Academic journal article Journal of Southeast Asian Economies

The Triad in Southeast Asia: What Determines U.S., EU and Japanese FDI within AFTA?

Academic journal article Journal of Southeast Asian Economies

The Triad in Southeast Asia: What Determines U.S., EU and Japanese FDI within AFTA?

Article excerpt

I. Introduction

Though foreign direct investment (FDI) has been mainly a phenomenon among the advanced OECD economies, the so-called newly industrialized economies (NIEs) of Southeast Asia (for example, Singapore, Malaysia, Thailand, Indonesia) have effectively integrated into the world economy and managed to attract growing shares of FDI inflows. In those countries, international trade and FDI have been a major contributing factor of economic development. Furthermore, the formation of the ASEAN (1) Free Trade Area (AFTA) in 1992, gave a further stimulus for trade and FDI inflows, originating from within and outside the AFTA regional integration area.

More recently, the emerging economies of China and India have also increasingly opened up their economies and integrated into the global market place and global production network. This development has a number of important implications for both the NIEs of Southeast Asia and the developed OECD countries. From the perspective of the Southeast Asian countries, the emergence and rising importance of the above giant economies in the world economy could have a negative impact on FDI inflows, manufacturing activity, and economic development in the AFTA member countries. This prospect represents indeed one of the major fears of AFTA countries (see, for instance, Eichengreen and Tong 2006; Ravenhill 2006; Chantasasawat et al. 2004; Lall and Albaladejo 2004).

However, there is a strand of empirical literature that shows increased FDI in China from the developed countries has not negatively affected FDI inflows into the Southeast Asian region so far (Eichengreen and Tong 2005, 2006; Zhou and Lall 2005; Chantasasawat et al. 2004; Wu and Keong 2003). Whether or not there are negative effects from the giant economies, the factors that affect the location of inward FDI among the member economies are also particularly important, as those determine which AFTA countries are more likely to succeed in the attraction of FDI directed towards the AFTA economic space. In fact, in the case of significant adverse China or India effects, the above determinants could become even more important for the individual members. This is due to the fact that once FDI towards the AFTA region would shrink significantly, the factors determining the distribution or location of the FDI inflows within that economic space would be more important and relevant for retaining and securing large FDI inflows.

In any case, with the deepening globalization process the international competition for FDI has been greatly intensified, especially among the developing countries, which devote a great deal of their economic policies to the attraction of FDI. As the Triad economies--the United States, European Union (EU), and Japan--dominate global FDI flows as both outward investors to other countries and recipients of FDI (UNCTAD 2006), the attraction of FDI from those source-countries is particularly crucial for all host-countries, and thus also for the AFTA member-states. In fact, the Triad is of high importance to AFTA members, as the United States, the EU, and Japan represent by far the major source of inward FDI within the AFTA regional integration area.

For the above reasons, the aim of this paper is to investigate empirically the determinants of outward FDI of each of the Triad economies--the United States, EU, and Japan--towards the AFTA regional integration area. From the perspective of the AFTA countries, the empirical analysis is particularly important as it sheds light on the determinants of FDI inflows into the AFTA economic region from each of the Triad economies. It thus provides information on the deterministic factors for each individual investing country and allows comparisons to be made with regard to the effects and relative importance of various factors in each case. Our econometric analysis covers the 1995-2004 period and includes nine AFTA member countries.

The remainder of the paper proceeds as follows. …

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