ASEAN Beyond the Regional Crisis: Challenges and Initiatives

5. ASEAN Investment Area: Progress and Challenges

80 Nick J. Freeman© 2001 Institute of Southeast Asian Studies, Singapore 80 FDI in South-East Asia (ASEAN 10) decreased by 23 per cent in 1998. The share of these countries as a group in total FDI in Asia has declined by nearly one tenth during the 1990s.1 Introduction The Association of Southeast Asian Nations (ASEAN) has been through rough times in the last couple of years. A vicious currency crisis in Thailand during mid-1997 mutated into a financial crisis, which then spread to the other currencies and financial markets of Southeast Asia, before mutating again into a more virulent regional economic downturn across much of East Asia. Depicted by one observer as the “bonfire of the certainties”, the Asian economic crisis knocked (formerly ebullient) subjective business confidence across the region, which further exacerbated the damage already being done to more objective business activity. Previously bold commercial banks took fright, as over-leveraged corporates in several countries began to default on loans, en masse. Banks’ loan books were frozen, credit became scarce, interest rates climbed precipitously, and the business environment became extremely hazardous. In those countries worst affected, good and bad firms alike found themselves 5 ASEAN Investment Area: Progress and Challenges NICK J. FREEMAN* ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg ASEAN Investment Area: Progress and Challenges 81© 2001 Institute of Southeast Asian Studies, Singapore in life-threatening situations. Some countries even saw the economic fallout from the crisis making an impact in their political arenas. The value of ASEAN’s various local currencies came under downward pressure, as did the prices of most asset classes, from shares to property. Many forms of business endeavour were adversely impacted, including trade and investment. For almost anyone involved in business in ASEAN during 1997–99, the experience was decidedly unpleasant. Perhaps the only net winners so far have been corporate lawyers and accounting firms. For most of those with operational investments in ASEAN, the period since mid-1997 has been extremely disappointing, as both the value of these investments, and the earnings to be derived from them, have shrunk fairly substantially. Conversely, for those seeking to enact new investments in Southeast Asia, the period since mid1997 has been quite exciting. Not only can some operational businesses now be bought at levels commensurate with their distressed condition, but post-crisis liberalization reforms are allowing foreign investors to acquire assets that were previously offlimits (in formerly protected sectors). This state of affairs has also dovetailed with new trends apparent in the field of international business, particularly with regard to a burgeoning of mergers and acquisition (M&A) activity, and strategic alliances. Global overcapacity has brought down prices for a wide spectrum of services, products and commodities, thereby squeezing corporate profit margins.2 Major corporates have responded by trying to derive efficiency gains from intra-industry consolidations (“bulking up”) and introducing new technology, among various other strategies, in a bid to maintain positive earnings. While these new trends have been most apparent in the industrialized countries, their growing impact on the developing world — including much of Southeast Asia — should not be under-estimated. A major re-evaluation of emerging markets’ comparative advantages is under way, as are notions of what makes an attractive host country environment. Looking ahead, for example, the skill levels of the local work-force are likely to be of increasing importance, at the expense of the low labour rates of the local workforce (a traditional bulwark of emerging markets).3 Similarly, the digital infrastructure of a host country, and/or its record on intellectual property rights, is likely to be of greater relevance to foreign investors than its ability to provide greenfield sites or export 82 Nick J. Freeman© 2001 Institute of Southeast Asian Studies, Singapore processing zones for yet more conventional “smoke-stack” industrial plants. A full-blown business revolution may not be under way, but a paradigm shift in international business is occurring, and this poses new challenges for all those Southeast Asian countries seeking to attract foreign capital.4 Simply getting back to the way things were before the “wheel came off” in mid-1997, and before the Asian crisis rudely interrupted the sustained economic growth trajectory that Southeast Asia had been enjoying, is not an option...