The small oil-rich country of Brunei has captured a lot of international attention this year for its strict interpretation of sharia law, which includes applying the death penalty to a range of offences, including same-sex relationships, which has attracted criticism from international organisations such as the UN. Some commentators have maintained, however, that the focus on these issues is preventing a deeper understanding of the progress that is under way in the country's economy, which could establish Brunei as one of south-east Asia’s foremost investment destinations.

Located on the northern coast of the island of Borneo in south-east Asia, Brunei’s economy has historically relied on its oil and gas exports. According to the Brunei Economic Development Board, oil and gas accounts for 67.7% of the country's GDP. But, although the country is the world’s fifth richest economy in terms of purchasing power, according to the International Monetary Fund, the government has proactively worked to diversify its competitive sectors.

Taking shape

According to David Clive Price, an Asia business consultant, Brunei’s government has worked to gain a competitive edge in niche yet strategic sectors in order to differentiate itself as a key member of the Association of South-east Asian Nations (Asean).

Pointing to Brunei’s efforts to develop a host of sharia-compliant financial products, Mr Price says that Brunei has made significant strides in establishing itself as a leading Islamic financial centre in Asia, catering to neighbouring countries including Indonesia and Malaysia, as well as investors from other regions such as the Middle East. “Brunei has established a very strong position when it comes to sharia-compliant Islamic finance,” he says.

“One of the competitive advantages the country enjoys is it has a highly educated workforce, with strong technocratic abilities. Thus, the country has leveraged this through encouraging innovation [in new financial products].”

For its efforts, Brunei has witnessed a significant increase in Islamic finance insurance investments. According to Brunei’s central bank, Autoriti Monetary Brunei Darussalam, assets held by Islamic insurance institutions in Brunei grew by 21% in 2013 to $336m. The country's financial sector has also drawn interest from foreign investors. Data from greenfield investment monitor fDi Markets shows that, between 2003 and 2014, financial services recorded the largest number of greenfield projects of any sector, attracting 11 projects, compared with five in the coal, oil and natural gas sector.

A centrepiece of the government’s diversification strategy has been promoting the development of the information and communication and technology (ICT) sector, by encouraging foreign investors to foster closer ties with the country's technology firms. As part of the plan, the government has built a new industrial hub, Rimba Digital Junction, which offers readily accessible ‘plug and play’ facilities for foreign firms, encouraging knowledge and technology transfer with local firms. At the same time, the University of Brunei Darussalam has established its new entrepreneurship centre, which functions as an incubator for local start-up firms.

Mr Price says that the government’s push to create links between foreign and local technology firms by connecting the centres could establish Brunei as a key ICT hub in the Asean region. “Brunei’s government has adopted a very paternalistic approach to supporting the growth of its local technology firms, however it has also combined this with a very open approach to attracting FDI,” he says. “Its efforts in creating excellent infrastructure have been important in aiding the development of its ICT and creative industries.”

Connecting the dots

Critics have maintained, however, that while the government has done much to support Brunei’s private sector, it has not done enough to tackle the country’s highly bureaucratic culture, which continues to undermine its ability to attract substantial FDI. Although Brunei is placed in 59th position in the World Bank’s Doing Business ranking, a common complaint among investors is that establishing a new project can be a lengthy process.

“Similar to many other countries in Asia, Brunei has a challenge with respect to its bureaucratic barriers,” explains Mr Price. “Getting permits to start a business and enforcing contracts can be difficult.”

Additionally, while the government has built a range of investor-friendly sites for companies operating in Brunei, the relatively weak connections between such business clusters means that firms lack access to a supportive ecosystem to support their commercial needs. “When you look at China, it developed several special economic zones, which geographically clustered a range of businesses in one area,” says Mr Price. “Brunei’s business clusters are still relatively underdeveloped."

Nevertheless, Mr Price is optimistic about the future. "Despite these challenges, it is important to note that Brunei has taken leadership in a range of areas, including logistics, meaning it will play an important role as an investment destination in Asean," he says. "For example, Brunei is party to the construction of a trans-Pacific railroad that will connect it to Malaysia, Myanmar, India and China. Companies that take a long-term view when investing in Brunei will have much to gain in coming years.”