Foreign Direct Investment (FDI) inflows into the ASEAN region reached a record level of USD182 billion during 2019, making the region the largest recipient of FDI in the developing world. However, due to the impact of the COVID-19 pandemic on governments around the world, FDI inflows to the region declined to USD137 billion in 2020. Compared global FDI level, ASEAN performed significantly better, with its share of global FDI rising from 11.9 per cent in 2019 to 13.7 per cent in 2020. Funding for the digital and infrastructure-related industries helped to mitigate the impact of the pandemic on FDI in other sectors.

In November 2020, ASEAN and its Free Trade Agreement (FTA) partners, including Australia, China, India, Japan, Korea and New Zealand, finalised discussions for the Regional Comprehensive Economic Partnership (RCEP) Agreement. The regional trading agreement, which will account for roughly 15 per cent of total FDI stock and over 33 per cent of total FDI flows by 2020, is expected to allow ASEAN and its partners to increase investment and promote the region’s global value chain development.

Southeast Asia infrastructure provides excerpts from “The ASEAN Investment Report 2021” which highlights the role of FDI and Multi-National Enterprises (MNEs) in the region’s Industry 4.0 transformation, as well as how member states can encourage the adoption of Industry 4.0 technologies to support industrialization and boost overall economic competitiveness.  The report also includes recommendations on how to overcome the obstacles of attracting FDI, noting that the possibilities for FDI in Industry 4.0-related industries and activities are promising.

The period between 2019 and 2020 were exceptional for ASEAN in terms of foreign direct investment (FDI): 2019 saw the region’s highest-ever inflows, at USD182 billion – making ASEAN the largest recipient of FDI in the developing world – and 2020 saw the unprecedented impact of the COVID-19 pandemic, with a 25 per cent fall in FDI, to USD137 billion. The decline followed lockdown measures, supply chain disruptions, falling corporate earnings, successive waves of the pandemic, economic uncertainty and postponement of investment by multinational enterprises (MNEs).

Investment activity in the region shrank across all types. Announced greenfield investment declined by 17 per cent to USD68 billion, international project finance fell by 21 per cent to USD53 billion, and cross-border mergers and acquisitions (M&As) recorded a precipitous dive from USD9.8 billion in 2019 to -USD4.7 billion. Despite the decline, ASEAN remained an attractive investment destination; the region’s share of global FDI rose from 11.9 per cent in 2019 to 13.7 per cent. FDI inflows remained more than twice the amount seen during the 2007–2008 global financial crisis and nearly five times more than the annual average during the 2002–2004 outbreak of SARS.

The pandemic affected most Member States, with seven seeing a drop in investment. Brunei Darussalam and the CLMV (Cambodia, the Lao People’s Democratic Republic, Myanmar and Viet Nam) countries were relatively resilient, with either an increase in investment or a small change in inflows. Investment from most of the top 10 source countries, which accounted for 75 per cent of FDI in ASEAN in 2020, fell. Investment within ASEAN was resilient, rising by 5 per cent to USD23 billion, pushing up the intra-ASEAN share of FDI in the region from 12 to 17 per cent (figure 2). A significant portion of such investment originates from outside the region and is channelled through a few Member States. Such conduit investment involves ultimate owners from outside the region.

Most industries other than those in infrastructure and digital economy sectors saw FDI fall. FDI in manufacturing contracted by 55 per cent, from USD49 billion in 2019 to USD22 billion – a key contributor to the overall decline. FDI also faltered in services industries such as finance, hospitality, tourism, real estate and construction. Yet, investment rose in infrastructure-related industries such as electricity and in information and communication as well as transportation and storage – underscoring the resilience of these industries in an economically challenging time. FDI in wholesale and retail trade declined marginally, by 5.6 per cent, to USD26.5 billion – still a high level – sustained by continued growth in digital technologies, e-commerce and online activities. Strong investment in the digital economy, the roll-out of 5G licences and active investment in data centres and cloud computing, including relocation of factories to some Member States, helped to cushion the fall to some extent.

ASEAN remains an important destination for international project finance activities, mostly in infrastructure. Despite the 2020 fall, the longer-term trend, comparing 2015–2017 and 2018–2020, is encouraging. Values of international project finance in ASEAN nearly doubled between the two periods, from an annual average of USD37 billion in 2015–2017 to an annual average of USD74 billion in 2018–2020. The region’s share of such activities worldwide rose from 7.9 per cent in 2015–2017 to 12.5 per cent in 2018–2020. Asia, the largest destination for international project finance, accounted for nearly 40 per cent of global values in 2018–2020, and ASEAN accounted for 32 per cent of Asia’s share.

Post-pandemic recovery

 The Regional Comprehensive Economic Partnership (RCEP) group is an important and growing source of global FDI. Intraregional investment, at about 30 per cent of total FDI in RCEP, has significant room for further growth. About 15 per cent of global FDI stock and more than 33 per cent of global flows in 2020 were in RCEP members. Growing annual inflows pushed up FDI stock in the group from USD2.7 trillion in 2010 to USD6.2 trillion in 2020, an average growth rate of 9 per cent per year. In outward FDI, the group accounted for 48 per cent of global flows in 2020, up from just 17 per cent in 2010. The rise pushed up the stock of outward FDI, from USD2.4 trillion in 2010 to USD7.1 trillion in 2020 – more than twice the growth rate of global outward FDI stock in the same period.

