ABSTRACT
Foreign direct investment (FDI) has played a key role in economic dynamism in East Asia. For over two decades up to the onset of the Asian financial crisis in mid-1997, at least three major trends were clearly evident in investment patterns. First, FDI flows were increasing rapidly, much more quickly than international trade flows, which in turn were increasing faster than world GDP. Second, although the ‘OECD North’ continued to be the dominant source of FDI, cross-border flows were everywhere apparent, with notable increases over time. The East Asian Newly industrialized economics (NIEs), which emerged as sizeable outward investors in the 1980s, became even more significant investors, in some cases eclipsing Japan, the USA and Europe. Third, there was a clear shift in investment flows away from traditional import-substituting activities and towards export-oriented production, particularly export-platform activities in vertically integrated high-tech industries. Contrary to some pessimistic predictions, the crisis has not introduced a major discontinuity into this story, apart from a modest decline in inflows in the immediate aftermath of the crisis, and sharp decline in inflows to Indonesia due mostly to non-economic factors. In fact the remarkable resilience of FDI flows to the crisis economies, compared to other forms of capital inflow, seems to have ushered in an era of firmer commitment to an open FDI regime in the region.
