Foreign direct investment in Southeast Asia: - Regional Office China

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Investment policy craft -- creating policy coherence out of conflictingdemands as well as scaling and measuring the necessary factors andvariables -- is a challenge. The growing importance of investment andbusiness climate benchmarking as a guide to policy making wasacknowledged while indicating econometrically, that every factor or variable(or their combinations) has its own FDI inflow-elasticity and FDI stockelasticity.IPAs and policy-makers with limited resources should thereforeconcentrate their policy craft on those FDI factors and variables with thehighest FDI-elasticities [Christiansen (2004)] 11 . In rank order, these areshown to be: i) growth-competitiveness; ii) economic freedom, combininggovernment intervention, property rights, wages/prices and regulationvariables; iii) taxation and regulation; iv) quality of telecommunicationservices; and v) labour market regulation. This approach lays out thechoices available to policy-makers in making viable policy instruments in asystematic manner based on rigorous analysis. Hence from a fourthgeneration investment promotion perspective, a focus on macro-economicenvironment stability and technology policies to increase the rate ofinnovations is welcome.All these elements and issues in Figure 2 reflect the need for sequencing andswitching policy instruments and incentives, both in space and time. In otherwords, while FDI policy-making is increasingly more complex and diverse,host governments, according to their development needs, have to adapt tothe MNEs dynamic activities by sequencing and switching (in a predictablemanner) their FDI policy instruments. Moreover, these different policydimensions also indicate the importance for host governments to createdifferent levels of policies: i) the meta- or supra-national level; ii) the macroornational level; iii) the meso- or regional and cluster level; iv) the micro- or11 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, theFDI inflow-elasticity of a host country’s competitiveness (scaled 1 to 5) at 0.63 implies that an increase of1 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, humanresources).24
industrial sector and sub-sector level; and v) the firm level of organisationalstrategy and competitiveness. The complexity of FDI host policy-making isobvious, but the policy dimensions that are chosen should be in harmonywith the country’s wider development goals.Ultimately, it could be argued that all these dimensions distill into onedimension regarding incentives. In fact, incentives can be fiscal or non-fiscal[UNIDO (2003)], as selectively illustrated in the Table 1 below. As we cansee, non-fiscal incentives are constituted by financial and non-financialincentives.Table 1: Fiscal and Non-Fiscal IncentivesFiscal incentivesTax holidaysTax-free importsTax exemptionsNon-Fiscal incentivesDepreciation methodsDevelopment Banks’ loan policiesR&D supportEnvironmental standards supportLabour training supportGovernment subsidiesThe presentation noted that whereas industrialised countries typically utilisefinancial incentives, such as grants, developing countries usually use fiscalincentives, such as reductions in the base rate of corporate income tax, taxholidays and import-duty exemptions and drawbacks [Oman (2000)].Incentives are widely used to attract MNEs and thus create a climate ofcompetition for FDI. Fiscal incentives may be successful in attracting MNEs,but incentives-based competition also creates some problems. Indeed, thefirst problem of incentives is that they represent an opportunity cost for hostgovernments. Secondly, there can be a significant lack of transparencyregarding incentives, which leaves space for corruption and other kinds ofrent-seeking behaviour. Finally, given the dimension choices in Figure 2,incentives also provoke market distortions. The major distortions are thatincentives tend to favour large corporate investors, at the detriment of smallfirms, as well as foreign over domestic companies, partly because of theirlower risk profile and higher bargaining power. This distortion would tend todisappear (over time) in countries adopting fourth generation investment25
Page 3: Foreign Direct Investment in Southe
Page 7 and 8: PrefaceThis UNIDO report presents t
Page 9 and 10: PreambleWithin the constantly evolv
Page 11 and 12: IntroductionThe Changing Face of Fo
Page 13 and 14: Theme 1FDI and Multinational Enterp
Page 15 and 16: These include: i) changes in long-t
Page 17 and 18: quality of life in a country can be
Page 19 and 20: consequence, as well as in terms of
Page 21 and 22: high-technology cluster development
Page 23 and 24: Theme 3FDI, Boundaries, Hierarchies
Page 25: A second dimension is that incentiv
Page 29 and 30: industrial base without relying to
Page 31 and 32: socialising public goods and privat
Page 33 and 34: Typically, but not exclusively, Sin
Page 35 and 36: generate tax revenues to fund vario
Page 37 and 38: cumulatively serving to constrain F
Page 39 and 40: Southeast Asia as an integrated mar
Page 41 and 42: Theme 5FDI and Capital in Southeast
Page 43 and 44: Finally, there is also a need for i
Page 45 and 46: components of the integrated global
Page 47 and 48: ConclusionEmerging Policy Direction
Page 49 and 50: In conclusion, Frank Bartels sugges
Page 51 and 52: Taking the above research needs int
Page 53 and 54: Annex 1:Presenters at the EGMName P
Page 55 and 56: TIMOR LESTEMs. Warubon SUKASAMEMr.
Page 57 and 58: 14:00 - 15:30 Theme II: Intra-regio
Page 59 and 60: y Japan ITPOsCommentator: Frank L.
Page 61 and 62: This type of deep information excha
Page 63 and 64: The extent of FDI effects and their
Page 65 and 66: Appendix IV: Opening Statement by U
Page 67 and 68: only of UNIDO but also other UN spe
Page 69 and 70: LIST OF ABBREVIATIONSAFTA - ASEAN F
Page 71 and 72: in mind that host policy for attrac
Page 73 and 74: forces of competition and co-operat
Page 75 and 76: 2. BACKGROUND ISSUESAn accurate per
Page 77 and 78:
economies. In contrast, Sub-Saharan
Page 79 and 80:
costs, boost quality and accelerate
Page 81 and 82:
Fourthly, in terms of a framework f
Page 83 and 84:
in joint venturing), while retainin
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experiencing the kind of global rel
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other hand, being predominantly nat
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Also, the trade surplus (or deficit
Page 91 and 92:
limited [Freeman and Bartels (2000)
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technology and innovation policy; h
Page 95 and 96:
Credit Information Index NA 0 3 0 6
Page 97 and 98:
Appendix II - Investment climate in
Page 99 and 100:
REFERENCESAlmor T., Hirsch S., 1995
Page 101 and 102:
Freeman N. J., Bartels F. L., Eds.,
Page 103:
Trigeorgis L., 1996, Real Option: M
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Foreign direct investment in Southeast Asia: - Regional Office China

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