1204 Determinants of Foreign Direct Investment attraction in 7 countries of Association of South East Asian Nations 2022.docx

NGÂN HÀNG NHÀ N CƯỚ VI T NAMỆ BỘ GIÁO D CỤ VÀ ĐÀO T OẠ TR NGƯỜ Đ I H C NGÂNẠ Ọ HÀNG TP HỒ CHÍ MINH NGUY NỄ KHÁNH DUY DETERMINANTS OF FOREIGN DIRECT INVESTMENT ATTRACTION IN 7 COUNTRIES OF ASSOCIATION[.]

NGÂN HÀNG NHÀ NƯỚ VI T NAMC Ệ BỘ GIÁO D CỤ VÀ ĐÀO T OẠ

DETERMINANTS OF FOREIGN DIRECT INVESTMENT

ATTRACTION IN 7 COUNTRIES OF ASSOCIATION OF SOUTHEAST

ASIA NATIONS

GRADUATE THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

LECTURER: Ph.D NGUYEN DUY LINH

Ho Chi Minh City, the year of 2022

1

NGÂN HÀNG NHÀ NƯỚ VI T NAMC Ệ BỘ GIÁO D C VÀỤ ĐÀO T OẠ

DUY 050606180064

DETERMINANTS OF FOREIGN DIRECT INVESTMENT

ATTRACTION IN 7 COUNTRIES OF ASSOCIATION OF SOUTHEAST

ASIA NATIONS

GRADUATE THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

LECTURER: Ph.D NGUYEN DUY LINH

Ho Chi Minh City, the year of 2022

2

of 7 specific countries of ASEAN in the period from 2005 and 2021, estimating 7variables which are market size, foreign exchange rate, labor salaries, infrastructuraldevelopment, economic openness, inflation rate, and financial development(explained in more detail below) by using Fixed Effects Model approach.

Empirical results indicate that the variables of market size, foreign exchangerate, labor salaries, and economic openness have an impact on FDI inflows.Besides, this thesis has not yet found the influence of infrastructural development,inflation rate, and financial development on abroad capital flows Also, the authorhas not studied the backward effect of FDI inwards on the aforementioned factorswhich is a drawback of this thesis and needs to shed light on other research in thefuture

Keywords: foreign direct investment, exchange rate, market size, trade openness

GUARANTEE

This thesis is my own research work which I did under the supervision of Dr.Nguyen Duy Linh In addition, the data and research conclusions presented in thisthesis are completely truthful To the best of my knowledge, the thesis contains nomaterial previously published or written by other people except where the reference

is made in the thesis itself

Nguyen Khanh Duy

The graduate thesis is a synthesis of the knowledge gained during the year study course at the Banking University of Ho Chi Minh City In this process, Ihave established a valuable knowledge foundation as a result of experiencingteaching at the university With that being said, I was conscientiously equipped toconduct this thesis

four-Although I possess the required knowledge to carry out the thesis, I still havedeficiencies that need to be pointed out and adjusted Were there no assistance comingfrom teachers and friends, I would never be able to undertake this thesis promptly.Hence, this part is dedicated to expressing my gratitude towards every individualinvolved in helping me to conduct the thesis

First and foremost, I would like to wholeheartedly appreciate Dr NguyenDuy Linh for helping me to formulate a categorical timetable to complete the thesisstep by step Additionally, I was also accompanied by his expertise in adjusting thelayout of the thesis objectively and comprehensively Therefore, I would like toexpress my appreciation to him for providing sincere feedback to steer me in theright direction in accomplishing my thesis adequately I wish his blissful health tocontinue to mentor and achieve the desired objectives in the near future

I would also like to express my genuine thanks to the teachers who arelecturing at Banking University of Ho Chi Minh City During the learning process,with sophisticated and state-of-the-art teaching methods, the teachers were able toconvey essential knowledge to me, as well as other students Thanks to this, myknowledge base has been further consolidated to create a solid academic foundation

