Foreign Direct Investment Effect on Economic Growth in Selected Asian Countries

Abstract

The purpose of this study is to examine the impacts of foreign direct investment (hereafter FDI) on economic growth in selected Asian countries: Brunei, Indonesia, Malaysia, Thailand, and Vietnam. The study also utilizes instrumental variables including regulatory quality, government effectiveness, corruption control, political stability and absence of violence, voice and accountability, and rule of law to explain differences in institutions and macroeconomic policies in the host countries. Data was gathered from the World Bank and the Worldwide Governance Indicators(hereafter WGI) between 2002 and 2019 and analyzed using ordinary least squares(hereafter OLS), two stage least squares(2SLS), and generalized method of methods(hereafter GMM) methodologies. These selected Asian countries have seen higher FDI inflows in recent years, it is important to figure out the reason, and we would like to concentrate on the influence of FDI on economic growth in each of these Asian countries, together with the effect of these instrumental factors on FDI. This study show that the impact of FDI on a country’s GDP growth rate is dependent on the economy’s institutional quality. The FDI and domestic investment are positively connected and have an influence on economic growth in these selected Asian countries when instrumental characteristics such as accountability, corruption control, political stability, and the absence of violences are taken into account. The country’s macroeconomic policies and institutional stability have an impact on its economic growth. For FDI-driven growth to materialize, comprehensive institutional stability and macroeconomic policies are required.