AFTA and Japanese investment in Malaysia

Abstract

The ASEAN Free Trade Area (AFTA) was formed in 1992 at the Fourth ASEAN Summit Meeting in Singapore. As explained in Lee (1994), both external and internal factors coincided to enable this regional grouping to be formed. Externally the prolonged negotiations of the Uruguay Round (UR) and the emergence of new groupings such as the European Single Market and the North-American Free Trade Area (NAFTA) were some of the push factors toward enhancing economic cooperation within ASEAN. In addition the opening up of formerly socialist economies of China and Vietnam was also perceived to be a common external threat to the growing prosperity of the region due to the rapid growth that was experienced since the mid-80s. At the same time, this internal growth has also raised the confidence of the member countries that each will be able to cope with the challenges of liberalisation. The main objectives of AFTA are to enhance ASEAN competitiveness in the world market as well as to reap the economies of scale that comes with the specialization in a free trade area (Nattapong, et al., 1999). More importantly, given the dependence of the member countries on foreign direct investment (FDI), it is envisaged that the wider AFTA market will serve to enhance the investment potential of the region. However, since its formation, AFTA has seen the two major changes that can affect the realization of its goals. The first is the extension of the membership of ASEAN to ten which has increased the heterogeneity within the group and the second is the emergence of the financial crisis in 1997 that has derailed the economic growth of its member countries. In the light of these two changes the main objective of this paper is to assess the progress that has been made in AFTA thus far and to analyze the future of Japanese investment in the region, particularly for Malaysia.