to bolster this crucial thesis to bear fruit

TABLE OF CONTENTS

EXECUTIVE SUMMARY i

GUARANTEE ii

ACKNOWLEDGEMENT iii

TABLE OF CONTENTS iv

LIST OF TABLES vii

LIST OF FIGURES vii

LIST OF ABBREVIATIONS viii

CHAPTER 1.INTRODUCTION 1

1.1 Reason for writing 1

1.2 Thesis novelty 2

1.3 Objective of the thesis 3

1.3.1.General objective 3

1.3.2.Specific objective 3

1.3.3.Research question 3

1.4.Subject and scope of the thesis 3

1.4.1.Thesis subject 3

1.4.2.Thesis scope 4

1.5 Regression methodology 4

1.6 Thesis structure 5

CHAPTER 2.LITERATURE REVIEW AND EMPIRICAL RESEARCH 7

2.1 Literature review of foreign direct investment 7

2.1.1.Foreign direct investment definition 7

2.1.2.Classification of foreign direct investment 8

2.1.2.1 Horizontal FDI 8

2.1.2.2 Vertical FDI 8

2.1.2.3 Conglomerate FDI 9

2.1.3.The role of foreign direct investment 9

2.1.3.1 Capital supplement for economic development 9

2.1.3.2 Acquisition of technology and managerial abilities 10

2.1.3.3 Job creation and individual worker training 10

2.1.3.4 Budget revenues trengthen 11

2.2.Determinants of foreign direct investment attraction hypothesis 11

2.2.1.Market size 11

2.2.2.Foreign exchange 12

2.2.3.Trade openness 13

2.2.4.Infrastructure 14

2.2.5.Wage 15

2.2.6.Finance 16

2.2.7.Inflation 17

CHAPTER 3.DATA AND METHODOLOGY OF THE THESIS 21

3.1.Thesis methodology 21

3.1.1.Research process 21

3.1.2.Model building 22

3.2.Data collecting 23

3.2.1.Dependent variable: 23

3.2.2.Independent variable 23

CHAPTER 4.IMPLEMENTATION AND ANALYSIS OF THE MODEL RESULT… 28

4.1.Descriptive statistic 28

4.2.Regression model 28

4.2.1.Hausman test 29

4.3.Detection testing 30

4.3.1.Autocorrelation test 30

4.3.2.Multicollinearity test 32

4.3.3.Heteroskedasticity test 32

4.3.4.Correlation variable test 33

4.4.Thesis result and discussion 33

CHAPTER 5.CONCLUSION AND POLICY IMPLICATIONS 39

5.1.Thesis conclusion 39

5.2.Thesis limitation 40

5.3.Thesis distribution 39

5.4.Policy implications 40

REFERENCES 45

APPENDIX 49

LIST OF TABLES

Table 2.1 The influence of selected variables on FDI inwards from empirical research

summary

19 Table 3.1 Variable definition and its expectation 26

Table 4.1 Descriptive statistic of variables 28

Table 4.2 Regression model results 29

Table 4.3 Correlated Random Effects - Hausman Test 30

Table 4.4 Autocorrelation test result 31

Table 4.5 Multicolllinearity test result 32

Table 4.6 Heteroskedasticity test result: White 32

Table 4.7 Correlation variable matrix 33

Table 4.8 Appropriate model result 34

LIST OF FIGURES

Figure 3.2 Determinants of FDI inflows 22

CHAPTER 1 INTRODUCTION

1.1 Reason for writing

Currently, International commerce and investment are days by day increasingdramatically Developing countries are always seeking possibilities to invest in othercountries in order to profit from competitive advantages in the cost of raw materials,natural resources, labor, science and technology, infrastructure, and tariffs… Emergingcountries, on the other hand, are attempting to attract foreign direct investment for thepurpose of generating employment, developing their economies, and taking advantage

of other countries' scientific and technological breakthroughs with the intention ofimprovement in their stand, such as Vietnam and other Southeast Asian countries,which have cheap labor and plentiful natural resources, must generate jobs and invest

in modern technology As a result, several measures have been implemented tostimulate the influx of foreign direct investment

Foreign direct investment (FDI) is a form of international investment based onthe process of capital movement between countries As a result, FDI plays a criticalrole in creating opportunities for developing nations to access capital from abroad inexchange for domestic contributions In countries with specific policies, FDI not onlyboosts the availability of investment capital but also encourages fostering technologytransfer, promoting the accumulation of human capital which are determinantspursuing long-term objectives

Not every country will be able to attract the necessary quantity of outsidecapital due to a variety of issues such as economy, politics, diseases Over the pastthree years, in terms of FDI, have been extraordinary for ASEAN, specifically: 2019witnessed the region's highest-ever inflows of $182 billion, making it the world'slargest recipient of FDI which was contrary to 2020, 2021 saw an unprecedentedimpact of the COVID-19 pandemic, with a 25% and 12% fall in FDI, to $137 billionand $120 billion, respectively Despite the drop, ASEAN remained a desirableinvestment destination, with the region's share of global FDI increasing from 11.9percent to 13.7 percent in

2019 FDI inflows maintained more than twice as high as they were during the globalfinancial crisis of 2007–2008, and nearly five times higher than the yearly averageduring the SARS (severe acute respiratory syndrome) pandemic of 2002–2004(UNCTAD and ASEAN Secretariat, 2021).

