Understanding Big Picture -- Stories of Trade, CAB, and BOP

Transcription

1 Understanding Big Picture -- Stories of Trade, CAB, and BOP (S I X M ) (for Students in the GAD Course, GSID, Nagoya Univ.) Prof. Shigeru T. OTSUBO GSID, Nagoya University December

2 Trade, CAB, and BOP Stories I (CAB S I X M) Arguments on SI Side of CAB Shortage of Capital? (Do we have enough savings to invest in our future?): Developing Cos. vs. Developed Cos. ( A Threat from the Developing World Arguments) Asia vs. Japan ( A Threat from Asia Arguments) Some Long-Term Trends of Great Concern Development Stages Theory of BOP Are we getting old? -- Can we continue to save enough? 2

3 Magnitudes and compositions of the aggregate net resource flows to developing countries and East Asia? 3

4 What about net claims and CABs? 4

5 Developing countries (and East Asia s) claims on resources are relative small 5

6 Trade, CAB, and BOP Stories I (CAB S I X M) Arguments on SI Side of CAB Shortage of Capital? (Do we have enough savings to invest in our future?): Developing Cos. vs. Developed Cos. ( A Threat from the Developing World Arguments) Asia vs. Japan ( A Threat from Asia Arguments) Some Long-Term Trends of Great Concern Development Stages Theory of BOP Are we getting old? -- Can we continue to save enough? 6

7 Development Stages Theory of BOP (cf. Crowther, 1957) Indonesia Malaysia Korea Singapore Japan Thailand Immature Debtor Country Matured Debtor Country Debt Repayment Country Immature Creditor Country Matured Creditor Country F. Asset Take-down Country Net Foreign Assets Capital Account Balance

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11 HI OECD saving and investment ratios declined from 27% to 22% in the past 30 years LMIC s saving ratio (GDS) increased from less than 20% (before 1970) to over 25% (mid 1970s) and stayed after CA deficit expanded from early 1970s (1%) to early 1980s (4-5%), and then shrank after the debt crisis (to 1-2% range) Except for the periods of Euro dollar circulation (mid 1970 to early 1980), LMIC s investment increases have been largely financed by their own saving increases 11

12 East Asia s saving ratio (GDS) increased from 22% to 32% in 1970s, and reached 37% before the AFC, supporting healthy increase in investment ratio CA deficit also expanded in 1990s till the AFC And then? 12

13 Separating the movements driven by the financial bubble that led to the AFC, what are the long-term trends in Asia? East Asia s Investment Needs Investment growth is expected to be strong because of the need to expand and upgrade existing infrastructure capacity, which was under severe strain as a result of rapid economic growth and urbanization before the AFC (ex. China, Malaysia, Philippines, Thailand, Indonesia, Vietnam ). East Asia will also reconsider and increases its investment to rural areas and agriculture (ex. China, Thailand, Indonesia ) with the ongoing moves toward decentralization. The current post-crisis level of investment ratio (less than 30%) will recover to the pre-crisis level (close to 38%). Typical East Asian S I Pattern Higher growth raises the saving rate, which helps finance the increased investment associated with higher growth. Capital Inflows Capital inflows (FDIs in particular) will resume with the expansion of global production networks and with more liberalization in investments in infrastructure. This will be supported by cofinancing effects (more domestic investment). Although size does matter in infrastructure investment, the positive effects of FDIs will continue to be more eminent in quality (product and industry upgrades). Trade and FTAs Expanded trade and trade competition will upgrade East Asia s industrial/trade structure continuously, where positive effects of trade are more eminent in quality (productivity) rather than in quantity (size contribution to GDP and growth). 13

14 Is the Doomsday Imminent? Determinants of the private saving ratio: Income (level), rates of return, uncertainty, domestic/foreign borrowing constraints, financial depth, fiscal policy, pension system, income/wealth distribution, and demographics 14

