The University of the West of England Pham Quynh Trang 22083659 THE RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENT AND ENVIRONMENTAL, SOCIAL AND GOVERNANCE ESG MSc in Finance, the Uni
INTRODUCTION
The importance of the topic
Foreign direct investment (FDI) plays a crucial role in shaping the global economy, benefiting both emerging and developed nations Multinational firms primarily drive transnational commercial activities through FDI, as countries seek investment opportunities to leverage comparative advantages in areas such as raw material pricing, natural resources, and labor Many nations pursue FDI to create jobs, stimulate economic growth, and harness foreign science and technology for accelerated development Notably, developing Asia attracts 50% of global FDI, sustaining a flow of $662 billion (UNCTAD, 2023), driven by its dynamic growth, dense population, affordable labor, educated workforce, and ongoing investment in infrastructure and skill development.
Policymakers can enhance foreign direct investment (FDI) inflows by recognizing and addressing the key factors that attract investors By providing better information, firms and investors are empowered to make informed decisions, thereby facilitating a more effective decision-making process.
Rapid expansion often leads to habitat destruction and ecosystem degradation, necessitating greater economic output and resource utilization to sustain growth This, in turn, elevates carbon dioxide emissions, posing risks to human health Developing countries face the challenge of balancing foreign direct investment (FDI) with environmental conservation, while host nations must evaluate whether environmental, social, and governance (ESG) factors play a role in attracting FDI Numerous studies have explored the macroeconomic variables influencing a country's ability to attract FDI, particularly in regions such as ASEAN and Africa.
Research on the relationship between Environmental, Social, and Governance (ESG) factors, Foreign Direct Investment (FDI), and macroeconomic variables in Latin America and other regions remains limited and often inconclusive Previous studies have primarily concentrated on Asian countries without considering income disparities Despite the critical role of FDI and ESG in sustainable management, there is a notable lack of comprehensive research in this area.
This research is particularly valuable as it addresses the urgent need for sustainable development and economic growth in Asian countries facing environmental challenges The post-COVID era presents an opportunity for rapid economic recovery, emphasizing the importance of investigating the relationship between sustainable foreign direct investment (FDI), environmental, social, and governance (ESG) factors, financial development, and human development index (HDI) There exists a notable research gap regarding these connections, especially in Asian economies striving to combat environmental pollution through enhanced green financing Consequently, the author focuses on the topic of “The relationship between foreign direct investment and environmental, social, and governance (ESG)” for this thesis.
Research objectives
This thesis aims to explore the impact of Environmental, Social, and Governance (ESG) factors on Foreign Direct Investment (FDI) flows in Asian countries, considering variables like trade, GDP, and financial conditions By analyzing the relationship between ESG and FDI, the research seeks to provide insights into local, regional, and international investment trends, ultimately assisting policymakers in identifying promising investment directions and areas requiring increased investment.
The thesis aims to enhance foreign direct investment (FDI) attraction and foster sustainable investment in developing countries, which is crucial for achieving sustainable development goals.
- Research the relationship between FDI and ESG parameters for a sample of 31 Asian countries from 2010 to 2020 using empirical data and running econometric models
- Determine the impact of these factors on attracting FDI capital flows
- Propose and recommend policies to attract FDI capital flows into Asian countries based on relationship results.
Research question
The study focuses on addressing the following research questions to present research findings on the impact of ESG on Asian countries' ability to attract FDI:
Several key factors influence the attraction of Foreign Direct Investment (FDI) in Asian countries, including CO2 per capita emissions, government effectiveness, the Human Development Index, GDP per capita growth, trade openness, the financial development index, and the price level ratio Understanding the interplay of these elements is crucial for assessing FDI potential in the region.
- Do the researched factors have a positive or negative effect on FDI capital flows?
- For the Asian countries, how does this result change and how does it affect the application of the policy?
Object and scope of research
This study investigates the relationship between Foreign Direct Investment (FDI) and Environmental, Social, and Governance (ESG) factors from 2010 to 2020, focusing on a sample of 31 Asian countries The analysis includes 18 high and upper-middle-income countries, such as Japan, China, and Singapore, alongside 13 low and lower-middle-income countries, including India, Bangladesh, and Vietnam, as classified by the World Bank.
Research Methods
The study employed quantitative research methods, utilizing regression sample data to analyze the findings Key baseline models included pooled ordinary least squares (Pooled OLS), fixed effects models (FEM), and random effects models (REM).
The analysis utilized R and R Studio software to derive regression estimators from secondary panel data collected between 2010 and 2020 To achieve efficient and reliable regression estimates, the author conducted model selection tests, correlation analysis, and assessments for multicollinearity and heteroskedasticity.
Thesis structure
LITERATURE REVIEW
Foreign direct investment overview
Foreign Direct Investment (FDI) is characterized by long-term relationships and reflects the control and interest of a foreign entity in an economy, as noted by the United Nations Conference on Trade and Development (UNCTAD, 2023) The International Monetary Fund (IMF) defines FDI as an investment aimed at achieving lasting benefits in a foreign economy, focusing on management control and the permanence of the investment (IMF, 2004; Galeza and Chan, 2015) According to the IMF's Balance of Payment Manual, a direct investor is typically someone who owns 10% or more of a company's capital, although control can be exerted with a smaller stake, and this threshold serves as a key distinction between direct and portfolio investment (Duce and Espaủa, 2003).
The most widely accepted definition of Foreign Direct Investment (FDI) is based on the IMF/OECD benchmark, developed through a collaboration between these two international organizations to assist national statistical offices in compiling FDI statistics This definition emphasizes that FDI involves an international business venture where an investor from the home economy acquires long-term influence over a subsidiary in the host economy The host economy records these FDI flows as inbound investments, along with other liabilities in its balance of payments.
6 home economy, which records FDI flows as outward FDI, a category of assets, can be used to observe FDI flows (OECD, 2008)
Foreign Direct Investment (FDI) involves the transfer of technology, capital, and management expertise from foreign investors to host countries, enabling them to gain economic benefits It is crucial to recognize that FDI specifically refers to capital provided directly by the investor or through affiliated enterprises (Auzairy et al., 2018).
FDI is classified based on three factors: first, the direction of investment; second, the investment instrument used; and third, the sector breakdown (Duce and Espaủa, 2003)
First, the direction can be viewed from both the host's and the home's perspectives
From a domestic standpoint, funding from a resident parent firm to its non-resident associates is classified as a direct investment abroad Conversely, any financial support from non-resident subsidiaries or affiliates to their resident parent is viewed as a reduction in foreign direct investment Similarly, funds from non-resident parent companies to resident subsidiaries or branches are also recorded as a decrease in foreign direct investment, rather than as direct investments abroad This classification occurs in the host country's records under foreign direct investment Notably, if there is a cross-holding of over 10% in the share capital between the parent firm and its subsidiaries, affiliates, or branches, the aforementioned principles do not apply (Duce and España, 2003).
Second, for instruments, direct investment capital includes capital contributed
Direct investment capital transactions involve three key components: (i) Equity capital, which encompasses branch equity and shares from subsidiaries and affiliates, excluding non-participating preferred shares classified as debt securities; (ii) Reinvested earnings, representing the direct investor's share of undistributed earnings, such as dividends and branch profits, which are typically allocated traditionally if not identified; and (iii) Other direct investment capital, which includes inter-company debt transactions like borrowing and lending cash, debt securities, and trade credits between direct investors and their enterprises Notably, deposits and loans from associated deposit institutions are categorized as other investments rather than direct investments.
Foreign Direct Investment (FDI) flows are categorized by various sectors, with the IMF identifying four institutional sectors based on the resident party However, the Fifth IMF Manual does not mandate sector-split reporting, leading some countries to provide FDI data with this division In practice, the Banks and Other sector is the most relevant, although national banks may finance foreign enterprises through local non-banking holding companies, resulting in potential distortions in reporting Instead of using institutional sectors, the OECD Benchmark definition employs an "industrial" split that encompasses nine economic sectors, suggesting that FDI should be classified based on a resident holding.
Foreign Direct Investment (FDI) transactions are categorized by the industrial sector of the parent company In cases where the parent firm operates as a bank, any FDI activities conducted by a non-banking holding company are attributed to the banking institution.
Table 1: Institutional sector (IMF) and Industry sector (OECD)
2.1.2 The role of FDI in economic development
Economists advocate for cross-border capital flow as it enables capital to pursue maximum returns According to Feldstein (2000), unrestricted capital movements offer several benefits: they allow capital owners to diversify their investments, thereby reducing risk; they promote the dissemination of best practices in corporate governance, accounting, and legal frameworks; and they restrict detrimental government policies Furthermore, host nations can gain additional advantages from foreign direct investment (FDI), enhancing their economic landscape.
