ASEAN Economic Growth Strategies

Transcription

1 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? Dr Zakariah Abdul Rashid Executive Director Malaysian Institute of Economic Research Introduction National policy-makers in ASEAN have accepted that there are considerable benefits to be accrued from Foreign Direct Investment (FDI), especially in manufacturing. FDI has the advantage that brings with it financial capital, management know-how, product knowledge, manufacturing and other processes, distribution networks, brands and marketing skills. All this saves the recipient country the time, effort and risks involved in creating all these requirements for export competitiveness. FDI also helps to diversify the economy away from primary production, upgrading the existing manufacturing sector through raising productivity, and increasing efficiency through exposure to greater competition. Further, it is always the case that there are more employment opportunities that are created. Therefore, an important component of the growth strategies of most ASEAN countries is to attract foreign investment. It has been noted that despite numerous attempts and initiatives to create an appropriate investment climate for foreign investors, ASEAN continues to struggle in raising inward FDI beyond levels achieved prior to the Asian financial crisis of In fact, looking at ASEAN s share of the stock of global FDI over the past three decade, it can be observed that this share rose to a peak of more than 5% just before the financial crisis of Although this figure has been rising over the past few years, ASEAN s stock of world FDI has not as vibrant as in the pre-1996 levels. In terms of the annual flow of FDI, ASEAN s share has ebbed significantly in the 2000s from an average of 8% in the mid-1990s before recovering to about 6% in An area of concern is ASEAN s declining proportion of both stock within and flow of FDI into developing countries. ASEAN accounts for around 15% of developing countries total stock of FDI for the last decade and this is lower than its peak of 20% before the financial crisis. Its share of annual FDI flows has experienced a dramatic decline, hovering at around 14% in 2010 as compared to 37% in Further, there is increased competition for FDI in ASEAN. In the 1990s the ASEAN countries were leaders in pursuing the policy of export-led growth policies. With the opening up of the People s Republic of China (PRC) and following that of India, there is stiff competition to ASEAN in claiming the FDI share. The economic rise of the PRC and India has attracted the attention of investors eager to take advantage of the massive economies of scale offered by the huge and rapidly growing consumer markets in these giants whose 22

2 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 23 middle classes in particular are enjoying substantial growth in spending. In fact, the PRC has overtaken ASEAN in FDI received in 2010 while its stock of total FDI is also rising quickly. On the other hand, India still lags behind ASEAN, but is picking up momentum and could soon pose a much bigger threat to the region s share of world FDI. Further, with the new government in place in India, with its outward-looking policies and its assurance to open up to foreign investment, there is every possibility that India will join the fray in laying a claim to FDI. Indeed, other developing countries have also started developing export-led strategies by opening up their industries to foreign investors. Specific cases are Brazil and the Russian Federation, both of which have undertaken market reforms and provided investors with new options and this will further threaten ASEAN s share of total FDI. The AEC Blueprint as a Catalyst to Raise FDI Bhaskaran argues that there is a gap between the capacity to deliver high returns in some key ASEAN economies and the low investment rates that they actually achieve. Although returns on investment have been reasonable, ASEAN is unable to break out of a downward trend in overall investment. Using data on comparable rates of return on investments by US corporations across the world, Bhaskaran points out that ASEAN s return on capital has indeed declined below the levels in the early 1990s but is still not lower relative to the world average despite a sharp fall in the returns premium after the global crisis of Analysing the return performance for US multinational companies (MNCs) in Asia, he shows evidence that ASEAN has held up well, even as the PRC and India have improved. He makes the following points: First, return on capital is not the sole determinant of investment decisions; Second, ASEAN s fortunes are highly tied to the global economy: a big decline in world economic health affects the profits of firms in ASEAN more negatively than in other economies such as the PRC and India. Third, investors demand risk premiums for investing in ASEAN countries as theoretically there should not be an outflow of investments if returns are higher than or matches other economies outside the region. These observations suggest that efforts to enhance the investment climates of the region should focus on reducing country risks for firms in ASEAN economies in order to attract and retain investment. The AEC was endorsed by ASEAN leaders at the Bali Summit in October 2003 as one of the three pillars of the ASEAN Community vision. In general, the AEC aims to integrate ASEAN into the global economy and create a single market and production base where goods, services, capital and labor flow freely, so that equitable development can be realized within the region. The successful construction of the AEC will have tremendous implications for investment flows into and within ASEAN by expanding the economies of scale and scope in the region. In 2007, ASEAN leaders agreed to push forward the AEC deadline to 2015 and approved the AEC Blueprint, which provides

