Doing Business in ASEAN Markets

Leadership Challenges and Governance Solutions across Asian Borders

Peter Verhezen, Ian Williamson, Mark Crosby, Natalia Soebagjo, Peter Verhezen, Ian Williamson, Mark Crosby, Natalia Soebagjo

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9783319417905
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

The authors of this important book analyse the pitfalls and risks of doing business in ASEAN countries that are mostly absent in Western markets, covering various strategic, external, operational, and legal-cultural challenges for international companies. Doing Business in ASEAN Emerging Markets crucially addresses how to resolve those barriers. Encompassing issues of governance and leadership standards, the authors present case studies and practical solutions underpinned by academic research. Helping executives learn how to implement high international standards and maintain sensitivity to socio-cultural and political Asian contexts, the book highlights the need to create an international diverse and unified leadership team that will take better decisions and effectively deal with risks, and apply best corporate governance practices within an Asian context.

© The Editor(s) (if applicable) and the Author(s) 2016

Peter Verhezen, Ian Williamson, Mark Crosby and Natalia Soebagjo (eds.)Doing Business in ASEAN Marketshttps://doi.org/10.1007/978-3-319-41790-5_1

Begin Abstract

1. Introduction: Doing Business in ASEAN Markets: What Is So Different?

Peter Verhezen¹ , Ian Williamson¹, Mark Crosby¹ and Natalia Soebagjo²

(1)

Melbourne Business School, 200 Leicester Street, Carlton, 3053, VIC, Australia

(2)

UI Center for Governance & Administrative Reform, Jakarta, Indonesia

Peter Verhezen

Email: [email protected]

End Abstract

Many scholars and practitioners have anointed the 21st century as the “Asian Century”. It is now obvious that an economic shift from the West to the East is underway, having both major economic and socio-political implications China and India are often featured as drivers of this Asian economic renaissance. China and India are the two remaining BRIC countries that still grow at a considerable speed. China is projected to have a growth rate of about 6.5 % over the next several years (lower than the double digit growth it experienced at the turn of the century) and India may pick up some steam and hit 7 % for the next years. However, less well-known and less analyzed is the equally remarkable story of the rise of the ASEAN market, which may generate interesting prospects for many multinational companies (MNC) and global investors in the coming years.

Founded in 1967, ASEAN today encompasses Negara Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam – economies at vastly different stages of development but all sharing immense growth potential. ASEAN may be seen as a major global hub of manufacturing and trade, as well as one of the fastest-growing consumer markets in the world. Indeed, ASEAN’s 10 economies are a growing force in global affairs. With a gross domestic product of USD 2.7 trillion, the AEC (ASEAN Economic Community) is the seventh-largest economy in the world. With a population of more than 620 million, it is the third largest in Asia after China and India. It can be easily argued that the AEC economies have collectively grown faster than any other Asian economy save China since the beginning of the century. During that time span, GDP has expanded fourfold, per capita income threefold, and foreign direct investment inflows fivefold. The poverty rate has halved.

However, these positive facts and trends notwithstanding, doing business in the ASEAN region often means overcoming barriers and hurdles not present in most Western markets. In many ways the ASEAN context, due in part to its diversity, can be even more difficult to navigate than the Chinese and Indian markets. A failure to appreciate both the systematic and nuanced differences between the ASEAN market and other global settings has caused many MNCs and international investors to experience major financial and reputational losses in the past.

This book attempts to analyze the pitfalls and risks of entering into ASEAN markets and, more crucially, how to overcome those barriers when doing business in the region. In particular, as a response to these challenges the authors of the chapter examine the role of responsible leadership – encompassing wise decision-making by a leadership of the highest integrity – and sound corporate processes and governance in avoiding the pitfalls and reducing the risks in the ASEAN markets.

Business Opportunities in ASEAN Markets

Why focus on ASEAN and why now? We believe several recent economic, political, and demographic trends have made the ASEAN region more important than ever to the world’s economy and as a result an important consideration for global business leaders.

First, the ASEAN market is currently one of the strongest economic regions in the world.

Despite the recent global economic headwinds, the ASEAN market continues to be a platform for continuous growth. On average market growth is about 4.5 % for the ASEAN region – creating a market worth USD 2.7 trillion. The ASEAN market is projected to become the 4th largest by 2030, behind only the USA, China and India.

