arti

Foreign Direct Investment in East

Asia: Trends and Determinants*
A nthony B ende - N abende , J ames L . F ord , J im S later and S omnath S en

This study utilizes two approaches to investigate the

determinants of foreign direct investment (FDI) into
East Asia. The first approach, descriptive in nature,
explores how, why and which locational determinants
have significantly influenced the FDI trends in the last
two or three decades. The second approach, an empirical
one, examines the long-run determinants of FDI during
the pre-Asian financial crisis period (1970-97), using
cointegration and Granger-causation methodologies.

he globalization of the world economy entails a

growing inter-penetration among economies in
which the role of foreign direct investment (FDI) has
become increasingly important. Not only can FDI add to
investible resources and capital formation, but, perhaps
more importantly, it is also a means of transferring
production technology, skills, innovative capacity,
and organizational and managerial practices between
locations, as well as of accessing international marketing
networks. Therefore, the ongoing competition between
countries to host FDI is not surprising. The Asian region
has emerged as one of the key participants among the
competitors, particularly from the developing countries
perspective.
As Figure 1 (opposite) illustrates, within the
developing country regions, recent trends demonstrate

Bende-Nabende is Research Fellow, Graduate Centre

for Business Administration, The University of
Birmingham, England

Ford is Emeritus Professor of Economics, The

University of Birmingham

Slater is Director, Graduate Centre for Business

Administration, The University of Birmingham

Sen is Professor of Development Economics, The

University of Birmingham

the Asian region as the most dynamic and, consequently,

the dominant FDI recipient, followed by Latin America.
Within Asia, the East has been the dominant FDI recipient.
Within the East, the pre-1990s (except 198488) period
was characterized by the dominance of the Southeast.1
However, this was mainly attributable to the original five
members of the Association of South East Asian Nations
(ASEAN),2 which derived comparative advantages from
their surging economies, stable and business-minded
governments, cheap labour, falling trade barriers and open
investment policies. However, current evidence suggests
that the Southeast, after leading the region for years in the
aforementioned advantages, is now losing many of them
to the developing countries of the Northeast.3
This study utilizes two different approaches
to examine how the locational determinants of FDI

FIGURE 1
Percentage share of FDI flows to developing countries

80
60
% 40
20

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

198792

198590

Years
Africa

Asia

LA&C

Note: LA&C Latin America and the Caribbean.

(Source: Computed from UNCTAD (various years) data)

have shaped the FDI trends in developing East Asia

(i.e. excluding Japan). The first approach, which is
descriptive in nature, seeks to explore how, why and

Granger techniques. Concluding remarks are given in

the final section.

which locational determinants have significantly

influenced the FDI trends over the past two decades,
particularly during the post-1991 period. This is
achieved by integrating the literature with some existing
basic information. Specifically, explanations are sought
for the recent (short-run) growing FDI inflow disparity
between the Northeast and the Southeast. The second
approach involves an investigation of the long-run
determinants of FDI for the pre-Asian financial crisis
period, i.e. 197097, utilizing the methodologies of
cointegration and Granger-causation. This is achieved
by the formulation of a model, backed by theoretical
economic literature.
The rest of the paper is structured as follows. The
next section presents an overview of the recent FDI
trends, after which there is a discussion of the theoretical
framework. This is followed by a qualitative assessment
of the post-1991 trends of FDI locational advantages
(disadvantages) in East Asia. The focus then shifts to
a quantitative approach based on co-integration and

FDI Trends in Asia: An

Overview
The data presented in Table 1 (p. 6) illustrate that East
Asia has been responsible for over 85% of FDI flows
into developing Asia, at least since the mid-1980s when
FDI started playing a significant role in international
capital flows.
Until the mid-1980s, FDI to developing countries
was concentrated in raw material and resource-based
extraction, processing and manufacturing. Within
East Asia, the Southeast was the main recipient
of the inflows because its resource endowments,4
combined with its more liberal attitudes towards
FDI, made it a more favourable location than the
Northeast. The exception to this broad generalization
was FDI in Singapore, which was directed largely
to manufacturing, and to commerce, finance and
transport,5 since Singapore lacked natural resources and
an agricultural base (Bende-Nabende 2002). Figure2


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TABLE 1
East Asias annual percentage shares of FDI inflows to developing Asia, 19852000
8590

8792

91

92

93

94

95

96

97

98

99

00

East Asia

88.1

92.4

88.1

90.9

85.2

93.8

93.9

90.8

87.3

86.3

93.4

93.6

Northeast

43.3

43.8

30.2

50.0

56.0

64.1

60.3

58.1

56.9

67.1

78.6

83.9

Southeast

44.8

48.4

57.9

40.9

29.2

29.7

33.6

32.7

30.4

19.2

14.8

9.7

(Source: Computed by the authors using UNCTAD (various years) data)

(opposite) demonstrates that, with the exception of

the years 198488, the Southeast dominated the FDI
inflow share within developing East Asia during the
pre-1992 period.
The explanation for the inconsistency during
the years 198488 is as follows: Japanese firms lost
international competitiveness when the appreciation of
the yen in 1985 escalated production costs. The solution
was to seek cheaper production locations elsewhere.
Because of their comparatively superior infrastructure,
and their geographic and cultural proximity, the Asian
newly industrializing economies (ANIEs)6 were the
most favoured locations vis--vis other developing
countries, including the ASEAN-4. 7 In addition,
Chinas liberalization, which started in the late 1970s,
led to a gradual surge in FDI inflows. The combined
effect improved the Northeasts position vis--vis the

ANIEs meant that they were often by-passed by

Japanese transnational corporations (TNCs) in favour
of the ASEAN-4. Furthermore, in expanding the
ASEAN presence, Japanese TNCs in particular took
advantage of not only the relatively cheap labour, but
also the quotas and trade arrangements that were more
favourable than those that were applying to exports
from Japan.
However, since 1992 the trend has changed in
favour of the Northeast, with an increasing disparity,
particularly since the 1997/98 Asian financial crisis.
This time round, the ASEAN economies experienced
a marked decline in their share of inflows from 61%
during 199091 to slightly over 30% during 199496
(UNCTAD 1997). As illustrated in Table 1, by the end
of 2000, the Southeasts share had been eroded to less
than 10%. These trends are also captured by the annual
aggregate figures presented in Table2 (p. 8).
Evidently, these recent trends indicate that
investors are getting more interested in the Northeast.
In order to understand the underpinning factors
responsible for the structural changes of the competitive
advantages of the respective regions and countries, it
is essential to identify the theoretical framework and
link it to empirical evidence. This is the focus of the
following sections.

Southeast during 198488.

Between 1989 and 1991, increasing production
costs in the ANIEs warranted relocation of production,
similar to the one Japanese investments had experienced
earlier, making the ANIEs new outward investors.
Countries at a lower level of development than the
ANIEs, particularly the ASEAN-4 and China, were
the prime beneficiaries of this relocation. In addition,
during the late-1980s, the rising wage costs in the

F oreign D irect I nvestment in E ast A sia

FIGURE 2
Annual percentage shares of FDI flows to developing East Asia, 19702000
100
90
80
70
% share

60
50
40
30
20
10
2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

Year
Northeast

Southeast

(Source: UNCTAD (various years) data)

The Theoretical
Framework

the ownership advantage without internalization and

locational advantages, then it will pursue other strategies
such as licensing agreements or exporting as a means of
entering the foreign market.
Traditional trade theory (Helpman & Krugman
1985; and Krugman & Obstfeld 1994) asserts that the
direction and magnitudes of capital flows are determined
by differences in factor proportions among countries,
which cannot be countered by international trade.
Developing on Dunnings eclectic theory, Eiteman,
Stonehill and Moffett (1995) emphasize the merits
of internalization. Under the internalization theory,
the key ingredient for maintaining a firm-specific
competitive advantage is the possession of propriety
information and control of the human capital that can
generate new information through expertise in research,
management, marketing and technology.
Usually, foreign firms targeting investment in
specific industries or market segments in developing
countries have similar firm-specific capabilities and

The literature has provided several alternative

explanations for FDI, a thorough review of which is
well documented in, for instance, UNCTC (1992). The
most recent view, which in a way embraces the concepts
of the earlier explanations, is that which suggests
that the propensity for a firm to engage in foreign
production depends on the combination of ownershipspecific advantages,8 internalization opportunities9 and
locational advantages10 in the target market. These
reasons, which explain why FDI takes place at all, have
been given by Dunning (1981) under the eclectic theory
of FDI. Each of these determinants of FDI relates to an
advantage of direct investment over alternative modes of
serving the firms customers abroad. It means, therefore,
that a firm can only capture a foreign market through
FDI if it has the capacity to exploit simultaneously all
the three advantages. If, for instance, it possesses only

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TABLE 2
FDI flows to developing Northeast and Southeast Asia, 19702000 (US$ billions)
70

80

90

95

96

97

98

99

00

7091

9296

9700

n.a.

n.a.