15 Trade, CAB, and BOP Stories II (CAB S I X M) Arguments on XM Side of CAB Developments in Trade (Export Competitiveness): Asia vs. Japan ( A Threat from Asia Arguments) Asia vs. China Free Trade Areas (FTAs) and Comprehensive Economic Partnerships (CEPs) in Asia Time Schedule Expected Impacts (GTAP CGE Model Simulations) 15

16 Revealed Comparative Advantage RCAij = ( Xij / Xi ) / ( Xj / X ) RCA>1 or RCA<1 1) RCA indices are computed for East Asian economies using UN/COMTRADE (WB Version) SITC 3-digit level (269 lines) data, for 1985, 1990, 1995, and ) Then correlations among RCAs for Asian economies are computed. 16

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22 Trade, CAB, and BOP Stories II (CAB S I X M) Arguments on XM Side of CAB Developments in Trade (Export Competitiveness): Asia vs. Japan ( A Threat from Asia Arguments) Asia vs. China Free Trade Areas (FTAs) and Comprehensive Economic Partnerships (CEPs) in Asia Time Schedule Expected Impacts (GTAP CGE Model Simulations) 22

23 Regionalization under Globalization There is a surge in the formation of regional arrangements in the 1990s, even with the successful completion of the Uruguay Round. New motives for new arrangements. Deep integration Safe haven Insurance Buy out Open regionalism can be conducive to free world. Developing countries can utilize regional arrangements to effectively negotiate in multilateral organizations such as the WTO. 23

24 Number of Existing Regional Integration Schemes (by their establishment year) Regions Prior to Total Europe Americas Asia and Oceania Middle East Africa Other (across multiple regions) Total Source: JETRO, White Paper on International Trade,

25 Classification of Regional Economic Integration Abolishment of tariffs and quantitative restrictions on trade among members Common tariff on imports from non-members Free factor movements among members Harmonization of economic policies Unification of policies by a supranational organization Free Trade Customs Common Economic Political Area Union Market Union Union X X X X X X X X X X Source: Compiled according to Balassa, Bella (1973) The Theory of Economic Integration. 25

26 Classification of Main Regional Integration (excl. bilateral agreements) Regional Cooperation Free Trade Area Customs Union Common Market Europe EFTA EU CEFTA Americas NAFTA LAFTA Asia Africa APEC ASEAN SAARC ECOWAS CEAO MRU CEPGL UDEAC PTA SADC AFTA MERCOSUR ANCOM CACM CARICOM (MRU) (ECOWAS) (CEAO) (CEPGL) (UDEAC) (PTA) SACU Note: 1. African RIs in parentheses indicate their objectives. 2. SADC is a cross-border initiative (CBI) aiming at sectoral coordination and transport links. 3. PTA also aims at establishing a regional development bank on top of a multilateral clearing house. 26

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28 The GTAP Model GTAP Web Site: The GTAP model is a multi-region multi-industry computable general equilibrium (CGE) model constructed over a database consisting of bilateral trade, transport, and protection data for economic linkages among countries/regions, and of input-output tables that represent intersectoral interactions within each country/region. Each industry is represented by a single homogeneous commodity. The model includes three factors of production: labor, capital, and land. Labor and capital are mobile across domestic sectors, while land is assumed to be used only in agricultural sectors. Capital is traded internationally like intermediate inputs, while labor and land are not mobile across borders. Microeconomics-oriented model with incentive structures of economic agents explicitly modeled. Global saving-investment identity is preserved. WTO, WB, USDA, and EPA are among the active users. For further details, refer to the papers,, and the GTAP web site. 28

29 GTAP Macro Framework: Multi-Region Open Economy Model Regional Household Taxes Taxes Private Government Expenditures Expenditures Savings Private Household Government Global Bank Export Taxes Import Taxes Taxes Factor Payments Net Investment Private Domestic Public Domestic Purchases Purchases Imports Producer Imports Inter-Firm Transactions Imports Exports Rest of the World Note: Arrows show direction of payments. Source: Adapted from Brockmeier (1996), Figure 6. 29

