Intra-regional 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 addressed in the paper Why 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 market -seeking, 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 subregional 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- , low-cost, 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)