Foreign Direct Assessment: Analyzing the Mobility of FDI
Models in Emerging Markets
Kyle Himmelwright & Damian Zaccaria, Villanova Business School
In this article, the authors will explore foreign direct investment in emerging markets. Applying a two prong investment model, they’ll assess three emerging Southeast Asian marketplaces; Indonesia, Thailand, and Malaysia. Additionally, they’ll explore the impact a variety of explicit and implicit factors have on the outcome. The research will indicate which of the three markets has the most potential for investment.
Keywords: Foreign Direct Investment (FDI), emerging markets, investment, economic factors, growth, defense

Foreign direct investment (FDI) plays a prominent and growing role in the global marketplace. FDI is defined as an investment made by a company or entity based in another country. The investment provides the firm with an opportunity to access new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing (Goingglobal.com 2015).
Accurately assessing marketplace factors is essential when evaluating whether to invest in a foreign market, especially when it comes to making decisions requiring foresight and conviction. “The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.” Rupert Murdoch’s quote concisely illustrates the current state of the global marketplace; it simply isn't as big as it once was and it's changing faster than ever. Understanding and tapping into emerging markets is of the utmost importance for companies looking for future success in the global marketplace.
According to a United Nations estimate from 2014, FDI in emerging markets eclipsed $700B.
This milestone signified the first time that emerging markets were responsible for over half of global FDI.
The defense industry was chosen for its importance to these countries given their geographic location, economic growth, and overall increased presence in a global marketplace. Defense spending is a percentage of GDP for the nations studied and as that increases, so does defense spend. Economic growth is directly tied to advancements in infrastructure, technology, and human measurement, such as workforce quality; All trending upward in the countries studied.
Infrastructure and other growth is often a direct result of government and FDI. Exhibit 1 shows ASEAN military spend from 2004 - 2013, and as the graph reads three of the most active nations are Indonesia, Thailand, and
Malaysia (Vos 2015). Not only is defense spending
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increasing in these three countries but all face multiple defense needs that likely cannot be met by government expenditure alone.
(Exhibit 1) – ASEAN Military Expenditure, 2004-2013, in USD$
Millions

Emerging Markets
Southeast Asia (SEA) is a region regarded as the one of the next frontiers of the business world with countries found on numerous top emerging market lists and studies, including Deloitte’s Emerging Markets
Report, AT Kearney’s Global Economic Outlook Report, and World Bank Competitiveness Index. The region consists of eleven countries spanning from Eastern India to China and is known for its rich and varying cultures. In fact, an estimated 1000 of the some six thousand spoken languages in the world today are spoken there, very much

reinforcing the cultural complexity. As different as the countries may be in certain aspects, they collectively all realized both their individual and regional potential, and have taken steps to capitalize on it. Indonesia, Malaysia, and Thailand were the selected markets for this analysis; each a high potential emerging market individually and in aggregate providing a representative sample of the region. To reinforce the region's potential, SEA has implemented several major strategic initiatives, the most significant being the establishment of the Association of
Southeast Asian Nations or ASEAN. The association is comprised of 10 states and 2 observers with stated goals to “(1) accelerate economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations, and (2) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. “ (ASEAN.org
1967).
Additional objectives of the group include supporting joint projects between the public and private sectors to finance the region’s pressing infrastructure needs, collaborating for better utilization of agriculture and industry to raise standard of living and promoting
Southeast Asian studies. ASEAN has made several significant decisions in order to further substantialize the group and its projects, the most notable of which a partnership with the Asian Development Bank, allowing for co-financing of the group's initiatives. Currently this partnership is working to expand the Indonesian power transmission network from Jakarta to Bali in an attempt to stimulate more industrial growth.
Each of the three countries was analyzed in the
FDI model in exhibit 2 below. The Foreign Direct
Investment Decision Support model contains two main characteristic sets; Market Risks and Economic Risks.
These two risk sets were chosen as they are important economic and performance indicators for FDI and provide a set of metrics to evaluate the tangible, Market, and financial, Economic, snapshots of the region.
Management consulting companies such as AT
Kearney emphasize similar metrics to exhibit 2 when forecasting future country growth. Aside from individual market analysis, AT Kearney’s Global Economic Outlook
2015 – 2020 report pulled data compiled by global economic leading organizations such as the United
Nations and International Monetary Fund. This study points at economic growth, labor force, politics, and

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infrastructure as important metrics for growth forecasting
(Laudicina and Peterson 2015).
Economic and Market indicators have also been used successfully in the past for FDI investments in
Southeast Asia. Singapore has been the top ranking Asia
Pacific investment environment since 2012 according to a study of over 200 multinational business executives.
Similar to the model in exhibit 2, the study honed in on political and economic factors as key decision making data points around FDI. While this particular study focuses on the Economic side, the consulting firm Mercer rated
Singapore as having the World’s best infrastructure, an honor also supported by the World Economic Forum (WEF
2015). These same organizations ranked the Singapore workforce as the most skilled in the Asia Pacific region with over half the workforce in the highly skilled range
(WEF 2015). These accolades are important FDI market metrics and when coupled with sound economic ratings likely influenced the aforementioned investment. India, where FDI has been increasing rapidly in the past few years, also attributes the FDI success to many of its market risk metrics. According to the India Brand Equity
Foundation (IBEF), the 2015 FDI rise of over 24% was primarily driven by infrastructure investment and service industries such as IT (IBEF 2015). These are two of the highest weighted Market Risks in exhibit 2’s model.
India’s FDI growth goes beyond the market risks described above. Their economy is one of the World’s fastest growing and, according to Worldbank, is on pace to eclipse China in 2016. The success of these two countries in consistently securing significant FDI speaks to the importance of the Market and Economic Risks modeled in exhibit 2 when evaluating FDI opportunities.
Each risk set is comprised of four risks to evaluate, detailed later. Each risk will be rated on a scale of 1 to 5.
The risks are weighed and applied to the rating for a total score. The higher the rating the more likely the market selected for FDI.
The market and economic risks in the model were derived from substantial Internet, consulting and article research on emerging markets, their economies, market entry, and FDI. As discussed, many of these metrics are often used in both evaluating entry into an emerging market or FDI. The sample risks selected for the model support data found about surrounding important economic and growth indicators in the marketplaces.
Both market and economic risks are very strong in the developed economies that emerging markets emulate.
The measures used in each vary by risk. The market risks were measured based on findings from studies and readings and any type of rankings, such as level of workforce education, were also taken into consideration.

