International Journal of Social Economics

The determinants of foreign direct investment in ASEAN: The first differencing

panel data analysis
Phonesavanh Xaypanya Poomthan Rangkakulnuwat Sasiwimon Warunsiri Paweenawat

Article information:

Downloaded by New York University At 17:41 19 June 2015 (PT)

To cite this document:

Phonesavanh Xaypanya Poomthan Rangkakulnuwat Sasiwimon Warunsiri Paweenawat , (2015),"The
determinants of foreign direct investment in ASEAN", International Journal of Social Economics, Vol.
42 Iss 3 pp. 239 - 250
Permanent link to this document:
http://dx.doi.org/10.1108/IJSE-10-2013-0238
Downloaded on: 19 June 2015, At: 17:41 (PT)
References: this document contains references to 56 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 407 times since 2015*

Users who downloaded this article also downloaded:

Muhammad Azam, Ather Maqsood Ahmed, (2015),"Role of human capital and foreign direct
investment in promoting economic growth: Evidence from Commonwealth of Independent States",
International Journal of Social Economics, Vol. 42 Iss 2 pp. 98-111 http://dx.doi.org/10.1108/
IJSE-05-2014-0092
Abdullah Alam, Syed Zulfiqar Ali Shah, (2013),"Determinants of foreign direct investment in OECD
member countries", Journal of Economic Studies, Vol. 40 Iss 4 pp. 515-527 http://dx.doi.org/10.1108/
JES-10-2011-0132
Recep Kok, Bernur Acikgoz Ersoy, (2009),"Analyses of FDI determinants in developing
countries", International Journal of Social Economics, Vol. 36 Iss 1/2 pp. 105-123 http://
dx.doi.org/10.1108/03068290910921226

Access to this document was granted through an Emerald subscription provided by emeraldsrm:198285 []

For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald
for Authors service information about how to choose which publication to write for and submission
guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.com

Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as
well as providing an extensive range of online products and additional customer resources and
services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the
Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for
digital archive preservation.

Downloaded by New York University At 17:41 19 June 2015 (PT)

*Related content and download information correct at time of

download.

The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0306-8293.htm

The determinants of foreign

direct investment in ASEAN

Determinants
of FDI in
ASEAN

The first differencing panel data analysis

Phonesavanh Xaypanya, Poomthan Rangkakulnuwat and
Sasiwimon Warunsiri Paweenawat
School of Economics, University of the Thai Chamber of Commerce,
Bangkok, Thailand

239
Received 25 October 2013
Revised 9 February 2014
17 February 2014
Accepted 18 February 2014

Downloaded by New York University At 17:41 19 June 2015 (PT)

Abstract
Purpose The purpose of this paper is to investigate the significant factors determining foreign
direct investment (FDI) in Cambodia, Laos, and Vietnam (ASEAN3) and Indonesia, Malaysia, the
Philippines, Thailand, and Singapore (ASEAN5).
Design/methodology/approach This paper applies the first differencing technique to estimate the
parameters on the constructed panel data starting from 2000 to 2011.
Findings Due to the different stages of economic development between ASEAN3 and ASEAN5,
the determinants of FDI are different. We found that there are significantly positive effects of
infrastructure facility, level of openness, and negative effect of inflation on FDI inflow in ASEAN3;
while real exchange rate, gross domestic product and net official development assistance have no effect
on its FDI. The finding in ASEAN5 showed that market size and infrastructure facility are significant
factors to attract FDI. Furthermore, even though there are an increase in inflation rate as well as
a decrease in level of openness measurement, ASEAN5 are still attractive to foreign investors.
Originality/value The time variant and invariant unobserved effects that are ignored in the
previous studies are considered in this study.
Keywords Economic philosophy/theory, Developing countries, Philosophy of economics
Paper type Research paper

1. Introduction
Over the decades, most of the countries around the world have made their business
investment environment friendly for attracting more foreign direct investment (FDI)
into their countries. FDI has been known as a key source of income, capital flows,
business competition, innovations, job creations, technological transfer, which are
important process of economic development. The member countries of the Association
of Southeast Asian Nations (ASEAN) have also attracted FDI through various policies,
which are summarized in Table I[1].
According to the recent data from United Nation Conference on Trade and Development
(UNCTAD) (2013) in Table II, Singapore is the largest recipient of FDI compared to the rest
of ASEAN countries. Thailand, the Philippines, Malaysia, and Indonesia have also been
continuously attracting FDI into their countries. Even though some of them had been
struggled in some periods such as Indonesia during 2000-2003; however, it finally could
recover. Furthermore, the least developed countries in ASEAN including: Cambodia, Laos,
and Vietnam have recently been one of the most attractive investment destinations for
foreign investor around the world. Due to the different stages of development among
ASEAN countries, the factors determining FDI should be different. As a result, this paper
divides ASEAN member countries into two groups according to their levels of economic
development including: first, ASEAN3 (Cambodia, Laos, and Vietnam) and second,
ASEAN5 (Indonesia, Malaysia, the Philippines, Thailand, and Singapore).

