Strategic Recommendation for Sustaining and Expanding Japanese FDI in ASEAN: An Abridged Version

Toshihiko KINOSHITA (Professor, Waseda University)

This is an abridged version of Prof. Kinoshita's presentation at the Roundtable Seminar on Japanese FDI in ASEAN, which was co-sponsored by the ASEAN Secretariat and UNCTAD and held in Jakarta, Indonesia on September 8, 2005. His powerpoint slides are available here (in PDF format).

First, I would like clarify the difference in determinants between FDI and trade, while both FDI and trade have much to do with the economic development of host countries. These days every country is trying to increase incoming FDI in addition to trade, especially exports. The volume of exports depends on exchange rates as well as factor costs and product quality, both of which are major determinants for the competitiveness of exporting products. Risk factors are important, but are far less so for exports than for FDI, as far as exporters can make use of sound banking and its guarantee system. Hence one can predict fairly precisely what will happen in trade, at least in the near future.

In contrast, FDI involves a complex process of decision-making on the part of foreign investors in addition to a complex system of regulation and approval by host countries. Actually, there are various types of FDI such as resource-based FDI, local market-oriented FDI, and R&D-oriented FDI. For each type, foreign investors will select the best host country to invest in among a number of candidates, unlike exports. Risk factors, both political and commercial, are quite important in determining FDI. For both foreign investors and host countries, investment climate is crucially important, where climate is determined by political stability, cost factors, policy consistencies, macro-economic management, economic infrastructure, taxes, general attitude toward foreign investors and individual FDI projects, etc.

Leaders of host countries should understand the logic and determinants of FDI and take a leadership role to improve their countries' investment climates. In this context, host governments should 'educate' people regarding the importance of investment both at home and from abroad so that they would not reject foreign investment but rather cooperate to improve their countries' investment climates.

In most ASEAN countries, many arguments have been made to improve their investment climates to invite more FDI. In response, the Japanese government as well as private companies has been cooperating with ASEAN countries. As a result, many leaders of ASEAN countries now understand what should be done; for example, in the case of Indonesia quick legislation and amendment of investment and taxation acts, appropriate implementation of labor laws, and improvements in economic infrastructure such as power stations. Hence, the current issue is not to find problems or impediments regarding FDI, but to have strong political will on the part of host governments to execute necessary policies and reforms.

Leaders in the ASEAN should have better knowledge about the decision making process of FDI and various problems facing foreign investors such as Japanese firms so that there can make quick and flexible responses to investors' needs and requests to increase FDI in the future. For example, some Japanese firms may be thinking of installing R&D centers in East Asia or setting up new production/distribution networks among China, ASEAN and India, or having additional production facilities in countries other than China. So the ASEAN's strategies for FDI should be multi-layered, including basic, middle and advanced courses. It should also be noted that both public and private sectors in Japan are ready to provide any level of assistance in this regard in response to requests by host countries in the ASEAN region.