30 Production Structure of the GTAP Model Gross Output (Leontief, =0) separable Value Added Intermediate Inputs (CES, VA ) (CES, D ) separable Land Labor Capital Domestic Foreign Armington Composite (CES, M ) Source: Adapted from Hertel (1997), Figure 2.6. Sources of Export Supply 30

31 Aggregation Aggregation 1. JAPAN 1. AGRICULTURE, FORESTRY & FISHERY 2. INDONESIA 2. MINING 3. MALAYSIA 3. FOOD & BEVERAGES 4. PHILIPPINES 4. TEXTILES 5. THAILAND 5. CHEMICALS 6. CHINA 6. METALS 7. HONG KONG 7. TRANSPORT EQUIPMENT 8. TAIWAN 8. MACHINERY & EQUIPMENT 9. SOUTH KOREA 9. OTHER MANUFACTURING 10. SINGAPORE 10. ELECTRICITY, GAS & WATER 11. VIETNAM 11. CONSTRUCTION 12. AUSTRALIA 12. TRADE & TRANSPORT 13. NEW ZEALAND 13. OTHER SERVICES (PRIVATE) 14. USA 14. OTHER SERVICES (GOVERNMENT) 15. CANADA 16. RUSSIA 17. MEXICO 18. CHILE 19. Other Latin America 20. WESTERN EUROPE 21. REST OF THE WORLD Source: Compiled from GTAP atabase (Version 4.0) 31

32 Welfare Implications of Asian FTAs ($US million) AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan -2, ,115-4,678 31,976 Singapore 3, ,812 4,292 3,142 Indonesia , Malaysia 1, , Philippines , Thailand , ,000 Vietnam ,148 China ,171-4,972-8,247 Hong Kong ,616 4,945 S. Korea , ,537 Taiwan ,415-4,329 Australia New Zealand Russia ,003 USA ,010-2,717-8,005 Canada Mexico Chile Latin America ,682 Western Europe ,909-2,367-10,244 ROW , ,208 World ,897 32

33 Welfare Changes due to Gains in Allocative Efficiency ($US million) AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan ,168 Singapore Indonesia Malaysia ,100 Philippines Thailand ,099 Vietnam China ,672 Hong Kong S. Korea ,459 Taiwan Australia New Zealand Russia USA Canada Mexico Chile Latin America Western Europe ROW ,322 World ,674 33

34 Welfare Changes due to TOT Changes (excl. TOTcgds) ($US million) AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan -1, ,841-2,761 14,048 Singapore 2, ,467 3,816 2,812 Indonesia Malaysia Philippines Thailand Vietnam China ,375-9,982 Hong Kong ,409 4,340 S. Korea ,500 Taiwan ,164-3,454 Australia New Zealand Russia USA ,875-2,390-4,270 Canada Mexico Chile Latin America Western Europe ,323-2,309-5,151 ROW World

35 GDP Quantity Index AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan Singapore Indonesia Malaysia Philippines Thailand Vietnam China Hong Kong S. Korea Taiwan Australia New Zealand Russia USA Canada Mexico Chile Latin America Western Europe ROW

36 Trade Balances (US$ million) AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan 1, ,892 5,445-2,662 Singapore -1, ,261-1,545-1,362 Indonesia Malaysia -1, ,730-1,131-1,852 Philippines -1, ,244-1,785-2,682 Thailand -1, ,087-1,312-2,107 Vietnam ,042-1,004-1,230 China ,163-10,831 Hong Kong ,615-4,707 S. Korea ,497 Taiwan Australia ,026 New Zealand Russia USA 1, ,007 4,448 9,738 Canada Mexico Chile Latin America ,070 Western Europe 1, ,143 6,555 12,747 ROW ,518 1,772 4,803 36

