Innovation fuels investor trust in Asia-Pacific

The year 2026 has so far been marked by turmoil and chaos in the global economy.

The Iran conflict has created an unprecedented energy crisis, driving up prices of commodities and services. Asia has been hit hard because it is heavily dependent on imports from the Middle East. As the crisis deepens and economic difficulties increase, concerns are beginning to arise about investments.

Economic instability is bad news for investors, as uncertainty clouds the economic outlook and undermines investor confidence. Both long-term investors committed to foreign direct investment and short-term investors focusing on gains from the capital market are impacted by uncertainty. For Asian economies, this uncertainty has become a serious issue as investors are hesitating to commit funds.

Investor sentiments can improve significantly if they are convinced that major Asian economies can withstand the current crisis and remain committed to their development plans. Though much depends on the outlook for China, it is not the only economy that matters. China's ability to grow along with the other economies of Southeast Asia is equally important.

Investment decisions are significantly influenced by investor confidence in the resilience of economies. China is actively working to enhance the long-term resilience of its economy by positioning itself as an innovation hub.

How does becoming an innovation hub improve economic resilience? Innovation provides solutions to complex problems. It does not always have to be path-breaking and phenomenal; incremental progress is equally valuable. An economy's capacity to innovate determines its ability to adapt its industries and institutions to withstand future shocks.

Globally, most economies are using artificial intelligence to transform industrial processes, thereby increasing efficiency and boosting productivity.

However, rapid adoption requires access to AI content, an area dominated by countries that have the edge in foundational and generative AI. Countries that have enterprises owning and running large language models (LLMs) are at the forefront of innovative AI production. The United States and China are global leaders in this regard.

China has invested substantially in both foundational and embodied AI. While the former involves training LLMs to conduct research and propose solutions for new problems, the latter emphasizes the use of robots to raise industrial productivity.

Both contribute to increasing the resilience of the country's economy.

Frontier LLMs, capable of complex reasoning and advanced code generation, offer innovative solutions for potential crises. At the same time, the use of industrial robots, combined with deep learning technologies such as image recognition and automated driving, is not only increasing productivity in traditional industries, such as textiles, chemicals and machinery, but also enabling better management of process logistics.

These improvements help industries to better handle shortages when supply chains are disrupted and overcome logistics challenges caused by pandemics or similar events.

China's innovation capabilities are complemented by its collaboration with the broader region, particularly Southeast Asia. Regional economies such as Vietnam and Malaysia have developed expertise in semiconductor assembly, testing, packaging and fabrication.

These economies, along with others in Southeast Asia, are working on formalizing the digital economy framework agreement, which will establish regional rules for the digital economy.

Coupled with the focus on training workers in AI, including integrating AI into school curricula, this initiative should provide the region with a workforce skilled in AI.

The existing economic synergies between China and the region, as already seen through various industry supply chains, can become more resilient as China's innovation outcomes combine with the region's ability to absorb them.

Understanding the Chinese strategy of becoming an innovation hub, and extending the reach of the hub to Southeast Asia for developing a wider regional innovation ecosystem, is important for investors.

This understanding is likely to generate more confidence among investors as they closely monitor how Asian economies are navigating external shocks.

The military conflicts in Ukraine, Gaza and Iran have created new stress tests for Asian economies. Traditional solutions are no longer enough to build resilience. Innovation outcomes and their collective application can be a game changer.

The author is a senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies in the National University of Singapore.

The views don't necessarily reflect those of China Daily.

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