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The Investment Regime in ASEAN Countries

Dr. Lawan Thanadsillapakul


The government of Singapore actively encourages foreign investment. The principal investment incentives are consolidated in the Economic Expansion Incentives Act and are administered primarily by the Economic Development Board (EDB) (APEC:1998, SIN-5). EDB was set up in 1961 as a one-stop agency to spearhead Singapore's industrialisation drive through investment promotion in manufacturing. Presently, Singapore is more advanced than any other ASEAN country in its industrialisation and its high technology industries. TNC networks from all over the world have established in this country so that further its economic progress and encourage inflows of trade and investment into the country even more. Being a free economy, Singapore has already liberalised its investment regulations and comprehensively provides investment incentives to both local and foreign investors.

In Singapore, as mentioned, the Economic Development Board (EDB) administers tax incentives under the Economic Expansion Incentives Act, which provides incentives in various categories. A pioneer status company is entitled to the exemption of 27% tax on profits arising from pioneer activities and the tax relief period is 5-10 years. Expansion incentive gives exemption of 27% on profits in excess of the pre-expansion level, and the tax relief period is up to 5 years, with provision for extension. The investment allowance incentive exempts taxable income of an amount equal to a specified proportion of new fixed investment (up to 50%). Operational headquarters will be granted the incentive that income arising from the provision in Singapore of approved services will be taxed at 10%, and other income from overseas subsidiaries and associated companies may also be eligible for effective tax relief, and this incentive will be up to 10 years with provision for extension. Export of services will be entitled to 90% of the qualifying export income being exempted from tax and the tax relief period is 5 years, with provision for extension. Post-pioneer incentives will be granted to the company by reducing the corporate tax rate to 15% for up to 10 years. The venture capital incentive is that if losses are incurred from the sale of shares, up to 100% of equity invested can be offset against the investor's other taxable income. The international direct investment incentive is that if losses are incurred from the sale of shares or liquidation of the overseas company, up to 100% of equity invested can be offset against the investor's other taxable income. The approved foreign loan scheme gives exemption from withholding tax on interest, and the approved royalties provision gives full or partial exemption of withholding tax on royalties. Also, double deduction for research and development expenses is granted to approved projects.

Actually, investment incentives granted by Singapore are similar to those given by other ASEAN countries but with a more open economy and more liberalised investment regime without restriction on FDI entry and foreign equity, Singapore gains more advantages in attracting foreign investors. This can be seen from the huge inflows of FDI and the trade volume of this country (Asia Pulse Pte Ltd: 1999) despite its small size. The economic success of Singapore helps encourage other ASEAN countries to follow suit, especially when the AIA has been fully implemented. A country with a more liberalised investment regime, like Singapore, will attract non-ASEAN investors to establish themselves in the country.


Two major laws affecting foreign investment are the Investment Promotion Act of 1977 and the Alien Business Law of 1972. The Thai government has consistently maintained favourable attitudes towards foreign investment. There are no prohibitions or restrictions an foreign investment per se. But foreign investors may be subject to the Alien Business Law when it is applicable(95).

Under the Investment Promotion Act, the Board of Investment (BOI) may approve the promotion of investment projects in agriculture, animal husbandry, fishery, mineral exploration and mining, manufacturing and services when it considers that the products, commodities or services:

are either unavailable or insufficiently available in Thailand or are produced by an outdated process;
are important and beneficial to the country's economic and social development, and to national security; or
are economically and technologically appropriate, and have adequate preventive measures against damage to the environment.
(Investment Promotion Act 1977, Art. 16)

Apart from the Alien Business Law Act 1972, all industries are open to foreign investors, and if they reach the criterion set forth by the BOI they will be approved to be "promoted projects" entitled to incentives. In Thailand, tax incentives are available to both local and foreign investors. Major incentives include tax holidays, exemption or reduction of import duties on machinery, and exemption or reduction of taxes on imported raw materials.

The magnitude of incentives granted depends on the location of investment projects in order to implement the industry decentralisation policy. Decentralisation is one of the aims of the Eighth National Economic and Social Development Plan of Thailand. Thailand has encountered the problem of urbanisation, and all development has centred in Bangkok and the central area. Therefore, the decentralisation policy has been adopted, and this can be realised through the creation of job and the allocation of industries to peripheral and remote areas for bringing in those areas of technology, jobs, and a high standard of living so that development would be evenly distributed throughout the Kingdom. BOI has implemented this policy by encouraging the location of investment in peripheral and remote areas, in doing so investment will be given more privileges and incentives (The Council of Ministers, 1997: The National Social and Development Plan).

