Restoring investors' confidence in Asean

Asean has been enjoying a steady flow of foreign direct investment (FDI) since the 2008 downturn. Total FDI inflows into the region went up from US$22 billion in 2000 to US$50 billion in mid-2000, and reached US$133 billion (S$187 billion) in 2014.

This corresponds to less than 2 per cent of global FDI inflows in 2000, to nearly 5 per cent in the mid-2000s - and more than 10.5 per cent in 2014. The 2014 figure is higher than that of China at US$129 billion and India at US$35 billion. Although the bulk of this FDI came from the European Union, Japan and the United States, intra-Asean flows are the second major source (after the EU) and accounted for 17 per cent of the total.

Indeed, the resurgence of investors' confidence in the region is due to a confluence of factors, including good domestic fundamentals and a positive investment climate in the broader Asian region. But one cannot ignore the efforts put in together by the 10 South-east Asian countries to establish the Asean Economic Community (AEC) that came into effect at the start of this year.

The AEC is a regional initiative to form an integrated production space with free movement of goods, services and skilled labour. Collectively, AEC has an economic size of US$2.4 trillion, making it the third-largest economy in Asia and the seventh largest in the world.

Although the AEC is said to be a "work in progress" and suffers from several teething issues in the 10 domestic economies, it should be noted that it was conceptualised in the post-1997/1998 crisis world in order to regain foreign investors' confidence in the region. At that time, an economically ascendant China had overtaken Asean as the world's prime location for FDI. This was worrisome for Asean policymakers as FDI has long played an important role in the region's economic development.

A worker harvests crabs at the soft- shelled crab farm in Aceh, Indonesia. Soft-shelled crab is one of the export items with high demand. PHOTO: EUROPEAN PRESSPHOTO AGENCY

Since then, the 10 South-east Asian countries have been making great efforts to improve regional connectivity in terms of trade, investment, infrastructure, trade facilitation, information and communication technology, movement of professionals and financial sector cooperation.

More particularly, to boost investments in an enlarged market place, the member countries adopted the Asean Comprehensive Investment Agreement that included mechanisms of investment liberalisation, facilitation and protection.

Regional policies of standardisation and harmonisation signalled an eventually lower-business-cost environment, encouraging FDI both from within and outside the region.

The countries of Asean did not stop with their own regional integration and related domestic reforms. Together they have been earnestly working to form linkages with the rest of the world. Asean, as a region, has developed institutional relationships with the rapidly growing economies of the broader Asian region - China, India, South Korea, Japan, Australia and New Zealand - and the countries have been regularly meeting to discuss issues of regional and global interests.

The positive investor sentiment in Asean has been reiterated by industry players who participated in the Regional Outlook Forum organised by the Iseas-Yusof Ishak Institute on Jan 12. One of the panellists, who was from Singapore's United Overseas Bank, when elaborating on the rising FDI trend, mentioned that the bank decided to form an FDI advisory unit, exclusively dedicated to helping companies navigate the complexities of doing business in Asean.

FDI in Asean also gained momentum from an "Asean plus" strategy, which implies that a foreign multinational can form strategic linkage with an Asean-based company and a third party from a country enjoying benefits under Asean+1 economic cooperation initiatives - such as China, India, Japan, South Korea, Australia and New Zealand.

One such Japanese company, Itochu Corporation, which participated in the Iseas forum, mentioned that it has formed alliances with Thailand's Charoen Pokphand Group (CP Group) and Citic Group Corporation of China mainly "to have access to business opportunities for value creation and potential co-investment in China, Asia as well as the global market".

While Citic is a strong player in the financial services industry, CP Group and Itochu possess strength in non-resource businesses, especially in the consumer-related sector.

However, internal headwinds remain, in addition to external uncertainties about China's slowdown, capital flows and currency volatility. These internal issues include the quality of human resources in accordance with industry need; inadequate service-sector liberalisation; a lack of transparency in setting up a new business; change in regulations without business knowledge; and limited awareness and advocacy of AEC regional policies by the business community.

These have the potential to affect the FDI inflows into the Asean region, even amid positive investor sentiment.

  • The writer is a Fellow and lead researcher (economic affairs) at the Asean Studies Centre of the Iseas-Yusof Ishak Institute.
  • S.E.A. View is a weekly column on South-east Asian affairs.

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A version of this article appeared in the print edition of The Straits Times on February 11, 2016, with the headline Restoring investors' confidence in Asean. Subscribe