Asian FDI Reached Records Last Year

by Mary Swire, LawAndTax-News.com, Hong Kong

01 August 2011

The United Nations Conference on Trade and Development, in its World Investment Report 2011, points out that, while global foreign direct investment (FDI) has not yet bounced back to pre-crisis levels, some regions, and particularly Asia, show a better recovery than others.

In fact, UNCTAD shows that Asia (excluding West Asia) set new records for FDI inflows and outflows in 2010. Last year, FDI inflows to South, East, and South-East Asia rose 24% to USD300bn, nearly one-quarter of the global total. However, the performance of the three sub-regions and their major economies varied significantly.

FDI to the member countries of the Association of Southeast Asian Nations (ASEAN) more than doubled, reaching USD79bn in 2010. The report says that countries’ proactive policy efforts contributed to the good performance of the group, and seem likely to continue to do so. Some ASEAN countries (for example, Indonesia and Vietnam) have gained ground as low-cost production locations, especially for low-end manufacturing, while the region´s least developed countries (Laos and Cambodia) received increasing inflows, particularly from neighbouring countries.

FDI inflows to East Asia rose to USD188bn, thanks to double-digit growth into China and Hong Kong. Inflows to China, the largest recipient of FDI in the developing world, climbed by 11% to USD106bn. However, with China experiencing rising wages and production costs, the trend in widespread offshoring of labour-intensive manufacturing to the country has slowed, and FDI inflows are shifting towards high-technology industries and services.

Finally, FDI to South Asia actually declined to USD32bn, reflecting a 31% slide in inflows to India and a 14% drop in flows to Pakistan. By contrast, inflows to Bangladesh, a rising low-cost production location, increased by nearly 30% to USD913m.

FDI outflows from developing Asia grew by 20% to about USD230bn in 2010, driven by increased investment coming out of China, Hong Kong, Malaysia, South Korea, Singapore and Taiwan Province of China. Outflows from the region´s two largest FDI sources - Hong Kong and China - increased by more than USD10bn on each and reached historic highs of USD76bn and USD68bn, respectively. In 2010, China exceeded Japan for the first time in outward FDI.

The region's share in global FDI outflows has jumped from below 10% before 2008 to around 17% over the past two years. Companies from developing Asia have been actively taking over companies in the developed world, including through a number of very large acquisitions. The significance of electronics in outward FDI from developing Asia reflects the international competitiveness of Asian companies in this industry, and they have become a dominant force at the production stage of the global electronics value chain.

The report predicts that both inflows to and outflows from developing Asia are expected to continue to grow. Countries in the region have made considerable progress in their regional economic integration efforts, and it is considered that this will translate into a more favourable investment climate for intra-regional FDI.

On the other hand, FDI inflows to developed countries in 2010 declined marginally to USD602bn, although the pattern was uneven. Europe stood out as the sub-region where flows fell most sharply. Inflows to Europe were USD313bn, a fall of 19% from 2009. A gloomier economic outlook prompted by government austerity measures and a looming sovereign debt crisis are said to have been among the factors hampering the recovery of FDI.

Declining FDI flows were also registered in Japan, where net inflows turned negative, due to large divestments by foreign multinational corporations. In contrast, inflows of FDI to North America showed a strong turnaround, with an increase of 44% to USD252bn. While FDI outflows from developed countries reversed their downward trend since 2008 with a 10% increase in 2010, it is noted that, despite the sizeable recovery of USD935bn, outflows of FDI from the region as a whole in 2010 were half of their peak in 2007.

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