Liberalization and FDI Performance: Evidence from ASEAN and SAFTA Member Countries

Muhammad Shariat Ullah,Kazuo Inaba

doi:10.1186/s40008-014-0006-z

Muhammad Shariat Ullah, Kazuo Inaba

Open Access

https://doi.org/10.1186/s40008-014-0006-z

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Abstract

The developing and least developed countries in the South and Southeast Asia have emerged as dynamic hosts of foreign direct investment; and inbound FDI growth surpassed that of the developing world during the decade 2001–2010. Yet foreign investment continues to flow quite unevenly into individual countries in the region, although majority of the Asian countries do emphasize liberalization unilaterally, bilaterally under the bilateral investment treaty (BIT) and the bilateral trade agreement (BTA), and regionally under the regional trade agreement (RTA). Under such scenarios, this study empirically assesses FDI determinants with a specific focus on the FDI effects of BIT, BTA, and RTA as well as of factors pertaining to institutional quality. Gravity-type econometric results of unbalanced panel data uncover that BIT, BTA, and RTA promote FDI insignificantly. It appears that the role of bilateral instruments in stimulating the inflow of foreign capital diminishes if liberal FDI policies already exist in the host country. Under such circumstances, the quality of the host country’s legal and regulatory environment exerts a profound influence on firms’ investment decisions. Nonetheless, core gravity variables are found to be important determinants of FDI. JEL Classification: C33, F21, F23.

Highlights

South and Southeast Asian countries are integrated under two distinct regional trade blocs, namely the South Asian Association for Regional Cooperation1 (SAFTA) and the Association of Southeast Asian Nations2 (ASEAN)
We investigate the extent of integration of Japan with ASEAN and South Asian Free Trade Agreement (SAFTA) countries by incorporating two dummies
Higher per-capita income of the host country motivates the inflow of foreign investment, while that of the home country negatively affects firms’ decisions to undertake FDI

Summary

Introduction

South and Southeast Asian countries are integrated under two distinct regional trade blocs, namely the South Asian Association for Regional Cooperation (SAFTA) and the Association of Southeast Asian Nations (ASEAN). Owing either to a perception of bolstering economic prosperity or to overcoming an economic crisis by injecting foreign capital and technology, developing and least developed participants of these trade blocs’ undertook unilateral opening to international investments over recent decades. FDI policies—i.e., national treatment, equity ceiling, sectoral opening, profit repatriation, and foreign exchange control—were gradually softened. ASEAN and SAFTA members have maneuvered a wide range of fiscal incentives so as to remain more competitive and to feature attractive investment locations. Alongside the unilateral opening to FDI, these economies have signed an extensive number of bilateral investment treaties (BITs) over time.. Alongside the unilateral opening to FDI, these economies have signed an extensive number of bilateral investment treaties (BITs) over time. In addition, some countries have attempted to complement the investment liberalization process by forming bilateral trade agreements (BTAs); these are like free trade agreements (FTAs) that contain provisions for stimulating investment at a bilateral level

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