CESIS

Electronic Working Paper Series

Paper No. 57

FDI and Exports: the case of the High Performing East Asian
Economies

Andreas Johnson

(JIBS)

January 2006

The Royal Institute of technology

Centre of Excellence for studies in Science and Innovation
http://www.infra.kth.se/cesis/research/publications/working papers
Corresponding author: [email protected]

1
 FDI and Exports: the Case of the High
Performing East Asian Economies

Andreas Johnson*
January 17, 2006

ABSTRACT
The paper investigates the flows of FDI and trade in eight high performing East Asian economies with a
focus on the relationship between FDI and host country exports. The development and importance of FDI
and trade for the region is described. The empirical part of the paper examines the relationship between
FDI and host country exports, using data for the period 1980 to 2003. Time series regressions for
individual economies as well as panel data estimation indicate that FDI inflows have a significant and
positive effect on host country exports, suggesting that export-platform FDI may be important for the East
Asian economies. No clear link between outflows of FDI and exports was found, allowing FDI outflows
to function as both a complement and a substitute for source country exports. Granger causality tests find
indications of FDI inflows causing exports, providing further evidence that the export-platform FDI
strategy applies for the East Asian economies.

Keywords: foreign direct investment, East Asia, international trade, exports

JEL classification: F21, F23, F14

*
Jönköping International Business School, P.O. Box 1026, SE-551 11 Jönköping, Sweden, Phone: +46
36 10 17 53, Fax: +46 36 12 18 32 , E-mail: [email protected]

2
1.0 Introduction

Multinational enterprises (MNEs) generate the global flows of foreign direct investment but
they are also extremely important for global trade flows. UNCTAD (2004) estimates that MNEs
account for around two-thirds of world exports. Since MNEs are responsible for a large
proportion of world trade, one may conjecture that there is a close relationship between flows of
FDI and trade. An MNE network, consisting of a parent and affiliates, generates simultaneous
flows of goods and investments. There is an increasing body of knowledge and associated
models which explain international trade, but there is less theoretical consensus about the
relationship between trade flows and FDI. The fact that exporting and local production are
alternative ways for an MNE to serve the demand in a foreign market suggests a substituary
relationship between FDI and trade. MNE production in the host country implies that local
production is a substitute for exports from the home country. On the other hand, MNE affiliate
production in a host country can generate a demand for intermediate goods from the parent,
resulting in a complementary relationship between flows of FDI and trade (exports). Theoretical
reasoning therefore supports both a complementary and a substituary relationship between FDI
and trade, providing a strong incentive for empirical analysis.
East Asia is a very challenging region for research on the link between FDI and trade since
it is obvious that FDI flows have been of great importance for the region’s successful
development. Openness to trade and FDI, export orientation, factor accumulation as well as
government policies have all played an important role in improving the standard of living in
East Asia according to Stiglitz (1996) and the World Bank (1993). The success achieved by the
East Asian economies and the dramatic increases in the size of FDI and trade flows in the region
reinforce the argument that East Asia provides an exciting setting for an analysis of the
relationship between FDI and trade. Dowling and Ray (2000) argue that openness and export-
led growth has been essential for the high rates of economic growth that have been achieved. It
should therefore be of particular interest to study the link between FDI and exports.
How have FDI flows affected flows of exports from the region? Does FDI generate exports
or do exports generate FDI? Are inflows of FDI a prerequisite for a host country to develop into
an exporting country? Did the East Asian economies develop into exporters before they started
to receive substantial inflows of FDI? Is it possible that firms start to export to foreign
economies and subsequently invest in those economies, for example in order to promote sales?
Can a developing economy evolve into a major exporter without having attracted considerable
3
inflows of FDI? Are there special characteristics in East Asia important for the relationship
between FDI and exports?
This paper aims to investigate the relationship between FDI and host country exports on the
macroeconomic level for the East Asian economies.
From a policy perspective, why is it be interesting to analyse the relationship between FDI
and exports? Exports have a potential to stimulate economic growth in the exporting country
through what is referred to as export-led growth. Exports can affect the economy as a whole
through productivity enhancing externalities such as technology spillovers. If FDI is found to
promote exports, FDI can indirectly enhance economic growth. The East Asian economies
could thereby provide examples of the benefits of liberalising FDI and trade regulations.
Developing economies which have as yet failed to embark on a path towards increasing
standards of living could try to implement similar policies which were used in East Asia.
However, there is also a possibility that outward FDI flows could reduce host country exports,
providing an argument for governments to restrict outward FDI.
For the purposes of this paper we are mainly interested in what is sometimes referred to as
the ‘high-performing Asian economies’ since we believe that FDI and trade have been
particularly important for their development. The paper takes the definition in the World Bank
(1993) identifying ‘high performing’ East Asian economies as a starting point. It seems
reasonable to add China to this group based on its high rates of economic growth in recent time.
We choose to exclude Japan for two reasons. Firstly, we want to focus on developing
economies, but Japan was a high-income economy already in 1980. Secondly, Japan is a special
case due to the extremely small volume of FDI it has attracted considering the size of its
economy and it is unlikely that these flows could have had any effect on Japan’s large export
volume.1 Accordingly, the country group studied in this paper includes China, Hong Kong,
Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand.
The remainder of the paper is organised as follows. Section 2 reviews the existing
theoretical and empirical findings regarding the relationship between FDI and trade. Section 3
provides an overview of the role of FDI and trade in the East Asian economies, with a focus on
the relationship between FDI and host country exports. Section 4 contains the empirical
analysis. Section 5 concludes.

1
Section 3.2 of the introductory chapter includes some FDI data for Japan.
4
2. The relationship between FDI and trade

The objective of this section is to review the existing knowledge about the relationship between
foreign direct investment and trade. Section 2.1 examines the theoretical findings and Section
2.2 reviews empirical studies.

2.1 Theoretical studies of FDI and trade

Theoretical research regarding the relationship between FDI and trade has focused on the
question whether these flows are complements or substitutes. A reason for the interest in this
relationship is the link between MNE production and employment in the home country and
MNE production in foreign countries. A fear among trade unions and workers is that increased
MNE production in foreign host countries might substitute for MNE production in the home
country, reducing employment.
The classical trade theories of Ricardo and Heckscher-Ohlin in their strict form do not allow
for any conclusions about the relationship between FDI and trade since production factors are
assumed to be immobile internationally. However, if the immobility assumption is relaxed, it
becomes possible to analyse FDI in a Heckscher-Ohlin framework. One of the earliest examples
of a study relaxing the assumption of internationally immobile production factors is the seminal
paper by Mundell (1957). The paper develops a standard two-good, two-factor, two-country
Heckscher-Ohlin trade model. Capital mobility between the two countries is introduced, and the
Heckscher-Ohlin assumption of identical production functions is relaxed. In this setting, capital
movement becomes a perfect substitute for trade. The equalisation of capital endowments
removes the basis for trade. Trade barriers largely explain international capital movement in this
kind of framework.
However, Markusen (1983) presents several models in which factor movements can result
in an increase in the volume of trade. The models introduce reasons for trade that are not based
on differences in relative factor endowments. Instead, the models show how conditions such as
external economies of scale and different production technologies can function as a basis for
trade. In all models, factor mobility causes differences in factor proportions, creating an

