This paper discusses the rapid industrial growth and transformation which four of the five founding member countries of the Association of Southeast Asian Nations (ASEAN), including Indonesia, Malaysia, Singapore, and Thailand, have experienced during the past three decades, at least until the severe financial and economic crisis hit all the five original ASEAN countries since mid 1997, particularly Indonesia and Thailand and to a lesser extent Malaysia, the Philippines, and Singapore.

Although all the five ASEAN countries, including Singapore, initially embarked on import-substituting industrialisation, over time one after another all these countries shifted to export- oriented industrialisation, albeit with varying degrees of success. Starting with Singapore in the late 1960s, and subsequently Malaysia, the Philippines, and Thailand since the 1970s, and finally Indonesia since the mid 1980s, these countries began to promote export-oriented industrialisation.

In all the five ASEAN countries foreign direct investment (FDI) has played a significant role in the industrialisation process in these countries, both during the import substitution and export promotion phases. This paper will try to assess to what extent the five ASEAN countries were able to mobilise FDI for the purpose of promoting their manufactured exports and upgrading their industrial structures through the transfer and diffusion of advanced industrial technologies.

This paper first provides an overview of the industrial development in the five ASEAN countries, with a special focus on the period since the early 1980s when export promotion was pursued with greater vigour than in the past. After an assessment of the role which FDI has played in the industrial development of these countries, this paper will discuss the economic policies, including industrial policies, which these countries had been pursuing (at least until they were hit by the financial and economic crisis) to sustain their export-oriented industrialisation, in particular by broadening and upgrading their industrial structure in order to raise their industrial competitiveness.

The remarkable economic development of the ASEAN countries, including their rapid industrial development and transformation, can to a large extent be attributed to their increasing globalisation, that is their increasing integration with the world economy through the steady increase in the role which foreign trade and FDI have played in their economies. However, the serious financial and economic crisis which has hit the ASEAN countries since mid 1997, in particular Indonesia and Thailand, has exposed some basic weaknesses in their economic policies, structures, and institutions which have rendered these countries less resilient to withstand severe external shocks. Hence, this paper will also try to identify the basic weaknesses in the industrial policies and structures of these countries which only became evident after the onset of the crisis, and which need to be addressed once the financial and economic crisis has been overcome. For this reason the paper will first start with a brief overview of the impact of the severe economic crisis of 1997/1998 on the manufacturing sector in the ASEAN countries, specifically in Indonesia which has been the hardest hit by the economic crisis.

The impact of the crisis on the manufacturing sector in the ASEAN countries, particularly Indonesia

While all the ASEAN countries have been adversely affected by the financial crisis of 1997 which hit Thailand first, none of them have been as badly hit as Indonesia. As a result of the gradual widening differential between the inflation rates of the US and the ASEAN countries, the real effective exchange rates of these countries started appreciating since the mid 1990s. In turn, the real appreciation of the currencies of these ASEAN countries resulted in a gradual but steady deterioration in the export competitiveness of the ASEAN countries. This deterioration in export competitiveness and the decline in electronics exports of some of the ASEAN countries due to the weakening of the world market for semiconductors led to a rapid increase in the current account deficits of these countries, particularly Malaysia and Thailand, and to a lesser extent Indonesia. (Komine 1998: 2-3).

The burst of the 'bubble economy' in the ASEAN countries in mid 1997, caused by a sudden change in perceptions on the part of foreign and domestic investors about the foreign exchange risk of their local currency-denominated financial assets, faced these countries with the serious problem of servicing a huge foreign debt and the resulting steep depreciation of their currencies. However, none of these countries had experienced such a steep depreciation as Indonesia whose currency had depreciated by more than 80 per cent against the US dollar by late January 1998, although by early 1999 the Indonesian 'rupiah' had strengthened to Rp. 8,000 - Rp. 9,000 against the US dollar.

As a result of the steep rupiah depreciation, several sectors of the Indonesian economy, including the manufacturing sector, experienced a substantial decline in their activities. Burdened with foreign debts they cannot repay and the higher prices of their imported inputs as well as declining revenues because of the reduced real incomes of consumers, many manufacturing companies have either had to reduce their output drastically or stop operations altogether. The problems faced by many manufacturing companies, including a number of small- and medium-scale enterprises (SMEs), is due to the fact that they are assembling companies highly dependent on imported inputs, including raw materials, parts and components. Hence, as a result of the steep depreciation of the rupiah these foreign inputs have become prohibitely expensive. Even the few companies still able to pay for these foreign inputs are unable to import these inputs because foreign banks have refused to accept the letters of credit (LCs) issued by Indonesian banks on behalf of Indonesian importers. Although some of Indonesia's trading partners have offered trade financing facilities, some technical difficulties have hampered the speedy provision of these facilities. As a result, many manufacturing companies are still experiencing difficulties in importing needed inputs.

The problem caused by the difficulties in importing expensive inputs is faced both by export-oriented industries (e.g. the textile, garment, footwear, and consumer electronics industries) as well as domestic market-oriented industries (e.g. the steel, automotive and pharmaceutical industries). As a result, many firms in these industries have either stopped or steadily cut down their operations, resulting in the layoffs of hundreds of thousands of workers. The difficulties faced by these industries has exposed the vulnerability of assembling industries and the failure of Indonesia's manufacturing sector to develop a broad base of economically viable supporting industries to supply the various assembling industries with the inputs which until now have to be imported.

It should be pointed out, however, that not all manufacturing firms have been adversely affected by the crisis. While many domestic market-oriented companies have been severely affected by the steep reduction in the purchasing power of consumers hard hit by the steep inflation, several export- oriented companies, including SMEs, particularly those using local rather than imported, inputs have in fact benefited from the steep depreciation of the rupiah which have rendered their products more competitive in the export markets.

Although the manufacturing sector, specifically the assembling industries, in the other ASEAN countries are also facing some difficulties with importing more expensive inputs their currencies had also depreciated steeply, none of them have experienced the serious problems faced by Indonesia's manufacturing sector as the rupiah had depreciated even more steeply than the other currencies.

Industrial development in the ASEAN countries: from import substitution to export promotion

Until the financial crisis hit Southeast Asia in mid 1997, industrial growth and transformation in the ASEAN countries, with the exception of the slower growing Philippines, have been very rapid during the past three decades and, in fact, among the highest among the developing countries. While all the five ASEAN countries, starting with the Philippines in the early 1950s, initially embarked on an import-substituting pattern of industrialisation, the levels of protection varied widely among the five countries, with Singapore having the lowest level of protection (with nominal rates of protection averaging only 7 per cent in 1967)(Tan 1984: 40) and the Philippines the highest and Indonesia a close second. In pursuing import-substituting industrialisation, the ASEAN countries were simply pursuing a similar path of industrialisation traversed earlier by the Latin American and South Asian countries, particularly India.