3 24 東 協 瞭 望 010 detailed outlines and commitments to achieve the unified market. The AEC Blueprint has four major components: 1. Single Market and Production Base Free flow of goods including the elimination of tariffs and non-tariff barriers (NTBs), rules of origin harmonization and rationalization, trade facilitation, customs integration (including the ASEAN Single Window), and standards and technical barriers to trade (including mutual recognition arrangements, or MRAs). Trade in goods receives the most attention, in part because it includes areas relevant to the entire AEC project (such as customs and other areas of trade facilitation). Free flow of services through a progressive increase in sectoral coverage, a commitment to advance mutual recognition of professional qualifications and services, and financial services liberalization through an ASEAN-X formula. Free flow of investment, particularly FDI, building on the process initiated by the ASEAN Investment Area (AIA). The AEC will integrate several agreements pertinent to FDI, such as investment protection, and emphasize the cornerstones of the AIA (i.e., national treatment, investment facilitation and cooperation, and promotion). This will be done under the ASEAN Comprehensive Agreement on Investment (ACIA). Freer flow of capital, as a means to strengthen ASEAN capital market development and harmonize capital market standards and practices in order to facilitate cross-border transactions. It also envisions greater capital mobility and liberalization, through an emphasis on orderly processes and guarantees of safeguards to maintain stability. Free flow of skilled labor, especially to facilitate FDI and trade in services, through MRAs and concordance of skills and qualifications. More rapid liberalization of the 12 priority integration sectors wood- based products, automotives, rubber-based products, textiles and apparels, electronics, agro-based products, fisheries, e-asean, healthcare, air travel, tourism and logistics. 2. Competitive Economic Region Establishment of a clear competition policy to ensure a level playing field in the integrated ASEAN market. Consumer protection, including the creation of an ASEAN Coordinating Committee on Consumer Protection. Regional commitments in intellectual property rights protection, based on the ASEAN IPR Action Plan ( ) and accession to the Madrid Protocol. Infrastructure development to improve transport links, narrow development gaps, and enhance regional information infrastructure. Sectoral cooperation in energy and mining to create stable supplies and enhance efficiency. Taxation rationalization, featuring a bilateral network that would avoid double taxation. Approaches to e-commerce, to be implemented through the e-asean Framework Agreement. 3. Equitable Economic Development Fostering SME development in ASEAN, with an emphasis on taking advantage of ASEAN s diversity. Enhancing the goals of the Initiative for ASEAN Integration launched in 2000, to narrow development gaps between older ASEAN 6

4 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 25 members and the newer ASEAN members (CLMV). 4. Integration into the Global Economy ASEAN is to work toward ASEAN Centrality in external foreign economic relations (including in the area of free trade areas and other preferential arrangements with non-partners). Enhanced participation in global supply networks, with a strong dedication to the adoption of best international practices and standards. The AEC Blueprint provides a comprehensive framework to increase investment because it contains many mutually reinforcing measures that will improve the investment climate of individual countries as well as the region as a whole. For example, sectoral cooperation will allow resource-rich but ill-equipped countries to learn and absorb technology from more developed members, increasing both its human and capital stock. A single market and production base will allow for more efficient allocation of resources via the phasing out of uncompetitive firms and better flow of information and also increase potential economies of scale through a bigger market. The study by Aldaba and Yap (2009) is useful in identifying the impacts of FDI flows. First, they underscore the importance of ACIA. This is a more comprehensive agreement to foster investment than previous agreements. It provides a wide range of investment provisions on investment liberalization, most-favored-nation status, national treatment, and investment protection, promotion and facilitation. With the initiatives to lift foreign ownership restrictions, sector restrictions and performance requirements it can be expected that there will be an increase in FDI. Also, deeper integration features, such as the legislation and harmonization of standards, competition and custom laws, intellectual property rights and dispute settlement mechanisms, will improve the region s investment climate particularly in services. Second, the establishment of AEC and the improvement of trade flows will significantly raise the level of vertical FDI in the region. This is because the development of complex networks due to the fragmentation of production and trade in parts and components will dominate intra-regional trade and investment. Third, a larger market will prove more attractive for foreign MNCs. The effect of regional integration through AEC will create a larger market, which will attract MNCs to invest in the region. It can be expected that regional integration may affect FDI by generating growth, although the causation for the positive relationship between FDI and economic growth is uncertain. Finally, Aldaba and Yap (2009) draw on evidence from elsewhere to show that regional agreements tend to have a positive impact on FDI. They point out that the EU, NAFTA and Mercosur have had a positive impact on FDI inflows and indeed that economic integration in these regions promoted investment. The AEC Blueprint is meant to and will encourage the integration of ASEAN. It is comprehensive and it has disciplines that will encourage member states to show progress in key areas. However, there are challenges. These are

5 26 東 協 瞭 望 010 of a political nature arising from vested interests and fear of competition. The main problem, however, is the fact that ASEAN member states come from diverse levels of economic development; and there are historical factors, territorial disputes and misunderstandings that sometimes hinder cooperation. Despite the shortcomings, it is important to realize that such top-down initiatives such as the AEC encourage bottom-up integration processes, which will allow the region to emerge increasingly like a single market over time. Indeed, as far as the private sector is concerned they are always interested in investment; and will welcome a more closely interlinked ASEAN. They have realized the need to provide support to the AEC s ambitious plans in order to tap into the value of economic integration. For instance, Air Asia is working toward its goal of a single ASEAN aviation authority by setting up an office in Jakarta to engage with the ASEAN Secretariat. CEOs from major private sector companies like CIMB Bank, Bangkok Bank, Air Asia and the Ayala Group have jointly launched the ASEAN Business Club (ABC) in order to engage in ASEAN community building efforts. The advantage of regional integrations is seen, for example, in Singaporean and Malaysian banks and telecommunication firms have invested heavily in the region. Siam Cement is gearing up to invest 75% of its investment fund to acquire assets in ASEAN countries. As Bhaskaran points out, even companies outside ASEAN have started to take notice of ASEAN as an integrated region. He cites the example of Shin Shin-Etsu Chemical, Japan s largest chemical producer, which has invested US$64 million to build two chemical plants in Viet Nam with the hope of serving a large base of customers in the region. ASEAN as a Single Market and Production Base One of the four primary objectives of the coming ASEAN Economic Community is to become a single market and production base with five core elements: the free flow of goods, services, investment, and labor, and the freer flow of capital. In turn, the objective of the ASEAN Comprehensive Investment Agreement (ACIA) that came into effect on 29 March 2012 is to bolster ASEAN investment by establishing a free, open, transparent and integrated investment regime for domestic and international investors throughout the ASEAN member states that supports the economic integration of the region before and after the ASEAN Economic Community integration in The ASEAN Secretariat published the ACIA Guidebook in 2013 which details the strengths and benefits of the Agreement for potential investors. Two earlier ASEAN investment frameworks, the ASEAN Investment Area agreement (AIA) and the Investment Guarantee Agreements (IGA), make up the foundation of the ASEAN Comprehensive Investment Agreement. The ACIA improves on the two earlier agreements in a number of areas by means of: Adopting international best practices that help protect investors and their investments and providing increased protections Following recent trends in international investment practices that encourage less restrictive investment regimes

6 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 27 Including portfolio investment and intellectual property as well as broader definitions of investors and investments Allowing third-country nationals to benefits from the ACIA Encouraging a higher level of transparency in investment rulemaking Adopting Investor-State Dispute Settlement mechanisms (ISDS) and promoting alternative dispute resolution methods. Liberalization, Protection, Facilitation, and Promotion are the ACIA s four pillars, and to achieve the end goal of the ASEAN Economic Community by 2015, its guiding principles include: Achieving a free and open investment environment in the region through progressive investment liberalization and improving the transparency and predictability of investment rules, regulations and procedures conducive to increased investment Benefiting domestic and international investors and their investments based in ASEAN and providing enhanced protection to investors and their investments Promoting the ASEAN region as a whole as an integrated investment area that has favourable conditions for domestic and international investment Maintaining and according preferential treatment among Member States with no back-tracking of commitments made under previous agreements Granting special and differential treatment and other flexibilities to Member States with no back-tracking of commitments made under previous agreements Openness to expand the scope of the ACIA to cover other sectors in the future The overall goal of the ASEAN Comprehensive Investment Agreement is to establish a free, open, transparent and integrated investment regime for domestic and international investors throughout the ASEAN region, and the ACIA s benefits include investment liberalization, non-discrimination, transparency, investor protections, and Investor-State Dispute Settlement. Therefore, the benefits will be as follows: a. Investment Liberalization The Agreement liberalizes cross border investment in five sectors: manufacturing, agriculture, fishery, forestry, mining and quarrying, and the services incidental to each. Each ASEAN member state submitted a list of reservations for these sectors, and anything not on the list is subject to national policy, liberalized and open to ASEAN investors. Each member state is then responsible to reduce or eliminate their reservation list in accordance with the three phases of the Strategic Schedule of the AEC Blueprint. To help promote the ASEAN rgion as an integrated investment area that has favourable conditions for domestic and international investment, all member states agree through the ACIA to: Create the necessary environment to promote all forms of investment and new growth areas in ASEAN Promote intra-asean investment, particularly investments from ASEAN-6 (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) into the less developed ASEAN countries Nurture the growth and development of Small and Medium Enterprises

