A decade since setting up the ASEAN Economic Community, the region has made progress in integration and drawing FDI but challenges remain.
It was 2013, the night before the launch of UOB’s foreign direct investment (FDI) advisory unit in Indonesia. The rupiah had weakened due to global and domestic factors and while this was not representative of Indonesia’s vast hinterland and growing economy, there were understandably concerns.
At the launch, local media asked why investors should still invest in Indonesia and the region. I replied: “The answer is in the room.” After the puzzled silence, I said FDI would continue to flow into Indonesia because of its young talent, like those in the room.
More than a decade later, this has proven true. But it has taken more than young talent to drive record investments into Southeast Asia. It is also the robust regional trade structure set up by the Association of Southeast Asian Nations, in particular the ASEAN Economic Community (AEC), which celebrates its 10th anniversary this year.
Record inflows
Despite the achievements, intraregional trade and the region’s sheer diversity still present challenges. When the AEC was created in 2015 to drive economic integration, there were doubts about ASEAN’s consensus approach to decision-making. Was the dream of a single market, with shades of the European Union, a step too ambitious?
A decade on, the numbers have allayed concerns. Annual FDI since 2015 has increased significantly, breaking the US$200 billion mark in 2021 and growing every year.
Under the AEC, an investment-friendly environment has been created, including through the 2018 establishment of the ASEAN Single Window to simplify the electronic exchange of trading documents and the 2021 setting up of the ASEAN Investment Facilitation Framework. These, together with the long-established free trade areas, have encouraged integration and growth in strategic sectors like manufacturing and professional services.
Complementing these are national measures to promote FDI and membership of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement covering 30 per cent of the global economy.
As the region moves decisively into higher-value services like semiconductor manufacturing and as its digital economy grows, Southeast Asia is no longer seen as just a low-cost production base. In emerging areas like electric vehicles (EVs), countries such as Indonesia, Malaysia and Thailand are one-stop shops, providing raw material, production lines and even markets.
The fast-growing middle class has attracted international brands like supermarket chain Don Don Donki, hotpot leader Haidilao and athleisure wear Andar. Southeast Asia is also rapidly cementing itself as a financial and digital hub, with international investment in the digital economy (e-commerce, fintech and digital infrastructure) growing more than fivefold to US$4.4 billion since the AEC’s creation.
Where there was once doubt about ASEAN’s potential, now there is belief, manifested in more than 5,000 multinational enterprises operating regional headquarters here.
Yet, it is more than just policies and population that attract FDI. The winds of geopolitics have also brought many to the region. At a recent ASEAN conference, Singapore’s Deputy Prime Minister Gan Kim Yong said ASEAN was “a bright spot” in a difficult world amid US-China tensions, wars and protectionism.
The region’s open, multilateral stance marks it out as a trade and investment hub. We have seen partnerships form between companies from different countries that may not collaborate back home, but do so on neutral ground in Southeast Asia. We have also witnessed how the RCEP, driven by ASEAN, is the first free trade agreement to include China, Japan and South Korea.
These are testament to how ASEAN plays convenor and honest broker for the world.
Eyes on AEC 2045
The first decade of AEC has brought good results, but what about the next 20 years and beyond?
Obstacles remain, for instance, in intraregional investment, which fell by 35 per cent from 2022 to US$21.9 billion in 2023. More can be done to support the regionalisation of businesses, one prime example being the proposed Johor-Singapore Special Economic Zone. This can draw more investments, not just between both countries but also across the region, supporting business expansion.
Inherent difficulties exist across the region, with its sheer diversity, including about 1,000 languages. We often quip that when foreign businesses enter, banking is typically not the first priority but understanding the lay of the land: which country to invest in, what the regulations are and, sometimes, even where to get reliable power.
It is time for ASEAN businesses to level up to meet the world-class demands of multinational enterprises. Financial institutions can work with governments and trade associations to uplift local enterprises in areas like sustainability and creating livelihoods.
Development among ASEAN members remains uneven. Developed economies like Singapore must continue leveraging their roles as strategic hubs, facilitating FDI flows to neighbouring countries. By playing to complementary advantages, the region can create an appealing investment environment. The effectiveness of Singapore in a hub-and-spoke model, for instance, relies heavily on its neighbours’ ability to provide the resources and opportunities businesses seek.
We believe the bright spot of the world will continue to glow. UOB expects FDI to reach US$312 billion by 2027, up from US$226 billion in 2023, with trade flows hitting US$4.7 trillion in 2027, up from US$3.5 trillion in 2023. ASEAN, with its surging consumption, exports and young workforce, is on track to become the world’s fourth-largest economy by 2030. By then, ASEAN’s digital economy could be worth over US$2 trillion.
If the region remains united, the years ahead could entrench Southeast Asia as the world’s conduit. And it will be powered by the next generation, much like the young journalists in the conference room I met in 2013 in Indonesia.
A version of this article was published on South China Morning Post on 9 January 2025.
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About the author
Sam Cheong is the Head of Group Foreign Direct Investment Advisory and Network Partnerships, UOB. Follow him on LinkedIn