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The Investment Regime in ASEAN Countries
Dr. Lawan Thanadsillapakul
Approval procedures for FDI in ASEAN countries were fairly stringent until the late 1980s. Eligibility criteria were used in many countries to direct FDI inflows towards specific industries, such as sophisticated technological industries, heavy industries and chemical industries. They also restricted foreign competition in areas reserved for domestic investors. Government authorities strongly preferred minority ownership by foreign investors except in particular cases, for instance technology-intensive projects and export-oriented industry.
In conclusion, ASEAN countries targeted FDI inflows in specific industries and encouraged specific forms of TNC engagement. At the end of the 1980s, a major wave of liberalisation began because ASEAN countries needed inflows of FDI to enhance their industrialisation in sophisticated technology industries, reflecting the emergence of a significantly less restrictive attitudes towards FDI in the region. Most importantly for foreign investors, the principle of equal treatment of foreign and domestic investors began to be widely accepted in the region, mainly through changes in policy rather than the laws. Legal changes have been after 1998 under the Short-Term Measures and AIA. Industries previously considered "sensitive" have been gradually opened to FDI, and restrictions on profit remittances have been relaxed. Ownership restrictions have also become more liberalised; in particular, foreign majority ownership, extending up to 100% in certain industries, is now possible in most ASEAN countries, although a number of activities, especially in strategic industries, remain reserved for domestic enterprises. Furthermore, approval procedures have become less burdensome, with automatic approval now being used more widely. One-stop service agencies have reduced bureaucratic hurdles. As a result, FDI policies in ASEAN countries are beginning to converge around broadly similar international standards. Nevertheless, the perception of the private sector is that the FDI regimes of several ASEAN host countries need further improvement; it appears to be difficult for foreign investors to acquire a controlling share in ASEAN companies. Malaysia and Thailand are considered to be the most restrictive in this respect. Foreign investors are constrained in employing foreigners. Also investment in some ASEAN countries, e.g., Malaysia and Indonesia, continues to be directed by government to a considerable degree. Notably, regulatory obstacles were the most important factors in discouraging some investments(65). However, to the extent that regulatory deterrents to FDI exist, they are faced by all foreign investors. They do not discriminate against any particular country.
Ownership Limits and Restricted Sectors
Ownership limits and sectoral restrictions are the main control on FDI in ASEAN countries. The main purpose of these restrictions is to protect the interests of nationals from competition from foreign investors in those business areas which have been regarded as key sectors for their national economies or to protect "sensitive sectors", and also business concerning national security and the public interest. In general, these controls are intended to encourage their nationals to participate in their economy and ensure a balance of controlling power in their economic activities.
In the case of Indonesia, limitation of ownership is subject to a negative list(66). The Investment Negative List is valid for three years and subject to annual review. Now foreign investment is subjected to the new government regulation No. 20 of 1994 concerning share ownership in foreign capital investment enterprises, which allows 100% foreign equity ownership in all areas except those in negative list. This clearly shows the more liberalised investment policy of Indonesia(67). The Indonesian government clearly declared that
"To maintain and speed up the momentum of national development, the deregulation of policies and measures and simplification of investment procedures should be continued and implemented in order to enhance and improve the productivity and efficiency of economic sectors. Besides that, due to the need of Indonesian economic development, the presence of foreign direct investment should be encouraged to support economic development."
(APEC, 1998: INA-1).
Therefore, foreign investors are encouraged to fully invest in this country except those in the negative list, which is transparent and limited only to the security and public interest. Accordingly, the Indonesian government expressed that it should take any measures to create an attractive and conducive investment climate and should implement many new measures with transparency and consistency. (APEC: 1998: INA-1).
The negative lists have been classified into five categories as follows:
(1) sectors that are closed to foreign investment(68); (2) sectors that are closed to foreign investment, except for new projects that export at least 65% of the products(69); (3) sectors that are closed to new investment, except for projects exporting 100% of their production(70); (4) sectors that are totally closed to foreign investment(71) are contracting services in forest logging, casino/gambling, utilisation and cultivation of sponges, marijuana and the like, veneer, penta chlorophenaol, dichloro trichloro ethane (DDT), dieldrin, and chlordane; (5) sectors that are reserved for small-scale industry in co-operation with medium and large scale industry(72) are mainly in agricultural production such as dairy cow breeding, shrimp larva culture, coral fish catching, salted and dried fish, various flours from grain, brown sugar, soybean products, yarn-spinning, fabric printing, weaving, knitting, lime and lime products, and household clay ceramic goods.
Moreover, the Indonesian government has taken various specific actions to stimulate a large increase of foreign investment in the last five year, namely the continuity of deregulation and debureaucratisation efforts(73). The new wave of investment liberalisation of Indonesia clearly facilitates the process of open regionalism, especially it conforms to the AIA in opening up industries to both ASEAN and non-ASEAN investors.
(65) These views are expressed in the results of the survey of a number of firms of the European Round Table (ERT), an association of large European TNCs, carried out for a 1995 study: out of 25 factors discouraging investment, which were either explicitly considered in the survey questionnaire or identified by individual respondents.
(66) The Negative Investment List is enacted by the Law No. 1 of 1967 concerning Foreign Investment, and established by the Presidential Decree No. 54 of 1993 which replaces the Negative Investment list of 1992. It is now replaced by the Government Regulation NO. 2/ 1994.
(67) See ASEAN Secretariat (1998) Compendium of Investment Policies and Measures in ASEAN Countries. Jakarta: ASEAN Secretariat.
(68) Manufacturing of aircraft, motor vehicles (except for manufacturing at least equal to the present degree of localisation implemented by existing motor vehicle manufacturers), utility boilers, explosive materials and the like, printing of valuable paper (postage stamps, duty stamps, bank notes, passport) postcards, powder milk, palm oil, sawmills, plywood, mangrove wood products, block board, and ethyl alcohol (Negative list No.2/1994).
(69) Manufacturing of cigarettes and medicine, including pharmaceutical formulation and traditional herbal drugs (Negative list No.2/1994).
(70) Manufacturing of artificial sweeteners, alcoholic beverages, fireworks, and disposable gas lighters. Service sectors that are closed to foreign investment are taxi/bus, local shipping, scheduled chartered flights, aircraft and components workshops located in the airport, retail trade, trade supporting services/advertising, private television broadcasting and radio broadcasting services, and any industry which involves the use of photographic equipment (Negative list No. 2/1994).
(71) Contracting services in forest logging, casino/gambling, utilisation and cultivation of sponges, marijuana and the like, veneer, penta chlorophenaol, dichloro trichloro ethane (DDT), dieldrin, and chlordane (Negative list No. 2/1994).
(72) Dairy cow breeding, shrimp larva culture, coral fish catching, salted and dried fish, various flours from grain, brown sugar, soybean products, yarn-spinning, fabric printing, weaving, knitting, lime and lime products, and household clay ceramic goods (Negative list No. 2/1994).
(73) For example, liberalisation of the financial sector, relaxation of import and export procedures (the October Package of 1998), harmonisation of import tariff codes, reduction of import tariffs, and reduction of the number of business fields that were closed for investment (the June Package of 1991), the simplification of drawback system procedures, and intensification of investment promotion activities especially for facilitating the industrial relocation from NIEs and Japan (BKPM, Indonesia (1998) The New Investment Policies Jakarta: BKPM).