In the case of Vietnam, after participating in the WTO in 2007, Vietnamreceived a substantial amount of FDI inflow in 2008 with a registered capital of up to

64 billion USD which was three times greater than in 2007 However, for a variety ofconsequences, including the global financial crisis in 2008 and the European publicdebt crisis in 2010 FDI inflows into Vietnam declined dramatically from 2009 to 2012before the steady recovering and fluctuating from 2013 to 2020 (during this period,Vietnam had officially overtaken Malaysia in term of FDI attraction in ASEANregions, finishing in third place behind Singapore and Indonesia) Although thesituation in Vietnam regarding the COVID-19 outbreak is more problematic in 2021than it was in 2020, the accomplishments of luring FDI investment into Vietnam arestill relatively positive Particularly, the overall amount of freshly registered capitalincreased by 3.76% over the same period while the total adjusted registered capitalalso increased by 26.7% Vietnam has received a total of 405.9 billion dollars in FDIprojects which can be seen that Vietnam appears to maintain a considerable appeal tointernational investors despite the global investment market volatility According to theinformation above, as well as the impact of the Covid-19 epidemic and changes in theglobal economic climate, how to attract FDI is a pressing issue that governments areconstantly concerned about due to the different incentive programs exist based on theeconomic features and growth pace of each nation To do so, policymakers mustidentify and understand which aspects most attract foreign investors, which is why theauthor's thesis titled "Determinants of Foreign Direct Investment attraction in 7countries of Association of Southeast Asia Nations”

1.2 Thesis novelty

This study was built on prior research which focuses on the influence of FDI inVietnam or in a specific country However, in this thesis, the author has broadened the

research space to include seven ASEAN nations in a longer time span Furthermore,the majority of earlier empirical research and articles just stated the results withoutdelving into detail about the influence of the independent factors on FDI inflows.Thereby, this thesis will precisely clarify and give appropriate solutions in order toprovide commenters with a broad picture of FDI in ASEAN nations.

1.3 Objective of the thesis

1.3.1 General objective

This study is conducted with the aim of determining which factors influence theability to attract FDI inwards into ASEAN countries Also, assessing the impact ofthose factors on FDI attraction Then, recommending appropriate macro policies inenhancing FDI attraction

1.3.2 Specific objective

(i) Research on determinants of FDI attraction in ASEAN countries

(ii) Measure the influence of these determinants on attracting FDI inflows.(iii) Propose and recommend policies to enhance the attraction of FDI inflowsinto ASEAN countries

1.3.3 Research question

(i) Which determinants influence the attraction of FDI inflows in ASEANcountries?

(ii) How do these determinants affect the FDI inflows?

(iii) What policy implications does the thesis make for policymakers about thepossibility of attracting FDI in ASEAN countries?

1.4 Subject and scope of the thesis

1.4.1 Thesis subject

The subject of this thesis is the attraction of foreign direct investment to 7ASEAN countries and the determinants of FDI attraction include market size, tradeopenness, labor expenses, foreign exchange rate, infrastructure, financial development,and inflation rate

1.4.2 Thesis scope

Space: This thesis proceeds by pooling 7 member countries of ASEAN

Time: The author chooses the time period from 2005 to 2021 for threepurposes: Firstly, to ensure that the data for each selected variable is comprehensive.Secondly, to verify the sample size is large enough to produce highly reliable results.Lastly, to evaluate the determinants influencing FDI inflows in the context of theeconomic crisis by comparing the 2008-2009 and 2020-2021 economic crises

1.5 Regression methodology

All data for this study was gathered, processed, and collated from relevant andtrustworthy research articles For each experimental objective, the relationshipbetween the dependent and independent variables can be measured quantitatively,supported by reliable and convincing data sources such as World Bank, InternationalMonetary Fund (IMF), UNCTAD Database, and the Department of Statistics of eachmentioned country in this thesis As previously stated, the author applies quantitativeresearch methodology which is sample data regression and the regression estimate iscalculated by using the Fixed Effects Model (FEM) approach with secondary paneldata obtained between 2005 and 2021

