Role of Foreign Capital in Southeast Asian Countries 9789814376327

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The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968 It is a regional research centre for scholars and other specialists concerned w1th modern Southeast Asia, particularly the multi-faceted problems of stability and secunty, economic development, and political and socml change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professwnal and civ1c organizations A ten-man Executive Committee oversees day-to-day operations, it 1s chaired by the Director, the Institute's chief academic and administrative officer The ASEAN Economic Research Unit is an integral part of the Institute, commg under the overall supervision of the Director who is also the Chairman of 1ts Management Committee The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN The day-to-day operations of the Umt are the responsibility of the Co-ordinator A Regional Advisory Board, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

Role of Foreign Capital in Southeast Asian Countries U Tun Wai

Research Notes and Discussions Paper No. 68 ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

1989

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored m a retneval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1989 Institute of Southeast Asian Studies The responsibility for facts and op1mons expressed m this publication rests e.xclusJVe/y w1th the author and his mterpretations do not necessanly reflect the v1ews or the policy of the InstJtute or 1ts supporters.

Cataloguing in Publication Data

U Tun Wai Role of foreign capital m Southeast Asian countries. (Research notes and discussions paper j Institute of Southeast Asian Studies ; no. 68) 1. Investments, Foreign--Asia, Southeastern I. Institute of Southeast Asian Studies (Smgapore). II. Title. III. Series. DS501 1596 no. 68 1989 sls89-71341 ISBN 981-3035-38-2 ISSN 0129-8828 Printed in Singapore by Vetak Services

CONTENTS

List of Tables

lV

1

I

Introduction

II

Costs and Benefits Burma Indonesia Malaysia Philippines Singapore Sri Lanka Thailand

3 17 18 20 21 23 25 26

III

Main Findings

28

Notes

31

Bibliography

32

LIST OF TABLES

2.1 2.2 2.3 2.4 2.5 2.6 2.7

Summary of Comparative Investment Incentives in ASEAN Countries, 1981 Net Foreign Investment, Debt-Creating Capital, and Total Foreign Capital Flows to Southeast Asian Countries, 1965-86 Capital Flows, Growth Rates, and Current Account Balance of Payments, 1977-86 Net Factor Income Payments in Relation to GDP in Southeast Asian Countries, 1965-86 Singapore: Stock of Foreign Investment in Manufacturing and Yields, 1975-85 U.S. Direct Investment Position Abroad and Rate of Return by Sectors, 1985 and 1986 U.S. Direct Investment Position in Developed, Developing, and ASEAN Countries, Income, and Rate of Return, 1982-86

4 6 9 11

12 14 16

I

INTRODUCTION

Foreign capital flows are important to both capital-exporting and capitalimporting countries. The exporting countries benefit from an increase in foreign demand for their domestic output and the additional employment opportunities that are created. However, too much capital outflow in periods of full or near-full employment can exacerbate inflationary pressures and weaken the balance of payments of these countries. Capital-importing countries benefit in many ways, including additional resources to finance domestic investment, facilitating technology transfer, raising employment and standards of living, and access to overseas markets for exports. There are, of course, costs involved in this process and this is one of the many issues considered in this study in the context of Southeast Asian economies. The world supply of capital to developing countries is limited by world output, world savings and investment, world trade and payments, and capital flows among industrial countries. The allocation of the amounts available to developing countries as a whole, among regions, and by countries is influenced by (1) the decisions of the authorities of both industrial and developing countries regarding the role they wish to assign to foreign capital in economic development and the trade and payments position of the Third World, and (2) the decisions of business enterprises and private individuals in both capitalexporting and capital-importing countries. The government's attitudes in capital-importing countries manifest themselves in the economic incentives contained in fiscal, monetary, exchange, and incomes policies, and the nature of government controls exercised in these fields. The private sector's response, while guided by the profit motive, depends greatly on how dynamic it is and upon its ability to interpret government policies, make accurate forecasts about overall economic trends, and take correct investment decisions. If we assume that the world supply of foreign capital in any given period is fixed by decisions in capital-exporting countries, then the amounts available

2

Role of Fore1gn Capital in Southeast Asian Countnes

to each importing country and region will depend on its ability to attract capital as compared to other importing countries. The ASEAN countries have been more successful than most other developing countries in attracting capital. During 1982-86, direct plus portfolio investment flows into the five ASEAN countries 1 averaged US$3.9 billion per year or 19.3 per cent of the US$20.3 billion flowing to all developing countries. But within the ASEAN countries, the results have not been uniform. Some countries such as Singapore have been more successful than others such as the Philippines. Why has this been the case? Should the less successful countries make policy changes to attract more foreign capital? The following chapter deals with the costs and benefits to selected Asian countries from using foreign capital and a treatment of policy issues in each country. The countries included in this study are Burma, Indonesia, Malaysia, the Philippines, Singapore, Sri Lanka, and Thailand. The study concludes with a brief chapter on the main findings.

II

COSTS AND BENEFITS

Each Southeast Asian country has its own policy issues, but many of them are common to all countries. First is the question of whether there has been a sufficient inflow of capital in response to the host country's policies within the context of a changing world economic environment. The amount of inflow could be optimum, insufficient, or even excessive. If the inflow is insufficient what changes in policies would make the host country more attractive? Second, has the capital been used efficiently and for purposes desired by the authorities and the people? Related issues are employment opportunities created, type of technology used, amount of technology transferred, and whether or not investments are consistent with priorities laid down in the development programmes. Third, is the foreign capital entering the country for the long haul or does it wish to make quick profits and depart? Fourth, are the costs of attracting capital too high in relation to the benefits of greater output and employment? The costs include tax revenues foregone and the impact on the balance of payments when interest and dividends are repatriated. Fifth, has the use of foreign capital stifled local business initiative and reduced domestic savings effort? All the five ASEAN countries covered in this study have liberal investment incentives to attract direct foreign investment (Table 2.1) and Malaysia, Singapore, and Thailand have been fairly successful in attracting direct foreign investment (Table 2.2). Indonesia, the Philippines, and Sri Lanka, though providing investment incentives, have been less successful while Burma has not sought direct foreign investment. If a country feels that the amount of direct foreign investment is inadequate, what should it do? The answer to this question is rather difficult, but a survey conducted by the Bank of Thailand in 1977 may be of some help. Replies were obtained from 271 corporations which represented a 28 per cent return of the questionnaire. Businesses were asked to compare the investment climate in the five ASEAN countries according to seven factors: political

TABLE2.1 Summary of Comparative Investment Incentives in ASEAN Countries, 1981 Indonesia

Malaysia

Philippmes

Singapore

Thailand

Basic Rights and Guarantees to Investors Guarantee against expropriation Guarantee against losses due to· a. nationalization b. damage caused by war c. inconvertibility of currency Remittance of foreign exchange earnings and payments Repatnation of capital

X

X

X

X

X

X

X

X

X

X X

X X

X

X

X

X

X

X

X

X

X

X

X

X

X X

X

X

X

X

X X

X

X

X

X

X

X

X

X' X' X'

Protectwn Schemes and Pnontles G1ven to Investors and Aliens Employment of aliens Patent protection Preference m the granting of government loans Protection against unjust competition: a. Import competition b. Government competition c. Local competition Real estate ownershtp by alien investors

X X

X

X X X

X

X

X

X

Exemptions from Taxes and Tanff Duties Capital gains tax Corporate income tax Taxes on imported capital goods Taxes on imported raw materials Taxes on royalties Withholding tax on interest on foreign loans Other taxes and fees