International Journal of Social

Economics
Vol. 42 No. 3, 2015
pp. 239-250
Emerald Group Publishing Limited
0306-8293
DOI 10.1108/IJSE-10-2013-0238

Table I.
FDI policies of
ASEAN
Malaysia

Indonesia

Philippines

Laos
Allowance for
duty exemptions
on imported
capital goods
required by
promoted
investment
project

Cambodia
In March 2011,
Prakas No. 288
was issued on
authorization to
use tax removal/
reduction
programs of
Cambodia under
the Agreement on
ASEAN
Merchandise
Trade

Vietnam

Reduction of
business costs
significantly as
part of a costreduction
package
amounting to
savings of US $10
billion, in addition
to extending a
30% corporate
investment tax
allowance on a
liberal basis to
industrial projects
and to selective
service industries.
These activities
span
manufacturing,
engineering and
technical services
and computerrelated services

Allowance of 100 %
foreign-equity
ownership for
manufacturing
projects regardless
of location

Offer 100 %
foreign-equity
ownership in the
manufacturing
sector, with no
export conditions
imposed on new
investments,
expansions and
diversifications.
With limited
exceptions,
foreigners can
also own land in
Malaysia

Offer qualified
investors 100%
foreign-equity
ownership in
wholesale and
retail trading
companies. 100%
foreign-equity
ownership in all
areas of the
manufacturing
sector. Reduction
of the processing
time required for
the approval of
investments of
less than US$100
million to ten
working days.
Banks were open
to 100% foreignequity ownership

Open its retail and

distribution
sectors to foreign
equity, and
allowance for
foreign companies
to compete in the
domestic private
construction
sector

Allows duty
exemptions for
imported capital
goods for all projects,
on the importation of
raw materials for
production in
encouraged
investments and for
projects located in
mountainous or
remote regions for the
first five years of
Tax incentive in
operation
securities
The period required
exchange: (i) 10%
for the issuance of
of tax on profit for
investment licenses
securities
for several types of
companies; and
project has been
(ii) 50% reduction
reduced to 15 days
of withholding
from the receipt of the
taxes on interest
required
and dividend
documentation
distribution for
Investment licensing
public investors
for projects under US
$5million in Viet Nam
has been
decentralized to
provincial and city
levels
Sources: ASEAN Investment (AIA) Council: Agreements and Declarations. Legal text: ASEAN Investment Area. Web site: www.asean.org/communities/aseaneconomic-community/category/agreements-declarations-7 and for Cambodia: Source from ASEAN Secretariat (2011)

Thailand

240

Singapore

Downloaded by New York University At 17:41 19 June 2015 (PT)

IJSE
42,3

Downloaded by New York University At 17:41 19 June 2015 (PT)

Years

ASEAN3
Cambodia Laos Vietnam

2000
149
34
2001
149
24
2002
145
5
2003
84
19
2004
131
17
2005
381
28
2006
483
187
2007
867
324
2008
815
228
2009
539
190
2010
783
279
2011
902
301
Source: UNCTAD statistics
July 2013)

Indonesia

Malaysia

ASEAN5
Philippines

Thailand

Singapore

1,298
4,550
3,788
2,240
3,410
15,515
1,300
2,977
554
195
5,073
17,007
1,400
146
3,203
1,542
3,355
6,157
1,450
597
2,473
491
5,222
17,051
1,610
1,896
4,624
688
5,859
24,390
1,954
8,336
4,065
1,854
8,067
18,090
2,400
4,914
6,060
2,921
9,501
36,700
6,700
6,928
8,595
2,916
11,359
46,972
9,579
9,318
7,172
1,544
8,455
12,200
7,600
4,877
1,453
1,963
4,854
24,939
8,000
13,771
9,060
1,298
9,147
53,623
7,430
19,241
12,198
1,816
7,779
55,923
online database, http://unctad.org/en/Pages/Statistics.aspx (accessed

