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ASEAN and FTAA: External Threats and Internal Institutional Weaknesses

Published online by Cambridge University Press:  20 January 2017

Yasheng Huang ,
Randall K. Morck  and
Bernard Yeung
Yasheng Huang
Affiliation:
Sloan School of Business, MIT
Randall K. Morck
Affiliation:
University of Alberta
Bernard Yeung*
Affiliation:
New York University
*
44 West 4th Street, KMEC 7–87, Stern, New York University, New York, New York, 10012, USA. Email: byeung@stern nyu.edu
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Abstract

ASEAN countries perceive the possible formation of the FTAA as a potential threat on the grounds that it may divert export markets and foreign direct investment (FDI) capital to the FTAA region. This effect, together with the “China factor” and the hangover from the 1997 financial crisis, posts a concern to the ASEAN countries' economic growth. We show that, with Singapore as an exception, ASEAN countries are afflicted with state activism, poor property rights protection, and under-developed corporate governance. We argue that a poor institutional environment may exacerbate the effects of an external shock – such as that of FTAA – and thus we need to explicitly incorporate the role of institutional environments in our analysis. We further argue that while FDI flows to locations with market opportunities, a location's institutional environment affects the composition of FDI. Due to ASEAN countries' institutional weakness, its substantial inward FDI has mainly substituted, rather than complemented, local entrepreneurship. As FTAA may divert FDI flows into ASEAN countries, their appropriate response is to improve institutional quality so that the share of the more productive complementary FDI will increase in the total FDI inflows.

Type
Research Article
Information
Business and Politics , Volume 6 , Issue 1 , April 2004 , pp. 1 - 43
Copyright
Copyright © V.K. Aggarwal 2004 and published under exclusive license to Cambridge University Press 

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