- Digitalization & Tech Landscape in Southeast Asia
- Low Costs of Doing Business in SEA (Southeast Asia)
- Regional & Economic Stability in Southeast Asia
- Flourishing economies fueled by worldwide trade integration
- Developing economics in SEA: The most exciting investment destinations
- Business Opportunities by Sector in Asia
- Forecasts Investors should be aware of
- Bottom Line
- Download the Guide to Doing Business in Southeast Asia
Asia is a continent of contrasts, with huge disparities in natural resources, business conditions, and cultures across its many nations. However, economic growth and business opportunities are commonly found here.
Asia is anticipated to account for around 60% of the world’s economic growth by 2030. The Asia-Pacific region will also account for the vast majority (90%) of the world’s 2.4 billion new middle-class citizens. Investing and doing business in Southeast Asia, then, makes for a highly lucrative opportunity for foreigners with great prospects of returns.
Over the past few years, there has been a gradual shift of economic power from the developed countries toward the Asia-Pacific region. The developed countries accounted for approximately 80% of the global GDP in 2000. However, in 2019, their contribution dropped to around 60%, thanks to Asian economies gradually gaining traction.
As per the findings of an Allianz research conducted in 2021, the world’s economic center of gravity (WECG) is shifting eastwards. Based on projected growth paths before the Covid-19 crisis, the WECG will move eastward at a rate of 1.4x faster by 2024.
In the longer term, the WECG could be located near the confluence of China, India, and Pakistan by 2030. This move implies that Vietnam, Indonesia, and other Southeast Asian countries will attract more business opportunities in Asia.
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Digitalization & Tech Landscape in Southeast Asia
The population in Asia is heavily reliant on technology; it has pervaded every aspect of their life considerably more than in many other areas of the world. In almost every area of digitization, Asian players are ahead of the pack. Furthermore, even in the continent’s poorest economies, such as Cambodia, digitization is speeding up. Asian companies like Alibaba, Tencent, and Baidu, provide a wide range of services ranging from e-commerce to finance and cloud computing.
Asia is also at the forefront of the e-commerce and the fintech sector. Technological advancement also had a huge impact on production and growth, as well as the creation of new employment. Moreover, the proportion of GDP devoted to information and communications technology (ICT) in this continent has grown at a far higher rate than the rest of the world’s economy.
Low Costs of Doing Business in SEA (Southeast Asia)
Minimum wage rates are steadily growing throughout ASEAN nations to keep pace with rising living costs and promote domestic demand. However, several ASEAN countries did not raise their minimum salaries or did not raise them considerably, as a result of the pandemic.
Despite growing incomes, the majority of ASEAN nations’ minimum wages remain substantially lower than those in the world’s wealthy economies. Given the lower minimum wage and skilled labor force, the cost of doing business in Southeast Asia becomes much less as compared to any other continent.
For instance, the minimum capital requirement in Vietnam for setting up a business is lower than in other SEA nations. There are also numerous government incentives in place in countries such as Vietnam, and Indonesia which makes investing in Southeast Asia profitable.
Regional & Economic Stability in Southeast Asia
East Asia has been politically and economically stable for the past four decades. The absence of any major conflicts among SEA nations facilitates Asia’s integration into global supply chains and foreign investment flows, all of which contribute to the continent’s most prominent achievement: the alleviation of poverty for hundreds of millions of people and the emergence of a global middle class that has reshaped the global economy.
Due to rising tensions between the US and China over China’s expanding power projection in the area, US investors have shifted their focus to the next best alternatives like Vietnam. Moreover, the United States maintains a high degree of involvement in Southeast Asia.
Flourishing economies fueled by worldwide trade integration
Several free trade agreements (FTAs) have come into effect to boost economic and trade integration in the Asia-Pacific region, a center for various high-growth companies. The FTAs could mean a shift in the global economic balance in favor of APAC countries.
In the 2010s, trading activities within the Asia-Pacific region represented 25% of global trade, whereas EU27 and North American Free Trade Agreement (NAFTA) accounted for 17% and 6%, respectively.
ASEAN Free Trade Agreement (AFTA)
The ASEAN Free Trade Area (AFTA) promotes local trade and manufacturing, enhancing economic integration with regional and international partners. It is one of the world’s largest and most important free trade areas (FTAs), driving some of the world’s major multilateral forums and blocs, such as the Asia-Pacific Economic Cooperation, East Asia Summit, and Regional Comprehensive Economic Partnership.
