Investment Climate Assessment for APEC Economies

Transcription

1 2017/SOM1/IEG/016 Agenda Item: 7.1 Investment Climate Assessment for APEC Economies Purpose: Information Submitted by: APEC Business Advisory Council First Investment Experts Group Meeting Nha Trang, Viet Nam February 2017

2 Investment Climate Assessment for APEC Economies February 2017 Regional Investment Analytical Group

3 Contents Introduction... 3 Overview of the FDI in the APEC region... 3 The FDI Inflow Performance... 5 Econometric analysis of inward FDI determinants... 6 Conclusion... 9 Appendix Definitions of WEF s 12 Global Competitiveness Pillars References

4 Introduction This report presents a brief review of the recent FDI trends in the APEC region relevant to RIAG s work on using publicly available indicators for FDI analysis and econometric modelling of inward FDI stock drawing on data sourced from UNCTAD, the World Economic Forum, World Bank, OECD and other sources. The analysis show that FDI flows into the APEC region increased between 2014 and However, recent reports by UNCTAD indicate that FDI flows declined in It includes commentary on the most recent ratings under RIAG s investment performance indicators and as analysis of inward FDI determinants and comments on the OECD s FDI Restrictiveness Index. The results of econometric estimations show that financial market development, higher education and training, infrastructure, market size and FDI restrictiveness index are (not surprisingly) statistically significant determinants of inward FDI. Overall, high level results of the econometric modelling show that economies within the APEC region should work towards developing domestic financial markets, enhancing human capital, increasing investment in infrastructure and reducing unnecessary regulatory burdens on foreign investment to increase FDI inflows. Overview of the FDI in the APEC region Table 1 below shows trends in investment flows for APEC economies as a percentage of GDP from 2000 to The APEC region as a whole (Table 2) shows a continuation of the FDI growth trend, a percentage of global world FDI, despite increased uncertainty in the economic environment globally. Several APEC economies including Australia, Brunei Darussalam, Indonesia, Japan, Korea, New Zealand, Peru, Philippines, Russian Federation and Thailand experienced reductions, whereas Canada, Hong Kong China, Malaysia, Mexico, Singapore, United States and Viet Nam improved between 2014 and According to UNCTAD s Global Trends Investment Monitor 1 FDI flows fell in developing Asia and Oceania and Latin America and the Caribbean in Compared to inflows, FDI outflows increased in Brunei Darussalam, Canada, Chile, Japan, Mexico, PNG, Chinese Taipei, and Thailand. Hong Kong China showed substantial reduction from 57% to 18% of GDP, and Singapore a slight reduction from 13.5% to 12.3% of GDP between 2014 and It is interesting to note that some developing APEC economies are experiencing more outflows compared to inflows. As a region, in 2015, APEC was the second largest recipient of global FDI flows, attracting 54.1 per cent of the total FDI, a rise from 52.1 per cent in This was roughly in line with APEC s share of world GDP (Table 2). 1 UNCTAD s Global Trends Investment Monitor 2016 (No 25) 3

5 Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow Investment Climate Assessment Framework for APEC economies Table 1: FDI Inflow and Outflow as % of GDP Australia Brunei Darussalam Canada Chile China Hong Kong, China Indonesia Japan Korea Malaysia Mexico New Zealand Papua New Guinea Peru Philippines Russian Federation Singapore Chinese Taipei Thailand United States Viet Nam Source: UNCTAD (2016) Multinational Enterprises (MNE) from Japan, Korea, China, Hong Kong China, and Chinese Taipei have a significant presence in other Asian APEC members, while United States and Canadian MNEs are heavily invested in the NAFTA subregion. Taken together, these MNEs are contributing to a wide production network and to inter- and intraregional value chains across the Pacific (UNCTAD, 2016). Compared to APEC, other groupings, ASEAN, ASEAN+3 and COMESA experienced falls in investment flows during this period, while the G20, NAFTA and OECD groupings improved from 2014 to 2015 (Table 2). 4