This study aims to investigate the significant factor determining FDI in ASEAN3
and ASEAN5. The factors we are interested are real exchange rate, inflation, gross
domestic product (GDP), telephone lines, level of openness, official development
assistance (ODA), and loans for countries development. These variables are drawn
from location-specific advantages in the Eclectic Paradigm Theory (EPT), proposed
by Dunning (1988) and being observable effects (or factors). However, the EPT states
two more unobservable effects affecting FDI, which are ownership-specific
advantages and internalization advantages. The unobservable effects can be time
invariant and time variant, such as licensing, organizational and management skills.
Even though there are many recent studies such as Nasser (2007), Anwar and Nguyen
(2010), and Tekin (2012) investigating the determinants of FDI in several countries,
these previous studies focussed on only the observable effects.
The contribution of this paper is to include these unobservable variables into our
model of estimation. This closes the gap of literatures which have ignored the time
invariant and time variant unobservable effects in the FDI determination. Furthermore,
we expect that our results could be guideline for government agencies in host countries
in designing policies to induce FDI into their countries.
The rest of the paper is organized as follows. Section 2 discusses literature review.
Section 3 presents the theoretical framework. Section 4 introduces model and data
adopted in this paper. The results and conclusions are in Sections 5 and 6, respectively.
2. Literature review
FDI can be viewed as a main tool for encouraging countrys economic growth.
There are several empirical studies confirming positive relationship between FDI and
economic growth in developing countries around the world such as Blomstrom et al.
(1992), Borensztein et al. (1998), Nair-Reichert and Weinhold (2001), Lipsey (2002),
Alfaro et al. (2004), Hansen and Rand (2006), Rodriguez and Pallas (2008), Anwar and
Nguyen (2010), Tekin (2012).
The main reason is that in addition to private investment, FDI has largely
contributed to total investment in a country, which is the main engine to drive economic
growth. Many studies investigated various determinants of private investment in

Determinants
of FDI in
ASEAN
241

Table II.
FDI inflows in
ASEAN3 countries
(millions of USD)

IJSE
42,3

Downloaded by New York University At 17:41 19 June 2015 (PT)

242

developing countries such as financial liberalization in India (Bhaduri, 2005), business

opportunity and investment costs in Thailand (Jongwanich and Kohpaiboon, 2008),
financial sector policies in India and Malaysia (Ang, 2009), and financial development
in Turkey (Ucan and Ozturk, 2011).
In the case of FDI, after Dunning (1977, 1979) first proposed eclectic theory, which is
later developed and known as the EPT in Dunning (1988), to explain the three main
factors determining FDI including: ownership, internationalization, and location,
many studies empirically investigated various factors attracting FDI into countries.
Agarwal (1980) summarizes the main determinants of FDI, that most empirical
literatures during the pre-1980 period had focussed on, are political situation in host
countries, incentives offered by the host countries, and low cost of labor. Then, in the
late 1980s, in addition to traditional market-related determinants of FDI, non-traditional
market FDI determinants, which is skills of labors as well as trade policy of the host
countries, have become significant factors (Nunnenkamp, 2002). The government of each
country is competing by providing attractive policy regarding investment and tax
incentive to attract FDI into their countries (Wheeler and Mody, 1992; Oman, 2000).
Furthermore, recent literatures focus on the financial determinants as significant factors
for firms to undertake FDI such as credit access (Klein et al., 2002), size of financial market
(Di Giovanni, 2005), stock market valuations (Baker et al., 2009), and financial
characteristics of firms (Forssbeck and Oxelheimb, 2011).
There are several determinants affecting the FDI; however, this study will include
only the variables based on the availability of our data set. As a result, we will briefly
summarize factors affecting FDI, in which we will apply in this study:

Market size the size of market is usually measured by GDP or GDP per capita.
Shamsuddin (1994) found that the market size is the most significant determinant
of FDI in 36 less developed countries (LDC) in 1983. This result is consistent
of the survey of 173 Japanese firms by the World Bank (Kawaguchi, 1994).
Several studies indicated a strongly positive relationship between FDI and
market size; such as Kravis and Lipsey (1982), Wheeler and Mody (1992), Dees
(1998), Fung et al. (2000), Ismail et al. (2009), Anwar and Nguyen (2010), Azam
(2010), Vijayakumar et al. (2010).

Infrastructure facility Loree and Guisinger (1995), Mody and Srinivasan (1996),
Fung et al. (2000) indicated that there is a positive effect of infrastructure on
attracting FDI. In order to measure infrastructure facility, telephones per thousand
of population (Anwar and Nguyen, 2010) and telephone lines (Nasser, 2007) were
applied in the estimation.

Macroeconomic stability two main variables have been used as an indicator of

stability of economy affecting FDI including: first, real exchange rate (Barrell and
Pain, 1996; Erdal and Tatoglu, 2002; Tsen, 2005; Anwar and Nguyen, 2010), and
second, inflation rate (Glaister and Atanasova 1998; Wint and Williams 2002;
Nasser, 2007). The literature mostly found that high volatile of host countries
currency and high inflation rate tend to discourage foreign investors to engage in
the activities of FDI.

Level of openness multinational enterprises (MNEs) will choose to invest in an

export-oriented country rather than invest in a country with closed economy
(or low level of openness) (Choong and Lam, 2012). To measure the degree of
openness in the country, Kravis and Lipsey (1982), Singh and Jun (1995), and

Dees (1998), Anwar and Nguyen (2010) use the ratio of value of export (or import)
to GDP; while Choong and Lam (2010) and Ismail et al. (2009) used the trade ratio
(export plus import values divided by GDP).

