 Chapteer 4
The Cuurrent Sttate and O
Outlook of ASEA
AN’s Intraa-Regionnal
Direct Investm
ment
EAN beccomes itss own larrgest inveestor― ASE
Koji Kobbayashi
Senior Ecconomist, ResearchR
Deepartment-A
Asia, Mizuho
o Research Institute Lttd.
【Key Points】
P Foreeign direct investmenti((FDI) between the ASE
EAN Membber States haas
beenn steadily ex
xpanding ass ASEAN works
w
toward the establlishment of the
AEC
C. As a resu
ult, ASEAN has become its own laargest investtor of inwarrd
FDI, which indicates that iintegration amongathe ASEAN
A
Meember Statees is
deeppening in terms of FDI as well.
 Mosst of the intrra-regional F
FDI is among four majjor countriees: Singaporre,
Malaysia, Thailland, and Inndonesia. Th
hey mutuallly invest andd receive
intraa-regional FDI.
F Aside ffrom these countries,c
FDI from Thhailand to
Myaanmar, (inteended to acqquire resourrces and the market) haas been notaable
overr the last few
w years.
 Withh ASEAN’ss integrationn, intra-regio
onal FDI th
hat aims to ccapture themarkkets of partn
ner countriees is expected to increaase. FDI thaat aims todeveelop verticaal process sppecializationn is currentlly limited; hhowever, it isanticcipated to graduallyginccrease.
Inwarrd FDI to ASEAN
A(Byy extra-regiional and intra-regionnal investorrs)
120,000 (In million US
SD)
Extra‐regional FDI
100,000
80,000(%) 4540Intraa‐regional FDI

35

Perc
centage of intraa‐regional FDI (RRightaxis))

30
25

60,00020

40,00015
10

20,000

n.a.
0

5

0
2002 2003 2004
2
2005 2006 2007 2008 20
009 2010 2011 2012(Year)

Note: Sinngapore’s 201
12 data is not aavailable. Perrcentage of inttra-regional FD
DI = Intra-reg
gionalFDII/Inward FDI.
Source: UNCTAD
U“Biilateral FDI Sttatistics.”

Japan Centerr for Economic Research, 20014 “Asia Ressearch” Reporrt 47

1. Foreword
ASEAN is planning to establish the ASEAN Economic Community (AEC) by
the end of 2015. The AEC aims to eliminate tariffs and non-tariff barriers between theMember States, and liberalize trade in services and the flow of skilled labor. Since themarkets of the ASEAN countries would be integrated, not only is mutual intra-regional
trade among the Member States expected to increase, but intra-regional foreign direct
investment (FDI) is also expected to intensify.
The aim of chapter 3 is to analyze the current situation of ASEAN’s
intra-regional FDI, which is currently subject to high expectation. Using various
statistics, the actual conditions of the intra-regional FDI will be closely examined.
Statistics on ASEAN’s FDI are largely restricted; therefore, information fromindividual corporations will be used to supplement missing data.
2. Inward FDI from the world to ASEAN
Inward FDI from the world to ASEAN was $125.4 billion (USD) in 2013,
which was +6.7% year-on-year (figure 1). Country-by-country, FDI inflow from theworld to Singapore accounts for half of ASEAN’s share at $63.8 billion (+4.3%
year-on-year). Indonesia follows at $18.4 billion (-3.6% year-on-year), then Thailand
at $12.9 billion (+20.9% year-on-year), and Malaysia at $12.3 billion (+22.2%
year-on-year). After Ben Bernanke’s remarks caused so-called “ taper tantrum” in May
2013, Indonesia’s rupiah currency fell compared to the other ASEAN currencies;
however, FDI inflow to Indonesia fell only slightly and Indonesia was able to maintainits place as ASEAN’s second biggest FDI receiver after Singapore. In 2013, large
protests to remove then-Prime Minister

