IDEAS home Printed from https://ideas.repec.org/a/gam/jecomi/v13y2025i6p157-d1670474.html

The Impact of Foreign Direct Investment on Economic Development in South Asia and Southeastern Asia

Author

Listed:
  • Darlington Chizema

    (Department of Accounting and Economics, Faculty of Economic and Management Sciences, Sol Plaatje University, Central Campus, C003 Economics and Management Sciences Building, 26 Scanlan Street, Kimberley 8301, South Africa)

Abstract

This study examines the impact of inward foreign direct investment (FDI) on economic growth in South and Southeast Asia from 2006 to 2022, using a comprehensive panel dataset and multiple econometric techniques. The baseline estimation employs Feasible Generalized Least Squares (FGLS), with robustness checks using Fixed Effects with Driscoll–Kraay standard errors, the Common Correlated Effects Mean Group (CCEMG) estimator, and Two-Stage Least Squares (2SLS). The results consistently show that FDI and Gross Capital Formation (GCF) significantly promote growth, while the Human Capital Index (HCI), Trade Openness (TO), and Inflation (I) have limited or adverse effects. Government spending (GS) is negatively associated with growth, suggesting inefficiencies in public resource allocation. The findings underscore the importance of enhancing absorptive capacity through investments in education, institutional quality, and trade facilitation. Policy recommendations include adopting performance-based budgeting and independent audits, drawing on Malaysia’s anti-corruption and audit reforms. To address the weak impact of human capital, this study advocates for expanding public–private partnerships in technical and vocational education, modelled on Singapore’s SkillsFuture initiative. Additionally, digital investment platforms like Indonesia’s Online Single Submission (OSS) system and infrastructure upgrades are recommended to reduce trade costs and improve the investment climate. Finally, the study calls for deeper regional integration through harmonized investment regulations under the ASEAN Comprehensive Investment Agreement (ACIA) and the development of cross-border special economic zones (SEZs). These recommendations are grounded in empirical evidence and tailored to the region’s structural characteristics, offering actionable insights for policy-makers.

