Research by: Ines Lam, Economist, Asia, and Frederic Neumann, Chief Asia Economist at HSBC Global Investment Research
- ASEAN is taking an increasingly large share of global FDI flows, cementing its role as the world's top investment destination
- This role, however, may be threatened by the Trump administration's demand for investment commitments from trading partners who are key investors in ASEAN
- That said, we see ASEAN's economic competitiveness and China's continued diversification drive underpinning continued strong FDI flows to the region
*The US administration's quest for FDI seeks to reshape global investment flows*
ASEAN is a clear winner of global investment flows. In 2024, FDI inflows into ASEAN reached USD226bn, the second highest in record after nearly USD231bn in 2022. The 8.5% annual increase outpaced the 3.7% growth in global FDI flows. The usual practice of the United Nations Conference on Trade and Development (UNCTAD), a key source of the global FDI data, is to exclude flows to a handful of European conduit economies [1]. When these flows are excluded, global FDI flows in fact declined by 11% in both 2023 and 2024. Chart 1 highlights the widening divergence in the global and ASEAN FDI trends in post-pandemic years. While ASEAN's FDI inflows have doubled in 2024 from 2012, global FDI flows are on the way down to their 2012 level. ASEAN keeps outperforming the rest of the world in attracting FDI inflows.
But the tides may be changing. The US trade deals that the Trump administration signed with a number of trading partners include multibillion-dollar commitment to invest in the US. The administration also wants American companies to reshore production. Were these investment pledges to actualise, they could potentially compete with or displace these countries' investment into ASEAN. We estimate that a total 40% of ASEAN's FDI source could be at risk. The good news for ASEAN is that it is not as easy as news headlines suggest for these governments to compel private companies divert investment. The US also has a lot of manufacturing hurdles that make the US administration's reshoring dream hard to achieve. While the future remains highly uncertain, we argue that ASEAN will defy global headwinds and see the continuation of the strong FDI uptrend.
Total foreign direct investment inflows into ASEAN went beyond USD200bn in 2021 and stayed above that level in the following years. The FDI-to-GDP ratio has risen to 6% in 2022-24 from 5% in 2017-19. This dwarfs the 1% ratio of the US, which is the world's largest FDI recipient, and also highlights the importance of FDI to ASEAN economies.
The US has long been the biggest source of FDI for ASEAN. In 2024, flows from the US halved from a year ago, although the US remained the number one investor in the region. The shortfall was more or less offset by stronger inflows from, in descending order, UK, intra-ASEAN, Japan, Taiwan and Korea.
ASEAN's FDI has a diversified profile in terms of source country. The region receives investment from North America, Europe and Asian economies. With the second Trump presidency, however, ASEAN may run into competition for investment funds with the US, ASEAN's largest FDI source. In the trade deals signed in July, the administration has included investment pledges from the European Union, Japan and Korea that amount to USD1.5tn in total. These three combined account for 21% of ASEAN's FDI in 2024.
Besides, the administration also uses tariffs and low taxes as incentives, demanding that American corporates move production to the US. This, theoretically, could mean US investment in ASEAN would fall if American firms shifted their investment away from the region. The US alone accounts for 19% of ASEAN's FDI in 2024. In fact, the US has become an even bigger investor in ASEAN in 2022-2024 compared with the pre-pandemic period.
All this could mean a potential reduction in FDI flows into ASEAN. However, there are several reasons for caution about the Trump administration's ambition. First, as several commentators have pointed out, private companies cannot be forced by their governments to make investments (The Japan Times, 24 July). EU officials have also stated that the investment would come entirely from private sector investment over which Brussels has no authority (Politico, 28 July). The final actualised investment in the US might fall short of the administration's expectations.
Second, expanding or reshoring manufacturing in the US may not be as straight-forward as the administration would hope. A CNBC survey of 380 US businesses in April found that cost is the biggest headwind in relocating supply chains to the US and 21% said the top challenge is finding skilled labour. The tariff-driven rise in producer prices poses another obstacle to manufacturing reshoring.
And there are still the other 60% of investors. Most notably, we believe the momentum of mainland China's outbound direct investment will remain robust , on the back of ASEAN's strong participation and geographic significance in the Belt and Road Initiative and Chinese businesses' diversification need (Belt and Road Initiative: Forging a new path, 3 September; China's outward direct investment: How trade tensions complicate outlook, 30 May).
Growth in FDI from Taiwan was remarkable in recent years. FDI flows from Taiwan has seen over a 200% rise from 2017-19 to 2022-24, although in absolute terms they remain quite small. The increase coincides with the launch of New Southbound Policy launched in 2016, and more importantly, the trend of Taiwanese companies relocating production out of mainland China in response to US tariffs.
Finally, ASEAN's pull factors are strong. We continue to believe that ASEAN's competitiveness as an FDI destination remains high, as we have argued in reports such as Malaysia Economics Comment: It's all relative (1 August) and Vietnam at a glance: It's a long way (4 August). The region's active pursuit of free trade agreements will boost trade openness and its growing consumer market and digital economy means investment opportunities could go beyond manufacturing.
[1] Several European economies, including Ireland, Luxembourg, the Netherlands and Switzerland, where FDI statistics are significantly affected by, often volatile, conduit financial flows.