Has China Crowded out Foreign Direct Investment from Its Developing East Asian Neighbors?

This paper applies a gravity model to investigate the determinants of foreign direct investment (FDI) in East Asia. Economic fundamentals, such as market size, per capita income and country risk indicators, economic and cultural ties, exchange rate volatilities and information asymmetry are found to be important determinants for FDI. Globally, the inward FDI among high‐income OECD economies declined significantly on average over the period of 1990‐2003, whereas the inward FDI of the high‐income OECD economies in emerging market economies gained substantially. In the East Asian region, the ASEAN‐4 (Indonesia, Malaysia, the Philippines and Thailand) received above‐average inward FDI from the high‐income OECD economies after controlling for their economic fundamentals. By contrast, China's FDI from the high‐income OECD economies is below average relative to its economic fundamentals. Therefore, it is difficult to establish that China has crowded out FDI from its developing ASEAN neighbors.