X

X'

X

X

X X

X

X

X

X

X X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

Deductions from Taxable Corporate Income Accelerated deprecJatwn allowance Carry forward of capital allowance during the relief period

X

X'

X

TABLE 2.1 (Continued) Indonesia Carry forward of loss Export allowances/deductions Deduction of organization and pre-operating expenses: a Organization expenses b. Pre-operating expenses Remvested profits Investment allowance

X

Malaysia

Philippines

Singapore

Thailand

X

X

X

X

X

X

X

X

X

X

X

X

X

X X

X

X

Tax Credits (D1rect Reduction from Corporate Income Taxes) Investment tax crechts Tax credit on domestic capital equipment Other tax credits

X

Extenswn of Incentive Avmlment Period

X

X

X

X

X

X

X X

Special Incentives To multinational companies To exporters To offshore banking units Other laws granting benefits to foreign investors

X X

X

X

X

X

X

X

X

X

X

Ass1stance to Investors Joint venture brokerage Technical assistance Processing of application and other requirements

X X

X

i'

X

X

x!

X

X

X

X

X

X

•Applicable only to BOI-registered enterprises; other incentives are applicable to both EPZA- and other BOI-registered firms. •Applicable only to Filipino mvestors m firms registered under B P. 44 and m firms registered as piOneer firms under P.D. 1989. SOURCE. The SGV Group, Comparative Investment Incentives- Hong Kong, Indonesia, Korea, Malaysia, Philippmes, Taiwan, ROC, Thailand (Manila· SGV and Co., 1981).

TABLE2.2 Net Foreign Investment, Debt-Creating Capital, and Total Foreign Capital Flows to Southeast Asian Countries, 1965-86 (In million US$)

Net Foreign Investment

Direct

Portfolio

Debt -Creating Capital

Long

Short

Total Foreign Capital

Net Foreign Investment as Percentage of Total Foreign Capital*

ASEAN Indonesia

1971 1972-81 1982-86

139.0 2049 249.2

0.0 25.6 1862

238.0 1,094.6 3,220.6

60.0 -370 7 5208

4370 954.4 3,741.4

318 24.2 11.6

Malays1a

1965-71 1972-81 1982-86

64.6 526.6 936.0

422 1842 1,030.2

-5.3 118.0 738.8

3.3 -63.8 57.4

108.8 765.0 2,762.4

1018 92.9 71.2

Ph1hppines

1965-71 1972-81 1982-86

-9.4 64.4 53.8

0.3 3.5 4.6

76.6 653.5 1,540.4

95.1 501.9 -822.2

162.6 1,155.4 776.4

-5.6 56 7.5

Smgapore

1965-71 1972-81 1982-86

48.7 477.0 874.8

0 1.1 84.4

30.3 127.4 -21.0

17.6 335 6 185.4

96.6 463.0 1,123.6

50.4 50.8 85.4

Thailand

1965-71 1972-81 1982-86

43.6 111.7 2706

4.6 43.5 2392

29.7 612.3 686.6

31.9 34.3 231.6

109.8 1,088.8 1,428.0

43.9 14.3 35.7

TABLE 2.2 (Continued) Net Foreign Investment Direct

Portfolio

Debt -Creating Capital Long

Total Foreign Capital

Short

Net Foreign Investment as Percentage of Total Foreign Capital*

Others Burma

1965-71 1972-81 1982-85

0.0 0.0 0.0

0.0 0.0 0.0

5.7 154.4 217.1

2.6 0.7 15.0

8.3 155.1 232.1

0.0 0.0 0.0

Sri Lanka

1965-71 1972-81 1982-86

-11

0.0 0.0 0.0

36.0 111.6 356.1

10.2 1.4 2.8

45.1 113.0 396.5

-2.4 11.2 9.5

14.2 37.6

• The annual average amount of net foreign investment as percentage of the annual average foreign capital and not the average of the annual percentages. SOURCE: International Monetary Fund (IMF), International Fmancia/ Statistics, various issues

8

Role of Foreign Cap1tal m Southeast Aswn Countnes

stability, abundant natural resources, adequate infrastructure, low cost of production, clear-cut foreign investment policy, attractive investment incentives, and efficient bureaucratic procedure. Each factor was given 100 points totalling 700 and the respondents had to allocate these 700 points among the factors and the countries. Out of the total of 700 points, Singapore received 272.3, Thailand 146.7, Indonesia 138.7, Malaysia 85.4, and the Philippines 56.7. For Malaysia, abundant natural resources were the most important; for Singapore, adequate infrastructure, clear-cut foreign investment policy, and efficient bureaucratic procedure; for Indonesia, political stability and low cost of production; for the Philippines, political stability (at that time); and for Thailand, low cost of production and attractive investment incentives (Khan 1985, p. 131). The adequacy question is related to the efficiency question. If resources are used efficiently, the foreign capital will yield good returns and the overall balance of payments will not be jeopardized. The foreign capital will either help to increase exports or reduce imports so that the dividends and interest will not aggravate the current account deficit. Even if the current account deficit is increased it could be more than matched by new inflows of capital. Growth rates would also be satisfactory. Table 2.3 presents data on foreign capital inflows, growth rates, and current account balances. The quantity of capital inflows in relation to GDP has been highest in Singapore and Malaysia reaching double digits in many years, and growth rates in these two countries have exceeded those in other Southeast Asian countries. The next country with the largest capital inflow during the past decade has been Sri Lanka. This is followed by Thailand and the Philippines. Capital inflow in relation to GDP has been smallest in Burma and Indonesia. Growth rates have been satisfactory in most countries except Burma and the Philippines, especially in recent years. In relation to the balance of payments, capital inflows have adequately financed the current account deficit. In Malaysia and Singapore it has been larger than the current account deficit yielding an overall balance of payments surplus in most years. Much has been written about technology transfer (for example, see Sekiguchi 1983). The multinational corporations feel that they are transferring adequate amounts of technology. However, some economists in host countries are not satisfied either with the amount or the pace of the transfer, not to mention their feeling that foreign investment is too capital-intensive and thus not providing sufficient employment opportunities. A recent study by Lindsey (1986) concludes that while U.S.-based transnational corporations do transfer

TABLE2.3 Capital Flows, Growth Rates, and Current Account Balance of Payments, 1977-86 (As percentage of GDP)

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

Indonesia Capital Flow Growth Rate Current Account

24 89 -01

33 77 -27

1.7 6.3 1.9

1.8 9.9 4.0

2.0 7.9 -06

60 2.2 -5.6

7.5 4.2 -7.8

4.2 6.2 -2.2

2.6 1.9 -2.1

4.6 -3.6 -5.3

Malaysia Capital Flow Growth Rate Current Account

1.9 7.8 33

38 85 07

1.0 9.3 4.4

5.9 7.4 -1.2

10.5 6.9 -9.9

14.0 5.9 -134

12.9 6.3 -117

8.9 7.8 -49

62 -1.0 -23

4.5 1.0 -1.1

Ph1llppmes Capital Flow Growth Rate Current Account

24 61 -3.6

74 55 -45

5.3 6.3 -5.1

7.6 5.2 -5.4

52 3.9 -54

7.1 2.9 -8.1

-11 ·o.9 -80

2.4 -6.0 -3.9

1.0 -44

1.1 1.1 3.3

Smgapore Capital Flow Growth Rate Current Account

9.2 7.9 -4.5

12.9 86 -5.8

10.6 94 -78

135 103 -131

15 6 99 -99

15.1 6.3 -79

14.2 7.9 -3.4

8.4 8.3 -2.0

3.0 -1.8

-7.3 1.9 2.8

Thmland Capital Flow Growth Rate Current Account

54 72 -5.7

59 10 1 -5.0

7.3 61 -77

6.1 5.8 -6.2

6.9 6.3 -7.1

35 41 -2.7

4.9 59 -7.2

6.1 5.5 -5.0

4.0 3.2 -4.0

-0.4 3.5 0.5

ASEAN

TABLE 2.3 (Continued) 1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

Bunna Capital Flow Growth Rate Current Account

1.3 6.0 -2.4

4.0 65 -4.7

8.1 52 -6.7

6.3 7.9 -5.9

5.4 64 5.3

5.7 5.7 -8.3

4.0 4.3 -5.5

3.0 5.6 -3.4

2.3 43 -3.1

n.a. 3.7 n.a.

