Countries in the region are accelerating the development of major infrastructure as part of efforts to revive their economies and create jobs. Photo credit: Asian Development Bank.
Foreign direct investment (FDI) flows to Southeast Asia declined by 25% to $136 billion in 2020 but are expected to pick up this year, says the World Investment Report 2021 of the United Nations Conference on Trade and Development (UNCTAD).
The region was an engine of global FDI growth for the past decade. The outbreak of the coronavirus disease (COVID-19) in 2020, however, slowed FDI flows. The report cited lockdown measures, successive waves of COVID-19 infection, supply chain disruption, falling corporate earnings, economic uncertainties, and delayed investment plans as key reasons for the contraction.
UNCTAD says FDI in Southeast Asia is “likely to increase, but much will depend on how well countries in the region are able to contain the new wave of the pandemic unfolding in 2021.” It sees foreign investments rising particularly in digital infrastructure (5G networks and data centers) and technology-related activities and as a result of the Regional Comprehensive Economic Partnership (RCEP) Agreement, which was signed in November 2020.
In general, FDI prospects for Asia will be “more favorable than the global average because of recovery in trade, manufacturing activities, and a strong GDP growth forecast,” says James Zhan, UNCTAD’s director of investment and enterprise. He notes that “developing Asia is the only region recording FDI growth (in 2020), accounting for more than half of global inward and outward FDI flows.” Growth was driven by the People’s Republic of China (PRC); Hong Kong, China; India; and the United Arab Emirates.
Reduced inflows and outflows
In Southeast Asia, three countries accounted for more than 90% of inflows in 2020, but all recorded FDI declines. FDI to Singapore fell by 21% to $91 billion, to Indonesia by 22% to $19 billion, and to Viet Nam by 2% to $16 billion.
Other countries in the region also suffered reduced investment inflows. In Thailand, FDI sank to -$6 billion, driven by the divestment of Tesco (United Kingdom) to a Thai investor group for $10 billion. In Malaysia, FDI fell by 55% to $3 billion. FDI in Cambodia was flat at $3.6 billion, thanks to inflows in finance.
There was also 16% less outward investment from Southeast Asia at $61 billion last year, but its share of global FDI outflows rose to 8% from 6% in 2019. Singapore and Thailand were the region’s largest investors, and they invested a significant amount in fellow ASEAN member states. Investments from Singapore fell by 36% to $32 billion, while those from Thailand more than doubled at $17 billion.
The report also notes increased FDI outflows from Indonesia and the Philippines at $4.5 billion and $3.5 billion in 2020, largely because of merger and acquisition transactions and infrastructure projects in neighboring countries. These include the $172-million wind farm that Ayala Corporation of the Philippines and a Singaporean partner are constructing in Viet Nam and Japfa Comfeed of Indonesia’s $13-million feed mill, also in Viet Nam.
Prospects for 2021
UNCTAD expects FDI to increase in selected service industries and in the digital economy. Investments in data centers and cloud computing by multinational enterprises are expected to turn Southeast Asia into a global data center hub in the next 5 years.
The pandemic has accelerated the digital transformation of countries in the region as an increasing number of consumers and businesses move to contactless, digital platforms in response to COVID-19. Google, Temasek, and Bain see the internet economy in the region exceeding $100 billion last year and moving toward $300 billion by 2025.
Countries are also stepping up the development of public infrastructure as part of their efforts to revive their economies and create jobs. This includes major telecommunications and transport projects and the development of special economic zones to facilitate investment in priority industries.
The RCEP is also seen to draw more FDI to ASEAN member states, which signed the agreement with Australia, PRC, Japan, Republic of Korea, and New Zealand to create the world’s largest free trade area. The trade deal promotes investment, trade, and services, including e-commerce. The report says the RCEP is expected to encourage more multinationals to relocate their factories and services to Southeast Asia.