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ANALYSIS OF FDI INFLOWS TO CHINA FROM SELECTED ASEAN COUNTRIES: APANEL COINTEGRATION APPROACH

Hussin AbdullahE-mail: ahussin@uum.edu.my

No !A"nin Abu #a$aE-mail: noraznin@uum.edu.my

Sallahuddin HassanE-mail: din636@uum.edu.my

College of Arts and SciencesUniversiti Utara Malaysia

Sintok 06010,Kedah Malaysia

Abs% a&%

This study analyses the F ! inflo"s into China fro# the selected AS$A% countries using the &anel cointegration a&&roach' The F ! #odel has (een utili)ed in deter#ining factors thatinfluence F ! inflo"s into China fro# selected AS$A% countries* Malaysia, Thailand, the

+hili&&ines, !ndonesia and Singa&ore' S&ecifically, varia(les such as trade o&enness, e changerate of China relative to each of individual AS$A% countries -$.C/, gross do#estic &roduct- +/ and fi ed ca&ital for#ation -FCF/ are used for the &eriod of 1 023004' Fro# the

findings it is ho&ed that it can give useful infor#ation as guidelines to assist researchers, &olicy#akers, as one (asis for &lanning and #aking decisions on future &olicies regarding #ultilateralrelationshi& (et"een China and selected AS$A% countries'

Keywords: Trade openness, Exchange rates, Foreign Direct Investment, panel cointegrationanalysis

'EL Classi(i&a%ion: F)*+ F,)+ F-)+ C,,

1

mailto:ahussin@uum.edu.mymailto:noraznin@uum.edu.mymailto:ahussin@uum.edu.mymailto:noraznin@uum.edu.my

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I. INTRODUCTION

Foreign direct investment (FDI) lays an im ortant role in the gro!th and develo ment

o" not only the develo ed countries #ut also in the develo ing countries. $esides% ca ital have

#een #rought in% it also introduces ne! and modern technology !hich rovides mar&et

o ortunities and lin&ages to e' ort. ountries are com eting !ith each other to o""er a lucrative

incentive lans to attract "oreign direct investments.

sian region has al!ays #een considered as a rudent centre "or investment es ecially

"rom the *nited +tates o" merica% ,a an% *nited ingdom and other Euro ean countries.

lo#alization and integration o" economic activities across the !orld "orced the government o"

the sian countries to attract FDI !hich later on e' erienced a sur rising gro!th. sian

countries are im lementing ne! lans and olicies to attract more and more FDI !hich !ill #ring in ne! innovative and automation #ased technologies that can re/uvenate the host

country0s e'isting manu"acturing #ase. Furthermore% human la#our trans"er in the "orm o" highly

s&illed% e' erienced and &no!ledge-versed is a remar&a#le move to #oost the country0s

economic gro!th.

hina has #een o ening u its economy "or more than t!enty years1 ho!ever its

accession to 2 4 im lies e'tensive conse5uences "or its economy. hina0s o ening u olicy

has aimed at romoting e' orts% !hile rotecting the domestic mar&et. his !as achieved

through a dualistic trade regime% !hich has granted tari"" e'em tions on im orts o" intermediate

#y e' ort-oriented industries% and through a selective olicy% !hich has channelled F ! into

manu"acturing roduction targeted "or e' orts or "or im ort su#stitution. s a result% F !

in"lo!s have layed a ma/or art in the o ening u o" hina0s industry and its integration into

the international division o" la#our. he ra id e' ansion o" its international trade and large

ca ital in"lo!s rovide evidence o" the increasing integration o" hina in the !orld economy.

+ince 789% hina0s share in international trade has tre#led% rising "rom less than one ercent to

more than three ercent in 777. hina has #ecome the second largest reci ient o" F ! % a"ter the

*.+ !ith cumulated in"lo!s amounting to more than *+ 399 #illion at the end o" 777.

ccording to +hu and ;eng (

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!hich e'ceeded the cumulative amount o" hina0s actually utilized FDI "rom the * % France

and ermany com#ined% !hich !as *+

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"actors that in"luence the level o" F ! in"lo!s into hina. he em irical results o" the study are

re orted in +ection > and +ection resents the conclusion.

