Looking back to the start of the year, Asia’s foreign direct investment (FDI) outlook was gloomy. The region was battling inflation, weaker external demand, supply chain disruptions and continuing coronavirus lockdowns in China. Today, economic conditions look set to slowly improve. The IMF expects the regional economy to grow by 4.6% this year, accounting for two-thirds of global growth. In 2024 it has forecast Asia to grow by 4.2%, increasing to 5% in 2025. Closer economic ties and trade pacts are creating a more liberal trade and investment regime in Asia. The regional Digital Economy Framework Agreement is boosting Asia’s economy, inflation is receding due to softening commodity prices and the World Bank expects external demand for Asian exports to gradually improve. 

Based on balance of payments data, China remains the region’s top destination for FDI, followed by Hong Kong, Singapore and India. However, China’s FDI inflows are slowing due to strained international relations, a domestic economic slowdown and regulatory uncertainty. Despite its economy having reopened after Covid-19, growth in its service and retail sectors is hampered by increasing debt levels and weaknesses in the property sector.

Supply chain disruptions in Asia are expected to continue as investors push ahead with relocating, diversifying and reshoring their value chains. However, the so-called ‘China plus one’ strategy, whereby firms minimise their reliance on the country by establishing production hubs in south-east Asia, will mitigate the regional impact of China’s slowdown. 

In terms of the region’s FDI bright spots, electric vehicles, manufacturing, electronics, renewable energy, e-commerce, IT and digital sectors are expected to feature prominently in 2024. Meanwhile Vietnam will remain a FDI magnet due to its low wages, large, educated workforce, young demographics, proximity to China, and shift up the economic value chain towards high tech.

However there is still underinvestment in many countries, and while global FDI flows to Asia have been recovering to pre-pandemic levels, inflows are expected to slow in 2024. Indian poet Rabindranath Tagore’s famous quote that “light that emanates from the core of gloom is your glow” aptly describes Asia’s FDI outlook, and particularly the Association of Southeast Asian Nations (Asean). Last year, inward FDI flows into the 10-country Asean bloc grew by 5% to hit $224bn, according to Unctad. Next year, it is these countries that will remain the region’s shining beacon for FDI.

Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asian market research and investment/trade promotion services. E-mail: lawrence@asiabizstrategy.com

This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence

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