Are FDI Inflows Complements or Substitutes Across Borders: Empirical Evidence from Five Asian Countries

The inflow of foreign direct investment (FDI) in Asian countries increased rapidly during the 1980s and 1990s, and a vast literature has found a positive association between FDI inflows and growth for developing countries, noting a series of threshold effects. Less attention has been paid in the literature to whether developing countries are competing or complementing each other in ongoing efforts to stimulate FDI inflows. In this paper we therefore study the causality between growth and FDI in a sample of five Asian countries and uncover the co movements of FDI shares in the region using a vector autoregressive (VAR) model. It emerges clearly that Granger causality exists from growth to FDI, and FDI flows are indeed strongly interrelated in the Asian region. Significant policy relevant differences among individual countries in our sample and the rest of Asia are also revealed.