Cross border capital flows : an analysis of the South-East Asian region

Abstract

Capital flows are becoming an important element for economic growth and development in the South-east Asian region. Therefore, the main aim of this study is to examine the determinants of foreign direct investment in emerging economies through a comparative study and econometric modelling. The empirical analysis is based on cross-sectional data for 89 countries, both developed and emerging in order to help in the assessment of whether there are significant differences between these country groups. According to the econometric results, in the developed country model, six variables have proven to be statistically significant and therefore have an effect on foreign direct investment, these being, market size, capital formation, consumption, exports, exchange rate movements and inflation. On the other hand, in the emerging countries model, three explanatory variables, capital formation, consumption and unemployment resulted to be statistically significant. In contrast, the combined sample of both developed and emerging countries has shown that capital formation, consumption and exports are statistically significant. Noticeably, capital formation and consumption are statistically significant in all three models, therefore indicating that these explanatory variables affect foreign direct investment irrespective of whether the country is developed or not. Furthermore, a comparative analysis of the structural reforms taking place in three South-east Asian countries, namely Indonesia, the Philippines and Malaysia was conducted to provide an understanding on the similarities and progress that these reforms are fostering within the respective country with reference to capital inflows. Overall it was concluded that the reforms being implemented in these countries are providing a better investor climate, hence foreign direct investment has been increasing.