Academic journal article Journal of Southeast Asian Economies

Ease of Doing Business and FDI Inflows in ASEAN

Academic journal article Journal of Southeast Asian Economies

Ease of Doing Business and FDI Inflows in ASEAN

Article excerpt

1. Introduction

The Association of Southeast Asian Nations (ASEAN), which since 1967 has undergone several successive steps of economic integration, is a very dynamic region with regard to foreign direct investment (FDI) flows and international trade. This fact reflects the member countries' commitment to regional as well as global economic integration, with trade and FDI playing a significant role in ASEAN's economic development strategy (e.g., Hsieh 2013; Plummer and Cheong 2009; Freeman and Bartels 2004). Besides deepening integration, developments such as the rising importance of the service sector, time-based competition, and human capital imply greater adjustments and challenges for these countries. The reshaping of conditions and economic factors to attract FDI has been ongoing and is likely to take place with an increased intensity, as the integration process progresses.

The above discussion suggests that standard location determinants (e.g., labour cost, natural resources, etc.) might no longer be sufficient and may even become relatively less important. The relevant literature, which is presented in the next section, identifies institutional quality and business regulatory framework as important determining factors of domestic business activity, FDI, and economic growth in a country. Hence, an entrepreneurship-oriented and business-friendly production location coupled with an efficient regulatory environment could increasingly constitute a crucial driving force behind an ASEAN member country's competitiveness and attractiveness for multinational enterprises (MNEs).

With regard to ASEAN, however, the evidence thus far is scarce, as there is only a small number of empirical studies on the subject matter (e.g., Buracom 2014; Tajul Ariffin Masron and Eliza Nor 2013; Hussain Gulzar Rammal and Zurbrugg 2006). Furthermore, these findings are based on rather general governance quality indicators. Thus, though the importance of the overall quality of the institutional environment is highlighted, no information is provided on specific business matters pertaining to the efficiency of regulatory systems and on the ease of undertaking entrepreneurial activities.

However, firms' daily operations, productive activities, and investment decisions are affected by a large number of distinct regulations corresponding to specific business issues. Therefore, the objective of this paper is to conduct a comprehensive and detailed analysis with respect to the role of business regulations in attracting FDI into ASEAN by examining distinct business regulatory issues.

More specifically, besides investigating the role and overall effect of the business regulatory environment, this paper aims to provide evidence on how the various regulations are related to FDI inflows, and identify the most relevant individual business regulations (categorized across different regulatory themes) as potential determinants. This is the key objective of the paper, which makes it rather unique and more insightful compared to other papers that only consider either a general institutional quality variable or the overall ease of doing business index.

By considering also a large set of other country-specific control variables, we empirically examine the inward FDI host country location determinants in the ASEAN area. The empirical analysis is conducted separately for intra- and extra-ASEAN FDI inflows to explore whether there are significant differences with regard to the location factors. Attention is also given to the relative importance and effect of business regulations vis-a-vis the control variables.

The remainder of the paper is structured as follows. Section 2 provides a brief overview and discusses the theoretical and empirical literature. Section 3 presents the data and variables for business regulation in detail. It also provides a descriptive analysis on the trends and patterns of the regulatory systems in ASEAN countries. …

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