Investing In Southeast Asia - Term Paper Example

 Investing in Southeast Asia – A comparative assessment Table of Contents Introduction 2 The political environment 3 (a) Indonesia (b) Malaysia (c) Thailand (d) Singapore The Economic environment 7 (a) Indonesia (b) Malaysia (c) Thailand (d) Singapore The Business environment 12 (a) Indonesia (b) Malaysia (c) Thailand (d) Singapore Conclusion 14 Investing in Southeast Asia – A Comparative assessment Introduction Southeast Asian countries are a favored destination for investment by multinational companies (MNCs). The region’s geographical proximity to Australia is an added attraction for Australian companies to think of it as a first choice for their foreign investment. This report is an assessment of some relevant factors regarding investment in the countries of the region to help the Australian mining service company, MINSER P/L to decide on the country in the region as a preferred location for investment. In order to make the best business choices MINSER needs to have the best information on opportunities, risks and the degree of competition that it may have to face and on the cultural environment within which it may have to perform. In the following sections, relevant information on these matters in Indonesia, Malaysia, Thailand and Singapore are presented in order to enable the management of MINSER P/L to decide on the best possible country to locate their business. It has to be mentioned that in preparing this report, information available from various sources such as government reports, research reports found in Journals like the Economist of London, articles in Journals of repute and reliable internet sources have been resorted to and relied upon and in all such instances accurate references and acknowledgements have been made in the text itself. (Any report on Plagiarism should be double-checked and compared with the language of this report before any conclusion on this matter is arrived at). 1. The Political environment (a) Indonesia Indonesia is a nation of islands: its five main islands are Java, Sumatra, Kalimantan Sulawesi and Irian Jaya, bordering on Papua New Guinea. It has a population of more than 240m people, 88 percent of whom are Muslims. However, the country has a history of cultural and religious diversity and tolerance, due to centuries of interregional trade and exchange, and its multi-ethnic composition. Immediately after World War II, on August 17, 1945, Indonesia declared its independence from the Dutch. There was political and economic instability in the wake of independence in spite of the first nationwide elections held in 1955. President Sukarno, the country’s first president secured a secular state based on representative democracy by consensus, and social justice. However, some Muslim groups preferred either an Islamic state or a constitution subject to Islamic law. Suharto, an army general replaced Sukarno as president in 1967, and was able to be re-elected for seven consecutive five-year terms with the help of the military to which he had given an increasing role in national affairs. Soon after the economic crisis in 1997, Suharto resigned in May 1998, and the Vice-President Bucharuddin Jusuf Habibie succeeded him. The 1999 parliamentary elections were won by the Indonesian Democratic Party of Struggle (PDI-P), of Megawati Sukarnoputri, the daughter of Indonesia’s first president, Sukarno. However, parliament elected Abdurrahman Wahid, Leader of the National Awakening Party (PKB) as president. Within a year, Wahid was removed as president through impeachment and Megawati, who was the Vice-President, became the president. In the 2004 direct presidential elections Susilo Bambang Yudhoyono, a retired general was elected president. Indonesian governance is based on the 1945 constitution, which provides for limited separation of executive, legislative and judicial powers. The president is both head of state and head of government, and can be elected for a maximum of two five-year terms. He conducts the administration of the government together with a co-elected vice-president and a cabinet that he appoints. He is accountable to the People’s Consultative Assembly (MPR), which can impeach him and which has the right to amend the constitution. President, Susilo wants to turn Indonesia into a democratic, tolerant country, a model for the entire Islamic world. There had been violent conflicts between the army and the populations in various parts of the country, and civil conflicts too between the Muslims and other ethnic and religious groups. The need for democratic consolidation is an important item on the political agenda. This will need to be supported by a ‘strong judiciary, good governance, effective law enforcement, respect for human rights, and social cohesion. With the strengthening of these qualities of a democratic society, the quality of security and public order will also strengthen, and the threat of terrorism and extremism can be better managed. (Rizal Sukma) (b) Malaysia Malaysia is a federation of 13 states with a constitutional monarchy, rotated every five years among the nine sultans of the federating units. It has a bicameral legislature with an upper chamber – the Council of the Nation – consisting of 44 nominated and 26 elected