Foreign Direct Investment Determinants in the South, East and
South-East Asia Mohammed Omar Sheriff Supervisor: Micheal
Cortez
The thesis is submitted to the Graduate School of Management for
the fulfilment of the requirements for the degree of Masters in
Business Administration in Finance
Graduate School Of Management, Ritsumeikan Asia Pacific
University, Beppu, Japan
Acknowledgement
Many people assisted me to accomplish this task. First and
foremost I would like to express my gratitude to my supervisot Dr.
Micheal Cortez for his continuous support, guidance and
constructive comments. It was a pleasure to do this research under
his supervision.
I would also like to express my heartfelt thanks to the who
provided me important information about my study
Finally I would like to thank for their support and
encouragement.
Table of contents
List of acronyms OLS: Ordinary Least Squares regression
technique SAARC: South Asian Association for Regional Cooperation
ASEAN: Association of SouthEast Asian Nations FDI: Foreign Direct
Investment M&A : Mergers and Acquistions
ABSTRACT Purpose: This paper provides a research proposal
investigating the question of determinants of FDI in the ASEAN and
the SAARC. significant relationships and differentials between
potential Macroeconomic, country specific and Transnational company
specific determinants of Foreign Direct Investment in the ASEAN
(Indonesia, Malaysia, the Philippines, Singapore, Vietnam and
Thailand) and select SAARC countries (Sri Lanka and India) using
data sets from 1990-2011 are identified. The paper ascertained all
objectives of the study and conducted a literature review where 32
variables and 32 hypotheses were identified to test the research
question. The proposal was critically centred on research design
and research method but also the research conducted time frames,
weaknesses and bibliographic references which are to be proposed
for future research in to the authors research topic. Finding of
the study are to be conducted as per the time frame. Furthermore
the Author provides definitions of all variables in the annexure
2.
Or Abstract This study aims at analyzing the determinants of
foreign direct investment inflows for a group of European regions.
The originality of this approach lies in the use of disaggregated
regional data. First, we develop a qualitative description of our
database and discuss the importance of the macroeconomic
determinants in attracting FDI. Then, we provide an econometric
exercise to identify the potential determinants of FDI inflows. In
spite of choosing regions presenting economic similarities, we show
that regional FDI inflows rely on a combination of factors that
differs from one region to another.
Design/Methodology/Approach A mixed method approach to research
is conducted gathering secondary data from the World Bank
Statistics, International Financial Statistics (IFS) of the
International Monetary Fund (IMF) and the Global Market Information
Database (GMID). Global Market Information Database (GMID), the
database of Department of Statistics for each country (Malaysia,
Indonesia, Thailand, Singapore and Philippines) and the Bloomberg
database. Central bank annual reports of all countries. Furthermore
primary data analysis will be conducted post testing where
interviews with specialists in the field of Finance and economics
will help make meaning to the results. The paper proposes to use a
multiple regression analysis method where robustness of results and
hypothesis are proven/disproven using ANOVA, Correlations and Model
significance. This data will be tested using various statistical
packages such as SPPS and visually will be shown to the reader via
MS project. Then based on the variables ascertained from literature
the hypothesis will be proven or disproven. Furthermore to
stimulate the interest of the reader the data will be displayed as
much as possible in the research report stage using graphical
software such as MS project, Microsoft visio, Mind Mapping software
and Matlab. Findings:
The following paper is a research proposal and no findings have
been ascertained. Research limitations and implications: Certain
variables lacked time series data and may prove to have some level
of significance on FDI. Certain countries did not have the required
data to test Hypothesis. Practical Implications: The finding will
be a guideline so that policy planners in emerging markets can use
prior to making any type of investment decision related to the
markets concerned. Also the paper after the finding will have
section on the lessons learnt for each country or region in terms
of FDI and it will be catalyst paper for future research and
academia. Originality/value The paper extends and expands the
knowledge of international capital flows and provides a more
nuanced understanding of the importance of internal market dynamism
in attracting FDI in the ASEAN and SAARC. Paper type: Research
Chapter 1: Introduction 1.0 Background One of the remarkable
features of globalization in the 1990s was the flow of private
capital in the form of foreign direct investment. FDI is an
important source of development financing, and contributes to
productivity gains by providing new investment, better technology,
management expertise and export markets (Sahoor, 2004). Domestic
investment still accounts for the majority of the total investment
in developing economies. Foreign investment can only complement
this. However, each form of foreign investment plays a distinct and
important role in promoting growth and sustainable development,
boosting countries competitiveness, generating employment, and
reducing social and income disparities. Non-FDI flows may work
either in association with FDI, or separately from it. As no single
type of flow alone can meet investment needs, it is vital to
leverage their combinations to maximize their development impact
(UNCTRAD, 2011) Foreign investors are also expected to transfer
intangible assets such as technology and managerial skills to the
host country and provide a source of new technologies, processors,
products, organizational technologies and management skills as a
strong impetus to economic development (Dr Catherine S.F. et .al,
2011) As per the Ernst & young report six factors will shape
our world including, Emerging markets increase their global power,
Cleantech becomes a competitive advantage, Global banking seeks
recovery through transformation, Governments enhance ties with the
private sector, Rapid technology innovation creates a smart, mobile
world and Demographic shifts transform the global workforce. If we
Identify the key emerging markets globally as per a study conducted
by Ernst and Young suggests "Estimates show that 70% of world
growth over the next few years will come from emerging markets,
with China and India accounting for 40% of that growth. Adjusted
for variations in purchasing power parity, the ascent of emerging
markets is even more impressive: the International Monetary Fund
(IMF) forecasts that the total GDP of emerging markets could
overtake that of the developed economies as early as 2014" also
other emerging markets were identified such as . "The emerging
markets already attract almost 50% of foreign direct investment
(FDI) global inflows and account for 25% of FDI outflows. In fact
the largest
The brightest spots for FDI continue to be Africa, the Middle
East, and Brazil, Russia, India and China (the BRICs), with Asian
markets(Thailand, Indonesia, Malaysia, the Philippines, Singapore
and Thailand) of particular interest at the moment. By 2020, the
BRICs are expected to account for nearly 50% of all global GDP
growth (Ernst & Young,2011). In fact from the top 20 FDI inflow
host countries as depicted in figure 3 China, Hong Kong, Singapore,
India and Indonesia are among the top recipients in the world. In
fact as per the UNCTADs World Investment Prospectus Survey(WIPS)
confirms that developing and transition economies are becoming
important investors, and this trend Is likely to continue in the
near future (UNCTAD, 2011) Therefore Securing a strong base in
these countries will be critical for investors seeking growth
beyond them" (Ernst & Young, 2011). As depicted below in figure
2 shows the FDI inflows both global and group of economies, and it
is estimated that in 2014 share of GDP growth in developing
countries will surpass that of developed cuntries as shows bellow
in figure 2, furthermore as Krugell, 2009 Suggets The spatial
distribution of FDI depends firstly on interregional differences in
factor and resource endowments. When foreign firms can choose
between different regions, cities or towns, they locate in
favourably endowed places. Investors also prefer to locate where
other firms cluster together. Agglomeration creates a large local
market and ensures diverse intermediate inputs and a thick labour
market. This generates positive externalities which reduce costs
and increase competitiveness and hence attracts investors. .
250
200
150
100
50
0Ko na ng (2 ,C ) hi na Be (4 lg ) iu m (1 7) Br \ az il ( G 15
er Un ) m ite an d Ru y Ki (8 ss ng ) ia do n m Fe (3 de ) ra tio
Si n ng (7 ap ) or e (2 Fr 2) an ce (2 Ire 0) la nd (1 4) In di a
(8 Sp ) ai n (3 Ca 0) na Lu da xe (1 m 8) bo ur g (1 M 2) ex ic o
(2 1) Ch illi e In (2 do 6) ne sia (4 3) st at es Un i te d (1
)
Figure 1 : Top 20, Host recipients of FDI (Source: UNCTAD, based
on annex table I.1 and the FDI/TNC database
(www.unctad.org/fdistatistics). a Ranked on the basis of the
magnitude of 2010 FDI inflows. Note: The number in bracket after
the name of the country refers to the ranking in 2009. British
Virgin Islands, which ranked 12th in 2010, is excluded from the
list)
Ho ng
Ch i
60
50
% of GDP growth
40 emerging Developed
30
20
10
0 2008 2009 2010 2011 Year 2012 2013 2014 2015
Figure 2: World GDP forecast (World Economic Outlook, Business
Source Monitor, 2010) To secure strong base as advised by Ernst
& Young for investors require an understanding on the history,
policy, trends, important lessons learnt from a global context with
an emphasis in the South, East and South East Asian regions to
understand its investment environment prior to understanding FDI
determinants, which will be covered in section 1 of the report.
Then the essay will conduct a literature review looking at various
benchmark indices that measure FDI performance together with other
literature which will help in understanding the location or
regional FDI determinant factors at a country specific and regional
level. Then the determinants will be tested by model creation for
its significance by using data from a variety of reputed sources
and testing panel data using OLS regression and a unit root
equation using panel data from 1xxx-2010. Then the findings will be
done both for a country specific angle and at a regional level.
