Impact of geopolitical risk, GDP, inflation, interest rate, and trade openness on foreign direct investment: Evidence from five Southeast Asian countries

doi:10.1016/j.regsus.2024.100177

Abstract

Abstract:

Historically, geopolitical risk (GPR) has posed significant challenges to international economic, social, and political frameworks. This study investigated how internal GPR in the selected five Southeast Asian countries (Indonesia, South Korea, Malaysia, the Philippines, and Thailand) influences foreign direct investment (FDI) during 1996-2019. The stationarity of the data was assessed using the Augmented Dickey-Fuller (ADF) unit root test, which shows that the data became stationary after the first difference. The Kao, Pedroni, and Westerlund cointegration tests were employed to examine long-term cointegration among the selected variables (FDI, GPR index (GPRI), gross domestic product (GDP), inflation, interest rate, and trade openness (TOP)). The results indicated that these variables have a long-term cointegration. Consequently, regression analysis using the Pooled Ordinary Least Squares (OLS) regression, fixed effect, random effect, Arellano-Bond dynamic panel-data estimation, and system generalized moment method (GMM) revealed that GPRI and TOP negatively impacted FDI in the selected five Southeast Asian countries. At the same time, GDP, inflation, and interest rate positively influenced FDI in these countries. Because FDI is crucial to shaping a country’s macroeconomic structure, this study recommends that governments and central banks of the selected five Southeast Asian countries should implement policies and strategies to encourage foreign investments.

Key words: Foreign direct investment, Geopolitical risk, Gross domestic product (GDP), Inflation, Interest rate, Trade openness, Southeast Asian countries

Md. Shaddam HOSSAIN, Liton Chandra VOUMIK, Tahsin Tabassum AHMED, Mehnaz Binta ALAM, Zabin TASMIM. Impact of geopolitical risk, GDP, inflation, interest rate, and trade openness on foreign direct investment: Evidence from five Southeast Asian countries[J]. Regional Sustainability, 2024, 5(4): 100177.

Figures/Tables 6

Table 1

Fig. 1.

Table 2

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Table 4

Table 5

References 67

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Variable	Abbreviation	Description	Unit	Logarithmic form	Sources
Foreign direct investment	FDI	Net foreign direct investment	USD	lnFDI	World Bank (2019)
Gross domestic product	GDP	The total value of all final goods and services produced by a country or region in a given period of time	USD	lnGDP	World Bank (2019)
Inflation	INF	GDP deflator	%	lnINF	World Bank (2019)
Interest rate	IR	Lending rate minus deposit rate	%	lnIR	World Bank (2019)
Trade openness	TOP	The ratio of exports plus imports to GDP	-	lnTOP	World Bank (2019)
Geopolitical risk index	GPRI	The 12-month GPRI is summed to obtain its annual GPRI	-	lnGPRI	Caldara and Iacoviello (2018, 2022)

	Test statistic value	P-value
Delta	-0.817	0.414
Adjusted Delta	-1.173	0.241

Variable	Statistic method	P-value
Variable	Statistic method	At the level	At the first difference
lnFDI	Inverse chi-squared	6.7705	27.0383^***
	Inverse normal	0.6366	-2.9633^***
	Inverse logit	0.6337	-3.0813^***
	Modified inverse chi²	-0.7221	3.8099^***
lnGDP	Inverse chi-squared	19.3300	15.2167^**
	Inverse normal	0.4458	-1.5009^*
	Inverse logit	0.1045	-1.4431^*
	Modified inverse chi²	2.0862	1.1665^**
lnINF	Inverse chi-squared	1.9961	16.2151^*
	Inverse normal	1.7555	-2.4326^***
	Inverse logit	1.6656	-2.5275^**
	Modified inverse chi²	-1.7897	1.3897^*
lnIR	Inverse chi-squared	51.7097	38.4702^***
	Inverse normal	-2.2478	-4.0519^***
	Inverse logit	-5.3770	-4.6261^***
	Modified inverse chi²	9.3266	6.3661^***
lnTOP	Inverse chi-squared	19.4291	18.3896^**
	Inverse normal	-1.3891	-1.9994^**
	Inverse logit	-1.6804	-1.9755^**
	Modified inverse chi²	2.1084	1.8760^**
lnGPRI	Inverse chi-squared	19.1246	15.7659^*
	Inverse normal	-2.0146	-1.7415^**
	Inverse logit	-1.9860	-1.6286^**
	Modified inverse chi²	2.0403	1.2893^*

Cointegration test		Statistic value	P-value
Kao cointegration test	Modified Dickey-Fuller	-1.4311	0.0762
	Dickey-Fuller	-2.7701	0.0028
	ADF	-0.8027	0.2111
	Unadjusted modified Dickey-Fuller	-7.7260	0.0000
	Unadjusted Dickey-Fuller	-5.3771	0.0000
Pedroni cointegration test	Modified Phillips-Perron	0.5995	0.2744
	Phillips-Perron	-3.2228	0.0006
	ADF	-3.5676	0.0002
Westerlund cointegration test	Variance ratio	-0.9778	0.0164

Variable	Pooled ordinary least squares (OLS) regression	Fixed effect	Random effect	Arellano-Bond dynamic panel-data estimation	System generalized moment method (GMM)
lnFDI	-	-	-	-0.0980	-0.0690
lnGDP	0.2960^**	1.9360^***	0.2960^**	0.9640^**	0.4110^**
lnINF	-0.0430	0.0580^***	-0.0430	0.0090^**	0.0220^**
lnIR	-0.0340	1.2720^***	-0.0340	0.2980^**	-0.0640
lnTOP	-0.3040^**	-0.6590^***	-0.3040^**	-0.4620^**	-0.2030^*
lnGPRI	-0.3210^**	-0.1770^**	-0.3200^**	-0.2000^***	-0.2690^***
Constant	14.6510^***	-29.3110^***	14.6510^***	-0.5660	13.0620^***
R²	0.2790	0.1347	0.2790	-	-
F-statistic	4.8110	11.0500	-	-	-
Probability (F-statistic)	0.0010	0.0000	-	-	-
Wald chi²	-	-	24.0300	16.7000	27.8000
Probability>chi²	-	-	0.0000	0.0100	0.0000
Hausman test statistic (chi²)=22.2300; Probability (Probability>chi²)=0.0002