ON THE DETERMINANTS OF DIRECT FOREIGN-INVESTMENT - EVIDENCE FROM EAST AND SOUTHEAST-ASIA

A model of derived demand for foreign capital by a multiple product monopolist is estimated for seven Asian countries. Direct foreign investment (DFI) inflows are estimated to be less elastic with respect to the costs of capital (including taxes) than to wages, and to be more elastic with respect to aggregate demand in export markets than domestic demand. The output deterrent effect of higher wages is estimated to outweigh any substitution toward greater capital intensity. The estimates also suggest that: DFI rises with greater costs within the investors' home countries; no similar effect occurs with respect to costs in rival host countries, and concerns for political stability have overlain economic determinants.