Macroeconomic gains from liberalising foreign investment in APEC

Abstract

This paper analyses the macroeconomic gains to Asia-Pacific economies from liberalising foreign investment flows. It first presents an intertemporal theoretical framework to convey, in principle, how higher national income stems from the narrowing of the gap between domestic and foreign rates of return on capital. Using a computable general equilibrium model it then empirically quantifies the impact on investment, the capital stocks, the external accounts and national income of a one percentage point reduction of the rate of return on capital due to further liberalisation of impediments to foreign investment. The results show national income gains for Asia-Pacific economies are on average around 0.3 percent per annum, which compounded through time implies significant long-term improvement in living standards in the region. This suggests APEC should afford greater priority to foreign investment liberalisation.