1. FDI, Economic decline
and recovery: lessons
from
the Asian financial
crisis
Based on a paper by :
Hwy-Chang Moon, Joseph
L.C. Cheng,
Min-Young Kim, Jin-Uk Kim

2. • FDI Definition :An investment made by a company or
entity based in one country, into a company or entity based in
another country is called Foreign Direct Investment(FDI).
• FDI Flow: Amount of FDI over a period of time (one year)
• FDI Stock: Total accumulated value of foreign owned assets
at a given point in time. FDI stock can happen in buying common
stock, or joint venture of a foreign company and a local or like that.
• Note : investment by individuals or firms or public bodies in
foreign financial instruments like foreign bonds and derivatives is
not called FDI.

3. U.S. is the largest receiver of FDI in the world with total amount of 194$
billion in 2010. About 84% of FDI in US. come from or through 8 countries :
Switzerland, the United
Kingdom, Japan, France, Germany, Luxembourg, the Netherlands and
Canada. The FDI stocks in U.S. at the end of 2008 was about 16 percent of
its GDP.

4. Flow of FDI inward /outward South East Asia
All Asian economies have been working towards trade agreements such as Free Trade
Agreements (FTA) between countries. 10 South East Asian countries have trade agreement under
the ASEAN. Under the ASEAN the countries have free flow of goods categorized under no import
duty or reduced import duty.
ASEAN nations are attracting FDI so that each country has its competitive advantage. For
example Thailand is attracting automobile sector, and is one of the industry with highest FDI in
Thailand.

5. FDI Stock China and Australia didn’t get
affected so much by the 1997
Thailand
Singapore
Asian Crisis and didn’t raise so
Philippines much and rapid FDI.
Million US $
Malaysia
South korea
Japan
India
The interesting part is in the
Hong Kong
-
China 1998, while crisis had not
recovered, the FDI increased
GDP % sharply.
Australia
China Historical data shows that
Hong Kong
India
Australia got affected later
Japan than the Southeast Asian
Malaysia
- Philippines
countries (1999), as shown in
-
Singapore
the graph.
South Korea
- Thailand

6. • Economic situation today (worldwide)
– Subprime crisis, Euro zone crisis, fear of other regional crisis
• 3 possible senarios :
– V shape drastical rebound
– U shape gradual recovery
– L shape stagnation
• Some solutions :
– Monetary policy making
– Fiscal policy making
– Attracting more FDI
• Main Questions of the study paper:
– Q1. Does FDI help reduce the negative impact of an externally induced crisis on a host
country’s economic growth?
– Q2. Does it help speed up the country’s economic activities during the recovery period?
– Q3. Are these effects of FDI during economic decline and recovery the same for both inward
and outward foreign direct investment?

7. • Why an MNC chooses FDI ?
(1) Possesses ownership-specific advantages (O-advantage);
(2) Finds location-specific resources (L-advantage) to complement its ownership-
specific advantages;
(3) The ability to internalize markets through administrative fiat (I-advantage).
• Benefits to the Host country :
– Increasing capital accumulation
– Transfer of the non-financial and intangible ownership specific assets to the
location. Items like advanced production methods, marketing know-
how,superior management skills, and new organizational form, which is the
Main Benefit for the host country.
– Upgrading and introducing of new and higher
standards, increase productivity, adopt new
technology, and learn new ideas.
Host Country: Country receiving the FDI

8. • Major Economic effects of FDI Outflow :
– balance of payments of the nation by bringing back the profit and earnings of
the company working in another country to the main country .
– the presence of the company in another country may help the export of other
products of the main country.
– increment of the employment and higher consumers’ spendings in the
country because of the growth in subsidiary demands from the home country
resources.
– the country has to improve itself regularly and acquire more skills to be able
to compete in the foreign markets and can transfer back these skills to the
home country and spread the existing strategic assets.

9. Main Hypothesis and
method of testing
H1. The higher the level of FDI prior to the crisis,
the smaller the change (decline) in economic growth
during the crisis period.
H2. The higher the level of FDI prior to the crisis,
the smaller the change (increase or reduced decline)
in economic growth during the recovery period.

10. Data and the collection method
Economic growth data for the 15 largest Asian economies in the affected
region. however, full data were available from only ten of these economies:
Australia, China, Hong
Kong, India, Japan, Korea, Malaysia, Philippines,Singapore, and Thailand.
• Period :
Asian Financial Crisis(AFC) lasted only in 1997-1998.
it had astrong V shaped rebound in 1999.
This region had a great steady economic growth for
5 years before the crisis.
Total period = 1992 – 1999
• Data collected and source of data:
– United Nations Conference on Trade and Development (UNCTAD)
– World Development Indicators (WDI) online database of the World Bank

11. Data and the collection method
Data collected from affected economies during the Asian financial crisis using
a fixed-effect panel regression analysis.
Panel (data) analysis is a statistical method, widely used in social
science, epidemiology, and econometrics, which deals with two-dimensional
panel data.
Panel data analysis has three more-or-less independent approaches:
• Independently pooled panel;
• Random effect model;
• Fixed effect models or first differenced models;
In panel data analysis, the term fixed effects estimator (also known as
the within estimator) is used to refer to an estimator for the
coefficients in the regression model. If we assume fixed effects, we
impose time independent effects for each entity that are possibly
correlated with the regressors.

12. Variables
• Dependent variable :
– Change in Economic Growth (CEG)
• Independent Variables :
– GDP growth rate
– GNP growth rate
• Control variables :
– Inflation
– Labor
(as they both affect the economic growth.)
• Emperical Model :

13. Analysis
The following model which is based on the first formula is tested for 4 types
of FDI :
For the hypotheses to be supported, the results would need to show a
negative coefficient for the FDI*Crisis and FDI*Recovery variables, indicating
a reduction in the CEG variable (absolute CEG) during the crisis (1998) and
recovery (1999) periods.

14. Results

15. Results

16. Results

17. Conclusion and recommendations
Different Economic Same
Reasons Crisis Solutions
Good
More More stable
monitoring
economy economic
and policy
integration growth
making
Main focus of policy making to
attract more FDI stock .

18. Conclusion and recommendations
• South East Asian countries might be the next region affected by crisis.
• South East Asian countries is much dependent on Export to Western
countries.
• The economic infrastructures in this area is not so strong.
• Paper concludes that traditionally trade was considered as a key tool to
promote prosperity as it was export driven. But the Asian Financial Crisis
has shown that FDI is a more reliable mechanism to promote national
prosperity.
• Therefore ASEAN countries are trying to
attract FDI to their own country and also
promoting FDI and trade amongst ASEAN
countries

19. References :
Multinational Business Review
Emerald Article: FDI, economic decline and recovery: lessons from the
Asian financial crisis
Hwy-Chang Moon, Joseph L.C. Cheng, Min-Young Kim, Jin-Uk Kim
U.S. Department of Commerce
Economics and Statistics Administration
1401 Constitution Ave., NW
Washington, DC 20230
www.esa.doc.gov
www.unctad.org united nation conference on trade and organization