Singapore was the first ASEAN country which shifted to export-oriented industrialisation following its separation from the Malaysian federation in 1965 and the subsequent loss of its expected larger domestic market. However, the need to shift to export promotion became even more imperative in 1967 when the British announced their plans to phase out their military bases by 1971. Since these bases employed nearly 20 per cent of Singapore's labour force and generated nearly 20 per cent of Singapore's GNP (Tan 1984: 40), export-oriented industrialisation was seen as the only way to overcome the adverse effects of the liquidation of the British military bases.

To support the shift to export promotion, the Singapore government successively eliminated tariffs and quotas. By 1973 only 197 manufactured products were subjected to mild tariff protection, while only another three enjoyed quota protection. (Tan 1984: 40). To support its export drive Singapore turned to the transnational corporations (TNCs) from the advanced countries to set up export-oriented plants. TNCs were attracted to invest in Singapore because of its very liberal policies towards foreign investment, its efficient and supportive bureaucracy, and excellent physical infrastructure. As a result, TNCs have played a crucial role in Singapore's export-oriented industrialisation, accounting for almost 90 per cent of Singapore's manufactured exports, over 70 per cent of capital expenditure, and almost 70 per cent of total manufacturing value added. (Lecraw 1985: 393). This great reliance on TNCs has persisted until the 1990s, as in 1992 TNC subsidiaries still generated 85 per cent of Singapore's manufactured exports. (Hill 1995: 11).

In the four other ASEAN countries import-substituting industrialisation lasted longer as the necessity for these countries to promote manufactured exports was less than in the case of Singapore as these countries could still rely on commodity exports. This was particularly the case with Indonesia which during the 1970s benefited from the oil boom as the large volume as well as high unit price of petroleum exports led to a huge increase in oil export earnings. As a result of this oil boom, Indonesia caught the 'Dutch disease' as the surge in export revenues and the subsequent real appreciation of the rupiah made it difficult for the other tradable industries, including the non-oil manufacturing industries, to compete in the export markets. (McCawley 1979: 13). This was less the case with Malaysia which only became an oil exporter in 1975. (Naya 1988: 76).

In the four large ASEAN countries import substitution policies were supported by tariff and quota protection as well as various import surcharges. Although import protection was often introduced in an ad hoc way and also often changed, in general protection in these countries had a cascading structure in which the finished goods enjoyed the highest protection, while primary products and the industrial raw materials had the lowest protection. As a result, there was a wide dispersion of the effective rates of protection (ERPs) between the various industries. (James, et.al., 1987: 47). Moreover, the ERPs of large-scale, capital-intensive, import-substituting industries producing final consumer goods, including consumer durables, such as the automotive and the consumer electronics industries, often enjoyed the highest ERPs, while labour-intensive industries producing exportables often had negative ERPs. Hence, industries producing goods in which these countries had a comparative advantage often were discriminated against, while those industries in which these countries had a comparative disadvantage were often promoted. (James, et.al: 47).

Not surprisingly, therefore, by 1981, some two decades after Malaysia, the Philippines, and Thailand had started developing their manufacturing sector, the bulk of their merchandise exports still consisted of primary commodities, with manufactured exports only accounting for 20 per cent of total exports in Malaysia, 23 per cent in the Philippines, and 25 per cent in Thailand. In that same year Indonesia's manufactured exports accounted for even less, a miniscule three per cent of total exports. (Naya 1988: 77). To some extent Indonesia's much poorer performance with manufactured exports can be attributed to the fact that it had started developing its modern manufacturing sector about one decade later than its ASEAN neighbours. A more important reason for Indonesia's laggard performance was that the oil booms of the 1970s had caused Indonesia to catch the 'Dutch disease', that is the oil boom and the resulting real appreciation of the exchange rate made it difficult for the other tradable goods industries (i.e. the non-oil export-oriented industries) to compete in the export markets.

Following the example of Singapore, the other four more resource-rich ASEAN countries also began to pursue export- promoting industrial policies, first Malaysia, the Philippines, and Thailand in the early 1970s, but Indonesia only since the mid 1980s. Three reasons have been advanced to account for this shift in policy-orientation. (Ariff & Hill 1985: 19). First and most important, the import-substituting pattern of industrialisation had in general not been able to generate sustained growth in manufacturing output and employment, particularly after the completion of the first or 'easy' phase of import substitution. Second, the remarkable success of the first tier East Asian newly-industrialising economis (NIEs), including Singapore, in achieving sustained rapid growth in output and employment and an equally rapid reduction in the incidence of absolute poverty had been underpinned by export-oriented industrial development. Third, a number of authoritative studies commissioned by the Organisation of Economic Cooperation and Development (OECD), Paris, and the National Bureau of Economic Research (NBER), New York, had clearly shown the economic drawbacks of inefficient import-substituting industrialisation and the economic advantages of export-oriented strategies. The findings of these studies gradually led to a change in the thinking among international and regional aid organisations as well as among policy-makers in the ASEAN countries about the limits to import-substitution and the economic benefits of export-oriented industrialisation.

In view of the traditonal relative openness of the Malaysian and Thai economies, even during the import substitution phase, the shift to an export-oriented pattern of industrialisation proceeded relatively smoothly, even though in these countries the above shift did not involve the introduction of a neutral trade regime (i.e. first-best trade reforms). However, even during its import-substituting phase of industrialisation in the 1960s and early 1970s Malaysia has never discriminated strongly against other traded goods nor did it overvalue its currency as was the case in other developing countries pursuing import substitution policies. Though there was a wide divergence in its tariff rates, Malaysia's overall simple average tariff rate on manufactured goods was relatively low. Malaysia also did not make much use of non-tariff barriers (NTBs) to protect its manufacturing sector. (Naya 1988: 87).

Malaysia's major device for promoting manufactured exports was the establishment of export-processing zones (EPZs) in the early 1970s. In these EPZs the exporting companies were allowed to import duty-free raw materials, parts, and components subject to the requirement that their entire output would have to be exported. Aside from Singapore, which can be considered as one whole export-processing zone, Malaysia has been the most successful country among the ASEAN countries in effectively operating its EPZs within the context of a relatively open economy, an able and generally honest bureaucracy, and a location strategy which linked these EPZs in an efficient way to the country's good transport infrastructure. (Hill 1997: 8). Malaysia also benefited from the fact that it had established its EPZs at a time when internationally integrated production of electronics goods was growing rapidly. Under this production system vertically integrated electronics transnational corporations (TNCs), particularly from the U.S., relocated the labour- intensive processes in the chain of the whole production process of an electronics product to low wage production sites in Southeast Asia, particularly Malaysia, because of its good physical infrastructure and its liberal foreign investment regime which allowed foreign investors to establish fully-owned subsidiaries. (Hill 1997: 8; Helleiner 1973: 26-31).

Malaysia's reliance on EPZs during its early stage of export-oriented ndustrialisation has been criticised as they are basically export enclaves, generating little, if any, local linkages. The reason for this is that virtually all the plants in these EPZs are basicallly highly import-intensive assembling operations, thus generating neither significant domestic value nor extensive backward linkages with the local economy. On the other hand, EPZs are useful in providing job opportunities for low skill labour as well as in establishing a country's international reputation as a reliable exporting country by virtue of its reliance on TNCs. (Hill 1995: 12).