37 Terms of Trade (Export Price / Import Price) AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan Singapore Indonesia Malaysia Philippines Thailand Vietnam China Hong Kong S. Korea Taiwan Australia New Zealand Russia USA Canada Mexico Chile Latin America Western Europe ROW

38 Export and Import Volumes AFTA JAPAN JAPAN China, Hong Kong AFTA Cos. & Regions & Singapore plus AFTA plus AFTA plus 3 Japan exports imports Singapore exports imports Indonesia exports imports Malaysia exports imports Philippines exports imports Thailand exports imports Vietnam exports imports China exports imports Hong Kong exports imports S. Korea exports imports

39 Impacts on Thailand by Sectors (Output: Value Added) AFTA JAPAN JAPAN China, Hong Kong AFTA Sectors & Singapore plus AFTA plus AFTA plus 3 Agriculture Mining Food & beverages Textiles Chemicals Metals Trasport equipments Machinery and equipments Other manufacturing Electricity, gas and water Construction Trade and transport Other services (private) Other services (government) cgds 39

40 Impacts on Japan by Sectors (Output: Value Added) AFTA JAPAN JAPAN China, Hong Kong AFTA Sectors & Singapore plus AFTA plus AFTA plus 3 Agriculture Mining Food & beverages Textiles Chemicals Metals Trasport equipments Machinery and equipments Other manufacturing Electricity, gas and water Construction Trade and transport Other services (private) Other services (government)

41 Trade, CAB, and BOP Stories III (CAB S I X M) Linking SI and XM Sides of CAB FDI and Trade Flows in the APEC Region Does FDI create trade flows? If so, in which direction? (Panel and Cross-Section Econometric Analyses) Impacts of Japanese FDI in Asia What would be the optimal strategies for supplier and host countries? (CGE Model Analyses) 41

42 Trade in Goods, Trade in Services, and FDI Flows 42

43 Gravity Model of Directions of Trade Flows Trade ij = f [GDP i, pcgdp i, POP i, GDP j, pcgdp j, POP j, Distance ij, FDI ij (and/or FDI ji ), CMP ij, RTAD ijk, Other Dummies], Trade ij --- trade flow from country i to country j, pcgdp --- GDP per capita, POP --- population, FDI --- foreign direct investment (either direction), CMP --- complementarity index, RTAD --- a set of dummy variables for a set of k different regional trade arrangements (=1 if both i and j are members of the particular RTA). A similarity indexpcgdp i pcgdp j that represents the Linder Hypothesis is not included in the current study so as to focus on trade complementarity given the flying geese pattern of Asian production and trade. 43

44 Index of Trade Complementarity: k j i (1) CMP 1 / 2 (0 CMPij 1) ij M = k M j X X k i where i is an exporting region, j is an importing region, and k represents goods categories. This index takes the value of one when a composition of import needs in an importing country matches perfectly with the export bundle of an exporting country. At the other extreme, where an export bundle of an exporting country has no relevance to the import needs of an importing country, the index takes the value of zero. 44

45 Trade Complementarity Indices for Selected Trade Arrangements Trading arrangements Index Trading arrangements Index Successful arrangements Recent arrangements EEC (6) 0.53 NAFTA 0.56 Canada-U.S. FTA 0.64 Mercosur 0.29 Unsuccessful arrangements Potential arrangements LAFTA 0.22 Americas AFTA (NAFTA+5) a 0.31 Andean Pact 0.07 Asia-Pacific APEC (17) 0.35 Sub-Saharan Africa (20) 0.09 a The Americas free trade area is proxied by NAFTA plus the next five biggest economies: Argentina, Brazil, Chile, Colombia, and Venezuela. Source: World Bank, Global Economic Prospects and the Developing Countries

46 Intra-APEC Trade Complementarities and Trade Flows (average for ) 1,000, ,000 Exports (log of US$ millions) 10,000 1, Complementarity Index 46

