Foreign direct investment(FDI) inflows to ASEAN member countries: Problems and prospects

FDI has played an important part in the industrialization and growth experience of ASEAN countries. The growth in Gross Domestic Product (GDP) of ASEAN as a whole is strongly correlated with inflows of FDIs in the region. The share of ASEAN in global FDI inflows is disproportionately larger than its share in global GDP. About 5% of total world FDI went to ASEAN member countries during the period 1980-2005 while the region accounted for less than 2% of world GDP. This reflects the perceived attractiveness of ASEAN member countries as FDI hosts. Global firms were initially attracted by favorable conditions for export production (e.g.: low costs of labor and raw materials, investment incentives) in ASEAN countries. The export-oriented FDIs in the 1980s increased incomes in the ASEAN countries and their market potential began to be recognized by the international business community. In the 1990s, both export- and domestic market-oriented FDIs flooded ASEAN countries. Though still having comparative advantage over other developing countries, ASEAN countries are finding it more and more difficult to lure foreign investors. Up to the midnineties, ASEAN was capturing about 8% of global FDIs. This share dropped to only about 3% from the late 1990s until mid-2000s. This is explained by a number of factors: the prolonged stagnation in ASEAN countries triggered by the Asian financial crisis, increasing competition from other developing countries and transitional economies, worldwide economic slow-down, and fundamental weaknesses of the ASEAN economies. As growth in ASEAN has been fuelled to a considerable extent by FDIs and in the face of the continuing severity in the competition for FDIs, what can ASEAN member countries individually and as a group do to stay on the growth track and remain a key FDI host region? This paper first looks at the trends and patterns of FDI flows to the whole of ASEAN, and then at the individual ASEAN countries’ experience. From the past performance of the individual countries and of the ASEAN as a whole, the prospects and problems are assessed and future trends are projected. The paper ends with some recommendations on specific courses of action