Sn Lanka Cap1tal Flow Growth Rate Current Account

-0.3 3.8 34

3.1 7.0 -2.5

5.5 64 -6.8

8.1 5.8 -16.3

8.7 58 -10.1

10.5 5.1 -11.5

8.6 5.0 -9.0

5.8 4.1 0.1

5.8 6.8 -9.3

53 2.5 -6.4

Others

n.a. : Not available. SOURCES: IMF, International Fmancial Statistics, various issues, and Yearbook 1987.

Costs and Benefits

11

technology to ASEAN countries " the degree and quality of technology transfer of industrial processes by transnational firms is not large" (p. 243). He mentions that Japanese technology is thought to be more appropriate and cheaper for the region than American technology, and Japanese firms are more willing to enter into joint ventures. Although Japanese training programmes are more extensive, the American firms are more willing to place host-country nationals in positions of authority. The cost of using foreign capital can be measured by the ratio of net factor income payments abroad to GDP (Table 2.4) and also by the actual yields on foreign investments. Net factor income payments consist mainly of profits and interest as well as workers' remittances. Thus, it provides an upper limit to the cost of using foreign capital in relation to GDP. Judged by this standard, the cost is smaller for the Philippines and Sri Lanka than for the other countries. Considering the large inflow of foreign capital used by Singapore, its cost, judged by this criteria, is reasonable whereas Malaysia's cost appears to be high. Data on yields are sketchy but some estimates have been made for Singapore (Table 2.5). Data are also available for yields on U.S. investments in developed and developing countries and in Southeast Asian countries (Tables 2.6 and 2.7). The U.S. yields are after taxes while the yields based on Singapore data are before taxes. Another cost of using foreign TABLE 2.4 Net Factor Income Payments in Relation to GDP in Southeast Asian Countries, 1965-86 (In percentages) 1960

1965

1970

1975

1980

1985

1986

na 1.0 14 na. 02

16" 29 05 na

15 2.9 02 -0.1 0.3

4.4 4.4 02 2.3. 01

4.4 3.6 01 3.6 18

4.2 7.4 2.5 3.6 3.9

4.4 72 2.0 3.7 3.9

0.7

0.2

0.8

0.6

2.1

2.2

ASEAN

Indonesia Malaysia Philippines Singapore Thailand

Others Sn Lanka

"1966. "1974. n.a. = Not available. SOURCE Same as for Table 2 3

1.6

TABLE 2.5 Singapore: Stock of Foreign Investment" in Manufacturing and Yields: 1975-85 (In millions of S$ and percentages)

Europe

Total Foretgn

United States

Japan

Total

United Kmgdom

West Germany

Switzerland

1975:

Stock Yteld

3,217 240

n.a. n.a.

na. n.a.

n.a. n.a.

n.a. na.

n.a. n.a.

n.a. n.a.

1976:

Stock Yield

3,560 28.4

n.a. n.a

n a. na.

n.a. n.a.

na. na.

n.a. n.a.

n.a. na.

1977.

Stock Yield

3,942 291

n.a. n.a.

n.a. n.a.

n.a. n.a.

n.a. na.

n.a. n.a

n.a. n.a.

1978·

Stock Yteld

4,694 29.1

1,484 39.5

717 9.7

1,706 32.9

679 191

137 280

46 882

1979

Stock Yteld

5,7% 326

1,709 443

925 114

2,220 41.9

911 12.7

155 209

74 107.7

1980.

Stock Yteld

6,935 38.0

2,016 52.2

1,117 23.1

2,693 42.8

1,129 12.5

195 23.5

107 1130

1981:

Stock Yield

8,057 35.1

2,407 39.7

1,279 185

3,154 44.4

1,320 17.2

202 2.6

148 89.9

1982:

Stock Yield

9,100 22.8

2,920 251

1,478 99

3,569 31.5

1,497 11.7

201 7.5

177 53.4

TABLE 2.5 (Continued) Europe Total Fore1gn

Uruted States

Japan

Total

Uruted Kingdom

West Germany

Switzerland

1983

Stock Y1eld

10,365 16.7

3,486 204

1,910 6.0

3,953 19.9

1,670 8.0

228 11.8

196 32.6

1984:

Stock Yield

11,652 148

3,693 238

2,555 9.0

4,132 126

1,675 2.8

249 12.9

275 84.7

1985

Stock Y1eld

12,489 12.4

3,820 22.0

2,904 6.1

4,251 9.9

1,604 1.2

261 19.4

278 62.1

"Average of end of prevwus year and end of current year cumulative foreign investment • Yield is gross profits before taxes as percentage of cumulative stock of investment. Gross profit is output less sum of cost of inputs, work given out, employees' remuneratiOn, and other costs of production. n.a. = Not available. SOURCES: Singapore Economic Development Board, Yearbook 1986/87 and Singapore Department of Statistics, Report on the Census of lndustnal ProductiOn, vanous issues.

TABLE2.6 U.S. Direct Investment Position Abroad and Rate of Return by Sectors, 1985 and 1986 (In million US$ or percentages)

Rate of Return•

Direct Investment Position•

All Areas

Petroleum

Manufacturing

Other

All Areas

Petroleum

Manufacturing

Other

All Countries

1985 1986

220,614 244,819

58,041 59,590

90,485 101,173

72,088 84,056

14.8 15.0

15.7 12.5

164 17.6

122 13.6

Developed Countries

1985 1986

164,4% 183,292

36,290 38,182

71,429 81,535

56,777 62,945

15.8 17.0

16.4 15.6

17.8 19.2

12.8 150

Developing Countries

1985 1986

50,846 56,570

17,384 17,263

19,056 19,638

14,406 19,669

12.7 10.3

16.5 10.6

10.9 10.8

10.4 9.6

Latm America

1985 1986

26,264 31,436

5,400 5,131

14,663 14,977

6,201 11,328

8.0 9.3

7.4 9.5

9.9 10.0

4.3 8.2

Other Africa

1985 1986

4,476 4,380

3,393 3,409

378 328

705 643

19.2 3.5

23.4 1.5

4.5 -0.9

6.8 262

Middle East

1985 1986

4,918 5,082

2,357 2,509

420 301

2,141 2,272

8.0 98

3.4 20.5

-14.5 -25.9

17.5 2.9

Other As1a and Pac1fic

1985 1986

15,188 15,677

6,234 6,213

3,5% 4,033

5,358 5,431

20.0 14.5

25.6 12.6

18.8 17.3

14.5 14.5

TABLE 2.6 (Continued) Direct Investment Positwn• All Areas

Petroleum

Manufactunng

Rate of Return•

Other

All Areas

Petroleum

Manufacturing

Other

Indonesia

1985 1986

4,264 4,370

3,640 3,689

235 237

389 444

314 11.6

36.5 13.2

-2.1 3.4

36 2.3

Malaysia

1985 1986

1,121 1,108

617 649

377 354

127 105

29.7 11.1

n.a. n.a.

n.a. -9.3

n.a. n.a.

