Structure of FDI in East Asia and its Implications on Regional Economic Integration

Suthiphand Chirathivat Chayodom Sabhasri Thanee Chaiwat November 2007

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Outline † FDI and Trends: the fact on Business Perspectives † Trade and FDI: the linkages † Simple Empirical Tests and Results † Implications for ASEAN+6

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Objective † To examine the trends and determinants of FDI in East Asia with regionalism.

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Fact: FDI Trends † Since the mid 1980s, rapid expansion of FDI and FDI-induced manufactured trade have clearly contributed to further economic development and growth of the region. † FDI in East Asia, driven as part of the business activities of transnational corporations, regionally and worldwide, has tended to create more trade, in particular intra-industry trade. † Forming regional and global production networks in relation to the business activities of transnational corporations and firms.

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Fact: FDI Trends † Even with the financial crisis of 1997-98 which had slowdown somewhat crisis-hit ASEAN countries’ economic performance, but it has not deterred the attention of foreign investors as they had deepened the structure of FDI and helped to increasing economic integration among the regional economies even with the lack of regional institutions and mechanisms that serve to strengthen such interdependence (Rutngamlug (2002), Chirathivat (2002)).

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FDI and Growth † Among countries at the sub-regional level, China and Hong Kong retained the positions as the largest FDI recipients in the region, followed by Singapore and India. † Rapid economic growth in the region will continue to attract „ Efficiency-seeking FDI „ Market-seeking FDI

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FDI Flows: Trends and Patterns

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Share of FDI Inflows to China and ASEAN

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Share of Japan’s FDI Outflows

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FDI Inflows to ASEAN, 1997-2006 (Bn. USD): Japan took almost half of the total share from the region.

10 Source: Statistics of Foreign Direct Investment in ASEAN, ASEAN Secretariat

ASEAN + X † FDI from Japan, Korea and China to ASEAN shares substantially as compared to FDI from Australia, New Zealand, and India.

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Intra-East Asian FDI flows, 1997-2006 (Billion USD)

Source: ASEAN Secretariat, Japan External Trade Organization, Ministry of Commerce, Industry and Energy Republic of Korea and National Bureau of Statistics of China

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FDI Flows Prospects for Major Industries in ASEAN: Business Perspectives

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Intra - ASEAN FDI flows † For intra-ASEAN FDI flows, ASEAN countries Malaysia, Singapore and Thailand are attractive for „ electrical and electronic products (ISIC 32) „ food products and beverages (ISIC 15) „ paper and paper products (ISIC 21) † Indonesia and Vietnam, because of its natural resource endowment, are more attractive for „ food products and beverages

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Intra-ASEAN FDI Inflows 1999-2003

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FDI Inflows to ASEAN † ASEAN was most attractive for Japanese investors for its industries like electrical and electronic products (ISIC 32), rubber and plastic products (ISIC 25) and chemical and chemical products (ISIC 24). † Chinese investors had interested much natural resourcebased industries in ASEAN like wood and wood products, paper and paper products (ISIC 21),for example. † For South Korean investors in ASEAN, they were interested in manufacturing-based industries like other non-metallic mineral products (ISIC 26), electrical and electronic products (ISIC 32) and textiles (ISIC 17) with some differences from resource-intensive to technologyintensive industries. 16

ASEAN FDI Inflows 1999-2003

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Trade and FDI: the linkages

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Intra-regional Trade and FDI † Most regional and global TNCs had to fragment and agglomerate their production process into different sub-processes and sub-regional locations according to the required factor production and technological capabilities (Kawai(2004)). † As a result, a network of intra-regional, intraindustry trade in parts, components, semifinished products, and finished products within East Asia has become an integral part of a more efficient division of labor and deeper economic integration. 19

Intra-regional Imports † Changes in intra-regional imports as percentage of total imports between 1997 and 2006 demonstrate the degree of trade intensity with the region for each country and also for the region. † In general, it confirms that most of the countries trade with the region represent more than half for its imports with Hong Kong the highest (72.1 per cent) following by Thailand, Indonesia, Taiwan, Singapore, etc. 20

Intra-regional Exports † Changes in intra-regional exports as percentage of total exports between 1997 and 2006 shows that the region is more dependent for their exports.