Downloaded by New York University At 17:41 19 June 2015 (PT)

ODA there are mixed results of ODA on FDI. Rodrik (1995), Tuman and
Emmert (1999), and Kosack and Tobin (2006) stated that ODA has no impact on
FDI; while Yasin (2005), Blaise (2005), Azam (2010), and Shahmoradi and
Baghbanyan (2011) found that ODA is one of main factor and positively affects
on FDI inflows to developing countries.

3. Theoretical framework
Dunning (1988) first introduced the EPT. This theory states that the extent and pattern of
multinational operations are generally determined by three factors: ownership-specific
advantages, location-specific advantages, and internalization advantages:
(1) Ownership-specific advantages (O) include capital, technology, marketing,
organizational and management skills, and benefits of economies of scale.
This ownership-specific advantages refer to the competitive advantages of the
enterprises seeking to engage in FDI. The greater the competitive advantages
of the investing firms, the more investors are likely to engage in their foreign
production.
(2) Location-specific advantages (L) include the existence of factor endowments,
investment incentives, wages, market size, macroeconomic conditions,
infrastructure, labor condition, and special tax. Locational attraction refers to
alternative countries or regions undertaking the value adding activities of MNEs.
The more immobile, natural or created resources, which firms need to use jointly
with their own competitive advantages, the more firms choose to exploit their own
specific advantages by engaging in FDI.
(3) Internalization advantages (I) represent the advantages by own production
rather than producing through a partnership arrangement such as licensing or
a joint venture. Firms may organize the creation and exploitation of their core
competencies, or circumvent market failure such as achieving synergistic
economies, controlling supplies of inputs and market outlets, avoiding or
exploiting government intervention. The greater the net benefits of internalizing
cross-border intermediate product markets, the more likely a firm prefers to
engage in foreign production itself rather than licensing.
Based on the EPT, the factors affecting FDI can be separated into observable and
unobservable effects as shown in Figure 1. We define the location-specific advantages
as the observable effects, and the ownership-specific advantages and internalization
advantages as unobservable effects, which can be time variant or time invariant.
4. Model and data
According to the EPT, the observable effects are composed of macroeconomic stability
(measured by inflation), market size (measured by GDP), infrastructure facility
(measured by the number of telephone lines), level of openness (measured by the trade
ratio)[2], ODA, and a loan for the country development. The unobservable effects,
which can be time variant or time invariant, such as licensing, organizational and
management skills, law, government policies. We include these unobservable effects

Determinants
of FDI in
ASEAN
243

IJSE
42,3

into the model of FDI determination, where those of time invariant are represented by ai
and those of time variant are represented by time dummy variables. The model used in
this study is represented by the Equation (1):
FDI it a0 a1 d1t a2 d2t . . . aT dT t b1 RERit b2 I N FLit b3 GDP it

Downloaded by New York University At 17:41 19 June 2015 (PT)

244

b4 T_LI N E it b5 TRD_ROit b6 ODAit b7 LOAN it ai uit

(1)

where subscript it represents for country i at time period t (i 1, , N, t 1, , T), dt

is time dummy variables, which is 1 if t ,and is 0 if otherwise, uit is the idiosyncratic
error. RER is real exchange rate, INFL is inflation rate, GDP is gross domestic product,
T_LINE is the number of telephone lines, TRD_RO is level of openness, ODA is the
official development assistance, and LOAN is loan for the country development.
Based on the EPT and previous papers, we expected that 1 W 0, 2 o 0, 3 W 0, 4 W 0,
5 W 0, 6 W 0, and 7 W 0.
This study separates the estimations of ASEAN3 and ASEAN5. For ASEAN5 model,
ODA and LOAN are excluded from the model since these countries are not in the
Development Assistance Committee list of ODA recipients as defined by World Bank.
According to Wooldridge (2009), the panel ordinary least square (POLS) estimation
would give biased estimators when ai is correlated with any regressors. When we
consider our panel data model as shown in the Equation (1), government policies
related to FDI of each country, which is included in time invariant unobservable effect,
ai, can be correlated with GDP, hence Cov(GDPit, ai) 0.
To obtain the unbiased results, Wooldridge (2009) suggests to remove the time
invariant unobserved effects, ai, out from the equation by using the method of first
differencing (FD). Hence, we estimate the parameters in ASEAN3 and ASEAN5 models
as expressed in Equation (2) and (3), respectively:
DFDI it a1 a2 d2t    aT dT t b1 DRERit b2 DI N FLit b3 DGDP it
b4 DT_LI N E it b5 DTRD_ROit b6 DODAit b7 DLOAN it Duit ; (2)

DFDI it a1 a2 d2t    aT dT t b1 DRERit b2 DI N FLit b3 DGDP it

b4 DT_LI NE it b5 DTRD_ROit i Duit ;

(3)

where t 2, 3, , T. In order to capture the aggregate time effects, we simply include

the intercept and the time dummy variables since 2002 in the model.
Macro-Economic Stability

Market Size

Infrastructure Facility

Location-Specific Advantages
Level of Openness

Official Development Assistance

Observed Effects
Unobserved Effects

Figure 1.
The observed and
unobserved effects
affecting to FDI

Loan

Ownership-Specific Advantages
Internalization Advantages

FDI

The data used in this study is annual data from 2000 to 2011. The FDI data are from
UNCTAD; while RER, INFL, GDP, T_LINE, TRD_RO, ODA, and LOAN are from the
World Development Indicators of the World Bank.

