Investment anomaly: Worldwide FDI outflows VS ASEAN’s inflows

“How do you keep doing it? How do you defy the trend in the world when it comes to FDI (foreign direct investment),” Richard Bolwijn, head of investment research at the United Nations Conference on Trade and Development (UNCTAD), asked a gathering of Southeast Asian businessmen and officials attending the ASEAN Business Investment Summit (ABIS) in Bangkok. Peter Janssen specially for the Asia Times.

The UN official knew the answer to his own question. Last year, worldwide FDI outflows fell by more than 1%, but FDI inflows to the ten-member Association of South East Asian Nations (ASEAN) were up 11.5%, from US$147 billion in 2017 to $155 billion in 2018, according to new UNCTAD research.

During the first half of this year, a period when global FDI outflows were down by 5%, they jumped 20% to ASEAN, according to the latest UNCTAD estimates reported last week.

“What is remarkable is that it seems that all the big global trends that we are seeing dragging down FDI worldwide seem to have overlooked ASEAN,” Bolwijn said.

Those trends include the US-China trade war that has slowed economic growth worldwide and created a climate of uncertainty for most investors, and digitalization, or the so-called 4th industrial revolution underway thanks to new digital technologies that are transforming traditional forms of manufacturing, banking and services.

Oddly, neither of these disruptive trends have undermined FDI inflows in ASEAN, at least not thus far. There are some explanations for ASEAN’s anomaly.

“The trade war is leading to downward FDI in the world but up in ASEAN because of investment divergence away from China towards the region,” Bolwijn told Asia Times.

In 2018, four ASEAN countries saw FDI inflows hit record highs – Cambodia, Indonesia, Singapore and Vietnam – all of them likely recipients of what Bolwijin calls “investment divergence” from China.

Much of the new FDI in ASEAN was in manufacturing, jumping from $30 billion in 2017 to $55 billion last year, up some 83% year-on-year. The lion’s share of that growth went to Singapore, Indonesia, Vietnam and Thailand.

This runs counter to the other worldwide FDI trend of more and more manufacturing retreating from the developing world back to the developed world, due in large part to advances in technology.

“Today we have 3-D printing, which means you can build products one at a time and they can be completely customized,” said Justin Wood, head of regional agendas at the Geneva-based World Economic Forum.

“In this new era of 3-D printing you no longer need the large factories with a lot of workers,” Wood said.

“So the nature of the global value chain is going to really change and you’re going to see a lot of manufacturing moving back to markets such as Europe and North America, whereas in the past 40 years it was moved out, trying to find cheap labor in places like ASEAN,” he said.

One example of that rising trend is Adidas, the German sports shoe company, which recently built a “super factory” in Germany to manufacture trainer shoes for the European and German markets using 3-D printing technology. “It’s no longer about economies of scale because automation does it cheaper than people,” Wood said.

That trend would be bad news for ASEAN if the regional bloc was not a huge market itself, comprising 650 million people, many of them joining the middle income bracket and more than half of them under the age of 35.

“Increasingly, ‘Factory Asia’ is being seen as ‘Market Asia’ as consumption is booming from the growing middle class,” said Gabriela Ramos, chief of staff at the Organization for Economic Cooperation and Development (OECD).

With average gross domestic product (GDP) growth of 4.9% forecast for the ASEAN region this year, and its growing middle class, the digital trend is not necessarily a negative one for the region.

“The digital trend is leading to downward FDI in the world but up in ASEAN because it has the market,” Bolwijn said. “This is the fastest growing market with improved integration and access is improving.”

Another factor in ASEAN’s favor has been FDI inflows from Japan and South Korea, which have increased rather than declined despite growing economic uncertainty.

Japan’s total FDI in ASEAN reached $249 billion in 2018, a figure that has tripled over the past ten years, and far exceeds the accumulated totals of the European Union and the US in the region, said Nobuhiko Sasaki, chairman and CEO of Japan External Trade Organization (JETRO).

South Korea has likewise become a growing player in ASEAN over the past decade, with much of its FDI shifting away from China, according to UNCTAD. While Korean FDI in China was three times higher than that in ASEAN in 2000, the numbers have now reversed, Bolwijn said.

Despite all the good FDI news for ASEAN, with US President Donald Trump still controlling US foreign trade policy, the global investment climate remains uncertain, with no clear sign where America’s tariff-imposing leader will strike next.

FDI from the US to ASEAN plummeted to just $8 billion last year, compared with $25 billion in 2017, primarily due to Trump’s tax reforms that prompted US companies to repatriate their overseas profits.

There is much ASEAN governments could still do to improve their allure to foreign investors, panelists at ABIS noted.

“Now is the time for ASEAN to demonstrate its commitment to the world as the standard bearer of free trade,” JETRO’s Sasaki said.

While ASEAN has made considerable progress in creating a real free trade area for tariffs , namely through the advent of the ASEAN Economic Community (AEC) in 2015, it still has far to go in terms of removing non-tariff measures, Sasaki noted.

Another common complaint heard from panelists was the need for freer-flowing intra-regional computer data, deemed a necessity in the emerging digital era.

“Investors will look at data and how easy it is to access,” said WEF’s Wood, noting that several ASEAN governments have imposed tight controls over data flows, citing security concerns. “Policymakers need to think how they can allow data and services to flow, flourish and thrive.”