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Intra-regional Exports † Japan, and South Korea have also become dependent for its exports to the region, particularly due to the role of firms operated within the regional production networks. † ASEAN depend the most for their exports to the region especially to Japan and China. † China is much less dependent for their exports to the region as most of these are mostly targeted the developed markets in the USA and the EU. 22

Bilateralism and Regionalism † Recent regional and bilateral trade agreements are to deepen the process of regional integration as ASEAN has exemplified since the 1990s and more recent proliferation of FTAs that resulted in the region. † Bilateral agreement: FTA/EPA † Plurilateral agreement: ASEAN Plus One, ASEAN Plus Three, ASEAN Plus 6

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Simple Empirical Tests † Due to the limited role of Australia, New Zealand, and India, this paper uses ASEAN5 +3 data Indonesia, Malaysia, the Philippines, Singapore, Thailand, Japan, South Korea and China for the period from 1990 to 2006 to examine the relationship among FDI between countries, networking effects and its controlled variables. † The fixed effect pooled data regression models are estimated as following: † FDI = f(PN, MS, RS, Planned FDI, Cross FDI) 24

Variables † PN is the variables „ IRTI = Intra-regional trade intensity index* „ TII = Trade intensity index* „ CEPT = CEPT Tariff † MS is a set of market-seeking variables „ GDPG = Real GDP Growth „ POP = Population † RS is a set of resource-seeking variables „ WAGE = Wage rate „ SKILL = High school graduate/labour force „ GOVT = Government expenditure on infrastructure to GDP * ASEAN (5) level

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Variables for each ASEAN country † Planned FDI is a set of FDI to each ASEAN country „ JFDI(1) „ CHFDI(1) „ KFDI(1)

= = =

Lagged FDI from Japan Lagged FDI from China Lagged FDI from South Korea

† Cross FDI is a set of South Korea, Japan and China FDI to each ASEAN country „ „ „ „

RFDI JFDI CHFDI KFDI

= = = =

FDI FDI FDI FDI

from from from from

the other countries Japan China South Korea 26

Estimated Model

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Overall Results Variable C IRTI_AS? IRTI_AS?^2 TII_AS? LOG(CEPT?) LOG(KFDI) (-1) LOG(JFDI) (-1) LOG(CFDI) (-1) GDPG? LOG(POP?) LOG(WAGE?) LOG(SKILL?) LOG(GOVT?) LOG(FDI_R_X?) LOG(KFDI_X?) LOG(JFDI_X?) LOG(CHFDI_X?)

KFDI Coef. 31.332 4.341 0.326 2.235 -0.020 0.034

Prob. 0.037 0.091 0.263 0.000 0.013 0.499

JFDI Coef. -0.546 3.714 0.379 0.672 -0.032 0.059

0.040 2.752 -0.081 0.612 0.676 0.271

0.004 0.033 0.425 0.008 0.067 0.000

0.681 -0.042

0.000 0.628

Prob. 0.959 0.034 0.047 0.056 0.003

CHFDI Coef. 75.479 3.751 0.306 1.077 -0.061

Prob. 0.001 0.152 0.277 0.045 0.038

0.246 0.018 6.462 -0.127 0.278 1.337 -0.026 -0.151 0.116

0.041 0.138 0.002 0.411 0.546 0.018 0.633 0.267 0.582

0.491

0.001 0.193 -0.301 0.382 0.106 -0.061 0.260

0.867 0.826 0.002 0.010 0.664 0.104 0.000

0.076

0.102

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Production Network The results imply that the production networking hypothesis can explain the trade and investment relationship between ASEAN and Japan as well as ASEAN and Korea. Variable C IRTI_AS? IRTI_AS?^2 TII_AS? LOG(CEPT?) LOG(KFDI) (-1) LOG(JFDI) (-1) LOG(CFDI) (-1) GDPG? LOG(POP?) LOG(WAGE?) LOG(SKILL?) LOG(GOVT?) LOG(FDI_R_X?) LOG(KFDI_X?) LOG(JFDI_X?) LOG(CHFDI_X?)

