3rd INTERNATIONAL CONFERENCE ON BUSINESS AND ...

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3rd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH ( 3rd ICBER 2012 ) PROCEEDING 12 - 13 MARCH 2012. GOLDEN FLOWER HOTEL, BANDUNG, INDONESIA ISBN: 978-967-5705-05-2. WEBSITE: www.internationalconference.com.my

COINTEGRATION BETWEEN ASEAN FDI AND NON-ASEAN FDI: EVIDENCE FROM MALAYSIAN MANUFACTURING SECTOR Tajul Ariffin Masron School of Management, Universiti Sains Malaysia [email protected] Haslindar Ibrahim School of Management, Universiti Sains Malaysia [email protected] Abdul Hadi Zulkafli School of Management, Universiti Sains Malaysia [email protected]

ABSTRACT The significant role played by foreign direct investment (FDI) is no longer a secret. As a result, many countries, either developing or developed countries are competing to attract FDI circulating around the globe. Without exception, Malaysia is also one of the developing countries which has been successfully attracted huge FDI in the past and continue to promote as an attractive avenue for world FDI. At the same time, the emergence of some ASEAN countries to be part of world FDI contributors with ASEAN region as their primary location has raised several uncovered story. This study aims at investigating the integration between FDI from ASEAN with FDI from non-ASEAN by utilizing data of FDI inflows into Malaysian manufacturing sector. Field of Research: FDI; ASEAN; Non-ASEAN; Manufacturing Sector _______________________________________________________________________________

1.

Introduction

Malaysia has been receiving a lot of foreign direct investment (FDI) inflows since 1980s and continues to be among the attractive location of FDI, albeit at decreasing rates this day. One of the major reasons that very appealing and differentiating FDI from other types of capital flows and made it the most suitable form of capital for long term economic development is the resiliency of it to crisis. It means that 

Corresponding author’s address: School of Management, Universiti Sains Malaysia, 11800 Minden, Penang, Malaysia. E-mail: [email protected]. Tel no: +604-6535158. Fax no: +604-6577448.

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in the occurrence of crisis, FDI will remain firm with host economy and does not subject to sudden reversal. The clear evidences are the Mexican crisis of 1994-95, the global financial crises of 1997-98 that mainly struck East Asian countries, as well as the Latin American debt crisis of the 1980s (Loungani and Razin, 2001). OECD (2002) has outlined several benefits that potentially can be reaped by host economy from the inflows of FDI. Firstly, FDI will help promoting host economy to the world economic landscape with the ultimate anticipated outcome to be higher exports and imports. Inward FDI contributes to host economy’s further integration into the global economy by engendering and boosting foreign trade, starting from arms length trading between home and affiliate companies in host economy. Secondly, FDI will assist host economy’s technological development via technology transfer and/or diffusion work. There are four channels through which technology transfer and diffusion work are expected to take place namely, (1) vertical linkages with suppliers or purchasers in the host countries, (2) horizontal linkages with competing or complementary companies in the same industry, (3) migration of skilled labour, and (4) the internationalisation of Research and Development (R&D). Thirdly, and as per today remains very theoretical, the inflows of FDI or multinational corporations (MNCs) may be spurring domestic competition and eventually leading to higher productivity, lower prices and more efficient resource allocation1. Consequently, the forth benefit to be derived, which has an intimate connection with the point (2) and (3), is the development of domestic enterpreneuers/enterprises. In summary, FDI has a good prospect of transfering social and environmental benefits to host economies through the dissemination of good practices and technologies within MNCs, and through their subsequent spillovers to domestic enterprises (OECD, 2002). Because of the above mentioned benefits, there are so many studies done to examine various aspects of FDI inflows, particularly on their determinants (see Lim, 2001; Hong, 2008) as well as on their impact on variety of points within economic development such as GDP (Basu, Chakraborty, and Reagle, 2003; Hansen and Rand, 2006), trade (Hejazi, 2005), technology development (Markusen and Venables, 1999; Ciruelos and Wang, 2005), economic convergence (Silverstriadou and Balasubramanyam, 2000; Cyrus, 2004; Ramirez, 2006) and so on. However, with the growing importance of outward FDI from developing countries, out of the same issues as mentioned above, no study has been exactly examined the possible integration between the FDI inflows from developed countries and FDI inflows from developing countries into a specific country. While detail examination could end up with similar conclusion about as listed by OECD (2002) that FDI from developing countries could be the results of spillovers effect and competition which led to high efficiency as well as earning accumulation and later on translated into FDI to other countries, research on this issue is deemed important. Hence, it is the objective of this study to investigate the integration of FDI from developed and developing countries. Due to difficulty to gain information about both for many countries, this study will focus only on Malaysian experience in receiving FDI from non-ASEAN and FDI from neighboring ASEAN members. The organization of study is as follows: the next section will provide brief literature about the integration and followed by methodology. Owing to the limited direct reference to the topic, inevitably we have to find other related literature that could support our study. The discussion on methodology will be divided

