Effects of external capital inflows on industrialization in developing countries: evidence from ASEAN-4 economies

John Paul Corpus and Danny Cassimon

No 2025.05, IOB Working Papers from Universiteit Antwerpen, Institute of Development Policy (IOB)

Abstract: We examine the effect of net capital inflows on industrialization in the ASEAN-4 countries of Indonesia, Malaysia, Philippines, and Thailand. Using panel data covering 1980–2018, we estimate the influence of both aggregate and disaggregated net capital inflows on the manufacturing sector’s share in employment and real output. We find that aggregate net capital inflows have a negative influence on the manufacturing share of employment. Disaggregating capital inflows reveals that the negative effects emanate from non-FDI inflows, particularly portfolio investment and portfolio debt inflows. Meanwhile, FDI inflows have a positive effect on the manufacturing share of output. Our findings are consistent with existing evidence on the effects of aggregate capital inflows and non-FDI inflows on the manufacturing sector. We make a novel contribution for the ASEAN-4 by tracing the negative effects of non-FDI inflows to portfolio investment and portfolio debt, and uncovering the positive ffect of FDI on manufacturing’s output share. Our findings imply that policymakers in developing countries must pay attention to the influence that capital inflows exert on structural change and their industrialization efforts.

Keywords: capital inflows; structural change; premature deindustrialization; ASEAN-4 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2025-03
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