1. INTRA-ASIAN FDI FLOWS: TRENDS, PATTERNS AND DETERMINANTS by Rabin Hattari and Ramkishen Rajan

2. i) Definitions ii)Trends in FDI Outflows iii)Data and Methodology iv)Findings v)Conclusions Contents

3. “FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is termed the ‘direct investor’.” Definitions

4.  FDI commonly bears three broad characteristics:  Refers to a source of external financingnet physical investment or real activity.  Refers to a source of external financing rather than net physical investment or real activity.  As matter of convention FDI involves a 10 percent threshold value of ownership.  FDI involves both the initial transaction that creates (or liquidates) investments as well as subsequent transactions between the direct investor and the direct investment enterprises aimed at maintaining, expanding or reducing investments. Definitions (cont’d.)

5.  At an operational level FDI consists of three broad aspects: a)New foreign equity flows (either M&A of existing local enterprises or Greenfield investments). b)Inter-company debt transactions (which refer to short-term or long-term borrowing and lending of funds including debt securities and trade credits between the parent company and its affiliates). c) Reinvested earnings (which comprise the investor’s share of earnings not distributed as dividends by affiliates or remitted to the home country but rather reinvested in the host country). Definitions (cont’d.)

6.  At an operational level FDI consists of three broad aspects:  Most M&A statistics tend to include announced rather than actual financial flows and may not always even include activities considered to be FDI (as defined above).  Announced flows often includes funding of capital via equity from local minority share- holders or local/international borrowing (as opposed to funds from the parent or sister companies) or swapping of shares. Definitions (cont’d.)

7. Trends  Developing countries continue to attract more direct investment from abroad but are increasingly also becoming significant investors abroad.

8. Trends (cont’d.)  However, most of the outward direct investment activities have so far involved Asian economies.

9. Trend (cont’d.)  Developing Asia, in the past 3 decades, has become the leader in FDI outward stock for developing countries.  The location and types of their investments have varied.

10.  Hong Kong’s outflows are far higher than any other developing economy. A large part of outflows from Hong Kong is bound for Mainland China (part of which is round- tripping from the Mainland to begin with).  The other three NIEs of Singapore, South Korea and Taiwan have consistently remained among the top developing economy sources of FDI. Trend (Cont’d)

11. Trend (cont’d.)  Malaysia’s outward FDI flows have picked up since the 1990s. Indonesia remains an important source of FDI, while more aggressive internationalization strategies by Indian companies has seen it rise in the rankings from 39 in 1990 to top 20 by 2005.

12. Trend (cont’d.):  Developing Asian economies are also investing in their own backyard.  Hong Kong, China, Singapore and Taiwan are particularly important investors.

13. Trend (cont’d.)  Most of the direct investment activities are between East Asian countries.

14. Trend (cont’d.)  Most of the direct investment activities are between East Asian countries.

15. Trend (cont’d.)  FDI outflows and inflows for most countries during the sub-periods 1990 to 1996 and 1997 to 2005 are positively correlated.  This indicates periods of economic liberalization have been characterized by simultaneous rises in both FDI inflows as well as outflows.

16. Question:  What are the determinants of intra-Asian (excluding Japan) bilateral direct investment flows over the period 1990-2004?

17. Methodology and Data  We use a gravity model on a panel data of intra-Asia bilateral direct investment flows from 15 Asian countries to other 10 Asian countries from 1990 to 2004.  Econometric methodology: Pooled OLS. Country-pair fixed effects to filter out any time invariant variables.

18. Methodology and Data (cont’d.)

19. Data  Our data is based FDI inflows to the host economy (i.e. we focus on the sources of inflows rather than destination of outflows).  Reasons: UNCTAD FDI outflows data from source countries are incomplete for many countries. For example, some donor countries (Malaysia and Thailand) have relatively complete outflows data, others either have incomplete data (India and Singapore), or no data all (Mainland China). FDI inflow data reported in host economy are more complete and data are available for all developing Asian economies under consideration here.

20. Model 1  Baseline model is based on gravity model: where each of these variables refer to market size, growth, exchange rates, and institutional type variables, respectfully.

21. Model 2  We augmented our model to include KOF- index of globalization.

22. Model 2

23. Models 1 and 2  We re-ran both models by taking into account the country-pair effects.  By pairing countries, we take out any time invariant variables (e.g. institutional type variables).  In this way, an Asian country that has traditionally invested directly in another Asian country will affect the coefficients of market size, growth, and bilateral exchange rate.

24. Our Findings

25. Findings – Equation 1  Our findings are consistent with study on determinants of bilateral FDI outflows based on cross-section.  Country-pair fixed effects show that market- size, growth, and bilateral exchange rate have significant effect with correct sign.

26. Findings 2  The economic globalization process (trade and capital restrictions) negatively impacts intra-Asia bilateral flows.  The political globalization process negatively impacts intra-Asia bilateral flow.

27. Conclusion  Asia remains a favoured destination for FDI inflows but firms from the region are also rapidly expanding operations overseas.  Determinants of intra-Asia FDI flows (bilateral) appear broadly similar to determinants of FDI flows globally.

28.  Against the background of rising reserve, policy makers in many emerging economies like China, Korea and India are actively promoted an internationalization thrust through gradual liberalization of rules governing capital account outflows and providing a financing mechanism to domestic firms looking to invest abroad. Conclusion (Cont’d)

29.  Singapore through “International Enterprise” specifically aims “to promote overseas growth of Singapore-based enterprises” www.iesingapore.gov.sg/ www.iesingapore.gov.sg/  Thailand and Malaysia are actively assisting their firms to invest abroad. Conclusion (Cont’d)

30.  This study has focused on bilateral FDI flows and their determinants, rather than determinants that are specific to host or source countries.  Specific rationale, types, and destination of outward FDI will vary between countries and require more careful country analyses. Conclusion (Cont’d)

31.  Bilateral and regional trade and investment agreements within the region might facilitate the cross-border flow of FDI. In turn, intensified intra-Asian FDI flows will help promote closer de facto regional integration.

32. Thank you for your attention

39. Trends (Cont’d)  Round-tripping significantly increases the amount of FDI outward from China.  Studies have estimated 25% (WIR03, p. 45) to 50% (Xiao 2004) of FDI inward to China is round- tripped via Hong Kong.