Business Investment in ASEAN and Asia

11th Dec, 2014

Kazumi Nishikawa

Executive Director, JETRO Singapore

Special Advisor to Minister, METI, GOJ

1. Asian economy and Japan’s Business View

2. Business response to Individual Country

3. Expectation for AEC

4. Expectation for RCEP

2

Asian Economy and Japan’s Business View

3

Flow and Stock of Wealth in the region

4

GDP, Wealth and Global Business

（Unit：US$ billion,％, Number）

Per capita GDP（2013）

GDP（2013）

GDP outlook (2019)

Share of World Wealth (2013)

Number of Fortune Global 500 (2014)

Thailand 5,674 387 492 0.16 1

Vietnam 1,902 171 265 0.12 -

Cambodia 1,016 16 26 0.01 -

Laos 1,477 10 19 0.01 -

Myanmar 869 56 97 0.03 -

Mekong 5 - 640 899 0.33 1

- 2,406 3,608 2.00 7

6,747 9,181 14,839 9.21 95

1,505 1,871 3,096 1.50 8

Japan 38,491 4,902 5,718 9.38 57

- 45,338 59,137 79.05 368

USA 53,101 16,800 22,090 29.91 128

EU 32,152 17,372 23,433 29.05 128

- 73,982 100,847 100 500

Source: "World Economic Outlook April 2014"(IMF), Credit Swiss Global Wealth Databook 2013

ASEAN

China

India

Advanced countries

World

Supply Chain in East Asia

5

Many intermediary goods are traded within East Asia. They are assembled in East Asia and exported to huge markets including East Asia itself as well as EU and NAFTA.

100.9

145.3

208.6

208.4

142.6

80.8

104.9

94.1

119.5

84.2

372.9

197.2

278.5

115.9

93.9

380.8

140.565.0

80.5

Japan

NAFTAEU

China

2,791.7

1,971.5

East Asia

839.1

193.8

Korea

26.7

63.4

46.6

42.5

65.8

45.538.2

54.4

151.2

70.4

ASEAN

428.5

（2010）The size of an arrow represents a trade amount (billion dollars)

The share of intermediary goods

70%～

60%～

50%～

40%～

30%～

～30%

Source : RIETI-TID 2011

ASEAN

AustraliaNZ

Japan

China

Korea

India

.

• Companies need to be integrated into the supply chain networks to increase exports to the

growing markets in the region as well as to the outside of the region.

• Companies are now troubled with different rules in various existing EPAs (ex. ROOs). Simple,

unified and business friendly rules under the RCEP will further facilitate cross-border supply

chain networks.

6

Case1. Japanese automotive

company in Thailand imports

engines and transmissions

from Japan, assembles cars in

Thailand and exports finished

cars to Australia.

Case 2.Japanese auto parts company in Thailand imports components from Japan, manufactures air bag in Thailand and exports to India.

Case 3. Japanese elevator

manufacturer in Thailand

imports hoisting machine from

China, manufactures elevator

in Thailand and exports to

India.

Japan’s Business View

1. Integrate into the supply-chain networks in the region

•Recent FDI are creating more employments in non-manufacturing sectors, such asICT, distribution, wholesale etc.

•Business environment for non-manufacturing sectors should be further improved tomake East Asia a more attractive investment destination.

Country 2004 2011

Thailand 46,135 (10%) 63,751 (11%)

Indonesia 36,530 (12%) 63,823 (17%)

Philippines 12,766 (7%) 48,015 (22%)

Malaysia 19,689 (9%) 33,109 (20%)

Singapore 24,494 (40%) 33,557 (48%)

Vietnam 3,676 (4%) 14,825 (5%)

India 5,719(9%) 16,688 (11%)

Number of employments by Japanese FDI in non-manufacturing industries in each

country (% in total employments by Japanese FDI)

Increase in ICT

industries

(846 -> 35,410)

Increase in

distribution/ service

industries

(9,235 -> 20,630)Increase in wholesale

industries

(572 -> 3,770)Source; METI (Basic Survey of business activities abroad)

7

2. Increase cross-border investment

Japan’s Business View

Business response to

individual country

8

Environmental change in ASEAN and Southwest Asia:

Business merits

9

• Expansion of the consumer market, economic integration by free trade agreement (FTA), progress of infrastructure

development, etc. expands business opportunities for Japanese companies in ASEAN and Southwest Asia.

