What drives bilateral foreign direct investment among Asian economies?

Abstract

This study analyses the role of knowledge transfers via bilateral foreign direct investment (FDI) among 31 Asian economies. We make three distinct contributions to the literature on the drivers of FDI by: (1) applying the knowledge-capital model to FDI among Asian economies for the first time, using a comprehensive data set, and comparing it to an empirical gravity-type model of FDI; (2) conducting model selection tests to choose between alternative empirical specifications and estimation methods; and (3) modelling both the FDI participation decision and the decision on the amount of FDI. The main findings are: (1) while vertical FDI, driven by seeking low-cost unskilled labour, appears to be the dominant type of intra-Asian FDI, overall the knowledge-capital model is not supported by the data; and (2) conventional gravity variables (e.g., size, distance, common language) provide a better explanation of intra-Asian FDI and, therefore, a more suitable vehicle for future research.