5
additional motive for trade in goods. Markusen (1983) concludes that the result of
substitutability between FDI and trade found by Mundell (1957) is a special case only present in
factor proportions models.
Markusen (1983) was not the first theoretical contribution arguing that a complementary
relationship between FDI and trade is possible. Schmitz and Helmberger (1970) proved that it
was possible to construct factor proportion models where capital movements and trade are
complements. In order to make a complementary relationship plausible, the Heckscher-Ohlin
assumptions of international production factor immobility and identical production functions is
relaxed. Using a spatial equilibrium framework, Schmitz and Helmberger show that when going
from a situation of factor immobility only allowing for trade, to a situation where capital is
mobile internationally, trade increases when capital mobility is introduced. In a setting with
trade in both products and factors, a complementary relationship between FDI and trade is
possible.
Vernon (1966) introduced a locational dimension to the product life-cycle theory. This
contribution made it possible to describe the relationship between exports and FDI on the
aggregate level. To Vernon, the location of production was determined by the product-life cycle,
and, eventually, increased competition would result in foreign production as a substitute for
exports from the home country (U.S.) in order to reduce production costs. The model describes
how a change in the location of production generates an outflow of FDI from the U.S. to low
income countries and thereby replacing export flows. Thus, Vernon’s product cycle model
suggests a substitutional relationship between FDI and trade.
Horst (1976) provides a somewhat different example of a possible complementary
relationship between FDI and exports. Horst argues that foreign investment is not limited to
local production of final goods in the host country. The MNE investing in the host country also
engages in non-manufacturing activities not directly related to production. These activities have
the objective of increasing demand for the MNE good in the host country market. Horst (1976)
suggests that these activities include advertising, retail distribution, technical assistance and
adaption of the good to local preferences. Horst uses the concept of ‘ancillary goods’ to describe
such activities. As a result, demand for other kinds of goods is established, possibly generating
an increase in exports from the MNEs home country to the host country.
The OLI paradigm was developed by John Dunning (1977), and has had a large impact on
FDI theories.2 For the purpose of the paper at hand, the usefulness of the OLI paradigm is that it

2
The OLI paradigm is described in more detail in the introductory chapter of the dissertation.
6
can function as a framework for a discussion of whether an MNE serves a foreign market
through exports or local production. The MNE’s decision about exporting, licensing or
investing is determined by the combination of ownership, location and internalisation
advantages. The relationship between FDI and trade can be discussed in relation to these
advantages. If the host country does not have a location advantage, the MNE will serve the
foreign economy through exports, suggesting a substitutional relationship between FDI and
trade.
The new trade theory emerging during the early 1980s generated more realistic general
equilibrium trade models which could handle increasing returns to scale, imperfect competition
and differentiated products. These models are based on the ideas of ownership and location
advantages presented in the OLI paradigm. The new trade theory has been able to incorporate
the relationship between FDI and trade. However, early models were not very helpful in
handling MNEs and FDI due to the assumption of single-plant national firms, excluding the
existence of MNEs, but more recent models allow for MNEs to arise endogenously.
New trade theory models distinguish between horisontal and vertical FDI. In the case of
vertical FDI, the MNE decomposes the production process into stages according to factor
intensity. Production activities are located in order to exploit differences in factor cost and
therefore minimise production costs. Horisontal FDI, on the other hand, implies that the MNE is
locating production close to the final market. The production process is duplicated and demand
in foreign markets is served by local production, reducing trade costs.
Helpman (1984) and Markusen (1984) are among the first trade models that incorporate
MNEs. Helpman (1984) presents a model of vertical MNEs and FDI. The paper develops a
general equilibrium trade model based on differences in factor endowments. Firms are modelled
as having one labour-intensive activity and one capital-intensive activity. Factor intensities
differ between the two activities and they can be separated geographically. MNEs only arise if
the differences in factor endowments are large enough. Markusen (1984) provides a general
equilibrium model incorporating horisontal MNEs. The model is based on firm-level scale
economies. The firm possesses a technical advantage, possibly in the form of an innovation,
which can be used in several production facilities simultaneously without reducing its marginal
productivity. The MNE therefore has an incentive to duplicate the production process, resulting
in horisontal FDI.
The distinction between horisontal and vertical FDI as modelled in Helpman (1984) and
Markusen (1984) and similar papers has important implications for the relationship between

7
FDI and trade. In the case of horisontal FDI, a substitutional relationship is expected. The MNE
produces the good locally instead of exporting it from the home country. For vertical FDI, FDI
is expected to have a complementary relationship to trade. Vertical FDI does not substitute for
exports. Instead, demand for intermediate goods from the MNE affiliate can result in an increase
in exports to the host country.
Brainard (1993) shows how including intermediate goods into a trade model allows for the
possibility of a complementary relationship between FDI and trade. The paper develops a two-
country, two-sector general equilibrium model with a three-stage production process where
firms choose between exporting and cross-border investment. The decision depends on the
tradeoffs between proximity to the market and concentration advantages due to scale economies
at the plant level. These tradeoffs differ according to production stages and FDI and trade can
exist simultaneously. One of the equilibrium outcomes implies that FDI stimulates intra-firm
trade in intermediate goods while at the same time reducing trade in final goods.
The model in Markusen and Venables (1998) is similar to Brainard (1993) in the sense that
MNEs tend to arise when firm-level scale economies and transport costs are large compared to
plant-level scale economies. However, since the Markusen and Venables model has
asymmetries in size and endowment between economies, the model is more in line with
observations of actual flows of trade and investment than Brainard (1993). Suppressing MNEs
in the model makes it possible to find the effect of FDI on trade. Starting from a situation with
only national firms and introducing MNEs reduces the volume of trade as affiliate sales
substitute for trade.
The distinction between horisontal and vertical FDI has been extended in recent so-called
knowledge-capital models.3 Examples of this type of model are presented in Carr et al. (2001)
and Markusen and Maskus (2002). These models add more realism since they allow
combinations of horisontal MNEs, vertical MNEs and national firms to arise endogenously.
Knowledge-capital models consequently incorporate both a complementary and a substitutional
relationship between FDI and trade.
As this review has made clear, theoretical contributions have focused on the link between
outward FDI and exports. However, Ekholm et al. (2004) model a form of FDI where foreign
direct investment is performed in order to create an export-platform in the host country. Such
export-platform FDI is defined as MNE production in a host economy when the output is sold in

3
Knowledge-capital and trade models based on this concept are described in more detail in Section 4.4 of the
introductory chapter.
8
third markets and not in the parent or host country market. Ekholm et al. construct a three-
country model with two high-cost countries and one low-cost country. Numerical simulations of
the model are performed in order to find conditions that tend to result in export-platform FDI.
The probability of this type of FDI emerging in the model is determined by the interaction of
shipping costs and cost advantages between the countries. An export-platform model
consequently predicts a complementary relationship between inward FDI and host country
exports. Barry and Bradley (1997) argue that Ireland has functioned as an export-platform for
U.S. MNEs. It is possible that export-platform FDI is important for East Asia due to the
importance of exports for these economies.
This review of the theoretical literature suggests that the form of FDI should have a strong
influence on the relationship between FDI and trade. Table 1 presents a summary of the
relationships suggested by the literature review.

Table 1 The relationship between FDI and trade suggested by trade theory
Form of FDI The primary relationship References
between FDI and trade
Horisontal Substitutional Helpman (1984)
Vertical Complementary Markusen (1984)
Knowledge- Complementary or Carr et al. (2001),
capital based substitutional Markusen and Maskus
(2002)
Export-platform Complementary (inward Ekholm et al. (2004)
FDI and host country
exports are
complements)

Theoretical models of horisontal MNEs predict a substitutional relationship between outward

FDI and exports. In this case, local MNE production substitutes for exports. Vertical models
primarily predict a complementary relationship due to an increase in demand for intermediate
goods. Knowledge-capital models are able to incorporate horisontal and vertical MNEs
simultaneously, and consequently both complementary and substitutional relationships between
FDI and trade are possible. Export-platform FDI suggests a complementary relationship
between inward FDI flows and host country exports.

9
 Table 1 shows that trade theory can support FDI and trade being either complements or
substitutes depending on the form that FDI takes. Empirical studies therefore have to be used in
order to find the exact nature of the relationship.

