FDI & Economic Development Update | Asia

Inbound FDI was down globally last year, but the lion’s share went to Asia.

Glance at the latest Foreign Direct Investment (FDI) Regulatory Restrictiveness Index, courtesy of the Organisation for Economic Co-operation and Development (OECD), and you’ll notice that Asia has a prominent position—in the worst possible spot. China wins, hands down, with the highest score—a clear 80 points more obstructive than the second-ranked country, Myanmar. Indonesia occupies fourth position, India sixth, and Malaysia eighth. The index is compiled on the basis of the level of foreign equity ownership permitted, screening and approvals applied to inward FDI, restrictions on key foreign personnel, and blocks to land ownership and other types of property rights.

The OECD index does not present a complete picture of investment climate. Still it’s worth keeping the index (the latest of which covers the year 2013) in mind when gazing in admiration at the pace at which investment flows are seeking out Asia, despite the roadblocks set up by Asian governments. That’s because Asia, pound for pound, still offers the liveliest growth.

Direct investment into China reached $127.6 billion in 2014, up from $123.9 billion in 2013, according to figures published by the United Nations Conference on Trade and Development (Unctad). It’s not the 3% increase over the previous year that is worth noting but rather the fact that China roared past the US to become the most attractive nation for direct investors in 2014. Investment into the US, the leader in 2013, collapsed in the face of a strengthening dollar.

Investors are flocking to China, in spite of its slowing economy. If you include Hong Kong in the mix, which Unctad does not but which China’s government does, then China occupied the first and second positions on the ranking of the most attractive locales for FDI. Hong Kong attracted $111 billion, while the US drew in $86 billion, leading Singapore by a mere $4 billion.

Investments into both China and Hong Kong were led by services firms. In China, growth was strong in November and December, as the government’s purchasing managers index (PMI) for services stood at 53.9 and 54.1 for the months, respectively—well above the 50 mark that separates growth from contraction. FDI into manufacturing fell, according to Unctad, under the weight of rising labor costs.

Some one-off items led to Hong Kong’s remarkable performance, including last year’s $42 billion consolidation deal within Citic Group, a state-owned financial services conglomerate, and the purchase of Hong Kong’s AS Watson—the retail and manufacturing arm of Hutchison Whampoa—by Singapore’s sovereign fund Temasek Holdings, for $5.6 billion.

Singapore’s high position on the Unctad ranking reflects a growing regional ex-China trend. FDI is pouring into the Association of Southeast Asian Nations countries, with Singapore as both attractor and conduit to investments into other Asean countries. The launch of the Asian Economic Community (AEC) this coming December, with its gradated relaxation of some trade barriers and reasonable promise of additional easing, should help encourage investment into Asean.

“Asean’s recovery from volatility in 2013 and early 2014 has had a tangible impact on investor sentiment across the region, with momentum fully supported by the start of the AEC in 2015,” says SooHai Lim, investment manager of Baring Asean Frontiers Fund. Lim notes that some of Southeast Asia’s political volatility has subsided. The two most-affected countries, Thailand and Indonesia, have calmed, with Thailand’s military government vowing to restore stability and Indonesia’s recent election acting as a milestone in the development of its democracy.

Perhaps the market with the most uncertain growth picture for inbound FDI is India, where prime minister Narendra Modi’s government is still in its early days of instituting reforms targeted partly at creating a better environment for investment.

FDI into India grew a remarkable 26% in 2014, with the greatest growth, as in China, in the services sector. “Foreign direct investors are placing their faith in India now,” says Ravi Mehrotra, executive chairman of London firm Foresight, an investor in energy and shipping. “The promise of Modi has energized services and manufacturing to some extent. But the faith will only hold if Modi delivers improvements to infrastructure and tames the runaway bureaucracy. Time will tell.”