INTRODUCTION

Foreign direct investment (FDI) has long been a key driver of economic growth and industrialization in the Association of Southeast Asian Nations (ASEAN) countries. ASEAN countries have traditionally been attractive destinations for foreign enterprises and multinational companies (MNCs), thanks to abundant natural resources, cheap and motivated labour force, and its strategic location in Asia. Inward FDI ushers in not only capital resources and jobs, but also knowledge, know-how, technology, and organizational expertise through spillovers as well as backward and forward linkage effects. Through these mechanisms, inward FDI has been part and parcel of economic and industrial development strategies and has seen the region play host to FDI since the 1980s.

However, the past two decades have witnessed rapidly evolving global and regional business environments. China and India have emerged as competing hubs for low-cost production since the 2000s, due in no small part to their large domestic markets and improving connectivity through regional production networks. Many ASEAN countries such as Indonesia, Malaysia, and Thailand have also experienced rising labour costs, thereby making them less conducive for low-cost production. These recent developments caution that the conventional FDI strategies will soon reach the limit of offering the pace of economic growth and industrialization they once achieved.

Given the emerging challenges, ASEAN countries have exhibited a shift in FDI strategies towards outward FDI. Although inward FDI has been, and will continue to be, an important element of economic development, it has been vividly observed that more enterprises, especially government-linked and large businesses, have started to seek new business opportunities overseas and venture in foreign markets. This implies that regionalization and industrialization among firms will serve as another catalyst of economic growth and industrialization in the region.

Against this backdrop, this chapter aims to examine the emerging trends of outward FDI from ASEAN countries and characteristics of outward FDI strategies among three major players, namely Singapore, Thailand, and Malaysia. The lessons learnt from the experience of these ASEAN countries potentially provide interesting insights into the essential policies and reforms which will enable other ASEAN countries to successfully ride the waves of internationalization.

RECENT TRENDS IN CAPITAL FLOWS

Southeast Asia was one of the first regions to recover from the recent global economic meltdown. While the region posted an anaemic 1.2 per cent growth in 2009 — its worst performance since the 1997 Asian financial crisis — the outlook for Southeast Asia in 2010 and beyond is buoyant. The five economies that bore the brunt of the crisis — Brunei Darussalam, Cambodia, Malaysia, Singapore and Thailand — have all recovered rapidly.

Southeast Asia's bullish outlook and relatively high interest rates have attracted a massive influx of capital, with the region's emerging markets becoming an attractive destination for footloose liquidity from global funds. These have flown into financial and equity markets in the main, although some have arrived as foreign direct investment (FDI). The two-year peaks of price-to-book values have increased in all major Southeast Asian markets — by a factor of 3.4 for Indonesia's JKSE, 2.1 for the Philippines’ PSI, 1.9 for Malaysia's KLSE, and 1.7 for both Singapore's FTSTI and Thailand's SETI — all well above pre-crisis levels. This rally in the region's stock markets is expected to continue in the near term, as the economies continue to perform above expectations, and as risk-taking investors rotate money to underpriced financial assets.

POST-CRISIS CAPITAL FLOWS: POLICY ISSUES AND CHALLENGES

In theory, capital inflows should offer substantial benefits to Southeast Asian countries in terms of improving resource allocation and filling financing gaps, facilitating cross-border transfers of knowledge and technology, improving risk diversification, and promoting financial market reforms, provided that host countries are equipped with absorptive capacity and sound economic fundamentals. These benefits are usually associated with FDI in productive sectors, but what if the majority of the inflow is short term in nature? In reality, the recent surge in volatile capital has complicated macroeconomic policy management and has the potential of compromising economic stability, putting the region at risk of succumbing to another round of financial distress.

The large volume of volatile capital flows raises a number of policy challenges. First, expectations of currency revaluations and further interest rate increases in order to curb rising inflation will inevitably attract speculative capital flows. This is already evident in some Southeast Asian countries like Indonesia, Malaysia and Thailand, where real exchange rates have kept appreciating despite central banks’ intervention in the foreign exchange markets.

INTRODUCTION

Export-led growth strategies have by and large been seen as a key engine of economic growth among the Asian economies. Persistent account surpluses achieved through a wide array of policy pushes such as import substitution and export orientation since the 1950s have allowed these economies to attain economic development at a pace otherwise unachieable. A great deal of research has confirmed that export-led growth has delivered enormous benefits to the Asian economies in terms of staggering economic growth, accelerated poverty reduction, rapid productivity growth, sharp surges in income per capita, and outward-looking industrialization (see, for instance, Thangavelu et al. 2009; Greenaway and Kneller 2007; Hsieh 2002; and Aw et al. 2000, among many others).

