Foreign direct investment (FDI) is under pressure. Slowing global FDI flows, rising capital costs and increasingly cautious investor sentiment are reshaping investment dynamics worldwide, especially in Asia and the Pacific.

Recent shifts in global tariff policies have fundamentally altered the investment landscape. Tariffs, once a trade issue, now structurally influence where and how companies invest. For governments and investment promotion agencies (IPAs) across the region, the challenge is clear: How can economies attract FDI amid heightened uncertainty and ensure it drives sustainable development outcomes under new conditions?

Asia and the Pacific: Not one market, but many

Investors often focus narrowly on many of the larger economies in the region. Yet Asia and the Pacific’s diversity, which spans developed and developing markets, and countries in special situations, means that FDI drivers and policy responses vary widely across the region. Recognizing this diversity is essential both for investors seeking new opportunities and for governments trying to position their economies in the shifting global investment map.

Tariffs redraw the map of opportunity

Recent tariff adjustments are reshaping the global trade and investment landscape. A 10 per cent baseline tariff has been applied to a wide range of imports, with some Asian economies facing higher rates— Viet Nam at 46 per cent, Thailand at 36 per cent, Cambodia at 49 per cent, and Malaysia at 24 per cent. In certain cases, cumulative tariff levels may be considerably higher, depending on the product category.

A 90-day pause offers temporary relief for selected trading partners, but uncertainty looms. For investors, this window is a time for strategic reassessment and not a sign of broader policy reversal.

ASEAN economies, integral in global production networks, are especially sensitive to shifts in trade policy frameworks. Analysis by ESCAP highlights the varying degrees of exposure through value chain linkages across the region. Economies with higher exposure are reviewing their investment positioning, while others see opportunities to strengthen their role in regional supply chains.

On the ground, investors are navigating increased volatility, evolving compliance requirements, and heightened complexity around origin certification and documentation. Investment planning now increasingly involves multiple scenarios based on tariff, regulatory and geopolitical considerations.

Companies are becoming more cautious and more strategic. Supply chain planning cycles have lengthened. Corporate boards are integrating tariff exposure into core investment decisions, not just operational risk assessments.

Investment strategies are evolving

Sectoral impacts are becoming clearer. Garments and apparel face shrinking margins and rising compliance costs. Electronics manufacturers face tougher origin audits. Renewable energy sectors, including solar and electric vehicles, are restructuring supply chains to manage emerging import controls and policy shifts in major destination markets. 

Notably, some sectors show greater resilience. Digital infrastructure, advanced manufacturing, and green energy continue to attract investment, underlining Asia’s enduring competitiveness in high-value industries.

Investors are moving from tactical tariff mitigation to strategic supply chain architecture. Instead of relocating production, companies are diversifying operations - They are looking at building multi-country supply networks—with manufacturing in one country, assembling in another, and designing elsewhere. This deliberate derisking prioritizes operational resilience and flexibility, even if it means accepting higher short-term costs.

FDI for sustainable development: Risks and opportunities

The stakes are high. FDI is a vital engine for sustainable development—supporting decent jobs, building critical infrastructure, transferring technology, and advancing environmental and social standards. Disruptions risk delaying green energy projects, industrial upgrades and skills growth. Countries in special situations in the region are particularly vulnerable.

However, this shift also creates new opportunities. The emphasis on supply chain resilience, traceability, and sustainability aligns with broader sustainable development imperatives. Investors could use this opportunity to prioritize compliance, transparency, workforce skills, and ecosystem strength. Countries that offer regulatory predictability, skilled human capital, and digital infrastructure will increasingly attract the next generation of FDI.

IPAs must adapt accordingly. Simply marketing low costs is no longer enough. Governments must build environments that enable compliance-driven, adaptable business models. This means investing in skills development for trade compliance professionals, strengthening digital customs systems, ensuring environmental and social safeguards, and offering clear pathways for supply chain traceability.

Evolving trade measures and global economic adjustments have raised the bar for FDI attraction, but they have also raised the bar for sustainable development alignment. The two can, and must, move together.

Looking ahead: Precision, partnership and resilience

The new FDI environment demands more precision from investors, greater partnership between governments and businesses, and a stronger focus on building resilience.

• Precision: Investment decisions will be slower and more analytical. Companies will model multiple tariff and policy scenarios before committing.
• Partnership: Investors will expect governments and IPAs to offer incentives, and demonstrate clear plans for supply chain security, compliance infrastructure, sustainability and political stability.
• Resilience: Distributed, modular supply chains will become the norm. Countries that invest in operational certainty and ecosystem robustness may appeal more to investors.

For Asia and the Pacific, this is not a moment of decline. It is a moment of strategic transition. If governments and IPAs move quickly—adapting strategies, strengthening institutions, and aligning with Sustainable Development Goals—the region can emerge stronger, more resilient, and better positioned to lead in the evolving global economy.