Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia

This 2009 report by the International Institute for Sustainable Development (IISD) examines the use and impact of investment incentives used by Southeast Asian nations to attract foreign direct investment (FDI). It analyzes how these incentives affect economic growth, government revenue, technology transfer, employment, and the environment, while exploring the dynamics of investment competition within the region and with China.

• Investment incentives in Southeast Asia primarily consist of tax holidays, reduced duties on capital goods and raw materials for export-oriented production, and the establishment of designated special zones providing infrastructure and streamlined administration.
• While incentives are credited with helping attract FDI and spurring growth in Singapore, Malaysia, and Thailand—particularly in the electronics sector—they are not a sufficient condition for attracting investment. Other factors such as political stability, infrastructure, and the macroeconomic environment are often more critical.
• The monetary cost of investment incentives to governments is significant, often characterized by high redundancy rates where investments would have occurred regardless of the incentives. In the Philippines, 80% of incentives granted by the Philippine Board of Investments in 2004 were found to be redundant, costing approximately US$770 million in foregone revenue.
• Technology and knowledge spillovers from FDI are not automatic and depend heavily on local absorptive capacities. Singapore and Malaysia have successfully leveraged FDI for technology transfer due to high rankings in education and innovation, whereas Cambodia has seen relatively few new technologies enter through FDI.
• FDI has generated significant employment, particularly in manufacturing and export processing zones, but the quality and extent of these gains vary. In Cambodia, the foreign-owned garment industry grew from 19,000 direct jobs in 1995 to 270,000 in 2005. However, capital-intensive sectors like mining and hydropower in Laos and Vietnam have seen employment lag behind capital inflows.
• The environmental impacts of investment incentives are under-researched, but concerns exist regarding 'pollution havens' and the degradation caused by large-scale projects in Cambodia and the Lao PDR. In Thailand and Malaysia, FDI-driven growth in electronics has led to issues with hazardous electronic waste and high energy consumption.
• Incentive-based competition is prevalent among Southeast Asian countries with similar factor endowments, often leading to 'bidding wars.' This competition is particularly visible in the automobile, petrochemical, electronics, and IT sectors.
• The 'China effect'—the diversion of FDI to China—has influenced Southeast Asian investment regimes, but its impact is nuanced. While China may have diverted FDI from Indonesia and Malaysia, it may have helped attract FDI to the Philippines by creating a market for components assembled in China.
• Bilateral investment treaties (BITs) and regional agreements like the ASEAN Comprehensive Investment Agreement (ACIA) often prohibit certain performance requirements (TRIMS+), which critics argue limits the ability of recipient countries to ensure that FDI creates domestic linkages.

APA

International Institute for Sustainable Development (n.d.). Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia. https://www.iisd.org/system/files/publications/competing_business_southeast_asia.pdf

Chicago

International Institute for Sustainable Development. Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia. n.d. https://www.iisd.org/system/files/publications/competing_business_southeast_asia.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia |url=https://www.iisd.org/system/files/publications/competing_business_southeast_asia.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopmentndcompeting, author = {{International Institute for Sustainable Development}}, title = {{Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia}}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/system/files/publications/competing_business_southeast_asia.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }