(BDT) In the report "ASEAN Perspectives - FDI capital flows: Persistent in the face of challenges", HSBC said that, while the global trade outlook is gloomy, foreign direct investment (FDI) is still being poured into ASEAN. The region's share of global FDI soared after the 2008 global financial crisis and accelerated in recent US-China trade tensions. In 2022, ASEAN will attract a record high of nearly 17% of global FDI capital, nearly double from 4 years ago.

FDI boom – A long story

Since the Covid-19 pandemic, global trade has suffered many obstacles. A structural shift with consumers increasingly using services instead of goods and rising inflation has put pressure on Western countries’ consumption on the wallets of Western countries, which caused a severe impact on ASEAN exporters. However, FDI - which reflected investors' confidence in the long-term prospects of an economy – was still one of the few bright spots in the region. Despite the short-term trade downturn, a consistent increase in FDI was critical for ASEAN to enhance its value chain and consolidate its importance in global trade.

Over the past 30 years, ASEAN has seen a bounty of FDI, thanks to the region's enormous growth potential, rising cost effectiveness, countless trade agreements and ongoing structural transformation, and many other activities. While the Asian Financial Crisis (AFC) dampened ASEAN's investment climate, the Global Financial Crisis (GFC) in 2008-2009 was a significant catalyst to the region's FDI boom, as multinational companies searched for investment opportunities in fast-growing and cost-competitive economies.

FDI inflows into ASEAN hit a record high

Total FDI to ASEAN-6 has averaged nearly USD 128 billion per year during 2010-19, approximately three times more than the average over the previous decade. Similarly, net FDI averaged nearly USD 53 billion per annum in the same period, almost four times higher than the average from the previous decade. In particular, the trend has intensified in the post-COVID-19 era. Total FDI surprisingly rose 45 percent to around USD 185 billion on average, with net FDI doubling to USD 105 billion in the period of 2020-2022.

The share of FDI into ASEAN-6 clearly reflected this trend. While ASEAN-6 attracted no more than 6% of the world's FDI capital after AFC, this inflow returned to the region more significant to a more significant extent after GFC, increasing to approximately 8% (except in 2011 and 2015 - 2016). In particular, FDI has reached a new record high since the global pandemic began. In 2022, ASEAN-6 attracted nearly 17% of the world's FDI, a historic high that shows ASEAN's growing importance to investors.

"After all, US-China trade tensions have pushed investors to accelerate the relocation of supply chains to elsewhere, in which ASEAN, thanks to its neighboring geography and improved basic standards, has clearly emerged as an alternative destination," HSBC's report commented.

Where do investors come from?

ASEAN has seen a very diverse group of investors from the US, EU and Asia in different sectors. "Northeast Asian countries have long accounted for 1/3 of FDI inflows into ASEAN, but intra-ASEAN investment has long become the leading source of FDI if we intend to invest from Northeast Asia by economy," HSBC’s report said. This strongly reflected the growing economic integration among ASEAN member countries over the past years, as many previously industrialized countries (Singapore, Malaysia and Thailand) invest in the latecomer countries with growth potential, including Vietnam and Indonesia.

The shares of FDI inflows into ASEAN by year (average)

According to HSBC, in the past 3 years, the US (17% market share) has replaced the intra-ASEAN region (14% market share) to become the largest FDI investing country in the region. This change reflected the supply chain shift of US investors since the US-China trade tensions, and although temporarily disrupted by the pandemic, it has quickly returned and increased to a record high.

The US is the leading investor in ASEAN's manufacturing and financial sectors, with each sector accounting for nearly 30% of FDI. The advantages of this investment were more evident in the manufacturing sector, which was also the "backbone" of attracting foreign investment in ASEAN. The US has poured an average of USD 12 billion in the past 5 years, equivalent to the total FDI inflows from EU and ASEAN. That showed, a large share of US FDI has flowed into advanced manufacturing, such as high-end semiconductor production in Singapore and Malaysia. Meanwhile, Singapore also captured the largest FDI market share in the region for financial activities.

Besides the US, intra-ASEAN investors also kept an eye on these two key pillars. Meanwhile, FDI inflow from Europe was directed towards "wholesale, retail and motorbike repair", while Japanese investors focused more on "transportation and warehousing". Manufacturing ranked second in terms of FDI for each of these markets.

The importance of Chinese investors

China, a country focused on investing in ASEAN real estate, is now trying to boost investment in the region's manufacturing sector. In which, Indonesia, Vietnam and Thailand have seen a sharp increase in the share of Chinese FDI.

In Indonesia, Chinese investment including leading EV battery manufacturer, CATL, and stainless steel manufacturer Tsingshan has been a key in facilitating the boom in nickel smelters, a key input material to produce EV batteries. However, Indonesia was not the only candidate to attract Chinese FDI in the electric vehicle supply chain. China's leading electric vehicle manufacturers, BYD, Great Wall Motor (GWM) and SAIC, have all set up production lines in Thailand, due to their strategic location in the automotive supply chain and generous subsidies of this country.

On the other hand, Malaysia was also competing in the field of electric vehicle manufacturing. Not only did it attract three Chinese investors, BYD, Great Wall Motor and Chery in this year, Tesla also recently chose Malaysia as a destination to expand production. Meanwhile, Chinese investment also expanded into Malaysia's growing solar sector, with Risen Energy announcing its first initial grassroots investment in Southeast Asia worth more than $10 billion in the 15 coming years.

"In the case of Vietnam, mainland Chinese investors also kept an eye on the consumer electronics industry, with two of Apple's three major suppliers pouring investment into Vietnam to expand their capacity, "HSBC’s report said.

While China was not a major FDI investor in Singapore, Chinese investors have also made moves in the strategic high-value-added pharmaceutical sector. The only exception was the Philippines, where Chinese FDI is almost negligible.

"Overall, the race to attract FDI has begun. Although the near-term trade outlook remains muted, stable FDI inflows will help ASEAN continue to enhance the value chain and reinforce their crucial positions of importance in global trade," HSBC’s report stated.

Final Thoughts

The commencement of the competition to attract Foreign Direct Investment (FDI) within the ASEAN region is unmistakably underway, marked by the various incentives and optimistic developments put forth by governments across the region. It is evident that investors stand to reap substantial advantages from this ongoing initiative. Explore Vietnam’s promising market right now to gain yourself significant advantages in the investing race! Reach out to us if you need support with setting up a company in Vietnam. With our specialized knowledge and experience in Vietnam and global markets, as well as legal procedures across diverse majors and sectors, we will walk you through the challenges. Don't miss your chance to be part of this transformative journey. Take action now and explore the possibilities of doing business and investing in Vietnam.

Source: Baodauthau