3.5

35.8

40.2

44.2

43.8

40.4

40.8

22.6

149.0

169.0

0.7

0.6

1.8

2.3

2.8

5.4

10.6

10.2

8.4

6.4

29.0

0.002 0.31

0.03

-0.02

0.11

Northeast
China

Korea, Rep. 0.08

n.a.

n.a.

Dem.Taiwan 0.06

0.12

1.3

1.6

1.9

2.2

0.2

2.9

4.9

7.9

6.6

10.3

Hong Kong 0.03

0.37

0.8

6.2

10.5

11.4

14.8

24.6

64.4

14.0

28.2

115.0

Southeast
Malaysia

0.09

0.9

2.3

5.8

7.3

6.5

2.7

3.5

5.5

19.2

27.9

18.3

Philippines

-0.03

-0.11

0.5

1.5

1.5

1.2

1.8

0.74

1.5

3.8

6.0

Singapore

0.09

1.2

5.6

8.8

10.4

12.9

6.3

7.2

6.4

32.5

34.6

32.9

Thailand

0.04

0.19

2.4

2.0

2.3

3.6

5.1

3.6

2.4

10.3

9.5

14.8

Indonesia

0.08

0.18

1.09

4.3

6.2

4.7

-0.4

-2.7

-4.6

7.8

16.4

-2.9

Vietnam

n.a.

n.a.

n.a.

2.3

2.5

2.8

2.3

1.99

2.1

0.23

8.1

9.1

Cambodia

n.a.

n.a.

n.a.

0.15

0.29

0.2

0.12

0.14

0.15

0.0

0.6

0.6

Myanmar

n.a.

n.a.

n.a.

0.28

0.31

0.39

0.31

0.25

0.24

0.2

1.0

1.2

Lao

n.a.

n.a.

n.a.

0.095

0.16

0.09

0.05

0.08

0.07

0.007

0.4

0.3

Brunei

n.a.

n.a.

n.a.

0.013

-0.07

0.002

-0.02

-0.04

-0.02

0.001

-0.03 -0.08

Korea,

n.a.

n.a.

n.a.

0.002

0.4

5.2

Notes: n.a. data not available. Figures may not tally due to rounding-off.
(Sources: UNCTAD (various years); periodic totals computed by authors)

similar internalization advantages. For instance, in the

primary sector, firms that target the oil extraction and
processing industries often have strong firm-specific
capabilities. In the secondary and tertiary sectors,
however, foreign firms may segment the target market
into niches, and serve the niches in accordance with their
strategic capabilities. For instance, rather than pursuing
head-on competition with larger and strategically more

capable firms, the small and medium-sized enterprises

(SMEs) may opt to operate in market segments in
which they compete among themselves.11 This same
level playing-field syndrome is also true for the mode
of entry. For instance, acquisitions require substantial
resources and are mostly undertaken by firms with
strong firm-specific assets. On the other hand, mergers
and strategic alliances are undertaken by any type of

F oreign D irect I nvestment in E ast A sia

firm. Nonetheless, evidence shows that, among other

things, the firms sizes have to be comparatively similar
for the alliances to succeed. Similarly, any investing
firm can undertake green-field investment, but the
scale of such investment is determined by the firms
strategic capabilities. The end result is that similar firms
compete in specific niches. Thus, if firms with similar
firm-specific assets and internalization advantages target
similar segments, the choice of the investment location
is then highly influenced by the locational advantages.
For that matter, locational factors may be significantly
responsible for any FDI disparity between specific
developing countries/regions. FDI from the locational
advantage point of view is influenced by four broad
categories of factors: the cost-related factors, the
investment environment improving factors, other
macroeconomic factors and the development strategy
of the host country.
Under the first category, the presence of a
significant cost factor disparity between a home country
and a host country may significantly influence the
choice of an investment location. Such a disparity might
be particularly prevalent in the labour-intensive exportoriented, and sourcing and assembly type of industries
in which major market imperfections arise from the
disproportionate cost of given unit inputs between
the developed countries and the developing countries.
Key cost-related locational factors will be the host
countrys real wage rate, foreign exchange rates, land
and property rents/rates, fuel costs, local input costs
(where applicable), level of taxation, transport costs,
and cost of capital (i.e. lending interest rate) in relation
to those of the home country. Since, by definition, FDI
is funded from abroad, one would assume that only the
home country cost of capital is relevant. It is noted,
however, that the host countrys cost of capital impacts
directly on domestic consumption. Thus, the lower the
interest rates, the higher the domestic consumption

(market size) and, hence, the higher the FDI inflows.

Schreiber (1970) found low-cost labour to be the leading
factor influencing the choice of Taiwan as an offshore
production site; and Hill and Lindsey (1987) found it
to be a vital influence for export-oriented subsidiaries
in the Philippines. Likewise, Hollander (1984) found
transport costs to be significant in determining United
States (US) firms sourcing, while Goldberg and Klein
(1998) identified a relationship between real exchange
rates and FDI from Japan and the US into the Southeast
Asian countries. It need not be emphasized that these
factors may, in practice, form only a small percentage
of the total costs in some industries. However, because
of the competition in the global arena, any source of
cost-reduction can be instrumental to the determination
of the market share a company commands.
The investment environment improving factors
not only make it possible for the investment to take
place, but also smooth the entire process of investment
and of eventual production. The central factors here are
seen to be the openness of the economy, the degree of
liberalization of the investment and the trade regimes,
and the prevailing political risk. The FDI policy
liberalization package may include ownership policies,
taxes/subsidies,12 convertibility of currency,13 price
controls, and performance requirements.14 Trade policy
liberalization involves the reduction of restrictions and
tariffs on traded merchandise regarding the countries
in question, making them more open and acceptable
to trade.15 These factors may play that crucial role of
influencing the investors preference when making a
choice between, say, two locations that have similar
cost-related advantages. Thus, the expected response
of FDI may depend upon the degree to which the host
developing country is open to foreign trade, which can
influence productivity/competitiveness through scale
economies. Kravis and Lipsey (1982) found that a high
propensity to trade was an important factor in the

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human capital; of a good physical infrastructure; and

of the associated technology, will induce FDI inflows.
Bhattacharya, Montiel and Sharma (1996) identified
gross domestic product (GDP) growth as a major factor
for sub-Saharan Africa as a whole, while Mbekeani
(1997) found market size and growth rates to be the
most important determinants of FDI in East Asia and
the Pacific, and Latin America and the Caribbean.
The political ideology and, hence, development
strategy of the host country also plays a critical role,
particularly with respect to the type of investment to
be undertaken. For instance, it may be a restrictive
import-substitution strategy, which draws investment
(defensive) geared for the domestic market. Alternatively,
it may be a less restrictive export-orientation strategy,
which promotes investment for exports. Singh and
Juns (1995) study revealed that exports, particularly
manufacturing exports, are a significant determinant of
FDI flows and that there is strong evidence that exports
precede FDI flows.

decision to locate US transnational affiliates in foreign

countries. Hence, the more open the economy, the more
likely it is that any given investment will take place.
Furthermore, investment benefits that are conditioned by
liberalization of the trade and FDI regimes may emanate
from their facilitation of freer trade and investment in
conjunction with the repatriation of dividends and
profits to home countries. BendeNabende, Ford
and Slater (2001) found liberalization to be a major
determinant of FDI into the ASEAN5 economies.
Furthermore, the political risk rating of the country
cannot be ignored. An unstable political environment
makes investments risky and, therefore, erodes the
investors confidence.16
Under the macroeconomic factors, consideration
is given to factors that can, in their own right, influence
foreign firms to consider direct investment in the host
country as opposed to continuing to service it either
through exports or through other means such as
licensing. Here there are two market familiar factors, i.e.
current market size and the potential market size. While
a large domestic market size generates scale economies,
a growing market improves the prospects of market
potential. Therefore, the larger the current market size
and the higher the market growth rate, the more likely
that the investment will take place. In addition, there
are country-specific created assets in the form of the
quality of the available infrastructure, technology and
labour, which facilitate the production and distribution
processes of goods and services. TNCs are increasingly
seeking world-class infrastructure, skilled and productive
labour, innovatory capacities and an agglomeration of
efficient suppliers, competitors, support institutions
and services. In terms of transnational cost theory,
advanced created assets help the investors to reduce
information costs and to achieve other cost-improving
efficiency. Thus, the availability of a skilled work-force
(both technical and managerial), otherwise known as

Locational Determinants
in East Asia: A Qualitative
Assessment
The post-1991 FDI trends can be traced to specific policy
changes in the aforementioned locational advantage
categories. However, it is worthwhile noting that the
degree to which each locational determinant influences
the FDI inflows is, among other things, dependent
upon the type of the proposed investment. It will
vary according to whether the investment is resource
seeking, market seeking, tariff jumping, efficiency
seeking or strategic asset/capability seeking. Likewise,
the degree of influence of locational determinants is
dependent upon the level of economic development of
the host country. For these reasons, in the discussion,

10

F oreign D irect I nvestment in E ast A sia

the focus is only on those factors that are believed to

have been most influential for the structural changes.
For instance, the authors of this paper are of the opinion
that the development strategies in terms of political
ideology have not been responsible for any significant
recent structural differences. This is because the exportorientation strategy has, in general, been prevalent in
the region in the recent past, particularly during the
post-1991 period. The paper now focuses on the most
influential factors and synthesizes them in the sections
that follow.

