This report aims to investigate the factors that affect the inflow of Foreign Direct Investment (FDI) in 10 ASEAN countries from 2010 to 2021. The authors make use of an extensive dataset gathered from different sources, such as national statistical agencies, international organizations, and scholarly publications and use multiple regression analysis with Fixed effects model to determine the importance and extent of the factors that affect the inflow of Foreign Direct Investment (FDI) in this region. Several key variables are taken into account, including market size, trade openness, infrastructure and inflation. The findings emphasize the significance of market size, trade openness, and favorable business infrastructure in attracting foreign investment. It helps policymakers and businesses formulate strategies to attract and retain FDI, thereby fostering economic growth and development in the ASEAN countries.
Rationale and objectives of the study
Rationale
ASEAN countries have experienced a consistent rise in foreign direct investment (FDI) in recent years, driven by an attractive investment environment, expanding consumer markets, and a strategic geographic position that appeals to foreign investors.
It is mainly driven by factors such as regional integration, growing consumer markets, favorable investment climates, and government support.
Foreign Direct Investment (FDI) plays a crucial role in fostering economic growth and development within the ASEAN region Despite substantial FDI inflows, it is essential to identify the specific factors that influence these investments, especially as their importance continues to rise in ASEAN economies This study seeks to address the existing research gap by analyzing the key determinants affecting FDI inflows in ASEAN countries during the designated period.
Objectives
- To identify and analyze the economic factors influencing FDI inflows in
ASEAN countries, considering variables such as market size, trade openness, infrastructure, and inflation.
- To compare the variations in FDI patterns among individual ASEAN countries and identify country-specific factors that influence FDI inflows.
- To provide recommendations and insights for policymakers, businesses to enhance the attractiveness of ASEAN countries for FDI, foster economic growth, and contribute to the sustainable development of the region.
Objects and scope
Our research pays attention to the factors that have an impact on FDI inflows in 10 ASEAN countries including Market size, Trade openness, Infrastructure and Inflation.
The analysis spans from 2010 to 2021, providing a thorough examination of trends and changes in foreign direct investment (FDI) inflows during a crucial period when ASEAN members increasingly attracted substantial FDI from various sources.
The study will focus on quantitative analysis, by applying relevant techniques to conduct a result based on the collected data.
Structure of the study
Provide an overview of the importance of FDI and the significance of analyzing factors affecting FDI inflows in ASEAN countries.
- Review of literature on theoretical framework and factors affecting FDI inflows
Provide a clear and detailed description of the methods and procedures that will be used to conduct the research.
Present and interpret the findings of your research This section provides a comprehensive and thoughtful analysis of our findings, demonstrating the value and significance of our proposed research project.
5 Recommendations for Vietnam’s service industry
Based on the result, we provide recommendations for the specific needs and challenges of Vietnam, considering the unique characteristics and aspirations of the country.
Summarize the key points of this proposal and reinforce the recommendations.
2.1 Theoretical Basis and Literature Review
Foreign Direct Investment (FDI), as defined by the International Monetary Fund (IMF), refers to cross-border investments where an investor from one country exerts control or significant influence over a business in another economy This form of international capital flow is a crucial element of a nation's financial accounts.
Foreign Direct Investment (FDI) is defined by Eurostat as a type of international investment aimed at establishing a lasting interest by an investor in an enterprise located in a different economy.
Horizontal FDI is the predominant type of foreign direct investment, where companies invest in foreign firms that produce similar products and services to those offered in their home markets.
Vertical FDI involves investing in a company within a supply chain, which may not necessarily belong to the same sector as the investor Companies engaging in vertical FDI typically aim to reduce raw material costs and enhance control over their supply chain.
There are two sub-categories of vertical FDI:
● Forward vertical FDI: A multinational decides to acquire or operate in the role of a distributor
● Backward vertical FDI: A multinational decides to acquire or operate in the role of a supplier
Conglomerate FDI occurs when investments are made in two wholly separate enterprises in two completely different industries As a result, FDI is not directly related to the investor's company.
Platform FDI refers to the type of investment when an enterprise has an expansion plan into a foreign country, but the products manufactured are exported to another third country.