Yingluck Shinawatra erupted in Bangkok, thecapital of Thailand. Even through the political crisis, though, Thailand’s FDI continued
to rapidly increase. This indicates that investors have not significantly changed theirviews on Indonesia or Thailand’s long-term growth.When looking at themedium-to-long term picture, the trend is also encouraging. Inward FDI to ASEAN
first peaked at $86.7 billion in 2007, but following the Global Financial Crisis of 2008,
it dropped by half to $46.7 billion in 2009. Inward FDI would make a v-shaped
recovery, though, and between 2010 and 2013 it rose again and reached a new peak in
2013. This was a huge contrast to the FDI inflow to developed countries, which

48 Japan Center for Economic Research “Asia Research” Reportcontinued to experience a slump during this period. Moreover, even compared to otheremerging countries and regions, FDI inflow to ASEAN recovered the fastest.

Figure 1: FDI between ASEAN and the World(In million USD)
140,000
120,000

World→ASEAN(%)
ASEAN→World
World→ASEAN (Percentage of the total global FDI) Right axis
ASEAN→World (Percentage of total global FDI) Right axis

1098100,000

7
6

80,000560,0004
340,0002
20,000100(Year)

Source: UNCTAD．

The percentage of ASEAN’s inward FDI to total global FDI has also reached
new heights. In 1995 and 1996, about 8% of the global FDI went to ASEAN countries,
but this fell after the Asian Financial Crisis of 1997. In 2000, it was just 1.6%.
Although the amount of FDI inflow to ASEAN Member States recovered until the
Global Financial Crisis of 2008, since the amount of global FDI also increased, thepercentage of ASEAN’s FDI to the global FDI was stagnant. However, the amount of
FDI into the ASEAN Member States after the Global Financial Crisis was sooutstanding that in 2012 and 2013, ASEAN’s share of the global FDI had increased up
to about 8.5%.
Similar to inward FDI from the world to the ASEAN Member States, outward
FDI from ASEAN Member States to the world has also held steady. ASEAN’s outward
FDI was $56.4 billion (+4.7% year-on-year) in 2013, which is close to the peak of$61.4 billion in 2007. In 2012 and 2013, ASEAN’s outward investment peaked at 4.0%

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 49

of the world’s FDI. Country-by-country, Singapore’s outward FDI was $27 billion in2013, which was a 100.3% increase from the previous year.
These factors prove that ASEAN is not only a major receiver of FDI, but has
also been increasing its presence as an investor.
3. ASEAN’s intra-regional FDI
As mentioned in section 2.2, ASEAN is not only a major receiver of theworld’s FDI, but has also been rising as an investor. Here, the trend of ASEAN’s
inward FDI will be examined by looking at both FDI within the region, that is intra
FDI,

and from outside the region. Similarly, the trend of ASEAN’s outward FDI will

be examined by looking at FDI to ASEAN Member States as intra one and to
non-ASEAN Member States.
The “ASEAN Investment Report” and the “ASEAN FDI Statistics,” bothpublished by ASEAN, and the “UN Bilateral Statistics” published by UNCTAD are themain sources for data on ASEAN’s intra-regional FDI. Here, the UNCTAD data will be
primarily used since it has the longest period of data collection.1 If necessary, the datafrom ASEAN will be used to supplement.
3.1 Overview of ASEAN’s intra-regional FDIFirst, inward FDI to ASEAN will be examined, by investor, from within theregion and outside the region. The amount of intra-regional FDI has steadily grownsince the early 2000s (figure 2). As the ASEAN economies have integrated, more
Member countries have become interested in investing in each other. Meanwhile, FDI
amount from outside the region has also increased, reflecting ASEAN’s rising presencein the global economy.
The percentage of intra-regional FDI to the total inward FDI to ASEAN was
22.2% in 2005. Although it fell to 8.3% in 2007, in the past few years, it has beenaround 15% and the most recent data shows that in 2011, it was 14.6%.2

12Unless otherwise noted, the UNCTAD data will be used for analysis.
The “ASEAN Investment Report 2013-2014” includes four years’ worth of data on intra-regional FDI
from 2010 to 2013. According to this data, it was 15.1% in 2010, 15.6% in 2011, 18.1% in 2012, and17.4% in 2013. The data on 2011 is almost the same as the one from UNCTAD and from 2012 to 2013,
the ASEAN’s data shows an upward trend.