Asian economies. For instance, even with its modest

population of about seven million, Hong Kongs
annual levels of GDP exceed those of all the Southeast
Asian countries except Thailand and Indonesia. Even
for these two, their GDP levels fell below that of Hong
Kong after the 1997/98 Asian financial crisis. However,
Indonesia caught-up again in 2000. When the 1998
shares of aggregate GDP, based on the purchasing
power parity (PPP) value of a country, are used to
proxy market size, only those for Indonesia and
Thailand carry some significant weight. In fact, the
PPP estimates indicate that even when the Democratic
Republic of Korea is excluded from the sample, the
combined size of the Northeast (13.4) is almost three
times as big as that for the Southeast (4.8).
Thus, combining the indicators of future market
potential with those of current market size gives the
Northeast a competitive edge over the Southeast.
The wealthy consumer base in Hong Kong, Korea
and Taiwan, and the giant population in China,18
far outweigh not only any current benefits of the
Southeast, but also any potential problems of the
Northeast. Consequently, investors are betting on
Asias future and channelling more of their money
into the large economies of the Northeast. For
instance, Chinas fast-growing cellphone business is
responsible for Motorola Inc.s planned US$1.9 billion
chip-making plant (Frank 2001).

Macroeconomic Factors
Market characteristics
The data contained in Tables 3 and 4 (pp. 1213)
respectively represent the growth rates of real GDP,
which indicate the future market potential, and the
level of GDP, which is a proxy measure for market
size. It is evident that for much of the 1970s, 1980s
and early-1990s, the economies of both Northeast and
Southeast Asia grew by 6% to 10% a year.17 Thus,
they were more or less on the same level playingfield vis-vis future market potential, at least until
the early-1990s. This trend, however, changed after the
199798 Asian financial crisis. Although most countries
recorded negative growth rates in 1998, the Southeast
tended to be hit much more. For instance, whereas in
the Northeast, China and Taiwan showed only minor
signs of slowdown in growth, in the Southeast only
Myanmar showed no signs of slowdown in growth.
In effect, by the end of 2000, the growth rates of the
ASEAN-4 (except Malaysia) were still lagging behind
those of the Northeast, which had shown signs of
almost full recovery.
The data for market size highlight one obvious
characteristic. The GDP levels for the Northeast Asian
countries are far larger than those of the Southeast

Created assets
With the exception of Singapore, the Southeast
has lagged behind in developing resource bases to
facilitate their progressive shifts up the levels of
technological complexity; and, hence, to participate
in the state-of-art production activities. Take the
example of the on-going e-com revolution, which is
transforming the global transaction of business and,
therefore, enhancing the knowledge-driven global

11

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V ol . 6 N o . 1 ( june 2 0 0 2)

TABLE 3
Growth rates of developing East Asian nations, 19702000 (%)
7075

7680

8185

8690

9195

9600

1997

1998

1999

2000

Northeast
China
Korea, Rep.
Taiwan
Hong Kong

8.9
8.6
10.3
8.5

5.6
7.2
10.6
12.3

10.4
8.1
6.7
5.7

7.9
10.0
9.2
7.5

12.0
7.5
6.6
5.3

8.3
2.7
5.7
1.3

8.8
5.5
6.8
5.3

7.8
-5.5
4.6
-5.1

7.1
2.0
5.7
-1.3

8.0
4.6
5.8
3.1

Southeast
Malaysia
Philippines
Singapore
Thailand
Indonesia
Cambodia
Lao
Vietnam
Myanmar
Brunei

8.3
5.7
11.5
6.2
8.4
n.a.
6.1
2.9
2.0
2.5#

8.6
6.3
8.7
7.6
7.5
n.a.
2.0
5.9
6.3
10.7

5.2
-1.1
6.3
5.4
3.9
n.a.
7.7
7.0
4.8
-3.3

6.8
4.7
8.4
10.4
6.9
4.9
3.7
4.7
-2.0
0.4

8.7
2.2
8.7
8.5
7.8
6.1
6.4
8.2
5.8
0.5

4.6
3.5
6.4
0.2
-0.5
2.7
6.2
5.9
7.4
3.1*

7.3
5.2
8.5
-0.4
4.6
1.0
6.5
8.8
5.7
4.0

-7.4
-0.6
0.1
-8.0
-13.7
0.0
5.0
3.5
5.8
2.6

6.1
3.3
5.9
1.0
-4.0
5.0
7.4
3.5
10.9
n.a.

8.3
3.9
9.9
3.0
2.5
5.0
5.7
4.5
n.a.
n.a.

Notes: Averages computed by the authors. # 197475; * 199698; 199699; and n.a. data not available.
(Source: IMF Tables retrieved from the World Bank data website)

economy. For this to succeed, the work-force in the

host country has to be computer literate. In addition,
there has to be an infrastructure that enables easy
and fast internet communication. The indicative
figures for 1996, 1998, 1999 and 2000 are presented
in Table5 (p. 14). Even in the absence of data for
Taiwan, it is evident from these indicators that the
country-specific concentration of personal computers
and internet hosts are highest in the ANIEs, three of
which are located in the Northeast.
The knowledge-based economy aside, for any
given country, the general quality of infrastructure,
technology and human capital at its disposal improves
with a growing level of economic development, for

obvious reasons. For this reason, the NIEs are

better placed than their counterparts in East Asia
when it comes to created assets. As Table6 (p. 15)
illustrates, only Singapore is competitive with the
Northeast when it comes to investment in technical
skills, and in technical proficiency and innovation
capabilities.

The Investment Environment

Liberalization and openness
During the mid-1980s, while the countries of the
Southeast fast-tracked their liberalization process,
those of the Northeast remained comparatively less

12

F oreign D irect I nvestment in E ast A sia

TABLE 4
GDP of East Asian nations, 19912000 (US$ billion, current prices), and PPP 1998
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1998 PPP

Northeast
China
Korea, Republic
Taiwan
Hong Kong

406.1
294.2
179.4
86.0

483.0
307.9
212.1
10.7

601.1
332.8
222.6
116.0

542.5
38.8
241.0
13.8

70.2
456.4
26.2
139.2

817.9
484.6
272.3
154.1

902.0
442.5
283.4
173.6

96.8
31.1
258.9
166.5

1048.0
369.1
286.7
161.2

1144.0
392.6
309.0
166.0

11.90
1.50
1.10
0.40

Southeast
Malaysia
Philippines
Singapore
Thailand
Indonesia
Cambodia
Laos
Vietnam
Myanmar
Brunei

48.1
45.3
43.7
96.2
128.2
1.6
1.0
8.3
1.0
3.8

58.3
53.0
49.7
109.4
139.1
3.1
1.2
9.9
1.2
4.0

64.2
54.4
58.4
122.0
158.0
6.7
1.3
12.8
1.3
4.1

72.5
64.1
7.8
144.4
176.9
7.6
1.5
15.5
1.5
4.4

87.3
74.1
83.6
168.1
202.1
9.0
1.5
2.2
1.5
5.0

99.2
82.8
91.5
181.4
226.9
1.4
1.8
23.4
1.8
5.3

97.9
82.2
95.1
153.9
215.0
11.6
1.0
25.3
1.0
5.5

67.5
64.5
84.4
117.0
88.6
13.8
1.1
24.6
1.1
5.6

72.6
74.3
82.9
134.8
15.3
26.6
1.5
26.6
1.2
n.a.

77.9
8.8
87.0
142.7
169.3
28.7
1.7
28.7
n.a.
n.a.

0.60
0.60
0.20
1.20
2.00
0.01
0.04
0.05
0.10
n.a.

Note: n.a. data not available.

