Determine Macroeconomic and Institutional Indicators for Foreign Direct Investment Attraction in the Association of Southeast Asian Nations

Abstract

This research would attempt to study the effect of determinants approached from macroeconomic and institutional theories with Foreign Direct Investment (FDI) in the Association of Southeast Asian Nations (ASEAN), a major emerging regional market consisting of ten countries as most of them are developing countries. There are seven variables taken to emphasize their relationship with FDI, by using panel data from 1995 to 2006. Four variables from macroeconomic theory—Economic growth approximated by Growth Domestic Product (GDP), International Trade, Exchange Rate and Inflation; and three from Institutional theory—Political Stability, Corruption Freedom and Rule of Law. The finding results of each variable are found to have relationships with FDI. FDI strongly flows into ASEAN because of most of effective macroeconomic indicators such as Economic Growth and International Trade. Economic Growth is the most positive significant variable; this clearly shows the effective market integration of ASEAN to attract FDI. International Trade is the second strong affirmative variable which indicates to the openness of ASEAN as well. Moreover, FDI slightly flows in the region by Exchange Rate. On the contrary, and unlike other macroeconomic variables, Inflation is the powerful wall to disrupt ASEAN’s FDI inflow. Besides, Institutional variables play important roles in creating a better investment climate. Political stability and Rule of Law are confidently shown the effectiveness to absorb FDI, while Corruption Freedom is found as the strongest core value to appeal FDI. Even though the study points out a majority of macroeconomic variable have strong influences on FDI, institutional variables are absolutely needed to create more investment climate. Therefore, we finally suggest that the seven macroeconomic and institutional variables implemented in our study are important indicators which governments in the host countries and relevant policy makers in ASEAN should concern to improve. Moreover, we indicate the empirical finding results to foreign investors who are interested to invest in ASEAN, as well as, to scholars or researchers who impress to do researches on FDI attraction and economic development.