50 Japan Center for Economic Research “Asia Research” ReportMeanwhile, the largest investors of extra-regional FDI are Japan and the EU.
Japan and the EU’s percentages of inward FDI to the ASEAN Member States change
from year to year; however, on the whole, both of these sources contribute almost thesame as ASEAN to intra-regional FDI in recent years.
ASEAN, which had been growing using extra-regional FDI as a leverage, isturning into its own largest investor, on par with Japan and Europe. Intra-regional FDI
is becoming a valuable source of capital for ASEAN.
Figure 2: Inward FDI to ASEAN (By extra-regional and intra-regional investors)
120,000 (In million USD)
Extra‐regional FDI
100,000
80,000(%) 4540

Intra‐regional FDI

35

Percentage of intra‐regional FDI (Right
axis)

30
25

60,00020
15

40,00020,000010n.a. 502002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(Year)

Note: Singapore’s 2012 data is not available. Percentage of intra-regional FDI = Intra-regional
FDI/Inward FDI.
Source: UNCTAD “Bilateral FDI Statistics.”

Next, the outward FDI from ASEAN will be examined by intra-regional andextra-regional destination. In recent years, the percentage of intra-regional FDI in the
ASEAN’s total outward FDI has remained in the range of 25% to 40% range (figure 3).
Unfortunately, data is only available after 2008; therefore, it is difficult to determine
whether the percentage is increasing or decreasing. Nonetheless, compared to inward
FDI, outward FDI has a higher intra-regional ratio. ASEAN is putting value on itself as
an investor and is actively investing capital in other member states.3

3

See chapter 4 for more details regarding ASEAN companies developing their businesses in the ASEAN
region.

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 51

Figure 3: Outward FDI from ASEAN(By extra-regional and intra-regional
120,000 (In million USD)
100,000
80,00040

Intra‐regional FDI

35

Percentage of Intra‐regional FDI(Right axis)

30
25
20

40,0000(%) 45Extra‐regional FDI

60,00020,000destinations)

15

n.a.

10
5

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(Year)

Note: Malaysia’s 2002-2007 data is not available. Percentage of intra-regional FDI = Intra-regional
FDI/Outward FDI.
Source: UNCTAD “Bilateral FDI Statistics.”

What can be learned when comparing ASEAN’s intra-regional FDI to that of
the EU? The EU traces its origin to the European Economic Community (EEC) formedby six countries in 1958. The EU is an economic union that had more than half acentury of history until it expanded to include 28 member states. Based on the 15
countries that were members of the EU in 1995,4 the percentage of intra-regional FDI
as compared to total inward FDI reached 80% in 2000. Meanwhile, the percentage ofintra-regional FDI as compared to outward FDI was also at a high level of around 60%
during the same period. Member states of the EU actively invested in each other,reflecting the deepening integration of the EU market.
However, the situation in the EU changed drastically with the blows of the
Global Financial Crisis and the European Debt Crisis of late 2009.5 The intra-regional
percentage of inward FDI in 2012 was 23.0%, and intra-regional percentage ofoutward FDI fell to 29.3%. These levels are not much different from ASEAN’s

4

Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, the United Kingdom, Austria, Finland, and Sweden.
5
There were credit concerns over the ability of governments in the so-called PIIGS countries – Portugal,
Italy, Ireland, Greece, and Spain – to repay or refinance their national debt.