Institutional sector (IMF) Economic or industry sector (OECD)
+ Insurance corporations and pension funds
1 Agriculture, hunting, forestry and fishing
6 Wholesale and retail trade and restaurants and hotels
8 Financing, real state and business services
9 Community, social and personal services
Private capital inflows, particularly foreign direct investment (FDI), play a crucial role in enhancing competition within domestic markets and boosting human capital in host countries While FDI brings significant benefits, such as increased corporate tax revenues from earnings, countries may reduce corporate tax rates to attract these investments, potentially sacrificing some revenue in the process This trend is evident in certain OECD nations, where heightened competition has led to a notable decline in corporate tax receipts.
Capital inflows can enhance GDP per capita in capital-importing countries, as suggested by growth and trade theory The literature on foreign direct investment (FDI) highlights significant factors such as technological spillovers, linkage effects, and competitive impacts on host countries (Kind, 2003).
Affiliates operating abroad often possess technological advantages that enable them to compete effectively with local businesses, providing opportunities for host country enterprises to learn and enhance their productivity through technological spillovers Empirical studies indicate that these spillovers can significantly boost local business productivity and incentives, although the least developed countries may lack the necessary human capital to effectively utilize foreign technology (Blomström and Kokko, 2001) Research by Blomstrom and Wolff (1994) further supports this, showing that while FDI inflows can drive income growth in advanced developing nations, they do not yield the same benefits for the least developed countries Additionally, governments that impose restrictions on inward FDI and mandate partnerships between foreign enterprises and local firms tend to experience fewer technological spillovers Multinational corporations are often hesitant to introduce innovative technologies in countries where they have limited control over their proprietary information (Blomstrom and Wolff, 1994) In today’s highly globalized economy, a country’s economic development cannot solely rely on its internal resources.
Foreign investors play a crucial role in projects that require significant capital, especially in host countries lacking sufficient resources These investors often engage in ventures that the host country prioritizes less, yet still seeks foreign capital to supplement its investments (Kind, 2003).
Foreign direct investment (FDI) can significantly impact employment when foreign enterprises collaborate with local firms, fostering strong links that enhance efficiency and quality among local suppliers This interaction often leads to improved performance, as international corporations demand higher standards from local intermediate suppliers Research by Lall (1978, 1992) indicates that substantial connections exist between multinational enterprises (MNEs) and local businesses, particularly in large economies with strict local content regulations While MNEs transitioning from import-replacing to export-oriented production may initially lack local industry ties, their localization decisions are more influenced by labor and travel costs than by the availability of local inputs In emerging nations, efficiency constraints can severely limit these local connections, especially for export-oriented MNEs in complex sectors like electronics Ultimately, FDI companies engage with domestic businesses to source raw materials and production services, thereby reducing costs and fostering local economic integration.
11 production chain, creating jobs and revenue for host nation companies and people.(Bissoon, 2012; Kind, 2003)
Foreign market entry can decrease firm concentration and enhance competition, leading to lower prices and a broader selection of goods Increased competition may compel companies to eliminate organizational inefficiencies, known as X-inefficiencies, to remain viable (Blomström and Kokko, 2001; Blomstrom and Wolff, 1994) The pro-competitive effects are expected to be most pronounced in sectors that are typically shielded from foreign competition However, as highlighted by Graham and Krugman (1995), trade protection often exhibits a sectoral bias, with countries tending to shield industries where they hold a comparative disadvantage (Krugman).
Local firms express concerns that foreign direct investment (FDI) in key sectors can undermine their competitiveness, as foreign companies may gain market power and profits without intensifying competitive pressure Research indicates that foreign investments tend to thrive in industries with low trade barriers or weak local competition However, the benefits of increased consumer surplus from foreign entry must be weighed against the detrimental effects on domestic producer surplus, particularly in sectors that rely on dynamic learning processes This challenge has led many developing countries to adopt infant industry policies to protect local enterprises, which may otherwise struggle to compete and risk being eliminated from the market, ultimately harming the host economy.
Overview of environmental, social and governance (ESG)
In the early 1960s, the environmental movement compelled major corporations to acknowledge their responsibilities towards the environment and public health The United Nations Brundtland Commission established global sustainable development goals in 1987, defining sustainable development as meeting present needs without jeopardizing future generations Following the 1992 Earth Summit, the UNEP introduced the Financial Institutions Declaration of Commitment to Sustainable Development, laying the groundwork for the UNEP Finance Initiative, which aims to integrate environmental and social considerations into financial operations In response to growing public expectations, the European Commission published reports in 2001 to promote corporate social responsibility (CSR), emphasizing the need for corporations to address their societal impacts However, CSR lacks a standardized performance measurement system The term Environmental, Social, and Governance (ESG) was introduced in the UN report "Who Cares Wins" in 2004, which aimed to guide financial institutions on incorporating ESG issues into asset management and related services.
The ESG principle serves as a comprehensive framework that integrates governance (G), social (S), and environmental (E) factors into investment decisions Originating from responsible investing, ESG is recognized as a strategy that guides investors in assessing corporate behavior and potential financial performance The Principles for Responsible Investment (PRI) advocate for the incorporation of ESG factors, making them essential benchmarks in investment analysis Consequently, the three core elements of ESG are crucial criteria for investors when evaluating opportunities and making informed decisions.
Source: (EBA, 2021; Lee and Eastman, 2021)
MSCI (2007) defines ESG investment as the consideration of environmental, social and corporate governance factors in addition to financial factors in the investment
The decision-making process in investing increasingly incorporates ESG (Environmental, Social, and Governance) criteria, which assess the sustainable growth and social impact of businesses (Marina Brogi, 2018; EBA, 2021) According to the European Banking Authority, ESG issues encompass factors that can significantly influence the financial performance or solvency of entities, including individuals and governments As an investment philosophy, ESG emphasizes long-term value creation through a comprehensive governance strategy that integrates economic, environmental, social, and governance considerations (Li et al., 2021) While many international frameworks and standards recognize the importance of ESG, they often do not provide a singular definition.
ESG criteria are widely recognized as fundamental pillars of sustainability; however, the lack of a standardized definition makes it challenging to consistently understand and manage these factors ESG elements possess intrinsic properties that can be interconnected, as illustrated in various frameworks.
Table 3: ESG framework (International frameworks)
ESG factors encompass both non-financial elements, like greenhouse gas emissions, environmental impact, social welfare, and ethics, as well as financial aspects, including profits and costs These variables can produce effects that are short-, medium-, or long-term in nature, often leading to unpredictable impacts It is essential not to assume that ESG issues are solely relevant in the medium or long term, as they can also lead to immediate challenges, such as urgent environmental policy implementation.
Environmental, Social, and Governance (ESG) issues, such as greenhouse gas emissions, pollution, social welfare, and poverty, raise significant public concern due to their harmful economic externalities (Schanzenbach and Sitkoff, 2020) These externalities arise from individual actions that are not reflected in financial statements, leading to costs that are often absorbed by society rather than the responsible parties As societal preferences and objectives evolve, ESG considerations become increasingly relevant, necessitating potential regulatory reforms and structural adjustments to address climate change and other environmental challenges (EBA, 2021) Ultimately, ESG encompasses the impact of an entity's actions and its interactions with stakeholders throughout its value chain, including how it meets various ESG criteria through its relationships with debtors and creditors.
Figure 1: Commonalities of ESG factors
2.2.2 The rationale for investing in ESG
Influential is Friedman's (1970) perspective on the social obligations of business
A business's primary objective is to increase profits while maintaining fair competition However, corporate leaders face the challenge of balancing shareholder profitability with legal and ethical responsibilities (Carson, n.d.) Engaging in social or environmental issues can divert corporate funds and managerial focus away from core operations, ultimately harming investor wealth (Friedman, 1970) According to Jensen and Meckling's agency theory (1976), agency interactions involve agreements between shareholders and management, but conflicts can arise when agents act against the interests of the principals This agency dilemma occurs when management fails to share earnings, reflecting a misalignment between the interests of managers and business owners (Mccolgan, 2001; Jensen and Meckling, 1976).
Freman (1984) introduced the stakeholder theory, which posits that organizations should treat all stakeholders equitably In cases of conflicting interests, organizations must strive to find a balance that benefits all parties involved The focus should be on addressing the needs of stakeholders with significant and direct interests, while assuming that the interests of other stakeholders are also being met, recognizing that these demands can vary and evolve over time.
