FDI, Economic declineand recovery: lessons from the Asian financial crisis Based on a paper by : Hwy-Chang Moon, Joseph L.C. Cheng,Min-Young Kim, Jin-Uk Kim
• FDI Definition :An investment made by a company or entity based in one country, into a company or entity based in another country is called Foreign Direct Investment(FDI).• FDI Flow: Amount of FDI over a period of time (one year)• FDI Stock: Total accumulated value of foreign owned assets at a given point in time. FDI stock can happen in buying common stock, or joint venture of a foreign company and a local or like that.• Note : investment by individuals or firms or public bodies in foreign financial instruments like foreign bonds and derivatives is not called FDI.
U.S. is the largest receiver of FDI in the world with total amount of 194$billion in 2010. About 84% of FDI in US. come from or through 8 countries :Switzerland, the UnitedKingdom, Japan, France, Germany, Luxembourg, the Netherlands andCanada. The FDI stocks in U.S. at the end of 2008 was about 16 percent ofits GDP.
Flow of FDI inward /outward South East AsiaAll Asian economies have been working towards trade agreements such as Free TradeAgreements (FTA) between countries. 10 South East Asian countries have trade agreement underthe ASEAN. Under the ASEAN the countries have free flow of goods categorized under no importduty or reduced import duty.ASEAN nations are attracting FDI so that each country has its competitive advantage. Forexample Thailand is attracting automobile sector, and is one of the industry with highest FDI inThailand.
FDI Stock China and Australia didn’t get affected so much by the 1997 Thailand Singapore Asian Crisis and didn’t raise so Philippines much and rapid FDI. Million US $ Malaysia South korea Japan India The interesting part is in the Hong Kong - China 1998, while crisis had not recovered, the FDI increased GDP % sharply. Australia China Historical data shows that Hong Kong India Australia got affected later Japan than the Southeast Asian Malaysia - Philippines countries (1999), as shown in- Singapore the graph. South Korea- Thailand
• Economic situation today (worldwide) – Subprime crisis, Euro zone crisis, fear of other regional crisis• 3 possible senarios : – V shape drastical rebound – U shape gradual recovery – L shape stagnation• Some solutions : – Monetary policy making – Fiscal policy making – Attracting more FDI• Main Questions of the study paper: – Q1. Does FDI help reduce the negative impact of an externally induced crisis on a host country’s economic growth? – Q2. Does it help speed up the country’s economic activities during the recovery period? – Q3. Are these effects of FDI during economic decline and recovery the same for both inward and outward foreign direct investment?
• Why an MNC chooses FDI ? (1) Possesses ownership-specific advantages (O-advantage); (2) Finds location-specific resources (L-advantage) to complement its ownership- specific advantages; (3) The ability to internalize markets through administrative fiat (I-advantage).• Benefits to the Host country : – Increasing capital accumulation – Transfer of the non-financial and intangible ownership specific assets to the location. Items like advanced production methods, marketing know- how,superior management skills, and new organizational form, which is the Main Benefit for the host country. – Upgrading and introducing of new and higher standards, increase productivity, adopt new technology, and learn new ideas. Host Country: Country receiving the FDI
• Major Economic effects of FDI Outflow : – balance of payments of the nation by bringing back the profit and earnings of the company working in another country to the main country . – the presence of the company in another country may help the export of other products of the main country. – increment of the employment and higher consumers’ spendings in the country because of the growth in subsidiary demands from the home country resources. – the country has to improve itself regularly and acquire more skills to be able to compete in the foreign markets and can transfer back these skills to the home country and spread the existing strategic assets.
Main Hypothesis and method of testingH1. The higher the level of FDI prior to the crisis,the smaller the change (decline) in economic growthduring the crisis period.H2. The higher the level of FDI prior to the crisis,the smaller the change (increase or reduced decline)in economic growth during the recovery period.
Data and the collection methodEconomic growth data for the 15 largest Asian economies in the affectedregion. however, full data were available from only ten of these economies:Australia, China, HongKong, India, Japan, Korea, Malaysia, Philippines,Singapore, and Thailand.• Period : Asian Financial Crisis(AFC) lasted only in 1997-1998. it had astrong V shaped rebound in 1999. This region had a great steady economic growth for 5 years before the crisis. Total period = 1992 – 1999• Data collected and source of data: – United Nations Conference on Trade and Development (UNCTAD) – World Development Indicators (WDI) online database of the World Bank
Data and the collection methodData collected from affected economies during the Asian financial crisis usinga fixed-effect panel regression analysis.Panel (data) analysis is a statistical method, widely used in socialscience, epidemiology, and econometrics, which deals with two-dimensionalpanel data.Panel data analysis has three more-or-less independent approaches:• Independently pooled panel;• Random effect model;• Fixed effect models or first differenced models; In panel data analysis, the term fixed effects estimator (also known as the within estimator) is used to refer to an estimator for the coefficients in the regression model. If we assume fixed effects, we impose time independent effects for each entity that are possibly correlated with the regressors.
Variables• Dependent variable : – Change in Economic Growth (CEG)• Independent Variables : – GDP growth rate – GNP growth rate• Control variables : – Inflation – Labor (as they both affect the economic growth.)• Emperical Model :
AnalysisThe following model which is based on the first formula is tested for 4 typesof FDI :For the hypotheses to be supported, the results would need to show anegative coefficient for the FDI*Crisis and FDI*Recovery variables, indicatinga reduction in the CEG variable (absolute CEG) during the crisis (1998) andrecovery (1999) periods.
Conclusion and recommendations Different Economic Same Reasons Crisis Solutions Good More More stable monitoring economy economic and policy integration growth making Main focus of policy making to attract more FDI stock .
Conclusion and recommendations• South East Asian countries might be the next region affected by crisis.• South East Asian countries is much dependent on Export to Western countries.• The economic infrastructures in this area is not so strong.• Paper concludes that traditionally trade was considered as a key tool to promote prosperity as it was export driven. But the Asian Financial Crisis has shown that FDI is a more reliable mechanism to promote national prosperity.• Therefore ASEAN countries are trying to attract FDI to their own country and also promoting FDI and trade amongst ASEAN countries
References :Multinational Business ReviewEmerald Article: FDI, economic decline and recovery: lessons from theAsian financial crisisHwy-Chang Moon, Joseph L.C. Cheng, Min-Young Kim, Jin-Uk KimU.S. Department of CommerceEconomics and Statistics Administration1401 Constitution Ave., NWWashington, DC 20230www.esa.doc.govwww.unctad.org united nation conference on trade and organization