52 Japan Center for Economic Research “Asia Research” Reportnumbers. In the EU, intra-regional FDI has decreased following the Global Financial
Crisis, which is a contrast to ASEAN’s upward trend.
3.2 Intra-regional FDI destinations by industry
Next, ASEAN’s intra-regional FDI destinations by industry will be examined.
Since industrial trends cannot be determined from UNCTAD’s data, the data from the“Investment Report 2012-2013” that was published by ASEAN in 2013 will be used.
According to the report, the latest data in 2011 showed that FDI in the
manufacturing sector was the largest at $5.9 billion, which accounted for 20% of thetotal intra-regional FDI. Following that the real estate sector at $3.9 billion, thefinancial sector at $2.7 billion, and the trading sector at $2.5 billion. Compared to these,
investments in industries such as agriculture, mining, and construction have beensluggish6 (figure 4).
Figure 4: Intra-Regional FDI Destinations by Industry (2002-2011)
6,000 (In million USD)
5,000
4,000
3,000
2,000
1,000
0
Service

Real estate

Finance

TradeConstruction

Manufacturing

MiningAgriculture▲ 1,000

Note: Graph of intra-regional FDI by industry for each year from 2002 to 2011.
Source: ASEAN (2013).
6“The ASEAN Investment Report 2013-2014” published by ASEAN in 2014 includes two years of dataon intra-regional FDI by industry (2013 and 2014). It is necessary to take note that classification ofindustries differs from the report published in 2013 and there may be no continuity. However, even in2013, the result was similar in that industries classified as manufacturing, financial, real estate, andtrading were the main destinations for FDI within the region. When industries is devided into just only
sectors, manufacturing or services, the latter attracted a much larger FDI. See chapter 4 on details
regarding how the ASEAN companies are actively developing their businesses in the ASEAN region
with a focus on the service sector.

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 53

The time-series trend from 2002 to 2011 by industry shows that FDI in the
manufacturing sector has been relatively large since the beginning and it rapidly
increased in recent years. Similarly, FDI in the real estate sector and trading sector also
rapidly increased. On the other hand, FDI in the financial sector seems as if it hasreached a plateau at a high level.
The reason why FDI in the manufacturing sector increased is that the
expansion of ASEAN’s consumer market triggered the increase in market-seeking FDI,
in which both production and sales are done in partner countries. Since tariff rates havealready been lowered since AFTA (ASEAN Free Trade Area) took effect,
efficiency-seeking FDI that aims to avoid tariffs could not have been the motive. The
trend on strategicfragmentation-seeking FDI, which establishes division of
manufacturing process within the ASEAN network, is hard to examine with only databy industry available.
The increase in FDI in services sectors such as real estate, finance, and trading
are also a result of market-seeking FDI in partner countries. Particularly in recent years,
FDI in real estate and trading sectors have risen due to urbanization and expansion of
the consumer markets in ASEAN.
By contrast, resource-seeking FDI in mining and agricultural sectors did not
grow. This indicates that the dynamism of economic development has shifted to
manufacturing and service sectors in the ASEAN region.
3.3 Investors and receivers of the intra-regional FDI
With regard to ASEAN’s increasing intra-regional FDI, ASEAN Member
States can be divided into very active and somewhat active investors. Singapore has
been the most prominent investor: 60% of the total intra-regional FDI was fromSingapore in 2012. Following Singapore are Malaysia, Thailand, and Indonesia. The
other member states invest almost nothing in other ASEAN nations7 (figure 5).

7

However, investment to ASEAN from companies in Philippines and Vietnam has recently started toincrease (see chapter 4).

54 Japan Center for Economic Research “Asia Research” ReportFigure 5: ASEAN’s Intra-Regional FDI (By investing countries, 2008-2012)
14,000 (In million USD)
12,00010,000
8,000
6,000
4,000
2,000
VietnamThailandSingapore

The Philippines

Myanmar

Malaysia

Laos

Indonesia

Brunei▲ 2,000

Cambodia0

Source: UNCTAD “Bilateral FDI Statistics.”

