MBA_LOCATION CHOICE OF FIES THE CASE OF ASIA

DAO THI NGOC LAN * LOCATION CHOICE OF FIES: THE CASE OF ASIA * 2019

MINISTRY OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY

MASTER THESIS

LOCATION CHOICE OF FIES: THE CASE OF ASIA

Specialization: Master of Research in International Economics

FULL NAME: DAO THI NGOC LAN

Hanoi – 2019


MINISTRY OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY

MASTER THESIS

LOCATION CHOICE OF FIES: THE CASE OF ASIA

Major: Master of Research in International Economics
Specialization: International Economics
Code: 8310106

Full name: Dao Thi Ngoc Lan
Supervisor: Ass. Prof, Dr. Nguyen Thi Tuong Anh

Hanoi – 2019

ABSTRACT
Considered as one of the most important factors in one country’s economy
growth, Foreign Direct Investment (FDI) is properly appreciated in both developed
and developing countries. Especially developing Asia, already the largest recipient
region of FDI flows, registered an FDI rise of 4 per cent to $512 billion in 2018,
with positive growth occurring in all subregions, according to the World Investment
Report 2019 (UNCTAD, 2019). This study, therefore, analyses the determinants of
foreign-invested enterprises’ (FIEs) locational choice in Asia region over a period of
10 years from 2008 to 2017. The estimation is for a panel of 30 Asian countries and
based on the random fixed effect model. The results highlight that a country’s
market size and regulatory quality of a government have a large positive impact on
the on the Asian FDI inflow attractiveness. Also, the research reaffirmed the
previous literature that a country with higher corruption index is less attractive in
terms of locational investment decision of FIEs. Surprisingly, results indicate that
working population, infrastructure, inflation, openness to trade, economic growth,
natural resources and political stability are not significant determinants of FDI
inflows in Asia during 2008 and 2017.

1


STATEMENT OF ORIGINAL AUTHORSHIP
I, Dao Thi Ngoc Lan, confirm that this Master's Thesis has been written solely
by the undersigned and contains the work of no other person or persons except
where explicitly identified to the contrary.
I also state that said Master's Thesis has not been submitted elsewhere for the
fulfilment of any other qualification.
I make this statement in full knowledge of and understanding that, should it be

found to be false, I will not receive a grade and may face disciplinary proceedings.


ACKNOWLEDGMENTS
I would like to express my deep gratitude to people who supported and
assisted me in completing my dissertation. Firstly, I would like to thank my
supervisor sincerely, Ass. Prof, Dr. Nguyen Thi Tuong Anh. This thesis has
benefited substantially from her guidelines, suggestions, comments and
encouragements. Without her help, it could have been impossible for me to finish
my research.
Secondly, I would like to sincerely thank my lecturer in Econometrics, Dr.
Chu Thi Mai Phuong, who has made many value comments and suggestions in the
formulating of the research model and estimation method.
Besides, I also would like to show my appreciation to the whole of staff in the
Department of Graduate Studies, Foreign Trade University throughout our study
process, especially Dr. Cao Thi Hong Vinh for her thoughtful administrative
arrangements, patience and tremendous encouragement during our thesis writing
process.
Moreover, I desire to show my heartfelt appreciation to my parents, my
brother and my family as well. They always stand by me to strongly encourage in
completing my whole study.
Finally, I feel very thankful for my friends even if they are my classmates in
the Master of Research in International Economics or not, since they supported me
sincerely and enthusiastically in many ways when I was embarking on this tough
yet beneficial higher education path.
Dao Thi Ngoc Lan
July, 2019