2.2 Empirical research of FDI and trade

A substantial body of empirical research on the link between FDI and trade has emerged.
Empirical studies are heavily focused on FDI generated by developed economies. Similarly to
the theoretical contributions, most of the research efforts have concentrated on the link between
outward FDI and source country exports. One of the first studies is Horst (1972), analysing the
relationship between U.S. exports and FDI to Canada. Horst finds that exports and foreign
investments are alternative ways for U.S. manufacturing firms to supply the Canadian market.
Data for individual U.S. firms are used by Lipsey and Weiss (1984) in order to investigate
the effect of foreign production on exports from the home country. They find that higher MNE
affiliate sales in the host country were linked to higher exports from the MNE parent, that is,
foreign production does not substitute for exports. The empirical results of the paper indicate
that when a firm produces both final and intermediate goods, production of final goods in a host
country can increase the exports of intermediate goods used in host country production from the
source country.
Blonigen (2001) is the first study that takes advantage of product level data when trying to
determine whether FDI and trade are complements or substitutes. The paper uses data on
Japanese production in the U.S. and Japanese exports to the U.S. Blonigen (2001) finds strong
substitution effects between production in the U.S. and exports to the U.S. for both automobile
parts and consumer goods. However, the paper also finds strong complementary effects between
automobile production in the U.S. and imports of automobile parts, providing empirical
examples showing that intermediate goods can result in a complementary relationship between
FDI and trade as suggested by Brainard (1993).
Head and Ries (2001) use a panel data set of 900 Japanese manufacturing firms to analyse
the effect of an increase in a firm’s foreign investment on firm exports. The hypothesis is that
when a firm performs foreign direct investment in a host country, this stimulates the export of
intermediate goods to the same country. This hypothesis is supported by the empirical analysis
indicating a complementary relationship between outward FDI and exports.

10
 Camarero and Tamarit (2004) estimate the demand for exports and imports of manufactured
goods for a panel of EU countries and United States and Japan. For the majority of the
countries, inward and outward FDI is positively related to trade. Camarero and Tamarit
therefore conclude that their results mainly point to a complementary relationship between FDI
and trade. There are few empirical studies analysing the link between inward FDI and host
country exports. However, Blonigen et al. (2004) use data for U.S. FDI to a panel of 20 OECD
economies for the period 1980 to 2000 in order to examine spatial correlation between FDI
flows. They find evidence consistent with export-platform FDI into Europe.
This review of the empirical research indicates that studies using firm-level data tend to
dominate. Furthermore, most empirical studies have focused on flows of FDI and trade between
developed economies. To achieve a more complete picture it might be necessary to perform
studies for developing economies and to use aggregate data. What about empirical research on
FDI and trade in East Asia? There exist a number of studies such as Jeon (1992), Liu et al.
(1997) and Farrell et al. (2004) which analyse determinants of FDI in East Asian economies, but
what about studies of the relationship between FDI and trade? Several studies of Japan exist, see
for example Eaton and Tamura (1996) and Bayoumi and Lipworth (1998). Kim and Kang
(1996) investigate whether outward FDI substitutes for exports from the home country using
industry level data for Korea and Japan. Kim and Kang conclude that outward FDI does not
substitute for exports for either Korea or Japan. Lin (1995) studies the effect of Taiwan’s
outward and inward FDI on the bilateral trade with four other Asian economies using time
series data. The paper finds that while outward FDI has a positive effect on exports, inward FDI
does not affect Taiwan’s imports.
Summarising this overview of earlier research, it can be argued that previous studies have
focused on the relationship between outward FDI flows and exports in developed economies by
using firm-level data. Accordingly, this paper provides a contribution by providing a study that
includes an analysis of the link between FDI inflows and host country exports on the aggregate
level for a group of East Asian economies.

3. FDI and trade in East Asia

This section provides a background description of FDI and trade in East Asia, focusing on the
eight chosen economies. The objective is to illuminate the importance of FDI and trade for these
economies and possibly find indications of a tentative relationship between FDI and exports.
11
 The East Asian economies have been able to achieve very impressive rates of economic
growth and some of them, such as Hong Kong and Singapore, should now be included in the
high-income country group. Many earlier studies, including the World Bank (1993), Chen
(1993) and Fukao et al. (2003), among others, argue that FDI and trade have been fundamental
for this remarkable development. Marwah and Tavakoli (2004) show that FDI had a positive
effect on economic growth in Indonesia, Malaysia, Philippines and Thailand, while Urata
(2001) argues that FDI promoted exports from the region. It should therefore be interesting to
present some data indicating the importance of flows of FDI and trade. Table 2 presents data for
the group of East Asian economies analysed in this paper.

Table 2 East Asia share of world trade and world FDI flows, per cent
1960 1970 1980 1985 1990 1995 2000 2002
a a

Share of 3.6 3.5 6.5 7.1 8.6 12.2 15.9 18.8

world exports
Share of 2.5 2.8 4.2 4.8 6.4 10.1 10.0 11.0
world imports
Share of .. <0.1 0.9 4.4 4.9 11.9 7.0 5.6
world
outward FDI
flows
Share of .. 3.8 6.3 7.7 9.9 21.0 9.8 11.3
world inward
FDI flows
Source: Based on World Development Indicators and UNCTAD (2004)
Notes
“..” indicates missing data
a: excluding China

Table 2 indicates that the East Asian economies have become increasingly important over time
for world trade, both as exporters and importers. The increase in the world export share from the
region since 1980 is particularly impressive. The East Asian share of world exports tripled
between 1980 and 2002. What about FDI? There was a large increase in the region’s share of
world FDI flows between 1970 and 1995. Since then, however, East Asia has lost some of its
importance for global FDI flows.
12
 While all of the East Asian economies which are the subject of this paper have been
successful in improving their standard of living they have used different paths to reach that
success, as argued by Fischer (1996). But are there any characteristics of FDI or trade shared by
these economies? It is clear that export-orientation and FDI have been fundamental for success.
Over time, there has been a liberalisation of FDI regimes in East Asia, providing further
stimulus for FDI inflows. However, there are substantial differences in the importance of FDI
for individual economies as depicted in Table 3. The table presents inward and outward stocks
of FDI for the years 1980 and 2003.

13
Table 3 Importance of FDI for the East Asian economies
Economy Inward FDI stock Inward FDI stock Outward FDI stock Outward FDI stock
per capita in 1980, per capita in 2003, per capita in 1980, per capita in 2003,
USD USD USD USD
Hong Kong 35 276 (1) 54 992 (1) 29 (2) 49 281 (1)
Singapore 2 570 (2) 34 659 (2) 1 543 (1) 21 391 (2)
Malaysia 376 (3) 2 381 (3) 14 (3) 1 198 (4)
Taiwan 135 (4) 1 501 (4) 5 (4) 2 886 (3)
Indonesia 69 (5) 266 (8) .. 13 (8)
Korea 35 (6) 991 (5) 3 (5) 721 (5)
Thailand 21 (7) 595 (6) <1 (6) 53 (6)
China 1 (8) 389 (7) .. 29 (7)
EU-15 609 8 765 607 10 605
Source: Based on FDI data from UNCTAD (2004) and population data from WDI (2005).
Population data for Taiwan has been collected from the U.S. Census Bureau (2005).
Note:
“..” indicates missing data

14
The two city state economies, Hong Kong and Singapore, have large inward stocks of FDI per
capita, while China, Indonesia, and Thailand only have attracted limited inflows of FDI per
capita. Outward stocks of FDI are smaller than inward stocks for all economies, except Taiwan.
Again, Hong Kong and Singapore have the largest outward stocks per capita while the stocks
for China, Indonesia and Thailand are small.
What about export flows? Table 4 presents exports per capita for the years 1980 and 2003.
The economies are ranked according to the export flow in 1980. Data for the group of EU-15
economies are added in order to allow for comparisons.

