Determinants of foreign direct investment and volatility in South East Asian economies

Abstract

The objective of this paper is to identify and examine the determinants of barriers to foreign direct investment (FDI) in South East Asian economies. Based on our theoretical groundings, we identify potential barriers under four categories, namely macroeconomic policy factors, political factors, institutional factors and socioeconomic factors. Using cross-sectional time-series data for 17 South East Asian economies from 1996 to 2005, we test these set of barriers against per capita FDI inflows and volatility in FDI inflows using fixed effects pooled regression analysis. In the process, we also check as to how fragile our results are to the small but important changes, which we bring in the conditioning information set using robustness check. Our empirical evidence suggests that all the possible set of barriers identified have significant negative effect on per capita FDI and positive impact on volatility in FDI inflows. We therefore suggest that there is an urgent need to find the solutions to break these barriers that are acting as stumbling blocks in attracting FDI of their actual potential.

Keywords:

• FDI
• barriers
• South East Asia

JEL classifications:

• F21
• O5

Acknowledgements

We would like to thank the anonymous referee of the Journal of the Asia Pacific Economy and also the anonymous reviewer of WDI Michigan University for their comments and suggestions to improve earlier drafts of this article.

Notes

∗Significant at 1% confidence level

∗∗significant at 5% confidence level

∗∗∗significant at 10% confidence level; + significant at 15% confidence level. The models are controlled for heteroskedasticity. White heteroskedasticity-consistent standard errors are reported in parentheses.

∗Significant at 1% confidence level

∗∗significant at 5% confidence level

∗∗∗ significant at 10% confidence level; + significant at 15% confidence level. The models are controlled for heteroskedasticity. White heteroskedasticity-consistent standard errors are reported in parentheses.

1. The South Asian region is defined to include Burma and exclude Nepal, Afghanistan, Bhutan and Maldives as we could not get the some important data for these countries.

2. This study excludes Burma, Bhutan and Maldives. The countries considered are India, Pakistan, Sri Lanka, Bangladesh and Nepal.

3. We divided the total weight of 100 into seven equal parts and assigned each indicator a weight of 14.29 to be precise.

4. They include China, Burma, Vietnam and Hong Kong.

5. They include Sri Lanka, Singapore, Bangladesh, Indonesia and Malaysia. Though South Korea was under partial Democracy till 1997, it made the transition to full democracy from then on.

6. Two of those four interactive terms are proposed by Harms and Ursprung (2004) themselves. We use their own methodology to check for the arguments.