The country-level analysis of institutional factors affecting the foreign direct investment (FDI) in 6 Asean countries

Abstract

This empirical study is a country-based analysis aiming to investigate how institutional factors (primary economic and social determinants) affect the FDI inflows in six ASEAN countries, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam during the period of 1990-2016. This study uses a mixed-methods research approach employing a pooled data multiple regression technique to analyze the significant determinants of FDI in the ASEAN region at the country level from a holistic approach.

The findings revealed that, on the one hand, social institutions affected inward FDI in several countries such as Malaysia, Singapore, the Philippines, and Vietnam. On the other hand, economic institutions were seen to have a significant correlation with the flow of FDI in most countries, particularly through the proxies of government effectiveness and control of corruption. However, conventional socio-economic factors, such as GDP growth, GDP per capita, and the labor force can still explain the movement of FDI in some countries, which means that the consideration of FDI with regard to socio-economic determinants is important to some extent. This paper contends that the flow of FDI in most ASEAN countries is not only motivated by economic institutional quality, but also by the robust social institutions (or rich social capital endowment) in a society. This includes sound and effective institutions that govern overall economic activities and implementations. The results of the present study are consistent with previous scholarly works advocating the crucial role of institutions in determining positive economic outcomes and FDI inflows.

This paper concludes by suggesting that the concrete improvement of institutional quality among ASEAN economies is vital for sustaining the current flow of FDI, trade attractiveness, and for encouraging further ASEAN market integration or the ASEAN Economic Community (AEC) 2025. Moreover, good institutional environments would also lead to a friendlier business climate, strengthen a trustworthy society, and increase national competitiveness as a whole.