(Source: IMF Tables retrieved from the World Bank data website)

liberalized. The exception was Hong Kong, which

represented a quintessential case of laissez-faire.
The attitude has now reversed. The Southeast,
which vigorously opened up from the mid-1980s,
is now switching back to regulation. Malaysia
and Indonesia have, for instance, imposed capital
controls; Thailand has largely halted its privatization
plans; and the Philippines giant budget deficit has
disqualified it from vital International Monetary
Fund finances.
In contrast, the lowering of barriers in the
Northeast has partly encouraged cross-border
mergers and acquisitions (M&As), particularly in the
services sector. The change in the policy environment

is exemplified by the move by South Korea to sell

off major banks and the elimination of foreignownership ceilings in almost all of its industries. That
is why Newbridge Capital, after being rebuffed in an
attempt to buy a bank in Thailand, decided to acquire a
controlling stake in Korea First Bank. Similarly, Taiwan
has torn down most of its foreign-ownership limits,
and is allowing take-overs of its banks (Frank 2001).
M&As were also made by Littauer Technologies Co.
Ltd of Korea, which acquired Hong Kongs AsiaNet
(Linkage On-Line) for US$1.4 billion; and Standard
Chartered PLC of United Kingdom, which acquired
Hong Kongs Chase Manhattan-HK Banking for
US$1.3 billion (UNCTAD 2001).

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V ol . 6 N o . 1 ( june 2 0 0 2)

TABLE 5
Concentration of personal computers and internet hosts
Region/
Country

Personal computers
per 1,000 people

Internet hosts
per 10,000 people

Internet users millions

(% of population)

1996

1998

1999

2000

1996

1998

1999

2000

Northeast
China
Korea (rep.)
Hong Kong

1996

3.6
131.7
190.1

8.9
169.0
255.6

12.2
181.8
300.1

15.9
237.9
350.6

0.0
6.5
28.7

0.2
37.6
108.0

0.5
55.5
146.1

0.7
100.7
182.9

0.16 (0.01)
0.73 (1.6)
0.3 (4.6)

Southeast
Malaysia
Philippines
Singapore
Thailand
Indonesia
Cambodia
Lao
Vietnam
Myanmar
Brunei

41.6
11.6
263.0
17.2
6.6
0.7
1.1
3.3
n.a.
42.6

59.9
15.1
374.7
21.6
8.3
1.0
1.9
6.4
n.a.
54.0

68.7
16.9
436.6
23.0
9.1
1.1
2.3
7.6
1.1
62.2

103.1
19.3
483.1
24.3
9.9
1.1
2.6
8.8
1.1
70.1

2.0
0.3
65.7
0.7
0.1
0.0
0.0
0.0
0.0
5.3

18.4
1.0
153.8
4.2
0.5
0.1
0.0
0.0
0.0
23.5

23.5
1.3
262.8
4.6
0.8
0.1
0.0
0.0
0.0
37.2

27.5
2.2
385.7
8.8
1.1
0.2
0.0
0.0
0.0
43.0

0.2 (0.9)
0.04 (0.06)
0.3 (8.2)
0.135 (0.2)
0.11 (0.06)
n.a.
n.a.
0.0001
n.a.
0.01 (3.3)

1999
8.9 (0.7)
10.9 (23.0)
2.4 (36.0)

2.5 (11)
1.3 (1.7)
0.95 (24)
1.3 (2.1)
0.9 (0.4)
0.004 (0.03)
0.002 (0.04)
0.1 (0.13)
0.0005 (0.0)
0.025 (7.6)

2000
22.5 (1.8)
19.0 (40.2)
2.6 (38.2)

3.7 (16.0)
2.0 (2.6)
1.2 (30.0)
2.3 (3.7)
2.0 (0.95)
0.006 (0.05)
0.006 (0.11)
0.2 (0.3)
0.007 (0.01)
0.03 (8.9)

Notes: n.a. data not available; data for Taiwan and Korea (Democratic Republic) not available.
(Source: World development indicators database)

One critical issue that is often overlooked is

the fact that M&As can only be undertaken if the
host country possesses local companies that have
developed strategic assets and capabilities that
can interest international firms. Evidently, there is
potential for M&As in the Northeast for the simple
reason that the region possess indigenous firms with
which foreign firms can engage in M&As. By contrast,
however, the potential for domestic firms to engage in
M&As with foreign firms in the Southeast (including
the more developed Singapore) is comparatively
smaller. Unsurprisingly, there are more M&As and,
hence, more FDI inflows in the Northeast than in

the Southeast. UNCTAD (2001) concludes that the

wave of M&As in the Southeast Asian countries,
particularly those hit by the 199798 financial crisis,
has tapered off, reflecting both a slowdown in the rate
of asset disposals and reduced pressure for further
corporate restructuring.
In addition, China and Taiwans move to
join the World Trade Organisztion (WTO), which
signalled their further integration into the global
economy, played a significant role in the recent
developments. For example, in its effort to become
a member of the WTO, China adopted new policy
measures relating to FDI, and is devising policies to

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F oreign D irect I nvestment in E ast A sia

TABLE 6
Indicators of technical proficiency
Country

Year

% of tertiary students
enrolled for natural
sciences, engineering and
agriculture in 1996

Personnel engaged
in R&D per million
inhabitants

Expenditure for R&D as

% of GNP

Northeast
China
Hong Kong
Taiwan
Korea, Republic

1996
1996
n.a.
1996

53
42
n.a.
34

454
n.a.
n.a.
2193

0.61
n.a.
n.a.
2.82

Southeast
Brunei
Cambodia
Indonesia
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam

1996
1996
1994
1996
1996
1992
1995
1995
1985

6
23
28
n.a.
37
n.a.
58
21
n.a.

n.a.
n.a.
n.a.
93
n.a.
157
2318
118
334

n.a.
n.a.
0.07
0.24
n.a.
0.22
1.13
0.13
n.a.

Note: n.a. data not available or not applicable.

(Source: UNESCO data bank)

there are allegations of suppression of the opposition in

Malaysia. After several years of relative political stability
in the Southeast, could a bubble of political instability
be building up?
The Northeasts political stability situation,
on the other hand, although not perfect by Western
standards, is in fact improving. For instance, South
Korea and North Korea have taken steps to make peace,
and there is deepening economic integration between
mainland China and Hong Kong. Nonetheless, there
are still worrying elements such as the conflict between
mainland China and Taiwan.

encourage cross-border M&As. In fact, UNCTAD

(2001) gives this as a reason for the upsurge of
inflows to Hong Kong, particularly in 2000.
Political risk
As if the failure to deregulate is not bad enough, politics
in the Southeast is growing more volatile. For instance,
in the Philippines, the president (Joseph Estrada) was
ousted following angry protests, not to mention the
increasing kidnaps undertaken by guerrillas. In addition,
riots and ethnic cleansing are not uncommon in
Indonesia; Thailand has held controversial elections; and

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A sia P acific J ournal of E conomics &

Cost-related Factors

B usiness ,

V ol . 6 N o . 1 ( june 2 0 0 2)

Chinas abundant cheap labour, this model of development

can be sustained within the Northeast. In contrast, the
Southeast cannot possibly survive under this model of
development without support from the Northeast. For
instance, Singapore, the most developed country in the
Southeast, is incapable of playing the role of the lead
goose. Similarly, Malaysia and Thailand are incapable
of playing the role of support geese. Moreover, because
of the slow ability to restructure, there is a similarity of
comparative advantages among most of the Southeast
Asian countries. This is pushing the Southeast Asian
countries into a more competitive situation with each
other for a shrinking pool of investment, lured by almost
similar locational advantages.

Labour costs
Only a decade ago, Southeast Asia was leading the region
in low-cost labour. However, having benefited from the
flying-geese model of development, the ASEAN-4
lagged behind the ANIEs in upgrading their created
assets. Consequently, they have found themselves locked
between two strong competitors. At the upper end are
the ANIEs with a comparatively superior infrastructure
(including human skills), while at the lower end are
several countries including China, former Indochina,
and South Asian countries whose relative wage rates
are more competitive. For example, a factory worker
in the Chinese city of Shenzhen commands about half
the wage of one in Bangkok (Thailand); while the salary
for a middle-manager in Cebu (Philippines) is 47%
more than a middle manager in Shanghai (Frank 2001).
Consequently, when it comes to low wage costs in Asia,
there is now a better alternative than the ASEAN-4.
Asias model of development, i.e. the flying-geese,
which is based on the inter-regional division of labour,
requires at least two relatively developed countries;
one to act as the lead goose and the other to act as
the support goose. The lead goose, in the course of
its own development process, constantly develops new
industries and passes on to the next-tier countries those
in which it has lost competitive advantage. Specifically,
this flying-geese model is workable if the countries are
at different levels of development; have the ability to
restructure; possess sufficient demand and markets; have
market verification of restructured industries through
internationally competitive exports; possess enabling
framework for the transmission of TNC assets; and have
a favourable investment climate (UNCTAD 1997). The
Northeast currently satisfies all these conditions. For
example, Japan plays the lead goose role, while Korea and
Taiwan play the role of support geese. Therefore, with

Locational Determinants
in East Asia: A Quantitative
Analysis
The Model
Data constraints make it impracticable to investigate
all the developing East Asian countries. Therefore,
the empirical analysis is conducted for only eight
countries: Hong Kong, Indonesia, Korea, Malaysia,
the Philippines, Singapore, Taiwan and Thailand.
Similarly, data constraints make it impracticable to
test all the aforementioned potential determinants
of FDI. Consequently, a limited number of variables
has been selected to represent each of the categories
in the analysis. The variables and their expected
directions of response are presented in Table 7
(opposite) where the following notation has been
adopted: RWR = real wage rates, IR = interest rates,
XR = foreign exchange rates, OPEN = openness,
LIB = liberalization, GDP = current market size,
Gr = market growth (future market potential),