TABLE OF CONTENTS

ABSTRACT..............................................................................................................i
STATEMENT OF ORIGINAL AUTHORSHIP....................................................ii
ACKNOWLEDGMENTS.....................................................................................iii
LIST OF ABBREVIATIONS.................................................................................vi
LIST OF TABLES AND FIGURES....................................................................viii
CHAPTER 1: INTRODUCTION..........................................................................1
1.1 Rationale of the thesis...................................................................................1
1.2 Objective of the thesis...................................................................................3
1.3 Methodology..................................................................................................3
1.4 Scope of the thesis..........................................................................................5
1.5 Structure of the thesis...................................................................................5
CHAPTER 2: LITERATURE REVIEW...............................................................6
2.1 Theoretical foundation..................................................................................6
2.1.1 What is FDI?............................................................................................6
2.1.2 Why should countries encourage FDI inflow?.......................................10
2.2 Background of Economy and FDI Inflows in Asia....................................13
2.2.1 The Asian economies..............................................................................13
2.2.2 The facts of FDI flows into Asia.............................................................16
2.3 Determinants of FDI Inflows......................................................................30
2.3.1 Market size.............................................................................................31
2.3.2 Working population................................................................................32
2.3.3 Infrastructure.........................................................................................32
2.4.4 Inflation..................................................................................................33
2.3.5 Openness to Trade..................................................................................33
2.3.6 Economic growth...................................................................................34
2.3.7 Corruption index....................................................................................34
2.3.8 Natural resources...................................................................................35
2.3.9 Political Stability....................................................................................35

2.3.10 Regulatory quality................................................................................36
CHAPTER 3: THE MODEL................................................................................38
3.1 Model research............................................................................................38
3.2 Description of variables..............................................................................42
3.2.1

Dependent variable..........................................................................42

3.2.2

Independent variables......................................................................43

3.3 Data collection.............................................................................................49
3.4 Estimation method......................................................................................50
CHAPTER 4: FINDINGS AND DISCUSSION..................................................53
4.1 Results of the regression model..................................................................53
4.2 Discussions on the outcomes of model........................................................56
4.3 Summary......................................................................................................59
CHAPTER 5: POLICY IMPLICATIONS..........................................................61
CONCLUSION......................................................................................................63
REFERENCES......................................................................................................66
APPENDICES.......................................................................................................70


LIST OF ABBREVIATIONS

BCC:

Business Cooperation Contract

BEA:

Bureau of Economic Analysis

BI:

Brownfield Investment

BLT:

Build -Lease-Transfer

BOO:

Build-Own-Operate

BOT:

Build-Operate-Transfer

BT:

Build-Transfer

BTL:

Build-Transfer-Lease

BTO:

Build-Transfer-Operate

CLMV:

Cambodia, Laos, Myanmar and Viet Nam

EU:

European Union

FDI:

Foreign Direct Investment

FE:

Fixed effects

FEM:

Fixed effect model

FIEs:

Foreign Invested Enterprise

GDP:

Gross Domestic Product

GI:

Greenfield Investment

IIP:

Index of industrial production

IMF:

International Monetary Fund

M&A:

A merger and acquisition

MNE:

Multinational Enterprise

O&M:

Operate-Manage

OECD:

Organization for Economic Cooperation and Development

OLS:

Ordinary Least Square method

PPP:

Public and Private Partnership

RE

Random effects

REM:

Random effect model

WTO:

World Trade Organization


LIST OF TABLES AND FIGURES
Table 1: Asia: Real GDP..........................................................................................15
Table 2: Top 10 Global and Asian Foreign Direct Investment Recipients in recent
years (Millions of dollars).......................................................................................18
Table 3: Expected effects of explanatory variables on FDI inflow into Asia...........48
Table 4: Descriptive statistics of variables in model................................................52
Table 5: Correlation matrix of the explanatory variables.........................................54
Table 6: Results of analysis.....................................................................................55
Table 7: Descriptive statistics of variables in model................................................69
Table 8: Correlation matrix of the explanatory variables.........................................70
Table 9: OLS model.................................................................................................71

Table 10: Random effect model...............................................................................72
Table 11: Breusch and Pagan Lagrangian multiplier test for random effects...........73
Table 12: Fixed effect model...................................................................................74
Table 13: Results of Hausman Test..........................................................................75
Table 14: Robust regression for random effect model.............................................76
Table 15: Results of analysis...................................................................................77

