The political economy of the asean free trade area (afta)

the ASEAN economies to FDI, did not reject the idea of a global investment regime, while 

the Thai government was rather ambivalent on this point. 

 

Using the AIA as a developmental tool to nurture domestic capital 

In response to concerns about the future of emerging domestic capital, the 

Malaysian side advocated a developmental role for the AIA that would help to nurture 

domestic capital through the privileging of ASEAN investors in the AFTA market.  The 

single regional market under AFTA would provide the necessary scale and learning 

economies for domestic firms.  Preferential market access and national treatment 

privileges for ASEAN investors was aimed at providing domestic (ASEAN) firms space to 

grow and become internationally competitive before TNCs were allowed full investment 

privileges in the regional market.

18

  A crucial part of this project was also to encourage the 

development of ASEAN conglomerates through joint ventures or other forms of alliances 

between ASEAN investors as a means of competing with the global corporate giants.  A 

senior official from the ASEAN Secretariat explained, “the ASEAN countries saw the 

need to develop ASEAN multinationals using the grace period before foreign (non-

ASEAN) investors would be accorded the same privileges”.

19

  Whether the idea of using 

the AIA as a developmental tool was workable is a separate issue that cannot be addressed 

in this paper.  Why such a project was adopted is the more interesting question, to be 

addressed in the next section. 

 

The Indonesian government explicitly supported the Malaysian position on the 

AIA when then Coordinating Minister for the Economy, Ginandjar Kartasasmita, publicly 

endorsed in October 1998 the Malaysian suggestion of using the AIA to develop ASEAN 

multinationals and conglomerates that would be globally competitive.

20

  Although 

technocrats from the Commerce Ministry in Thailand found the privileging of ASEAN 

investors in the AIA to be contradictory to AFTA’s role as an instrument to attract FDI to 

ASEAN,

21

 the Thai government did not reject the Malaysian suggestion.

22

  Neither did 

Singapore, although it had always advocated openness to foreign capital.   

 

                                                 

18

 Interview with Karun Kittisataporn, a senior official on ASEAN from the Thai Commerce Ministry, 

August 2000. 

19

 Interview with Dr Wee Kee Hwee, July 2000.   

20

 Bisnis Indonesia (Indonesian Business), 10 October 1998. 

21

 Interview with Karun Kittisataporn. 

22

 Interview with an official of the Singapore Trade Development Board, conducted via e-mail in June 2001. 

14 

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In fact, the respective investment agencies in the core ASEAN countries accepted 

the need to initially accord investment privileges to ASEAN investors in the AIA and only 

later to extend these to non-ASEAN investors.

23

   This point had, in fact, been extensively 

debated during the three years of consultations that led up to the formal signing of the AIA 

Agreement in October 1998.  It had been noted at these consultations that privileging 

ASEAN investors would be difficult to justify on economic grounds, since foreign TNCs 

possessed the wealth-creating assets that the ASEAN countries required in order to 

participate in increasingly sophisticated global production.

24

   Nevertheless, it was also 

acknowledged that preferential treatment of ASEAN investors could potentially stimulate 

intra-ASEAN investments and facilitate the emergence and growth of indigenous ASEAN 

multinationals, which were a necessary vehicle “to compete in a world economy 

increasingly characterised by globalisation and competition”(Chia, 1996: 21).  ASEAN 

leaders and policymakers were broadly united on the importance of domestic firms 

becoming large and/or multinational as a means of meeting global market competition.   

 

Where the investment officials differed was on how to define an ‘ASEAN’ 

investor in terms of its minimum ASEAN equity share (or maximum foreign equity share).  

This was a critical point in the negotiations, since many domestic investors in the ASEAN 

countries were also involved in joint ventures with foreign capital.  In any case, FDI was 

an important player in ASEAN and the ASEAN governments were not advocating keeping 

out FDI; they were only interested in nurturing domestic capital through temporary 

privileges accorded to the latter, and particularly in non-manufacturing sectors.  Thus, 

developmental regionalism was to be achieved through the AIA without necessarily 

jeopardising the role of the CEPT tariff liberalisation component of AFTA in attracting 

manufacturing sector FDI.   

 

Thus, it was not surprising that a very open economy like Singapore advocated a 

liberal definition of an ASEAN investor that stipulated only a minimum 30 per cent 

ASEAN equity share.  This meant that any venture up to a maximum foreign equity share 

of 70 per cent could qualify for national treatment and market access privileges.

25

    The 

Thai Board of Investment, in contrast, advocated a minimum ASEAN equity share of at 

                                                 

23

 See Bangkok Post, ‘Hopes vary for investment area’ 11 September 1996.   

24

 See the argument put forward by economists at these meetings (Chia, 1996: 20). 

25

 Bangkok Post, ‘Investment area plan proceeding’ 9 January 1998. 

15 

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