AFTA was signed in Singapore on 28 January 1992. At the time of the original signing of AFTA, ASEAN had six members, which included Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Vietnam, Myanmar, and Cambodia joined in 1995, 1997, and 1999, respectively. AFTA now comprises the ten countries of ASEAN.
AFTA’s primary goals include:
- Achieve a competitive edge for ASEAN in the world market by eliminating tariffs and non-tariff barriers within ASEAN
- Increase the amount of foreign direct investment into ASEAN
EU – Vietnam Free Trade Agreement (EVFTA)
The EVFTA is a trade agreement signed by Vietnam and all of the EU’s 27 member countries on 30 June 2019. The accords, according to the European Commission, would expand trade while also supporting employment and growth on both sides. Several features include:
- Eliminating 99% of all tariffs
- Reducing regulatory barriers
- Ensuring the protection of geographical indications
- Opening up services and public procurement markets
- Ensuring the agreed rules are enforceable
After the Vietnamese National Assembly ratified the agreements, and the European Parliament and national parliaments of EU member states consented to them, the FTA went into effect on 1 August 2020. The culmination of all these benefits makes Vietnam an ideal destination for European investors to scale up their presence in the region and leverage the untapped opportunities in the market.
Regional Comprehensive Economic Partnership (RCEP)
The RCEP (Regional Comprehensive Economic Partnership) is a free trade agreement that aims to eliminate 90% of tariffs on imports between the Asia-Pacific countries. It provides new rules for intellectual property, government procurement, competition, electronic commerce, and small and medium-sized businesses. It also includes regulations regarding trade in goods, trade in services, investment, economic, and technical cooperation.
RCEP plays a vital role in the region
RCEP not only provides a framework for East Asian trade to flourish, but it also reduces the reliance of its members on overseas technology. This non-binding treaty will lead to new market openings and transform the region into a powerful trade bloc and manufacturing hub. Increased interdependence and a rising sense of economic integration will create a powerful sense of security.
ASEAN’s institutional practices are, to a certain extent, aligned with RCEP, so it will also aid in boosting political trust and resolving geopolitical disputes. As a result, poverty in low-income countries will eventually decrease, and governments will develop economic cooperation and sustainable economies.
One of the biggest beneficiaries of RCEP is Vietnam. The inbound tariffs imposed by Vietnam have reduced from 0.8% to 0.2%, whereas the outbound tariffs have gone down from 0.6% to 0.1%. As per the World Bank’s baseline evaluation, trade within the RCEP network is projected to increase real income by over 112% between 2020 and 2035.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
Having entered into force in 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) brings Canada and some South American countries (Peru, Chile, Mexico) into close cooperation with other countries in the Asia-Pacific region: Japan, Australia, Brunei, Singapore, Malaysia, New Zealand, and Vietnam.
As a result of an amendment to the original Trans-Pacific Partnership (TPP), most of the provisions have been incorporated into the new CPTPP agreement. CPTPP maintains the high level of trade rules and market access ambition of TPP despite its updated withdrawal, accession, and review procedures.
The Agreement includes aggressive market-access provisions in goods and services trade, investment, labor mobility, and governmental trade. The Agreement also aids in the creation of reliable, transparent, and fair business spaces in participating markets, with critical issues in mind, such as technical trade barriers, state enterprises, and customs administration. Furthermore, the CPTPP includes environmental protection and labor rights conditions to enhance trade and investment.
Developing economics in SEA: The most exciting investment destinations
In the last two decades, emerging Asian economies have performed better than the other fast-growing economies, with India, Vietnam, and China having annual average real GDP growth of more than 6%. However, their success is not without setbacks; before COVID-19, these countries were already suffering from several challenging trends:
- stagnation in international trade and investment
- the shift from labor-intensive to technology-intensive manufacturing
- the waning growth of productivity
Emerging Asian economies have yet to come close to competing with developed nations, but they’re heating up. Long-term prospects are better for the region as they focus on altering, rebuilding, and getting back on track after the pandemic. Here are some contributions that emerging Asian countries are projected to make during the coming two decades:
- A global increase in GDP by 46% (in terms of Purchasing Power Parity)
- The population of consumers will rise by 55% globally (total income of more than USD 5,000 in PPP);
- Global consumer expenditures will increase by 41% (at USD 2020 constant prices)
Despite China’s dominance, small and prospering Asian markets such as India, the Philippines, Thailand, Indonesia, and Vietnam also present opportunities, thanks to their growing economies and consumer bases.
