Intraregional investment The neglected aspect of Asean integration

Intra-regional investment The neglected aspect of Asean integration Pavida Pananond Thammasat Business School Thammasat University

Outline � Questions � Why addressed in the paper these questions � Outward FDI from Asean � Conclusions and implications

Questions � Can intra-regional investment contribute to the closer regional integration in Asean? � If so, how?

Why these questions? � Regional integration in Southeast Asia › Goal: to establish the Asean Economic Community (AEC) as a single market with a free flow of goods, services, investment and capital by 2015 › State-led regionalism not as significant as market-led regional integration through the globalisation of production networks of extra-regional MNEs. But Asean continues to be top-down and state-led! › Intra-Asean FDI in 2008 = 18. 2% compared to 66% of intra-EU FDI a lot of room to grow?

Why these questions? (cont. ) � Surge of outward FDI from developing countries › Southeast Asia is the 2 nd largest source of investors from developing countries, following East Asia (OFDI stock) › As these economies develop, more OFDI is expected and the nature of OFDI should be more complex and sophisticated › The rise of China and India as source and destination of FDI what would happen to Asean

Outward FDI from Asean � How significant is Asean as outward investors? � How important is intra-Asean investment? � Who are Asean investors? � Where and in which sectors do they invest? � What drives their investment strategies

Asean as outward investors

Asean as outward investors � Inward FDI far outweighs outward FDI � Singapore and Malaysia are top performers, with Indonesia and Thailand following far behind (10 th, 22 nd, 52 nd, and 66 th in UNCTAD outward FDI performance index) � Outward FDI from Singapore and Malaysia = 85% of Asean outward FDI

How important is intra-Asean investment?

How important is intra-Asean investment?

How important is intra-Asean investment? � Inward FDI: › Asean is heavily dependent on FDI inflows from non-members (82%v. s 18%) � Outward FDI: › Asean more important to each other as destinations › But China is luring Asean outward FDI away from the region

Outward FDI from Singapore

Nature of intra-Asean investment

Nature of intra-Asean investment � Singapore is the clear leader, both as source and host countries � Two layers of integration among Asean countries › Extensive cross-country investment among Asean-5, esp Singapore, Malaysia and Indonesia › Uni-dimensional investment from more advanced members to CLMV

Nature of intra-Asean investment

Nature of intra-Asean investment � Key sectors: manufacturing, financial services, real estate, and mining � Intra-Asean investment is driven most by marketseeking, followed by efficiency-seeking (esp. lower cost locations), and resource-seeking objectives � Key indigenous players are large firms and government-linked companies

In sum… � Asean regional integration is more driven by inward FDI from outside the region � Intra-Asean investment exists, but tends to be limited among the more advanced members. � Increased competition among Asean firms. � China poses a major challenge as alternative destination for FDI from non-Asean and Asean members

Implications on regional integration � Regional level: Asean needs to be flexible enough to accommodate extra-regional (e. g. Asean +3) and sub-regional structures (e. g. GMS, growth triangle) � Country level: a need for a clear and proactive policy on outward FDI. OFDI is an indicator of the country’s competitiveness. � Firm level: Asean firms should not be limited to market- , lowcost, and resource-seeking investment only. More complex activities for the region should be encouraged. � Key challenges: › Intraregional competition (ex. PTT and Petronas) › Sensitivity to government-linked companies (ex. Temasek)