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ByRamkishen Rajan

Indeed, many Asian companies have made headlines as they have been on a hectic buying spree over the last few years.

According to UNCTAD data, gross FDI inflows to Asia grew at an average annual rate of just over US$ 75 billion and double that between 1997 and 2004. At the same time, FDI outflows averaged around US$ 50 billion annually. Interestingly, the two economies with the highest magnitudes of inflows and outflows have been Mainland China and Hong Kong, respectively. On average, about two-fifths of FDI inflows to developing Asia have been to Mainland China. More specifically, for the period 1990 to 1996, the average FDI inflows to Mainland China was around US$ 20 billion, while for the second sub-period, 1997 to 2004, the average FDI inflows to Mainland China crossed US$ 50 billion.

With regard to outflows, Hong Kong is clearly the single largest source of FDI outflows from Asia. FDI outflows from Hong Kong averaged just under US$ 15 billion annually in the first sub-period and over US$ 25 billion in the second sub-period. FDI outflows from Hong Kong are at an altogether different level than any other regional economy. Excluding Hong Kong from the analyses, the picture is more even across our sample countries. It is apparent that the three newly industrializing economies (NIEs) of Singapore, South Korea and Taiwan have consistently remained among the top developing economy sources of FDI over the last two decades. Malaysia (a near-NIE) is also notable for the size of its outward FDI flows, particularly since the 1990s. More aggressive internationalization strategies by Indian companies has seen it rise in the rankings from 39 in 1990 to top 20 by 2005 and likely even higher by end 2007.

But how much of these FDI flows are intraregional in nature? Analysis of the data by my colleague at George Mason University, Rabin Hattari and myself reveals that around 35 percent of FDI flows to developing Asia between 1997 and 2004 have come from within the region (40 percent including Japan). Clearly some of these flows are overstated as they involve recycling or round-tripping of funds (especially between China and Hong Kong which makes up almost 40 percent of intraregional flows).

Against this, it is important to note that the data on intraregional developing Asian FDI flows discussed above exclude the offshore financial centers (OFCs) such as the British Virgin islands, Bermuda, Cayman islands, Mauritius and Western Samoa as sources of FDI. Insofar as at least some part of inflows from the OFCs involve FDI that originated from other Asian economies, and the inflows are not destined back to originating country (i.e. trans-shipping as opposed to round-tripping), the size of intra developing Asian FDI flows are undercounted. For instance, the British Virgin islands has consistently been the second largest source of FDI into China, surpassed only by Hong Kong, with the Cayman Islands and Western Samoa also being among the top 10 in 2006.

These caveats notwithstanding, the data reveal a few other interesting features.

One, Hong Kong has been the region’s leading investor, followed by Singapore, Taiwan, Korea, China, and Malaysia, in that order. The importance of China as a source of capital is noteworthy in that there has been a great deal of debate on whether China has diverted extra-regional FDI from the rest of Southeast and East Asia.

Two, bilateral FDI inflows between developing Asian economies is particularly pronounced between and within East Asian economies and South-East Asia economies.

Three, almost three-fifths of flows from East Asia to South-East Asia have been destined for the relatively higher-income South-East economies, viz. Singapore, Malaysia and Thailand. Singapore has attracted about half of all East Asian FDI destined for South-East Asia. The city state has also been a major investor to the rest of South-East Asia, China and India.

Four, FDI flows between East Asia and South Asia remains low and stagnant, with most of the limited interest in South Asia having involved India. India is becoming an important host from for investments from Korea, Hong Kong and Singapore. Conversely, many Indian firms use Singapore as a regional headquarters, particularly following the signing of a bilateral Comprehensive Economic Cooperation Agreement (CECA). In addition, Mauritius has low corporate tax and has a liberal Double taxation agreement (DTA) with India. As such, many investments from other Asian and global sources have been re-routed to India via Mauritius which has consistently been the top source of FDI to India, but this not captured in the available data. Therefore, the actual extent of flows of FDI between India and East and Southeast Asia may be understated.