KFDI Coef. 31.332 4.341 0.326 2.235 -0.020 0.034

Prob. 0.037 0.091 0.263 0.000 0.013 0.499

JFDI Coef. -0.546 3.714 0.379 0.672 -0.032 0.059

0.040 2.752 -0.081 0.612 0.676 0.271

0.004 0.033 0.425 0.008 0.067 0.000

0.681 -0.042

0.000 0.628

Prob. 0.959 0.034 0.047 0.056 0.003

CHFDI Coef. 75.479 3.751 0.306 1.077 -0.061

Prob. 0.001 0.152 0.277 0.045 0.038

0.246 0.018 6.462 -0.127 0.278 1.337 -0.026 -0.151 0.116

0.041 0.138 0.002 0.411 0.546 0.018 0.633 0.267 0.582

0.491

0.001 0.193 -0.301 0.382 0.106 -0.061 0.260

0.867 0.826 0.002 0.010 0.664 0.104 0.000

0.076

0.102 29

Market & Resource Seeking Considering the market seeking hypothesis, Korean and Chinese FDIs flow into ASEAN in order to enjoy the business and market opportunities and resources. However, the FDI inflow from Japan is due to resource seeking. Japanese FDI seeks for the cheaper resource to relocate their production. Chinese FDI to ASEAN on the other hand can be explained by the planned FDI.

Variable C IRTI_AS? IRTI_AS?^2 TII_AS? LOG(CEPT?) LOG(KFDI) (-1) LOG(JFDI) (-1) LOG(CFDI) (-1) GDPG? LOG(POP?) LOG(WAGE?) LOG(SKILL?) LOG(GOVT?) LOG(FDI_R_X?) LOG(KFDI_X?) LOG(JFDI_X?) LOG(CHFDI_X?)

KFDI Coef. 31.332 4.341 0.326 2.235 -0.020 0.034

Prob. 0.037 0.091 0.263 0.000 0.013 0.499

JFDI Coef. -0.546 3.714 0.379 0.672 -0.032 0.059

0.040 2.752 -0.081 0.612 0.676 0.271

0.004 0.033 0.425 0.008 0.067 0.000

0.681 -0.042

0.000 0.628

Prob. 0.959 0.034 0.047 0.056 0.003

CHFDI Coef. 75.479 3.751 0.306 1.077 -0.061

Prob. 0.001 0.152 0.277 0.045 0.038

0.246 0.018 6.462 -0.127 0.278 1.337 -0.026 -0.151 0.116

0.041 0.138 0.002 0.411 0.546 0.018 0.633 0.267 0.582

0.491

0.001 0.193 -0.301 0.382 0.106 -0.061 0.260

0.867 0.826 0.002 0.010 0.664 0.104 0.000

0.076

0.102

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Cross FDI Japanese FDI is complemented by both Korean and Chinese ones, while Korean and Chinese FDI are seemed to be substituted each other. Variable C IRTI_AS? IRTI_AS?^2 TII_AS? LOG(CEPT?) LOG(KFDI) (-1) LOG(JFDI) (-1) LOG(CFDI) (-1) GDPG? LOG(POP?) LOG(WAGE?) LOG(SKILL?) LOG(GOVT?) LOG(FDI_R_X?) LOG(KFDI_X?) LOG(JFDI_X?) LOG(CHFDI_X?)

KFDI Coef. 31.332 4.341 0.326 2.235 -0.020 0.034

Prob. 0.037 0.091 0.263 0.000 0.013 0.499

JFDI Coef. -0.546 3.714 0.379 0.672 -0.032 0.059

0.040 2.752 -0.081 0.612 0.676 0.271

0.004 0.033 0.425 0.008 0.067 0.000

0.681 -0.042

0.000 0.628

Prob. 0.959 0.034 0.047 0.056 0.003

CHFDI Coef. 75.479 3.751 0.306 1.077 -0.061

Prob. 0.001 0.152 0.277 0.045 0.038

0.246 0.018 6.462 -0.127 0.278 1.337 -0.026 -0.151 0.116

0.041 0.138 0.002 0.411 0.546 0.018 0.633 0.267 0.582

0.491

0.001 0.193 -0.301 0.382 0.106 -0.061 0.260

0.867 0.826 0.002 0.010 0.664 0.104 0.000

0.076

0.102

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Comparative Advantages

KFDI

Variable

Coef.

JFDI Prob.

Coef.

CHFDI Prob.

Coef.

Prob.