• The following are the top 10 items listed as “merits of the investment environment" conducted by questionnaire survey to

overseas Japanese companies. It turns out that the "market size and growth potential" is common and the greatest merits for

the respondent companies which listed India, Indonesia and Myanmar as a high ranking country. In the following listed items,

Singapore and Malaysia are remarkable in terms of fundamental investment environment such as political and social

situation, living environment and infrastructure.

Listed items Total ManufacturingNon-

manufacturing

Top 3 countries

(%)

1 Market scale/growth potential 56.6 50.9 63.6India

(86.9)

Myanmar

(84.6)

Indonesia

(83.8)

2 Political/social stability 39.8 39.0 40.7Singapore

(87.7)

Malaysia

(81.7)

Lao PDR

(68.2)

3 Good living environment for Japanese expatriates 30.6 30.0 31.2Thailand

(56.3)

Singapore

(42.6)

Malaysia

(36.3)

4 Sufficient infrastructures (power/logistics/communications) 24.9 25.0 24.7Malaysia

(51.5)

Singapore

(49.5)

Thailand

(39.0)

5 Fewer linguistic/communication problems 24.6 21.5 28.3Philippines

(69.2)

Malaysia

(56.1)

Singapore

(51.6)

6 Local industrial clusters formed by client companies 22.8 23.6 21.8Thailand

(45.6)

Indonesia

(23.0)

Singapore

(18.8)

7 Easy to hire local staff (general worker/staff/clerk) 20.1 24.9 14.2Philippines

(58.0)

Bangladesh

(40.6)

Pakistan

(34.6)

8 Tax incentives (corporate taxes/customs duties) 18.9 22.8 14.1Singapore

(53.4)

Philippines

(34.3)

Pakistan

(30.8)

9 Plentiful land/offices, low land price/rent 11.3 12.3 10.1Lao PDR

(31.8)

Malaysia

(16.0)

Bangladesh

(15.6)

10 Formation of local industrial clusters, i.e. easier to procure local goods 9.8 10.9 8.4Thailand

(22.9)

Bangladesh

(12.5)

Pakistan

(7.7)

Copyright © 2014 JETRO. All rights reserved

Analysis by item on business challenges

10

For the purpose of exploring "business challenges" concerning Japanese companies in each country, this survey was encouraged to

respond to the selected 16 subject items with multiple answers allowed.

Listed are the 10 subject items which received the highest rate of responses. The most recognized item is “wage increase" which is

common among the Japanese companies in each country, and in which Indonesia's reply rate is highest with 82%. The items which

ranked 2nd, 3rd, 4th, 5th and in the margin of 15th “lack of protection of intellectual property rights” can be classified into “soft

infrastructure”, while 6th falls into “hard infrastructure." It turns out that India, Bangladesh and Myanmar are highest ranking in almost

all of these items. Analysis and description is made in the following pages of features, tendencies and countermeasures for every

subject item along with a country-by-country comparison.

Responded items Total ManufacturingNon-

manufacturing

Top 3 countries

(%)

1 Wage increase 62.6 69.9 53.7Indonesia

(82.0)

Singapore

(68.8)

Thailand

(68.7)

2 Time-consuming administrative procedures 42.5 41.3 44.0India

(74.4)

Myanmar

(69.2)

Vietnam

(66.1)

3Unclear policy management by local

government39.7 40.6 38.7

Myanmar

(76.9)

Bangladesh

(67.6)

India

(58.7)

4 Time-consuming tax procedures 38.9 38.6 39.4Myanmar

(76.9)

India

(76.2)

Vietnam

(65.0)

5Underdeveloped legal institutions and unclear

legal institution operation38.1 38.4 37.8

Myanmar

(76.9)

