FDI Flow Volatility and ASEAN Members: An Exploratory Approach

The volatility of Foreign Direct Investment (FDI) flows, particularly those into ASEAN countries is well known. Still researchers will continue to use regression approaches to analyze this volatility. This paper is an exploratory approach to analyzing the behavior of FDI with no attempt to design a complete regression model. Our approach is probabilistic in that we treat the FDI flows from home or source country to various members of ASEAN as random independent events over the time period 1999-2003 and over ISIC manufacturing sectors. We then show how closely the random plots of FDI fit two common cumulative distribution functions (CDF), the Gumbel and the Weibull and whether the plots are from multi-regimes or not. A brief econometric analysis shows FDI volatility within the ISIC industrial sectors. The essential thesis (or hypothesis) is that if capital markets are in a general equilibrium across hosts, home, industrial sectors, and time, then the return on capital (the marginal efficiency of capital) is equalized everywhere, and a home investor’s dollar will be randomly allocated across hosts, industrial sectors, and time.