Worldbox: Southeast Asia’s Growing Appeal as an FDI Destination

A combination of factors, including growing tensions between China and the US, are helping to drive a renaissance in FDI into ASEAN, writes Adrian Ashurst, CEO of Worldbox Intelligence.

Southeast Asia remains one of the most attractive regions for foreign investors, reflecting political stability, business-friendly policies, hard-working and disciplined workforces, and growing domestic markets. It’s little surprise, therefore, that foreign direct investment (FDI) grew by 41% over the five years to 2022, to reach US$225 billion, according to the latest UNCTAD data. 1 That increase outpaced growth in investment in China, Latin America and Africa.

Investment in Singapore, the largest recipient of FDI in the region, rose by 8% in 2022, to a record US$141 billion. Flows to Malaysia grew by 39% to US$17 billion – also a new record for the country. Meanwhile, FDI into Vietnam and Indonesia grew by 14% and 4% respectively, to reach US$18 billion and US$22 billion.

Sino-US tensions provide regional boost

Nikkei Asia reported in December that a new factor is driving FDI into the region, namely its strategic role as a buffer zone amid intensifying Sino-US competition. Indeed, the US is the largest investor in capital projects in Southeast Asia, spending US$74.3 billion on plant construction and other projects between 2018 and 2022, according to the Financial Times’ fDi Markets tracker of cross-border investment. The US is followed by China, which invested US$68.5 billion in the same period, reports Nikkei Asia. 2

The news agency added that US businesses are mostly focused on semiconductor-related investments in countries such as Singapore and Malaysia, while Chinese companies have invested in projects like the construction of electric-vehicle (EV) plants in Thailand and mining development in Indonesia. The US is keen to reduce its dependence on advanced computer chips produced in Taiwan, given China’s avowed intent to claim the island.

The US also wishes to relocate manufacturing bases away from China and towards friendly nations, while Chinese companies are moving plants and other facilities to third countries to facilitate exports to the US and Europe.

Turning Japanese

Japanese companies are also increasingly favouring Southeast Asian nations as Japan’s economy slows, according to the Economic Research Institute for ASEAN and East Asia (ERIA). Japanese companies are also moving away from China, where they used to invest heavily. They are now turning towards countries such as Indonesia, Vietnam and Thailand as the risk of investing in China grows. Japan was ASEAN’s second-largest foreign investor in 2022, with an investment of US$26.7 billion. 3

Electric vehicles driving growth

ASEAN is also benefitting from surging foreign investment in the EV sector. The region received US$18.1 billion worth of international investment in EV-related sectors in 2022, a 570% increase on the US$2.7 billion registered in the previous year. The investment flowed into the mining of critical minerals (nickel and cobalt), battery production, and EV manufacturing. 4

Indonesia, Thailand, Malaysia and Vietnam, already established auto hubs, are fighting to win the race for EV FDI, each country unleashing a range of incentives in recent years. Consequently, foreign investors are flocking to the region, lured by already established car-manufacturing bases, vast natural resources and generous government incentives.

Indonesia is leading the race in EV battery production, due to its large nickel reserves and a ban on the export of unprocessed nickel, which creates extra incentives for those in the value chain to locate within the country. Thailand, meanwhile, is faring well in terms of vehicle production, with five factories under construction. Given the relatively small size of the domestic market, with EVs accounting for just under 2% of the region’s total passenger-vehicle sales in 2022, much of the output is likely to be exported.

Regional trends

There are also some interesting dynamics emerging within ASEAN. These include the growing appeal of the Philippines, which overtook Malaysia and Thailand in terms of FDI in the first three quarters of 2023, helped by the government’s efforts to liberalise the economy. The Philippines ranked sixth among Southeast Asian countries in terms of FDI inflows in 2022, receiving US$9.2 billion.

The Department of Trade and Industry accepts that high power costs are a major deterrent to FDI and is seeking to address the situation by provides incentives to facilities that produce their own power supply – especially those using clean energy. The Marcos government’s aim is for the Philippines to become the second-largest recipient of FDI in ASEAN by 2028.

Cambodian lift-off

Cambodia is benefiting from reforms and a range of new incentives, including income-tax exemption for three to nine years, depending on the nature of investments, as well as exemptions from certain customs duties. Net FDI inflows into Cambodia accounted for 11.9% of the country’s GDP in 2022.

Following the release of those figures, Cambodia scored 5.10 in the Inward FDI Performance Index produced by the website Investment Monitor. That means it received more than five times its share of inward greenfield FDI compared with what could be expected given its GDP. That ratio, says Investment Monitor, was well above regional competitors like Malaysia (3.39), Singapore (4.28), Thailand (2.36) and Vietnam (3.85). 5

The strong growth in investment inflows continued in 2023. The Kingdom attracted US$4.92 billion from abroad last year, up 22% over 2022’s US$4.03 billion. Moreover, the country appears to be reducing its dependence on China as a source of FDI. China accounted for 66% of overall FDI in 2023, down from 80% in the previous year. Other major sources of investment include Malaysia and Singapore.

Officials attribute the rise in FDI inflows to the Regional Comprehensive Economic Partnership, the Cambodia-China Free Trade Agreement, China’s Belt and Road Initiative, and Cambodia’s new law on investment, one of the most liberal in the world.

There is little doubt that FDI into the region will continue to rise in the coming years, given the likelihood of continuing tensions between China and the US, as well as the competitive race between ASEAN members to liberalise economies and adopt generous FDI incentives. As the size of domestic economies grows, Worldbox Intelligence expects an increasing proportion of FDI to be geared towards meeting the needs of the region’s increasingly sophisticated and prosperous businesses and consumers.

1 https://unctad.org/news/investment-flows-developing-countries-asia-remained-flat-2022

2 https://asia.nikkei.com/Spotlight/Datawatch/U.S.-and-China-butt-heads-over-investment-in-Southeast-Asia

3 https://jakartaglobe.id/business/japanese-investors-favor-southeast-asia-as-domestic-economy-slows

4 https://jakartaglobe.id/business/asean-fdi-hits-alltime-high-as-ev-investment-skyrockets

5 https://www.investmentmonitor.ai/news/fdi-cambodia-leading-2024-investment-opportunities

Source: Worldbox Press Release

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