Table 4 Exports per capita in 1980 and 2003, USD

Economy Exports per capita in Exports per capita in
1980, USD 2003, USD
Singapore 8 039 33 786
Hong Kong 3 909 32 805
Taiwan 1 110 6 380
Malaysia 940 4 220
Korea 459 4 004
Indonesia 148 283
Thailand 139 1 064a
China 24b 340
EU-15 2 017 7 380
Source: based on trade data from Comtrade (2005) and population data from WDI (2005). Population
data for Taiwan has been collected from the U.S. Census Bureau (2005).
Notes:
a: Data for 2001.
b: Data for 1984.

Table 4 indicates that all eight economies achieved large increases in exports per capita between
1980 and 2003. However, there is considerable variation in the size of the export flows.
Singapore and Hong Kong have the largest flows of export per capita and are the only East
Asian economies which show export figures that surpass those of the EU-15. Indonesia and
China have the lowest export flows per capita.
A study of FDI and trade in East Asia needs to take into account the effect of the Asian
crisis in 1997. Since the crisis had such a dramatic effect on the region, at first glance one would
expect that the effect on FDI and trade would be considerable. A more detailed study of the data
(Appendix A) reveals that there was a decrease in FDI inflows to the region between 1997 and
1998 of less than ten per cent. Already in 1999 (not shown) there was a large increase in inflows
suggesting that the Asian crisis only had a limited effect on the total FDI inflow to the group of

15
East Asian economies. However, there are differences between individual economies.
Indonesia, Singapore, Taiwan and Malaysia saw substantial decreases in FDI inflows in 1998,
but for China inflows were stable and for Hong Kong, Korea and Thailand inflows even
increased during 1998. The FDI data presented in Appendix A support the argument of
Athukorala (2003) that the Asian crisis did not cause a major decrease in FDI inflows. Changes
in trade flows were also limited. Between 1997 and 1998 there was a decrease in exports of
around seven per cent, while imports fell by close to 16 per cent.
However, the effects of the crisis on FDI and trade might be obscured by the use of annual
data. Dowling and Ray (2000) report that there was a large fall in exports during the latter part
of 1997 and the first part of 1998. In 1999 imports were in line with the volume in 1997.
Which are the most important conclusions that can be drawn based on the discussion in
Section 3? The section shows that both trade and FDI have become increasingly important for
the East Asian economies. The share of world exports generated by the eight economies tripled
between 1980 and 2002. The economies have also attracted growing FDI inflows resulting in
increasing stocks of inward FDI. The section also indicates that there is considerable variation
in the importance of FDI and exports between individual East Asian economies. While Hong
Kong and Singapore have attracted large inflows of FDI as well as exports, countries such as
Indonesia and Thailand have been less successful in generating exports and FDI inflows.

4. Empirical analysis

This section presents a more formal analysis of the relationship between FDI and exports.
Section 4.1 discusses the data and presents the regression equation. Section 4.2 contains the
empirical analysis.

4.1 Data and stationarity tests

Bilateral data would have been preferable when analysing the relationship between FDI and
exports allowing for a gravity approach using data for distance between the economies, their
relative sizes with regard to GDP and bilateral FDI flows. Several studies of this type have been
performed for the OECD economies, (e.g. Lipsey and Weiss, 1984; Blomström et al., 1988).
Unfortunately, the lack of bilateral FDI data for the East Asian economies precludes using a
gravity approach.
Instead, as a first step, this paper carries out time series and panel data estimations, using
total exports as the dependent variable and total inflows and outflows of FDI as explanatory

16
variables. All variables have been normalised according to population. This results in the
following time series equation:

EXPt = β 0 + β1FDIINt + β 2 FDIOUTt + ε t (1)

where EXPt represents total exports per capita time t, FDIINt is the inward flow of FDI per
capita and FDIOUTt is the outward flow of FDI per capita, and εt is the disturbance term

What signs do we expect the coefficients of the explanatory variables to take? For a host
country that functions as an export-platform, β1 should have a positive sign if these investments
represent export-platform FDI. However, if market-seeking FDI dominates, FDI inflows should
not affect host country exports. The sign of β2 could be either positive or negative depending on
whether outflows of FDI complement or substitute for source country exports.
Table 5 presents a description of the regression variables, and Appendix B provides
summary statistics and a correlation matrix for the original data. Data are available for the
period 1980 to 2003.

Table 5 Regression variables

Variable Explanation Data source Expected sign
for coefficient
Dependent
variable
EXP Total exports per Based on trade na
capita, USD data from
Comtrade (2005)
and population
data from WDI
(2005)
Independent
variables
FDIIN Inward FDI flow Based on FDI + (export
per capita, USD data from platform FDI)
UNCTAD (2004)
and population
data from WDI
(2005)
FDIOUT Outward FDI Based on FDI ?
flow per capita, data from

17
 USD UNCTAD (2004)
and population
data from WDI
(2005)

However, relating the variables in levels might be inappropriate. Section 3 describes how the
importance of both FDI and trade has increased for East Asia in the past decades. There have
been large inflows of FDI and at the same time the volume of exports has increased. This
suggests a potential nonstationarity problem. Performing regressions on nonstationary time
series can result in spurious regression. It is therefore necessary to try to determine whether the
data is stationary or not. The time series are plotted as a first step. Figure 1 describes the flows
of total exports and FDI inflows per capita for Singapore and is generally representative for the
development of FDI inflows and exports in the other seven economies.

40000

35000

30000

25000

20000

15000

10000

5000

0
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Total exports per capita FDI inflow per capita

Figure 1 FDI inflows and exports for Singapore

Figure 1 suggests that the export variable is likely to be nonstationary and possibly also the FDI
inflows variable. A more formal analysis of the existence of nonstationarity involves performing
a unit root test. Accordingly, the augmented Dickey-Fuller (ADF) test is performed on the
individual time series for all eight economies. The ADF-test consists of estimating the following
regression:
m
∆Yt = β1 + β 2t + δYt −1 + α i ∑ ∆Yt −1 + ε t (2)
i =1
where Yt is the time series being investigated for nonstationarity, t is the trend variable and εt is
the error term

18
The null hypothesis is that δ = 0, implying the existence of a unit root and a nonstationary time
series. The Schwarz information criterion is used in order to determine the number of lagged
difference terms. Table 6 presents the results for the ADF-tests.

Table 6 Unit root tests for regression variables in levels

China δ estimate Observations* Prob.**
Exports 1.16 15 -
FDI inflows -2.62 22 0.28
FDI outflows -4.11 21 0.02
Hong Kong δ estimate Observations* Prob.**
Exports -3.04 18 0.15
FDI inflows -3.18 23 0.11
FDI outflows -3.54 23 0.06
Indonesia δ estimate Observations* Prob.**
Exports -4.64 18 0.01
FDI inflows -2.73 22 0.23
FDI outflows -2.86 23 0.19
Korea δ estimate Observations* Prob.**
Exports -3.64 22 0.05
FDI inflows -3.71 18 0.05
FDI outflows -1.92 23 0.61
Malaysia δ estimate Observations* Prob.**
Exports -2.30 23 0.42
FDI inflows -1.46 23 0.81
FDI outflows -2.27 23 0.43
Singapore δ estimate Observations* Prob.**
Exports -2.40 18 0.37
FDI inflows -3.59 23 0.05
FDI outflows -5.16 23 0.00
Taiwan δ estimate Observations* Prob.**
Exports -3.41 23 0.07
FDI inflows -5.08 22 0.00
FDI outflows -3.88 22 0.03
Thailand δ estimate Observations* Prob.**
Exports -2.33 21 0.40
FDI inflows -6.86 20 0.00
FDI outflows -2.16 23 0.49

19
* After adjustments
**The probability of observing δ estimate less than or equal to the one observed given δ=0. MacKinnon
(1996) one-sided p-values.