Figure 1: Top 10 recipients of FDI flows in developing Asia in 2017 (millions of US
dollars)......................................................................................................................2
Figure 2: FDI inflows, 2012–2018..........................................................................17
Figure 3: FDI trend for China during 2008 – 2018 comparing to East Asia and Asia.....19
Figure 4: FDI trend for Hong Kong (China) during 2008 – 2018 comparing to East
Asia and Asia...........................................................................................................20
Figure 5: FDI trend for Republic of Korea during 2008 – 2018 comparing to East
Asia and Asia...........................................................................................................20
Figure 6: FDI trend for Singapore during 2008 – 2018 comparing to South-East
Asia and Asia...........................................................................................................21
Figure 7: FDI trend for Indonesia during 2008 – 2018 comparing to South-East Asia
and Asia................................................................................................................... 22


Figure 8: FDI trend for Thailand during 2008 – 2018 comparing to South-East Asia
and Asia................................................................................................................... 23
Figure 9: FDI trend for CLMV countries during 2008 – 2018 comparing to SouthEast Asia.................................................................................................................. 24
Figure 10: FDI trend for India during 2008 – 2018 comparing to South Asia and Asia. .25
Figure 11: FDI trend for Bangladesh during 2008 – 2018 comparing to South Asia
and Asia................................................................................................................... 25
Figure 12: FDI trend for Sri Lanka during 2008 – 2018 comparing to South Asia
and Asia................................................................................................................... 26
Figure 13: FDI trend for Pakistan during 2008 – 2018 comparing to South Asia and

Asia......................................................................................................................... 27
Figure 14: FDI trend for Turkey during 2008 – 2018 comparing to West Asia and
Asia......................................................................................................................... 28
Figure 15: FDI trend for Saudi Arabia during 2008 – 2018 comparing to West Asia
and Asia................................................................................................................... 29
Figure 16: FDI trend for Saudi Arabia during 2008 – 2018 comparing to West Asia
and Asia................................................................................................................... 29


CHAPTER 1: INTRODUCTION
1.1 Rationale of the thesis
Over the last 6 decades or so of globalization, foreign direct investment (FDI)
has played an important role in stimulating international trade, facilitated the global
integration and growth of many developing and emerging economies. FDI is
considered as one type of investment funds contributing to the growth of a country
in general and the development of economy in particular because of some key
reasons. For instance, FDI generates a huge number of impacts on all sectors in the
national economy relating to financial development of various industries, the level
of economy’s openness and so on. Beginning in the mid-1980s, world foreign direct
investment (FDI) flows increased rapidly with a growing number of multinational
enterprises (MNEs) as the engine of the increased international economic activities.
Both industrialized and developing countries are becoming more receptive to
FDI flows such that a majority of FDI policy changes in these countries are in the
direction of more liberalization of FDI inflows (United Nations, 1992) as there are
various benefits which FDI brought for economic growth. Asia, in particular has
benefited enormously from FDI flows into the region. According to UNCTAD’s
World Investment Report 2014, Asia was the world's top recipient region of foreign
direct investment (FDI), accounting for nearly 30 per cent of global FDI inflows.
Total inflows to developing Asia (excluding West Asia) amounted to $382 billion in
2013, 4 per cent higher than in 2012. FDI flows to developing Asia in 2017

remained at the level of 2016 ($476 billion), according to UNCTAD’s World
Investment Report 2018. The region regained its position as the largest recipient of
FDI in the world as its share in global inflows rose from 25% in 2016 to 33% in
2017. Worldwide investors have long been interested in Asia as an investment
destination thanks to the growth of local and regional markets, the region’s
enormous natural resources and its strategic location for export-oriented production.
The following figure 1 presents the top 10 Asian recipients of FDI inflows in
2017 which shows increasing amounts of FDI invested into Asia region by


worldwide Foreign-invested Enterprises (FIEs). The data are in millions of US
dollars.
Malaysia
United Arab Emirates
Turkey
Viet Nam
Korea, Republic of
Indonesia
India
Singapore
Hong Kong, China
China
-

