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Not far from the borders of China, the nations of a rapidly emerging region are vying for the title “next economic superpower”–or at least for a big piece of the global economic pie.
The neighboring countries’ proximity to China offers an inroad to the giant and makes them a logical next destination for foreign investment. Sizeable populations, cost efficiencies, industrious workforces and attractive government incentives bolster their appeal, but with youthful promise comes risk.
Vietnam and Indonesia have huge potential, but to fulfill it they must continue to address concerns over, respectively, an insecure economy and tremendous legal uncertainty. Thailand and the Philippines have in recent years seen continuing political strife that breeds economic uncertainty. Even in Malaysia, where doing business is comparatively simple, protectionist laws mean that for U.S. companies, it’s rarely business is usual. Only Singapore, where the business and legal landscapes approach U.S. standards of ease and consistency, rates an unqualified endorsement from legal experts who specialize in the region.
InsideCounsel has consulted with these experts to distill the promise that drives each of the countries forward and the challenges that could temper their potential success. What follows is an overview of six countries on the forefront of the race to emerge from China’s shadow.
Singapore: On the Fast Track
In late September, Singapore’s soaring skyscrapers and gleaming neon signs provided a dramatic backdrop for the first-ever after-dark Formula One Grand Prix, momentarily transforming the tiny island nation into a playground for the jet set.
It was a coming-out party of sorts for the undisputed belle of the Southeast Asian economic ball. While widely hailed as the perfect location for global businesses to headquarter their regional offices, Singapore has struggled to overcome an image of social conservatism. So its success at hosting the hard-partying F1 fans accelerated the government’s plan for making Singapore a destination for well-heeled tourists as well as global business leaders.
The cultural conflict inherent in this plan is reflected in the euphemistic labeling of the country’s first casinos as “integrated resorts.” Now under construction, the two gambling-hotel-entertainment complexes will employ 30,000 to 40,000 people, according to Joyce Tan, founder of Joyce A. Tan & Associates, a Singapore law firm.
“Singapore is undergoing a reinvention,” Tan says. “Things that were taboo in the past, such as the whole idea of having a casino, which was an absolute no-no, are now underway. It reflects a totally new nation in terms of style and a maturing of confidence to say, ‘Yes, we can handle casinos.’”
In a region where competition for business is stiff, this willingness to change reflects the Singaporean government’s determination to remain on top. The country, which gained independence 43 years ago, has overcome stifling disadvantages to get there. The entire nation has a landmass slightly smaller than New York City and a million fewer people than metropolitan Chicago. It is virtually bereft of national resources.
Initially Singapore’s economic base was manufacturing, but it couldn’t compete with its labor- and resources-rich Asian neighbors. So Singapore turned to high-value enterprises by cultivating a reputation for world-class facilities and tempting financial incentives. For example, in 2003 the government created the Biopolis, which houses government research institutes and has attracted multinational bio-tech companies. And by making it simple for companies to move people to Singapore and conduct business there, Singapore has established itself as Southeast Asia’s headquarters city.
The country’s Economic Development Board (EDB) makes relocating from New York to Singapore as painless as moving to Atlanta. Obtaining an employment card is simple, and the EDB will help expatriates find office space, staff, housing and even schools.
“The EDB has divisions to help you and your spouse and children settle down,” Tan says. “They take care of the details so you can concentrate on running your business.”
It doesn’t take long to get the business started either.
“You could set up a company in a day,” says Gerald Singham, partner in Rodyk & Davidson, a Singapore law firm. “It costs only US$250 to register a company, and a company can be 100 percent foreign owned. The only requirement is that one
director must be a Singapore resident.”
The Singapore and U.S. governments have close ties and signed a free trade agreement in 2003. U.S. in-house counsel will be similarly comforted by Singapore’s transparent legal system. Intellectual property laws are the best in the region. And
the Companies Act that governs business law is similar to those in Canada and Australia–certain aspects reflect a hybridization of English and U.S. corporate law, according to David Eich, partner at Kirkland & Ellis’ Hong Kong office.
“From the perspective of people doing business in Asia, Singapore has a strong reputation for clear rules and transparent, reliable tribunal decisionmaking and government regulatory regimes,” Eich says.
