Foreign direct investment in Southeast Asia: - Regional Office China

industrial base without relying to some extent on infant industry protection.“Both early industrialised and newly industrialised countries applied the sameprinciple, although to varying degrees and in different ways” (p. 2). In aworld of different levels of industrialisation, market failures do not enablefree international competition to promote effective industrialisation in theleast developed countries. Therefore, it appears reasonable that developingcountries encourage their infant industry by using the regulation of foreigninvestment. Nevertheless, regulation should be on a selective, rather thanon a universal, basis and the level of protection should not be excessive.It is also arguable that regulation impedes FDI activity, and thus disfavoursdeveloping countries. In fact, these countries often have very high officialcosts of entry, and MNEs have to follow long procedures before investing.Whereas regulation is meant to achieve socially superior outcomes bycountering market failures (such as monopolies and negative externalities),in real terms regulation is very often associated with higher corruption andunofficial economies. Gratuitous regulation can benefit the regulator and notthe whole society, and can prevent MNEs from investing. Therefore,extensive regulation can have the opposite effect from its initial purpose,since it is associated with socially inferior outcomes. Thus, as a logicalcorollary, FDI policies should be liberalised.However, it is worth mentioning that policies aiming at liberalising FDI arenot necessarily the best policies for creating a favourable investment climate,and even less so for attracting or promoting FDI. Moreover, one can notethat the liberalisation process should not be seen as a decline of the role ofthe state, since the measures mentioned above relate to governmentregulation. In fact, whereas the two first measures imply FDI liberalisation,their overall beneficial impact depends highly on the presence of competentand well-organised market supervision. Thus, one can argue thatliberalisation and regulation of FDI are not contradictory, but rathercomplementary, in order to attract and promote FDI that is beneficial forboosting industrial development.27