The Economic Risks were measured based on a combination of forecasted growth and current strength.
The political climate risk was measured on a conglomerate of current events, their future impact, and levels of corruption and regulations.

Market Risks
The Market Risks taken into consideration for the model are infrastructure, technological readiness, labor efficiency, and defense need. All of these risks are valuable to potential investors as they strongly support the current and future states of the economy. Growth and progress in areas such as infrastructure and technological readiness are expensive and help investors draw a conclusion that this growth could only have been driven by other people’s successful FDI. As GDP grows so does defense spend, which is a % of total GDP. These risks are also good for a defense investor to evaluate
(Exhibit 2)–Foreign Direct Investment Decision Support

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because as infrastructure and other factors grow the country needs more defense as it becomes more of a target. The Economic Risks used are economic growth,
GDP per capita, Forex vs USD, and the political climate.
Economic growth, GDP per capita, and Forex vs USD all speak to the performance of the economy yet all add value to investors in their own way. Economic growth shows the potential for the country to become more successful allowing an investor to strategize on the economy as a whole, whose growth is directly related to the first three Market Risks in the model. GDP per capita allows investors to evaluate the performance of the economy one level down and compare it to another country. Forex vs USD not only shows how the currency has performed and will perform against the USD but also to evaluate the future value of a current investment especially if it is made in the foreign currency. Lastly the
Political Climate risk looks at the prevalence of corruption, bribery, and regulatory issues in the country.

Infrastructure
Infrastructure is one of the model’s four assessment pillars, playing a key role in factoring the competitiveness of a nation, as it leads to increased operating efficiencies and the economy frequently grows along with it. Infrastructure includes available networks of transportation, including roads, railroads, and air and sea travel, and available sources of electric/energy. A well-developed infrastructure
“reduces the effect of distance, integrating the national market and connecting it at low cost to markets in other countries and regions.” (Competitiveness Report 2015)
The infrastructure assessment is particularly important in this model because the assessment includes the current state as well as the future capability to support growth. Infrastructure in Indonesia has long been a hindering factor in both international trade and foreign investment. Currently ranked 72nd out of 144 countries by the World Economic Forum, the
Indonesian Government has recognized their shortcoming and has committed its focus to improving and stimulating infrastructure spending. Indonesia’s spend on infrastructure is expected to grow approximately 7% per year by 2025 and president Joko
Widodo has committed to at least $429B on upgrades, almost half of their 2014 GDP. Coupling these commitments with the market’s potential, Indonesia is considered one of the Southeast Asian countries’ best examples of substantial infrastructure growth over the next ten years.
Indonesia’s road network totals
508,000 km, of which only 287,926 (56.7%) are paved.
Of the network, only 820 km are operated as toll roads.
It’s estimated that 90% of all domestic passenger transport and 50% of cargo traffic is carried by road
(KPMG 2015). Land acquisition has proven to be the biggest road development issue in terms of roads; however the government plans to build 4621 km of additional toll roads as part of Trans Java and Trans
Sumatra highway program. From a railway perspective,
Indonesia has 5,107 km, the majority of which are operated by state owned Kereta Api. This is another area in which government has made significant investment through increasing the quality of track
(double tracking) to allow for more substantial traffic and increasing connectivity through multiple trans-rail projects. As an archipelago comprising more than
17,000 islands and covering an area of over 2 million square kilometers astride the main trade routes between the Indian Ocean and the Pacific Ocean, air and maritime connections are vital to Indonesia and its economy (KPMG 2015). Indonesia is home to 645 total
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ports, of which 4 are classified as “prime” and 14 are
“class 1”, indicating their suitability for international shipping. Indonesian ports are among the least efficient in Southeast Asia in terms of lead times, which are 3 days compared to those of most ASEAN countries, which are only 1 day (KPMG 2015). Indonesia recently announced the construction of a “Sea Toll Road,” a project to drastically improve their port network by connecting the many islands of Indonesia and minimizing ship congestion allowing for larger volumes of cargo. One of the positive impacts of this project is the planned growth of manufacturing to develop
Indonesian infrastructure further.
(PWC 2015)
Indonesia currently has 296 airports, 27 of which are international. To keep pace with growing air demands, new airports are expected to be built and current airports upgraded, such as the expansion of Kualanamu
International Airport, the Sultan Hasanuddin
International Airport, and the Ngurah Rai International
Airport. The power sector in Indonesia is monopolized by the Perusahaan Listrik Negara (PLN), a nationally owned and controlled provider. To meet market demands, PLN has two subsidiaries, Indonesia Power and Pembangkitan Jawa Bali (PJP). The Indonesian
Government and senior management of the PLN are officially committed to ongoing reforms designed to improve the efficiency of operations of the electricity supply sector in Indonesia.
Current state, Malaysia sits in the strongest infrastructure position of the three markets, with one of the most developed infrastructure systems in SEA.
Malaysia has a strong network of highways, efficient seaports, internationally equipped airports, and developed industrial and specialized parks. Much of
Malaysia’s industry takes place in these 200+ industrial parks and 14 Free Industry Zones developed throughout the country. These zone allow for a relaxed tax and operating setting for non-domestic corporations conducting business in Malaysia. Both government and private developers are continuously developing these parks, fully equipped with “roads, electricity and water supplies, and telecoms” (EMB 2014) to attract and meet foreign investment.
Malaysia’s roadway network includes “94,500 kilometers of primary and secondary roads, 70,970 kilometers of which are paved,” (WEF
2015) which provides the critical connective fibers to sync major growth centers within the country with their air and seaports, to allow for an efficient means of goods transportation. Additionally, a “Kuala LumpurBangkok-Kuala Lumpur containerized service known as the ASEAN Rail Express (ARX) has been initiated with