Organizations can achieve happiness by aligning their business strategies and data reporting with social norms and values As the demand for environmental information increases from stakeholders such as government entities, credit institutions, investors, consumers, and the community, this theory illustrates the motivations behind organizations' voluntary adoption of ESG standards.
Investing in ESG standards is crucial for sustainable development as it enhances long-term value through sustainable business practices This approach not only addresses regulatory compliance but also considers the broader impacts on society, the environment, and stakeholders By mitigating significant sustainability risks and capitalizing on future growth opportunities, ESG investing creates a resilient portfolio that can better withstand market volatility Furthermore, it aligns investors' values with their assets, fostering a sense of purpose in their investment choices while yielding substantial financial benefits Research indicates that companies with strong ESG performance tend to achieve superior financial outcomes over time, highlighting that ESG investments offer advantages that extend beyond ethical considerations.
Figure 2: Outperformance of top ESG-rated companies and bottom ESG-rated companies within the MSCI World Index
Source: MSCI World Index (Bank, n.d.)
Businesses that prioritize Environmental, Social, and Governance (ESG) concerns often outperform their competitors by effectively optimizing internal resources, managing human capital, and enhancing supply chains ESG leaders adopt a forward-thinking approach to capital allocation, addressing market, regulatory, reputational, and physical risks while focusing on sustainable, long-term growth As a result, these companies typically enjoy stronger profitability and above-average returns, leading to increased shareholder payouts Furthermore, companies with higher ESG ratings consistently outperform those with lower ratings, as demonstrated by performance data.
Risk-adjusted return evaluates an investment's profitability by considering the associated risks, typically represented as a numerical value or rating This concept is relevant for individual securities, mutual funds, and entire portfolios, allowing investors to make informed decisions based on potential returns relative to the risks taken.
Common risk measures such as the Alpha coefficient, Beta coefficient, R-Squared coefficient, standard deviation, and Sharpe ratio are essential in evaluating investments (Schanzenbach and Sitkoff, 2020) ESG investing emphasizes environmental, social, and governance factors that can mitigate risks and enhance risk-adjusted returns Compared to traditional investing, ESG investments have the potential to improve alpha and volatility while identifying companies with strong management and positive corporate cultures The theoretical relationship between key ESG indicators and firm performance is supported by some empirical evidence, although results may vary based on research methods and contexts Studies indicate that companies with high environmental and social scores tend to be more profitable and face lower risks than those with lower scores (Mozaffar Khan, 2016) Additionally, firms engaging in socially responsible initiatives can cultivate goodwill, safeguarding their reputation against negative events (Paul C Godfrey, n.d.).
Despite recent shifts in the financial landscape and challenging macroeconomic conditions, investment in ESG (Environmental, Social, and Governance) elements is anticipated to grow Since 2004, ESG principles have gained traction in Europe, America, and other developed nations, leading to the maturation of evaluation, disclosure, and index systems for these components This global adoption and study of ESG principles, as highlighted by Wu (2022), continue to support sustainable growth patterns.
DATA AND RESEARCH METHODS
Database
The study utilizes secondary data from 31 dynamic and developing Asian economies, which are known for their deep integration and appeal to foreign investors Data collected from 2010 to 2020, sourced from the World Bank, UNDP, UNCTAD, and IMF, reflects the recovery and growth of these economies following the 2008-2009 global financial crisis This period was marked by significant central bank interventions, influencing factors such as interest rates and market size To accurately analyze the post-crisis recovery and avoid distortion in regression results, the study focuses on data from 2010 onwards, aligning with the realities of economic adjustments made in response to the crisis.
In multivariate regression analysis, the minimum required sample size can be calculated using Tabachnick and Fidell's formula: N > 50 + 8*m, where N represents the sample size and m denotes the number of independent variables This guideline is essential for ensuring the validity of the analysis (Tabachnick and Fidell, 2019; Delİce).
2001) Therefore, using data from 31 Asian nations from 2010 to 2020 (11 years) to ensure homogeneity, and the sample is large enough to achieve a significant regression (number of observations is 31 * 11 = 341 observations)
Foreign Direct Investment (FDI) inflows are influenced by various factors beyond Environmental, Social, and Governance (ESG) considerations, such as GDP, currency rates, trade openness, financial development, political stability, and national sustainable development goals Analyzing the relationship between FDI and ESG is particularly relevant, especially when focusing on a diverse sample of Asian countries with varying income levels, including both high and low median incomes Recognizing that sustainable development is linked to income levels, this study examines the FDI and ESG dynamics in 31 Asian nations from 2010 to 2020, comprising 18 high and upper-middle-income countries and 13 low and lower-middle-income countries, as reported by the World Bank.
Description of research variables
Foreign direct investment is the net inflow (% of GDP) Variable FDI measures the change of foreign direct investment inflows into Asian countries when independent variables change
CO2PC, or CO2 Per Capita Emissions, highlights the significant impact of anthropogenic greenhouse gases—primarily carbon dioxide, methane, nitrous oxide, and fluorine gas—on climate change within the ESG framework Human activities, particularly the combustion of fossil fuels and cement production, are the largest sources of CO2 emissions, making them the foremost contributors to global warming.
34 dioxide produced through the use of solid, liquid, and gas fuels, as well as gas flaring (Abdouli and Hammami, 2018)
Government effectiveness is a critical governance factor that evaluates the quality of public services, the competence and independence of the civil service, and the effectiveness of policy development and implementation It also assesses the reliability of the government's commitment to these policies This evaluation results in a numerical rating reflecting the country's overall performance on this composite indicator, typically ranging from approximately -2.5 to 2.5, as noted by various sources including Chipalkatti, Le, and Rishi (2021), Auzairy et al (2018), and the World Bank.
The Human Development Index (HDI) is a United Nations measurement system that evaluates the level of individual human development in countries It encompasses three key dimensions: a long and healthy life, indicated by life expectancy; access to education, assessed through expected years of schooling for children and mean years of schooling for adults; and a decent standard of living, measured by Gross National Income per capita adjusted for local price levels (Klugman J, Rodríguez F, 2011).
GDP per capita growth (GDPPCG) measures the annual percentage increase in GDP per capita, calculated using constant local currency This figure represents the gross domestic product divided by the midyear population GDP at purchaser's prices includes the total gross value added by all resident producers in the economy, accounting for product taxes while excluding subsidies that are not part of the product value.
The article discusses the depreciation of fabricated assets and the depletion of natural resources, highlighting their impact on economic development and living standards in various nations The author expects a positive correlation between these variables, indicating that higher per capita growth makes a location more attractive, aligning with findings from Chipalkatti et al (2021).
The Financial Development Index (FIND) evaluates financial development through a combination of market depth, accessibility to financial services, sustainable revenue generation, and capital market activity It encompasses six lower-level sub-indices, constructed from various indicators that assess the depth, accessibility, and efficiency of financial institutions and markets This comprehensive approach allows for a nuanced understanding of how effectively financial services are provided at low costs while ensuring sustainable growth.
Figure 4: Financial Development Index framework
Trade openness, defined as the total of exports and imports of goods and services relative to gross domestic product (GDP), is a crucial measure for understanding a country's economic engagement In this analysis, the author employs the percentage of GDP to standardize the large numerical values associated with trade variables, following the methodology of Buchanan et al (2012) This approach anticipates a positive correlation, indicating that increased trade openness is beneficial for economic growth.
The Price Level Ratio (PLR) measures the purchasing power parity (PPP) conversion factor against market exchange rates, highlighting pricing differences across countries It indicates how many units of a common currency are required to purchase the same volume of goods at the GDP level, reflecting variations in general price levels among nations (Alba, Wang, and Park, 2010; Chipalkatti, Le, and Rishi, 2021) Since market exchange rates often fail to accurately represent these price level differences, economists frequently prefer using PPP conversion factors to convert local monetary values into international currency.
Research methodology
Numerous empirical studies have focused on Foreign Direct Investment (FDI) inflows; however, research on their sustainability remains limited This thesis begins with an Ordinary Least Squares (OLS) regression analyzing a single country's data from 2010 to 2020 Following this, a panel data analysis was conducted to investigate the cross-sectional and time-series aspects of sustainable FDI, utilizing 341 observations Panel data is particularly advantageous when there is a suspicion that the outcome variable is influenced by unobservable factors that are correlated with the observable explanatory variables.