6 Table 2: Total FDI Inflow (% of total world FDI) Year APEC ASEAN ASEAN COMESA G NAFTA OECD Source: UNCTAD (2016) The FDI Inflow Performance The APEC FDI inflow performance indicator (first published by RIAG in 2016) Table 3 compares each economy s share of FDI in global FDI inflow and its relative GDP share in global GDP. The ratio of these shares equal to one, indicates that the economy attracts the same amount of FDI as its contribution to the world GDP. A value greater than one indicates a larger share of FDI relative to GDP; a value less than one indicates a smaller share of FDI relative to GDP. These values are normalised to render them comparable over longer periods. Hong Kong China and Singapore were excluded as their shares of FDI (and trade) are much higher than other APEC economies and their extreme values may influence subsequent steps in analysis. Accordingly, the highest ratings are assigned for Hong Kong China and Singapore without including them in the calculations. Table 3 shows that twelve economies retained their positions while Malaysia, Mexico, Thailand and United States improved. Australia, Brunei Darussalam, China and New Zealand showed reversals, perhaps reflecting a subdued global economic performance. Table 3: Inward FDI Rating of APEC Economies, Change Australia B C B A A A B B C Brunei Darussalam C A A B A A A A C Canada C B B A B B B A A Chile B A A A A A A A A China A A A C C C C B C Hong Kong, China A A A A A A A A A Indonesia C D D C B B C B B Japan D D D D D D D D D Korea, Rep. D D C D D D D D D Malaysia A A B B B B A B A Mexico C C B B C C B C B 5

7 New Zealand A B C C B C D B D Papua New Guinea A B C C D D D D D Peru B B B A A A A A A Philippines B C D D D C C C B Russian Federation D D C B B B B C C Singapore A A A A A A A A A Chinese Taipei D D D D D D D D D Thailand B B A B C B B C B United States D C D D C D C D B Viet Nam A A A A A A A A A Source: RIAG(2016) Econometric analysis of inward FDI determinants There is a consensus that foreign direct investment (FDI) produces economic benefits including spill over effects to the recipient countries by providing capital, technology, access to foreign markets, increasing competitiveness, assists human capital development, contributes to global value chains and to enterprise development. Dunning (1993) argues that issues related to the determinants of FDI are multidimensional, because different types of motives work behind the decision to invest in foreign countries by multinational corporations (MNCs). For example, some seek to benefit through investment in a large foreign market (market seeking FDI), and some seek assured access to the supply of natural resources (resource seeking FDI). Some relocate their plants to other countries to reduce production costs and to link to the global market more strongly (efficiency seeking FDI). Assuncao (2011) and Blonigen (2005) provide a literature review of the FDI determinants based on various theories. The econometric modelling supporting the analysis in this section of the report is shown in the Attachment to this paper. Other data that contributes to an understanding of factors impacting on investment inflows to APEC economies draws on panel data covering the period from 2006 to 2015 for 20 APEC economies and sourced from the WEF Global Competitiveness Report, UNCTAD and the OECD (PNG data was not available). (A note on the WEF Global Competitiveness Pillars are shown in the Appendix to this report.) Figures 1 and 2 below provide an overview of Global competiveness pillars for developed and developing APEC economies. Figure 1 shows that infrastructure, market size and financial market development and institutional factors (mainly the FDI policy framework, including screening) impact adversely on competitiveness in some developed APEC economies. 6

8 Figure 1: Global Competiveness Pillars for Developed APEC economies 2015 Financial market development Labor market efficiency Technological readiness Market size Business sophistication Innovation Institutions Goods market efficiency Infrastructure Higher education and training Macroeconomic environment Health and primary education AUS CAN HKG JPN KOR NZL SGP USA Figure 2: Global Competiveness Pillars for Developing APEC economies 2015 Labor market efficiency Technological readiness Financial market development Market size Business sophistication Innovation Institutions Goods market efficiency Infrastructure Higher education and training Health and primary education Macroeconomic environment Source: WEF (2016) CHL CHN IDN MYS MEX PER PHL RUS THA VNM 7

9 Global competiveness pillars for developing economies show a somewhat different picture. Overall innovation, higher education and training and technological readiness are key factors impacting on competitiveness in developing APEC economies. This suggests that factors contributing to weaknesses in competitiveness could be addressed, in part at least, through investment policies aimed at enhancing competitiveness. FDI regulations and their applications are a determinant of a country s attractiveness to foreign investors. According to OECD (2016), FDI restrictions tend be prominent mostly in primary sectors such as mining, fishing and agriculture, but also in media and transport. Figure 3 presents the data from the OECD database. It indicates that Japan and Chile are the least restrictive economies (lower than OECD average), while Philippines, China and Indonesia are the most restrictive in the APEC region (on a scale of 0 to 1, restrictive economy). Figure 3: OECD FDI Restrictiveness Index Source: OECD (2016) Primary Secondary Tertiary Total FDI Restrictiveness Index (right axis) The FDI Restrictiveness Index was available for 14 economies of APEC; the exceptions are Brunei Darussalam, Hong Kong China, PNG, Singapore, Chinese Taipei, Thailand and Viet Nam. Table 4 in the Attachments provides correlation statistics for Inward FDI stock and its determinants over 2006 and 2015 period. According to column 2 of Table 4 of the Attachments, correlation between FDI inward stock and other variables are highly statistically significant except macroeconomic environment and market size. The correlation statistics also reveal negative correlation between inward FDI stock and FDI regulatory environment (restrictiveness). 8

