TMF Group: Asia has huge potential for business expansion

Asia has been a dominant economic force for nearly 2,000 years and, in 2013 (for the second year in a row), continued to be the region with the highest foreign direct investment (FDI) inflows, accounting for nearly 30 percent of the global total.

Asia’s significant growth has largely been at the expense of the EU – traditionally the region with the highest share of global FDI – which saw its share fall from 42 percent in 2007 to just 17 percent in 2013. A major part of this growth has been fuelled by the significant increase in FDI to Southeast Asia and specifically the ASEAN-5: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Indeed, in 2013, for the first time, FDI flow to this group overtook that to China; the ASEAN-5 received $128.4bn compared to China’s $117.6bn.

Much of this market’s attractiveness is its sheer size: a population of 620 million, home to the third largest workforce in the world, and economic growth of around 5.5 percent per annum. If ASEAN were one economy, it would be the seventh largest in the world.

Further analysis into the source of ASEAN’s FDI indicates an important trend about the region. The largest source of FDI is in fact coming from ASEAN itself, with Southeast Asian countries investing among themselves; this accounted for about a quarter (24 percent) of the region’s FDI and has been growing steadily over the past decade.

This surge in intra-ASEAN FDI signifies a new chapter in the region’s corporate development as local companies now have the capacities, funds and skills to expand overseas. Naturally, the first foreign market for ASEAN companies will be their neighbouring countries due to closer economic relations, cultural similarities and geographic proximity.

Besides ASEAN, other Asian countries – namely Japan and China – are also big investors in the region. Notably, Japanese FDI into the region is growing rapidly: it reached $23bn in 2013. This is amplified by non-ASEAN factors, such as rising wages and production costs in China, and the government’s strategy of revitalising the domestic economy through ‘global outreach’.

Due to encouragement from the government, Chinese corporations (now third on the global list of top foreign investors) are also starting to mark Southeast Asia as a major investment destination. This is part of their strategy to pursue continuous growth, obtain natural resources and expand political influence.

Creating a single economic market
The integration of ASEAN economies through the establishment of the ASEAN Economic Community (AEC) has opened up many new opportunities for investment. The vision of the AEC is to create a unified market with a common production base and free-moving goods, services and investments across the 10 member states. The realisation of the AEC would enable foreign investors to consider Southeast Asia as one integrated region instead of individual countries.

Although many details remain to be determined, negotiations are progressing steadily. For example, intra-ASEAN trade tariffs have been adjusted near to zero for most goods, while cross-border customs requirements are seeing improvement in synergy. These trade-friendly measures are drawing huge responses from organisations seeking opportunities in the region, as they would generate economies of scale for their investment.

Simultaneously, ASEAN is negotiating a series of free trade agreements with other countries to create the Regional Comprehensive Economic Partnership (RCEP). This is to cover ASEAN and its free trade partners (namely Australia, China, India, Japan, South Korea and New Zealand). The RCEP is entrusted to integrate involving economies into a unified market of more than three billion people (more than 45 percent of the world’s population) with a combined GDP of about $17.23trn (about a third of the world’s current annual GDP).

Another significant free trade agreement in talks is the Trans-Pacific Strategic Economic Partnership (TPP), which seeks to manage trade, promote growth and regionally integrate the economies of the Asia-Pacific region. Spearheaded by the US, the current negotiating partners include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The combined population of the TPP catchment area would be more than 650 million people, with an average per capita income of $31,491 and a combined GDP of more than $20trn. While there is some overlap between the TPP and RCEP, crucially the RCEP features China and India whereas the TPP does not. Both negotiations aim to liberalise trade and bring economic integration, but the TPP goes deeper.

Getting it right
While there are plenty of opportunities in Asia, the compliance and regulatory risks across the region can vary hugely due to highly diverse cultures and political landscapes. Research conducted by TMF Group in 2013 found almost one-third (30 percent) of the most complex countries in which to do business are in Asia, with Indonesia, Thailand and China all featuring in the top 10 out of 81 global jurisdictions reviewed.

In particular, tax rates and regulations are fast becoming the largest compliance burdens and expense items for foreign companies in Asia. Revenue-hungry governments see raising tax rates, or increased audits and administrative requirements to trigger fines and interest penalties, as a key component of supporting their income bases.

Understanding and managing the local administration and reporting requirements in numerous territories can therefore be complex and time-consuming, and can often distract companies from their key focus: managing and growing their businesses.

Taking the time to anticipate and tackle local legal, accounting, tax, and HR and payroll issues is crucial to the success of expansion into Asia. Start your planning early and research the specifics of your target territory’s political, legal and cultural environments, including its competitive landscape and workforce.

Give serious consideration to working with third parties with a strong local presence, particularly in the early stages of territorial expansion. Third parties include IT and business process outsourcers, as well as corporate secretarial service suppliers that can help constitute new subsidiaries and keep them compliant with local legal and working requirements. It might be beneficial to select a partner that operates across more than one jurisdiction. This will assist to smooth the transition to further markets should that be your long-term goal and it will also accelerate the time to revenue.

In short, wherever in Asia you plan to expand, local knowledge is the key. Without it, companies can put themselves at serious risk of financial penalty or even prosecution. But for those willing to invest in getting it right, the opportunities are endless.