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‘Parsing the Reality and Promise of Gulf-Asia Engagement’ IISS Seminar 15-16 October 2011 SIXTH SESSION: Barriers and Challenges to Gulf-Asia Engagement: Political, Financial and Social Terry Newendorp Chairman and Chief Executive Officer, Taylor-DeJongh Inc. SIXTH SESSION: Barriers and Challenges to Gulf-Asia Engagement: Political, Financial and Social Terry Newendorp Chairman and Chief Executive Officer, Taylor-DeJongh Inc. Barriers and Obstacles to GCC-Asia Economic Relations: Closing the Triangle The modern relationship between the states of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – and Asia first began in the 1950s and is, not surprisingly, rooted in hydrocarbon exchange. Since then, an important bilateral trade relationship has evolved between the two regions. While the economies of Northeast Asia have become reliant upon energy imports from the Gulf, GCC states have simultaneously benefited from Northeast Asia’s low-cost manufacturing industries. Looking ahead over the next 15 years, market analysts expect to see an increasing percentage of capital flowing from the GCC into emerging markets, and Asia in particular.1 While historic precedent would indicate that this capital might be directed toward Northeast Asia, regulatory obstacles and an overly complicated investment environment threaten to impede this development. At the same time, the markets of Southeast Asia look increasingly primed for GCC investment. In the coming years, Southeast Asia looks likely to outcompete other regions in Asia to capture a growing share of GCC investment in the region. This paper seeks to assess the economic relationship between Asia and the GCC and to describe the obstacles and opportunities for economic cooperation between the two regions. Finally, this paper will explain why certain Asian economies are particularly inviting for lucrative GCC investment. ‘GCC Trade and Investment Flows: The Emerging-Market Surge’, Economist Intelligence Unit (EIU), London, 2011. 1 2 Historic Ties between Northeast Asia and the GCC While economic ties between Asia and the GCC have evolved significantly since the 1950s, hydrocarbons remain the central feature of the relationship. Within Asia, China, Korea and Japan have historically been the drivers of bilateral trade. Japan was the first Asian nation to establish economic ties with the GCC, establishing formal diplomatic relations with Saudi Arabia. In 1956, Japan’s Arabian Oil Company secured a 43 year concession to explore and extract Saudi oil, launching production in 1960. The trade of non-hydrocarbon goods later experienced significant growth, with Dubai positioning itself as a re-export hub. Japan originally exported clothes to India through Dubai, and beginning in the late 1970s this trade expanded to include a number of electronic goods. Throughout the 1960s and 1970s Japan broadened its engagement with the GCC by establishing diplomatic relations with Kuwait, Qatar, Bahrain and Oman. Japanese oil companies in turn moved into Kuwait (1961) and the UAE (1972). Meanwhile, though to a lesser degree than Japan, China and Korea began to engage GCC nations. China initially approached Gulf countries for re-export trade opportunities throughout the 1950s and 1960s. Due to its domestic supply, then sufficient, China demonstrated little interest in oil trade with the GCC at the time. However, China’s interest in the GCC region shifted in 1983 when it began to import crude oil from Oman. Omani crude was initially imported on a temporary basis, and a permanent arrangement was established in 1988 as China’s industrialisation accelerated. By the early 1990s, China had engaged all GCC nations to varying degrees, and its strategic interests in the region were made clear. South Korea, which had no oil industry until the late 1970s, gradually established diplomatic relations with GCC nations throughout the 1960s and 1970s.2 Northeast Asia and the GCC Today Totaling US$192.2 billion in 2008, or three-quarters of GCC exports to Northeast Asia, hydrocarbon trade continues to be the centerpiece of trade between these two regions.2 China currently imports 58% of its oil from the Middle East, with Saudi Arabia, Oman and Kuwait providing most of this. China sources one-third of its oil from Saudi Arabia, and will overtake the US as the largest buyer of Saudi crude within the next five years.1 Energy exports from the GCC play an equally important role for Japan and South Korea, though import volumes are much lower than China’s. The UAE exported 2.32 million barrels per day (b/d) of oil in 2009 with Asian markets as the predominant destination.3 While Japan received 40% of total exports, South Korea and Thailand are also major importers UAE crude.4 In an effort to balance trade deficits with the GCC, Northeast Asian nations have worked to increase exports to the Gulf and to broaden trade beyond the exchange of hydrocarbons. In 2009, nonChristopher M. Davidson, ‘Persian Gulf-Pacific Asia Linkages in the Twenty-First Century: A Marriage of Convenience?’ Kuwait Programme on Development, Governance and Globalisation in the Gulf States, The Centre for the Study of Global Governance, London School of Economics, January 2010, pp. 8-15. 3 ‘United Arab Emirates, Country Analysis’, Energy Information Agency (EIA). 2 3 hydrocarbon trade between Saudi Arabia and Japan reached US$5bn, comprising mostly Japanese automobile, machinery and consumer durables exports.2 South Korea’s non-hydrocarbon trade with Saudi Arabia reached US$3bn in 2009, the majority including Korean automobile, rubber and textile exports.2 In addition, Korean and Japanese firms have also leveraged their skills in advanced electronics, construction and technology to secure investment opportunities within the GCC. Construction Trade Most major Korean contractors have over 30 years of experience in civil engineering projects, which has played a key role in helping many of these firms secure major engineering, procurement and construction (EPC) awards in the GCC. Between April 2010 and March 2011, South Source: MEED Insight Korean firms won 47% of all EPC contracts awarded in the GCC and over 65% of the top EPC contracts in the region.4 In 2009, South Korea’s KEPCO beat out France’s Areva and a consortium led by GE-Hitachi to secure a landmark US$18.6bn contract for the construction of four nuclear power plants in the UAE by 2020.5 While Indian and Chinese firms are eager to compete with Korean firms in the GCC, their expertise continues to lag.6 By comparison, Japan has strengthened and diversified its economic relations with the GCC through a range of public-private partnerships (PPPs). Foreign ownership restrictions in upstream assets and natural resources are common throughout the GCC, but PPPs offer a unique opportunity for foreign firms to invest directly in the Gulf. Beginning in ‘EPC Market Still Buoyant in the Gulf’, MEED, July 2011. Kim Tae-gyu, ‘Korea brushes aside UAE doubts’, Korea Times, 01 February 2011. 6 Kevin Baxter, ‘Korean Contractors face increased competition’, MEED Insight, 2011. 4 5 4 1994 with the Al-Manah independent power project in Oman,7 PPP deals in the GCC have totaled US$54.7bn. Over 90% of these deals (by value) have been in the power and desalination sector.4 As of August 2010, Japanese, French and Malaysian firms have been the most successful foreign companies engaged in power and desalination PPPs in the GCC. Seven Japanese companies have entered into at least one power or desalination PPP in the region: Japan’s Marubeni Corporation is currently involved in six projects, third only to France’s GDF Suez and International Power by number of projects.4 While EPC and service contracts do not qualify as direct foreign investment in the GCC, these deals generally involve a complex matrix of financing that often include direct and indirect lending from Korean and Japanese banks. Since 2007, 28 deals have reached financial close in the GCC involving an EPC contract with a Japanese or Korean firm, 21 of which have involved some form of Japanese or Korean financing.8 Financing was conducted either though Japanese commercial bank lending or direct loans and loan guarantees issued by KEXIM, KSURE (formally KEIC) and JBIC. 8 While Japanese commercial bank lending is the most commonly used technique of these three approaches, direct loans and loan guarantees have also become quite common, especially since 2009. Since January 2010, five deals involving Korean and Japanese EPC contracts totaling around US$5.6bn have reached financial close in the GCC. KEXIM or KSURE have issued three direct loans totaling US$709m and three loan guarantees totaling US$246.6m, while JBIC also issued one direct loan for US$400m.8 Since 2007, Korean export credit agencies have issued US$2.5bn in direct loans and US$1.3bn in loan guarantees to facilitate projects in the GCC involving Korean contractors.8 These figures do not include the estimated US$9bn in loan guarantees that KEXIM plans to issue for the nuclear reactor deal in the UAE. Tracking GCC Investments in Asia Due to undeveloped local capital markets, petrodollar foreign investments have dwarfed the size of domestic securities markets in the GCC as domestic investors have sought external investment opportunities.9 Between 2002 and 2006, roughly 73% of capital outflows from the GCC were directed to the United States and Europe, with only 11% to Asia.9 However this trend has changed in recent years as investors from the GCC increasingly seek out investment opportunities in emerging markets and especially Asia. According to a McKinsey report, investors from GCC countries invest an average of 80% of their wealth offshore. The same report identified Asia as a key market for GCC investors in the coming years and estimated that cross-border capital flows between the GCC and Asia will climb from US$15bn in 2007 to as much as US$290bn by 2020.9 A recent Economist Intelligence Unit report corroborated this analysis by forecasting that Asia is poised to become the most important emerging market for the GCC in the coming years. 