The country also offers one of the lowest corporate tax rates in Asia–18 percent–and large companies may enjoy a reduction as an incentive to locate in Singapore. It boasts a modern telecommunications and transportation infrastructure, an English-speaking population with a strong work ethic, and a reputation for being corruption-free.
“Singapore is terrific,” says Dennis Unkovic, partner in Meyer, Unkovic & Scott. “There is no corruption, it’s squeaky clean. They have good lawyers, they have water, they have energy. Singapore works. So there really isn’t much downside
to Singapore, except it’s expensive.”
That cost factor primarily comes from two sources: real estate and labor. The influx of global business operations has pushed office rental rates “through the roof” in the past 18 months, Tan says. And Singapore’s small population has created a worker shortage that keeps wages high–on par with the Midwestern United States.
With nearly a quarter of the population comprised of what locals call “FTs”–foreign talent–and 7,000 multinational companies, Singaporeans are used to differences in cultural style.
“Singapore is a cosmopolitan community,” says Mark Katz, general counsel of Singapore-based First Oriental Investment Holdings Corp. “People are used to the directness of Americans. They won’t be shocked by Americans wanting to get down to brass tacks quicker than Singaporeans would. That’s one of the reasons why it is a comfortable place for Americans to go.”
As for Singaporean traits, Katz says business will be smoother if Americans take the time to establish respect and trust. He adds that Americans are often frustrated by Singaporeans’ inability to think outside the box.
“People in Singapore succeed in their studies if they follow the rules and master the information given to them,” Katz says. “As a result, they sometimes lack imagination and comfort with cutting through procedures the way American lawyers do.”
And although Singapore is home to 160 private equity funds, a cultural disconnect can impede deals, according to Eich. “Culturally, there is a risk aversion that does not make it the most entrepreneurial place,” he says.
But, Tan points out that the propensity of Singaporeans for following the rules has its advantages for foreign business partners, too.
“The rule of law mentality does prevail in business,” she says. “People do care about inking a document, and they expect it to be enforced. It’s not a culture where you can sign a contract today and tomorrow do something else.”
Vietnam: Overheated Economy
The streets of Ho Chi Minh City today might stun a middle-aged American who grew up with images of a destitute communist nation battered by a brutal war with the United States. Today, Vietnam’s youthful population–more than 60 percent under 35 years old–is fueling an economy that grew 8.5 percent in 2007, the same year the Ho Chi Minh Stock Exchange doubled its value. The Vietnamese are eager consumers of western goods, spurring an influx of U.S. companies, which find both a growing market and an entrepreneurial spirit in the country.
“In Vietnam today, there is very little memory of the war,” says Khoa Do, a partner at DLA Piper. “The populationis young, and the Vietnamese admire Westerners and embrace capitalism. Ho Chi Minh City, for example, is full of U.S. household names such as Coca-Cola, Intel, eBay and Yahoo.”
But recently Vietnam has found itself sharing more with America than brand names. Rising global prices of food and oil and a speculative real estate bubble at home wreaked havoc on the country’s economy this year. By May, Vietnam’s trade deficit already had surpassed by $3 billion its total 2007 trade deficit.
Year-to-year inflation reached a 17-year high of 28.3 percent in August before falling only slightly in September. And the Ho Chi Minh Exchange, once wildly successful, fell 68 percent and saw trade activity plummet as the economy’s growth slowed to 6.5 percent.
Yet despite all this, Vietnam remains firmly on the foreign investment radar. Against all odds, foreign direct investment in the country is actually up 37.3 percent this year, with some massive projects in the iron and steel, oil and gas, and real estate sectors that make up for fewer projects overall. And experts believe the crisis has begun to subside as prices come back down to earth following government measures to control inflation through credit restrictions and higher interest rates.
“I think Vietnam will prevail as one of the obvious picks for foreign direct investment with regard to emerging growth companies,” Do says.
In the technology sector, Vietnam is already an obvious choice for many multinationals. Moving forward in Vietnam this year despite inflation are projects from giants such as eBay, Sun Microsystems, Samsung, Canon, Fujitsu and Intel, which plans to open its $1 billion assembly and testing facility next year–all part of the government’s announced goal to double or triple technology revenues by 2010 and for technology to become “a main driver of the nation’s socioeconomic development” by 2020, employing 500,000. The government has offered tax incentives and more procedural efficiency, with promises to improve laws governing the sector.
