FDI boom in ASEAN

Vietnam's electronics exports reached a record high of USD100bn in 2021, accounting for over 30% of Vietnam’s total exports.

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FDI on a roll

ASEAN has seen a FDI boom in recent years, thanks in large part to the region’s substantial economic potential. In HSBC’s view, the Global Financial Crisis (GFC) in 2008-09 was a significant catalyst to the region’s FDI boom, as multinational companies searched for investment opportunities in fast-growing and cost-competitive economies.

Since 2010, total FDI to ASEAN-6 (Singapore, Malaysia, Indonesia, Thailand, Vietnam, and the Philippines) has averaged nearly USD127 billion per year, nearly three times the previous decade's average (average in 2000-09: USD 41 billion).Similarly, net FDI (inbound minus outbound direct investment) averaged nearly USD 54 billion a year since 2010, almost four times the average from the previous decade.

The share of ASEAN-6 inflows of global FDI exemplifies this trend as well.While the Asian Financial Crisis (AFC) had an initially deleterious effect on ASEAN’s investment climate, FDI poured back into the region more substantially after the GFC.

In particular, FDI has been holding up extremely well since the start of the global pandemic. In fact, ASEAN-6 accounted for a record high of around 13% of world FDI inflows in 2020, largely thanks to booming flows into Singapore. HSBC believes this trend is likely to continue in the medium term, given ASEAN’s growth outlook remains robust.

HSBC noted that not all ASEAN economies have benefited equally from the recent FDI boom. Since the GFC, the majority of inflows have gone to Singapore, with the Philippines and Indonesia receiving a relatively small share.FDI as a percentage of GDP in Singapore has increased to over 20% on average since 2010, and it has been an increasingly attractive investment destination for diversified manufacturing sectors, especially in advanced manufacturing (though note that, as a regional financial centre, the size of Singapore’s inflows is not necessarily comparable to that of other economies).

Vietnam as a rising star

Looking at high frequency data, Malaysia and Vietnam also stand out, with the former’s 4Q22 FDI approvals jumping to as high as 12% of GDP and the latter successfully transforming into an emerging global production base. While the Philippines’ share and Indonesia’s share remain below that of their regional peers, it is encouraging to see that they have also pushed for structural reforms to improve the investment climate.

Thinking of FDI-driven economic success stories, Vietnam naturally stands out: Vietnam has turned itself into a rising star in global supply chains, gaining substantial global market share in sectors, including textiles, footwear, and consumer electronics. Since Vietnam’s Doi Moi reforms in 1986, industrial parks have been set up across the country, attracting investors with preferential tax incentives and an abundance of relatively cheap and productive labor.

New FDI has been flowing into the country since the 2010s, with the lion’s share concentrated in the manufacturing sector, consistently accounting for 4-6% of GDP. Much of the investment initially entered the low value-add textile and footwear spaces. However, Vietnam has climbed up the value chain over the years, growing into a key manufacturing hub for electronics products in the last two decades. Vietnam's electronics exports reached a record high of USD100bn in 2021, accounting for over 30% of Vietnam’s total exports; just 20 years ago, the share was only 5%.

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Much of the success in tech is thanks to Samsung’s multi-year FDI in Vietnam, which started in the late 2000s. With an investment of around USD 18 billion over the years, Samsung now has eight factories and one R&D centre in Vietnam, including two smartphone factories, producing half of the company’s smartphones and tablets. The success of Samsung has led to other tech giants, such as Google and LG, shifting their supply chains to Vietnam. The trend intensified during the US-China trade tensions, which not only lifted Vietnam’s exports but also accelerated FDI inflows.

Even though the process was partially disrupted by COVID-19, FDI inflows have remained remarkably resilient, in particular related to Apple-connected production. For example, two Taiwanese Apple suppliers, Pegatron and Foxconn, and two mainland Chinese assemblers, Luxshare and Goertek, have all announced substantial investment plans to ramp up production capacity in Vietnam.

"Vietnam’s competitive FDI regime and sound macro fundamentals should continue to attract quality FDI, which is key in helping the economy move up the value chain. Its tech ambition is far from just being a low-end manufacturing hub, however, which means more reforms, including upskilling the workforce and improving infrastructure quality, are needed to grasp the opportunities", said HSBC.

Improving the regulatory framework

The FDI policy environment in ASEAN has improved meaningfully over the last few years as more favourable policies have been introduced. In particular, Indonesia and Vietnam have seen the biggest improvements, including improving infrastructure, easing investment restrictions, and better fiscal management, just to name a few.

In Indonesia, a new social security program, JKP, will protect laid-off workers by providing 45% of wages for 1-3 months, while providing 25% of wages for 4- 6 months. There is a 1 ppt VAT hike to 11%, effective starting from April 2022; the implementation date of the carbon tax is pushed back to July 2022.

Only six sectors in Indonesia are closed to any foreign or local investment, while prioritised sectors can enjoy fiscal incentives.

In Vietnam, a new labor code took effect on January 1, 2021, with an extension of some employee protection, more changes aligned with international practices, and an increase in the retirement age.

There was a 2ppt cut in the VAT to 8% from January 2022. An amended law on investment took effect from January 1, 2021, aiming to introduce more incentives and attract more FDI inflows. There is a goal to increase the population covered by the government- sponsored insurance program to 95% by 2025.