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ASEAN Economic Integration through Trade and Foreign Direct Investment: Long-Term Challenges

Listed author(s):
  • Kawai, Masahiro

    (Asian Development Bank Institute)

  • Naknoi, Kanda

    (Asian Development Bank Institute)

This paper explores the long-term challenges for trade and foreign direct investment (FDI) of the Association of Southeast Asian Nations (ASEAN). The region has emerged as an important production base for multinational corporations by joining East Asia’s supply chains. While proceeding to establish the ASEAN Economic Community (AEC) by the end of 2015, ASEAN has also forged five major free trade agreements (FTAs) with its dialogue partners (People’s Republic of China, India, Japan, Republic of Korea, and Australia–New Zealand) and is currently negotiating the Regional Comprehensive Economic Partnership (RCEP). In addition, four ASEAN member states are working on the Trans-Pacific Partnership (TPP) negotiations. Econometric evidence suggests that (i) trade flows and inward FDI mutually reinforce each other, i.e., an increase in trade flows stimulates inward FDI and vice versa; (ii) a larger market attracts more inward FDI; (iii) FTAs tend to help stimulate inward FDI; and (iv) strong institutions, good physical infrastructure, and low costs of doing business are critical in boosting inward FDI. The paper concludes that in the long run ASEAN should aim to further integrate itself with the rest of Asia and the world (through a Free Trade Area of the Asia-Pacific and an Asia–Europe FTA), while substantially deepening its internal integration (by moving from the AEC to a customs and economic union) and thereby maintaining ASEAN centrality.

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Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 545.

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Length: 31 pages
Date of creation: 27 Oct 2015
Handle: RePEc:ris:adbiwp:0545
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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  2. Bruce A. Blonigen & Jeremy Piger, 2014. "Determinants of foreign direct investment," Canadian Journal of Economics, Canadian Economics Association, vol. 47(3), pages 775-812, August.
  3. Alan V. Deardorff, 2014. "Trade Implications of the Trans-Pacific Partnership for ASEAN and Other Asian Countries," Asian Development Review, MIT Press, vol. 31(2), pages 1-20, September.
  4. Richard Baldwin & Masahiro Kawai, 2013. "Multilateralizing Asian Regionalism," Trade Working Papers 23553, East Asian Bureau of Economic Research.
  5. Stein, Ernesto & Daude, Christian, 2007. "Longitude matters: Time zones and the location of foreign direct investment," Journal of International Economics, Elsevier, vol. 71(1), pages 96-112, March.
  6. Jeffrey J. Schott & Barbara Kotschwar & Julia Muir, 2013. "Understanding the Trans-Pacific Partnership," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6727, November.
  7. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
  8. Yoshifumi Fukunaga & Ikumo Isono, 2013. "Taking ASEAN+1 FTAs towards the RCEP: A Mapping Study," Working Papers DP-2013-02, Economic Research Institute for ASEAN and East Asia (ERIA).
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