Monetary and Economic Studies Vol.25, No.S-1 / December 2007

Integration and Growth in East Asia

Sanghoon Ahn, Jong-Wha Lee

This paper empirically analyzes the experience of East Asia's economic growth with data both at aggregate-economy and micro-firm levels, focusing on the role of international integration through trade and direct investment. The analysis within a framework of cross-country panel regression shows that trade openness and foreign direct investment (FDI) inflows have a positive effect on GDP growth-particularly in the 1970s and 1980s-while FDI outflows appear to have a negative effect on GDP growth. Micro-level evidence based on manufacturing data in the Republic of Korea (Korea) confirms the positive effect of trade and investment integration on plant-level productivity growth. It also suggests that the relationship between FDI outflows and productivity growth depends on the characteristics of a recipient economy. We find that FDI to the People's Republic of China tends to reduce productivity growth of firms in Korea, while FDI to the United States or Japan works in favor of productivity growth.

Keywords: Integration; Growth; Trade; Foreign direct investment; East Asia

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2007 Bank of Japan All Rights Reserved.

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