A STUDY ON FOREIGN DIRECT INVESTMENT IN ASEAN COUNTRIES

Abstract: FDI inflows in ASEAN countries have been increasing at a significant rate. The
member countries have introduced several measures to improve the investment environments by
opening up their industries, making investment procedures simpler and giving tax and other
financial incentives to promote FDI in new industries. The ten member ASEAN can be divided
in various ways: geographically, it is split into continental states like Thailand, Cambodia and
Myanmar and the archipelagos of Indonesia and the Philippines; culturally, it has the largest
Muslim nation in the world (Indonesia), Buddhism bastions like Cambodia and Thailand, Roman
Catholic majority of the Philippines; and economically, the GDP of Indonesia exceeds that of
Thailand and Malaysia combined and weighs a hundred times larger than Laos. However, it is
the regions growing integration that is capturing the attention of foreign investors.
As the region is fast approaching its target of economic integration by 2015, it is all set to be the
magnet for FDI over the coming years.
This study explores the research on role of FDI in ASEAN countries, outlines the reasons that
have made ASEAN an attractive destination for foreign direct investments and delves into
Indias trade relations with ASEAN in particular.

1. Introduction
Foreign Direct Investment (FDI) is an investment in a business by an investor from
another country for which the foreign investor has control over the company purchased.
The Organization of Economic Cooperation and Development (OECD) defines control as
owning 10% or more of the business. One of the primary advantage of FDI is that it
allows money to go freely to whatever business has the best prospects for growth
anywhere in the world.
The Association of Southeast Asian Nations(ASEAN) was formed on August 8, 1967 by
five member countries: Singapore, Indonesia, Malaysia, Thailand and Philippines. Today,
the membership has grown to ten with the joining of Brunei, Cambodia, Laos, Burma and
Vietnam. The force behind ASEAN was politics at its inception i.e. prevention of
external interference in the internal affairs of member countries. With a population of
over 500 million and combined GDP of more than $1 trillion, what happens in ASEAN
countries is not only important to Asia and Europe but to the entire globe community.
The ASEAN countries were among the first to pursue a strategy of export-led
development based partly on foreign direct investment (FDI). They welcomed firms from
Japan and the newly industrializing economies like Chinese Taipei, as these firms faced
currency appreciation and rising wages at home. They also attracted investment from rest
of the OECD, particularly US and Europe.The focus drifted away from ASEAN
following the economic collapse of 1997-98. The East Asia financial crisis of 1997 was
characterized by serious region-wide depression and recession. ASEAN countries were
also affected in terms of currencies, asset prices, stock market indicators, output and
inflows of capital. The recovery of FDI inflow was remarkable swift after the crisis in
1999.However it gradually decreased due to the signs of economic slowdown in US and
Europe and recession in Japan. FDI kept fluctuating till 2003 and picked up afterwards.

2. Literature Review
Although extensive literature is available, we are giving some of the key findings of the
researchers.
Pradhan (2009) works out the relationship between FDI and economic growth in Asean. His
results reflect that there is cointegration between foreign direct investment and economic growth
in Singapore and Thailand at the individual level and the panel of five ASEAN countries. That
means the results confirmed that foreign direct investment and economic growth share a long run
equilibrium relationship in the ASEAN countries.
Thorbecke et al (2013) show how China has increased its outward FDI. These investments are
often in lower end products like garments, toys and footwear and in lesser developed members of
ASEAN. Japanese FDI has also had a positive impact on the economies of East Asia. Initially,
the major destinations for Japanese FDI were NIEs, especially South Korea and Taiwan.
However, as wages and exchange rates in the NIEs increased, Japanese MNCs transferred
their production bases to ASEAN countries.
Nwosu et al (2013) investigates the role of regional integration in attracting foreign direct
investment.They employed panel data model in the analyses and the findings show that FDI from
rest of the world are determined by macroeconomic fundamentals especially market size (GDP)
and exchange rate, while inter-ASEAN FDI is not significantly related to macroeconomic
fundamentals but depends on previous investments in the region. This implies most investments
in ASEAN from ASEAN are motivated by economic integration.
S. Thomsen, M. Otsuka, B. Lee(2011) further emphasize on regional integration and bilateral
investment agreements helping to shape the policy environment. ASEAN countries have stepped
up international co-operation, both amongst themselves and with other countries and regions.
This latter group includes free trade agreements (FTAs) and economic partnership agreements
signed between ASEAN and other countries, as well as bilateral trade agreements and investment
treaties signed by individual ASEAN member states
Choong and Liew (2008) argue that the level of FDI, but also its volatility can have significant
effect on the economic growth of a country. Using autoregressive distributed lag (ARDL) model,
the study finds that FDI volatility and economic growth are cointegrated implying the existence
of long run relationship between these two variables for the majority of the ASEAN-5 countries
(except Singapore). Furthermore, higher (lower) FDI volatility is associated with lower
(higher) economic growth.The intuition of this study is that most ASEAN countries generally
have less effective domestic stabilizers, which can efficiently absorb part of the FDI volatility.
As a result, macroeconomic uncertainty is greater and FDI volatility is
counter-cyclical with long-run growth. Therefore, FDI volatility tends to
exacerbate macroeconomic uncertainty, having larger adverse effects on growth

