Foreign Direct Investment and Services Trade: Evidence from Malaysia and Singapore

Abstract

Services trade is an important source of growth in Malaysia and Singapore. Both economies are export-oriented and actively court foreign direct investment (FDI) to advance their economic objectives of industrialization and economic development. This paper examines the causal linkages between inward FDI and the country's engagement in services trade in bi-variate and tri-variate VAR frameworks. The empirical findings for Singapore show evidence of bi-directional causality between inward FDI and the total trade volume in services (i.e. the absolute sum of payments and receipts) as well as between FDI and services imports (in the tri-variate specification). This may reflect her relative open foreign investment policy and free trade regime in services. For Malaysia, the evidence of causality is weaker and uni-directional, from inward FDI to services imports. These findings are consistent with the different stages of economic development and openness attained by the two sample countries, and they provide useful background for trade and foreign investment policies and development strategies.     

The Chinese electricity industry: supply capacity and its determinants with reference to OECD countries

Empirical evidence suggests that China has benefited from foreign direct investment (FDI). An important question that remains unanswered is whether China has benefited more from FDI than other countries in general, and other transition and developing countries in particular. This paper investigates this issue by performing a meta-analysis on a sample of 67 country-specific studies yielding 137 observations that have gauged the link between FDI and measures of economic growth. The results suggest that the impact of FDI is, on average, more positively significant for China than for the full sample of countries, but that the difference between China and other transition economies is less clear.     

Global Foreign Direct Investment Flows: The Role of Governance Infrastructure

It is widely argued that a country’s economic performance over time is determined to a great extent by its political, institutional and legal environment. We refer to these institutions and policies as the governance infrastructure of a country. We utilize newly developed indices to examine the effects of governance infrastructure on both foreign direct investment (FDI) inflows and outflows for a broad sample of developed and developing countries over 1995–97. In addition, we examine the role of other forms of infrastructure including human capital and the environment. The results clearly indicate that governance infrastructure is an important determinant of both FDI inflows and outflows. Investments in governance infrastructure not only attract capital, but also create the conditions under which domestic multinational corporations emerge and invest abroad. It would appear that investments in governance infrastructure are subject to diminishing returns, so that the benefits, in terms of inflows, are most pronounced for smaller and developing economies.     

“Following” or “attracting” the customer? Japanese Banking FDI in Europe

Using firm-level Japanese FDI data on investment into 18 European countries between 1970–2000 in all industries (banking, manufacturing, wholesale/retail distribution, and business services), this study examines if the “follow the customer” (FTC) hypothesis holds for firm-level data. The results suggest that banks do follow their customers into a foreign market, as part of a larger strategy that goes beyond the FTC theory. The firm level data show that the majority of FDI into a host country occurs after the foreign bank has established operations. Policy implications of this finding include the suggestion that host economies liberalize their financial sector early in an effort to attract banking FDI which then will attract non-banking FDI rather than the reverse.     

Services Policy Reform and Economic Growth in Transition Economies

Major changes have occurred in the structure of former centrally planned economies, including a sharp rise in the share of services in GDP, employment, and international transactions. However, large differences exist across transition economies with respect to services intensity and services policy reforms. We find that reforms in policies toward financial and infrastructure services, including telecommunications, power, and transport, are highly correlated with inward FDI. Controlling for regressors commonly used in the growth literature, we find that measures of services policy reform are statistically significant explanatory variables for the post-1990 economic performance of transition economies. These findings suggest services policies should be considered more generally in empirical analyses of economic growth. JEL no. F14, F43, O14, O40     

China's post-economic reform growth: The role of FDI and productivity progress

China has become the top FDI destination among all developing countries and remained host to the world's largest share of foreign direct investment receipts since its accession to the WTO in 2001. Given the impressive growth performance and FDI influx into China, the two globalized delta economies (GDEs), Pearl River Delta (PRD) and Yangtze River Delta (YRD), have continued to out-perform all other regions in China in terms of FDI absorption and growth. The role that inward FDI plays in the process of regional development and the exact channels through which economic growth would be affected are investigated by panel data estimations of the GDEs at the city level since China's economic opening and reform. This research shows consistent results with some recent findings in other developing countries in that FDI exerted spillover effects and affected productivity (TFP) growth of the recipients. While TFP was found to be increasing overtime in the GDEs cities and facilitated economic growth in both PRD/YRD regions, major technology- and knowledge-related factors including R&D and human capital other than FDI also played critical roles in TFP enhancement and regional growth. The endogeneity of TFP and the simultaneous relations of FDI in affecting TFP and output growth are also addressed in this regard.     