the aim of expanding to becoming the Trans-Asia Rail
Link, (EMB 2014),” to serve as a compliment the current highway system. This system’s connections will include
Singapore, Vietnam, Cambodia and others before ending in China. Malaysia's seaports play a heavy role in their international trade capabilities, handling nearly
95% of the country's trade volume, with Ports Klang and
Tanjung Pelepas recognized for a variety of international awards, included “among Asia’s top ten best seaports and top ten best container terminal operators,” (EMB 2014) by Asia Cargo News.
Competition, especially with Singapore, has provided incentive for Malaysia to ensure there is continued investment in their seaports. Maersk-Sealand, the world’s largest container line, relocated its regional operations from Singapore to the Port of Johor, marking a huge victory for the Malaysian shipping industry.
From an air perspective, Malaysia’s central location within the APAC region makes it an ideal Asian hub. The
Malaysia network offers 32 airports with paved runways and 83 that are unpaved. The cornerstone of the air network is the state of the art KLIA, Malaysia’s largest airport, which boasts a fully automated cargo import and export procedures. Malaysia’s energy network is soundly established, with the majority of electrical power being provided by Tenaga Nasional, a statecontrolled entity. With the support of the government, the Independent Power Providers (IPP) coalition was established to combat the rapidly increasing industrial energy demands and to capitalize on the oil, gas, and coal reserves found in Malaysia. Malaysia also has the potential for huge hydroelectric power output, which will require significant investment, but is highly attractive to investors looking to ride the current wave of momentum centered on global sustainability.
Thailand is behind when it comes to infrastructure primarily due to governmental stagnation and conflict as well as financial neglect. The current regime has laid plans to rectify the situation through a number of initiatives, including an 8 year, $33 billion dollar infrastructure program, ranging from railway upgrades to utilities management. The goal of the strategy is to develop the logistics system and integrate all transportation platforms - rail, air, road and water stretches beyond the Thailands's borders, as some of the projects form part of a plan to link the country's transportation system with those of neighboring countries. (Morgan, Plummer and Wignaraja 2013) In terms of available road transit Thailand has been able to construct a fairly robust network relatively quickly, offering 63,063 km of roadway, with more than 98% being paved. Roads have been the main mode of
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transit of both goods and people in Thailand. Thailand has 5,382km of railroad much of which is narrow gauge however the railroad network is widely regarded as highly inefficient. As such, a major focus of the 8 year plan includes a 7 year, $100 billion dollar commitment to upgrade the national railway system including upgrading the national rail network and opening links to
Southern China. The project aims to “turn Thailand into a key logistics hub in the ASEAN Economic Community
(AEC) by the time the projects are completed in 2022, said Roengsak Tongsom, director of the Rail Project
Development Office.” (Southgate 2015) Thailand has 5 main ports, Bangkok, Laem Chabang, Ranong, Phuket, and Songkhla, which handle approximately 48 million tons of goods per year. Additionally, the government is planning to add two strategic ports in Pak Bara and in
Songkhla with plans to connect the two ports by road and rail to establish a new distribution channel to
Middle East, Africa, and Europe. Looking at Thailand’s airport footprint, it has 103 airports, 63 of which have paved runways and 30 that are unpaved. Their 5 Main international airports are located Bangkok, Chiang Mai,
Chiang Rai, Hat-Yai, and Phuket.
The new
Suvarnabhumi airport will be able to handle 45 million passengers a year and 3 million tons of cargo per year.
Energy in Thailand, as in both Indonesia and Malaysia, is controlled by the state, in this case the Electricity
Generating Authority of Thailand. A large portion of this energy comes from natural gas reserves, and is supplemented by subsidizing energy from neighboring countries. Thailand has a vast hydroelectric potential, but it will require fairly substantial investment to construct the necessary dams and power stations to harness the resources.
The ratings assessment is based on an analysis of both current and future states of the market, with
Malaysia rating highest as a 2.0, Indonesia a 1.75, and
Thailand a 1.25.
Malaysia’s strength lies in a combination of its strong current infrastructure system and the high potential presented with the relocation of
Maersk and the Trains-Asia-Rail Link project. Indonesia was discounted slightly due to their current situation, which simply isn’t as strong as Malaysia, however garnered significant support for the potential of their new Sea Toll Road project, as well as the large scale governmental commitments and initiatives. Thailand offers solid initiatives and potential projects, however there are concerns as to the over feasibility due to their more lacking current infrastructure situation. In the end, it represents too much of a risk, relative to the other two markets.

