AbstractDeveloping and transition e

Abstract

Developing and transition economies are an increasingly important source of outward foreign direct investment (OFDI). The objective of this paper is to fill the gap in the literature regarding outward foreign direct investment by adopting the well known gravity model to examine the relationship between trade (export and import), inward and outward FDI using Malaysia as a case. This contributes to the literature as previous studies on OFDI in Malaysia have focused primarily on the determinants of these outward flows, and there are no studies examining the impact of OFDI on trade. Based on Hausman–Taylor estimation method, our findings reveal that inward foreign direct investment (IFDI) conforms to the observed pattern of a complementary relationship between FDI and trade, while OFDI and trade linkages are not significant as OFDI is dominated by the services sector, which generally is non-tradable. However, intra-firm trade in services could be increased through the process of fragmentation or outsourcing.
Keywords

Outward FDI; Trade; Multinationals; Malaysia

JEL classification

F21

1. Introduction

In the literature, the trade effects of outward foreign direct investment (OFDI) are based primarily on the experiences of multinational enterprises (MNEs) from developed countries. However, there are some notable changes in the global OFDI landscape, namely, a shift towards services, with mergers and acquisitions (M&A) being the most common entry modes UNCTAD, 2004 and UNCTAD, 2008. This shift reflects the deregulation of services in many host countries as well as the proximity burden in services as producers and consumers generally have to be in the same locality, although there is increasing cross border tradability of some services with the use of information and communications technology (ICT). Another major change in the trend in global OFDI, as reported by UNCTAD (2011), is the increasing prominence of MNEs from developing and transition economies (DTEs) due to increasing globalization on the one hand, and falling barriers to trade and investment on the other. According to the World Investment Report 2011, outward investors from DTEs contributed 29% to global FDI outflows in 2010. In particular, developing economies predominantly from Southeast Asia have become an emerging source of OFDI within and outside the region (UNCTAD, 2011). Malaysia's OFDI, as in the case of some of these developing economies, is also increasing over time (Bank Negara Malaysia (BNM), 2009 and Ramsamy et al., 2012). According to UNCTAD statistics,1 Malaysia's total approved nominal OFDI increased from US$115 million in 1992 to US$8,038 million in 2009, leading to a growth of 6,890% over a span of 17 years. In fact, outflows of FDI have exceeded inflows since 2007 resulting in a shift in Malaysia's position from a net capital importer to net exporter of capital (Fig. 1). The change in the FDI landscape was the result of the rising labor cost in the home country (Tham, 2007), the emergence of more attractive destinations for FDI in the region e.g. People's Republic of China (PRC), India and transitional economies from Indochina (see Hussain and Radelet, 2000). For instance, Goh and Wong (2011) found that the larger foreign market size was one of the key determinants of OFDI from Malaysia. Besides, other macroeconomic determinants like income, real effective exchange rate and trade openness were also positively related to Malaysia's OFDI in short and long run (Kueh et al., 2008).

Malaysia's FDI inflows and outflows, 1980 to 2008.Source: UNCTADstat.
Fig. 1.

Malaysia's FDI inflows and outflows, 1980 to 2008.

Source: UNCTADstat.
Figure options

The major impetus to the increasing outflows of capital from Malaysia can be attributed to progressive trade liberalization in the region, the search for new and expanding markets of major host countries (like the People's Republic of China), the strengthening of the ringgit against the US dollar, and the Malaysian government's liberal policy on capital outflows (Goh and Wong, 2011). However, at the same time, international trade is also an important component of Malaysia's economic structure with trade constituting 176% of the country's Gross Domestic Product (GDP) in 2010. A significant part of this trade is contributed by the multinationals operating in Malaysia and the region as Malaysia is also an important host economy, despite its declining attractiveness as a destination country for FDI since the Asian Financial Crisis (AFC). Consequently, the drastic increase in Malaysia's OFDI has raised concerns about the impact of these cross border direct investment activities on the country's trade, especially whether they promote or substitute trade since theoretically both impacts are possible (UNCTAD, 2006).

Based on the investment development path (IDP) theory, the OFDI and inward FDI (IFDI) position of a country is correlated with its stage of economic development. A country thus moves from stage 1, or the “least developed stage” where the country is a net IFDI receiver to stage five, or the “developed” stage where both inward and outward stocks of capital are about the same (Dunning and Narula, 1996). Since Malaysia's inward stock of FDI in 2010 is USD101 billion while its outward stock is USD97 billion (UNCTAD, 2011), it is expected that Malaysia is close to stage 4, based on this theory. This evolution is supposed to occur when local firms have acquired firm-specific advantages that allow them to engage in OFDI. But it is unclear whether the parent companies of Malaysia's OFDI will maintain linkages with their foreign affiliates through intra-firm trade as experienced by the OFDI of the developed countries.

