Comparative study of macroeconomic impact of FDI in selected East Asian countries

Abstract

During the past two decades, there has been a major shift in degree of financial integration in East Asian countries, especially foreign direct investment (FDI), which is the most important source of funds compare to other types of investment flows. FDI is accepted as a great role of increasing in economic growth and stability because it makes resource allocation process more efficiency, increase more capital, and risk diversification. However, the impact of FDI is different depending on host country’s economic conditions. Host countries should have enough level of financial markets development, institution development, better governance, and appropriate macro policies in order to receive the highest benefit from FDI. The objective of this paper is to examine the impact of FDI in 15 East Asian economies, using time series data for the period 1990-2007. Three methodologies including Panel Cointegration Analysis, GTAP model, and CAM model of the world economy are used to study impact of FDI in various aspects. The results show that FDI has a positive relationship with economic development only in countries which have more appropriate economic conditions. Moreover, the results verify that countries which have more high level of financial market development, human capital, trade openness, and high degree of investment in infrastructure tend to get more benefit from FDI