Written by Guanie Lim and Xu Chengwei.
Image credit: Foreign Secretary Dominic Raab visits South East Asia by Number 10/ Flickr, license: CC BY-NC-ND 2.0.
In March 2021, the UK government published the ‘Global Britain in a Competitive Age’ report. Amongst other things, it sets out the UK’s four key objectives: upholding an international order supportive of liberal democratic values; contributing to the security of this order; building greater global resilience to the impacts of climate change, health insecurity, and related challenges; and pursuing an international economic agenda that strengthens the UK’s global competitiveness and supports the welfare of its citizens. One of the most practical measures to achieve such goals is to channel foreign direct investment (FDI) to outward-oriented economies, not least those with potentially enormous upside. Boasting the fifth-largest economic output in the world and a very favourable demography, the Association of Southeast Asian Nations (ASEAN) must figure prominently in the calculus of UK policymakers.
For similar reasons, the ASEAN economies have attracted the attention of other powers. Within East Asia, China and Taiwan come to mind. A significant portion of China’s burgeoning foreign exchange reserve has been channelled to finance outward FDI in the region. Moreover, Chinese outward FDI has gained even more momentum after the Belt and Road Initiative (BRI) was announced in 2013. Not to be outdone, Taiwan in 2016 announced its New Southbound Policy intending to foster closer ties across the Indo-Pacific, which again includes the ASEAN member states. Given the heated competition, we have to ask: can the UK compete against China and Taiwan, at least in the arena of international investment, in Southeast Asia? To answer this question, we examine the trends and patterns of these three economies’ regional investments, focusing on two interrelated perspectives – the amount and sectoral breakdown of their FDI.
The UK: Weakened, but Still Going Strong
Our analysis shows that, between 1995 and 2007, UK FDI entering ASEAN was more significant than that of the Chinese and Taiwanese (see Figure 1). However, the UK’s lead has seemingly been chipped away, especially since the 2008 global financial crisis, which caused a severe downturn in the UK. It was also affected by the ensuing European sovereign debt crisis that only got stabilized by the mid-2010s. Filling the void are Chinese, and to a smaller extent Taiwanese, FDI. However, Chinese transnational corporations (TNCs) had to reduce their exposure in Southeast Asia by 2017 following Beijing’s implementation of capital controls to curb the outflow of funds and stabilize the exchange rate of the Chinese Yuan (CNY).
Given Taiwan’s relatively smaller economic size than China and the UK, it is not surprising that Taiwan is not the largest capital exporter in most ASEAN economies over the past two decades. Nevertheless, Taiwan has carved out a competitive niche in selected economies such as Vietnam and the Philippines, fending off the challenges from the UK and China. In particular, Taiwanese firms have fostered advantageous positions in key products. For example, motorcycles manufactured by Sanyang Motor (SYM) rank among the most popular brands in Vietnam. The company also holds the distinguished record of setting up the first motorcycle manufacturing plant in the Southeast Asian nation when it heeded Hanoi’s clarion call to reform the latter’s then moribund economy under the 1986 doi moi (renovation) program. However, SYM’s brand-building story implies the merits of a careful, targeted economic approach rather than one that aims to encompass the interest of the entire region.
Services to the Fore
Our research also reveals that UK FDI entering Southeast Asia mainly finances the tertiary/services sector. This is understandable given the UK’s relatively mature economy compared to the region. However, it is surprising to discover that Chinese and Taiwanese FDI – often regarded as manufacturing powerhouses – entering Southeast Asia lean almost just as heavily towards the tertiary/services sector. As shown in Table 1, 33.22% and 69.91% of the UK’s FDI were from secondary and tertiary industries, respectively. China invested most of its FDI in the tertiary/services sector (79.81%); only 10.00% of China’s FDI went to the secondary/manufacturing sector. Taiwan saw 59.86% of its FDI in the tertiary/services sector and only 37.20% in the secondary/manufacturing sector.
Perhaps more importantly, 30.43% of Chinese FDI has financed the region’s construction and real estate activities. An economy’s outward FDI structure usually reflects its domestic economic development and production capacity. In the case of China, its economy remains primarily dominated by state-owned enterprises (SOEs), despite its decades-long liberalization efforts. After years of robust public investment, many of these SOEs became behemoths in the provision of construction and real estate activities. In recent years, however, these SOEs and their private sector counterparts have had to source more business abroad as the Chinese economy has slowed down noticeably, with overcapacity a major concern. However, there are doubts about how much spare capacity the far smaller Southeast Asian economies can absorb from China. For example, a real estate bubble was fomented in southern Malaysia merely a few years after the BRI’s launching. What is worse, the aggressive courting of Chinese FDI to fund costly real estate projects have generated discontent amongst the local community. Combined with other ‘hot button’ issues, unhappiness with the manner Chinese-financed real estate FDI was embedded into the domestic ecosystem contributed to the then Barisan Nasional government’s unexpected defeat in the country’s watershed general election of May 2018.
Some Food for Thought
Overall, the UK is not likely to gain substantially more influence relative to China and Taiwan in Southeast Asia, at least based on existing trends and short-run projections of their FDI within the region. However, the UK remains a competitive player as it enjoys a first-mover advantage courtesy of its more developed status. It also can draw on deep-rooted socio-political goodwill from the region’s political and business communities. Additionally, the UK could become a more prominent player if it plays its cards right because of the uncertainties surrounding US-China ties and China’s increasingly challenging economic situation. Some of these low-hanging fruits include the swift securing of membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which key ASEAN states are already signatories.
Guanie Lim is Assistant Professor at the National Graduate Institute for Policy Studies (GRIPS), Japan. His main research interests are comparative political economy, value chain analysis, and the Belt and Road Initiative in Southeast Asia. Guanie is also interested in broader development issues within Asia, especially those of China, Vietnam, and Malaysia. His latest monograph — The Political Economy of Growth in Vietnam: Between States and Markets (published by Routledge) — details the catching-up experience of Vietnam since its 1986 doi moi (renovation) reforms.
Xu Chengwei is a research fellow in the Nanyang Centre for Public Administration at Nanyang Technological University, Singapore. Dr Xu received his PhD degree in Public Policy and Global Affairs from NTU Singapore in 2018. Before joining NCPA, he was a research fellow at Singapore Management University (SMU). Dr Xu’s research primarily focuses on public administration, public health, Asian public governance, and FDI in the Asia-Pacific region. His publications have appeared in various peer-reviewed journals, such as the International Journal of Public Administration in the Digital Age, International Review of Administrative Sciences, Journal of Public Budgeting, Accounting & Financial Management, Public Personnel Management, and Public Performance & Management Review.
This article was published as part of a special issue on “Comprehensive and Progressive Agreement for Trans-Pacific Partnership.”
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