Some new evidence on intra-industry trade and complex FDI in ASEAN countries: a spatial panel approach

This paper examines the interaction on intra-industry trade (IIT) and foreign direct investment (FDI) with special attention to the Association of Southeast Asian Nations (ASEAN). We introduce the 2×3×3 knowledge-capital model, recently proposed by Baltagi et al. (2007) and Uttama and Péridy (2009). The theoretical implications are suggested, not only how IIT is determined by country characteristics, such as similarity in market size and factor differentials, but also trade costs as well as regional economic integration. Moreover, it also empirically investigates the determinants of aggregated and disaggregated IIT in five ASEAN countries over the period 19952008, concerned with what extent complex FDIs boost IIT. Using spatial panel data model, we find the fact that the empirical results are consistent with the theoretical predictions. Vertical FDI tends to discourage ASEAN’s IIT, whereas complex horizontal FDI in neighbours tends to encourage its IIT in ASEAN.