IMPACT OF GROWTH, REER, TRADE OPENNESS, POLITICS AND CORRUPTION ON IN FDI EAST ASIA 1996-2024
DOI:
https://doi.org/10.65886/ijde.v2i03.61Keywords:
Foreign Direct Investment (FDI), ARDL-PMG Panel, Real Effective Exchange Rate (REER), Efficiency-Seeking Motive, Grease the WheelsAbstract
East Asia accounts for more than one-third of total global Foreign Direct Investment (FDI), yet empirical studies that distinguish between short-term and long-term effects and test the conditionality of the exchange rate on FDI in this region remain limited, particularly following the implementation of the RCEP in 2022. This study aims to analyze the influence of economic growth (GDP), the real effective exchange rate (REER), trade openness, political stability, and corruption control on FDI, while also testing the nonlinear relationship between corruption and FDI and the moderating effect of political stability on the REER–FDI relationship in China, South Korea, and Japan. The novelty of this study lies in the empirical testing of the moderating effect of political stability on the REER–FDI relationship using ARDL-PMG on a post-RCEP East Asian panel, an approach that has not been explored in previous literature. This study employs a quantitative method using balanced panel data comprising 87 observations from 1996 to 2024, sourced from the World Development Indicators (WDI) and the Worldwide Governance Indicators (WGI). The estimation technique used is the Panel ARDL-PMG (Pooled Mean Group) model, which can simultaneously estimate long-run and short-run coefficients, preceded by IPS and CIPS stationarity tests as well as the Johansen cointegration test for each country. The long-run estimation results indicate that GDP growth has a significant negative effect on FDI, reflecting the dominance of the efficiency-seeking motive. Trade openness has a significant negative effect, confirming trade-FDI substitution. Political stability has a significant positive effect as the strongest determinant. Corruption control is not significant due to high multicollinearity with political stability. The interaction between the REER and political stability has a significant negative effect, demonstrating the conditional effect of the exchange rate. In the short term, however, the REER and trade openness have a significant positive impact. Institutional stability is proven to be the primary prerequisite for long-term FDI attractiveness in East Asia. Governments are advised to prioritize strengthening political governance, formulating exchange rate policies that are responsive to a country’s institutional profile, and diversifying trading partners to mitigate trade FDI substitution.
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