The Asian Perspective
ADBI series on Asian Economic Integration and Cooperation
Edited by Richard Baldwin, Masahiro Kawai and Ganeshan Wignaraja
Chapter 13: The role of foreign direct investment flows and a possible multilateral agreement
Foreign direct investment flows play a key role in globalization. The size of FDI flows has increased dramatically since the 1990s, albeit with some ups and downs. Foreign direct investment brings capital, technology, and management to the host economies; rationalizes industrial allocation; and creates supply–demand chains both on the regional and the global level. On the other hand, FDI could increase cross-border trade since industrial reallocation and supply–demand chains create multiple routes of exchange of goods and services. As a cross-border activity, FDI is supported by business incentives, business strategies, the host market environment, and in particular by FDI-friendly policy. In general, all economies have now adopted an FDI-friendly policy and welcome inflow of FDI, since it not only meets the gap in investment, but also encourages competition and improves economic efficiency. This is why FDI flows have complex incentives and directions. The incentives include those for production networks, for market access, or for lowering business costs, while the direction could be either among developed economies, from developed to developing economies, among developing economies, or even from developing to developed economies. Foreign direct investment is an integrated part, and the most active factor, of global economic activities. Given that the global economy is in a period of post-financial/ economic crisis recovery and restructuring, it is crucial to improve the environment for FDI so to facilitate FDI flows. However, there are still many barriers that hamper FDI flows, the major barrier being policy restrictions.
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