members, 2 each from the 13 states, and a lower chamber – the Council of the People – consisting of 219 deputies directly elected by universal suffrage. The Judiciary is not independent as understood under a democratic constitution. Its independence was effectively curbed by Dr Mahathir, the then prime minister, in 1987-88 in response to a court ruling declaring the April 1987 UMNO (United Malays National Organization) leadership elections invalid. The High Court was stripped of the power of judicial review and the separation of executive and judicial power was terminated. In the years that followed the powers of the executive were increased further. It was hoped that under Abdullah bin Haji Ahmad Badawi, the present prime minister, the judiciary might be given greater independence, but there has been no sign of judicial reform. The constitution declares Islam to be the official religion, but other religions are free to be practiced. During the past two decades, the government has actively promoted and favored Islam. In September 2001, Dr Mahathir stated that Malaysia was “already” an Islamic state. Since 1970, the government has marginalized Chinese and Indians in the civil and armed services. As a cosmetic measure, a few Chinese and Indians have been promoted to high ranks of office, but the majority of them are severely circumscribed in their careers unless they become Muslim. (Louay M. Safi) (c)Thailand In 1932, a constitutional monarchy was established in Thailand. During World War II, the Japanese occupied the country. After the war, for more than 45 years the military dominated Thailand’s political landscape. In 1992, after extensive student-led protests, King Bhumibol put an end to military rule. In 1997, Thailand adopted a new constitution designed to bring about stable civilian government, just before its currency, the baht, collapsed, setting off a chain of currency collapses around East Asia. A military coup in September 2006 deposed the prime minister, Thaksin Shinawatra. Under an interim constitution put in place by October 1st 2006, the military council, known as the Council for National Security (CNS), appointed a retired general, Surayud Chulanont, as prime minister to head the planned year-long transitional government. The CNS has pledged to hold a general election by the end of 2007 after a new permanent constitution has been promulgated. The interim constitution provides for a 250-member National legislative Assembly whose members are appointed by the king and are drawn from all regions of the country. (Economist Intelligence Unit, 1) (d) Singapore Singapore was a British trading colony from 1819 onwards. It joined the Malaysian Federation in 1963 but separated two years later and became independent. Singapore is a multi-ethnic multi-religious city-state with a population of a little over 4.5 million. It has a parliamentary form of government, with an elected president for six years as head of the State. The present president, Sellapan Ramanathan, was elected to office on 17 August 2005; the next election is to be held by August 2011. The legislature is a 84-member unicameral body elected by adult franchise for a period of five years. Elections are based on ‘the first-past the-post system’, that is, whoever secures the most votes wins. The leader of the majority party in parliament is invited by the president to be the prime minister and form the government. All the ministers will have to be from among the elected members of parliament. Voting in the general election in Singapore is compulsory and the voting age is 21 years and above. Anyone who does not vote in an election without a valid reason loses his franchise and has to pay a penalty to have it restored. Since 1968, the People's Action Party (PAP) has enjoyed almost total supremacy in parliament. Although the opposition has been securing an average of more than 30 per cent of the vote since 1984, they could get only between 1.2 and 4.6 per cent of parliamentary seats. This is due to ‘the first-past-the-post system’, but PAP, the ruling party for over three decades, has also been placing obstacles in the path of the opposition parties. These means used, although within the purview of law, had the overall effect of weakening political opposition (Yeo Lay Hwee). 2. The Economic Environment (a) Indonesia Indonesia was badly affected by the Asian financial crisis of 1997 and has to struggle to overcome it. It still grapples with high unemployment, extensive corruption, inadequate infrastructure, poor investment climate and unequal resource distribution between regions. It has also been unsuccessful in attracting the pre-1997 level of FDI in spite of its explicitly high investor-friendly macroeconomic policies. This poor investment response in Indonesia has greatly disappointed the government, which has reformulated its economic policies since 1997 with help from the International Monetary Fund (IMF) in order to create an investor-friendly environment. The primary objective of this reform has been for economic development. (Tulus Tambunan). Indonesia was devastated by the December 2004 tsunami, with heavy loss of lives and deprivation of homes and properties estimated at $4.5 billion. Terrorist incidents in 2005 slowed tourist arrivals and several