Issn 0143-6597 print/issn 1360-2241 online/03/020235-19

ISSN 0143-6597 print/ISSN 1360-2241 online/03/020235-19

᭧ 2003 Third World Quarterly

DOI: 10.1080/0143659032000074574

235

Third World Quarterly, Vol 24, No 2, pp 235–253, 2003

Southeast Asian economic regionalism during the 1990s took the form of a

regional free trade area, namely the 

ASEAN

Free Trade Area (

AFTA

), which was

jointly initiated in 1992 by Brunei, Indonesia, Malaysia, the Philippines,

Singapore and Thailand.

1

AFTA

has conventionally been explained as a project of

open regionalism, adopted by the 

ASEAN

member governments as an instrument

to attract foreign direct investment (

FDI

) to the 

ASEAN

region through the ‘carrot’

of the single regional market. Yet, when the same governments formally incorpo-

rated an investment liberalisation component programme within the 

AFTA

project

in 1998, they opted to accord full national treatment and market access privileges

to foreign (non-

ASEAN

) investors at least 10 years later than to domestic or 

ASEAN

Attempting developmental

regionalism through 

AFTA

: the

domestic sources of regional

governance

HELEN E S NESADURAI

A

BSTRACT

The 

ASEAN

Free Trade Area (

AFTA

) has conventionally been explained

as a project of open regionalism adopted by the 

ASEAN

member governments to

attract foreign direct investment to the region through the ‘carrot’ of the single

regional market. Yet, when the same governments incorporated an investment

liberalisation component programme within the 

AFTA

project in 1998, they opted

to accord full national treatment and market access privileges to foreign (non-

ASEAN

) investors at least 10 years later than to domestic or 

ASEAN

national

investors. Although member governments removed this particular discriminatory

clause in September 2001, the fact that a distinction between foreign and

domestic investors was adopted and maintained for a three-year period is

puzzling given 

AFTA

’s acknowledged role as a magnet for foreign investment.

Although 

AFTA

is clearly a response to the pressures of globalisation, the

available theoretical models of the relationship between globalisation and

regionalism are unable to account for this empirical anomaly because they do

not make a distinction between foreign-owned and domestic-owned capital.

This paper advances the notion of ‘developmental regionalism’ as a way to

incorporate domestic-owned capital in analysing the globalisation–regionalism

relationship, which allows for a more robust explanation of the empirical puzzle

outlined above.

Helen E S Nesadurai is at the Institute of Defence and Strategic Studies of Nanyang Technological

University, Singapore. E-mail: [e-mail].

HELEN E S NESADURAI

national investors. Although member governments removed this particular

discriminatory clause in September 2001, the fact that a distinction between

foreign and domestic investors was adopted and maintained for a three-year

period is puzzling given 

AFTA

’s acknowledged role as a magnet for foreign

investment. 

This article explains this development as a move by 

ASEAN

member govern-

ments, spearheaded by Malaysia, to use the investment liberalisation programme

of 

AFTA

as a developmental tool to build up domestic firms, in addition to using

AFTA

’s tariff liberalisation programme to attract 

FDI

to the single regional market.

Specifically, the idea was to nurture domestic capital by using both the expanded

regional market and the offer of temporary investment privileges to domestic-

owned capital ahead of foreign investors. These temporary investment privileges

took the form of earlier market access and national treatment for 

ASEAN

national

investors in the 

ASEAN

regional market, particularly in non-manufacturing

sectors, and represents an attempt at what I term ‘developmental’ regionalism.

AFTA

, in short, displayed the features of both  open  and  developmental regional-

ism, thanks to the political significance of foreign and domestic-owned capital in

ASEAN

. While both forms of regionalism were driven by the imperative of

growth, distributive concerns were woven into the concern with growth in

developmental regionalism as governments sought to direct economic benefits to

those segments of domestic capital that were important in sustaining elite rule.

The analysis suggests that, although 

AFTA

was triggered in the first instance by

the external pressures associated with globalisation, it was the tussle at the

domestic level between the imperatives of growth and domestic distribution

(directed towards politically important domestic-owned businesses) that shaped

the distinctive way economic co-operation unfolded. In short, the nature of

domestic coalitions was a crucial mediating variable between globalisation and

regional outcomes. 

