Asia-Pacific Foreign Investment Brief
The FDI, Trade, and Economic Development Community

UN Trade and Development calls for innovative investment strategies to foster inclusive and sustainable economic growth. Launched by UN Trade and Development (UNCTAD), the report entitled “Global economic fracturing and shifting investment patterns” examines the complex landscape of global foreign direct investment (FDI). The report sheds light on ten transformational shifts in investment priorities across industries and regions, shaped by trends in global value chains and geopolitical dynamics, and emphasizes the necessity of integrating sustainability and development into investment strategies. It reveals how the combination of structural transformations in global value chains (GVCs), external shocks like the COVID-19 pandemic and rising geopolitical tensions are increasingly influencing investment decisions and hindering development. Here are some key findings. FDI struggles to keep pace with trade and GDP Since 2010, global GDP and trade have grown annually by an average of 4% and 4.2%, respectively, even amidst rising trade tensions. By contrast, FDI growth has stagnated near zero. This lag reflects increased investor caution as a result of shifts in international production and GVCs, rising protectionism and growing geopolitical tensions. It highlights the vulnerability of developing economies that are dependent on FDI. Shift from manufacturing to services The share of cross-border greenfield projects in the services sector rose from about 65% two decades ago to over 80%. And services-related investment within manufacturing industries nearly doubled to about 70%, driven by technological advances. Meanwhile, FDI in manufacturing has seen a significant downturn, with a compound annual growth rate of -12% in the three years following the outbreak of the pandemic. The decline severely hinders developing economies’ efforts to leverage participation in GVCs for economic development and industrial transformation. Diminishing role of FDI in China The geography of global FDI has been significantly re-shaped by China’s reduced role as a recipient country over the past two decades, a process that accelerated after the outbreak of the COVID-19 pandemic. Over the past three years, the number of greenfield projects to China has hovered at a level around one third the same figure a decade ago. However, China continues to play a dominant role in global manufacturing and trade, suggesting that its “global factory” mode has not downsized but instead transitioned from globally integrated production networks to more domestically focused ones. Geopolitical tensions increasingly affect FDI flows Investments between geopolitically distant countries – those with divergent political interests or foreign policies – decreased from 23% in 2013 to 13% in 2022. This trend particularly affected the manufacturing sector as trade tensions began to escalate in 2019. Rising investments in environmental technologies… Investments in environmental technologies like wind and solar energy have surged. Their share of total greenfield projects in non-services sectors jumped from 1% in the early 2000s to 20% by 2023. Likewise, FDI in the manufacturing of electric vehicles and batteries has seen 27% annual growth over the past decade. However, this growth only partially offsets the decline in other manufacturing sectors. It also primarily benefits developed countries, while least developed countries (LDCs) continue to struggle with reduced FDI in traditional sectors. VIEW ARTICLE

Satvinder Singh, ASEAN’s deputy secretary-general, joins BCG’s Aparna Bharadwaj to discuss the evolution of the Digital Economy Framework Agreement and its role in accelerating economic growth through regional collaboration.