Like Malaysia, Thailand pursued a relatively mild import substitution policy, although its tariffs were on the average higher than those of Malaysia. (Naya 1988: 87). On the whole, however, tariff duties in Thailand were not prohibitive and were largely imposed for revenue purposes. But compared to Malaysia, Thailand also made greater use of non-tariff barriers (NTBs). However, once the 'easy' phase of import substitution was completed in the early 1970s, it became obvious that sustained industrial growth required a need to shift from import substitution to export promotion. This realisation was reflected in Thailand's Third Five-Year Development Plan (1972-1976) which stressed the need to reorient the manufacturing sector from import substitution to export promotion. (Ariff & Hill 1985: 16- 17).

One factor which may also have accounted for the rapid increase in manufactured exports from Thailand since the early 1960s was the effective cooperation between the government and private sector, as reflected by the establishment of the Joint Public-Private Consultative Committee (JPPCC) in 1982. One of the important tasks of this JPPCC was to provide the government with information on the various problems which export-oriented Thai companies, including foreign-owned companies, were facing in exporting their products. These problems included long delays in obtaining tax refunds (i.e. duty drawbacks) and cumbersome custom procedures for getting export clearance. To its credit, the Thai government accomodated many of the complaints of the private companies. (Yoshihara 1994: 113).

In Indonesia and the Philippines, on the other hand, the policy reorientation to export promotion turned out to be much more difficult. With the longest history of import-substituting industrialisation dating back to the early 1950s, vested interests in protected industries in the Philippines managed to hamper efforts to export promotion despite the disappointing results of import substitution. (Hill 1995: 10). Hence, despite half-hearted attempts at export promotion, the Philippines remained stuck in its pattern of import-substituting industrialisation because of continued high import protection. Industrial expansion, however, was hampered by the small domestic market for consumer durables and capital goods, and by the increasing scarcity of investible funds. As manufacturing firms were unable to import intermediate goods and capital equipment, the manufacturing sector was saddled with substantial excess capacity, leading to negative growth of the sector. (James, et.al. 1987: 48).

It was only under pressure from the World Bank and the IMF that the Philippine government finally started reducing its tariff and non-tariff protection gradually in the early 1980s. However, it was only under the Aquino administration (1986-1992) that significant progress was made with trade liberalisation. (Yoshihara 1993: 108). Under the Ramos administration (1992-1998) further progress was made with trade liberalisation which, in turn, has led to the steady increase in manufactured exports since the mid 1990s.

In Indonesia the shift to export promotion proved to be the most difficult, as it had been pursuing the most inward-looking economic policies among the ASEAN countries. Import-substituting industrialisation in Indonesia in the 1970s was buttressed by a wide array of protectionist barriers, including the highest nominal and effective rates of protection for consumer goods among the ASEAN countries and a a wide array of non-tariff barriers (NTBs). (James, et. al.: 47). It was only after the steep decline in oil prices in 1982 that Indonesia, forced to develop a more sustainable source of non-oil exports, particularly manufactured exports, was forced to undertake a thorough reappraisal of its industrial strategy. However, in the immediate period following the end of the oil boom, roughly from 1982 through 1985, the policy response did not involve a major shift in the trade regime, but only measures to restore macroeconomic stability, financial deregulation allowing state banks to freely set deposit and lending rates, and a substantial devaluation in March 1983. (Hill 1996: 155). In fact, during this period the planned implementation of the ambitious second phase of state-led import-substituting industrialisation, involving the establishment of large-scale, state-owned, resource-processing heavy industries, was not even abandoned despite the clear evidence of high domestic resource costs (DRCs) associated with the establishment of these industries and the clear need to promote manufactured exports.

It was only with the introduction of a duty drawback and exemption scheme for export-oriented companies in May 1986, after an even steeper decline in the price of oil, that a more decisive step was taken to shift to a more export-oriented industrial strategy. The introduction of the May 1986 deregulation package, which also involved some steps to liberalise the restrictive foreign investment regime, was soon followed by other deregulation packages to encourage the private sector to become more efficient. The deregulation measures also included trade reforms aimed at reducing the 'anti-export bias' of the trade regime. In fact, the surge in Indonesia's manufactured exports since 1987 can largely be attributed to the introduction of the duty exemption and drawback scheme which, at least during the first years, was efficiently administered by Bapeksta, an agency under the jurisdiction of the Department of Finance.

Besides the trade reforms, the shift to an export-oriented industrial strategy since 1986 was also supported by a sensible exchange rate policy. Following the devaluation in September 1986 in response to the steep decline in the price of oil in early 1986, the Bank of Indonesia began to pursue a managed float policy, which involved the steady depreciation of the rupiah by 4 to 5 per cent annually to offset the differential between Indonesia's higher inflation rate and the inflation rates of its major trade partners. In this way the Bank of Indonesia largely succeeded in keeping the real effective exchange rate at a competitive level.

The above policy measures turned out to be quite successful in stimulating Indonesia's manufactured exports, particularly labour-intensive products, such as garments, footwear, toys, and consumer electronics products. In fact, since 1987 for the first time in Indonesia's modern economic history manufactured exports and the private sector became the primary engines of industrial growth. It was during this period that Indonesia began to resemble the other East Asian countries, both in regard to its economic performance as well as in the causes of its rapid growth. (Hill 1996: 155).

Rapid industrial growth and transformation in the ASEAN countries, 1980-1995: the record

During the period 1980-1995 the ASEAN countries, except for the Philippines, have generally been able to sustain their rapid industrial growth, as shown in table 1.

During this period Indonesia's manufacturing sector grew the fastest, growing at double digit rates on the average both during the 1980s as well as during the first half of the 1990s. During the same period the manufacturing sector of both Malaysia and Thailand also grew at a rapid rate. Since the 1980s these three ASEAN countries, which until the early 1980s were still largely dependent on the exports of primary commodities, also began to record rapid increases in manufactured exports, although not at the high rates achieved durig the 1970s and 1980s by the 'first tier' East Asian NIEs, South Korea, Taiwan, Hong Kong, and Singapore. (World Bank 1993: 37). As a result of this surge in manufactured exports, the share of manufactured exports of these three ASEAN countries of total world manufactured exports rose from 0.1 per cent in 1965 to 0.4 per cent in 1990 and to 1.5 per cent in 1990. While these figures are striking, the figures relating to the rapid rise of their share in total developing economy manufactured exports are even more impressive, namely 1.1 per cent in 1965, 3.8 per cent in 1980, and 12.0 per cent in 1990. (World Bank 1993: 38).

In both Malaysia and Thailand the surge in manufactured exports started in the early 1980s, while in Indonesia this surge started only since 1987. As a result, by 1993 in all these three ASEAN countries manufactured exports accounted for the bulk of the these countries' total exports. It is for the above reasons that these three Southeast Asian countries were referred to as the 'second tier' East Asian NIEs, following in the footpath of the 'first tier' East Asian NIEs.