7 28 東 協 瞭 望 010 Promote joint investment initiatives focusing on regional clusters and production networks b. Non-Discrimination Equality in treatment for ASEAN investors and their investments is another important function of the ACIA. The Agreement s National Treatment and Most-Favoured-Nation Treatment principles obligate the ASEAN member states to not discriminate and treat ASEAN investors less favourably than either local or foreign competitors. Under National Treatment, an ASEAN country agrees to treatment investors from any ASEAN country no less favourably than it would treat its investors in the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. Under Most-Favoured-Nation Treatment, all ASEAN investors must be treated equally and this includes investors from non-asean countries. In addition, member states cannot impose any specific nationality requirements on senior management unless there is an official published reservation, and if a member state requires the board of directors in a foreign company to be of a particular nationality or be residents, it cannot impair the ability of the investor to control its investment. The ACIA also guarantees no performance requirements and cannot impose conditions like minimum local contents, export requirements, or trade balancing requirements. c. Transparency Another of the ACIA s guiding principles is to improve the transparency and predictability of investment rules, regulations and procedures conducive to increased investment. These include: Harmonized investment policies that lead to investment policy convergence Streamlined and simplified procedures for investment applications and approvals Dissemination of information on rules, regulations, policies and procedures affecting investors and their investments within ASEAN d. Investor Protection The ACIA also provides enhanced protection to investors and their investments including fair and equitable treatment, full protection and security, no unlawful expropriation, compensation in cases of strife, and free transfer of funds. The ASEAN member states have agreed to give all covered investments under the ACIA fair and equitable treatment, to not deny justice in any legal or administrative proceedings according to the principles of due process, and that the host country will not make arbitrary decisions and follow it rules and regulations. e. Investor-State Dispute Settlement Another valuable component of the ACIA is its Investor-State Dispute Settlement mechanisms (ISDS) and the promotion of alternative dispute resolution methods. ASEAN investors can resolve disputes by using domestic courts and tribunals, through international arbitration including ICSID, UNCITRAL, and other agreed rules, and by means of alternative dispute methods: mediation, conciliation, and consultation & negotiation. A disputing investor must show that it incurred a loss or damage by reason of or arising out of the breach of the host ASEAN member state of its obligations under ACIA relating to the

8 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 29 management, conduct, operation or sale or other disposition of a covered investment. For any disagreements about ACIA interpretation other than investment disputes, all parties must use the existing ASEAN State-to-State dispute settlement mechanism under the ASEAN Protocol on Enhanced Dispute Settlement Mechanism. Trade Agreements and ASEAN ASEAN has achieved formidable economic development since In all ASEAN member states (AMS), both poverty rate and gap are reducing substantially and the share of the middle income class is also rising. This is possible due to significant economic progress and transformation with high growth particularly in , which was considered as the region's golden decade. However, the growth moderated in 2000s. Indeed, AEC has been instrumental in bring about this development. However, there are still many challenges such as the prevalence of large number of poor and vulnerable people in most AMSs, mixed record of income inequality and still much to be desired with respect to the level of competitiveness. AEC thus promises many hopes, which can be realized provided that it is fully functioning. But what matters most is to keep the ambition and momentum of the economic community transcend 2015 target. For this, ASEAN does not need to reinvent the wheel for the regional grouping vision transcending 2015, the 1997 ASEAN vision 2020, has provided the necessary impetus. ASEAN vision of 2020 sees the region as concert of robustly growing middle income and high income AMSs, an economic community of dynamic development, which is not only inclusive, resilient, sustainable and people-centred but also strong, outward-looking and globally engaged. Built upon the vision, ASEAN beyond 2015 envisages by 2030 the "ASEAN Miracle" will be realized, wherein ASEAN economy will achieve sustained high growth, eliminating dire poverty and the prevalence of middle class population. It will also be competitive and dynamic, making it highly attractive to investors. The region will also be markedly more resilient. The ASEAN Miracle can be realized provided it puts in place a strong foundation and is supported by the necessary pillars. One of the pillars to achieve ASEAN miracle is the region has to be globally engaged wherein it will be well integrated into the global economy, drives further regional integration in East Asia, and raises ASEAN's voice internationally. As globalization is inevitable and the region is gradually integrated into the world economy, ASEAN certainly not only needs to develop a coherent approach towards external economic relations but also sets a strategy to enhance participation in global supply network. The most outstanding attempt to achieve regional integration that is linked to the wider global market is the Regional Comprehensive Economic Partnership (RCEP) agreement. RCEP is a framework that builds on the existing ASEAN+1 FTAs and it allows the participation of all AMS. An open accession clause allows the participation of ASEAN FTA partner to participate at the pace that they choose and it allows for other external partners to join subject to the mutual approval of all AMS.

