Outward Foreign Direct Investment and the Financial Crisis in Developing East Asia

Abstract

This paper examines two interrelated aspects of Asian economic dynamism and the management of external shocks, in the context of outward foreign direct investment (FDI) from developing East Asia. Outward FDI from these economies has been growing rapidly, driven by deeper economic integration, more open FDI regimes, growing technological and financial sophistication, and rising savings levels. The paper underlines these common region-wide determinants while pointing to a range of country-specific circumstances. Economic crises, such as the Asian financial crisis of 1997–1998 and the current global financial crisis, have large and unpredictable effects on the behavior of FDI and other forms of capital flow, with the general expectation that FDI will be less volatile than portfolio investment. This has been confirmed in both crisis episodes. Investment outcomes during the current crisis have accelerated the growing importance of developing East Asia in the global economy.