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 Co. released today. “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 Co. and Google Inc. (GOOG:US) 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 AG 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 LLP 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 PT Fastfood Indonesia, which operates more than 400 Yum! Brands Inc. (YUM:US) 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.
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