The trade between the two regions is growing at an explosive rate. Economy Middle East speaks to Huda Al-Lawati, founder and CEO of Aliph Capital, on the importance of digitalization at companies, strong Middle East-Asia trade ties, and opportunities for women in the financial sectors. In what ways can digitalization boost the growth of the private equity market in emerging economies? What important digitalization initiatives has Aliph Capital recently implemented? How have these impacted your operations? What can boost PE market growth is the need for digitization and technology. Technology is no longer an option but a necessity for success today. However, digital transformation (Dx) is both expensive and difficult to navigate. As such, the need for Dx also creates a need for capital and expertise. A particular strength of Aliph Capital is that we not only fund Dx journeys, but also help portfolio companies in designing and implementing fit-for-purpose digital transformation roadmaps. An example is our work post acquiring The Petshop – the UAE’s largest omnichannel pet services business in 2022. We identified and addressed backend ERP gaps, launched a B2B e-commerce platform, added express delivery, integrated CRM (customer relationship management) & marketing automation system to centralize online & in-store data, automated marketing channels, rolled out an AI-powered search engine and launched a centralized data warehouse supporting customer engagement by driving insights into basket mix, retention, and opportunities. The most important aspect of what we do is bringing the conversation around Dx to the board and ensuring that management teams take ownership and have proper incentives to prioritize tech enablement. Some experts say the Middle East and Asia corridor is an emerging, potentially powerful conduit for global capital. What are your thoughts on this and what are the opportunities? I think that we should not ignore this corridor. The trade between the two regions is growing at an explosive rate. In fact, as per research by Asia House, Gulf-Emerging Asia trade has surged by some 35 percent between 2021 and 2022. Meanwhile, trade between the GCC and Emerging Asia could overtake trade with Advanced Economies in 2026. Several factors are driving this growth, including Asia’s increasing role as a primary oil importer (particularly with the U.S. achieving oil self-sufficiency), the GCC’s significant food imports coupled with India’s status as the world’s second-largest food producer, and growing investments from the GCC’s sovereign wealth funds into Asia. Efforts to enhance ties and foster partnerships are evident in the accession of UAE and Saudi Arabia into BRICS, the ASEAN-GCC Summit in Riyadh, and UAE’s Comprehensive Economic Partnership Agreements with India and Indonesia. The GCC has committed to becoming a diversified, global economy. Diversifying our trade and investment networks globally is essential to achieving this goal. We have successfully established ourselves not only as oil exporters but also as prominent global investors and leading transport and logistics centers. It’s crucial to acknowledge the significant and growing Asian demographic contingent in the GCC expat ecosystem. Fostering ties among regions abundant in talent, energy, knowledge base and food resources benefits all involved and creates opportunities across the board. Increased trade flows generate opportunities within the servicing and building logistics infrastructure. E-commerce growth drives demand for last-mile delivery solutions. Growing demand can also incentivize companies to establish manufacturing bases in the GCC. Growing tourism presents opportunities in hotels, airlines, and travel agencies – these are just some examples. VIEW ARTICLE

Microsoft, said on Thursday it will invest $2.2 billion over the next four years in Malaysia to expand cloud and artificial intelligence (AI) services in the company's latest push to promote its generative AI technology in Asia. The investment, the largest in Microsoft's 32-year history in Malaysia, will include building cloud and AI infrastructure, creating AI-skilling opportunities for 200,000 people, and supporting the country's developers, the company said. “We want to make sure we have world class infrastructure right here in the country so that every organisation and start-up can benefit,” Microsoft Chief Executive Satya Nadella said during a visit to Kuala Lumpur. Microsoft will also work with the Malaysian government to establish a national AI Centre of Excellence and enhance the nation's cybersecurity capabilities, the company said in a statement. Prime Minister Anwar Ibrahim, who met Nadella on Thursday, said the investment supported Malaysia's efforts in developing its AI capabilities. Microsoft is trying to expand its support for the development of AI globally. Nadella this week announced a $1.7 billion investment in neighbouring Indonesia and said Microsoft would open its first regional data centre in Thailand. VIEW ARTICLE

KW Group APAC FDI Advisory Managing Partner Michelle Wong will be moderating a session on 'Bridging Borders, Building Opportunities: Advancing gender-driven foreign direct investment (FDI)' alongside our United Nations ESCAP colleague Heather L. Taylor-Strauss, PhD as part of the program to be held in Bangkok next week. 🌟 We are excited to be part of the upcoming #FeministFinanceForum hosted by United Nations ESCAP! Join us as we come together to discuss how we can create a more inclusive financial ecosystem. Together, we can make feminist finance a reality! #FFF2024 Register your interest here: https://lnkd.in/d-WNF9vF

The 6-monthly roundup of foreign direct investment data is out now. In general, we see continuing downward trends, which could be a reflection of ongoing geopolitical tensions and a deteriorating overall economic climate. Some key findings and trends for FDI in 2023 include: ✔  Global FDI flows dropped by 7%, continuing on a downward trend and failing to reach pre-pandemic levels for the second year in a row. ✔ Downswings were recorded for more than two-thirds of OECD economies and other major FDI recipients, such as the People’s Republic of China, who received record-low FDI flows. ✔ Despite the drop, the United States was the leading FDI recipient worldwide, followed by Brazil and Canada. ✔ OECD equity flows remained below any level recorded since 2005, partially reflecting a slowdown in new investment activity. ✔ Cross-border mergers and acquisitions activity continued on a downward trend, hitting a ten-year record low. ✔ In general, greenfield investment activity stalled. The number of new projects announced dropped by 20% in advanced economies, but increased by 9% in emerging and developing markets. VIEW REPORT

