Advertisement

Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

The Determinant of Foreign Direct Investment in ASEAN: A Semi-Gravity Approach

Abstract

This study used a semi gravity model to identify the determinants of FDI in ASEAN countries. The results revealed that besides the market size for host and source country, other criteria such as the shorter the distance, common in language and border, the extended market relative to distance also attracts more foreign investors. Other macroeconomic factors such as lower inflation rate, the slightly higher in exchange rate and good management of the government budget are among the key factors that attract more FDI. In addition to economic factors, social factors such as good telecommunication and infrastructure and non-economic factors such transparency and trade policy also encourage more investors to the ASEAN.

This is a preview of subscription content, log in to check access.

Notes

  1. 1.

    NIEs represent countries such as South Korea, Singapore, Taiwan and Hong Kong.

  2. 2.

    Japan and NIEs sought to relocate their labor-intensive operation overseas.

  3. 3.

    The source countries included in this study are Japan, China, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Indonesia, The Philippines, Thailand, and Unites States of America, Canada, Australia, New Zealand, France, Germany, United Kingdom and Netherland.

  4. 4.

    The host countries included in the study are from all ASEAN members such as Malaysia, Indonesia, Thailand, The Philippines, Singapore, Laos, Myanmar and Vietman.

  5. 5.

    Since the log form of zero does not exist.

  6. 6.

    See Kinoshita and Campos (2003).

  7. 7.

    However, this case is more relevant to portfolio investment, which has a higher liquidity than FDI.

  8. 8.

    The Index of Economic Freedom includes ten factors that cover trade policy, the fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal market activity.

  9. 9.

    In this regression, the log of distance is dropped due to multicollinearity with extended market relative to distance.

  10. 10.

    Since lower trade barriers encourage vertical type of FDI by facilitating the imports of input and machinery (Jaumotte 2004).

References

  1. ASEAN Secretariat (2004) ASEAN statistical yearbook 2004

  2. Balasubramanyam VN, Sapsford D, Griffiths D (2002) Regional integration agreements and foreign direct investment: theory and preliminary evidence. Manchester School 70(3):460–482

  3. Billington S (1999) The location of foreign direct investment: an empirical analysis. Appl Econ 31(1):65–66

  4. Boreinsztein E, De Gregorio J, Lee JW (1998) How does foreign direct investment affect economic growth? J Int Econ 45(1):115–135

  5. Brenton P (1999) Trade and investment in Europe: the impact of the next enlargement. Brussels: Centre for European Policy Studies, Brussels

  6. Buch CM, Kleinert J, Toubal F (2003a) The distance puzzle: on the interpretation of the distance coefficient in gravity equations. Kiel working papers 1159, Kiel Institute for the World Economy

  7. Buch CM, Kokta RM, Piazolo D (2003b) Foreign direct investment in Europe: is there redirection from the South to the East? J Comp Econ 31:94–109

  8. Chen C (1997) Provincial characteristics and foreign direct investment location decision within China. Chinese economy research unit working paper no. 97/16, University of Adelaide

  9. Cushman D (1985) Real exchange rate risk, expectations, and the level of direct investment. Rev Econ Stat 67:297–308

  10. Dowling M, Cheang CT (2000) Shifting comparative advantage in Asia: new tests of the ‘flying geese’ model. J Asian Econ 11:443–463

  11. Dowling M, Ray D (2000) The structure and composition of international trade in Asia: historical trends and future prospects. J Asian Econ 11:301–318

  12. Drabek Z, Payne W (1999) The impact of transparency on foreign direct investment. Staff working paper, EAR 99–02. World Trade Organization, Geneva

  13. Eaton J, Tamura A (1996) Japanese and U.S. exports and investment as conduits of growth. NBER working paper no. 5457. National Bureau of Economic Research, Cambridge

  14. Egger P, Pfaffermayr M (2002) The pure effects of European integration on intra-EU core and Periphery trade. Working papers in economics, 25, Institute of Economic theory, Economic Policy and Economic History, University of Innsbruck

  15. Eichengreen B, Frankel JA (1995) Economic regionalism: evidence from two 20th century episodes. North Am J EconFinanc 6(2):89–106

  16. Ekholm K (1998) Proximity advantages, scale economies, and the location of production. In: Braunerhjelm E (eds) The geography of multinational firms. Kluwer, Boston

  17. Froot K, Stein J (1991) Exchange rates and foreign direct investment: an imperfect capital markets approach. Quart J Econ 106:1191–1217

