Openness to foreign investment
It is important to consider the longer-term consequences of legal and regulatory changed spawned by the crisis which will take some time, perhaps a decade, to have effects at the level of the firm and particular markets. Two important examples are the development of bankruptly and foreclosure laws and reforms of corporate governance. A third reform, born of financial constraint and pushed by the IMF but also championed by reformers, were the rules governing foreign direct investment.
Well before the crisis, all countries had already begun to liberalise the rules governing foreign direct investment. This was particularly true in Malaysia and Thailand which took advantage of the sharp appreciation of the yen in the mid-1980s to position themselves as major sites for manufacturing investment not only from japan, but from the other newly industrialising counries, the united states and Europe as well. However, the rules governing foreign direct investment were often ringed with eceptions, for example emphasising export-oriented industries, shielding the non-tradable goods sector, and particularly finance, from foreign entry, and continuing to impose equity requirements.
In all countries, the crisis accelerated the liberalization of foreign investment, often with the explicit objective of facilitating the restructuring process. In Thailand, the government eased restrictions governing land ownership and replaced the alien business law of 1972 with a new foreign investment law in October 1999. The new law retains a restrictive negative-list system and still requires firms to seek approval for investment in a number of sensitive sectors, but it opens domestic transport, retail trade, and legal services to foreign ownership. In the manufacturing sector, the board of investment substantially liberalized the criteria required for firms to receive investment incentives, particularly with respect to enquiry requirements, and even set up a mergers and acquisitions unit. Foreign firms responded quickly by expanding their stake in joint venture or buying out partners entirely. Finance minister tarrin was also explicit in his desire to use foreign investors to facilitate the financial restructuring process. Foreign parties were major bidders in the asset sales organized by the FRA, and the government encouraged thai banks to seek foreign equity partners and approved foreign take-overs of four failed banks in 1998.
Of the ASEAN countries, Malaysia was the most aggressive in courting export-oriented foreign investment prior to the crisis, bit a number of domestically-orientd and import-substituting industries, such as autors, were restricted. Following the crisis, the government eliminated sectoral restrictions on new manufacturing projects, allowed foreign joint-venture partners serving the domestic market to increase their shareholdings, and permitted wholly-owned foreign firms to expand their local sales. The imposition of the capital controls in September 1998 explicity guaranteed convertibility on current account transactions and free flows of direct foreign investment and repatriation of interest, profits, and dividends and capital, thereby trying to minimize disruption to ongoing foreign operations. In one respect, However, Malaysia did take a more restrictive stance than the other most seriously affected countries. Wholly foreign-owned banks licensed in the past continue to occupy an important position in the financial system, but the government has retained the 30 percent equity cap on new investment in the financial sector. Nor was foreign purchase of asset seen as a central component of the restructuring process.