This document summarizes a paper about the impact of foreign direct investment (FDI) on economic decline and recovery during the 1997 Asian financial crisis. The paper analyzes data from 10 Asian economies to test the hypotheses that higher FDI levels prior to a crisis can reduce economic decline during the crisis and speed up recovery. The results found FDI did help mitigate decline and boost recovery in some cases. The conclusion is that Asian countries' efforts to attract more FDI can help build more stable economic growth and resilience to future crises.
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The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.
Financial contagion refers to “the spread of market disturbances -- mostly on the downside -- from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows." Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, or even regions.
Bubble Spotting - The East Asia Currency and Debt crisis of 1997Benjamin Van As
During the 1990s, various Eastern Asia economies grew at double-digit figures, and exports grew at well over 10% pa. in some cases.
Then the party ended with a bang as the Currency and Debt Bubble popped, the impact of which could be felt in markets around the world.
This presentation (which forms part of a larger series on Market Bubbles) gives a short overview on what happened.
Asian Financial Crisis in 1997
Asia before Financial Crisis
Beginning of Asian Financial Crisis
Affected countries from Asian financial Crisis
End of Asian Financial Crisis
IMF role during Asian financial crisis
3 Causes of Asian Financial Crisis
Impact of Asian Financial Crisis to:
Thailand
Philippines
Malaysia
Japan
How these countries overcame the Crisis
Current developments to Avoid future financial crisis
Overview of the Asian currency crisis and the potential for such crisis to occur in other nations including the potential for crisis in the United States. Written in May 2007.
A Case Study Analysis on the Asian Financial Crisis of 1997 and Zapa ChemicalsSadman Ahmed
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Asian Financial Crisis in 1997
Asia before Financial Crisis
Beginning of Asian Financial Crisis
Affected countries from Asian financial Crisis
End of Asian Financial Crisis
IMF role during Asian financial crisis
3 Causes of Asian Financial Crisis
Impact of Asian Financial Crisis to:
Thailand
Philippines
Malaysia
Japan
How these countries overcame the Crisis
Current developments to Avoid future financial crisis
Overview of the Asian currency crisis and the potential for such crisis to occur in other nations including the potential for crisis in the United States. Written in May 2007.
A Case Study Analysis on the Asian Financial Crisis of 1997 and Zapa ChemicalsSadman Ahmed
Asian Financial Crisis of 1997:-
The Asian crisis was one of the worst financial disasters in the history of Thailand. The investors moved away large sums money away, inflation spiraled out of control, and it ultimately put pressure on the exchange rates of the Baht. Due to Thailand’s problems alone, the effect of the crisis spread along different countries in Asia. The impacts prove how integrated the economies of today are. Much of the fault lies on the failed policies of the government and weak regulatory regime.
Zapa Chemicals (risk management)
The exchange rate exposure and the legal hurdles can be quite a burden when transferring funds across the borders. In the case of Zapa Chemicals, the tax filing problem did not help them to transfer funds. They didn’t know when exactly the funds would be available for receiving. The risk management of the firm is quite a hefty task for foreign companies to successfully pursue.
In the aftermath of the Asian crisis of 1997, a number of rapid assessments on the extent and nature of the social impact appeared. They brought out the human cost of the crisis in bolder relief. One such study, launched in the last quarter of 1998, was conducted by ADB. It was designed to assist in devising policy responses to the social crisis and identifying reforms that would strengthen social protection systems in the longer term. It covered Indonesia, the Republic of Korea, the Lao Peoples' Democratic Republic, Malaysia, Philippines, and Thailand. It sketched the transmission of social impacts from the crisis, analyzed the crisis effects on prices and employment, discussed the impact on inequality and poverty, looked at human development in terms of education, health, and family planning, touched on social capital, and looked at the environment.
Public debt and risk premium: An analysis from an emerging economyFarhad Hafez
This Slide is based on a paper which studies the public debt to GDP ratio, the economic policies which can stabilize it and the role of this ratio in controlling the risk premium of treasury bill and finally stabilizing the whole economy and avoiding the economic crisis to happen. It studies the economy of Brazil and takes it as a good sample of developing country which uses Inflation targeting as the monetary policy and has been having budget surplus rather than budget deficit for a very long time.
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FDI, economic decline and recovery: lessons from Asian Financial Crisis
1. FDI, Economic decline
and 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
2. • 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.
3. 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 United
Kingdom, Japan, France, Germany, Luxembourg, the Netherlands and
Canada. The FDI stocks in U.S. at the end of 2008 was about 16 percent of
its GDP.
4. Flow of FDI inward /outward South East Asia
All Asian economies have been working towards trade agreements such as Free Trade
Agreements (FTA) between countries. 10 South East Asian countries have trade agreement under
the ASEAN. Under the ASEAN the countries have free flow of goods categorized under no import
duty or reduced import duty.
ASEAN nations are attracting FDI so that each country has its competitive advantage. For
example Thailand is attracting automobile sector, and is one of the industry with highest FDI in
Thailand.
5. 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
6. • 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?
7. • 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
8. • 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.
9. Main Hypothesis and
method of testing
H1. The higher the level of FDI prior to the crisis,
the smaller the change (decline) in economic growth
during 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.
10. Data and the collection method
Economic growth data for the 15 largest Asian economies in the affected
region. however, full data were available from only ten of these economies:
Australia, China, Hong
Kong, 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
11. Data and the collection method
Data collected from affected economies during the Asian financial crisis using
a fixed-effect panel regression analysis.
Panel (data) analysis is a statistical method, widely used in social
science, epidemiology, and econometrics, which deals with two-dimensional
panel 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.
12. 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 :
13. Analysis
The following model which is based on the first formula is tested for 4 types
of FDI :
For the hypotheses to be supported, the results would need to show a
negative coefficient for the FDI*Crisis and FDI*Recovery variables, indicating
a reduction in the CEG variable (absolute CEG) during the crisis (1998) and
recovery (1999) periods.
17. 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 .
18. 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
19. References :
Multinational Business Review
Emerald Article: FDI, economic decline and recovery: lessons from the
Asian financial crisis
Hwy-Chang Moon, Joseph L.C. Cheng, Min-Young Kim, Jin-Uk Kim
U.S. Department of Commerce
Economics and Statistics Administration
1401 Constitution Ave., NW
Washington, DC 20230
www.esa.doc.gov
www.unctad.org united nation conference on trade and organization