Trade and FDI key drivers to prosperity in Asia and Pacific

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Trade openness and foreign direct investment will strengthen Asia and the Pacific’s resilience to slow global growth, according to the Asian Economic Integration report released by the Asian Development Bank.

With the continued slowdown in global economic recovery, trade growth in Asia and the Pacific decelerated in 2015, falling further behind growth in gross domestic product. Asia’s trade growth by volume decelerated to 2.3% in 2015, below the 2.7% growth in global trade, and falling further below the region’s gross domestic product (GDP) growth rate of 5.3%.

“Trade and FDI have been key drivers of growth and prosperity in Asia and the Pacific,” said Juzhong Zhuang, ADB’s Deputy Chief Economist. “The region should guard against the threat of rising protectionism and make concerted efforts to push for freer trade and better investment policies to preserve the region’s growth momentum.”   

Strengthening trade linkages and attracting foreign direct investment (FDI) will contribute to Asia and the Pacific’s growth and help improve resilience to emerging protectionism, according to the report. While inter-subregional trade linkages weakened across the region, it remained strongest in East Asia, followed by Southeast Asia.

Financial integration continues to increase gradually in the region; but still lags far behind trade integration. With greater financial openness, Asia’s cross-border portfolio investment and bank claims increased from $3.0 trillion in 2001 to $11.0 trillion in 2015. However, Asia’s share in global cross-border portfolio investment and bank claims remained a modest 16.2% in 2015, slightly up from 14.1% in 2001.

The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment, and policy effectiveness to encourage FDI.

Asia continues to be the world’s top destination for FDI, attracting $527 billion in 2015, up 9.0% over 2014. Global foreign direct investment (FDI) increased to a record $1.8 trillion in 2015, with nearly 30% going to the region.

FDI can contribute to economic growth through job creation, capital mobilization, and infrastructure development, while promoting productivity through technological and knowledge spillovers. It also fosters inclusiveness through better working conditions and rising wages. 
 
The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment, and policy effectiveness to encourage FDI. Asia and the Pacific attracts almost a third of global FDI, among which more than half is now intraregional, driven by the expansion of global and regional value chains. Greater trade openness through more regional trade agreements and bilateral investment treaties can also increase FDI.

The report cautions that the benefits of FDI are not automatic. Different types of FDI will bring different benefits and what works in one country may not necessarily work for another. For example, FDI in extractive industries can be less beneficial than FDI that promotes trade, which strengthens the host country’s links to international production networks. 

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Reading Time: 2 minutes

Trade openness and foreign direct investment will strengthen Asia and the Pacific’s resilience to slow global growth, according to the Asian Economic Integration report released by the Asian Development Bank.

Reading Time: 2 minutes

Trade openness and foreign direct investment will strengthen Asia and the Pacific’s resilience to slow global growth, according to the Asian Economic Integration report released by the Asian Development Bank.

With the continued slowdown in global economic recovery, trade growth in Asia and the Pacific decelerated in 2015, falling further behind growth in gross domestic product. Asia’s trade growth by volume decelerated to 2.3% in 2015, below the 2.7% growth in global trade, and falling further below the region’s gross domestic product (GDP) growth rate of 5.3%.

“Trade and FDI have been key drivers of growth and prosperity in Asia and the Pacific,” said Juzhong Zhuang, ADB’s Deputy Chief Economist. “The region should guard against the threat of rising protectionism and make concerted efforts to push for freer trade and better investment policies to preserve the region’s growth momentum.”   

Strengthening trade linkages and attracting foreign direct investment (FDI) will contribute to Asia and the Pacific’s growth and help improve resilience to emerging protectionism, according to the report. While inter-subregional trade linkages weakened across the region, it remained strongest in East Asia, followed by Southeast Asia.

Financial integration continues to increase gradually in the region; but still lags far behind trade integration. With greater financial openness, Asia’s cross-border portfolio investment and bank claims increased from $3.0 trillion in 2001 to $11.0 trillion in 2015. However, Asia’s share in global cross-border portfolio investment and bank claims remained a modest 16.2% in 2015, slightly up from 14.1% in 2001.

The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment, and policy effectiveness to encourage FDI.

Asia continues to be the world’s top destination for FDI, attracting $527 billion in 2015, up 9.0% over 2014. Global foreign direct investment (FDI) increased to a record $1.8 trillion in 2015, with nearly 30% going to the region.

FDI can contribute to economic growth through job creation, capital mobilization, and infrastructure development, while promoting productivity through technological and knowledge spillovers. It also fosters inclusiveness through better working conditions and rising wages. 
 
The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment, and policy effectiveness to encourage FDI. Asia and the Pacific attracts almost a third of global FDI, among which more than half is now intraregional, driven by the expansion of global and regional value chains. Greater trade openness through more regional trade agreements and bilateral investment treaties can also increase FDI.

The report cautions that the benefits of FDI are not automatic. Different types of FDI will bring different benefits and what works in one country may not necessarily work for another. For example, FDI in extractive industries can be less beneficial than FDI that promotes trade, which strengthens the host country’s links to international production networks. 

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