The Giant Sucking Sound: Is China Diverting Foreign Direct Investments from Other Asian Economies?

UC Santa Cruz International Economics Working Paper No. 04-25; UC Santa Cruz Economics Working Paper No. 594

28 Pages Posted: 1 May 2005

See all articles by Busakorn Beam Chantasasawat

Busakorn Beam Chantasasawat

University of California, Santa Cruz

K. C. Fung

University of California at Santa Cruz

Hitomi Iizaka

University of California at Santa Cruz

Alan Siu

The University of Hong Kong - School of Economics and Finance

Date Written: November 30, 2004

Abstract

Is China taking direct investments away from other Asian economies? Theoretically, a growing China can add to other countries' direct investments by creating more opportunities for production-networking and raising the need for raw materials and resources. At the same time, the extremely low Chinese labor costs may lure multinationals away from other Asian sites when the foreign corporations consider alternative locations for low-cost export platforms. In this paper, we explore this important issue empirically. We use data for eight Asian economies (Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Philippines, Indonesia and Thailand) from 1985 to 2001 and control for the determinants of their inward direct investment. We then add China's inward foreign direct investment as an indicator of the "China Effect". Due to issues of simultaneity, we use a random effects simultaneous equation model to estimate our coefficients. We have three results: (1) The level of China's foreign direct investment is positively related to the levels of these economies' inward direct investments; (2) the level of China's foreign direct investment is negatively related to the direct investments of these economies as shares of total Asian foreign direct investments; (3) The China effect is not the most important determinant of the inward direct investments of these economies. Policy and institutional factors such as openness, corporate tax rates and corruption can be more important.

Suggested Citation

Chantasasawat, Busakorn Beam and Fung, K.C. and Iizaka, Hitomi and Siu, Alan K. F., The Giant Sucking Sound: Is China Diverting Foreign Direct Investments from Other Asian Economies? (November 30, 2004). UC Santa Cruz International Economics Working Paper No. 04-25; UC Santa Cruz Economics Working Paper No. 594, Available at SSRN: https://ssrn.com/abstract=711204 or http://dx.doi.org/10.2139/ssrn.711204

Busakorn Beam Chantasasawat

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

K.C. Fung (Contact Author)

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-3273 (Phone)
831-459-5900 (Fax)

Hitomi Iizaka

University of California at Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States
408-476-6645 (Phone)

Alan K. F. Siu

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+852 2859 2192 (Phone)
+852 2548 1152 (Fax)

HOME PAGE: http://www.econ.hku.hk/~asiu

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
150
Abstract Views
1,435
rank
236,289
PlumX Metrics