AEC 2015 Prospects Part 5: Attracting Investments

By Cirilo P. Noel

First Published in Business World (05/12/2014 – p.S1/3)

(Fifth in a five-part series)

AS we come to the final installment of this five-part series on the ASEAN Economic Community (AEC), it may be useful to recall the ultimate goal of pursuing freer flows of goods, services, capital, and labor. At the end of the day, the vision is to establish a competitive, sustainable, and inclusive region that is integrated into the global economy.

Numerous indicators exist to measure how far ASEAN members have come in reaching this goal, with many analysts concluding that the implementation of various commitments in support of the AEC will fall short of the 2015 deadline. A more straightforward way to judge the success of the integration effort is to check on the region’s ability to attract investments.

This is the view shared by the Ernst & Young (E&Y) report Trade Secrets — ASEAN Economic Community and Inward Investment. The idea is to treat the AEC as a “large-scale and coordinated exercise for attracting foreign direct investment (FDI).” This way, the focus goes beyond just keeping an inventory of policies for implementation; instead, it shifts to a concrete approach wherein an attractive climate is established to lure in business.

That is not to say, however, that a one-size-fits-all approach should be used. The report argues for the need to involve each country’s business community in order for implementation to be locally relevant and sensitive to the political, economic, and cultural differences among all the ASEAN members.

Otherwise, the integration effort will be for naught. The E&Y report notes that while total FDI for ASEAN as a whole has grown over the years, the amount is still dwarfed by FDI into China. Furthermore, the ASEAN’s share of global FDI over the past 30 years has actually declined and has not regained its 1996 peak prior to the Asian financial crisis.

Recognizing this, economies in the region have come up with the ASEAN Comprehensive Investment Agreement (ACIA) in order to jointly pursue four pillars: 1) investment protection; 2) facilitation and cooperation; 3) promotion and awareness; and 4) liberalization.

Under the ACIA, action steps include harmonizing investment policies, streamlining procedures, enhancing the business environment, and using investment missions focused on regional clustering and production networks.

The ACIA’s focus on these four pillars confirm the three areas identified in the E&Y report as critical to promote FDI across the region: enhancing business registration, strengthening investment promotion bodies, and eliminating obstacles to cross-border trade.

STARTING A BUSINESS

However attractive the ASEAN market may be, the ease of setting up a business in the region can still be the deciding factor for a major investment. The Philippines, along with the other member countries, would do well to consider simplifying, streamlining and harmonizing their respective screening processes and pre-entry requirements.

As it stands, there are yawning gaps between members’ respective regulations and standards. Foreign ownership restrictions vary as do requirements for authorized capital requirements and registration documents, as indicated in the E&Y report. Marked differences also abound in the cost and speed of processing times, as well as provisions on whether foreigners can hold executive positions in the investment project.

An investor lured by the promise of a single ASEAN market and production base may thus hesitate when faced with the tangle of contrasting regulations in each country.

To address this, the E&Y report recommends a three-pronged approach covering the regional, national, and local levels. This entails a regional effort to identify differences in, develop standards for, and publish information on investment regulatory procedures.

A national effort to involve the business sector and cascade integration information and deadlines is also prescribed. At the local level, working committees composed of government representatives and professional firms that assist foreign investors can ensure efficiency at the grassroots level.

As the report states, it is “important that the local government maintains dialogue with the business community to ensure that the processes and regulations remain relevant.” The reality is that the integration effort must be tailor-fit to each member’s nuances while keeping in mind the pursuit of a common regional goal.

INVESTMENT PROMOTION AND TRADE BARRIERS

Another area for improvement is in the functions of investment promotion bodies. The E&Y report notes that some ASEAN members have authorized their respective investment bodies to influence policy-making when it comes to attracting FDI, while others are hampered in their ability to “smooth the path” for inbound investment. Many do not have overseas presence to reach out to potential investors. Singapore and Malaysia, for instance, are said to have 19 and 24 overseas offices, respectively, dedicated to investment promotion while the rest have to contend with fewer resources.

Then, there is the issue of cross-border trade barriers, many of which have been detailed in the earlier installments of this series. For trade in goods, this column earlier discussed the need to ease the qualification processes for preferential tariffs. National Single Windows, as well as harmonized product standards, will facilitate the flow of goods. For services, we mentioned in Part 3 the need to put in place implementation procedures for Mutual Recognition Arrangements (MRAs) that will allow professionals to access the regional market. Links in transport services as well as uniform service standards would also be a boon.

For investments, granting businesses a full understanding of regulations will go a long way in putting the ASEAN on the shortlist of investment locations. This can be later followed by more extensive work on harmonizing and streamlining entry and incentive policies.

More importantly, investment promotion bodies should take this opportunity to exercise increased cooperation. They can identify potential areas for collaboration, such that investors can be made to appreciate the complementation offered by each member country’s economic niche. As the E&Y report puts it, this way, investors get a “more complete view of ASEAN and what it has to offer.”

Indeed, differences among the ASEAN members may make integration difficult at the get-go, but each economy’s unique background and varied offering is also what makes meaningful trade and exchanges worthwhile. Realizing the envisioned ASEAN economic community will be far from easy, but done right, it could unlock a wealth of opportunities this emerging region truly deserves.

Cirilo P. Noel is the chairman and managing partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.