Philippines

1985 1986

1,137 1,064

134 64

415 415

588 585

8.9 18.1

-13.4 -29.9

n.a. 12.8

n.a. 27.1

Singapore

1985 1986

1,908 2,088

3% 424

949 1,208

563 456

201 21.8

-9.9 9.4

34.3 31.7

3.6 7.0

Thailand

1985 1986

1,068 1,051

778

726

162 182

128 143

12.6 129

120 12.1

16.7 12.1

11.0 18.1

•Average of the begmning (which 1s the same as the end of previous year) and end of year position. •Income dlVlded by average direct investment position. n.a. = Not available. SOURCE· Umted States Department of Commerce, Survey of Current Busmess 67, no. 8 (August 1987).

16

Role of Foreign Cap1tal m Southeast As1an Countnes

TABLE 2.7 U.S. Direct Investment Position• in Developed, Developing, and ASEAN Countries, Income, and Rate of Return: 1982-86 (In million US$ or percentages) 1982

1983

1984

1985

1986

Developed Countries Investment Position Income Rate of Return

154,381 11,558 na.

155,736 13,803 89

157,723 13,436 8.6

171,869 25,970 15.8

194,710 31,196 170

Developing Countries Investment Position Income Rate of Return

48,058 8,791 na

45,746 5,689 121

49,153 7,223 15.2

52,539 6,438 12 7

60,609 5,840 103

Indonesia Investment Position Income Rate of Return

2,295 1,756 na

2,770 1,630 64.4

4,093 1,985 57.8

4,434 1,339 314

4,305

Malaysia Investment Position Income Rate of Return

1,221 284 n a.

1,157 381 32.0

1,101 393 348

1,141 333 29.7

1,074 123 11.1

Ph1lippmes Investment Position Income Rate of Return

1,315 47 na.

1,331 3 02

1,263 84 6.5

1,011 101 8.9

1,117 193 181

Singapore Investment Posit10n Income Rate of Return

1,720 504 n a.

1,821 510 28.8

1,932 511 272

1,884 384 201

2,291 455 218

Thailand Investment Position Income Rate of Return

780 -27 n a.

892 1 0.1

1,081 51 52

1,054 134 126

1,048 136 12.6

505 116

"End of year. •Income divided by beginning and end of year duect investment position n a = Not available. SOURCE United States, Department of Commerce, Survey of Current Busmess 67, no. 8 (August 1987).

Costs and Benefits

17

capital is whether in a macro-economic sense the country can afford to finance net transfers of profit and interest in relation to net capital inflows. In this regard Singapore has no problem as even in 1982 net income payments were only 18 per cent of capital inflow and, beginning in 1984, income receipts have been larger than income payments. During 1984-86 income receipts averaged US$1.8 billion and income payments averaged US$1.3 billion. In Burma and Sri Lanka they have averaged 40 per cent of net capital inflows in recent years, but in Indonesia, Malaysia, the Philippines, and Thailand, net income payments have even exceeded net capital inflows during 1984-86. The question of whether the inflow of capital has stifled local business initiative or reduced domestic savings effort is difficult to answer. It seems that since most Southeast Asian countries have been encouraging joint ventures with indigenous enterprises, local entrepreneurship must have benefited. With regard to domestic savings one would need to put it in the context of a complete model which could use methods contained in other works (see for example, Chattophadhay 1976, U Tun Wai 1972, and Lim 1988). Bunna

Burma has not allowed any direct foreign investment and its use of foreign capital has been confined only to foreign borrowings. It has the smallest amount of capital inflow both in absolute terms and in per capita among Southeast Asian countries. Its per capita income is the lowest and its growth rate, though satisfactory in certain years, has been lower than the Southeast Asian average during the past few decades. Why have the Burmese authorities been reluctant to accept direct foreign investment and why has debt-creating capital not yielded better results? To understand the Burmese position, one has to examine the economic structure in pre-war years when the country was economically dominated by the English, the Chinese, and the Indians. Although foreign investment in pre-war and early post-war years did increase output and gave employment opportunities, the share of the pie accruing to foreigners was resented by the Burmese. The amount of net factor income payments abroad in 1938/39 has been estimated at 5.8 per cent of gross domestic product. Hence the Burmese have not been willing to accept foreign investment. Beginning in 1962, with the mtroduction of the "Burmese Way to Socialism", there was a further change in the thinking of the Burmese authorities. Although economic objectives contmued to be included in the

18

Role of Foreign Capital in Southeast As1an Countnes

successive development plans, higher priorities were given to education, cultural, social, political, and other non-economic nation-building projects. The limited resources meant that insufficient amounts were allocated for economic projects which, when combined with the suppression of domestic private sector activities, can be considered the main elements of why Burma's economic position is not as good as that of other Southeast Asian countries. It is, of course, for each country to decide whether to maximize economic objectives or non-economic ends. A model formalizing this approach with factors determining economic and non-economic output can be found in the essay "Policy Objectives and Means with Special Reference to Developing Countries" (U Tun Wai 1980). Burma is presently at a new crossroad. In his speeches given in August and October 1987, U Ne Win called for a re-examination of all policies, asked for suggestions, and stated, "The government alone cannot undertake the economic work of the entire nation. The participation of the people is needed" (The Guardian [Rangoon], 10 October 1987). A few small steps have been taken including the decontrol of internal rice trade and also allowing private businesses to enter the rice export trade. But a much more vigorous action is needed if Burma is to reduce the economic gap with its neighbours. On foreign debt, it is using the U.N. resolution on the poorest countries to obtain relief. But this by itself is only eliminating a negative factor. Burma needs to build up its stock of positive elements. And, in this regard it should rethink its attitude towards direct foreign investment. Obviously there are difficulties both psychologically and materially for the Burmese authorities to allow foreign investment. But with adequate safeguards and lessons from the experiences of its Southeast Asian neighbours, the authorities might consider taking the necessary risks. 2 Indonesia The 1967 Law on Foreign Investment and the 1968 Law on Domestic Investment are the basic laws affecting investment in Indonesia. In 1967, the government gave liberal incentives and guarantees to foreign investments. But from 1974 onwards there emerged a more restrictive set of policies. In the last few years there has been some concern that Indonesia is becoming less attractive for foreign investment. Indonesia has not succeeded in attracting much foreign investment which in 1982-86 averaged only 12 per cent of total foreign capital flows consisting mainly of debt-creating foreign capital. Foreign investment during 1982-86

