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The Role of Financial Development on Foreign Direct Investment in ASEAN-5 Countries: Panel Cointegration with Cross-Sectional Dependency Analysis

Author

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  • Elya Nabila Abdul Bahri

    (School of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM Bangi, Selangor, Malaysia
    Faculty of Business, Finance and Hospitality, MAHSA University, Jalan SP 2, Bandar Saujana Putra, 42610 Jenjarum, Selangor, Malaysia)

  • Abu Hassan Shaari Md Nor

    (School of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM Bangi, Selangor, Malaysia)

  • Nor Hakimah Haji Mohd Nor

    (Faculty of Management and Muamalah, Kolej Universiti Islam Antarabangsa Selangor, Bandar Seri Putra, 43000 Kajang, Selangor, Malaysia)

Abstract

This paper investigates the impact of the financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980ñ2013. 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.

Suggested Citation

  • Elya Nabila Abdul Bahri & Abu Hassan Shaari Md Nor & Nor Hakimah Haji Mohd Nor, 2018. "The Role of Financial Development on Foreign Direct Investment in ASEAN-5 Countries: Panel Cointegration with Cross-Sectional Dependency Analysis," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 14(1), pages 1-23.
    • Handle: RePEc:usm:journl:aamjaf01401_1-23
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