Which countries are the destinations for major investors of intra-regional FDI?
Two characteristics can be found when studying the investment amount by destinationfrom the four main investors (Singapore, Malaysia, Thailand, and Indonesia).
The first characteristic is that the destinations of intra-regional FDI from themain four countries are the four countries themselves. For example, Singapore’s
biggest investment destination in the ASEAN region is Indonesia, and Indonesia’s
biggest (and almost only) investment destination is Singapore. This type of reciprocal
relationship among these four countries forms the core of intra-regional investment in
the ASEAN region.
The second characteristic is that aside from the four main countries, althoughsmall in scale, Thailand’s FDI to Myanmar is becoming prominent. Singapore andMalaysia invest in Vietnam as well.
The breakdown of intra-regional FDI by country shows that there are twopatterns: reciprocal investment by the four main countries and peripheral investmentby the four main countries to the rest of the ASEAN Member States.
4. The background of intra-regional FDI (Singapore and Thailand’s cases)

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 55

This section will review the background of intra-regional FDI by further
analyzing the data. From the two patterns that emerged from ASEAN’s intra-regional
FDI, Singapore, the largest investor will be examined as a case for reciprocal
intra-regional FDI by the main four countries. Similarly, investment from Thailand to
Myanmar will be examined as a case of peripheral intra-regional FDI.8
4.1 Singapore’s case
The government of Singapore publishes data on FDI(stock base) byindustry Two types of data by industry are available: the industry that invests fromSingapore as well as the industry that is invested in a partner country. The reason that
Singapore is examined herer as a case for reciprocal intra-regional FDI by the fourmain countries is not only because Singapore is the largest investor, but also because it
has relatively abundant data on FDI and is easy to analyze.
First, Singapore’s intra-regional FDI stock will be examined by the domestic
investor’s sector. Singapore’s financial sector was the largest sector to invest inIndonesia (accounting for 84.4% of Singapore’s total investment in Indonesia), thelargest investment destination at the end of 2012. Similarly, Singapore’s financial
sector accounted for close to 70% of Singapore’s investment in Malaysia (65.2%) and
Thailand (69.6%).
Next, data by sector in the investment destination will be studied. In Indonesia,
29.9% of Singapore’s investment went to the financial sector, with 28.7% going to the
manufacturing sector. Singapore’s main investing sector, the financial sector, does notnecessarily invest in Indonesia’s corresponding financial sector, half of Singapore’s
financial sector’s investment is in manufacturing. Similar trends can be seen in
Malaysia and Thailand. The percentage of Singapore’s total investments in thefinancial sectors of Malaysia and Thailand is less than half, 49.2% and 45.8%,
respectively. By contrast, the percentage of Singapore’s total investments in the
manufacturing sectors of Malaysia and Thailand is as high as at 32.4% and 30.7%,
respectively (table 6).

8

Chapter 4 explains in detail about Malaysia’s investment to ASEAN.

56 Japan Center for Economic Research “Asia Research” ReportFigure 6: Intra-regional FDI stock by Singapore (Percentage by sector as of 2012)
Singapore's Investors by Sector
To Indonesia

Singapore's Investment Destinations by Sector

To Malaysia To Thailand To Indonesia To Malaysia

Manufacturing

2.3

8.8

4.0

Construction

0.2

0.3

0.0

Wholesale/retail

8.3

13.1

22.5

1.1

0.1

0.7

1.6

2.9

0.6

1.3

1.3

1.9

1.0

2.0

Hotels/restaurants
Transport

28.7

To Thailand

4.0

32.4

30.7

0.3

0.4

8.6

11.4

Information and communications

0.1

0.4

0.3

0.5

3.7

Finance

84.4

65.2

69.6

29.9

49.2

45.8
1.3

Real estate

6.3

0.2

6.1

2.5

Professional services

2.2

3.3

2.0

0.9

1.4

0.3

Others

0.1

0.3

0.0

18.8

2.5

1.6

Source: Statistics Singapore (2014) “Singapore’s Investment Abroad, 2012.”

