FDI flows to Asia: Did the dragon crowd out the tigers?

• Author: Benoît Mercereau
• Position: IMF Asia and Pacific Department
• Pages: 94

Page 94

In recent years, China has topped the list of destinations for foreign direct investment (FDI) among developing and emerging market countries. But has its stellar performance come at the price of reduced FDI elsewhere in Asia? Generally, no, argues a new IMF Working Paper, although Singapore and Myanmar may be exceptions.

Many developing countries have been eager to attract FDI flows, which are not as volatile as other types of capital flows, tend to boost technology transfers and raise growth rates, and can spur domestic investment. China's success in attracting FDI has been impressive. Only 25 years ago, China's share of FDI in developing Asia was about 10 percent. By 2002, the country's share was 70 percent (see chart).

With success, however, have come fears that China has diverted flows from other countries in the region. For a clearer sense of what has, in fact, happened, our study, using a new methodology, analyzed data for 1984-2002 for 14 Asian economies (Bangladesh, China, India, Indonesia, Korea, Malaysia, Myanmar, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan Province of China, Thailand, and Vietnam).

The study found that, on average, China does appear to have diverted FDI flows during this period. Between the early 1990s, when China began opening its doors to FDI, and 2002, flows to other countries declined by an average of 1.3 to 2.1 percent of GDP a year, depending on the estimation method used. A closer look suggests, however, that this crowding out was concentrated in two countries-Singapore and Myanmar.

What explains the change in flows?

Singapore and Myanmar experienced large declines in FDI inflows-between 1.9 percent and 2.8 percent, and 3.9 percent and 4.5 percent of GDP a year, respectively. For Singapore, the most probable explanation for the decline seems to lie in the role played by overseas Chinese. They account for a significant share of foreign investment in China and invest because they have family connections or, at least, linguistic and cultural ties. Some overseas Chinese are similarly connected to Singapore. If these investors focus their investment on regions to which they are connected, a decision to...