Determinants
of FDI in
ASEAN

5. Results
5.1 ASEAN3 estimation
The data of ODA and LOAN is measured in the single form of net ODA[3] due to the
way of recording. Therefore, the final model adopted in the ASEAN3 study is adjusted
as the following form:

245

DFDI it a1 a2 d2002t    a11 d2011t b1 DRERit b2 DI N FLit b3 DGDP it

Downloaded by New York University At 17:41 19 June 2015 (PT)

b4 DT_LI N E it b5 DTRD_ROit b6 DLODAit Duit

(4)

where LODAit is the summation of ODA and LOAN for country i at time t.
The POLS is adopted to estimate the parameters in Equation (4); we have not found
the existence of Autocorrelation and Heteroskedasticity. Moreover, the panel unit root
of uit is tested by the method of Levin et al. (2002). We found that the t-statistics to test
for the existent of the unit root is 3.94, hence the null hypothesis of common unit root
process can be rejected at 1 percent significant level. This implies that uit is stationary
and spurious regression is not the problem in this case. Since some time-dummy variables
are insignificant, we develop the model by removing each time dummy variable one by
one from the estimated regression until the time dummy variables appeared in the model
are significant. The final result is shown in Table III.
The coefficient on RER has been found statistically insignificant; while
the coefficient on INFL is negative and statistically significant at 5 percent.
This corresponds to the hypothesis and is consistent with previous studies of Azam
(2010), Nasser (2007), and Tsen (2005). However, the coefficient on GDP has been
found positive sign but not statistical significance. The coefficient on T_LINE has
been found positively and statistically significant at 1 percent. That implies that an
improvement of telecommunication networks in ASEAN3 could be essential to attract
more FDI inflows. The coefficient on TRD_RO has been found positive as expected
and statistically significant at 1 percent. This result is as expected in hypothesis and
similar to the previous studies of Choong and Lam (2010), Ismail et al. (2009),
Ramasamy and Yeung (2010). This confirms that FDI in ASEAN3 are significantly
Variables

Coefficient

Constant
305.701
d2004
1,067.751
d2007
1,452.184
d2008
1,236.085
RER
0.119
INFL
49.867
GDP
0.049
T_LINE
207.707
TRD_RO
72.685
LODA
0.702
Adjusted R2
0.643717
Notes: *,**,***Statistically significant at 10, 5,

SE

t-statistics

p-value

146.857
446.522
391.292
621.178
0.2564
23.248
0.029
63.577
19.926
0.428

2.082
2.391
3.711
1.990
0.464
2.145
1.707
3.267
3.648
1.641

0.0498**
0.0262**
0.0013***
0.0598*
0.6474
0.0438**
0.1026
0.0037***
0.0015***
0.1156

and 1 percent level, respectively

Table III.
The parameter
estimates of
ASEAN3

IJSE
42,3

Downloaded by New York University At 17:41 19 June 2015 (PT)

246

influenced by the level of openness. Finally, the effect of the LODA has been found
statistical insignificance, indicating that the LODA is not the main determinant of FDI
inflows into ASEAN3 during the period of study. This result is consistent with Rodrik
(1995), Tuman and Emmert (1999), and Kosack and Tobin (2006).
5.2 ASEAN5 estimation
The method of POLS is adopted to the FD model in Equation (3). There is no existence
of autocorrelation and heteroskedasticity problem in the model. The panel unit root of
uit is also tested using the same method as in the model of ASEAN3. We found that
the t-statistics for testing the unit root is 6.93, hence the null hypothesis of common
unit root process can be rejected at 1 percent significant level. This implies that uit is
stationary and spurious regression is not the problem in Equation (3). The insignificant
time dummy variables are removed one by one until they are all significant in the
model. The results are shown in Table IV.
The coefficient on RER has been found a positive sign as expected, but not
statistical significance. The coefficient on INFL has been found positive sign and
statistically significant at 5 percent, which is opposite to the hypothesis. This can be
explained by the fact that the main investors in ASEAN5 are from the USA and
Europe. When the economic recession occurred in these regions, these investors
decided to bring the fund out from their countries and move to invest in ASEAN5
regardless of the high inflation rates in these host countries.
The coefficient on GDP has been found statistically significant at 1 percent with
a positive sign as expected. This result is consistent with the previous studies of Azam
(2010), Vijayakumar et al. (2010), Choong and Lam (2010). The coefficient on T_LINE
has been found statistically significant at 10 percent with a positive sign as expected.
This indicates that the policy regarding an expansion and an improvement in market
size as well as in infrastructure facility can build up the confidence of foreign investors
and then increase FDI inflow into ASEAN5. The coefficient on TRD_RO has been
found statistical significance at 1 percent with a negative sign, which is not consistent
to our hypothesis. This might be the reason that many countries had been struggled
with the negative impacts from the global economic crisis, which leads to a lower export
and import volumes. Based on the fact, even though the trade ratios of Indonesia,
Malaysia, and the Philippines have been continuously decreased, those of Thailand and
Singapore have been stable. As a result, overall picture presents that the FDI inflows in
ASEAN5 still increase.
Variables

