What drives OFDI? Comparative evidence from ASEAN and selected Asian economies
| Date | 01 January 2018 |
| Pages | 15-31 |
| Published date | 01 January 2018 |
| DOI | https://doi.org/10.1108/JCEFTS-03-2017-0010 |
| Author | Fayyaz Ahmad,Muhammad Umar Draz,Su-Chang Yang |
| Subject Matter | Economics,International economics |
What drives OFDI? Comparative
evidence from ASEAN and
selected Asian economies
Fayyaz Ahmad
School of Economics, Lanzhou University, Lanzhou, China
Muhammad Umar Draz
Department of Management and Humanities, University Technology Petronas,
Perak, Malaysia, and
Su-Chang Yang
School of Economics, Lanzhou University, Lanzhou, China
Abstract
Purpose –The purpose of this study is to examinethe factors that are influential on outward foreign direct
investment(OFDI). A sample of four Association of Southeast Asian Nations(ASEAN) countries is compared
with dominantAsian economies during 1981-2013.
Design/methodology/approach –The authors used time series data for analysis. An econometric
model using ordinaryleast squares, with a series of complementary tests, was estimatedfor every country to
determinethe variables affecting OFDI.
Findings –The results depictthat exchange rates, income and human capital affectthe OFDI of most of the
countries in the sample.For comparatively advanced and dominant economies(i.e. China, Japan, South Korea
and India), opennessis the most influential variable, whereas income levels and exchange rates are dominant
factors in caseof ASEAN economies. Overall, different types of endowmentshave a different impact for every
country.
Originality/value –Previous studieshave primarily examined advanced countries’OFDI. Thiswork adds
to the literature by focusing on ASEAN economies and by making a comparisonwith the dominant Asian
economies. Furthermore,the validity and stability of the model is tested with a series of specificationtests. In
this way, thiswork is a useful source of information for every stakeholder.
Keywords FDI, OFDI, ASEAN, Openness, Asian economies
Paper type Research paper
1. Introduction
The analysis of foreign direct investment (FDI) motives, patterns, impact and directions is
not a new phenomenon. Although most of the existing studies have focused primarily on
developed countries, the trend of investigating developing economieshas emerged recently
as a major stream of research; it is mainly because of the change in pattern of FDI flows
from industrial countries to other economies. In particular, outward FDI (OFDI) from
developing economiesof different regions has increased significantly during the past couple
of decades (Holtbrügge and Kreppel,2012). As a result, these emerging economies have now
become globally important. Over the past few decades, the emergence of Chinese, South
Korean and Indian enterprisesin the manufacturing sector has beenphenomenal, and OFDI
flows from emerging economieshave increased up to $340bn in the past decade. Rising from
5 to 18 per cent of global OFDI, Brazil, Russia, India, China and South Africa (BRICS) and
What drives
OFDI?
15
Journalof Chinese Economic and
ForeignTrade Studies
Vol.11 No. 1, 2018
pp. 15-31
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-03-2017-0010
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
small economies have becomean import source of FDI inflows to other developing countries
(Gammeltoft etal.,2010).
Recently, the emerging Asian economieshave also joined the important players of OFDI
in the global market. Chinese, South Korean and Taiwanese enterprises have been
expanding their operations to take advantageof low factor prices and to access the markets
and resources of host nations. Following Japan and South Korea, Association of Southeast
Asian Nations (ASEAN) economies, Singapore and Malaysia in particular, are expanding
their activities in neighboringcountries. Likewise, Thailand’s OFDI to East Asian countries
has increased significantly in the past decade. Conversely, OFDI from the USA and Europe
has decreased in Asia. Meanwhile, Malaysia has targeted knowledge-based advanced and
developed markets, which shows that ASEAN enterprises, as a result of economic
integration, have extended their OFDI within the region and across the globe (Hiratsuka,
2006).
The following three factors are important for the enterprises engaged in OFDI: the
competitive advantage of ownership, skills and the exploitation of available resources.
Thus, the OFDI propensity of a country’sfirms is the function of their ability of acquisition
and utilization of their competitive assets. In that sense, a higher ability in terms of the
utilization of availableassets will result in higher OFDI in a particular country.These assets
can either be natural or created, such as natural resources, unskilled labor, capital, human
capital and technology. These endowments are country-specific; every country possesses
different natural resources and different level of efficiency in creating various technical
resources that highly depend on available capital, skills and the local environment.
Therefore, having a dynamic character, these specific endowments are influenced by
different development policies and market forces and evolve along with the economic
prosperity of a country. To be ableto compete in local and foreign markets, firms may draw
their own competitive advantage of available endowments. This, in turn, will increase a
country’s OFDI propensity and also local market efficiency (Dunning, 1980;Kyrkilis and
Pantelidis, 2003).
The purpose of the present study is to test the impactof substantially important factors
that are influential on OFDI. These generally include income, exchange rate, liberalization,
human capital, interest rates and technical advancements of countries. The model
established in our study recognizesthe key factors of OFDI by using the time series data of
eight countries: four ASEAN members, i.e. Singapore (SGP), Malaysia (MYS), The
Philippines (PHL) and Thailand (THA), and four major Asian economies, i.e. China (CHN),
India (IND), Japan (JPN) and South Korea (KOR). The period of our empirical investigation
covers a time span of 33 years, starting from 1981 to 2013, on annual basis. The novelty of
our work is that it is focused on selected developingASEAN countries and compares results
with the dominant Asian economieswith a data set of more than three decades. Most of the
previous efforts have focused on developed and relatively large economies. Therefore, the
current study is a valuable addition to the literature representing both relatively small and
leading economiesof Asia.
2. Literature review
FDI involves the transfer of capital of both tangible and intangible nature, e.g. machinery
and technical know-how.Capital abundance increases the propensityof OFDI in a particular
country, which increasesthe marginal efficiency of capital, hence leading to a corresponding
decrease in interest rates. For example, productivity differentials are influential on OFDI;
modern technology affects efficiency and directs OFDI toward technically advanced
countries. Furthermore, the low opportunity cost of capital at home encourages OFDI
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