Then a TOPSIS analysis will be conducted to see if FDI promotes
competitiveness. Then the findings will be interpreted and finally
the dissertation will be concluded with some considerations for
investors/Policy Makers. 1.0.1 History, policy, Trends and Lessons
learnt through Global FDI and FDI in the ASEAN and SAARC 1.0.1.1
Global trends and directions in FDI
As stimulus packages and other public fiscal policies fade,
sustained economic development fade, sustained economic recovery
becomes more dependent on private investment, at present Trans
National Corporations (TNC) have taken a customary role as private
investors (UNCTRAD, 2011). Global FDI rose to $ 1.24 Billion in
2010 from $1.185 Billion, but were 15% below pre-crisis averages.
This in contrast global industrial output and trade, which were
back to pre-crisis levels. UNCTAD estimates that Global FDI, will
recover to pre-crisis level in 2011, increasingly to $1.4
Trillion-1.6 Trillion, approaching its 2007 peak(as per UNCTAD
econometric model), this is baring any global economic shocks, that
may arise due to a number of risk factors (UNCTRAD, 2011) risk
factors especially for TNCs have become critical as
unpredictability of global economic governance, possible widespread
sovereign debt crisis, fiscal & financial sector imbalances,
rising inflation, apparent signs of overheating certain economies;
might derail global FDI. Therefore investors have changed there
preferences as the global FDI trends depict below:
Developing (including ASEAN and SAARC) and transition economies
contributed more than half(52%) of Global FDI flows while its
outward flows were also the highest, while intraregional flows of
FDI between developing countries plus TNC were also high. Figure 3
depicts the transition of FDI flows over 3 decades from developed
to developing and transition economies (UNCTRAD, 2011). TNC are
actively in those countries due to its cost effectiveness and to
remain competitive in the global production networks and also since
the consumption patterns in the world are shifting (UNCTAD,
2011).
3000
2500
2000 Transition Developing Developed
1500
1000
500
52% to developed and transition countries
0 1980
1983
1985
1988
1990
1993
1995
1998
2000
2003
2005
2008
2010
figure 3: World FDI inflows, global and by group of
economies(Source: UNCTAD, based on annex table I.1 and the FDI/TNC
database (www.unctad.org/fdistatistics)
In the South, East and South East Asia inflows rose in the
region by 24% in 2010, reaching $300 Bn, as a result of economic
growth, good macro-economic fundamentals and higher commodity
prices spurred FDI, figure 4 depicts FDI inflows to the developing
economies in the region and it is clear that most FDI flows are
flowing to South, East and South East Asia.
350 300 250 200 150 100 50 0 Africa Latin America and the
Carribean South, East and South East Asia West Asia Transition
Economies
Ave
200
200
201
Figure 4: FDi inflows to developing and transition economies, by
region, average of 2005-2007 and 2008 to 2010 (Source: UNCTAD,
FDI/TNC database (www.unctad.org/fdistatistics).
International production expansion in foreign sales, assets and
employment TNCs account for 1/10 of global GDP and 1/3 of world
exports. TNC contribute largely as global presence sustains price
advantage, cost effectiveness and make them remain competitive with
global production networks. Furthermore state owned TNCs
account(650 in number) with its affiliate network (8500 in number),
their outward investments account for 11% of global FDI flows.
Therefore the governance of state owned TNCs have raised concerns
of late, the level playing field, national security, regulatory
implications for international expansion becomes important for
these companies. Understanding their incentives for capital flows
is important to understand FDI flows. o In 2010, 70% projects(Cross
border merger and acquisition (M&A) and Greenfield FDI
projects) from these were invested in these regions. Mainly FDIs
were inherited by BRIC countries in which China and India have
gained ground In recent years following rapid economic development
in home countries, abundant financial resources are strong
motivations to acquire resources and strategic assets abroad.
Infact Chinese and Indian companies saw large capital investment
beyond their own regions. In fact in 2010, there were seven mega
deals(12% of the total inward FDI came from these deals as shown
below in table 1 in appendix 2 of this report were done by Chinese
companies mainly to the Latin American Region. o TNC ROI on FDI is
approximately 7.3%, where leverage has shown decline, as proxy by
outward FDI stock over foreign assets. Sales over foreign
affiliates increased by 9.1%, reflecting strong revenue in
developing and transition economies, employment continued to
expand, as efficiency seeking investments increased. A new recent
development is that TNCs account for nearly 80% of global FDI and
TNCs are in the developing world account for 70% of global FDI
flows.
Strong profits of TNCs in emerging markets were incentives for
further investments. Infact 100 of the largest TNC companies of
Anglo-American origins gained 93% of their profits from these
economies, this includes high EBIT positions for Coca-Cola, Toyota
Motor, Unilever, SABMiller, Nestle, Barrick gold, Holcim, British
American Tobacco, Nissan Motor, BASF, Honda Motor and Bayer. Even
state owned TNCs became important to global FDI contributing
largely to global FDI inflows and outflows, the 15 largest state
owned TNCs account for large chunk of global FDI. Geographically
56% of State owned TNCs are located in China (50), Malaysia (50)
and India (20) are among some top participants. Among them include
Volkvagen group, GDF suez, General Motors, CITI group, Tata steel
to just name a few. If we consider FDI by sector wise
classification, FDI towards manufacturing sector increased while
services and primary sector saw declines. Within manufacturing
business cycle sensitive industries such as metal and metal
products, electronics and wood products saw declines while
chemicals, food, beverages & tobacco, textile, automobiles
showed rapid increases in emerging economies. In fact manufacturing
related FDI rose to 23% in 2009 to $554 Billion, this as seen made
TNCs more receptive to restructuring in to more profitable and
productive units FDI in the primary sector decreased in 2010
despite growing demand for raw materials and energy resources, and
high commodity prices. FDI projects (including cross-border M&A
and Greenfield investments) amounted to $254 billion in 2010,
raising the share of the primary sector to 22 per cent, up from 14
per cent in the pre-crisis period(UNCTAD, 2011). Natural
resource-based companies with sound financial positions, mainly
from developing and transition economies, made some large
acquisitions in the primary sector. Examples include the purchase
of Repsol (Brazil) by Chinas Sinopec Group for $7 billion, and the
purchase of the Carabobo block in the Bolivarian Republic of
Venezuela by a group of investors from India for $4.8 billion. The
value of FDI projects in the services sector continued to decline
sharply in 2010, with respect to both 2009 and the pre-crisis level
of activity. All main service industries (business services,
finance, transport and communications and utilities) fell, although
at different speeds(UNCTAD, 2011). Business services declined by 8
per cent compared to the precrisis level, as TNCs are outsourcing a
growing share of their business support functions to external
providers, seeking to cut internal costs by externalizing non-core
business activities Transportation and telecommunication services
suffered equally in 2010 as the industrys restructuring is more or
less completed after the round of large M&A deals before the
crisis particularly in developed countries (UNCTAD, 2011). Figure 5
depicts the breakdown of Sectoral distribution of FDI projects
during the 20092010 period.
600
500
400
300
2
2
200
100
0 Primary Manufacturing Services
Figure 5: Sectoral Distribution of FDI projects (Source: UNCTAD.
a Comprises cross-border M&As and Greenfield investments. The
latter refers to the estimated amounts of capital investment.)o
In terms of mode of entry Greenfield investment has become much
larger that cross-border M& A, however TNCs. Recovery of FDI
flows in 2011 reliant on the rise of both Greenfield and M&A.
as depicted in figure 6 M&A and Greenfield projects have
increased by 36% to $ 339 Bn as a result of higher stock prices
increased the purchasing power of investors to invest abroad, the
higher the values of corporate assets in 2010 raised the leverage
of investors to undertake M&A by using shares in part payment.
At the same time the ongoing corporate and industrial restructuring
is creating new oppertunies for for cash rich TNCs including those
from emerging markets. However the total project value of
Greenfield Investments over M&A is not surprising as varying
conditionality has tilted the favor towards Greenfield projects
1600 1400 1200 1000 800 600 400 200 0 2007 2008 2009 2010
M&A Value Greenfield FDI
Figure 6: Greenfield Vs Mergers and Acquisitions (Source:
UNCTAD, based on UNCTAD crossborder M&A database and
information from the Financial Times Ltd, FDI Markets
(www.fDimarkets.com). Note: Data for value of Greenfield FDI
projects refer to estimated amounts of capital investment.o
If we consider FDI by component; reinvested earnings grew fast,
while equity capital investments and intra-company loans declined,
cash reserves of foreign affiliates grew substantially. For example
the profits to sales ratio of the United States S&P 500 firms,
Japanese Firms, Korean firms and developing country firms rose in
2010. However the rise in reinvested earning brought a decline in
equity capital, intra-company loans declined as loans were paid
back and capital was held for future investments. Given the fact
the foreign affiliates hold large retained earnings on their
balance sheet, repatriation to their parents become important role
in determining the investment flows. Here government policymakers
need to take steps. FDI flows in developing economies and
transition economies should be treated with caution due to
containing some short-term volatile flows, hot money, stabilization
of capital flows represents an important challenge to many
developing countries. As private foreign capital flows-portfolio
investment, bank loans and FDI all contribute to development. But
due to the nature of the crisis, official development assistance
(ODA) is less prone to fluctuations and is as important to
developing countries. But there effectiveness has been questioned
on actual development. Private equity sponsored FDI has regained
momentum, although it fell of its pre-crisis level. It is directed
more towards developing and transition economies as secondary
buyouts and smaller acquisitions.
