Foreign investment in Asia to grow 5-10%, uptick likely for SE Asia

Investment in the digital economy, data centers, information and communications technology (ICT) and health care will be robust, according to UNCTAD's World Investment Report 2021.

28, Jun. 2021

A full moon illuminating the night sky on June 24, 2021, in Kuala Lumpur, the capital of Malaysia where the pandemic has continued to rage on. Foreign investment is likely to increase in Southeast Asia, but much will depend on how well countries contain the new wave of infections. (Photo courtesy of Wendy Graham)
A full moon illuminating the night sky on June 24, 2021, in Kuala Lumpur, the capital of Malaysia where the pandemic has continued to rage on. Foreign investment is likely to increase in Southeast Asia, but much will depend on how well countries contain the new wave of infections. (Photo courtesy of Wendy Graham)

SINGAPORE, NNA - Foreign direct investment (FDI) inflows in Asia are expected to increase in 2021, outperforming other developing regions with a projected growth of 5–10 percent.

Signs of trade and industrial production recovering in the second half of 2020 provide a strong foundation for FDI growth in 2021.

Yet, substantial downside risks remain for the many economies in the region that struggle to contain successive waves of COVID-19 cases and where fiscal capacity for recovery spending is limited.

Investment in tourism-related industries and labor-intensive manufacturing will remain weak in 2021, whereas investment in the digital economy, data centers, and information and communications technology (ICT) as well as health care will be robust.

Economies in East and South-East Asia, and India, will continue to attract foreign investment in high-tech industries, given their market size and their advanced digital and technology ecosystem.

In 2020, amid an overall contraction in greenfield investment announcements in the region, the value of new projects in the ICT industry grew 8 percent.

In many economies, accelerating infrastructure development as part of stimulus programs is expected to encourage investment in infrastructure-related activities.

In other sustainable development goals (SDG) sectors, FDI in renewables is expected to continue to grow as countries push for greener energy sources, such as in China, the Republic of Korea, Saudi Arabia and a few South-East Asian countries.

In South-East Asia, FDI is likely to increase, but much will depend on how well countries in the region are able to contain the new wave of the pandemic unfolding in 2021.

Improving global and regional economic growth in 2021, as well as ASEAN member states’ economic stimulus packages, will help bolster the resilience of the region.

Investment in selected service industries and technology-related activities such as the digital economy, e-commerce, digital infrastructure (5G networks and data centers) and cloud computing, is expected to remain robust.

The region is projected to become a rapidly growing global data center hub in the next five years, overtaking growth in North America and in other Asia-Pacific countries.

Many data center and cloud multinational enterprises (MNEs) are increasing investment or building more facilities, which are expected to be completed in 2021–2022.

Industrial production activities in the region are also gaining momentum, which will encourage further capital expenditure and investment to increase capacity.

To mitigate the impact of the pandemic, countries in the region are accelerating the development of major physical infrastructure (e.g. transportation, telecommunication, power and Special Economic Zones (SEZs). For example, Indonesia is accelerating SEZ development, adding incentives and facilitating investment in priority industries.

Large infrastructure projects launched in 2020 will stretch into the next few years. These projects include the $10 billion La Gan wind power project in Vietnam, led by a consortium involving Copenhagen Infrastructure Partners (Denmark); and a $4 billion LNG power generation facility in Bac Lieu Vietnam by Delta Offshore Energy (Singapore).

In 2020, the region was the largest location for announced greenfield investment projects (at $68 billion), indicating MNEs’ strong investment commitment to the region.

The signing of the Regional Comprehensive Economic Partnership (RCEP) Agreement in November 2020, involving the ASEAN member states plus Australia, China, Japan, the Republic of Korea and New Zealand, will also help the region attract FDI for post-pandemic recovery.

The RCEP establishes the world’s largest free trade area with provisions promoting investment, trade and services, including e-commerce development.

Relocation of production by Chinese firms and other MNEs for cost reasons and to circumvent the impact of the United States–China trade tensions, as well as to build a more resilient supply chain network, will continue to benefit the ASEAN countries in 2021 and beyond.

Home-country measures such as Japan’s program to strengthen overseas supply chains will help the region host more factories and business services.

Long-term investment growth in South Asia is expected to reverse.

The value of greenfield investments announced in 2020 contracted (-59 percent to $27 billion in 2020), and the second wave of the COVID-19 outbreak in India weighs heavily on the country’s overall economic activities.

Announced greenfield projects in India contracted by 19 per cent to $24 billion, and the second wave in April 2021 is affecting economic activities, which could lead to a larger contraction in 2021.

The outbreak severely hit main investment destinations such as Maharashtra (home to one of the biggest automotive manufacturing clusters, Mumbai–Pune–Nasik–Aurangabad), and Karnataka (home to the Bengaluru tech hub), which face another lockdown as of April 2021, exposing the country to production disruption and investment delays.

Yet India’s strong fundamentals provide optimism for the medium term. FDI to India has been on a long-term growth trend and its market size will continue to attract market-seeking investments.

In addition, investment into the ICT industry is expected to keep growing. Export-related manufacturing, a priority investment sector, will take longer to recover, but government facilitation can help.

The country’s Production Linkage Incentive scheme, designed to attract manufacturing and export-oriented investments in priority industries (e.g. automotive and electronics) can drive a rebound of investment in manufacturing.

In Bangladesh and Sri Lanka, FDI inflows will take longer to recover, as investment commitments in these countries remained weak.

For instance, announced greenfield investment projects in 2020, an indication of FDI trends over the next few years, contracted significantly (-87 percent in Bangladesh, and -96 percent in Sri Lanka).

This contraction is due to weak investment interests in garment production, a major export industry and FDI recipient in these countries. Investment in, and production of, garments suffered severely in 2020, with no sign of recovery as of early 2021.

Garment factories in Bangladesh for example, faced some $3 billion worth of cancelled export orders in 2020. In Sri Lanka, export data for January 2021 show no recovery yet.

*This article is extracted from the World Investment Report 2021 prepared by the United Nations Conference On Trade And Development (UNCTAD).