Lao PDR

(73.9)

Cambodia

(72.4)

6Insufficient infrastructure (power, logistics,

communications)37.1 38.1 35.9

Myanmar

(92.3)

Bangladesh

(88.2)

India

(77.7)

7 Labor shortage and difficulty in recruitment 33.3 34.5 31.9Lao PDR

(60.9)

Malaysia

(52.7)

Cambodia

(48.3)

8 Currency volatility 31.2 33.4 28.5Pakistan

(70.4)

India

(66.9)

Indonesia

(54.4)

9 Unstable politics and social conditions 31.1 30.3 32.0Pakistan

(96.3)

Bangladesh

(88.2)

Myanmar

(69.2)

10 Labor disputes/lawsuits 21.0 27.4 13.1Indonesia

(49.6)

India

(34.0)

Sri Lanka

(30.3)

Copyright © 2014 JETRO. All rights reserved

Expectation for AEC

11

Expectation for AEC (Japanese Companies)

12

As for the expectation for implementation of the AEC items, the predominant response

was “Simplified customs clearance” (63%), followed by “Elimination of import tariffs in

CLMV (Cambodia, Laos, Myanmar, and Vietnam)” (39 %), “Free movement of skilled

labor” (32 %) and “Infrastructure development in CLMV” (23%).

No. of firms and (%)

Ranking The expectation for implementation of the AEC items

1 Simplified customs clearance 145 (69) 72 (55) 217 (63)

2 Mutual duty exemption among CLMV 84 (40) 50 (38) 134 (39)

3 Free movement of skilled labor 73 (35) 38 (29) 111 (32)

4 Infrastructure development in CLMV 42 (20) 35 (27) 77 (23)

5Introduction of standardization, certification and making systemstandardized in ASEAN nations

48 (23) 24 (18) 72 (21)

6 Relaxation of capital control in the service sector 16 (8) 51 (39) 67 (20)

7 Further deregulation of capital transfer 26 (12) 29 (22) 55 (16)

8Deregulation of investment in manufacturing, mining, agriculture andforestry industries

33 (16) 10 (8) 43 (13)

9 Improvement of intellectual property rights-related system 23 (11) 15 (11) 38 (11)

10Introduction of self-verification system in relation to ASEAN FreeTrade Agreement(AFTA)

28 (13) 7 (5) 35 (10)

11Harmonized policy within the region (e.g. fair competition, consumerprotection)

10 (5) 7 (5) 17 (5)

12 Others 1 (0) 0 (0) 1 (0)

Total 529 338 867

No. of firms 211 131 342 (100)

Manufacture Non-manufacture Total

Source: JCC Bangkok Survey 2013

Expectation for AEC (ASEAN Regional Business)

13

The ASEAN Economic Community: The Status of Implementation, Challenges and Bottlenecks

Summary Findings:

• Sound political, legal, institutional, and technical frameworksA clear finding is that ASEAN scores high on the political, legal, institutional, and technical frameworks that govern regional economic integration. The AEC, and a multitude of

related agreements in facilitation of the free flow of goods and services, intra-regional investments, customs harmonisation, SME support standards and non-tariff barriers to trade

and other fields, if implemented, would indeed lead to an economic community. However, there is ample evidence to suggest that actual implementation lags significantly behind

the timelines of stated objectives.

• Mismatch between political ambitions and realityThe main hurdle is the mismatch between political ambitions and the capacities, capabilities and, often, political will of several member states to walk the talk. The basic conditions

for creating common regimes or even for harmonizing national legislative frameworks and enforcement practices among ASEAN countries are not yet in place, owing to considerate

disparities in technical and institutional capacities, economic development and political priorities. The reasons for the slow and insufficient process towards AEC implementation can

be broadly divided into economic and political arguments.

• Lack of binding commitmentEconomic Integration cannot work on the basis of non-binding agreements. If member states are allowed to opt-out at any time or choose not to implement agreed actions,

integration is hardly achievable. However, this is exactly what happens under the ASEAN-Minus-X-formula which guides almost every aspect of liberalisation and integration.

