What Attracts Foreign Direct Investments in Asian Economies?: An Institutional Approach to FDI

Overall Trends In Fdi

Since the 1990s, foreign direct investment (FDI) has played a leading role in globalizing Asian economies. Today, most Asian economies have become important destinations for FDI from advanced economies. FDI has several advantages for these economies, in addition to its direct effect on economic growth. FDI is often associated with technological transfer or the introduction of new knowledge and skills, which in turn improves the economic environment for long-term growth. While domestic firms may benefit from the inflow of new knowledge associated with FDI, the increased competition in domestic markets induced by FDI may put pressure on local firms to enhance their productivity and promote human capital mobility among firms. A combination of these factors can create the conditions necessary for increased long-term economic growth. It is therefore believed that FDI inflows contribute to economic growth in Asian economies (Lee, Lee, & Kim, 2011).

Figure 1 shows the ratio of regional inward FDI to world inward FDI from 1990 to 2014. During the whole period, the ratio for the African region is steady at nearly 3 per cent. The ratio for South and Central America remained steady at roughly 5 per cent until 2010, when it increased to nearly 8 per cent.

Figure 1.

Inward FDI by region

North America, i.e., Developed economies: America, was the largest recipient of FDI, accounting for nearly 30 per cent of the total FDI in the 1980s. However, its share gradually declined and approached the share of the EU in the 1990s. In the early 2000s, the regional share of North America dropped rapidly, whereas there was a steep rise in the share of the EU region. Since then, the EU has been the largest recipient of FDI, accounting for roughly 40 per cent in the 2010s. However, the ratio of inward FDI to total FDI in the EU region gradually declined to 33.70 per cent in 2013.