2 days ago
The investment story in charts: How South-East Asia is defying global FDI trends
The movement of capital across countries is going through a tumultuous phase. Data released in mid-June by a United Nations body on trade and investment shows that global foreign direct investment (FDI), adjusted for probable conduit financial flows (or capital flows from one country, through an intermediate country), fell 11% in 2024, marking its second consecutive decline.
This year, US President Donald Trump has triggered a tariff war, which could have more ramifications on FDI. In his previous term, Trump dealt a blow to the functioning of the organisation that frames rules for global trade by blocking appointments to its dispute settlement body.
There are other triggers. The economic rivalry between the US and China—the world's top two economies—is forcing companies with manufacturing facilities in the communist nation to look for alternatives to ensure supply chain continuity. India, the world's fifth-largest economy that is currently seeing a demographic dividend, would have liked to be a frontrunner to draw such foreign capital.
However, the latest World Investment Report by the UN Trade and Development (UNCTAD) shows that even as Asia remained the largest recipient of FDI in 2024 (40% share), South-East Asia was the only sub-region that grew in 2024.
Each of the top seven FDI draws in South-East Asia recorded FDI growth in 2024, led by the Philippines, Malaysia and Thailand. In manufacturing, the global rebalancing of locations by multinationals is driving greenfield FDI in South-East Asia, especially in the digital economy. As many as five South-East Asian countries (Singapore, Vietnam, Indonesia, Malaysia and Thailand) figure in the top 10 countries for FDI in the digital economy.
FDI decoupling
Outside of South-East Asia, North America and Africa showed higher growth. North America was driven by FDI inflows into the US towards high-tech (semiconductors) and clean energy sectors. The CHIPS Act (Creating Helpful Incentives to Produce Semiconductors Act), passed in the US in 2022, was an enabler. "...among the top 10 highest-value greenfield projects announced globally in 2024, four were in semiconductor manufacturing, with three of them located in the US," said the latest World Investment Report by the UNCTAD.
But that is an anomaly. Global trade, facilitated by the easy movement of FDI, has lifted millions out of poverty in developing economies. But in recent years, FDI has decoupled from global GDP and world trade (exports of goods and services). The decline in FDI in 2024 is more pronounced in sectors vital for development: infrastructure (35% over 2023), renewable energy (31%), water, sanitation and hygiene (30%) and agrifood systems (19%).
Chinese outreach
The other challenge is the concentration of FDI in a few countries. Ten major emerging markets received 75% of FDI flows to the developing world—the order being China, Brazil, Mexico, Indonesia and India. For most of this century, companies in China have received more FDI than they have invested in other countries. However, in recent years, this has reversed. In the 11 quarters since July-September 2022, China has recorded a negative net FDI figure.
China was a significant investor in several South-East Asian countries in 2024, according to reports specific to these countries. China was among the top three foreign investors in Vietnam, accounting for the largest share of FDI projects (28%). In Malaysia, too, China was among the top three FDI investors. In Indonesia, which drew FDI in metal refining and mining, China was the second-largest FDI investor.
Digital play
Digital is the fastest-growing FDI segment, increasing its share in all greenfield FDI globally from 20% in 2020 to 28% in 2024. This covers both the core digital space (digital infrastructure like data centres, ICT manufacturing and cloud service) and the narrow-scope digital space (like sharing economy, e-commerce, fintech and artificial intelligence services). The top 100 ICT companies by sales have about 40% of their assets outside their home country, and South-East Asia has been a top draw for them.
One challenge in the digital space is concentration. Among the top 100 ICT companies by sales, the top five companies account for about 26% of this set's sales. Concentration is also seen at the country level. There are 29 companies from the US, followed by 13 apiece from China and Taiwan, and 12 from Japan. In a fickle policy environment, many of these companies—including Apple, the biggest of them—are reviewing their FDI strategy.
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