“The government has been able to clear some of the logjams in terms of individual income tax and bandwidth in terms of infrastructure and other constraints that we’d been facing in years past,” says Fred Burke, managing partner of Baker & McKenzie’s Vietnam office. Burke is chairman and a member of the prime minister’s Advisory Council on Administrative
Reform and chairman of its legal committee.
But obstacles remain in the legal and regulatory codes. The WTO approved Vietnam as a member just two years ago, and in the years running up to accession, the government rushed to put its legal code into order. To give an idea of the scope of the undertaking, Vietnam didn’t have a formal civil procedure code until 2005. Other existing laws had to be adjusted to comply with WTO rules.
The speed with which some laws were updated resulted in a number of unstable laws. The major laws governing foreign and domestic investment and business establishment and licensing remain unclear and untested on any significant level. And while venture capital and private equity deals are growing in popularity, Vietnamese law must evolve to accommodate them. “It takes a lot of creativity and patience,” says Do. “But I think the rough patches will work themselves out over time.”
The good news is that the government has been open to consultation on business issues and is committed to making things easier on foreign investors. Tran Thi Thanh Ha, a Baker & McKenzie partner who worked on Vietnam’s Civil Procedure Code, says, “The court system is open to advice for improvements to respond to the needs of society.”
Real Estate Woes
The other recent hurdle to business growth in Vietnam is the stress that rampant inflation has put on the economy.
“It’s really put the brakes on some of these projects that are having to go back to the drawing board and cut costs by either cutting out part of their plans or stalling the project,” Burke says. “[Many projects] seem to be going as planned, but I do hear rumblings that there are really unprojected cost overruns that [some companies] are going to be facing due to the inflation and construction prices.”
Still, the real estate market continues to be a hot area for foreign investment following a 2007 decree that allows foreign investors to own land for 70 years with unlimited renewals–previously they were allowed only 50-year leases. While demand for construction materials and services remains high, land prices have come down thanks to the government’s efforts to control credit.
“Nine months ago, it was a huge problem for these companies coming in to set up industrial zones,” Burke says. “[Clients were complaining], ‘The price of rent goes up every 45 minutes.’”
While growth continues in the short term, long-term economic success in Vietnam hinges on how fast the government can overhaul the new, underdeveloped legal and regulatory codes and, of course, on whether the economy stabilizes. But experts across the board have confidence that the country will regain its status as the next Asian tiger.
“The World Bank, the Asian Development Bank and a number of the major economic agencies have looked at what the government has done and feel that it’s done a credible job, and that in fact the inflation is falling and what the government has done has been effective,” says Christopher Runckel, a former U.S. diplomat in Vietnam. Runckel, who now consults businesses on Asian expansion, compares Vietnam’s rapid economic growth to that of China–which has fought inflation problems of its own.
The economic setbacks of the past year, he says, “were all the sort of necessary things that Vietnam had to go through to get its growth down to a less heated and more measured approach.”
Philippines: Accent on Outsourcing
In many ways, the Philippines seems like an ideal place for Americans to do business.
Nearly everyone speaks English, the literacy rate is high while wages are low, the telecommunications infrastructure is highly developed, and the government offers tax breaks for foreign investors. People in the Philippines even seem to genuinely like Americans.
But American lawyers and business people setting up shop in the island nation learn quickly that it requires a virtue not taught in law schools or MBA programs: patience.
V. Johann Espiritu, senior associate at Romulo Mabanta Buenaventura Sayoc & De Los Angeles in Manila, has experienced firsthand the difference between practicing in the U.S. and the Philippines–he formerly was in-house counsel for Pixia Corp., a Virginia-based defense contractor.
“There’s one difference between the U.S. and the Philippines that I need to explain,” Espiritu says. “[When doing business in the Philippines], expect it to take a long time to get the simplest thing done. Everything is very slow, very red tape-y. If you can finish a case in 12 to 18 months, that’s Guinness Book stuff. That’s the big culture shock.”