Yasmin et al (2003) identified key factors influencing foreign direct investment (FDI) in developing countries, highlighting that domestic investment, labor force, external debt, and trade openness significantly affect FDI inflows in both upper and lower middle-income nations In contrast, lower-income countries are more influenced by urbanization, market size, living standards, inflation, current account balance, and wages The study also revealed that upper middle-income countries, characterized by better internal and external balances, higher real GDP per capita, trade openness, and larger market sizes, attract greater FDI flows.
Demirhan and Masca (2008) investigated the determinants of foreign direct investment (FDI) inflows in 38 developing countries from 2000 to 2004 Their research identified three key factors positively correlated with FDI inflows: per capita growth rate, number of telephone main lines, and the level of openness Conversely, they found that inflation and tax rates negatively affect FDI inflows.
Nunnenkamp (2002) examined the factors influencing foreign direct investment (FDI) inflows in developing countries amid globalization The study categorizes these determinants into traditional factors, like market size and growth, and non-traditional factors, including costs, additional production factors, and openness levels Despite the emergence of non-traditional influences, traditional market-related determinants remain the primary drivers of FDI allocation.
Bakar et al (2012) examined the impact of infrastructure on foreign direct investment (FDI) inflows in Malaysia, while also considering other factors such as market size, trade openness, and human capital The study found that improved infrastructure significantly attracts FDI by enhancing operational efficiency for multinational corporations (MNCs) Additionally, a higher real GDP per capita, indicative of market size, positively influences FDI inflows Furthermore, a greater trade share relative to real GDP, reflecting trade openness, correlates positively with FDI In contrast, the study revealed a negative relationship between human capital and FDI inflows.
2.2 Factors affecting FDI inflows and hypothesis:
Research has consistently examined the relationship between foreign direct investment (FDI) and gross domestic product (GDP) GDP is a key indicator of a nation's market size and economic strength, and it is anticipated to positively impact FDI inflows (Asiedu, 2001; Polyxeni & Theodore, 2019).
Research consistently highlights the importance of GDP per capita as a dependent variable in analyzing foreign direct investment (FDI) in developing countries This approach allows for meaningful comparisons of economic conditions and their impact on FDI For instance, Hakizimana (2015) found a strong positive relationship between FDI and GDP per capita in Rwanda, indicating that FDI contributes to economic growth Similarly, Kok and Ersoy (2009) noted that rising GDP per capita positively influences FDI inflows Chakrabarti (2001) emphasized the significance of market size, measured by GDP per capita, as a robust determinant of FDI Al-Sadig (2009) also utilized GDP per capita to assess market potential in FDI analysis Furthermore, Arbatli (2011) considered GDP per capita as a key factor in emerging markets, while a study covering India, Iran, and Pakistan from 1982 to 2012 reaffirmed GDP per capita as a conventional determinant for sustained FDI inflows.
In light of these findings, our team would like to propose the first hypothesis:
H1: Market size positively affects FDI inflows
Trade openness, defined as the sum of imports and exports relative to GDP, reflects a nation's integration into global markets and significantly influences foreign direct investment (FDI) inflows Research by Alotaibi & Mishra (2014) and others, including Busse & Hefeker (2007) and Efobi et al (2015), consistently demonstrates a positive correlation between trade openness and FDI Studies focusing on developing countries, such as Liargovas & Skandalis (2011), and specific Asian nations like India, Iran, and Pakistan (Zaman et al., 2018; Patsupathi & Sakthi, 2019), further confirm this relationship Additionally, Mudiyanselage et al (2021) highlight that higher trade openness is linked to increased FDI inflows, suggesting that enhancing trade openness is a strategic approach to attracting sustained foreign investment.
Research, including Seim (2009), indicates a negative correlation between FDI inflows and trade openness in transitioning countries, suggesting that the relationship is complex and warrants further examination The nature of this relationship may differ based on individual case characteristics, with theoretical insights from Markusen and Maskus (2002) and Dunning (1993) emphasizing that the effects of trade openness on FDI are influenced by the motivations behind FDI activities Consequently, we propose the following hypothesis:
H2: Trade openness positively affects the FDI inflows
A well-developed and accessible infrastructure is crucial for the operations of multinational companies, significantly reducing costs and positively influencing investors' decisions on where to establish their operations While not the only determinant, infrastructure plays a vital role in economic activity in developing nations Multinational corporations tend to favor countries with established infrastructure, as it allows them to effectively utilize imported machinery and equipment to optimize their operations.