II. LITERATURE RE;IEW

Aany studies have #een carried out to analyze the issue o" FDI and economic gro!th. s

stated in many studies% FDI lays an im ortant role in emerging mar&ets as these economies are

generally lac&ing in terms o" technology as !ell as ca ital to "und the ro/ects ($orenzstein et

al.% 7781 Estrin%

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green"ield investment or a /oint venture may #ring in ne! ca ital and !ould li&ely have a strong

local s illovers. In contrast% mergers and ac5uisitions are li&ely the channel% through !hich FDI

!ould e'ert negative im acts as no ne! ca ital and there"ore% less li&ely increase in technology

trans"er% managerial s&ill trans"er% local sourcing s illovers or roductivity to ta&e lace

(+umner%

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,.- Mod/l S /&i(i&a%ion

In this a er !e ool cross-section and time series data to study relationshi s #et!een

"oreign direct investment and inde endent varia#les such as trade o enness% e'change rate% gross

domestic roduct and "i'ed ca ital "ormation. 2e get the "ollo!ing e5uation:

)%%%( 0 + FCF 5$6$.C 7+$%$SS f F ! = ( )

!here FDI is "oreign direct investment and "actors that in"luence FDI in"lo!s in hina includes

level o" trade o enness ( 7+$%$SS )% e'change rate o" hina relative to each o" individual

+E = countries ( 5$ $.C )% gross domestic roduct ( + ) and "i'ed ca ital "ormation ( FCF ).

mong these "our time-varying e' lanatory varia#les are em loyed in this analysis% 7+$%$SS isconsidered as the &ey time-varying e' lanatory varia#le. he choice o" these varia#les relies on

the data accessi#ility. FDI it re resents the total F ! in"lo!s into hina "rom selected +E =

countries. 7+$%$SS is the level o" trade o enness. It is measured #y the ratio o" real trade share

(e' ort im ort) to gross domestic roduct1 5$ $.C is the e'change rate o" hina relative to

each o" the individual +E = countries1 + is the gross domestic roduct o" hina1 and FCF

is the total o" "i'ed ca ital "ormation in hina. he em irical model "orm "or this s eci"ication is

given #y:

it it it it it it 0 + FCF 5$6$.C 7+$%$SS F ! +++++= >3

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dimension% such that "e!er time o#servations are re5uired "or the test to have o!er. +ince the

IG+ test has #een "ound to have su erior test o!er #y researchers in economics to analyze long-

run relationshi s in anel data% !e !ill also em loy this rocedure in this study. IG+ #egins #y

s eci"ying a se arate DF regression "or each cross-section !ith individual e""ects and no time

trend:

J KIyLMIyNIOPyLi

6P /it /t%ii/6t%iiiit (3)

!here i P % . . .% % and t P % . . .%T

IG+ use se arate unit root tests "or the % cross-section units. heir test is #ased on the

ugmented Dic&ey-"uller ( DF) statistics averaged across grou s. "ter estimating the se arate

DF regressions% the average o" the t -statistics "or 6 "rom the individual DF regressions%

:) (t iii

J )M (t =6

Pt =

6Piiii =

(>)

he t -#ar is then standardized and it is sho!n that the standardized t2(ar statistic converges tothe standard normal distri#ution as = and . IG+ ( 77?) sho!ed that t2(ar test has #etter

er"ormance !hen = and are small. hey ro osed a cross-sectionally demeaned version o"

#oth test to #e used in the case !here the errors in di""erent regressions contain a common time-

s eci"ic com onent.

Panel Cointegration Tests

he ne't ste is to test "or the e'istence o" a long-run cointegration among FDI and the

inde endent varia#les using anel cointegration tests suggested #y Gedroni ( 777 and ). 2e

!ill ma&e use o" seven anel cointegrations #y Gedroni ( 777)% since he determines the

a ro riateness o" the tests to #e a lied to estimated residuals "rom a cointegration regression

a"ter normalizing the anel statistics !ith correction terms.

