Roadmap to an ASEAN Economic Community

8. FDI and the Free Movement of Investments in ASEAN

148 Tham Siew-Yean 8 FDI and the Free Movement of Investments in ASEAN Tham Siew-Yean 1. Introduction The ASEAN-Five economies (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) were identified among the twenty economies that had raised their world market shares of non-resource-based technology manufactures by at least 0.1 per cent between 1985 and 2000 (UNCTAD 2002). How did these economies manage to become global export winners given that global market shares are exceedingly hard to gain and even harder to sustain? In this regard, these five economies share a common contributory factor: all have benefited from the extensive presence of foreign direct investments (FDIs) and multinational corporations (MNCs) in their respective economies. These MNCs have contributed to the export competitiveness of the ASEAN-Five in non-resource-based industries in three ways: First, the MNC operations are export-oriented from the start due to the fragmentation and globalization of the production process, especially in the electronics industry that has spawned across the region. Second, the MNCs, through their backward linkages with local firms, assist local firms to become indirect exporters. Third, MNCs also indirectly promote the export activities of local firms that manage to copy the operations of foreign affiliates, employ staff trained by foreign affiliates, and benefit 08 Roadmap2AEC Ch 8 7/9/05, 3:43 PM 148 FDI and the Free Movement of Investments in ASEAN 149 from improvements in infrastructure and reductions in trade barriers undertaken in response to the demands of foreign companies. Given the important role played by FDI in enhancing the export competitiveness of the ASEAN-Five, the objective of this chapter is to assess the progress of the ASEAN Investment Area (AIA) and its contribution to FDI in ASEAN. Based on this analysis, the chapter then identifies the main challenges posed towards the free movement of investment within ASEAN. After the introduction in section 1, the salient features of the AIA and its progress are analysed in section 2. The pattern and trend of FDI in ASEAN is presented in section 3 in order to assess the contribution of the AIA to the flows of investments in ASEAN while the main challenges confronting the free movement of investments in ASEAN are discussed in section 4. The concluding section summarizes the main findings. 2. ASEAN Investment Area (AIA) 2.1. Main Features of the AIA The Framework of Agreement on the AIA was signed on 8 October 1998, with the objective of establishing a competitive AIA in order to attract greater and sustainable levels of FDI into the region and to realize substantially increasing flows of FDI from both ASEAN and non-ASEAN sources by making ASEAN an attractive, competitive, open, and liberal investment area. The agreement binds the member countries to progressively reduce or eliminate investment regulations and conditions which may impede investment flows and the operation of investment projects in ASEAN and to ensure the implementation of the AIA within the agreed time frame. It is based on the three pillars of broad-based programmes for encouraging investment in the ASEAN region, that is, co-operation and facilitation, promotion and awareness, and liberalization (see Table 8.1). Moreover, under Article 4 of the agreement, the AIA is also expected to be an area for the free flow of skilled labour and professionals and technology among the member countries of ASEAN. Under the first pillar, members agree to take individual initiatives to increase the transparency of their respective investment rules, to simplify and expedite procedures for applications and approvals of investment projects at all levels as well as to expand the number of bilateral Double Taxation Avoidance Agreements among member countries. Collective initiatives will be undertaken to establish a Database for ASEAN Supporting Industries and ASEAN Technology Suppliers, a database to enhance the flow of ASEAN 08 Roadmap2AEC Ch 8 7/9/05, 3:43 PM 149 150 Tham Siew-Yean investment data and opportunities for investment in ASEAN, promote public– private sector linkages, identify target areas for technical co-operation, review and where possible improve the ASEAN Agreement for the Promotion and Protection of Investment, and examine the possibility of an ASEAN Double Taxation Agreement. Investment promotion and awareness involves the organization of joint investment promotion activities, regular consultation among the investment agencies of ASEAN on investment promotion matters, the organization of investment-related programmes for officials of the investment agencies of ASEAN, exchanging...