The ASEAN-Gulf Cooperation Council (ASEAN-GCC) should find mechanisms to advance trade, investments, collaboration, and research, said Prime Minister Datuk Seri Anwar Ibrahim. In his opening remarks at the Joint Regional Strategy Dialogue on Asean-GCC on the sidelines of the World Economic Forum's (WEF) special meeting in Riyad, he emphasized, that the collaboration between both sides is mutually beneficial. "Not only do we (Asean) welcome GCC participation in terms of investments and collaboration, but also more Asean companies also active here in the kingdom (Saudi Arabia), in the UAE (United Arab Emirates), Qatar, and neighbouring countries," he said. As Southeast Asia becomes one of the fastest growing regions, Anwar noted that ASEAN member states have taken a more pragmatic approach to discuss both bilateral and multilateral relations among their neighbours. VIEW ARTICLE

The 10-country bloc has matured from a China alternative to a target region for investors. Thanks to Alex Irwin-Hunt for inviting Andrew Keable, Managing Partner, KW Group to share perspectives for the recent article with fDi Intelligence along with United Nations ESCAP colleague Heather L. Taylor-Strauss, PhD ASEAN has moved from a China +1 alternative pre-pandemic to now stand on its own as an alternative to China. With a population of 660 million (30% more than the EU and double that of the USA), ASEAN stands as a formidable market. Its embrace of digital technology and e-commerce is remarkable, signaling a rapid modernization. Once considered the less affluent relative, ASEAN has emerged as a prime target for foreign direct investment. More than $124bn was pledged to greenfield foreign direct investment (FDI) manufacturing projects in Asean in 2022 and 2023, according to fDi Markets, as countries in the region turned the page on pandemic restrictions and became natural destinations for projects that in the past would have likely located within China. While the region had a combined GDP of $3.3tn in 2021, there is an uneven spread of foreign investment across the diverse 10 member countries to the Asean bloc. This transition reflects a significant shift in investor perception combined with new soft-power geopolitics, transforming the attitude of major countries and corporations as investors, underlining the region's newfound economic strength and potential. ASEAN's attractiveness as an investment destination is underscored by its vast consumer base and growing market opportunities, pointing towards sustained growth and development in the region. “During Covid, supply chains that were overly reliant on manufacturing in China were completely left in the lurch,” says Andrew Keable, Malaysia-based managing partner of KW Group, an advisory firm. “Over the past five years, ASEAN has stood on its own as an alternative to China.” “These FDI trends are largely politically driven,” says Heather Taylor-Strauss, an economist and FDI lead at UN’s Economic and Social Commission for Asia and the Pacific. “There is keen interest from many countries to get more involved with Asean in trade and investment.” VIEW ARTICLE

International trade has become increasingly fragmented over the last five years as countries have shifted to trading more with their geopolitical allies. This graphic from The Hinrich Foundation, the first in a three-part series covering the future of trade, provides visual context to the growing divide in trade in G7 and pre-expansion BRICS countries, which are used as proxies for geopolitical blocs. Trade Shifts in G7 and BRICS Countries This analysis uses IMF data to examine differences in shares of exports within and between trading blocs from 2018 to 2023. For example, we looked at the percentage of China’s exports with other BRICS members as well as with G7 members to see how these proportions shifted in percentage points (pp) over time. Countries traded nearly $270 billion more with allies in 2023 compared to 2018. This shift came at the expense of trade with rival blocs, which saw a decline of $314 billion. All shifts reported are in percentage points. For example, the EU saw its share of exports to G7 countries rise from 74.3% in 2018 to 75.4% in 2023, which equates to a 1.1 percentage point increase. The UK saw the largest uptick in trading with other countries within the G7 (+10.2 percentage points), namely the EU, as the post-Brexit trade slump to the region recovered. Meanwhile, the U.S.-China trade dispute caused China’s share of exports to the G7 to fall by 5.2 percentage points from 2018 to 2023, the largest decline in our sample set. In fact, partly as a result of the conflict, the U.S. has by far the highest number of harmful tariffs in place. The Russia-Ukraine War and ensuing sanctions by the West contributed to Russia’s share of exports to the G7 falling by 3.8 percentage points over the same timeframe. India, South Africa, and the UK bucked the trend and continued to witness advances in exports with the opposing bloc. VIEW ARTICLE