Still, the Philippines enjoys a growing reputation as one of the world’s leading locations for call centers and outsourcing work, including legal research, document review, medical transcription and desktop publishing. That is helping its economy recover from the blows it took during the Asian financial crisis. Its economic growth rate hit a 30-year high of 7.3 percent in 2007.
The low wage structure–call center employees typically earn $5,000 to $7,000 a year–makes the Philippines particularly attractive as an outsourcing venue. For call centers dealing with American consumers, it is becoming the favored location because of the ability of Filipino workers to mimic the American accent and thus be less annoying to callers from the U.S.
But Philippine unions are strong, and the country’s labor laws don’t favor employers.
“It’s a very pro-labor code,” Espiritu says. “It states in case of doubt, the matter has to be resolved in favor of labor.”
And while the code is written in English and influenced by U.S. law, U.S. lawyers are sometimes tripped up by its idiosyncrasies, says Darren Gardner, partner at Seyfarth Shaw.
“In the Philippines, if you come to an agreement to settle [with a dismissed employee], you have to have a specific form of agreement–including certain things that may not be intuitive to U.S. counsel,” Gardner says. “There could be serious consequences if you don’t understand the [rules].”
Foreign investors face other challenges, including political instability. Most recently, an opposition group briefly took over the Peninsula Hotel in Manila in November 2007, demanding the resignation of President Gloria Macapagal-Arroyo. The siege
ended when government troops crashed an armored car into the lobby. Manila business people were unperturbed.
“On the one side of the capital, there is a little attempted rebellion, and on the other side people are working their offices,” Espiritu says. “Business carries on despite that.”
More disturbing to foreign investors than the occasional opposition protest is the government bureaucracy and court system–both areas where patience will serve you well.
“It’s a slow-moving culture with a lot of corruption,” says Mark Katz, general counsel of Singapore-based First Oriental Investment Holdings Corp. “A limited number of families run everything. The court system takes forever. People don’t arrive on time for meetings. It’s a very frustrating pattern, even though the people are gracious.”
So while it’s possible to register a business in Singapore in a day or two, it takes four to six weeks to incorporate in the Philippines. There are efforts to make things more efficient: The government’s intellectual property office has reduced the time it takes to register a trademark from up to five years to 18 months. But if you think that means quick justice for counterfeiters, forget it: The entire court system is 1 million cases behind, so it takes up to 10 years to get any type of case resolved.
“One major problem is that the judicial system takes forever and ever and ever,” says Christopher Lim, an IP attorney with Baker & McKenzie’s affiliate firm Quisumbing Torres in Manila. “If the defendant has no defense, his game plan is to delay until the foreign company says, ‘I give up. I’m spending too much for legal fees.’ So most IP owners know the best thing is to hit them hard and work out a suitable settlement.”
In early 2007, the U.S. government upgraded the Philippines from the IP “priority watch list” to the “watch list” due to increased enforcement actions. But the court backlog effectively means counterfeiters aren’t prosecuted, so the U.S. Trade Representative and the American Chamber of Commerce are pressing the government to establish a separate court to handle IP cases, according to Jeff Williams, president of Manila-based Orion Support Inc., which conducts counterfeiting investigations.
“The only answer is to establish one court in Manila to handle IP rights matters,” Williams says. “That would work and lead to fewer settlements.”
The court backup affects other kinds of legal disputes as well. Furthermore, corruption plagues the judicial process, and arbitration awards are not always enforced. That means taking a cautious approach to entering into a business agreement.
“Choose your partners carefully because the legal system is cumbersome,” Katz says. “Litigation can go on for years, and you may have trouble enforcing an arbitration agreement.”
Malaysia: Relaxed Atmosphere
Free trade negotiations between the U.S. and Malaysia started with a bang in 2006 with the U.S. offering, as part of an agreement, around $250 billion in government procurements. As talks continued, however, they seemed to hit a stalemate.
Kuala Lumpur, Malaysia’s capital
Although “discussions” continue, Malaysian Minister of International Trade and Industries Muhyiddin Yassin declines to call them negotiations, and in October Yassin announced his intention to turn Malaysia’s trade focus from the struggling U.S. economy to the Asian region.
