Vice President Kamala Harris and ASEAN Leaders at the US-ASEAN Summit in Jakarta [Image: Office of the Vice President of the United States]

Southeast Asia’s Digital Economy and its Implications for US Investment


While Southeast Asia’s digital economy has tremendous potential for US companies, there are several enormous challenges for investing in the region, including digital divides, digital literacy levels, and different digital governance schemes among ASEAN nations. Moreover, a recent change in the United States’ digital governance policy may confuse regional partners, with the consequences remaining to be seen.

Southeast Asia’s digital economy has expanded massively over the past few years. It is expected to generate $100 billion in revenue, representing an eight-fold increase in revenue for digital businesses over the previous eight years. Gross merchandise value reached $218 billion in 2023 and is expected to reach $1 trillion by 2030. This market added 100 million internet users over the past three years. With more than 460 million digital customers, a young and tech-savvy population, and increasing internet penetration, Southeast Asia's digital economy has a lot of room for growth.

US Engagement with ASEAN's Digital Economy

In the last few years, the US government and US companies have deepened their engagement with ASEAN countries’ digital economy and addressed differences between the two sides in this field.

US tech giants, including Microsoft, Google, Amazon, and Meta, have invested billions of dollars in the region to expand their markets and “increase influence and leverage in the region.” Apart from building a data center worth $1 billion in Singapore, Meta, in partnership with Google and telecommunication companies in Singapore, Indonesia, and the Philippines, is building two trans-Pacific undersea cables, which are expected to be operational in 2024.

The US government must engage with the region to support US companies by addressing the differences in regulatory frameworks between the United States and ASEAN countries, by supporting capacity-building for regional countries in digital transformation, and providing training for micro, small, and medium-sized enterprises (MSE).

Recent US engagements with the region, including the US-ASEAN Digital Workplan 2023-2025 and the US partnership with the ASEAN Consultative Committee on Standards and Quality (ACCSQ), all emphasized building digital regulations and cybersecurity standards.

ASEAN itself is also trying to build its own digital regulatory framework. On September 9, 2023, ASEAN officially launched negotiations on the ASEAN Digital Economy Framework Agreement (DEFA). DEFA is expected to help ASEAN companies compete more effectively in the global economy, as well as regulate engagements of ASEAN top trading partners (including the United States, China, and the EU) in a fair and transparent manner.

Challenges to US Digital Businesses Operating in the Region

However, the regional digital transformation has five radical challenges that can negatively impact the investment and operation of US digital businesses in the region.

Firstly, the huge digital divide among Southeast Asian countries can makes it difficult for US companies to have the same operational approach across the region. According to ASEAN Digital Integration Index report, ASEAN countries can be categorized into three groups according to digital economy indicators. Singapore is the most digitalized member. The second group contains Malaysia, Thailand, Vietnam, Indonesia, Philippines, and Brunei. Myanmar, Laos, and Cambodia are the third group that lack digitalization prospects and are far behind other regional countries, especially Myanmar.

Second, there is a major urban-rural digital divide within each country. For example, in Indonesia, the urban-rural digital divide was 24.8 percentage points pre-pandemic, which “slightly decreased to 22.5 percentage points in 2021 post-Covid.” Customers outside big cities are at risk of experiencing a widening digital economic divide because of the current demand and supply gap in digital services. Currently, 70% of transaction values in the digital economy are made by 30% of the wealthiest customers, who mainly scatter in big cities. Based on the World Bank’s 2021 estimates, except for Singapore, Malaysia, and Brunei, the other Southeast Asian states have over 40% of their populations located in rural areas.

Third, because of the low level of urbanization, Southeast Asia’s countries have low digital literacy. Though there are approximately 460 million internet users, most of them are digitally connected, not digitally literate, as they only possess smartphones and use them for social media like Facebook, Tiktok, and Instagram, and not for accessing a web browser. Due to low digital literacy, the labor workforce lacks necessary digital skills.

Fourth, the region lacks a united, consistent, and complete regulatory framework. As different countries are at different stages of digitalization, they are also at different stages of developing their regulatory frameworks. This leads to a plethora of regulations and policies called “digital fragmentation,” making it difficult, time-consuming, and expensive for US companies to adhere to.

Notably, different cross-border data regulatory systems require cross-border digital businesses such as e-commerce or cloud computing to adhere to different regulations. It is likely to increase the cost of regulatory compliance for these businesses or even hinder them from accessing ASEAN markets, and “undermine cybersecurity by storing data in specific geographic locations vulnerable to targeted cyberattacks.” These burdens will probably fall most heavily on MSEs.

Fifth, the biggest divides in digital regulations between the United States and ASEAN countries is related to the flow of data, data local storage, and disclosure of source code. The United States has long supported a free flow of data across borders, opposed forced data localization, and safeguarded source code.

However, each ASEAN member adopts a different cross-border regime. According to the Digital Economy Report 2021 of the United Nations Conference on Trade and Development, Singapore and the Philippines permit all data, including personal data, to move freely across borders with minimal regulatory requirements. On the other end, Vietnam and Indonesia take a restrictive regulatory approach, which partially or entirely outlaws cross-border data flows due to concerns of public and national security. Malaysia and Thailand allow conditional cross-border data flows if they are under strict compliance with regulations pertaining to domestic data protection.

Recent Surprise: Suspension on Negotiations of IPEF Digital Trade

Southeast Asian countries have actively promoted engagement with the United States in digital governance. 7 out of 10 ASEAN countries, including Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam, have actively joined negotiations for the Indo-Pacific Economic Framework (IPEF) on the pillar of digital trade, with an aim to harmonize their digital regulations in trade.

However, on November 7, 2023, the United States suddenly decided to suspend IPEF negotiation on key aspects of digital trade. The decision was made after the US Trade Representative’s Office (USTR) withdrew three US digital trade demands at the WTO on October 25, 2023, in which the United States no longer insisted on regulations that protected a free flow of data, prohibit data localization, and safeguarded source code. USTR explained that this decision aimed to set new rules to regulate US big tech companies. Nevertheless, this action caught ASEAN countries off guard and might complicate US cooperation with the region in this field.

In sum, US companies have significant opportunities in the thriving digital economy of Southeast Asia. However, opportunities inevitably accompany huge challenges. The final position of the Biden Administration on digital governance is uncertain. However, if this wavering continues for a long time, it will be detrimental to US digital businesses operating in the region, as well as to US cooperation with regional countries in digital trade.

Thao Dang is a Young Professional at the East-West Center in Washington. She is a graduate student at the Elliott School of International Affairs, George Washington University, where she is focusing on US foreign policy.