Following this brief introduction, the next section develops the notion of

developmental regionalism by drawing on strategic trade theory from inter-

national economics. This section also elaborates on how developmental region-

alism relates to globalisation and suggests why such a project might have proved

attractive to governments in 

ASEAN

. The third and fourth sections apply this

concept to 

AFTA

, explaining developmental regionalism as a project through

which a number of 

ASEAN

governments sought to nurture domestic capital amid

global market competition,

2

while the fifth section reveals why member govern-

ments were prompted to halt their attempt at developmental regionalism in

September 2001. 

Conceptualising developmental regionalism

Contemporary regionalism is generally conceived of as a response to the

pressures and incentives associated with economic globalisation (Gamble &

Payne, 1998; Hveem, 2000; Mittelman, 2000: 111). One source of these pressures

and incentives is the growing economic inter-linkages between countries that

generate common interests in co-operation (Hurrell, 1995: 56). But globalisation

is much more than the interactions and interdependences between countries.

236

ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

Globalisation is best regarded as a multi-faceted structural phenomenon

generating multiple pressures and incentives arising from the complex interplay

of its material, institutional and cognitive dimensions (Higgott, 2000: 70). 

Material changes in production, trade and finance, especially since the 1980s

have heightened both the pressures on governments as well as competition

among them as they seek to generate wealth for their societies by attracting

transnational corporations (

TNC

s) to locate within their territories (Stopford &

Strange, 1991: 1). Increasingly, the assets required for wealth creation in the

‘new’ world economy centre on information, technological innovation as well as

management and organisational competence, what are termed ‘created assets’

that reside within these global firms (Dunning, 1993: 6). While previously salient

‘natural assets’ such as labour, land and natural resources remain important in

many sectors, governments wishing to involve their economies in higher value-

added economic activities have become increasingly reliant on the wealth-

creating resources controlled by 

TNC

s (Stopford & Strange, 1991: 1). In addition,

neoliberal economic rules instituted at the multilateral level, especially through

the World Trade Organization (

WTO

), increasingly prescribe free markets and

proscribe government intervention in and control of economic activity, which

effectively adds a second set of pressures on governments unable to employ

traditional policy instruments to meet domestic social and political objectives

(George, 2001). 

Moreover, these multilateral rules are creating an environment in which 

TNC

s

face fewer and fewer restrictions worldwide on their activities. This has

contributed to a shared consciousness among governments of heightened global

market competition vis-à-vis the global corporate giants and a sense of the

growing dominance of these 

TNC

s in markets everywhere. Governments, there-

fore, are not only reacting to actual external pressures associated with globalisa-

tion, they are increasingly responding in anticipatory fashion to perceived

challenges to the competitiveness of the home economy and of home country

firms (Palan & Abbott, 1996: 32). Regionalism can emerge as one such response

to these multiple pressures. 

The literature identifies two ideal-type models of the globalisation–regionalism

relationship, with open regionalism the dominant theoretical model as well as in

practice (Mittelman, 2000: 126). Open regionalism is aimed primarily at

advancing the competitive position of business in global competition (the liberal

economic interpretation),

3

or to attract wealth-creating 

FDI

to the region amid

competition with other sites for it (the economic realist interpretation).

4

The main

driving force behind open regionalism is the concern with economic efficiency

or, more broadly, with ensuring economic growth through participation in global-

wealth creating activities. An alternative ideal-type model of the globalisation–

regionalism relationship in the literature is the ‘resistance to globalisation’ model

of regionalism (Hveem, 2000: 75–78). Resistance projects are driven largely by

concern with non-economic or social values like distribution and social justice,

and by seeking to preserve through regionalism particular forms of domestic

social/economic arrangements that are arguably difficult to sustain individually

amid globalisation (Mittelman, 2000: 116–130). While proponents of regionalism

in this model seek to resist globalisation, the advocates of both variants of open

237

HELEN E S NESADURAI

regionalism accept full engagement with globalisation. 

While providing useful insights into the relationship between globalisation and

regionalism, these two models are limited in their treatment of the state–market

relationship, particularly that between governments and fractions of capital

distinguished by their ownership—domestic or foreign.