10 The results of the econometric estimates both without cross section weights and with cross section weights are provided in Table 5 of the Attachments. They indicate statistically positive relationship between inward FDI Stock and financial market development, higher education, infrastructure and market size. Interestingly we find statistically significant estimates between the goods market efficiency and inward FDI stock with negative sign. This might indicate that some potential investors in foreign markets are deterred because there are relatively high levels of competition in the markets of interest. The econometric estimates with the FDI restrictiveness index indicate statistical significance at 5% level with a negative sign in the model with cross-section weights but not in the model without cress-section weights. Nevertheless, both estimations resulted in a negative sign. Overall, the results of the econometric modelling suggest that APEC economies region should work towards developing domestic financial markets, increasing human capital, building infrastructure and reducing unnecessary regulatory burdens on foreign investment to ensure high level of FDI inflows. However, due to the aggregate nature of the econometric model, the results provide very high-level indications on what countries might want to do to attract specific types of FDI. Future research would also be required to compare effects of FDI determinants on other regions vis-à-vis APEC. Conclusion This report provides a brief review of the recent FDI trends in the APEC region. The analysis show that FDI flows into the APEC region has increased between 2014 and 2015 but the composition of contributions by economies has changed. Early reports by UNCTAD indicate that FDI flows have declined in 2016 perhaps due to changing regulatory environment globally with signs of protectionist measures, increasing cost of investment and concerns about setbacks in the negotiation of the TPP. These developments will likely cause disruptions to the FDI flows further both worldwide and within the APEC region. These developments suggest that APEC should elevate its focus in investment flows and desirable policy objectives. In particular, a more focused approach towards developing domestic financial market, increasing human capital, building infrastructure and reducing unnecessary foreign investment regulatory burden may facilitate attracting productive FDI flows into APEC economies. 9

11 ATTACHMENT AN ECONOMETRIC APPROACH TO INWARD FDI DETERMINANTS The baseline fixed effects econometric model is defined as follows: y i,t = β X i,t + i + ε i,t where i denotes the individual economy, and t denotes time (year). y is the natural logarithm of inward FDI stock in economy i at time t, and X includes explanatory variables in natural logarithms such as business sophistication, financial market development, goods market efficiency, Health and primary education, Higher education and training, infrastructure, innovation, institutions, labour market efficiency, macroeconomic environment, market size and technological readiness. α is an economy-specific fixed effect, and ɛ is the error term, assumed independently and identically distributed (Normal distribution). In order to ensure that causality goes in the right direction we employ lags of the explanatory variables in the model. The intuition is that the inward FDI stock in the current period is based on the information from previous years. Moreover, employing lags in the estimation also mitigates against the possibility of reverse causality or endogeneity. We also allow for heteroscedasticity of the effects among cross sections by employing GLS cross section weights to account for varying degree of effects on the basis of different levels of economic development. Definitions and descriptive statistics for each variable are provided in Table 6. Data for the dependent variable (FDI Inward Stock) was obtained from UNCTAD Statistics database. Independent variables were sourced from WEF global competitiveness database for

12 Table 4: Correlation between Inward FDI Stock and its determinants FDISTOCK 1.00 FDISTOCK BUSOFST FIN GOODMKT BUSOFST 0.28*** 1.00 FIN 0.64*** 0.62*** 1.00 GOODMKT 0.53*** 0.82*** 0.87*** 1.00 HEALTHEDU 0.57*** 0.60** 0.53*** 0.68*** 1.00 HIGHEDU 0.69*** 0.68*** 0.63*** 0.74*** 0.82*** 1.00 INFSTR 0.54*** 0.76*** 0.53*** 0.72*** 0.81*** 0.88*** 1.00 HEALTH EDU HIGHEDU INFSTR INNOV INST LBOUR MACRO INNOV 0.38*** 0.92*** 0.51*** 0.74*** 0.72*** 0.82*** 0.89*** 1.00 INST 0.67*** 0.68*** 0.85*** 0.90*** 0.76*** 0.77*** 0.71*** 0.66*** 1.00 LBOUR 0.59*** 0.66*** 0.70*** 0.76*** 0.58*** 0.71*** 0.67*** 0.70*** 0.75*** 1.00 MACRO *** -0.16* *** *** 1.00 MKTSIZE *** -0.27*** *** 0.48*** ** -0.17* 1.00 TECH 0.66*** 0.73*** 0.63*** 0.74*** 0.78*** 0.96*** 0.90*** 0.83*** 0.75*** 0.65*** -0.15* MKT SIZE TECH RESTRICT RESTRICT -0.28*** -0.34*** -0.27*** -0.31*** -0.22** -0.41*** -0.45*** -0.35*** -0.25*** -0.35*** 0.27*** *** 1.00 *, ** and *** represents the level of significance at 10, 5 and 1 percent levels, respectively Note: See the appendix for the definitions of variables 11