The study utilizes panel data to analyze the impact of Environmental, Social, and Governance (ESG) factors alongside macroeconomic variables on Foreign Direct Investment (FDI) across 31 Asian countries over an 11-year period, resulting in a total of 341 observations With one dependent variable and seven independent variables, the research employs Pooled Ordinary Least Squares (OLS), Random Effects Model (REM), and Fixed Effects Model (FEM) to accurately fit the data and assess the influence of these variables According to Schmidheiny (2012), consistent estimation of the effects of observable explanatory factors is achievable when omitted variables remain stable over time.
Research by Cameron and Trivedi (2005) highlights the Pooled OLS model as a widely used regression tool in quantitative studies This model maintains constant coefficients and employs conventional valuation methods for cross-sectional data, while also controlling for variations year by year.
FDIit = + β1∗CO2PCit + β2∗GOVit + β3∗HDIit + β4∗GDPPCGit + β5∗TRADEit + β6∗FINDit + β7∗PLRit + uit
Foreign Direct Investment (FDI) serves as the dependent variable in this model, where 'i' denotes the observation and 't' indicates the time period The analysis includes seven independent variables: CO2 emissions per capita (CO2PC), government effectiveness (GOV), Human Development Index (HDI), GDP per capita growth (GDPPCG), trade openness (TRADE), foreign investment (FIND), and private lending rates (PLR) The model is structured with a constant term (α), regression coefficients (βk for k = 1-7), and a residual component (u).
FEM, or Fixed Effects Model, is a widely used approach in panel data analysis This statistical model focuses on parameters that are fixed or non-random, reflecting factors that remain constant over time, such as individual consumption habits, a country's social system, and regional characteristics By accounting for individual impact, FEM allows researchers to analyze how these stable factors influence the overall data trends.
In this research, we utilize a fixed factor model, known as the permanent impact model (Schmidheiny, 2012), which remains constant over time The analysis employs a fixed effects model (FEM) that considers two key variables: year and country (entity) The equation for foreign direct investment (FDI) is represented as 𝐹𝐷𝐼 𝑖𝑡 = 𝛽 1 𝑋 1,𝑖𝑡 + 𝛽 2 𝑋 2,𝑖𝑡 + ⋯ + 𝛽 𝑘 𝑋 𝑘,𝑖𝑡 +, highlighting the relationship between various influencing factors and FDI across different countries and time periods.
In which, i=1,2,…,n; t=1,2,…,N; X1 indicates the value of the first regressor for observation i in time t; and X2 indicates the value of the second regressor
The Random Effects Model (REM) is a statistical approach where the model's parameters are treated as random variables, effectively addressing the limitations of the Fixed Effects Model (FEM) While FEM eliminates time-invariant variables through group dispersion, it fails to estimate the impact of these unchanging variables In contrast, the REM model successfully overcomes this challenge, allowing for a more comprehensive analysis of both time-variant and time-invariant factors (Schmidheiny, 2012; Phillips, 1996a).
To choose the most suitable model, the author employed various statistical methods, including descriptive statistics, pair correlation tests, F-tests, Breusch-Pagan tests, and Hausman tests After determining the optimal model, the article conducts tests to identify potential defects, along with diagnostic assessments for heteroskedasticity and autocorrelation.
Research model and research hypothesis
The author develops a model incorporating one dependent variable and seven independent variables, drawing on data from prior studies that examine the influence of Environmental, Social, and Governance (ESG) factors on Foreign Direct Investment (FDI).
Foreign direct investment (net inflows) - FDI is the dependent variable used in the stated studies
(Acharyya, 2009), (Chandran and Tang, 2013), (Zhang and Zhou, 2016), (Cole and Elliott, 2005), (Pao and Tsai,
(Kim, 2010), (Samimi, Moghaddasi and Azizi, 2011), (Asiedu, 2006), (Chipalkatti, Le and Rishi, 2021) Human
(Reiter and Steensma, 2010), (Lehnert, Benmamoun and Zhao, 2013)
(Yang, Groenewold and Tcha, 2000),(Fauzel, 2016), (Li and Liu,
(Li et al., 2021), (Narayanamurthy, Sridharan and Rao, 2010), (Auzairy et al., 2018), (Buchanan, Le and Rishi,
(Ng et al., 2020), (Irandoust, 2021), (Anokye M Adam and Tweneboah,
2009), (Fauzel, 2016) The price level ratio PLR + (Singhania and Saini, 2021), (Nur
In this study, the model used to evaluate the impact of ESG on the FDI inflows has the form: FDIit = + β1∗CO2PCit + β2∗GOVit + β3∗HDIit + β4∗GDPPCGit + β5∗TRADEit + β6∗FINDit + β7∗PLRit + uit
In this equation, the intercept factor is denoted by α, while the slope is represented by βk for k values ranging from 1 to 7 Here, 'i' signifies a specific country, and 't' indicates the year within the panel data The primary focus of this analysis is on foreign direct investment (FDI) inflows, measured as a percentage of the destination country's GDP (FDI/GDP).
This study aims to comprehensively analyze all dimensions of Environmental, Social, and Governance (ESG) factors and their influence on Foreign Direct Investment (FDI) inflows, rather than focusing on a single aspect Multiple research papers have explored this multifaceted relationship, highlighting its significance in understanding the broader impact of ESG on investment trends.
Recent research indicates that Foreign Direct Investment (FDI) and Environmental, Social, and Governance (ESG) factors are interrelated concepts that influence each other Although empirical studies on the FDI-ESG relationship yield mixed outcomes, a majority suggest a positive correlation, aligning with multilateralism theory Consequently, the author hypothesizes that ESG factors significantly impact FDI inflows.
Research has explored the relationship between CO2 emissions and foreign direct investment (FDI), with studies by Acharyya (2009), Chandran and Tang (2013), Zhang and Zhou (2016), and Pao and Tsai (2011) indicating both positive and negative associations Notably, Hoffmann et al (2005) found that the pollution haven hypothesis is relevant only for low-income countries, with no causal link identified for middle- and high-income nations Additionally, Cole and Elliott (2005) revealed that countries offering substantial capital grants are more appealing to pollution-intensive FDI compared to those with stringent environmental regulations Despite these findings, the debate continues regarding the effects of environmental factors like CO2 emissions on FDI, leading to the hypothesis that CO2 per capita emissions influence FDI inflows.
Effective governance plays a crucial role in enhancing investment sustainability, significantly influencing foreign direct investment (FDI) inflows, especially in developing nations Research indicates a strong correlation between good governance practices and increased FDI, highlighting that a stable political environment, efficient government operations, anti-corruption measures, rule of law, and robust regulatory frameworks attract more foreign investments (Kim, 2010; Samimi, Moghaddasi, and Azizi, 2011; Asiedu, 2006; Chipalkatti, Le, and Rishi, 2021) Investing in governance infrastructure is essential for fostering a conducive climate for foreign investments.
Foreign Direct Investment (FDI) not only brings capital into the host country but also creates an environment that promotes domestic businesses to pursue international investments This highlights the significance of Governance Effectiveness in influencing FDI inflows.
Numerous studies indicate a significant connection between Foreign Direct Investment (FDI) and factors such as human capital, the labor force, and the Human Development Index (HDI) (Reiter and Steensma, 2010; Lehnert, Benmamoun, and Zhao, 2013) While investments enhance the quantitative value of enterprises, they also play a crucial role in fostering long-term social development The debate surrounding the influence of HDI on FDI attraction remains contentious, with varying perspectives on its positive or negative effects Thus, Hypothesis 3 posits that the Human Development Index significantly impacts FDI inflows.
Research has extensively explored the relationship between foreign direct investment (FDI) and economic growth in both developed and developing countries, utilizing various macroeconomic indicators However, the findings in the literature, particularly concerning developing nations, are often contradictory Key parameters analyzed include GDP per capita growth, trade openness, the Financial Development Index, and price level ratios, as highlighted in studies by Yang, Groenewold, and Tcha (2000), Fauzel (2016), and Li et al.
Research indicates a cause-and-effect relationship between various economic indicators and Foreign Direct Investment (FDI), with most studies supporting a positive impact (Narayanamurthy, Sridharan and Rao, 2010; Ng et al., 2020; Irandoust, 2021; Anokye M Adam and Tweneboah, 2009; Fauzel, 2016) However, some scholars argue that certain factors do not significantly influence FDI in either the short or long term (Herzer and Klasen, 2008; Adams, 2009) Consequently, this essay proposes Hypothesis 4, which posits that GDP per capita plays a crucial role in determining FDI trends.
The study explores several hypotheses regarding the factors influencing Foreign Direct Investment (FDI) It posits that economic growth and trade openness significantly affect FDI, alongside the impact of the Financial Development Index Additionally, the research examines how the price level ratio plays a role in shaping FDI trends.