Table IV.
The parameter
estimates of
ASEAN5

Coefficient

SE

t-statistics

Constant
1,418.170
1,303.230
1.088
d2003
5,054.507
2,882.578
1.754
d2004
5,310.704
2,952.756
1.799
d2008
12,150.81
3,391.488
3.583
RER
1.667
2.051
0.813
INFL
804.753
327.849
2.455
GDP
0.109
0.033
3.302
T_LINE
2,043.837
1,211.190
1.688
TRD_RO
271.803
63.133
4.305
Adjusted R2
0.451877
Notes: *,**,***Statistically significant at 10, 5, and 1 percent level, respectively

p-value
0.2827
0.0868*
0.0793*
0.0009***
0.4209
0.0183**
0.0020***
0.0989*
0.0001***

Downloaded by New York University At 17:41 19 June 2015 (PT)

6. Conclusion
This study investigates the factors determining FDI in ASEAN3 (Cambodia, Laos, and
Vietnam) and ASEAN5 (Indonesia, Malaysia, the Philippines, Thailand, and Singapore)
based on the EPT proposed by Dunning (1988). The panel data model is applied in this
study in order to capture the time invariant and time variant unobservable effects,
which has been ignored in most previous studies. The FD method is adopted in the
estimation in order to obtain unbiased estimators as suggested by Wooldridge (2009).
The annual data starting from 2000 to 2011 are used in this paper.
For ASEAN3, we found that inflation, telephone lines, and trade ratio significantly
determine FDI inflows. These results are consistent with the hypothesis of this study
and conform to the fact that even though these countries are least developed countries
in ASEAN , they have a great potential to attract FDI. The governments should provide
stable macroeconomic situation, especially low inflation rate invest more in basic
infrastructure, as well as gradually opened their economies to international trade.
For ASEAN5, we found that the effects of GDP and telephone lines on FDI are
consistent to the hypothesis of this study, indicating that an importance of market size
and infrastructure facility in attracting FDI inflows. However, the estimated results of
inflation rate and degree of trade openness affect FDI inflows in these countries in
opposite way to the hypothesis. With higher inflation rate and lower degree of
openness, the foreign investors are still interested in investing more in this region.
This could be explained that even through there was the global economic crisis, foreign
investors still found ASEAN5 as the attractive investment region during the period of
the study.
Notes
1. Brunei and Myanmar are excluded in this study due to the limitation of the data.
2. The trade ratio is value of export plus import divided by GDP.
3. Net ODA consists of disbursements of loans made on concessional terms and grants by
official agencies of the members of the Development Assistance Committee (DAC),
multilateral institutions, and non-DAC countries to promote economic development and
welfare in countries and territories in the DAC list of ODA recipients. It includes loans with
grant element of at least 25 percent (calculated at rate of 10 percent discount) (The World
Bank, 2012).

References
Agarwal, J. (1980), Determinants of foreign direct investment: a survey, Weltwirtschaftliches
Archiv, Vol. 116 No. 4, pp. 739-773.
Alfaro, L., Chandna, A., Kalemli-Ozcan, S. and Sayek, S. (2004), FDI and economic growth: the role
of local nancial markets, Journal of International Economics, Vol. 64 No. 1, pp. 445-465.
Ang, J. (2009), Private investment and financial sector policies in India and Malaysia, World
Development, Vol. 37 No. 7, pp. 1261-1273.
Anwar, S. and Nguyen, L.P. (2010), Foreign direct investment and economic growth in Vietnam,
Asia Pacific Business Review, Vol. 16 No. 12, pp. 185-200.
Azam, M. (2010), Economic determinants of foreign direct investment in Armenia, Kyrgyz
Republic and Turkmenistan: theory and evidence, Eurasian Journal of Business and
Economics, Vol. 3 No. 6, pp. 27-40.

