Working Papers

No. 8: Foreign Direct Investment and APEC Economic Integration

by Ashfaq Ahmad, P. Someshwar Rao and Colleen Barnes, Micro-Economic Policy Analysis, Industry Canada, February 1996

Request this document

---

Summary

The Asia-Pacific is the fastest growing economic region in the world. Accessing markets in member economies of the organization for Asia-Pacific Economic Cooperation (APEC) will be instrumental in promoting jobs and growth in Canada.

While many studies have been published in recent years relating to the Asia-Pacific, little empirical work has been done on investment and economic integration in the region. In part, this is due to a lack of data. This study develops a reasonably consistent set of data on direct investment for APEC member economies. It examines in some detail the investment linkages among APEC members and investigates the relationship of trade to international investment.

The main findings of the study are as follows:

Economic Dynamism

• All the Asia APEC member economies, except the Republic of the Philippines, enjoyed very rapid growth rates in output and real incomes and gained significant ground over the industrialized economies in the post-War period.
• However, the productivity and real income levels in Asian countries, (except Japan, Hong Kong and Singapore) are still well below those of non-Asia APEC member economies.
• High savings and investment rates, the rapid growth of exports, the presence of well educated and skilled workers, low labour costs, favourable exchange rate movements, a well developed infrastructure, and outward looking and market oriented micro- and macro-economic policies seem to have contributed to the Asian growth miracle.
• The Asia APEC region will continue to outperform the non-Asia Pacific region because of very large productivity and technology gaps, provided these countries continue to apply appropriate micro and macro policies and strengthen their trade and investment linkages with countries inside and outside of APEC. In other words, the APEC market, with over 2 billion people, has tremendous growth potential.

Openness

• On average, Asia APEC member economies (except Japan) have a much higher trade propensity than non-Asia APEC member economies. In the 1980s, relative share of trade increased dramatically in the domestic economy of the Peoples' Republic of China (PRC) and Mexico.
• The share of foreign direct investment (FDI) flows in domestic capital formation more than doubled in most of APEC member economies during the second half of the 1980s.
• In 1992, FDI inflows in the PRC jumped to US$ 11.2 billion, from only US$ 4.4 billion one year earlier, making it the second largest FDI recipient in the world (after the US) and the largest FDI host country in the developing world.
• The shares of the two direct investment stocks (inward and outward) in GDP also increased substantially in most of APEC member economies during the 1980s.
• The manufacturing and tertiary sectors account for much of the inward and outward FDI stocks in all APEC member economies, except in the Association of Southeast Asian Nations (ASEAN) countries. The share of the tertiary sector in APEC inward FDI stocks increased markedly in the 1980s.

APEC Economic Integration: Trade Linkages

• Between 1980 and 1992, trade linkages between the Asia APEC and the non-Asia APEC member economies strengthened considerably. Similarly, the importance of intra-Asia APEC and intra-non-Asia APEC trade in the total trade of these two sub-groups increased substantially. As a result, the share of intra-APEC trade in total APEC trade climbed from about 58 percent in 1980 to about 70 percent in 1992.
• Trade linkages between APEC and the rest of the world (ROW) declined dramatically in the 1980s while trade linkages with the European Union (EU) remained virtually unchanged.

APEC Economic Integration: Investment Linkages

• In 1992, intra-APEC inward FDI stock accounted for about 50 percent of the total APEC FDI stock, with roughly equal shares coming from Asia APEC and non-Asia APEC.
• In both the ASEAN and the newly industrializing economies (NIEs), the single most important source of FDI was Asia APEC, with Japan and the NIEs being the main source countries. Non-Asia APEC member economies are more important investors in the NIEs than in the ASEAN countries.
• The shares of Japan and the EU in the total inward FDI stock of the non-Asia APEC region increased considerably during the 1980s. On the other hand, the importance of the U.S. as a source country declined markedly.
• In 1992, almost half of the APEC outward direct investment stock went to other APEC member economies, 30 percent went to the EU and 20 percent to other countries around the globe. During the 1980s, the shares of APEC and EU increased significantly at the expense of a decline in the ROW share.
• While APEC as a source of FDI in other APEC member economies is declining, overall investment linkages between the region's countries are strengthening.
• Within APEC, non-Asia APEC countries are linked more closely through direct investment ties with other member economies than are Asia APEC countries.
• In terms of overall investment linkages, Asia APEC is predominantly linked to non-Asia APEC member economies. In terms of inward flows alone, however, intra-Asia APEC linkages dominate.

Interrelationship Between Trade and Investment Linkages

• The following factors seem to have played a major role in shaping the trade and investment patterns of APEC member economies in the 1980s: faster rates of economic growth in APEC member economies, especially in the Asia APEC region; the complementary nature of trade among APEC member economies; very low labour costs in the Asian countries (except Japan); geographic proximity and rapid changes in the comparative advantage position of APEC member economies; cultural affinity of economies in the three APEC sub-groups: Asia APEC, North America, and Australia-New Zealand (ANZ); regional free trade agreements (FTA, NAFTA, ASEAN and ANZ); the opportunities and fears associated with the advent of the EU; slower economic growth in the ROW countries; declining real commodity prices; and, more importantly, the stronger investment linkages between APEC member economies.
• The trade and investment patterns of all APEC member economies showed a strong and positive correlation in both 1980 and 1992, suggesting trade and FDI are complements rather than substitutes. The trends in trade flows and the two direct investment stocks in APEC member economies in the 1980s also imply complementarity between trade and investment linkages.
• The total elasticity of trade flows to inward and outward FDI stocks for the APEC region averages around 0.6. Nevertheless, it varies significantly across APEC member economies (between 0.3 and 0.8), with a lower elasticity in Asia APEC countries.

Investment is leading the integration of APEC economies and trade linkages are developing in response to investment patterns. In policy terms, the analysis suggests that efforts to facilitate investment and trade should continue; this will inevitably bring pressures to harmonize policies among APEC countries in areas such as corporate law, intellectual property, and competition.

Working Papers