Has China Crowded out Foreign Direct Investment from Its Developing East Asian Neighbors？

This paper applies a gravity model to investigate the determinants of foreign direct investment (FDI) in East Asia. Economic fundamentals, such as market size, per capita income and country risk indicators, economic and cultural ties, exchange rate volatilities and information asymmetry are found to be important determinants for FDI. Globally, the inward FDI among high-income OECD economies declined significantly on average over the period of 1990-2003, whereas the inward FDI of the high-income OECD economies in emerging market economies gained substantially. In the East Asian region, the ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand) received above-average inward FDI from the high-income OECD economies after controlling for their economic fundamentals. By contrast, China's FDI from the high-income OECD economies is below average relative to its economic fundamentals. Therefore, it is difficult to establish that China has crowded out FDI from its developing ASEAN neighbors.     

Business start-up regulations and the complementarity between foreign and domestic investment

This paper shows that the complementarity between foreign direct investment (FDI) and domestic investment significantly depends on regulations required to start a new domestically owned business in host economies. It finds evidence that FDI crowds out domestic investment in countries with entry regulation cost above a certain level, and many of these countries are in the bottom quartile of GDP per capita. Reforms in business start-up regulations can therefore play a critical role in enhancing the complementarity between foreign and domestic investment and thereby increase entrepreneurship and economic growth in low-income countries. The analysis takes into account other significant factors which affect domestic investment such as the cost of capital, government’s economic growth track record, institutional quality, and market size.     

Does foreign direct investment cause long run economic growth? Evidence from the Latin American and the Caribbean countries

The empirical evidence about the temporal precedence between foreign direct investment (FDI) and economic growth in open developing economies is mixed. In this research effort, we explored the FDI-growth nexus for 16 developing countries of Latin American and the Caribbean countries during the last three decades, a period in which many of these countries introduced various economic and financial reforms. As a departure from many previous studies, the current analysis uses the Granger noncausality test procedure recently developed by Toda and Yamamoto (J Econ 66:225–250, 1995), and Dolado and Lutkepohl (Econ Rev 15:369–386, 1996)–TYDL. Our results suggest that the null hypothesis that ‘FDI does not Granger cause economic growth’ is rejected for all countries except Dominican Republic, Trinidad and Tobago, and Jamaica. There is also evidence of unidirectional causality from growth to FDI for all countries except Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. We found bidirectional causality for Argentina, Brazil, Mexico, Peru and Venezuela.     

International labour migration in the Asian-Pacific region: patterns,policies and economic implications

"This paper reviews the literature on international labour migration from and within the Asian-Pacific region. It deals with patterns and characteristics of migration flows, government policies towards labour migration, and economic implications of labour migration for both labour-exporting and importing countries in the region. The indications are that, despite gradual slowing down of labour flows to the western industrial countries and the Middle East, labour migration will continue to be a major economic influence on surplus-labour countries in the region. As an integral part of the growth dynamism in the region, labour migration has now begun to take on a regional dimension, with immense implications for the process of industrial restructuring in high growth economies and the changing pattern of economic interdependence among countries."     

Effects on China and ASEAN of the ASEAN-China FTA: The FDI perspective

The ASEAN-China FTA (ACFTA) is a significant step in regional economic integration for both China and the ASEAN countries. While analysis of the effects of Free Trade Agreements (FTAs) most commonly focuses on the trade effects, the closeness of the link between trade and investment implies that the effect of an FTA on foreign direct investment (FDI) is also potentially significant. FTAs may stimulate FDI through the effects of market expansion and vertical fragmentation, while they may also reduce FDI through a plant rationalization effect. The overall effect of an FTA on FDI flows is an empirical question. This paper examines the impact of ACFTA on FDI flows through an econometric model that captures the influence of East Asian production networks on FDI, which we expect to be an important explanatory factor. The model finds that ACFTA has a significant and positive effect on FDI flows. A brief survey of the theoretical literature on the welfare and other related effects of FDI serves to emphasize that the extent to which individual member countries of the ACFTA will benefit from this increase in FDI will depend in important ways on the policies pursued in each country.     

Heterogeneous effects of bilateral investment treaties

Bilateral investment treaties (BITs) are an increasingly used policy instrument to encourage FDI inflows, particularly inflows into developing countries. In this paper we estimate a gravity model of FDI flows from a sample of OECD countries to a broader sample of developing economies, examining the impact of BITs on these flows. BITs are signed between highly heterogeneous country-pairs, with important differences found in terms of the institutional and economic distance between BIT signatories. These differences may help explain the mixed results on the effects of BITs on FDI flows in the existing literature, with our exploration of non-linearities in this relationship suggesting that the effects of BITs are increasing in the difference in GDP and GDP per capita between source and host. BITs appear to have no impact upon FDI flows for country-pairs that are too dissimilar in terms of the strength of their political institutions.     