in these countries. It is therefore important for policy-makers of these countries to find effective
ways to alleviate volatility in FDI

3. Objectives, Data and Methodology

The Association of Southeast Asian Nations is an economic and political organization of ten
countries located in Southeast Asia. These are Malaysia, Indonesia, Philippines, Thailand,
Singapore, Vietnam, Cambodia, Laos, Brunei, and Myanmar.
This study presents the brief profile of ASEAN countries. It examines the emergence of ASEAN
as a trade bloc and also analyses trade and recent developments in the ASEAN region. It further
explores Indias trade relations with ASEAN and major countries involved in it.
The time period under study spans from 2000 to 2013. The data on basic development indicators
of ASEAN countries is collected from ASEAN.org. Data on Indias relations with ASEAN are
collected from the database of Ministry of External Affairs, India.

4.ASEAN economies: An Overview

Fig.1:ASEAN economies

The ten member ASEAN can be divided in various ways: geographically, it is split into
continental states like Thailand, Cambodia and Myanmar and the archipelagos of Indonesia and
the Philippines; culturally, it has the largest Muslim nation in the world (Indonesia), Buddhism
bastions like Cambodia and Thailand, Roman Catholic majority of the Philippines; and

economically, the GDP of Indonesia exceeds that of Thailand and Malaysia combined and
weighs a hundred times larger than Laos.
Figure 1 presents the overview of the ASEAN economies. Indonesia is the largest of the ASEAN
nations. Indonesia has the highest GDP followed by Thailand and Malaysia. The inflation rate
too is highest in Indonesia while its the lowest in Brunei. Home to more than 600 million people, it
has a larger population than the European Union or North America. ASEAN has the third-largest labor
force in the world, behind China and India; its youthful population is producing a demographic dividend.
Perhaps most important, almost 60 percent of total growth since 1990 has come from productivity gains,
as sectors such as manufacturing, retail, telecommunications, and transportation grow more efficient.
ASEAN is a diverse group. Indonesia represents almost 40 percent of the regions economic output and is
a member of the G20, while Myanmar, emerging from decades of isolation, is still a frontier market
working to build its institutions. GDP per capita in Singapore, for instance, is more than 30 times higher
than in Laos and more than 50 times higher than in Cambodia and Myanmar; in fact, it even surpasses
that of mature economies such as Canada and the United States. The standard deviation in average
incomes among ASEAN countries is more than seven times that of EU member states. That diversity
extends to culture, language, and religion. Indonesia, for example, is almost 90 percent Muslim, while the
Philippines is more than 80 percent Roman Catholic, and Thailand is more than 95 percent Buddhist.
Although ASEAN is becoming more integrated, investors should be aware of local preferences and
cultural sensitivities; they cannot rely on a one-size-fits-all strategy across such widely varying markets