  18. Helpman E (1984) Multinational corporations and trade structure. Rev Econ Stud 92(3):451–471

  19. Hobday M (1995) East Asian latecomer firms: learning the technology of electronics. World Dev 23:1171–1193

  20. Jaumotte F (2004) Foreign direct investment and regional trade agreements: the market size effect revisited. International Monetary Fund, WP/04/206

  21. Kinoshita Y, Campos NF (2003) Why does FDI go where it goes? New evidence from the transitional economies. CEPR discussion paper no. 3984

  22. Kohlagen S (1977) Exchange rate changes, profitability and direct foreign investment. South Econ J 44:43–52

  23. Lall S (1996) Learning from the Asian Tigers. Macmillan, Basingstoke

  24. Manaenkov D (2000) What determines the region of location of an FDI Project? An empirical assessment. Working paper no. BSP/00/036E. New Econ School, Moscow

  25. Mauro FD (2000) The impact of economic integration on FDI and exports: a gravity approach. Working document No. 156, Centre for European Policy Studies

  26. Noorbakhsh F, Paloni A (2001) Human capital and FDI inflows to developing countries: new empirical evidence. World Dev 29(9):1593–1610

  27. Yeyati L, Stein E, Daude C (2002) Regional integration and the locational of FDI. Inter American Development Bank, Washington DC

Download references

Author information

Correspondence to Normaz Wana Ismail.

Data Source

Data Source

 

Variable Source
Bilateral FDI flows Dependent variable
ASEAN statistical yearbook 2004 ASEAN Secretariat ( website: http://www.aseansec.org)
Real gross domestic product Proxy for size market (constant US$, 2000)
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Population Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Gross domestic product per capita Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Endowment Proxy for relative endowment: absolute difference of GDP per capita between exporters and importers. (If countries differ in factor endowment, Vertical FDI is expected to prevail otherwise horizontal FDI becomes the prevalent mode of country)
Capital labor ratio Alternative measure for factor endowments
Gross fixed capital formation (constant 2000 US$)/total labor force
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Distance Distance are calculated based on the great circle formula, which uses latitudes and longitudes of the most important city (in terms of population) or of its official capital
Source: Centre D’etudes Prospectives Et D’informations Internationals (CEPII)
Common border and common language An alternative proxy for distance costs—FDI are generally higher in neighbouring countries to which economic, political, cultural and personal relations are much intense
Source: Centre D’etudes Prospectives Et D’informations Internationals (CEPII)
Extended market host country Alternative measure of market size which takes the value of the regional market size for countries belonging to a RTA
Calculated as the sum of the domestic market size of all countries sharing RTA
Extended market relative to distance host country Alternative measure for extended market size calculated by the sum of GDPs the host country that access at a zero tariff-calculating a weighted sum of the partners’s GDPs with weights equal to the inverse of the distance between the host and each partner
(Xi = ln(1 + Σ GDPj/Dij))
Real interest rate End of period: minimum lending rate (%), proxy for macro stability
Source: ASEAN Statistical Yearbook 2004
Real exchange rate Proxy for macro stability
International Monetary Fund, IMF Balance of Payment Statistics, ESDS International, University of Manchester
Inflation rate Proxy for macro stability
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Government budget Proxy for stabilization
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Openness Proxy for trade liberalization.
The sum of export and import, US dollars
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Trade Policy Index Trade policy Index, which measures the score from 1 to 5 based on country’s weighted average tariff rate, the lowest means very low level of protection
Source: The Heritage Foundation (http://www.heritage.org/index/)
Phone lines Proxy for infrastructures, Fixed line and mobile phone subscribers (per 1,000 people)
Source: World Bank, World Development Indicators, ESDS International, University of Manchester
Economic freedom index The Index of Economic Freedom is grading based on the score from 1 to 5 which the lowest represent the more conducive economic freedom inclusive ten factors that covers trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property right, regulation and informal market activity
Source: The Heritage Foundation (http://www.heritage.org/index/)
Transparency corruption perception index Transparency Corruption Perception Index compiled transparency International available at http://www.transparency.org/policy_research/surveys_indices/cpi

About this article

Cite this article

Ismail, N.W. The Determinant of Foreign Direct Investment in ASEAN: A Semi-Gravity Approach. Transit Stud Rev 16, 710 (2009). https://doi.org/10.1007/s11300-009-0103-0

Download citation

Keywords

  • ASEAN
  • Foreign direct investment
  • Gravity model

JEL Classification

  • F000
  • F150
  • F210