The Relationship between Foreign Direct Investment and Economic Growth of Selected ASEAN Countries

Abstract

The intention of this research is to examine the relationship between foreign direct investment and economic growth of selected ASEAN nations, namely, Myanmar, Singapore, Thailand, Malaysia, and Indonesia over the study period from 1991 to 2013. In theoretical terms, the neoclassical growth and endogenous growth theories have been mainly applied in order to support this study. The different methods of Levin, Lin and Chu (LLC) (1992), Im, Pesaran and Shin (IPS) (1997), and Fisher-Type unit root tests where used to analyze our data set to determine whether they have unit root, or, if not, whether they are stationary. This resulted that some are stationary at the I(0) and some are stationary at I(1). In addition, panel granger causality test was carried out and found that there is only one way causality from GDP to FDI; the country’s economic prospects attracts foreign direct investment inflows of the selected countries. By choosing panel ARDL approach, it is proper for this study due to it can analyze long-run and short-run dynamics even when the variables are mix of stationary and non-stationary time-series. Pooled mean group (PMG), mean group (MG) and traditional dynamic fixed-effect estimator (DFE) where used to forecast the short-run and long run relationship between variables. As the PMG and DFE are efficient estimation methods according to the Hausman Test, we cannot conclude that foreign direct investment has positive or negative impact on the economic growth in the long-run as the results are not significant, but the FDI impact on GDP is positive in the short-run at the panel level. As the second of individual level findings, foreign direct investment (FDI) of Myanmar, Thailand, and Singapore has an encouraging impact on the growth process of their economies except Malaysia and Indonesia. Moreover, the trade openness impact is either positive or negative on GDP for Malaysia while it shows negative in Myanmar. Furthermore, apparently, the effect of exchange is significantly negative on the economic performance of the country’s GDP of Thailand, Singapore, Malaysia, and Indonesia.