Has Regionalism Delivered for Developing Countries?
INTRODUCTION The role of direct foreign investment (DFI) in the economies of developing countries in general, and Asia in particular, has been strongly emphasized in recent years. In addition to bringing in new non-debt-creating capital and foreign exchange, DFI has been actively courted as a means of stimulating technology transfer, increasing efficiency in the economy, and providing ready-made markets for a country’s exports. Indeed, mounting empirical evidence, including that which is presented in this chapter, suggests that trade and investment are intricately linked, with larger DFI flows being associated with robust export growth. Developments in Asia since the financial crisis of 1997–9 further underscore the importance of DFI. Over the 1990s, the rate of increase in DFI to Asia slowed down, and financing of massive current account deficits mainly came from footloose portfolio investment flows. As portfolio flows are far more volatile than DFI, this change in the composition of inward capital flows made the region more vulnerable to crisis. Hence Asian countries have placed an even greater emphasis on DFI inflows in the post-crisis era. Thus awareness of the implications of global and regional integration for DFI flows to developing countries are essential to the economic development prospects of developing countries. In this chapter, we consider several relevant dimensions of DFI. First, we review the theoretical literature on the determinants of DFI, including the potential effects of regional economic integration and trade–investment links. Second, we analyse empirically various trends in global DFI with the intention of identifying...
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