CHAPTER 4 CURRENT SITUATION, RESEARCH RESULTS AND DISCUSSION
Overview of FDI and ESG in Asian countries
4.1.1 Global FDI and FDI in Asian countries
In 2022, global Foreign Direct Investment (FDI) dropped by 12% to $1.3 trillion, following a significant decline in 2020 and a strong recovery in 2021 This downturn was driven by a global poly-crisis, encompassing the Ukraine conflict, rising food and energy prices, and increasing debt pressures Heightened financial constraints, escalating interest rates, and uncertainty in capital markets adversely affected international project finance and cross-border mergers and acquisitions Notably, the value of international project finance transactions plummeted by 25%, while cross-border mergers and acquisitions saw a decrease of 4%.
Foreign Direct Investment (FDI) growth in emerging nations has been uneven, with significant concentration in a few major economies while many smaller nations experienced stagnant inflows In Africa, FDI dropped to $45 billion in 2019 after a spike in 2021, despite an increase in greenfield project announcements and international funding Emerging Asia attracted over half of global FDI, totaling $662 billion, while Latin America and the Caribbean saw a record increase of 51%, reaching $208 billion However, the least developed countries received only 2% of global FDI, amounting to $22 billion, a decline of 16% Small island developing states and landlocked countries reported minimal FDI gains The United States remained the leading destination for FDI, greenfield projects, and global project finance, followed by the United Kingdom, India, the UAE, and Germany for greenfield projects, and the United Kingdom, Spain, Brazil, and India for project finance agreements.
Figure 5: FDI by subregion 2021, 2022 (USD billions)
FDI in Asian countries is very stable and has been steadily increasing over the years, contributing to an average of 30% of FDI globally from 2010 to 2022
Figure 6: FDI in the world and FDI in Asian countries (2010-2022)
Source: https://unctad.org/fdistatistics
Foreign Direct Investment (FDI) flows to developing Asia remained stable at approximately $662 billion, with project announcements suggesting future growth This region accounts for half of global FDI inflows, although these inflows are still somewhat limited India and ASEAN emerged as the leading recipients, experiencing increases of 10% and 5% respectively, alongside robust growth in project announcements Notably, five economies—China, Singapore, Hong Kong, India, and the United Arab Emirates—represented nearly 80% of total FDI India has advanced to become the second-largest host for international project finance deals and the third-largest for announced projects China, the world's second-largest FDI host, also saw a 5% increase While FDI in the Gulf region decreased, project announcements surged by two-thirds The year 2022 indicated strong foreign investment activity in the region, highlighted by a 45% increase in announced greenfield projects and a 20% rise in international project finance deals.
Figure 7: FDI inflows in developing Asia, by subregion, 2021-2022
(Billions of dollars and percent)
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics)
Vietnam is also one of Asia's top countries for FDI attraction between 2015 and
2022 According to UNCTAD statistics, Vietnam ranks second among the world's top 10 emerging economies in terms of FDI in renewable energy
Figure 8: Top 10 developing economies by international investment in renewable energy (2015–2022) Billions of US dollars and percent
Source: UNCTAD, FDI/MNEs database
In 2022, foreign investment projects in Vietnam reached a realized capital of nearly 22.4 billion USD, marking a 13.5% increase from 2021 While new projects rose by 17.1%, the overall investment capital decreased due to fewer large-scale projects compared to the previous year The processing and manufacturing sector dominated registered investment capital, accounting for 60.6% with a total of 16.8 billion USD The real estate sector followed, attracting 4.45 billion USD or 16.1% of the total registered investment Additionally, power generation projects secured registered capital of approximately 2.26 billion USD and 1.29 billion USD, respectively.
47 distribution, research and technological operations follow The rest are businesses Wholesale and retail, manufacturing and processing, and professional research and technology comprise 30%, 25.1%, and 16.3% of new ventures
Figure 9: Structure of FDI in Vietnam by industry
Source: Ministry of Planning and Investment Vietnam
In 2022, Vietnam attracted investments from 108 countries, with Singapore leading at approximately 6.46 billion USD, representing 23.3% of the total investment, despite a 39.7% decrease from 2021 Korea followed with around 4.88 billion USD, a decline of 1.5%, while Japan secured third place with over 4.78 billion USD, accounting for 17.3% of the total and reflecting a 22.7% increase compared to the previous year Additionally, China, Hong Kong, and Taiwan were notable investors, and Korea collaborated with interested investors to facilitate new investment decisions and expand existing projects in 2022.
4.1.2 Implementing ESG in Asian countries
The environmental impact in Asia is particularly pronounced due to its dense population, especially in low-lying countries where sea levels are rising rapidly Consequently, regional governments have made sustainability a priority in construction, establishing some of the most ambitious green targets globally However, the concept of ESG is still emerging in Asia, with many industry professionals beginning to explore and implement ESG-compliant frameworks to integrate these values into their operations This has led to a significant gap between ESG aspirations and the actual progress being made in the region.
A study on ESG implementation in Southeast Asia, utilizing Sustainalytics' ESG Risk Ratings, highlights the need to assess ESG risk exposure and management among the ASEAN-6 nations The findings reveal that Thailand leads in average ESG performance, attributed to its strong management score and lower risk exposure In contrast, Vietnam and Indonesia face heightened unmanaged ESG risk due to their lower management scores and higher exposure to high-risk industries such as steel, mining, oil and gas, electric utilities, and food.
The ASEAN-6 countries exhibit higher ESG risks compared to businesses in Europe and North America, aligning with the average for the Asia-Pacific region Notably, five out of the six nations, with the exception of Thailand, fall below the global average for ESG performance (Pan, 2021).
This study examines legal challenges in implementing various ESG components across several Asian countries, highlighting notable cases In Singapore, the Sustainability Reporting Guide, established by the Singapore Exchange in 2016, mandates that all listed issuers produce an annual sustainability report, adhering to a comply-or-explain framework.
Issuers are encouraged to select a recognized sustainability reporting methodology that aligns with their industry and business model, providing a rationale for their choice Additionally, they should identify key ESG factors that influence financial performance The sustainability report must detail the issuer's policies, procedures, performance, and objectives concerning the identified significant ESG elements, in accordance with the Guide.
Thailand, the Securities and Exchange Commission (SEC) mandated a new Corporate
Governance Code in 2017 that calls for company boards to ensure sustainability reporting,
To ensure sustainable business development, companies should adopt a reporting framework that aligns with their size and complexity while adhering to both domestic and international standards The Stock Exchange of Thailand provides resources on its website to encourage best practices in this area Many organizations choose to implement the Global Reporting Initiative (GRI) as their preferred reporting structure, in accordance with the guidelines set by the Stock Exchange of Thailand.
In Vietnam, to comply with the provisions of Decree No 155/2020/ND-CP and Circular
According to No 96/2020/TT-BTC issued by the Government of Vietnam, public companies are required to prepare annual reports that disclose their environmental and social impacts, as well as their corporate sustainability goals In collaboration with the International Finance Corporation (IFC) of the World Bank Group, the State Securities Commission of Vietnam (SSC) published the Environmental and Social Information Disclosure Guidelines in 2016, which were based on GRI G4 and emphasized the importance of independent assurance In 2021, SSC and IFC further advanced sustainable finance by releasing the Handbook “Issue Guidance for Green Bonds, Social Bonds, and Sustainable Bonds,” aimed at assisting issuers and market participants in adhering to green bond standards to mobilize resources for sustainable and environmentally friendly projects.
Empirical results
To display the maximum value, minimum value, mean value, and standard deviation of the study variables in the model, the author uses descriptive statistics on the
(Source: Data collected by the author from R software)
The descriptive statistics table presents the mean, standard deviation, minimum, and maximum values of the research variables from 2010 to 2020 The average Foreign Direct Investment (FDI) among 31 selected Asian countries is 3.484, with a standard deviation of 4.6404, indicating significant variability in FDI across these nations Notably, the lowest recorded FDI is -5.1603 from the Kyrgyz Republic in 2020, while the highest is 29.767 from Singapore in 2017.
The mean values for the variables CO2PC, GOV, and HDI are 7.1244404, 0.11095655, and 0.7361496, respectively Notably, the CO2PC variable shows significant variation, with a minimum of 0.1646312 recorded in Myanmar (2010) and a maximum of 39.5821395 in Qatar (2012) While both GOV and HDI are derived from reputable global organizations such as the World Bank and UNDP, their differences are minimal The GOV variable ranges from -1.62286842 in Myanmar (2010) to 2.32485986 in Singapore (2020), whereas the HDI values range from a low of 0.5050000 in Pakistan (2010) to a high of 0.9380000 in Singapore (2019).