Technological Readiness
Technological Readiness represents the second evaluation risk in the market portion used to assess the three emerging Asian markets. The measurement assesses a market’s technological availability, particularly telecom, as well as its willingness to “adopt existing technologies to enhance the productivity of its industries.” (Competitiveness Report 2015) A key point to this assessment is to understand that while a particular market may not have developed the technology, the ability for global firms to have access to the necessary infrastructure to implement technology is what is being measured.
Indonesia's telecom in anchored in two state owned telephone companies, Indosat and Telkom. Both companies are financially and operationally healthy, however they are facing pressure to privatize the sector. Indonesia especially, due to geographic footprint, has seen a boom in wireless demand versus fixed line service. Both Indosat and Telkomsel (Telkom
Subsidiary), as well as XL Axiata, currently provide 2G and 3G network services.
There are significant investment opportunities in meeting the 4G network demands, as a substantial investment will need to be made in towers, equipment and inter-island cabling, as well as in building and running the data centers. A strong example of Indonesia’s push towards a more advanced technological environment is evident in
Surabaya: “Surabaya’s mayor, Tri Rismaharini, wants to use telecoms infrastructure to help transform her city into a “smart city,” one in which an interconnected IT framework supports everything from government administration to traffic control and even crime prevention.” (Cosseboom 2015)
The Malaysian government also has an active hand in their technological capabilities progress and has been productive in the development of satellite communication networks as well as the Internet.
Telecoms in Malaysia saw an impressive expansion in the decade following the successful privatization of the government telecommunication department, and were also aided by an inflow of private investments. The MSC
Malaysia program, formally known as the multimedia super corridor, is a highly ambitious development initiative with the goal of “attracting world-class technology companies while grooming the local ICT industry” (MSCMalaysia 2013). This project, set in motion by Prime Minister Mahathir Mohamed in
February of 1996, aims to establish a “Malaysian Silicon
Valley,” 15 kilometers wide and 50 kilometers long, including construction of 2 technologically-forward smart cities.
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In the technology sector, Thailand’s main providers are AIS, DTAC and Truemove. By far the biggest development in Thailand, as it pertains to telecom, has been the movement towards its “digital economy.” On the telecommunications front, Thailand has experienced some difficulties modernizing the sector (prospectus group). Much of this is due to geographic issues and the long time governmental control over telecoms, however there has been a recent push to partner with the private sector to hopefully spur on progress. Thailand plans to invest 275 million towards improving the nation's telecom infrastructure as part this strategy, and there have been 8 proposals to strengthen the movement. It will be valuable to reassess their progress around 2020, the theorized point at which Thailand will be highly digitized, negating much of the geographic issues. The government aims to double Thailand's internet-connected population to
40 million users by 2018. (Budde2016)
Indonesia boasts a well-established telecom system and a strong desire to push towards evolving into a tech attractive country, most notably illustrated with stated goals of establishing smart cities.
Additionally, they have a population that is very open and adaptive to new technology, resulting in the strongest score of 2.0. Malaysia has a marginally less favorable current situation, requiring more foreign commitment to reach full potential. With that said, their sights are set very high with the MSC project, which if fully recognized, will prove highly fruitful for the market. This potential is reflected in their 1.75 score. Thailand has lagged some on the telecommunications front, and were scored as such; a
1.15.
Labor efficiency
Labor efficiency is the third pillar in the market risks portion of the model, measuring the availability and efficiency of the labor force. This measure is also a good indication of the quality of the labor force, as it pertains to skill and education. If a market has an efficient labor force, that indicates that there are workers available and they’re being deployed in an effective capacity. An additional component of labor efficiency is how flexible the workforce is. The most efficient labor markets can shift its workers from one activity to another at low cost, as well as to allow for wage fluctuations without suffering major social disruption. The Indonesian labor force took an extreme hit during the economic crisis of the late 90’s, and while they have recovered, they are still underperforming compared to neighboring countries.
Additionally,

Indonesia has severe shortages of skilled labor due to the outward migration of skilled workers, an ageing workforce or simply the lack of capacity to provide training (ILO 2015). The Indonesian government, in a gesture to ensure the long term competitive landscape, has promised increased spend on human resource development. The initiative aims to help educate skilled workers further to create a more flexible and agile workforce. Nearly 47% of the 110 million person workforce hold a primary education level or lower. A secondary initiative, the Biaya Operasional Sekolah
(BOS) Program, aimed at the fortifying lower level education, was launched in 2005 to keep students in school and give those more educations tracks, affording more career options.
As with Indonesia, Malaysian business operations and growth have been seriously handicapped by an inadequate labor force. The country suffers from a shortage of skilled workers, weak productivity growth, stemming from a lack of creativity and innovation in the workforce, and an over-reliance on unskilled and low-wage migrant workers (National
Economic Advisory Council 2010). The 10th Malaysia
Plan represents one of the more bold actions taken by the government to combat the issues at hand. The plan details “an integrated human capital and talent development framework which streamlines the major policy measures introduced in various initiatives”
(OEDC.org). Roughly 60% of the Malaysian workforce has not been educated based a secondary level, and
15% had only a primary education or no formal education at all, an issue recognized by the government. In response, The Malaysia Education
Blueprint 2013-2025 was launched in September 2012 as the latest initiative to transform the education system into one that produces thinking and innovative students to meet the needs of the new economy.
A recurring trend amongst the 3 markets,
Thailand too struggles in the Labor efficiency department. Thailand faces impending labor and skills shortages due to ageing demographics and shortcomings in the qualifications of the workforce (ILO
2015). There is willingness among the labor force to pursue technical schooling however, Thai government has expressed increasing concerns regarding the mismatch between the skills imparted by the Technical and Vocational Education and Training (TVET) system and those required actually required in the workplace.
In response, Thai government has adopted a strategy of narrowing the gap through entrepreneurship education and adopting regular capacity building programs to