1 This shift is based upon both Asia’s growing oil consumption, growing export markets and its expanding ‘PPPs in the GCC’, MEED, 2011. TDJ Analysis based on data collected from Projectware for research conducted on 9/27/2011. 9 ‘The New Power Brokers: How Oil, Asia, Hedge Funds, and Private Equity Are Shaping Global Capital Markets’, McKinsey & Company, October 2007, pp. 62-3. 7 8 5 middle class.1 Growth in bilateral activity is reflected in increased trade flows from 2003-2009: over that time, exports from GCC to Asia increased 55%, to US$174bn.10 Despite a history of trade between Northeast Asia and the GCC, direct financial investments between these regions have developed relatively slowly. For each Northeast Asian country this situation is the result of a different set of circumstances. In 2010, foreign direct investment (FDI) into Korea and Japan represented just 2% of global FDI flowing into Asia.11 Though foreign firms face an overly complex regulatory environment in Japan, inward FDI is constrained primarily by structural rather than regulatory factors.12 Entrenched local firms that understand the unique Japanese market are known to act as ‚cartels‛ in order to thwart competition and drive up prices. Wages and real estate are expensive, which drives up the cost of doing business.13 Finally, Japan’s internal labour markets (i.e. Japanese firms tend to promote internally) make it difficult for foreign firms to recruit local talent.12 Foreign investors face a similarly challenging environment in South Korea, where the local Chaebol continue to dominate the economy despite government efforts to encourage FDI. Foreign firms confront a historically unfriendly investment environment.14 At a very basic level, examples of this include a lack of legal and business-related information available in English, difficult immigration laws, powerful labour unions and a regulatory environment that lacks clarity, stability and transparency.15 It has been over six years since a foreign investor of any kind has taken over a Korean financial company valued at over US$500m.16 Perhaps the most poignant example of Korea’s arduous foreign investment climate has been US-based Lone Star Funds failed attempts to exit the Korean market. Lone Star has been eager to sell its 51% stake in Korea Exchange Bank (KEB) since 2006. HSBC has twice attempted to purchase Lone Star’s shares: once through a failed bid in 2006 and again in 2007 when it signed an agreement to with Lone Star to sell its stake for US$6.3bn. In 2008, HSBC abandoned its bid following regulatory delays and legal disputes brought by the Korean government. Korea’s Hana Financial Group recently agreed to purchase the stake in KEB for just US$4.1bn but the sale has been delayed pending continued legal suits.16 In another example, Standard Chartered’s efforts to transition its First Bank Korea to a performance-based pay system have been met by stern labour union opposition and resulted in the longest labour strike in Korea’s banking history.15 ‘Direction of Trade Statistics’, International Monetary Fund, 2010. For purposes of this study, Asia includes: Japan, South Korea, China, Malaysia, Indonesia, Thailand, and Vietnam. 11 ‘World Investment Report 2011’, UNCTAD, 26 July 2011. 12 Franz Waldenberger, ‘Has the Japanese Economy Become More Open?’, Maison Franco-Japonaise, February 2008. 13 ‘World Investment Service: Japan Country Report’, EIU, 2011. 14 ‘World Investment Service: South Korea Country Report’, EIU, 2011. 15 ‘Foreign Investment Climate Still Unsatisfactory’, Korea Times, 25 June, 2009. 16 Cha Seonjin, ‘Korea Banking Pitfalls Snaring Lone Star Help Scare Away Foreign Investors’, Bloomberg, 29 August, 2011. 10 6 China continues to capture the largest share of FDI flowing into Asia, yet GCC direct investment into China has not been overwhelming.11 A number of obstacles have inhibited GCC investment, including language barriers, a lack of suitable local partners,17 insufficient protection for intellectual property, and a ‚complex and contradictory‛ legal and regulatory system.18 The investment obstacles are highlighted by a World Bank study which ranked China in 79th globally in ease of doing business – the same study ranked Malaysia and Thailand 19th and 21st respectively.19 China’s restrictions on inward foreign investment are much broader than restrictions in most developing economies.18 Foreign investment in China is approved on a case-by-case basis: the Catalogue for the Guidance of Foreign Investment Industries is used by Chinese regulators at the Ministry of