CHAPTER 1: FDI AND CORPORATE INVESTMENT TRENDS
1.7. Prospects and concluding remarks
Governments across ASEAN are integral to the rise of the private equity and venture capital industry in the region. They have introduced initiatives to support the growth of start-ups and foster investment in collaborative environments. For example, Singapore’s Startup SG initiative offers co-investment opportunities and tax incentives to encourage private sector funding.
Indonesia launched the NextICorn Foundation to showcase the government’s commitment to facilitate start-ups in its domestic digital ecosystem. These two countries are home to six unicorns between them, the most in ASEAN. The Malaysian government established the Malaysia Innovation Policy Council to support digital tech initiatives in the private sector. SiHub, launched by Viet Nam’s Ho Chi Minh City Conservation Centre, provides facilities for start-ups and looks to promote integration between its domestic start-start-ups and the global start-up community. These initiatives in ASEAN are a step forward in promoting a healthy ecosystem in which future unicorns can flourish.
1.7. PROSPECTS AND CONCLUDING REMARKS
MNEs and ASEAN companies continued to invest and expand in the region in a broad range of industries in 2018. Their investment and expansion activities helped push up FDI flows in ASEAN to an all-time high. A significant jump in manufacturing FDI and strong investment flows to financial services contributed to the rise. Active M&A activities in the region by MNEs and ASEAN companies have also help pushed up FDI flows last year.
Even before the recent trade tensions and the shift in production, MNEs had been investing and expanding in the region to meet growing demand, upgrade in value chains (e.g. into R&D and retailing functions to support manufacturing) and join regional production networks (AIR 2014). MNEs from within and outside the ASEAN region will remain active investors, driven by their growing interest to strengthen regional footholds, take advantage of emerging regional
Figure 1.21. ASEAN-based investors targeting ASEAN-focused venture capital funds, by location, as of August 2019 (Per cent)
Source: Preqin Pro.
opportunities and encouraged by regional integration. Their operations are contributing to increasing regional connectivity through intra- and interfirm activities.
Investment into ASEAN is expected to continue its upward trend, driven by dynamic industrial development with new growth opportunities from production links with and shifts from China, and the improving regional investment environment. MNEs (e.g. from Australia, the EU, Japan and the United States) and ASEAN companies are expected to invest or further expand their operations in the region. This sentiment is corroborated by various recent investment and business surveys (table 1.12).
Many United States corporate executives with business in ASEAN expect their companies to increase investment in the region in the next five years (Amcham Singapore and United States Chamber of Commerce 2018). ASEAN is increasingly seen as an important market for United States MNEs in terms of worldwide revenue (Amcham Singapore and United States Chamber of Commerce 2019). Similarly, many European companies are also planning to expand their operations in ASEAN over the next five years (EU-ASEAN Business Council 2018). Japanese and Australian companies also have expansion plans in the region (JETRO 2018; Australia-ASEAN Chamber of Commerce 2019).
MNEs surveyed in these and other studies perceive ASEAN as a region with high potential and an attractive location for investment. The factors include the rapid growth of the middle class, an integrating region of more than 650 million people, an improving investment environment, with commitment to infrastructure development and complementary location advantages that support regional value chain activities. The region is also witnessing rapid growth in several key industries, such as the automotive, electronics and retail businesses, and in the digital economy. Indeed, 85 per cent of European firms responding to the EU-ASEAN 2018 business survey see further ASEAN economic integration as an important consideration in their business success in the region.
Manufacturing activities and the three major services industries (finance, wholesale and retail, and real estate) will continue to receive significant share of FDI flows – similar to the pattern witnessed in 2018. However, the Chinese government’s policy in curbing outward OFDI in real estate will have implications for Chinese real estate investment in ASEAN in 2019. Chinese companies are significant investors in real estate in the region.
The rise in e-commerce and other digital-related activities in the region will motivate more firms and start-ups to operate in the digital space, also attracting other service providers to ASEAN (e.g. logistics, packaging and fintech start-ups). Many start-ups in the region have scaled up or are planning to scale up their operations to neighbouring countries – further strengthening intra-ASEAN investment. Private equity and venture capital investments play an important role in funding the expansion of these start-ups. Such investments are rising in ASEAN with an increasing volume of assets under management, numbers of deals and numbers of investors as well as more ASEAN-focused funds. Investment in 4IR technologies in the region is growing because of increasing demand and the continuous efforts of governments in the region to attract and promote FDI in these industries.