Variable Obs Mean Std Dev Min Max
The macroeconomic variables, including GDPPCG, TRADE, FIND, and PLR, exhibit stable values without any significant anomalies, as detailed in the accompanying table To visually represent the distribution of these variables, a distribution chart has been provided by the author.
The author employs R software to conduct a correlation matrix analysis among the model's variables This correlation analysis enables the examination of the relationship direction between the independent and dependent variables in the model.
Table 5: Correlation coefficient between variables in the research model
FDI CO2PC GOV HDI GDPPC
(Source: Data table from R software)
The correlation coefficient results reveal the degree of multicollinearity within the research model, highlighting 28 pairs of correlations among independent variables Notably, the pairs of FDI and TRADE (52%) and GOV and CO2PC (53%) exhibit higher correlations than the other pairs, yet remain below the 70% threshold, indicating their influence is insignificant In contrast, the correlations between HDI and GOV (79%) and HDI and CO2PC (77%) are considerably high, exceeding 70%, suggesting a potential for multicollinearity.
When one independent variable is virtually a combination of other independent variables during the fitting of a regression model, the combination will alter parameter
Multicollinearity refers to the complications arising when independent variables in a regression model are highly correlated This issue can lead to unreliable parameter estimates, which may be insignificant or display unexpected signs, ultimately affecting the model's reliability and interpretability (Adeboye, Fagoyinbo, and Olatayo, 2014).
The multicollinearity test assesses the correlation among independent variables, specifically examining CO2PC, GOV, HDI, GDPPCG, TRADE, FIND, and PLR in this study Identifying multicollinearity is crucial, as it can lead to misleading regression results To ensure the accuracy of these results, the variance inflation factor (VIF) test is utilized, serving as an indicator of multicollinearity in multiple regressions VIF is calculated as the reciprocal of tolerance (1 / 1 – R²) and is preferred over tolerance because it highlights the inflation of standard errors associated with specific beta weights due to multicollinearity VIF values exceeding 2.5 indicate a concerning level of multicollinearity, as noted by Adeboye, Fagoyinbo, and Olatayo (2014).
Table 6: Variance inflation factor (VIF) of the model
(Source: Data table from R software)
Table 10 presents the coefficients and correlation levels for both independent and control variables within the model The findings indicate that the Variance Inflation Factor (VIF) values for CO2PC, GOV, HDI, GDPPCG, TRADE, FIND, and PLR are all below 2.5, suggesting that multicollinearity is not a significant concern among the variables in this model.
4.2.4 Test the regression method selection
After assessing the multicollinearity among the independent and control variables and determining that it is unlikely to be an issue, the author employs R software to perform the regression analysis.
Table 7: Multivariate regression results on the influence of ESG on FDI
The results of the analysis of the influence of ESG and macroeconomic variables on FDI attraction of Asian countries in the period 2010-2020 are presented in Table 11
The study implements the models in turn Pooled OLS, FEM, and REM
To test the compatibility between the OLS model and the FEM, the author uses the
F-test (Phillips, 1996b) The null hypothesis states that the model with no independent variables fits the data, run Pooled OLS The alternative hypothesis says that your model fits the data better than the intercept-only model, run FEM The F-test results show that
57 p-value = 0.00% is less than 5%, so accepting the FEM is more appropriate for research than the Pooled OLS model
Next, the author uses the Breusch-Pagan test to test the suitability of the Pooled
The comparison between the OLS model and the REM, as discussed by Schmidheiny (2012), involves testing the null hypothesis that error variances are equal using Pooled OLS, against the alternative hypothesis of unequal error variances, which necessitates the use of REM The findings indicate that REM is more appropriate for the research context, as evidenced by a P-value of 0.00%, significantly lower than the 5% threshold.
To determine the most appropriate model for the research, the author performs Hausman tests comparing Fixed Effects Model (FEM) and Random Effects Model (REM), as outlined by Schmidheiny (2012) The null hypothesis posits that the REM is the preferred model, while the alternative hypothesis suggests otherwise.
F test for individual effects data: FDI ~ CO2PC + GOV + HDI + GDPPCG + TRADE + FIND + PLR
F = 11.204, df1 = 30, df2 = 303, p-value < 2.2e-16 alternative hypothesis: significant effects
Lagrange Multiplier Test - (Breusch-Pagan) data: FDI ~ CO2PC + GOV + HDI + GDPPCG + TRADE + FIND + PLR chisq = 289.74, df = 1, p-value < 2.2e-16 alternative hypothesis: significant effects
58 is FEM With P-value = 0.01% smaller than 5%, the author concludes that the FEM is most suitable to study the impact of ESG on FDI inflows
The FEM model is deemed appropriate for research due to its significance level of 5% and a P-value of 0.0018% This indicates that the independent variables in the model effectively explain variations in the dependent variable, which includes CO2PC, GOV, and HDI.
GDPPCG, TRADE, FIND, and PLR is studied in a model that explains the effect on the
FDI inflows Besides, the value of R-squared = 68.52% shows that the independent and control variables included in the model can explain 68.52% of the change of the dependent variable
4.2.5 Diagnostic test for FEM estimations
The hypothesis is as follows:
H0: The model does not have heteroskedasticity
When testing heteroskedasticity for the FEM model, the author uses Breusch –Pagan Test, bptest function from the lmtest package in R software
Hausman Test data: FDI ~ CO2PC + GOV + HDI + GDPPCG + TRADE + FIND + PLR chisq = 22.787, df = 7, p-value = 0.001856 alternative hypothesis: one model is inconsistent
The results show that P-value = 0.06981 > 0.05 So, we do not reject H0, the model does not have heteroskedasticity
The hypothesis is as follows:
H0: The model does not have autocorrelation
The author used the Breusch-Godfrey test to check the autocorrelation of the
FEM model According to the results in the table, the P-value =0.1011 is greater than
0.05, so we do not reject H0, and the model does not have autocorrelation
(Source: Data from R software) studentized Breusch-Pagan test data: fixed
Breusch-Godfrey test for serial correlation of order up to 2 data: fixed
Regression results
With a 5% significance level, the FEM model shows a negative link between
Countries with lower carbon emissions are more attractive for foreign direct investment (FDI), highlighting the importance of addressing pollution and promoting green FDI for sustainability Auzairy et al (2018) emphasize that lower levels of carbon emissions correlate with increased FDI, indicating that pollution control is crucial for the long-term viability of investments Additionally, effective governance is a key determinant for maintaining FDI, as lower corruption levels enhance corporate governance and create a more favorable investment climate Thus, good governance is essential for fostering sustainable FDI growth.
Min 1st Qu Median 3rd Qu Max
Estimate Std Error t-value Pr(>|t|)
F-statistic: 100.439 on 7 and 333 DF, p-value: < 2.22e-16
Foreign Direct Investment (FDI) inflows show a notable relationship with the Human Development Index (HDI), despite initial expectations The HDI variable's P-value of 0.5887 indicates no significant connection with FDI inflows; however, it is positively correlated, suggesting that FDI is drawn to regions with higher HDI levels.
Macroeconomic variables, particularly GDP per capita growth (GDPPCG), significantly influence foreign direct investment (FDI) at a 5% significance level, indicating that higher GDP growth rates positively impact FDI attraction Additionally, trade openness is positively correlated with FDI, suggesting that increased trade openness and GDP growth enhance a country's ability to attract foreign investment This relationship implies that fostering trade openness can lead to improved governance and a more favorable environment for FDI.
The findings indicate a positive correlation between trade and the price level ratio (PLR) with foreign direct investment (FDI) inflows Specifically, a 1% increase in trade leads to an average FDI increase of 0.0071% of GDP, while a one-unit rise in PLR results in an average FDI boost of 8.4086% of GDP, assuming other factors remain constant Additionally, an increase in the exchange rate enhances the value of local currency received by investors, thereby increasing their benefits from foreign investment The positive relationship between trade openness and FDI suggests that higher levels of trade openness foster improved governance in business environments, aligning with the findings of Singhania and Saini (2021) and Nur Mohamad et al (2023).
The research indicates a significant positive correlation between the FIND variable and Foreign Direct Investment (FDI) at a 5% statistical significance level, supporting the notion that FIND influences FDI attraction in Asian nations To enhance the internationalization of domestic companies and attract foreign multinational enterprises, it is essential for countries to improve access to external financial resources Furthermore, greater financial development can facilitate international technology transfer and contribute to sustainable economic growth (Irandoust, 2021; Fauzel, 2016).