9 30 東 協 瞭 望 010 Further, RCEP takes the ASEAN-way in that it is based on a consensus approach, with all AMS agreeing to any decision that is taken. This provides flexibility in convergence to desired goals, while also acknowledging the different levels of development and the divergence in backgrounds and interests. Nevertheless, there is a common interest among all AMS to raise the level of growth, development and welfare of the peoples of ASEAN. RCEP should be seen as the first step towards regional integration and a necessary measure to resolve the noodle-bowl effect. This will reduce transactions costs, the problems connected with differing rules of origin, and allow ASEAN to be treated as a single entity as far as trade and investment are concerned. The main objectives of RCEP should be to reduce tariffs substantially or even eliminate them. There should also be liberalisation of services also, particularly to help strengthen ASEAN s position in the global production network, and also to improve East Asia s link with AMS. The priority issues for RCEP to strengthen will be intellectual property rules, trade facilitation, connectivity, integration within regional supply chains in East Asia, promotion benefits to SME s through RCEP and domestic regulatory reforms. With respect to the formation of regional trade arrangements, the Trans Pacific Partnership (TPP) has to be mentioned. The TPP agreement is a high quality FTA. In that sense its requirements will be more stringent than WTO, or RCEP. Nevertheless, the TPP should not be seen negatively because it will set the agenda for a new global trade regime. It can be expected that the future global trade will be more rules-based, with more emphasis on transparency, competition and greater liberalisation. TPP includes as its members two of the world s most significant economies, viz, the United States and Japan, and other economies that are important to ASEAN, such as Australia, New Zealand and Canada. The TPP will gain more influential members in time to come. This being the case, the value of the TPP cannot be underestimated. The TPP is not in conflict with RCEP. In fact, RCEP can be seen as a step that can be taken towards TPP membership should the need be felt, and at the time determined by the member state. Thus, by meeting RCEP commitments member states are potentially converging towards TPP commitments. The notion of ASEAN centrality should be maintained. Agreeing to participate in the TPP need not take AMS away from this goal. The TPP is not in conflict with ASEAN centrality. An ASEAN which is better integrated through AEC and the RCEP will be in a stronger position to take advantage of membership in the TPP. This will place ASEAN in a better position to gain from the TPP. It must be acknowledged that AMS are at different stages of development and they are on different levels of liberalisation. According to their level of development, the member states will take liberalisation paths that are unique to their backgrounds. This has to be accepted. Nevertheless, the TPP can be seen as a set beyond RCEP that will catalyse the growth and development of ASEAN.