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foster stronger links between TVET institutions and society. The Malaysian labor force was the strongest of the three markets; however each has significant potential for improvement. Malaysia’s 10th Malaysian
Plan will provide a tremendous boost to their human capital development along with their Malaysia
Education Blue Print, which encourages the embrace of creativity and the entrepreneurial spirit. As such, they weighed in with a 2.0. Indonesia was close behind with a 1.8, reflecting their governmental commitment to growth and development, through their BOS program and through increased human resource funding.
Thailand once again was lowest on the paradigm, with a score of 1.15. Their government needs to take significant steps to make this labor force competitive with the region.
Defense Needs
The defense industry, as it pertains to emerging markets, requires an establishment and/or expansion approach. The countries must have the resources and capabilities to monitor and defend the global trade routes running through their geographic locations, particularly the straits of Malacca and Singapore. The
Strait of Malacca stretches from the western corner of
Malaysia to Bintan Island on the tip of Indonesia. This water pathway is one of the most traveled on the globe and has become a popular target for piracy in recent years. These countries must also be able to defend themselves from other threats such as global terrorism, notably ISIS, and the rapid growth of other regional military forces, for example, China.
Indonesia’s 2015 defense spend is forecast to approach $7B or $27 per person, accounting for less than 1% of GDP. Indonesia has the fourth largest population in the world, of which 42% is considered, fit for military service, with approximately 4.5m citizens reaching military age each year (GFP 2014). Between
2001 and 2014 Indonesia has increased its defense spend by almost 700% and this is expected to continue with defense spend in 2020 predicted to be in the $15B range. Indonesia is home to almost 60,000 kilometers of coastline and borders the global ocean highway from the Strait of Malacca to the Strait of Singapore on one side. Indonesia’s naval defense infrastructure is quite deficient for a country with so many coastlines to defend and so much daily commercial traffic. The
Indonesian navy currently has zero destroyers or aircraft carriers, just two submarines, and only 21 coastal defense craft.
Further highlighting their deficiency, Malaysia has 35 coastal defense craft for only 4700 km of coastline.

With Indonesia’s military & defense outlook however, it couldn’t be a more attractive market. The
60,000 kms of coastline offer the opportunity for a defense organization to implement high tech monitoring systems that appeal to both the functionality and the high tech capabilities that
Indonesia is seeking. Indonesia is strategically situated at middle of the Strait of Malacca Pathway, making a cornerstone piece of the defense of the maritime traffic passing through. As piracy continues to be an issue, the necessary steps to solidify these trade routes will only further strengthen Indonesia’s potential as a marketplace. The Indonesian government often references its devotion to increased military spend promising to double the 2016 defense budget if the economy surpasses 7% growth in 2015 focusing on naval and air force improvement. A driving factor contributing to the desire to double spend is Indonesian president Joko Widodo pointing out that Indonesia cannot even successfully control its own waters (10). As of July 2015, it had grown 3.21% so there is a way to go in the second half of 2015 to achieve that aggressive growth target (Trading Economics 2016).
In 2015, Malaysia spent $4.7B on defense or
$153 per citizen. 40% of Malaysia’s population is considered fit for military service and 500,000 citizens reach that age group per year (GFP 2014). Malaysia has invested large sums in its infrastructure in recent years and wants to leverage this to increase domestic involvement in defense actions by procuring local industry resources. This strategy not only boosts the domestic economy, but also increases the military expertise of the Malaysian workforce. Malaysian defense group Boustead Heavy Industries has a contract in place with French naval contractor DCNS to spend
$2.8B on 6 coastal combat ships. The ships will all be built in the coastal town of Lumuk, the home base of the Royal Malaysian Navy, supporting the Malaysian defense goal of strengthening its maritime abilities.
Recent budget cuts and corruption issues have jeopardized some of Malaysia’s defense goals. One of their top priorities is to replace their ageing Russian
MiG-29 jets with 18 modern fighters. The presence of higher technology and faster fighter jets, coupled with the expanded naval roster, will help combat both the piracy in the Strait of Malacca and China’s aggressive activities in the South China Sea, which Malaysia shares a border.. Malaysia has also committed to purchasing four Airbus Military A400M cargo planes. Malaysia’s low defenses spend makes growing their military difficult, and as such, both the army and navy are currently lacking. The Malaysian military is expected to
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start pushing for more defense funding in 2016 (Menon
2015) but that is less likely to be granted as the corruption scandal against the current prime minister plays out. The Ringgit is weakening and the Malaysian economy’s growth is slowing; a military area of concern as the defense budget is directly tied to GDP.
Thailand projected a spend in 2015 of $5.4B on defense in 2015, which translates to $80 per Thai resident, 41% of whom are fit for military service with over a million residents entering that age range annually. Thailand’s defense budget is on pace to comprise 1.5% of GDP, below the Southeast Asian average of approximately 2.2%. The Thai government spent 6.6% of its reserves on defense while the regional average is closer to 9% (CSIS 2014). The 2016 Thai defense spend is expected to increase by almost $1B.
Currently, Thailand’s army has over 2600 armored fighting vehicles to protect its 198m square miles of land mass, this is double the amount of Malaysia who is comparable in size.
In 2015, Thai Prime Minister Prayut Chan-o-cha, a former Royal Thai Army officer, was quoted saying “If we don’t increase the (defense) budget and purchase new weapons, then nobody will fear us”. Most of
Thailand is not directly exposed to the coastline; however Southern Thailand sits on the Gulf and as a result, is exposed Southeast Asian pirates. Thailand has been the location of several terrorist attacks in recent years, such as the 2012 bombings in the Southern Thai town of Yala resulting in 13 casualties and over 350 injuries. Piracy is not as common in Thailand's waters as it is between the straits of Singapore and Malacca but during 2013 and 2014, four Thai tankers were victim to pirate attacks while traversing that pathway. (CNBC
2014)
Indonesia is top ranked in this category due to the tremendous aggregate potential of their strategic location along the Straits of Malacca and Singapore, large defenses spend commitment and desire for high tech capabilities.
Additionally, the Indonesian government has raised the optic level of their defense issues, reinforced with their nearly 700% increase in defense spending. These facts, coupled with their existing force, scored the market a 2.25. The most major detractor from Malaysia’s score, resulting in a
1.65, was the lingering effect of the current governmental scandal.. While they possess lucrative defense contracts and a desire to continue to push forward in their expansion, there are doubts as to the speed in which spending will take place as the scandal continues to unfold. Thailand rounds out the three with a 1.10, illustrating their less committed defense spend,

even though their physical military footprint is larger than others in the region. There are simply more pressing issues for the market.