Table 1.12. Prospect for global investments and business in ASEAN, 2018–2019
Study Findings
EU-ASEAN Business Sentiment Survey 2018
A survey by the EU-ASEAN Business Council of more than 330 executives from European companies in Southeast Asia (EU-ASEAN Business Council 2018). Executives were asked about their experiences and plans in the region. Some key fi ndings:
• 72 per cent of European businesses expect an increase in ASEAN profi ts for 2018.
• 70 per cent said ASEAN has become more important in terms of global revenues over the last two years.
• 99 per cent plan to expand or maintain their current levels of operations in the region.
• 75 per cent expect their level of trade and investment in ASEAN to increase over the next fi ve years.
• 85 per cent see further ASEAN economic integration as an important consideration in their business success in the region.
ASEAN Business Outlook Survey 2018
A report coordinated by the American Chamber of Commerce in Singapore and the United States Chamber of Commerce on experiences of American MNEs and their plans in the region (AmCham Singapore and United States Chamber of Commerce 2018). Some key fi ndings:
• 48 per cent regard ASEAN as more important for their company in terms of worldwide revenue over the past two years.
• 58 per cent project ASEAN will increase in importance in terms of worldwide revenue over the next two years.
• 62 per cent expect increased levels of trade and investment in ASEAN over the next two years.
• 80 per cent plan to increase their level of trade and investment in ASEAN over the next fi ve years.
• Key investment drivers in the region in the next two years include economic growth, the rise in the middle or consumer class, and regional integration.
• 56 per cent expect higher profi ts in 2017 than in 2016, with 74 per cent expecting profi ts to be higher in 2018 than in 2016.
ASEAN Business Outlook Survey 2019
A report by the American Chamber of Singapore and the United States Chamber of Commerce. Some key fi ndings:
• The importance of ASEAN markets for United States MNEs in terms of worldwide revenue for the next two years has risen, from 58 per cent in 2017 to 61 per cent in 2018.
• Key reasons include the availability of raw materials (70 per cent), openness on business and land ownership (60 per cent), regional integration (59 per cent) and competitiveness of production costs (50 per cent).
• For United States MNEs based in Singapore, regional integration (76 per cent) and improvement of infrastructure regionally (74 per cent) were their leading factors in this survey.
2018 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania
A regular survey done by the Japanese External Trade Organization (JETRO) to understand the current business activities of Japanese-affi liated companies operating in Asia and Oceania (JETRO 2018). Key fi ndings with regard to ASEAN:
• 65 per cent forecasted profi t in 2018.
• Large percentages plan to expand operations in many ASEAN Member States in the next one to two years:
Myanmar (72 per cent), Viet Nam (70 per cent), the Lao People’s Democratic Republic (55 per cent), Malaysia (54 per cent), Cambodia (53 per cent), the Philippines (52 per cent), Thailand (52 per cent), Singapore (50 per cent) and Indonesia (49 per cent).
Australian Business in ASEAN Survey 2019
A survey by the Australian-ASEAN Chamber of Commerce of Australian businesses in ASEAN. Key fi ndings:
• 60 per cent of respondents have expanded operations in ASEAN over the past two years.
• 82 per cent are planning to expand trade and investment in the ASEAN region over the next fi ve years.
• The top reasons given for expansion: the growth in middle-class consumers, improvement in infrastructure and infrastructure development, and the availability of skilled labour.
• 45 per cent of respondents believe that ASEAN integration is important for doing business in the region.
Asia Business Outlook Survey 2019
A survey by The Economist Corporate Network of 235 senior executives in Asia in the end of 2018 found the following:
• 83 per cent of respondents expect revenue growth in ASEAN in 2019. The ASEAN marketplace is expected to have the strongest growth in Asia in 2019.
• Firms plan to expand operations in ASEAN Member States in 2019, as follows: Indonesia (48 per cent), Viet Nam (40 per cent), Thailand (39 per cent), Singapore (39 per cent), Malaysia (34 per cent), the Philippines (32 per cent) and Myanmar (22.5 per cent).