Nevertheless, the adverse impacts of the global financial crisis in 2008–9 have made it excruciatingly clear that excessive dependence on external demand and persistent current account surpluses as a prime driver of economic growth are highly perilous. On the one hand, the sudden collapse of export demand from the United States and the eurozone appeared to be a crucial transmission mechanism through which the global economic meltdown propelled the Asian economies into a sharp recession. On the other, persistent current account surpluses, together with inadequate domestic demand (i.e., consumption and investment), bear the brunt of responsibility for global economic imbalances, which are in turn a root cause of the global financial crisis. Table 7.1 demonstrates this point by presenting the trends of current account balances as a share of GDP since the 1990s. It can be observed that the Asian economies, on average, consistently ran current account surpluses amounting to 4–6 per cent of GDP. These figures are well above the of 0–1 per cent averaged among advanced economies, and the deficits of 2–3 per cent for all countries in the World Bank's World Development Indicators (WDI) database.

Public and policy debates on reducing dependence on external export demands, as well as implementing global economic rebalancing in Asia, hinge on two policy options: domestic financial reforms and increasing social safety net expenditure (Servén and Nguyen 2013; and Adams and Park 2009). The idea is that the lack of a well-functioning financial market within the region imposes financial constraints on households and firms which are ultimately translated into inadequate domestic consumption and investment.

EXECUTIVE SUMMARY

1. • Although Southeast Asia has experienced the fast pace of economic development and exhibited exceptional economic performance, it has increasingly become apparent that the benefits of growth in the region are by and large unevenly distributed.

2. • Southeast Asia, to date, achieves substantial progress in terms of boosting income per capita and, thus, poverty reduction, notwithstanding unending economic uncertainties in the U.S. and euro zone.

3. • However, the buoyant picture has mostly been plagued by remarkable rises in income inequality.

4. • There are at least three main structural drivers of rising inequality in the region. These include economic growth, trade openness and liberalization, and financial market development.

5. • A set of policy options that allow the region to thrive on inclusive growth, include enhancing and equalizing access to education, incorporating inclusion and equity into economic strategies, improving governance and institutional quality, and rebalancing public spending on social protection.

INTRODUCTION

Although the economies in Southeast Asia have exhibited exceptional performance, development between the countries is largely uneven, and the emerging disparities pose critical challenges to inclusive and sustainable growth. There are quite a number of reasons for this which necessitates a new phase of policies and reforms that enhances inclusive growth.

First, disparities necessitate redistributive policies and interventions which fundamentally distort resource allocation and may practically entail inefficiencies in terms of poor administration and corruption. Second, inequality constitutes a root cause of socio-political instability and violence, which have become evident in many parts of Asia. Unrest arising from disparities is therefore detrimental to the growth trajectory of a country. Third, concentration of wealth and economic resources to small groups is eventually translated into inadequate market size and small aggregate demands that undermine the competitiveness of an economy. Finally, inequality entails misallocation of investment because rising inequality necessitates substantial social investment, especially in human capital and institutional infrastructure, ultimately hampering economic growth.

The Greater Mekong Subregion (GMS) embraces the nations and territories located in the Mekong river basin, including Cambodia, China (Yunnan Province and Guangxi Zhuang Autonomous Region), the Lao PDR, Myanmar, Thailand, and Vietnam. This diverse, dynamic subregion encompasses a huge market of more than 240 million people and a vast land area of 2.3 million square kilometres. The gross domestic product of the subregion was projected to reach US$863 billion in 2010 — more than triple the 1996 level — with Cambodia, the Lao PDR, Myanmar, Vietnam, and Yunnan Province, PRC, experiencing startling output growth rates of 6–10 per cent, despite the current global economic hardships. This is attributed fundamentally to their abundant resources, including a large motivated, cheap workforce, a rich agricultural base, extensive timber and fisheries resources, considerable mineral potentials, and vast energy resources in the form of hydropower and large coal and petroleum resources. The GMS is increasingly being recognized as a new frontier of the Southeast Asian economic strength.