The GIC (Government of Singapore Investment Corporation) and Temasek(Temasek Holdings) are two sovereign wealth funds of Singapore that can be classified
as FDI investors in the financial sector. GIC is an organization that manages foreign
reserves held by the Monetary Authority of Singapore. GIC does not disclose theamount of funds it manages, but according to GIC’s homepage, it oversees more than$100 billion (11.7 trillion yen) in assets and some say that the figure is more than that.
The annual report discloses information on asset allocation and in 2014, 57% of themoney invested was in equities. Within those equity investments, though, thebreakdown between FDI and portfolio investments is unknown. However, it is fair tosay that GIC is involved in FDI.9 Meanwhile, Temasek is an agency owned bySingapore’s Ministry of Finance. Originally, its function was to become a stable
stockholder for government-affiliated companies; however, in recent years, Temasek
has also been investing in foreign companies and, similar to GIC, it is contributing toSingapore’s FDI.
In addition to FDI by two major government funds, global money is collected
at investment companies founded in Singapore and then used in FDI in manufacturingsectors throughout the ASEAN region. In these cases, for statistical reasons, it wasrecorded that Singapore’s financial sector was the one that invested; however, in
reality, it is FDI by a third country via Singapore. Singapore is serving as a financial
hub that collects and reinvests global money due to the following factors: (1) the9

Kumagai (2014). Pananond (2008) also state that government agencies play a major role as investors of
FDI within the ASEAN region.

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 57

corporate tax rate is 17%, which is low compared to the rest of the world, (2) there isno capital gains tax, (3) dividends can be tax exempt, and (4) Singapore holds tax
treaties with countries around the world (including the ASEAN Member States) and isable to mitigate the effects of double taxation.10 These are the reasons why FDI by
Singapore is significant within the ASEAN region.
4.2 Thailand’s case
The characteristic of intra-regional FDI by Thailand is that it invests not only
in main ASEAN countries such as Singapore, Malaysia, and Indonesia, but also in
Myanmar.
Although detailed data on FDI from Thailand to Myanmar by sector is notavailable, it has been pointed out that a large share of the investments areresource-seeking FDIs for oil and gas. For example, Thailand’s energy company,
Public Company Limited (PTT), has been operating in Myanmar for over 15 years andis currently working on three projects that focus on the production and exploration ofnatural gas. Myanmar allows the export of 30% of the natural gas produced in the
projects to Thailand.11
Even though it cannot be confirmed by statistics, in recent years,
non-resource-seeking FDI from Thailand to Myanmar has also been taking place. For
instance, Thailand’s large company, The Siam Cement Group, which has a long
history of exporting to Myanmar for over 20 years, invested $400 million in Myanmar
in July 2014 and announced plans to build its first cement plant in Myanmar.
According to The Siam Cement Group, Myanmar’s market is expected to grow;therefore, the plant will be built to support exports.
With regard to consumer-related investments, Thailand’s retailers areplanning to start hotel businesses and build shopping malls in Myanmar.
In October 2014, Bangkok Bank – along with Japan’s three largest banks –was among the eight banks that won licenses for operations in Myanmar.
Furthermore, in June 2014, Thailand’s conglomerate, Saha Group, formed ajoint venture with a company in Myanmar to expand their logistics business. Earlier,
Saha Group had planned

10
11

2 billion baht investment (approximately 7.2 billion yen

Hanamizu and Fukuda (2014).
Kanyarat (2013).

58 Japan Center for Economic Research “Asia Research” Reportusing the exchange rate at the time of this paper) to set up an industrial estate in
Myanmar. The joint venture is a strategic move for the estate.
To sum, Thailand’s FDI has not been limited to Resource-seeking one
anymore.

Market-seeking FDI – such as investment in construction material, andconsumer and financial services – are becoming more prominent as Myanmar’s
domestic demand grows. The development of industrial estates can also be seen as amarket-seeking FDI as infrastructure demand also grows in Myanmar.

