Foreign Direct Investment in Asia: Key Trends and Regulatory Considerations

Foreign direct investment (FDI) in Asia continues to expand, with jurisdictions across the region implementing diverse regulatory frameworks to attract and control foreign capital. Understanding the nuances of these regulations is critical for investors looking to expand in the region. This Insight provides an overview of key FDI trends and regulatory considerations in India, Indonesia, Malaysia, Thailand, Japan, China, and Hong Kong.

SOUTH & SOUTHEAST ASIA: EXPANDING INVESTMENT OPPORTUNITIES WITH REGULATORY CHALLENGES

India

India remains a major FDI destination, attracting $71 billion in 2024 and surpassing $1.03 trillion in cumulative FDI since 2000. Most sectors permit 100% foreign investment under the automatic route, except for certain industries, such as print media (26%), multi-brand retail (51%), and private sector banking (74%). Investments from neighboring countries, including China, require government approval, limiting beneficial ownership to 10%.

Indonesia

Indonesia has expanded FDI in many sectors since 2021, although some remain restricted. Foreign investors must convert into a Penanaman Modal Asing (PMA) company before investing, leading to greater regulatory scrutiny. Convertible notes are often used to delay this requirement. Listed companies provide tax advantages upon sale, but the Indonesian stock exchange lacks liquidity and has no formal delisting or squeeze-out process.

Malaysia

Malaysia imposes minimal FDI restrictions, except in protected industries like oil and gas, banking, insurance, education, and freight forwarding. Some sectors require Bumiputera ownership, meaning foreign investors often use financing structures to achieve economic control without exceeding ownership limits. Common methods include the following:

• Financed shareholder arrangements: In this structure, foreign investors provide financing to local shareholders, who hold shares in compliance with FDI limitations. These agreements often include restrictive covenants to prevent local shareholders from selling or encumbering the shares. However, this structure has been challenged in courts, making it a legally risky approach that requires careful implementation.
• Preference share structures: Foreign investors may acquire preference shares that grant them economic control while maintaining compliant ownership levels. These shares typically provide disproportionate dividend rights or voting control, ensuring the investor retains significant influence over the company’s operations without breaching foreign ownership caps. This structure is commonly used in capital-intensive industries requiring foreign expertise and investment.
• Multiple company structures: This approach relies on commercial agreements between locally owned entities and foreign-invested companies to extract value from operations. By structuring agreements such as licensing, franchising, or service agreements, foreign investors can effectively control revenue streams while remaining within legal ownership limits. This structure is widely used in sectors like retail and professional services, where direct foreign ownership is restricted.

Thailand

Generally, Thailand limits FDI to 50% minus one share, except in promoted industries such as electric vehicles, smart electronics, and digital/creative services. Foreign investors in restricted sectors often use waterfall structures, where control is achieved through layered ownership, keeping foreign beneficial ownership below official limits.

JAPAN: COMPLEX REPORTING AND EXEMPTION MECHANISMS

The Foreign Exchange and Foreign Trade Act (FEFTA) provides Japan’s FDI regulations. The FEFTA and relevant regulations categorize businesses into (1) designated sectors and (2) non-designated sectors, and further categorize designated sectors into (a) core designated sectors and (b) non-core designated sectors, determining whether prior notification or post-investment report will be required in connection with the investment. The Ministry of Finance (MOF) published the list of classification of companies and periodically updates it.

Under the FEFTA, foreign investors acquiring 1% or more of shares or voting rights of a listed company that conducts a designated business, or conducts certain types of acts, may be required to file a prior notification and/or post-investment report unless the foreign investors may rely on any exemption. When a foreign investor acquires one or more shares or voting rights of a non-listed company that conducts a designated business, the foreign investor may be required to file a prior notification and/or post-investment report.

With respect to the investment in a listed company, there are (1) blanket exemptions available to foreign financial institutions and (2) regular exemptions available to general investors (including sovereign wealth funds (SWFs) and public pension funds accredited by the authorities).

Exemption conditions are as follows:

• Investors or their closely related persons will not become board members of the listed company.
• Investors will not propose to the general meeting of shareholders transfer or disposition of the listed company’s business activities in the designated business sectors.
• Investors will not access non-public information about the listed company’s technology in relation with business activities in the designated business sectors.

Additional exemption conditions on core sectors’ business activities are as follows:

• Investors will not attend the listed company’s executive board or committees that make important decisions in these activities.
• Investors will not make proposals, in a written form, to the executive board of the listed companies or board members requiring their responses and/or actions by certain deadlines.

The MOF published a draft of the upcoming amendments of FEFTA regulations on February 10, 2025. Under the new regulations, the MOF creates a new category of foreign investors who have obligations to cooperate with foreign governments in collecting information related to Japan’s national security and always requires that such new category of foreign investors always file a prior notification (no exemption is available) in connection with the foreign investor’s investment in a business categorized in core designated sectors. Also, the MOF proposes to add other conditions to Additional Exemption Conditions in connection with the investment in core designated sectors.

CHINA & HONG KONG: EVOLVING REGULATORY FRAMEWORKS

China

China’s FDI landscape is governed by a Foreign Investment Negative List, national security and merger control review processes, and stringent cross-border data transfer rules. Key developments include the following:

• Negative List (2024 Version): The number of restricted/prohibited sectors has decreased from 63 in 2017 to 29 in 2024. Sensitive industries include human stem cells, news publication, and telecommunications. While restrictions have eased in some areas, investments in biotechnology and media continue to be highly regulated.
• National Security Review: Required for foreign investments in sectors critical to national security, including military industries, infrastructure, and financial services. Foreign investors acquiring businesses in these sectors must undergo a rigorous approval process, with potential for transaction modification or outright rejection based on security concerns.
• Unreliable Entity List: Foreign entities perceived as endangering China’s interests may face prohibitions on investment, trade, and personnel entry. Entities engaging in discriminatory trade practices or restricting exports to China could be listed, leading to operational limitations.
• Merger Control Review: Transactions exceeding 12 billion yuan in global turnover or 4 billion yuan within China require approval from the Anti-Monopoly Bureau. Even if these thresholds are not met, the Bureau retains discretionary authority to review deals that could potentially restrict competition.

Cross-Border Data Transfers Rules & Counter Espionage

China's cross-border data transfer rules, as outlined in the Regulations on Promoting and Regulating Cross-Border Data Flows issued by the Cyberspace Administration of China (CAC) aim to ease compliance while maintaining oversight.

• Data transfers affecting fewer than 100,000 individuals do not require approval, streamlining smaller transactions.
• Pilot-free trade zones may establish “negative lists” exempting certain data transfers, offering regional flexibility for multinational corporations.
• China’s Counter-Espionage Law (2023) expands espionage definitions to include corporate due diligence, raising concerns for foreign businesses. Companies operating in China must now reassess how they collect, store, and process sensitive data to avoid potential security-related violations.

Hong Kong

Hong Kong maintains no restrictions on FDI, except in broadcasting, where non-residents cannot exceed 49% voting control. Prior approval from the Communications Authority is required for foreign ownership above 5%.

CONCLUSION

Navigating Asia’s FDI landscape requires a deep understanding of local regulations, sector-specific restrictions, and evolving compliance requirements. Investors should conduct thorough due diligence, engage with local legal advisors, and consider strategic structuring to mitigate risks and maximize investment potential.