The GMS enjoys a strategic location at the heart of East Asia and between the burgeoning economies of China and India. Closer economic ties to external markets offer the GMS opportunities to tap benefits from boosts in trade, tourism, and investment, which have been a crucial driving force of impressive economic growth in the subregion. The last two decades since its inception in 1992 witnessed strong growth in intra-GMS trade and investment. Cross-border trade is now estimated to account for 30–50 per cent of the GMS economies’ total trade, and has increased sharply at a compound average annual rate of nearly 10 per cent, while intra-GMS net foreign direct investment nearly doubled during the period of 2000–2002.

This chapter aims to assess the recent economic, social, and political developments in the GMS, and identify emerging opportunities and challenges facing the region's successful transition towards a market-driven economy. The GMS countries are at a critical juncture where subregional efforts and cooperation must be made to address fully the rapidly evolving issues which are vital to appropriate policy formation, yet remain widely debatable. The deliberation in this chapter sheds light on what the development stages of GMS countries are, and gives an overview of the contributions of the ensuing chapters.

Foreign direct investment (FDI) has long been a crux catalyst of impressive economic and industrial development in Thailand. It not only brings in capital resources and job creation but also offers new technology, knowhow, and managerial and organizational expertise, among others, to domestic industries vis-à-vis backward and forward linkages. Due to this reason, Thailand's economic development strategies have zeroed in on ushering in FDI since the 1980s. Even though the strategy that positioned Thailand as a regional host of FDI with low production costs and a rich source of relatively skilled workers has proven to be successful as it fuelled remarkable economic growth, the rapidly evolving business environment in the world highlights the erosion of Thailand's competitiveness. This was particularly evident in the aftermath of the global economic downturn in 2008–9, thanks to escalating labour costs, the rise of China and India, and chronic political unrest, in addition to the recent floods caused by poor infrastructure and flawed water management. These recent developments suggest that the conventional FDI strategy Thailand has adopted will soon reach its limits in providing the pace of economic growth and industrialization the country once experienced.

Against this backdrop, this chapter attempts to take stock of FDI, both inward and outward, in Thailand and assesses its potential and performance. Although the global economic crisis in 2008–9 negatively impacted the prospect of foreign investment in Thailand and spurred a sharp reversal, the recent developments witnessed a resurgence of inward FDI which has by and large set the stage for Thailand's robust economic recovery. Concurrently, firms headquartered in Thailand have also emerged as global investors. The recent trend of outward FDI flows from Thailand highlights that Thai firms have increasingly started to depart from their comfort zones, explore new business opportunities, and thrive on synergies and complementarities with new partners by venturing overseas. Nevertheless, several drawbacks and challenges remain and critically hamper the country from fully exploiting its massive potential.

INTRODUCTION

Early expectations for Thailand's economic performance in 2010 were cheery, as its 2009 performance coupled with upbeat business confidence around the globe in the last quarter of the same year painted a fabulous picture of the Thai economy reaching a GDP growth rate of 4.5 to 6 per cent in 2010. All major sectors — manufactures, tourism, finance, and trade — exhibited positive growth figures during the country's strong recovery from the global economic downturn. By June, however, the country appeared to be on the verge of losing all gains from the global economic turnaround, as the Red Shirt army had jeopardized livelihoods in the Ratchaprasong district — the hub of business activities in Thailand.

This essay aims to provide a realistic assessment of the impacts of Thailand's never-ending political pandemonium. The analysis of several economic indicators reveals that economic hardship in the aftermath of the Red blockade will prove transitory and limited only to a plunge in GDP growth by 1 to 2 per cent as business confidence bounced sharply back to its pre-crackdown level and as the manufacturing sector — a key driver of Thailand's economy — continued to enjoy the global economic recovery and a surge in export demand from emerging Asia. However, closer examination at the sectoral level reveals that Thailand's generally resilient economic condition conceals the excruciating pain felt by the labour force. The Red uproar pushed millions of workers, especially those employed in the service and the wholesale and retail trade sectors, into unemployment. Several policy responses to shield the economy against weakening sentiment and the physical damage done during the protests are proposed. These measures include tax relief, provision of liquidity to businesses in the erstwhile no-go zone, direct subsidies for those affected by the crackdown, and long-term economic policies to bridge Thailand's income gap.

The organization of this essay is as follows. The second section reviews developments in the Thai economy leading up to the 2010 crackdown. The third section assesses the economic impacts of the Red strife on the economy. The fourth section concludes and discusses several policy measures intended to revive economic sentiment and shield the most vulnerable against the knock-on effects of the country's political conflict.

ECONOMIC OUTLOOK LEADING UP TO THE 2010 CRACKDOWN

The Thai economy was hit hard by the global economic downturn and domestic political turbulence in 2009.