Foreign direct investment in Southeast Asia's largest economies surged past China last year, a strong indicator of the region's growing importance in the global economy. These economies form part of the Association of Southeast Asian Nations, set up to promote regional trade and prosperity and now viewed as the next hub of low-cost manufacturing and fast-growing consumer markets. Asean was formed by Indonesia, Malaysia, Singapore, Thailand and the Philippines. It later expanded to include Brunei, Myanmar, Cambodia, Laos and Vietnam. "The main factor that stands out is the demographic differences. We are seeing the demographics turn the worst for China because of the one-child policy, and the working age population is shrinking. Wages are rising a lot more quickly for China than for the Asean countries," said Merrill Lynch economist Chua Hak Bin. The attractions are clear. With a gross domestic product growth of 5 per cent last year, the region is home to 600 million people, 8.8 per cent of the world's population, and has a consumer market worth US$1.2 trillion. But it is also plagued by corruption and outbreaks of political violence. Foreign investment in Asean's five founding members last year grew fivefold from 2001 to US$128.4 billion, according to a report by Chua. By comparison, China attracted US$117.6 billion, after peaking at US$124 billion in 2011. Chinese and international companies were pouring billions of dollars into north Vietnam alone, said George Yeo, Kerry Logistics' chairman. Yeo, who visited the border region this year, said companies seeking cheaper labour were moving out of China and into Asean countries. The larger Asean economies had always welcomed foreign investment and Chinese firms were following rivals from Japan, South Korea and Taiwan, said John Wong, an economist at the National University of Singapore. "China's demand for primary commodities and natural resource products has been a boon to the region's economic growth. With China's manufacturing sector set to undergo restructuring and upgrading, some Asean countries will look forward to having more manufacturing-type of investment from China. But this will take time," Wong said. In a sign investment flows are not always a win-win, a larger share of Japanese investment is going to Asean and less to China, according to Merrill Lynch. "Escalating geopolitical tensions between Japan and China are driving this material shift," Chua wrote. Asean members are negotiating the latest round of talks to forge a single market. Incremental steps taken since the group's founding have seen tariff barriers removed and a governing framework created covering cross-border trade and investment. The group, however, had no plans to emulate the European Union model of a single currency and full freedom of movement given the economic differences, said Yeo, a former minister in the Singaporean government. In 2012, Singapore's per capita income was 36 times higher than that of Laos. Efforts to reduce the cost to businesses were welcomed, said Tan Wen, a partner at Flag Squadron Asia, a private equity firm. "The challenge Asean has always faced, with the possible exception of Indonesia, is that they are all relatively small economies within a global context, making it difficult for international businesses to operate," he said. Among other issues, Asean members hope to reach agreements on labour mobility in select industries next year. Negotiations were 80 per cent finished, Le Luong Minh, Asean secretary-general, told a recent conference. Minh said the goal was to "unleash the potential for the economy and create a single market and single production base that is nominally competitive in the global economy". Asean had a GDP of US$2.4 trillion last year. It would top US$4 trillion by 2018, Minh said. In recent years, credit ratings of Asean members' sovereign debt, with the exception of Vietnam, have all been upgraded. Despite a basic framework, the region remains politically diverse. Sovereign risk concerns were highlighted in last month's decision by Indonesia to not renew 66 bilateral investment treaties governing protections for foreign companies operating in the country. In recent years, Jakarta has lost a series of overseas arbitration cases brought by foreign companies. Such actions sent negative messages to foreign investors, many of who borrowed from international creditors that insisted on such treaties before issuing a loan, said Lucy Reed, a partner at Freshfields Bruckhaus Deringer. "Don't expect a transfiguration next year. It's just a milestone along a journey. What happens in 2015 is a small step," Yeo said.