Academic journal article Journal of Economics and Economic Education Research

A Survey of Determinants of Us Foreign Direct Investment in ASEAN-5 Countries

Academic journal article Journal of Economics and Economic Education Research

A Survey of Determinants of Us Foreign Direct Investment in ASEAN-5 Countries

Article excerpt

ABSTRACT

Since the early 1980's, the flow of US Foreign Direct Investment (FDI) has been an important source of private external finance for developing nations, contributing to their growth and stability. Although it is difficult to predict the destination of US foreign investment abroad due to the multiplicity of factors that influence the decision, numerous studies have examined host country determinants and their relationship to US FDI. The most documented and studied determinants of US FDI include the size of the host country's economy, growth rate of GNP, exports from both the host country and the US, exchange rate fluctuations, and inflation rates in the host country.

The purpose of this paper is to examine seven hypothesis-driven determinants of US Foreign Direct Investment, based on literature studies, and apply these to five of the ASEAN countries to access the significance of each determinant. Statistical data obtained from the years 1985 through 1999 on the following countries; Thailand, Singapore, Malaysia, Philippines, and Indonesia (ASEAN-5) was used in the study. Data analysis used multiple regression analysis to test hypotheses regarding some of the determinants that may influence US FDI. Results from this study show that size of the host country's economy, the host country's total exports, US exports to the host country, inflation rate, exchange rate fluctuations, composite risk index (including political risk, economic risk, and financial risk), and the perception of corruption in the host country serve as a useful model for predicting US FDI in Indonesia, Malaysia, Singapore, and Thailand. Although a few of these indicators weakly correlated with US FDI in the Philippines, the overall model was not useful for this country.

LITERATURE REVIEW

The increase in US FDI in developing countries since the early 1980's has laid the foundation for expansion of international production by multinational corporations throughout the world. Although industrialized countries continue to attract the greatest proportion of US FDI, their share is beginning to erode, as developing countries are becoming increasingly attractive targets for investment (Mallampally and Sauvant 1999). As US FDI flows to developing countries continue to grow, the effort to determine the factors that influence these flows has become an increasingly attractive area of research.

The theoretical foundation for evaluating factors that influence the flow of US FDI into developing countries can be found in the sizable body of existing literature. The Eclectic Theory of International Production developed by John Dunning identifies three categories of determinants

that multinational corporations (MNC) must perceive as advantages before directly investing in a foreign country; 1) location advantage, 2) ownership advantage, and 3) internalization advantage (1980). First, the host country must possess some locational advantage that will attract investors. This is usually determined in the availability of natural resources, market size or potential market size, and lower costs. Second, the investing corporation must have an ownership advantage over competitors in the host country. This is usually in the areas of technology, marketing, or financial resources. Third, there must be an internalization advantage that would persuade companies to chose FDI over other strategies such as licensing, franchising, or exporting (Yue 1996).

Location advantage determinants

Econometric studies examining a variety of countries indicate a strong positive correlation between FDI and the size of the market (usually measured by GDP) as well as other characteristics that would determine market size, such as average income levels and growth rates (Marr 1997). However, some low-income countries with large markets may fail to attract large FDI flows. Given the questionable circumstances of achieving adequate product sales in a low-income country, other economic and political determinants may have a greater impact on FDI decisions in this situation. …

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