FDI to Asia defies pandemic to grow 4% in 2020, but S-E Asia takes a hit

FOREIGN direct investment (FDI) flows to developing countries in Asia increased by 4 per cent to US$535 billion in 2020, reflecting resilience amid global contraction which saw South-east Asia taking a hit with a 25 per cent contraction.

UNCTAD's World Investment Report 2021 notes that global flows of FDI have been severely hit by the Covid-19 pandemic. As companies re-assessed new projects, they fell by 35 per cent from US$1.5 trillion the previous year to US$1 trillion, well below the low point reached after the global financial crisis a decade ago.

Greenfield investments in industry and new infrastructure investment projects in developing countries were hit especially hard. FDI flows to Europe plunged by 80 per cent, while those to North America fell 40 per cent.

In contrast, flows to Asia rose by 4 per cent, with East Asia being the largest host region, accounting for half of global FDI in 2020. Growth was driven by China, Hong Kong, India and the United Arab Emirates.

"Despite the pandemic, FDI to and from the region remained resilient in 2020. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows," said UNCTAD's director of investment and enterprise, James Zhan.

He added: "FDI prospects in 2021 for Asia are more favourable than the global average, because of recovery in trade, manufacturing activities and a strong GDP (gross domestic product) growth forecast."

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FDI prospects for Asia are more favourable than the global outlook, with a projected growth of 5-10 per cent, thanks to resilient intra-regional value chains and strong economic growth prospects. Signs of trade and industrial production recovering in the second half of 2020 are providing a strong foundation for FDI growth in 2021.

Manufacturing, an important FDI sector for the region, already showed signs of recovery in the second half of 2020. However, in smaller economies oriented towards services and labour-intensive industries - particularly hospitality, tourism and garments - FDI could decline further in 2021.

Elsewhere in Asia, FDI contracted. In economies where FDI is concentrated in tourism or manufacturing, contractions were particularly severe.

South-east Asia, an engine of global FDI growth for the past decade, recorded a 25 per cent contraction to US$136 billion.

Singapore, Indonesia and Vietnam, the region's largest FDI recipients in that order, all recorded FDI declines. FDI to Singapore fell by 21 per cent to US$91 billion, Indonesia down 22 per cent to US$19 billion, and Vietnam slipped 2 per cent to US$16 billion.

"Lockdown measures, successive waves of Covid-19 infection, supply chain disruption, falling corporate earnings, economic uncertainties and delayed investment plans were key reasons for the contraction," the report said.

In Thailand, FDI was a negative US$6 billion, driven by the divestment of Tesco (United Kingdom) to a Thai investor group for US$10 billion. In Malaysia, FDI fell by 55 per cent to US$3 billion. FDI in Cambodia was flat at US$3.6 billion, underpinned by inflows in finance. In Myanmar, FDI dropped 34 per cent to US$1.8 billion.

FDI in South Asia rose by 20 per cent to US$71 billion, driven mainly by a 27 per cent rise in FDI in India to US$64 billion.

In India, robust investment in information and communications technology (ICT) and construction bolstered FDI inflows. Cross-border mergers and acquisitions surged 83 per cent to US$27 billion, with major deals involving ICT, health, infrastructure and energy.

Flows to East Asia rose by 21 per cent to US$292 billion, inflated by the FDI recovery in Hong Kong, which surged by 62 per cent to US$119 billion, after a sharp fall of FDI in 2019 and due to corporate reconfigurations by multinational enterprises (MNEs) headquartered in the economy.

In China, FDI growth picked up pace in 2020, growing by 6 per cent to US$149 billion, reflecting the country's success in containing the pandemic and its rapid GDP growth recovery. The growth was driven by technology-related industries, e-commerce and research and development.

In South Korea, FDI fell by 4 per cent to US$9 billion. Though the country was among the earliest to contain the Covid-19 outbreak and economic growth remained strong, a large drop in cross-border mergers and acquisitions (M&As) due to large divestments led to a decline in investment.

Outward FDI (OFDI) from Asia increased by 7 per cent to US$389 billion - again, the only region recording expansion in outflows.

Growth was driven by strong investment from Hong Kong (China) and Thailand. China, the largest investor country in 2020, saw OFDI stabilising at US$133 billion. The country's tighter screening of OFDI, added to heightened scrutiny by the United States of investments originating from China, weighed on the country's OFDI since 2017.

"Continued expansion of Chinese MNEs and active M&A purchases abroad underpinned the stabilisation in 2020," the report said.