Table: Key macroeconomic indicators

5. Trade Agreements in ASEAN

ASEAN is the third largest trade bloc in the world after European Union and NAFTA.
ASEAN has largely cancelled all import and export duty taxes on items traded between its
member countries with the exception of Laos, Cambodia, Myanmar and Vietnam, who continue
to impose nominal duties on certain items. However, these will also be completely lifted by
December 31st , 2015.This implies that the entire region will be duty free by this date.
ASEAN has entered into various free trade agreements with other Asian nations that are radically
altering the global sourcing and manufacturing landscape. The treaty with China has effectively
done away with reduced tariffs on around 8000 products or 90 percent of imported goods to zero
ASEANs free trade agreement with China allows MNCs and regional companies to place the
manufacturing capacity at cheaper locations. Vietnam, Indonesia and other ASEAN countries
benefit from China FTA by being able to offer lower wages and attracting foreign investment
both for the Chinese market and from globa destinations such as EU and United States.
ASEAN has a similar trade agreement with India which is elaborated in the next section.By
2016, import-export duties on over 4000 products will be abolished. This is supposed to have a
similar effect as of China FTA in that it opens up the Indian consumer market to ASEAN
manufactured goods. India has a sizeable middle class consumer market of around 250 million.
These two agreements will collectively make ASEAN the strategic hub for global sourcing and
manufacturing. In addition to these, ASEAN also has a combined FTA with New Zealand and
Australia. This is known as AANZFTA. It has eliminated tariffs on 67 percent of all traded
products between the regions and will expand to 96 percent by 2020. This one is the most
comprehensive agreement by ASEAN so far as it is the first time that ASEAN has entered into
FTA negotiations which cover all sectors, including foods, services, investment and intellectual
property rights.
ASEAN also has a series of Comprehensive Economic Partnerships with Japan and FTA with
South Korea.
For a foreign investor, the ability to take advantage of these trade agreements is simple. It just
has to establish a subsidiary in one of the ASEAN nations. In this regard, Singapore has emerged
as the regional hub to reach out across all ASEAN nations.

Analysis of FDI inflows statistics

ASEAN-5 countries are the biggest economies in Southeast Asia. They received $128.4 billion
in foreign investment in 2013 which was a 7 percent increase from $120 billion in 2012.
Meanwhile, foreign direct investment (FDI) into China fell to $117.6 billion, down 2.9 percent
from $121.1 billion in 2012.
In Malaysia, FDI strengthened by 19 percent, 17 percent in Indonesia and 5 percent in Singapore,
It fell 12 percent in Thailand as the country grappled with political instability. There was a
phenomenal 118 percent increase in FDI in Philippines in the first three quarters. But it took a hit
from Typhoon Haiyan towards the end of the year, though Philippines still managed to book a
robust 24 percent rise in FDI for the full 2013.
Singapore has been the greatest recipient of FDI in ASEAN. It is followed at a wide margin by
the remaining ASEAN-5 members and Vietnam. Singapore is also the largest source of intraregional FDI at 45 percent. The greatest outside contributors for FDI inflows are the European
Union (22 percent of total FDI), and Japan (18.7 percent).

6. Indias Trade with ASEAN Countries

ASEAN has emerged as one of Indias largest trading partners. A majority of India-ASEAN
trade is with Singapore, Indonesia, Malaysia, Thailand and Vietnam.

Source:ficci.com
Timeline

1990: As part of Look East Policy, India starts engaging with ASEAN.

1992: India became sectoral dialogue partner of ASEAN.

1996: India-full dialogue partner of ASEAN.

2002: India starts annual summits with ASEAN.

2003: India agrees to the Treat of Amity and Cooperation in Southeast Asia(TAC),signs counterterrorism declaration.

2009: FTA established between India-ASEAN

2010: FTA in goods becomes effective.

2012: India became strategic partner of ASEAN, 20th Anniversary of ASEAN-India Dialogue.

2014: FTA in services and investment signed by all ASEAN nations except Philippines, with
India.