5

Neither variant of open

regionalism makes adequate distinction between foreign and domestic capital,

although the former is privileged in the 

FDI

variant. Although it may be increas-

ingly difficult to distinguish business in terms of its nationality—the ‘who is us?’

question posed by Robert Reich (1991: 304)—such a distinction nevertheless

remains relevant in particular political contexts where policy makers and

politicians do consciously make this distinction for various political reasons. In

these settings, and this is especially true for developing countries where domestic

capital is usually not as well developed as foreign capital but often plays a crucial

political role, governments may well respond to globalisation in ways that

attempt to preserve and nurture domestic capital. 

By making an analytical distinction between foreign and domestic capital, a

third model of regionalism is possible—developmental regionalism (Nesadurai,

2001: 74–79). Deriving from the notion of the developmental state, develop-

mental regionalism encapsulates the developmental state idea of state inter-

vention in markets to promote national development agendas, in this case by

adopting an approach to regionalism through which to nurture emerging domestic

firms to eventually become internationally competitive. This is achieved through

two instruments: one, the expanded regional market generated through inter-state

co-operation; two, temporary protection or privileges for domestic capital in this

expanded market. According to strategic trade theory from the international

economics discipline, both measures can help to secure benefits for domestic

firms over their foreign competitors.

6

Proponents of developmental regionalism, it is argued, are not necessarily

resisting globalisation through regionalism. They do not fully accept the

anticipated dominance of foreign/global firms that is associated with globalisa-

tion, however, and attempt to support the development of domestic capital

through regionalism. While the concern here is with distribution—the selective

allocation of economic benefits including rents—to domestic businesses as a

means to preserve and nurture them, the growth/efficiency imperative is not

absent either. Rather, the growth imperative is infused with distributive concerns.

Developmental regionalism is, therefore, not about resisting globalisation

completely, but neither is it about complete acquiescence to global market forces.

Instead, it encompasses a period of temporary and limited resistance to aspects of

globalisation through which attempts are made to build capabilities that will

enable domestic businesses eventually to participate in global market activities.

This model of regionalism, therefore, allows us to consider departures from open

regionalism as representing a distinct approach to regionalism rather than merely

as inconsistencies in open regionalism or as instances of protectionism. 

The question that remains, however, is why political actors would seek to

nurture  domestic  capital. The following discussion addresses this question with

regard to the specific case of 

ASEAN

. The analysis is based on a general/basic

model of domestic politics that emphasises the preferences of key domestic groups

238

ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

and the role of formal and informal domestic institutions and political practices in

shaping preference representation in policy making (Moravcsik, 1997). 

Domestic coalitions and elite politics in 

ASEAN

While political systems in 

ASEAN

during much of the 1990s ranged from

democracies, to semi-democracies and authoritarian regimes, all the 

ASEAN

countries shared the basic characteristics of elite governance political systems

where political power was largely in the hands of elites, despite the presence of

mechanisms for citizen participation (McCargo, 1998: 127). The political elite

was, however, not completely insulated from domestic society, and needed to

respond to concerns arising from this level in order to maintain its rule and its

legitimacy, which remained fragile throughout the 1990s. In such settings,

political elites depend on two factors to maintain themselves in power and ensure

the stability and security of the prevailing domestic regime or political system. 

On the one hand, political elites need the support of citizens to maintain their

right to rule and to ensure political order, and this is largely achieved through

creating material wealth for citizens—the notion of performance legitimacy,

which remains relevant to date (Alagappa, 1995: 330; Stubbs, 2001). This

explains the preoccupation of political leaders with securing and maintaining key

sources of growth in the economy, of which 

FDI

is pre-eminent in 

ASEAN

. On the

other hand, elite rule is also sustained by unity and accommodation between

members of the elite/governing coalition (Haggard & Kaufman, 1997). Political

elites selectively distribute economic benefits to their elite partners as a primary

means to achieve elite unity. 

By the 1990s it was the accommodation between the political elite and

an emerging domestic business class that was crucial in much of 

ASEAN

. The

material and other forms of political support provided by domestic businesses

helped incumbent political elites maintain their power base, while the former in

turn received economic privileges through preferential policies instituted by the

latter. In addition, domestic businesses were privileged because they helped

political actors fulfil broader political aims. This was especially clear in the

Malaysian and Indonesian cases, where political legitimacy also rests on the

capacity of the state to develop, respectively, an ethnic Malay and an indigenous

Indonesian domestic capital class, particularly to offset the dominance of ethnic

Chinese capital.