human cases of avian influenza in 2005, sparked off concerns of an epidemic. Another earthquake struck the country in 2006, which again caused a tsunami that destroyed houses on the south coast of Java, killing more than 550 people and leaving at least 230 missing. Since November 2004, the government has implemented measures to stimulate growth and foreign investment in order to create employment, and accelerate economic and social development. It has also launched an anti-corruption campaign, initiated tax reforms and tightened law enforcement. With the help of business, the government has initiated a series of programs to restore confidence in the economy and investment climate. The measures designed to improve investment climate include streamlining investment procedures such as customs and taxes, deregulating labor and synchronizing national with regional regulations. (b) Malaysia The World Fact Book describes Malaysia as “a middle-income country, (which has) transformed itself from 1971 through the late 1990s from a producer of raw materials into an emerging multi-sector economy”. Exports of manufactures, particularly of electronics, were the engine of growth. The global economic downturn in the information technology (IT) sector in 2001 and 2002 affected Malaysia very badly. Economic growth slowed down in 2003, and the Iraq War led to caution in the business community. However, growth picked up in 2004 and again in 2005-06. Higher world oil prices have benefited the economy. However, the rising cost of domestic petrol and diesel forced the government to reduce government subsidies, which in turn has contributed to higher inflation. Malaysia has a healthy foreign exchange reserves and a small external debt, both of which will be a buffer against any risk that the country may have to face if a financial crisis similar to the one in 1997 is to occur in the near future. However, the dependence of the economy on the US, the Chinese, and the Japanese economies, the country’s main export destinations and sources of foreign investment, continues. (Malaysia –Economy). Among the factors contributing to growth during the next five years are the increased public investment in high-impact projects, the private investment response to infrastructure investments and the continued strong demand for commodity products (Malaysia Economic Update). (c) Thailand Rice cultivation has been is ‘the bedrock of the Thai economy’. Currently there is much more to the Thai economy besides rice but rice was the basis for the economy and, until recent decades, the dominant industry. ‘Now rice growing and other agricultural industries, constitutes less than one sixth of the GDP. Manufacturing and trade account for more than one fifth of GDP each’ (The Economic History and Economy of Thailand). Thailand’s infrastructure is well developed. It has a thriving free-enterprise economy. Thailand was very hard-hit by the 1997 economic meltdown, with unemployment and poverty on the increase. By 2004, however, the country appeared to have fully recovered from the crisis. Thailand was one of East Asia's best performers from 2002-04. There was a strong growth in consumption expenditure and export earnings, which pushed up the economy’s growth to 6.9% in 2003 and 6.1% in 2004 despite a sluggish global economy. Thailand has preferential trade agreements with many countries in order to boost exports and to maintain high growth. The 2004 tsunami took 8,500 lives in Thailand and caused massive destruction of property in the southern provinces of the country. The military coup in September 2006 brought in a new government. The value of investment applications from January to November 2006 declined by 27% compared to the previous year. On the positive side, exports have risen by nearly 17% in 2006, mainly from export of automobile products and farm output (Thailand Economy). The Economist Intelligence Unit estimates that annual GDP growth rate will “average 4.4% in 2007-2011, strengthened by private consumption, and investment from 2008 onwards”. Growth in the manufacturing sector will be uneven, with some like automotive sector growing strongly and others like the textiles being sluggish. The outlook for inflation is positive, with a stable currency and declining global crude oil prices contributing to a fall in inflation over the next five years (The Economist Intelligence Unit, 2). (d) Singapore Singapore has a free-market ‘export-dependent’ economy. Major export items include consumer electronics and information technology products. The 2001-2003 global recession and the consequent slump in the technology sector had an adverse impact on Singapore’s economy. This was compounded by an outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, which affected tourism and consumer spending. However, a host of measures such as ‘low interest rates, a surge in exports, and internal flexibility’ was able to help the economy to regain is high growth in 2004-06 with the real GDP growth averaging 7% annually. Singapore's strategic location on a major sea route and its industrious people has given the country an economic advantage in Southeast Asia disproportionate to its small size. It has been able to overcome its lack of physical resources and a small domestic market with a pro-business, pro-foreign investment, export-oriented economic policy combined with prudent investments in strategic government-owned corporations. 