Competing for business: sustainable development impacts of investment incentives in Southeast Asia

Competing for business: sustainable development impacts of investment incentives in Southeast Asia

Incentives alone are unlikely to attract foreign direct investment and promote sustainable economic, social and environmental progress

Recent decades have seen a proliferation of investment incentives around the world as governments seek to attract increasingly mobile FDI in the hope of spurring economic growth, raising employment and bringing technology and know-how to the country. Southeast Asia is no exception to this trend. The region has seen substantial growth in FDI inflows over the last three decades, reaching US$60 billion in 2007, a 15-fold increase compared to FDI substantial inflows in 1987. All Southeast Asian countries have offered incentives to foreign investors over the years, although the timing and extent of investment promotion has differed among the countries.

The most widely available incentives in Southeast Asian countries are tax incentives, usually granted for a defined period and with certain eligibility criteria, and reduced duties on capital goods and raw materials used in export-oriented production. Moreover, all Southeast Asian countries have set up designated zones where investors can benefit from special tax benefits, infrastructure and streamlined administrative procedures. Understanding the impacts of the incentives can be challenging due to difficulties in assessing the costs and benefits of investment incentives and isolating the role of incentives from other factors.

A general comparison of FDI sectors, source countries, types of investors, investors’ motivations and the broader investment environment among the Southeast Asian countries suggests that incentives could play a role in diverting FDI between Singapore and Malaysia for high-tech industries as well as among Malaysia, Thailand, Indonesia, the Philippines and Vietnam for manufacturing components and medium-tech products for export. The region’s least-developed countries Cambodia and Laos (as well as Vietnam to a lesser extent) would likely compete for low-tech assembly industries and FDI in natural resource extraction and large-scale agricultural production.

All Southeast Asian countries have concluded a number of bilateral investment treaties (BITs) and/or free trade agreements (FTAs) that include investment provisions.

Some parts of Southeast Asia have been highly successful in promoting FDI as an important stimulus of economic growth, while others continue to lag behind. Whether the benefits have indeed outweighed the costs of providing incentives remains difficult to estimate. The continued and accelerating economic integration of Southeast Asia through association of Southeast Asian nations (ASEAN), combined with the rapid growth of China, could place further pressure on governments to provide ever more generous incentives without a full understanding of their benefits.