Sovereign Wealth Funds FDI declined substantially because of
severely reduced investment from the Gulf region. However its long
term potential as a source of investment remains. Poorest countries
saw declines in FDI flows such as landlocked countries, small
island developing countries or certain regions in south Asia.
(UNCTRAD, 2011)
2010
2009 Equity Other capital 2008
Renvested Ear
2007
0
200
400
600
800
1000
1200
Figure 5: FDI inflows by component (Source: UNCTAD, based on
data from FDI/TNC database (www/unctad.org/fdistatistics). a Based
on 106 countries that account for 85 per cent of total FDI inflows
during the period 20072010. 1.0.1.2 Policy reform in terms of FDI
and Macro-economic reform in East, South, South-East Asia The
Peoples Republic of China (PRC) and East/Southeast Asian countries
have made rapid enhancement in their macroeconomic situations,
investment, exports and employment over the decade of 1980s and
1990s through the use of large amounts of Foreign Direct
Investment. Similarly private capital, which was long seen with
concern and suspicion, is now regarded as source of investment and
economic growth in South Asia. Like other developing countries,
South Asian economies focus their investment incentives exclusively
on foreign firms. Over the last twenty years, market reforms, trade
liberalization and intense competition for FDI have led to reduced
restrictions on foreign investment and expanded the scope for FDI
in most sectors. However, the South Asian countries have been
largely unsuccessful in attracting FDI. These countries, jointly
and also individually, receive low FDI compared to PRC, Brazil,
Singapore and other East/Southeast Asian countries. South Asia
received the smallest FDI flows among developing Asian countries,
accounting for around 3 percent of the total FDI inflows to
developing countries in the region. All the countries in the South
Asian region except India have
received very little attention and negligible FDI inflows. South
Asian policymakers realize that credible efforts for economic
reforms in South Asia must involve an upgrading of technology,
scale of production and linkages to an increasingly integrated
globalise production system chiefly through the participation of
Multi National Corporations (MNCs). South Asian countries have many
advantages to offer to potential investors, including high and
steady economic growth, single-digit inflation, vast domestic
markets, a growing number of skilled personnel, an increasing
entrepreneurial class and constantly improving financial systems,
including expanding capital markets. On top of these advantages,
South Asian countries have been designing policies and giving
incentives to foreign direct investment in several ways (Sahoor,
2006) Till the late 1960s, most of the developing economies,
including those of East Asia, adopted closed macroeconomic policies
with import substitution industrialization policies, under which
self-reliance and indigenous efforts were encouraged. At the same
time, a dominant role was assigned to the state in the development
process. These import substitution strategies, coupled with the
large public sectors, resulted in rent seeking activities and
uncompetitive production processes (Bhagawati and Srinivasan,
1975). Therefore, export-led industrialization and liberalization
was advocated to make the production process efficient and
competitive. Following the export-oriented growth argument
(Bhagawati and Srinivasan, 1975 and Kruger, 1975), and the success
of East Asian countries with higher exports and economic growth
during the period from the early seventies to mid nineties, most of
the South Asian countries started opening up their economies from
the early eighties. The South Asian economies are currently
enjoying the benefits of economic reforms, particularly reforms
related to trade and investment. These countries undertook reform
processes and opened up their economies after having experienced
sluggish growth rates throughout the seventies and eighties
(Sahoor, 2006 ). Please see appendix 1 for the types of reforms
undertaken by SAARC countries. 1.0.1.3 Current trends in the ASEAN
and SAARC * to understand the Policy, policy framework or related
public institutions for FDI then foreign policy in terms of its
automatic routes, government approval, FDI in attractive zones,
repatriation of profit, labour regulations applicable to the South,
East and South-East Asian Countries have been shown in appendix 1
of this report.
Figure 6: Various Tables and Graphs (Source UNCTAD, 2011)
In 2010, FDI inflows to South, East and South- East Asia
increased by 24 per cent, to $300 billion (Figure A of Figure 6).
inflows to the ASEAN countries more than doubled; those to China
and Hong Kong (China) enjoyed double-digit growth; while those to
India, the Republic of Korea and Taiwan Province of China showed
decline (table B of figure 6). FDI to ASEAN increased to $79
billion in 2010 breaking 2007s previous record of $76 billion
recorded at pre-crisis level times. The boost was driven by large
magnitude of FDI inflows to Malaysia (537 per cent), Indonesia (173
per cent) and Singapore (153 per cent) (table A ; annex table I.1).
Positive policy at country level fuelled good performance within
region, and seem likely to continue to do so: in 2010, Cambodia,
Indonesia and the Philippines liberalized more industries;
Indonesia improved its FDIrelated administrative procedures; and
the Philippines strengthened the supportive services for public
private partnerships.
Singapore the global financial centre and a regional hub of TNC
headquarters, has benefited greatly from increasing investment in
developing Asia, this accounted for half of ASEANs FDI, recorded
record FDI levels of $39 billion in 2010. Due to rising production
costs in China, some ASEAN countries, such as Indonesia and Viet
Nam, have gained ground as low-cost production locations,
especially for low end manufacturing. FDI to East Asia rose to $188
billion, thanks to growing inflows to Hong Kong (China) (32 per
cent) and China (11 per cent) (table A). Benefiting greatly from
its close economic relationship with mainland China, Hong Kong
(China) quickly recovered from the shock of the global financial
crisis, and FDI inflows recorded a historic high of $69 billion in
2010. However, inflows to the other two newly industrializing
economies, namely the Republic of Korea and Taiwan Province of
China, declined by 8 per cent and 11 per cent, respectively. China
continues to experience rising wages and production costs, so the
widespread offshoring of low-cost manufacturing to that country has
been slowing down and divestments are occurring from the coastal
areas. Meanwhile China has seen structural transformation shifting
FDI inflows towards high technology sectors and services. For
instance, FDI in real estate alone accounted for more than 20 per
cent of total inflows to China in 2010, and the share was almost 50
per cent in early 2011. Mirroring similar arrangements in some
developed countries, China established a joint ministerial
committee in 2011 to review the national security implications of
certain foreign acquisitions. FDI to South Asia declined to $32
billion, reflecting a 31 per cent slide in inflows to India and a
14 percent drop in Pakistan, the two largest recipients of FDI in
the subcontinent. In India, the setback in attracting FDI was
partly due to macroeconomic concerns, such as a high current
account deficit and inflation, as well as to delays in the approval
of large FDI projects;10 these factors are hindering the Indian
Governments efforts to boost investment, including the planned $1.5
trillion investment in infrastructure between 2007 and 2017. In
contrast, inflows to Bangladesh increased by nearly 30 percent to
$913 million; the country is becoming a major low-cost production
location in South Asia. Cross-border M&As in the region
declined by about 8 per cent to $32 billion in 2010. M&As in
manufacturing rose slightly while they declined by 8 per cent in
services. Within manufacturing, the value of deals surged in
industries such as chemical products ($6.0 billion), motor vehicles
($4.2 billion) and metal products ($1.6 billion), but dropped in
industries such as food and beverages ($2.9 billion) and
electronics ($920 million) (table D). Greenfield investment
remained stable in 2010, after a significant slowdown due to
widespread divestments and project cancellations in 2009 (annex
table I.8).
FDI inflows to East Asia should continue to grow in the near
future, and those to South Asia are likely to regain momentum. The
competitiveness of South- East Asian countries in low-cost
production will be strengthened, and further FDI increases can be
expected. Prospects for inflows to the LDCs in the region are
promising, thanks to intensified SouthSouth economic cooperation,
fortified by surging intraregional FDI. Indeed, countries in the
region have made significant progress in their regional economic
integration efforts (within Greater China, and between China and
ASEAN, for example), which will translate into a more favourable
investment climate for intraregional FDI flows. To get a closer
picture of the emerging trends in terms of its industrial patterns
please refer appendix 2 of this report.
(UNCTAD, 2011) 1.2 Problem Statement However despite recent
improvements FDI flows have declined in 2012, for the first time
Developed nations and nations in transition received more FDI than
there Asian counterparts during the recent period which has
primarily been as a result of volatility in the markets. The
capital surge is exposing developing countries to greater
unstability, putting direct pressure on their exchange rate and the
low interest rate environment will be hard sustain in the long term
(UNCTRAD, 2011). While FDI recovery resumes unevenly, the world
wide demand for private productive investment is increasing as
public investment, which rescued the global economy from declines
in FDI in one country after another. With unsustainable level of
debt in many countries, with nervous capital markets, governments
must now rein in their deficits and let private investment take
over the lead role in generating and supporting recovery. Infact
responses by TNCs indicate increasing awareness to invest, and
clear priority in opportunistic areas but TNCs feel that increased
protectionism coupled by regulatory risks have put a brake on
capital expenditures. Infact many developed nations require private
investment rather than public investment, but TNCs are reluctant to
invest due to past FDI performance would seem to warrant(UNCTRAD,
2011). Taking in to consideration the volatility in the markets,
TNC investments directed towards the right countries, sectors and
the understanding of the current investment environment is pivotal.