Economic Risks
Economic growth is a critical factor when evaluating the past state of an economy as well as future potential and is a good indicator of what the return could be. While past GDP growth is important future projections play the largest role in investing significant amounts of money into infrastructure or a country. Economic growth is tied directly to the investment of a defense company because all the countries studied have defense spend at a fixed percentage of their GDP, resulting in a positive correlation between growth and governmental defense spend. This speaks volumes to a defense company wanting to negotiate a contract with the government, not only in ensuring payment but also in forecasting future defense contracts.
According to the 2015 - 2020 Global Economic
Outlook by AT Kearney, emerging economies around the world will experience substantial growth. This fact is also supported by the 2015 Nielsen review of ASEAN nations which points to an important fact that the middle class in this region is expected to more than double in size over the next 4 years. This points to the purchasing power of the citizens of a country and supports the strong economic growth on the horizon
(Leggett 2015). As the economy of these countries continues to grow, so will the level of competition between them, as countries constantly strive to find a new competitive advantage.
Indonesia’s
president has expressed commitment to grow many facets of the Indonesian economy with defense spend doubling to 2% of GDP from its current state of less than 1%, some of the lowest in Southeast Asia (Abuza 2015). This will not positively impact Indonesia’s defense capabilities unless the economy grows as a whole, which has been the case and is projected to continue moving forward. AT
Kearney has forecasted moderate to strong growth for the Indonesian economy through 2020 and the Nielsen study of ASEAN crowned Indonesia as the most confident nation in the World with a projected economic growth of 6.4% through 2017. As discussed in the Market Risk section, Indonesia is investing in its infrastructure, labor force, and is already very technology friendly; all metrics that further solidifying the future growth forecast of the Indonesian economy.
Its geographic location on the Strait of Malacca also puts Indonesia in position to continue to grow their exports, mainly silk, which is up 705% since 2010 and is
7|F D I in S EA Emergi ng Ma rke ts

a key part of the textile industry, Indonesia’s third largest. Agriculture and mining are the two largest industries. Oil, Indonesia’s current top export will continue to provide the economy with consistent revenue, as it generated over $50B in 2014. As the defense presence in the Strait of Malacca continues to fight the battle with pirates earning a living through siphoning oil, this will only grow (McCauley 2015). The factors, primarily the positive growth going forward and the rank of most confident country in the World, contributed to Indonesia’s rating of 1.95.
Malaysia’s economic growth was not rated highly in this analysis model despite AT Kearney rating it as high growth and Nielsen providing a 5.2% growth forecast through 2017. Both studies were published before the 1MDB scandal was exposed. The Malaysian
1MDB scandal is a July 2015 corruption probe surrounding Malaysian Prime Minister Najib Razak stealing approximately $700M in funds from the
1Malaysia Development Berhad (1MDB) fund (1MDB
2015). The 1MDB fund’s goal is to increase foreign direct investment to strengthen Malaysia’s long run economic prosperity via global partnerships and strategic initiatives. 1MDB is also under scrutiny from
Malaysian investors as it has over $11B in debt, much of which is owned by foreign investors (1MDB 2015). The
Malaysian Government is cooperating with the investigation investigators but this scandal could have a potentially negative impact on their economy. A development setback, which would point foreign investors’ dollars elsewhere, is one possible externality.
AT Kearney rated both Economic Performance and
Regulations & Governance the highest for Malaysia, but both will likely be negatively impacted by this scandal.
This is unfortunate for Malaysia whose economy has strengthened from positive investment leading to improvements in infrastructure. The looming scandal could negate this economic growth, simultaneously lowering defense spend as it is a percentage of GDP.
Much of the $11B debt owed in this scandal, almost 4% of 2014 GDP, will likely fall on the Malaysian government. Malaysia is also a large exporter of oil, which has grown 10% in the last five years (OECD 2015) and should continue to support the economy as
Malaysia produces upwards of 700k barrels a day.
Similar to Indonesia oil exports, Malaysia’s are linked to defense spending further, as oil piracy is responsible for billions of dollars a year from the global economy and this could end up hurting Malaysia's economy if the final sale is not completed. The Malaysian economy currently operates with a trade deficit but this could change as the country is becoming more innovative.

The aforementioned investment in the Malaysian workforce will continue to provide a partial offset to any negative result of the 1MDB scandal. The volatility, even if short term based, drove Malaysia’s economic growth rating of 1.10, the lowest of the three.
Thailand’s economy is expected to grow at almost 4.7% through 2017 according to Nielsen and it’s projected to be moderate from AT Kearney. While 4.7% is the lowest forecast economic growth of the three countries studied it is still impressive for Thailand as their economy grew less than 3% from 2008 to 2012. This speaks to Thailand's ability to overcome adversity, as those years of growth are on the tail end of the global economic crisis and December 2004 Thailand tsunami.
Nielsen has pegged Thailand as the 7th most confident nation in the World. The economic growth for Thailand is very beneficial for their defense industry, as well as the fact Thailand’s defense budget is only 1.5% of GDP, but has a strong desire to increase driven by the government. Vehicle exports are growing rapidly, up almost 65% since 2010 and continued to grow as automotive powerhouses such as BMW, Ford, and
Honda are investing in Thailand. Thailand’s projected growth rate and high confidence rating were driving factors in its score of 1.95. It has a lower confidence ranking than Indonesia but Thailand's ability to bounce back from two significant economic events is important.
The 2014 GDP per capita in Indonesia is just over $3500 which is the lowest of the countries studied. Indonesia is home to almost 250 million people boasting the
World’s fourth largest population, a fact that no doubt contributes to that low GDP per capita. Malaysia’s 2014
GDP per capita is $10,547; the highest of the countries studied by far, with Thailand’s a little more than half of that at $5,674. This proves useful when comparing the performance of countries to one another but should always be further investigated. For example, Malaysia’s
GDP per capita is the highest but that is mirrored by poverty rate, with almost 40% of Malaysians living below poverty according to the standards used by the
United Nations. In comparison, 13% of Thai’s, and 11% of Indonesia's live below poverty standards. Nielsen’s aggressive forecast for growth of the middle class in
ASEAN markets will increase competition and further help to stimulate the economy, simultaneously leading to growth of this metric. GDP per capita ratings were derived using an allocation based on each country as a percentage of the group.
Forex
Forex rates are important metrics to evaluate when determining FDI. Currency correlations versus the
USD dating back to 2011 were analyzed and taken into
8|F D I in S EA Emergi ng Ma rke ts

