Rapid Expansion of Trade and FDI in Asia Pacific - Essay Example

?Why might the rapid expansion of trade and foreign direct investment in the Asia Pacific be the main driver of economic change in the Asia Pacific? Many nations surrounding the Pacific Ocean have been instrumental in creating an economic miracle that has come to be referred to as the Pacific Rim. The Pacific Rim constitutes of countries surrounding the Pacific Ocean from Oceania to Asia to North America and South America. Over the recent years, one notable and common feature of economies in the Asia Pacific is rapid expansion of their international transactions like foreign direct investment (FDI) and international trade. FDI-induced trade is an important component of international business of the multinational companies. Kawai and Urata (2002) states that at the time of pre-crisis ‘miracle’ period, the percentage share foreign trade in the (GDP) gross domestic product was significantly higher for upcoming market economies in Asia Pacific than for other emerging economies in other parts of the globe. Generally, new developments have been experienced in the international economic activities of the Asia Pacific economies since 1980s. For example, between 1980 and 1977, the share of East Asia’s foreign trade in GDP increased at significantly greater rates. Currently, the region is more economically integrated with other parts of the world than with itself. Since FDI and trade are more of complementary to each other than substitutes, large inflows of FDI to Asia Pacific have increased the region’s participation in international trade. A combination of FDI and international trade has therefore become the main driver of economic change in the Asia Pacific. The rise in the levels of FDI in Asia Pacific can be attributed improved regional and global economic environment. For example, emergence of global markets and globally integrated production, accelerated technological change and existence of investment treaties between Asia Pacific and other countries. There are other reasons why the rapid expansion of trade and FDI in the Asia Pacific might be the main driver of economic change in the Asia Pacific. First, there has been reduced lending from commercial banks due to debt crisis. This has caused economies of the Asia Pacific to reform their investment policies so as to attract foreign capital. The economic changes can therefore be linked to economic benefits gained from FDI as an attractive alternative to loans from commercial bank. Moran (1998) observes that FDI is the most stable and strong source of external finance for countries that are developing in the Pacific and Asian regions. In agreement with this, Rajan (2005) states that FDI is a source of supplementary capital that is productive. This therefore denotes that it is a scarce source of capital in terms of deep structural changes of an economy. Rajan (2004) and Nunnenkamp (2004) point out that FDI is an advanced form of international cooperation. It is therefore one of the most effective ways of integration and transforming a local/national economy into a global one. One of the major advantages of FDI is that it helps in facilitating economic development of the country where the investment is done. In other words, the host country. This scenario is mainly applicable for developing economies like that found among countries comprising the Asia Pacific. FDI normally favours an increase in the foreign-trade turnover of the receiving country, lead to diversity of production, technical and scientific collaboration forms, and expansion trade in volume. This is to say that the higher levels of FDI in a country, the higher the chances of that country engaging foreign trade. Such multinational companies will be exporting their produce to other global markets. FDI flows that are induced/stimulated by transnational corporations (TNCs) investing in Asia Pacific have had great economic significance in the region. They have brought in technological know-how, attracted capital flows, created global production networks, and introduced advanced managerial, organizational and marketing practices (Lall, 2000 and OECD, 2002). In this way, FDI has helped to quicken the process of economic development and transformation in Asia Pacific. The advanced marketing, managerial and organizational methods brought about by FDI are instrumental in facilitating effective usage of production sources both in national companies of the host country/receiving economy and companies having foreign interest in business. One important feature of FDI in the Asia Pacific is production fragmentation. Production fragmentation refers to the decoupling of goods that were previously integrated into its sub-component parts, components and accessories (PCAs). These in turn are distributed across economies on the basis of comparative advantage. By producing their products in Asia Pacific, multinational corporations have stimulated increased economic development in the region, increased income through taxes and improved the economic status of the population through the creation of employment opportunities. The UNCTAD (1999) notes that through FDI, TNCs can complement local development efforts by strengthening the skills base and generating employment, boosting export competitiveness of the local firms and financial resources within the economy. Enhanced export competitiveness has resulted from improved production because of the knowledge, skills and technology borrowed from international companies. FDI has also enhanced the technological capabilities Asia pacific and has protected its environment and social responsibility. Technological capabilities include generation diffusion and transfer of technology. A detailed examination of studies linking FDI and the development of technology in the host country indicates that FDI is a catalyst to the overall industrial development and consequently, higher the income of the host economy (Xu 2000). Asia Pacific has been able to experience economic changes resulting from FDI in the region due to its ability to absorb new technology brought about by TNCs. As a result of this, the superior technology brought about by foreign firms has been able to spread freely and quickly to the existing firms. The eventual outcome of assimilating these technologies is improved productivity by the local firms, and economic changes and benefits for the region (Lipsey, 2000, and Blomstrom et al 1994). Foreign investment has also increased competition in the Asia Pacific region. This is because the entry of new firms in