However current indicies are full of limitations and thus building
an index to both understand the current investment environment and
reduce the limitations in other indicies is the main problem trying
to be solved by this report. 1.3 Objective This study aims to
provide an investigation of the determinants significantly
affecting FDI flows in to key emerging markets in in East, South
and South East Asia. The investigation builds on previous research
both from literature & conference proceedings and focuses on a
variety of determinants including the policy framework of FDI,
economic determinants and FDI determinants in relation to business
facilitation for FDI. This is a important consideration in the
global context for investors. To construct the variables 3 sets of
macroeconomic, country specific and transnational company specific
determinants of FDI will be used. The empirical assessment will
consider econometric models such as Improved Inward FDI Potential
Index (IIFPOI), Inward FDI Potential Index of UNCTAD for 140
countries (IFPOIUN140), Inward FDI Potential Index of UNCTAD,
re-calculated for the 49 countries in our sample (IFPOIUN49),
Reverse ranking of the Competitiveness Index of Global
Competitiveness Report (GCR), World Competitiveness Yearbook (WCY)
Index and Economic Freedom Index (ECFREE). Both literature findings
and the econometric models will be analyzed and the best fit model
or the right mix of FDI determinants will be proposed as a
benchmarking index for global FDI flows.
This study will allow good investment insight to develop policy
focus on understanding and knowledge as well as provide a
systematic framework for various market and risk analysis to assist
investors in investment strategy and decision making. In a nutshell
it is a bench mark index for investors prior to making any
commitments in the intended nation. While also it should help
policy maker make certain considerations on rules and regulations
as well as trade, investment policies in there host countries
mentioned in order to promote more FDI inflows to promote growth
and sustainable development, boost countries competitiveness,
generate further employment while making it a more attractive place
to for investment. Institutions such as the Board of
Investment(BOI) and the Also by understanding the significance it
will depict important consideration for governments, academics,
policymakers and the general populas to understand the constraints
pertaining to a countries FDI promotion policies together with key
indicators that need correction to maximise the benefits obtained
from such investment. 1.4 Data source and methodology The empirical
analysis considers a case approach where China from East Asia, five
ASEAN countries Malaysia, Indonesia, Thailand, Philippines and
Singapore while India are considered from the SAARC countries from
2000-2010. A deep study in to literature initially found that a
variety of authors has classified varibales according to market
seeking, Resource seeking, asset seeking and considering the
Macro-economic determinants, Country specific and TNC specific
determinants will be identified. This study will use a case
approach to identify the variables and then will use multiple
regression analysis to identify the robustness of the determinants
of FDI. The data to be tested will come from World Bank Meta Data,
World Competitiveness Online(IMD), Bloomberg, International
Financial Statistics (IFS) of the International Monetary Fund (IMF)
and the Global Market Information Database (GMID). The essay will
use visual displays of the data using XLSTAT, MSPROJECT, STRATA and
other related software to depict the results making it easier for
the reader. Furthermore mixed methods will be used to understand
the variables and there meaning to all three factors mentioned in
my study. 2.0 Litreature Overview The literature consists of a
multitude of research, therefore to create sound policy paradigms,
initially the literature will identify the definition of FDI,The
benefits and costs of FDI, the microlevel theories of FDI,the
Macro-Economic determinants will be asctained via th help of
benchmark global indicators. Furthermore the literature reiew will
take it one step further by gathering all studies based on the
indicators and see various scholars and their view on FDI both at
regional and country level. Understanding the benefits and the
drawbacks of FDI is imperative to formulate a sound policy. Even
if, in recent times, the policy that favors FDI dominates, there
are two opposing views as to the role of FDI in developing
economies. On the one hand, it is argued that FDI benefits the host
country, for instance by creating employment opportunities and
bringing new technologies. In contrast, the other group argues that
the adverse effects of FDI outweigh its benefits. 2.2.1 Pro-FDI
Views Economic growth depends on the rate of investment which in
turn largely depends on savings. However, gross domestic savings
are too low in the least developed countries (LDCs). Foreign direct
investment is an alternative source to fill the gap between savings
and the required investment. Foreign firms bring not only financial
capital but also managerial techniques as well as, entrepreneurial
and technological skills that lack in LDCs and these skills can be
transferred to domestic firms through different channels. The
governments budget deficits can also be filled by profit-tax may be
collected from transnational companies (Todaro, 1992; Woldemeskel,
2008).
The total amount of foreign exchange that can be obtained from
export and net public foreign aid falls short of foreign exchange
that is required by LDCS. FDI can help to fill this gap by reducing
part or the entire deficit in the balance-of-payments. Moreover,
multinational companies manufacturing products that can be exported
are able to generate net positive export earnings (Todaro, 1992
Woldemeskel, 2008). FDI can also play important role by creating
employment opportunities and by integrating the host-country
economy in to the world economy (OECD, 2002). 2.2.2 Anti-FDI Views
However, there is a group of scholars that strongly disagrees with
the positive view on FDI that has been explained above. Their
arguments are presented in the following. The first counter
argument says that Multinational Corporations (MNCs) increase
income for low income groups, which have low propensity to save. If
individuals do not save enough, the gap between savings and
investments cannot be closed. Besides, foreign firms may also fail
to reinvest the profit they generate in the host country; hamper
the growth of domestic enterprises and domestic investment by
importing the input and intermediate product from their
subsidiaries in other countries. FDI might also inhibit the
development of indigenous skills as the result of multinational
companies dominance over local enterprises (Todaro, 1992;
Woldemeskel, 2008). Certainly, initial investment of foreign firms
improves the current and the capital account of the host country.
However, in the long run, substantial import of intermediate and
capital goods, repatriation of profit, interest, royalties and
management fees may harmfully affect the foreign exchange position
of the host country (OECD, 2002; Woldemeskel, 2008). Transnational
companies contribute to close the gap between locally collected tax
and targeted revenue. However, governments often enter in to
exclusive agreements with foreign firms and provide tax holidays,
tariff protections, and investment allowances. Due to these
reasons, the taxes that can be collected become quite small.
Moreover, these firms can avoid local taxation by transfer pricing
techniques -a method used to reduce local profit level by paying
artificially inflated prices to the intermediate products purchased
from abroad subsidiaries (Thomas A. andPeter H. 2000; Woldemeskel,
2008). 2.3 Theories of FDI Theories of FDI can be split into two
groups: micro-level determinants of FDI and macro-level
determinants of FDI. The micro-level theories of determinants of
FDI try to provide answer the questions why multinational companies
prefer opening subsidiaries in foreign countries rather than
exporting or licensing their products, how MNCs choose their
investment locations and why they invest where they do. The
macro-level determinants deal with the host countries situations
that determine the inflow of FDI. 2.3.1 Micro-level Theories of FDI
2.3.1.1 The Early Neoclassical and Portfolio Investment Approaches
According to the early neoclassical approach, interest rate
differentials are the main reason for the firms to become a
multinational company. In this line of arguments, capital moves
from a country where return on capital is low to a place where
return on capital is high. This approach is based on perfect
competition and capital movement free of risk assumptions (Harrison
et al, 2000). The portfolio approach to FDI reacted to this early
theory of FDI by emphasizing not only return differentials but also
risk (Almayehu, 1999). However, the movement of capital is not
unidirectional. Capital moves from countries where return on
capital is high to countries where return on capital is low and
vice versa (Woldemeskel, 2008). 2.3.1.2 The Product Life Cycle
Theory of FDI This theory was first developed by Vernon in 1966. A
new product is first produced and sold in home market. At the early
stage, the product is not standardized. i.e. per unit costs and
final specification of the product are not uniform. As the demand
for the product increases the product will be standardized. When
the home market is saturated, the product will be exported to other
countries. The firm starts to open subsidiaries in locations where
cost of production is lower, when the competition from the rival
firms intense and the product reaches its maturity. Therefore, FDI
is the stages in the product lifecycle that follows the maturity
stage (Dunning, 1993). Vernons product life cycle theory is a
dynamic theory because it deals with changes overtime. However, it
seems that the theory is not confirmed by empirical evidence, as
some multinational companies start their operations at home and
abroad simultaneously (Chen, 1983). (Woldemeskel, 2008). 2.3.1.3
Internalization Theory of FDI To increase profitability, some
transactions should be carried out within a firm rather than
between firms and this is one of the reasons why multinational
companies exist. In other words, there are transactions that should
be internalized to reduce transaction costs and hence increase
profitability. This theory may answer the question why production
is carried out by the same firm in different locations. One of the
reasons of internalization is market imperfection. Any kind of
economically useful knowledge can be called technology. Mostly,
technologies or knowhow can be sold and licensed. However,
sometimes, there are technologies that are embodied in the mind of
a group of individuals and not possible to write or sale to other
parties. This difficulty of marketing and pricing know how forces
multinational companies to open a subsidiary in a foreign country
instead of selling the technology. In addition, a number of
problems may arise if an output of a firm is an input to other firm
in other country. For instance,if each has a monopoly position,
they may get into a conflict as the buyer of the input tries to
hold the price down while the firm that produces input tries to
raise it(p.173). Nevertheless, these problems can be avoided by
integrating various activities within a firm rather than
subcontracting the activities (Krugman and Obstfeld, 2003).