7

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he rocedures ro osed #y Gedroni ma&e use o" estimated residual "rom the

hy othesized long-run regression o" the "ollo!ing "orm:

t%it%AiAit%i

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( )J U SeSLeSJ J eSP;W 6Pt

it%i6t%i

6 =

6Pi 6Pt

< (-9.69) -

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In a#le >.3% !e "ound that the estimate o" the coe""icient "or 4GE==E++ is ositive

( . and 6.33) and statistically signi"icant at the ercent level "or Indonesia and Aalaysia.

Aean!hile% +inga ore has a negative coe""icient (->.6?) and statistically signi"icant at the

ercent level. 2e conclude that there is a resence o" a long run relationshi #et!een FDI and

4 enness "or Indonesia% Aalaysia% and +inga ore. 2e "ound that there is statistically no

signi"icant long run cointegration #et!een HE EY and FDI "or +E =- countries. he

coe""icient on F F is negative1 -) and statistically

signi"icant at the ercent level in Indonesia% +inga ore% and hailand. here"ore% DG ositively a""ect FDI and there is a long run cointegration #et!een the DG and FDI.

;. CONCLUSION

his study e'amines the determinants o" "oreign direct investment in"lo!s into hina

using the anel cointegration a roach. he unit root test (IG+) is used to con"irm the stationarity

o" all varia#les #e"ore the cointegration test can #e er"ormed. "ter con"irming that all varia#les

are non-stationary at level% the anel cointegration a roach is a lied. *sing Gedroni0s% the long

run cointegration test is er"ormed to investigate the e'istence o" the long run cointegration

among the varia#les. Hesults o#tained indicate the resence o" the long run relationshi #et!een

FDI and 4GE==E++ "or Indonesia% Aalaysia and +inga ore. Ro!ever% there is statistically no

signi"icant long run cointegration #et!een HE EY and FDI "or +E =- countries. For the

case o" Aalaysia% the coe""icient o" F F is statistically signi"icant !ith the value o"

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in"lo!s into hina. here is room "or hina to im rovement o" e'change rate% DG% and "i'ed

ca ital "ormation as attraction "or FDI to in"lo! into hina. his could #e e' lained #y the "act

that although +E = as a !hole is not as o ulous as hina% the urchasing o!er o" +E =

is actually higher than hina and there"ore% could serve as a good avenue "or high 5uality

roduct o" multinational cor orations. Finally% the im act o" trade o enness is ositive and

signi"icant% im lying that maintaining the level o" o enness could #e another good olicy.

lthough hina0s accession into 2 4 !ill have an im act on sian countries% es ecially

!hen hina0s FDI inta&e and glo#al share have increased in a eriod !hen glo#al FDI in"lo!s

have contracted% hina0s rise should #e inter reted as t!in o ortunity. 2hile FDI "urther

romote hina0s e' ort% it also e' ands its domestic mar&et !here sian countries and regions

directly #ene"it #y recording surging e' orts to hina. t the same time% hina0s cost

com etitiveness "orces sian countries to move u the value chain #y shi"ting "rom lo! techmanu"acturing to higher value added% ushing "or economics as !ell as industrial trans"ormation.

It !ould ta&e several years0 time #e"ore hina e' orts FDI in signi"icant amounts. sian

countries should ta&e this o ortunity to actively ursue% instead o" encum#er economic

coo eration and "ree trade !ith hina.

REFERENCES

$orensztein% E.% De regorio% ,. and ee% ,.2 ( 778)% Ro! does "oreign direct investment a""ecteconomic gro!thf >ournal of !nternational $cono#ics % > : - 3

$os!orth% $arry G.% +usan A. ollins and armen A. Heinhart ( 777)% a ital "lo!s toDevelo ing Economies: Im lications "or savings and investment. ?rookings +a&ers on

$cono#ic Activity, 777( ): >3- 89

alvo% . .% eonardo eiderman and armen A. Heinhart ( 776)% In"lo!s o" ca ital toDevelo ing countries in the 779s% >ournal of $cono#ic +ers&ective % 9(

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ee% R.R. and an R.$. (ournal of Asian $cono#ics % ol. ?% >9?->33.

Gedroni% G. ( 776). Fully Aodi"ied 4 + "or Reterogenous ointegrated Ganels and he ase 4"Gurchasing Go!er Garity. orking &a&er % =orth merican Econometric +ociety +ummerAeeting% 76-