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FDI inflows into Asia-Pacific region remain strong, China likely to be the global top destination for FDI once again
MON, OCT 11, 2021 - 1:30 PMPROSPECTS for foreign direct investment (FDI) flows into the Asia-Pacific region over the medium term remain strong, with China likely to be the top destination for FDI once again, said Oxford Economics in a report on Monday (Oct 11).
Meanwhile, as supply chains continue to adjust to higher labour costs in China and trade protectionism, South-east Asia, and in particular Vietnam, is poised to be the key beneficiary, said Sian Fenner, lead Asia economist for Oxford Economics.
Based on their new FDI attractiveness scorecard, China is the most attractive destination for FDI, accounting for more than 9 per cent of global FDI over the next decade.
That said, share of global FDI inflows will likely trend lower over the 2020-2029 period, as the composition of foreign investment into China continues to evolve and the mainland itself increasingly becomes a source of foreign investment in the region, said Fenner.
Specifically, foreign investment will likely become further oriented towards services and meeting the needs of China's domestic market. Meanwhile, FDI previously directed towards low-skilled export-oriented manufacturing will likely continue to be redirected to other Asian countries.
Vietnam, in particular, is expected to benefit from these supply-chain adjustments, given its close proximity to China, low wages, and participation in trade agreements.
"That said, Vietnam still needs structural reforms to improve firms' ability to do business in the country and must ensure adequate education to enhance the scalability of product," noted Fenner.
"We rank Malaysia as the third most attractive destination for FDI inflows over the next decade, with Indonesia ranked at a respectable sixth, behind India. However, we see the Philippines as being one of the least attractive among the APAC economies," she continued.
"This adds further weight to our forecast that the extent of economic scarring caused by the pandemic will be especially large in the Philippines."
Meanwhile, advanced economies are least likely to benefit due to their high wages and challenging demographic outlook. The exception is Taiwan, where the pandemic and US-China tensions have led to some reshoring of manufacturing by Taiwanese multinationals.
The FDI environment in advanced economies has also become more restrictive since the pandemic, noted Fenner. In particular, Japan, South Korea and Australia have all introduced tighter screening regulations which will dampen future FDI.
"While the advanced economies may not be as attractive destinations for FDI, we do expect to remain important sources of regional FDI, with the RCEP agreement further boosting intra-regional inflows as the trade bloc becomes more economically integrated," she said.
