(EGM) Foreign Direct Investment in Southeast Asia - Unido

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Investment policy craft -- creating policy coherence out of conflicting demands as well as scaling and measuring the necessary factors and variables -- is a challenge. The growing importance of investment and business climate benchmarking as a guide to policy making was acknowledged while indicating econometrically, that every factor or variable (or their combinations) has its own FDI inflow-elasticity and FDI stock- elasticity. IPAs and policy-makers with limited resources should therefore concentrate their policy craft on those FDI factors and variables with the highest FDI-elasticities [Christiansen (2004)] 11 . In rank order, these are shown to be: i) growth-competitiveness; ii) economic freedom, combining government intervention, property rights, wages/prices and regulation variables; iii) taxation and regulation; iv) quality of telecommunication services; and v) labour market regulation. This approach lays out the choices available to policy-makers in making viable policy instruments in a systematic manner based on rigorous analysis. Hence from a fourth generation investment promotion perspective, a focus on macro-economic environment stability and technology policies to increase the rate of innovations is welcome. All these elements and issues in Figure 2 reflect the need for sequencing and switching policy instruments and incentives, both in space and time. In other words, while FDI policy-making is increasingly more complex and diverse, host governments, according to their development needs, have to adapt to the MNEs dynamic activities by sequencing and switching (in a predictable manner) their FDI policy instruments. Moreover, these different policy dimensions also indicate the importance for host governments to create different levels of policies: i) the meta- or supra-national level; ii) the macro- or national level; iii) the meso- or regional and cluster level; iv) the micro- or 11 For example, the FDI stock elasticities of GDP per capita range from 0.89 to 0.96 implying that a 10% increase in a country’s GDP per capita would result in a 10% increase in inward FDI stock. Likewise, the FDI inflow-elasticity of a host country’s competitiveness (scaled 1 to 5) at 0.63 implies that an increase of 1 point in the scale would result in an increase of 88% inward FDI ceteris paribus. See Christiansen (2004, pp. 32-37) for other FDI-elasticities (economic freedom, taxation, regulation, infrastructure, human resources). 24
industrial sector and sub-sector level; and v) the firm level of organisational strategy and competitiveness. The complexity of FDI host policy-making is obvious, but the policy dimensions that are chosen should be in harmony with the country’s wider development goals. Ultimately, it could be argued that all these dimensions distill into one dimension regarding incentives. In fact, incentives can be fiscal or non-fiscal [UNIDO (2003)], as selectively illustrated in the Table 1 below. As we can see, non-fiscal incentives are constituted by financial and non-financial incentives. Table 1: Fiscal and Non-Fiscal Incentives Fiscal incentives Non-Fiscal incentives Tax holidays Depreciation methods Tax-free imports Development Banks’ loan policies Tax exemptions R&D support Environmental standards support Labour training support Government subsidies The presentation noted that whereas industrialised countries typically utilise financial incentives, such as grants, developing countries usually use fiscal incentives, such as reductions in the base rate of corporate income tax, tax holidays and import-duty exemptions and drawbacks [Oman (2000)]. Incentives are widely used to attract MNEs and thus create a climate of competition for FDI. Fiscal incentives may be successful in attracting MNEs, but incentives-based competition also creates some problems. Indeed, the first problem of incentives is that they represent an opportunity cost for host governments. Secondly, there can be a significant lack of transparency regarding incentives, which leaves space for corruption and other kinds of rent-seeking behaviour. Finally, given the dimension choices in Figure 2, incentives also provoke market distortions. The major distortions are that incentives tend to favour large corporate investors, at the detriment of small firms, as well as foreign over domestic companies, partly because of their lower risk profile and higher bargaining power. This distortion would tend to disappear (over time) in countries adopting fourth generation investment 25
Page 3: Foreign Direct Investment in Southe
Page 6 and 7: Abbreviations and Acronyms ADB Asia
Page 8 and 9: thinkers and writers on FDI and mat
Page 10 and 11: The realignment of structural facto
Page 12 and 13: Recent years have seen increasing c
Page 14 and 15: overlap according to production pro
Page 16 and 17: enchmark rankings should be one aim
Page 18 and 19: Theme 2 FDI and National Experience
Page 20 and 21: ‘pipeline’ of harmonising legis
Page 22 and 23: major determinant of success. This
Page 24 and 25: and viii) general foreign investor
Page 28 and 29: policies, as they would treat forei
Page 30 and 31: It appears that the advantages and
Page 32 and 33: seeking to attract FDI? Examining t
Page 34 and 35: attractiveness of the region to inv
Page 36 and 37: Theme 4 FDI and the China Dimension
Page 38 and 39: greater regional collaboration, the
Page 40 and 41: The increasing significance of outs
Page 42 and 43: aise their own finance like any oth
Page 44 and 45: Notwithstanding the dynamics of ris
Page 46 and 47: The logistics of the UNIDO ITPO Del
Page 48 and 49: no longer be an appropriate indicat
Page 50 and 51: FDI lens. Consequently, some IPAs h
Page 52 and 53: Select References Bartels F.L. and
Page 54 and 55: Annex 2: Participants at the EGM Co
Page 56 and 57: Appendix I: Thematic Programme of t
Page 58 and 59: 12.30-14.0 Lunch Plenary Discussion
Page 60 and 61: Appendix II: Opening Statement by t
Page 62 and 63: Appendix III: Opening Statement by
Page 64 and 65: and practitioners in other developi
Page 66 and 67: The themes of the EGM have been car
Page 68 and 69: Appendix V: EGM Working Paper EF Un
Page 70 and 71: ABSTRACT This working paper discuss
Page 72 and 73: In recent years, we have seen incre
Page 74 and 75: usiness domestically (improving int
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intra-industry trade, which account
Page 78 and 79:
The agglomeration of markets and di
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These patterns are characterised by
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etween locations and maximises the
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ecome insiders and thus avoid being
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(iv) Those that relate to the “pu
Page 88 and 89:
their indicators 50 of industrial p
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evolve more rapidly to account for
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changing morphology of MNEs with a
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92 Appendix I - Doing Business in A
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94 Appendix II - ASEAN Investment C
Page 98 and 99:
96 Appendix III - Ranking of Econom
Page 100 and 101:
Buckley P. J., Carter M. J., 2004,
Page 102 and 103:
McKinsey & Company, 2003, New Horiz
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(EGM) Foreign Direct Investment in Southeast Asia - Unido

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