Investments in Asia's developing markets can hold great potential if you look beyond the obvious, says Lydia So, portfolio manager for Matthews Asia.

In a webcast entitled Asia Investment Strategies for the Next Decade, sponsored by Matthews Asia Funds, So says the fear associated with investing in Asia that existed a decade or so ago has disappeared.

However, investors should now look beyond the obvious to small-cap companies that cater to product needs of domestic Asian markets, rather than those that export to the United States.

The companies may be under the radar and require personal research by the portfolio manager to see if they have sound business plans for the future, adequate cash flow and a commitment to paying dividends, says Jesper Madsen, Matthews Asia portfolio manager.

Materials and commodities industries in Asian countries, which dominate now, may begin to shrink, as industries such things as the service sector and health care increase, Jesper says. Also, Asian-produced computer software has potential, although it may not seem obvious now, So says.

As an example of the potential for growth, there were 1,800 small-cap IPOs in Asia (minus Japan) in 2009, compared to 3,500 year to date.

The European debt crisis should not affect Asian companies that market domestically, So says, so investors must be picky about the industries they put money into and where those companies distribute products.

Another example of being particular is Chinese real estate, where good investments can be made in interior areas, rather than in the areas of Shanghai or Beijing, she says.