7

Thus, although political actors were powerful and had some

degree of autonomy in decision making, they were, nevertheless, constrained by

the need to respond to domestic society at these two levels—citizens in general

and domestic business interests allied with political and state elites. 

Tensions can emerge when particular policies generate significant trade-offs

between the growth and distributive imperatives,

8

or between maximising wealth

and efficiency in society as a whole and maximising the wealth of a segment of

society. In much of 

ASEAN

, foreign capital remains a key source of growth and

exports, particularly in the high value-added and advanced sectors of the

economy that virtually all governments are increasingly targeting, although

domestic-owned firms are not entirely absent from this picture. On the other

hand, the distributive imperative in 

ASEAN

, where it exists, is usually aimed at

239

HELEN E S NESADURAI

privileging domestic-owned capital or segments of it that are also close allies of

the political elite. A simplifying, though not unreasonable, assumption made in

the paper is that the foreign capital governments are targeting is internationally

orientated and thus in favour of liberal market policies that maximise growth.

While domestic capital may be either internationally orientated or

emerging/inward focused, it is when the political elite is closely allied to the

latter that the tension between growth and distribution becomes pronounced.

Since this segment of domestic capital is not as well developed as foreign capital,

policy makers may well adopt measures to protect, preserve and/or nurture

emerging domestic capital vis-à-vis foreign capital if the former is to survive

direct competition with the latter. 

When distributive policies involve restricting the domestic operations of

foreign (or internationally orientated) firms, growth prospects may be weakened

if the latter are significant agents of growth. Growth need not, however, be

disrupted if the extent of distribution is limited, either to particular sectors or in

terms of time. On the other hand, governments may find it necessary to limit their

distributive agenda during times of economic distress, or expected economic

hardship, which will affect citizens in general through unemployment, for

instance, as well as threaten elite unity (Haggard & Kaufman, 1997). By

threatening the political future of incumbent political elites, economic decline, or

the prospect of it, often compels governments to restore the conditions favouring

growth, particularly since growth will allow distribution to take place with fewer

costs than under conditions of generalised economic decline. The rest of this

paper employs the analytical framework described above to account for develop-

ments in 

AFTA

. 

AFTA

: encompassing open and developmental regionalism

AFTA

has generally been explained as a project of open regionalism aimed at

attracting 

FDI

to member economies through the carrot of the single regional

market.

9

Globalisation had by the early 1990s significantly altered patterns and

flows of 

FDI

and increased worldwide competition for it. By 1991–92, the surge

of 

FDI

into 

ASEAN

, particularly from its traditional sources in the 

OECD

countries,

Taiwan and Hong Kong had moderated, flowing instead to China (Hay, 1996).

This raised considerable concern among 

ASEAN

governments as 

FDI

was a crucial

source of growth, and had helped these countries emerge from the disastrous

economic and political consequences of the mid-1980s recession. The 

ASEAN

governments attempted through 

AFTA

to offer foreign investors who were increas-

ingly practising a regional division of labour an alternative regional space

of investment and production to China. China by itself offered investors a

potentially competing ‘regional’ investment site in the Asia Pacific region

(Baldwin, 1997: 3), and was regarded by all the core 

ASEAN

countries as their

primary competitor for 

FDI

. Specifically, it was the tariff liberalisation component

programme of 

AFTA

(the Common Effective Preferential Tariff (

CEPT

) scheme)

that members employed to define a distinctive space of production for global

capital in the wider Asia Pacific region. It was thus the growth imperative that

drove the turn to open regionalism in 

AFTA

.

240

ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

Yet, when the 

ASEAN

Investment Area (

AIA

) was formally adopted as a com-

ponent programme within 

AFTA

in October 1998, it stipulated that full market

access and national treatment privileges in the manufacturing sector would be

accorded to 

ASEAN

investors by 2010 and to all foreign investors only in 2020.

