Shadow Economy and the Efficiency of FDI Inflow: The case of ASEAN Economy.

Abstract

This paper focuses on the influence of shadow economy on the efficiency of foreign direct investment (FDI) inflow to the Association of Southeast Asian Nations (ASEAN). The panel stochastic frontier analysis with time varying technical inefficiency is employed to evaluate the efficiency level of inward FDI in nine ASEAN countries over the 2003 to 2017 period and examine the significant determinants affecting the efficiency of FDI inflow to ASEAN. The estimated results demonstrate that the efficiency levels of the FDI in such ASEAN countries are low. They also reveal that the market size and trade openness have significantly positive influences on the efficiency in attracting FDI to ASEAN countries. Moreover, the large shadow economy tends to significantly lower the ASEAN's FDI inefficiency, whereas a higher control of corruption significantly generates the FDI inefficiency in ASEAN.