FDI by sector and industry

Strong FDI into the manufacturing sector (figure 1.10a) and three major services industries (finance, wholesale and retail trade, and real estate) (figure 1.10b) contributed to the record inflows in 2018 (annex table 1.1). They together received $130 billion in investment or some 85 per cent of total inflows in the region.

There were important changes in the industrial investment pattern in 2018. FDI in the manufacturing sector rose significantly, while investment in the three major services industries (finance, wholesale and retail, and real estate) was mixed.

Source: ASEAN Secretariat, ASEAN FDI database.

Figure 1.10a. ASEAN: FDI flows in manufacturing, 2016–2018 (Billions of dollars and per cent)

22

30

55

2016 2017 2018

83%

36%

Primary sector Agriculture

FDI in agriculture fell by 6 per cent to $4 billion. ASEAN companies remained the largest investor in agriculture activities. Some 84 per cent of FDI flows into agriculture was intraregional.

Indonesia is the principal recipient, receiving more than 80 per cent of the agriculture FDI.

Malaysian and Singaporean companies are active investors in Indonesia (sections 1.3 and 1.4).

Extractive industries

FDI in the extractive industries fell significantly, from $2 billion in 2017 to a divestment of -$6 billion, largely due to divestments (sales of assets to local firms) from the EU (-$3.4 billion) and the United States (-$0.9 billion). MNEs from ASEAN also divested (-$836 million). Most of the divestment took place in Indonesia. For instance, PT Indonesia Asahan Aluminium (Indonesia) acquired a 40 per cent stake in Grasberg Mine from Rio Tinto (United Kingdom) for $3.5 billion and PTT Exploration & Production (Thailand) acquired a 22 per cent stake from Shell (Netherlands) for the Bongkot offshore gas field in Thailand, a joint project of the two companies, for $750 million.

Manufacturing sector

The manufacturing sector witnessed a significant jump in FDI, with inflows rising from $30 billion in 2017 to a record level of $55 billion in 2018. Manufacturing FDI accounted for 35 per cent of total inflows in the region, which contrasted with only 21 per cent in 2017. Most ASEAN Member States saw an increase in manufacturing FDI; much of it went to Singapore, Indonesia, Viet Nam and Thailand.

The United States ($12 billion), Japan ($10 billion), intra-ASEAN investment ($8 billion), the EU ($7 billion), Hong Kong (China) ($3 billion) and the Republic of Korea ($2 billion) were the six largest sources of manufacturing FDI in 2018. All made larger investments in manufacturing activities than in 2017. Investment from these source economies and intra-ASEAN investment accounted for more than 76 per cent of manufacturing FDI in the region. MNEs were particularly active in automotive and electronics activities (section 1.4).

Figure 1.10b. ASEAN: FDI flows in services and the three major industries, 2016–2018 (Billions of dollars)

Source: ASEAN Secretariat, ASEAN FDI database.

2016 2017 2018

84

44

12 10

103

39 26

14

94

42

20 13

Services total Financial services Wholesale and

retail trade Real estate

The increase in manufacturing FDI in ASEAN is due in part to a longer-term gradual shift of production capacity from China and elsewhere to ASEAN (see box 1.2, and in particular box figure 1.2.2). The structural driver is the steady increase in relative labour costs in China, and now that shift has accelerated as a result of the effect of the United States-China trade tensions. The main beneficiaries in terms of manufacturing FDI include Indonesia, Thailand and the CLMV countries.

There has been an increase in cases of foreign and Chinese companies establishing or shifting operations from China to ASEAN because of these reasons,⁷ with more firms planning to follow suit.⁸ More than one-third of the 430 United States companies in China surveyed by the American Chamber of Commerce China and the American Chamber of Commerce Shanghai have moved or are considering moving production bases elsewhere to mitigate the effects of the higher tariffs, with 18.5 per cent planning to move to Southeast Asia (AmCham China and AmCham Shanghai 2018).

Tech companies have already made such moves. For example, Nintendo (Japan) has announced its intention to move video console manufacturing to Viet Nam.⁹ Apple (United States) is considering moving 15 to 30 per cent of its Chinese production capacity to Southeast Asia and has already begun trial manufacturing of its AirPods in Viet Nam.¹⁰ Hewlett-Packard and Dell (both United States) plan to move some of their operations for personal computers to ASEAN.¹¹ Furniture company Man Wah Holdings (Hong Kong, China) has expanded with a facility in Viet Nam. Another furniture company, UE Furniture (China) and Strategic Sports (China), a helmet production company, are planning to move part of their operations to Viet Nam to avoid the tariffs imposed on China.¹² Electronics company Ricoh (Japan) moved its manufacturing to Thailand from China,¹³ and Kyocera (Japan) moved its manufacturing from China to Viet Nam, both to avoid tariffs. United States companies have also made such moves.

Harley Davidson set up operations in Thailand to serve the ASEAN¹⁴ and China markets, and shoe company Brooks Sports (United States) moved its production to Viet Nam from China.

Services sector

FDI in finance reversed the drop seen in 2016–2017 with a rise from $39 billion in 2017 to $42 billion in 2018. The EU, Japan and ASEAN were the major investors (chapter 2). More than 80 per cent of FDI in finance in ASEAN last year went to Singapore. A significant part of that investment may be used to fund FDI activities throughout the region, given the importance of regional headquarters functions in Singapore.

FDI in the wholesale and retail industry in ASEAN fell by more than $6 billion to $20 billion in 2018, despite increased investments from Japanese, Chinese and ASEAN MNEs (chapter 2).

The fall was due to a -$9 billion divestment by United States firms (mostly funds repatriation), which had invested $4 billion in 2017. There was also a significant fall in FDI from EU firms, which invested $8 billion in 2017 but just $292 million in 2018.

FDI in real estate was flat at $13 billion. MNEs from three major economies (China, Hong Kong (China) and ASEAN) invested a combined $7 billion, which accounted for about 50 per

cent of total FDI inflows in this industry in 2018. The rise in real estate FDI from Hong Kong (China), Japan and the United States made up for the decline in intraregional investment and in investment from China. Malaysia witnessed the largest drop in FDI in real estate, from $3 billion in 2017 to less than $1 billion in 2018. Real estate investment in Indonesia and Singapore also fell.