Determinants Attracting FDI Into ASEAN

In this paper, we survey existing theories on international direct investment as well as empirical findings on determinants toward foreign direct investment(FDI), wherein we tried to analyze those determinants for all ten ASEAN states using empirical analyses based on economic and institutional aspects, viewed from the perspectives of both the host and home countries. We also examined ASEAN competitiveness via descriptive statistical methods. After conducting the above analyses, we concluded that:First, from the analysis of determinants attracting FDI into ASEAN, it was derived that from an economic perspective, the main factors attracting FDI into ASEAN include market size, market growth, trade openness, infrastructural development, unemployment rates and foreign exchange rates. These findings are consistent with previous studies. From an institutional perspective, an important factor attracting FDI into ASEAN is regulatory quality, also consistent with previous studies, implying its significance toward determining FDI. In most ASEAN developing states, traditional economic factors tend to remain important toward attracting FDI, too. However, in recent years, amid a volatile global political environment, institutional factors are also becoming important toward FDI and cannot be ignored.Second, we conclude that determinants toward China’s outward direct investment within ASEAN include, economically, the market size, natural resources, human capital, proximity between host/home, and foreign exchange rates. This result is consistent with previous studies. From an institutional perspective, Chinese investors do not give highest priority to the rule of law, political stability, governmental or regulatory quality, but are more concerned with the alignment with their business strategy and social acceptance such as a large population of ethnic Chinese.Third, determinants toward Japan’s outward direct investment into ASEAN economically include market size, natural resources, Japanese import volume from ASEAN, and ASEAN rates of inflation. From an institutional perspective, we found that that there was no factor having a significant impact.Fourth, the main findings toward ASEAN competitiveness in attracting FDI – by comparative analysis – were:1) Market size and level of economic development have an inverse relationship, which means that a country with a higher per capita real GDP faces lower real GDP growth. Singapore and Brunei have high per capita GDPs, but mid‐range GDP growth, while the CLMV states have lower per capita GDPs, but higher economic growth rates.2) As for labor costs, rising ASEAN minimum wage rates, with incumbent higher pay for workers and mid‐level professionals as well, has led to rising manufacturing costs. After the launch of the ASEAN Economic Community(AEC) at the end of 2015, freer movement of skilled labor will encourage some of them to migrate to states with higher wages, e.g., Singapore, which could lead to further deterioration in domestic skilled labor shortages.3) With regard to human resources development, many ASEAN states are currently able to provide not only a large, young workforce required for labor‐intensive manufacturing, but also the ability to supply such young workers over the next 20 years. Most of ASEAN’s high‐tech workers are concentrated in Singapore, but Malaysia, Thailand and the Philippines could also show such development.4) In infrastructure, Singapore, Thailand, Malaysia have better integrated systems, and can provide convenient transport by land, sea or air for foreign invested businesses. Indonesia and Vietnam are also focused on improving their infrastructure and investment environment to attract more foreign capital.5) As for corruption, the 2014 Corruption Perceptions Index places four‐fifths of ASEAN states with scores below 50 points, indicating that most still practice insider trading. However, their rankings have increased significantly, meaning that they are also aware that corruption has affected economic development, thereby increasing the intensity of their fight against it to better their image and thus improve foreign investor confidence.6) In ease of doing business, the 2015 Doing Business report ranks Singapore as highest within ASEAN as having the most favorable business environment, followed by Malaysia, Thailand, Vietnam, the Philippines, Brunei, Indonesia, Cambodia, Laos and Myanmar, in that order. It is noteworthy that the distance to acceptable scores of ASEAN states, excepting Singapore, is diminishing, indicating that they are competing to create a more favorable environment to attract more foreign investors.This paper has the following significant contributions:1. Gathering the numerous empirical studies on determinants of FDI using research methods, proxies, expected results and empirical results, we searched data on all ten ASEAN states using listed proxies, then designed models, including proxy variables, via a regression method, and thereafter by elimination finally selected the best estimate model. This provides a quick reference for researchers who are intent upon further investigation into this topic.2. A combination of economic and institutional perspectives were used to analyze the determinants of FDI into ASEAN, attempting to collect the most recent data on all ten ASEAN states for empirical analysis. There is much research on FDI, but in China, most studies on FDI so far focus on the impact of investment on industrial structure. There are few empirical studies on the determinants of FDI into ASEAN, and most such findings are not up to date, and because of the inaccessibility of some data, most empirical studies focus only on the six leading ASEAN members. However, in recent years, due to a changing international economic environment and progress toward regional economic integration, factors influencing foreign investment decisions have also changed. Therefore, we used the most recent data samples from 2004‐2012 on all ten ASEAN states to conduct empirical analyses that might be closer to the actual situation.3. We conducted our empirical analyses on the determinants of FDI into ASEAN from the perspectives of both the host countries(ASEAN states) as well as home countries(China and Japan). This differs from international investment studies on determinants of FDI that mostly focus on a single perspective of either the host or home country.