Despite the ongoing economic uncertainties, small and medium-sized enterprises (SMEs) and large enterprises in the Southeast Asian and Greater China regions are eager to venture overseas in search of a boost to their profits and reputation. In particular, they have their sights set on the ASEAN region. The UOB Business Outlook Study 2024 (SMEs & Large Enterprises), which surveyed more than 4,000 businesses in seven key markets across the ASEAN and Greater China regions, found that more than 80 per cent of businesses want to expand overseas. This interest is most keenly felt in Indonesian and Vietnamese companies. The top two sectors looking to expand are manufacturing and engineering, as well as tech, media, and telecom. Overall, the study, which is into its fifth year, found that almost eight in 10 businesses are positive about the current business environment, with one in four expecting business performance to vastly improve this year. However, many businesses said they are still watchful of the impact of inflation, and higher operating costs and are recovering from the overall economic slowdown. Businesses said they plan to focus on reducing costs and adopting digital solutions to improve productivity. Venturing overseas still key part of growth plans Around three in five businesses highlighted ASEAN as the top market which they want to expand to within the next three years. In contrast, only one in three companies said they wanted to enter Mainland China. Within ASEAN, Malaysia is the most important country that businesses want to venture into, followed by Singapore, Thailand and Indonesia. However, businesses face several challenges such as: difficulty in finding the right partners to work with (39%); lack of in-house talent/expertise to drive overseas expansion (36%); and inadequate financial support or funds (35%). Most companies are seeking more support for funding or grants to enter new markets, connections to large corporations, as well as tax incentives. Around four in five companies said they are keen to use cross-border digital trade platforms for their overseas expansion. VIEW REPORT

China Investment Corporation is looking at future private equity investment opportunities in ASEAN, focusing on healthcare, technology, AI, green economy, and supply chains. China Investment Corporation (CIC) has expressed its intention to actively explore private equity (PE) investment opportunities in Asean as the PE activity in the region has been in good momentum since the second half of last year. The sovereign wealth fund’s deputy chief investment officer Qi Bin said the positive momentum is expected to continue into 2024 despite potential barriers and ongoing global risks. “Among the key themes of ASEAN’s PE landscape in the future are healthcare, technology and artificial intelligence, green economy, aspirational consumer, business services, as well as supply chains,” he said during the session titled “The Intersection of China and Asean: In Search of Growth Verticals” at the KL20 Summit 2024 this week. As for last year, he said, the top three sectors of PE investments were healthcare, telecommunication, and business services. VIEW ARTICLE

If Southeast Asian countries had to choose a strategic partner, slightly more would now prefer to align with China than the United States. A poll conducted by the Institute of Southeast Asian Studies found that 50.5 percent of respondents in the ten ASEAN member countries would choose the Asian power in 2024, while 49.5 percent would pick the United States. This has changed from 38.9 percent and 61.1 percent, respectively, just one year ago. The change is largely due to respondents from Laos, Indonesia and Malaysia favoring China more strongly at an increase of between 20 to 30 percentage points each since 2023. In Cambodia, support increased by around 18 percentage points, but remained below 50 percent overall. The picture in similar in Thailand and Myanmar at increases of around 10 percentage points each and with support for China in Thailand reaching 52 percent. Countries that would still strongly prefer to partner with the United States are the Philippines (83.3 percent in favor of the U.S.), Vietnam (79 percent) and Singapore (61.5 percent). In all three countries, support for the U.S. was relatively stable compared to 2023. VIEW REPORT