The package for calculating the regression estimates is Eviews version 8.Furthermore, in order to ensure the truthful regression of the model, the author willutilize the Hausman test to determine whether to employ REM or FEM and check thedetection of variables including autocorrelation, multicollinearity, heteroskedasticitytest (Gujarati, 2004)

1.6 Thesis structure

Chapter 1: Introduction

The author conducts an overview of the thesis and also, provides the writingreason, research objective, methods of data collection, and research questions

Chapter 2: Literature review and empirical research

Based on previous studies, the author presents the available associated ideasand theoretical frameworks about FDI as well as its function in economicdevelopment In addition, the paper has provided several prior research studies onFDI-related and non- FDI-related determinants

Chapter 3: Data and methodology of the thesis

The author outlines with some detailed explanations of the research methods usedand how it was carried out

Chapter 4: Implementation and analysis of the model result

The results and detections of this thesis will be detailed specifically in thischapter Besides, the author goes through the results and comes up with the mostreasonable arguments

Chapter 5: Conclusion and policy implications

The author draws conclusions, main findings, and proposes some policyrecommendations

Chapter 1 summary

In this chapter, the author has stated the necessity of the study on determinants

of FDI inflow attraction into Southeast Asian countries and the significance of theresearch is to help planners and policymakers have appropriate policy adjustments toincrease FDI inflows Furthermore, the author has established thesis objectives andquestions as well as thesis objects and scope The research approach is a quantitativepoint of view by using secondary data and methodology regression with Fixed EffectsModel (FEM)

CHAPTER 2 LITERATURE REVIEW AND EMPIRICAL

RESEARCH

2.1 Literature review of foreign direct investment

2.1.1 Foreign direct investment definition

The IMF (2003) defined FDI as a type of international investment with the goal

of a direct investor (a resident of one economy) obtaining a long-term stake in a firmbased in another economy (the direct investment enterprise)

According to WTO (1996), Foreign direct investment (FDI) occurs when aninvestor from one country (the home country) purchases an asset in another (the hostcountry) with the purpose of managing the asset Additionally, the managerialdimension sets FDI apart from portfolio investments in foreign stocks, bonds, andother financial instruments Both the investor and the asset it manages abroad aretypically corporate entities In such circumstances, the investor is commonly termedthe "parent firm" and the asset is referred to as the "affiliate" or "subsidiary"

On the other hand, UNCTAD implied Foreign direct investment (FDI) as aninvestment that involves a long-term committed partnership and indicates a persistentcontrol and interest by a company in a foreign country (foreign direct investor orparent firm) in an enterprise residing in another economy than the foreign directinvestor (FDI enterprise or affiliate enterprise or foreign affiliate)

Meanwhile, OCED (2009) stated foreign direct investment is a type of border investment undertaken by a resident of one country (the direct investor) withthe goal is to create a long-term stake in a company (the direct investment enterprise)that is resident in a different economy than the direct investor The direct investor'smotivation is to establish a long-term strategic partnership with the direct investmentcompany in order to have a large degree of control over the administration of the directinvestment company The proof of “lasting interest” come up when a direct investorcontrols at least 10% of the voting power in a direct investment company Directinvestment may also allow the direct investor to obtain access to the direct investment

cross-enterprise's economy which might otherwise be unable to do The goals of directinvestment differ from those of portfolio investment in which investors do not expect

to have any influence on the company's management There are three components thatmake up FDI which are: horizontal investment, vertical investment, and joint ventureloans (conglomerate FDI) between multinational enterprises and foreign affiliates(Naudé and Krugell, 2007)

2.1.2 Classification of foreign direct investment

2.1.2.1 Horizontal FDI

Horizontal foreign direct investment is the most common form of FDI whichmainly revolves around the investment of capital in a foreign company in the sameindustry as the company owned or operated by the FDI investor Here, one companyinvests in a company resident in another economy, where both companies manufacturesimilar goods

Horstmann & Markusen (1987, 1992) and Markusen & Venables (1998, 2000)indicated that the horizontal FDI model is that multinationals arise to avoid tradebarriers that make it costly to serve overseas markets through exports Horizontal FDIemerges as an alternative for exporting and a desire to locate manufacturing nearclients so as to reduce transportation costs whether trade expenses and trade barriers(Buckley & Cassson, 1981)

