Southeast Asian countries, including Vietnam, Indonesia and Thailand, attracted record foreign direct investments last year as the ongoing trade friction between the United States and China prompted manufacturers to shift their production to countries not subject to US tariffs.

Foreign Direct Investment (FDI) in the region rose 3% in 2018 to a record level of $149 billion (€132 billion), UNCTAD'S World Investment Report 2019 showed.

The US and China have been engaged in a bitter trade spat for about a year with both sides imposing punitive tariffs on each other's goods. The Trump administration has already imposed a 25% levy on $250 billion worth of imports from China and has threatened to slap the same tariff on the remaining Chinese imports worth $325 billion. In retaliation, Beijing has imposed levies on $110 billion worth of US goods.

"The escalation in US-China trade tensions triggered a significant increase in investments in South and Southeast Asia," James Zhan, director of UNCTAD's investment division and the main author of the report, told DW. "They are export-oriented investments in the form of new production facilities what we call greenfield investments."

To be clear, Vietnam and some of its Southeast Asian neighbors have long been attracting foreign firms, many of them from China, because of their cheaper labor, business-friendly policies and strong trading relations with major importers such as the European Union and the US.

But the US tariffs have accelerated the diversion of investments and the exodus of manufacturing activity from China.

"The Chinese firms that engage in exports are moving out and are investing in the region due to the tariffs," Zhan said. "This is what we call barrier-hopping FDI."

Read more: Vietnam, Taiwan winning the US-China trade war

China too big to ignore

Despite trade tensions with the US, China — the world's second-largest economy — remained an attractive investment destination.

Inflows to China increased by 4% to an all-time high of $139 billion, making it the second-largest FDI recipient behind the US, the report said. Foreign investors set up more than 60,000 new companies in the country last year, up 70% from 2017.

Last year, Beijing shortened its negative list of protected industries, opening up more FDI opportunities. China also relaxed ownership restrictions for some key industries such as automotive, power grids, ship and aircraft manufacturing. The move pushed up FDI in manufacturing industries by a fifth.

Several foreign firms are choosing to hang in in China to cater to the country's huge domestic market. There is also an understanding that the smaller economies in the region may not have the capacity to meet the demands of the firms looking for alternatives to China.

"There is a kind of a limitation for such a massive restructuring of global value chains in the region. The absorptive capacity in South and Southeast Asia is limited," Zhan said. "The limitation relates to skilled labor, relates to infrastructure and relates to energy supply, energy costs and production materials."

Africa defies global slump

Global FDI flows fell by 13% to $1.3 trillion in 2018, mainly hurt by US companies repatriating earnings from abroad to capitalize on massive tax rebates introduced by the Trump administration in 2017.

The decline took place despite an 18% rise in cross-border merger and acquisitions and a 41% jump in the values of announced greenfield projects.

Inflows to Europe more than halved to $172 billion because of profit repatriations.

Flows to Africa bucked the global trend, rising 11% to $46 billion, mainly helped by a recovery in commodity prices that attracted investments in the continent's mining industry. The investments mainly came from China, France, the United Kingdom and India.

"The outlook for investments in Africa remains positive," Zhan said. "One of the factors is the regional integration efforts…and also the intensification of infrastructure building and connectivity in Africa and the continuous efforts of further liberalization, promotion, facilitation of international mobile investment."

The possibility of some large greenfield projects announced in 2018 materializing could also drive higher FDI flows to Africa this year, the report concluded.