Analyze and evaluate research results
Based on the research results, it can be seen that factors E have a negative impact,
S does not influence foreign direct investment (FDI), while G positively affects FDI attraction in Asian countries Additionally, the new FIND indicator demonstrates a beneficial impact on FDI Traditional factors show that GDP per capita growth does not significantly affect FDI, whereas trade openness and the price level ratio both contribute positively to FDI inflows.
Table 8: Summary of test results
Research indicates that CO2 pollution negatively affects Foreign Direct Investment (FDI), with a statistically significant correlation The findings suggest that a cleaner natural environment enhances the appeal for FDI, highlighting the necessity to tackle pollution effectively To promote sustainable FDI, it is crucial to focus on environmentally friendly investments These results align with previous empirical studies, including those by Acharyya (2009), Chandran and Tang (2013), and Zhang and Zhou.
Recent studies, including those by Cole and Elliott (2005), Pao and Tsai (2011), align with the current trends in foreign direct investment (FDI) attraction in developing Asian nations However, this perspective contrasts with findings from Chipalkatti et al (2021), Kardos (2014), and Feng et al (2019), which indicate that FDI inflows tend to rise alongside CO2 emissions per capita This phenomenon is supported by "pollution paradise" theories, suggesting that FDI is attracted to countries with lenient environmental regulations and elevated levels of CO2 pollution.
FDI CO2 Per Capita Emissions (E) Negative impact
Human Development Index (S) No impact
GDP Per Capita Growth Positive impact
Financial Development Index Positive impact
The price level ratio Positive impact
Firms may relocate “dirty” industries to countries with less stringent environmental regulations
Government efficiency significantly influences foreign direct investment (FDI), as it encompasses public service quality, civil service independence, policy implementation, and the credibility of government commitments For instance, Singapore exemplifies how high environmental standards, effective public services, and low corruption levels attract substantial FDI from 2010 to 2020 Conversely, corruption raises unofficial costs and complicates business operations, highlighting the need for enhanced government efficiency and corruption control to boost FDI inflows.
Despite expectations that higher Human Development Index (HDI) scores would attract Foreign Direct Investment (FDI), this study finds HDI to be statistically insignificant in influencing FDI attraction While HDI aims to measure social progress through access to health, education, and goods, its positive correlation with FDI in developed nations may stem from high living standards and strong human rights concerns Conversely, in developing countries, particularly in Asia, social issues remain ambiguous, and factors such as human capital and low-cost labor are more critical in attracting FDI, especially in nations like Vietnam.
An increasing number of skilled individuals and well-qualified human resources in the country is crucial for sustaining Foreign Direct Investment (FDI) The Human Development Index (HDI) is commonly used as an indicator of social development, highlighting the complexity of measuring this multifaceted issue.
The GDP growth rate positively influences foreign direct investment (FDI) flows in Asian countries, demonstrating a low level of statistical significance with a p-value below 5% This finding aligns with previous research conducted by Yang et al (2000), Fauzel (2016), and Li and Liu (2005), as well as Acharyya.
Since 2009, GDP growth and market expansion have attracted foreign direct investment (FDI) to Asian nations, which have consistently demonstrated high growth rates However, this rapid market expansion has increased competition between domestic firms and foreign investors, raising the risk of market collapses and cyclical recessions, while also amplifying investor anxiety The ongoing challenges in the global economy have led to a decline in outward investment from developed countries Factors such as global political conflicts, rising inflation, and supply chain disruptions have created significant uncertainty, exerting downward pressure on global FDI from 2020 to 2022 and adversely affecting foreign investment flows in major economies.
Trade and PLR significantly attract FDI capital flows, aligning with the findings of Li et al (2021), Narayanamurthy (2010), Auzairy et al (2018), and Buchanan (2012) Additionally, a favorable exchange rate increases the value of local currency for investors converting foreign funds, providing early benefits to FDI investors.
Manufacturing investment projects face rising production costs due to increased exchange rates, which elevate the cost of imported inputs However, these challenges can be alleviated through exporting goods Enhanced trade openness can attract foreign direct investment (FDI) by fostering cooperation with new partners Overall, trade openness is beneficial, highlighting FDI's crucial role in leveraging open trade Asian nations are actively pursuing trade liberalization by signing free trade agreements and joining international organizations, aligning with the multilateral framework that suggests greater economic openness enhances financial development and attracts FDI.
The study reveals a positive correlation between Foreign Direct Investment (FDI) and the financial development index, indicating that developed financial sectors attract foreign investment Key control variables, including historical FDI values, trade openness, and economic growth, significantly influence FDI These findings provide insights into the policies nations should implement to attract FDI Furthermore, the research examines the role of FDI and financial development in enhancing national growth rates.
The findings led to the conclusion that foreign presence helps countries' economies grow
RECOMMENDATION AND CONCLUSION
Recommendation
The growing emphasis on Environmental, Social, and Governance (ESG) factors is becoming essential for governments to achieve Sustainable Development Goals (SDGs), particularly in developing nations Managers must integrate ESG into their business strategies to enhance value and effectiveness, which is crucial for attracting Foreign Direct Investment (FDI) As ESG continues to gain traction across various industries, its incorporation into corporate practices during a time of global market integration offers significant benefits for both businesses and society The paper provides empirical recommendations to enhance the role of ESG in attracting FDI in Asian countries, with specific strategies for Vietnam to improve the efficiency of ESG implementation by the government and regulatory bodies.
5.1.1 Policies proposed for Asian countries
First, promoting sustainable FDI policies to attract responsible and ecologically friendly investments, adopting a clear and transparent investment framework
Policymakers must establish a clear and transparent legal and regulatory framework for foreign direct investment (FDI) that outlines the rights and responsibilities of both investors and the government The UNCTAD investment policy framework for sustainable development emphasizes the necessity of clarifying and simplifying these regulations to enhance investor confidence It is crucial that investment, property, and contract laws are explicit and consistent to ensure predictability for corporations and to maintain robust property rights.
To safeguard investors' assets, particularly intellectual property, it is crucial to establish robust rights protections that are enforceable in disputes The creation of an Investment Promotion Agency (IPA) is essential, providing investors with valuable information, assistance, and guidance throughout the investment process Additionally, the investment framework must guarantee nondiscrimination and equal treatment for both foreign and domestic investors, ensuring that no origin-based bias affects their opportunities.
Integrating ESG considerations into investment promotion is essential for attracting foreign direct investment (FDI) that aligns with sustainability goals A robust ESG policy framework not only fosters responsible business practices but also contributes to long-term economic and environmental benefits Asian countries should establish and enforce environmental standards that meet international best practices, while providing incentives for FDI projects that surpass these standards or invest in green technologies Financial incentives, tax breaks, and subsidies for environmentally sustainable practices, such as renewable energy and resource efficiency, can further encourage responsible investment Additionally, promoting FDI that includes technology transfer agreements is vital for enabling domestic industries to access advanced technologies, thereby fostering innovation and sustainable development.
Third, Public-Private Partnerships (PPPs) and supporting Small and Medium Enterprises (SMEs) Facilitate PPPs for infrastructure projects, particularly in sustainable
Collaborations across sectors such as renewable energy, transportation, and healthcare can effectively harness private investments for the benefit of the public By promoting foreign direct investment (FDI) that nurtures the development of local small and medium-sized enterprises (SMEs), we can stimulate job creation and enhance economic sustainability.
To enhance foreign direct investment inflows, Asian countries must strengthen their integration into the global market by committing to bilateral and multilateral trade agreements This approach not only boosts the ratio of imports and exports relative to national GDP but also assures investors of favorable conditions for capital and goods flow, thereby reducing trade barriers Additionally, maintaining exchange rate stability within a defined range is crucial for fostering confidence among businesses and investors in the central bank's exchange rate management.
To boost foreign direct investment (FDI) inflows, the government must implement policies that promote financial development, recognizing the vital role of foreign capital in strengthening the banking system and capital markets Furthermore, the presence of foreign companies benefits various sectors, including education, by enhancing local workforce skills and knowledge It is also crucial for policymakers to avoid imposing heavy corporate taxes and restrictive profit repatriation rules that could discourage FDI in the country.
5.1.2 Recommendation on policies of Vietnam
To attract foreign direct investment (FDI), Vietnam must establish a stable and transparent legal framework that upholds property rights and contract integrity Consistent enforcement of laws is crucial to maintain investor confidence, avoiding abrupt policy shifts that may deter investment Addressing the overlaps in investment, enterprise, tax, and intellectual property laws is essential to streamline processes for FDI projects Additionally, enhancing the protection of intellectual property rights will foster innovation and facilitate technology transfer, ensuring that patents, copyrights, and trademarks are effectively safeguarded.