Suggested Citation

  • Darlington Chizema, 2025. "The Impact of Foreign Direct Investment on Economic Development in South Asia and Southeastern Asia," Economies, MDPI, vol. 13(6), pages 1-15, June.
    • Handle: RePEc:gam:jecomi:v:13:y:2025:i:6:p:157-:d:1670474
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7099/13/6/157/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7099/13/6/157/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    2. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    3. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    4. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    5. Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LLC, vol. 7(3), pages 281-312, September.
    6. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    7. B. Bhaskara Rao & Gazi Hassan, 2011. "Determinants of the long-run growth rate of Bangladesh," Applied Economics Letters, Taylor & Francis Journals, vol. 18(7), pages 655-658.
    8. Shahzad Hussain & Ajid ur Rehman & Sabeeh Ullah & Abdul Waheed & Shoaib Hassan, 2024. "Financial Inclusion and Economic Growth: Comparative Panel Evidence from Developed and Developing Asian Countries," SAGE Open, , vol. 14(1), pages 21582440241, February.
    9. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Prempeh, Kwadwo Boateng & Musah, Mohammed & Appiah, Thomas & Danso, Felix Kwabena, 2025. "Revisiting the resource curse: Natural resource rents as drivers of economic growth in Ghana using advanced nonlinear techniques," Resources Policy, Elsevier, vol. 110(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mariia Shkolnykova & Lasse Steffens & Jan Wedemeier, 2024. "Systems of innovation: Path of economic transition and differences in institutions in central and Eastern Europe?," Growth and Change, Wiley Blackwell, vol. 55(1), March.
    2. Amendolagine, Vito & De Pascale, Gianluigi & Faccilongo, Nicola, 2021. "International capital mobility and corporate tax revenues: How do controlled foreign company rules and innovation shape this relationship?," Economic Modelling, Elsevier, vol. 101(C).
    3. Nayab Karim & Muhammad Tariq & Muhammad Azam Khan, 2025. "Examining the Moderated-Mediation Role of the Financial Sector and Institutional Quality in the Relationship Between Remittances and Economic Growth in Developing Countries," Journal of International Migration and Integration, Springer, vol. 26(1), pages 279-316, March.
    4. Alssadek, Marwan & Benhin, James, 2021. "Oil boom, exchange rate and sectoral output: An empirical analysis of Dutch disease in oil-rich countries," Resources Policy, Elsevier, vol. 74(C).
    5. Polloni-Silva, Eduardo & Moreno, Rosina & Moralles, Herick Fernando, 2025. "Technological content and institutional quality of FDI: Investigating the effects on the environment in Brazil," International Business Review, Elsevier, vol. 34(6).
    6. Augustin Chola Kazembe & Martin Kazembe Shula & Gilbert Michel Lwanga Kapwaye & Bruno Emmanuel Ongo Nkoa & Arsene Mouongue Kelly, 2026. "Leveraging remittances for economic diversification: empirical insights from sub-Saharan Africa," Future Business Journal, Springer, vol. 12(1), pages 1-21, December.
    7. Dilla, Diana, 2017. "Staatsverschuldung und Verschuldungsmentalität [Public Debt and Debt Mentality]," MPRA Paper 79432, University Library of Munich, Germany.
    8. Albert MILLOGO & Ines TROJETTE & Nicolas PÉRIDY, 2021. "Are government policies efficient to regulate immigration? Evidence from France," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 53, pages 23-49.
    9. Li Chen & Stéphane Mbiankeu Nguea, 2025. "Natural Resource Protection: A Path to Human Development in Africa," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(5), pages 6604-6619, October.
    10. Prianto Budi Saptono & Gustofan Mahmud & Intan Pratiwi & Dwi Purwanto & Ismail Khozen & Lambang Wiji Imantoro & Maria Eurelia Wayan, 2024. "Book-Tax Differences during the Crisis: Does Corporate Social Responsibility Matter?," Sustainability, MDPI, vol. 16(17), pages 1-38, August.
    11. Eduardo Polloni-Silva & Diogo Ferraz & Flávia de Castro Camioto & Daisy Aparecida do Nascimento Rebelatto & Herick Fernando Moralles, 2021. "Environmental Kuznets Curve and the Pollution-Halo/Haven Hypotheses: An Investigation in Brazilian Municipalities," Sustainability, MDPI, vol. 13(8), pages 1-19, April.
    12. Maha Kalai & Hamdi Becha & Kamel Helali, 2024. "Effect of artificial intelligence on economic growth in European countries: a symmetric and asymmetric cointegration based on linear and non-linear ARDL approach," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 13(1), pages 1-37, December.
    13. Biswajit Patra & Narayan Sethi, 2024. "Does digital payment induce economic growth in emerging economies? The mediating role of institutional quality, consumption expenditure, and bank credit," Information Technology for Development, Taylor & Francis Journals, vol. 30(1), pages 57-75, January.
    14. George Ekonomou & George Halkos, 2024. "Expanding the tourism energy growth nexus: an empirical analysis within the Eurozone," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(11), pages 27585-27605, November.
    15. Asane-Otoo, Emmanuel, 2015. "Carbon footprint and emission determinants in Africa," Energy, Elsevier, vol. 82(C), pages 426-435.
    16. Mohammad Naim Azimi & Mohammad Mafizur Rahman, 2024. "Examining the environmental Phillips curve hypothesis in G7 nations: critical insights from wavelet coherence and wavelet causality analysis," Quality & Quantity: International Journal of Methodology, Springer, vol. 58(6), pages 5683-5713, December.
    17. Nerhagen, Lena & Brandt, Daniel & Mortazavi, Reza, 2023. "Use of public transport as a means to reach national climate objectives - On the importance of accounting for spatial differences and costs," Transport Policy, Elsevier, vol. 131(C), pages 56-65.
    18. Michael Hübler & Eduard Bukin & Yuting Xi, 2022. "The Effects of International Trade on Structural Convergence and CO2 Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(3), pages 579-604, November.
    19. Vatthanamixay Chansomphou & Masaru Ichihashi, 2011. "Foreign aid, foreign direct investment and economic growth of Lao PDR," IDEC DP2 Series 1-2, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    20. Amponsah, Mary & Agbola, Frank W. & Mahmood, Amir, 2021. "The impact of informality on inclusive growth in Sub-Saharan Africa: Does financial inclusion matter?," Journal of Policy Modeling, Elsevier, vol. 43(6), pages 1259-1286.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecomi:v:13:y:2025:i:6:p:157-:d:1670474. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.