The low number of observations unfortunately reduces the reliability of the test but Table 6
clearly indicates that the hypothesis of nonstationarity for the various regression variables
cannot be rejected. The exports variable is especially problematic. To avoid the problem of
spurious regression, the time series have to be transformed to make them stationary.
Consequently, we take the first differences of the time series and the ADF-test is re-run. Table 7
presents the results of the ADF-test on the data in first difference form.

Table 7 Unit root tests for regression variables in first difference

China δ estimate Observations* Prob.**
Exports -1.22 15 0.87
FDI inflows -2.52 22 0.32
FDI outflows -5.05 19 0.00
Hong Kong δ estimate Observations* Prob.**
Exports -3.78 22 0.04
FDI inflows -3.60 18 0.06
FDI outflows -7.42 22 0.00
Indonesia δ estimate Observations* Prob.**
Exports -4.65 22 0.01
FDI inflows 1.06 17 NA
FDI outflows -6.35 22 0.00
Korea δ estimate Observations* Prob.**
Exports -4.10 17 0.03
FDI inflows -4.65 17 0.01
FDI outflows -4.75 22 0.01
Malaysia δ estimate Observations* Prob.**
Exports -3.94 22 0.03
FDI inflows -4.89 22 0.00
FDI outflows -5.12 22 0.00
Singapore δ estimate Observations* Prob.**
Exports -3.74 21 0.04
FDI inflows -4.69 20 0.01
FDI outflows -4.32 17 0.02
Taiwan δ estimate Observations* Prob.**
Exports -5.68 21 0.00

20
 FDI inflows -4.13 19 0.02
FDI outflows -4.96 21 0.00
Thailand δ estimate Observations* Prob.**
Exports -3.54 20 0.06
FDI inflows -3.83 18 0.04
FDI outflows -4.02 22 0.02
* After adjustments
** The probability of observing δ estimate less than or equal to the one observed given δ=0. MacKinnon
(1996) one-sided p-values.

Table 7 indicates that differencing has turned most of the time series stationary. However, some
time series are still nonstationary in their first difference form, notably exports from China.4
Due to the indication of nonstationarity, the empirical analysis is performed by using the data in
first difference form. Differencing destroys some of the information about the long-run
relationship between the time series but since this paper uses annual flows of FDI and trade this
is not believed to be a serious problem as focus lies on the short-run relationship.

4.2 Estimation and results

As a first step, individual time series regressions are performed for the eight East Asian
economies using the data in differenced form. Table 8 presents the results.

Table 8 Time series regressions

Country Constant FDIIN FDIOUT R2 Adj. N
2
R
China 16.569 0.179 -4.618 0.12 0.02 19
(2.99)*** (0.20) (-2.26)**
Hong Kong 1251.833 0.975E-01 0.529 0.34 0.27 23
(4.78)*** (-0.23) (1.38)
Indonesia 5.906 0.101 -0.669E-01 0.02 0.01 23
(1.41) (0.13) (-0.09)
Korea 128.464 1.217 7.001 0.34 0.28 23
(3.45)*** (0.82) (2.42)**
Malaysia 135.171 0.884 3.495 0.42 0.36 23
(3.22)*** (0.97) (2.17)**
Singapore 974.067 2.135 -1.024 0.38 0.32 23
(2.19)** (3.63)*** (-2.01)*

4
Appendix C presents a graph of the Chinese export flows.

21
Taiwan 211.870 3.557 1.440 0.27 0.19 23
(2.51)** (1.75)* (1.17)
Thailand 48.286 -1.684 3.278 0.31 0.23 21
(4.16)*** (-2.61)** (0.62)
Note: t-statistics within parenthesis. The symbols *, ** and *** denote statistical significance at the 10, 5
and 1 per cent level, respectively.

Table 8 reveals that the coefficient for FDIIN has a positive sign for all economies except
Thailand. For Singapore and Taiwan, FDI inflows are found to have a significant positive effect
on total exports but in Thailand inflows have a significant negative effect on total exports. The
results are more mixed for the FDIOUT variable. The coefficient takes a positive sign for five
economies out of eight. Furthermore, there are two cases of a significant negative effect of FDI
outflows on exports (China and Singapore) and two cases of a significant positive effect (Korea
and Malaysia). In short, the results of Table 8 seem to suggest that FDI inflows tend to increase
total exports while FDI outflows can function both as a complement and a substitute for exports
but the support is not very strong. The indications of a positive effect from FDI inflows support
the idea of export-platform FDI in the East Asian economies.
However, the reliability of the results from the time series regressions is reduced by the low
number of observations. The results for China are also highly suspicious since both the total
exports and FDI inflows time series were still nonstationary even in differenced form.
To increase the number of observations, we turn to panel data estimations. The Hausman
test suggests that a fixed effects model (FEM) should be used for the sample of East Asian
economies.5 The test statistics for the slope parameters are estimated by using the White
heteroscedasticity consistent estimator. Table 9 presents the results for the total sample.

Table 9 Fixed effects model, total sample

Variable B Std. error t-value Sig.
FDIIN 0.873 0.355 2.46 0.015
FDIOUT -0.336 0.317 -1.06 0.292
Dependent variable = Total R2 = 0.37
exports
Number of observations = 178 Adj. R2 = 0.28
Hausman spec. test = 7.48
(Critical value at the 5 per cent level = 5.99)

5
Using a random effects model (REM) does not substantially alter the results.

22
Table 9 indicates that FDI inflows have a significant and positive effect on host country exports,
providing further evidence for export-platform FDI. No indications that FDI outflows from the
exporting country affect the volume of exports is found.
Since there were indications of nonstationarity also in the differenced time series for China,
we re-run the regression, excluding the observations for China. The results are presented in
Table 10.

Table 10 Fixed effects model, reduced sample

Variable B Std. error t-value Sig.
FDIIN 0.857 0.339 2.53 0.013
FDIOUT -0.342 0.303 -1.13 0.261
2
Dependent variable = Total R = 0.17
exports
Number of observations = 159 Adj. R2 = 0.16
Hausman spec. test = 7.36
(Critical value at the 5 per cent level = 5.99)

The results for the reduced sample are very similar to the results for the total sample. Inflows of
FDI are still found to have a significant positive effect on host country exports. FDIOUT is
insignificant as for the total sample.
In order to provide a reference point for the results which have been found, another panel
data regression is run on an additional sample of economies. The sample consists of the EU-15
economies and covers the same time period (1980 to 2003).6 Unit root tests indicate that there
are nonstationarity problems also in the EU-15 sample (not reported) so the regression is run on
the data in differenced form. The Hausman test suggests that a random effects model should be
used but the results when using a fixed effects model are similar.7 The results are presented in
Table 11.

Table 11 Random effects model, EU-15

Variable B Std. error t-value Sig.

6
There are inconsistencies in the reported FDI data for Belgium and Luxembourg so the observations for these two
economies have been excluded.
7
The null hypothesis for the Hausman test is that we have a random effect. The test statistic is chi-square distributed
2
( χ k ) where k is the number of explanatory variables.

