Foreign Direct Investment, Institutional Quality and Sustainable Economic Development in ASEAN and SAARC Countries

Abstract

<p>In recent years, sustainable economic development has emerged as the main focal point of development strategies for governments and policymakers across the globe, including the Association of Southeast Asian Nations (ASEAN) and South Asian Association for Regional Cooperation (SAARC) regional member countries, which aligns with the United Nations sustainable development goals for member countries. Sustainable development has become critical for social and economic development that incorporates both societal and environmental aspects of development along with economic aspects. Conducive to sustainable development strategies, foreign direct investment (FDI) appears instrumental to economic development in emerging Asian countries in the last few decades. Similarly, in the recent past, macroeconomic institutional quality characteristics have become pivotal and the key driving force to attract FDI and stimulate growth in socio, environmental and economic aspects for sustained development. </p> <p>In this study, sustainable economic development is designated through a combination of outcomes from economic growth, poverty reduction and environment aspects for long-term economic development, and institutional quality factors as a set of macroeconomic governance indicators such as voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, and control of corruption. The purpose of this dissertation is to explore the association of FDI, institutional quality factors and their interaction variables with sustainable economic development aspects of (i) economic growth, (ii) poverty and (iii) environmental degradation in ASEAN (Thailand, Indonesia, Vietnam, Philippines, Malaysia, Singapore, Myanmar, Cambodia, Laos, and Brunei) and SAARC (Bangladesh, India, Pakistan, Nepal, Bhutan, Sri Lanka, Maldives, and Afghanistan) countries from a comparative perspective. While some of the ASEAN countries are vibrant and dynamic economies in Asia, most SAARC countries remain underdeveloped, backward and unprosperous. However, most ASEAN and SAARC member countries have some common characteristics, such as weak infrastructure, low per capita private consumption, high unemployment rates, mass poverty levels on the economic front, and poor macroeconomic institutional governance settings and enforcement on the national front. Thus, a comparative analysis between both regional member countries can be non-trivial for better understanding of the role of FDI and institutional quality characteristics for sustainable economic development aspects and strategies.</p> <p>The study's sample period is 2006–2017" it spans a 12-year period with 120 observations in ASEAN and 96 observations in SAARC countries that represent significant changes in macroeconomic FDI inflow, economic growth, poverty and environmental aspects in ASEAN and SAARC countries. This study relies mainly on the framework provided by endogenous growth theory and institutional theory to develop a set of hypotheses for empirical testing. The regression analyses are framed around three dependent variables for sustainable economic development—economic growth (per capita gross domestic product [GDP]), poverty incidence (poverty head count rate [PHR]) and environment (carbon dioxide damage [CO₂])—and two independent variables (FDI and institutional quality characteristics) as the major variables of interest to test the study's hypotheses. To examine the relationship between FDI, institutional quality factors and sustainable economic development proxies (GDP, PHR, CO₂), this study uses two econometric methods: first, an ordinary least squares (OLS) regression" second, a panel model (fixed effect [FE] or random effect [RE]) regression to control for unobserved heterogeneity. </p> <p>For the first test of relationship between FDI, institutional quality and GDP, the findings of FE estimations show that for the combined sample of ASEAN and SAARC countries, (a) FDI has substantial positive impact on GDP, (b) institutional quality factors have positive impacts on GDP and (c) FDI and institutional quality interaction variables have positive moderating impacts on the relationship between FDI and GDP. Again, for ASEAN sample countries, the findings are largely similar to those of combined sample reported.</p> <p>Finally, for SAARC sample countries, FDI has no significant effect on GDP and institutional quality has marginal positive impacts on GDP. However, FDI and institutional quality interaction variables have no effective moderating impact on the relationship between FDI and GDP. These findings provide evidence of vast differences between ASEAN and SAARC regional member countries pertinent to the role of institutional quality environments, wherein ASEAN countries outperform SAARC countries in shaping economic growth through attracting FDI for sustainable economic development. </p> <p>Further, for the second test of relationship between FDI, institutional quality and PHR, the findings of FE estimations demonstrate that for the combined sample of ASEAN and SAARC countries, (a) FDI has no significant influence on PHR, (b) institutional quality factors have some negative association with PHR and (c) FDI and institutional quality interaction variables have no moderating influence on the association between FDI and PHR. Again, for ASEAN sample countries, the findings are mostly similar to those of combined sample reported. Finally, for SAARC sample countries, both FDI and institutional quality have no significant poverty reduction effect on PHR. Further, their interaction variables have a detrimental moderating influence on the relationship between FDI and PHR. This evidence indicates substantial differences between ASEAN and SAARC regional member countries in relation to their institutional quality characteristics, in which, unlike SAARC countries, ASEAN countries can effectively reduce poverty for sustainable economic development without the use of FDI. </p> <p>Finally, for the third test of relationship between FDI, institutional quality and CO₂ emissions, the findings of the FE estimations reveal that for the combined sample of ASEAN and SAARC countries, (a) FDI has no significant effect on CO₂, (b) institutional quality factors have no expected effects on CO₂ and (c) FDI and institutional quality interaction variables have no moderating effects on the link between FDI and CO₂. However, for ASEAN sample countries, the findings are similar to those of the combined sample reported. For SAARC sample countries, FDI has no significant effects on CO₂ emissions and institutional quality factors have no expected significant effects on CO₂ emissions. Besides, FDI and institutional quality interaction variables have no significant moderating effects on the CO₂ of ASEAN, whereas marginal moderating effects on SAARC countries. These findings document differences between ASEAN and SAARC regional member countries regarding their deficiency of appropriate institutional quality settings and preparedness through proper resourcing to mitigate environmental degradation challenges for sustainable economic development.</p> <p>This study offers in-depth insights on the role of FDI and institutional quality characteristics for long-term sustainable economic development in ASEAN and SAARC regional member countries from a comparative perspective, implying the importance of implementing FDI and institutional quality policies depending on the characteristics of respective regional member countries. The findings of this study contribute to the growing body of knowledge in economic growth, poverty reduction and environmental degradation from the context of emerging markets and regional economic cooperation. The institutional quality settings in ASEAN and SAARC countries are significantly different, as are their varied impact on economic growth, poverty reduction and environmental aspects, with the use of FDI or not. The first study emphasises the necessity to adopt appropriate FDI policies while taking into account the country's institutional characteristics by exposing differences among ASEAN and SAARC countries regarding the impact of FDI and institutional quality on economic growth. The second study uses two alternative measures of poverty to provide evidence that FDI alone is unable to reduce poverty in sample countries, rather appropriate institutional quality settings can eradicate poverty in both regional member countries. The third study provides evidence that FDI is not responsible for environmental degradation in sample countries and institutional settings of sample countries are not sufficient to reduce environmental degradation. The empirical findings of this study for ASEAN and SAARC countries have implications for governments, regulators and policymakers of these countriessuch as the implementation of effective national governance environment and human capital development for attracting FDI and eradicating poverty- as well as international donor agencies, investors and foreign governments supplying FDI and other types of in-kind socioeconomic-technological assistance. </p>