The literature indicates that much of this depends on the motivation of the MNEs for entering a foreign market as well as industry characteristics and the tradability of the goods and services produced in that industry (Agarwal and UNCTAD, 2006). In general, both market-seeking and efficiency-seeking OFDI may affect trade positively as affiliates may rely on the parent company for the import of capital and intermediate goods. Non-tradable services are expected to have limited trade effects. A closer examination of the sectoral distribution of OFDI in Malaysia reveals that the largest sector of OFDI is the services sector, with government-linked companies (GLCs) leading these outward flows, followed by oil and gas while the manufacturing sector takes a third place (BNM, 2009). Nevertheless, as more services are traded, process fragmentation is also emerging, with low-wage activities being sliced away and outsourced (Christen and Francois, 2009), thereby raising the possibility of intra-firm trade in services.

Given the above, this paper adopts the well known gravity model to examine the relationship between trade (export and import), inward and outward FDI. This adds on to the literature on OFDI as past studies on OFDI in Malaysia have focused primarily on the determinants of these outward flows while there are no studies examining the impact of OFDI on trade (see for example Ariff and Lopez, 2008, Globerman and Shapiro, 2006, Goh and Wong, 2011, Kueh et al., 2008, Ragayah, 1999, Sim, 2005, Tham, 2007 and Wong, 2013). Moreover, the literature on the impact of OFDI focuses more on the developed world rather than DTEs even though the latter economies are increasingly investing outside their home countries at an earlier stage of their development (Globerman and Shapiro, 2006 and UNCTAD, 2006). This study aims to fill this gap. Finally, the findings of this study have implications for policy formulation and analysis for Malaysia's OFDI especially in the current wave of globalization.

The structure of this paper is as follows. Section 2 reviews the relevant literature. Section 3 specifies the model for the panel data analysis. It also describes the data and discusses the appropriate methodology to undertake this empirical study. The estimation results are reported and analyzed in Section 4 followed by conclusions and policy implications in Section 5.
2. Review of the literature

Historically, industrialized countries are the main sources of global FDI outflows. One of the major effects of FDI is its impact on international trade. In theory, FDI may substitute or complement trade. In the early literature, Mundell (1957) used a theoretical model to demonstrate that FDI and exports are substitutes for each other. However, subsequent theoretical developments have shown that it is possible to have either a substitutionary or complementary relationship between FDI and trade, depending on the nature of the investment. Thus, for example, Markusen, 1984 and Markusen and Venables, 1995 showed that horizontal FDI is market-seeking or these firms expand overseas to avoid trade costs, leading to a substitutionary relationship with trade. On the other hand, Helpman, 1984 and Helpman and Krugman, 1985 showed the possibility of a complementary relationship when vertical FDIs are involved due to the fragmentation of the production process geographically. This results in the location of different stages of production in host economies that offer the best cost advantages for a particular stage of production.

Empirical studies on the relationship between OFDI and trade have been undertaken at different levels, viz. country level (i.e., based on bilateral trade data e.g. Grubert and Mutti, 1991 and Clausing, 2000), industry level (i.e., based on cross-section data by industry e.g., Lipsey and Weiss, 1981, Brainard, 1997 and Kawai and Urata, 1998), firm level (i.e., based on U.S. MNEs e.g., Lipsey and Weiss (1984)) as well as product level (i.e., based on disaggregated export data e.g., Blonigen (2001)). In general, there is no consensus on the trade effects of OFDI based on the empirical literature as positive and negative relationships have been found in different st

Kết quả (Việt) 1:

