Determinants of Foreign Direct Investment (FDI): A Panel Data Analysis for the Emerging Asian Economies

Abstract

In this paper, we explore the economic, institutional, and political/governmental factors in attracting Foreign Direct Investment (FDI) inflows in the emerging twenty-four Asian economies. To examine the significant determinants of FDI, the study uses panel data for a period of seventeen years (2002-2018). The panel methodology enables us to deal with endogeneity and other issues. Multiple regression models are done for empirical evidence. The study focuses on a holistic approach and considers different variables under three broad areas: economic, institutional, and political aspects. The variables include market size, trade openness, inflation, natural resources, lending rate, capital formation as economic factors, the Business Regulatory Environment and the Business Disclosure Index as institutional factors, and political stability, government effectiveness, and the rule of law as political factors. The empirical findings show most of the economic factors significantly affect FDI inflows, whereas Business Disclosure is the only important institutional variable. Moreover, political stability has a significant positive impact in attracting foreign capital flow, although the impact of government effectiveness is found insignificant. Overall, the economic factors prevail strongly compared to institutional and political factors.