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GTAP Resource #1742

"New Behavioral and Empirical Perspectives on FDI: International Capital Allocation across the Asian Region "
by Brooks, Douglas, Jean-Pierre Verbiest, Fan Zhai and David Roland-Holst

International capital allocation has long been a primary driver of dynamic economic growth, particularly for emerging economies, and this relationship has nowhere been more fortuitous than in Asia. Together with disciplined commitments to domestic and external economic reform, the region’s economies have leveraged foreign savings to achieve growth and modernization beyond the imaging of prior generations. Despite the pervasive influence FDI has had on Asia’s growth experience, the precise benefits of foreign investment remain challenging to quantify and the process of international capital allocation very difficult to predict. Given the nearly universal appeal of FDI as a growth catalyst, however, it would clearly be desirable for policy makers to better understand its fundamental determinants. As Asia transits from a loose federation of emergent economies to a more fully integrated and mature economic region, the need to understand multilateral investment dynamics will only increase.
During the region’s evolution toward greater multilateralism, one of the most dramatic events has been the emergence of private agency across a web of supply networks and value chains, heavily mediated by FDI. Beneath an official veneer of negotiated trade agreements, there is now a remarkably diverse and dynamic mosaic of private commercial linkages that draw the region’s economies into concerted value creation. These linkages are often part of global networks where tens, hundreds, even thousands of intermediate products change hands along extended value-added chains. The result is unprecedented geographic diffusion of economic activity, growth, and innovation, coexisting with and often transcending official networks of diplomacy and trade negotiation. With better understanding of these complex linkages, policy makers can more effectively pursue policies that facilitate dynamic and sustainable growth. Broadening the basis for such activities can only amplify their benefits, distribute them ever more widely, and reduce risks of excessive economic concentration and instability.
In this paper, we advance FDI research by combining the new GTAP VI database and a global forecasting model with a new capital flow modelling component. The latter consists of independent data on foreign capital stocks and flows, calibrated to a sub-model that permits experimentation with diverse specifications of FDI behaviour. This hybrid approach has reinforced our understanding of the research challenges in this area. Having said that, however, it also yields illuminating evidence on the underlying relationships between Heckscher-Ohlin endowments and more modern considerations such as human capital, productivity, endogenous growth, competitive strategy, and the complex economic roles of institutional behavior. Our results indicate that all these factors have played a role in Asia’s remarkable growth experience, to different degree in different countries. Moreover, each has its own relationship to investment incentives, and policy makers must understand them to attract and capture the many benefits FDI can offer.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Zhai, F. (5/1/2005)
Updated: Batta, G. (6/21/2005)
Visits: 2,258
No keywords have been specified.

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