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Institute for Workplace Studies                 Professor Samuel B. Bacharach
School of Industrial & Labor Relations          Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor                  Stuart Basefsky
New York, NY 10016                      Director, IWS News Bureau
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Asian Development Bank (ADB)

ADB Institute Discussion Paper No.17
Foreign Direct Investment in East Asia and Latin America: Is there a People's Republic of China Effect?
Busakorn Chantasasawat
K.C. Fung
Hitomi Iizaka
Alan Siu
November 2004
http://www.adbi.org/files/2004.11.dp17.fdi.prc.effect.pdf
[full-text, 32 pages]

Abstract
People's Republic of China (PRC) in recent years has emerged as the largest
recipient of foreign direct investment (FDI) in the world. Many analysts and government
officials in the developing world have increasingly expressed concerns that they are
losing competitiveness to PRC. Is PRC diverting FDI from other developing countries?
Theoretically, a growing PRC can add to other countries' direct investment by
creating more opportunities for production networking and raising the need for raw
materials and resources. At the same time, the extremely low Chinese labor costs may
lure multinationals away from sites in other developing countries when the foreign
corporations consider alternative locations for low-cost export platforms.

In this paper, we explore this important research and policy issue empirically. We
focus our studies on East and Southeast Asia as well as Latin America. For Asia, we use
data for eight Asian economies (Hong Kong, China, Taipei,China, Republic of Korea,
Singapore, Malaysia, Philippines, Indonesia and Thailand) for 1985-2002 while for Latin
America, we use data for sixteen Latin American economies (Argentina, Bolivia, Brazil,
Chile, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua,
Panama, Paraguay, Peru, Uruguay and Venezuela) for 1990-2002. We control for the
standard determinants of their inward direct investment. We then add PRC's inward
foreign direct investment as an indicator of the "PRC Effect". Estimation of the coefficient
associated with the PRC Effect proxy gives us indications about the existence of the
PRC Effect.

We have three results: (1) The level of PRC's foreign direct investment is
positively related to the levels of inward direct investments of economies in East and
Southeast Asia, while the PRC Effect is mostly insignificant for Latin American nations;
(2) the level of PRC's foreign direct investment is negatively related to the direct
investment of these economies as shares of total foreign direct investments in the
developing countries; (3) The PRC Effect is generally not the most important
determinant of the inward direct investments of these economies. Market sizes and
policy variables such as openness and corporate tax rates tend to be more important.
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Institute for Workplace Studies *
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