As a result of this rapid industrialisaton, the economic structure of these three ASEAN countries also underwent a rapid transformation as the contribution of the manufacturing sector to the Gross Domestic Product (GDP) of these countries rose very rapidly. With the manufacturing sector contributing more than 20 per cent to GDP, by UNIDO standards Indonesia and Thailand could by 1995 be categorised as 'semi-industrial economies', while Malaysia, with its manufacturing sector contributing more than 30 per cent to GDP, could already be categorised as an 'industrialised economy'.

In the Philippines, on the other hand, the manufacturing sector hardly grew at all throughout the 1980s and the early 1990s. Compared to the first three ASEAN countries, Singapore's industrial growth has also been less impressive as Singapore has become a 'modern services economy'. Both the Philippines and Singapore have been 'de-industrialising' during the past 15 years as the share of their manufacturing sector in GDP has declined. In the Philippines this process was caused by the protracted industrial stagnation and the faster growth of the services sector. In Singapore the process of 'de-industrialisation' has been similar to that of Hong Kong, as these two economies have become 'post-industrial' or 'modern services economies' with the modern services sectors (financial services, telecommunications) having become the major engine of economic growth. In addition, the relocation of a large number of Singapore's low skill, labour-intensive industries to Johore, Malaysia, and the offshore islands of Riau province, Indonesia, has also contributed to the 'de-industrialisation' of Singapore.

Using manufacturing value added (MVA) per capita as another indicator of industrial development, the data in table 1 show that among the ASEAN countries Singapore and Malaysia are industrially the most advanced, while Indonesia and the Philippines are the least advanced. Thailand occupies an intermediate position between these two groups of countries.

Over time structural change has also taken place in the manufacturing sectors of these ASEAN countries as the share of 'low-technology' industries in all the five economies has declined, while the shares of both 'medium- and 'high-technology' industries have increased, albeit at different rates. (Table 2).

The data in table 2 also show that during the period 1980- 1995 the share of the 'low-technology' industries in Indonesia, the Philippines, and Thailand in total MVA has only declined slightly, unlike in Malaysia and Singapore where the share of these industries has declined much more rapidly. To the extent that 'low-technology' industries are also labour-intensive industries, the modest decline of 'low-technology', labour- intensive industries in Indonesia and the Philippines reflects the fact that these two economies are still labour-surplus economies. Consequently, their major comparative advantage still lies in the low-technology, low skill labour-intensive industries. For this reason these countries have found it less profitable to invest in more technology-intensive industries.

On the other hand the much more rapid decline of 'low- technology', labour-intensive industries in Malaysia and Singapore reflects the fact that the labour markets in these two economies have become increasingly tight, which has led to rapidly rising real wage rates in these countries. Like in Japan and the 'first tier' East Asian NIEs, the tight labour markets in Singapore and Malaysia have forced these countries to develop more skill- and techology-intensive industries.

The rapid growth of high-technology industries in Singapore and Malaysia have been supported by a correspondingly high rate of investment in these industries, as shown in Table 3.

During the period 1970 - 1994 the share of investment spending on high technology industries in Singapore rose from 11.1 per cent in 1970 to 27.6 per cent in 1980, and to around one half of total manufacturing investment by 1994. In Malaysia the share of investment spending on high-technology industries rose from 13.7 per cent of total manufacturing investment in 1970 to 21.2 per cent in 1980, and to slightly more than one third in 1994. (UNIDO 1997: 37).

The data on the two other ASEAN countries, Indonesia and the Philippines, contrast quite sharply with those of Singapore and Malaysia. In the two former countries the bulk of manufacturing investment is still taking place in the low-technology, mostly labour-intensive industries with relatively little investment in high-technology industries. To a large extent this investment pattern can be attributed to the prolonged industrial stagnation in the Philippines and the belated shift to export-oriented industrialisation in Indonesia which was mostly supported by low- technology, labour-intensive industries.

Although table 3 does not contain data on the pattern of manufacturing investment in Thailand, a study by a Thai economist has indicated that the industrial structure of Thailand is still largely dominated by low-technology industries. The study also argued that the shift to more technology-intensive industries was hampered by several constraints to technology development. (Sripaipan 1990: 6).

The Indonesian data on the pattern of manufacturing investment, however, must be qualified, as they do not include the huge expenditures on the high-technology industries (strategic industries), particularly IPTN (Industri Pesawat Terbang Nusantara), Indonesia's state-owned aircraft industry, which was initiated in the late 1970s by Dr. B.J. Habibie, the then Minister for Research and Technology. For instance, much of the investment in the aircraft industry was financed by off- budget funds, including the Investment Fund and Reforestation Fund, which were not subject to the fiscal discipline normally imposed by the Minister of Finance. Expenditures from these off- budget funds were put under the discretionary authority of the President and therefore largely non-transparent. Adding these off-budget expenditures to the large explicit and implicit subsidies provided to the aircraft industry and the other strategic state-owned industries, including the shipbuilding industry, would obviously raise the figure on Indonesia's manufacturing investment in the 'high-technology industries'.

However, since the onset of the severe financial and economic crisis since mid 1997, government spending on the ambitious high-tech aircraft industry and the other strategic industries has virtually come to a halt as the Indonesian government has run out of money. Moreover, under the terms of the second Agreement with the IMF of 15 January 1998, the two large off-budget items, namely the Investment Fund and the Reforestation Fund, will be incorporated in the central government budget as from the beginning of the 1998/1999 fiscal year (i.e. 1 April 1998). (Government of Indonesia 1998: 3). Hence, henceforth neither IPTN nor any of the other 'strategic industries' will have access anymore to these off-budget funds.

The industrial structure and pattern of manufacturing investment in the ASEAN countries is also reflected in the pattern of manufactured exports, as shown in table 4.

The data in table 4 show that Singapore is by far the largest exporter of merchandise products, most of which consist of manufactured exports. However, the Singapore data must be qualified as they also include the re-exports of products previously imported from other countries. Not surprisingly, the protracted sluggish growth of the Philippine economy accounts for the fact why the Philippines's merchandise exports have by far been the lowest among the ASEAN countries throughout the period 1980-1993.

While Indonesia's exports have more than doubled during this same period, Indonesia's per capita exports are still the lowest among the ASEAN countries, even lower than the slow-growing Philippines. Aside from Singapore, the growth of Malaysia's per capita merchandise exports have been the most impressive among the ASEAN countries.

Looking at the structure of manufactured exports, the data in table 4 show that Indonesia is far behind the other ASEAN countries in regard to the exports of technology-intensive products, such as machinery and transport equipment. On the other hand, the large share of textile fibre, textile, and garment exports in Indonesia's merchandise exports indicate that Indonesia's comparative advantage at present still lies in the labour-intensive, low or medium technology industries.

The data in tables 3 and 4 underline the need for the large ASEAN countries, particularly Indonesia, the Philippines, and Thailand, to gradually develop more technology- and skill- intensive, higher value added industries which are internationally competitive in order to sustain their industrial growth which, in turn, depends on a sustained growth of their manufactured exports. The need to develop these industries has become more evident as the manufactured exports from the larger ASEAN countries, particularly Indonesia, the Philippines, and Thailand, had, even before they were hit by the economic crisis, been growing at a sluggish rate.

