Political Economy of FDI, Integration and Path Dependence: EU and East Asia

1. Political Economy of FDI, Integration and Path Dependence: EU and East Asia Ken Morita (Hiroshima Shudo University, Hiroshima, Japan)  and  Yun Chen (Fudan University, Shanghai, China)

2. Difference between “institutional integration” and“functional integration” EU: Institutional integration East Asia: Functional integration

3. Difference between “institutional integration” and“functional integration” EU: Institutional integration led by Nation States East Asia: Functional integration led by Enterprises

4. Difference between “institutional integration” and“functional integration” EU: Institutional integration led by Nation States towards “Renunciation of war” East Asia: Functional integration led by Enterprises towards “Profit oriented”

5. Economic Integrationin Europe: net effect? • net economic welfare Trade diversion effect Trade creation effect Uncertain ? probably net positive ?

6. Both “institutional integration” and “functional integration” Trade structure within the region has been close

7. International trade ratio among the region (%) Note: East Asia; ASEAN plus 3 and Taiwan. EU; EU 27. Source:JETRO, Trade and Investment White Paper (annual).

8. International trade ratio among the region (average) (%) • （＊ｆor reference） East Asia: 48.8 EU: 66.9 ＮＡＦＴＡ:50.3

9. FDI (Foreign Direct Investment)has never been the same • FDI activities within EU: active • FDI activities within East Asia: not active EU: Institutional integration East Asia: Functional integration

10. How should we evaluate the FDI to be “active” or “not active” • there has occurred “no FDI” • there has occurred “large scale FDI” When there has been no international relations, When there has been strong international relations,

11. How should we evaluate the FDI to be “active” or “not active” There can be close relationship between “international relations” and “FDI activities”.

12. How should we evaluate the FDI to be “active” or “not active” • In order to objectively evaluate the FDI to be “active” or “not active”. It is necessary to consider the FDI activities (“active” or “not active”) comparatively with the international relations (“strong” or “weak”).

13. How should we evaluate the FDI to be “active” or “not active” • In order to evaluate the international relations to be “strong” or “weak”. We consider the international trade as “proxy index” for international relations.

14. Relative ratio of FDI(EU case) • (numerator) • EU outward FDI amount／world outward FDI amount • (denominator) • EU export amount／world export amount

15. Whether or not FDI has been “active”? • active • not active more than one less than one

16. Relative ratio of FDI Note: East Asia; 10 countries and region EU; EU 27 Source:JETRO, Trade and Investment White Paper (annual).

17. FDI activities EU (average 1.59) : active East Asia (average 0.58) : not active

18. Relative ratio of FDIWhy : Difference between EU (1.59) and East Asia (0.58) (1) the difference of economic development level (2) existence or absence of “international regime”

19. Relative ratio of FDIPer capita GNI in East Asia and EU • Source: World Bank, World Development Report 2011

20. International regime(according to Keohane) ‘sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations’

21. Relative ratio of FDI:“international regime” • How about the “common sense of values” EU: (1) liberalism, (2) democracy, (3) market economy, (4) christianity East Asia: Usually said to be “nothing”. Particularly different between China and Japan

22. Focusing uponSino-Japanese relations Sino-Japanese relations: from Japanese viewpoints of international trade and FDI Japanese FDI in China: “active” or “not active”?

23. Japanese FDI into China:“active” or “not active”? FDI concentration index trade linkage index

24. FDI concentration index • (numerator) • Japanese FDI in China／ inward FDI in China • (denominator) • Japanese outward FDI／worldwide outward FDI

25. FDI concentration index • ＊ <more than one> • Japanese FDI in China: relatively larger than in other countries • ＊<less than one> • Japanese FDI in China: relatively smaller than in other countries

26. FDI concentration index • Source: JETRO, Trade and Investment White Paper (annual) • and authors’ calculation.

27. trade linkage index • (numerator) • Japanese export to China／ Japanese export to the whole world • (denominator) • Import of China／import of the whole world

28. trade linkage index • ＊ <more than one> • Japanese trade with China: relatively larger than with other countries • ＊<less than one> • Japanese trade with China: relatively smaller than with other countries

29. trade linkage index • Source: JETRO, Trade and Investment White Paper (annual) • and authors’ calculation.

30. trade linkage index • International relations of Japan with China are strong as expressed more than 2.0, and with USA are as displayed 1.2 to 1.4 “trade linkage index” points out a degree of strength and weakness of international relations

31. FDI-trade index • (numerator) • FDI concentration index • (denominator) • trade linkage index

32. FDI-trade index • ＊< the ratio: equals to one> FDI relations between the two countries correspond with their strength of International relations

33. FDI-trade index • ＊< the ratio: more than one> FDI relations between the two countries are more active than expected from the strength of International relations

34. FDI-trade index • ＊< the ratio: less than one> FDI relations between the two countries are less active than expected from the strength of International relations

35. FDI-trade index • ＊< the ratio: more than one> • ＊<the ratio: less than one> • ＊ “in comparative sense” FDI: active FDI: not active

36. FDI-trade index • Source: JETRO, Trade and Investment White Paper (annual) • and authors’ calculation.

37. We can say that • from FDI-trade ratio Japanese FDI in China: might not be so active (average: 0.505)

38. We can say that • from FDI-trade ratio Japanese FDI in USA: might be active (average:1.248)

39. Why the difference 0.505 (China) and 1.248 (USA) US-Japanese relations have no institutional integration • but they both have such “common sense of values” as liberal, democratic, rule of law, market economy etc. Sino-Japanese relations have neither institutional integration nor “common sense of values”

40. Japanese FDI in China:might not be so active “lack of international regime”

41. International regime(according to Keohane) ‘sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations’

42. “lack of international regime” between China and Japan • Why “Path Dependence”

43. Path Dependence • means • ＊cannot move to “another path” a situation in which such factors as cultural, institutional, historical etc., are locked in

44. It says Japan: own path (locked in) China: own path (locked in) difficult to be integrated

45. Path Dependence:how to break away from it? • Cases of breaking away from it • from Mao Zedong’s path • from Soviet type’s path (1) Deng Xiaoping’s reform and opening-up policy (2) Demise of Cold War

46. Common characteristic features • Mao Zedong’s path and Soviet type’s path Inefficiency and introversion

47. Inefficiency and introversion • should be changed • ＊　extroversion: necessary to break • away from path dependence Efficiency and extroversion

48. How to break away towards “extroversion”: the case of China • ＊(from economic point of view) to break away from “regional protectionism”

49. What are (possible) reasons to break away from “introversion”? coming close towards the limit of inefficient economy ＊towards “Perestroika” by M. Gorbachev existence of a person with “mission” ＊Asian version of Coudenhove-Kalergi and Jean Monnet with “Pan-Asianism”

50. Is it probable to break away from “introversion”? It seems to be difficult to expect it as “realistic”.