The role of financial development on foreign direct investment in asean-5 countries

Panel cointegration with cross-sectional dependency analysis

Elya Nabila Abdul Bahri, Abu Hassan Shaari Md Nor, Nor Hakimah Haji Mohd Nor

Research output: Contribution to journalArticle

Abstract

This paper investigates the impact of the financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980–2013. The 5 countries included in this study are Malaysia, Thailand, Indonesia, Singapore and Philippines. In the model, financial development, consumer price index (CPI) and real gross domestic product (GDP) per capita are the independent variables. The stationarity of the variables is examined through both first-and second-generation unit root tests with the cross-sectional dependence among countries. The Pedroni and Westerlund cointegration tests results show the existence of long run relationship among the variables. Long term coefficients are estimated using Fully Modified Ordinary Least Square (FMOLS) model and it reveals that financial development has a nonlinear relation with FDI. When financial development passes the threshold point at above 70 point, it will benefit the FDI. Furthermore, the Panel Vector Error Correction Model (VECM) is applied to examine the causality relationship among the associated variables. The causality analysis confirms the presence of both long-term relationship and short term dynamic among the FDI, financial development, CPI and real GDP per capita.

Original languageEnglish
Pages (from-to)1-23
Number of pages23
JournalAsian Academy of Management Journal of Accounting and Finance
Volume14
Issue number1
DOIs
Publication statusPublished - 1 Jan 2018

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Panel cointegration
Foreign direct investment
Financial development
Consumer price index
Gross domestic product
Causality
Stationarity
Cross-sectional dependence
Unit root tests
Ordinary least squares
Long-term relationships
Singapore
Coefficients
Thailand
Indonesia
Cointegration test
Malaysia
Philippines
Vector error correction model
Long-run relationship

Keywords

  • Cross-sectional dependence
  • Financial development
  • Foreign direct investment
  • Nonlinear
  • Panel cointegration second-generation

ASJC Scopus subject areas

  • Accounting
  • Finance

Cite this

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title = "The role of financial development on foreign direct investment in asean-5 countries: Panel cointegration with cross-sectional dependency analysis",
abstract = "This paper investigates the impact of the financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980–2013. The 5 countries included in this study are Malaysia, Thailand, Indonesia, Singapore and Philippines. In the model, financial development, consumer price index (CPI) and real gross domestic product (GDP) per capita are the independent variables. The stationarity of the variables is examined through both first-and second-generation unit root tests with the cross-sectional dependence among countries. The Pedroni and Westerlund cointegration tests results show the existence of long run relationship among the variables. Long term coefficients are estimated using Fully Modified Ordinary Least Square (FMOLS) model and it reveals that financial development has a nonlinear relation with FDI. When financial development passes the threshold point at above 70 point, it will benefit the FDI. Furthermore, the Panel Vector Error Correction Model (VECM) is applied to examine the causality relationship among the associated variables. The causality analysis confirms the presence of both long-term relationship and short term dynamic among the FDI, financial development, CPI and real GDP per capita.",
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