INTRA-ASIAN FDI FLOWS: TRENDS, PATTERNS AND DETERMINANTS

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INTRA-ASIAN FDI FLOWS TRENDS, PATTERNS AND
DETERMINANTS

• by
• Rabin Hattari and Ramkishen Rajan

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Contents

• i) Definitions
• Trends in FDI Outflows
• Data and Methodology
• Findings
• Conclusions

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Definitions
FDI refers to an investment made to acquire
lasting interest in enterprises operating outside
of the economy of the investor. Further, in cases
of FDI, the investors purpose is to gain an
effective voice in the management of the
enterprise. The foreign entity or group of
associated entities that makes the investment is
termed the direct investor.
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Definitions (contd.)

• FDI commonly bears three broad characteristics
• Refers to a source of external financing rather
  than net physical investment or real activity.
• As matter of convention FDI involves a 10 percent
  threshold value of ownership.
• FDI involves both the initial transaction that
  creates (or liquidates) investments as well as
  subsequent transactions between the direct
  investor and the direct investment enterprises
  aimed at maintaining, expanding or reducing
  investments.

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Definitions (contd.)

• At an operational level FDI consists of three
  broad aspects
• a) New foreign equity flows (either MA of
  existing local enterprises or Greenfield
  investments).
• b) Inter-company debt transactions (which refer
  to short-term or long-term borrowing and lending
  of funds including debt securities and trade
  credits between the parent company and its
  affiliates).
• c) Reinvested earnings (which comprise the
  investors share of earnings not distributed as
  dividends by affiliates or remitted to the home
  country but rather reinvested in the host
  country).

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Definitions (contd.)

• At an operational level FDI consists of three
  broad aspects
• Most MA statistics tend to include announced
  rather than actual financial flows and may not
  always even include activities considered to be
  FDI (as defined above).
• Announced flows often includes funding of capital
  via equity from local minority share-holders or
  local/international borrowing (as opposed to
  funds from the parent or sister companies) or
  swapping of shares.

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Trends

• Developing countries continue to attract more
  direct investment from abroad but are
  increasingly also becoming significant investors
  abroad.

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Trends (contd.)

• However, most of the outward direct investment
  activities have so far involved Asian economies.

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Trend (contd.)

• Developing Asia, in the past 3 decades, has
  become the leader in FDI outward stock for
  developing countries.
• The location and types of their investments have
  varied.

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Trend (Contd)

• Hong Kongs outflows are far higher than any
  other developing economy. A large part of
  outflows from Hong Kong is bound for Mainland
  China (part of which is round-tripping from the
  Mainland to begin with).
• The other three NIEs of Singapore, South Korea
  and Taiwan have consistently remained among the
  top developing economy sources of FDI.

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Trend (contd.)

• Malaysias outward FDI flows have picked up since
  the 1990s. Indonesia remains an important source
  of FDI, while more aggressive internationalization
  strategies by Indian companies has seen it rise
  in the rankings from 39 in 1990 to top 20 by
  2005.

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Trend (contd.)

• Developing Asian economies are also investing in
  their own backyard.
• Hong Kong, China, Singapore and Taiwan are
  particularly important investors.

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Trend (contd.)

• Most of the direct investment activities are
  between East Asian countries.

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Trend (contd.)

• Most of the direct investment activities are
  between East Asian countries.

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Trend (contd.)

• FDI outflows and inflows for most countries
  during the sub-periods 1990 to 1996 and 1997 to
  2005 are positively correlated.
• This indicates periods of economic liberalization
  have been characterized by simultaneous rises in
  both FDI inflows as well as outflows.

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Question

• What are the determinants of intra-Asian
  (excluding Japan) bilateral direct investment
  flows over the period 1990-2004?

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Methodology and Data

• We use a gravity model on a panel data of
  intra-Asia bilateral direct investment flows from
  15 Asian countries to other 10 Asian countries
  from 1990 to 2004.
• Econometric methodology
• Pooled OLS.
• Country-pair fixed effects to filter out any time
  invariant variables.

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Methodology and Data (contd.)
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Data

• Our data is based FDI inflows to the host economy
  (i.e. we focus on the sources of inflows rather
  than destination of outflows).
• Reasons
• UNCTAD FDI outflows data from source countries
  are incomplete for many countries. For example,
  some donor countries (Malaysia and Thailand) have
  relatively complete outflows data, others either
  have incomplete data (India and Singapore), or no
  data all (Mainland China).
• FDI inflow data reported in host economy are more
  complete and data are available for all
  developing Asian economies under consideration
  here.

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Model 1

• Baseline model is based on gravity model
• where each of these variables refer to market
  size, growth, exchange rates, and institutional
  type variables, respectfully.

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Model 2

• We augmented our model to include KOF-index of
  globalization.

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Model 2
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Models 1 and 2

• We re-ran both models by taking into account the
  country-pair effects.
• By pairing countries, we take out any time
  invariant variables (e.g. institutional type
  variables).
• In this way, an Asian country that has
  traditionally invested directly in another Asian
  country will affect the coefficients of market
  size, growth, and bilateral exchange rate.

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Our Findings
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Findings Equation 1

• Our findings are consistent with study on
  determinants of bilateral FDI outflows based on
  cross-section.
• Country-pair fixed effects show that market-size,
  growth, and bilateral exchange rate have
  significant effect with correct sign.

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Findings 2

• The economic globalization process (trade and
  capital restrictions) negatively impacts
  intra-Asia bilateral flows.
• The political globalization process negatively
  impacts intra-Asia bilateral flow.

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Conclusion

• Asia remains a favoured destination for FDI
  inflows but firms from the region are also
  rapidly expanding operations overseas.
• Determinants of intra-Asia FDI flows (bilateral)
  appear broadly similar to determinants of FDI
  flows globally.

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Conclusion (Contd)

• Against the background of rising reserve, policy
  makers in many emerging economies like China,
  Korea and India are actively promoted an
  internationalization thrust through gradual
  liberalization of rules governing capital account
  outflows and providing a financing mechanism to
  domestic firms looking to invest abroad.

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Conclusion (Contd)

• Singapore through International Enterprise
  specifically aims to promote overseas growth of
  Singapore-based enterprises www.iesingapore.gov.s
  g/
• Thailand and Malaysia are actively assisting
  their firms to invest abroad.

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Conclusion (Contd)

• This study has focused on bilateral FDI flows and
  their determinants, rather than determinants that
  are specific to host or source countries.
• Specific rationale, types, and destination of
  outward FDI will vary between countries and
  require more careful country analyses.

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Conclusion (Contd)

• Bilateral and regional trade and investment
  agreements within the region might facilitate the
  cross-border flow of FDI. In turn, intensified
  intra-Asian FDI flows will help promote closer de
  facto regional integration.

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• Thank you for your attention

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Trends (Contd)

• Round-tripping significantly increases the amount
  of FDI outward from China.
• Studies have estimated 25 (WIR03, p. 45) to 50
  (Xiao 2004) of FDI inward to China is
  round-tripped via Hong Kong.

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