Later, its coverage was extended to include agriculture, forestry, fisheries and

mining, as well as services incidental to all these sectors. Although the 

AIA

programme was accelerated in 1999, only 

ASEAN

investors were to be accorded

full market access and national treatment privileges at the earlier dates of 2003 in

manufacturing and 2010 in the other sectors. Foreign (non-

ASEAN

) investors

would receive these benefits only in 2020 as originally scheduled. 

Some scholars advise against reading too much into the 

AIA

distinction

between 

ASEAN

and non-

ASEAN

or foreign investors, since they contend that it is

irrelevant or redundant in the first place because of essentially liberal 

FDI

regimes

in 

ASEAN

.

10

This argument can be challenged in two ways. First, if the distinction

is indeed irrelevant, the question of why policy makers would choose to make it

in the first place needs to be answered. It is insufficient to assume that policy

makers were acting irrationally or were misinformed, since the implications of

instituting such a distinction were actively debated during the three years of

discussions leading up to the formal adoption of the 

AIA

Agreement in 1998,

and continued to be debated from its adoption until September 2001 when this

particular clause was dropped. Clearly, there were some quarters for whom the

distinction was salient. Moreover, when member governments revised the terms

of the 

AIA

Agreement in 1999, they continued to privilege 

ASEAN

investors over

foreign investors. Second, the argument that the foreign–

ASEAN

distinction is

irrelevant or redundant is easily challenged on empirical grounds. Foreign

investors continued to face investment restrictions in many of the original 

ASEAN

countries during the 1990s in selected sectors and in particular policy areas

despite liberalisation of 

FDI

regimes, thus making the 

AIA

distinction between

domestic and foreign investors significant. This was especially true for the non-

manufacturing sectors where fairly restrictive 

FDI

conditions prevailed. These

restrictions ranged from equity ownership conditions, market access to certain

sectors, land ownership regulations, and access to domestic sources of funds.

11

Another possible explanation, and one that can be accommodated within the

open regionalist framework, is that the 

AIA

Agreement constituted an additional

tool to reinforce 

AFTA

as a means to attract 

FDI

to the region. The temporary

discrimination of non-

ASEAN

/foreign investors was simply a way of offering

domestic capital in the different 

ASEAN

countries sufficient time to prepare for full

investment liberalisation in 2020. This argument appears to have some merit if

we consider the way the 

AIA

Agreement was framed. The original Agreement, in

fact, specified that full market access and national treatment privileges were to be

accorded to all  investors immediately where possible, but allowed governments

to maintain temporary exemptions in a variety of sectors and policy areas as they

saw fit (

ASEAN

, 1998).

Yet this does not explain why 

ASEAN

investors were allowed full market access

and national treatment privileges 10 years earlier than foreign investors. The

exemptions, which were fairly extensive, were to be removed by 2003 and 2010

for 

ASEAN

investors and only in 2020 for all other foreign investors (

ASEAN

,

241

HELEN E S NESADURAI

1998). Such a move would not have protected domestic investors from all

external investors, since other 

ASEAN

investors were to be treated as domestic

investors from 2003 or 2010. This suggests that there were other dynamics apart

from the 

FDI

dynamic that shaped the development of 

AFTA

. As the following

discussion reveals, domestic political priorities, centred on the need to preserve

emerging domestic capital which was politically salient in the face of a different

set of globalisation pressures, also influenced the design of the regional project.

Anticipated changes in multilateral investment rules

Attempts by advanced country governments and their 

TNC

s during the 1990s to

develop global rules to lower and remove ‘beyond the border’ barriers to free

trade (Smythe, 2000: 72) constituted a second set of globalisation pressures and

incentives that confronted the 

ASEAN

governments. In particular, it was the move

through forums like Asia Pacific Economic Co-operation (

APEC

), the 

WTO

and the

OECD

to develop a multilateral regime for investment that would maximise

freedom of operation for foreign investors in as many countries as possible that

was especially salient. Even though these attempts through the 

OECD

and 

APEC

were unsuccessful, many developing country governments, including those in

ASEAN

, expected guarantees to foreign investors to be written into the 

WTO

frame-

work eventually (Khor, 2001: 86). 

