Why Might The Rapid Expansion Of Trade And Foreign Direct Investment Essay

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 - Essay Example 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 th e 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,