As economic growth in other Asian markets slow down (e.g., China), ASEAN may provide alternatives for foreign investment. Moreover, ASEAN’s government debt is under 50 % of GDP – far lower than the 90 % share in the United Kingdom or 105 % in the United States. Most of the region has held steady so far, despite concerns about the impact of quantitative easing by the US Federal Reserve on emerging markets. In fact, ASEAN has experienced much lower volatility in economic growth since 2000 than the European Union. Savings levels have also remained fairly steady since 2005, at about a third of GDP, albeit with large differences between high-saving economies, such as Negara Brunei Darussalam, Malaysia, and Singapore, and low-saving economies, such as Cambodia, Laos, and the Philippines. ASEAN has dramatically outpaced the rest of the world on growth in GDP per capita since the late 1970s. Income growth has remained strong since 2000, with average annual real gains of more than 7-10 %.

According to a survey by Boston Consulting Group Global, ASEAN was home to the headquarters of 49 companies in the Forbes Global 2000 about one decade ago. By 2013, that number had risen to 74. ASEAN includes 227 of the world’s companies with more than USD1 billion in revenues, or 3 % of the world’s total. ASEAN is the seventh-largest host of such companies, according to the 2014 BGC survey. ¹ Singapore in particular stands out, ranking fifth in the world for corporate-headquarters density and first for foreign subsidiaries.

Consistent with this growth, foreign direct investment in ASEAN has boomed, surpassing its pre-crisis levels of 1997. In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted more foreign direct investment than China (USD 128 billion versus USD117 billion) in 2013. In addition to attracting multinationals, ASEAN has become a launching pad for new companies; the region now accounts for 38 % of Asia’s market for initial public offerings.

Second, due to recent trade agreements the ASEAN region is likely to entering into a new dynamic period:

ASEAN is an economic community (AEC, ASEAN Economic Community) where the member countries have made a formal declaration to eliminate interregional tariffs. This will probably result in more economic opportunities within the region, while tapping on the integrated production base from 2015 onwards. This is all consistent with the AEC’s five core objectives of integration, competitiveness, enhanced connectivity and sectorial cooperation, equitable outcomes, and global engagement. The AEC is pursuing something akin to what came to be known as the four freedoms – similar as in the European integration: freedom of movement of goods, services, capital and labor. The AEC version of the four freedoms is a single market and production base with the free flow of goods, services, investment and skilled labor, along with freer capital flows, but still with full sovereignty on all the other issues like tax, citizenship, budget control, currency, monetary and fiscal policies. As the AEC progresses toward this vision it will undoubtedly create many new economic opportunities.

Third, the ASEAN market represents a huge opportunity for consumer products with potential consumers of about 620 million:

With a growing population of more than 620 million people, ASEAN is fast becoming an important hub for increased consumer demand. Some member nations have grown at a torrid pace: Vietnam, for example, took just 11 years (from 1995 to 2006) to double its per capita GDP from USD 1300 to USD 2600. By 2050, ASEAN could be the 4th largest economy. Its GDP in 2014 stood at USD 2.395 trillion with a GDP per capita of USD 3832. Extreme poverty is rapidly receding. In 2000, 14 % of the region’s population was below the international poverty line of USD 1.25 a day (calculated in purchasing-power-parity terms), but by 2014, that share had fallen to just 3 %. Already some 70 million households in ASEAN states are part of the “middle class consuming class,” with incomes exceeding the level at which they can begin to make significant discretionary purchases. That number could almost double to 125 million households by 2025, making ASEAN a pivotal consumer market of the future. There is no typical ASEAN consumer, but some broad trends have emerged: a greater focus on leisure activities, a growing preference for modern retail formats, and increasing brand awareness; Indonesian consumers, for example, are exceptionally loyal to their favorite brands. Moreover, ASEAN’s cities are booming and this urbanization process and consumer growth seem to move in tandem. Nearly 40 % of ASEAN’s GDP growth through 2025 is expected to come from 142 cities with populations between 200,000 and five millions. ²

ASEAN consumers are increasingly moving online, with mobile penetration of 110 % and Internet penetration of 25 % across the region. Its member states make up the world’s second-largest community of Facebook users, behind only the United States. But there are vast differences in adoption. Hyperconnected Singapore has the fourth-highest smartphone penetration in the world, and almost 75 % of its population is online. By contrast, only 1 % of Myanmar has access to the Internet. Indonesia, with the world’s fourth-largest population, is rapidly becoming a digital nation; it already has 282 million mobile subscriptions and is expected to have 100 million Internet users by 2016.