Although a group of developing countries including Malaysia and Indonesia

successfully kept investment off the negotiating agenda for the First 

WTO

Ministerial Meeting in 1996, many governments regarded this reprieve to be only

temporary. These expectations were not misplaced. A working group on invest-

ment was established at the 1996 Ministerial to study the feasibility of incorpo-

rating investment into the 

WTO

in the future. In 1998 the 

WTO

General Council

decided that the working group should continue its work until the Seattle minis-

terial meeting in 1999 when members would decide on whether to incorporate

investment within the 

WTO

(

WTO

, 1998). The European Commission was particu-

larly interested in ensuring that the national treatment principle formed a key part

of any future 

WTO

regime on investment (Khor, 2001: 87). Expectations of an

impending global investment regime reinforced perceptions in 

ASEAN

of further

intensification of market competition for domestic firms and of the potential

dominance of foreign corporations. They led at least two of the five original

ASEAN

national governments to contemplate providing preferential investment

treatment for 

ASEAN

firms in the 

AFTA

regional market as a means to build up

domestic firms. 

The 

ASEAN

response 

The concerns about a global free investment regime were strongest in Indonesia

and especially Malaysia and were centred on the future of domestic firms.

Although the Malaysian government had instituted extensive neoliberal

economic reforms from the mid-1980s, the government and the private sector

both saw foreign interest in negotiating global investment rules as posing the

biggest threat to domestic companies.

12

The expectation was that global rules

242

ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

would eventually allow foreign corporations unrestricted access to the domestic

market. Malaysian policy makers had, by the early 1990s, begun to voice their

reservations about the country’s overwhelming dependence on 

FDI

and articulated

the importance of nurturing Malaysian multinationals.

13

In response to moves to

include investment on the inaugural 

WTO

agenda, Malaysian trade minister

Rafidah Aziz argued against the idea of full market access and national treatment

privileges for foreign investors. She pointed out that such a move would prevent

national governments from implementing ‘national level investment policies …

to enable [domestic firms] to grow and be able to compete with large established

foreign firms’.

14

Indonesia expressed similar concerns, and formally objected to

the inclusion of investment in the 

WTO

agenda together with Malaysia and six

other developing countries.

15

Singapore, the most open of the 

ASEAN

economies to

FDI

, did not reject the idea of a global investment regime, while the Thai govern-

ment 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 

TNC

s were allowed full investment privileges in the regional market.

16

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’.

17

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 below.

The Indonesian government explicitly supported the Malaysian position on the

AIA

when then Co-ordinating 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 com-

petitive.

18

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

,

19

the Thai government did not reject the

Malaysian suggestion.

20

Neither did Singapore, although it had always advocated

full openness to foreign capital. 

In fact, the respective investment agencies in the core 

ASEAN

countries accepted

the need to accord investment privileges to 

ASEAN

investors in the 

AIA

initially

and only later to extend these to non-

ASEAN

investors.

21

This point had, in fact,

been extensively debated during the three years of consultations that led up to the

243

HELEN E S NESADURAI

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 

TNC

s possessed the wealth-creating assets that

the 

ASEAN

countries required in order to participate in increasingly sophisticated

global production.

22

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 policy makers 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 member govern-

ments 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% 

ASEAN

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

70% could qualify for national treatment and market access privileges.

23

The Thai

Board of Investment, in contrast, advocated a minimum 

ASEAN

equity share of at

least 51%, in keeping with prevailing Thai investment policy, at least during the

initial negotiations on this matter. On the other hand, the Thai Commerce Ministry

that has overall charge of 

AFTA

policy and negotiations was more concerned about

emphasising the 

AIA

as a tool to attract 

FDI

rather than its developmental role. It

was able to pressure the Board to lower the minimum 

ASEAN

equity figure to

30%.

24

The other countries, all with varying degrees of restrictions on foreign

participation, preferred a more conservative definition, however. In the end, the

ASEAN

governments agreed to define an 

ASEAN

investor as a domestic investor

according to each prospective host country’s local investment laws and policies.

25

Flexibility prevailed for two reasons. First, it allowed individual governments the

independence to adopt mixes of domestic/

ASEAN

and foreign investment that met

national needs. Second, it continued to facilitate joint ventures between foreign

and domestic/

ASEAN

firms as a way of building up the domestic partner through

technology transfer and learning from the foreign partner.

26