Sectoral FDI cycles in South and East Asia

•We study response of sector FDI in South & East Asia to host countries' business cycles.•We focus on FDI in extractives, manufacturing and services in 15 economies, 1980-2011.•We employ a dynamic panel system GMM methodology.•We find acyclical behavior of both extractive industries and manufacturing FDI.•We find countercyclical behavior of services FDI with important policy implications.

This study aims to analyze how sectoral foreign direct investment (FDI) inflows in South and East Asian economies respond to changes in the business cycles of the host countries, as measured by their output gaps. We focus on 15 economies during the period 1980-2011 and examine inflows of FDI in extractive industries, manufacturing and services in addition to aggregate FDI by using a dynamic panel Blundell-Bond GMM methodology. We find evidence of countercyclical behavior of services FDI and acyclical behavior of both extractive industries FDI and manufacturing FDI. The coutercyclical behavior of services FDI in South and East Asia has important policy implications.