Indian Investors want

to enter ASEAN for:

ASEAN Investors want

to enter India for:

IT
Automobiles
Engineering
Pharmaceuticals

Construction
services
Transportation
services
Engineering services
Shipping

India-Singapore
Indias largest trade and investment partner in the ASEAN is Singapore. It accounts for a third of Indias
overall trade with ASEAN. The bilateral trade has grown significantly from US$ 8.8 billion in 2005-06 to
US$ 21.1 billion in 2013.Singapore has emerged as the seventh largest trade partner of India globally
with US$ 19.3 billion of bilateral trade in 2013-14 .
Singapore acts as a key offshore logistics and financial hub of many Indian companies. Nine Indian banks
operate in Singapore- Indian overseas Bank, UCO Bank, Indian Bank, Bank of India, Axis Bank, ICICI Bank,
Bank of Baroda, Exim Bank and State Bank of India.
India signed Comprehensive Economic Cooperation Agreement (CECA) with Singapore, the first such
agreement to be signed by India with any country. This integrates agreements on trade in goods and
services, economic cooperation and investment protection in fields like science & technology, education
and intellectual property
The companies from Singapore are active in Indias equity market as FIIs. There are 81 FIIs from
Singapore that are registered with SEBI. With a share of 11.7% of the total FDI received by India- a
cumulative amount of US $25.5 billion from 2000 to 2014, Singapore has become the second largest
investor in India. As per RBI, a cumulative outward India FDI into Singapore was around US$ 25 billion.

India-Indonesia
Indonesia is the second largest trading partner of India among ASEAN countries. The bilateral trade has
increased to US$ 20.1 billion in 2012-13 from US$ 6.9 billion in 2007-08.
India is the largest buyer of crude palm oil from Indonesia and imports minerals, coal, pulp and paper
rubber and hydrocarbons reserves. India exports maize, refined petroleum products, commercial

vehicles, oil seeds,cotton, animal feed, telecommunication equipment, plastics and steel products and
to Indonesia. Also, India exports pharmaceuticals in bulk and formulations to Indonesia.
Indian companies have made significant investments in power, infrastructure, textiles, automotive,
steel, banking and consumer goods, mining machinery sectors. Prominent Indian corporates such as
Reliance,GMR, Tata Power, Adani, GVK,L&T, Trimex, Punj Lloyd, CG Power,Videocon, Spice, Madhucon,
Indo Rama, Bombay Dyeing, JK Industries, Aditya Birla, Jindal Stainless Steel, Ispat, ESSAR, Tata Motors,
TVS, Mahindra, Bajaj, Classic Stripes, Minda, BEML, Wipro, Godrej, Balmer & Lawrie, Bankof India, SBI
etc. have established fully-owned subsidiaries/joint ventures in Indonesia.
Tata Motors has proposed to set up its assembly line production of vehicles in Indonesia. The National
Aluminum Company of India (NALCO) has proposed to invest US$ 4 billion in Indonesia. It plans to
develop a 0.5 million ton aluminum smelter plant and a 1250 MW power plant in Kalimantan. Several
medium and small Indian companies are operating coal mines in Indonesia. Indian IT companies
including Tech Mahindra, TCS, HCL, Wipro, Satyam and Polaris have business interests in Indonesia.
India has signed Agreement for Promotion and Protection of Investment with Indonesia in 1999, and
Double Taxation Avoidance Agreement (DTAA) in 2012.

7. Conclusion

Consistent with this growth, foreign direct investment in ASEAN has boomed, surpassing its precrisis
levels. In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted
more foreign direct investment than China ($128 billion versus $117 billion) in 2013. 8 In addition to
attracting multinationals, ASEAN has become a launching pad for new companies; the region now
accounts for 38 percent of Asias market for initial public offerings.
Despite their distinct cultures, histories, and languages, the ten member states of ASEAN share a focus on
jobs and prosperity. Household purchasing power is rising, transforming the region into the next frontier
of consumer growth. Maintaining the current trajectory will require enormous investment in
infrastructure and human-capital developmenta challenge for any emerging region but a necessary step
toward ASEANs goal of becoming globally competitive in a wide range of industries. The ASEAN
Economic Community offers an opportunity to create a seamless regional market and production base. If
its implementation is successful, ASEAN could prove to be a case in which the whole actually does exceed
the sum of its part

References:
Ficci.com
http://www.ficci.com/spdocument/20186/India-ASEAN-Report-Exec-Summry.pdf
Mea.gov.in
http://www.mea.gov.in/Portal/ForeignRelation/Indonesia_January_2014.pdf

http://www.aseanbriefing.com/news/2014/02/13/understanding-aseans-free-trade-agreements.html

http://www.mckinsey.com/insights/public_sector/understanding_asean_seven_things_you_need_
to_know