Commerce, State Administration of Industry and Commerce, and National Development and Reform Commission to determine approved foreign capital inflows. However, not only are changes made to the Catalogue without forewarning or rationale, but Chinese bureaucrats are not bound to follow it and are free to restrict or approve investments for other reasons. This ad hoc style of approval allows for little transparency or certainty in the decision-making process.18 Top* GCC Sovereign Wealth Funds (SWF) Direct Investments in Asia By Sector 3% 3% Healthcare 5% Ports 8% 31% Consumer Discrentionary Industrial 8% Telecom Undisclosed 8% 17% Financials Real Estate 17% *Analysis based on top 14 SWFs in GCC by asset value. Data does not include SAMA Foreign Holdings because information was not publicly available. Energy Source: Sovereign Wealth Fund Institute, Capital IQ ‘Near East Meets Far East: The Rise of Gulf Investment in Asia’, EIU, 2007. ‘Doing Business in China’, 2010 CountryCommercial Guide for U.S. Companies (Washington DC: United States Department of Commerce 2010), Chapter 6. 19 For more information, see http://www.doingbusiness.org/rankings 17 18 7 GCC investors typically favour investments in sectors where they possess experience and thus have a competitive advantage: real estate, energy, port operations, tourism, financial services, agriculture and minerals.1 However, many of these sectors are considered ‚vital industries and key fields‛ by the Chinese government, which seeks to discourage or limit foreign investment in the farming, mining, electric power, transportation, manufacturing, scientific research, telecommunications, oil and petrochemicals industries.18 For all these reasons, it is not surprising that the focus of GCC investment in China to date has been in the merchandise trade.17 GCC-Southeast Asia Compatibility Global Flow of FDI into North and Southeast Asia Investment obstacles in Northeast Asia 100% have encouraged potential investors to seek out alternative opportunities in the 80% region. Against this backdrop, Southeast Korea and Asian economies exhibit a growing Japan number of characteristics that are 60% attractive to GCC investors. Financial SE Asia markets in Southeast Asia, and in particular in Malaysia, Indonesia, 40% China Thailand and Vietnam, have a number of attributes that are particularly attractive 20% to GCC investors. Among these characteristics are the region’s current Source: UNCTAD state of economic development, its 0% World Investment relatively friendly foreign investment Report 2011 2005 2010 environment and its cultural affinity with the GCC. As a result, there is a strong likelihood that Southeast Asia will capture a growing share of GCC foreign investments in the future. The stock exchanges in Indonesia (US$406bn) and Malaysia (US$409bn) are the largest in Southeast Asia by market capitalisation. These are followed by Thailand (US$294bn) and Vietnam (US$44bn). By comparison, the largest exchange in the GCC is in Saudi Arabia (US$ 317bn). However, all of these are overshadowed by the stock markets in Shanghai (US$2,661 bn) and Hong Kong (US$2,494bn).20 All of these Asian exchanges (except for Hong Kong) have foreign ownership limits. Foreign institutional investors must be individually approved to invest in Shanghai Stock Exchange A Shares, though all foreigners are free to invest in the much smaller pool of B Shares. Southeast Asian exchanges have foreign ownership ceilings in most industries, though the laws have been liberalised. One example of interest to GCC investors is Bursa Malaysa. The foreign ownership limit 20 World Federation of Exchanges, as of 31 August 2011. 8 is commonly 30% for domestic firms. However, Islamic banks, telecommunications firms and companies which produce goods for export have much higher foreign ownership ceilings.21 The developing economies of Southeast Asia provide many investment opportunities, especially in the real estate, energy and tourism sectors. These sectors are well-suited for GCC investors due to their prominence in Gulf economies.17According to Sourav Kumar, head of Middle East sales and marketing for Prudential Asset Management, ‚*For Gulf investors+ real estate is likely to remain the most important asset class after equities.‛17 A noteworthy example of this is the US$1.2bn in funds committed by a Gulf-based consortium led by Mubadala Development Corporation in Malaysia’s Iskandar Development Region. The deal was agreed upon in 2007 and is one of the largest ever single foreign investments in Malaysia.22 Southeast Asian economies have worked to increase local investment opportunities for foreign firms. Extra-ASEAN (Association of Southeast Asian Nations) FDI into Indonesia, Malaysia, Thailand, and Vietnam nearly doubled from US$16bn to US$29bn in 2009-10, eclipsing pre-crisis levels (USD 26 billion in 2008). 