I recently attended a conference organised by the ASEAN Federation of Accountants (AFA) In Bangkok as a delegate of the Institute of Chartered Accountants of Bangladesh. The theme of the conference was "AFTA - new challenge for ASEAN Accountants'. There were several technical sessions of which two drew maximum participation and Interest of the delegates. They were (I) "Investment incentives and Impact on the Industrial sector In the ASEAN countries* and (II) "Structural reforms tn ASEAN financial market". The standard of the papers presented, level of commentaries made and the floor participation of the delegates were excellent and highly Informative. There was much Information to gather from this conference with my fellow professionals as well as persons who are Involved in some way or other In the economic development of Bangladesh whether within the Government or out of ft.

I have made several visits to the ASEAN countries in the last three or four years. During these visits I have had extensive Interactions with a wide cross section of people.

I have visited important Institutions and have exchanged views with Bangladeshi business people who have multi dimensional ad extensive commercial relationships with these countries.

Since the middle of the eighties. I became aware that the economic balance was slowly and steadily shifting from the west, dominated by the USA and EEC. towards the East. Reaganomics which had created

an economic rejuvenation In the west was gradually running out of steam. Japan, being constantly clobbered to slow down her exports to the west and par ticuiariy to the US. was forced to look towards east particularly ASEAN for new Investments and new markets. The opening up of China was the greatest single economic development of the decade of eighties which necessitated new economic realignment to be drawn on entirely new perceptions. Direct Foreign Investment (DFI) assumed a role of extraordinary importance In drawing up the national and regional strategics for economic development. DFI not only meant capital Investment, it also was the most important vehicle for access to modern technology and International markets. Unlike others. ASEAN countries were quick to respond to these signals early on and did not lose time to create a most congenial and hospitable environment for the DFI Inflows to move In. Today they have replaced South Korea. Taiwan and Hongkong as the most popular centres for DFI. How was It possible for countries of ASEAN to achieve such a spectacular industrial transformation when barely a decade ago all these countries' economics excepting that of Singapore were largely commodity based? The other marvel of this accomplishment Is that this was achieved without having to run up huge external debts. This is where the foreign Investment particularly direct foreign Investment had played Its spectacular role.

A number of recent studies have concluded that Investment

Incentives are not the primary concern for potential Investors In a study of US Investors In ASEAN. It was found that only a relatively small number of their affiliates reported being Influenced by Incentives, due in large part to their attempt to avoid bureaucracy. Similar conclusions were found In an opinion survey conducted In Malaysia.

The limited impact of Investment Incentives could have been that given the proliferation of lncentives.no country has been able to offer a uniquely attractive package of Incentives for Investors. But one must also note that businessmen are Influenced by a whole range of factors when deciding to Invest in a country. Therefore, policy intervention through the extension of Investment Incentives alone may not bear fruits if other preconditions are lacking.

What are these other factors? Proximity to a wide-range of natural resources is one major reason for plant location. It cuts down transportation cost, giving the country a comparative advantage. Labour resources Is another. Cheap labour provides an attraction for labour-intensive industries from high-costs developed countries (and NIEs) looking far cheaper alternatives. In addition to minimising costs through Increased access to cheaper factors of production. Investors also seek to increase revenues by increasing access to markets — reduce natural (geographic) or induced (trade policies etc) barriers. Depending on what prompt the Investors to go overseas, even seemingly unrelated factors can determine

the location of plant, e.g., a lax environmental rule or con-trolled/doclle labour force In the recipient country. Beyond that, a strong but stable economy, free and growing market, good and dependable physical infrastructure, a government administration that poses minimal hassles to Investors, and political stability would most certainly receive thumbs-up from DFI. The last factor Is well illustrated tn the case of Philippines where investment inflow took a plunge between 1988 and 1990. no doubt a result of uncertainty over the change tn political leadership. Other Important considerations are availability of local partners, ability to source parts locally, and accessibility to reliable business information, and of course transparency and pre dlctability of government policies to reduoe risks of business operation.

Thus, apart from the attractive incentive schemes offered by ASEAN, foreign Investors could have been drawn to this region because of the many 'comparative advantages" they offer Except for Singapore, they are blessed with vast natural resources Malaysia has attracted a tot of DFI in the rubber products Industry because it has a developed rubber sector. Philippines and Indonesia enjoy huge DFI Investments In wood and wood products (Including pulp and paper) due to their huge forest resources. Similarly, a tot of DFI has gone Into the mining sector tn Indonesia and Malaysia where these resources (especially gas and petroleum) exist for exploration. development and ex

traction. There is also a pool of labour that Is relatively cheap, thus the mushrooming of labour Intensive textile Industry In Malaysia, Thailand. Philippines and Indonesia, and the electrical-electronica assem-bly/manufacturlng plants In Malaysia. More Importantly, labour unrest is uncommon, thanks to the tough labour taws. Even In Singapore where wages are higher, the educated but largely docile labour force holds a big attraction for investors. In addition, environmental regulations are generally lax compared with those In the developed countries. This Is probably a main reason for the heavy participation of DFI In the chemical Industry in the region.

It is therefore true to say that whatever fiscal Incentives are available, an Investor will not Invest unless it is competitive for It to do so and the investment will enhance its profitability whether tn the short or long term.

The other most Important non-fiscal Incentive considered by the investor is the requirement of equity conditions. This issue la of particular significance to Malaysia where prior to 1986 foreign participation was generally restricted to 30 per cent of equity. The liberalisation of this factor in the countries of ASEAN tn particular Malaysia has been very effective tn attracting DFI. Especially with the Increasing globalisation of business, for elgn investors increasingly feel more comfortable to have majority control over the establishment especially If it has substantial exports and Involve heavy capital outlays.

This can be substantiated In the case of Malaysia when the number of projects with wholly or majority foreign equity Increased from 304 In 1985 to 709 in 1991 after the libera llsatlon undertaken by the government

This docs not, however, imply that fiscal incentives are unimportant. These Incentives can still play a critical role tn Influencing DFI Inflow Into a country In general and into designated sectors In particular In the real world, investors tend to assess policy Incentives together with other "comparative advantages' of the country concerned. and weigh them against the disincentives Imposed. Incentives may thus be treat as compensation for lack of natural advantages or for policy-induced disincentives such as restrictions on foreign equity or land ownership and foreign exchange controls. This can best be illustrated in the case of Indonesia where officials replaced costly incentives like tax holiday tn the mid- 1980s and in stead Instituted reforms to extend Investment licenses to 30 years, tower minimum Investments for foreigners from USMni to USS250.000, open up of banking and finance sector. and liberalise foreign equity rules for export-oriented industries. As a result, foreign investments In Indonesia jumped almost 10-fold between 1986 and 1990 (of which close to two-thirds are export-oriented Industries).

(To be concluded tomorrow)

The writer. a Chartered Accountant by profession, is a former Deputy Prime Minister of Bangladesh.