Despite the concurrent crises affecting the globe, foreign direct investment (FDI) in ASEAN achieved a new peak of $224 billion in 2022, marking a 5.5% increase compared to the previous year. The resilience in FDI flows toward Southeast Asia is, in part, attributed to the restructuring of global supply chains and the emphasis on sustainability in emerging markets.
The ASEAN Investment Report 2023, unveiled in December, highlighted that certain developing regions, including Southeast Asia, deviated from the declining trend in FDI. The report acknowledged the impact of global factors such as the Ukraine conflict, elevated food and energy prices, recessionary risks, and escalating public debt, which collectively led to a 12% decrease in global FDI to $1.3 trillion in 2022.
Key contributors to the positive trend in ASEAN include opportunities arising from regional integration, propelling economic and industrial growth, an improving investment policy environment, and the expansion of businesses across the region. Additionally, the adoption of clean energy and the transition to electric vehicles are further stimulating investor interest in the region.
Developed with technical assistance from the United Nations Conference on Trade and Development and financial support from the Government of Indonesia, the report, released in December, conducts an in-depth analysis of FDI trends and developments. It identifies emerging issues and opportunities while presenting policy options for consideration.
Becoming a Central Hub for Relocation
“The ASEAN region has solidified its standing as a premier destination for investment in the developing world, surpassing inflows directed towards the People’s Republic of China for the second consecutive year,” as indicated in the report. “The region’s proportion of global FDI has notably expanded, escalating from below 15 percent in 2021 to surpass 17 percent.”
There were notable increases in the primary modes of international investment, including announced greenfield projects, international project finance deals, and cross-border mergers and acquisitions.
The report highlights the proactive expansion of multinational enterprises throughout ASEAN, as they construct regional value chains and fortify supply chain networks. Equity investment experienced an 8% increase, reaching $127 billion, constituting 56% of the total FDI in 2022. Additionally, reinvestment grew by 5%, totaling $86 billion or 38% of the overall FDI.
“Geopolitical tensions and disruptions driven by the pandemic have instigated a wave of supply chain restructuring, favoring ASEAN as a relocation hub. This environment is prompting investors, including those already present in ASEAN, to enhance capacities, establish more robust regional footholds, and strengthen supply chains,” the report elaborated.
A compelling attraction for FDI is regional integration, exemplified by initiatives such as the ASEAN Economic Community and the Regional Comprehensive Economic Partnership. These initiatives provide opportunities for firms to enter swiftly growing markets, exploit locational advantages, and reinforce regional value chains.
Leading Recipients
In 2022, Malaysia, Singapore, and Vietnam experienced unprecedented highs in foreign direct investment (FDI). Although the inflows to Cambodia and Indonesia remained steady without significant growth, the level of investments remained substantial. Singapore led in FDI, recording $141 billion, reflecting a 10% increase, while Malaysia witnessed the most substantial growth at 39%, reaching $17 billion.
Prominent sectors demonstrating robust performance include manufacturing, wholesale and retail trade, the digital economy, and finance. Moreover, there is a growing focus on renewables and the electric vehicle industry.
Within the Sustainable Development Goals (SDGs) sector, the number of projects attracting foreign investments increased for a second consecutive year. However, FDI flows exhibited disparities, with infrastructure and renewables drawing more attention than projects related to water, sanitation, and hygiene.
Emerging Challenges and Opportunities
The report identified four critical areas for policy intervention, encompassing international tax reforms, global supply chain restructuring, the energy transition, and the electric vehicle supply chain.
- Global tax reforms: The report emphasized the necessity for ASEAN to brace for the repercussions of international tax reforms proposed by the Base Erosion and Profit Shifting (BEPS) project of the Group of 20 and the Organisation for Economic Co-operation and Development (OECD). These reforms target the tax avoidance practices of multinational enterprises and involve implementing a global minimum tax of 15% on the profits of enterprises with revenues exceeding 750 million euros. The commencement of this reform, set for this year, is expected to impact FDI policies, especially those related to profit-based tax incentives in special economic zones, which are commonly established by ASEAN member states to attract foreign investment.
- Reshaping of supply chains: The region is anticipated to continue benefiting from the ongoing restructuring of global supply chains. The report underscores the importance of sustained active promotion of foreign direct investment (FDI) and continuous outreach. Effective communication of regional development, integration efforts, synergies, and emerging opportunities is considered crucial. Timely attainment of milestones in the ASEAN Economic Community (AEC) and the Regional Comprehensive Economic Partnership (RCEP) is highlighted as vital.
- Energy transition: To achieve its energy transition goals, ASEAN needs to invest $180 billion annually, aiming for a 23% share of renewable energy in primary supply and a 35% share in installed capacity by 2025. Despite the substantial gap in investments, the report suggests policymakers focus on the entire renewable energy supply chain, including technologies, equipment, and their integration into manufacturing sites. Encouraging private engagement, both domestic and international, in the development of eco-industrial parks, environmentally friendly Special Economic Zones (eco-SEZs), and data centers across the region is recommended. Accelerating regional cooperation initiatives, such as cross-border trade, is identified as a means to enhance the investment environment for renewable energy.
- Electric vehicle supply chain: International investment in the electric vehicle (EV) sector experienced a remarkable 570% growth to $18 billion in 2022. This surge is attributed to growing demand, emerging markets, favorable policies, incentives, and strategic supply chain decisions. Upstream activities, particularly the mining and processing of critical minerals, attracted significant investments, leveraging the region’s abundance of these minerals. Indonesia holds the title of being the foremost global producer of nickel and the second-largest producer of cobalt, both crucial components in battery manufacturing. The report highlighted that the region attracts notable attention, with nine out of the top 10 battery manufacturers actively investing in Indonesia.
The report acknowledges the positioning of several ASEAN member states as regional automotive hubs, attracting FDI in manufacturing.
ASEAN aims to develop a Regional Electric Vehicle Ecosystem and sees the promotion of FDI in the EV supply chain as a substantial industrial policy opportunity. Policymakers are urged to tailor investment promotion strategies to encompass diverse actors in the EV supply chain, aligning with the broader goals of the energy transition. Strengthening linkages between multinational corporations and small and medium-sized enterprises, along with facilitating intraregional sourcing and production networks, is recommended.