Essentially, the principal allows AMS to join the bandwagon in their own time. The member states of ASEAN are trying to achieve far-reaching visions of economic community-

building, which are not that much dissimilar to European integration, without the necessary modifications to the traditional ASEAN Way of cooperation. Yet, AMS have made a

commitment to establishing the AEC with all of its detailed and explicitly spelled out targets and action plans. Hence, the argument that “binding decision-making and supra-

nationality are alien concepts in the Southeast Asian context” is no longer a convincing excuse for the delay in the implementation process.

Recommendations:

• ASEAN should take more ownership of the integration processInternational donors, mainly the EU, USAID, AusAID and JICA, have invested millions of USD in support of all areas in regional economic integration. While many bottlenecks have

been effectively addressed as a result, the massive presence of donors has also created a dependence of ASEAN as a whole and the AMS on external funding for the

implementation of AEC. Regardless of whether one wants to see donor involvement as a blessing, a necessity or a curse, there is no way around the requirement that AMS will

have to show more responsibility and commitment in the shaping of the economic community and develop a stronger sense of ownership. Sooner or later, this will have to include

larger financial contributions from the more developed AMS.

• Rethinking the ASEAN WayIt would not be realistic to recommend – as has been done in other studies – that AMS should accept the idea of supra-nationality and transfer autonomous decision-making

authority to the ASEC, enabling it to steer the process of economic integration. This is unachievable in the presence of young nation states which – for legitimate reasons – are

eagerly protecting their national sovereignty.

ASEAN has worked well as an inter-governmental organization based on the core norms and principals of the ASEAN Way. However, this approach to regional cooperation does

not and cannot facilitate deep, European-style integration as envisioned by the AEC. The decisive issue is that ASEAN will not be able to deliver on the expectations that have been

created.

• Expectation of AEC 2015 needs to be correctedMany extra-regional and ASEAN stakeholders, and, above all, large parts of the private sector stakeholders take the AEC 2015 at face value. These expectations need to be

corrected. ASEAN needs to concentrate on those areas in which closer economic interaction and an increase in transactions can be achieved, on the basis of the proven structures

and institutions of inter-governmental interaction.

Source: CARI (CIMB ASEAN RESEARCH INSTITUTE) Dedicated to ASEAN Integration, The ASEAN Economic Community: The Status of Implementation, Challenges

and Bottlenecks

Expectation for AEC (World Bank report)• ASEAN integration has progressed in parallel with global integration

• Broadly defined, the ASEAN agenda of regional integration has been implemented concurrently with the opening of market

access to non-ASEAN traders

• Looking forward, ASEAN should continue as a facilitator of better integration of its members’ economies into the global

trading system and pursue an open regionalism agenda

• The high trade complementarity of some ASEAN countries to the region – indicating that exports of those ASEAN member

countries are in high demand in other countries of the region- points to significant gains from further trade within ASEAN

• Supply chains are only as strong as their weakest links: complementarities among member countries should be developed

through the help of the ASEAN integration agenda

• A key finding of this report is the areas of commonality that arise in the four trade integration pillars examined: goods,

services, trade facilitation, and investment

• As this report also shows, while there remain several areas (non-tariff measures, services, investment) where progress must

still be achieved to meet and expand existing liberalization commitments, the overall integration agenda should also now

include regulatory measures that remain largely unaddressed

• Regulatory barriers impeding trade are different from traditional trade barriers such as tariffs and are potentially numerous

and pervasive

• The across-the-board regulatory challenge has implications in terms of how to move forward in pursuing the ASEAN

integration objective

• A second dimension of the regulatory agenda is setting up processes that help address the unnecessary costs that

regulatory barriers may create

• Given that regulatory issues pervade goods, services and investment integration policies, and affect regional supply chains

in more than one way, it would be advisable for the ASEAN membership to also think holistically in terms of supply-chain

policy strategies

• Going beyond commitments, the ASEAN membership must now focus on implementation and the institutions supporting it

