Determinants of Foreign Direct Investment (FDI) in Asean-5 Countries: A Review

Abstract

The foreign direct investment (FDI) inflows play an important role in achieving a country’s economic development. Hence, this study aims to investigate the main determinants of FDI inflows in ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand). Using five explanatory variables (market size, inflation rate, trade openness, exchange rate and consumption tax (GST)), this study tries to investigate the factors that determine FDI inflows to the studied countries. To achieve this objective, this study will utilise Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) approaches to investigate the long-run relationship between the explanatory variables and FDI inflows. The NARDL model is applied to examine the asymmetric effect of exchange rate on FDI inflows. Based on a comparative discussion, the study results will demonstrate what are the common factors will attract or discourage FDI inflows into the ASEAN-5 countries. This research also indicates if FDI inflows react differently during an appreciation or a depreciation on host country currency. This study has significant implications for the body of knowledge and practitioners. The effect of GST and asymmetric effect of exchange rate will add the existing body of knowledge of FDI inflows in the studied countries. Meanwhile, policymakers from the sample countries would be able to understand the importance of the main determinants of FDI inflows to their respective countries. Hence, steps could be taken to utilize the factors to attract FDI inflows. Furthermore, knowledge about the asymmetric
effect of the exchange rate will also help the policymakers in adopting appropriate policies to accommodate the asymmetry. The sample of countries from Southeast Asian countries has not been extensively investigated in the literature regarding the GST effect and asymmetric effect of exchange rates on FDI inflows motivated this study in this area.