23
 Constant 283.587 88.961 3.19 0.001
FDIIN -0.462E-01 0.517E-01 -0.90 0.371
FDIOUT 0.188 0.630E-01 2.99 0.003
2
Dependent variable = Total R = 0.16
exports
Number of observations = 281 Adj. R2 = na
Hausman spec. test = 0.78
(Critical value at the 5 per cent level = 5.99)

Table 11 indicates that the results for the EU-15 economies differ from the results for the East
Asian economies. For the case of the EU-15 economies, FDIIN has a negative coefficient but is
not significant and consequently there is no indication of export-platform FDI inflows to the
EU-15 economies. FDIOUT has a significant and positive coefficient, suggesting that FDI
outflows complement exports, possibly as a result of an increase in demand for intermediate
goods in the host countries.
If export-platform FDI indeed is important for the East Asian economies, FDI inflows
should result in an increase in export flows from the host country. Granger causality tests can be
used to analyse this. In general, the idea of Granger causality is that while past events can cause
current events, future events cannot cause current events. In our case we want to examine
whether FDI inflows Granger-cause export flows. The Granger causality test therefore involves
estimating the following two regressions:
n n
FDIINt = ∑ α i EXPt −i + ∑ β j FDIINt − j + u1t (3)
i =1 j =1

n n
EXPt = ∑ λi EXPt −i + ∑ δ j FDIINt − j + u 2t (4)
i =1 j =1

The null hypothesis is H0: ∑αi = 0. The direction of causality suggested by the Granger causality
test is sensitive to the number of lags which are used. Therefore, this paper performs all Granger
causality tests for one, two and three lags. Since there is a limited number of observations
available, it does not seem reasonable to use more than three lags. However, a more formal
approach to determine the number of lags to use for Granger causality tests is to calculate the
value of the Akaike Information Criterion (AIC). This criterion suggests that the lag with the
lowest computed AIC value should be used.8 The Granger causality regressions are estimated

⎛ 2k ⎞ ⎛ RSS ⎞
8
The AIC is defined as: ln AIC = ⎜ ⎟ + ln⎜ ⎟ where k is the number of regressors, n is the number of
⎝ n⎠ ⎝ n ⎠
observations and RSS is the residual sum of squares.

24
for one to four lags, for those economies where indications of Granger causality are found. The
results are presented in Appendix E.
Granger causality tests are also sensitive to nonstationarity in the time series. Table 7
reveals that the time series for Chinese export flows and FDI inflows as well as Indonesian FDI
inflows were still nonstationary even in first difference form. The Granger causality tests
involving these time series are still presented for consistency reasons, but the interpretation of
the results based on these time series should be done with extreme caution.
A summary of the results of the Granger causality tests for FDI inflows and exports are
presented in Table 12. An asterisk indicates the number of lags suggested by the AIC. Table D.1
in Appendix D presents the detailed results.

Table 12 Granger causality tests, exports and FDI inflows

Economy Causality Number of
lags
China Independence 1-3
Hong Kong Independence 1*
Independence 2
EXP Granger- 3
causes FDIIN
Indonesia Independence 1
Independence 2
FDIIN Granger- 3*
causes EXP
Korea EXP Granger- 1
causes FDIIN
EXP Granger- 2*
causes FDIIN
FDIIN Granger- 3
causes EXP
Malaysia Independence 1
Independence 2
FDIIN Granger- 3*
causes EXP
Singapore Independence 1-3
Taiwan Independence 1
FDIIN Granger- 2*

25
 causes EXP
FDIIN Granger- 3
causes EXP
Thailand Independence 1-3

For the case of China, Singapore and Thailand there is independence between the two time
series for all three lags. There are five cases where FDIIN Granger-causes EXP and three cases
where EXP Granger-causes FDIIN. For Korea, exports Granger-cause FDI inflows for the first
two lags but for the third lag FDI inflows Granger-cause exports. For the case of Indonesia,
Malaysia and Taiwan, Granger causality from FDIIN to EXP is found for the same number of
lags suggested by the Akaike Information Criteria. In general, the results indicate that the
direction of causality tends to go primarily from FDI inflows to export flows.
Finally, we also use Granger causality tests to further analyse the relationship between
outflows of FDI and source country exports. Equations (3) and (4) are estimated, but using
FDIOUT instead of FDIIN. The AIC values are also computed. Table 13 presents a summary of
the findings while Table D.2 in Appendix D and Table E.2 in Appendix E present the complete
results.

Table 13 Granger causality tests, exports and FDI outflows

Economy Causality Number of
lags
China Independence 1
FDIOUT Granger- 2
causes EXP
EXP Granger- 3*
causes FDIOUT
Hong Kong Independence 1*
FDIOUT Granger- 2
causes EXP
Independence 3
Indonesia Independence 1-3
Korea Independence 1-3
Malaysia Independence 1-3
Singapore EXP Granger- 1
causes
FDIOUT
EXP Granger- 2
causes

26
 FDIOUT
EXP Granger- 3*
causes
FDIOUT
Taiwan Independence 1-3
Thailand FDIOUT Granger- 1
causes EXP
FDIOUT Granger- 2*
causes EXP
FDIOUT Granger- 3
causes EXP

The results for outflows of FDI and exports are mixed. For four out of the eight economies,
there is independence between FDIOUT and EXP for all three lags. In the case of Singapore,
exports Granger-cause FDI outflows for all three lags while for Thailand outflows of FDI
Granger-cause exports for all lags.
Summarising the results of the Granger causality tests, there are indications that FDI
inflows tend to Granger-cause exports, providing further evidence for export-platform FDI in
the East Asian economies. There are mixed results for the relationship between outflows of FDI
and exports.

5. Conclusions

The paper has argued that the high performing East Asian economies provide a particularly
interesting setting for an analysis of the relationship between FDI and trade. Export-orientation
and FDI inflows have provided major contributions to the region’s impressive increase in
income levels. The paper therefore focuses on the link between FDI flows and exports for
China, Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand.
The study has described the development of FDI and trade flows in the region with a focus
on the period after 1980. FDI and trade have become increasingly important for the economies
in East Asia.
Unit root tests detected nonstationarity in the time series data. The time series were
therefore transformed to first difference form and both time series regressions for individual
economies as well as panel data regressions were performed. These regressions provided
indications of a positive effect of FDI inflows on host country exports, suggesting that export-
platform FDI inflows may be important for the region. The results for the effect of FDI outflows

27
on source country exports are mixed, suggesting that outflows of FDI can constitute both
complements and substitutes to exports as suggested by the theoretical literature.
Granger causality tests indicate that FDI inflows cause export flows. This provides further
evidence that export-platform FDI is present in the East Asian economies.
The results of this paper suggest that inflows of FDI tend to have a positive effect on host
country exports, possibly due to MNEs performing export-platform FDI. What implications
does this finding have for host country policies in other developing economies? The paper has
provided several references claiming that export orientation has been important for the
improvement in standard of living in East Asia during the past decades. Since the finding of this
paper suggest that FDI inflows tend to increase host country exports, inflows of FDI should be
encouraged. Liberalising FDI regulations could therefore result in an increase in inflows,
possibly stimulating exports and eventually increasing the standard of living in developing
economies.

