China’s investment surge is forcing Southeast Asia to rethink industrial policy
Looking at Chinese investment in Southeast Asia, Soon Cheong Poon and Guanie Lim find that the impact of investment depends on how it is governed. Southeast Asian governments can and have pushed back against negative spillovers. But it remains to be seen if they can band together regionally to handle the next waves of investment.
China’s economic rise has reshaped global investment patterns, offering developing economies an alternative source of capital beyond traditional investors such as Japan and Western countries. In the first half of 2025, China overtook the US to become the world’s largest source of foreign investment, accounting for approximately 10% of global foreign direct investment (FDI). Nowhere is this more evident than in Southeast Asia.
Over the past decade, the region has attracted substantial Chinese investment. According to the ASEAN Secretariat’s 2025 investment report, China has emerged as one of the region’s largest investors. Chinese FDI inflows into the region rose from less than US$4 billion in 2010 to a record US$17 billion in 2023, with cumulative investment exceeding US$140 billion between 2010 and 2023. A combination of market, resource and efficiency-seeking motives, including risk diversification and supply chain reconfiguration, drives these investments.
... many of these Chinese-financed smelters are often powered by coal-fired power plants, resulting in substantial carbon emissions.
Foreign capital not all a bed of roses
This wave of investment has brought tangible benefits: jobs, infrastructure, export capacity and fiscal revenues. Yet it has also exposed an uncomfortable truth — foreign capital does not automatically support industrial upgrading, environmental sustainability or long-term development. Left unmanaged, it can just as easily lock countries into environmentally damaging and technologically backward production structures.
Nowhere is this tension clearer than in energy-intensive, resource-based sectors. Southeast Asia’s steel industry offers a telling example. Historically, much of the region relied on electric arc furnaces, a relatively cleaner technology that recycles scrap metal. However, in recent years, integrated blast furnace-basic oxygen furnace (BF/BOF) megamills, known for their high carbon intensity and environmental impact, have been expanding rapidly. These investments, many linked to Chinese firms, have increased capacity rapidly but at a high environmental cost.
Similar dynamics are visible in mineral mining and refining. Indonesia’s nickel industry, now central to global electric vehicle (EV) supply chains, has attracted massive Chinese investment in smelting and processing. Nevertheless, many of these Chinese-financed smelters are often powered by coal-fired power plants, resulting in substantial carbon emissions. Local communities have also raised persistent concerns about water and air pollution, public health risks, and deforestation. The result is a paradox: materials essential for the green transition are being produced through highly carbon-intensive processes.
To be fair, the problem here is not uniquely “Chinese” in nature. Earlier waves of Japanese, Korean and Western capital produced their own environmental and social costs. The difference today lies in the scale, speed and industrial concentration of investment, which have strained regulatory systems and exposed weaknesses in industrial governance.
Southeast Asia’s institutional capacity has improved. Bureaucracies today are more capable of designing, negotiating and enforcing conditions on foreign investors than they were two or three decades ago.
Southeast Asia’s institutional capacity has improved
More important to the discussion here is the response of various Southeast Asian governments. Across the region, there has been a noticeable revival of industrial policy — less ideological, more pragmatic and shaped by earlier experience. For example, Indonesia’s much-touted nickel export ban in 2014 is not merely a nationalist gesture, as some critics suggest. Rather, it represents an attempt to retain value domestically, foster downstream industries and avoid the familiar resource-export trap.
Malaysia, faced with a sudden influx of iron and steel investment from China, imposed moratoriums in 2023 to address overcapacity, environmental risks, and other regulatory gaps. The Malaysian government also introduced the national steel roadmap in 2025, which sets out plans to prepare for decarbonisation to achieve a “fully green” industry by 2050. In Thailand, the Ministry of Industry has required Chinese EV manufacturers to assemble their vehicles with at least 40% locally sourced components, aiming to strengthen domestic supply chains and enhance local industrial upgrading.
These interventions reflect something often overlooked in the popular press: Southeast Asia’s institutional capacity has improved. Bureaucracies today are more capable of designing, negotiating and enforcing conditions on foreign investors than they were two or three decades ago. This has expanded the policy space for the region’s governments, allowing them to seek a better balance between attracting capital and managing its externalities.
However, there are limits. Most of these interventions remain reactive, introduced only after problems have become too visible or politically costly to ignore. Their effectiveness also varies widely across countries, depending on bureaucratic strength, political backing and enforcement capacity.
Industrial policy, as history repeatedly shows, is not simply about announcing rules or incentives. Rather, it is about sustained and often uncomfortable implementation: enforcing performance discipline, coordinating infrastructure provision and withdrawing support from industries and firms that no longer contribute to the process of catching up.
Proposals to establish an ASEAN Steel Council, for example, could provide a platform for policymakers to jointly address issues such as decarbonisation, capacity management and industrial upgrading.
Deeper regional coordination the way to go
More fundamentally, national responses alone are increasingly inadequate for challenges that are regional, and in many cases global, in nature. Issues such as industrial overcapacity in steel, carbon leakage in mining and the fragmentation of supply chains do not respect national borders. When countries compete for investment by weakening standards or offering indiscriminate incentives, the outcome is predictable. Such competition erodes policy space and fiscal capacity, while failing to generate durable industrial capabilities. In the end, it even undermines both long-term development and environmental sustainability.
If Southeast Asia is to sustain growth while meeting environmental and climate goals, more proactive and preventive approaches are needed. One promising avenue is deeper regional coordination. Proposals to establish an ASEAN Steel Council, for example, could provide a platform for policymakers to jointly address issues such as decarbonisation, capacity management and industrial upgrading. Similar mechanisms could be explored in mining and battery supply chains.
The broader lesson is clear. Foreign investment, whether from China or elsewhere, is neither a blessing nor a curse. Its impact depends on how it is governed. Southeast Asia’s recent experience shows that when institutions are reasonably robust and policy tools are available, governments can and have pushed back against negative spillovers.
However, the next phase of Chinese investment will test the region more deeply. National resolve, on its own, will likely no longer suffice. What will be required is a shared vision, whereby regional stakeholders are explicit about the kinds of industries, capabilities and developmental trajectories Southeast Asia is prepared to nurture, and which it is willing to leave behind.
![[Big read] When the Arctic opens, what happens to Singapore?](https://cassette.sphdigital.com.sg/image/thinkchina/da65edebca34645c711c55e83e9877109b3c53847ebb1305573974651df1d13a)