(Woldemeskel, 2008). 2.3.1.4 The Eclectic Theory of FDI John
Dunning developed an eclectic theory of FDI, which is called OLI
paradigm. O, L and I refer ownership advantage, location advantage
and internalization conditions, respectively. Operating in a
foreign country market has many costs and these costs of
foreignness include a failure of knowledge about local market
conditions, cultural, legal and many other costs. Therefore,
foreign firms should have some advantages that can offset these
costs. Ownership advantage is a firm specific advantage that gives
power to firms over their competitors. This includes advantage in
technology, in management techniques, easy access to finance,
economies of scale and capacity to coordinate activities. Unlike
ownership advantages, location advantages are country specific
advantages. Transnational Companies (TNCs) in order to fully reap
the benefit of firm specific advantages, they should consider the
location advantage of the host country. This includes accessibility
and low cost of natural resource, adequate infrastructure,
political and macroeconomic stability. As a consequence, the
location advantage of the host country is one essential factor that
determines the investment decision of TNCs. Internalization is
multinational companies ability to internalize some activities to
protect their exclusive right on tangible and
intangible assets, and defend their competitive advantage from
rival firms. Accordingly, all the three conditions must be met
before transnational companies open a subsidiary in a foreign
country (Soderstein (1992), Laar(2004)). (Woldemeskel, 2008). 2.3.2
Motives of FDI Assefa and Haile (2006) assert that the ownership
and internalization advantages as developed in Dunning (1993)
eclectic theory are firm specific advantages, while location
advantages are regarded as host country qualities. Firms choose
locations where all these advantages can be combined together to
advance the firms' long-term profitability. Asiedu (2002) and
Dunning (1993) distinguish the motives of FDI as either market
seeking or non-market seeking (efficiency and resource seeking).
According to Dunning (1993), a market seeking FDI is that which
aims at serving the domestic and regional markets. This means that
goods and services are produced in the host country, sold and
distributed in the domestic or regional market (Asiedu, 2002). This
kind of FDI is therefore, driven by host country characteristics
such as market size, income levels and growth potential of the host
market and so on. A non-market seeking FDI can either be classified
as resource/asset seeking and/or efficiency seeking. Resource
seeking FDI aims at acquiring resources that may not be available
in the country of origin. Such resources may comprise natural
resources, availability and productivity of both skilled and
unskilled labour forces as well as availability of raw materials.
Efficiency seeking FDI aims at reducing the overall cost of factors
of production especially when the firm's activities are
geographically scattered (Dunning, 1993). This allows the firm to
exploit scale and scope economies as well as diversify risks. Apart
from the economic factors that are believed to be the major
motivation for FDI, the host country's FDI policy also plays a
major role in attracting or deterring FDI. This therefore, suggests
a need for the host country to develop policies that provide a
conducive environment for business if the authorities believe in
the benefits of FDI. This necessitates a regular monitoring of the
activities of TNCs and an acceptance by the host government that,
if FDI is to make its best contribution, policies that were
appropriate in the absence of FDI may require amendments in its
presence. For example, macroeconomic policies may need to be
altered in order to provide a favourable climate for FDI. Stronger
competition as a result of FDI may also induce a host government to
operate an effective and efficient competition policy.
2.4 Common Macro-economic determinants of FDI The literature has
identified numerous push and pull-side determinants of FDI. Push
side factors include intangible assets, internalization, product
life cycle, oligopoly reaction and economies of scale, among
others. Examples of pull-side determinants are market size,
economic growth, labour cost, levels of competition, technology
level, infrastructure, cultural distance, political and legal
environment, government policy, and so forth. Empirical studies by
Lim (1983) and Tonisi (1985) have demonstrated the crucial
importance of pull-side factors in determining FDI (Wang, Clegg,
& Kafouros, 2011). However many authors have identified many
variables with variety of views on their effect on country or
region. However to narrow down the variables to ascertain the best
variables for the study The world Investment Report 2011 depicted
in the introduction is a global conference on trade and development
discussing integral issues in relation to FDI and its development
policies in the global context. These are traditional determinants,
but the current globalization process is likely to induce important
changes to location determinants (UNCTAD, 1996). The theoretical
argument for explaining these changes is that technological
advances, increasing openness to trade, FDI and technology inflows,
and the subsequent competitive pressure on firms, would result in a
reconfiguration of the strategies pursued by TNCs to achieve their
objectives (resources-, markets- and efficiency-seeking FDI). The
two possible consequences on the location determinants are: first,
host countries would be assessed by TNCs on the basis of a wider
set of variables than before; and, second, the relative importance
of FDI determinants would be rebalanced.5 Although the traditional
economic determinants and the type of FDI associated with these
would not disappear, their relevance is likely to decrease, giving
a greater weight to
the determinants related to efficiency-seeking and created
assets-seeking FDI. Since the aim of this index is to be a useful
tool for analysing the relative advantages of countries for FDI
inflows, we adopt Dunnings eclectic paradigm as theoretical
framework. This paradigm encompasses, as location advantages, a
wide range of factors, including those related to policies
regulating FDI (and policies that affect FDI indirectly), those of
an economic nature, and those related to the climate in which
foreign investors operate in host countries. Dunning (1993)
provides a long list of factors that may be considered as
determinates. In WIRs (UNCTAD, 1998a and 2001), these same factors
are included, ordered according to the main objectives that
transnational corporations (TNCs) seek when they invest abroad. In
these works, mainly in WIR 1998, an extensive review of empirical
studies on the determinants of FDI inflows is undertaken. The
synthesis of all the literature is that the most significant
variables are those related to marketseeking and resources-seeking
FDI (in the case of the less developed countries) such as GDP,
income per capita, labour costs, etc (Carlos Rodrguez, 2009). These
are traditional determinants, but the current globalization process
is likely to induce important changes to location determinants
(UNCTAD, 1996). The Although the traditional economic determinants
and the type of FDI associated with these would not disappear,
their relevance is likely to decrease, giving a greater weight to
the determinants related to efficiency-seeking and created
assets-seeking FDI is interpreted by UNCTAD as a sign that
institutional characteristics of the countries have a positive
influence on FDI inflows (Carlos Rodrguez, 2009). Recent studies
concur with the findings of UNCTAD. Stein and Daude (2001) find
that the quality of institutions, as defined by the Governance
Indicators of the World Bank, has positive effects on FDI.
Globerman and Shapiro (2002) conclude that, for the period
19951997, the attractiveness of a country (for both developed and
developing countries) is strongly conditioned by National Political
Infrastructure. Moreover, although the Human Development Indicator
is not a significant indicator, the level of education is
important. Busse and Hefeker (2005) find that the 12 indicators
used to proxy political risk have a significant negative impact on
FDI inflows. Regarding the institutional framework, Bengoa and
Snchez-Robles (2003) find, using panel data for 18 Latin American
countries over the period 19701999, that economic freedom (as
defined by the Fraser Institute Index) in host countries is a
positive determinant of FDI inflows. Addison and Heshmati (2003)
conclude that the wave of democratization9 and, mainly, the spread
of technologies of information and communication positively affect
FDI inflows in developing countries. Asiedu and Lien (2004), in a
study of 96 developing, transition and emerging economies, that
almost all the indicators for capital control have a significant
negative effect in a fixed panel specification (Carlos Rodrguez,
2009). However, Nunnenkamp (2002) questions whether a change in the
relevance of determinants amongst developing countries has really
taken place. Using data from a survey of companies including 33
questions on a set of economic and political factors related to FDI
in 28 developing countries, he concludes that between 1987 and
1999, no important changes took place regarding location
determinants. The traditional determinants related to host markets
(population and GDP per capita) are still dominant, and the only
new determinant with a higher relevance is the skill level of the
labour force. Noorbakhsh et al. (2001) also conclude that human
capital is a statistically significant determinant of FDI inflows,
having a growing relevance, and that other traditional variables
(the growth of the domestic market, a stable macroeconomic
situation, liberalization policies, a sustaining business
framework, etc.) are also significant. Chakrabarti (2001) also
reject the hypothesis of a change in the determinants, and argues
that the market size and the degree of openness of the host country
are more stable than other determinants (wages, net exports, rate
of growth, taxes, trade tariffs and exchange rates). (Carlos
Rodrguez, 2009)
Hallward-Driemeier (2003), making an econometric study of
bilateral flows in the OCDE countries over a 20 year period,
concludes that there is no solid evidence that BITs stimulate
additional FDI flows, although they would act as complement to the
institutional framework of the target country by offering
sufficient guarantees on property rights to foreign investors.