Because of the more intensive use of (knowledge) capital in the local economy,horizontal FDI may have more spillover effects than (easier to attract) vertical FDI,while vertical FDI is connected with a bigger influence on local labor demand (Sjoerd

et al, 2008)

2.1.2.2 Vertical FDI

Vertical foreign direct investment is primarily intended to utilize naturalresources in the host nation Simultaneously, using inputs such as labor and land toencourage future development and profit in the host nation is a fairly common type ofinvestment by direct investors in developing nations such as countries in ASEAN

Vertical FDI has generally been linked to multinational enterprises’ desire tocarry out unskilled labor demanding industrial activities in areas where unskilled labor

is available (Braconier, Norback, & Urba, 2005; Markusen, 1995) Following textbookinternational economics, multinational enterprises are formed to take advantage ofpricing disparities in international factors and to geographically divide theirmanufacturing processes (Carr, Markusen, & Maskus, 2001)

2.1.2.3 Conglomerate FDI

Conglomerate foreign direct investment is a form of investment when investorsput their capital in a foreign enterprise that is unrelated to its primary business.Because the funding firm has no prior experience in the foreign company's field ofcompetence, a joint venture is frequently used

Subhanij & Annonjarn (2016) revealed conglomerate investment occurs whenfirms are neither horizontally related through sharing the same industry nor are theyvertically connected through the supply chain

2.1.3 The role of foreign direct investment

2.1.3.1 Capital supplement for economic development

In the era of extreme globalization, the economic development of a countrycannot only be completely fulfilled by its own external capital but also come up withthe participation of foreign capital in order to support comprehensive development inall industries of a country It can be said that FDI is one of the important capitalsources to back up the shortfall in capital and foreign currency of the recipient country,especially for developing countries in ASEAN

The majority of developing countries are trapped in a vicious cycle in whichlow income leads to low savings, poor investment, and consequently, go back to lowincome This vicious condition is one of the hardest for countries to overcome if theyare willing to join the contemporary economic growth trajectory As a result, FDI is thebest solution in order to break through that round of debate, a country depending solely

on internal accumulation to generate capital for the economy would eventually lead to

a slowdown in global growth

2.1.3.2 Acquisition of technology and managerial abilities

In business projects demanding a high level of technology that the host countrydoes not currently have, calling for foreign investment would allow the host country toadapt to and take advantage of brand new technologies from overseas investors inorder to develop their technology and processes However, this type of investment alsocontains its risks which are oversea investors transferring the post-refining technology

or handing over it incompletely, making the host country have reliability on theirtechnology or becoming the investor's "technological waste dump"

The same goes for the managerial level of global corporations, to enhance theirmanagement capacities and be prepared for the future, all investment recipientcountries also want to learn how to manage giant enterprises, multi-industries, andmany subsidiaries in several countries for potential international ventures However,international investors frequently "swallow" their cash, leading the host country to losemarket share, enterprises, and projects while failing to benefit from the foreigninvestors' management experience from MNCs

2.1.3.3 Job creation and individual worker training

Foreign direct investment (FDI) has played a significant role in boosting thequality of human resources, which is a critical component of economic integration andgrowth In Vietnam, over 14,000 firms have been calculated as FDI enterprises,bringing in close to 4 million workers, training and employing over 2.3 milliontechnical workers for assembling and operating In addition, FDI firms also generateindirect employment as a result of the favorable impact of domestic investment.During the course of employment in FDI firms, employees have access to cutting-edgetechnology, strict labor discipline, knowledge of current working practices, improvedprofessional credentials, and job management skills

Since then, this group of workers has developed into highly qualifiedprofessionals who are also strong administrators, serving as the foundation ofcompanies In particular, employees at FDI companies might eventually take the

position of foreign professionals in managerial roles and in the oversight of moderntechnological processes.

