Southeast Asia will be the next ‘factory of the world’

Jorge Costa Oliveira

Foreign direct investment (FDI) in China declined after Q2 2022. This drop in FDI is part of a broader global trend of decreasing investment flows and is likely also the result of the slowdown of China’s economy and the uncertainty arising from the decoupling/de-risking between the West and China. In 2023, out of a total of €1.21 trillion, €564 billion was invested in developing Asian countries. Compared to 2022, China experienced a 9% decline, and India saw a 37% drop.

Although it took a few years, many foreign companies have reached the same conclusion that many Chinese companies had already reached: it is preferable to invest in stable emerging countries with lower costs and growing domestic markets. These countries benefit from the fact that their products are not subject to entry restrictions in the coveted EU and US markets. Moreover, it’s wise to avoid dependency on a country (China) that, despite its large market and productive potential, may face a gradual decoupling from the world’s current major economic blocs—Europe and North America.

Among these emerging markets, the most attractive are those in the major Southeast Asian countries, all of which are members of the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement (FTA) that provides privileged access to the Chinese market. Another FTA—between ASEAN and India—facilitates access to the Indian market. Additionally, these countries maintain political neutrality to navigate the turbulent waters of a world polarized by the West-China rivalry, yet increasingly multipolar.

In the short term, the 2024 World Investment Report shows that the number of greenfield investments announced for Southeast Asia increased by 42% (+ €56.4 billion in value), focusing on services (in 2022) and the manufacturing sector (in 2023). According to UNCTAD data, China, Hong Kong, the US, Japan, and Singapore remain the region’s largest investors.

Over the next decade, Southeast Asia (with 700 million people, mostly low-income, but with a good percentage of qualified professionals) is set to be one of the regions with the fastest and highest economic growth, catalyzed by foreign investment.

An interesting report (‘Southeast Asia Outlook 2024–34’ by the Angsana Council, Bain & Company, and DBS Bank) predicts that the foreign investment channeled into the major Southeast Asian countries from now until 2034 will be massive. If we consider just four strategic sectors—electric vehicle production (in Thailand, Malaysia, and Indonesia), electric battery production (in Indonesia, Thailand, and Malaysia), semiconductor production (in Malaysia and Singapore), and data centers (in Indonesia, Thailand, and Singapore)—there are already investment leads worth hundreds of billions of euros.

Southeast Asia is set to become the next “factory of the world.”

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