The integrated approach presented by (1977, 1979, 2000) combines traditional trade theories with internalization theory, highlighting that foreign direct investment (FDI) decisions are influenced by ownership-specific competitive advantages, locational advantages in host countries, and internal firm-specific advantages The significance of a host country's infrastructure is crucial in shaping FDI decisions made by multinational enterprises (MNEs), as enhanced infrastructure has been shown to boost productivity and long-term profitability, thereby attracting FDI (Kaur et al., 2016) Improved transportation systems, including road, rail, and air networks, play a vital role in attracting FDI by reducing domestic freight costs and lowering import and export expenses, creating a favorable investment climate for investors (Bellak, Leibrecht, & Rửmisch, 2007; Leibrecht & Riedl, 2010; Riedl, 2010; Wekesa et al., 2016).
Therefore, our team would like to propose the third hypothesis:
H3: Infrastructure positively affects the FDI inflows
The relationship between Foreign Direct Investment (FDI) and inflation has been extensively studied, as FDI is a key driver of economic growth in countries High inflation rates negatively impact FDI inflows in developing economies, hindering their progress (Mustafa, 2019) Therefore, it is essential to empirically explore the causal relationship between inflation and FDI Increased inflation leads to greater uncertainty and risk, which discourages foreign investors and adversely affects their investment decisions (Udoh &).
THEORETICAL BASIS AND LITERATURE REVIEW
Factors affecting FDI inflows
Research has consistently examined the relationship between foreign direct investment (FDI) and gross domestic product (GDP) GDP, reflecting a nation's market size and economic strength, is anticipated to positively impact FDI inflows (Asiedu, 2001; Polyxeni & Theodore, 2019).
Research consistently highlights the importance of GDP per capita as a dependent variable in analyzing foreign direct investment (FDI) in developing countries This approach allows for meaningful comparisons of economic conditions and demonstrates a strong positive relationship between FDI and GDP per capita, as evidenced by studies in Rwanda (Hakizimana, 2015) and broader analyses (Kok & Ersoy, 2009) The significance of market size, measured by GDP per capita, is emphasized by Chakrabarti (2001) and further supported by Al-Sadig (2009), who also uses GDP per capita to assess the potential of host countries for FDI Additionally, Arbatli (2011) incorporates GDP per capita in his research on FDI inflows in emerging markets A recent study covering India, Iran, and Pakistan from 1982 to 2012 reinforces these findings, confirming GDP per capita as a key determinant for sustained FDI inflows.
In light of these findings, our team would like to propose the first hypothesis:
H1: Market size positively affects FDI inflows
Trade openness, defined as the sum of imports and exports normalized by GDP, reflects a nation's integration into global markets and significantly influences foreign direct investment (FDI) inflows Numerous studies, including those by Alotaibi & Mishra (2014) and Seyoum et al (2014), have established a positive correlation between trade openness and FDI Research by Busse & Hefeker (2007), Efobi et al (2015), and others further supports this relationship Notably, a 2011 study on 36 developing countries from 1990 to 2008 confirmed that trade openness positively impacts FDI Similar findings emerged from research on Asian countries, including India, Iran, and Pakistan, conducted by Zaman et al (2018) and Patsupathi & Sakthi (2019), which utilized fixed-effect and Pooled OLS techniques Additionally, Mudiyanselage et al (2021) highlighted that higher trade openness correlates with increased FDI inflows globally and nationally, suggesting that enhancing trade openness is a strategic approach to attracting sustained FDI in the long term.
Research, including Seim (2009), indicates a negative correlation between FDI inflows and trade openness in transitioning countries, suggesting that the relationship is complex and warrants further examination The nature of this relationship may differ based on individual case characteristics Theoretical insights from Markusen and Maskus (2002) and Dunning (1993) emphasize that the effects of trade openness on FDI are influenced by the motivations behind FDI activities Consequently, we propose the following hypothesis:
H2: Trade openness positively affects the FDI inflows
A well-developed infrastructure is essential for the efficient operation of multinational companies' production and trade activities, leading to significant cost reductions and positively influencing investors' decisions on where to establish operations While not the only factor, infrastructure plays a critical role in economic activity in developing nations Multinational corporations tend to favor countries with established infrastructure, as it allows them to effectively utilize imported machinery and equipment to optimize their operations.
