Academic journal article Journal of Southeast Asian Economies

The Contribution of Foreign Direct Investment to Growth and Stability: A Post-Crisis ASEAN-5 Review

Academic journal article Journal of Southeast Asian Economies

The Contribution of Foreign Direct Investment to Growth and Stability: A Post-Crisis ASEAN-5 Review

Article excerpt

The Asian financial crisis has raised doubts about the role of foreign capital in future economic development of ASEAN. This article looks at the FDI component of foreign capital and examines its contribution to growth and stability in the ASEAN-5 economies. Based upon a simple growth accounting framework, the findings indicated that FDI directly accounted for 4 to over 20 per cent of GDP growth in the ASEAN-5 during the 1987-97 period. Moreover FDI inflows were found to be a stabilizing factor during the Asian financial crisis. These positive results need to be factored into future policy deliberations on the appropriate role of foreign capital in ASEAN development.

I. Introduction

The rapid growth enjoyed by the Association of Southeast Asian Nations (ASEAN) was interrupted by the Asian financial crisis in 1997. To date, the ASEAN members are still grappling with the economic challenges. The crisis has also aroused doubts and confusion about the past strategy and future direction that economic development should take.

In particular, the Asian financial crisis has created confusion about the role of foreign capital in the development of ASEAN. Since the crisis, there has been heated debate on how beneficial foreign capital is in promoting economic growth, given that it also created systemic risks that were a key to the Asian financial crisis. This paper contributes to the debate by assessing the role of foreign direct investment (FDI)1 in generating sustainable growth. Though there has been a large number of studies of FDI, few have gone beyond qualitative assertions regarding FDI and economic growth. This study makes some attempt at rectifying this lacuna by quantifying the contribution of FDI to growth within a growth accounting framework. This study also attempts to investigate a second important aspect of FDI: its relative stability in relation to other forms of foreign capital and its contribution to mitigating external shocks experienced during the Asian financial crisis.

The discussion will focus on the five founding members of ASEAN 2 for two important reasons. The economies of these members had undergone a most dramatic experience from high growth to crisis. Also the minimum requirements for data availability are met for these members. This article is organized as follows: Section II provides a brief introduction to FDI inflow into ASEAN-5, Section III analyses the contribution of FDI to growth within a growth accounting framework, Section IV examines the relative stability of FDI flows during the Asian financial crisis, and Section V completes the study with some overall conclusions.

II. FDI Inflows in Asean-5 Prior to the Financial Crisis

The last two decades have witnessed sustained expansion in FDI inflow into the ASEAN-5 economies (Figure 1). However, the magnitude of FDI inflow has changed over time. FDI inflows only increased gradually from US$1.3 billion in 1975 to US$2.2 billion in 1985. From 1986, however, FDI increased rapidly. The 1996 FDI figure of US$23 billion is more than eight times the 1986 level.

This take-off of FDI inflow in ASEAN-5 largely reflects the receptive policies adopted by these members. While Singapore practised liberal trade and investment policies from the early 1970s, other Southeast Asian nations followed policies of protecting manufacturing activities from foreign competition before mid to late 1980s. This was influenced by the fact that they were largely commodity exporters. Since mid to late 1980s, these economies have embarked upon extensive trade and investment liberalization. This has resulted in accelerated FDI inflow (Chen and Drysdale 1995). In addition to a liberal investment regime, the ASEAN-5 economies also possessed locational advantages that included low costs of inputs, large domestic markets, high growth rates, and flexible labour markets. Some members, such as Indonesia and Malaysia, are also endowed with natural resources such as oil and minerals. …

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