This article first appeared in Forum, The Edge Malaysia Weekly on July 20, 2026 - July 26, 2026

For close to 40 years, Southeast Asia has been thriving on foreign direct investment. FDI proved to be a shortcut for the region’s development because it brought in a combined package of capital, management skills, access to markets, advanced manufacturing processes and brands that a developing country would take decades to create on its own. While the latest data shows that the region is holding its own in attracting FDI, it also highlights shifting trends that will require policy attention.

In this regard, the United Nations Conference on Trade and Development’s (Unctad) World Investment Report 2026 makes for interesting reading. Investments are becoming more concentrated in a few key sectors and now tend to favour developed economies over developing economies in 2025. Moreover, what makes one country more attractive than another to foreign investors is also evolving — it will be less about costs alone but a range of other factors such as reliability of electricity and regulatory certainty.

In the future, competition will be more among industrial clusters rather than among countries — investors will favour agglomerations that pull together a critical mass of subcontractors and other service providers, good infrastructure, supportive local governments and good educational institutions which generate a pool of highly trainable labour.

Going by these metrics, Singapore and Malaysia come across as well positioned to attract FDI. In addition, Thailand and Vietnam look able to capture the opportunities from supply-chain reconfiguration. Others such as Indonesia and the Philippines appear attractive because of their market size and low costs. But infrastructure deficiencies and policy uncertainty weaken their ability to convert these advantages into large FDI commitments. There are thus important policy implications for the region to consider.

The most recent data highlight some important shifts in trends.

First, overall, global FDI has been growing, up 6% to US$1.6 trillion in 2025, but this growth was concentrated in developed economies rather than developing ones. In developed countries, actual inflows of FDI expanded 11% while developing economies saw only a 2% rise in inflows.

Separately, to understand future FDI flows, we need to look at company announcements of new greenfield investment projects — these increased by around 20% year on year in developed economies, with the US and the European Union (EU) enjoying a strong 30% rise each. Worryingly, developing economies saw such greenfield announcements contract by a large 18%, suggesting that actual inflows to developing countries could fall in coming years.

Second, Asia remained the largest recipient among developing regions, with actual FDI inflows rising a modest 3% to US$644 billion in 2025. However, FDI into East Asia fell while it grew for Southeast and South Asia. But when announced greenfield projects are taken into consideration, the future is less bright. Future commitments into the region fell 8% to US$348 billion, with sharp divergences among different subregions in Asia. In particular, Southeast Asia’s pipeline shrank while South Asia’s pipeline of future investments fell by a third.

Delving deeper into the data, it looks like Southeast Asia’s main competitors — China and India — are facing some difficulties:

*For China, actual FDI inflows declined 10% to US$104.7 billion in 2025. But announcements of inward greenfield projects fell 43%. This could be a result of previous over-investment: China holds 1.7 times the productive capital stock of the EU or the US relative to its economy’s size. Not surprisingly, China offers investors significantly lower capital returns, reducing its attractiveness for foreign investors.

*India enjoyed a 44% surge in actual inflows to US$38.9 billion but this increase was flattered by a single huge commitment (Google’s US$14.5 billion data centre project). In addition, the incoming pipeline looks weak, with announced greenfield projects falling from US$111 billion to US$74 billion. Notably, the average project size fell: that suggests that investors remain engaged but are committing less per decision, reflecting cautious sentiment amid domestic and external policy uncertainty.

Within Southeast Asia, Thailand was the only economy where both actual inflows (+30%) and project announcements (+75%) rose. Vietnam did not see much expansion in FDI inflows but could take heart from new project announcements rising 8%, which indicates that FDI could rise in coming years. Malaysia and Singapore saw their pipelines of future investment fall in 2025 — but this was from record 2023/24 levels that leave them well above pre-pandemic norms. Indonesia (13.6%) and the Philippines (4.3%) underperformed on both measures, reflecting weakening market confidence in the policy and institutional environment, as well as structural shortcomings.

Third, FDI in 2025 was focused within a smaller set of capital- and technology-intensive sectors such as data centres and semiconductors while oil and gas also attracted more FDI. Project announcements suggested that there would be less FDI in renewable energy, non-digital infrastructure and global value chain (GVC)-intensive manufacturing in future.

Fourth, FDI now comes in bigger lumps. Projects of US$1 billion or more now account for 44% of announced greenfield value, roughly double the share in 2017.

Fifth, the investor base is shifting away from the private sector multinational enterprise towards state enterprises: over a quarter of Unctad’s top-100 MNEs are now state-owned. These state enterprises are driven by different motivations compared with their private sector peers. These players deploy capital with strategic mandates in mind. They are more concerned about resource security, technology acquisition and building economic corridors. This means that FDI flows are less sensitive to cost fundamentals and more responsive to considerations such as national policy imperatives and technology endowments.

The IMD World Competitiveness Ranking 2026 offers heartening news for a select group of Asian economies. Singapore reclaimed its top spot while China, Malaysia, South Korea and Thailand improved their rankings. IMD cited business efficiency as a key driver of the gains, reflecting the importance placed on capacities such as workforce skills, entrepreneurship and managerial practices, and social attitudes. The main loser in the latest edition is Indonesia, where business efficiency fell from 26th to 50th place in a single year, suggesting that adverse policy developments have had downstream effects on private-sector performance.