2.1.3.4 Budget revenue strengthen

When an FDI enterprise makes a business investment in any country, they mustpay a tax rate on their profits As a result, taxation on an oversea enterprise is asignificant source of revenue for the host country's government, accounting for a greatportion of the country's cash flow and economy

2.2 Determinants of foreign direct investment attraction hypothesis

2.2.1 Market size

The size of the market in the host nation indicates economic circumstances andprospective demand which is a major determinant of foreign investors' decisions Thescale of the market may entice foreign investors, allowing them to take advantage oflocal sales meaning the countries with large markets and scale, diversifying industriesand fields, attracting investment capital from foreign enterprises would be much easier

In this thesis, the author uses the market size variable measured by GDP (Hiep &Hung, 2014) From a production perspective, GDP (gross domestic product) is thetotal market value in money of final goods and services produced within a country in acertain period GDP includes the value of all public and private goods consumption,government consumption investments, and the balance of trade Additionally, GDP isoften used to determine the health of an economy as well as the standard of living in acountry

Hiep & Hung (2014) suggested that market size has a significant influence onattracting foreign direct investment meanwhile Narayanamurthy et al (2010), Asiedu(2002), Loree and Guisinger (1995) revealed no effect of the market size on FDIcapital flows By utilizing the inverse of income per capita as a proxy for the return oncapital, Edwards (1990) and Jaspersen et al (2000) came to the same conclusion as thenegative connection between market size and FDI inflows: the market size of a hostnation is inversely connected to FDI/GDP

The market variable is used to indicate the domestic market's potential forproducts from international investors In conclusion, the greater the GDP or GDP percapita, the larger the market size, the better the port production outcomes, and the greaterthe need for capital to expand and promote business, as well as the opportunity forinvestment in which the author expects market size (GDP) will have an impact on acountry's FDI inflow.

Hypothesis 1: The larger the market size of the host country, the more FDI inflow it appeals to.

2.2.2 Foreign exchange

Most countries keep and manage foreign exchange reserves for a variety ofreasons, including implementing monetary and exchange rate policies, maintainingforeign exchange market liquidity to limit negative impacts in the event of a financialcrisis, and serving as a reserve asset to uphold trust in the economy's ability to pay itsinternational debt commitments, supporting the value of its domestic currency in order

to secure the financial health of a country To the views of investors, most MNEs traveloverseas in search of lower manufacturing costs, they prioritize low product pricing so

as to boost their competitiveness when selling to other nations As a result, if theexchange rate is high (the currency depreciates), the amount of money investorsreceive when changing the currency to the host country's currency will be moresignificant Simultaneously, the rise in the differential exchange rate opens the door toarbitrage trading as well as higher earnings for international businesses Higher returnsnaturally attract further FDI inflows On the other hand, a high exchange rate aidsthem in exporting more effectively

Hiep and Hung (2014) found that the exchange rate positively boosts FDIinwards Efiong et al (2018) documented empirical evidence in Nigeria in the period2001-2015 showing that exchange rate instability will restrict FDI inflows In Bevin’sempirical research (2000), the author has pointed out that Country risk ratings aresignificantly influenced by the foreign exchange of that country However, the research

published by Liu & Deijphanomporn (2018) demonstrated foreign exchange rate doesnot have any impact on oversea capital flows.

In this thesis, the author anticipates that the exchange rate will affect the task ofrecruiting FDI inwards and the logarithm of the exchange rate will be used betweenthe host country's currency and the US dollar

Hypothesis 2: Foreign exchange rate has a positive effect on attracting FDI inflows in investment-receiving nations.

2.2.3 Trade openness

A country’s openness reflects the openness, connectivity, and the level of theeconomic interdependence of the host nation with the international economy whichrepresents an economy's degree of freedom The economy is considered to be entirelyfree when there are no taxes, tariffs, licensing requirements, subsidies, patronage ofdomestic enterprises or immature sectors, and no other regulations that interfere withthe inherent laws of the market as Adam Smith’s “The invisible hand” The opennessentails the progressive removal of trade barriers for goods in the host nation This is anopportunity for foreign investors to take advantage of the host nation's comparativeadvantage to re-export to their home country while also increasing the process ofexport to the entire globe The level of a country's openness to international trade is acrucial determinant to take into account if investment initiatives are focused on thetradable sector

According to Jordaan (2004), the influence of openness on FDI varies byinvestment type When it comes to market-seeking investments, trade restrictions(reduced openness) may be advantageous for FDI businesses looking to serve localmarkets since, if the importing process meets problematic issues, they may decide tocreate subsidiaries in the host country FDI enterprises involved in export-orientedinvestments, therefore, often decide to invest in a more broad economy to avoidexpenses since increasing defects associated with trade protection frequently signifygreater export transaction costs

To measure the openness of the economy, there is one common approach which

is measuring the total of importing and exporting goods to GDP (Hiep & Hung, 2014),(Boateng et al, 2018) Research by Edwards (1990), Hoa & Phuong (2014), Ang(2008), Xaypanya et al (2015) has confirmed an optimistic effect of economicopenness on FDI inflows In conclusion, the author expects that there will be asignificant correlation between trade openness and FDI inflows

Hypothesis 3: The more openness of the host country is, the more FDI it draws.

