Investments in productive assets, tangible and intangible, are critical to a country’s development. And for developing countries, in particular, foreign direct investment (FDI) is key. FDI brings with it not only capital funding but new technology, managerial expertise, know-how and skills — important for the development of local human capital. It also helps position emerging countries as part of the global supply chain and, in the process, open up new markets. In addition, FDI is often a catalyst for domestic investments, when local businesses expand the ecosystem to support-complement the initial FDI — thus creating more jobs and opportunities for the people.
Last week, we looked at statistics on FDI flows globally. We showed that Asia remains the premier destination for FDI, outside of the developed world (primarily the US and Europe). And contrary to some narratives, Asean continues to attract huge capital inflows — despite rising competition from other regions. Most notably, Singapore, Vietnam and Indonesia recorded robust foreign capital inflows, especially over the past decade. On the other hand, Malaysia has been one of the biggest losers in the FDI race (see Chart 1).
In absolute US dollar terms, Malaysia’s inflow of FDI since 2010 recorded the second-weakest growth from the previous corresponding period (1998 to 2009). While Thailand too saw volatile year-to-year FDI flows, the country is far less reliant on foreign investments compared to Malaysia. As a result, its total investments remained in a broad uptrend while Malaysia recorded stagnant-decline in total investments (see Chart 2).
In fact, Malaysia is more reliant on FDI to drive investments than Indonesia, Thailand and the Philippines (see Table 1). As we wrote a couple of weeks back, Malaysians were sending money abroad at a rapid clip after capital controls were relaxed while declining corporate profits in recent years meant less for reinvestments. This would explain, at least in part, the weakness in domestic-driven and overall investments.
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Statistically, investments — whether foreign or domestic — are shown to be strongly correlated to per capita income growth. Chart 2 underscores this positive relationship for the biggest economies in Asean. Very simply, investments kick-start the virtuous cycle that lifts living standards for the people — by increasing economic activities, creating jobs, improving productivity and raising wages. More disposable incomes, in turn, can support higher consumption and leftover income for savings. Consumption is an important driver for further economic growth while savings are a major source of domestic funding for investments. In short, investment is the key driving force behind improvements in living standards.
This is evidenced by statistics (see Table 2) — strong growth in investments correlates to faster income increases. Of course, the pace of income growth also depends on the quality — for instance, sector and complexity-value-added — of the investments. As the economy grows and evolves, the nature of investments should change, for instance, from low value-added to higher value-added manufacturing, services and knowledge-based sectors — that would entail the creation of better-paying jobs and expanded opportunities, all of which translates into even higher per capita income and standard of living.
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To summarise, in this series of articles so far, we have shown the broader trends in FDI flows to major Asean economies as well as the strong correlation between investments and income growth and living standards.
We have written on the accelerating outflows of capital by Malaysians in the immediate years after relaxation of capital controls, falling FDI and the cascading effects of this slowdown in total investments on the economy. They include premature de-industrialisation and over-dependence on consumption as the primary growth driver. This reliance on consumption to drive growth is ultimately unsustainable as per capita income growth slows. The result is high household debts. Living standards for the average Malaysian are deteriorating in the face of rising costs, while the risks of poverty in retirement are rising for many.
Singapore’s per capita income growth too has slowed (see Table 2). We believe that this is due, at least in part, to the high base effect. The country has the highest per capita income, by far, in Asean — at US$54,920 (in 2020), or more than five times that in Malaysia — and is among the highest in the world. Having said that, Singapore has been the most successful in attracting FDI, which accounts for the lion’s share of foreign investment flows to Asean. This has not translated into the expected surge in domestic investments. Next week, we will explore the reasons we think this is so, as well as take a deeper dive into the sectors that received the most FDI in the region.
We acquired about US$50,000 ($69,252) worth of shares each in three regional banks — DBS Group Holdings in Singapore, Bank Rakyat Indonesia and Commercial Bank for Foreign Trade of Vietnam. As this article has shown, Indonesia and Vietnam are expected to grow rapidly on the back of strong investments while Singapore is the largest destination for FDI in Asean. The banking sector is the best proxy for the economy.
The Global Portfolio closed 2% lower for the week ended June 22. All stocks in the portfolio ended in the red except for DBS, which was unchanged; the iShares 20+Year Treasury Bond ETF gained 2.1%. The biggest losers were Bank Rakyat Indonesia (-5%), Guangzhou Automobile Group Co (-4%) and Alibaba Group Holding (-3.9%). Total portfolio returns since inception now stand at 24.5%, trailing the MSCI World Net Return Index’s 30.3% returns over the same period.
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