FOREIGN DIRECT INVESTMENT AND EXPORT SOPHISTICATION IN ASEAN-5 DURING THE ASEAN PLUS THREE COOPERATION PERIOD

Abstract

Export sophistication is widely regarded as a channel through which trade contributes to sustained growth, yet evidence on its relationship with foreign direct investment (FDI) in Southeast Asia during the period of deepening ASEAN Plus Three (ASEAN+3) cooperation remains limited. This study examines trade with China, Japan, and the Republic of Korea (South Korea) and the relationship between FDI inflows and export sophistication in five ASEAN economies (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) over the period of the ASEAN Plus Three Cooperation Work Plan 2007-2017. Export sophistication is measured by the EXPY index and FDI by inflows per capita with one- to five-year lags, controlling for population, inflation, human capital, trade openness, and institutional quality. The relationship is estimated with the Arellano-Bond difference Generalized Method of Moments (GMM) estimator and examined further with fixed-effects specifications and an alternative FDI measure, FDI inflows as a share of GDP. Trade with China grew faster than trade with Japan and South Korea in all five countries. In the GMM estimation, lagged FDI per capita is positively and significantly associated with EXPY at the one-, two-, three-, and five-year lags, and institutional quality is also positively associated with EXPY. This association, however, is limited to the 2013-2017 estimation sample. It is not observed when the sample is extended to 2007-2017 or when FDI is measured relative to GDP, and the small number of countries limits the validity of the GMM instruments and standard errors. Because the FDI data cover total inflows rather than investment from ASEAN+3 partners, the findings do not identify an effect of ASEAN+3 cooperation. The results indicate that evidence of FDI-related export upgrading in ASEAN-5 remains fragile and call for analysis with broader country coverage.