However, Banga (2003), analysing 15 Asian countries using a panel
data analysis, concludes that BITs play a significant positive
role. Although there are a large number of studies on the effects
of taxation on FDI, this is not the case of DTTs. Blonigen and
Davies (2001) conclude, by making a regression analysis of
bilateral inflows of FDI between the United States and 65
countries, that these treaties do have a positive impact on FDI in
the medium and long term (Carlos Rodrguez, 2009) 2.4.1 Problems
with current indices The United Nations Conference on Trade and
Development has developed several indices to evaluate and compare
the location advantages of the countries and their relative success
in attracting FDI. Some of the indices include Improved Inward FDI
Potential Index (IIFPOI), Inward FDI Potential Index of UNCTAD for
140 countries (IFPOIUN140), Inward FDI Potential Index of UNCTAD,
re-caluclated for the 49 countries in our sample (IFPOIUN49),
Reverse ranking of the Competitiveness Index of Global
Competitiveness Report (GCR), World Competitiveness Yearbook (WCY)
Index and Economic Freedom Index (ECFREE) However, these indices
suffer from several limitations but it has been used as a benchmark
for assessing policy in relation to FDI and it posses as a severe
limitation. Therefore Carlos Et.al constructed an improved inward
FDI potential index that can solve some of those limitations,
making use of 70 variables for 49 countries and data reduction
techniques. The correlation analysis shows that it fits better with
the Inward FDI Performance Index, and thus this new index explains
more precisely countries FDI inflows. Moreover, the larger number
of variables included allows us to rank the countries for different
kinds of FDI and to assess countries strengths and weaknesses for
policy purposes. Furthermore the Index uses not only variables from
model but also encompasses a variety of theoretical literature.
Infact the choice of the variables included in IIFPOI is justified
by the following criteria: the theoretical analysis of the
determinants of FDI; the empirical studies testing the validity of
the theoretical analysis; the availability of quantitative data on
the potential determinant factors and their geographic scope; and
finally, the correlation between these criteria and IIFPI (Carlos
Rodrguez, 2009). Since the aim of this index is to be a useful tool
for analysing the relative advantages of countries for FDI inflows,
we adopt Dunnings eclectic paradigm as theoretical framework while
also recognising the pro view of FDI and also we adopt the product
life cycle theory as well in to the analysis. This paradigm
encompasses, as location advantages, a wide range of factors,
including those related to policies regulating FDI (and policies
that affect FDI indirectly), those of an economic nature, and those
related to the climate in which foreign investors operate in host
countries. Dunning (1993) provides a long list of factors that may
be considered as determinats. In WIRs (UNCTAD, 1998a and 2001),
these same factors are included, ordered according to the main
objectives that transnational corporations (TNCs) seek when they
invest abroad. In these works, mainly in WIR 1998, an extensive
review of empirical studies on the determinants of FDI inflows is
undertaken.The synthesis of all the literature is that the most
significant variables are those related to market-seeking and
resources-seeking FDI (in the case of the less developed countries)
such as GDP, income per capita, labour costs, etc (Carlos Rodrguez,
2009) At this point, however, we must stress that the number of
variables included in an index of this nature is constrained by the
availability of data. We must stress that the UNCTADs decision to
include only 13 variables in her potential index is not guided by
this restriction, although it is proposed as such. Furthermore, the
difficulty in quantifying some qualitative determinants related to
the political and institutional framework, which UNCTAD cites as
the reasons for their
omission in its index, is a problem which can be solved, as most
of the above mentioned studies do, with indicators produced by a
number of bodies. However, this solution involves that, with the
data available at the time of writing, we cannot include all
countries in the world, and, therefore, there is a trade-off
between geographical scope and the depth of analysis. For this
paper, we opted to improve the quality of the index, leaving aside
the issue of limited geographic scope. This option allows this
index to fulfil better than the current UNCTADs potential index the
objectives of being a tool, first, to evaluate the countries
competitiveness to attract certain kinds of FDI inflows, and,
second, to design policies to improve, or change, the location
advantages of host countries. Compared to the correlation analysis
done by Carlos et.al 2007 shows that it fits better with the Inward
FDI Performance Index, and thus this new index explains more
precisely countries FDI inflows. Moreover, the larger number of
variables included allows us to rank the countries for different
kinds of FDI and to assess countries strengths and weaknesses for
policy purposes (Carlos et.al, 2007) 2.5 Varaible selection To
choose such Varables Carlos et.al classified the variables after
ascertaining a variety of variables and comparing it with models
measuring FDI performance. Therefore he classified FDI based on the
3 factors that was the Policy of FDI in a country, Economic
Determinants factors and business determinants. Within these
factors were determinants again re-classified and certain
determinants were having sub-determinants as well to ascertain
accurate measurement. The reclassification of Variables have been
depicted in table xx below, which depicts the classification of
variables ascertained from both literature and improved &
refined UNCTAD models are depicted below. Totally 71 variables have
been considered and has been divided in to 5 FDI classifications
and 12 factors with that will be broken down in to further
determinants of FDI.. Therefore the essays variable classification
can be shown below, in a colour coordinated sequence to easily
identify the variables as per the FDI classification and the
category the factors fall under can be easily ascertained. For
example Social amenities are coloured in lime green they are
classified as a factor under Host country FDI policy. The factor
contains a variable known as Access to Capital markets ACM. The
variables considered for the study and the literature pertaining to
its expected positive or negative significance has been considered.
for example the sixth variable under FDI policy is sustainabale
development, however studies indicate that While sustainable
development had no bearing or relationship on FDI. These findings
are similar to that of kamal who suggests the follwing The level of
inflows does not necessarily give an indication of the actual
contribution of FDI as a source of financing for sustainable
development. A closer look at the breakdown of such inflows into
the various sectors of the economic, social and environmental
components of sustainable development gives a better
understanding
Based on the classification the variables can be reclassified as
follows: 2.5.1 The variables The list of variables and their
proxies are listed in Table 2. The changes in the variables are
computed as a measure of the variables in order to avoid spurious
analysis of results. Furthermore the UNCTAD improvement index has
classified the variables as per several factors and models
including Host country FDI policy, Economic Determinants of FDI,
Business facilitation of FDI, Market Seeking FDI, Efficiency
seeking FDI, Reource Seeking FDI and Asset seeking FDI and a colour
coated table has been listed below. These have been classified
based on Carlos et.al article and listed below:
Locational determinants CCR MEII PS ERS SD AFC RFCT PSC MA
Greenfield CBV FI FFI ACM FC
Measurement composite country rank Macro-economic enviroment
Risk of Political stability Exchange rates Sustainable development
Protectionism Finance and Banking regulation Public sector
contracts sheet Number of M&As Number of Greenfield investments
Venture capital Foreign investors % of foreign companies capital
markets Investment incentive
Measurement composite country rank ICRG Macroeconomic enviroment
GCR Risk of Political stability IMD Exchange rates IMD Sustainable
development Protectionism Finance and Banking regulation Public
sector contracts sheet Number of mergers and acquisitions Number of
Greenfield investments Venture capital Foreign investors % of
foreign companies capital markets Investment incentive IMD GCR
IMD
IMD or UNCTA IMD IMD IMD IMD IMD IMD IMD
IPS PA
Investment protection scheme Number of patents in force Taxes on
international trade (% of revenue) Tariff rate, applied, simple
mean, all products (%) Simple mean differeed from most favoured
nation Tariff Bariers Customs and other import duties (% of tax
revenue) Billateral investment treaties Corporate Tax rate
Investment incentives sheet 6 Subsidies and other transfers (% of
expense) Control of Corruption Bribing and corruption sheet 6
Beuracracy
CL
MTR
VTR HIB
COI BIT DTT CTR
Ii GS CC BC
EODB GB TRSB
Ease of Doing a business Government Beuracracy Ease of Doing
Business Index
Investment protection scheme Number of patents in force Taxes on
international trade (% of revenue) Tariff rate, applied, simple
mean, all products (%) Simple mean differeed from most favoured
nation Tariff Bariers Customs and other import duties (% of tax
revenue) Billateral investment treaties Corporate Tax rate
Investment incentives sheet 6 Subsidies and other transfers (% of
expense) Control of Corruption Bribing and corruption sheet 6
Beuracracy Time required to start a business (days) Government
Beuracracy Ease of Doing Business Index
World Bank World Bank
WDI
WDI
World Bank IMD
World Bank UNCTAD World bank ICRG
IMD GCR World Bank ICRG
World Bank IMD IMD
QL GDPgrowth GDPpercapita WFDIS
Quality of life sheet 8 GDP growth GDP per capita % of World FDI
stock % of merchant exports by region Total Exports Current % of
world total Labour regulations sheet 7 Unit labour cost
IIWRB TE NR LR UCL CB SL FHSKL Its
Quality of life sheet 8 GDP growth GDP per capita % of World FDI
stock % of merchant exports by region Total Exports Current % of
world total Labour regulations sheet 7 Unit labour cost Skilled
labour sheet 7 Foreign high skilled people sheet 7 Information
technology skills sheet 8 Secondary school enrolment % sheet 8
School enrollment, tertiary (% gross) Research and development
expenditure (% of GDP) Patents granted to residents sheet 8 number
of patents in force sheet 8 Technological readiness roads sheet 8
railroads
IMD World Bank World Bank IMD
World Bank World Bank UNCTAD IMD IMD IMD IMD IMD World Bank
Skilled labour sheet 7 Foreign high skilled people sheet 7
Information technology skills sheet 8 Secondary school enrolment %
