The Determinants of Inbound FDI: Asia on a Reappraisal

Although FDI inflows in Asia have increased over the years, the share of FDI in GDP has remained persistently low. There has also been a lack of general consensus on the relationship between FDI inflows and its potential determinants Results have varied considerably depending on econometric methodologies, sample periods and countries under study. Do domestic investment and government expenditure complement or crowd out foreign investment? How significant a role do trade openness and market size play in attracting foreign investment in Asia? We re-examine the short-run and the long-run determinants of FDI inflows (in proportion to GDP) for a panel of 32 Asian economies. The period of study is 1970-2013. The variables are found to be integrated of order one. Cointegration tests establish long-run relationship between the panel variables. Government expenditure is found to have a significantly negative long-run effect on FDI inflows. Trade openness and domestic investment significantly complement FDI inflows. Results also indicate that market size, when measured by per-capita real GDP, is not a significant determinant of FDI inflows in Asia.