Determinants
of FDI in
ASEAN
247

IJSE
42,3

Downloaded by New York University At 17:41 19 June 2015 (PT)

248

Baker, M., Foley, C. and Wurgler, J. (2009), Multinationals as arbitrageurs: the effect of stock
market valuations on foreign direct investment, Review of Financial Studies, Vol. 22
No. 1, pp. 337-369.
Barrell, R. and Pain, N. (1996), An econometric analysis of US foreign direct investment,
The Review of Economics and Statistics, Vol. 78 No. 2, pp. 200-207.
Bhaduri, S. (2005), Investment, financial constraints and financial liberalization: some stylized facts
from a developing economy, India, Journal of Asian Economics, Vol. 16 No. 4, pp. 704-718.
Blaise, S. (2005), On the link between Japanese ODA and FDI in China: a microeconomic
evaluation using conditional logit analysis, Applied Economics, Vol. 37, pp. 51-55.
Blomstrom, R., Lipsey, E. and Zejan, M. (1992), What explains developing country growth?,
NBER Working Paper No. 4132, NBER, Cambridge, MA.
Borensztein, E., De Gregorio, J. and Lee, J.-W. (1998), How does foreign direct investment affect
economic growth?, Journal of International Economics, Vol. 45 No. 1, pp. 115-135.
Choong, C.K. and Lam, S.Y. (2010), The determinants of foreign direct investment in Malaysia:
a revisit, Global Economic Review, Vol. 39 No. 2, pp. 175-195.
Dees, S. (1998), Foreign direct investment in China: determinants and effects, Economics of
Planning, Vol. 31 No. 2, pp. 175-194.
Di Giovanni, J. (2005), What drives capital flows? The case of cross-border M&A activity and
financial deepening, Journal of International Economics, Vol. 65, pp. 127149.
Dunning, J. (1977), Trade, location of economic activity and MNE. A search for an eclectic
approach, in Ohlin, B., Hesselborn, P.-O. and Wijkman, P.M. (Eds), The International
Allocation of Economic Activity, Proceedings of a Nobel Symposium Held at Stockholm, June
8-11, 1976, London.
Dunning, J. (1979), Explaining changing patterns of international production: in defence of the
eclectic theory, Oxford Bulletin of Economics and Statistics, Vol. 41 No. 4, pp. 269-296.
Dunning, J. (1988), The eclectic paradigm of international production: a restatement and some
possible extensions, Journal of International Business Studies, Vol. 19 No. 1, pp. 1-31.
Erdal, F. and Tatoglu, E. (2002), Locational determinants of foreign direct investment in an
emerging market economy: evidence from Turkey, Multinational Business Review, Vol. 10
No. 1, pp. 21-27.
Forssbeck, J. and Oxelheimb, L. (2011), Corporate financial determinants of foreign direct
investment, The Quarterly Review of Economics and Finance, Vol. 51 No. 3, pp. 269-282.
Fung, K., Iizaka, H., Lee, J. and Parker, S. (2000), Determinants of U.S. and Japanese Foreign
Direct Investment in China, Working Paper No. 456, Department of Economics, University
of California at Santa Cruz, CA.
Glaister, K. and Atanasova, H. (1998), Foreign direct investment in Bulgaria: patterns and
prospects, European Business Review, Vol. 98 No. 2, pp. 122-134.
Hansen, H. and Rand, J. (2006), On the causal links between FDI and growth in developing
countries, The World Economy, Vol. 29 No. 1, pp. 21-41.
Ismail, N.W., Smith, P. and Kugler, M. (2009), The effect of ASEAN economic integration on
foreign direct investment, Journal of Economic Integration, Vol. 24 No. 3, pp. 385-407.
Jongwanich, J. and Kohpaiboon, A. (2008), Private investment: trends and determinants in
Thailand, World Development, Vol. 36 No. 10, pp. 1709-1724.
Kawaguchi, O. (1994), Foreign direct investment in East Asia: trends, determinants, and policy
implications, internal discussion paper, World Bank, Washington, DC.
Klein, M., Peek, J. and Rosengren, E. (2002), Troubled banks impaired foreign direct investment:
the role of relative access to credit, American Economic Review, Vol. 92 No. 3, pp. 664-682.

Kosack, S. and Tobin, J. (2006), Funding self-sustaining development: the role of aid, FDI and
government in economic success, International Organization, Vol. 60 No. 1, pp. 205-243.
Kravis, I. and Lipsey, R. (1982), The location of overseas production and production for
export by U.S. multinational firms, Journal of International Economics, Vol. 12 Nos 3/4,
pp. 201-223.
Levin, A., Lin, C.F. and Chu, C.-S.J. (2002), Unit root tests in panel data: asymptotic and finite
sample properties, Journal of Econometrics, Vol. 108 No. 1, pp. 1-22.
Lipsey, R. (2002), Home and host country effects of FDI, NBER Working Paper 9293,
NBER, Cambridge, MA.
Loree, D. and Guisinger, S. (1995), Policy and non-policy determinants of U.S. equity foreign
direct investement, Journal of International Business Studies, Vol. 26 No. 2, pp. 281-299.

