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FDI to Asia and the Pacific resilient despite the COVID-19 pandemic

COVID-19 has disrupted FDI considerably, and while global FDI flows collapsed in 2020 and fell by 42 per cent (UNCTAD, 2021), a recent ESCAP report finds that flows to developing countries in Asia and the Pacific declined only mildly by 4 per cent in 2020. The report also highlights that despite the pandemic, the region is now both the largest destination for and source of global FDI (figures 1 and 2). FDI to the region has started to rebound in 2021, driven by accelerated inflows to both the East and North-East Asian and South-East Asian subregions.

Figure 1. FDI inflows to Asia and the Pacific and their global share, 2009-2020

Source: ESCAP calculations based on UNCTAD (2021), World Investment Report: Investing in a Sustainable Recovery.

Note: China includes Hong Kong, China and Macao, China; A-P stands for Asia and the Pacific; Developing A-P excludes China, Hong Kong, China and Macao, China.

Figure 2. FDI outflows from Asia and the Pacific and their global share, 2015-2020

Source: ESCAP calculations based on UNCTAD (2021), World Investment Report: Investing in a Sustainable Recovery.

Note: China includes Hong Kong, China and Macao, China; A-P stands for Asia and the Pacific; Developing A-P excludes China, Hong Kong, China, and Macao, China.

While overall FDI flows have started rebounding, the opposite has been true for inbound greenfield investment to the Asia-Pacific region, which slid to a record low of $103 billion in 2021. Greenfield investment is a type of FDI in which foreign capital investments create new assets in the host country, such as a new subsidiary, manufacturing base or service center (for more on types of FDI see ESCAP, 2017). Severe third and fourth waves of COVID-19 resulted in widespread lockdown measures across the region and reflected the continued vulnerability of this type of investment, especially in developing countries.

A special section in the report highlights that investment in the health sector in Asia and the Pacific has been volatile over the last decade and even declined by 34 per cent in the first three quarters of 2021. Key impediments to sectoral investment include poor regional and domestic investment ecosystems, lack of capital, technology and skills, low regulatory capacity, and poor infrastructure and related services.

Looking ahead, FDI in the Asia-Pacific region is expected to remain below pre-crisis levels in 2022. Access to vaccines, together with the emergence of COVID-19 mutations, is expected to put continued downward pressure on FDI levels in 2022 and to heighten competition for FDI among countries, not only in the region, but also globally.

Economies in Asia and the Pacific are expected to register small, positive growth in FDI inflows. However, as the environment for FDI flows becomes more competitive, effective investment strategies together with a commitment to improving the transparency and predictability of investment regimes and to further easing of investment restrictions, will be critical in stimulating more and better quality FDI. To this end, the coming-into-force of the Regional Comprehensive Economic Partnership Agreement together with the recently concluded ASEAN Investment Facilitation Framework, and progress on the WTO negotiations on a multilateral investment facilitation framework for development are expected to send important positive signals to investors in the region, which could help to boost more sustainable FDI.

The pandemic will have lasting effects on national, regional and global investment policymaking. While the priorities of each country in the building-back period differ, all Governments will have to work out how to tailor their investment policies so that FDI can be most effectively harnessed to enable economies to get back on the path to sustainable development. Many economies in the region, including, inter alia, Bhutan, Cambodia, Fiji, Indonesia, Malaysia and Mongolia, have used the pandemic to revisit and revise their FDI strategies and investment laws, with a view towards sustainable development. However, a more concerted effort among the region’s other economies to ensure that FDI is repurposed to target sustainable development priority sectors is still needed. ESCAP can support countries through technical assistance and policy advisory services to make FDI more aligned with sustainable development objectives. To this end, ESCAP has been working with several countries to design sustainable FDI policies to respond to the COVID-19 pandemic.

Furthermore, in 2022, ESCAP will be releasing the second edition of its Handbook on FDI Policies, Promotion and Facilitation for Sustainable Development in Asia and the Pacific as well as a Policy Guidebook on Promoting and Facilitating FDI in the Digital Economy.

Regional cooperation, together with political commitment to keeping countries open to investment, will be critical to helping economies and businesses build back better in the recovery period. Such cooperation can help stimulate more FDI in the region’s health sector, attract investments to address transboundary challenges, make national and international investment governance more coherent and sustainable development-oriented and enable countries to more effectively harness intraregional investment flows. To this end, the ESCAP ARTNeT on FDI platform and FDI Policymakers Network will continue to work together with the investment promotion agencies in our member States and the relevant line ministries to support and broaden regional cooperation on FDI to address these issues.

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Heather Taylor-Strauss
Economic Affairs Officer
Vanika Sharma
Consultant, Investment and Enterprise Development Section
Tom Becker
Intern, Investment and Enterprise Development Section
Trade, Investment & Innovation +66 2 288-1234 [email protected]