We observe that countries that improved their competitiveness ranking also tended to secure larger gains in FDI inflows. Malaysia stands out as a winner across both dimensions; what helps it appear to be its proximity to Singapore, macroeconomic stability and conducive investment climate. This positions it as a favoured destination for highly capital-intensive projects, particularly in semiconductors and data centres. In sharp contrast, India and Indonesia have not succeeded in materially boosting their competitiveness and seem to have been let down by weaknesses in longer-term fundamentals such as policy predictability and economic complexity. This has meant they have lost relative ground to their regional peers.

In addition to these factors, we see industrial clusters or large regional agglomerations becoming more important as a determinant of competitiveness in future. It is striking how China has startled the world with stunning improvements in competitiveness, now manifesting itself in extraordinary gains in shares of global exports in a range of industries, including pharmaceuticals, electric vehicles, solar panels and batteries. This is not because Chinese labour costs are low; they are materially higher than most Southeast Asian economies. China’s far-sighted investments in research and development explain part of this increased competitiveness. But an important factor is the advantages their large industrial clusters such as the Pearl River Delta grant to Chinese exporters.

Indeed, the Pearl River Delta has become a massive urban agglomeration which grants it tremendous advantages. Such an agglomeration has several strengths:

● The first is specialised labour markets which allow firms to hire skilled labour such as mould-and-die engineers or supply-chain managers fluent in export documentation without bearing the risk of training from scratch.

● A second advantage is more rapid knowledge diffusion. When so much talent is concentrated in a narrow area, proximity accelerates the informal transfer of process knowledge. For example, engineers job-hop between assemblers and their component suppliers, taking process improvements with them.

● Third, with every component supplier, mould shop and contract assembler being within a few hours’ drive of each other, the region grants firms locating in it a time-to-market and iteration-speed advantage. As a result, a firm can progress from prototype to revised prototype in days rather than weeks in other locations.

● Fourth, there are benefits that accrue from scale. With so many final-assembly original equipment manufacturers and brand owners located close to each other, upstream specialist suppliers can reach an efficient minimum scale by serving many customers in the locality. This encourages suppliers to specialise narrowly in a way that wouldn’t be viable in other regions.

If the region is to maintain its share of global flows of foreign investment, it needs to adapt to these changes. So far, the region has concentrated on improving infrastructure, deregulating their economies to improve the ease of doing business and strengthening skills development especially in the vocational area. These are all important and must continue. However, in a global economy that is going to be harsher, further steps need to be taken:

First, countries will increasingly use industrial policy tools and aggressive trade protectionism to give their own producers an advantage.

● Governments within our region need to conceive industrial policies of their own which are suited to their resource endowments and other economic fundamentals. They must learn from the mistakes made in past strategies and improve how they utilise industrial policies. For example, Indonesia has focused on “downstreaming” or getting investors to add value to natural resources such as nickel instead of simply exporting the raw stuff that is dug out of the ground. In some cases, such “downstreaming” strategies might work but in many cases, they can create problems as well. Vietnam’s approach of making its ecosystem as conducive as possible for foreign investors to operate in seems to work better. Once the foreign investors are in, they can be persuaded with incentives to nurture home-grown component suppliers. In that way, industrial clusters can emerge and the spillovers from the initial wave of foreign investment can be expanded.

● On the trade side, regional economies need to maintain as much momentum in trade opening as possible by pursuing plurilateral trade arrangements. It is not surprising that the most aggressive pursuers of such agreements — Singapore and Vietnam — are favoured by foreign investors. Rather than take the lazy route of subscribing to relatively low-standard trading agreements such as the Regional Comprehensive Economic Partnership agreement, they should be prepared to make the painful reforms needed to join agreements such as the Comprehensive and Progressive Trans-Pacific Partnership — as Vietnam, Malaysia, Singapore and Brunei have done.

Second, the region must try to establish urban agglomerations that can compete with China’s. These need not be as large as China’s to succeed. Thailand’s Eastern Economic Corridor (EEC) is well-conceived as it is an expansion of its highly successful Eastern Seaboard. However, implementation has been slow and the country’s political difficulties have got in the way by scaring foreign investors away. Now that there is a stable government and the political tensions have receded, there is an opportunity to speed up the EEC’s implementation.

Singapore and Malaysia are also on the right track with the proposed Johor-Singapore Special Economic Zone (JS-SEZ). The two countries need to speed up its implementation and explore how the JS-SEZ can be expanded to include Batam, Bintan and Karimun. If those Indonesian regions are included, the region would gain an economic agglomeration that could be highly competitive.

Given the scale of the challenges ahead, business as usual will not do. Southeast Asian nations need to step up measures to increase their attractiveness to foreign investors. Infrastructure has improved in the region but by not enough. The impetus for cutting red tape appears to have lost a bit of momentum. The speed of technological progress means that strengthening education systems has become more urgent. 

Finally, beyond single country efforts, the region must also accept that they will be better off if they combine their efforts rather than engage in wasteful competition with each other.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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