10 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 31 The question of sequencing the progress towards membership into TPP is another matter for consideration. AMS can only be expected to join the TPP only when they are prepared to undertake the necessary domestic reform. AMS can be encouraged to consider participating in the TPP as an option that is worthy of consideration, but the individual countries must be left to decide when they want to do so. In sum, it can be maintained that ASEAN with the RCEP will be a very vibrant economic region. The question of TPP is another issue, and it is one that will not impact the whole of ASEAN for a long time, because most ASEAN member states will not be a part of TPP for a long time now. But that aside, the RCEP because it links ASEAN with the other countries with which it has regional trade agreements will help ASEAN move ahead as an investment location. In that sense, it is worth pointing out that ASEAN with RCEP will be linking with some of the most powerful economic dynamos in the world, and this includes China and Japan, with India emerging rapidly. Malaysia as ASEAN s Investment Hub Further to Prime Minister Najib Razak's budget speech in March 2009, on 22 April and 27 April 2009, the Prime Minister's office announced a number of liberalisation measures. The steps were taken to encourage growth and development in the service and financial sectors. The purpose of these measures was to promote investment liberalisation which would attract the inflow of international investment in Malaysia. The government realizing the importance of the services sector has chosen to liberalise this sector. In 2010, the services sector contributed 53.2 per of GDP, rising up to 54.2 per cent of GDP in 2011 and hovering at about that level in subsequent years. The target is to see the services sector contribute up to 60 per cent of GDP, a target that is not unreasonable in comparison to that achieved by developed economies. Prior to the 22 April 2009 announcement, ordinarily 30% of the equity of each Malaysian company had to be held, directly or indirectly, by Bumiputera. Certain exceptions were made to this rule, and it included waivers if the products produced were predominantly for the export market. This was followed in 30 June 2009 with the rationalisation of the investment guidelines as administered by the Foreign Investment Committee (FIC). The FIC allowed for greater liberalisation of foreign investments. The 2009 announcement declared the 30% Bumiputera equity condition would no longer be imposed on 27 sub-sectors of the service sector. These exempted sectors included the following: health and social services tourism services transport services business services computer and related services sporting and other recreational services The reason for this change in policy was to encourage the growth of the services sector. It was reasoned that the services sector could be the new engine of growth. In order for the service sector to increase its contribution to Malaysia's GDP from

11 32 東 協 瞭 望 % to 60% the need for the services sub-sectors was seen as being necessary. Indeed, 18 additional sub-sectors were liberalised by phases in Some of the sectors that were liberalised included medical specialist services, dental specialist services, legal services, telecommunications, technical and vocational schools, and private schools. Along with these services sub-sectors being liberalised, several Acts were reviewed to support the liberalisation process. The Acts under review included the architectural services, engineering services and quantity services Acts. In its budget for 2012, it was announced on 7 October, 2011, that there will be liberalisation of telecommunication (Application Service Provider) licenses. It was also announced that 100 per cent foreign ownership of accounting and tax services, courier services, private higher education, international schools and technical and vocational secondary education services would be allowed. The Malaysian government's willingness to liberalise other sub-sectors was also clear since it declared its intention to liberalise private hospital services, dental clinic services, and architectural and enggineering services. The liberalisation of these services depended on amendments to the relevant Acts. The government has also undertaken supporting initiatives to facilitate investment liberalisation, primary among them are business enabling frameworks. This includes improving the regulatory regime and administrative guidelines. Specific assistance is to be extended towards the setting up of regional establishments, and for the following areas: logistics tourism environmental management business services, and healthcare travel (medical tourism). Two additional areas that are targetted are Islamic finance and the Multimedia Super Corridoris a (MSC). The latter is to make Malaysia an important hub for shared services, data centres, back office operations and customer service centres. Globally, the MSC has been ranked by A.T. Kearney as the 3 rd most competitive centre for offshoring and outsourcing activities. The financial sector has also been long-earmarked for liberalisation. It was planned that a phased approach be introduced so as to liberalise the financial sector. In the commitment of 2009, it was planned that the financial sector be liberalised over a 3 year period commencing in that year. The financial liberalisation package included the following: (i) the issuance of a number of licences which will allow more foreign companies to operate in the Malaysian financial services sector; (ii) measures to increase foreign equity ownership limits; and (iii) the relaxation of operational restrictions. In keeping with these measures it was proposed that the following licenses be issued: 1. Islamic banking liceces 2. Commercial banking licences 3. Family takaful licences It was proposed that up to 2 licences be issued by the end of 2009 to foreign companies to establish