Source: Survey reports.
NOTES
1 Brunei Darussalam, Cambodia, Indonesia, Singapore, Thailand and Viet Nam.
2 Khmer Times, “Laos suspends new dam projects”, 16 August 2018.
3 Myanmar Times, “New round of oil and gas exploration bids to be called soon”, 24 February 2019.
4 The Spokesman Review, “Key Tronic will open Vietnam factory as hedge in US-Chinese trade war”, 30 August 2019.
5 ABB, press release, “ABB opens Robotics Technical and Service Center in Vietnam”, 12 May 2018.
6 Based on inward FDI statistics from the ASEAN Secretariat, ASEAN FDI database.
7 Nikkei Asian Review, “China scrambles to stem manufacturing exodus as 50 companies leave”, 18 July 2019;
The Economist, “The trouble with putting tariffs on Chinese goods”, 16 May 2019; and ING, “Trade tensions accelerate move of China’s factories”, 19 May 2019.
8 Financial Times, “China’s factories eye Southeast Asia to avoid US tariff threat”, 20 July 2018; and Reuters, “To dodge US tariffs, Chinese exporters shift production to low-cost nations”, 26 June 2019.
9 Business Insider, “Nintendo is moving production of its hit Nintendo switch game console to Vietnam amid trade tensions between China and the US”, 9 July 2019.
10 Nikkei Asian Review, “Apple tests AirPods production in Vietnam as it cuts China reliance”, 17 July 2019.
11 Washington Post, “More than 50 major companies, from Google to Nintendo, pull production from China because of the trade war”, 19 July 2019.
12 Politico, “How U.S. and Chinese firms are outmaneuvering Trump in trade war”, 29 November 2018.
13 Nikkei Asian Review, “Ricoh moves output to Thailand as China tariffs extend to printers”, 16 May 2019.
14 Reuters, “Sales to emerging markets a bright spot for Harley Davidson”, 23 July 2019.
15 South China Morning Post, “Apple supplier sets up shop in Indonesia as island of Batam profits from US-China trade war”, 27 June 2019.
16 ABB, press release, “ABB opens Robotics Technical and Service Center in Vietnam”, 5 December 2018.
17 Assets under management is the combination of dry powder (the amount of capital committed to a private capital fund minus the amount that has been called by the general partner for investment) and the unrealized value of assets.
18 Other private equity includes balanced funds, co-investment funds, co-investment multi-manager funds, direct secondaries and turnaround funds.
CHAPTER 2 FDI in Services
2.1. INTRODUCTION
The services sector is the largest recipient of FDI in ASEAN and FDI in services in the region is rising. Building on AIR 2018 on the digital economy, this chapter looks at those services industries that are important for digital development (e.g. fintech, payment systems, e-readiness).
2.2. FDI IN SERVICES
FDI in services rose from an annual average of $12 billion in 1999–2003 to $88 billion in 2014–
2018. The sector accounted for two-thirds of FDI flows in ASEAN in 2014–2018 (figure 2.1), in line with the global average, but much higher than the share of services in regional GDP (50 per cent).
Figure 2.1. ASEAN: Rising FDI in services, annual average, 1999–2003, 2004–2008, 2009–2013 and 2014–2018 (Billions of dollars and per cent)
Source: ASEAN Secretariat, ASEAN FDI database.
Services Other sectors 50%
50%
$24 bn
$54 bn
$95 bn
$134 bn
56% 44%
69% 31%
66% 34%
125%
76%
41%
1999–2003 2004–2008 2009–2013 2014–2018
0 20 40 60 80 100 120 140 ($ billion)
FDI in services in ASEAN is mostly in three key industries (financial services, wholesale and retail trade, and real estate), which accounted for 78 per cent of services investment in 2012–
2018 (table 2.1). The financial services industry is the largest recipient of services FDI (42 per cent), followed by wholesale and retail trade (24 per cent) and real estate (12 per cent).
