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ASEAN-5 Countries: In Competition for FDI

This paper explores the factors that may account for the disparities in FDI received by five ASEAN member-countries, namely, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, from 15 source countries for the period 2009-2019. As funding from FDI will be paramount in reviving economies post-COVID-19, governments need to take the necessary steps to improve their investment environments to retain and attract FDI. Using a gravity model approach, this study found that foreign direct investors are attracted by a range of economic and non-economic factors. First, sovereign credit ratings have signaled effects for foreign direct investors. Second, while reducing corporate tax rates and FDI restrictions can potentially increase FDI, improving the efficiency of doing business in a country, particularly on trading across borders, is considered as more relevant by foreign direct investors. Third, the quality of human capital appears to be more important than the cost of labor. Finally, while public governance appears to be important only for some investors, it is positively and highly correlated with the indicators of ease of doing business, quality of infrastructure, competitive industrial performance, and technological innovation in production – implying that improvements in governance can have both direct and indirect significant effects on a country’s FDI performance. Findings suggest that foreign investors are attracted to a range of economic and non-economic factors. FDI promotion can be successful only if it is accompanied by relevant policies, including but not limited to those that improve the efficiency of business regulations, raise the quality of public governance and infrastructure, and improve the availability of appropriate human capital.


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