12 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 33 new Islamic banks. Any new institution receiving a licence will have to be incorporated locally and will be required to have issued and paid-up capital of at least US$1 billion. In the case of commercial banking licences with specialist expertise, it was also proposed that up to 2 licences to be issued by the end of 2009 to foreign companies that will bring specialist expertise to Malaysia and spur on the development of targeted economic sectors. These newly licensed banks will need to be incorporated locally and maintain, at all times, capital funds of RM300 million (unimpaired by losses). It was further proposed that 3 licences be issued to world class banks that would be able to offer expertise and resources for the development of the Malaysian financial services sector. Once again, it was announced that these banks had to be incorporated locally and be required to maintain capital funds of RM 300 million at all times. As far as the family takaful licences are concerned, it was announced that up to two new licences be issued by the end of that year to foreign companies to encourage the development of the takaful industry and to spur the development of Malaysia as an international Islamic financial hub. However, there were some conditions that were imposed. This included being registered under the Takaful Act 1984 and maintaining a minimum issued and paid-up capital of RM100 million. In addition to offering more licences the government has realised the need to increase foreign investor stake in banks incorporated in Malaysia. In accordance with this, the government has permitted foreign investors to hold up to 70% in Malaysian incorporated Islamic banks, investment banks, insurance companies and takaful operations. The foreign equity limit for insurance companies has also been increased. The insurance industry is allowed to consolidate and rationalise the industry and a foreign equity holding of more than 70% will be allowed on an individual basis. However, the restriction on foreign investors holding more than 30% of domestic commercial banks remains unchanged. The other issue is that a 30% stake that must be held by Bumiputera in all companies in the financial service sector is still maintained. The government has also brought about changes to the legislative and regulatory regime governing the financial sector. One of the changes that was instituted was the flexibility to allow locally-incorporated foreign commercial banks to establish up to 10 microfinance branches. In the case of locally-incorporated foreign insurance companies and takaful operators, there is more flexibility in so far as they are allowed to establish branches nationwide and without restriction. The Labuan Offshore Financial Services Authority (LOFSA) was also accorded more flexibility in that they can allow offshore banking institutions to have an onshore presence if they met stipulated conditions. The same applies to offshore insurance companies. The constraints on skilled labour were also recognised, and banking institutions, insurance companies and takaful operators will be accorded greater flexibility to employ specialist expatriates. Other changes to the legislative and regulatory regime governing the financial sector, which were announced recently and which are intended to increase operational flexibility, include the following:

13 34 東 協 瞭 望 010 Locally-incorporated foreign commercial banks were permitted to establish up to 10 microfinance branches and will, subject to certain conditions, be able to establish up to 4 new fully-fledged branches in Locally-incorporated foreign insurance companies and takaful operators were allowed to establish branches nationwide without restriction. The restriction on locally-incorporated foreign insurance companies and takaful operators entering into bancassurance and bancatakaful arrangements with banking institutions was lifted. Offshore banking institutions licensed by LOFSA that meet stipulated criteria may have the opportunity to have an onshore presence from 2010; similarly, offshore insurance companies licensed by the LOFSA allowed to establish an onshore presence by Banking institutions, insurance companies and takaful operators were accorded greater flexibility to employ specialist expatriates. From the above, it is very obvious that Malaysia is taking liberalization very seriously. In recent years the burden of focus has been on liberalizing trade in services, but that is not what the government is exclusively doing. In fact, the government is concentrating on liberalization of services because much has been done to liberalise trade in goods, and the next logical step is to concentrate on services. Since Malaysia, within the ASEAN group of nations, has very good infrastructure, good supply of human capital, a stable economic and political environment and high quality of life, it is in a position to attract foreign investors. This is not to exclude the pro-business nature of the government and its urge to improve private sector and foreign investor participation in the economy. These qualities will attract FDI into Malaysia. The next step of the argument is to establish that Malaysia can be a hub for ASEAN, both as a hub for production and also as a single market. In this respect, the on-going initiatives in ASEAN such as liberalizing rules of origin (ROOs), streamlining the processes to obtain certificates of origin (COO) will make trade within ASEAN more efficient and it will also make it easier for ASEAN member states to trade with their partners such as China, Japan and India, but it will also make it easier for the flow of FDI. Another issue that is being worked upon is non-tariff measures (NTMs). NTMs should not be indirect barriers to trade. While there is scope for NTMs to be imposed, for instance, for health and safety reasons, NTMs should not be imposed to restrict trade and investment. Malaysian government has improvised the tariff levels in the country. With a low tariff environment, the role of non-tariff measures (NTMs) as a regulatory trade policy and protectionist tool has become clearer amongst the Malaysian manufacturers and traders. The NTMS could be strictly imposed on their imports of raw material, intermediate input and final products. Even though their imports are subject to NTMs for reasons such as safety, sanitary, health, etc however NTMs still have a potential to increase the companies operating costs as well as slow down the access of imports to local markets. In Malaysia, the imports that are subject to NTMs are categorized into four different schedules of the Customs Order of the Royal Malaysia Customs Department (RMCD). The first schedule