13 Table 5: Econometric estimates for APEC Inward FDI Stock Without Cross-section weights With Cross-section weights Variable Coefficient Coefficient Coefficient Coefficient C st.error LOG(BUSOFST(t-1)) st.error LOG(FIN(t-1)) 1.07*** 1.18** ** st.error LOG(GOODMKT(t-1)) -1.69** -3.56*** -1.11* -2.44*** st.error LOG(HEALTHEDU(t-1)) st.error LOG(HIGHEDU(t-1)) 2.78*** 2.37** 2.28*** 2.44*** st.error LOG(INFSTR(t-1)) 0.68** *** 1.04*** st.error LOG(INNOV(t-1)) st.error LOG(INST(t-1)) -1.36*** * st.error LOG(LBOUR(t-1)) * st.error LOG(MACRO(t-1)) st.error LOG(MKTSIZE(t-1)) 2.16*** 3.72*** 2.44*** 3.24*** st.error LOG(TECH(t-1)) st.error LOG(RESTRICT(t-1)) ** st.error ADJ R^ Note: *,**,*** stands for significance at 10%, 5%, 1% levels Source: Author s estimations 12

14 Table 6: Descriptive Statistics for Inward FDI Determinants FDISTOCK BUSOFST FIN GOODMKT HEALTHEDU HIGHEDU INFSTR Mean Median Maximum Minimum Std. Dev Skewness Kurtosis INNOV INST LBOUR MACRO MKTSIZE TECH RESTRICT Mean Median Maximum Minimum Std. Dev Skewness Kurtosis

15 Appendix Definitions of WEF s 12 Global Competitiveness Pillars 1. Institutions. These collective bodies and structures comprise the legal and administrative environment in which individuals, firms and governments interact to generate wealth. Simply stated, investors need to believe the marketplace is fair and that their investments are going to be protected. 2. Infrastructure. Roads, transportation and reliable utilities are crucial to facilitating the sale, purchase and transporting of goods and services. 3. Macroeconomic environment. Healthy competition requires a stable economy with a reasonably stable monetary unit. Businesses find it challenging to operate efficiently during periods of high inflation. 4. Health and primary education. Basic healthcare and education are critical to a trainable, sustainable workforce with low absenteeism and the skills to perform more than just rudimentary manual labour. 5. Higher education and training. Economies that want to move beyond simple production and products need to provide a way for workers to adapt and continuously improve their skills. Otherwise, they are forced to import skills. 6. Goods market efficiency. Healthy competition both domestic and foreign encourages the efficient production of the right goods in the right quantities at a fair price. 7. Labour market efficiency. A healthy labour market that allows workers to be employed at their highest and best use enhances quality and productivity. 8. Financial market development. An efficient financial sector weighs risks and allocates resources to those entrepreneurial or investment projects with the highest expected rates of return, rather than to the politically connected. 9. Technological readiness. A competitive economy needs to provide access to existing and emerging technologies or risk falling behind other countries with those capabilities. 10. Market size. Economies of scale can make a big difference in pricing and productivity. 11. Business sophistication. The most competitive economies are those with the most networked and advanced operations and strategies. 12. Innovation. Beyond technological readiness, a competitive economy must nurture original thought, leading to the creation of new technologies, new applications, and new processes and procedures. 14

16 References Assuncao, S., Forte, R., Teixeira, A. (2011) Location Determinants of FDI: a Literature Review, FEP Working Paper, no Blonigen, B.A (2005) A Review of the Empirical Literature on FDI Determinants, Working Paper, University of Oregon Centre for International Development, Harvard University (2015). The Observatory of Economic Complexity, Available at: Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, Berkshire: Addison Wesley fdimarkets (2016) Foreign Direct Investment Database, Financial Times, Available at: GEDI (2016), 2016 Global Entrepreneurship Index, the Global Entrepreneurship and Development Institute, Available at: GGKP (2016) Green Growth Knowledge Platform, Available at: Milken Institute (2015) Global Opportunity Index 2015, Available at: OECD (2016) FDI Regulatory Restrictiveness Index, Available at: UNCTAD (2015), World Investment Report 2015, Available at: UNCTAD (2016), FDI Statistics, Available at: World Bank (2015) Doing Business, Resolving Insolvency, Available at: WEF (2016) The Global Competitiveness Report , Available at: 15