3. The Business Environment (a) Indonesia Poor corporate governance is blamed as one of the main factors that caused the crisis in Indonesia and contributed to its severity and length.  The Indonesian banking and corporate sectors lacked transparency, and seemed to have rules of their own. However, the 'new' Indonesia is said to have opened the way to improvements in corporate governance.  Both government and the business sector are now much more accountable to the public. In the past, joint venture (JV) companies were the only means for FDI in Indonesia. In 1996, the government allowed the setting up of 100% foreign-owned companies and subsequently a range of commercial activities were permitted to 100% foreign owned companies.  There are now very few areas of the Indonesian economy that are closed to foreign investment. Some commercial activities, such as retailing, food and drink manufacturing and animal husbandry, require an Indonesian partner, usually with a minimum equity share of 20 %.( Gary Dean). (b) Malaysia Malaysia’s economy is very investor-friendly. However, signs of some of its weakness are beginning to show. Foreign investment declined by 1.6% to US$3.9bn in 2006. Prime Minister Abdullah Ahmad Badawi’s slow progress on reform has also frustrated would-be investors. Internal political squabbles have taken their toll and are viewed as possible threats to stability. Another issue has been the ruling United Malays National Organization (UMNO) party’s blatant and aggressive pro-Malay racial and veiled “Islamic” stance that has frightened many and damaged the government’s moderate reputation. The government is committed to making Malaysia into a “developed” state by 2020, but in many areas, the country falls well behind Singapore and other of Asia’s more developed economies. Since he became prime minister in 2003, Abdullah has promised to clean up corruption, restore independence of the judiciary and make changes to the education systems, but progress has been far too slow up to now. (c) Thailand As recently as March 23, 2007, the Executive Board of the IMF commended “the resilience of Thailand's economy in the face of significant negative shocks over the past year. They noted that robust export growth has supported economic activity, prudent fiscal and monetary policies have contained inflation and raised foreign reserves, and the financial sector has withstood the increased financial market volatility stemming from political events and policy changes”. The IMF regards Thailand's economy as fundamentally strong. (IMF Executive Board meeting 2006). (d) Singapore The 2007 Index of Economic Freedom says: “Singapore's investment laws are clear and fair. Foreign and domestic businesses are treated equally, there are no production or local content requirements, and nearly all sectors are open to 100 percent foreign ownership. Foreign investment is still limited in broadcasting (up to 49 percent unless waived); and some sectors in which government-linked companies are dominant (for example, foreign equity in the PSA Corporation, one of two main managers of Singapore's ports, is restricted to 49 percent). Foreign ownership of certain landed properties is subject to approval by the relevant authority. Residents and non-residents may hold foreign exchange accounts. There are no controls or requirements on current transfers, payments, or repatriation of profits” (The 2007 Index of Economic Freedom). Conclusion In the previous sections, a panoramic view of four Southeast Asian countries has been presented. All the countries surveyed have been among those that have been attractive destinations of foreign investment funds for much more than a decade. All of them had also been badly affected by the economic crisis about a decade ago and the tsunami of December 2004. They have resurrected themselves from these economic and natural calamities and are on the way to full recovery. However, some of them, Indonesia and Malaysia in particular, have other internal problems of socio-political instability engendered by Islamic “fundamentalist” groups operating with impunity in these countries. Compared to these countries, Thailand and Singapore have socio-political coherence and stability and the consequent economic attractiveness for foreign investment. Words: 3080 _____________________________________ References Gary Dean - Doing Business in Indonesia, from a Western perspective, at www.okusi.net/garydean/works/bizindo.html , accessed April 25, 2007 IMF Executive Board meeting 2006; Public Information Notice, at www.imf.org/external/np/sec/pn/2007/pn0739.htm, accessed April 26, 2007 Louay M. Safi: Religion and Politics in Malaysia, at www.lsinsight.org/articles/2000/religion.htm, accessed April 26, 2007 Malaysia –Economy -Overview: at https://www.cia.gov/cia/publications/factbook/print/my.htm, accessed April 26. 2007 Malaysia Economic Update: at www.siteresources.worldbank.org/Inteaphahalfyearlyupdate/Resources/550192-1163436396659/Malaysia_Brief_Oct06.pd , accessed April 27, 2007 Rizal Sukma, deputy executive director, CSIS, Jakarta. 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