2.2.4 Infrastructure

Infrastructure is the basic systems and services that are necessary for a country

or an organization to run smoothly; for example, buildings, transport, water, and powersupplies (Oxford dictionary) Infrastructure can be divided into three systems:production infrastructure, technical infrastructure, and social infrastructure AnIncrease in infrastructure will attract more foreign direct investment This presupposesthat nations with better and enhanced infrastructure will compete for foreigninvestment against other countries Infrastructure that is well-developed or well-maintained can also boost investment productivity As a result, encourage FDI inflowsinto the host nation Infrastructure contributes to the development of the FDIinvestment by lowering costs for foreign investors, allowing them to boost theirprofitability (Ang, 2008)

In this thesis, the author uses the total number of phones and mobile phoneusers (per 100 people) to represent the infrastructure (Hiep & Hung, 2014) Earlierstudies such as Ab Quyoom Khachoo & Mohd Imran Khan (2012), and MandisiRungcu (2014) reported evidence of infrastructure being a significant determinant ofFDI On the contrary, Narayanamurthy et al (2010), and Schneider & Frey (1985)documented an increase in infrastructural development will decline FDI inwards.Surprisingly, the findings of Hiep & Hung (2014) and Krzystof & Liwiusz (2016) didnot find any evidence of the impact of the infrastructure variable on FDI attractiveness

In conclusion, infrastructure is one of the important factors supporting theproduction and business process which leads to the author’s expectation the better the

quality of infrastructure, the more favorable the production and business activities, andthus the more attention it attracts from foreign investors

Hypothesis 4: Countries with sophisticated infrastructure will attract more FDI businesses.

an employee plays a significant effect in choosing the site of FDI The theoretical basisshows that an increase in host country wages relative to those in the source country is abarrier to FDI entry, particularly for oversea firms that specialize in labor-intensivemanufacturing Higher salaries, thereby, may not always prohibit FDI inflows sinceimproved salaries may indicate greater productivity Even after accounting forvariations in labor productivity and skill, empirical data on the labor cost effect on FDI

of labor in developing countries to reduce production expenses (Schneider & Frey,1985; and Friedman et al, 1996)

In this thesis, labor expenses will be calculated based on the average wage ofemployees based on the study of Hiep & Hung (2014), and Boateng et al (2015)

Moreover, the author expects low wages have an impact on attracting FDI inwards asmost of the ASEAN nations are manufacturing countries, it can be seen as a greatadvantage for MNEs in lowering input expenses and resulting in higher profits.

Hypothesis 5: The host countries with low labor costs will entice FDI.

2.2.6 Finance

Financial development is measured by the percentage of domestic credit provided

by the country's commercial banks relative to GDP (Hiep & Hung, 2014) For invested enterprises, investors always understand that after pouring their investmentcapital as registered with state agencies, their subsequent production and businessactivities will need more capital As a result, the financial responsiveness ofcommercial banks in the host country reflects the financial development of a country

foreign-by easily allowing overseas to access bank loans at a low cost (low-interest rate) Italso fosters an atmosphere that encourages company interaction and collaboration,especially between international and domestic enterprises Before deciding to invest in

a country, foreign enterprises should consider factors such as institutional stability,political risks, labor costs, labor productivity, and especially, financial marketdevelopment in order to make sure their investments will be as expected

According to Noorbakhsh et al (2001), Ang (2008), Hiep & Hung (2014), there

is a strong positive link between financial growth and FDI flows to developing nations

On the other side, Dutta & Roy (2008) with the panel data research of 97 countriesduring a 20-year span: financial development has observed a positive influence on FDIinflows before it reaches a certain threshold, thereby, financial variable changes into anegative sign when the threshold is crossed Meanwhile, financial development andFDI inflows in the research of Asiedu (2002) and Xaypanya et al (2015) were shown

to be positive but not statistically significant

As mentioned above, the financial responsiveness of commercial banks in thehost country reflects the financial development of a country by easily allowingoverseas to access bank loans from which the author expects an increase in thequantity of credit to the private sector will probably have a positive effect on FDIinflows growth

Hypothesis 6: The development of a country's financial situation will lead to better FDI attraction.