20 000.0 40 000.0 60 000.0 80 000.0 100 000.0 120 000.0 140 000.0 160 000.0

(Millions of dollars)

Figure 1: Top 10 recipients of FDI flows in developing Asia in 2017
(millions of US dollars)

Source: UNCTAD, 2019.
However, as can be seen in Figure 1, FDI inflows has historically been widely
uneven distributed across Asia. While China, Hongkong (China), Singapore and
India have received the regional major FDI inflows, other economies have been
comparatively low in attracting FDI. South Korea, Indonesia, Vietnam, Turkey,
United Arab Emirates and Malaysia have been hesitant to absorb FDI, despite its
benefits to potentially drive further economic development and efficiency. Various
countries have different policies to enhance FDI in order to meet the new economic
challenges. In the worldwide globalization context, it is important to have affective
policies to attract FDI for trade facilitation and economy stimulation. Hence, many
economists have examined the relationship between FDI and several variables such


as economic growth, trade and energy consumption (Apergis et al., 2006; Tang et
al., 2008; Lee, 2013; Omri, 2014; Tang and Tan, 2014; Bhattacharyaa et al., 2016).
The FDI inflow differential among developing countries has also generated much
research interest among researchers. As a result, a largely amount of empirical
literature has concentrated on investigating the factors attracting FDI inflow into the
developing regions such as infrastructure, trade openness, human capital, political
stability, etc. Still, the determinants of FIEs’ location choice in Asia are underresearched while it is important to design the effective policies in order to achieve
high economic growth.
In this context, this paper is to provide a systematic study on the determinants
of FIEs’ location choice and policy implications for Asian countries.
1.2 Objective of the thesis
This paper examines the determinants of foreign direct investment (FDI) into
Asia in range of 2008-2017. Policy makers can then use the findings to channel FDI
to the targeted regions or countries.
Using Ordinary Least Square method (OLS), random effects model (REM)
and fixed effects model (FEM), this paper investigates the effects of market-size,
labor force, infrastructure, inflation, trade openness, economic growth rate,

corruption perceptions index, total natural resources rents, political stability and
regulatory quality on FDI inflows in thirty Asian countries in the period from 2008
to 2017.
1.3 Methodology
Two methods have been used to estimate the panel data model including Pool
OLS and Random effects and finally the Random effect technique was chosen to
estimate the model. We ran some tests to select the methods as the Breusch and
Pagan Lagrangian multiplier test for random effects to select the panel data’s
estimation method out of Pool OLS or Random effects technique, and Hausman
tests for choosing between fixed and random effects. In all model, the time-variant
independent variables use the first-order lag to reduce endogenous problems.


Gravity-type models can be estimated by both standard and more advanced
econometric methods. A simple and widely used method is OLS, applied to the
linear regression derived by taking logarithms of the gravity equation. However,
estimation results are biased and inconsistent because of missing data implied by
the logarithmic transformation 2, heteroskedasticity and unobserved heterogeneity.
Despite not being applicable to the gravity model estimation, OLS is used in many
research papers at both country and regional level.
The other standard estimation approach is panel data estimation, both with
fixed effects (FE) and random effects (RE). By dealing with country specific
effects, the panel FE method solves the inconsistency problem of the OLS
estimation in the gravity model. The presence of the distance variable in the gravity
model might make it inappropriate to use either FE method (because there are time
invariant variables in the regression) or RE method (because the individual effects
could correlate with some explanatory variables). To solve this problem, they
suggest using the Hausman test. At the regional level, the method of panel data
estimation with fixed and random effects was used.
Time lag involved in decision making of FIEs on investment location into Asia

has been taken account of in this study given that investment decision is normally a
time-consuming process and is made in advance before the actual investment takes
place. Therefore, current values of the explanatory variables might not have much
impact on the FDI inflows. In contrast, if sudden change in host countries’
economic factors makes them less attractive than at the time the initial investment
decision is made, the planned investment might not be realized (Faeth, 2005). As
one-year time lag is logical to take an informed decision, the time-variant
independent variables use the first-order lag in all models to reduce endogenous
problems (Blattner, 2006).
As regards a research data collection, the dissertation would like to utilize two
different data sources – primary and secondary data. The primary information is
collected from reports of FDI projects and the government’s official websites while
the secondary data is gathered from research books, journals, articles and websites.