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F oreign D irect I nvestment in E ast A sia

TABLE 7
The variables and their expected directions of influence
Cost-related

Investment environment
improving

RWR

IR

XR

OPEN

LIB

GDP

Gr

HC

HC = human capital and X = export-orientation

development strategy.19
This relationship can be represented in very
simple terms as follows:

Policy

Other macroeconomic

FDI = F([ RWR, IR, XR], [OPEN , LIB]

[GPD, Gr, HC],[ X ])

of host countries, but it has tended to do so on the basis

of one-way causality, in either direction. The exploration
of two-way causation is only just beginning. There are
two main avenues open if one wishes to explore that
interdependency in a simultaneous fashion (rather than
just establishing causality la Granger). The first is
to construct some form of a structural simultaneous
equation, dynamic, macro-model. The other is to
employ a vector autoregession (VAR) in orthodox
format, or in the form of a vector error correction
(VEC); which is a Johansen (1995) VAR incorporating
(potential) error correction terms, consequent upon
potential co-integrating vectors. This study employs the
latter avenue for the analysis and assesses co-integration
or, rather, long-run relationships between FDI and its
determinants.

(1)

The Methodology
It is not realistic, of course, to envisage FDI as
responding to a set of exogenous host country
variables, given those in the country of origin;
and to ignore the feedback effect between those
variables and FDI, as well as the interdependencies
between the host countrys factors themselves. To
do so is to ignore the possible spillover effects of
FDI, the potential existence of which is such a
strong motivator for host governments attempts
to attract FDI. In effect, in equation (1) above, the
expectation must be that if macroeconomic factors
are strong pull-factors for FDI, then those factors,
such as national output or its growth rate, will in
turn be influenced by FDI.
The literature on FDI has obviously considered the
links between FDI and the macroeconomic performance

Measurement and Properties

of Variables, Data Sources and
Limitations
The measurement of variables and data sources are
reported in Appendix A (p. 22). The limitations of the
World Penn Tables have been pointed out by Summers
and Heston (1991). These include the low reliability of
data obtained from the less developed countries, which
means that biases as well as measurement errors may

17

A sia P acific J ournal of E conomics &

vary. Consequently, the reliability of the analysis based

upon the data may be compromised.
The most notable limitation of the annual time series
data used has been their small sample size. The authors
attempted to boost the sample size by pooling the data.
Unfortunately, poolability tests indicated that the pooled
data did not meet the homogeneity condition within
the estimation framework.20 Therefore, the authors
conducted country-specific analyses but improved the
efficiency of the results by making the appropriate
adjustments for small sample size.
Tests were run for unit roots and the order of
integration and the roots of the companion matrices. The
results indicated that the variables order of integration is
1 or could be so; the VARs and the VECs are stable; there
is Normality; and there is no evidence of Autoregression
(AR), or Autoregressive Conditional Heteroscedasticity
(ARCH). Although the zero-order correlations between
FDI and its determinants convey a limited range of
information, they reveal the preliminary strength of the
relationships. For instance, each country has at least six
determinants whose correlation with FDI is |0.5|.21

B usiness ,

V ol . 6 N o . 1 ( june 2 0 0 2)

responsible for the no economic sense direction

of relationship between FDI and some of the other
endogenous variables. Nonetheless, it is further
noted that this no economic sense relationship is
not peculiar to this investigation alone. For example,
when investigating the impact of growth on FDI
flows to the European Economic Community (EEC),
Scaperlander and Mauers (1969) results were at times
wrongly signed. In addition, Schmitz and Bieris (1972)
results were negatively signed (sometimes significantly).
Furthermore, Lunn (1980) found the growth rate in
the most recent year (Yt Yt 1 ) to be significantly
positively related, but that lagged one year Yt Yt 2
to be significantly negatively related. For this study, it
was decided to eliminate the variables from which the
results did not make economic sense. This enabled
experimentation with up to three lags, but eventually
two lags were used.
In testing for co-integration, the study utilizes
the Osterwald-Lenum (1992) critical values for the
trace statistic adjusted for small sample size. The trace
statistics reported in Appendix B (p. 23) illustrate
cointegration (at the 5% level) for all the countries,
i.e. r= 1 for Thailand; r = 4 for Hong Kong, Malaysia
and Singapore; r = 5 for Indonesia, Korea and Taiwan;
and r = 6 (full rank) for the Philippines.
The standardized co-integration vectors are reported
in Table 8 (opposite). Among the cost-related factors, the
most striking results are those for the real wage rates
variable. It exhibits a negative long-run relationship with
FDI for all the countries, demonstrating its importance
in influencing the investment decision. The t-statistics
indicate that its co-integration with FDI is significant in
all countries except Thailand and Korea. The results for
Hong Kong suggest that it is marginally insignificant.
In addition, the foreign exchange rate and interest rate
variables display long-run negative relationships with
FDI except in Hong Kong, Malaysia and Singapore.

Empirical Results
Co-integration
It is noted that the variables in the VAR are treated as
endogenous. However, in a real economic environment,
there exists exogenous (at times policy) variables, which
impact on the endogenous variables to complete the
economic system (as you would have instrumental
variables in a system estimation). For instance, market
size (output) is definitely influenced by capital and
labour, which are in turn influenced by factors such
as the levels of investment, savings and taxation. The
inclusion of such exogenous variables in this analysis
was hampered by the sample size limitation. Thus,
the absence of these exogenous variables might be

18

F oreign D irect I nvestment in E ast A sia

TABLE 8
Co-integrating vectors
Cost-related

FDI

RWR

Hong Kong

-1.00

Indonesia

-1.00

-15.8
(-8.2)
[0.02] [-1.8]

-1.00

IR

-18.9
(-1.5)
[-0.73] [-4.55]

Korea

Malaysia

-0.75
(-1.2)
[0.02] [-0.5]

-1.00

[-0.6]
Philippines

Singapore

-1.00

-23.9
(-17.4)
[0.13] [-16.4]

-1.00

[-0.3]
Taiwan

Thailand

-17.3
(-5.5)
[-2.2]

-1.00

-64.2
(-1.7)
[-97.1]

-6.96
(-3.8)
[0.02] [-2.4]

-1.00

Other macroeconomic

Investment
environment
improving
XR

OPEN

LIB

GDP

Gr

e.v

21.8
(5.2)
[-1.9]

-21.8
(-5.1)
[-8.2]

-3.38
(-0.82)
[-23.8]

e.v

6.49
5.59
(1.65) (2.14)
[-2.7] [-1.5]

-13.9
(-4.1)
[2.0]

-10.9
(-5.6)
[-8.3]

e.v

n.a

e.v

e.v

e.v

e.v

Policy

HC

103.7
85.9

7.4
(1.95) (4.15) (0.74)
[10.7] [12.8] [17.1]
e.v

24.98
(0.97)
[-0.12]

e.v

e.v

24.65 40.46
(1.85) (6.3)
[-2.5] [18.7]

11.9

(0.96)
[-4.9]

10.48
(3.5)
[1.8]

e.v

e.v

12.2

(0.56)
[-6.7]

9.26
(9.2)
[3.8]

e.v

e.v

e.v
28.95
(1.89)
[7.0]

-15.08
(-11.3)
[-8.6]

-3.65
(-2.6)
[4.2]

e.v

247.9
(17.9)
[-3.7]

e.v

89.8
71.5
38.5
(1.95) (2.49) (0.45)
[-5.9] [-16.8] [47.1]

e.v

48.06
(0.23)
[-18.5]

e.v

e.v

e.v

-4.76 -37.7
(-0.89) (-5.7)
[0.5] [-0.6]

e.v

e.v

e.v

e.v

136.9
(2.2)
[-2.4]

-179.4
-618.7
-832.4
(-0.24) (-0.25) (-0.24)
[-0.01] [-10.8] [-7.1] [-22.4]

e.v

e.v

e.v

392.0
202.0
(0.25) (0.24)
[7.6] [-1.2]

e.v

5.89
(6.23)
[-0.4]
e.v

Notes: e.v. eliminated variables; n.a data not available (Hong Kong); ( ) t-statistics; and [ ] alpha coefficients.

The foreign exchange rate co-integration is significant

for Korea, the Philippines and Taiwan; while that for
interest rates is significant for Indonesia, Korea and the
Philippines. These cost-related factors results reaffirm
the general literature that emphasizes the reasons for
the relocation of production, particularly from Japan
to the ANIEs, and from the ANIEs to the baby Tigers
(Indonesia, Malaysia, the Philippines and Thailand),
especially since the mid-1980s.

