Harnessing RCEP to Harvest ASEAN’s Unicorns

The ASEAN digital economy is expected to add an estimated USD1 trillion to regional GDP over the next 10 years. Before the onset of the Covid-19 pandemic, venture capitalists were already scouring ASEAN for start-ups with high growth potential. In 2018, it was reported that at least 5,800 active start-ups were operating in the region, including e-commerce, fintech, enterprise solutions, big data and consumer goods and services.

Increased digitalisation over the pandemic period added further impetus to the growth of start-ups across the region. In particular, the number of unicorns — start-up companies with a value exceeding USD 1 billion — in ASEAN shot up. In 2021 alone, 25 new unicorns emerged, bringing to date a total of 35 unicorns in ASEAN. These are spread across six ASEAN countries, with Singapore leading (15), followed by Indonesia (11), Malaysia (3), Thailand (3), Vietnam (2) and the Philippines (1). Sectorally, fintech has the most (26%), followed by e-commerce (20%), logistics (11%) and diversified internet (8%). ASEAN is expected to churn out another 10 new unicorns by 2024, according to a report by Bain & Company. The region is thus emerging as a major ecosystem for nurturing start-ups and unicorns.

Can regional free trade agreements facilitate further development of start-ups and unicorns in ASEAN? The Regional Comprehensive Economic Partnership (RCEP) Agreement does just that by providing an expanded regional market, bolstering protection of intellectual property (IP) and enhancing rules in services and e-commerce. The agreement entered into force on 1 January 2022, for ten countries: Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand and Vietnam. It will enter into force on 1 February 2022, for the Republic of Korea, 18^th March for Malaysia and 60 days after ratification for the remaining participating countries.

There are also several provisions in the agreement that can attract investors, especially in the emerging digital economies of ASEAN.

The agreement will expand trade among the member countries of the pact through tariff reductions, provisions on non-tariff measures, standardised rules for determining the origin and regional content of goods, as well as customs and trade facilitation. Since RCEP member countries together account for nearly one third of the world’s population, gross domestic product (GDP) and merchandise trade, the enlarged regional market provides invaluable opportunities for ASEAN’s start-ups to expand horizontally by selling the same product across a wider range of markets. Smaller ASEAN member states stand to benefit the most through the broadened reach of RCEP’s domain.

Start-ups cherish IP rights protection, which secures their intangible assets, boosts value propositions and enables continuous innovation. The IP chapter in RCEP is a World Trade Organisation (WTO)–Plus chapter as it provides protection for IP beyond the existing WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement). For example, there are provisions on protection of technology and electronic rights management. RCEP member countries that have yet to ratify or accede to multilateral agreements on IP will be required to do so, within a specified time frame. This will serve to align IP standards in member countries to global standards. The chapter therefore adds to the attractiveness of the region for nurturing more innovative start-ups and unicorns.

There are also several provisions in the agreement that can attract investors, especially in the emerging digital economies of ASEAN. The services sector, for example, houses all the important digital segments, such as telecommunication and logistics services, along with professional, financial, and computer-related services. Scores of service industries stand to flourish through the RCEP chapter on services, which establishes market access, enhanced rules of engagement, and greater transparency.

Importantly, the agreement includes a chapter on e-commerce that creates a conducive environment for the sector by providing rules for digital trade facilitation, especially through promotion of paperless trading and electronic authentication and signature. Although there is no comprehensive coverage of cross-border data flows and localization requirements, there is reduced scope for new restrictions.

RCEP therefore provides investment opportunities for investors within the pact that are eyeing ASEAN’s growing digital economies. Singapore, Japan, China, Republic of Korea and Thailand are already among the top ten investors in ASEAN. From 2015 to 2020, RCEP countries contributed approximately 40 per cent of the FDI received in ASEAN.

The pact can also help attract investments from outside its domain, since global FDI could potentially fully recover to its pre-pandemic level of about $1.5 trillion in 2022, based on the United Conference on Trade and Development’s (UNCTAD) optimistic upper-bound scenario. Of course, this assumes the absence of subsequent regional or global crisis relapses, and a return to rapid economic growth and high investor confidence.

The entry into force of RCEP comes just in time to facilitate investments in the vibrant and growing start-up scene in ASEAN. The region’s maturing bench of start-ups can act as an important catalyst for new investment activities, brightening the prospect of more unicorns on the horizon.

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