The role of foreign direct investment in east and Southeast Asia: Evidence before and after 2009 global financial crisis

Abstract

This research investigates the influence of Foreign Direct Investment (FDI), domestic physical stock, and the human capital index on labor productivity across 17 East and Southeast Asian economies. In the period from 1980 to 2009 (pre-global financial crisis), the study reveals that, initially, FDI stock independently contributes little to productivity. It underscores the necessity of specific human capital thresholds for FDI to enhance productivity by facilitating technology diffusion from source to host economies. While most economies in our sample surpass these thresholds, Cambodia, Laos, and Myanmar do not, indicating unexploited potential for productivity enhancement via FDI. In the post-2009 era, following the financial crisis, FDI emerges as the primary driver of labor productivity in these economies, rendering the previously mentioned human capital thresholds less critical across all 17 economies. The study also observes a significant, mutually intensifying crowding-out effect between FDI stock and domestic physical capital, which notably escalated around the 2009 financial crisis. Despite this, the influence of FDI stock on labor productivity substantially surpasses that of domestic physical capital, especially after 2009. These insights underscore the critical need for policymakers to strategically balance the influx of foreign investment with domestic capital investment to optimize economic growth in the aftermath of the 2009 crisis.