Trade, FDI and Regional Integration in East Asia

Abstract

The study examines the long-run relationship between trade, FDI and GDP growth in the East Asia region employing panel integration and cointegration techniques for a dynamic heterogeneous panel of 20 East Asian countries over the period 1980 to 2007. The paper also explores the long-run impact of FDI and trade among ASEAN, ASEAN plus 3 and ASEAN plus 6 groupings in the panel framework. The long and short-run relationships are examined in a vector-autoregressive error correction model using the pooled mean group (PMG) estimation of Pesaran et al. (1996). Our findings support the existence of long-run relationship between trade, FDI and GDP growth for ASEAN and ASEAN plus 3 groupings. The panel unit roots test indicates that the panel series are stationary after first differencing. The panel cointegration tests of Pedroni (1999) clearly indicate the existence of a long-run relationship between trade, FDI and GDP for East Asia, AESAN plus 3 and ASEAN. However, we found little evidence of a long-run relationship for ASEAN plus 6 groupings from the panel cointegration analysis and PMG estimation. The direction of the causality clearly indicates that FDI is the key variable driving the trade and regional integration in East Asian region.

Keywords: FDI, Exports, Intra Industry Trade, ASEAN, Panel Cointegration, Pool Mean Group Estimator

JEL Classification: C23, F02, F1, F41