47 Estimation Results for World Trade Gravity Models with RTAs (113 countries) (Dependent variable is Export ij) Year 1984 & & & & Constant (-76.82) a (-57.21) (-76.76) (-48.99) (-58.69) (-57.95) (-36.68) (-44.55) Distance ij (-53.93) (-52.56) (-48.20) (-31.08) (-37.34) (-47.38) (-30.18) (-37.07) GNP i (57.97) (39.74) (58.26) (37.51) (44.79) (40.67) (25.53) (31.72) GNP j (56.65) (57.40) (57.00) (37.57) (42.99) (57.96) (38.73) (43.28) Per capita GNP i (30.13) (14.47) (29.93) (24.64) (18.38) (14.35) (11.70) (8.53) Per capita GNP j (23.90) (21.03) (23.19) (16.68) (15.75) (20.75) (14.48) (14.39) Border Dummy b (8.92) (8.76) (8.29) (6.25) (5.43) (8.22) (6.24) (5.32) Complementarity (33.70) (33.06) (24.92) (21.92) RTA Dummies c APEC (28.99) (17.71) (23.95) (30.09) (18.43) (24.80) EU (25.11) (16.85) (18.36) (19.08) (12.28) (14.41) NAFTA 0.52 x 0.77 x 0.28 x 0.29 x 0.62 x x (1.55) (1.57) (0.61) (0.98) (1.45) (-0.07) MERCOSUR (4.43) (3.41) (3.03) (4.45) (3.55) (2.96) LAFTA (4.67) (2.14) (4.79) (6.01) (3.45) (5.22) ANDEAN PACT 0.27 x x x 0.78 (1.22) (-0.14) (2.27) (2.19) (0.56) (2.94) ASEAN x 0.13 x x x 0.04 x x (-0.28) (0.31) (-0.67) (-0.64) (0.09) (-0.96) Sample size 23,923 23,923 23,923 11,740 12,183 23,923 11,740 12,183 F-statistics 6,576 6,286 3,502 1,354 2,123 3,584 1,426 2,133 SSE 41,554 38,775 37,917 18,061 19,528 35,535 16,717 18,479 Adjusted R Note: a. Numbers in the parentheses are t-statistics. b. This dummy takes the value of one when two countries share a border. c. These dummies take the value of one when two countries are members of the same RTA. x = Insignificant at the 5% significance level (t-value<1.645) 47

48 Intra-APEC FDI and Trade Flows (average for ) 1,000,000 Bilateral Exports (log of US$ millions) 100,000 10,000 1, ,000 10, ,000 Inward FDI (log of US$ millions) 48

49 Results for APEC Trade Gravity Models with FDI (Dependent variable is Export ij) Year Constant (-4.65) a (-3.34) (-3.54) (-4.19) (-4.32) (-4.27) (-3.11) (-3.17) (-4.03) (-4.00) (-3.97) Distance ij (-7.84) (-8.98) (-8.92) (-7.50) (-7.50) (-7.91) (-7.55) (-7.55) (-6.43) (-6.42) (-7.05) GNP i (4.01) (5.11) (4.84) (4.61) (4.36) (4.25) (4.67) (4.58) (4.11) (4.05) (3.92) GNP j (4.76) (5.23) (5.48) (4.20) (4.48) (5.15) (4.97) (5.07) (4.04) (4.12) (4.95) Per capita GNP i (8.20) (7.25) (5.85) (8.71) (7.18) (6.58) (4.51) (4.18) (5.61) (5.33) (4.38) Per capita GNP j (7.09) (6.87) (6.84) (4.26) (4.30) (5.47) (6.09) (6.05) (3.57) (3.57) (5.05) Border Dummy b x 0.39 x 0.47 x x 0.40 x 0.49 (1.71) (2.02) (1.93) (1.21) (1.14) (1.37) (2.31) (2.26) (1.41) (1.38) (1.65) Complementarity (4.41) (4.09) (4.13) (3.84) (3.51) FDI ij x 0.06 x (2.03) (1.70) (0.77) (0.54) FDI ji (7.02) (6.98) (7.00) (7.03) FDI ij x FDI ji (4.84) (3.99) Sample size F-statistics SSE Adjusted R Note: a. Numbers in the parentheses are t-statistics. b. This dummy takes the value one when two countries share the border. x = Insignificant at the 5% significance level (t-value<1.645) 49

