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Tigers subdued

Asia-Pacific's investment flows put the region center stage in determining the overall health of the global economy.

Asia-Pacific is the world's dominant region for attracting cross-border investment and trade, with foreign direct investment (FDI) inflows running into the hundreds of billions of dollars and the region accounting for 40 percent of global exports and imports.

Economic power is shifting to Asia-Pacific, and the region will continue to spark unprecedented opportunities and challenges for global businesses and the wider world.
Eric Berg, partner, Head of Asia, White & Case

The recent weakness of Chinese growth has contributed to the broader jitters that have affected the world economy in the past year—not least, in reducing demand for crude oil. That said, the Asia-Pacific region remains a major destination for FDI, receiving 43 percent of total global inflows (US$533 billion) in 2014, according to UN Economic and Social Commission for Asia and the Pacific (Unescap) data.

East and Southeast Asia saw FDI increase by 10 percent in 2014, according to the UN Conference on Trade and Development in a year when globally, FDI flows were falling (declining 16 percent in global terms to US$1.23 trillion that year).

China became the single largest recipient of FDI globally—surpassing the US—with US$129 billion in 2014, an increase of 3.7 percent on 2013.

But Asian trade and investment flows have still suffered under the weaker economic conditions of the past couple of years. Although Asia and the Pacific region exports grew by 1.6 percent in 2014—better than the equivalent global trade performance—they remain well below pre-financial crisis levels.

China has, in recent years, pulled the wider region up with a positive "spillover" effect but Unescap figures show that the country is now exporting and importing less within the region. The message is clear: Weaker commodity demand has ramifications across the Asia-Pacific region, not just the strongest industrial demand centers such as China, Korea and Japan.

This will also affect the outlook into 2016. According to the Asian Development Bank's (ADB) Asian Development Outlook 2016, the Asian economy will grow at its slowest pace in 15 years this year, as global headwinds and a slowing China continue to weigh on regional growth. Again, however, the picture is not uniform across the region. While China is slowing, India is showing stronger dynamism and Vietnam, too, is proving a resilient trade and investment center.

According to ADB, while investment has been the main growth driver since 2001—peaking at an 86 percent contribution to growth in 2009—consumption now contributes more than half of China's growth.

of total foreign direct investment flowed into the Asia-Pacific region in 2014.
Source: UN Economic and Social Commission for Asia and the Pacific

Furthermore, rising labor costs have led China to lose some of its appeal as a low-cost manufacturing base. Indeed, the ADB estimates that Chinese labor costs are now almost four times higher than in Bangladesh, Cambodia, the Lao People's Democratic Republic and Myanmar. Contrast that with India, where the government of Prime Minister Narendra Modi has been busy finessing reforms to the investment climate, and reaping the rewards in terms of surging inward capital flows into productive areas of the economy.

Not least, the removal of restrictions on foreign investment into areas such as defense, railways, construction development, medical devices and insurance, along with the much-vaunted Make in India program to catalyze FDI in the manufacturing sector, has boosted net flows of foreign direct investment, according to the ADB.

Changes are also in progress in the forms of investment seen in the Asia-Pacific region. M&A surged by 137 percent to US$123 billion in 2014, compared to the previous year. Greenfield FDI inflows grew by a more modest 17 percent, to US$279 billion.

These data underscore foreign investors' increasing caution; it is easier to persuade investment committees to channel investment dollars into operating entities with existing balance sheets and track records, rather than putting money behind comparatively riskier greenfield projects that have yet to prove themselves.


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