1.4 Scope of the thesis
This paper examines the possibility of cointegration and causality among FDI,
market-size, labor force, infrastructure, inflation, trade openness, economic growth
rate, corruption perceptions index, total natural resources rents, political stability
and regulatory quality in Asian countries in the period of 2008 - 2017.
1.5 Structure of the thesis
The remainder of this study is structured as follows. Section 2 provides the
literature review of FDI and the factors affecting FIEs’ geographical investment
decision. The data sources, model researcher and strategic estimation are presented
in Section 3. Then, section 4 analyses and discusses the regression results. Lastly,
the conclusion and policy implications are presented in Section 5.


CHAPTER 2: LITERATURE REVIEW
The literature review section attempts to illustrate the fundamental

knowledge involving in the aim and objectives of the study. First of all, the
literature will concentrate on analyzing the fundamental of FDI concept and the
reasons why countries want to attract FDI inflows, what are the benefits of FDI.
Next, the background of the Asian economy and its current FDI inflow trend are
presented in this chapter for a better understanding of the Asian countries’ economic
situation in correlation with how FDI is distributed in the region. In addition, the
author will review the previous literature on the determinants of FDI inflow in order
to identify a number of appropriate independent variables for the model estimation.
2.1 Theoretical foundation
2.1.1 What is FDI?
Foreign Direct Investment (FDI) implies an investment made with an intent
of obtaining an ownership stake in an enterprise domiciled in a country by an
enterprise situated in some other country. The investment may result in the transfers
of funds, resources, technical know-how, strategies, etc. There are several ways of
making FDI i.e. creating a joint venture or through merger and acquisition or by
establishing a subsidiary company.
The investor company has a substantial amount of influence and control over
the investee company. Moreover, if the investor company obtains 10% or more
ownership of equity shares, then voting rights are granted along with the
participation in the management. Below are some popular definitions widely used
for FDI.
According to the International Monetary Fund (IMF) and the Organization
for Economic Cooperation and Development (OECD) definitions, FDI is defined as
a category of international investment that reflects the aim of obtaining a lasting
interest by a resident entity of one economy (direct investor) in an enterprise that is
resident in another economy (the direct investment enterprise). The lasting interest
implies the existence of a long-term relationship between the direct investor and the


direct investment enterprise, and a significant degree of influence by the investor on

the management of the enterprise. A direct investment relationship is established
when the direct investor has acquired 10 percent or more of the ordinary shares or
voting power of an enterprise abroad. Direct investment involves both the initial
transaction establishing the relationship between the investor and the enterprise and
all subsequent capital transactions between them and among affiliated enterprises,
both incorporated and unincorporated. It should be noted that capital transactions
which do not give rise to any settlement, like an interchange of shares among
affiliated companies, must also be recorded in the Balance of Payments and in the
Index of industrial production (IIP).
The fifth Edition of the IMF’s Balance of Payment Manual defines the owner
of 10 percent or more of a company’s capital as a direct investor. This guideline is
not a fast rule, as it acknowledges that smaller percentage may entail a controlling
interest in the company (and, conversely, that a share of more than 10 percent may
not signify control). But the IMF recommends using this percentage as the basic
dividing line between direct investment and portfolio investment in the form of
shareholdings. Thus, when a non-resident who previously had no equity in a
resident enterprise, purchases 10% or more of the shares of that enterprise from a
resident, the price of equity holdings acquired should be recorded as direct
investment. From this moment, any further capital transactions between these two
companies should be recorded as a direct investment. When a non-resident holds
less than 10 per cent of the shares of an enterprise as portfolio investment, and
subsequently acquires additional shares resulting in a direct investment (10 per cent
of more), only the purchase of additional shares is recorded as direct investment in
the Balance of Payments. The holdings that were acquired previously should not be
reclassified from portfolio to direct investment in the Balance of Payments but the
total holdings should be reclassified in the IIP.
According to the World Trade Organization (WTO), foreign direct
investment (FDI) occurs when an investor based in one country (the home country)
acquires an asset in another country (the host country) with the intent to manage