Table 2.1. FDI fl ows in ASEAN, by industry, 2012–2018 (Billions of dollars and per cent)
Cumulative
value Share of services FDI
2012 2013 2014 2015 2016 2017 2018 2012–2018 2012–2018
Services 115 67 87 74 84 103 94 624 100
Financial and insurance 40 22 44 32 45 39 42 265 42
Wholesale and retail trade 38 17 22 11 13 26 20 147 24
Real estate 11 9 10 9 11 14 13 76 12
Information and communication 2 2 2 2 2 2 1 14 2
Electricity, gas, steam 0 1 0 2 1 7 2 13 2
Construction 0 1 1 0 1 2 2 7 1
Others and unspecifi ed 23 14 7 19 13 13 13 102 16
Total FDI fl ows 117 121 130 119 119 147 155 907
Source: ASEAN Secretariat, ASEAN FDI database.
Note: May not add up to 100 per cent due to rounding.
Financial services
FDI flows in this industry are mainly in Singapore, which alone accounted for 89 per cent of financial services FDI in the region. Many financial MNEs, in particular banks, and foreign affiliates of MNEs carrying out financial activities that are classified as financial services FDI, have established a presence in Singapore to coordinate operations across ASEAN and to provide financial services to clients based in the region. Many of the international banks from North America, Europe and Asia have had operations in the region for a few decades (section 2.4). Some have expanded by moving into new segments of the banking value chain (chapter 1) and into other ASEAN Member States.
Wholesale and retail
FDI flows in wholesale and retail activities are also highly concentrated in ASEAN. Singapore received 69 per cent, Indonesia 18 per cent, and Viet Nam and Thailand 4 per cent each of FDI flows to this industry in 2014–2018. In more recent years, Asian retailers (from Japan and the Republic of Korea, and intra-ASEAN) have been actively expanding and opening more stores across the region because of rising demand (section 2.5). In the e-commerce segment, key players are MNEs from Asia (particularly ASEAN and China) and the United States.
Real estate and construction
Strong industrial activity, steady economic growth, infrastructure demand and other factors contributed to the increase in investment in construction and real estate development of hotels, residential properties, and commercial and office buildings. ASEAN and Chinese companies are major investors in this services industry. FDI in real estate is widespread in
the region although Singapore accounted for 45 per cent of the total. Other major recipients were Thailand (15 per cent), Viet Nam (13 per cent) and Malaysia (11 per cent).
2.2.1. Major services investors
The leading sources of investment in services in ASEAN are the European Union, the United States, intra-ASEAN investment, Japan and China (table 2.2). These sources accounted for 66 per cent of total FDI in services in 2014–2018.
Table 2.2. FDI fl ows in services, major investor economy, annual average 2014–2018 (Billions of dollars)
European Union United
States
Intra-ASEAN Japan China Hong Kong
(China) Republic of
Korea Australia Other
economies Total
FDI in all services 16.8 14.8 11.6 7.6 7.6 5.3 2.7 2.0 20.2 88.5
Wholesale and retail
trade 3.1 2.4 2.4 2.3 1.9 0.9 1.0 0.4 4.0 18.3
Financial services 4.9 11.6 3.8 3.1 1.9 2.3 0.6 0.8 11.6 40.6
Real estate 0.6 0.6 3.2 0.6 2.5 1.3 0.4 0.1 1.8 11.2
Source: ASEAN Secretariat, ASEAN FDI database.
Taken together, the EU economies contributed an annual average of $17 billion in FDI in services or 19 per cent of all FDI in services in ASEAN in 2014–2018. Almost 30 per cent of services FDI from the EU was in financial activities. The second largest recipient of EU services FDI was wholesale and retail activities, and the EU was the largest source of investment in the wholesale and retail industry.
MNEs from the United States invested an annual average of $15 billion in 2014–2018, or 17 per cent of services FDI in the region. More than 78 per cent of United States services FDI was in financial services. The United States was the second largest investor in wholesale and retail activities in ASEAN during this period.
Intra-ASEAN investment in services over this period was significant. The annual average of intraregional services investment was $12 billion, which accounted for 13 per cent of services FDI. Of the three key services industries, intra-ASEAN investment in real estate stood out prominently, accounting for 29 per cent of FDI in this industry. ASEAN companies were the largest investor in real estate development in the region.