non-tradable sectors increases the output of the industry and reduces the domestic price. These have resulted to a net improvement in economic welfare of the region. Cooper (2002) states that foreign investment typically leads to an increase in local investment. In an analysis of panel data for 58 developing nations, Bosworth and Collins (1999) found that approximately half of each dollar of capital inflows translates into an increase in local investment. The findings of Bosworth and Collins suggest a transfer of foreign resources equal to 53-69% of the inflow of the financial capital. However, when capital inflows from foreign investment take the form of FDI, their findings suggest a near one-for-one relationship between domestic investment and FDI. FID has presented advantages to the Asia Pacific in terms of export market access. This arises from economies of scale in product marketing that is conducted by foreign firms. These firms have a better ability of gaining access to markets abroad. Lim (2001) explores this better. He notes that apart from their contribution through joint ventures, international firms have served as catalysts for other domestic firms in the Asia Pacific to export. From the results of empirical analysis by (Aitken et al 1997), it was found out that the probability that a domestic firm to export was found to be positively correlated with the firm’s proximity to multinational firms. FDI has not only led to increased market access in the Asia Pacific. As for the Asian Pacific investors, FDI has provided the benefits of reduced cost through coordination advantages and the achievement of economies of scale. Coordination advantages are important for supply chains that are highly integrated. FDI has remained an economic preference because of its strategic control. Smarzynska (2002) explains that in FDI, managerial rights observed in FDI allow companies to keep their intellectual property and their technological know-how. TNCs do not therefore need to fear for the loss of these if they invest in Asia Pacific through FDI. FDI has been very useful in bridging foreign exchange gap in the Asia Pacific. Borensztein et al (1995) explain that economic growth requires investment which in turn requires saving, whether local or foreign. Normally, two gaps may exist in an economy. These are inadequate foreign exchange to transform domestic resources to foreign resources and inadequate saving to support capital accumulation in order to achieve a certain growth target. If a given investment requires the utilization of imported inputs, then local saving may not guarantee economic growth of the same. For such investments to become productive, the saving has to be converted to foreign exchange in order to acquire imports. In Asia Pacific, capital inflows from foreign investment have helped to ensure that foreign exchange is available in the region for purchasing imports for investment. Like in other host countries/countries where actual international investment takes place, FDI in the Asia Pacific countries has benefited its people through employment and creation of jobs. This has helped to increase the employment ratio and decrease the rate of unemployment in the region. It has therefore led to a general improvement in the economic status of the people. The (APEC) Asia Pacific Economic Cooperation was formed in 1989 and since then, it has become the main and most important economic forum in the Asia-Pacific. APEC’s key purpose is to facilitate economic prosperity and economic growth in the region, with the main vision of creating a seamless regional economy. APEC works towards the achievement of these objectives through business facilitation, trade and investment liberalisation, and economic and technical cooperation. The Department of Foreign Affairs and Trade (2011) notes that APEC makes a significant contribution to prosperity and economic development and prosperity in the Asian-Pacific region through the promotion of investment and open trade. The importance of international trade in the Asia Pacific region cannot be ignored. Trade has contributed greatly to the all-sided development of the region by bringing economic, social and even political advancement of its members. In this region, international trade has made significant contributions to the gross domestic product. Through the high levels of trade, the 21 members of APEC account for over 50% of the global GDP yet the region is a home to over 2.7 billion people. International trade in Asia Pacific has also served as a platform for the globalization of the region. There has been increasing trade and investment between APEC economies and other countries in the recent years. For example, total two-way trade between APEC economies and Australia increased from A$ 121 billion in 1994 to A$ 391 billion in 2010. This indicates an annual growth of 7.5%. Over the same period, investment by APEC economies into Australia rose by 10.65 annually to reach A$ 859 billion in 2010. On the other hand, the outward Australian investment into the APEC economies grew at a rate of 15.8% annually and reached its peak at A$662 billion in 2010 (Department of Foreign affairs and Trade. (2011). Studies into the Asian Pacific international trade indicates that due to reduction in its tariffs, the region has been able to attain notable changes in its economy (Krugman, 1995). Conclusion Over the recent years, there has been notable and positive economic change in the Asia Pacific. At the same time, there has also been rapid expansion of trade and FDI in the region. There are many convincing reasons to believe that the combination of these two factors is the main driver of economic change in the region. Generally, FDI and trade have increased the level of economic connectedness between the Asia Pacific and the rest of the world, have increased technological know-how and capital flows. They have also led to the development of better global production networks, and introduction of advanced managerial, organizational and marketing practices. By investing in the Asia Pacific, many TNCs have complemented the local development efforts by strengthening the skills base and generating employment, boosting export competitiveness of the local firms and enhancing financial resources for development in the region. This discussion indicates a great economic potential for Asia pacific if the region will open its doors wider for FDI and increase its participation in international trade. References Aitken, B, Hanson, G. and Harrison, A. 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