million) while Myanmar’s infrastructure
is very weak, so Cambodia has the edge for now.
In the near future if enough Thai
factories move to Cambodia, they could possibly set up an industrial estate
there, he added.
The Philippines, meanwhile,
remains an untapped market compared to many other Asean members. It has
abundant natural resources, particularly fertile arable land and an extensive
coastline, notes Dr Bunluasak.
In Malaysia, garment
manufacturers are working to upgrade technology to add value and create
higher-quality products, so investments to make mass-market goods will go less
developed neighbours, said Dr Bunluasak.
“There have already been many Malaysian businessmen
investing in Thailand particularly in service sectors such as hotels and
tourism,” he added.
In Dr Pavida’s view, the leading
players in intra-regional investment — Singapore, Malaysia, Thailand and
Indonesia — will likely remain the same after 2015. “But the constraints on
competitiveness of companies in this region will limit the volume growth of
intra-Asean FDI,” she said.
Companies in Thailand, for
example, have not been encouraged to grow outside the country, and have been
happy to serve a decent-sized domestic market of 68 million. If they want
external customers, exporting is easier than setting up new operations abroad.
Another constraint has been rules
and regulations in each country. However, these limitations are being removed
ahead of the AEC to facilitate private companies, Dr Pavida notes.
Dr Bunluasak said each country
needed to revise and modernise its laws to promote better flows of trade and
investment within the region, particularly rules related to retail business and
anti-monopoly laws.
In the meantime, says Dr Pavida,
Asean probably will have to satisfy itself with a 20:80 ratio of intra-regional
versus global FDI at best. By comparison, in the European Union, 66% of all FDI
comes from EU members.
“You can see that it will take decades for
Asean to lift outward FDI to the same level as the EU,” she said.
“Intra-regional FDI will increase; I do believe that. But it will not be so
much as to change the structure of FDI flows into Asean.”
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