Regions with the High Foreign Direct Investment: How FDI Impacts Southeast Asia
According to the UNCTAD World Investment Report 2022 released on June 9, there was a 19% increase in foreign direct investment (FDI) flows to developing countries in Asia, reaching an all-time high of $619 billion in 2021. Although global FDI fell 35% in 2020 due to the COVID-19 pandemic, this is the third consecutive year that investment flows to the region have increased.
In the same year, James Zhan, director of UNCTAD's investment and enterprise division, stated that this shows the resilience of developing Asian countries. While most sub-regions saw an increase in 2021, only six countries attracted more than 80% of total FDI inflows, of which two were from Southeast Asia, namely Singapore and Indonesia.
Southeast Asia continued its role as an engine of growth for FDI in emerging Asia and globally, with increases in most countries in the region. This increase was supported by strong investments in manufacturing, the digital economy, and infrastructure.
According to a report published by the Milken Institute in 2022, Southeast Asia provides a promising market for investors. The region shows better economic performance than other regions such as the Middle East and Central Asia, Sub-Saharan Africa, Latin America and the Caribbean, and other emerging and developing Asia, scoring only slightly lower than emerging and developing Europe.
Beyond economic growth, Broader Impact of Economic Development
In some ASEAN countries, FDI has proven to be one of the most important factors in addressing labor issues, especially in the services sector. In addition, GDP also plays a key role in increasing employment opportunities in manufacturing, construction, and services sectors in ASEAN. To increase wages, the government can implement appropriate policies in these sectors.
Generally, it is seen that Foreign Direct Investment has a positive impact on the labor market in the host country, such as increased wages, productivity, and improved labor skills. While some low-skilled workers may be negatively impacted and local firms may experience competitive pressures in finding skilled labor, the overall picture is that labor conditions improve due to the presence of Foreign Direct Investment. Although the growth in demand for skilled labor is not always proportional, it may encourage the labor force to pursue higher education and training.
The presence of FDI also affects the increase in exports and technology transfer in a country. FDI itself is also an important factor in long-term economic development in developing countries. This investment also affects the transfer of technology to management efficiency which is very useful for the progress of a country.
In Vietnam itself, FDI companies are slowly transferring technology, technical processes, and management experience to Vietnamese staff. Many positions previously filled by foreign experts are now filled by skilled Vietnamese workers who are able to contribute to the formation of a competent team of Vietnamese entrepreneurs.
Moving on to other countries, FDI in Indonesia has prompted the government to create programs aimed at improving labor productivity. The government provides support through various classroom and on-the-job training programs based on standards that are regularly monitored and revised.
From some of these countries, it can illustrate that the existence of FDI is very impactful on the recipient countries, one of which is on improving the quality of human resources in ASEAN countries.
Overcoming the Challenges that Await
The emerging Southeast Asian region attracts foreign investors due to its favorable economic framework, strategic location, and rapidly growing domestic market. However, to remain competitive with other emerging economies, countries in the region must identify new opportunities and undertake appropriate policy reforms.
It is also important to increase the social impact of foreign capital, so that it can contribute to the region's development. To achieve these goals, governments in the region need to take a proactive approach to attract quality investments, encourage responsible business behavior, and ensure that global capital inflows contribute to broad, sustainable, and inclusive growth in the region.
Overall, developing Southeast Asia is the best performing region in Economic Fundamentals and International Standards & Policies, but underperforms in Institutional Frameworks. Governments in the region must commit to adopting the highest standards of transparency tailored to their culture, history, and national interests, and improve their investment frameworks to provide greater certainty and predictability for all parties involved.
Achieving this goal will not be easy, although the opportunity is great. However, this opportunity can be used for governments to overcome the obstacles that exist in the region. Governments should also anticipate possible incoming threats that could adversely affect the country's domestic affairs. Not stopping at national solutions, governments should also adopt a regional approach to foster Southeast Asia's identity as a strong economic market.
UNCTAD. (2022). Foreign Investment in Developing Asia Hit a Record $619 Billion in 2021
Milken Institute. (2022). Global Opportunity Index 2022: Focus on Emerging Southeast Asia.
Ilhamdi, et al. (2016). Pengaruh Foreign Direct Investment dan AFTA Terhadap Kesempatan Kerja Sektoral di ASEAN 5. IPB University: Scientific Repository.
Ngoc Anh Pham, et al. (2020). The Impact of FDI in the Labor Market: The Case of ASEAN. International Journal of Management Sciences and Business Research, 9.3
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