Regulations on direct investment in ASEAN: do they reduce currency instability?

Abstract

Many authors have studied the impact of capital controls on currency crises. However, few attempts have been made to explore the impact of separate controls on each type of capital flow on currency instability. To date, no study has examined the impact of regulation and control of direct investment on the probability of currency instability. The hypothesis of this study is that direct investment control decreases currency instability, especially when there is no control over the liquidation of direct investment. Regression analysis of probit panel data from eight ASEAN members over 1998–2011 supported this hypothesis. Another interesting outcome, which confirms the results of previous studies, is that overall capital control insufficiently protects countries against currency attacks. This study underlines the importance of considering various types of capital flows separately during external reform policy in emerging economies.

Keywords:

• direct investment
• regulations
• ASEAN
• currency instability
• capital control
• probit panel data

JEL Classification:

• C51
• F30
• F43
• G28

Notes

¹ See Chien-Chiang and Chun-Ping (2009).

² FDI is also predicted to be an important aspect of economic integration in the ASEAN Economic Community in 2015 (Petri et al., 2012).

³ See Hegerty (2011).

⁴ Annual Report on Exchange Arrangements and Exchange Restrictions (1998–2012).

Additional information

Funding

The research was performed without any funding external to the author’s institution.