The Role of Regional Economic Integration in Attracting FDI: A Case Study of ASEAN Economic Community (AEC)

Regional economic integration is widely recognized as a means to enhance trade and investment flows. In Asia, the ASEAN Economic Community (AEC) represents one of the most advanced efforts, aiming to create an integrated market and promote free movement of investment within the region. This study examines trends in Foreign Direct Investment (FDI) inflows in ASEAN countries over 2010–2019, comparing periods before and after the implementation of the AEC, and explores the key factors driving FDI. The analysis shows that while intra-ASEAN FDI growth slowed slightly after the AEC, overall FDI inflows to the region showed a clear upward trend, reflecting the rising attractiveness of ASEAN as an investment destination. FMOLS estimation highlights that larger markets and greater trade openness, along with innovation, stability in exchange rates and prices, governance quality, and productivity, are important drivers of FDI, indicating that the AEC has contributed to a more integrated and stable economic environment. These findings provide insights for policymakers on how effective regional cooperation can sustain investment flows and also shed light on why similar initiatives in South Asia have struggled due to political and strategic challenges.