Vietnam’s economic endurance has been demonstrated by a GDP increase of 6.61% in Q2 2021, despite the ongoing Covid-19 epidemic, thanks to an abundance of natural resources, a fast-rising middle class, a growing number of internet users, and several free trade agreements. Furthermore, Vietnam is now expected to become the silicon valley of South East Asia, with one of the highest rates of new tech startups, coupled with significant investments from a government that prioritized integrating IT and other tech-related curriculums into the education system.
Before the COVID-19 pandemic, Vietnam was already a preferred destination for offshore manufacturing. Moreover, the country stands to benefit from the pandemic-induced disruptions to global supply chains and has an excellent opportunity to attract FDI and increase its manufacturing capacity. For instance, Samsung Electronics is moving production from China to Vietnam to reduce costs and avoid geopolitical risks. To entice foreign investors, Vietnam has permitted 100% foreign ownership of FDIs.
Malaysia has a strong export-oriented industrial base and a high GDP per capita, making it one of the most sophisticated economies in Southeast Asia. The country, according to the World Bank, has one of the world’s most open economies, with a trade-to-GDP ratio of over 116.50%% in 2020. Openness to trade and investment has aided in the creation of jobs and income growth. (4)
The Philippines’ economy has remained robust and resilient throughout the years, making it one of the region’s fastest-growing economies. Several businesses, including finance and insurance, public administration and defense, and agriculture, remained untouched by the COVID-19 pandemic in 2020 and continued to thrive until 2021 (5).
Private spending accounts for 60% of Indonesia’s GDP. A rapidly growing middle class that aspires to a contemporary, worldwide quality of living is fueling this trend. With half of Indonesia’s 264 million people under the age of 30, consumer products, specialized education and training, and innovative knowledge-based services and technology are in high demand (6).
The Singapore government aims to become a worldwide fintech powerhouse, and it has already established itself as an international financial center. The Singaporean government has launched the Smart Nation Initiative to achieve these goals, recognizing that technology is changing and will continue to disrupt the financial industry. It plans to take advantage of the shifting tides in the fintech industry to attract investors.
Business Opportunities by Sector in Asia
Asia accounted for 57.4% of the global e-commerce market in 2019 and will likely exceed 60% in 2024. Asia’s e-commerce revenues will benefit from a growing middle class, improved financial infrastructures, and rapid innovation, boosting GDP growth, productivity, and economic inclusion.
The table below shows how revenue will take off in major Asian countries in the coming future. Figures are in USD million.
Southeast Asia’s digital sector has been experiencing rapid growth in fintech. With a large unbanked population and increasing internet penetration, Southeast Asia is a hotbed of fintech innovation and a promising market for innovative financial goods and services.
Digital services have made strides during the Covid-19 pandemic due to increased internet usage and physical distance constraints. By the end of 2020, nearly 70% of the population was online in the top-six economies in the region, up from roughly 46% in 2016, according to Google, Temasek, and Bain & Company’s e-Conomy SEA 2021 report.
In the first quarter of 2022, APAC’s real estate sector investment volumes increased by 20%. Direct real estate investment capital in the region measured over USD 40 billion. Singapore represents an attractive market with a 134% growth in cash inflow year-on-year.
Following the e-commerce landscape’s rising demands, logistics will become an essential commodity across Asia. According to predictions on the e-commerce logistics market by Research and Markets, estimates say that Southeast Asian e-commerce logistics revenues will grow by 20.16% annually between 2022 and 2026, reaching USD 58.93 billion. Social commerce, cross-border e-commerce activities, and the growth of e-commerce startups are the primary elements driving investments in the market.
Forecasts Investors should be aware of
The Japan Center for Economic Research’s report claims that the economic size of China will surpass that of the U.S. by 2035. With a combined economic scale of 42.35 trillion in 2035, Japan and the U.S. will be slightly less competitive than China.
China won’t take long to surpass Taiwan’s per capita income mark (USD 22,000) after becoming a high-income nation in 2023. It is a positive development but still below China’s expectation (USD 30,000).
It is expected that India will remain below middle-class levels for at least another ten years, with a 5% growth by 2035 despite overtaking Japan as the world’s largest economy by 2033.
Based on projections, Vietnam’s economy will grow by 6% in 2035 thanks to a strong export drive. By 2035, Vietnamese GDP will surpass Taiwan’s as the region’s second-largest economy.
The US-China trade war has proven to be a pivotal factor in making SEA a global trading hub. Moreover, the region is backed by favorable demographics, political stability, and encouraging government policies. Hence, the economic bloc has been gaining traction from foreign investors to leverage untapped opportunities available.
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