Will Southeast Asia be the next global manufacturing hub? A multiway cointegration, causality, and dynamic connectedness analyses on factors influencing offshore decisions

TL;DR

This study investigates the factors influencing offshore manufacturing decisions in Southeast Asia, using advanced econometric models to analyze relationships, causality, and interconnectedness among countries, especially in light of recent supply chain shifts due to COVID-19.

Contribution

It introduces a novel econometric framework combining multi-way cointegration, causality, and dynamic connectedness analyses to understand offshore decision factors in Southeast Asia.

Findings

Southeast Asian countries exhibit multi-way cointegration.

There are significant spillover effects among these countries.

The analysis reveals dynamic interconnectedness influenced by offshore factors.

Abstract

The COVID-19 pandemic has compelled multinational corporations to diversify their global supply chain risk and to relocate their factories to Southeast Asian countries beyond China. Such recent phenomena provide a good opportunity to understand the factors that influenced offshore decisions in the last two decades. We propose a new conceptual framework based on econometric approaches to examine the relationships between these factors. Firstly, the Vector Auto Regression (VAR) for multi-way cointegration analysis by a Johansen test as well as the embedding Granger causality analysis to examine offshore decisions--innovation, technology readiness, infrastructure, foreign direct investment (FDI), and intermediate imports. Secondly, a Quantile Vector Autoregressive (QVAR) model is used to assess the dynamic connectedness among Southeast Asian countries based on the offshore factors. This study explores a system-wide experiment to evaluate the spillover effects of offshore decisions. It reports a comprehensive analysis using time-series data collected from the World Bank. The results of the cointegration, causality, and dynamic connectedness analyses show that a subset of Southeast Asian countries have spillover effects on each other. These countries present a multi-way cointegration and dynamic connectedness relationship. The study contributes to policymaking by providing a data-driven innovative approach through a new conceptual framework.