Costs and Benefits

19

averaged US$435 million or only 2 per cent of domestic investment and 0.6 per cent of GDP. According to one source (ESCAP 1985), of the total approved foreign investment during 1967-83 of US$13 billion, 33.5 per cent was from Japan, followed by Hong Kong (10.6 per cent), Belgium (7.9 per cent), the United States (4.4 per cent), the Netherlands (3.7 per cent), Germany (3.5 per cent), Australia (2.5 per cent), the United Kingdom (2.4 per cent), and Singapore (1.4 per cent). The figure of US$523 million reported in that source for the United States is well below the US$2,770 million reported in Table 2.7 from a U.S. source. The difference could be partly explained by the fact that the U.S. source is the total position while that of ESCAP is only for approved investments during a fixed period, 1967-83. One of the factors discouraging foreign investment in Indonesia must be the low yield in all areas except for the petroleum industry. According to U.S. sources (Tables 2.6 and 2.7) the rate of return on petroleum is quite high, amounting to 36.5 per cent in 1985. In manufacturing it was a negative 2.1 per cent in 1985 but a positive 3.4 per cent in 1986. In the past, Indonesian authorities gave liberal tax incentives to attract foreign investment, but since 1984 tax incentives have been reduced as the government feels that it needs to raise tax revenues. The key policy question for Indonesia is how to attract foreign investment without tax incentives. As noted in the early part of this study, foreigners invest in a country for a variety of reasons, but they must be able to make profits. Even when there were tax incentives, the inflow of foreign investment, except in the petroleum industry, was not important because the general investment climate relating to such things as inflation (GDP deflator averaging 20 per cent per annum during 1979-83), balance of payments problems, and government regulations were not satisfactory in Indonesia. Therefore, the first order of priority for Indonesia is to put its economic house in order. The authorities appear determined to do so. The 1988 budget has been prepared on an austerity basis and there are ongoing stabilization programmes with the International Monetary Fund. Indonesia has a debt servicing problem but it has decided not to reschedule its debt as this would adversely affect its credit worthiness and perhaps jeopardize its attempt to attract foreign capital. In December 1987, the government announced an economic reform package that eased restrictions on trade and inward foreign investment. It allowed foreign businesses to set up their own export outlets for the first time. Restrictions were eased for hotel construction licences and the hiring of expatriates. Foreign joint ventures were allowed to export goods produced by other companies. Another preoccupation has been to increase the value added of

20

Role of Fore1gn Capital in Southeast As1an Countries

processing industries. In the early eighties Indonesia phased out the export of logs and instead developed the plywood industry with the help of foreign investment and technology. Starting in October 1986 Indonesia's raw rattan, which had supplied 80 per cent of the world market, could no longer be exported. Again with the help of foreign investors and expertise, the government is encouraging the export of finished rattan products, mainly furniture. One measure which was recently introduced is the surcharge of 30 per cent on export of semi-finished products so as to encourage the export of the finished products. But there are difficulties in exporting finished products, such as lack of skilled labour and shortage of marketing expertise. Malaysia

Malaysia's attitude is to encourage and welcome direct foreign investment within the framework of the New Economic Policy in 1971. This policy aims to raise the level of bumiputra (indigenous population) business participation at all stages - from ownership to employment to management control. The government aims to bring about a gradual reduction in the relative share of foreign capital to 30 per cent of the aggregate value of the corporate sector capital by 1990. But this objective was already achieved by 1985. Foreign investment in resource-based industries such as processing of agricultural commodities, food and beverages, and wood and non-metallic products have generated more employment opportunities than capital-intensive manufactures of import substitutes. The dilemma is that the government is keen on developing capital-mtensive industries such as the "national car", sponge iron mills, and heavy engineering complexes. Manufacturing firms in Malaysia are deliberately encouraged to use modern and new equipment but the encouragement of capital-intensive industries is felt by some as inappropriate (for example, Ali 1984 and Chee 1984). There has also been a relatively limited amount of technological transfer because the necessary research and development are mostly undertaken at headquarters or subsidiaries abroad (Abdul 1984 and ESCAP 1985). Hirschman (1983a, 1983b, and 1983c) has argued that in Malaysia a heavy price was paid for having direct investment because foreign firms tended to be more capital-intensive and to reinvest less than local firms. O'Callaghan ( 1983) has challenged this and Gerald Tan ( 1983a and 1983b) argues that differences in the profit-wage ratio between foreign and local firms were due to differences in their capital intensity and productivity and not to differences in the nationality of the firms. A large number of Malaysian-owned firms are

Costs and Benefits

21

more capital-intensive than foreign-owned firms. One of Malaysia's concerns is that despite having given more liberal tax concession and encouragement to the foreign investors than other Southeast Asian countries, the amount of direct foreign investment inflow has not been regarded as very satisfactory. This view is perhaps not justified because both in absolute amounts and in relation to domestic investment, Malaysia has succeeded in attracting more direct foreign investment than many other countries. During the period 1982-86, the annual net inflow of foreign investment into Malaysia amounted to US$936 million as against US$270 million into Thailand. These flows financed 10 per cent of domestic investment in Malaysia as against 3 per cent in Thailand. Of the foreign equity projects approved by the Malaysian Industrial Development Authority (MIDA) during the period 1982-87, 23 per cent in value terms were from Japan, 13 per cent from Singapore, 9 per cent from West Germany, and 6-8 per cent each from Australia, Hong Kong, the Netherlands, Taiwan, the United Kmgdom, and the United States (MIDA 1988). On the cost-benefit issue, the data on yields from U.S. sources are scanty. From the data on stock of direct foreign investment and investment income payments abroad, reported in the Fund's Balance of Payments Yearbooks, it appears that yields on foreign investment were rather high in 1980 (23.8 per cent) and remained high in the subsequent four years, 1981-84, averaging 20.6 per cent. It is estimated to have fallen to 17.6 per cent in 1985 and still further to 9.8 per cent in 1986. Based on these figures it would seem that at one time the costs may have been excessive, but not so in 1986. The rate of return on U.S. investments in Malaysia (Tables 2.6 and 2.7) also appears high, averaging 32.2 per cent in 1983-85. A more in-depth study (Warr 1987) has concluded that by the end of 1982, the net benefits to Malaysia from its Free Trade Zones (FTZs) had already exceeded the net costs incurred in establishing these zones. Since the initial tax holiday periods are now ending, Warr recommends levying some company income tax for FTZ firms but at substantially lower rates than the 45 per cent applied to firms operating outside the zones. He also recommends reducing the amount of subsidy on land provided to FTZ firms, better administration of the FTZ programme, and increased linkages between FTZ firms and the domestic economy. Philippines

The Republic Act (RA) 5455, implemented in 1968, regulates foreign

22

Role of Forezgn Capital m Southeast Asian Countries

investment where foreign equity exceeds 30 per cent of the capital stock. The Board of Investment in granting approval to foreign investment has to ensure that such investment has the following characteristics: a. b. c. d. e.

consistent with national investment priorities; contributes to a sound, balanced, and sustained development of the economy; does not conflict with the constitution and laws of the country; does not encroach on areas adequately exploited by the Philippines; and does not promote monopolies or restrain trade.