To develop more skill- and technology-intensive industries, the ASEAN countries will need to make a greater technological effort, that is to invest more in the broadening and deepening of their indigenous technological capabilities and human capital. (UNIDO 1997: 38). This need also applies to Malaysia, as the relatively larger presence of high-technology industries in its economy is mainly due to the greater presence of foreign investment projects established by transnational corporations (TNCs) from the advanced countries. However, the presence of high-technology industries cannot be said to have led to a substantial improvement in Malaysia's indigenous technological capabilities.

To the extent that the above ASEAN countries will be able to develop internationally competitive, higher value added industries, their pattern of industrial development will be in accordance with the catching-up product cycle (CPC) model of industrial development, originally developed by Professor Kaname Akamatsu and further extended by other Japanese economists to the historical pattern of industrial development in the East Asian NIEs. This CPC model of industrial development, more popularly known as the 'flying wild geese' pattern of industrial development, is based on the empirical observation that late- industrialising countries, such as Japan and subsequently the first tier East Asian NIEs, generally started with the import of new manufactured products from the advanced industrial countries, which was followed by import-substituting production, and then progressed to production for exports. (Yamazawa 1990: 27-28).

Whether the industrial developmnt of the ASEAN countries in the coming years will be in accordance with the CPC model will depend on the extent to which these countries will be able to improve the international competitiveness of their industries through sustained productivity improvements and cost reductions. This, in turn, will require the manufacturing firms in these countries to develop their industrial technological capabilities (ITCs). Obviously, this goal cannot be achieved if the manufacturing industries in these countries continue to rely on high tariffs, import restrictions, and export subsidies. (Yamazawa 1990: 238).

Foreign direct investment in ASEAN manufacturing

Compared to Japan, South Korea, and to a lesser extent Taiwan, the ASEAN countries have in general been pursuing relative liberal policies towards foreign direct investment (FDI). However, among the ASEAN countries foreign investment policies have varied widely, ranging between the very liberal policies being pursued by Singapore and the much more restrictive policies being pursued by Indonesia, at least until recently. Moreover, some individual countries, notably Indonesia, have often changed their foreign investment policies in response to domestic or external developments. For instance, during the early years of independence in the 1950s Indonesia's attitude towards foreign investment was still very much influenced by its bitter colonial experience, and therefore quite hostile. A foreign investment law which, after many deliberations, was finally enacted in 1958 was repealed in 1959, only one year after its enactment. (Hill 1988: 4-5). Not surprisingly, no new foreign investment was flowing into the country during this period, and whatever little prospect remained evaporated after the nationalisation of Dutch enterprises in 1958 and of British enterprises in 1963, and the take-over of American enterprises in early 1965.

However, in 1967 with the advent of a new, more pragmatic government strongly committed to economic development, a new, quite liberal policy towards FDI was introduced, which subsequently led to the first substantial inflows of FDI into Indonesia since independence. The substantial improvement in the investment climate during this period was not only due to the liberal policy towards FDI, but also by the liberalisation of the capital account in 1972. (James & Stephenson 1993: 16).

The liberal policy towards FDI, however, lasted only for a few years, as since the early 1970s foreign investment policy again became increasingly restrictive in response to a resurgence of economic nationalism and a tendency towards increased government regulation over the economy, including foreign investment activities, as a result of the greater fiscal capacity of the government associated with the oil boom.

With the sharp reversal in Indonesia's economic fortunes in the early 1980s following the end of the oil boom, particularly the reduced fiscal capacity of the Indonesian government, more liberal foreign investment policies were once again introduced in response to the increased need for more private investment, including FDI, to sustain the high rate of investment needed for rapid economic growth. The thrust towards a more liberal foreign investment policy culminated in the June 1994 foreign investment deregulation package. This package substantially diluted the mandatory divestment rule which had been a key principle of Indonesia's foreign investment policy since 1974. Under this mandatory divestment rule foreign investors were required to divest their equity ownership in joint ventures to a minority shareholding of maximum 49 per cent within a specified period of time, which initially was set at 10 years after the start of commercial production, but then was extended to 20 years.

Following the financial crisis of 1997 and in response to the dire need to attract new FDI into the country, the Indonesian government has taken further steps to further improve the investment climate for foreign investors, amongst others by further streamlining the investment licensing process and by substantially reducing the fields closed to FDI. In January 1999 the Indonesian government offered a tax holiday of five years for pioneer FDI and domestic investment projects in regions outside of Java and Bali. An additional tax holiday of one year was also offered to investment projects employing more than 2,000 workers; to investment projects whose equity shares were owned for at least 20 per cent by cooperatives; and to investment projects whose investment, outside the value of land and buildings, was at least US$ 200 billion. (Republik Indonesia 1999).

However, without the restoration of political and economic stability and greater safety it appears unlikely that these measures will be successful in attracting new FDI into Indonesia. Tax incentives, in particular, cannot function as a sole panacea for the lack of inward FD, as foreign investors in general are often more interested in non-financial matters, including the intangible attitudes of host governments towards FDI and the investment climate of the potential host cuntry, before deciding whether or not to invest in a certain country. (Yeung 1996: 526).

In contrast to Indonesia, Singapore and to a lesser extent Malaysia have been pursuing quite liberal policies towards foreign investment. Singapore's great attractiveness as a favourable location for FDI has not only been due to its liberal policy towards FDI, but also to what a Singapore economist has called the Singapore government's total approach to ensuring a business environment characterised by transparent, predictable rules and in which both local and foreign companies can operate efficiently. (Pang 1995: 114). In addition, the Singapore government has also invested heavily in physical infrastructure and in social overhead capital, particularly in education at all levels, which have contributed to overall efficiency, low costs of operation, higher labour productivity, and accumulation of human capital. (Pang 1995: 114).

While the foreign investment policies of Malaysia and Thailand, have not been as liberal as that of Singapore, they have been far more liberal than Indonesia. Although both Malaysia and to a lesser extent Thailand have pursued active industrial policies and promoted local enterprises in certain industries, they have pursued relatively liberal, non-interventionist foreign investment policies, particularly in the export-oriented industries. (Lall 1996: 202).

Although the Philippines has, like Indonesia, also pursued a relatively restrictive policy towards FDI, it has also, like Indonesia, in recent years been pursuing an increasingly liberal policy towards FDI. This and the improved political and economic stability achieved under the Ramos administration has led to an increased inflow of FDI into the country. As the new Estrada administration is likely to continue the sound economic policies of the Ramos administration, including a relatively liberal policy towards FDI, new FDI is likely to continue to flow into the Philippines.

Since the early 1990s the policies of the four large ASEAN countries towards FDI have become increasingly liberal as a result of the increased competition from the other rapidly growing East Asian economies, particularly China, to attract more FDI. As a result of the financial and economic crisis of 1997/1998 this competition to attract new FDI is likely to become even stronger, as new FDI inflows are now needed more than ever to revive the ASEAN economies.

