Determinants of Intra-Region and Extra-Region Foreign Direct Investment Inflow in ASEAN: A Spatial Econometric Analysis

Abstract

In this paper, we explore the dominant forms of foreign direct investment (FDI) (horizontal, vertical, export-platform, and complex vertical) in ASEAN countries. To account for the heterogeneity in FDI forms according to their origins, we examine separately extra-ASEAN and intra-ASEAN FDI in ASEAN countries. Using macro-level annual data covering nine countries over 1999–2011 and spatial econometric models, we find that the significance and the signs of the coefficients for the determinants of FDI and of spatial interactions provide an indirect way to test the dominance of particular forms of FDI over others. Our results suggest that the location of extra-ASEAN FDI is affected by host country characteristics (such as market size, infrastructure quality, political stability, trade costs) and by FDI in neighboring countries. Then, extra-ASEAN FDI inflows seem to be dominated by complex vertical FDI. In contrast, the location of intra-ASEAN FDI is affected by a host country’s political stability and market size, but also by the market potential of neighboring markets, suggesting that intra-ASEAN FDI inflows are dominated by export-platform FDI. The significance of spatial interactions for both origins of flows warrants the acceleration of economic integration between ASEAN countries to continuously attract FDI.