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51 Trade, CAB, and BOP Stories III (CAB S I X M) Linking SI and XM Sides of CAB FDI and Trade Flows in the APEC Region Does FDI create trade flows? If so, in which direction? (Panel and Cross-Section Econometric Analyses) Impacts of Japanese FDI in Asia What would be the optimal strategies for supplier and host countries? (CGE Model Analyses) 51

52 A proper way to analyze the impacts of FDIs The majority of existing anti-fdi arguments are either non-economic such as the nationalist and dependence approaches, or economic but short-term, partial-equilibrium arguments such as the exporting employment, and balance of payments stories that focus on the flow aspects of FDI. FDI, as a micro phenomenon, should not be blamed for negative macro outcomes such as a worsening trade balance that in principle is a reflection of a country s savings-investment imbalance. By focusing, instead, on the analysis of medium- to long-term general equilibrium impacts (stock impacts) of FDI, this paper tried to capture the growth and welfare impacts of Japan s FDI in Asia. Stock impacts analyzed in this paper are: 1) a capacity and output expansion in the recipient economies in Asia, matched by a reduced capital stock in Japan (stock effects); 2) an increase in productivity through technology transfer and spillover (technology effects); and 3) an increase in domestic investment driven by a higher expected rate of return on investment and larger domestic savings (cofinance effects). Following the existing dichotomy in the theories of FDI those that assume perfect markets and the others based on imperfect markets simulations were conducted under both industrial structures. Simulation results replicated the traditional transfer problem in real resources, and showed that FDI was a positive-sum game. Larger gains were observed in the existence of scale economies. 52

53 Japan's FDI to Asian Economies (million US$) Indonesia ,276 1, , ,271 manufactures (%) Malaysia Philippines Thailand ,276 1, , , China , ,070 1,691 2,565 4, Hong Kong ,072 1,662 1,898 1, ,238 1,133 1, Taiwan South Korea Singapore , ,054 1,215 9-Country Total 1,055 2,183 4,543 5,800 8,765 6,996 5,479 6,765 6,510 8,278 11,778 % of total ROW 11,464 22,468 30,361 42,572 56,697 50,688 36,735 28,209 30,821 33,609 40,898 Total 12,518 24,651 34,905 48,371 65,462 57,684 42,213 34,974 37,332 41,886 52,676 53

54 Changes in Capital Stock and Japan s FDI (US$ million) Capital Stock FDI flows b/a 1992: a year average: b (%) Japan 12,088,694 6,510 8,278 11,778 8, Indonesia 260, , Malaysia 158, Philippines 149, Thailand 252, , China 991,254 1,691 2,565 4,592 2, Hong Kong 281,374 1,238 1,133 1,176 1, Taiwan 392, South Korea 706, Singapore 167, ,054 1, Source: Kokusai Kinyu Nenpo (Annual Report on International Finance), Ministry of Finance; GTAP Database, Version

55 Simulation Design Matrix Perfect Competition Monopolistic Competition Transfer of Capital Stock Simulation 1 Simulation 4 Transfer of Capital Stock & Technology Cofinance Joint Venture Simulation 2 Simulation 5 Simulation 3 Simulation 6 (on top of Simulation 2) (on top of Simulation 5) 55

