Trade interdependence and direct foreign investment between ASEAN and China

The objective of this paper is to examine the connection between international trade and foreign direct investment (FDI), by comparing some salient features of the Association of Southeast Asian Nations (ASEAN) FDI flows into China with those of FDI flows from the United States and other developed countries. This analysis should be especially instructive in light of the recent macroeconomic model of FDI pioneered by Kojima on the relationship between a country's comparative advantage and its outward direct investment. We postulate that the changing patterns of the ASEAN countries' comparative advantage and other macro-level factors play an important role in motivating firms to venture in China. Similarity of trade structure and lack of complementarity of the Chinese and ASEAN economies limit the absorptive capacity of each other's products, which further challenges the entrepreneurs of the ASEAN countries to a high commitment of direct investment into China.