The Impact Of FDI On Trade And Economic Growth In ASEAN Countries

This paper investigates the impact of FDI on economic growth and trade of ASEAN5 countries, including Indonesia, Malaysia, Philippine, Thailand, and Vietnam, during the period from year 1995 to 2010. The empirical results suggest that the impact of FDI inflows on growth depends on both human capital accumulation of host countries and the source countries of FDI:(1) FDI inflow in ASEAN countries significantly enhance economic growth only when the host country has accumulated high level of human capital to interact with FDI.(2) The source countries of FDI play a significant role in FDI-growth linkage. There are systematic differences between Intra-ASEAN FDI and Extra-ASEAN FDI. Extra-ASEAN FDI, which is most from developed countries, significantly promotes growth while the impact of Intra-ASEAN FDI is not significant.Regarding the impact of FDI on trade, the results show that:(1) FDI compliments both exports and imports.(2) Extra-ASEAN FDI has the larger effect on total exports of the host country than Intra-ASEAN FDI. These results imply that most Extra-ASEAN FDI are vertical FDI in global value chain, which take advantage of international factor prices differences and locate unskilled labor intensive production tasks in ASEAN countries. This paper also examines the impact of FDI on trade across different destinations. The results suggest that Extra-ASEAN FDI promotes both Intra-ASEAN exports(exporting goods and services to ASEAN member countries) and Extra-ASEAN exports(exporting goods and services to courtiers outside ASEAN region). These findings imply that another important motive of FDI is to take advantage of regional trade agreement and access to the integrated market of ASEAN region.