ASEAN, at the heart of the RCEP, will play an important role in the group. Already about 40 per cent of investment in ASEAN comes from RCEP members, of which 24 per cent comes from non-ASEAN RCEP member countries. There are opportunities for greater connectivity through investment, production and intrafirm transactions in ASEAN and between ASEAN and non-ASEAN RCEP members.

The RCEP increases ASEAN’s attractiveness for FDI, value chain activities and international production. It provides investors an opportunity to operate in ASEAN with access to the world’s largest market. Major provisions of the RCEP Agreement address liberalizing and promoting intra-RCEP trade, investment and services as well as developing e-commerce, which is highly relevant for regional value chains and market- and efficiency seeking investment. The top 100 MNEs from non-ASEAN RCEP member countries are all present in ASEAN. They hold more than USD1.1 trillion in cash or near-cash items and USD13.6 trillion in assets in 2019, an indication of their significant investment firepower and potential for new, expansion and diversification activities.

Relocation of production to ASEAN is not new; however, now MNEs are not relocating just for cost reasons. Influencing the decision are a mix of additional factors, including geopolitical and supply chain resilience considerations. MNEs’ diversification of production from China to ASEAN countries was originally driven by rising costs in China. The trade tensions between the United States and China accelerated the process, including for Chinese companies. The disruption of supply chains during the pandemic is a further motivation. Home-country policy measures that encourage diversification of supply chains are also encouraging firms to move operations away from China to neighbouring countries – making ASEAN Member States target destinations.

Since the pandemic, ASEAN Member States have accelerated the push for investment in infrastructure, facilitated by ambitious national infrastructure plans, policy measures and greater opportunities for private sector participation. The infrastructure investment need in the region is huge, estimated to be between USD110 billion and USD184 billion annually during 2015–2030. This estimate covers mostly transport, power and telecommunication. MNEs and foreign investors have been contributing to infrastructure development in the region through various channels: sponsoring; financing; providing engineering, procurement and construction (EPC) services and technology; and supplying equipment.

ASEAN has seen robust investment from China in the last decade through both equity and non-equity modes such as international infrastructure contracts. In some Member States (e.g. Cambodia and the Lao People’s Democratic Republic), FDI from China has constituted the largest source of investment for consecutive years. FDI from China rose by 65 per cent over the past decade, from an annual average of USD6.9 billion in 2011–2015 to an annual average of USD11.5 billion in 2016–2020, pushing up the country’s share in total FDI in ASEAN from 6.2 per cent to 7.9 per cent. ASEAN accounted for only 5.0 per cent of the global outward FDI stock of China in 2019, up from 4.5 per cent in 2010.

But rising Chinese investment in ASEAN pushed the region’s share of outflows from China from an average of 5.5 per cent in 2009–2010 to an average of 9.0 per cent in 2018–2019. Within Asia, ASEAN is the largest target destination for Chinese international infrastructure contracts. In 2017–2019, some 22 per cent of such contracts were in ASEAN, underscoring the importance of Chinese MNEs in infrastructure development. Most contracts were in transportation, power and telecommunication, and many were identified as related to the Belt and Road Initiative.

Industry 4.0 transformation in ASEAN

 All ASEAN Member States recognize the importance of Industry 4.0, or the 4th Industrial Revolution, for advancing economic development and industrial transformation and ensuring continued effective participation in GVCs. They also recognize the role that the private sector can play in Industry 4.0 transformation.

Foreign investors in ASEAN are playing an important catalytic role in the Industry 4.0 transformation process as users, technology providers, manufacturers, trainers, influencers of SMEs, and ecosystem enhancers. They are investing in digitalisation of manufacturing, using advanced manufacturing solutions, building smart factories and establishing research and development (R&D) facilities, technology hubs and centres of excellence in the region. Many have established a significant presence in the region to build digital infrastructure, manufacture industrial automation (IA) hardware and supply technologies to clients in the vibrant manufacturing environment and the rapidly growing regional digital economy. Many have also upgraded or plan to upgrade their factories with Industry 4.0 technologies.

The presence of many MNEs operating in key segments of Industry 4.0 technologies in ASEAN (e.g. 5G, data centres, IA, additive manufacturing, the industrial internet of things (IIoT) and smart factories) is a testament to the growing significance of the region for FDI in Industry 4.0 activities.

Subsidiaries of MNEs are often better equipped to adopt Industry 4.0 technologies than are local companies because of their relatively stronger financial and technological capacities, and the influence of their parent companies’ adoption of technology. MNE demonstration effects are encouraging other companies (local and foreign) to adopt Industry 4.0 technologies, especially SMEs that have vendor relationships with MNEs.

The full report can be accessed here.