The Effect of China and the Factors Affecting Foreign Direct Investments in Asean Countries

Koy Pei Wen,Roslinda Rahman,Mohamed Hisham Yahya,Abdul Razak Abdul Hadi

doi:10.32890/ijms.20.1.2013.10380

Abstract

Foreign direct investment (FDI) plays an important role in bolstering economic growth. It acts as a pillar in supporting the industrialization and economic development of countries. The objectives of this study are to: (a) Recognise factors aff ecting FDI in countries in the Association of Southeast Asian Nations (ASEAN) region and (b) examine the eff ect of China’s entry into the World Trade Organisation (WTO) on the FDI in ASEAN countries. The Vector Autoregressive method (VAR) was applied to establish the factors that had signifi cant impacts on FDI infl ows over the period 1980–2010 for these countries. Apart from the conventional variables, such as market size, labour cost, interest rates, exchanges rates, corporate tax rates, and degree of openness, this study incorporates another variable, that is, the event of China joining the WTO. This is to determine whether the entry of China into WTO had any impact on FDI in the ASEAN region. The result reveals that, fi rstly, only market size is not a signifi cant factor in determining the FDI infl ows for all the ASEAN countries being studied (i.e. Indonesia, Malaysia, Philippines, Singapore and, Thailand). Secondly, most of the ASEAN member countries’ FDI are infl uenced by China’s entry into WTO in 2001. Keywords: China, ASEAN, WTO, VAR, Foreign direct investment.

Highlights

Foreign direct investment (FDI) is a physical investment made by a company in one country into another country in the form of direct investment, direct acquisition of a foreign company, investment in strategic alliance or joint venture with a local firm
This paper examines the factors that might affect the level of inward FDI in Association of Southeast Asian Nations (ASEAN)-5 member countries (Indonesia, Malaysia, Singapore, Thailand and the Philippines) from 1980 to 2010
The Vector Autoregressive method (VAR) analysis is used to identify the dynamic relations of FDI inflow into ASEAN-5 as a result of changes in the explanatory variable chosen

Summary

Introduction

Foreign direct investment (FDI) is a physical investment made by a company in one country into another country in the form of direct investment, direct acquisition of a foreign company, investment in strategic alliance or joint venture with a local firm. After the 1997 and 1998 financial crisis, ASEAN-5 faced the problem of a radical decline in the percentage of FDI flows into Southeast Asia, especially in countries such as Indonesia and the Philippines (Freeman & Bartels, 2004). This unexpected crisis led to considerable negative influence in the level of inward FDI into ASEAN-5 which resulted in further dampening the weak economy of the countries in this group. A drastic negative change in the economic conditions of a country can lead to huge a pull-out in portfolio investments from the country

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Conclusion