Some Unpleasant Consequences of EMU

The recent economic woes of some Eurozone countries have raised doubts about whether they can remain in the Eurozone. Prior to these problems emerging, the price levels in these countries rose faster than the average Eurozone price level and their rates of economic growth were higher. It is conjectured in this paper that the two sets of events are connected. Using a formal theory of inflation in the Eurozone based on a stylised version of the New Keynesian model, it is shown that, due to a “one-size-fits-all” monetary policy, inflation rates in individual Eurozone countries are unlikely to converge, and their price levels are likely to diverge, causing large differences in levels of competitiveness over time. The reason for this is different real effects in these economies such as productivity differences or different fiscal policies. In other words the Eurozone is not an optimal currency area. Despite the outstanding record of the ECB in achieving its inflation goals, it is powerless to affect the underlying problem.     

Economics versus politics in trade policy

Do economies of scale contribute to our understanding of trade policy or is ideology and inequality sufficient? We develop a unified theoretical framework that encompasses both strategic economic and political variables deemed to be important in explaining trade policy. We predict that an increase in the scale effect leads to restrictive trade policies in labor-abundant countries and liberal trade policies in capital-abundant countries. Using cross-country data on economies of scale, ideology, inequality and various measures of trade barriers we confirm our predictions and establish that a unified framework, which incorporates economies of scale in production, performs better in explaining trade policy than existing political economy models.     

Foreign capital flows and economic growth in East Asian countries

This paper provides a quantitative assessment of the effect of various types of capital flow on the growth process of the East Asian countries, including China. The empirical analysis was based on dynamic panel data and we found; first, that domestic savings contribute positively to long-term economic growth. Second, we confirmed that FDI is growth enhancing and that its impact is felt both in the short and long run. Additionally, FDI influence on growth is much higher than domestic savings. Third, short-term capital inflow has adverse effect on the long-term as well as short-term growth prospects and it appears to be sensitive to long-term capital inflows. Fourth, long-term debt has positive effect on growth but its effect does somewhat disappear in the long-term. By and large, the observed positive contribution of FDI in the growth process of East Asian economies is a robust finding. From policy perspective, the evidence convincingly suggests that countries that are successful in attracting FDI can finance more investments and grow faster than those that deter FDI.     

Sectoral FDI cycles in South and East Asia

This study aims to analyze how sectoral foreign direct investment (FDI) inflows in South and East Asian economies respond to changes in the business cycles of the host countries, as measured by their output gaps. We focus on 15 economies during the period 1980–2011 and examine inflows of FDI in extractive industries, manufacturing and services in addition to aggregate FDI by using a dynamic panel Blundell–Bond GMM methodology. We find evidence of countercyclical behavior of services FDI and acyclical behavior of both extractive industries FDI and manufacturing FDI. The coutercyclical behavior of services FDI in South and East Asia has important policy implications.     

Foreign direct investment and growth in East Asia: lessons for Indonesia

Foreign direct investment (FDI) has been important in the growth and global integration of developing economies. Both Northeast and Southeast Asia, especially the latter, have been part of this development, with increasing inflows of FDI and greater foreign participation in local economies. However, Indonesia has been an outlier within the region. Inflows of FDI have been lower to Indonesia than to other countries, especially in manufacturing, and they have been lower than could be expected from Indonesia's size, population and other country characteristics. We show that the inflows that have occurred have benefited Indonesia, and use the East Asian experience to identify measures that are likely to increase these flows. A relatively poor business environment, inefficient government institutions, low levels of education and poor infrastructure all seem to be important explanations for the low inflows of FDI to Indonesia.     

2011-2012年东盟经济的分析与预测

2011年东盟国家经济保持复苏的态势。随着欧元区主权债务危机的蔓延,世界经济增长趋于放缓,东盟国家的经济增长也呈现出减缓的趋势。为应对国内经济的下滑,一些国家开始逐步调整宏观经济政策的方向。同时东盟区域经济一体化取得新的进展。在新的国内外经济形势下,2012年东盟国家经济发展将面临新的挑战,这将考验各国政府的宏观调控能力。     

Special economic zones and growth in China and India: an empirical investigation

This paper investigates the role of special economic zones (SEZs) in liberalizing the Chinese and Indian economies and their impact on economic growth. The policy change to a more liberalized economy is identified using SEZ variables as instrumental variables. The results indicate that export and FDI growth have positive and statistically significant effects on economic growth in these countries. The presence of SEZs increases regional growth but increasing the number of SEZs has negligible effect on growth. The key to faster economic growth appears to be a greater pace of liberalization.     

Is China's FDI coming at the expense of other countries?

We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI, using an approach that accounts for the endogeneity of China's FDI. Results suggest that China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. Firms more inclined to invest in China for this reason are correspondingly less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions. J. Japanese Int. Economies 21 (2) (2007) 153–172.