The ASEAN Economic Community: Implications for FDI and Production
Networks in East Asia
Deng-Shing Huang Institute of Economics
Academia Sinica 2014/10/29
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International Conference on “Towards ASEAN Economic Community: Investment Liberalization, Protection, and Emerging Trends,” Oct. 29, 2014, CIER
Outline
1. Introduction
2. AEC’s Prospects and Challenges
3. Inward FDI & ASEAN’s Performance
4. AEC and Global Production Network in Asia
5. Concluding Remarks
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1. Introduction
• Common Market (broad definition & example) – Free Trade in Goods & Services – Free Flow of Factors (Labor, Capital K)
• ASEAN Economic Community: (not a % CM) – FTA (1992) – free flow of skilled Labor + – Freer Flow of K – Slower Path for CLMV
• AEC’s goal 1. to create a unified market 2. to create production base
Question? AEC ASEAN in Asian Production network?
– MNC’s FDI types: what type be attracted? – MNC’s FDI strategy: country-based FDI vs. region-based FDI
AEC Not 100 %
Common Market
Example EFTA EEC EU
What’s good?
CM integrated Region 1. Scale Effect, (demand
side)… Trade Theory: HME / good for IRTS manufacturing 2. Scale Effect: Supply Side Prod. Fragmentation (vertical specialization ) efficient 3. Factors allocation more
efficient (L, Skilled L, K) Factor return increases
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1. …(introduction)
2. AEC’s Prospects and Challenges – Challenges for forming a single big market
– Challenges for becoming a single prod. base
3. Inward FDI & ASEAN’s Performance – History
– Prospects
4. AEC and Global Production Network in Asia
5. …(conclude)
Question? How AEC change the position of ASEAN in Asian Production network?
MNC’s FDI types: what type be attracted? MNC’s FDI strategy: country-based FDI vs. region-based FDI
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2. AEC’s Prospects and Challenges
Goals of AEC
• 2.1 Forming a Big Market Size under AEC
– Population =\= market size
– GDP, GNP per capita =~= market Size
• 2.2 a Single Production Base ?/!
– Double-Side of the Country Diversity
– Complement (in Factor Endow.)
– Logistics service diversity =\=> lumpy region
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2. AEC’s Prospects and Challenges
AEC A single market / production base
• Single Market (size of 615million populations)
– Wide diversity in national income
– Population Size =\= Market Size
– Middle income trap ASEAN a big market ?
– Not likely (in 15 or 20 years )
– Market expansion type of FDI, limited
2. AEC’s Prospects and Challenges
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2. AEC’s Prospects and Challenges
AEC A single market / production base
• Unified production base
– Wide diversity in inf. Income , and trade status
– non-tariff barriers high
– cross-border logistics service, not smooth
– Obstacle to region-based FDI
2. AEC’s Prospects and Challenges
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2.1 Big Market Size under AEC
• Country Diversity neg. effective ‘market size’
– Theory : lumpy region effect – ref: Courant and Deardorff , JPE(1992), International
Trade with Lumpy Countries
• skilled labor & K to free move effective skilled labor increase in real term advantage for skilled-labor intensive goods Income inequality will increase (between and within nations)
2. AEC’s Prospects and Challenges
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2.1 Big Market Size under AEC Country Diversity
1, Population size not the Market Size 2. Income level ranged by a large Industrial Structure big difference 3. Effective Market Size (income matter) is small 4. Market Expansion FDI, little incentive to come
Middle-income trap AEC less likely a big market even in the long run
2. AEC’s Prospects and Challenges
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2.2 Double-side of Diversity
• Good for development complement b/w partner countries
• Bad for less competitive sector and
• Adjustment cost will be high for replacing employment from weak to strong sector
– Non-tariff barrier will be high
– Lower incentive to economic integration
2. AEC’s Prospects and Challenges
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2.2 Diversity (Trade Balance)
Figure 2-1 Current Account Balance for ASEAN (% of GDP)
Trade status diversity diff power of competition in trade 1) ? more conservative for liberalization in trade, Eco Integration 2) ? Opening Policy (incentive high/ low)
2. AEC’s Prospects and Challenges
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2.2 Diversity (Inflation)
Figure 2-2 The inflation rate index of ASEAN10 countries
2. AEC’s Prospects and Challenges
1. Vietnam’s as a role model for CLM
2. Good/Bad side
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2.2 Diversity (Logistics Performance)
Table 2-2 ASEAN10 Logistics Performance Index
Country 2010 Score
2010 rank
2012 score
2012 rank
2014 score
2014 rank
Singapore 4.09 2 4.13 1 4.00 5
Malaysia 3.44 29 3.49 29 3.59 25
Thailand 3.29 35 3.18 38 3.43 35
Vietnam 2.96 53 3.00 53 3.15 48
Indonesia 2.76 75 2.94 59 3.08 53
Philippines 3.14 44 3.02 52 3.00 57
Cambodia 2.46 118 2.56 101 2.74 83
Lao PDR 2.37 129 2.50 109 2.39 131
Myanmar 2.33 133 2.37 129 2.25 145
Source: Logistics Performance Index database, World Bank
Logistics Performance Diversity Fragmented region (lumpiness Eff. In theory of com. adv.) Negative for forming a single production base?