While most of the FDI in the 1990s has gone to the advanced countries, particularly in North America and the European Union, the bulk of FDI flowing into the developing countries has, at least until the crisis of 1997/1998, gone to China and the other rapidly growing East Asian countries, in particular the ASEAN countries. The data in table 5 show that since the early 1990s FDI flowing into the ASEAN countries has been growing rapidly. In fact, by 1996 the amount of FDI flowing into the ASEAN countries combined had more than doubled compared to 1991. Among the developing countries the amount of FDI flowing into the ASEAN countries combined have only been surpassed by China, which since the early 1990s has been one of the top destinations of FDI in the world.

During the period 1985-1990 the five ASEAN countries combined each year on the average received no less than 24 per cent of the total FDI inflows into the developing countries. However, by 1996 this percentage had slightly declined to 21 per cent, largely due to the strong competition from China as the top destination of FDI inflows into the developing countries. (Thee 1997: 4).

Throughout the early 1990s Malaysia and Singapore ranked as the two top destinations of FDI into the ASEAN countries, but in 1995 and 1996 Indonesia emerged as the second-ranking destination of FDI into the ASEAN countries, being surpassed only by Singapore. This rapid increase of FDI into Indonesia was the second surge of FDI into Indonesia since the first surge in 1988- 90 when large amounts of export-oriented FDI from East Asia, particularly from the East Asian NIEs, flowed into the textile and garment industries. (World Bank 1996a: 12). This export- oriented FDI has led to the quadrupling of Indonesia's textile and garment exports in the five years to 1992/93, when they were Indonesia's largest manufactured exports.

The surge of FDI into the ASEAN countries, particularly export-oriented FDI from the East Asian NIEs, since the late 1980s was not only caused by 'pull' (host country) factors, such as the generally favourable investment climate for foreign investors, but also to 'push' (home country) factors. In the case of Indonesia, its successive deregulation measures to improve the country's investment climate and the trade reforms to reduce the 'anti-export bias' of its protectionist trade regime were important 'pull' factors which encouraged export-oriented FDI into the country. (Thee 1991: 56-60).

The 'push' factors at work in the home countries of export- oriented FDI, specifically in the East Asian NIEs, were the rapidly rising real wages in these countries caused by the increasingly tight labour markets and the steep appreciation of their currencies, particularly the Korean won and the New Taiwan dollar. As a result of these developments, the labour-intensive industries in these countries lost their comparative advantage in their home countries, forcing them to relocate these industries to the lower wage countries in Southeast Asia, particularly Thailand and Indonesia. (Thee 1991: 60-62). As a result of the surge of East Asian FDI, including Japanese and East Asian NIEs' FDI, into the ASEAN countries since the late 1980s, intra- regional FDI has emerged as the dominant feature of FDI in the ASEAN countries.

The large inflows of FDI into China and the ASEAN countries since the early 1990s had in part been driven by a worldwide boom in FDI during this period, as shown in table 5. But the surge of FDI into Indonesia was to a significant extent also caused by the significant liberalisation of foreign investment regulations in June 1994. (World Bank 1996a: 12). During this period the bulk of FDI flowing into the ASEAN countries was being invested in the manufacturing sector. This was also the case in resource-rich Indonesia, as shown in table 6.

It should be pointed out, however, that the data in table 6 do not include the data on FDI in the oil, gas, and financial sectors, which are regulated under different laws. In view of the large importance of FDI in the oil and gas sectors and the increasing importance of FDI in Indonesia's financial sector (e.g.banking, insurance), particularly since the financial deregulation measures of October 1988, the above figures underestimate the actual importance of FDI in the Indonesian economy. In view of the fact that the banking system in Indonesia has virtually collapsed as a result of the recent crisis, the role of FDI in Indonesia's financial sector is likely to rise substantially if foreign banks acquire more of Indonesia's bankrupt banks.

Although the ASEAN countries have in general been pursuing more liberal policies towards FDI than Japan and the large 'first tier' East Asian NIEs, specifically South Korea and Taiwan, during the early phases of their industrialisation, the degree of openness to FDI among the ASEAN countries themselves has, as we have seen, been quite different. The differential impact of the foreign investment policies of these countries on the inflows of FDI and, in particular, on the relative importance of FDI as a source of productive investment, is shown in table 7, which shows the FDI inflows into the East Asian countries in 1995 as a percentage of gross domestic capital formation in these countries.

Table 7 shows that the ratio of FDI inflows to gross domestic capital formation in 1995 was the largest in China, Singapore, and Malaysia. In the case of Singapore this ratio was around 24.0 per cent, and in the case of Malaysia around 17.5 per cent. However, in the case of the three other ASEAN countries the figures were less than 10 per cent. (UNCTAD 1997: 82).

Table 7 also shows that the industrially and technologically more advanced East Asian countries, specifically Japan, South Korea, and Taiwan, have relied much less on FDI as a source of productive investment than the industrially and technologically less advanced ASEAN countries. Among the 'first tier' East Asian NIEs the only exception has been Singapore which because of its small size, limited resources, and limited experience in manufacturing had to rely much more on FDI to develop its manufacturing sector than the larger 'first tier' East Asian NIEs.

The relatively much smaller role of FDI in Japan and the two large 'first tier' East Asian NIEs to pursue restrictive foreign investment policies can be attributed to their strong determination to promote their own domestic enterprises and to develop their own indigenous technological capabilities. To achieve these goals, selectivity on FDI was one important aspect of their strategies. It thus appeared that the governments of these countries were seeking to exploit causal relationships between the restricted entry of FDI, the development of domestic enterprises, and the development of indigenous innovative capabilities. (Lall 1996a: 202).

While the ASEAN countries were certainly not less nationalistic, they had in general more modest technological ambitions and less desire to promote domestic enterprises. (Lall 1996a: 202). The only exceptions to this tendency were Indonesia which, at least until the financial crisis of 1997/98 put a halt to its large-scale, capital-intensive projects, sought to develop a range of expensive high-technology industries, particularly its state-owned aircraft industry, and to a lesser extent Malaysia with its ambitious plans to develop its own 'national car' and its Multi-Media Supercorridor.

FDI and the Industrial Technological Development in the ASEAN Countries

Experience of some of the rapidly-industrialising ASEAN countries, such as Singapore and Malaysia, has shown that one of the most important determinants of successful industrial and technological upgrading required to achieve a competitive edge in the export markets has been their ability to attract FDI and make effective use of this FDI by promoting supporting industries and building up a pool of highly skilled managers and workers, who later establish their own firms, including supplier firms which supply parts and components to assembling industries. (World Bank 1996b: 4-5). Hence, FDI can be an important channel for the transfer of advanced technologies and the development of indigenous technological capabilities.

Among the ASEAN countries one can distinguish basically two categories of FDI policies, in particular as it has affected the industrial technological development in these countries. The first category of FDI policies was being pursued by Singapore which actively encouraged the TNCs from the advanced industrial countries to undertake export-oriented investments in manufacturing. Singapore's industrial and investment policies did not involve any deliberate attempt to promote local industrialists, but it did intervened pervasively and selectively to guide and induce the foreign investors to upgrade their activities and increase their local technological activities, particularly R & D activities. (Lall 1996a: 202-03).

