There is a clear premium being placed on countries whose companies are adept at converting innovation into marketable goods and services. A similar premium is accorded to countries most adept at straddling geopolitical struggles, and that can provide investors with an attractive base to produce goods.
What the latest data shows
UNCTAD's latest Global Investment Monitor notes that global foreign direct investment in the first half of 2025 fell 3% over the same period last year. It did add that early indications suggested that there might be some improvement in the third quarter of the year. However, it did not place much hope on this possible trend, noting that it expects the international environment to remain challenging for FDI.
Generally, the UNCTAD data is still preliminary and incomplete, but the available numbers show some interesting patterns:
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- Within the overall numbers for FDI, flows into greenfield investments such as new factories actually rose by 7%. That is good news because it means that firms worldwide still seek to expand industrial productive capacity, a vote of confidence in the future. The big fall in FDI was due to diminishing flows of a financial nature — a 23% fall in cross-border mergers and acquisitions. The final component of FDI — project financing — fell 8%, which is not a happy development, as much of it is used to finance infrastructure, which the world needs.
- Within the Asian region, India emerged as a key target for foreign investors, with FDI rising 64% over the comparable period last year.
- Southeast Asia as a whole registered growth of just 4% in FDI, but the flows varied greatly among countries. Singapore, Vietnam and Malaysia recorded consistent double-digit FDI increases, while the rest of the region largely struggled to attract investments. However, Thailand's Board of Investment has reported that investment applications surged by 23% in the first nine months of the year, so it is possible that the UNCTAD figures underestimated FDI into Thailand.
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- FDI into East Asia expanded by only 2% despite the region being at the heart of the semiconductor supply chain.
UNCTAD's report observed that a sharp rise in tariffs and geopolitical tensions "heightened investor uncertainty, leading to a widespread wait-and-see attitude across many sectors".
Technology is now a big driver of investments
In particular, AI has become a significant catalyst for investment, instigating striking movements of investment away from traditional sectors into semiconductors and data centres. Large-scale projects have been announced in the US, but developing economies are also enjoying some spillovers of such investments.
This "AI effect" has been most dramatically evident in the US. Greenfield investments surged by a staggering 79% in the US, no doubt driven by the widespread buildout of data centres, semiconductor facilities, electricity generation capacity to power these new facilities and other infrastructure that supports the AI rollout.
The concentration of big technology firms in the US, which have the technological and financing capacity to exploit AI, has clearly helped boost capital flows into the US. In fact, the overall value of greenfield investments in the US surged to US$237 billion ($308 billion) in the first half of 2025: that almost exceeds the full-year total for 2024 and is around four times the past decade's half-year average. Of this, more than half was concentrated in AI-related sectors, with US$103 billion in semiconductors and US$27 billion in data centres.
Beyond the US, a sectoral realignment is ongoing in developing countries as well, drawing capital away from areas such as sustainable development goals (SDGs) not linked to the AI story. While overall project finance deals used to fund infrastructure fell, they edged up in developing countries. While positive, this was only a modest recovery after declining sharply from 2023 to 2024.
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While the buildout of renewable energy was already a focal point for project finance deals in developing countries, the AI wave has intensified this trend, with around 90% of project finance deal value concentrated in just the renewables and telecommunications sectors, up from around 50% two years ago. In contrast, SDGs unrelated to AI — transport, sanitation, agrifood and health — all saw interest collapse this year, largely continuing their decline from 2023.
While the technologically advanced heavyweights like Taiwan and South Korea have benefited from relentless AI demand through surging exports, this success has not translated into new semiconductor facilities, which are gigantic, multi-year endeavours and which will ramp up production in future. One reason could be that major semiconductor firms are being strong-armed into building new facilities in the US in order to avoid punitive sectoral tariffs.
Importance of returns on capital, government capacity, connectivity and scale
Overall, while AI has undoubtedly shaken up the FDI landscape, the underlying drivers of FDI remain intact. Investors are attracted to locations where they can enjoy high returns on investment, where risks are contained and which offer an ecosystem with notable advantages.
First and most important is the capacity to support an investor's return on capital. The International Monetary Fund's data on income earned by global firms in each country helps us to work out returns on investment across different countries. The data shows that profits from the Indian and Southeast Asian operations of global firms have grown sharply since 2014. In fact, some of these countries can now offer returns on capital that exceed those in China. China's evolution into a higher-value economy with rising wages may have eroded some of its cost advantages. Separately, data from global firms indicate better profit margins from selected Southeast Asian operations than from China.
