Institutional Factors and FDI Inflows in ASEAN-7: A Bayesian Approach

Unlike previous research, which typically relied on frequency statistics, the research applies Bayesian regression to examine the impact of institutional factors on Foreign Direct Investment (FDI) inflows in the ASEAN-7 countries from 2002 to 2022. Counterintuitively, yet consistent with the unique context of the ASEAN-7, where institutional quality is relatively weak, the findings indicate that three institutional factors—control of corruption, rule of law, and voice and accountability—exerted a negative influence on FDI inflows. This suggests that strong anti-corruption measures, a robust rule of law, and high levels of voice and accountability do not necessarily attract more FDI in these countries. Only political stability and absence of violence/terrorism and Regulatory quality exhibited a positive correlation with FDI inflows, while Government effectiveness showed no significant impact. Robustness checks using Feasible generalized least squares estimation were conducted to ensure the reliability of the results and provide a solid foundation for policy implications. These findings underscore the intriguing possibility that countries with weaker institutional frameworks can compete effectively with developed economies in attracting FDI, a key driver of economic growth. Given the relatively low level of institutional quality in the ASEAN-7, other non-institutional factors may play a more prominent role in attracting FDI. Moreover, enhancing institutional quality to attract more FDI, as commonly perceived, requires a nuanced understanding of the specific conditions of each host country and necessitates further research on home country characteristics.