The second category of FDI policies was being pursued by Malaysia and Thailand since the 1970s, by Indonesia since the late 1980s, and finally by the Philippines since the early 1990s. Although these countries, particularly Indonesia and Malaysia, have been pursuing an industrial policy of some sorts, in that these countries tried with several means (high import protection, selective fiscal incentives, assured government procurement) to promote certain industries or local enterprises, their industrial policy was never as pervasive and comprehensive as that pursued by Japan, South Korea, and Taiwan. On the other hand, however, these countries have also been pursuing relatively liberal foreign investment policies, particularly in regard to the export-oriented industries. (Lall 1996a: 202).

Among the ASEAN countries Singapore has been an outstanding example of how a developing country by combining a liberal foreign investment policy with carefully calibrated selective interventions can effectively harness TNCs to its own ends, specifically by encouraging them by various incentives to facilitate the country's industrial and technological upgrading. In fact, Singapore's liberal foreign investment policy paved the way for technology transfer to local managers and workers. This was, amongst others, facilitated by the introduction in the 1980s of an effective workers' training program, the Local Industry Upgrading Program (LIUP) by the Economic Development Board (EDB). Under this Program selected local industries, including the important electronics industry, were attached to groups of TNCs which trained their workers to make the products they needed for technologically advanced processes. (Goh 1996: 2-3). In other words, this LIUP has been quite successful in raising the technological capabilities of local small- and medium-scale enterprises (SMEs) to serve as efficient supplier firms to the TNCs.

By giving a high priority to promoting the development of small- and medium-scale enterprises (SMEs) since the 1980s, the Singapore government has also been quite successful in improving the technological and managerial absorptive capabilities of these SMEs. Singapore has also made good use of policies that promoted clusters of supporting (ancillary) industries. As a result, there has been a growing trend on the part of the TNCs towards the use of local subcontractors. (Meyanathan & Munter 1994: 15). In particular the TNCs operating in the consumer electronics, computer manufacture, and semi-conductor industries have made increasing use of local subcontractors. The subcontracting activities which have rapidly increased in response to the rising demand for locally made parts and components include paper packaging, aluminium and plastic name plating, metal stamping, precision engineering, electroplating, and precision tooling. (Meyanathan & Munter, 1994: 15).

Studies on the improvement in the technological and managerial capabilities of the Singaporean SMEs have indicated that this has depended less on the direct efforts of the TNCs in transferring their technology (direct know-how transfer effect) than on the feedback provided by the stringent quality/performance assurance control system imposed by the TNCs on the output of the SMEs. (Soon 1994: 84).

By giving top priority to the expansion and upgrading of technical education at all levels, the Singapore government made it possible that the rapidly growing industries, including the important electronics industry which accounted for 43 per cent of Singapore's total manufacturing output, could be assured of a steady supply of the requisite highly trained engineers and technicians. (Goh 1996: 3). The availability of highly-trained local engineers, technicians, and workers also made it possible for the TNC subsidiaries to rapidly upgrade their operations and produce new, highly sophisticated products.

Like Singapore, Malaysia's manufacturing sector is highly dependent on TNCs, which generate more than three-quarters of Malaysia's manufactured exports, particularly electronics and electrical products (semi-conductors, disk drives, calculators, telecommunications apparatus, colour TV, and audio and video equipment). The only important mostly locally-owned export- oriented industry is the garment industry which generates about six per cent of Malaysia's manufactured exports. (Lall 1996b: 161).

Although the bulk of Malaysia's manufactured exports, unlike the composition of manufactured exports of most other developing countries, consists of products which are classified in the high- skill, high technology category, including electronics exports which constitute the bulk of Malaysia's manufactured exports, the local content of these manufactured exports has remained quite low. For instance, it has been estimated that for every RM (ringgit Malaysia) of output of the electronics and electrical industries, about 80 sen has been spent on imported inputs. Hence, these important industries generate very little local value added. (Zainal-Abidin 1996: 6). This low level of local content has been due to the inability or unwillingness of most TNCs to establish backward linkages with the domestic economy. As a result, most industries in Malaysia, including its export- oriented industries, are still largely engaged in relatively simple assembling and finishing activities. Where there has been some increase in local content over time, this has largely been made possible because of FDI in the parts and components subsectors. (Lall 1996b: 161).

However, although Malaysia has been less successful than Singapore in promoting the development of SMEs as efficient subcontractors to the TNCs, since the early 1990s a growing trend towards more vertical interfirm linkages between the TNCs and local SMEs operating as their subcontractors could be detected. This has especially been the case with the TNCs operating in the electrical, electronics, telecoms, furniture, and automotive industries. The subcontractors which have emerged in response to the rising demand of the TNCs are mostly engaged in tool- and die-mold making, metal stamping, plastic injection molding, engineering plastics, and application software. (Meyanathan & Munter 1994: 14-15).

Since the early 1990s the Malaysian government has taken several steps to promote the further development of subcontracting by various efforts to raise the absorptive capabilities of the SMEs, for instance by providing incentives to stimulate training by the private sector, by providing adequate infrastructure for and stimulating the creation of clusters of SMEs near the large industrial estates, and by stimulating the setting up of funds , financed by the private sector, for the training of SME workers. (Meyanathan & Muhd. Salleh 1994: 55-57).

Although Malaysia's various schemes to promote SMEs with view to broaden its industrial base has been less effective and efficient than Singapore, its efforts to date have been more successful than the SME promotion policies pursued by the three other large ASEAN countries, Indonesia, the Philippines, and Thailand. For instance, Indonesia, in the late 1970s and early 1980s attempted to foster the growth of local supplier firms, including SMEs, to the large, mostly foreign-controlled assembling companies operating in the engineering goods industries by introducing various mandatory 'deletion programs' (local content programs). Under these mandatory 'deletion programs' a deletion schedule was drawn up on an item by item basis, under which the large assembling firms were required to use progressively more and more locally made parts and components in the assembly of final goods as specified by the deletion schedule for that particular industry. (Thee 1994a: 109). It was hoped that through these 'deletion programs', the large TNC- affiliated assembly firms could transfer the necessary technologies to their subcontractors, most of whom were expected to consist of SMEs.

However, in practice these mandatory 'deletion programs' have in general not been able to develop economically viable SMEs which could function as efficient subcontractors to the large assembling firms. In view of the limited technical and managerial abilities of most small- and medium-scale subcontractors, the mandatory 'deletion programs' have in fact often resulted in either vertical integration, that is the establishment by the large assembling firm of an affiliated supplier firm, or the establishment of vertical interfirm linkages between the large assembly firms and unaffilated large supplier firms, most of which, however, were also affiliated with TNCs. (Thee 1994a: 110).