1

With the difficulty to measure competition, this is among the controversial point as stiff competition from MNCs, combined with low technology-orientation in domestic companies, could be crowding out domestic companies.

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into three sub-sections namely, modeling, method of estimation and data collection. Result and its corresponding discussion are available at Section IV. Section V concludes the study. 2.

Literature Review

We only found several studies which deemed as related to our study such as Apergis, Katrakilidis and Tabakis (2006), Pradhan (2007), Apergis (2008). Apergis et al. (2006) is in principle dealing with the implication of FDI inflows on domestic investment. The issue of crowding out and crowding in are the focus of the study and the latest that we could find in the area. Other studies are such as Mišun and Tomšík (2002), Kim and Seo (2003) and Agosin and Machado (2005). Apergis et al. (2006) found a mixed result whereby for the group of the developing countries, the outcome is crowding in while it is crowding out in the case of American countries and European countries. For the former, the possible explanation could be because FDI offers a bundle of benefits such as mentioned by OECD (2002) and thus stimulate domestic firms to be more productive. Similar argument made Kim and Seo (2003) in the case of South Korea. The latter, as suggested by Apergis et al. (2006) might be due to the reverse of OECD’s (2002) points, the mode of entrance - merger and acquisition - which is clearly led to a certain degree crowd out phenomenon. Moreover, Mišun and Tomšík (2002) provided another supporting evidence of crowd-out phenomenon in Poland by arguing that FDI inflows into Poland are mainly market oriented. FDI inflows in Poland are targeting domestic market and as a result, they have to compete with domestic companies. With a limited strength prevalent in domestic companies relative to MNCs, Mišun and Tomšík (2002) highlighted this as one possible explanation. Slightly different angle, Pradhan (2007) examined the linkage of FDI inflows into India against four other Asian countries namely Japan, Hong Kong, Singapore and Malaysia. Employing panel cointegration test for the period during 1970-71 to 2004-2005, Pradhan (2007) found that they are all cointegrated. One potential benefit of this study as mentioned by Pradhan (2007) is the prediction of FDI inflows among these countries can be predicted based on the inflows of FDI into India. This could also be the possible importance and way in deriving the benefit of our study. In addition, Apergis (2008) attempted to gauge the cointegration between inward FDI and outward FDI for the 35 countries which were later on divided into two categories – closed and open countries. Moreover, by considering various unpredicted events that may be struck FDI inflows and outflows, Apergis (2008) examined the relationship by taking into account the possibility of structural breaks. Interestingly, Apergis (2008) found the cointegration when structural breaks are being considered, suggesting non-economic events (which are not exactly identified in the study) are likely posing more meaningful impact on relationship between inward and outward FDI. 3.