A number of tax and other incentives, including availability of export processing zones, are provided to the foreign investor, but the amount of the inflow of direct foreign investment has been disappointing. During 1982-86, foreign direct investment averaged US$54 million or only 7 per cent of total capital inflow and was equivalent to less than 1 per cent of domestic investment. One of the major reasons for this must be the low rate of return on direct foreign investment in the Philippines. This averaged 15 per cent in 1975-77 but declined to 9 per cent in 1978-80 and still further to 6.7 per cent in 1982-83 (ESCAP 1985, p. 166). Based on U.S investment data, it seems to have recovered to 8.9 per cent in 1985 and 18.1 per cent in 1986 for U.S. direct investment (Table 2.7). According to one study (Goldsbrough 1985), the stock of foreign investment in the Philippines in 1973 was almost US$1 billion as compared to US$1.7 billion in Indonesia, US$1.2 billion in Malaysia, US$0.6 billion in Singapore, and US$0.5 billion in Thailand. Between 1973 and 1983 foreign investment flows grew more rapidly in Indonesia, Malaysia, and Singapore than in the Philippines and Thailand, and the stock of foreign investment in the first group of countries was 2.5 to 3 times that of the estimated US$2.7 billion 1983 stock in the Philippines. According to another source (ESCAP 1985, whose primary source is the Central Bank of the Philippines), out of the outstanding value of approved direct investment of over US$2.5 billion at the end of 1983, the United States accounted for 51.5 per cent, followed by Japan (16.5 per cent), Hong Kong (5.9 per cent), Australia (2.0 per cent), Canada (2.0 per cent), and Singapore (0.6 per cent). The figure for U.S. direct foreign investment position of US$1,288 million in 1983 is practically the same as reported in Table 2.7. The Investment Incentives Act of 1967 was enacted to promote an accel-

Costs and Benefits

23

erated pace of industrialization but the investment climate, despite tax incentives, has not been conducive to attracting foreign investment. Mismanagement of the economy under the Marcos regime and emphasis on government investment, inflation (GDP deflator increasing at 26.4 per cent per annum during 1983-85), and perhaps crowding-out of local financial markets have all played a role in making the Philippines not as attractive as Malaysia, Singapore, and Thailand. For the last two years under the Aquino administration the country, like Indonesia, has been trying to put its economic house in order, but the servicing of the foreign debt has been crippling. Thus the Philippines has adopted rescheduling as a solution. It also has ongoing financial and technical assistance from the Fund. Singapore

Singapore is at the other extreme but successful end of the spectrum in relation to Burma. It has the highest per capita income and growth rate. It has used direct foreign investment in large doses to obtain all the benefits associated with such capital inflows, namely additional financial resources, new technology, full employment, and export markets. Nevertheless, a group of twenty-six economists, while underscoring the benefits received, have raised the question of whether the continuing heavy dependence on direct foreign investment is desirable from other considerations such as: (1) limited absorptive capacity imposed by land and labour supplies in the short and medium term; (2) increased "crowding-out" of domestic entrepreneurs; and (3) the likelihood of having to offer more and more incentives to maintain investment competitiveness (Lim and Associates 1988). They have also made a number of important recommendations including selective acceptance of foreign investment in relation to absorptive capacity, a review of the tax incentives, promotion of domestic investment, entrepreneurship and innovative capacity of Singaporeans, and encouragement of outward foreign investment. A review of tax incentives will naturally have to cover rates of return earned by foreigners. As noted in Table 2.5 the rates of return earned by some investors appear to be very high, perhaps even more than the risks involved. The high rates probably stem from some oligopolistic position, associated with the particular technology or trademarks and patents, and under-valuation of capital stock. The rates computed for the U.S. direct foreign investment from Singapore sources for 1983-85 (Table 2.5) are fairly close to those calculated from U.S. sources (Table 2.7). According to studies

24

Role of Foreign Capital in Southeast Aszan Countnes

made by the Monetary Authority of Singapore (MAS) (1984a and 1984b), the yield of foreign equity investment in manufacturing in 1981 was 25.7 per cent while the calculated yield in this study for 1981 is 35.1 per cent. The difference arises in part from valuation differences, coverage of companies, and definition of foreign investment. Yields for Singaporean investment can also be estimated. Although the Economic Development Board (EDB) does not publish the cumulative Singaporean Investment in Gross Fixed Assets in manufacturing, the author has been informed that it amounted to S$7,270 million at the end of 1984 and S$7,542 million at the end of 1985 or about 60 per cent of the stock of foreign investment in manufacturing. Estimates of the Singaporean stock of investment in manufacturing for earlier years were derived by deducting the annual capital expenditure of Singaporean enterprises. For the years 1976 to 1985, yields on Singaporean investment of 14.9 (1976), 13.0, 13.0, 19.2, 21.2, 21.1, 10.7, 6.9, 8.5, and 4.2 (1985) were obtained. These are much below yields earned by foreign firms (Table 2.5). Yields on direct foreign investment and on Singaporean investment have declined markedly over the past decade partly due to rising wages and greater competition among investors. Product competition in other markets has also increased. Hence, it could be concluded that the cost of foreign capital is no longer exorbitant. There is, however, another aspect to the inflow of direct foreign investment, namely whether Singapore needs the additional financial resources. Since Singapore has the highest savings rate in the world, it has accumulated huge foreign exchange reserves. At the end of 1985 the cumulative foreign investment in gross fixed assets in the manufacturing sector amounted to S$12.72 billion which is about half of the total foreign investment in Singapore (according to the MAS studies noted above, foreign equity investment in manufacturing in 1981 amounted to S$8.2 billion out of a total foreign equity investment of S$16.8 billion). The foreign assets of the monetary authorities, as reported in International Financial Statistics, increased rapidly over the past two decades and amounted to S$27.08 billion at the end of 1985. The key questiOns to be answered before any contemplated change of policy can be made are as follows: 1.

2.

Is the government of Singapore able to earn as much return on its investments abroad as the foreign investor earns in Singapore? Will it be possible to unbundle the technology and managerial skills from the equity capital of the foreign investor?

Costs and Benefits

3. 4. 5. 6.

7.

25

Will there be enough local entrepreneurships either in the private or government sectors to take over from the foreign investor? Will the system of the Central Provident Fund be in jeopardy if the surplus proceeds are invested locally rather than invested abroad? Is the level of foreign exchange reserves excessive considering that Singapore's exports depend on the vagaries of the world market? Does Singapore need to further diversify its financial assets both abroad and domestically? Should not the foreign investor continue to assume the risks of new ventures?

While the balance of these factors appear to validate the government's liberal foreign investment policy in the past, these issues should be discussed further and perhaps Singapore should reduce its overdependence on direct foreign investment. Koh Ai Tee in the chapter on saving, investment, and enterpreneurship (Krause et al. 1987) has opted for having a strong foreign investment preserve with small amounts of government enterprise and some development of local entrepreneurship. Despite the policy issues raised above, Singapore must be considered as a model country for other Southeast Asian countries to emulate if one is keen to attract foreign investment. The economic policy of the government as a whole is geared towards attracting foreign investment through political stability, peaceful industrial relations, orderly wage increases, manpower development, tax incentives (Lim 1988, pp. 253-60), government provision of industrial estates, and equity and loan financing in the local as well as developed capital and money markets (ESCAP 1985, pp. 211-15). The activities of the EDB with its aggressive policies implemented through a network of world-wide branches have also helped to bring about a large inflow of direct foreign investment. Sri Lanka

The Sri Lanka Government is actively seeking to attract more foreign investment. In 1977 the Greater Colombo Economic Commission (GCEC) was established as the co-ordinating body in charge of designated Investment Promotion Zones (IPZs ). The incentives offered to enterprises setting up business in an IPZ include tax holidays, reduced taxes on turnover, and a reduction to 10 per cent in withholding tax on royalties and technical service payments (see Lloyds Bank 1986, Hongkong and Shanghai Bank Corporation, 1987, Sri Lanka Ministry of Finance and Planning 1980, and Greater Colombo

