Unpredictable Policies Thwart Investment in Southeast Asia

Unpredictable Policies Thwart Investment in Southeast Asia
Karl Lester M. Yap | February 23, 2013

An unpredictable legal environment in Southeast Asia is the top concern of investors, according to an Economist Corporate Network survey, highlighting the challenge the region faces as it seeks to integrate by 2015 in an effort to boost growth and attract more investments.

Governments change their minds about important legislation with little warning, according to a report based on a survey of 147 companies including Unilever and General Electric released on Friday. “Even when laws remain unchanged, court decisions and interpretations of the laws can be highly arbitrary,” the report said.

While China remains the manufacturing capital of the world, companies including Nissan Motor and Google are expanding in Southeast Asia, lured by the prospect of a $2.2 trillion market. Nations including the Philippines are stepping up efforts to regain investor confidence after regulatory reversals and contract disputes in the past prompted Frankfurt, Germany-based Fraport to leave the country.

“The region’s diversity and uncertain legal environment remain major challenges for many multinationals,” said Clive Cook, a senior consultant at law firm Baker & McKenzie that commissioned the report. Companies are looking for legal advisers with expertise across different Association of Southeast Asian Nations markets, he said in a statement.

Economic expansions in Indonesia, the Philippines, Thailand and Malaysia exceeded 6 percent last quarter, compared with 1.5 percent for South Korea and 3.4 percent for Taiwan. Foreign direct investments to the 10-member Asean rose to $116.54 billion in 2011, nearly equal to China’s $123.99 billion, according to the United Nations Conference on Trade and Development.

“Huge swathes of Asean’s population stand on the threshold of middle class status,” the Economist Corporate Network said in its report, forecasting the number of households with an annual income of at least $5,000 to more than double to 85 million by 2017 from 40 million in 2010.

Unilever, the world’s third-largest consumer-goods maker by market value, is extremely bullish in the region, according to the report.

“The populations are young and growing,” Peter Ter Kulve, chief executive officer of Unilever in the Asean, said in the report. “Incomes are rising rapidly. The cities are doing very well, but the rural story is just as strong. Given increasing demand for food globally, agricultural wages on the plantations across the region are rising.”

Southeast Asian nations already enjoy a demographic dividend, with the Philippine labor force expanding by almost 18 million, or 31 percent, to 75 million by 2020 compared with 2010, Bank of America Merrill Lynch projected in April. Malaysia will grow by 19 percent, to 22 million. Indonesia will see a gain of more than 18 million, to 180 million.

Still, resistance by domestic companies to open up markets remains strong with Myanmar and Indonesia identified as the two most protected markets, according to the survey.

“Another issue that companies have to contend with is protectionism,” the report said. “Despite ongoing efforts at integration and opening up of Asean’s internal market, resistance remains strong from local players in many markets.”

Indonesia will limit restaurant franchise holders to 250 outlets, with some exceptions, to protect small-and medium-size businesses, Trade Minister Gita Wirjawan said last week. The regulation affects companies such as Fastfood Indonesia, which operates more than 400 Yum! Brands’ KFC restaurants. Yum also owns the Pizza Hut dining chain. The rule applies to all food-mart franchisers and franchisees, including public companies, Wirjawan said.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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