Methodology

Although our initial intention is to investigate the existence linkage between FDI from developed and FDI from developing countries, by taking into account the data constraint facing us, we decided to examine the association between FDI from non-ASEAN and FDI from ASEAN which inflows into Malaysian manufacturing sectors. We do not think that this will violate our original idea as FDI from non-ASEAN is mainly came from USA, Japan, EU and other high income countries. Regarding the scope of sector, we focus only on manufacturing sector in Malaysia. Since we faced difficulty to get the data, the limited information forced us to further segregate the data into several sub-sectors in manufacturing sector. As

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per ASEAN Secretariat (2004) database, we managed to gather the information from the following 25 sub-sectors as in Table 1. Considering almost no inflow in the case of items number 16, 23, 24 and 25, we further divided our analysis to full sample (covering all 25 sub-sectors) and conduct additional robustness test of subsample, consisting of 21 sub-sectors only. For the data, we will test for both, number of projects and the value of projects in order to reach a more convincing conclusion. On the methodology, we will utilize cointegration technique proposed by Pedroni (1999). Kao’s cointegration technique cannot be used for small sample. This study utilizes data taken from ASEAN Secretariat (2004) for the period from 1999 to 2004.

Table 1: List of Sub-sectors in Manufacturing Sector of Malaysia 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

Food Products & Beverages. Tobacco Products. Textiles. Wearing Apparel; Dressing & Dyeing of Fur. Tanning & Dressing of Leather; Luggage, Handbags, Saddlery, Harness & Footwear. Wood & Wood Products & Cork, Except Furniture; Articles of Straw & Plaiting Materials. Paper & Paper Products. Publishing, Printing & Reproduction of Recorded Media. Coke, Refined Petroleum Products & Nuclear Fuel. Chemicals & Chemicals Products. Rubber & Plastics Products. Other Non-Metallic Mineral Products. Basic Metals. Fabricated Metal Products, Except Machinery & Equipment. Machinery & Equipment N.E.C. Office, Accounting & Computing Machinery. Electrical Machinery & Apparatus N.E.C. Radio, Television & Communication Equipment & Apparatus. Medical, Precision & Optical Instruments, Watches & Clocks. Motor Vehicles, Trailers & Semi-Trailers. Other Transport Equipment. Furniture; Manufacturing N.E.C. Recycling. Others. Natural Gas.

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4.

Result and Discussion

Table 2: Correlation Analysis EXTRANO INTRANO INTRAVALUE lnINTRANO lnINTRAVALUE

0.8130 -

INTRANO INTRAVALUE lnINTRANO lnINTRAVALUE

0.7957 -

EXTRAVALUE lnEXTRANO lnEXTRAVALUE Full Sample [25 sub-sectors] 0.6479 0.8654 0.6850 Sub-Sample [21 sub-sectors] 0.6437 0.8335 0.6131

We started our analysis by presenting the results of simple correlation analysis. As shown in Table 2, regardless of which combination, both types of FDI tend to have a strong positive association, especially when number of projects is used. The correlation coefficients have a tendency to exceed 80 percent except for the sub-sample. However, the value is closed to 80 percent. Despite of demonstrating lower coefficient coefficient, value of projects based FDI also reveals good sign of linkage between ASEAN FDI and non-ASEAN FDI that inflows into Malaysian manufacturing sector at preliminary level of analysis. Table 3: Cointegration Tests – Pedroni [Full Sample] Within PP-Statistic ADF-Statistic C C&T C C&T -4.87*** -9.12*** -4.79*** -8.71*** Model 1 -6.27*** -18.11*** -6.07*** -12.89*** Model 2 -3.66*** -8.22*** -3.72*** -6.85*** Model 3 -9.94*** -12.55*** -8.91*** -9.83*** Model 4 v-Statistic rho-Statistic C C&T C C&T 3.72*** -0.86 -1.78** 1.63 Model 1 0.41 -3.29 -0.64 1.50 Model 2 3.02*** -0.23 -0.95 2.27 Model 3 0.65 -3.07 -1.30* 1.81 Model 4

Between PP-Statistic ADF-Statistic C C&T C C&T -5.67*** -6.91*** -5.35*** -11.17***

-15.15*** -14.72*** -12.07*** -16.40***

-5.05*** -5.91*** -4.87*** -8.71***

-10.17*** -10.24*** -8.01*** -10.73***

rho-Statistic C

C&T

1.9437 3.9441 2.2405 3.9156 1.7366 4.2859 1.5470 3.7407 Note: Model 1: level no of projects. Model 2: level value of projects. Model 3: Model 1 in log form. Model 4: Model 2 in log form. Asterisks *, ** and *** denote significant at 10%, 5% and 1% respectively. v-statistic only for within.