26

Role of Foreign Capital in Southeast Asian Countries

Economic Commission 1979). Relative labour productivity in 1978 was reported to be just below that of Singapore and higher than that of other Asian countries including Malaysia, Hong Kong, South Korea, the Philippines, Taiwan, and Thailand (Greater Colombo Economic Commission 1979). Investment protection agreements have also been signed with a large number of industrial countries including the United States, West Germany, the United Kingdom, Japan, France, and Switzerland. But the amount of direct foreign investment into Sri Lanka during 1982-86 averaged only US$37.6 million (Table 2.2) or equivalent to 2.5 per cent of total domestic investment. Total capital inflows, that is including debt-creating capital, however, financed 26.6 per cent of domestic investment. There must be many reasons for this small inflow of direct foreign investment, perhaps including the requirement that investments in the IPZs should take the form of joint ventures where the majority of shares is to be usually held by Sri Lankan partners. Other reasons must include central govern-ment budget deficits averaging 13.4 per cent of GDP during 1978-83 and reaching 18.3 per cent of GDP in 1980. Only in 1984 the fiscal deficit was contained at 6.7 per cent of GDP but has risen to 11.5 per cent of GDP in 1985 and 1986. Inflation rates as measured by the GDP deflator have also been high, averaging 17.6 per cent per annum during 1979-84. Judging by the consumer price index, the rate of inflation slowed down in 1985 (1.5 per cent) and 1986 (8.0 per cent). Such improvements may help to attract direct foreign investment in the future. An important negative factor, however, is the political unrest and fighting in the northeastern part of the island. Thailand

The major pieces of legislation affecting direct foreign investment include the Investment Promotion Act of 1977, the Alien Business Law, and the Alien Occupation Law. Foreign investment projects seeking promotional privileges have to apply to the Board of Investments (BOI). Except for export-oriented industries, the only requirement is majority Thai ownership. The BOI has aggressively sought transnational corporations to invest in Thailand. There is concern that the transfer of technology is not rapid or as extensive as desired. It has been more successful when associated with the purchase of technology than when coupled with direct foreign investment (ESCAP 1985, p. 241). Thailand has utilized all the channels of foreign capital inflow, that is direct and portfolio investment as well as long- and short-term loans. The rate of increase of total capital flow has been rapid. The annual flow in 1982-86

Costs and Benefits

27

of US$1,428 million was about 13 times the 1965-71 average, the second highest rate of increase in the Southeast Asian region next to Malaysia whose capital inflow in 1982-86 was 25 times the capital inflow in 1965-71. The reliance on foreign investment has fluctuated over the years (Table 2.2). It appears that the government uses its foreign borrowing policy to supplement the inflow of foreign investment capital to reach national target levels of output and employment. The question for Thailand is whether the costs have exceeded the benefit. Data on yields are available for U.S. foreign investment which show that they were very low in 1983 and 1984 (0.1 and 5.2 per cent respectively) but were a respectable after taxes yield of 12.6 per cent in 1985 and 1986. Data compiled from the Thailand pages in the Fund's Balance of Payments Yearbook 1987 indicate a high yield of 15.76 and 14.20 per cent in 1979 and 1980, respectively, but lower yields in each of the years 1982-86 (7.03, 7.48, 7.05, 5.93, and 7.51). Taking all the evidence, one can conclude that the costs to Thailand have not been excessive. However, according to one source using another criteria, the outward remittances on investment income during 1970-83 at 30.4 billion baht (approximately US$1.5 billion) were equivalent to almost 80 per cent of the net investment inflow (ESCAP 1985, p. 239). This source feels that the amount of debt servicing for long-term loans, which increased from US$38 million 1976 to US$1,747 million in 1983, is quite serious and comments that it exerts a negative impact on the balance of payments. The source, however, admits that foreign loans should be able to strengthen the production capabilities of the country. Another policy issue is that the bulk of direct foreign investment in the 1970s had gone into import-substitute industries whose impact on the balance of payments is not clear. But in recent years, direct foreign investment in manufacturing exports has been rising, especially in textiles, garments, and electronic components.

III

MAIN FINDINGS

Except for Sri Lanka, foreign capital inflows are much more important than private and official unrequited transfers which in 1982-86 averaged US$74 million in Burma, US$147 million in Indonesia, US$23 million in Malaysia, US$430 million in the Philippines, US$166 million in Singapore, and US$203 million in Thailand. In Sri Lanka (US$452 million) they exceeded capital inflows. The total amount of foreign capital has increased many times over during the period 1965-86. In five ASEAN countries - Indonesia, Malaysia, the Philippines, Singapore, and Thailand - the total foreign capital flows averaged US$9.8 billion per year during 1982-86 or 11 times the US$0.9-billion per year inflow during 1965-71. The flows increased by 25 times in Malaysia, 13 times in Thailand, 12 times in Singapore, 9 times in Indonesia, and 5 times in the Philippines. The foreign capital flows into Burma and Sri Lanka in 1982-86 averaged only US$629 m1llion per year but this figure was still 12 times the 1965-71 flows. These capital flows have also generally increased in relation to GDP. During the decade 1977-86 they averaged 10 per cent of GDP in Singapore, 7 per cent in Malaysia, 6 per cent in Sri Lanka, 5 per cent in Thailand, 4.5 per cent in both Burma and Indonesia, and 3.8 per cent in the Philippines. The US$9.8-billion per year capital flow into the five ASEAN countries was 11 per cent of total flows to all developing countries. The relative importance of direct foreign investment, portfolio investment, and long- and short-term loans has changed over time and among countries. Countries such as Malaysia, Singapore, and Thailand which rely heavily on private sector initiative have a higher foreign investment component in total foreign capltal. During 1982-86 this component was 85.4 per cent in Singapore, 71.2 per cent in Malays1a, and 35.7 per cent in Thailand. In the other countries, partly because they have not been as successful as Singapore and Malaysia in attracting foreign investment and partly because foreign borrowing has been relied upon to fmance government budget deficits, the

Main Findings

29

component of foreign investment in total foreign capital has been much smaller. In Burma it does not exist because the government has not allowed foreign investment to come in. During 1982-86 the share of foreign investment in foreign capital was 11.6 per cent in Indonesia, 9.5 per cent in Sri Lanka, and 7.5 per cent in the Philippines. The availability of foreign capital has enabled all the Southeast Asian countries to finance a larger amount of domestic investment than would have been possible without it. Thus growth rates have been higher. But the inflow of'capital which has provided additional output and employment has its costs, all of which are difficult to quantify. However, income payments abroad of dividends and interest do affect the balance of payments. Their impact would be minimal where the investment has taken place in the export industry as in the case of Singapore. There would also be only a small impact where the foreign investment or loan capital was used in a country with a higher supply elasticity (Malaysia, Singapore, and Thailand) than in one with a lower supply elasticity (Indonesia and Sri Lanka). The impact would be greater if either the yields are very high or the interest payments are large owing to a rise in world interest rates as occurred in the late seventies and early eighties. Reliable data on yields are not available, but from U.S. sources some information has been compiled. It shows that yields were rather high on U.S. investments in manufacturing in Singapore (over 30 per cent in 1985 and 1986) and also in Malaysia (returns of over 30 per cent in all areas during 1983-85). But in the other countries - Indonesia, the Philippines, and Thailand - they ranged between 12 to 18 per cent. The U.S. data on yields for Singapore is confirmed by estimates made by the author, which during 1975-81 averaged 30.9 per cent. Beginning with 1982 (yield of 22.8 per cent) the total yield has begun to fall each year until it reached 12.4 per cent in 1985. For Singapore, this is a very reasonable price to pay for all the benefits it derives from foreign invest-ment. The decline beginning in 1982 must be attributed to greater competition among foreign investors and the rise in local wages. However, in some fields and for certain countries the yields on foreign investment in Singapore, especially from Switzerland, still appear excessive. Foreign capital flows per capita have been highest in Singapore, reaching almost US$1,000 in peak years, followed by Malaysia, around US$200. They ranged around US$50 per capita in Indonesia and Thailand, US$20 to US$30 per capita in Sri Lanka, and less than US$10 per capita in recent years in Burma and the Philippines. While a host of complex economic, political, and social factors have brought about these differences, the relative attractiveness of government policies must be considered as the key element in all this.

