# **_Foreign Direct Investment_**

Historically East Asian economies have shown more differences in their reliance on FDI than they have done on openness to trade or technology licensing, although in recent years there has been some convergence towards more openness to FDI. Historically, Korea and, to a lesser extent, Taiwan (China) have tended to restrict FDI while emphasizing licensing of foreign technology and upgrading of domestic technological capabilities, including through domestic R&D and strengthening of technical education and labor force skills. Singapore, on the other hand, has welcomed FDI, while also fostering domestic technology efforts. China too has drawn heavily on FDI inflows, emphasizing joint ventures, while more recently also emphasizing <!-- Start of picture text --> Exhibit 4<br>Inward FDI Stock (% of GDP) and Land Area.<br>(2003)<br>200<br>Singapore<br>150<br>Vietnam<br>Cambodia<br>100<br>Malaysia<br>Source:<br>UNCTAD<br>World Thailand<br>50<br>Investment Philippines<br>Report 2005 China<br>USA<br>0<br>2 3 4 5 6 7 8<br>Taiwan, China Korea Japan Indonesia<br>-50<br>Land Area (Sq. Km. Log)<br>FD I Inflow Stock (% of GD P)<br><!-- End of picture text --> domestic R&D. Middle income South East Asian economies like Malaysia, Thailand, Indonesia and Philippines (since the 1980s) have also been open to FDI, although, as we show in a later section, the level of indigenous technological effort in these economies (especially R&D) has been limited.<sup>12</sup> Exhibit 4 shows a scatter plot of countries’ accumulated stocks of inward FDI (relative to GDP) versus land area.<sup>13</sup> Consistent with their past history of relatively restrictive policies on FDI inflows, economies like Japan, Korea and Taiwan (China) have low stocks of inward FDI relative to other economies of comparable geographical size (or per capita income). FDI stocks are also low relative to country size and per capita income in Philippines and Indonesia. On the other hand, FDI stocks in economies like China, Hong Kong, Singapore, and most middle (and low) income economies in South East Asia are generally at or above the levels predicted by country size or (for the most part) per capita income, reflecting in part more open policies towards FDI. (A partial exception to these observations is that, despite the high absolute flows of FDI to China in recent years, the stock of FDI relative to China’s GDP remains low compared to most other economies at a similar per capita income level). It is also interesting to note (Exhibit 5) that while stocks of inward FDI in manufacturing in East Asia are generally higher than in other developing (or developed) regions, FDI in the much larger services sector of these economies is generally much lower.

Theories of the multinational enterprise emphasize its role as an originator of new product and process innovations, managerial expertise, higher quality standards, and access to global export markets. These theories suggest that multinationals opt for foreign direct investment rather than licensing their technology through arms length market transactions

> 12 Lall (2003) elaborates the strategies employed by East Asian economies to strengthen industrial competitiveness. 13 There is a weak slightly positive correlation between FDI stocks and per capita income across countries.  There is however a more significant negative correlation between country size and FDI stocks as a share of GDP.

14