Potential and Challenges of Chinese Direct Investment into ASEAN

Abstract

Although China’s outward direct investment (CODI) has been ranked number one for 25 years among developing countries, between 1995 and 2019, increased more than 66 times, from about US$ 2.0 billion to US$136.91 billion, and the Association of South East Asian Nations (ASEAN) is the most attractive world destination for foreign direct investment (FDI) due to its location advantages in terms of low labor cost, potential market size, CODI to ASEAN has been hovering at a very low level, accounting for only about 9.51% of China’s total outward direct investments. The relatively small CODI to ASEAN raises a question of how well the theories of FDI explain the interaction of China investors and ASEAN's location characteristics. This article tries to address the puzzle of a small share of CODI in ASEAN by investigating the determinants of CODI in ASEAN over the period 1995 to 2019. Evidence presented in this article indicates that the small CODI cannot be fully appreciated without understanding differences between CODI in ASEAN and that in EU, the latter attracting CODI at full speed. Empirical results suggest that the CODI in ASEAN was primarily motivated by natural resource and market access, and that in EU was technical and strategic assets oriented. The main purpose of Chinese investors to invest abroad is not to use their existing ownership advantages expanding overseas production, but to compensate their disadvantage and improve competitiveness to strengthen the domestic production. The small CODI in ASEAN thus is a result of China investors' strong interest in gaining raw materials, skilled labor, sale channels and potential market for its export rather than benefiting from cheap labor and ASEAN's export and employment-promotion FDI regime, poor infrastructure, containment attitude for Chinese investors, along with the political instabilities in ASEAN.