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The IUP Journal of Applied Economics
Regional Integration and Foreign Direct Investment into ASEAN-5: An Augmented Gravity Model Analysis
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Regional integration and capital inflows can be closely related to each other. Enlarged market through regional integration is an attraction for large-scale Foreign Direct Investment (FDI) inflow to take advantage of the opportunities present in the region. The intangibles present in the host countries, the availability of skill set among member countries, investment provision in the agreements and the location of the FDI source countries, among others, play an important role in attracting FDI into the integrated region. The present paper uses a panel data augmented gravity model to study the bilateral FDI inflows into original ASEAN-5 (Association of Southeast Asian Nations) countries after the initiation of trade and investment integration. The dataset for the study consists of 85 bilateral investment country pair for the period 1995-2015 across 14 variables with total data points of 24,990. Estimation techniques such as pooled ordinary least squares, fixed effect with vector decomposition and random effects model are employed to get an efficient estimate. The paper finds that there is a steady increase in FDI inflow into ASEAN countries and ASEAN integration positively influenced FDI inflow into the region. The economic, institutional and infrastructural factors that played an important role in attracting FDI inflow into host countries include per capita income, distance, economic globalization, economic freedom, government integrity in dealing with corrupt practices and telephone density.

 
 
 

Association of Southeast Asian Nations (ASEAN) is an important regional cooperation agreement in South East Asia, originally initiated with the purpose of political stability and regional harmony among conflicting nations in the region. Economic cooperation among ASEAN was brought in later to sustain the regional cooperation efforts in terms of more tangible outcomes such as consolidation of the regional market, efficient resource allocation within the region, regionalization of production networks and reap the economies of scale. Fifty years of regional integration along with an outward-oriented developmental strategy transformed ASEAN into a most dynamic region of the world today. ASEAN was the 6th largest economy in the world in 2016 with a combined Gross Domestic Product (GDP) of $2.55 tn, encompassing 6.2% of the world GDP (ASEAN, 2017a). As the regional integration gets deepened, ASEAN attracted more Foreign Direct Investment (FDI) from the rest of the world ($96 bn in 2016) as well as from within the region (24.7% in 2016). In this backdrop, the present paper looks into the impact of ASEAN regional integration on the bilateral FDI flows of original ASEAN-5 countries using an augmented gravity model approach. The paper is organized as follows: it discusses how FDI fits into Regional Trade Agreements (RTAs), followed by a brief review of the related literature, nature of FDI flows into the ASEAN region and the gravity model analysis of the bilateral FDI flows into ASEAN-5 countries.

 
 
 

Applied Economics Jouranl,Role of FDI in Regional Trade Agreements, FDI Inflows and Intra-ASEAN FDI ,Hausman Specification Test .