14 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 35 consists of a list of products which imports are completely banned due to national, religious, security and health reasons. The second schedule consists of a list of products which imports are allowed if accompanied with import licenses. The products being listed in this second schedule are controlled by the Malaysian government for health, sanitary, security, environmental protection or intellectual property reasons. Meanwhile, the third schedule consists of a list of products that may not be imported except with import license due to protective reasons. The fourth schedule consists of a list of products which imports are allowed provided the manufacturers or traders meet certain requirements such as the imports are accompanied with the import permits issued by certain government departments or agencies. The use of NTMs as a regulatory trade policy tool in many cases of imports in Malaysia is real. However, sometimes the NTMs are also used as the protectionist measures for Malaysian government to protect local producers from import competition. For instance, Malaysian government protects its local automotive industry by imposing a number of import restrictions including a system of Approved Permit (AP) on foreign vehicles. Besides, Malaysian government imposes quotas on how much foreign rice can be imported as it protects the interest of the local paddy farmers. The policy of having a single importer of rice which is BERNAS has led the country to achieve that particular goal. It is necessary to look beyond immediate gains and to ensure that NTMs do not become a barrier to trade, because if they do they will also restrict investment. The upshot of this is that ASEAN will be a more vibrant location for production networks. This will make it easier to fragment the production process and foreign investors will be more interested in locating their investments in an ASEAN country. Since Malaysia is a key player in ASEAN, and because it has desirable attributes to attract FDI, these initiatives will cause FDI to be located in Malaysia, with an eye to the ASEAN market as a whole. Malaysia is naturally suited to be the hub for ASEAN, both in terms of production and in treating ASEAN as a single market. This is because Malaysia is strong from the perspective of its institutional mechanisms. As proof of it, it is useful to note that Malaysia has been doing well in rankings on ease in doing business, and in the investment friendly environment, not just regionally but also globally. This is a big boost for investment. No less important is the role played by government agencies like MIDA and Pemudah, which are agencies that are meant to facilitate investment and to improve the government delivery system for the private sector, respectively. Malaysia has accomplished some important steps in making it a more favourable destination for investment. Among steps that have been taken are attempts to improve the following: Trade facilitation Investment facilitation Standards and conformance Non-tariff measures In this respect, it can be emphasized that Malaysia has achieved considerable strides in

15 36 東 協 瞭 望 010 implementing the National Single Window, which is an important step towards the ASEAN Single Window. Malaysia, as observed by the Economic Research Institute for ASEAN and East Asia (ERIA) is a regional leader as far as customs procedures, national single window is concerned. Malaysia also ranks very high with respect to standards and conformance; and it has a good score on NTBs. It must be emphasized that Malaysia has a strong tradition of liberalization. This is supported by institutional and regulatory reform. However, ASEAN has yet to harmonise its rules and regulatory framework, making Malaysia a leader in the region. A further point that makes Malaysia a good candidate as a hub is the fact that Malaysia is a balanced economy, that has all the necessary sectors that go to create a complete economy, i.e. Malaysia has well-developed manufacturing, services, agricultural sectors as well as skilled workforce. All the economies in Malaysia are not complete in this sense, which again gives Malaysia the opportunity to be a hub for investment. Conclusion ASEAN as a region is poised to grow in the next century. The concept of an ASEAN Economic Community will strengthen the region and will help to integrate the region economically. Further, the on-going negotiations on RCEP will lead to a regional entity that is strongly integrated with some of the economic giants of the world. In particular, it would lead to closer trade and investment ties with East Asia, that is, China, Japan and Korea, as well as with India (an emerging giant), not to mention Australia and New Zealand. These developments will improve the investment prospects for ASEAN and ASEAN will become a prime location for foreign investment. FDI is known to foster growth, and some of the ASEAN member states have a long tradition of being export-oriented and keen on attracting FDI, Singapore and Malaysia being prime examples. The regional initiatives, plus the attempt to facilitate trade and investment in ASEAN will improve ASEAN s standing as a centre for investment, which will promote production networks, seize opportunities for the fragmentation of production and, therefore, draw more investment into ASEAN. Due to the aforesaid, Malaysia has a potentially crucial role to play in being the investment hub of ASEAN. In fact, Malaysia is undertaking many liberalization measures in investment that will make Malaysia a favourable hub for foreign investment. It is also working to improve investment facilitation.

16 APPENDIX ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 37

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18 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 39

19 40 東 協 瞭 望 010

20 ASEAN, AEC AND EMERGING ISSUES IN INVESTMENT: What Role for Malaysia? 41