Foreign Direct Investment in the APEC Region: the Role of Country Risks

This paper aims to establish a firm understanding of the structure and determinants of bilateral FDI investment linkages among APEC economies. Specifically, this paper first aims to analyze determinants of intra-APEC FDI flows so as to ascertain if and whether APEC members tend to invest more intensively intraregionally than extraregionally and, conversely, whether APEC economies receive more investments from other APEC members compared to extra-regional investments. This paper then aims to assess the impact on FDI flows of three different types of country risks - political, economic and financial risks - for the destination economy. This paper finds that the APEC member economies engage more intensively with each other in terms of FDI flows than what one might expect based on the general determinants of FDI flows. However, this conclusion does not hold once we incorporate bilateral exports, suggesting that the reason for the more intensive FDI engagement within APEC was largely due to the significant trade links between the member economies. More exports tend to promote bilateral FDI flows. This points to the complementary nature of FDI and trade in the APEC region. This paper also finds that economies with lower political risk appear to attract more FDI inflows. Thus, individual and regional efforts to improve the institutional quality of member economies are expected to contribute to increasing intra-regional FDI flows in the region. Other aspects, such as more stable political systems, improvements in socioeconomic conditions, reduction in corruption and enhancement of law and order, are all important objectives in and of themselves and will obviously contribute to greater FDI flows