The research report, FDI in East Asia and Latin America: Is there a PRC Effect?, shows that – far from diverting investment away from other countries – the rush to invest in China has been positive for east and south-east Asian countries, with FDI spilling over from China into these countries.

The research by an international team of researchers from leading universities shows that despite the massive inflows of investment into the country, the People’s Republic of China (PRC) is not sucking investment away from other countries as it becomes the workshop of the world.

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In answer to one of the biggest economic questions of the decade, the research confounds analysts’ and governments’ fears that the rest of the world is losing competitiveness to China.

Although Asian countries are getting a smaller share of global FDI flows, they are receiving more investment dollars, not less, thanks to China’s investment boom.

“First, in terms of levels of FDI flows, the PRC effect is positive for the east and south-east Asian economies,” says the report. “For the Latin American economies, the PRC effect is mostly insignificant and occasionally mildly positive. In other words, foreign direct investments to Asian economies are positively related to direct investment into the PRC, while FDI to the Latin American economies has little systemic relationship with direct investment going into the PRC.”

The researchers set out to analyse the question of the China effect with empirical data after reading in the Miami Herald that Mexico lost more than 200,000 jobs in 2002 in the assembly lines that make up the maquiladora sector along the Mexico-US border because more than 300 companies relocated to China. Departments from the National University of Singapore, the University of California and the Hong Kong Institute of Economics and Business Strategy used regression analysis of determinant FDI levels (see box) in eight Asian and 16 Latin American countries to estimate the effect that FDI inflows into China have had on other economies.

Researchers said that their results were “consistent with the view that there is a thick and growing production network within these Asian economies and the PRC but, except for Mexico, there is relatively little vertical production-sharing among the Latin American countries”.

This supports the arguments that multinationals want to set up factories and distribution networks not just in China, but also in other parts of Asia to accommodate increasingly sophisticated global supply chains, and that multinationals do not see China and Latin America as rivals.

 

Charles Piggott

 

 

FDI DETERMINANTS

  1. Market size: GDP, GDP growth, per capita income growth
  2. Policy variables: degree of openness, corporate tax rates, import duties, quality of infrastructure
  3. Institutional characteristics: corruption indices, government stability, indices on rule of law
  4. Labour market conditions: illiteracy rates, wage rates
  5. Global supply of FDI