2. AEC’s Prospects and Challenges
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3. FDI and Development in ASEAN
1985 Plaza Accord
huge FDI in (join Asia prod Network) High growth till 1997
Figure 3.1 Real GDP Growth Rates of Selected ASEAN Countries
Inward FDI & ASEAN in Global Pro Network
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3. FDI and AEAN Performance
FDI and Growth of ASEAN in the past – Inward FDI
– Knitting ASEAN into a part of EA’s production Network
– Inward FDI waves: 1970s~, 1985~, 2001~ & 2008~
– Resulting in High eco. Growth (1985~1997)
– growth (2001~2007)
– growth (post 2008)
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3.1 Waves of FDI to ASEAN
Figure 3.2 Share of ASEAN’s Inward FDI over World Total
1985 Plaza Accord
huge FDI in (join Asia prod Network) High growth till 1997
FDI waves: 1970s 1985~ 2001 ~ 2008~
3. Inward FDI and ASEAN Eco.
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Figure 3.1 Real GDP Growth Rate of Selected ASEAN Countries
ASEAN’s Growth Performance Coincide with the the waves of inward FDI
3. Inward FDI and ASEAN Eco.
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3.2 Knitting into Prod. Network by FDI
Table 3.2 Inward FDI to ASEAN 2005~2012 unit: million US dollars
3. Inward FDI and ASEAN Eco.
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3.2 Knitting into Prod. Network by FDI
3. Inward FDI and ASEAN Eco.
• Japan (as a single country) lead FDI in ASEAN • Total FDI from East Asia =26.38% (higher than
22.84% from EU-28 • ASEAN joined Prod. Network in labor-intensive
industries, or production stages (e.g. Footwear, NB, Textile, Automobile, ITC etc.)
• FDI in natural resource sector ( 1988~, 14 billion of China FDI in Myanmar: mainly in resource and energy sectors, hydropower dam, mining, oil and gas pipeline etc.
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3.2 Knitting into Prod. Network by FDI
3. Inward FDI and ASEAN Eco.
• ASEAN already in the Prod. Network of EA
• Will 2015-AEC knit ASEAN wider and deeper in the network?
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4. AEC & Global Pro. Network
• Will the AEC Attract more FDI? How?
– MNCs have responded to the AEC in advance.
• Depending on the purpose of FDI,
– Market Expansion
– Cost Saving
– Natural Resource retrieving
4. AEC & Global Pro. Network
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Prod. Network Effect & FDI under AEC • Market-expansion (seeking host market)
– Growth under AEC (plus for FDI ) – Diversity less likely be integrated in the short-run (neg. for FDI) – Middle income class in short and/or median run (pro. for FDI) – Middle Income Trap (limited in the long-run, neg. to FDI )
• Cost-saving (export to 3rd region) – FDI increased in the short and long run – Region-based FDI (more attractive than country-based FDI), – Logistics quality diverse (negative to FDI)
• Resource-access (irrelevant to AEC) – European MNCs (due to historical linkage) – China (in recent decades)
• ODA type (construction, irrelevant to AEC / country-based)
4. AEC & Global Pro. Network
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V. Conclusion
• ASEAN has proceed in a fast speed to economic integration. 1. CEPR in 1992, ASEAN FTA in 2003, and expected
to be a common market in the near future of 2015.
2. More intensive integration implies the fostering of a greater economy, which in turns will attract more the FDI from outside the ASEAN.
3. Reshaping the Role of FDI in Glob. Production Network
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Will AEC achieve goals: (1) A single market & (2) production base?
• Single Market (size of 615million populations)
– Wide diversity in national income
– Population Size =\= Market Size
– Middle income trap ASEAN a big market ?
– Not likely (in 15 or 20 years )
– Market expansion type of FDI, limited
V. Conclusion (Cont.)
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V. Conclusion (Cont.)
Goal 2: A complete production base
• ASEAN already in the Prod. Network of EA
• Will 2015-AEC knit ASEAN wider and deeper in the network?
• Still a fragmented region (lumpy effect) – Region-based FDI limited, because
– high diversity in logistics quality, political/ social institution etc. (unlikely to be resolved in the foreseeable future)
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