We have, over the last few weeks, established the importance of investments to the development of a country. And we have provided concrete data linking the growth in productive assets to job creation, disposable incomes and living standards for the people. We also discussed the critical role of foreign direct investments (FDIs), particularly for developing countries — as the catalyst for local human capital development, productivity improvements, tapping of new markets and domestic investments.
Asean lost some of its lustre in the aftermath of the 1997 Asian financial crisis (AFC), but has since enjoyed robust foreign capital inflows, especially in the past decade. According to the latest UNCTAD World Investment Report, the region saw FDI grow 44% year on year last year, rebounding from the drop due to the pandemic in 2020 (see Chart 1 for a quick recap of inward FDI for Asean post-AFC).
This week, we are taking a deeper dive into the recipients of these monies, the sectors that attracted the most FDI over the years. It will explain, at least in part, why Singapore, Indonesia and Vietnam are the biggest gainers in the region while Malaysia lost out in the FDI race. In addition, we see how this affects the “future of jobs”, for instance, the types of jobs to be created and pay levels — and, ultimately, quality of life.
For Asean as a whole, the three largest recipient sectors of FDI are financial and insurance, manufacturing and wholesale-retail trade — accounting for a combined 69% of total inward FDI between 2012 and 2020 (see Chart 2). Naturally, the allocations differ between member countries, depending on their respective comparative advantages. Within the manufacturing sector, too, different countries have their own strengths and weaknesses in various sub-sectors. We will elaborate in a bit.
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For most Asean countries, the broader manufacturing sector, unsurprisingly, accounts for the largest share of FDI. The region has long been the cheap manufacturing base, outsourced from the US, Europe and Japan and, more recently, from South Korea, China and Taiwan. Cheap manufactured goods fed consumerism in the developed world, driving profitability for multinational enterprises (MNEs) and boosting shareholder wealth. At the same time, export manufacturing has been critical in the growth and development of emerging Asean economies.
The notable exception is Singapore — where more than half of all the FDI received was directed towards the financial and insurance sector. Wholesale and retail trade accounted for another 15% of total FDI, with manufacturing coming in only third (see Table).
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Singapore is punching well above its weight, attracting the lion’s share of capital flows — some 56% of total inward FDI between 2010 and 2021 — among all Asean members (see Chart 1). In fact, it consistently ranks among countries with the world’s highest inward FDI. As we highlighted last week, however, the large capital flows did not translate into surging domestic productive assets, as one would expect. Why? Singapore is the de facto hub for the region. It is home to MNE headquarters and holding companies, family offices and wealth management. This is also the reason that its biggest FDI sectors are notably different from the rest of Asean — that is, not manufacturing.
MNEs typically establish a regional headquarter-holding company to oversee investments and operations within the region. Key selection criteria include geographic location, trade and capital openness, labour and talent pool and ease of doing business — such as requirements, process, efficiency and transparency for approvals, permits, imports and exports; as well as flows of payments and receipts, investments and dividends to be almost seamless instead of hoops of regulatory approvals and forms to fill in. Other major considerations include investment policies and regulatory framework such as consistency and continuity, legal environment, intellectual property protection and contract enforceability, reliable infrastructure (roads, rails, seaports and airports) and internet connectivity, political stability, competency and accountability of government, cost-competitiveness and tax regime as well as quality of life for expatriates.
Singapore checks most of the boxes above. Its public service is widely seen to be streamlined, efficient and free of systemic corruption. Meanwhile, the Economic Development Board is highly effective in planning and driving long-term industrial-investment strategies, attracting and facilitating foreign investors. Critically, the country has invested in — and is reaping benefits from — a quality education system, R&D partnerships with MNEs, training, reskilling and upskilling programmes for its workforce and creating the necessary talent pool for the transition to a knowledge-based economy. As such, Singapore is the preferred hub for Asean and leading destination for FDI.
In short, the city state has become the major re-exporter of capital to the rest of Asean. Indeed, it ranks among the top 10 countries globally in terms of outward FDI and is among the top three largest sources of FDI in Indonesia and Vietnam. This explains why its huge inward FDI numbers do not exactly correlate to increases in domestic productive assets and per capita income growth. Does this mean the FDI does not, in fact, benefit the country and its people? Certainly not.
Its position as the regional hub creates huge benefits — not just in terms of high-paying jobs for bankers, lawyers, company secretaries, accountants and fund managers but, as the base for capital, it further strengthens the role of Singapore as the money centre for Asean. In the early 1990s, Malaysia too was competing for this role. Indeed, its stock market (then known as the Kuala Lumpur Stock Exchange) was not only bigger in market cap but also in terms of liquidity-volume traded. But those aspirations ended abruptly with the imposition of the currency peg and capital controls to compete on costs alone. To keep relying heavily on low-skill migrant labour churning out low value-added goods would ultimately be self-defeating. Wages are far lower in Vietnam, Indonesia and Thailand — countries that also have a much larger pool of workers to call upon.
Indeed, Vietnam stands to be the biggest beneficiary of the “China plus one” strategy — whereby MNEs diversify their supply chains from China (only) to include one other low-cost manufacturing base. The Vietnamese government is very much focused on FDI, undertaking reforms for more business-friendly policies, securing free trade agreements and offering incentives to foreign investors, and especially for high-tech and knowledge industries. In addition to cheap labour and real estate, its proximity to China is no small advantage.
Malaysia remains a major FDI attraction for the E&E manufacturing sub-sector in Asean, for now. Electrical, transport equipment and other manufacturing accounted for a hefty 47% of FDI. But Malaysia can expect increasingly intense competition, especially from Vietnam, which has a similar exports manufacturing profile — particularly if it does not capitalise on its head start, move up the value chain and strengthen the current ecosystem. There is great urgency in reversing the declining trend in investments. Failure to do so will result in stagnating income growth and deteriorating living standards for Malaysians.
For more stories about where money flows, click here for Capital Section
The Global Portfolio closed 2.4% higher for the week ended June 29. This was better than the MSCI World Net Return Index’s 1.5% gain. The biggest gainers were Alibaba Group Holding (+12.9%), Yihai International Holding (+10.8%) and Apple (+2.9%). On the other hand, Airbnb (-5.6%), Bank Rakyat Indonesia (-3.5%) and Commercial Bank for Foreign Trade of Vietnam (-0.7%) ended in the red last week. Total portfolio returns since inception now stand at 27.5%, trailing the benchmark index’s 32.3% returns over the same period.
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