The results for the investment environment

improving factors indicate that FDI is significantly
positively co-integrated with liberalization in
Hong Kong, Indonesia, Malaysia, the Philippines
and Singapore. However, openness is significant in
Singapore, but insignificant in Malaysia.
Turning to the other macroeconomic factors,
human capital stock emerges as a dominant long-run
determinant of FDI flows to East Asia. However, its

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A sia P acific J ournal of E conomics &

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V ol . 6 N o . 1 ( june 2 0 0 2)

Conclusion and Policy

Considerations

long-run relationship is significant only in Hong Kong,

Korea and the Philippines. Market size is significantly
co-integrated with FDI in Indonesia, but insignificant
for Singapore. Market growth is, on the other hand,
significantly co-integrated with FDI in Hong Kong,
Korea and Taiwan (the ANIEs), but insignificant in
Thailand.
With regard to export-orientation policy, the
results demonstrate that the export-oriented policy
has been capable of significantly inducing long-run
FDI inflows only in Malaysia and Taiwan. The results
for Hong Kong are insignificant.

The quantitative analysis has demonstrated that there

is no solitary long-run determinant of FDI across
Pacific Asia. In general, FDI flows into the individual
countries are influenced by different factors that may be
concomitant with the host countries levels of economic
development and, hence, their factor endowments.
However, it transpires that the dominant long-run
FDI determinants are the cost-related factors. These
are followed by the investment environment improving
factors, then the macroeconomic variables and the
export orientation development strategy. In particular,
real wage rates, liberalization and human capital stock
emerge as key long-run determinants of FDI in the
respective sub-groups. Hence, the conclusion may be
drawn that the driving long-run determinant of FDI in
Pacific Asia is the relatively under-priced skilled (semiskilled) labour force and a liberalizing environment. On
the impact of FDI on the macroeconomic factors, it
turned out that its benefits were mostly imparted on
human skills development.
The qualitative assessment has, on the other hand,
exposed the shortcomings of locational determinants of
FDI in East Asia in recent years. For instance, two to
three decades ago, FDI flows to Asia were characterized
by the dominance of the Southeast, which derived its
comparative advantages from its surging economies,
stable and business-minded governments, cheap labour,
falling trade barriers and open investment policies.
However, these advantages are now being lost to the
Northeast. While the Northeast is opening to the world
economy, the Southeast, which vigorously opened up
after the mid-1980s, is now switching back to regulation.
As if the failure to deregulate is not bad enough, politics
in the Southeast is growing more volatile, while that in

Granger Causality
FDI has been of major concern to economists and
politicians because of its potential effect on the
macroeconomic factors of the host country. Among
the locational factors investigated in the foregoing
section, there is a possibility of causation between
FDI and some of the macroeconomic variables. FDI
might impact on, for instance, output (GDP), growth
(Gr), human capital and international trade (X), each
investigated above under different contexts. The
present study is therefore in a position to investigate
this as well by normalizing each of these variables as 1
in the respective co-integrating relationship. However,
since some of the variables were eliminated during
the cointegration analysis, results are not given for
the above four variables for all the countries. The
Granger-causation methodology is therefore employed
to complement the results.
The results from the co-integration and the
Granger-causality methodologies (see Table 9,
opposite) suggest a consistent significant impact
of FDI on human capital. However, in general, the
results for output, growth and international trade are
inconclusive.

20

F oreign D irect I nvestment in E ast A sia

TABLE 9
Linkage between FDI and other macro-economic variables
Output

Growth

Human Capital

International trade

Granger

Coint.

Granger

Coint.

Granger

Coint.

Granger

Coint.

Hong Kong

n.s.

e.v.

n.s.

Indonesia

n.s.

n.s.

e.v.

n.s.

e.v.

Korea

n.s.

e.v.

n.s.

n.s.

n.s.

e.v.

Malaysia

n.s.

e.v.

n.s.

e.v.

n.s.

Philippines

e.v.

n.s.

e.v.

e.v.

Singapore

n.s.

n.s.

e.v.

n.s.

e.v.

Taiwan

n.s.

e.v.

n.s.

e.v.

n.s.

Thailand

n.s.

e.v.

n.s.

n.s.

n.s.

e.v.

Notes: The signs represent the direction of standardised ' eigenvectors with the dependent variable normalised as 1 for the cointegrating relationship; represents statistically significant Granger-causation; e.v. eliminated variables; n.s. not statistically
significant; Granger Granger-causation methodology; and Coint. co-integration methodology.

the Northeast is comparatively stable. Only a decade

ago, Southeast Asia was leading the region in low-cost
labour. This comparative advantage is now being lost
to China, former Indochina and South Asian countries.
On the other hand, new comparative advantages that
stem from created assets are not being developed at a
pace concomitant with that at which the old comparative
advantages are being lost. Nonetheless, even if the right
pace were achievable, it would imply competing with
the NIEs. This is a prisoners dilemma. Meanwhile,
the existing innovative environment in the Northeast
implies that technological upgrading continues to be
embraced. Moreover, the Southeasts situation has been
made worse by the wealthy consumer base in Hong
Kong, Korea and Taiwan, and the giant population in
China, which far outweigh any current benefits of the
Southeast. Consequently, investors are betting on Asias
future and channelling more of their money to the large

economies of the Northeast. Thus, any disadvantages

that the Northeast currently possesses are effectively
outweighed by its advantages.
It is now widely believed that FDI has the
potential to engender both negative and positive effects
in a host country. Nonetheless, a host country can
realize benefits from the presence of FDI if it pursues
policies that can minimize the negative effects but
maximize the positive effects. But in order to generate
such benefits, an extra effort has to be made to lure FDI
into the potential host country, particularly given that
the competition for it is getting stronger. Moreover,
it becomes even more difficult when a whole range of
factors has to be considered. However, it is evident
that, besides promoting the other factors, developing
countries particularly have to attempt to exploit their
real wage rates comparative advantage before it gets
eroded.

21

A sia P acific J ournal of E conomics &

The solution for the Southeast, particularly the

ASEAN-4, lies in more liberalization, deregulation,
political stability, and upgrading. In particular, the
Southeast should aim at setting up resource bases that
can facilitate their progressive shifts up the levels of
technological complexity. This involves instituting
plans for deepening the content of export activity,
and building the human capital and macroeconomic
capacity to sustain such a shift across a range of tradable
activities in response to changing world demand and
technologies. Nonetheless, the success of this strategy
depends not only on the presumption, but indeed also
on the hope, that the NIEs will themselves move up the

B usiness ,

V ol . 6 N o . 1 ( june 2 0 0 2)

APPENDIX A
Measurement of variables
and data sources
FDI = (100 billion US$)from the Balance of Payments
Statistical Yearbook (various years).
Market size = log GDP (international prices)from the
Penn World Tables.
M a r k e t g r o w t h = g r o w t h o f G D P, i . e .
Grt = log GDPt 1 log GDPt (international prices).
Openness = log total imports and exports (international
prices)from the Penn World Tables.
Export orientation development policy = log exports
(international prices)from the Penn World Tables.
Liberalization = dummy variable with 0 representing the
pre-liberalization period and 1 the post-liberalization
period.22
Real wage rates = log non-agricultural sector hourly
wage rates (US$)from the Labour Statistics
Yearbook (various years).
Interest rates = log annual average lending ratesfrom
the International Financial Statistics Yearbook
(various years).
Foreign exchange rates = log annual average exchange
rate between the local currency and one US dollar
from the International Financial Statistics Yearbook
(various years).
Human capital = log total mean years of education
from Nehru and Dhareshhwa (1993) for 196587. The
period 198897 estimated by authors. For Hong Kong
and Taiwan, the annual number of students enrolled
for second-level education23from the UNESCO
Statistical Yearbook (various years).
The data for FDI, wage rates, interest rates and human
capital for Taiwan was, on the other hand, obtained from
the Taiwan Statistical Data Book (various years).

ladder of technological development, thereby allowing

the ASEAN-4 to replace them. Otherwise, countries
of Southeast Asia will remain in a prisoners dilemma
and will continue to fight among themselves for the
dwindling FDI flows.

22

F oreign D irect I nvestment in E ast A sia

* The authors thank the two anonymous referees for their

helpful comments on an earlier draft of this paper.