consideration when reviewing long term economic and forex forecasts; both significant data points used to predict future ROI. Looking at past forex correlations with a currency and taking that into consideration with long term forex and economic forecasts are significant factors to estimate future ROI. The strengthening of a currency often runs parallel with economic growth and from a profitability standpoint, an investment will often increase in value reflective of the trend.. When a multimillion dollar investment is made, even a small currency appreciation can raise profits. This increase is also important for defense companies to take into consideration when drawing up defense contracts. The time that certain payments are due and the possibility of a variable rate coming into play can have the same effect. Since 2011, all three currencies vs USD have been relatively correlated; all growing at a steady pace with Thailand and Malaysia showing the sharpest appreciation vs USD in 2015. According to eFX news report from HSBC, the three currencies are not expected to be too active in 2015 through 2020
(eFXnews 2014). Thailand and Indonesia’s currencies are expected to depreciate a slightly, with Malaysia’s
Ringgit is growing slightly in the report. Again, this was published before the 1MDB scandal was uncovered in
July 2015, which will likely cause depreciation. When evaluating the aforementioned currency depreciations, it is important to note that these do not necessarily correlate with a bad investment decision. The USD is expected to continue to appreciate until 2020, which often has a weakening effect on other currencies, developed and emerging. Indonesia’s strong forex vs
USD rating of 2.25 is driven by its growth vs USD since
2011 of 36% coupled with a relatively flat forecast through 2020 as the nation undergoes infrastructure and other transformations. Malaysia’s Ringgit vs USD is rated 1.70 and has grown 27% vs the USD since 2011, but the biggest negative factor is the unknown, but likely negative impact, of the 1MDB scandal on the
Ringgit versus all currencies.
Given this new information, the economic and foreign exchange forecasts published before July 2015 are no longer reliable. The Thai Baht has grown 17% vs USD since
2011 and is also predicted to rise and fall in 1% increments through 2020 contributing to its rating of
1.05.
Political Climate
Emerging economies are attractive investment opportunities as the return can often times be substantial. One of the main struggles companies of all sizes have encountered during the process of expanding into, or doing business in emerging markets, is the high

frequency of bribery and fraud. Most notably, the subsequent damage this can have on market’s reputation. Regulations often change very rapidly and also can differ depending on where in the country you are attempting to do business. In 2015, Harvard
Business Review studied 150 North American/European based companies with revenues of more than $1B that were surveyed on expansion into emerging economies.
Since 2010, 83% of those companies experienced significant losses and regulatory losses were the most frequent at 44%, but bribery and fraud were the costliest. As FDI is contemplated in these countries, it is important research a great deal on how business is conducted and be prepared to walk away if the only way to succeed is to engage in corrupt business practices. Taking the FDI and using it to also benefit the economy, such as an infrastructure investment, is a way to combat this corruption, as the business can supplant itself as a part of the economy that favors growth of the country. While it is more expensive in the short run, investments in the country and its residents lead to longer term success and, as explained earlier, strengthens the company's reputation and leverages the power to bypass corruption. Increasing the awareness of the markets being invested in in will also help to alleviate this situation.
Corruption is widespread in the countries studied for this paper.
The most notable is aforementioned July
2015 corruption probe surrounding Malaysian Prime Minister Najib Razak, accused of stealing approximately $700M in funds from the 1Malaysia Development Berhad (1MDB 2015) fund; a fund structured to increase foreign direct investment to strengthen Malaysia’s long run economic prosperity via global partnerships and strategic initiatives.
Indonesia also experiences a high frequency of corruption, notably bribery in the public sector, which is a red flag for foreign investors. The most common issues occur when companies are attempt to secure entry or permits. Difficulties surrounding taxes, such as
VAT or frequent changes to tax policy, also cause multinationals problems, and cash payments are often required. This is only escalated by the aforementioned high number of permits, needed before starting business in Indonesia. The corruption is intensified by mediocre anti-corruption laws and the lack of optics surrounding what qualifies as actually being corrupt.
While there are laws in place against corruption and bribery, many officials do not believe what they are doing falls within those parameters, further highlighting that lack of education is part of the problem for
Indonesia (UNODC 2014). The actions by individuals
9|F D I in S EA Emergi ng Ma rke ts

