Abstract
As agreed in the AEC Blueprint, ASEAN is committed to achieving "free flow of investment" and "freer flow of capital" among its member states by 2015. ASEAN is focusing mainly on FDI inflows but is also concerned with regional financial integration, which entails opening the financial services industry and liberalizing capital flows among member states. Of the six dimensions of financial liberalization identified by Williamson and Mahar (1998), ASEAN is committed to two that are key to global financial integration: free entry into the financial services industry and liberalization of international capital flows. The other four - elimination of credit controls, deregulation of interest rates, bank autonomy, and private ownership of banks - are considered largely of national interest.
In theory, investment flows are part of capital flows but issues related to investment flows are distinct from those related to other capital flows. This is reflected in the objectives of the AEC wherein "free" is associated with investment and "freer" with capital. The structure of this chapter is based on this distinction. We first describe FDI inflows, the status of financial liberalization and integration in ASEAN, and the trade - investment nexus and production networks. We then survey the literature on the empirical effects of regional economic integration on FDI flows and the impact of financial liberalization. We also provide quantitative estimates of the impact of the AEC on FDI inflows and discuss the qualitative effects of AEC-related policy measures on FDI and capital flows.
INVESTMENT FLOWS AND CAPITAL FLOWS IN ASEAN
As Table 4-1 shows, the composition of capital flows to emerging markets and developing countries has changed over time, with inflows of FDI making up a growing share. This trend held true in ASEAN Member States until the 1997 financial crisis, after which the share fell sharply, from a 35 percent average in 1995-1999 to an average share of 25.7 percent for the period 2000-2006.