Chinese firms accounted for 9 per cent of services FDI in ASEAN. The industry composition of Chinese FDI is different from that of developed economies. In particular, real estate and construction together accounted for 39 per cent of services FDI from China. Wholesale and retail trade and financial services each accounted for 25 per cent.
Investment in ASEAN from Japanese firms contributed 9 per cent of FDI in services. More than 40 per cent of Japanese services FDI in 2014–2018 went to financial services and another 30 per cent went to wholesale and retail activities.
2.2.2. FDI in services by destination
The composition of services FDI in 2014–2018 varies widely across ASEAN. Singapore remained the largest recipient of services FDI throughout the period, with more than 70 per cent share (table 2.3). The high share of services FDI in Singapore is due to its role as a regional investment hub and its hosting of many holding companies, back-office activities, regional headquarters activities and distribution functions, which are classified as services FDI (UNCTAD 2017). Much of this investment flows through Singapore and is subsequently invested elsewhere in the region, including in industrial (non-services) activities. Indonesia, Malaysia and Viet Nam accounted for 6 per cent each and Thailand for 5 per cent. The following subsections detail pertinent investment in each ASEAN Member State over the 2014–2018 period.
Table 2.3. FDI fl ows in ASEAN, by country and selected services industries, cumulative 2014–2018 (Millions of dollars)
Brunei
Darussalam Cambodia Indonesia
Lao People’s Democratic
Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam Total Electricity, gas,
steam and air conditioning supply
– – 1,077 2,460 367 1,165 1,449 – -490 5,623 11,652
Construction 532 477 922 1,447 1,998 3 316 -508 -388 2,117 6,915
Wholesale and
retail trade -30 – 16,578 91 2,732 65 579 63,683 3,784 4,000 91,482
Transportation
and storage 8 – 2,075 2 406 3,680 152 -3,894 -357 933 3,005
Information and
communication -13 – 4,842 1 1,726 1,198 79 – 1,023 611 9,467
Financial and Insurance
activities -60 3,490 -9,734 436 10,805 104 3,005 181,284 13,131 376 202,836
Real estate
activities 0 1,114 5,704 80 6,322 733 958 25,276 8,232 7,399 55,817
Professional,
activities 68 3,029 3,934 135 682 1,351 1,104 48,902 -5,139 3,122 57,187
Services total 516 8,110 25,399 4,714 25,254 8,304 7,701 314,743 21,526 26,253 442,519 Source: ASEAN Secretariat, ASEAN FDI database.
Brunei Darussalam
FDI in services in 2014–2018 was mostly accounted for by inflows into the construction industry. A number of major projects started construction during this period. They include the
$1.6 billion 30-kilometer cross-sea Temburong bridge, which started construction in 2014 and is expected to open in 2020. Investors in the project include China State Construction Engineering Corporation and Daelim (Republic of Korea). The ongoing construction of a major crude oil refinery and petrochemical plant, which started in 2017, is another major activity.
This FDI project is a joint venture between Hengyi Industries (China) and the Government of Brunei Darussalam.
Cambodia
A series of investment activities in banking boosted services FDI in 2016 and 2017. They include the acquisition of an additional equity stake in Prasac Microfinance Institution by a foreign investor group, the acquisition of a 40 per cent stake in Phnom Penh Commercial Bank by Jeonbuk Bank (Republic of Korea) and the acquisition of an additional equity stake in Advanced Bank of Asia by National Bank of Canada. The rapid growth of the Cambodian economy has also attracted considerable real estate activities in recent years. Real estate companies from Asia, including from ASEAN Member States, were major investors.
Indonesia
Retail and infrastructure-related industries (including real estate) were the main recipients of services FDI in 2014–2018. Asian retailers such as Lotte (Republic of Korea) and FamilyMart (Japan) and Central (Thailand) have been expanding in Indonesia. FDI to the financial industry fluctuated, recording large net divestments due to local companies acquiring foreign entities.
The Indonesian tax amnesty programme between July 2016 and March 2017 contributed to the increase in local companies’ investment through such acquisitions (AIR 2017). Investment
The Indonesian tax amnesty programme between July 2016 and March 2017 contributed to the increase in local companies’ investment through such acquisitions (AIR 2017). Investment