Foreign direct investment and growth in East Asia (China, Korea, Singapore, Malaysia, Philippines, Indonesia, Thailand)

Chapter 1 addresses the following question: Is China diverting foreign direct investment from other Asian economies? Theoretically, a growing China can add to other countries' direct investment by creating more opportunities for production networking and by raising demand for raw materials and resources. At the same time, relatively low Chinese labor costs may lure multinationals away from other Asian sites when multinationals consider alternative locations for low-cost export platforms. In this paper, we explore this important issue empirically. We use data from eight Asian economies (Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Philippines, Indonesia, and Thailand) from 1985 to 2001 and control for the determinants of their inward foreign direct investment (FDI). We then add China's FDI inflows as an indicator of the "China Effect". Due to possible simultaneity between China's and the Asian countries' inward FDI, we use a random effects simultaneous equation model to estimate the "China effect". We have four results: (1) the level of China's FDI is positively related to the levels of these economies' inward direct investments; (2) the level of China's FDI is negatively related to these economies' shares of total Asian inward FDI and shares of total FDI inflows to the developing countries; (3) the China effect on the E&SE Asian countries' shares of the world inward FDI is mixed, minimal and not significant; and (4) the "China effect" is not the most important determinant of inward direct investments to these economies. In particular, corporate tax rate, level of corruption, and openness to trade have more influential effects on FDI inflows.; Chapter 2 studies the effects of five sources of FDI on output. These sources are USA, Japan, Hong Kong, Taiwan, and Korea. The empirical study implements pooled two-stage least square and random effects two-stage least square model. Our main results show that aggregate FDI has positive impact on output. When considering each of the five sources, FDI from the US has the largest effect on GDP, following by FDI from Hong Kong, Japan, Taiwan, and Korea, respectively. The results suggest that effects of FDI by source are fairly consistent, positive, and significant in the pooled two-staged least square model for, except for FDI from Korea whose significance is not as robust. In the random effects two-staged least square model, the effect of each source of FDI is even more consistent than that of the pooled 2SLS. This includes the result from the Korean investment. Moreover, in the random effects 2SLS model, the FDI-human capital interaction term is significant in the case of Japan and Korea. This may reflect the nature of relatively more capital-intensive investment from these two countries, where high skilled workers are required to perform functions. While sources of FDI in our sample are mostly significant, their impacts on China output are rather small compared to domestic investment and employment.