Unlike the Indonesian government, Thailand's government has not introduced mandatory 'deletion programs' to promote the development of subcontractors to the large assembling companies, but has instead preferred to let market forces stimulate the use of subcontracting and interfirm linkages. This has indeed stimulated subcontracting in the machinery, electrical, electronics, transport equipment, textile, wood and furniture industries. (Meyanathan & Munter 1994: 18). However, despite the development of these subcontracting networks, the further development of subcontracting is hampered by the limited technological and managerial capabilities of the subcontractors which mostly consist of SMEs. Hence, increasing the absorptive capabilities of these SMEs is crucial to developing the capabilities required to become viable subcontractors to the large assembling companies. This, in turn, requires the development of the human resources of the SMEs, which in turn requires a significant and continuous reform of Thailand's education system which at present is still inadequate. (Thongpakde, et.al, 1994: 142).

The above overview of the development of subcontracting networks in the ASEAN countries between large TNC-affiliated firms and SMEs has indicated that in general the hoped for technology transfer from the TNCs to indigenous ASEAN firms, particularly the SMEs, has been hampered by the lack of the absorptive capabilities of most SMEs in the ASEAN countries which, in turn, has hampered them from raising the technological and managerial capabilities required to become efficient subcontractors to the large assembly firms. Hence, instead of forcing the pace of subcontracting through mandatory 'deletion programs', the development of subcontracting might take place through market forces if promotion efforts are focused on enhancing the 'supply-side' capabilities of the SMEs, including training efforts for the SME workers. These training efforts could be jointly sponsored and financed by the public as well as private sectors, as has been the case with Singapore's highly successful LIUP. Besides implementing the necessary support programs to enhance the 'supply-side' capabilities of the SMEs, steps should also be taken to create a more enabling policy environment for the SMEs, since in all the ASEAN countries SMEs sometimes do suffer from unintended discriminatory government policies and practices. Removing these policy and administrative impediments would go a long way in establishing a more enabling policy environment for the SMEs.

Although in all the ASEAN countries technology transfer from the TNCs to local employees (including managers, technicians, and plant workers) have undoubtedly taken place and is still taking place, one important lesson to be drawn from the experience of Indonesia and the other ASEAN countries is that FDI does not provide a simple short-cut to the acquisition of indigenous technological capabilities. In fact, Japan's and later South Korea's and Taiwan's experiences show that rapid industrial progress and the development of indigenous technological capabilities have generally not been dependent on FDI. (Thee 1994b: 56). Instead, most Japanese, Korean, and Taiwanese firms were able to become internationally competitive through their own technological efforts, that is through their investments in developing their indigenous technological capabilities.

This certainly does not mean that FDI should not be welcomed anymore by the ASEAN countries since FDI has without doubt contributed a great deal to the rapid industrialisation of the ASEAN countries. On the contrary, as stated earlier, with the ASEAN countries experiencing a serious economic crisis, new FDI inflows into these countries are now needed more than ever to revive these economies. For this reason alone the ASEAN countries are simply not in a position to pursue the same restrictive policiies towards FDI which the first tier East Asian NIEs had been pursuing in the past. In fact, these first tier East Asian NIEs have recently also been pursuing more liberal policies towards FDI in order to further their technological development.

FDI has without doubt contributed to the technological development of the ASEAN countries, in particular through the transfer of the 'easier' technological capabilities, specifically the operational (production), adaptive (minor change), and acquisitive (investment) capabilities. However, it should also be clear that FDI cannot be relied upon to transfer the more difficult innovative (major change) capabilities to the local firms. To achieve the latter more demanding technological capability there is no shortcut to indigenous technological effort to acquire domestic technological capability. (Thee 1994b: 57).

Concluding remarks

At present all the ASEAN countries, particularly Indonesia and Thailand, having been hardest hit by the financial and economic crisis of 1997/1998, are struggling to overcome the adverse impact of the crisis. Hence, the most urgent short-run problem facing these countries is to restore macroeconomic stability and revive their economies, amongst others by attracting more FDI into their economies. This is a tall order, particularly for the worst affected country, Indonesia, which needs to achieve political and macroeconomic stability first before it can ever hope to attract new FDI into the country.

However, once economic recovery has been achieved, the ASEAN countries will again be facing the same challenge they were facing before the economic meltdown, namely how to achieve sustained rapid economic growth required to generate new productive and remunerative employment opportunities for their growing labour force which, in turn, could rapidly reduce the incidence of absolute poverty in their countries. For the four large ASEAN countries, Indonesia, Malaysia, the Philippines, and Thailand, sustained rapid economic growth would greatly depend on the sustained rapid growth of the manufacturing sector. This, in turn, would depend on sustained rapid growth of their manufactured exports. To this end these large ASEAN countries would, just like the first tier East Asian NIEs, need to develop a more sustainable source of comparative advantage, namely the development of industrial technological capabilities (ITCs).

By developing and continuously improving their ITCs, the manufacturing companies, including the SMEs, in these countries will be able to improve their international competitiveness. In the case of the city-state of Singapore, however, which has already become a post-industrial services economy, sustained economic growth would depend much more on the sustained growth of its modern service sectors.

In order to encourage the manufacturing firms in the large ASEAN countries, including the SMEs, to make the required technological efforts to master these ITCs, the governments of these countries have to ensure that certain basic and enabling conditions are being met. International experience, and particularly the experience of the 'first tier' East Asian NIEs has shown that the basic conditions to encourage and enable manufacturing firms, including SMEs, to develop their ITCs are macro-economic stability which would be conducive to long-term investment in the development of ITCs; pro-competition economic policies to stimulate firms to invest in technological development; and the development of human resources to upgrade their skills. (World Bank 1996b: i).

Besides these basic conditions, there are also a number of enabling conditions which would facilitate the technological development of manufacturing firms. (World Bank 1996b: i). These enabling conditions should involve a better access to foreign technologies (as developing countries are by definition net technology importers), for instance through foreign trade, as a lot of useful technological information can be acquired from a firm's foreign buyers; a more effective use of FDI (as has been done so effectively by Singapore); better access to finance; and a more effective provision of the necessary technology support services, including the important MSTQ (metrology, standardisation, testing, and quality assurance) services to the manufacturing firms, including the SMEs, in order to enable them to meet the exacting standards required to enter the demanding export markets.

In view of the greater attention being paid to the role of SMEs in the ASEAN countries, and particularly in Indonesia since the collapse of many large conglomerates in the wake of the recent economic crisis, it should be pointed out that technology support services have played an important role in raising the ITCs and competitiveness of Taiwan's SMEs. Hence, they could play a similar role in enhancing the supply-side capabilities of the SMEs in the ASEAN countries. Thus far, however, technology support services in the ASEAN countries have in general, with the exception of Singapore, not been very effective in raising the ITCs and competitiveness of the SMEs in these countries.

To a large extent the lack of effective technology support services in these countries has been due to the fact that these services has been provided by public institutions and therefore been overly bureaucratic in nature. Hence, in order to provide more effective technology support services to the manufacturing firms, including SMEs, in the ASEAN countries, the public institutions should be restructured in order to make their activities more demand-driven (i.e. driven by the demand of the manufacturing firms themselves). provision of these services by private institutions could go a long way towards a more effective provision of these important technology support services. In addition, private institutions should be given the opportunity to provide effective technology support services where public institutions are found wanting._

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