The clock is ticking on an agreement–the U.S. has warned any negotiations could end when President Bush leaves office in January. In Malaysia as well, a political sea change is possible, as Prime Minister Abdullah Ahmad Badawi has hinted at stepping down early in the face of mounting opposition.
A crucial issue from which the Malaysian government refuses to budge is its requirement that indigenous Malaysians–called Bumiputras–own 30 percent of any company that has foreign investors.
While the rule may give the impression that Malaysia is a xenophobic business environment, its policies suggest otherwise. It may not be ready to drop the Bumiputra requirement, but the country offers many paths around it.
“The government is definitely trying to encourage foreign investment and therefore it has relaxed a lot of the rules concerning foreign investment in certain sectors and also ownership of property,” says Grace Yeoh, partner at Shearn Delamore & Co. in Kuala Lumpur. “There is a lot of competition around Asia right now.”
So manufacturers, for instance, are now generally exempt from the rule. For other operations, the major path to 100-percent foreign ownership is to set up in one of Malaysia’s economic corridors, which offer various incentives to investors in specified industries. On top of relaxed foreign ownership rules, their biggest draw is a corporate tax rate around 10 percent for qualifying operations. (The usual rate is 26 percent.)
Through the corridor system, the country hopes to entice investors and nurture business centers, positioning itself as a top-notch destination for foreign investment.
One key to the plan is Malaysia’s neighbor, the global business hub Singapore, separated from Malaysia by two highways bridging the Straits of Johor. And Malaysia has every intention of benefiting from the proximity, promoting its adjacent regions as a cheaper alternative.
“The Malaysian government has taken a lot of steps to move up the value chain, and Singapore is a very helpful synergy in that regard,” says David Eich, partner at Kirkland & Ellis in Hong Kong. “Singapore is clearly not only a first-world place, but a top-of-the-first-world place.”
To cultivate this synergy, the government created the Iskandar Development Region Corridor in the area closest to Singapore. Not surprisingly, it targets services that complement its business-hub neighbor, such as financial services, health care, education, tourism and consulting. It plays to one of Malaysia’s greatest strengths: its highly educated, English-speaking workforce, which relative to Singapore’s is cheap.
For certain companies–high tech, in particular–the partnership provides a great resource, Eich says. “You might see manufacturing or programming in Malaysia, and sales and marketing in Singapore.”
In addition, multinationals have been known to relocate their regional headquarters from Singapore to Malaysia for greater cost efficiency, which the government promotes through tax incentives.
Corridors of Growth
Beyond the Iskandar region are four other corridors the government launched in recent years to spur overall development and business growth: The Northern Corridor focuses on electronics, manufacturing, agriculture, tourism and biotechnology.
The East Coast’s targeted industries include manufacturing, oil, gas and petrochemical–Malaysia’s state-owned oil and gas company served as “master planner.” The Sarawak Corridor of Renewable Energy (SCORE) seeks sustainable energy options. The Sabah Corridor offers incentives in the fields of biotech, logistics and agriculture, primarily palm oil.
A fifth corridor remains a huge draw, although it predates the other four by about a decade. Malaysia launched the Multimedia Super Corridor (MSC) in 1996 to develop the areas around Kuala Lumpur into a Silicon Valley-like destination for high tech companies as well as IT operations of companies in other industries. The MSC has since expanded its borders and is home to more than 2,000 companies, with presence from technology biggies such as Microsoft and Sun Microsystems.
“The government now appears to be targeting specific companies to invite them to set up in Malaysia,” says Janet Looi, partner at Skrine in Kuala Lumpur. “Recently HP came in, and we know of other major foreign investors that are very keen.”
Simple set-up procedures are also luring investors. Businesses face few significant challenges establishing in Malaysia, where the Malaysian Industrial Development Authority (MIDA) even offers something of a “one-stop shop” for businesses offering help with immigration and work permits.
“Senior government officials are always willing to have consultative discussions prior to our major clients actually committing to Malaysia,” Looi says. “They’re happy to answer questions and to facilitate with other government departments. We have our regulations, but generally speaking it’s easy.”