Second, sector-specific promotion and individualized incentive programs
To align with Vietnam's economic development goals and attract foreign direct investment (FDI), it is essential to identify key sectors such as manufacturing, technology, renewable energy, and infrastructure Tailored incentive packages should be developed for different industries and investors, considering their contributions to the local economy and specific needs Strategic sectors could benefit from tax rebates, investment credits, and reduced tariffs Additionally, enhancing support services for foreign investors by facilitating permits, licenses, and approvals is crucial Streamlining bureaucratic processes will help alleviate administrative burdens Ongoing efforts to improve the ease of doing business in Vietnam should focus on simplifying regulations, reducing red tape, and minimizing corruption.
Regional cooperation is essential for market access and diversification By leveraging economic agreements such as ASEAN and free trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), countries can enhance their trade opportunities and foster economic growth.
Vietnam serves as a strategic gateway to Southeast Asian markets, enabling access to larger markets and attracting investment from countries involved in regional agreements Its prime location is ideal for companies aiming to expand their reach to a broader customer base across the region.
To enhance industry efficiency and competitiveness, it is crucial to embrace digital transformation and leverage the abundant, cost-effective labor force The government should promote investment in the technology sector, focusing on software development and digital infrastructure Additionally, improving the education system and vocational training programs will strengthen the workforce, ensuring a steady supply of skilled labor that attracts foreign direct investment (FDI) investors.
The government should prioritize ESG commitments and sustainability initiatives to foster an ESG-friendly business environment By promoting environmental sustainability, social responsibility, and strong governance practices, the state can attract like-minded investors Vietnam actively encourages green and sustainable investments by offering incentives for projects aligned with its goals for environmental protection and renewable energy.
Conclusion
ESG considerations are increasingly influencing international investment decisions, particularly in the context of foreign direct investment (FDI) in Asia This study explores the relationship between ESG characteristics and FDI across 31 Asian countries, highlighting the need for a comprehensive examination of how combined ESG variables attract foreign investment Understanding the role of ESG elements in enhancing FDI appeal is crucial for policymakers and investors alike.
FDI inflows, and these inflows may then foster advances in a nation's progress toward the SDGs while also fostering economic growth
Foreign Direct Investment (FDI) inflows into Asian countries are positively influenced by key economic factors such as GDP growth rate, price level ratio, trade openness, and financial development Additionally, lower CO2 emissions per capita correlate with increased FDI, as countries increasingly seek to invest in sustainable and green projects aligned with sustainable development goals Furthermore, strong governance is crucial for attracting FDI, while higher Human Development Index (HDI) levels may deter investment in emerging markets due to elevated labor costs and stricter labor regulations.
Countries with a high Human Development Index (HDI) may seem poised to attract Foreign Direct Investment (FDI); however, empirical evidence from the research sample reveals no significant correlation between HDI and FDI in Asia's developing nations Contrary to initial assumptions, the findings suggest that HDI does not influence FDI attraction in this region.
The future of foreign direct investment (FDI) is increasingly influenced by impact investments and strategies linked to the Sustainable Development Goals (SDGs), appealing to investors interested in transitioning from profit-centric to impact-focused investments Both host and target regions are shifting their priorities away from traditional investment destinations, as investors now emphasize due diligence based on an industry or segment's ability to achieve a balance between financial returns and sustainable impact This shift is creating and enhancing investment opportunities, prompting policymakers to reassess their investment frameworks.
Increasing foreign direct investment (FDI) flows to developing nations is crucial for advancing the Sustainable Development Goals (SDGs) and translating them into financial returns and economic benefits This influx of investment not only aids countries in achieving their SDGs but also plays a vital role in combating climate change and ensuring the well-being of current and future generations By identifying sector-specific policy implications, nations can attract targeted FDI, leading to mutual benefits for both host and target countries.
Appendix 1: Sustainable Development Goals (17) GOAL 1: No Poverty
End poverty in all its forms everywhere (eradicate extreme poverty currently measured as people living on less than $1.25 a day)
End hunger, achieve food security and improved nutrition and promote sustainable agriculture
GOAL 3: Good Health and Well-being
Ensure healthy lives and promote well-being for all at all ages
Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
Achieve gender equality and empower all women and girls
GOAL 6: Clean Water and Sanitation
Ensure availability and sustainable management of water and sanitation for all
GOAL 7: Affordable and Clean Energy
Ensure access to affordable, reliable, sustainable and modern energy for all
GOAL 8: Decent Work and Economic Growth
Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
GOAL 9: Industry, Innovation and Infrastructure
Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
Reduce inequality within and among countries
GOAL 11: Sustainable Cities and Communities
Make cities and human settlements inclusive, safe, resilient and sustainable
GOAL 12: Responsible Consumption and Production
Ensure sustainable consumption and production patterns
Take urgent action to combat climate change and its impacts
Conserve and sustainably use the oceans, seas and marine resources for sustainable development
Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
GOAL 16: Peace and Justice Strong Institutions
Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
GOAL 17: Partnerships to achieve the Goal
This last goal aims to help realize strong partnerships and global cooperation for the SDGs
Source: https://www.undp.org/sustainable-development-goals
Appendix 2: Indicators of Financial Development Index (IMF)
Appendix 3: FDI inflows, top 20 host economies, 2021 and 2022
Source: UNCTAD, database (https://unctad.org/fdistatistics)
Appendix 4: FDI inflows, top 20 host economies, 2019 and 2020
Source: UNCTAD, database (https://unctad.org/fdistatistics)
Appendix 5: International private investment in the SDGs: change in the number of projects, 2021–2022 and 2015–2022 (Percent)
Appendix 6: Empirical studies on the relationship between FDI and ESG
Number of countries; Sample years
Environmental Score, Social Score, Governance Score, Economic Growth
The Global Climate Risk Index, CO2 emissions, HDI, Governance Scores, Gross capital formation, GDP per capita growth, Trade
FDI to GDP, Financial development
Financial development, Economic growth rate, Trade openness
Turkmenistan, Kyrgyzstan, Uzbekistan, and Tajikistan); 1990–2016
Export/GDP, Education spending/GDP, Labour productivity, Labour costs, Unemployment rate
CEE countries (Bulgaria, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Romania, Slovenia, Slovakia); 2009 –
Ng et al (2020) ESG scores
Financial development index, GDP per capita, trade openness, net inflows of FDI
(2019) FDI inflow Economic growth, GDP growth, HDI
The natural environment, natural resources, human capital, education, population, infrastructure, corruption, trade openness, GDP, interest rates, exchange rates, consumer price index
Economic growth, FDI inflows, CO2 emissions
Economic growth – FDI, Economic growth – CO2 emissions, FDI – CO2 emissions
17 countries in the Middle Eastern and North Africa; 1990 –
FDI inflows, FD, gross capital formation, general government expenditure, trade, population growth rate
The Real GDP Growth, Low Inflation, High Trade
GDP per capita, total labor force; gross fixed capital formation, FDI inflows, secondary school enrolment rate, export/ import, FD, Gini coefficient, CO2 emissions
Source: Author's synthesis from research papers
Appendix 7: Source of research variables in the model
Research variables Source Dependent variable
CO2 Per Capita Emissions (Tons) CO2PC WB
(S factor) -Human Development Index HDI UNDP
GDP Per Capita Growth (% annual) GDPPCG WB
Trade Openness (% GDP) TRADE WB
Financial Development Index FIND IMF
The price level ratio PLR WB
Min 1st Qu Median 3rd Qu Max
Estimate Std Error t-value Pr(>|t|)
F-statistic: 98.4316 on 7 and 333 DF, p-value: < 2.22e-16
Min 1st Qu Median 3rd Qu Max
Estimate Std Error t-value Pr(>|t|)
F-statistic: 100.439 on 7 and 333 DF, p-value: < 2.22e-16
Effects: var std.dev share idiosyncratic 3.732 1.932 0.491 individual 3.871 1.967 0.509 theta: 0.7161
Min 1st Qu Median 3rd Qu Max
Estimate Std Error z-value Pr(>|z|)
Appendix 11: List of 31 Asian nations chosen for the investigation
High and upper-middle-income (18) Low and lower-middle-income (13)
China, Indonesia, Iran, Japan, Jordan,
Bangladesh, Bhutan, Cambodia, India, Kyrgyz Republic, Lao PDR, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka, Uzbekistan, Vietnam
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