In the late 1980s, foreign direct investment, and in particular Japanese direct investment, became a major factor in the ASEAN economies. In the earlier part of the decade, this was barely foreseen. Investment from the West was declining, especially as the United States, the major Western investor country of the past, had recently been transformed into the world's largest debtor nation. Japanese firms were creating labour-saving and energy-saving technologies, and moving back to Japan some of the labour and energy intensive processes which had earlier been relocated overseas.

The change has been rapid. In the three years from 1985 to 1987 Japanese direct investment in ASEAN totalled over US$3.3 billion. This compared to a total flow of US$12.5 billion over the previous three decades. Foreign investment still represents a relatively minor percentage of total domestic investment in most ASEAN states (Singapore is the exception). Yet it is widely acknowledged that Japanese direct investment is playing an increasingly more important role because it is concentrated in the new, higher-tech, export-oriented industries which are powering the high growth rates of several ASEAN states. And it is expected to remain an important force for several years in the future.

This is a study of the forces driving the “new wave” of Japanese foreign investment in ASEAN. The study is confined to investment in manufacturing. Although investment in services is becoming more important, it is not covered here because of a lack of adequate information. The study does not attempt to assess the impact which this investment is making on the ASEAN economies. Since the new wave is relatively recent, and many projects are still at the gestation stage, it is too early to assess the impact in a meaningful way. Rather it is a study of the determinants and the determining characteristics of this new phase of Japanese overseas investment.