Note that this return advantage varies significantly across countries. Those with younger populations, simpler regulations and more developed industrial clusters are seeing their investment attractiveness grow faster than others, creating a clear hierarchy within the region that goes well beyond what traditional competitiveness rankings capture. Some of the factors that determine which countries do better than others can be identified.
Second, with businesses disturbed by geopolitical frictions and domestic instability, the premium for countries that project a degree of geopolitical neutrality and political-regulatory stability has grown. In the midst of tensions between the US and China, a "neutrality premium" is becoming more difficult to safeguard as both big powers make greater demands on third countries.
Thus, those countries that can pull off the right balance between the two squabbling giants have become even more valuable to investors. For example, Malaysia recently signed a trade deal that appeared highly lopsided but which its leaders believed was a necessary evil to keep the US on board while it deepens economic ties with China.
Similarly, Vietnam agreed to transhipment tariffs with the US despite being a key transhipment node for Chinese goods because of the need to maintain good relations with the US while continuing to reap the benefits of Chinese factory relocation to Vietnam.
While Thailand has done a relatively good job of remaining business-friendly despite the endless political instability, the rising competition for capital means that it will be more difficult to replicate this performance going forward, especially since a large portion of its FDI comes from countries like Japan and South Korea, which are now bound by investment commitments to the US.
Third, such diplomatic flexibility requires strong government capacity underpinned by bold and visionary leadership and effective state institutions, which provide such countries with added advantages.
For example, countries that courageously forge high-standard free trade agreements, even if these require difficult reforms, tend to perform better. Vietnam is a stand-out in this sense. Although the granular data is not available in the UNCTAD report, Vietnam is also a winner. Government data showed that realised FDI in January to September 2025 increased 8.5% over the same period last year. Gross FDI inflows are estimated at around 4.4% of GDP, slightly higher vs. 4.3% of GDP last year.
Reflecting the importance of high-performance state institutions, countries such as Singapore, Malaysia and Thailand, whose investment promotion agencies have an excellent track record, are also likely to do well.
Fourth, investors are enticed by scale. India is in a unique position in this regard. Despite constant complaints about the difficulty of doing business there, it is enjoying a surge in FDI flows. This is perhaps explained by the promise of its huge consumer market, a market that is made exciting by India's likely growth of around 6% for the next few years. Global firms like investment locations that can offer scale, and India, with its 1.4 billion largely youthful population, where the middle class is beginning to emerge in large numbers, has an unbeatable ability to offer this scale. However, the ongoing tensions with the US, in addition to the retirement of the production-linked incentives programme, spell trouble ahead, as the US is a key market and investment source for India's information technology industry.
Fifth, where these critical factors are not all present, countries can still attract investment in specific areas. For example, FDI in Indonesia was led by the mining and metals sectors, although telecom and transport emerged as the third biggest sector. For Thailand, the digital sector drew THB522 billion ($20 billion) of FDI, accounting for nearly half of total investment applications in 1H2025.
The competition for capital is clearly heating up
Overall, the key takeaway is that going forward, less capital is likely to be available for the region as a whole, making investors more discerning over the choice of country and sector for projects. Global firms may not cut developing economies much slack as they might have in the past.
The Asian region will be swimming against the double currents of structural drivers like AI pushing capital to the US, as well as artificial distortions in the form of US trade and investment deals. Note that the US has pressured allies into promising massive investments in the US — the funds promised by the European Union, Japan and South Korea alone add up to close to US$1.5 trillion. If those promises are kept, capital will be diverted away from Asia.
Under the new landscape of scarcer capital, the divergence between the relative winners and laggards is set to spread further. Though there are a number of important factors, the new era of elevated geopolitical uncertainty and domestic volatility has underscored the importance of geopolitical neutrality and regulatory stability, respectively.
Singapore, Malaysia and Vietnam look set to remain relative winners in the new FDI landscape, having emphasised building up their credibility in providing a stable and conducive environment for investments domestically, while managing to remain non-aligned on the geopolitical front — even actively hosting engagements between the US and China, as in the case of Malaysia.
Manu Bhaskaran is the CEO of Centennial Asia Advisors
