Academic journal article Journal of Southeast Asian Economies

ASEAN after the Financial Crisis

Academic journal article Journal of Southeast Asian Economies

ASEAN after the Financial Crisis

Article excerpt

Links between Foreign Direct Investment and Regulatory Change

I. Introduction

Foreign direct investment (FDI) was revealed by the Asian crisis to be a relatively stable form of capital compared to foreign portfolio investment and short-term foreign bank debt. The crisis also gave rise to numerous suggestions that regulatory and institutional reforms should be made throughout the Asia-Pacific that would not only help avert future crises, but improve the overall business environment from an FDI perspective. However, at the level of the individual firms that actually make decisions about direct investments, little systematic empirical evidence has been produced to substantiate whether or not such expectations of reform ever really existed. Nor has there been any attempt to examine empirically the link between possible reforms and potential FDI flows. Still less has there been any analysis of either of these that looks for differences on the basis of MNC home country origin. As a growing chorus of commentators hints at the dangers of apparently stalled reforms subsequent to ostensible recovery from the crisis, the need to shed systematic light on these issues has become more important.

Using data gathered directly from Japanese, European and U.S. firms with investments throughout the ASEAN region, this article shows two things: first, that multinational firms uniformly anticipated Asian crisis-induced reforms that would beneficially affect overall investment environments. Second, it demonstrates significant correlations between reform expectations and anticipated improvements in the ASEAN investment environment. Differences between Japanese and other country MNCs are highlighted. The article ends by suggesting that, notwithstanding the apparent economic turn-around of the region, ASEAN economies still need to implement reforms if they are to maintain optimum FDI flows and avert what some have already raised as the spectre of `the coming Asian crisis' (Prestowitz 1999). The article first discusses expectations of post-crisis reform and the role of FDI in recovery from the crisis. The research methodology is then detailed before reporting results.

II. Rise and Decline of Reform Expectations

The onset of the Asian crisis in 1997 was quickly proclaimed as a chance for `the creation of a sounder Asian economy' (Bremner et al. 1997) through regional governments taking the opportunity to initiate and implement wide ranging regulatory and institutional reforms (Magnusson 1997; Hornick 1997). Such prognostications made early in the course of the crisis were certainly in tune with the majority of subsequent, more detailed analyses. These have broadly referred to the vital importance of post-Asian crisis reform in financial and other areas, for the sustainable recovery and longer-run development of the region (Cole and Slade 1998; Macintyre 1998; Mathews 1998; Min 1999; Pincus and Ramli 1998).

In line with both predictions and prescriptions, governments in ASEAN economies have addressed reform, although responses have been varied at both a country and ASEAN-wide level (Soesastro 1998). For instance, Singapore undertook a range of internal reforms and restructurings to bolster its own international competitiveness (Chia 1998). Malaysia, taking a somewhat less open approach than Singapore, nevertheless set in hand some degree of reform of its banking system (Athukorala 1998). The Philippines attempted to adhere to reforms already in train, and the new Estrada administration was initially keen to emphasise a continuing need for limited reforms (Sicat 1998). Similarly, both Thailand and Indonesia have witnessed considerable political, institutional and regulatory reform since the onset of the crisis (Chowdhury 1999; Poon and Thompson 2000).

Notwithstanding a gamut of crisis-prompted reform initiatives, since the ostensible abatement of the crisis, from the end of 1998, commentators began to express fears that widely anticipated and hoped-for reforms would not be instituted due to a loss of impetus (Garten 1999; Gries 1999; Markillie 2000; Sender 1999; Sanger and Landler 1999). …

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