Enabling sustainable investment in ASEAN

Governments in Southeast Asia devote ample resources to attracting FDI with the hope of creating jobs. Greenfield FDI projects generate on average three direct jobs per million USD invested in the region, but the intensity of job creation varies substantially across countries according to their level of development and economic structure.

Lower-income countries, such as Myanmar and Lao PDR, as well as countries with abundant fossil fuel resources, such as Brunei Darussalam, tend to attract considerable FDI in natural resource extraction and energy generation, which creates relatively few direct jobs. Emerging economies with solid and diversified industrial capabilities, such as Viet Nam and Thailand, create the most jobs per USD invested. Countries with highly skilled labor forces, advanced industries and large financial sectors, such as Malaysia and Singapore, attract FDI in high-tech products and knowledge-intensive services, which require fewer workers.

The high capital intensity of manufacturing FDI in Indonesia is driven by the metals and chemicals industries, while the high labor intensity of FDI in the Philippines is driven primarily by business support services.

Beyond capital and jobs, FDI has made significant contributions to sustainable development in Southeast Asia. Significantly more foreign firms introduce new products and services than their domestic counterparts across most countries in Southeast Asia, and this greater innovation capacity suggests that there is potential for knowledge and technology to spill over to domestic firms. Foreign firms are also more likely to offer training opportunities to their employees, and the gap between foreign and domestic firms is considerably larger in many member states than in the average OECD or non-OECD country, suggesting that foreign firms contribute disproportionately to on-the-job skills development in the region.

By employing larger shares of women in their workforces in most ASEAN member states, foreign firms can also help improve gender equality in the workplace. Yet, some economies have benefited more than others, and the benefits of FDI have not been felt evenly across different parts of society.

While FDI creates jobs and contributes to upgrading skills and raising living standards, it can also create risks of irresponsible and unsustainable business practices and worsen income inequality, potentially leaving vulnerable segments of the population behind.

The contribution of FDI to green growth and decarbonization is not clear-cut. In Indonesia and Thailand, for example, FDI may be less aligned with national climate goals whereas in Viet Nam and the Philippines, the carbon footprint of FDI is lower than that of domestic investment. FDI’s contribution to renewable energy capacity in Southeast Asia has also lagged behind that of other regions, and varies considerably across the region.

In this in-depth report, co-sponsored by the Hinrich Foundation, a team of OECD analysts review the extent to which sustainable FDI has impacted the Southeast Asian region, how ASEAN member states have sought to court such capital, and uses OECD tools to recommend policy reforms to foster green investment in the region.

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