Fourth, due in part to the success of its economic performance the ASEAN region has become more embedded in the global business environment ³ :

Not surprisingly, ASEAN is becoming extremely well positioned in global trade flows. ASEAN is the fourth-largest exporting region in the world, trailing only the European Union, North America, and China/Hong Kong. It accounts for 7 % of global exports – and as its member states have developed more sophisticated manufacturing capabilities, their exports have diversified. Vietnam specializes in textiles and apparel, while Singapore and Malaysia are leading exporters of electronics. Thailand has joined the ranks of leading vehicle and automotive-parts exporters. Other ASEAN members have built export industries around natural resources. Indonesia is the world’s largest producer and exporter of palm oil, the largest exporter of coal, and the second-largest producer of cocoa and tin. While Myanmar is just beginning to open its economy, it has large reserves of oil, gas, and precious minerals. In addition to exporting manufactured and agricultural products, the Philippines has established a thriving business-process-outsourcing industry. China, a competitor, has become a key customer of ASEAN countries. In fact, it is now the most important export market for Malaysia and Singapore. But demand from the United States, Europe, and Japan continues to propel growth.

The region sits at the crossroads of many global flows. Singapore is currently the fourth-highest-ranked country in the McKinsey Global Institute’s Connectedness Index, which tracks inflows and outflows of goods, services, finance, and people, as well as the underlying flows of data and communication that enable all types of cross-border exchanges. Malaysia (18th) and Thailand (36th) also rank among the top 50 most connected countries. ASEAN is well positioned to benefit from growth in all these global flows. By 2025, more than half of the world’s consuming class will live within a five-hour flight of Yangoon in Myanmar, and within a seven-hour flight from megacity Jakarta in Indonesia.

The ASEAN Economic Community’s global trade flows seem to become more and more interdependent: today about 25 % of the region’s exports of goods go to other ASEAN partners, a share that has remained roughly constant since 2003. While this is less than half the share of intraregional trade seen in the North American Free Trade Agreement countries of Canada, Mexico, and the United States and in the European Union, the total value is climbing rapidly as the region develops stronger cross-border supply chains.

Intraregional trade in goods – along with other types of cross-border flows – is likely to increase with implementation of the ASEAN Economic Community integration plan, which aims to allow the freer movement of goods, services, skilled labor, and capital. Progress has been uneven, however. While tariffs on goods are now close to zero in many sectors among the original five member states (Indonesia, Malaysia, the Philippines, Singapore, and Thailand), progress on liberalization of services and investment has been slower, and nontariff barriers remain a stumbling block to freer trade.

Common Pitfalls and Leadership Challenges in ASEAN Markets

However, while these four trends illustrate the great potential the ASEAN markets might have for organizations, there are also many challenges in the region that make realizing this potential quite difficult.

1. 1.
   Public policy:

   The “ASEAN way” – provided that such a perspective really exists – still shows quite some significant gaps in terms of launching the AEC. In the field of services, for example, AEC economies are among the most closed in some sectors: heavy-handed bank regulation remains a sovereign matter and the 10 different markets for banking are still very closed to outsiders. Service trade policies in ASEAN are perceived to be more restrictive than in any other region in the world except the Persian Gulf, according to a World Bank report published in April 2015.

   In addition, one could argue that not enough has been done to separate the legitimate public policy objectives of non-tariff measures ⁴ from a desire to protect local interests. Therefore much more will be needed to ensure that non-tariff measures do not degenerate into red tape “non-tariff trade barriers”.
2. 2.
   Cultural Diversity & Ethical Leadership Challenges:

   Despite a shared goal, it needs to be mentioned that ASEAN is a heterogeneous market with many economic differences. Within ASEAN, Indonesia for instance represents almost 45 % of the region’s economic output and is a member of the G20 (the world’s 20 biggest economies). Singapore while much smaller than Indonesia is seen as a haven of legal reliability and economic efficiency, a first world country with enormous wealth per capita even surpassing mature economies such as Canada and the USA. Conversely, Myanmar is emerging from decades of isolation and is still a frontier market working to build its institutions.

   International business leaders will need to take into account this diversity between, and within, ASEAN countries. What is accepted as “proper business conduct and legal contract” in Singapore, may be ‘understood’, and possibly complied with, in Kuala Lumpur, Jakarta or Bangkok, but may be questioned at more local levels in Penang, Surabaya or Chang Mai. Any multinational will face leadership challenges in those emerging and frontier markets, whether rooted in cultural differences, or specific legal contexts, or different norm systems.

   Moreover, these dynamic ASEAN markets are changing very fast. Leaders will need a core [ethical and strategic] compass to navigate these ambiguous and swiftly changing environments to steer their organization towards value creating opportunities, while acknowledging the local context, norms and values. International leadership often complains about, or silently looks away from, allegations of corruption and misbehavior by their employees. And although Western companies have not been spared from unethical behavior resulting in reputational disasters, the chance that one faces some kind of perceived corruption in those emerging markets is more than likely, unless the organization has implemented a very strong ethical culture and g...

Table of contents

• Cover
• Front Matter
• 1. Introduction: Doing Business in ASEAN Markets: What Is So Different?
• Part I. Economic Outlook and Institutional Voids
• Part II. Company Specific Challenges
• Back Matter