Catching Up or Falling Behind
Chapter 7: Trade–Investment Nexus and Intra-Industry Trade
One of the more salient features of increasing interdependence in the international economy is the trade–investment nexus, which grew phenomenally in Asia after the mid-1980s (Bende-Nabende, 2003). The trade and foreign direct investment (FDI) nexus, initially led by industrialized Japan after the early 1960s, further accelerated after the Plaza Accord in 1985. After the mid-1980s, the first tier of the newly industrialized countries (NICs), notably Korea and Taiwan, engaged in outward FDI to structurally transform their economies as well. This phenomenal FDI–trade growth was caused by circumstances in the host countries and internal as well as external conditions in the home countries. Internally, as the first tier of the NICs encountered “factor incongruity” (Ozawa, 1992) and lost their comparative advantage in traditional labor-intensive manufactures, their economies were undergoing structural transformation by moving toward technological-intensive industries. Hence, similar to what Japan had done in the 1960s with its outward FDI,1 it became imperative for the first tier of the NICs to liberalize outward FDI and thereby shift labor-intensive sectors to less-developed countries, which, as host countries, could provide cost advantages. Industrial migration was extended to the low end of high-tech industries when manufacturing production became further fragmented across national boundaries. The “factor incongruity” in the first tier of the NICs was reinforced by the external pressure of currency appreciation under the Plaza Accord in 1985. From the first quarter of 1985 to the last quarter of 1988, the Japanese yen appreciated roughly 50% against the US dollar, from...
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