Indonesia: Risky Business
In English, the Republic of Indonesia’s national motto literally means “many, yet one,” and the notion is apt. It applies to the country’s 300 ethnic groups, which come together to form one massive, culturally diverse population–the world’s fourth largest. And it surely applies to the 17,600 islands that make up the country.
The effects of Indonesia’s distinct physical characteristics run deep into the heart of the country, and its legal landscape is no exception, with written law only recently reaching some of the more remote regions. Safety is an even more pressing national issue. In the last few years, the government has combated violence including ransom kidnappings and terrorism.
“Although I think the general consensus is that it is improving, from a business perspective Indonesia is still regarded as a very insecure place,” says David Eich, partner at Kirkland & Ellis in Hong Kong. “Inevitably, when you think about doing a deal in Indonesia, one of the first things people talk about is being safe.”
Yet despite all its drawbacks, foreign investors continue to put money there. For while the country’s unique geography has yielded some of its greatest difficulties, it has also provided some of its greatest assets. The vast archipelago offers an abundance of natural resources, including coal, timber products and palm oil. Rich reserves of oil and gas make Indonesia a standard post for global energy companies.
While commodities may still dominate the economy, foreign retailers are eager to tap the country’s human resources as well. Recently relaxed investment laws aim to tempt foreign investors, who have branched out increasingly in Indonesia, to explore structured finance, M&As, private equity deals and strategic joint ventures. And with the largest Muslim population in the world, Indonesia seems destined to become a center of Islamic finance.
“It’s the old saw of risk/reward,” Eich says. “If you can manage the issues or price those issues, then you should be able to have a greater return if there is less competition for resources.”
For in-house counsel, the first and foremost issue to manage is the country’s legal uncertainty. To begin with, its legal system is based on the Dutch system, an inquisitorial approach that gives the judge more discretion in rulings.
“It’s not a bad thing in principle, but what this means in the emerging markets context is that the opportunity for ‘unusual decisions’ by the courts is somewhat higher than it is in other emerging market jurisdictions,” says Joel Hogarth, Singapore-based counsel at White & Case. “We find enforcing contractual rights is very difficult, so we try to structure things around ownership and control.”
For example, he says a standard step in a sophisticated Indonesian investment would be to embed your rights in the articles of association–owning shares, maintaining control of bank accounts and having joint signatory rights.
Furthering legal unpredictability are the fledgling democracy’s steps toward decentralization. In the wake of three decades under President Suharto, recent efforts to redistribute some authority from the central government to other regions have resulted in separate locally applied sets of rules and procedures with which investors must comply. In short: more regulations.
Practically, this means that companies setting up in Indonesia must turn to provincial or even regency-level governments for things like business licenses. Although local governments must comply with central government rules, often there is some degree of disconnect. And newly empowered, remote regions may be unfamiliar with complex business setups.
“That can raise some issues,” says Harun Reksodiputro, partner at Hadiputranto, Hadinoto & Partners in Jakarta. “Sometimes [local governments] have different views on what the investors want to do and what kind of license they require based on central and local government regulations.”
Effects of the decentralization efforts are not all bad. Governments familiar with complex business deals can be a great help, and because they are localized they allow relationships to form between company and local officials. Those relationships will go far in helping discern how the law is applied.
“Consultation with the government is important in Indonesia,” Reksodiputro says. “Very often laws are subject to various interpretations, and one strategy is to go check with the relevant government agencies–central or local–on interpretation of the laws, and confirm [what they require].”
He stresses the need to get such confirmation in writing, because local governments change frequently, and a new regime may interpret a policy differently than the last.
That said, often the relationships you form in Indonesia ultimately determine your success there. Experts say local partnerships are key, so structuring a deal for 100 percent foreign ownership is not necessarily preferable and in some cases is discouraged.
“If somebody said they were looking to buy out 100 percent in Indonesia, we’d probably look at that with a little bit of surprise and caution,” Hogarth says.
A more common structure, he says, is a strategic joint venture in which foreign investors have 40 to 60 percent ownership with a strong local partner that can smooth things over on the ground and make sure everything is working from a local perspective.
“It’s very much a relationship place rather than a legal certainty-type place,” Joel says. “If you do the right investment with the right partners I think it has huge potential, and people have made an awful lot of money in the past doing that.”