Downloaded by New York University At 17:41 19 June 2015 (PT)

Mody, A. and Srinivasan, K. (1996), Japanese and United States Firms as Foreign Investors:
Do They March to the Same Tune? World Bank Mimeo, Washington, DC.
Nair-Reichert, U. and Weinhold, D. (2001), Causality tests for cross-country panels: a new look at
fdi and economic growth in developing countries, Oxford Bulletin of Economics and
Statistics, Vol. 63 No. 2, pp. 153-171.
Nasser, O.M.A. (2007), The determinants of the U.S. foreign direct investment: does the region
matter?, Global Economic Review, Vol. 36 No. 1, pp. 37-51.
Nunnenkamp, P. (2002), Determinants of FDI in developing countries: has globalization changed
the rules of the game?, Kiel Working Papers No. 1122, Kiel Institute for the World
Economy.
Oman, C. (2000), Policy Competition for Foreign Direct Investment, OECD Development Centre,
Paris.
Ramasamy, B. and Yeung, M. (2010), The determinants of foreign direct investment in services,
World Economy, Vol. 33 No. 4, pp. 573-596.
Rodriguez, X.A. and Pallas, J. (2008), Determinants of foreign direct investment in Spain,
Applied Economics, Vol. 40, pp. 2443-2450.
Rodrik, D. (1995), Why is there multilateral lending?, NBER Working Paper No. 5160,
NBER, Cambridge, MA.
Shahmoradi, B. and Baghbanyan, M. (2011), Determinants of foreign direct investment in
developing countries: a panel data analysis, Asian Economic and Financial Review, Vol. 1
No. 2, pp. 49-56.
Shamsuddin, A. (1994), Economic determinants of foreign direct investment in less developed
countries, The Pakistan Development Review, Vol. 33 No. 1, pp. 41-51.
Singh, H. and Jun, K. (1995), Some new evidence on determinants of foreign direct investment in
developing countries, World Bank Policy Research Working Paper No. 1531, World Bank
Policy Research, Cambridge, MA.
Tekin, R.B. (2012), Economic growth, exports and foreign direct investment in least developed
countries: a panel granger causality analysis, Economic Modelling, Vol. 29, pp. 868-878.
Tsen, W.H. (2005), The determinants of foreign direct investment in the manufacturing industry
of Malaysia, Journal of Economic Cooperation Among Islamic Countries, Vol. 26 No. 2,
pp. 91-110.
Tuman, J. and Emmert, C. (1999), Explaining japanese foreign direct investment in latin
America, 1979-1992, Social Science Quarterly, Vol. 80 No. 3, pp. 539-555.
Ucan, O. and Ozturk, O. (2011), Financial determinants of investment for Turkey, Journal of
Economic and Social Studies, Vol. 1 No. 1, pp. 83-110.

Determinants
of FDI in
ASEAN
249

IJSE
42,3

Downloaded by New York University At 17:41 19 June 2015 (PT)

250

UNCTA (2013), World Investment Report 2013: Global Value Chains: Investment and Trade for
Development, United Nations, New York and Geneva.
Vijayakumar, N., Sridharan, P. and Rao, K.C.S.(2010), Determinants of FDI in BRICS countries:
a panel analysis, International Journal of Business Science and Applied Management, Vol. 5
No. 3, pp. 1-13.
Wheeler, D. and Mody, A. (1992), International investment location decisions: the case of U.S.
firms, Journal of International Economics, Vol. 33, pp. 57-76.
Wint, G. and Williams, D. (2002), Attracting FDI to developing countries: a changing role for
government?, The International Journal of Public Sector Management, Vol. 15 No. 5,
pp. 361-374.
Wooldridge, J. (2009), Introductory Econometrics: A Modern Approach, 4th ed., Thomson Higher
Education, Mason, OH.
(The) World Bank (2012), Net official development assistance and official aid received
(current US$), available at: http://data.worldbank.org/indicator/DT.ODA.ALLD.CD
Yasin, M. (2005), Official development assistance and foreign direct investment flows to SubSaharan Africa, African Development Review, Vol. 17 No. 1, pp. 23-40.
Further reading
Dunning, J. (1993), Multinational Enterprises and the Global Economy, Addison Wesley,
Wokingham, Reading, MA.
Dunning, J. (2001), The eclectic (OLI) paradigm of international production, past, present and
future, The Economics of Business, Vol. 8 No. 2, pp. 173-190.
Janicki, H.P. and Wunnava, P.V. (2004), Determinants of foreign direct investment: empirical
evidence from EU accession candidates, Applied Economics, Vol. 36 No. 5, pp. 505-509.

Corresponding author
Poomthan Rangkakulnuwat can be contacted at: poomthan_r@yahoo.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com