28
References

Athukorala, P.-C. (2003), Foreign direct investment in crisis and recovery: lessons from the
1997-1998 Asian crisis, Australian Economic History Review, 43(2), 197-213.
Barry, F. and Bradley, J. (1997), FDI and trade: the Irish host-country experience, The
Economic Journal, 107, 1798-1811.
Barry, F., Görg, F., and McDowell, A. (2003), Outward FDI and the investment development
path of a late-industrializing economy: evidence from Ireland, Regional Studies, 37(4), 341-349.
Bayoumi, T. and Lipworth, G. (1998), Japanese foreign direct investment and regional trade,
Journal of Asian Economics, 9(4), 581-607.
Blomström, M., Lipsey, R.E., and Kulchycky, K. (1988), U.S. and Swedish direct investment
and exports, in R.E. Baldwin (ed.): Trade Policy Issues and Empirical Analysis, Chicago: UCP.
Blonigen, B. (2001), In search of substitution between foreign production and exports, Journal
of International Economics, 53, 81-104.
Blonigen, B., Davies, R.B., Waddell, G.R. and Naughton, H.T. (2004), FDI in space: spatial
autoregressive relationships in foreign direct investment, NBER Working Paper No. 10939,
Cambridge, Mass.: National Bureau of Economic Research.
Brainard, S.L. (1993), A simple theory of multinational corporations and trade with a trade-off
between proximity and concentration, NBER Working Paper No. 4269, Cambridge, Mass.:
National Bureau of Economic Research.
Camarero, M. and Tamarit, C. (2004), Estimating the export and import demand for
manufactured goods: the role of FDI, Review of World Economics, 140(3), 347-375.
Carr, D.L., Markusen, J.R., and Maskus, K.E. (2001), Estimating the knowledge-capital model
of the multinational enterprise, American Economic Review, 91, 693-708.
Chen, E.K.Y. (1993), Foreign direct investment in East Asia, Asian Development Review, 11(1),
24-59.
Comtrade (2005), UN Commodity Trade Statistics Database, 22 July 2005
[Online]
<http://unstats.un.org/unsd/comtrade/default.aspx>.
Dowling, M. and Ray, D. (2000), The structure and composition of international trade in Asia:
historical trends and future prospects, Journal of Asian Economics, 11, 301-318.
Dunning, J.H. (1977), Trade, location of economic activity and the MNE: a search for an
eclectic approach in B. Ohlin and P.O. Hesselborn (eds.): The International Allocation of
Economic Activity, 395-418, London, Macmillan.

29
Eaton, J. and Tamura, A. (1996), Japanese and U.S. exports and investment as conduits of
growth, NBER Working Paper No. 5457, Cambridge, Mass.: National Bureau of Economic
Research.
Ekholm, K., Forslid, R. and Markusen, J.R. (2004), Export-platform foreign direct investment,
IIIS Discussion Paper No. 50, Dublin, Institute for International Integration Studies.
Farrell, R., Gaston, N. and Sturm, J.-E. (2004), Determinants of Japan’s foreign direct
investment: an industry and country panel study, 1984-1998, Journal of the Japanese and
International Economies, 18, 161-182.
Fischer, S. (1996), Lessons from East Asia and the Pacific Rim, Brookings Papers on Economic
Activity, 2, 345-350.
Fukao, K., Ishido, H. and Ito, K. (2003), Vertical intra-industry trade and foreign direct
investment in East Asia, Journal of the Japanese and International Economies, 17, 468-506.
Head, K. and Ries, J. (2001), Overseas investment and firm exports, Review of
International Economics, 9(1), 108-122.
Helpman, E. (1984), A simple theory of international trade with multinational corporations,
Journal of Political Economy, 92(3), 451-471.
Helpman, E. and Krugman, P.R. (1985), Market structure and foreign trade, the MIT Press,
Cambridge.
Horst, T. (1972), The industrial composition of U.S. exports and subsidiary sales to the
Canadian market, American Economic Review, 62(1/2), 37-45.
Horst, T. (1976), American multinationals and the U.S. economy, American Economic Review,
66(2), 149-154.
IMF (2004), Direction of Trade Statistics Yearbook, Washington D.C., IMF.
Jeon, Y.-D. (1992), The determinants of Korean foreign direct investment in manufacturing
industries, Weltwirtschaftliches Archiv, 128(3), 527-542.
Kim, I.S. and Kang, J.-D. (1996), Outward FDI and exports: the case of South Korea and Japan,
Journal of Asian Economics, 8(1), 39-50.
Kim, S. (2000), Effects of outward foreign direct investment on home country performance:
evidence from Korea, in T. Ito and A.O. Krueger (eds.): The Role of Foreign Direct Investment
in East Asian Economic Development, The University of Chicago Press, Chicago.
Landesmann, M. and Snell, A. (1993), Structural shifts in the manufacturing export
performance of OECD economies, Journal of Applied Econometrics, 8, 149-162.
Lin, A.-L., (1995), Trade effects of foreign direct investment: evidence for Taiwan with four
ASEAN countries, Weltwirtschaftliches Archiv, 131(4), 737-747.
Lipsey, R.E. and Weiss, M.Y. (1984), Foreign production and exports of individual firms,
Review of Economics and Statistics, 66(2), 304-308.

30
Liu, X., Song, H., Wei, Y. and Romilly, P. (1997), Country characteristics and foreign direct
investment in China: a panel data analysis, Weltwirtschaftliches Archiv,133(2), 313-329.
MacKinnon, J.G. (1996), Numerical distribution functions for unit root and cointegration tests,
Journal of Applied Econometrics, 11(6), 601-618.
Markusen, J.R. (1983), Factor movements and commodity trade as complements, Journal of
International Economics, 14, 341-356.
Markusen, J.R. (1984), Multinationals, multi-plant economies and the gains from trade, Journal
of International Economics, 16, 205-226.
Markusen, J.R. and Venables, A.J. (1998), Multinational firms and the new trade
theory, Journal of International Economics, 183-203.
Markusen, J.R., and Maskus, K.E. (2002), Discriminating among alternative theories of the
multinational enterprise, Review of International Economics, 10, 694-707.
Marwah, K. and Tavakoli, A. (2004), The effect of foreign capital and imports on economic
growth: further evidence from four Asian countries (1970-1998), Journal of Asian Economics,
15, 399-413.
Mundell, R. (1957), International trade and factor mobility, American Economic Review, 47,
321-335.
OECD (2005), SourceOECD International Direct Investment Statistics Database, 20 July 2005
[Online]
<http://dandini.sourceoecd.org/v1=790856/c1=105/nw=1/rpsv/cw/vhosts/oecdstats/16081080/v
45n1/contp1-1.htm>.
Pain, N. and Wakelin, K. (1998), Export performance and the role of foreign direct investment,
The Manchester School Supplement, 62-88.
Schmitz, A. and Helmberger, P. (1970), Factor mobility and international trade: the case of
complementarity, American Economic Review, 60, 761-767.
Stiglitz, J.E. (1996), Some lessons from the East Asian miracle, The World Bank Research
Observer, 11(2), 151-177.
UNCTAD (2004), World Investment Report 2004: The Shift Towards Services, United Nations,
Geneva.
Urata, S. (2001), Emergence of an FDI-trade nexus and economic growth in East Asia, in J.E.
Stiglitz and S. Yusuf (eds.): Rethinking the East Asia Miracle, New York, Oxford University
Press.
U.S. Census Bureau (2005), International Data Base (IDB), 15 August 2005 [Online]
<http://www.census.gov>.
Vernon, R. (1966), International investment and international trade in the product cycle,
Quarterly Journal of Economics, 80, 190-207.
WDI (2005), World Development Indicators, World Bank.

