A Comparative Empirical Examination of Outward Foreign Direct Investment from Four Asian Economies: People's Republic of China; Japan; Republic of Korea; and Taipei,China

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This paper compares and contrasts the determinants of outward foreign direct investment from the People's Republic of China (PRC) with those of outward foreign direct investment from Japan, Republic of Korea, and Taipei,China. The paper examines descriptively and econometrically the motives and factors behind the investment abroad from these four Asian economies. The hypotheses being tested include the market-seeking hypothesis, the natural resource-seeking hypothesis, the technology acquisition hypothesis, and the human capital hypothesis. The paper examines outward foreign direct investment by the PRC for the years 1991-2006, Japan for 1983-2007, the Republic of Korea for 1980-2007, and Taipei,China for 1968-2007. Results using the full set of determinants yield uniform support for the market-seeking hypothesis. The natural resource-seeking motive holds for Japan and the Republic of Korea, while the technology acquisition hypothesis seems relevant for Taipei,China. The PRC's investments tend to go to destinations with poorer labor quality. In addition, openness is important for Japanese investment abroad, while distance deters investment from the PRC and Republic of Korea.

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I. INTRODUCTION

In recent years, the spectacular growth of the People's Republic of China (PRC) has attracted increasing attention from scholars and policymakers. Measured by market exchange rates and using the official government figures, the PRCs gross domestic product (GDP) reached $4.4 trillion in 2008. The PRC has surpassed Germany as the third largest economy in the world. Facing the ongoing global financial and credit crisis, it is expected that the pace of this economic growth will slow down. However, to combat slower economic growth, the government of the PRC has been implementing a stimulus package worth more than $580 billion. Forecasts of the current growth rate of the PRC vary, but most expect that the PRC will still meet its target 8 percent growth in 2009.1

As the PRC has grown, its inward direct investment has also increased substantially. According to UNCTAD (2008), foreign direct investment (FDI) inflows reached $83.5 billion in 2007. A large literature has emerged on studying various aspects of FDI flowing into the PRC (see, e.g., Fung et al. 2005). But a more interesting trend has caught the attention of scholars and policymakers in the last few years: the surge of FDI outflows from emerging economies like the PRC. Again according to UNCTAD (2008), the PRCs outward FDI flows increased from $21 .2 billion in 2006 to $22.5 billion in 2007. There are indications that the outflows will continue in the near future. From January to mid- July of 2008, the PRC already announced more than 130 foreign merger and acquisition (M&A) deals. In 2008, the PRCs outward M&As exceeded $26 billion (Wall Street Journal 2008).

This paper aims to examine the pattern and motives of the PRCs outward FDI and to compare the PRCs outward FDI with the past experiences of its richer neighbors such as Japan; Taipei,China; and Republic of Korea (henceforth Korea).2 One of the motivations of such comparisons is to ascertain whether the current wave of the PRCs FDI outflows follows the pattern of previous East Asian experiences. In other words, are outflows from the PRC different or do they follow a fairly typical East Asian pattern?

The organization of the paper is as follows: Section II provides a survey of the relevant literature on FDI outflows. Section III gives an overview of outward FDI from PRC; Japan; Korea; and Taipei,China. Section IV empirically analyzes the determinants of outward FDI for these four Asian economies. First, regressions are run for each economy to determine which of a full set of home and host economy variables influences outward FDI. Due to a fair amount of missing data that differs for each economy, the results of these regressions are not entirely satisfactory. …