• It is now widely agreed that a key task for ASEAN will be to prioritize the actions and targets set out in the highly

comprehensive AEC Blueprint

Source: ASEAN Integration Monitoring Report, A Joint Report by the ASEAN Secretariat and World Bank 14

Expectation for RCEP

15

Unit: No. of firms and (%)

Ranking Issues expected for discussion by the RCEP

1Improvement of various systems (transparency of Customs procedures, relaxation of issuance of work

visas)78 (38) 69 (36) 147 (37)

2 Common certificate of origin among the 16 countries 94 (46) 52 (27) 146 (37)

3 Simple and accessible rules of origin (Custom Tariff Change or Regional Value Content) 91 (44) 53 (28) 144 (36)

4 Participation of 16 countries i.e. ASEAN, Japan, China, Korea, India, Australia, and New Zealand 68 (33) 46 (24) 114 (29)

4 Relaxation or elimination of non-tariff barriers 73 (35) 41 (21) 114 (29)

6 Relaxation or elimination of the barriers for foreign ownership 39 (19) 62 (32) 101 (25)

7 Wider liberalization (elimination of tariffs) in product categories and trade volume 65 (32) 25 (13) 90 (23)

8 Improvement in protection of intellectual property rights 24 (12) 20 (10) 44 (11)

9 Relaxation or elimination of service trade barriers 14 (7) 25 (13) 39 (10)

10 Cumulative effect of added value according to the rules of origin 18 (9) 9 (5) 27 (7)

11Economic and technical cooperation among the participating countries for a reduction in development

disparity6 (3) 5 (3) 11 (3)

－ Other 1 (0) 3 (2) 4 (1)

Total 571 410 981

No. of firms 206 192 398 (100)

ManufacturingNon-

manufacturingTotal

Expectation for implementation of the items under consideration by RCEP

16

Regarding issues expected for discussion by the RCEP (check all that apply), the predominant

response was “Improvement of various systems (transparency of Customs procedures,

relaxation of issuance of work visas)” (37%), followed by “Common certificate of origin among

the 16 countries” (37%), “Simple and accessible rules of origin (Custom Tariff Change or

Regional Value Content)” (36%).

Source: JCC Bangkok Survey 2013

The countries with which Japanese business desire to expand

business under RCEP

17

The predominant response was “Indonesia” (40%), followed by “Myanmar” (39%), “Vietnam”

(39%) and “India” (30%).

In the manufacturing sector, the predominant response was ““Indonesia” (40%), followed by

“Vietnam”(39%).

In the non-manufacturing sector, the predominant response was “Myanmar” (55%), followed by

“Indonesia” (38%) and “Vietnam” (38%).No. of firms and (%)

RankingThe countries with which firms desire to

expand business under RCEP1 Indonesia 87 (40) 50 (38) 137 (40)2 Myanmar 64 (30) 71 (55) 135 (39)3 Vietnam 85 (39) 50 (38) 135 (39)4 India 79 (37) 24 (18) 103 (30)5 Japan 57 (26) 37 (28) 94 (27)6 Cambodia 43 (20) 44 (34) 87 (25)7 Malaysia 45 (21) 27 (21) 72 (21)8 Laos 30 (14) 41 (32) 71 (21)9 China 51 (24) 20 (15) 71 (21)10 Philippines 28 (13) 18 (14) 46 (13)11 Singapore 15 (7) 13 (10) 28 (8)12 Australia 22 (10) 2 (2) 24 (7)13 Korea 12 (6) 7 (5) 19 (5)14 New Zealand 8 (4) 1 (1) 9 (3)- None 22 (10) 7 (5) 29 (8)

Total 648 412 1,060No. of firms 216 130 346 (100)

Manufacture Non-manufacture Total

Source: JCC Bangkok Survey 2013

Further Reference

• JBIC Survey: Report on Overseas Business

Operations by Japanese Manufacturing

Companies (the 26th) http://www.jbic.go.jp/en/information/press/press-2014/1128-32994

• JETRO Asian Business Surveyhttp://www.jetro.go.jp/en/reports/survey/pdf/2013_12_27_biz.pdf

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