31
World Bank (1993), The East Asian Miracle: Economic Growth and Public Policy, New York:
Oxford University Press.

Appendix A The effect of the Asian crisis on FDI inflows and trade

Table A.1 FDI inflows and the Asian crisis, millions of USD
1995 1996 1997 1998 1999
China 37 521 41 726 45 257 45 462 40 319
Hong 6 213 10 460 11 368 14 766 24 580
Kong
Indonesia 4 346 6 194 4 678 -241 -1 866
Korea 1 249 2 007 2 640 5 039 9 436
Malaysia 5 815 7 297 6 323 2 714 3 895
Singapore 11 591 9 131 13 608 7 690 16 067
Taiwan 1 559 1 864 2 248 222 2 926
Thailand 2 070 2 338 3 882 7 491 6 091
Sum 70 364 81 017 90 004 83 144 101 447
Source: UNCTAD (2004)

Table A.2 Trade flows and the Asian crisis, millions of USD
1996 1997 1998
EXP IMP EXP IMP EXP IMP
China 151 138 182 142 183 139
047 833 791 370 803 483
Hong 180 198 188 208 173 184
Kong 742 541 062 615 986 501
Indonesia 49 727 42 925 53 220 41 679 48 373 27 336
Korea 124 144 129 138 125 116
402 724 991 097 106 393
Malaysia 78 280 76 063 78 570 76 937 73 172 57 296
Singapore 124 130 124 131 108 101
649 943 431 651 506 406
Taiwan 115 102 122 114 110 104

32
 942 370 081 425 582 665
Thailand 55 628 71 843 57 759 62 084 53 118 42 107
Sum 880 906 936 915 876 773
417 242 905 858 646 187
Source: Comtrade (2005)

33
Appendix B Summary statistics and correlation matrix

Table B.1 Summary statistics, total sample

Variable Variable Mean Standard Minimum Maximu
cases deviation m
EXP 186 6 030.88 9 411.99 23.99 34 191.7
9
FDIIN 193 434.54 1 052.17 -48.94 9 286.25
FDIOUT 190 361.42 1 023.59 -5.81 8 901.84

Table B.2 Correlation matrix, total sample

Variable EXP FDIIN FDIOUT
EXP 1
FDIIN 0.400** 1
FDIOUT 0.247** 0.792** 1
** indicates that correlation is significant at the 1 per cent level
* indicates that correlation is significant at the 5 per cent level

34
Appendix C

400

350

300

250

200

150

100

50

0
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Total exports per capita

Figure C.1 Total exports per capita for China, USD

35
Appendix D Granger causality tests

Table D.1 Granger causality tests, exports and FDI inflows

China
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 0.348 Do not reject
EXP → FDIIN 1 0.123 Do not reject
FDIIN → EXP 2 0.100 Do not reject
EXP → FDIIN 2 0.171 Do not reject
FDIIN → EXP 3 1.859 Do not reject
EXP → FDIIN 3 0.201 Do not reject
Hong Kong
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 2.994 Do not reject
EXP → FDIIN 1 1.760 Do not reject
FDIIN → EXP 2 2.188 Do not reject
EXP → FDIIN 2 1.459 Do not reject
FDIIN → EXP 3 0.600 Do not reject
EXP → FDIIN 3 3.420 Reject
Indonesia
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 1.406 Do not reject
EXP → FDIIN 1 0.103 Do not reject
FDIIN → EXP 2 3.043 Do not reject
EXP → FDIIN 2 1.027 Do not reject
FDIIN → EXP 3 5.737 Reject
EXP → FDIIN 3 1.538 Do not reject
Korea
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 2.739 Do not reject
EXP → FDIIN 1 9.779 Reject
FDIIN → EXP 2 3.450 Do not reject
EXP → FDIIN 2 4.737 Reject
FDIIN → EXP 3 3.484 Reject
EXP → FDIIN 3 2.656 Do not reject

36
Malaysia
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 0.040 Do not reject
EXP → FDIIN 1 0.095 Do not reject
FDIIN → EXP 2 0.262 Do not reject
EXP → FDIIN 2 0.600 Do not reject
FDIIN → EXP 3 3.530 Reject
EXP → FDIIN 3 2.072 Do not reject
Singapore
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 0.001 Do not reject
EXP → FDIIN 1 1.111 Do not reject
FDIIN → EXP 2 2.039 Do not reject
EXP → FDIIN 2 2.249 Do not reject
FDIIN → EXP 3 1.253 Do not reject
EXP → FDIIN 3 0.301 Do not reject
Taiwan
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 0.009 Do not reject
EXP → FDIIN 1 0.197 Do not reject
FDIIN → EXP 2 6.451 Reject
EXP → FDIIN 2 0.440 Do not reject
FDIIN → EXP 3 4.861 Reject
EXP → FDIIN 3 1.942 Do not reject
Thailand
Direction of Number of lags F value Decision
causality
FDIIN → EXP 1 0.004 Do not reject
EXP → FDIIN 1 0.498 Do not reject
FDIIN → EXP 2 2.403 Do not reject
EXP → FDIIN 2 0.039 Do not reject
FDIIN → EXP 3 2.549 Do not reject
EXP → FDIIN 3 3.522 Do not reject

Table D.2 Granger causality tests, exports and FDI outflows

37
China
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 0.214 Do not reject
EXP → FDIOUT 1 0.833 Do not reject
FDIOUT → EXP 2 7.467 Reject
EXP → FDIOUT 2 1.887 Do not reject
FDIOUT → EXP 3 1.806 Do not reject
EXP → FDIOUT 3 6.729 Reject
Hong Kong
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 1.787 Do not reject
EXP → FDIOUT 1 0.022 Do not reject
FDIOUT → EXP 2 2.719 Reject
EXP → FDIOUT 2 0.066 Do not reject
FDIOUT → EXP 3 1.147 Do not reject
EXP → FDIOUT 3 2.051 Do not reject
Indonesia
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 0.225 Do not reject
EXP → FDIOUT 1 0.071 Do not reject
FDIOUT → EXP 2 0.310 Do not reject
EXP → FDIOUT 2 0.049 Do not reject
FDIOUT → EXP 3 1.041 Do not reject
EXP → FDIOUT 3 0.027 Do not reject
Korea
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 0.040 Do not reject
EXP → FDIOUT 1 0.153 Do not reject
FDIOUT → EXP 2 0.038 Do not reject
EXP → FDIOUT 2 1.166 Do not reject
FDIOUT → EXP 3 0.167 Do not reject
EXP → FDIOUT 3 1.406 Do not reject
Malaysia
Direction of Number of lags F value Decision
causality

38
FDIOUT → EXP 1 0.447 Do not reject
EXP → FDIOUT 1 0.168 Do not reject
FDIOUT → EXP 2 0.730 Do not reject
EXP → FDIOUT 2 0.575 Do not reject
FDIOUT → EXP 3 0.994 Do not reject
EXP → FDIOUT 3 0.523 Do not reject
Singapore
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 0.170 Do not reject
EXP → FDIOUT 1 10.347 Reject
FDIOUT → EXP 2 1.447 Do not reject
EXP → FDIOUT 2 10.458 Reject
FDIOUT → EXP 3 2.932 Do not reject
EXP → FDIOUT 3 9.821 Reject
Taiwan
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 1.356 Do not reject
EXP → FDIOUT 1 0.346 Do not reject
FDIOUT → EXP 2 0.211 Do not reject
EXP → FDIOUT 2 0.361 Do not reject
FDIOUT → EXP 3 0.225 Do not reject
EXP → FDIOUT 3 0.529 Do not reject
Thailand
Direction of Number of lags F value Decision
causality
FDIOUT → EXP 1 4.551 Reject
EXP → FDIOUT 1 1.037 Do not reject
FDIOUT → EXP 2 6.808 Reject
EXP → FDIOUT 2 1.369 Do not reject
FDIOUT → EXP 3 5.081 Reject
EXP → FDIOUT 3 1.894 Do not reject

39
Appendix E Akaike Information Criterion (AIC)

Table E.1 AIC values for exports and FDI inflows

Economy Number of lags AIC value
Hong Kong 1 17.771
2 17.889
3 18.084
4 18.224
Indonesia 1 9.101

40
 2 9.075
3 8.449
4 8.684
Korea 1 13.914
2 13.573
3 13.575
4 13.579
Malaysia 1 14.272
2 14.360
3 14.014
4 14.089
Taiwan 1 15.268
2 14.648
3 14.733
4 14.915

Table E.2 AIC values for exports and FDI outflows

Economy Number of lags AIC value
China 1 9.021
2 8.441
3 8.185
4 8.283
Hong Kong 1 17.828
2 17.838
3 17.979
4 18.054
Singapore 1 18.894
2 18.859
3 18.175
4 18.753
Thailand 1 11.326
2 11.129
3 11.194
4 11.505

41