30

Role of Foreign Cap1talm Southeast Aswn Countries

Each country has to decide whether the amount of foreign capital available to it is at the optimum level in relation to its economic and social goals. The policies it has adopted have to be judged in the light of foreign capital targets and the amounts flowing in. Burma had not welcomed foreign investment, but it has recently passed a Foreign Investment Law which now opens the country to foreign investors under certain conditions. For Indonesia, Sri Lanka, and the Philippines a greater financial stability would encourage more foreign investment. For Malaysia and Thailand, a review of the amount of government borrowing is needed. And, for Singapore, which has done the best and could thus serve as a model for other countries, absorptive capacity, stifling of local entrepreneurship, and need for diversification of investment abroad have been raised. What is clear from this study is that foreign capital is a powerful tool which, if used properly, can bring immense benefits to the host country. However, if the economy is not managed properly then the inflow of foreign capital, especially debt-creating capital, will not be productive and one is likely to get into debt-management problems. The costs of direct foreign investment are always there and all countries have to keep a constant watch on how foreign capital and its many components are affecting the domestic economy.

NOTES

1 2

Brunei is not included in this study. The Saw Maung Government, which was established on 18 September 1988, has welcomed foreign investment and at the end of November 1988 promulgated the Union of Burma Foreign Investment Law.

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33

Greater Colombo Economic Commission. Sri Lanka's Investment Promotion Zones. Colombo: Greater Colombo Economic Commission, 1979. Hill, Hall. "Foreign Investment and Industrialization in Indonesia". Institute of Southeast Asian Studies (ISEAS) Staff Seminar Paper No. 11. Singapore, 1985/86. Hirschman, Charles. "Ownership and Control in the Manufacturing Sector in West Malaysia". In Fwther Readings on Malaysian Economic Development, edited by David Lim. Kuala Lumpur: Oxford University Press, 1983a. - - - - -. "A Response to Dr Gerald Tan's Paper". In Further Readings

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Kuala

"Foreign Investment in Malaysia, Once Again". In Further Readings in Malaysian Economic Development, edited by David Lim. Kuala Lumpur: Oxford University Press, 1983c. Hongkong and Shanghai Banking Corporation. Business Profile Series - Sri Lanka. Hong Kong: Hongkong and Shanghai Banking Corporation, 1987. International Monetary Fund (IMF). Balance of Payments Yearbook, 1987. Washington D.C.: IMF, 1987 . - - - - -. International Financial Statistics. Monthly and Yearbook, 1987.

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Khan, Ahmad, ed. Foreign Investment and Technology Transfer- Fiscal and Non-Fiscal Aspects. Singapore: Asian-Pacific Tax and Investment Research Centre, 1985. Krause, Lawrence B., Koh Ai Tee, and Lee (Tsao) Yuan. The Singapore Economy Reconsidered. Singapore: Institute of Southeast Asian Studies, 1987. Lim Chong Yah and Associates. Policy Options for the Singapore Economy.

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Singapore: McGraw-Hill Book Company, 1988. Lindsey, Charles W. "Transfer of Technology to the ASEAN Region by U.S. Transnational Corporations". ASEAN Economic Bulletin 3, no. 2 (November 1986): 225-47. Lloyds Bank. Sri Lanka -Economic Report 1986. London: Lloyds Bank, 1986. Malaysian Industrial Development Authority (MIDA). 2d ed. Investment in the Manufacturing Sector - Policies, Incentives and Procedures. Kuala Lumpur: MIDA, 1987. Statistics on the Manufacturing Sector, 1988. Kuala Lumpur: MIDA, 1988.

Monetary Authority of Singapore. "Foreign Investment in Singapore, 197081". In Ministry of Industry and Trade, Economic Survey, no. 1 (1984a): 12-22. _ _ _ _ _ . "Profitability of Companies in Singapore, 1970-81". In Ministry of Industry and Trade, Economic Survey, no. 3 (1984b ): 11-22. O'Callaghan, John. "Ownership and Control in the Manufacturing Sector of West Malaysia: A Note". In Further Readings on Malaysian Economic Development, edited by David Lim. Kuala Lumpur: Oxford University Press, 1983. Pangestu, Mari. "The Pattern of Direct Foreign Investment in ASEAN: The United States vs. Japan". ASEAN Economic Bulletin 3, no. 3 (March 1987): 301-28. Rana, Pradumna B. "Foreign Direct Investment and Economic Growth in the Asia and Pacific Region". Asian Development Review 5, no. 1 (1987): 100-15. Sekiguchi, Sueo, ed. ASEAN-Japan Relations: Investment. Singapore: Institute of Southeast Asian Studtes, 1983.

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Singapore Department of Statistics. Annual Report on the Census of Industrial Production, various issues. Singapore Economic Development Board. Yearbook 1986/87. Singapore: Singapore Economic Development Board, 1987. Sri Lanka Ministry of Finance and Planning. A Guide to the Foreign Policy Outside the Investment Promotion Zones. Colombo: The International Economic Co-operation Division, Ministry of Finance and Planning, 1980. Tan, Gerald. "Foreign Investment, Employment Generation and the Profitwage Ratio in the Manufacturing Sector of West Indonesia". In Further Readings on Malaysian Economic Development, edited by David Lim. Kuala Lumpur: Oxford University Press, 1983a. _ _ _ _ _. "Foreign Investment, Employment Generation and the Profitwage Ratio in the Manufacturing Sector of West Malaysia: A Reply to Professor Hirschman". In Further Readings in Malaysian Economic Development, edited by David Lim. Kuala Lumpur: Oxford University Press, 1983b. The SGV Group. Comparatzve Investment Incentives -Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, ROC, Thailand. Manila: SGV and Co., 1981. United Nations Department of Economic and Social Affairs. Foreign Investment in Developing Countries. New York: United Nations, 1968. U Tun Wai. Financial Intermediaries and National Savings in Developing Countries. New York: Praeger Publishers, 1972. _ _ _ _ _ . Economic Essays on Developing Countries. Alphen aan den Rijn, The Netherlands: Sijthoff and Noordhoff, 1980.

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THE AUTHOR

U Tun Wai, Ph. D. m economics, is an International and Economic Consultant. Formerly Deputy Director at the IMF Institute, he has also been consultant to the IMF, UNCTAD, UNDP, and various governments. In 198788, he was the Distinguished Fellow in Internatwnal Banking and Finance at the Institute of Southeast Asian Studies. His research interests focus on financial policies and problems of developing countries, as well as problems of economic development. His writings on the subject include Economic Essays on Developing Countries (1980); "Determinants of Private Investment in Developing Countries" (with Chorng-huey Wong) (1982); "A Study of ICOR in Developing Countries" (1987); "The Role of Developing Countries m the International Monetary System" (1988); and "ASEAN Finance and Banking Trends in 1988" (1989).