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Impact of Regulatory Barriers on Inward FDI in the ASEAN-5: An Augmented Gravity Model Approach (Updated Version of DP2023-01)

As the world recovers from the COVID-19 pandemic, attracting foreign direct investments or FDI has emerged as an important source for sustaining economic recovery in many developing countries. However, regulatory restrictions pose a challenge, limiting countries’ capacity to attract and benefit from FDI. This paper principally examines the impact of foreign restrictions on inward FDI in the ASEAN-5, namely, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. Data on FDI are based on the top 20 FDI source countries. Using an augmented gravity model for the period 2010 to 2020, this paper shows that reforms aimed at liberalizing FDI equity restrictions as measured by the index could potentially increase inward FDI. Moreover, host countries with greater geographical distance, higher corporate tax rates and inflation rates are likely to deter FDI due to increased costs for foreign investors. Larger market sizes, stronger perception that government corruption is controlled and greater quality of human capital also play significant roles in attracting FDI. By addressing regulatory barriers, particularly foreign equity restrictions and considering other factors deterring FDI, ASEAN-5 countries have the potential to substantially increase their level of inward FDI, unlock associated benefits, and accelerate their post-pandemic recovery.



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