I. Introduction

This chapter focuses on the investment dimension of the ASEAN Economic Community (AEC). The first section studies recent patterns and trends in foreign and domestic investment in the region. The key finding is that these trends have been largely disappointing. The second section examines the underlying factors that might explain the disappointing performance. There appears to be a disjuncture between the relatively good fundamentals for investment in the region and the actual outcome, a disjuncture mainly related to country-specific weaknesses in the investment climate. The third section assesses the progress in implementation of the AEC and finds that despite progress, implementation leaves much to be achieved before the 2015 target. The final section presents some recommendations as to what could be done to improve the situation. I believe that a key thrust must be to create economies of scale so as to boost ASEAN's competitiveness in attracting investment relative to the large dynamic economies of China and India.

II. Weakening FDI and Domestic Investment in ASEAN

Attracting foreign investment has been an important component of the growth strategies of most ASEAN countries. In assessing the overall investment climate in ASEAN, we begin with an analysis of FDI trends before studying domestic investment.

ASEAN's Share of FDI Flows has Declined

Despite numerous attempts and initiatives to foster the appropriate investment climate for foreign investors, ASEAN as a whole continues to struggle in raising inward FDI beyond levels achieved prior to the Asian financial crisis of 1997–98. Figure 5.1 shows ASEAN's share of the stock of global FDI over the past three decades; this share rose to a peak of more than 5 per cent just before the financial crisis of 1997, and although it has been rising over the past few years, ASEAN's stock of world FDI has not reached its 1996 level. In terms of the annual flow of FDI, ASEAN's share has ebbed significantly in the 2000s from an average of 8 per cent in the mid-1990s before recovering to about 6 per cent in 2010.

An area of concern is ASEAN's declining proportion of both stock and flow of FDI within developing countries.