that asset. The management dimension is what distinguishes FDI from portfolio
investment in foreign stocks, bonds and other financial instruments. In most
instances, both the investor and the asset it manages abroad are business firms. In
such cases, the investor is typically referred to as the “parent firm” and the asset as
the “affiliate“ or “subsidiary” (WTO, 1996).
In conclusion, it can be understood that FDI is a form of investment where
foreign investors invest the whole capital or a partial capital which is large enough
to gain the control over or to participate in controlling enterprises in the host
country.
In terms of FDI categories, there are 3 main investment categories of FDI
which is discussed as bellows.
a.

Following FDI penetration method: FDI is categorized into 2 types

Greenfield Investment (GI) and Brownfield Investment (BI).
In economics, a greenfield investment refers to a type of foreign direct
investment where a company establishes operations in a foreign country. In a
greenfield investment, the company constructs new facilities (sales office,
manufacturing facility, etc.) cross-border from the ground up. According to the
Bureau of Economic Analysis (BEA), a greenfield investment is a project “where
foreign investors establish a new business or expand an existing business on U.S.
soil.”
A greenfield investment is a form of market entry commonly used when a
company wants to achieve the highest degree of control over foreign activities. It
can be compared to other foreign direct investments such as the purchase of foreign
securities or the acquisition of a majority stake in a foreign company in which the
parent company exercises little to no control over daily business operations. Apart
from potential tax breaks or subsidies in establishing a greenfield investment, the

overarching goal of such an investment is to achieve a high level of control over
business operations and to avoid intermediary costs.


Meanwhile, a brownfield investment (BI) is a type of foreign direct
investment where a company invests in an existing facility to start its operations. In
other words, a brownfield investment is the lease or purchase of a pre-existing
facility in a foreign country. A brownfield investment is often undertaken when a
company wants to invest and start operations in a new country but does not want to
incur high start-up costs associated with a greenfield investment. The underlying
rationale behind a brownfield investment is to enter into a new foreign market. In a
brownfield investment, the company either invests in existing facilities and
infrastructure through a merger and acquisition (M&A) deal or leases existing
facilities in the foreign country.
b.

Based on the level of capital participation in investment projects
A 100% foreign-owned enterprise is an enterprise owned by foreign

investors, newly established, purchased, self-managed by the investors, who are
self-responsible for the business results.
A foreign-invested joint-venture enterprise is established on the basis of
capital contribution by foreign investors and at least one domestic investor.
Business Cooperation Contract (BCC) is a cooperation agreement between
foreign investors and at least one Vietnamese partner in order to carry out specific
business activities. This form of investment does not constitute the creation of a
new legal entity. The investors in a BCC generally share the revenues and/or
products arising from a BCC and have unlimited liability for the debts of the BCC.
Public and Private Partnership (PPP) Contract is an investment form
carried out based on a contract between the government authorities and project

companies for infrastructure projects and public services. PPP contracts include
Build-Operate-Transfer (‘BOT’), Build-Transfer (‘BT’), Build-Transfer-Operate
(‘BTO’), Build-Own-Operate (‘BOO’), Build-Transfer-Lease (‘BTL’), Build
-Lease-Transfer (‘BLT’) and Operate-Manage (O&M) contracts.


c.

