The latest foreign direct investment (FDI) data published by the United Nations Trade and Development (Unctad) in its World Investment Report reveals that global foreign direct investment (FDI) flows dropped by 2% to US$1.33 trillion in 2023.

Despite the global dip, countries in the Asean region saw record inflows for the third consecutive year, with a 1.2% increase to US$226.3 billion, UOB global economics and markets research says in a recent note.

Singapore remained the largest FDI destination, with flows rising 13% to nearly US$160 billion, while Vietnam gained 3.4% to US$18.5 billion. However, other Asean nations, such as Indonesia, Malaysia, and Thailand, saw declines in FDI inflows, reflecting the broader global trends.

Yet, even with their declines, Southeast Asia is likely to outpace China in gross domestic product (GDP) and FDI growth over the next ten years, according to a recent report, Navigating High Winds: Southeast Asia Outlook 2024 – 2034, produced by Bain & Company, DBS Bank and the not-for-profit Angsana Council.

For the first time in a decade, says the report, the six leading economies in Southeast Asia attracted more FDIs than China. In 2023, that FDI totalled US$206 billion while China saw US$43 billion in inflows.

Resilient region

By UOB's account, FDI inflows to China fell by 14% to US$163.3 billion while inflows to India sank by 43% to US$28.2 billion in 2023. In contrast, Asean maintained its stability due to strong economic growth and growing global value chain connections.

The region continued to attract significant investment, particularly in greenfield projects, which increased by 42% year-on-year in 2023.

Within Asean, Malaysia, the Philippines, Thailand, and Vietnam reported substantial increases in announced greenfield projects, but Indonesia emerged as the top destination seeing a 73% year-on-year increase, with significant investments in sectors such as glass and solar manufacturing, and battery supply chains for electric vehicles.

Since 2019 the United States has been the largest contributor of FDI inflows to Asean, according to the Asean Statistics Division (Aseanstats). In 2023, the US accounted for 32% of total inflows to the region, up from 13% in the previous year.

This increase could be attributed to a number of sources but the ongoing US-China political and trade strains and the shifting of supply chains influenced by the global Covid-19 pandemic are prominent factors. Inflows from Europe to Asean also rose significantly, but inflows from China and Hong Kong SAR showed no significant differences from past trends.

Another new developing and potentially lasting source of investment into Southeast Asia is coming from the expanding conduit of Asian-Arab ties.

Sovereign wealth fund investment from Saudi Arabia, Qatar and the United Arab Emirates such as Masdar’s investment into Phase II of the Cirata floating photovoltaic (FPV) power plant in Indonesia.

Positive outlook

The long-term prospects for FDI inflows to Asean remain positive, supported by the region’s demographic dividend, relative political stability, greater cross-border policy coordination, and deepening regional integration. The recent Johor-Singapore Special Economic Zone (JS-SEZ) agreement and the Regional Comprehensive Economic Partnership (RCEP) are examples of increased integration and economic cooperation in the region.

One of the newer pillars attracting significant investment is Southeast Asia’s renewable energy transition. The sector has already established robust solar, wind and hydropower roots but the Philippines and Vietnam are just beginning to tap into their substantial offshore wind potential. And all Asean states are only just beginning to realize their huge untapped solar and hydropower potential.

The region’s abundant natural resources and natural assets also provide a solid platform for FDI into carbon capture and storage projects and the region’s growing carbon credit exchanges.    

However, it’s not all plain sailing ahead. Challenges such as global geoeconomic fragmentation, trade and geopolitical tensions, and evolving supply chains will continue to shape the investment landscape.

According to shipping and logistics company AP Moller-Maersk, the global transport disruptions caused by the conflict in the Red Sea will last longer than expected and will not be resolved this year, severely affecting the main commercial route between Asia and Europe.

Nevertheless, despite the challenging global environment, Asean's resilience and proactive policies have positioned the region as a prime destination for FDI. Its ability to attract record inflows amid global declines underscores its economic potential and strategic importance to the global economy.