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Table 4: Cointegration Tests – Pedroni [Sub-Sample] Within Between PP-Statistic ADF-Statistic PP-Statistic ADF-Statistic C C&T C C&T C C&T C C&T -4.59*** -8.73*** -4.58*** -8.34*** -5.32*** -14.34*** -4.88*** -10.11*** Model 1 -5.99*** -17.27*** -5.80*** -12.30*** -6.29*** -13.82*** -5.46*** -10.09*** Model 2 -3.61*** -8.30*** -3.66*** -6.95*** -5.21*** -11.34*** -4.91*** -8.03*** Model 3 -9.26*** -13.13*** -8.30*** -9.83*** -10.54*** -15.57*** -8.18*** -10.57*** Model 4 Within Between v-Statistic rho-Statistic rho-Statistic C C&T C C&T C C&T 3.56*** -0.82 -1.70** 1.55 1.78 3.69 Model 1 0.39 -3.14 -0.61 1.43 2.17 3.70 Model 2 2.90*** -0.02 -1.10 1.99 1.51 4.01 Model 3 0.61 -2.95 -1.24 1.66 1.44 3.52 Model 4 Note: Model 1: level no of projects. Model 2: level value of projects. Model 3: Model 1 in log form. Model 4: Model 2 in log form. Asterisks *, ** and *** denote significant at 10%, 5% and 1% respectively. v-statistic only for within. Moving on to the cointegration test, we tabulated the finding in Table 3 for full sample and in Table 4 for sub-sample. In order to find a robust finding, we have tested various combinations. Model 1 is essential based on number of projects and Model 2 is consisting of value of projects based FDI. In addition to both models, we introduced third and fourth model which transformed the earlier information (number and value of projects) into log and later on tested. The full sample results are presented in Table 3. Table 3 demonstrates that based on PP and ADF statistics, we can strongly conclude that both sources of FDI, ASEAN and non-ASEAN, are cointegrated as the estimated statistics for within and between are highly significant. Moreover, v-statistics and rhol-statistic also lend additional support to this finding as some of them (in Model 1, Model 3 and Model 4) are significant. Table 4 highlights the results of cointegration test based on sub-sample, after excluding 4 sub-sectors which are found to be having zero FDI inflows in almost all years. The results are consistent with the earlier full sample case in which PP and ADF statistics suggesting that both types of FDI inflows are highly cointegrated in various specifications. Additionally, v-statistic and rho-statistic offer another support for the Model 1 and Model 3. Therefore, we can now convincingly conclude that there is strong evidence that FDI from ASEAN and non-ASEAN are cointegrated. 5.

Conclusion

This study attempts to examine the missing discussion on cointegration between FDI from developed countries and developing countries into specific country. Focusing on Malaysian experience, we investigate the cointegration between FDI from non-ASEAN and ASEAN into Malaysian manufacturing sector for the period between 1999 and 2004. Applying Pedroni’s panel cointegration technique, the results tend to support our hypothesis that FDI from ASEAN and non-ASEAN are cointegrated. At this stage, we cannot derive too many policy implications as the detail direction of causality is not checked. However, as stronger believe is that the direction should be running from developed countries’ FDI to

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developing countries’ FDI, this finding can suggest that in order to predict the magnitude of FDI from developing countries, the size of FDI from developed countries can be used as an indicator. This way of predicting is suggested by Pradhan (2007). The subsequent interesting explanation based on the finding is that FDI from developing countries could be referring to the decision made by MNCs from developed countries in order to identify the country they should choose. This could be because it will minimize the cost of searching for good location as very common MNCs will move into a very strategic location in terms of low cost, low risk and abundance of resources and incentives. Additionally, FDI from developing countries might be preferred to move into an area that having agglomeration effect, the area in which many MNCs are located as they believe the location should be something that providing advantage(s) which of immediate consumption.

Acknowledgement The first author would like to thank you Universiti Sains Malaysia and Ministry of Higher Education Malaysia for funding this project under the Exploratory Research Grant Scheme No. 203/PMGT/6730033.

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