NEAT Working Groupon East Asian Investment Cooperation

ReportBeijing
August 15, 2006

Introduction
The NEAT Working Group Meeting on East Asian Investment Cooperation was heldin Weihai, Shandong Province of China on July 29, 2006. The participants included
scholars and experts from 11 of the ASEAN +3 countries (Brunei and Cambodia wereabsent). The discussions, candid and down to earth, focused on 3 major themes,
namely, Changes in the Investment Environment and Progress of Investment
Cooperation in East Asia, Systemic and Institutional Streamlining in East AsianInvestment Cooperation and Priority Areas of East Asian Investment Cooperation.
Identifying the consensus and disagreements of the Working Group, this reporthighlights action-oriented policy proposals on East Asian Investment Cooperation.

I. Consensus: Changes, Progress and Difficulties
1. There is an increasingly urgent need for East Asian investment cooperation.
A. East Asian investment cooperation has to be strengthened to sustain rapid
economic growth. Foreign investment is one of the major factors for economic
growth in most East Asian economies. Continuous and sufficient input of capital
has to be ensured to maintain steady economic growth.
B. Quickened urbanization leads to huge demand for investment in urban
infrastructure and agricultural industrialization. It is estimated that from 2006 to2010 US$1 trillion will be needed for infrastructure building in East Asia. This isparticularly meaningful to narrow the gap between developed and less developednations.
C. Regionalization of FDI has become increasingly conspicuous. EU, North America,
and East Asia have attracted around 80% of the global FDI. Moreover,intraregional mutual investment ratio has gone up. In 2004, the ratio was as highas 70% in EU and 51% in North America. East Asia is obviously lagging behind,with a rate of 25%. Besides, East Asia’s share of global FDI inflow is 13.1%,
lower than that of EU (48.9%) and North America (15.1%).
D. Attracting FDI, especially SMEs investment is vital for economic growth,
employment and balance of trade of developing countries, However many SMEs
will not invest overseas unless necessary conditions, including national treatment
and transparency of investment rules, are arranged. For this purpose, toincorporate common international investment rules in a coming East Asian Free
Trade Agreement is very important.

1E. East Asian investment cooperation will be helpful in fighting against global
economic risks, such as the oil price surge.
F. Foreign reserves and savings in the region shall be better utilized. Intraregional
investment in areas of potential development will promise safer and better returns.

2. The overall environment for East Asian investment cooperation has beenimproving.
A. The political will has been strengthened. ASEAN signed and implemented“Framework Agreement on the ASEAN Investment Area” to attract investment
and to promote free capital flow. China, Japan and ROK have carried out joint
researches on relevant issues and made important headway. On a bilateral basis,
investment protection has been strengthened along with investment promotion.
B. Progress has been made in other aspects of regional cooperation. The Kuala
Lumpur Declaration adopted at the last ASEAN Plus Three Summit reconfirmed
the long-term goal of an East Asian community. China’s continued economic
growth provides an opportunity for closer regional economic cooperation. The
size of the swap under Chiang Mai Initiative has expanded by 90% within one
year. The rapid development of Asian bond market has provided an effective
financing channel.

3. There are still difficulties in the area of investment cooperation.
A. Regional institutional and capacity building lags behind. Investment cooperation
calls for a trilateral cooperation with governments, business, and academic circles
as active participants. It also needs coordination of the activities of the many
existing institutions. The low level of institutionalization has been a setback forfurther investment cooperation.
B. The gap between the rich and the poor nations poses great difficulties for theregion. Giving greater consideration to the needs of the less developed countries
in investment cooperation is an issue that needs to be addressed.
C. There is a lack of effective measures in protecting the interests of the investor andthe recipient. On the part of the investor, small and medium enterprises are
particularly vulnerable, for they are at a disadvantageous position when it comesto raising money, developing technology, and gathering information and market
2competition. On the part of the recipient, less developed countries are mostvulnerable, for there are loopholes in their legal systems, their environment could
be damaged, and their workers could be maltreated.
D. People’s awareness of the importance of investment cooperation shall be raised
through education. Unfortunately, most countries have very few institutions andprograms to accomplish this.

II. Disagreements
1. Role of Governments/Markets
Some argue that governments should play a more important role to promote
investment cooperation and others argue that the role of the market is the mostimportant.
2. ModelMany believe that a way of investment cooperation with characteristics of East Asia
should be explored, while some colleague argues that more international rules shallbe applied.
3. Institutional Framework
Some believe that it is most practical to use the existing institutions to strengthen
East Asian investment cooperation, while others think that existing institutions,such as APEC, are ineffective.
4. China’s Policy Adjustments
There is some worry that China’s domestic investment policy adjustments may
reduce incentives for investment, while others argue that China’s policy
adjustments mean to further economic development and cooperation.

III. Policy Recommendations 1
1. Establish an institutional framework for investment cooperation in East Asia
A. Set up a joint research by governments, business communities and academic
circles on investment cooperation in East Asia under the framework of East AsianFree Trade Area that is to be established, with NEAT as the coordinator.
B. Set up a single and integrated East Asian investment promotion center, and an1

These policy recommendations include both consensus and valuable ideas worth being listed here.
3integrated service network for East Asian investment cooperation within the 10plus 3 framework. The function is to coordinate the work of many existing similar
institutions.
C. Set up a dispute management center to deal with frictions and disputes during theinvestment cooperation process.

2. Create more financing channels for investment cooperation
A. Expand the scale of Asian Bond Fund, issue the bond on a more frequent basis andstrengthen its guarantor function; enhance the capacity-building of the Asian Bond
Market, including the infrastructure, an advanced transaction platform andclearing system.
B. Set up a uniform clearing system, regulatory framework, and market standards topromote the integration of bond markets within East Asia and to strengthen
cooperation in taxation.
C. Set up an East Asian investment cooperation fund. Money could come fromgovernments of East Asian countries and the fund should be operated by a single
body to provide financing guarantee for investment of small and medium
enterprises and agricultural investment cooperation.
D. Set up an East Asian investment bank, which should function as a policy bank toserve the need of investment cooperation.

3. Concentrate on priority areas for investment cooperation in East Asia

A. Promote investment cooperation in energy security and environmental protection.
It is recommended that an investment cooperation mechanism be establishedunder the 10+3 framework, including a 24-hour disaster monitor system, an East
Asia Fund for disaster prevention and relief, and control projects against
desertification in East Asia.
B. Promote investment cooperation in infrastructure development. Priority should begiven to cooperation in building pan-Asia railway, highway and waterway, with aview to building a pan-Asia transportation network.
C. Promote investment cooperation in the development of small and mediumenterprises. It is advisable to set up investment promotion agencies and an4

investment fund for these enterprises.
D. Promote investment cooperation in agricultural development. In most economies
in East Asia, agricultural production is family-based, with a low level ofindustrialization, technology, productivity, disaster-prevention capability andcompetitiveness. Agriculture is also a large proportion of the GDP of the lessdeveloped nations, and is usually the largest employer sector-wise. It is thusnecessary to increase mutual investment so as to accelerate agriculturaldevelopment in East Asia.

Conclusion
Investment involves the flow of capital, technology and personnel. It can deepen theinterdependence of the countries concerned and achieve a win-win result. The
working group agrees that investment cooperation is not only a promoter of economic
development, but more importantly a pillar of the East Asian community.

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