In order to encourage industrial decentralisation, the country is divided into three zones with varying degrees of incentives. Remote areas are granted more incentives. In Zone I, Bangkok and neighbouring provinces, the promoted investment is entitled to 50% of import duties on machinery for projects exporting not less than 80% of production, exemption of corporate income tax for three years for projects exporting not less than 80% of output and located in industrial estates or promoted industrial zones, and exemption of import duties on raw materials for one year for projects exporting not less than 30%. In Zone II, provinces in the central part of Thailand outside zone I, promoted investment is entitled to 50% reduction of import duties on machinery, and exemption of corporate income tax for three years, extendable to 7 years for projects located in industrial estates and promoted industrial zones, and exemption of import duties on raw materials for one year for projects exporting not less than 30%. In zone III, which is the rest, the promoted investment is entitled to exemption of import duties on machinery, exemption of corporate income tax for 8 years, exemption on import duties on raw materials for five years for projects exporting not less than 30%, and 75% reduction of import duties on raw materials used in manufacture for local distribution for 5 years.

In order to encourage industrial development in underdeveloped regional areas, the BOI offers tax incentives to existing activities, which may or may not have been promoted, if they relocate from the central to other regional areas. Relocating operations will receive the standard non-tax and tax incentives, exemption from corporate income tax, double deduction from taxable income of water, electricity and transportation costs, and deduction from net profit of 25% of the cost of installation or construction of the project's infrastructure facilities. As technological development is one of the most important policy objectives, additional tax incentives are granted to projects that invest in research and development activities.

This clearly shows that the investment policy of Thailand is geared towards the national economic and development policy. Therefore, the government encourages both appropriate and high technological industries, export-oriented industries, investment with high standard of environmental protection measures, and investment located in remote areas. Considering from these conditions we can see that a certain level of screening is maintain in this country. However, the Short-term Measures and the AIA scheme that Thailand has committed will ensure that Thailand will liberalise its investment regime further and open up all industries to both ASEAN and non-ASEAN investors. This is evidenced by the passages of new regulations by Thai government such as to reduce negative list in the Alien Business Law Act(96); to allow 100% of foreign equity shareholding(97); dramatically open industries(98), especially services sector such as banking, insurance, telecommunication(99); This shows that Thailand further liberalises investment regime to implement the open regionalism.


ASEAN countries have used investment incentives to attract FDI. Moreover, they use them as instruments to compete with each other among ASEAN countries to attract FDI as well. This encourages foreign investors to take advantage of incentive shopping. Generally, however, these have taken the form of tax benefits rather than government grants (which are more often available in the richer developed countries). Competition in the granting of incentives among ASEAN countries may distort the efficient allocation of investment and further distort trade and investment flows in the region, or at least such incentives are just a windfall fortune for foreign investors since they are likely to invest in that country no matter whether incentives are granted or not. Also the use of operational restrictions is usually done as a condition of investment incentives.

In the area of market access, the liberalisation process of ASEAN countries has been selective and is focused mostly on export-oriented industries. A number of countries have increased the level of foreign participation in certain sectors and allowed foreign participation in previously restricted or sensitive sectors. For instance, Indonesia changed to a negative list, reduced the sectors subject to the requirement of 100% equity, and substantially relaxed divestment requirements. The Philippines also increased the number of sectors open to foreign investment, and now allows foreign investors to lease private land for 50 years, and has suspended the nationality requirement in the case of ASEAN Projects or investment by ASEAN nationals. Thailand now allows wholly-owned foreign businesses to operate investments in basic infrastructure, public utilities development and transportation systems (ASEAN Secretariat, 1998a; CCH Asia Limited, 1998).

In the area of operational restrictions, governments have not been too eager to act unilaterally on this issue. However, some of the operational restrictions, such as local content requirements, are included in the TRIMs provisions, which require changes to national laws. In response to obligations under the TRIMs, restrictions have been reduced. In addition to the notification of investment measures, which all ASEAN countries have to comply with under the TRIMs agreement, they have also liberalised other aspects. Malaysia reduced its withholding tax on technical fees and royalties from 15% to 10%, and allowed exporters to keep a portion of export proceeds in a foreign currency account in Malaysia. The Philippines allowed greater participation by foreign investors in domestic economic activities, and also liberalised the land lease restriction and foreign exchange controls. Thailand abolished restrictions on the establishment of assembly plants and liberalised foreign exchange controls.

In conclusion, the investment regimes of ASEAN countries clearly show that all ASEAN countries carefully screen foreign investment, especially in controlling equity and ownership participation of foreign investors. Generally, they prefer a minority of foreign investors(100), and particularly certain business areas have been closed to foreign investment or subject to approval from authority in certain industries that reach the set requirements. Investment incentives are granted under terms and conditions that comply with the countries' economic and development plans. So the policy of ASEAN countries is to welcome foreign investment as long as it meets the set requirements of the countries. ASEAN countries open the door but hang curtains to prevent dust and flies from entering. Thus investment liberalisation in ASEAN countries before the Asian crisis was subject to domestic laws and regulations as well as economic policy. Therefore, under such circumstances it was unlikely that ASEAN countries would unilaterally extend national treatment to foreign investors. It was not until recently when ASEAN launched the AIA scheme that NT and MFN treatment could be granted to both ASEAN and non-ASEAN investors. Also the short-term measures dramatically alter national laws especially in two areas, i.e. allowing 100% foreign equity ownership and providing attractive investment incentives, both tax and non-tax incentives.

