World Economy

Developing Asia Expects $515 Billion FDI in 2017

Bangladesh, Nepal and the Philippines are among countries that are expected to benefit from more FDI inflows from within the region
China and India continue to remain the most promising investment destinations in 2017.China and India continue to remain the most promising investment destinations in 2017.

Developing Asia is expected to witness a 15% increase in foreign direct investment inflows in 2017, following a dramatic 22% drop in such inflows in 2016, according to the World Investment Report 2017, published by the United Nations Conference on Trade and Development.

In 2017, UNCTAD expects incoming FDI into the region to increase to $515 billion, owing to an improved economic outlook in key Asian economies, which is expected to result in more favorable investor sentiment. The estimate, however, falls short of 2015’s $524 billion in FDI, Brink Asia quoted the UNCTAD report as saying.

According to the report, policy efforts in countries such as China, India and Indonesia could contribute to this increase—for example, at the beginning of 2017, China opened up a few new sectors such as extractive industries, infrastructure, finance and manufacturing to foreign investment.

Countries such as Malaysia and Vietnam, however, could see a slowdown in investment in the short run owing to the stalling of the Trans-Pacific Partnership after the withdrawal of the US. On the other hand, the likelihood of the Regional Comprehensive Economic Partnership coming into effect “could provide fresh impetus for FDI growth,” according to UNCTAD.

In other parts of South and Southeast Asia, UNCTAD expects countries to strengthen their positions in the regional production networks, and this will result in increased FDI into their economies.

Countries such as Bangladesh, Nepal and the Philippines are among these countries, and they are expected to benefit from more FDI inflows from within the region as increasing division of labor between the developed and developing countries is witnessed, with the former focusing on the production of higher value-added goods and the latter specializing in labor-intensive manufacturing.

  Outflow Prospects

Although FDI inflows into developing Asia are expected to increase significantly, the prospects for FDI outflows are uncertain, especially given the Chinese government’s efforts to curb overseas investments and acquisitions.

That said, a structural change is expected in terms of FDI outflows. For example, the amount invested in green field infrastructure projects in developing Asia is expected to increase as a result of China’s Belt and Road Initiative, while cross-border mergers and acquisitions in developed Asian economies are expected to decline.

According to top executives at multinational corporations and investment promotion agencies surveyed by UNCTAD, China remains the most promising source of FDI in 2017, followed by the US, Germany and the UK. Other Asian countries such as Japan and South Korea have already improved their standings.

In addition to the US, China and India continue to remain the most promising investment destinations, according to the report. They are also forecasting an uptick in investments in countries such as Indonesia, Thailand, the Philippines, Vietnam and Singapore—a sign of their confidence in developing Asia’s economic prospects.

  Macroeconomic Uncertainty

FDI into Asia fell in 2016, for the first time since 2012. Data from the UN shows that FDI shrank by 15% to $443 billion, amid a huge drop in investment into Hong Kong (from $174 billion to $108 billion). Much of the investment into Hong Kong is eventually bound for elsewhere in the region, due to the city’s low-tax and tariff regime, Global Trade Review reported.

The figures reflect the ongoing macroeconomic uncertainty in the region, spearheaded by rising geopolitical tensions and slowing trade and economic activity in China. Lower investment in Hong Kong suggests lower confidence in the economy of the region at large.

Financial services investment in Hong Kong and China continued to grow, but a shift from low-end towards high-end manufacturing has led to less money being pumped into production facilities around the Pearl River Delta.

Rising costs are a deterrent to manufacturing companies, who in some cases are looking elsewhere in the region, but in others, are looking to invest closer to home. Many European companies are investing in production facilities in Eastern Europe, while American firms are often reshoring or near-shoring to Mexico.

“China is moving up the value chain. It’s now focusing more on the high-end segment and at the same time releasing the low-end segment to other countries,” Jong Woo Kang, lead economist at the Asian Development Bank told GTR.

“In garments, Bangladesh is now accounting for a large share of the ready-made garment market. In electronics, Vietnam is taking a growing share.”

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