56 Simulation 1: Transfer of Capital Stock under the Assumption of Perfect Competition (CRTS) A transfer of capital stock from Japan to nine developing Asian economies/regions (Indonesia, Malaysia, Philippines, Thailand, China, Hong Kong, Taiwan, South Korea, and Singapore) is emulated in order to assess the stock effects. Capital stock endowments of recipient Asian economies are augmented by 1 percent while Japan s capital stock is reduced by the amount equivalent to a total increase in the recipients capital stock. Without an accompanied technology transfer, there is no distinction between indirect investments and direct investments. International capital mobility is assumed. The savings rate is fixed. Simulation 2: Transfer of Capital Stock and Technology under the Assumption of Perfect Competition Production and managerial technologies accompany the transfer of capital stock. Assuming FDI flows to manufacturing sectors and there is resultant intra- and inter-industry technology spillover, the rate of technology growth is augmented in all seven manufacturing sectors (food & beverages, textiles, chemicals, metals, transport equipment, machinery, and other manufacturing) by 1 percent. Simulation 3: A Matching Increase in Capital Stock by Domestic Investment-Savings (Cofinance) Perceived higher rates of return in industrial activities with FDI inflows prompt domestic investors to mobilize domestic resources (savings) to cofinance the industrial projects. Recipient countries capital stock is further increased by an increment in domestic investment equivalent to the amount of the initial inflow of FDI. This simulation is conducted on top of Simulation 2 using the output file produced in Simulation 2. International capital flows are suppressed and the trade balance is fixed in order to force domestic savings to finance new domestic investment. The savings rate is thus endogenized on the marginal base. Simulation 4: Transfer of Capital Stock under the Assumption of Monopolistic Competition (IRTS) Transfer of capital stock (Simulation 1) is repeated, but this time, under an assumption of monopolistic competition with scale economies in all of the seven manufacturing sectors (food & beverages, textiles, chemicals, metals, transport equipment, machinery, and other manufacturing). International capital mobility is assumed. The savings rate is fixed. Simulation 5: Transfer of Capital Stock and Technology under the Assumption of Monopolistic Competition Transfer of capital stock and technology (Simulation 4) is repeated, except that monopolistic competition is assumed for the manufacturing sectors. Simulation 6: A Matching Increase in Capital Stock by Domestic Investment-Savings (Cofinance) Same as Simulation 3 except that the simulation is conducted under the assumption of scale economies and that the output file of Simulation 5 is used. International capital mobility is suppressed. The savings rate is endogenized. 56

57 World Aggregates FDI is a positive-sum game, not a zero-sum game! 57

58 Simulation Results under Perfect Competition (CRTS) -- Economy-Wide Effects Simulation Results under Monopolistic Competition (IRTS) -- Economy-Wide Effects 58

59 Simulation Results under Perfect Competition (CRTS) -- Economy-Wide Effects 59

60 Simulation Results under Monopolistic Competition (IRTS) -- Economy-Wide Effects 60

61 Major strategic implications of the study for Japan (FDI-supplier) are: (1) In order to benefit from the positive-sum game of FDI, Japan (or any FDI-supplier) should also provide a conducive environment to attract inward FDIs. Outward FDI alone is not likely to improve domestic welfare (just like the case in international trade) unless it is driven by welfare-improving domestic causes. Also, two-way flows in a large number of countries should enlarge the positive sum of FDI. (2) In order for Japan (FDI-supplier) to avoid the possible secondary burden of a transfer of productive resources, it should also mobilize local savings by looking for local partners and/or raising local funds when executing FDIs. (3) It may be important to retain R&D facilities in the domestic market and preserve technology terms of trade if one supplies technology abroad along with capital. Looking at the results from Developing Countries (FDI-recipient) point of view: (1) Developing Asia should promote (call back?) inward-fdis. (2) Intra-APEC FDIs should promote their exports and mitigate BOP problems. (3) Technology (productivity) enhancement is the key. (3) Cofinancing (mobilizing domestic savings/investment together with inward-fdis) will increase recipient s welfare, even though it turns TOT slightly against the recipient. 61

62 Understanding Big Picture -- Stories of Trade, CAB, and BOP (S I X M ) The End.. 62