sheet 8 School enrollment, tertiary (% gross) Research and
development expenditure (% of GDP) Patents granted to residents
sheet 8 number of patents in force sheet 8 Technological readiness
roads sheet 8 railroads sheet 8
Sse
World Bank
Set
IMD
RD
IMD
Patent Patentforce Tech Roads railraods
GCR IMD IMD IMD IMD
QofAIR Water transportation DISB Telephone mobile OP
quality of air transportation sheet 8 water transportation sheet
8 Distribution infrastructure sheet 8 Telephone lines Mobile
cellular subscriptions Productivity
sheet 8 quality of air transportatio n sheet 8 water
transportatio n sheet 8 Distribution infrastructure sheet 8
Telephone lines Mobile cellular subscriptions Productivity GDP per
unit of energy use (PPP $ per kg of oil equivalent) Gross fixed
capital formation fixed telphone tarrifs sheet 7 Electrical costs
for industrial clients sheet 7 Communicati ons technology sheet 7
Energy use (kt of oil equivalent) Cost of living index sheet 5
Apartment rent sheet 5 Office rent sheet 5 Exports of goods and
services (current US$)
IMD World Bank World Bank World Bank
IMD World Bank
Energy use percapita 6 2 GFCF
GDP per unit of energy use (PPP $ per kg of oil equivalent)
Gross fixed capital formation fixed telphone tarrifs sheet 7
Electrical costs for industrial clients sheet 7 Communications
technology sheet 7 Energy use (kt of oil equivalent) Cost of living
index sheet 5 Apartment rent sheet 5 Office rent sheet 5 Exports of
goods and services (current US$)
IMD
fixedtelephone
World Bank
electricacosts
IMD
Adequecyofcomm Energyuse COL Apartment Office Exports of
services
IMD IMD World Bank World Bank
World Bank
Imports of ICT
Imports of ICT (Current US$)
Imports of ICT (Current US$)
World Bank
Table 2: IIOFPI variables ascertained (Carlos et.al, 2009) 2.5
Varaible classifications, definitions and expected outcome as per
litreature In the tables found below, we summarize other studies on
the determinants of FDI, measurement used for this study and the
database of information derivation. It provides all the expected
signs (+ or -) from literature as the author is shows as well. It
shows that research is finding a diverse set of determinants as new
developments in the global economy take place and data availability
and econometric techniques evolve. In sum, the findings in the vast
empirical literature regarding location determinants justify our
approach to include the largest possible number of variables
related to the location determinants in constructing our improved
index, IIFPOI. All in all, and despite some mixed results regarding
some variables, empirical studies FDI potential index is an
efficient study to understand the business environment from a
variety of angles (Carlos Rodrguez, 2009) Dependednt Variable and
independent vaiables The dependent vatibale used is Foreign Direct
Investment (Current US$) There are 70 independent variables
classified classified in to 5 parts and 12 factor of classification
and have been colour coated as described earlier in this this
section and is classified from 2.5.1.1.-2.5.6.3 and will include
all abrevations used in study, definitions, literal findings and
the expected outcome of the variable on the dependent variable will
be discussed and classified accordingly. 2.5.1.1 Host Country FDI
policy The variables from Country composite risk to Exports of
services in the index has also been studied and derived via Carlos
et.al article and other literature. The table xxx below sumarises
the findings as is shown under host country FDI policy and will
later brought up in the findings section country by country trying
to link literature with findings. The findings will also contain
vital statistics from a variety of literature including central
bank annual reports, country reports and other literature to
confirm the findings to be country specific. The following section
will consider the expected sign of the variables considered and the
definition of the variable has been considered in this section.
2.5.1.1 Determinants for Economic, Political and social
Stability The determinants are as follows: CCR= Country Credit
Rating MEII= Macro Economic Environment PS=Political Stability
ERS=Exchange rate stability SD= Sustainable Development
CCR is derived from The International Country Risk Guide (ICRG)
rating which comprises 22 variables in three subcategories of risk:
political, financial, and economic. A separate index is created for
each of the subcategories. The composite scores, ranging from zero
to 100, are then broken into categories from Very Low Risk (80 to
100 points) to Very High Risk (zero to 49.9 points)
(http://www.prsgroup.com/ICRG_methodology.aspx) and can have
positive, negative or no siginificance. relationship similar to the
above findings,
where he states that the country has to improve its country risk
profile accompanied by cost factors and other common Macro-economic
variables, he goes on to state about this The country requires
maintaining the stable macroeconomic stability and continuity in
reform process of last 17 years of openness policies. This implies
continuity of sustained stable macroeconomic policies, improvement
in countrys risk profile followed by cost related and investment
environment improving factors. The long run scenario is also linked
with level of employment of skilled labor,,the process of capital
formation and the quality of human capital country produce.
Certainly, the fiscal, monetary, investment, social policies are
directed towards achieve these goals. Further, the country can
indeed realize benefits from present attributes in keeping FDI
friendly atmosphere. Therefore as per the research the better the
CCR score the larger the FDI flows in which a positive relationship
is generally expected(Hakro et.al, 2009).
MEII is derived from the Global Competitiveness report The
macroeconomic environment index indicates the quality of the
macroeconomic environment of a country also (SOURCE: World economic
forum - Global Competitiveness Report 2004-2005.) can have a
positive, negative or no significance. The term "Macroeconomic
Stability" describes a national economy that has minimized
vulnerability to external shocks, which in turn increases its
prospects for sustained growth. The hard-data indicators for
macroeconomic stability include statistics for government deficits,
national savings rates, inflation, real exchange rates and interest
rate spreads. These are supplemented by survey questions about the
likelihood of a recession and the availability of credits
(http://www.oecd.org/investment/investmentfordevelopment/33915741.pdf).
is taken from the ICRG and consists of Voice and accountability,
Political stability, government effectiveness, rule of law and
regulatory quality. Findings in relation to this variable is seen
in the ADB Working Paper Series on Regional Integration suggests
that Macro Economic Environment index is a good measure against
that of FDI. Furthermore Macroeconomic stability is important to
the overall business environment and competitiveness of an economy.
Although stability alone cannot increase the productivity of a
nation, it is recognized that macroeconomic disarray harms economic
efficiency and productivity. Firms cannot make informed decisions
when inflation is out of control and governments cannot provide
services efficiently if they have to make high-interest. A study
cnducted by Tan make use of the Macroeconomic Environment Index
compiled by the World Economic Forum. It is necessary to emphasise
first that this index and its composite sub indexes not only
measure macroeconomic policies, but also a countrys performance in
a number of related aspects, such as its credit rating. This study
uses the world bank governance indicators to empirically test the
relationship between macroeconomic level corporate governance and
Inwards FDI flows into emerging market countries, using a panel
data set of 33 countries between 1997 and 2002. The key finding is
that macroeconomic corporate governance has a positive and
significant effect on inwards FDI flows, suggesting host country
governments and authorities should shape policy. In the study
Adeyole finds positive relationship between FDI and the macro
economy, however instead of using MEI, he uses a world bank
indicator but however his OLS regression output suggests positive
relationship as shown in the findings in this report for China,
India, Indonesia and Philippines (Adeyole, 2010). Therefore the
expected outcome suggests that an improving macro economic index
promotes FDI. PS has a significant positive impact indicating that
if the risk political stability index increases which means that
FDI should increase proportionately. Political stability has been
measured via the measure the risk of political stability variable
updated by IMD which has defined it as Risk of political
instability indicates the level of threat that social protests have
towards its own government. The index ranges from 1 to 10 where a
higher
value indicating that the risk of political instability in that
specific country is very low. Almost no research can be found on
the direct effect of political instability on competition law.
Therefore a more intuitive approach will be followed, in order to
determine the a priori sign of the risk of political instability
coefficient. The level of political stability influences deeply the
economic environment. A more politically stable government is
thought to have less social issues and therefore it can focus more
on the economic environment. If a government is politically
unstable also the institutions that surround the government, such
as the antitrust offices are expected to be inefficient. A more
stable government takes care of investment protection, simple tax
and bureaucratic procedures; in other words, political stability
increases the ease of doing business.
(http://oaithesis.eur.nl/ir/repub/asset/8958/Grosso,%20M.%20325335%20id
%20thesis8958%20.pdf) therefore the more stable the government or
when the PS index increases the expectation is that it will promote
FDI.
ERS can have a positive, negative or no impact at all. Goldberg
and Klein (1997) indicates that exchange-rate movements are an
important determinant of both trade and FDI flows between Japan and
several Southeast Asian countries. For instance, a real
appreciation of the Japanese yen against the US dollar tends to
induce Japanese FDI flows into these countries, thereby
contributing to the development of local export capacity, which
supports the earlier findings of Kawai and Urata (1995)
(http://www.jbic.go.jp/en/research/report/research-paper/pdf/rp15_e.pdf).
Catherine et.al who conducted a study on the east asian five tigers
found mainly positive and negative significance. In Malaysia found
a negative correlation which means that apreciation of the
Malaysian Rupiah to other internatonational currencies will
discourage FDI. (Catherine et.al, 2011) Sustainable development has
no impact to FDI flows and will be omitted from the findings.