2.2.7 Inflation

Inflation is defined as an increase in the average price level per unit of time,which reduces the buying power of a country's currency Inflationary pressures canboost exports' competitiveness, attracting foreign direct investment High inflation'sinfluence on FDI capital flows, on the other hand, can be assessed in the followingdirections: Firstly, the growing inflation rate will exacerbate the challenges that MNCsface as interest rates on credit loans rise, as will salaries and expenditures Additionally, high inflation also reflects the instability of the economy, which canhinder investment attraction As a result, manufacturing expenses and output sellingprices would rise, creating market challenges and the possibility of company plans andcontracts being broken Poor financial statements and business securities become lessappealing, resulting in fewer investment flows Secondly, rising inflation will put morepressure on the government to tighten monetary policy, such as lowering loan limits,raising reserve requirements, and limiting interest rates Other credit-granting criteriahave also become more restrictive, resulting in lower domestic and internationalinvestment capital flows

For the above reasons, the author expects the negative effect of the inflationrate would attract more FDI inflows which is similar to the empirical evidence ofBoateng et al (2015) On the contrary, Bushra Yasmin et al (2004) observed a positiveeffect of inflation rate on FDI inflows, when the inflation of the investment country isabove usual meaning consumers will consume the product at a higher price fromwhich the profit of the producer will positively increase Similarly, Mahmut Masca(2008) believed the instability of the economy has a positive impact on FDI inflows indeveloping countries

Hypothesis 7: The lower the inflation is, the more FDI inflows a country can attract.

Determinants of FDI

No statistical significance

MARKET

Ab QuyoomKhachoo & MohdImran Khan (2012);

Bich Hoa & LienPhuong (2014); Ang(2008); Hiep &

Hung (2014);

Boateng et al(2015), Yousop et al

(2018)

Edwards (1990);

Jaspersen et al(2000)

Asiedu (2000);Loree &Guisinger(2005)

al (2018); Sinha et al(2018); Efiong et al(2018)

Yousop et al(2018);Xapanya et al(2015)

OPENNESS

Edwards (1990); AbQuyoom Khachoo &

Mohd Imran Khan(2012); Bich Hoa &

Lien Phuong (2014);

Ang (2008); Hiep &

Hung (2014);

Boateng et al(2015); Xaypanya et

al (2015)

Yousop et al(2018)

WAGE

Ab QuyoomKhachoo & MohdImran Khan (2012);

& Hung (2014);

Hazius (2000);

Friedman et al(1996)

Pain (1999); Nigel

& Taylor (2000)

Hanusch et al.(2018)

INFRASTRUCTURE

Ab QuyoomKhachoo & MohdImran Khan (2012);

Hiep & Hung(2014);Krzystof &Liwiusz (2016)

INFLATION

Narayanamurthy et

al (2010); Yousop et

al (2018); BushraYasmin et al

(2004); ErdalDemirhan MahmutMasca (2008)

Boateng et al(2015)

Hiep & Hung (2014); Efiong

et al (2018);Ismail (2009)

FINANCE

Ang (2008); HoangHiep Hong (2012);

Hiep & Hung (2014)

Asiedu (2002);Kinda (2008);Xaypanya et al.(2015)

Table 2.1 The influences of the selected variable on FDI inwards from a various

empirical research summary

Source: Author's own collection

Chapter 2 summary

In this chapter, the author has provided the theoretical review of FDI as well as

an explanation of the principle and its role The author has also presented empiricalevidence in which determinants influence the attractiveness of foreign directinvestment for the purpose of making appropriate hypotheses for the thesis

Concreting research questions and objectives

Linking research question to the theory Proposing research model based on empirical evidence

Discussion and policy implication in respect to FDI attraction FEM-REM

examination and presentation of resultData collection and analysis

CHAPTER 3 DATA AND METHODOLOGY OF THE

THESIS

3.1 Thesis methodology 3.1.1 Research process

From identifying the research problem, the author conducts research onconcepts and theories as well as explores prior studies on factors impacting ASEAN

nations' capacity to attract FDI flows Then, construct a theoretical framework as a

scientific foundation for developing a research model including the data collection

Based on the theoretical basis and proposed research model, the author examines and

analyses the result to arrive at the conclusions and policy implications of the topic

Figure 3.1 below depicts the information in detail:

Figure 3.1 Detail research process

Source: Author's own collection