Trade Openness, Foreign Direct Investment and Industrial Growth: Panel Data Evidence from the ASEAN Region

This paper re-examines the role of trade and FDI inflows in accelerating the process of industrial growth involving countries belonging to the “Association of Southeast Asian Nations (ASEAN)” region. Trade openness and foreign direct investment (FDI) have improved the growth performance of numerous economies and regions over the years. However, the specific role of both trade openness and FDI inflows in advancing the industrial growth process of economies has yet to be investigated in the case of economies belonging to ASEAN. This study analyzes data from 2000 to 2023 and employs several relevant econometric tools, including the “Pooled Ordinary Least Squares (POLS)”, “Fixed Effects Filter (FEF)”, “Feasible Generalized Least Squares (FGLS)” and “Two Stages Least Squares (TSLS)”, to assess the specific impact of both trade openness and FDI inflows on industrial growth. Our findings show that both trade openness and FDI have advanced the industrial growth of ASEAN member economies. In terms of relative importance, the impact of trade openness is higher as compared to FDI inflows on the industrial sector. Similarly, the results demonstrate that the industrial growth of ASEAN economies could be explained positively by increased domestic investment and government expenditures. Moreover, our results indicate that the inflation rate and the natural resource sector have adversely impacted industrial growth. Finally, the labor force has not had the desirable positive impact on the industrial progress of ASEAN economies. The obtained results are robust across alternative specifications and estimation techniques. Therefore, our results have important policy implications for ASEAN economies.