Liberalization and Foreign Direct Investment in Asian Transport Systems: The Case of Aviation

The aviation industry is critical for Asia to gain from participation in the global economy. The airline industry in developing Asia is generally dominated by state-owned enterprises, and the record of state ownership is poor. Foreign direct investment would provide the managerial and technical skills needed to improve productivity. Paradoxically, however, this is an industry that combines extensive cross-border activities with almost insurmountable obstacles to foreign investment. Airline alliances and marketing arrangements have emerged as an imperfect substitute to consolidation through (cross-border) mergers and acquisition. This paper sketches the main features of international air transport, focusing in particular on the bilateral and multilateral regimes; presents the main characteristics of the developing Asia market and the specific Association of Southeast Asian Nations and Asia-Pacific Economic Cooperation forum objectives in this domain; analyzes ongoing developments in selected countries, in particular in privatizing flag carriers in India and Thailand and consolidating airlines in People’s Republic of China; and concludes by putting findings from the region in the wider context of experiences in other developing regions and regulatory development at the multilateral level, including at the World Trade Organization.