APpENDIX B
Trace statistics
Ho: r = p

Country
Hong Kong

Malaysia

Singapore

Thailand
Indonesia

Korea

Philippines

Taiwan

Endnotes

Trace
statistic

5% critical
value

1. Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar,

the Philippines, Singapore, Thailand and Vietnam.

p=0
p<=1
p<=2
p<=3
p<=4

145.20**
89.78**
52.45*
30.82*
6.64

75.51
46.68
27.28
16.03
8.65

p=0
p<=1
p<=2
p<=3
p<=4

165.00**
105.50**
63.40**
35.10*
18.10

102.14
76.07
53.12
34.91
19.96

3. China, Peoples Republic; Hong Kong, China; Taiwan;

Korea (Peoples Republic); Korea (Democratic Republic)
and Mongolia.

p=0
p<=1
p<=2
p<=3
p<=4

147.60**
99.10**
62.80**
36.10*
17.20

102.10
76.10
53.10
34.90
19.90

5. Which supported and promoted its entrept role.

p=0
p<=1

86.70*
54.10

82.49
59.46

p=0
p<=1
p<=2
p<=3
p<=4
p<=5

338.60**
163.25**
98.87**
64.40**
35.78**
8.11

109.99
82.49
59.46
39.89
24.31
12.53

p=0
p<=1
p<=2
p<=3
p<=4
p<=5

116.90**
79.90**
48.60**
28.40*
13.39*
3.60

82.49
59.46
39.89
24.31
12.53
3.80

p=0
p<=1
p<=2
p<=3
p<=4
p<=5

193.70**
117.40**
63.70**
31.80*
16.64*
3.90*

94.15
68.52
47.21
29.68
15.41
3.80

p=0
p<=1
p<=2
p<=3
p<=4
p<=5

132.10**
81.02*
41.79*
28.05*
13.73*
0.03
Notes: * 5% levels of significance; ** 1%.

2. Indonesia, Malaysia, the Philippines, Singapore and

Thailand or, rather, the ASEAN-5.

4. Abundant natural resources and cheap labour.

6. South Korea, Taiwan, Hong Kong and Singapore.

7. ASEAN-5 excluding Singapore.
8. Production technology, financial resources, managerial
resources and marketing techniques.
9. This includes the desire to minimize the risk and/or costs
of fluctuating exchange rates; to cushion the adverse effects of
government legislation or policy; to be able to take advantage
of differential interest rates and leads and lags in intra-group
payments; and to adjust the distribution of its short-term
assets between different currency areas.
10. This may take the form of factors such as a large or
a potential domestic market; a low-cost, effective export
production base with abundant low-cost, high-quality
labour; low transportation costs; generous investment
incentives; lax pollution controls; political stability; and
sound macroeconomic policies.
11. For instance, those with similar strategic assets.
12. Including tariffs and transfer payments.

82.49
59.46
39.89
27.10
14.10
3.80

13. Including limits on dividends, and royalties and fees.

14. Such as export, local content and foreign exchange
balancing abilities.
15. For details on this, see, for instance, UNCTAD (1997).

23

A sia P acific J ournal of E conomics &

B usiness ,

V ol . 6 N o . 1 ( june 2 0 0 2)

16. For theoretical details, see, for instance, UNCTAD (1997,

1999).

Dunning, J.H. 1981, International Production and The

Multinational Enterprise, George Allen & Unwin, London.

17. With the notable exception of the Philippines and former

Indochina.

Eiteman, D., Stonehill, A. & Moffett, M. 1995, Multinational

Business Finance, Addison-Wesley Publishing Company,
New York.

18. One fifth of the entire world.

Frank, R. 2001, Asias investment spotlight sweeps North,

The Wall Street Journal, 28 Feb: 1617.

19. It has not been possible to compute the cost-related

variables as host country in relation to home country because
the FDI data used is aggregated in nature (i.e. it originates
from several countries).

Goldberg, L. & Klein, M. 1998, Foreign direct investment,

trade and real exchange rate linkages in developing
countries, in Managing Capital Flows and Exchange
Rates, ed. R. Glick, Cambridge University Press,
Cambridge (USA), pp. 36598.

20. The tests based on Larsson, Lyhagen and Lthgren

(1998) methodology give findings of no common rank for
the panel.
21. Results are available upon request.

Helpman, E. & Krugman, P. 1985, Market Structure and

Foreign Trade, MIT Press, Massachusetts.

22. For an account of the relevant changes of the liberalization

of FDI policy and of the liberalization of trade policy in these
economies, see, for instance, Lim and Pang (1991).

Hill, H. & Lindsey, C.W. 1987, Multinationals from larger and

small countries: a Philippine case study, Banca Nazionale
del Lavoro, 60: 7792.

23. In measuring human capital, focus is restricted to the

second-level education (i.e. secondary school and vocational
training) for simplicity, ignoring the contribution of primary
and higher education, and investment in health. The study
assumes that the knowledge and skills so acquired at the
second level of education enables individuals to carry out an
occupation that can form the foundation of a well-conducted
life. A higher second-level education enrolment means a higher
accumulation of human skills.

Hollander, A. 1984, Foreign location decisions by US

transnational firms: an empirical study, Managerial and
Decision Economics, 5: 718.
Johansen, S. 1995, Co-integration, Oxford University Press,
Oxford.
Kravis, I.B. & Lipsey, R.E. 1982, The location of overseas
production and production for export by U.S.
multinational firms, Journal of International Economics,
2: 20123.

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3rd edn, Harper Collins, New York.

Bende-Nabende, A. 2002, Globalisation, FDI, Regional

Integration and Sustainable Development, Ashgate,
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Larsson, L.J., Lyhagen, J. & Lthgren M. 1998, Likelihoodbased cointegration tests in heterogeneous panels,
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in economics and finance, no. 250.

Bende-Nabende, A., Ford, J.L. & Slater, J.R. 2001, FDI,

regional economic integration and endogenous growth:
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and Industrialisation in Malaysia, Singapore, Taiwan and
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Bhattacharya, A., Montiel, P.J. & Sharma, S. 1996, Private

capital flows to sub-Saharan Africa: an overview of
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growth, NIEPO, Occasional paper series, Sept.

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United Nations (various years), The UN Balance of Payments

Statistical Yearbook, UN, New York.

Nehru, V. & Dhareshwar, A. 1993, A new database on physical

capital stock: sources, methodology and results, at <ftp:
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Statistics, UN, New York.

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asymptotic distribution of the maximum likelihood
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Scaperlander, A.E. & Mauer, L.J. 1969, The determinants of

US direct investment in the EEC, American Economic
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Yearbook, UNESCO, New York and Paris.

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The Determinants of Foreign Direct Investment, A Survey
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World Investment Report, Transnational Corporations and
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Singh, H. & Jun, K.W. 1995, Some new evidence on

determinants of foreign direct investment in developing
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no. 1531, World Bank, Washington, DC.

United Nations Conference on Trade and Development 1997,

World Investment Report, Transnational Corporations,
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Summers. R. & Heston. A. 1991, The Penn World Table

(Mark 5): An Expanded Set of International Comparisons,
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The World Penn Tables Mark 5.6. Retrieved from data base
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Promoting Linkages, UN, New York.

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Organization data bank <http://www.unesco.org/
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/ / w w w. w o r l d b a n k . o r g / d a t a / c o u n t r y d a t a /
countrydata.html>

25

N O t e s

on

C O N trib u tor s
International Finance, International Economics and
Pacific Basin Financial Markets and Policies, as well as
other Chinese economic journals. Currently his areas
of research interest are international investment, merger
and acquisition, and international public finance.

ANTHONY BENDE-NABENDE obtained his

PhD in Business Economics from the University of
Birmingham, UK. He currently holds a Research Fellow
post at the University of Birminghams Business School.
His broad interests are in policy-driven economic
and business research, particularly in relation to the
international economyprimarily, but not exclusively
relating to the growing influence of globalization,
international trade, foreign direct investment and
regional economic integration on the economic
development process. Dr Bende-Nabende has published
articles in several refereed journals, including Economics
Bulletin, Pacific Economic Review, The Global Economy
Quarterly and World Development. In addition, he has
authored the following two books: Globalisation, FDI,
Regional Integration and Sustainable Development and
FDI, Regionalism, Government Policy and Endogenous
Growth. He has also undertaken some consultancy
work for the United Nations Centre for Trade and
Development (UNCTAD).

LICHENG FENG is an Associate Professor at

the School of International Trade and Economics,
University of International Business and Economics
(UIBE), Beijing. He is also Vice-Director, Center
for Financial Markets and Investments at UIBE.
He obtained his PhD degree in Economics from the
Washington State University in 1999. Dr Feng then
joined the China Center for Economic Research,
Peking University, as a visiting professor and taught
mathematical economics, advanced microeconomics
and investment analysis for one year. After leaving
Peking University, he became a member of the faculty
at the School of International Trade and Economics,
UIBE, where he teaches microeconomic analysis,
advanced microeconomics, advanced investment
analysis, financial theory and financial economics.
Associate Professor Fengs research interests are in the
areas of investment strategy and portfolio management,
market efficiency, anomaly, corporate finance, and
labour economics. He has published in The Journal of
Economic Research.

