Academic journal article Journal of Economic Cooperation & Development

Analysis of FDI Inflows into China from ASEAN-5 Countries: A Panel Cointegration Approach

Academic journal article Journal of Economic Cooperation & Development

Analysis of FDI Inflows into China from ASEAN-5 Countries: A Panel Cointegration Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Foreign direct investment (FDI) plays an important role in the growth and development of not only the developed countries but also in the developing countries. Besides the capital that it brought in, it also introduces new and modem technology which provides market opportunities and linkages to export. Countries are competing with each other to offer a lucrative incentive plans to attract FDI.

The Asian region has always been considered as a prudent centre for investment especially from the United States of America (USA), Japan, United Kingdom (UK) and other European countries. Globalization and integration of economic activities across the world forced the government of the Asian countries to attract FDI which later on translated into rapid growth in these economies. Asian countries are implementing new plans and policies to attract more and more FDI which will bring in new innovation and automation based technologies that can rejuvenate the host country's existing manufacturing base. Furthermore, the Asian region attracts FDI inflows as a result of her abundant natural resources, highly skilled, experienced and knowledgeversed labour, and huge size of domestic market.

China has been opening up its economy for more than twenty years; however its accession to World Trade Organization (WTO) on 11 December 2001 implies extensive consequences for its economy. China's opening up policy has aimed at promoting exports, while protecting the domestic market. This was achieved through a dualistic trade regime, which has granted tariff exemptions on imports of intermediate goods by export-oriented industries, and through a selective policy, which has channelled FDI into manufacturing production targeted for exports or for import substitution. As a result, FDI inflows have played a major part in the opening up of China's industry and its integration into the international division of labour. The rapid expansion of its international trade and large capital inflows provide evidence of the increasing integration of China in the world economy. Since 1980, China's share in international trade has trebled, rising from less than one percent to more than three percent in 1999. During the first 6 months of 2012, China has surpassed the USA as the world's largest recipient of global FDI with a total of USD59 billion compared to FDI flowing to the USA totalling USD57.4 billion

The cooperation and partnership between China and ASEAN has long been established through various channels for attaining certain goals. One of the major channels is FDI inflows. According to Shu and Zeng (2006), FDI inflows from ASEAN-5 into China in 2004 was about fifty times as much as it was in 1990 (see Table 1). During 1994 - 2004, the cumulative amount of China's actually utilized FDI from ASEAN-5 reached USD33.73 billion, which exceeded the cumulative amount of China's actually utilized FDI from the UK, France and Germany combined, which was USD27.21 billion. Based on country, Singapore recorded the highest amount of FDI inflows to China and then followed by Malaysia. This fact is in line with the argument by Ellingsen et al. (2006) that Singapore is one of the most important outward investors in the developed countries. Singaporean direct investors were strongly encouraged by the government to reach beyond ASEAN and were increasingly shifting their attention to other Asian host countries, particularly China. Furthermore, the growth of FDI inflows from ASEAN-5 into China increased tremendously in 1992 and 1993, but showed a declining trend after the year 1994. The worst FDI growth recorded in 1999 that due to East Asian financial crisis in the middle of 1997. This largely unforeseen crisis and its aftermath caused deterioration in the macroeconomic fundamentals, particularly slower economic growth of Thailand, Malaysia and Indonesia. As a result, these countries reduced their FDI inflows into China. …

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