Thailand: Business as Usual
In mid-September, Thailand’s ruling party elected the country’s fourth prime minister in two years, replacing a man who was removed for conflict of interest. The party’s choice, the brother-in-law of a prime minister ousted in 2006 who fled to London to avoid corruption charges, further angered protestors who have been occupying the government’s Bangkok office compound since August. The government, meanwhile, has been camped out in the city’s old airport.
Such continuing political strife obviously doesn’t build the kind of business climate that excites foreign investors. It also has dimmed prospects for resumption of free trade talks with the U.S., suspended following the 2006 coup.
“Foreign investors anywhere would prefer to have stable and predictable government policy,” says Santhapat Periera, partner at Tilleke & Gibbons, a Thai law firm. “When things are not so stable, they will play a wait-and-see type of game.”
But for companies already operating in Thailand, it has been business as usual. “Thailand is having political issues, but these have not really affected business as of yet,” says Christopher Runckel, president of Runckel & Associates, a consulting firm that helps clients work in Asia. “The political disturbances are all in a very small part of the city. Thailand has been slowing in terms of total foreign direct investment because of the political disturbances, although the practical matter is that most of the established businesses are seeing no problems.”
In some areas, business even seems to be booming–mergers & acquisitions in Thailand increased over the past year following the rejection of several proposed amendments to the Foreign Business Act (FBA) that would have led to increased government scrutiny of certain foreign partnerships. And the country remains attractive to some American companies that benefit from favored treatment.
While the FBA specifies that foreign investors own no more than 49 percent of a Thai company except under certain conditions, Thailand allows U.S. investors to sidestep such requirements. Through the 1966 U.S.-Thai Treaty of Amity and Economic Relations, American majority-owned companies can carry out FBA-restricted business in Thailand without the need for Thai shareholders. Applying for approval under the treaty is a straightforward process; a company just needs to show that it is, in fact, owned by Americans and incorporated in the U.S.
More incentives are available to any foreign investor through applications to the Thai Board of Investment (BOI). Approval allows companies to own land (normally forbidden to foreigners), enjoy a corporate income tax waiver for up to eight years (the standard is 30 percent annually), and obtain waivers on import duties.
Approval also streamlines the process for obtaining mandatory work permits for all expatriate employees. But employers still must follow the requirement that companies have four Thai workers to every foreign employee, and the rule of thumb is that if a Thai citizen can do the job, a Thai citizen should do the job.
To apply for privileges, “you need to basically show why this would be beneficial to Thailand,” says Troy Schooneman, a partner in White & Case’s Bangkok office. This might mean creating jobs or introducing technical expertise that is not accessible to locals.
“If it’s a highly sophisticated or high technology type of company that the Thais cannot operate alone, it would be very obvious to let a foreign company come in and do it themselves,” says Periera.
For years, most foreign businesses centered their operations in Bangkok, but more recently, factories have spread outside the city, spurred by government incentives in certain zones. For instance, minimum wage is lower in more provincial areas. Thailand has become a popular destination for auto parts and electronics manufacturers and they often set up in large industrial estates that provide water and electricity. Many of them can support up to several hundred factories.
“It’s impressive,” Schooneman adds. “They’re world class.”
As a whole, Thailand’s infrastructure is superior to any nearby countries, Runckel says. “[The country] has good airports, good seaports and a good highway system. They’re expanding the sky train and the underground that goes throughout [Bangkok], and these are all helping people get back and forth to work easily.”
But while getting around the country may be easy, navigating the court system is not. Not all laws have been translated into English, and even then, translations are not authoritative. Moreover, courts do not use English, and the system moves slowly.
“You try to avoid any court proceedings simply because they are very, very time consuming,” Schooneman says.
Arbitration is always preferable, and foreign arbitration decisions are usually enforceable within the country. Thailand also has specialized courts that foreigners can use as a last resort. Proceedings in the intellectual property and international trade courts can even be conducted in English.
“We have a special labor court that has jurisdiction over labor matters and labor disputes, and there the case can be handled quickly, compared to the general civil court,” Pereira says. “It has a very high expertise in dealing with those issues.”