Considering the actual national laws and the development of investment regulations of ASEAN countries, it can be seen that ASEAN countries have cautiously liberalised their investment regimes. They still maintain FDI entry-screening measures, while encouraging inflow of foreign investment in particular areas by granting investment incentives. Under such circumstances, it seems that the process of open regionalism would progress at a slow pace if it relied solely on investment liberalisation at a national level. However, the Asian crisis in 1997 prompted ASEAN countries to actively liberalise investment regulation. This can be seen from the adoption of the Short-term Measures and the AIA scheme that dramatically changes the ASEAN countries' investment policy and laws. Consequently, the national and regional investment liberalisation complementarily facilitates and reinforces the process of open regionalism.

It is important to understand the pattern of investment liberalisation of countries in this region that is based on the trade-oriented investment approach(101), which means compensating the propensity for foreign investment to generate an excess demand for imports, by increasing exports. Trade-oriented FDI is welfare improving in both home and host countries because trade-oriented FDI implies investment in industries in which the home country has comparative disadvantages, so that investment has been shifted to a host country which has comparative advantages. The host country can be viewed as a production base (where cost of production is lower than in home countries), and the products can be distributed at a lower price both in the local and global market. This would accelerate trade between the two nations, and promote beneficial industrial restructuring in both countries. This can explain the pattern of FDI in ASEAN countries from developed countries, which was initially directed towards natural resource development in which home countries have comparative disadvantages, and towards some manufacturing sectors in which home countries have been losing their comparative advantages. FDI from developed countries in ASEAN countries has been regarded as export-oriented, occurring in less sophisticated and more labour-intensive industries, and with a higher share of local ownership. This FDI pattern interacted with the development of ASEAN countries' national investment laws, which facilitated the export-push policy of these countries. Therefore, ASEAN countries have employed a targeted industry strategy to screen FDI, and offered incentives to promote export-oriented industries. Investment liberalisation in these countries thus accompanies this policy, i.e. enhancing exports and encouraging trade flows from within and outside the region. This process fits well with open regionalism and also it fits well into the market mechanism and investment patterns.


(95) The Alien Business Law is applicable only to natural persons and juristic persons who are: (1) a juristic person with majority foreign shareholding; (2) a juristic person, at least one-half of the number of shareholders, partners or members of which are aliens; (3) limited partnership or registered ordinary partnership having an aliens as managing partner or manager. The Alien Business Law sets three categories of business activities where foreign legal entities defined above are (1) prohibited (category A); (2) Permitted only with the Board of Investment promotion (category B); (3) implemented only with the permission of the Ministry of Commerce of Board of Investment promotion (category C). However The Alien Business Law does not apply to aliens in business with the permission of the Royal Thai Government, or covered by an agreement between the Royal Thai Government and foreign government which excludes certain activities. (BOI, 1999: 10), Alien Business Law Act 1972, Annexes attached to the Announcement of the National Executive Council (Alien Business Law Act 1972).

(96) The Foreign Investment Law 1999 has replaced the Alien Business Act Law 1972, and it reduces the negative list prohibited to foreign investors, mainly in commercial and service sectors (11 business).

(97) Thailand's commitment under the Short-term Measures is incorporated into national law by the Decree on relaxing ratio of foreign equity holding, 1 December 1998 (The Office of the Board of Investment, BOI Announcement).

(98) Thailand's commitment under AIA is incorporated into national law by the Decree on open up industries to foreign investors, 1 December 1998. The Office of the Board of Investment, BOI Announcement).

(99) Enforced by the Financial Institutions Law 1999 (Ministry of Finance, Announcement as of December 1999) also see Memorandum of Economic Policies of the Royal Thai Government.

(100) This means that indeed ASEAN countries as well as many developing Asian countries relied on FDI only to a moderate degree in the past. Investment was mainly financed by domestic savings, which were exceptional high by international standards (ranging from 25 to 35% of GDP), perhaps caused by the restriction of foreign ownership. Nevertheless, the rise of foreign investment flows into the region has increased the need for capital on the part of local investors in the increasing projects that encountered the restriction of foreign equity. Therefore local investors had to turn to offshore loans since onshore loans bear higher interest than offshore ones. This in the end increased foreign debt to ASEAN countries in the private sector. The financial crisis in ASEAN countries was partly caused by the heavy offshore loans of investors in these countries.

(101) See Lizondo, Saul (1992: 15).