5. Outlook
5.1 Impact of ASEAN’s integration
As stated at the beginning of this chapter, intra-regional FDI is expected tointensify with the establishment of the AEC by the end of 2015. Empirical researchsuch as Cheong and Plummer (2009), also shows that the process of the ASEAN
integration will have a positive impact on intra-regional FDI.
The ASEAN Comprehensive Investment Agreement (ACIA) that entered into
effect in March 2012 is a policy framework regarding investment in ASEAN’s
integration process. The aim of the ACIA is to expand investment within the region
and promote the establishment of a complementary division of labor system in eachcountry. The ACIA stipulates matters regarding the liberalization, promotion,
facilitation, and protection of investment. The target sectors for the liberalization of
investment are manufacturing, agriculture, fishery, forestry, mining, quarrying, andservices incidental to these sectors. The ACIA adopted a negative list approach inwhich Member States self-select sectors they wish to keep closed. In other words, itmeans that sectors not listed on the reservation list are liberalized.
The ACIA states that the negative list, which includes sectors that are closed
to liberalization, will be progressively reduced. At the 46th ASEAN Economic
Ministers Meeting in August 2014, the ministers signed a protocol to amend the ACIA.
This reflected that preparations are underway to reduce the number of target sectors on
the negative list and that ASEAN Member States are working to further liberalize
intra-regional investment.
The ACIA mainly covers investment in manufacturing, while the ASEAN
Framework Agreement on Services (AFAS) covers the liberalization of investment in

Chapter 4 | The Current State and Outlook of ASEAN’s Intra-regional Direct Investment 59

the services sector. The AFAS aims to progressively increase the ASEAN equity
participation up to 70% for the services sector (excluding finance) by the end of 2015
when the AEC is formed. Within the ASEAN region, there are many countries that
impose tight restrictions on foreign equity for the services sector. Therefore, if thegoals of the AFAS are achieved, solely the intra-regional investors can invest up to
70% and they will be able to enjoy a preferential treatment compared to investors fromoutside the ASEAN region.
After a year’s delay, ministers almost unanimously agreed on the interim
goals of the 9th Package, which would ease restrictions on intra-regional FDI for
service sectors in the AFAS. The package was supposed to be signed in 2013, but was
not signed until the AEM held in August 2014. The 10th Package – which includes the
final goal of raising foreign (ASEAN) equity participation up to 70% – has yet to benegotiated. After ministers agree on the 10th Package, intra-regional FDI in the services
sector is anticipated to intensify.
5.2 Types of intra-regional FDI that is anticipated to growWithin the intra-regional FDI that will receive a boost from ASEAN’s
integration, the type of FDI that is anticipated to grow the most will be themarket-seeking FDI that aims to capture demands in the partner country. In this case,since the size of the market becomes an important factor, four core countries, namely,
Singapore, Malaysia, Thailand, and Indonesia, are expected to be the main receiving
countries of FDI. Meanwhile, main investors will be government agencies such as
sovereign wealth funds in Singapore, conglomerates in Singapore, Thailand, andMalaysia, and foreign-affiliated companies operating businesses in the ASEAN region.
Although the strategic fragmentation-seeking FDI that aims to implement
vertical international specialization is currently limited, it is expected to gradually
increase. Countries anticipated to become receiving ends of strategic
fragmentation-seeking FDI are Cambodia, Laos, and Myanmar (CLM countries) thathave relatively low wages. For instance, Myanmar is forming FDI-related legislation
and rapidly preparing to receive FDI as it is scheduled to start operating an industrial
estate in the Thilawa special economic zone (SEZ) in 2015. The main investors of thestrategic fragmentation-seeking FDI is anticipated to be Thailand, where labor costs
are rising and there are concerns over labor shortages due to a low birth rate and an
aging society.
60 Japan Center for Economic Research “Asia Research” ReportReferences
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