Outward Foreign Direct Investment and the Financial Crisis in Developing East Asia
Hill, Hal, Jongwanich, Juthathip, Asian Development Review
This paper examines two interrelated aspects of Asian economic dynamism and the management of external shocks, in the context of outward foreign direct investment (FDI) from developing East Asia. Outward FDI from these economies has been growing rapidly, driven by deeper economic integration, more open FDI regimes, growing technological and financial sophistication, and rising savings levels. The paper underlines these common region-wide determinants while pointing to a range of country-specific circumstances. Economic crises, such as the Asian financial crisis of 1997-1998 and the current global financial crisis, have large and unpredictable effects on the behavior of FDI and other forms of capital flow, with the general expectation that FDI will be less volatile than portfolio investment. This has been confirmed in both crisis episodes. Investment outcomes during the current crisis have accelerated the growing importance of developing East Asia in the global economy.
This paper examines two issues that are central to the rise of the dynamic East Asian economies and the management of globalization during a period of large external shocks. First, the paper examines the rise of developing East Asian economies (i.e., East and Southeast Asia excluding Japan) as significant sources of outward foreign direct investment (FDI). Second, the paper investigates the impact of the global financial crisis on the patterns of FDI to and from this region.
On the relationship between FDI and crises, the literature on inward FDI postulates the well-known "fire-sale" phenomenon: paradoxically, FDI inflows may increase even while there has been short-term capital flight. The explanation is that the two flows are driven by different determinants- the latter is in response to a perceived increase in short-term risk profiles, while the former, which pursues a longer-term motive, is attracted by the asset-cheapening effects of a crisis (through lower prices in domestic currency terms and a depreciating exchange rate) as well as a frequent by-product of a crisis, a more liberal FDI regime. This response was documented at the time of the Asian financial crisis in 1997-1998, except in countries that experienced both deep economic and political crisis, such as Indonesia.
The analytics and empirical realities are less clear in the case of outward FDI and a generalized global crisis in 2008-2009. As with trade flows, FDI flows are likely to contract for similar reasons, namely, there are fewer attractive commercial opportunities, there is an increase in risk, finance is more difficult to secure, and global production networks may shrink. Nevertheless, even crises of much deeper magnitude do present opportunities for lightly indebted companies attracted by greatly cheapened asset prices. This was evident at the early stages of the current crisis, when companies from high-saving Asian nations such as the People's Republic of China (PRC) and Singapore acquired major international assets in the financial and other sectors.
Most of the literature on FDI has focused on inward flows. These are better monitored and measured; there is a clearer analytical framework guiding discussion of the pros and cons of these flows. They have aroused greater public discussion, especially concerning the "North-South" dimensions, and there is a clear analytical connection between trade and investment liberalization and the rise of global production networks. Outward FDI is, of course, the flip side of inward FDI. It has been less studied, partly because the database is less comprehensive (especially in an era of open capital accounts), less subject to regulatory scrutiny, and less contentious politically. But it is no less important as a field of study, for at least four reasons.
First, there are large inter-country differences in outward FDI on the basis of stock and flow. Just as differences in inward FDI are studied for what they reveal about a country's openness and international commercial engagement, so too is outward FDI worthy of examination. …