Sustainabale development is defined sustainable development as
development that can continue forever or at least for a very long
time; say, for several generations. Given the discussion above,this
statement can be put more fundamentally: sustainable development is
increasing well-being over a very long time. Yet more
fundamentally: sustainable development is increasing consumption,
following its broadest economic interpretation, over a very long
time. (http://www.google.co.jp/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CFAQFjAF&url=http%3A%2F
%2Fwww.ine.pt%2Fngt_server%2Fattachfileu.jsp%3Flook_parentBoui
%3D143216390%26att_display%3Dn%26att_download
%3Dy&ei=GCPHUJ3eCeXomAWMlIH4Aw&usg=AFQjCNEh8mIoWs8_9woRFzV0v2BFnYoRA&sig2=mLBggMMfqFMTiQD1KgEmkQ).
However Most studies have found little significance by Kamal et.al
who found no significance in his case analysis with econometric
research for a variety of research papers taken from 1990-2003
revel that it has no significance in East Asian Countries. At the
same time, it is generally recognized that FDI is only a complement
to domestic investment and that sustainable development benefits to
host countries depend, to a high degree, on the absorptive capacity
among the local enterprise sector. Therefore SD increase does not
encourage FDI. (http://unctad.org/en/Docs/iteiit35v12n3_en.pdf) In
a better climate of investment environment in which private sector
activity can flourish, each type of foreign investment can make a
valuable and contribute to economic growth, then sustainable
development. The study found that FDI stimulates not only economic
growth but its impacts are greater than investment by domestic
firms. The study encourages host government to continue promote
policies concerning foreign investment. Therefore this suggest that
it does not have direct effect on FDI but will indirectly be a
significant effect on the nation.
(http://dspace.wul.waseda.ac.jp/dspace/bitstream/2065/28631/4/Honbun-4575_01.pdf)
2.5.1.2 (Determinants for Rules regarding entry and exit)
AFC=Access to Foreign Capital RFCT=Restriction on Foreign Capital
Transactions PSC=Public Service Contract
AFC was known to have a positive significance on FDI. AFC was
measured via protectionism. The theory or practice of shielding a
country's domestic industries from foreign competition by taxing
imports. . AFC was measured through the level of prodtectionism and
the findings were similar to those of Boden et.al suggest that One
argument holds that trade protection may increase FDI, in
particular horizontal FDI. Multinational firms may aim to enter
markets that are protected by high trade barriers by setting up
affiliates in the protectionist country, thus increasing FDI flows.
By contrast, another argument holds that trade protection may in
fact deter FDI, in particular vertical FDI. For one, multinational
firms might find it less attractive to offshore affiliates that are
part of the value chain if the import and export of intermediate
and final goods is inhibited by trade protection measures. He
further goes on to state that More generally, trade protection may
evoke distrust in possible foreign investors regarding future trade
openness or other economic or institutional characteristics of a
certain protectionist country. However the expected sign is
positive implying that trade protectionism will promote FDI. RFCT
is defined by the level Banking and Finance regulations posed on
the foreign investor, the findings in this study is similar to that
of Cheng et.al who suggests for a panel study conducted in Africa
he finds negative correlation between the cost of regulation and
FDI growth rate is self-evident, considering the economic
environment for trade and investment in the five countries finds
negative growth (cheng et.al 1998). This suggest that the expected
outcome is an increase in banking and regulation(RFCT) will
discourage promotion FDI. . The higher FDI growth rate in South
Africa, Mali and Ghana were related to their relatively lower costs
caused by over regulation. However in other studies it is Noted
that Mali, albeit with higher costs of regulation, has high FDI
growth rate compared to Ghana. We believe this is due to specific
locational advantages and natural resources the country poses as
observed by Basu and Srinivasan (2002) for some African countries.
PSC Contracts other than public works or supply contracts having as
their object the provision of services referred to the public good.
A public contract having as its object both products and services
within the meaning for creating the public good shall be considered
to be a public service contract if the value of the services in
question exceeds that of the products covered by the contract. PSC
can have mixed results in for FDI based on the governments
conditions related to the contract and hence may affect crucial FDI
sectors.
(http://europa.eu/legislation_summaries/internal_market/businesses/public_procurement/l2
2009_en.htm) . Therefore based on government policy can result in
positive, negative or no significance effects on FDI.
2.5.1 3 (Determinants for standards of treatment of Foreign
Affiliates) M&A=Mergers and Acquisition Greenfield = Greenfield
Investment CBV= Cross Border Ventures
FI= Foreign Investors FFI= Foreign Financial Institutions ACM=
Access to Capital markets FC= Foreign Companies IPS=Investment
Protection Scheme
Mergers and acquisitions Acquisition:
M&A is defined as The purchase of the controlling interest
or ownership of another company. This can be affected be Agreement
with the persons having majority of the stake, Purchase of shares
in the open market, To make takeover offer to the general body of
share holders, Purchased of new shares by private treaty and
Acquisition of share capital while a Merger is the fusion of two or
more companies (OR) Merger is a combination of two or more
companies into a single company where, it survives and others loose
the corporate identity. The survivor acquires the assets and
liabilities of the rest. Mergers and Acquisition are based on the
number done in a given year, the effect to FDI is based on the
incentives provided by the host country
(http://www.karvy.com/mergers/glossary.htm). While Greenfield
investment A type of foreign investment in which a parent company
will begin a new venture in another, usually developing, country.
This parent company will construct new facilities as well as create
new jobs when they hire new employees for these facilities.
Thesecompanies are typically offered tax breaks and other
incentives for setting up green field investments
(http://www.investorwords.com/11625/green_field_investment.html#ixzz2EkjSuvi2).
Greenfielf investments are also determined by the number and again
its effect on FDI is based on the conditions of the host country
policy environment for FDI. Byun et.al where they suggest that
Greenfield Investment was positively significant in China and
Indonesia while in Phillipines it was negatively significant..
Using the dataset of FDI, M&A and Greenfield FDI with a
comprehensive set of external and internal factors to estimate a
dynamic panel model, this paper offers new findings which may have
implications for designing a policy framework to attract FDI,
particularly in a type that is more conducive to economic
development, to emerging countries. First, country-specific factors
(such as GDP per capita, macroeconomic and political stability,
etc) matter a lot for FDI flows both in the form of M&A and
Greenfield FDI. This suggests that the role of governments may play
an important role in helping stabilize FDI flows, to emerging
countries. The policy focus should be on strengthening economic
fundamentals and maintaining macroeconomic and political stability
in order to sustain high FDI flows. Second, the results suggest
that there are global and regional spillover effects on FDI flows
to an emerging country and such effects are stronger on M&A
than on Greenfield FDI having greater positive correlations. In
other words, if there is an increase in FDI to all emerging
countries, it is likely that FDI to any individual emerging country
increases as well, and this phenomenon is more visible when we
consider M&As. Moreover, the spillover effect seems to be
stronger in all types of FDI flows if it is originated from within
the region than if it comes from outside the region. Therefore,
here may be a merit in considering policy coordination at the
regional level when designing a policy framework to manage FDI
flows (particularly M&As) to emerging countries. For example,
instituting a sound macroeconomic management framework in an
emerging country can generate positive externalities on FDI flows
to other regional economies. Hence, promoting good institutions at
regional policy forums and dialogues shall help increase the
regions attractiveness as an investment destination. hird, we find
that financial stability of emerging countries has a negative
association with M&A sales, although its effect on Greenfield
FDI is positive. In other words, countries with greater financial
risks tend to have greater M&A sales. It is also found that
income growth has a
negative association with M&A sales, but it has a positive
association with Greenfield FDI. Last, but not least, when the
total value of M&A sales is split into the number of deals, it
is found that both financial stability and income growth have a
statistically significant negative association with the average
value of each deal, while they have a significant positive
association with the number of deals. These findings suggest that
fire-sale of firms in the crisis-hit emerging countries is driven
largely by an increase in the average value of each M&A case,
rather than an increase in the number of M&A cases. In this
study the variable considred is the number of M&A deals and
Greenfield investments and the relationships can be explained as
stated (Byun et.al, 2012). Therefore the expected outcome is that
Greenfield and M&A have generally encourage FDI. However all
outcomes are possible.
A joint venture is a contractual agreement between two or more
parties for the purpose of executing a business undertaking in
which the parties agree to share in the profits and losses of the
enterprise as well as the capital formation and contribution of
operating inputs or costs. It is similar to a partnership, but
typically differs in that there is generally no intention of a
continuing relationship beyond the original purpose. A joint
venture may not involve the creation of a new legal entity. CBV
create a significant positive impact and is measured in the index
by the value of cross border venture deals
(http://jointventures.uslegal.com/distinction-between-joint-venture-and-partnerships/).
The finding related to CBV can be explained by Mahavan et.al who
finds a positive correlation between FDi and CBV and hypothesize
that transnational technical communities accelerate cross-border
venture-related activities, especially when they possess an
entrepreneurship orientation. A regression analysis of factors
determining cross-border venture capital investments provides
evidence supportive of our argument where positive correlations
were found. The expected outcome is that Cross border ventures will
encourage FDI in an environment which has experience and
entrpreneurship orientation. Foreign investors are defined as from
the objective of establishin