We are pleased to alert you to ISS working paper 735, Aggregate and disaggregate inward FDI and economic diversification in Asia: evidence from 13 economies (2000–2020), by Arash Nabil Ruhaizat. He received an ISS Research Paper Award for the academic year 2024-2025.
Abstract
The paper examines whether FDI influences economic diversification. The paper contributes to existing literature by disaggregating FDI into primary, secondary and tertiary sector activities to see if they differentially affect diversification in Asia and if the effects vary with resource abundance and domestic capabilities. The study constructs an unbalanced panel of 13 Asian economies from 2000 to 2020 that links aggregated and disaggregated FDI share to export concentration (diversification index), economic complexity, and manufacturing and service value-added shares. Empirically, this study uses a multi-model approach, running fixed effects, random-effects and instrumental-variable two least squares approach where appropriate. Results indicate that tertiary (services FDI) reduces export concentration and increases economic complexity as well as manufacturing value-added. Primary FDI effects, surprisingly, increase diversification, but for all other outcomes, the results are inconclusive. Secondary FDI had no significant results across all outcomes. In terms of the net effect interactions, total FDI leads to less concentrated exports, and tertiary FDI showed marginally significant positive effects on both economic complexity and manufacturing value-added. Secondary FDI interactions yielded no significant results. Therefore, policymakers should prioritise attracting the economic sector that leads to greater diversification and that provides spillovers into other economic sectors.
Keywords
Foreign direct investment, sectoral composition, economic diversification,
economic complexity, spillover, Asia.
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