FDI, Growth and the Asian Financial Crisis: The Experience of Selected Asian Countries

FDI GROWTH AND THE ASIAN FINANCIAL CRISIS: THE EXPERIENCE OF SELECTED ASIAN COUNTRIES
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FDI Growth and the Asian Financial Crisis: The Experience of Selected Asian Countries
Foreign Direct Investment (FDI) is becoming an imperative contributor to the growth of developing economies. A review by Ucal et al. (2010, p. 20) shows that both economic theories and empirical studies have revealed that FDI is key to the economic developments experienced in many countries. Similar insights are presented by Thangavelu, et al. (2009, p. 1462) who allude the FDI offers an opportunity for direct injection of capital, modern technologies, new marketing strategies, and effective management strategies in the national economy. Resultantly, this increases the competitiveness of the economy and increases the potential for economic growth. Additionally, Thangavelu et al. (2009, p. 1462) allude that FDI enhances the economy by increasing the productivity of firms within the country. In this light, FDI has a substantial impact on various aspects of performance among the multinational corporations as well as the operations of local industries. This has encouraged the formulation of liberalized FDI policies across Asia to ensure that the countries benefit from increased investment. Further benefits are experienced in the increased inflow of FDI in through competition, technological innovations, and more employment opportunities that result in the development of an elite population that can drive economic transformation. Nevertheless, an array of researchers show that the benefits of FDI in the economy are compromised due to institutional limitations experienced in some Asian countries. Consequently, these countries are unable to take advantage of FDI. These institutional limitations are triggered by different factors, including challenges in the financial markets. In this light, researchers highlight that there are various factors other than the growth that influence the FDI flow in countries. Suggestively, the flow of FDI is influenced by the national market size, level of openness to investors, the effectiveness of institutional factors, and the level of integration of the country’s economy with the global economy.
Drawing from these insights, a financial crisis can have a substantial impact on the flow of FDI. According to Ucal, et al. (2010, p. 22) financial crisis has an impact on the aggregate economy, and this is experienced from different perspectives. The financial crises have far-reaching implications that are experienced in the country, regionally and globally. During the second half of 1997, nations in the East and South-East regions of Asia experienced challenges in the financial markets. The financial crisis that ensued in the region resulted in a substantial impact on the economic growth of the nations in different ways. The Asian financial crisis broke out in Thailand and spread to other countries in the region. Among the key impact experienced by the countries is the reduction in capital flows from outside the country. In countries like Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand there was negative net private foreign bank lending and portfolio equity investment in 1997. Despite the challenges presented by the financial crisis, the FDI inflows remained positive adding to the existing foreign investments. Notably, among the worst-hit countries, the FDI inflow in 1997 was similar to what was recorded in 1996. Nevertheless, these figures began to depreciate in the at the beginning of 1998. In this context, the financial crisis affected the FDI inflows due to the impact on the financial capital and other related aspects of economic growth, such as technological advancement, management, as well as intellectual capital, which are imperative in the production of goods and services. Furthermore, an increase in the FDI inflow is motivated by the efficiency of markets, availability of resources, and competitiveness efficiencies and enhancing strategies in a country (Diaconu, 2014, p. 904).
The Asian financial crisis affected the long-term relationships in the production level limiting the engagement of investors and other foreign partners. The mobility of FDI is limited by factors such as physical assets, the supply chain, the availability of reliable infrastructure, the labor market, energy availability, and the general economic environment. In this light, the impact of FDI in other sectors of the economy affects the national growth, compromising the factors that motivate foreign investors. The financial crisis had a substantial impact of FDI by raising uncertainties experienced in the macroeconomic sector. This is evident in the Asian financial crisis due to the economic downturn it caused. Coupled with the increased uncertainties, the economic downturn affected the capacity of firms’ interested in the Asian countries to strategize on investment. An analysis of the Asian financial crisis by various researchers confirms that the impact varied from one country to another. In this context, a review of Vietnam shows that the country’ relied on the Asia-Pacific nations for 71.53% of its foreign investment (Ucal et al., 2010, p. 23). Resultantly, the impact of the financial crisis on FDI in Vietnam could not be salvaged. Consequently, many projects in the country were delayed and during the period between 1997 and 1998, there was a reduction in the number of licen...