Fixed Effects (Cross) _INDONESIA--C

5.557

2.949

10.291

_MALAYSIA--C

-0.690

-0.346

-2.777

_PHILIPPIN--C

2.175

-0.837

5.770

_SINGAPORE--C

-5.141

-1.186

-11.623

0.318

0.665

2.620

_THAILAND--C

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Implications for ASEAN+6 † † †

† † † †

Currently, insignificant FDI from India, Australia and New Zealand to ASEAN. India has high potential in the future. Production network: the facts shows the rapid expansion of FDI and FDI-induced manufactured trade. Most regional and global MNCs had to fragment and agglomerate their production process into different subprocesses and sub-regional locations according to the required factor proportions and technological capabilities Our findings show the trade and FDI linkage and FDI from each country to ASEAN has also its own purposes, i.e., production networks, market-seeking or resource seeking. Capabilities of hosting countries is an important factor to attract FDI. ASEAN + 6 will certainly benefit the MNCs. However, only some countries have high potential MNCs. High Potential FDI from India. Examples for India’s FDI to ASEAN and Thailand are as follows. 33

Thailand-India FTA: Encouraging Private-Sector Investment †

(Thai-India FTA and ASEAN China FTA) In June 2005, Tata Motors of India, the world's fifth largest medium and heavy truck manufacturer and the second largest heavy bus manufacturer, entered a joint venture with Thonburi Automotive Assembly Plant (TAAP) to produce a pick-up truck which is a niche product of the Thai automobile industry. The joint venture aims to export pick-up trucks to ASEAN and PRC markets using the privilege of the tariff reduction under the ASEAN-PRC FTA. Similarly, Tata Steel took over the Thailand-based Millennium Steel Pcl. Ltd.

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Thailand-India FTA: Encouraging Private-Sector Investment †

(Thai-India-ASEAN) The latest FDI from India was in 2006 by the Tata Steel when it took over Millennium Steel Pcl. Ltd., a Thailand-based manufacturing company engaged in the production and distribution of steel products. The main products include deformed bars, round bars, angle channels, low-carbon wire rods, high-carbon wire rods, small sections, special bars and rolled steels. The company changed its name to Tata Steel Thailand Public Company Limited. Tata Steel will also invest more in the mini blast furnace project and will inject more than 130 million US dollars in the Thai subsidiary.

3535

Thailand-India EHS: Encouraging Private-Sector Investment †

(Thai-India-EA) Gems and jewelry industry is another area where Thailand and India have a high possibility to strengthen their investment relationship, which benefits from Thailand's well-known production of gems sets in both silver and gold and the potential to become the trading center for color stones and India's abundant supply of rough precious stones and polished small-sized diamond.

3636

India: Birla’s Business Activities in Thailand and the Region Thailand

Thai Rayon Indo Thai Synthetics Thai Acrylic Fibre Thai Carbon Black Aditya Birla Chemicals (Thailand) Ltd.

Thai Peroxide Philippines

Indonesia

China Australia Laos

Indo Phil Textile Mills Indo Phil Cotton Mills Indo Phil Acrylic Mfg. Corp. Pan Century Surfactants Inc. PT Indo Bharat Rayon PT Elegant Textile Industry PT Sunrise Bumi Textiles PT Indo Liberty Textiles PT Indo Raya Kimia Liaoning Birla Carbon Co. Ltd. Aditya Birla Minerals Ltd Birla Lao Pulp and Plantations Company Limited

viscose staple fibre (VSF) spun and fancy yarns acrylic fibre carbon black sodium phosphates, speciality phosphates, epoxy resins (bis-a and bis-f), diluents, curing agents and allied products, sodium sulphite, sodium metasulphite, sodium bisulphite, caustic soda, chlorine, epichlorohydrin, hydrochloric acid, allyl chloride hydrogen peroxide, peracetic acid, calcium peroxide yarns yarns yarns fatty alcohol / fatty acids viscose staple fibre (VSF) yarns yarns yarns carbon disulphide carbon black copper pulp wood plantations / pulp plant

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Japan’s Business Ties with Thailand and India under Thai-India EHS (Sept. 2004) †

In 2005, Thai exports to India of products under the agreement rose 130% to $337.78 million, a much larger gain than the 67.7% increase in exports of these products from all countries to India. Moreover, the 82 Early Harvest items accounted for over 20% of total Thai exports to India. The top exports were color TV picture tubes, polycarbonates and air conditioners, primarily produced by Japanese corporations in Thailand. Before Early Harvest, India had a 25% tariff on those items, but the rate was reduced to 12.5% when the agreement went into effect, and then further dropped to 6.25% in September 2005.

†

Similarly, Thailand’s import of Indian products covered by Early Harvest increased 25.5% to $88.29 million. The main import item was gearboxes for automobile transmissions, which were being exported from India by a Japanese-affiliated automaker. Again, Early Harvest brought large tariff reductions: the Thai duty fell from 30% to 15% in 2004, and then to 7.5% in 2005. 38