Based on the strategic purpose of the investor, FDI can be vertical

(investing in suppliers, distributors, retailers) or horizontal (investing in the same
type of firm), or conglomerate.
In case of horizontal FDI, the company does all the same activities abroad as
at home. For example, Toyota assembles motor cars in Japan and the UK.
In vertical assignments, different types of activities are carried out abroad. In
case of forward vertical FDI, the FDI brings the company nearer to a market (for
example, Toyota buying a car distributorship in America). In case of backward
vertical FDI, the international integration goes back towards raw materials (for
example, Toyota getting majority stake in a tyre manufacturer or a rubber
plantation).
In the type of conglomerate investment, the investment is made to acquire an
unrelated business abroad. It is the most surprising form of FDI, as it requires
overcoming two barriers simultaneously – one, entering a foreign country and two,
working in a new industry.
With regards to the FDI motives, there are a variety of motives for a firm to
engage in FDI:


Resource-seeking (location-specific). Resource seeking FDIs are aimed at

factors of production which have more operational efficiency than those available in
the home country of the investors.


Market-seeking (more about responding to market need than reducing costs).

This FDI is undertaken to strengthen the existing market structure or explore the
opportunities of new market.


Efficiency-seeking FDI which is carried out to ensure optimization of

available opportunities and economies of scale


Strategic asset-seeking (created assets) FDI which involves the transfer of

strategic asset.




Trade/import substituting (requiring FDI to direct trade to avoid customs

etc.)
2.1.2 Why should countries encourage FDI inflow?
Trade has always been a vital part of economy and with the concept of
globalization it reaches to the international level. Foreign direct investment (FDI)
has proved to be resilient during financial crises and the role of FDI in the economy
development is very crucial. It is widely recognized that FDI produces economic

benefits to the recipient countries by providing capital, foreign exchange,
technology and by enhancing competition and access to foreign markets. Foreign
Direct Investment take place when an investor based in one country acquires asset
in another country in this process, the company investing in the host country also
transfers assets such as technology, management and marketing.
In addition to this the investing company also get chances of power to exercise
control over decision making in a foreign land enterprise to the extent of which it
held equity control such investment could also be in the form of reinvestment of
earning in the shape of retained earnings by the host country‘s enterprises that also
strengthen the control of foreign investors.
According to Kurtishi-kastrati (2013), there exists a variety of benefits of FDI
as a key component for successful and sustainable economic growth and also as a
part of a method to social improvement.
Resource – Transfer Effect
Foreign direct investment can make a positive contribution to a host economy
by supplying capital, technology and management resources that would otherwise
not be available. Such resource transfer can stimulate the economic growth of the
host economy (Hill, 2008). According to Jenkins and Thomas (2002), FDI can
contribute to economic growth not only by providing foreign capital but also by
crowding in additional domestic investment; so it increases the total growth effect
of FDI. In addition, technologies that are transferred to developing countries in
connection with foreign direct investment tend to be more modern, and


environmentally ‘cleaner’, than what is locally available. Moreover, positive
externalities have been observed where local imitation, employment turnover and
supply-chain requirements led to more general environmental improvements in the
host economy (Kurtishi-kastrati, 2013). And by transferring knowledge, FDI will
increase the existing stock of knowledge in the host country through labour training,
transfer of skills, and the transfer of new managerial and organizational practice.

Employment Effects
According to Kurtishi-kastrati (2013), the effects on employment associated
with FDI are both direct and indirect. In countries where capital is relatively scarce
but labour is abundant, the creation of employment opportunities, either directly or
indirectly, has been one of the most prominent impacts of FDI. The direct effect
arises when a foreign multinational enterprise (MNE) employs a number of host
country citizens. Whereas, the indirect effect arises when jobs are created in local
suppliers as a result of the investment and when jobs are created because of
increased local spending by employees of the MNE.
Balance of Payments Effects
FDI’s effect on a country’s balance of payment accounts is an important policy
issue for most host governments. There are three potential balance of payments
consequences of FDI (Kurtishi-kastrati, 2013).
First, when an MNE establishes a foreign subsidiary, the capital account of the
host country benefits from the initial capital inflow. However, this is a one-time
only effect.
Second, if the FDI is a substitute for imports of goods or services, it can
improve the current account of the host country’s balance of payment. Much of the
FDI by Japanese automobile companies in the US and UK, can be seen as substitute
for imports from Japan.
A third potential benefit to the host country’s balance of payment arises when
the multination enterprise (MNE) uses a foreign subsidiary to export goods and
services to other countries. The evidence based on empirical research on the balance