23 Indonesia is considered a relatively investment-friendly environment due to its accommodating foreign-exchange policies, trade regulations and tax regime. The latter offers incentives to foreign investors in a number of sectors, including its rapidly growing automotive manufacturing industry.17 Additionally, a tax holiday was recently granted to foreign firms investing at least US$117m in Indonesia’s base metals, oil refining, petrochemicals and renewable energy sectors.24 As Country Equities Reports, Asia eTrading, 2011. ‘Mubadala to Develop AED 4.4 billion City in Malaysia’, Gulf News, 29 August 2007. 23 ‘Foreign Direct Investment Net Inflow, intra- and extra-ASEAN’, ASEAN Statistics Database, 15 August 2011 24 Farida Husna and Andreas Ismar, ‘Indonesia Offers Tax Incentives to Spur Growth’, The Wall Street Journal, 15 August 2011. 21 22 9 a result, a growing number of Gulf-based banks have established operations in the country in order to meet increased demand for energy and commodities project finance. The latest example is Abu Dhabi’s First Gulf Bank, which recently announced plans to apply for a license to operate in Jakarta as part of a larger effort to grow its presence in financing energy and commodities projects in the region.25 The Malaysian government also recognizes the importance of FDI inflows in supporting its exportdriven economy. In 2009, regulations governing inward foreign investment were relaxed and a law requiring a 30% indigenous ownership stake in 27 business subsectors was abolished.26 As a result, a growing number of Gulf banks, such as Kuwait Finance House, Alarajhi Bank and Asian Finance House (a joint venture between Qatar Islamic Bank, RUSD Investment Bank of Saudi Arabia and Global Investment House of Kuwait), have expanded into the country.17 Furthermore, a framework agreement for the formation of a Malaysia-GCC Free Trade Agreement (FTA) was reached in early 2011. If a Malaysia-GCC FTA comes to fruition, it will be just the second GCC FTA signed with an Asian country27 and will provide GCC states with access to the ASEAN network. The FTA could also help Malaysia realise its aspirations of becoming a hub for GCC investors and a cost-competitive environment for offshore operations in advanced technologies manufacturing. Bilateral trade and investment between Malaysia and GCC countries has increased significantly in recent years. According to the Malaysia External Trade Development Corporation, trade between the GCC and Malaysia reached US$11bn in 2010.28 In the same year, electronic goods overtook jewelry as the top exports to the UAE (by far Malaysia’s largest GCC export market), a sign that Malaysia’s manufacturing industry has continued to move up the value chain. Thailand and Vietnam have also made efforts to encourage foreign investment. Despite recent political instability, Thailand has historically been considered a friendly FDI destination.29 Aside from relatively low labor costs and flexible labor laws in Thailand, the local board of investment also offers certain exemptions on corporate income tax and duties on imported machinery. Foreign firms are also permitted to import foreign workers, own land and remit foreign currency abroad.29 This favorable environment likely contributed to the 15.7% increase in inward FDI (to US$5.8bn) between 2009 and 2010, after three consecutive years of contraction caused by political upheaval and the financial crisis. To date, Thailand’s manufacturing sector has attracted the largest proportion of FDI inflows.29 In Vietnam, political stability and inexpensive labor have been instrumental to attracting foreign investment.30 The socialist republic has proven particularly attractive to foreign investors seeking an ‘First Gulf Bank Plans Four Asia Offices to Boost Financing Role’, Gulf News, September 07, 2011. ‘World Investment Service’, EIU, 2011. 27 An FTA was signed between the GCC and Singapore in 2008. To date, it has not been ratified by every GCC country. 28 ‘GCC-Malaysia Trade Hits USD 11 billion’, Khaleej Times, 02 April, 2011. 29 ‘World Investment Service: Thailand Country Report’, EIU, 2011. 30 ‘World Investment Service: Vietnam Country Report’, EIU, 2011 25 26 10 alternative to China.30 FDI inflows have grown dramatically since 2005, increasing from under US$2bn to US$8bn in 2010.23 In recent years, the government of Vietnam has introduced a number of measures intended to bolster foreign investment. These include regulations eliminating discrimination against foreign companies, permitting profit convertibility and allowing foreign investors, for the most part, full ownership rights in domestic companies.30 In addition to compatible economic links and a welcoming investment environment, Southeast Asia also enjoys a degree of cultural affinity with the GCC that Northeast Asia does not. This is most specifically related to the role of Islam and Islamic banking in Southeast Asia. In a 2009 survey conducted for the Journal of Real Estate Literature, 78% of respondents agreed that Southeast Asia had the highest potential in Asia of attracting Sharia-compliant property investment. Further analysis of the Southeast Asian market found that Malaysia, followed by Singapore, Thailand, Indonesia and Vietnam are the most favored destinations for Sharia-compliant investments.31 These economies act as a gateway to further GCC-ASEAN economic integration. Islamic banking was first introduced in Malaysia in 1983 with the Islamic Banking Act, which created a regulatory framework for banks operating in the country. Today, Malaysia has become a global Islamic banking center. Overall, Islamic banks in the GCC (and in Saudi Arabia and Kuwait in particular) apply a more traditional and less flexible interpretation of Sharia law than in Malaysia.32 Islamic banking is approached as a co-investment in Malaysia and India, and this allows for liquidity via secondary market mechanisms. In addition, debt receivables are often permitted to be securitized and traded.33 These transactions are often difficult to execute in the Gulf because bond documentation lacks standardization: a new fatwa is necessary every time underwriters bring a borrower to market in the Gulf.34 In comparison, the documentation process has been standardized in Malaysia.34 Malaysia’s central bank, Bank Negara Malaysia, has also set guidelines and standardizations on term sheets for securities. Gulf issuers must obtain approval from the Sharia Advisory Council, which results in greater uncertainty and higher transaction costs. Though Islamic banking assets in Indonesia (US$11.5bn) are currently only one tenth the size of Sharia-compliant assets in Malaysia,35 the industry has experienced rapid growth in recent years and is poised for future expansion. Because Indonesia is home to the largest Muslim population in the world, the rise of Islamic banking in the country is a logical step in its economic development. Indonesia’s Central Bank anticipates that the nation's Islamic assets will increase by as much as 55% this year.35 This, coupled with Indonesia’s welcoming foreign investment environment, yields a range of prime investment opportunities for many Gulf based banks and GCC investors. This situation has not gone unnoticed: earlier this year Bahrain’s Al Baraka announced plans to acquire an Indonesian bank for US$100m.35 Muhammad Ibrahim et al, ‘Sharia Property Investment in Asia’, Journal of Real Estate Literature, vol. 17, no. 2, 2009. 32 ‘Malaysia versus the Gulf’, CPI Financial, August 2006. 33 However, securitized debt in Malaysia is limited to single-tier transactions. 34 Angela Shah, ‘Dubai Leads the Rise in Islamic Finance’, Institutional Investor, July 2011. 35 ‘Gulf Lenders Eye Indonesia Acquisitions’, Gulf News, 08 April 2011. 31 11 Conclusion Financial ties between the GCC and Asia are on track to experience rapid growth over the next 10 to 15 years; by 2017 Asia is expected be the GCC’s largest trade partner.1 Despite the dampening effects of the financial crisis, Asian exports to the GCC grew to US$81bn in 2009, an increase of 70% since 2003.36 As mentioned earlier, exports from the GCC to Asia increased to US$174bn (a 55% jump) over the same period.10 GCC relations with Asia were initiated by Northeast Asian countries, but many GCC nations are now finding investment opportunities in Southeast Asia increasingly attractive. Southeast Asian economies are growing rapidly, are eager to attract foreign investment, and a number of them possess a cultural affinity with the GCC. Southeast Asia’s Islamic banking sector is particularly attractive to GCC investors. These advantages, coupled with investment barriers in Northeast Asia, will encourage GCC financiers to increasingly look to Southeast Asia for (USD Millions) investment opportunities. Bilateral Trade, 2003-2009 400,000 What can Northeast Asian countries do to attract 300,000 Total GCC -> China more FDI, especially from the GCC? The easiest and Total GCC -> SE Asia most direct way to Total GCC -> NE Asia 200,000 improve the investment Total China -> GCC environment is make the rules simpler, more Total SE Asia -> GCC 100,000 predictable, and more Total NE Asia -> GCC transparent. The informal barriers to FDI are more Source: IMF Direction difficult to address: there of Trade Statistics 2003 2004 2005 2006 2007 2008 2009 should be an effort to increase the availability of business information in foreign languages and dismantle local oligopolies in Korea and Japan. Northeast Asian countries will be able to compete with Southeast Asia for GCC investments in the long term only if these changes are put in place. But the tide has probably already turned: China and Southeast Asian countries are the future of GCC foreign investment. NE Asia includes Japan and South Korea; SE Asia includes Malaysia, Indonesia, Thailand, and Vietnam. 36 12