Tóm tắtNền kinh tế đang phát triển và quá trình chuyển đổi là một nguồn ngày càng quan trọng của đầu tư trực tiếp nước ngoài ra nước ngoài (OFDI). Mục tiêu của giấy này là để điền vào khoảng cách trong các tài liệu liên quan đến đầu tư trực tiếp nước ngoài ra nước ngoài bằng việc áp dụng các mô hình lực hấp dẫn cũng được biết đến để kiểm tra mối quan hệ giữa thương mại (xuất và nhập), vốn FDI vào bên trong và bên ngoài bằng cách sử dụng Malaysia là một trường hợp. Điều này góp phần vào các tài liệu như các nghiên cứu trước đây trên OFDI tại Malaysia đã tập trung chủ yếu vào các yếu tố quyết định của các dòng chảy ra ngoài, và không có không có nghiên cứu cách kiểm tra các tác động của OFDI về thương mại. Dựa trên phương pháp dự toán Hausman-Taylor, những phát hiện của chúng tôi cho thấy rằng tiền đầu tư trực tiếp nước ngoài (IFDI) phù hợp với các mô hình quan sát của một mối quan hệ bổ sung giữa FDI và thương mại, trong khi OFDI và thương mại liên kết là không đáng kể như OFDI bị chi phối bởi các ngành dịch vụ, nói chung là không tradable. Tuy nhiên, trong công ty thương mại trong dịch vụ có thể được tăng lên thông qua quá trình phân mảnh hoặc gia công phần mềm.Từ khóa FDI ra nước ngoài; Thương mại; Đa quốc gia; MalaysiaJEL phân loại F211. giới thiệuIn the literature, the trade effects of outward foreign direct investment (OFDI) are based primarily on the experiences of multinational enterprises (MNEs) from developed countries. However, there are some notable changes in the global OFDI landscape, namely, a shift towards services, with mergers and acquisitions (M&A) being the most common entry modes UNCTAD, 2004 and UNCTAD, 2008. This shift reflects the deregulation of services in many host countries as well as the proximity burden in services as producers and consumers generally have to be in the same locality, although there is increasing cross border tradability of some services with the use of information and communications technology (ICT). Another major change in the trend in global OFDI, as reported by UNCTAD (2011), is the increasing prominence of MNEs from developing and transition economies (DTEs) due to increasing globalization on the one hand, and falling barriers to trade and investment on the other. According to the World Investment Report 2011, outward investors from DTEs contributed 29% to global FDI outflows in 2010. In particular, developing economies predominantly from Southeast Asia have become an emerging source of OFDI within and outside the region (UNCTAD, 2011). Malaysia's OFDI, as in the case of some of these developing economies, is also increasing over time (Bank Negara Malaysia (BNM), 2009 and Ramsamy et al., 2012). According to UNCTAD statistics,1 Malaysia's total approved nominal OFDI increased from US$115 million in 1992 to US$8,038 million in 2009, leading to a growth of 6,890% over a span of 17 years. In fact, outflows of FDI have exceeded inflows since 2007 resulting in a shift in Malaysia's position from a net capital importer to net exporter of capital (Fig. 1). The change in the FDI landscape was the result of the rising labor cost in the home country (Tham, 2007), the emergence of more attractive destinations for FDI in the region e.g. People's Republic of China (PRC), India and transitional economies from Indochina (see Hussain and Radelet, 2000). For instance, Goh and Wong (2011) found that the larger foreign market size was one of the key determinants of OFDI from Malaysia. Besides, other macroeconomic determinants like income, real effective exchange rate and trade openness were also positively related to Malaysia's OFDI in short and long run (Kueh et al., 2008).Của Malaysia FDI luồng vào và ra, năm 1980 đến 2008.Source: UNCTADstat. Hình 1. Của Malaysia FDI luồng vào và ra, 1980 đến năm 2008. Nguồn: UNCTADstat. Tùy chọn con sốNhững động lực chính để ra ngày càng tăng của vốn đầu tư từ Malaysia có thể được quy cho tự do hoá thương mại tiến bộ trong khu vực, việc tìm kiếm mới và mở rộng thị trường của chính chủ nhà nước (như cộng hòa nhân dân Trung Hoa), tăng cường Malaixia đối với đồng đô la Mỹ, và chính sách tự do chính phủ Malaysia trên vốn đầu tư ra (Goh và Wong, năm 2011). Tuy nhiên, cùng lúc đó, thương mại quốc tế cũng là một thành phần quan trọng của cơ cấu kinh tế của Malaysia với thương mại tạo thành 176% của của đất nước tổng trong nước sản phẩm (GDP) trong năm 2010. Một phần quan trọng của thương mại này là đóng góp bởi đa quốc gia hoạt động tại Malaysia và vùng như Malaysia cũng là một nền kinh tế quan trọng chủ nhà, mặc dù của nó hấp dẫn giảm như là một quốc gia điểm đến cho FDI kể từ cuộc khủng hoảng tài chính Châu á (AFC). Do đó, sự gia tăng mạnh mẽ của Malaysia OFDI đã tăng mối quan tâm về tác động của các băng qua biên giới các hoạt động đầu tư trực tiếp về thương mại của đất nước, đặc biệt là cho dù họ thúc đẩy hoặc thay thế thương mại kể từ khi trên lý thuyết cả hai tác động là có thể (UNCTAD, 2006).Based on the investment development path (IDP) theory, the OFDI and inward FDI (IFDI) position