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January - February 2010

The High Cost of Market Economy Label It has fascinated Vietnam watchers, particularly those from the West, to discover the metamorphosis of the country transforming itself from a closed political system into an aspiring market economy.

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The 10-member Association of Southeast Asian Nations (Asean) attracted $60 billion in foreign direct investment last year. Of that total about one-sixth, or $11 billion, came from Asean investors, mostly from Singapore and Malaysia.
This clearly shows that Asean businesses are behind the ‘foreign’ multinationals in taking the advantages of the bloc's trade and investment privileges.
With the world’s “stronger” economies in distress, Asean should do better if the business sector looks within the region for investment and trade. Asean secretary-general Surin Pitsuwan has been urging businesses in the Southeast Asian region to invest within the bloc, calling them the “nuts and bolts of regional economic integration.”
He noted that investors from Europe and other parts of the world see the potential of the region – which boasts of a 570 million-strong consuming market – and are aggressively trying to penetrate.
This, he said, is shown by an increasing number of ambassadors willing to work with us, willing to support us, willing to collaborate with us, willing to assist us. They are willing to work with us because in their calculations as they see a big chance of success for Asean. However, he warned that if local business remains lethargic, it may find itself holding diminishing market share.
For the last few years, Asean has been actively promoting foreign investment and has thus taken several key initiatives. In addition to the formation of a free trade area, the region aims to achieve an Asean Economic Community (AEC) by 2015. This promotes Asean not only as an integrated market but also as a single investment destination. Various tools such as the Asean Comprehensive Investment Agreement and the Asean Industrial Cooperation have been in place for the ease of doing business, allowing businesses to take advantage of the value chain of the production within the region.
However, the region has some inherent weaknesses that need to be addressed sooner rather than later. The ten-nation group is grappling with the issue of the development divide, especially since the admission of Cambodia, Laos, Myanmar and Vietnam.

DEG - German Investment and Development Company
Turan Caglayan, First Vice President and Head of New Business Asia, of DEG – German Investment and Development Company, shares his impressions of the 10-nation bloc, among others, the strength and weaknesses as an investment destination for German businesses. 

Q: What opportunities do you see for German companies looking to invest in Asean, which is launching an integrated market of half a billion consumers in 2015?
A: One can not deny it: since the nineties the Asean countries have constantly been losing ground in the focus of German companies. First, Middle and Eastern Europe, and later China and India absorbed most of the German direct investments. Interestingly this has happed although some of the Asean members did provide same or even better hard and soft infrastructure and more legal and political transparency. It is quite clear - none of the Asean countries can compete with India or China by itself.
German companies should realise that Asean is more than just cheap labor: For instance, Thailand is driving hard to become a hub for the automotive and bio fuel industry for the whole region. Indonesia is doing quite well in the recent financial crisis. It is a huge market with increasing average income and vast natural resources.
Singapore continues to reinventing itself all the time.
Sector-wise I consider infrastructure, services, agriculture and food processing the most promising areas for foreign direct investments. German companies can set up relatively smooth business based on a functioning private sector, proper working financial sector and last but not least a safe environment including protection of intellectual property.
Q: What are the risks and rewards for investors like DEG in Asean?
A: DEG with its specific mandate will continue to promote private sector activities in Asean countries as long as they are considered developing countries as per OECD’s DAC list. It is difficult to generalise and evaluate the risks and rewards because Asean member countries are too diverse.
What we appreciate very much is the functioning financial and capital markets and the existence of a traditional private sector with reputable entrepreneurs for a long time, which is important. DEG cannot promote its projects by itself. We are always depending on professional and reputable partners. We can help them financing the project, adding value in some areas like business plan, environmental and social issues etc.
Risks may arise from lack of transparency, political instability and poorly executed laws and regulations in some countries. Devaluation of local currency used to be one of the major risks prior and during the Asian crisis. But this has been reduced substantially due to the high foreign exchange reserves and proper foreign currency regimes in most of the Asean countries. All in all we consider Asean as a region with a moderate risk level and a decent but not high risk/return profile.
Q: When it comes to making efforts towards sustainable development, how would you compare Asean and the other regions where DEG has its presence?
A: Sustainability is getting more and more important worldwide. I hope some sort of development and changes triggered by the recent financial and economic turmoil will accelerate the whole process.
Unfortunately most of the economies, decision makers and influential political and economic leaders are still too much driven by short-term results – worldwide. Developing and emerging markets are squeezed between the need to provide food, jobs and infrastructure for a continuously growing population on one side, and the responsibility to safeguard the interests of future generations on the other. Although there are some specific programs on sustainability in Asean, a lot more need to be done. Asean, and Asia in general, is still focusing GDP growth only. We need to realise that, if we, for example, are still serious about achieving the Millennium
Development Goals, GDP growth is important but not the only indicator we must be guided by. However, having made these remarks I must admit that it is easier to talk about sustainable development rather than implementing it at a greater scale. Just to give you an example: just two or three years ago biofuels and bio mass was considered to be ecologically - and hence in terms of sustainability – most preferable. But the recent discussions about “food for fuel”, less energy efficiency rates of some crops, high consumption of water and fertilizer etc. made us cautious.
Q: What are DEG’s key investment and development activities in Asean?

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