ASEAN Economic Integration through Trade and Foreign Direct Investment: Long-Term Challenges

31 Pages Posted: 13 Oct 2015

See all articles by Masahiro Kawai

Masahiro Kawai

University of Tokyo

Kanda Naknoi

University of Connecticut

Date Written: October 12, 2015


This paper explores the long-term challenges for trade and foreign direct investment (FDI) of the Association of Southeast Asian Nations (ASEAN). The region has emerged as an important production base for multinational corporations by joining East Asia’s supply chains. While proceeding to establish the ASEAN Economic Community (AEC) by the end of 2015, ASEAN has also forged five major free trade agreements (FTAs) with its dialogue partners (People’s Republic of China, India, Japan, Republic of Korea, and Australia–New Zealand) and is currently negotiating the Regional Comprehensive Economic Partnership (RCEP). In addition, four ASEAN member states are working on the Trans-Pacific Partnership (TPP) negotiations. Econometric evidence suggests that (i) trade flows and inward FDI mutually reinforce each other, i.e., an increase in trade flows stimulates inward FDI and vice versa; (ii) a larger market attracts more inward FDI; (iii) FTAs tend to help stimulate inward FDI; and (iv) strong institutions, good physical infrastructure, and low costs of doing business are critical in boosting inward FDI. The paper concludes that in the long run ASEAN should aim to further integrate itself with the rest of Asia and the world (through a Free Trade Area of the Asia-Pacific and an Asia-Europe FTA), while substantially deepening its internal integration (by moving from the AEC to a customs and economic union) and thereby maintaining ASEAN centrality.

Keywords: ASEAN, economic integration, foreign direct investment

JEL Classification: F13, F14, F15, F18

Suggested Citation

Kawai, Masahiro and Naknoi, Kanda, ASEAN Economic Integration through Trade and Foreign Direct Investment: Long-Term Challenges (October 12, 2015). ADBI Working Paper 545, Available at SSRN: or

Masahiro Kawai (Contact Author)

University of Tokyo ( email )

7-3-1 Hongo
Tokyo, 113-8654

Kanda Naknoi

University of Connecticut ( email )

Storrs, CT 06269-1063
United States


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