The integrated approach presented by (1977, 1979, 2000) combines traditional trade theories with internalization theory, highlighting that foreign direct investment (FDI) decisions are influenced by ownership-specific competitive advantages, locational advantages, and internal firm-specific advantages The locational advantages emphasize the importance of a host country's infrastructure in shaping FDI decisions made by multinational enterprises (MNEs) Enhanced infrastructure not only boosts productivity and long-term profitability but also attracts FDI, as demonstrated by Kaur et al (2016) Improved transportation systems, including road, rail, and air networks, have been shown to lower domestic freight costs and reduce import and export expenses, creating a favorable investment climate for investors (Bellak, Leibrecht, & Rửmisch, 2007; Leibrecht & Riedl, 2010; Riedl, 2010; Wekesa et al., 2016).
Therefore, our team would like to propose the third hypothesis:
H3: Infrastructure positively affects the FDI inflows
The relationship between Foreign Direct Investment (FDI) and inflation has been extensively studied, as FDI is a key driver of economic growth in countries High inflation rates negatively impact FDI inflows in developing economies, hindering their progress (Mustafa, 2019) Therefore, it is essential to empirically explore the causal relationship between inflation and FDI Increased inflation leads to greater uncertainty and risk, which discourages foreign investors and adversely affects their investment decisions (Udoh &).
Diversifying investments across different countries and financing options can effectively reduce the adverse impacts of inflation on investment fluctuations Research by Djokoto (2012) revealed an inverse relationship between the inflation rate and foreign direct investment (FDI) in Ghana, a finding that was further supported by Igwemeka Ebele Okafor's research.
In Nigeria, a study conducted in 2016 revealed a direct relationship between foreign direct investment (FDI) and inflation; however, the effect of FDI on inflation was deemed insignificant Similarly, research by Mohammed Valli and Mansur Masih in 2014 explored the long-term relationship between inflation and FDI in South Africa, uncovering a negative correlation between inflation rates and FDI inflows.
Therefore, our team would like to propose the fourth hypothesis:
H4: Inflation negatively affects the FDI inflows
This research employs a quantitative methodology, beginning with a synthesis of information from prior studies in the literature review The authors carefully select relevant factors to construct the model for this paper Following the identification of these determinants, the quantitative method is applied to analyze, evaluate, and validate the data.
The research team utilized STATA software to analyze secondary data sourced from various online platforms, employing the Fixed Effects Model (FEM) technique for panel data analysis.
This study examines the influence of four key economic factors—market size, trade openness, infrastructure, and inflation—on foreign direct investment (FDI) inflows into Vietnam The proposed model aims to provide insights into these relationships.
FDIi = β0 + β1MKSi + β2TOi + β3TELi + β4INFi + ɛ
FDIi: The amount of FDI inflows in 10 ASEAN countries in year i (in million US dollars)
The market size, indicated by GDP per capita in year i (measured in million US dollars), is expected to positively influence foreign direct investment (FDI) inflows into Vietnam.
The higher the GDP per capita, the larger the market size and the more attractive a market is to foreign investors, hence increasing FDI inflows.
The trade openness of the 10 ASEAN countries in year i is measured by the sum of exports and imports of goods and services as a percentage of GDP A higher level of trade openness is expected to positively influence foreign direct investment (FDI) inflows, as it indicates greater international liberalization of capital and services This environment allows foreign investors to leverage the host countries' comparative advantages and facilitates re-exporting to their home countries and beyond, leading to an increase in FDI inflows alongside greater trade openness.
TELi analyzes the infrastructure across 10 ASEAN countries in year i, focusing on the number of mobile phone subscribers per 100 people This metric is anticipated to positively influence foreign direct investment (FDI) inflows, as improved infrastructure is likely to boost investment productivity.
INFi: The level of inflation in 10 ASEAN countries in year i (measured in percentage).