of a country is correlated with its stage of economic development. A country thus moves from stage 1, or the “least developed stage” where the country is a net IFDI receiver to stage five, or the “developed” stage where both inward and outward stocks of capital are about the same (Dunning and Narula, 1996). Since Malaysia's inward stock of FDI in 2010 is USD101 billion while its outward stock is USD97 billion (UNCTAD, 2011), it is expected that Malaysia is close to stage 4, based on this theory. This evolution is supposed to occur when local firms have acquired firm-specific advantages that allow them to engage in OFDI. But it is unclear whether the parent companies of Malaysia's OFDI will maintain linkages with their foreign affiliates through intra-firm trade as experienced by the OFDI of the developed countries.The literature indicates that much of this depends on the motivation of the MNEs for entering a foreign market as well as industry characteristics and the tradability of the goods and services produced in that industry (Agarwal and UNCTAD, 2006). In general, both market-seeking and efficiency-seeking OFDI may affect trade positively as affiliates may rely on the parent company for the import of capital and intermediate goods. Non-tradable services are expected to have limited trade effects. A closer examination of the sectoral distribution of OFDI in Malaysia reveals that the largest sector of OFDI is the services sector, with government-linked companies (GLCs) leading these outward flows, followed by oil and gas while the manufacturing sector takes a third place (BNM, 2009). Nevertheless, as more services are traded, process fragmentation is also emerging, with low-wage activities being sliced away and outsourced (Christen and Francois, 2009), thereby raising the possibility of intra-firm trade in services.Given the above, this paper adopts the well known gravity model to examine the relationship between trade (export and import), inward and outward FDI. This adds on to the literature on OFDI as past studies on OFDI in Malaysia have focused primarily on the determinants of these outward flows while there are no studies examining the impact of OFDI on trade (see for example Ariff and Lopez, 2008, Globerman and Shapiro, 2006, Goh and Wong, 2011, Kueh et al., 2008, Ragayah, 1999, Sim, 2005, Tham, 2007 and Wong, 2013). Moreover, the literature on the impact of OFDI focuses more on the developed world rather than DTEs even though the latter economies are increasingly investing outside their home countries at an earlier stage of their development (Globerman and Shapiro, 2006 and UNCTAD, 2006). This study aims to fill this gap. Finally, the findings of this study have implications for policy formulation and analysis for Malaysia's OFDI especially in the current wave of globalization.The structure of this paper is as follows. Section 2 reviews the relevant literature. Section 3 specifies the model for the panel data analysis. It also describes the data and discusses the appropriate methodology to undertake this empirical study. The estimation results are reported and analyzed in Section 4 followed by conclusions and policy implications in Section 5.2. Review of the literatureHistorically, industrialized countries are the main sources of global FDI outflows. One of the major effects of FDI is its impact on international trade. In theory, FDI may substitute or complement trade. In the early literature, Mundell (1957) used a theoretical model to demonstrate that FDI and exports are substitutes for each other. However, subsequent theoretical developments have shown that it is possible to have either a substitutionary or complementary relationship between FDI and trade, depending on the nature of the investment. Thus, for example, Markusen, 1984 and Markusen and Venables, 1995 showed that horizontal FDI is market-seeking or these firms expand overseas to avoid trade costs, leading to a substitutionary relationship with trade. On the other hand, Helpman, 1984 and Helpman and Krugman, 1985 showed the possibility of a complementary relationship when vertical FDIs are involved due to the fragmentation of the production process geographically. This results in the location of different stages of production in host economies that offer the best cost advantages for a particular stage of production.Empirical studies on the relationship between OFDI and trade have been undertaken at different levels, viz. country level (i.e., based on bilateral trade data e.g. Grubert and Mutti, 1991 and Clausing, 2000), industry level (i.e., based on cross-section data by industry e.g., Lipsey and Weiss, 1981, Brainard, 1997 and Kawai and Urata, 1998), firm level (i.e., based on U.S. MNEs e.g., Lipsey and Weiss (1984)) as well as product level (i.e., based on disaggregated export data e.g., Blonigen (2001)). In general, there is no consensus on the trade effects of OFDI based on the empirical literature as positive and negative relationships have been found in different st