and groups in their personal nature have negatively impacted Indonesia’s competitive advantage. Further compounding the problem is the overall lack of resources available to Indonesian regulatory agencies to investigate and resolve all instances. (UNODC 2014)
Thailand has also been impacted by corruption, going so far as to establish a national organization, The
Anti-Corruption Organization of Thailand, to combat it.
Despite legal framework in place and the threat of capital punishment for both domestics and foreigners, corruption and bribery are still commonplace in the
Thai public and private sectors (Thai Anti-Corruption
2012). This legislation makes corruption a capital offense but that penalty has not yet been issued.
Malaysia’s political climate was rated 0.65. The current scandal surrounding the Malaysian Prime
Minister supports this rating well. If the leadership of a country cannot be trusted how can the officials below them? This is a larger red flag for potential investors when consideration is paid to the fact that he has also not been asked to step down. It would not be prudent for a defense, or any company or investor, spend significant money in Malaysia at this current time.
Thailand is rated 1.85 as regulations, per AT Kearney, will likely stay in the moderate through 2020 pointing to no notable changes. While Thailand has recognized corruption as a problem and also has an established task force, it appears to have been put in place to mostly as a scare tactic. Indonesia was awarded the highest rating for the political climate, at 2.50.
Corruption is a problem in Indonesia and the government is working to combat it. The KPK,
Indonesia's anti-corruption agency, has a favorable track record, but needs to grow to absorb the volume of cases. Bribery needs to be taken into consideration, but a foreign investor this is the case in all Southeast Asian countries. Indonesia has also recognized that law enforcement needs to be more education on corruption and is exploring that investment.

Discussion and Implications
Whichever country selected for FDI, it is important for the company to choose their entry strategy wisely. Southeast Asia is a very profitable region, but results have shown that this process requires a long term strategy.. Many companies have suffered losses numbering in the hundreds of millions because of incorrectly entering into emerging markets.
Bribery and corruption, as well as rapidly changing regulations, must be avoided. When a multinational is entering into these markets, investing in the country, whether infrastructure or sourcing local labor, has proven beneficial to the reputation. It is more

expensive in the short run, but it is a direct investment that pays for itself, as the company is simultaneously improving the economy of a country it is relying on for future profits. Forcing your way into an economy to try and make fast profits is not a successful entry strategy with emerging markets. This should be taken into serious consideration by any company wishing to enter into a Southeast Asian market and capitalize.
The market recommendation to a defense company looking to make an investment in one of the
Southeast Asian markets analyzed is Indonesia. The recommendation is based on several factors. The first is that the Indonesian government is committed to building out their infrastructure in a substantial way, as displayed by President Widodo’s pledge of $429B to advancing infrastructure. Indonesia is also exceptionally committed to technology adoption, so in the arena of technological readiness, Indonesia is certainly trending in the right direction. Supplementing the infrastructure and technological readiness is the availability of a strong workforce. Indonesia boasts a young and flexible workforce consisting of high adopters of technology as evidenced by 115 cell phones per 100 people.
Indonesian citizens and the government appear willing to adopt the necessary technologies to allow for organizations to efficiently establish themselves within the marketplace, continuing to the opportunity growth in the area. While not the most skilled labor force,
President Widodo is also looking to grow the workforce, and has noted that that they intend to invest in the
Indonesian workforce for the foreseeable future. This will only continue to add value to the labor force by diversifying the skill sets they have to offer.
Indonesia’s coastline offers the opportunity for a defense organization to come in and implement high tech monitoring systems that appeal to both the functionality and the technological love that Indonesia is seeking. They are also dead in the middle of the Strait of Malacca Pathway, making them a cornerstone piece of the defense of the maritime traffic passing through.
As piracy continues to be an issue, taking matters to solidify these trade routes will only further strengthen
Indonesia’s potential as a marketplace.
As the government looks to the future to grow the aforementioned facets of the Indonesian market,
Indonesia’s economy is poised to also grow. Indonesia was recently voted the most confident country in the
World by Nielsen’s and has a positive economic forecast looking forward; a key metric as defenses spend is a percentage of GDP. While the Indonesian Rupee is forecast to perform relatively modestly versus the USD in the coming years it is not expected to suffer a rapid
10 | F D I i n S E A E m e r g i n g M a r k e t s

depreciation. Similar to all Southeastern nations
Indonesia is a corrupt country but the government is both aware of and working to fix this.
In our FDI model Indonesia’s score of 1.92 is the highest and is in line with our findings. The Market Risk score was 1.08 and the Economic Risk score was 0.85.
The scores are calculated by taking the rating of each risk multiplied by its assigned weight.
Malaysia was given consideration as it has made significant infrastructure improvements over recent years, mainly its highway, rail, and port networks. It is also a start-up friendly nation with easy requirements for a company to enter. Malaysia’s Market Risk score was the second highest at 1.85 driven by a rating of
2.00 for its infrastructure and educated workforce. The
Economic Risk score, on the other hand, was the lowest at 1.50 with most factors scoring the lowest because of the 1MDB scandal. The economic and forex troubles that the future likely holds is bad for a defense investment as defense spend is tied to GDP, but also corruption has permeated to the highest level of
Malaysian government. When these risk factors are paired with Malaysia recently contracting with several global defense contractors, such as DCNS to strengthen the navy at a key port, the risk does not outweigh the potential return from investment in Indonesia.
Thailand was not chosen as a desirable emerging market to enter into at this time mainly because the return on the investment will be less when compared to neighboring economies. Indonesia, for example, is in a similar position from an infrastructure standpoint, has frequent instances of terrorism, and also has very drawn out business entry processes.
Thailand has its defense needs, such as increased naval presence and counter terrorism efforts, but the threats are not as great and the money is not there. Thailand's defense spend as a percentage of GDP is lower than the
Southeast Asia average and compounding th0at is their
GDP has been declining for the last 2 years, hurting foreign direct investment and simultaneously shrinking the defense budget. Thailand scored the lowest at
1.38, and while it had the second highest Economic Risk score, 1.62, the Market Risk score was 1.19, the lowest by 0.66, driven in part by the lowest defense need of the countries analyzed at 1.10.

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