of payments effect of FDI, indicates that there is a difference between developed
and developing countries, especially with respect to investment in the
manufacturing industries.
International Trade
FDI can have a great contribution to economic growth in developing countries

by supporting export growth of the countries. According to Kurtishi-kastrati (2013),
output resulting from efficiency-seeking FDI is typically intended for export, and
therefore the impact of such FDI is likely to be an increase in exports from the host
country. If local firms provide inputs to affiliates producing goods for exports, the
local content of value-added exports would be much greater. In cases where
intermediate goods are imported from outside the host economy, efficiency-seeking
FDI will increase export as well as import.
Effect on Competition
According to an OECD report (OECD, 2002) the presence of foreign
enterprises may greatly assist economic development by spurring domestic
competition and thereby leading eventually to higher productivity, lower prices and
more efficient resource allocation. Increased competition tends to stimulate capital
investments by firms in plant, equipment and R&D as they struggle to gain an edge
over their rivals. FDI’s impact on competition in domestic markets may be
particular important in the case of services, such as telecommunication, retailing
and many financial services, where exporting is often not an option because the
service has to be produced where it is delivered. And according to an OECD study,
“Like trade, foreign direct investment acts as a powerful spur to competition and
innovation, encouraging domestic firms to reduce costs and enhance their
competitiveness” (OECD, 1998).
2.2 Background of Economy and FDI Inflows in Asia
2.2.1 The Asian economies
Asia is the world’s largest continent, in addition to being the most diverse in
terms of geography, ethnicity and so on. It stretches from the Mediterranean, Black


and Red Seas in the West to the Pacific Ocean in the East, and from the Siberian
glacial Arctic Ocean in the North to the Indian Ocean in the South.
The second half of the 20th century was characterized by various waves of
spectacular economic growth among countries of the Asian Pacific Rim, first in

Japan, then in South Korea, Singapore, Hong Kong, Malaysia and Indonesia, among
others. In more recent decades, the rapid growth of China and India has also been
breathtaking. Broadly speaking, the economic development of these countries has
been based on exporting manufactured goods. In the case of the Middle East and the
former Soviet Union republics of Central Asia, prosperity has been largely due to
these countries’ vast reserves of oil and other forms of non-renewable energy, in
particular gas. According to the International Monetary Fund (2018), economic
growth in Asia is forecast at 5.6 percent in 2018 and 2019 (see Table 1), while
inflation is projected to be subdued. China’s growth is projected to ease to 6.6
percent, partly reflecting the authorities’ financial, housing, and fiscal tightening
measures. Growth in Japan has been above potential for eight consecutive quarters
and is expected to remain strong this year at 1.2 percent. And in India, growth is
expected to rebound to 7.4 percent, following temporary disruptions related to the
currency exchange initiative and the rollout of the Goods and Services Tax. These
good prospects for the Asian economies have ensured that FDI has continued to
flow into these countries.
Moreover, since Asia accounts for 60% of the world’s population and thus
offers concentrations of cheap labor, some FDI source countries, including Japan,
the United States and European Union (EU) member-states, have invested strongly
in labor-intensive industries, such as textiles and clothing and so on. In many Asian
countries great emphasis is placed on creating and maintaining a highly educated
and skilled workforce, which is essential for producing cutting-edge electronics and
IT goods and services. With the improvements in the quality of education and
favorable policies, FDI inflows are likely to continue to increase.


Table 1: Real GDP in Asia
(Year-over-year percent change)

Source: International Monetary Fund, 2019.

1

EMDEs excluding Pacific island countries and other small states.

2

India’s data are reported on a fiscal year basis. Its fiscal year starts April 1 and ends March 31.

3

ASEAN comprises Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar,
the Philippines, Singapore, Thailand, and Vietnam.
4

ASEAN-5 comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand.