Joint Determinants of Foreign Direct Investment (FDI) Inflow in Cambodia: A Panel Co-integration Approach

Abstract

Globalization and modernization have generated the new opportunities for Multinational Enterprises (MNEs) to invest in foreign countries. Especially, many emerging and developing countries are making efforts actively to attract foreign direct investment (FDI) inflow in the purpose of boosting economic growth and development. This paper investigates the determinants of Cambodia’s inward FDI within the time interval from 1995 to 2014. Panel co-integration approach, namely Full Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square (DOLS) are proposed to estimate the long run coefficients. Our analysis shows that most of the variables are statistically significant except for population growth rate. Market size and financial development are, as expected, positively correlated whereas macroeconomic instability and cost of living are negatively associated but poor institution is, as unexpected, positively associated to inward FDI. The sign of ECT \((\mathrm {t}-1)\) coefficient from panel causality analysis is significantly negative for GDP to FDI equation. It is indicated that economic growth and FDI is bidirectional causal relationship in the short run and the long run. The result from measurement predictive accuracy obtained from out of sample ex-post forecasting (2013–2014) confirmed that panel DOLS has a good predictive power to apply the long run ex-ante forecasting of Cambodia’s inward FDI. Thus, our findings suggest that improving macroeconomic indicators, administrative barrier and financial instrument and development are the crucial policies to attract more inward FDI in the upcoming period.