JO-HUI CHEN is an Associate Professor in the

Department of Business Administration at Chung Yuan
Christian University, Taiwan, Republic of China. He has
also been seconded to the position of General Secretary
in the Taipei Bank. He earned a PhD in Economics from
Northern Illinois University (NIU), USA, and received
the award of Outstanding Economics Research Scholar
at NIU. Associate Professor Chen has received three
Grants of Outstanding Economics Researcher from
the National Science Council of Taiwan, ROC. His
disciplinary background is in the fields of public finance,
international monetary, and regional economics. He
currently teaches international monetary, finance
management and economics, at both undergraduate and
graduate levels. Dr Chen has published refereed papers
in Applied Economics, Journal of Foreign Exchange and

JAMES L. FORD is Professor Emeritus, University of

Birmingham, having been Mitsui Professor and Head of
Department. He was previously Professor of Economics
and Head of Department at the University of Sheffield.
He has also held posts at the universities of Manchester
and Ulster. He was Rockefeller Foundation Fellow at
Yale, Stanford and Michigan State universities in 196465;
and Visiting Professor at UCLA in 1969. Professor Ford
is listed in Whos Who in Economics. His publications
125

A sia P acific J ournal of E conomics &

include the following books: Expectations, Uncertainty

and the Term-Structure of Interest Rates; Choice,
Expectation and Uncertainty; Protectionism, Exchange
Rates and the Macroeconomy; Economic Choice under
Uncertainty: A Perspective Theory Approach; Current
Issues in Open Economy Macroeconomics: Paradoxes,
Policies and Problems; and G. L. S. Shackle: The
Dissenting Economists Economist. He is the editor of
the Uncertainty and Expectations Series published by
Basil Blackwell. Recent journal publications include
articles in Economic Journal, Economica, Advances in

B usiness ,

V ol . 6 N o . 1 ( june 2 0 0 2)

Markets Research Centre) Research Fellowship twice

(199495 and 19992000). Associate Professor How is
an Honorary Member of the Golden Key International
Honour Society. She has publications in several refereed
journals, including The Journal of Business, Journal
of Accounting Auditing and Finance, Pacific-Basin
Finance Journal, Australian Journal of Management,
and Accounting & Finance.
I-CHING KHOO is an Associate, Participant
Supervision Department, at the Singapore Exchange
Limited, Singapore. Her work involves auditing
the member companies of the exchange, ensuring
compliance with the exchange rules. She obtained her
Honours degree in Commerce from the University of
Western Australia.

Austrian Economics, Economics Letters, and Journal of

Economics. Professor Fords research interests are in
general economics and applied econometrics. His special
fields are monetary and macroeconomics, particularly
open-economy macroeconomics; international trade
theory; economic development; history of economic
theory; and uncertainty and expectations, especially
decision-models and their empirical evaluation by
means of experimental methods.

YUKIO MIYATA is a Professor in the Department of

Economics at Osaka Prefecture University, Japan. After
obtaining his BA in economics from Osaka University
(Japan), his BS in materials engineering from University
of Washington, Seattle, and MS in engineering policy
from Washington University, St. Louis, he obtained
a PhD in Economics from Washington University,
St. Louis (USA). Before moving to Osaka Prefecture
University in 2001, Professor Miyata taught at Osaka
University of Commerce (Japan) as a Lecturer and an
Assistant Professor. He is interested in research on
technological innovations and US industrial policy, in
particular university/industry collaborative research
for innovations. His publications include papers in
journals such as Japan and the World Economy and
Technovation. Professor Miyata has also published
three books in Japanese: Cooperative R&D and an
Industrial Policy (Keisou Shobou, 1997), An Industrial
Policy of the United States (Yachiyo Shuppan, 2001), and
UniversityIndustry Collaboration in the United States
(Toyo Keizai Shinpousha, 2002). His latest research

JANICE HOW is Associate Professor in the School

of Economics and Finance at Curtin University of
Technology, Perth, Australia. She holds a doctoral
degree in Accounting and Finance from the University of
Western Australia. Her current research interests include
IPOs, analysts forecasts, and voluntary disclosure. Dr
How has received numerous international research
awards, including the Singapore Stock Exchange/
PACAP (FMA) Competitive Research Award, Coopers
& Lybrands Accounting Association of Australia and
New Zealand (AAANZ) Conference Paper Research
Award, Sydney Futures Exchange Limited/PACAP
Competitive Research Award, Stock Exchange of
Hong Kong Limited/PACAP Competitive Research
Award, and Arthur Andersen International Research
Award. She was also awarded a Stanford/UWA Women
Fellowship in 1996 and a PACAP (Pacific-Basin Capital

126

N O T E S

O N

C O N T R I B U T O R S

work regarding university/industry collaboration in

the USA will be published in English as a chapter of
International Handbook on Innovation (Erlbaum
Publishers, forthcoming).

Co-operation and Development (OECD) Development

Centre and the United Nations. Professor Sen has
been a Senior Research Fellow at the Stockholm
International Peace Research Institute. He has recently
concluded (in 2000), with colleagues at Birmingham,
a large Economic and Social Research Council
(ESRC) project on Capital Formation, Governance
and Economic Growth in Pacific-Asian Economies,
as part of the ESRC programme on Pacific Asia.
Professor Sen has also completed (in 1999) an ESRC
project on the Political Economy of the Arms Trade,
with Paul Levine and Ron Smith. His current research
focuses on three areas: macroeconomic stabilization in
open economies; government and growth; and Asian
economies, including China and India.

HOCK GUAN NG is a Senior Lecturer in the School

of Business, University of Western Australia, Perth. He
holds a doctoral degree in Economics from Stanford
University. Before joining the University of Western
Australia in 1999, he taught at the National University
of Singapore.His research interests are in the areas of
corporate governance, financial econometrics, and the
market microstructure of financial markets.
SANGKYUN PARK is a Senior Economist, Office of
Management and Budget, US Government, Washington,
DC. Prior to this, he was an economist at the Federal
Reserve Bank of New York. He received his PhD in
Economics from the University of California, Los
Angeles (UCLA). Dr Parks research interests include
financial regulation, asset pricing, and consumer
behaviour. He has published extensively in economics
and finance journals, including Journal of Monetary
Economics; Journal of Money, Credit, and Banking;
Journal of Financial and Quantitative Analysis and
Journal of Banking and Finance.

YOJI SHIGEMATSU is a PhD candidate at Graduate

Program of Regional Policy Studies at Osaka University
of Commerce, Higashi Osaka, Japan. He obtained a BA
in German literature from Chuo University, Japan, and
an MA in regional economics from Osaka University
of Commerce. He is also the President of Mito-Kato,
Ltd in Yao-city, Japan, which manufactures artificial
bamboos from plastic materials for gardening. His
research interests include the relationship between
banks and business, small business management, and
the role of gambling businesses in regional economic
development. He has a journal article published in
Gambling and Gaming (co-authored with Professor
Ichiro Tanioka).

SOMNATH SEN is Professor of Development

Economics at the University of Birmingham. He was
also Head of the Department of Economics from
19942002. He graduated from Presidency College,
Calcutta, received a Masters degree from the University
of Birmingham and a PhD from the University of
Warwick. Professor Sen was the recipient of a gold medal
for his undergraduate degree results and also received a
Commonwealth Scholarship to undertake postgraduate
study in the UK. He has acted in an academic advisory
capacity to the World Bank, Organisation for Economic

JIM SLATER is the Director of the Graduate Centre,

The Birmingham Business School, Birmingham
University, and the Convenor of the EuropeEast
Asia Research Group. His research interests are in
comparative industrial structures of Asia Pacific;
the determinants of foreign direct investment; and
foreign direct investment and growth in East and

127

South East Asia. His publications include articles in

refereed journals such as Economics Bulletin, Pacific
Economic Review, International Journal of Human
Resource Management, The Journal of the Korean
Economy, Journal of Business Research and Journal
of Productivity. He has also co-edited the following
books: The European Union and ASEAN: Trade and
Investment Issues; Trade and Investment in China: The
European Experience; and Business Relationships with
East Asia.
PETER VERHOEVEN is a Lecturer in the School
of Economics and Finance at Curtin University of
Technology, Perth, Australia. His first degree is in
Science and he is currently completing his doctoral
degree in Financial Econometrics at the University
of Western Australia. His disciplinary background
is in the area of quantitative finance, in particular
computer modelling. Peters research is in the areas
of environmental modelling, risk analysis, and market
microstructure. His research paper on risk modelling
was selected as one of the top three research papers
at the Seventh International Joint Conference of
Computational Finance & Forecasting Financial
Markets at the London Business School, 2000, while
another of his papers was selected as one of the top
ten research papers at the PACAP/FMA Conference
in 2001. Peter was awarded the Best Student Presenter
Prize at the Modelling and Simulation Society of
Australia and New Zealand (MSSANZ) in 1999. He
has publications in Journal of Coordination Chemistry,
Minerals & Metallurgical Processing, Modelling and
Forecasting Financial Data and Mathematics and
Computers in Simulation. Two of his articles are
forthcoming in Pacific-Basin Finance Journal.

128

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