Doctoral Thesis A comparison of FDI determinants in ASEAN3 and ASEAN5 countries: New evidence from financial integration factor analysis Srovnání determinant PZI v zemích ASEAN3 a ASEAN5: Nové důkazy z analýzy faktoru finanční integrace Author: Ho Thanh Tri Degree programme: P6202 Economic Policy and Administration Degree course: 6202V010 Finance Supervisor: prof Ing Juraj Sipko, PhD MBA Zlín, January, 2020 © Ho Thanh Tri The publication was issued in the year 2020 Key words in Czech: hrubý domácí produkt (HDP), infrastruktura, otevřenost obchodu, mzdové náklady, úroková sazba, index vnímání korupce, směnný kurz Key words in English: Foreign Direct Investment (FDI), Gross Domestic Product (GDP), Infrastructure, Trade Openness, Labor cost, Interest Rate, Corruption Perception Index, Exchange Rate Full text of the Doctoral thesis is available in the Library of TBU in Zlín ACKNOWLEDGEMENTS I am deeply grateful to my Supervisor – Professor Juraj Sipko for his invaluable advice, guidance, and kindness supported in conducting this study I would like to thank Tomas Bata University in Zlín for awarding the scholarship that allowed me to concentrate on my research It is pleasant to express my gratitude to the Faculty of Management and Economics as well as Pavla Bartošová and Martina Drábková for supporting me in the administrative procedures during my study at the University I would like to especially thank Professor Drahomíra Pavelková, Boris Popesko and Dr Lubor Homolka, who gave me much advice for my dissertation I am also very grateful to my family: my mother and brothers Without their support, I could not have completed my study My deepest gratitude goes to my mother, Lê Thị Minh Nhu for her immeasurable love and encouragement And there are also many friends that I would like to say thank you to them for their help, support and encouragement during the time I study abroad I dedicate this achievement to all ABSTRACT Foreign direct investment (FDI) contributes greatly to the economic development of the receiving country by providing an important source of finance for development and acting as a channel for the transfer of capital and new technology On the one hand, FDI adds to the stock of domestic capital and increases the productivity of production factors such as raw materials and labor On the other hand, FDI also contributes to diversifying the economy by adding new economic actors and promoting competition to produce better products at lower prices in the host country The literature has indicated that FDI inflows are determined by the market size, the degree of openness, the role of institutional factors and degree of economic integration Besides, other factors such as labor costs, infrastructure, domestic tax rates, and institutional environment are correlated significantly with FDI inflows Many studies about the factors were influenced by foreign direct investment inflows in developing countries as well as developed countries However, none of the research articles compare FDI determinants in ASEAN3 and ASEAN5 with the new issue of the financial integration factor measured by the KAOPEN index to see whether or not it has an impact, along with other factors, on attracting FDI inflows in ASEAN3 and ASEAN5 member countries Therefore, in this study, the author conducts a "a comparison of FDI determinants in ASEAN3 and ASEAN5," focusing on the new issue of the financial integration measure by KAOPEN index and a reexamination of the impact of other factors such as gross domestic product, infrastructure facility, trade openness, labor costs, interest rate, institutional stability, and exchange rate to FDI inflows The author uses the quantitative research strategies by the panel ordinary least square estimation with the method of first differencing to address the critical research question and research hypotheses of this study There are three stages of this study In the first stage, the author identifies factors influencing FDI inflows in ASEAN countries In the second stage, the author uses econometric models to give concrete empirical evidence And in the third stage, the author draws a conclusion based on findings from the econometric models The author also includes an interview conducted with experts on the impact of these factors on attracting FDI in ASEAN member countries, which can help policymakers improve the FDI attraction of ASEAN member countries as well the FDI attraction of Vietnam This study collected data from eight ASEAN member countries during two financial crises from 1996 to 2016 The author divides ASEAN member countries into two groups, ASEAN3 and ASEAN5, based on their level of economic development The findings indicate that the coefficient of financial integration is positive and statistically significant at a 1% level of significance on FDI capital inflows The empirical results also support the hypothesis that foreign direct investment in ASEAN3 and ASEAN5 is positively correlated to market size and infrastructure facilities, and negatively correlated to labor costs as well as trade openness in ASEAN3 ABSTRAKT Přímé zahraniční investice (PZI, Foreign direct investment - FDI) významně přispívají k hospodářskému rozvoji hostitelské země tím, že poskytují důležitý zdroj financí pro rozvoj, převod kapitálu a nové technologie Na jedné straně PZI navyšují zásoby domácího kapitálu a zvyšují produktivitu výrobních faktorů, jakými jsou suroviny a práce Na druhé straně PZI také přispívají k diverzifikaci ekonomiky tím, že vytváří nové hospodářské subjekty a podporují konkurenceschopnost s cílem vyrábět v hostitelské zemi lepší produkty za nižší ceny Literatura naznačuje, že příliv PZI je určován velikostí trhu, stupněm otevřenosti, rolí institucionálních faktorů a stupněm ekonomické integrace Další faktory, jakými jsou mzdové náklady, infrastruktura, daňová sazba dané země a institucionální prostředí, pak s přílivem PZI vysoce korelují Mnoho studií zaměřených na tyto faktory bylo ovlivněno přílivem přímých zahraničních investic jak v rozvojových zemích, tak v rozvinutých zemích Žádný z výzkumných článků však nesrovnává determinanty PZI v ASEAN3 a ASEAN5 s novou problematikou faktoru finanční integrace měřenou indexem KAOPEN, aby se zjistilo, zda má nebo nemá dopad, spolu s dalšími faktory, na příliv PZI ASEAN3 a členských zemí ASEAN5 Z toho důvodu provedl autor této práce „srovnání determinant PZI v ASEAN3 a ASEAN5“ zaměřující se na novou problematiku faktoru finanční integrace měřenou indexem KAOPEN a na následné přezkoumání dopadu dalších faktorů, jakými jsou hrubý domácí produkt, infrastruktura, otevřenost trhu, mzdové náklady, úroková sazba, institucionální stabilita a směnný kurz, na příliv PZI K řešení zásadní výzkumné otázky a výzkumných hypotéz použil autor této práce kvantitativní výzkumné strategie s využitím metody nejmenších čtverců aproximací s metodou první diferenciace Tato práce má tři fáze V první fázi autor identifikuje faktory ovlivňující příliv PZI v zemích ASEAN Ve druhé fázi autor využívá ekonometrických modelů k zajištění konkrétních empirických důkazů Ve třetí části pak autor, na základě výsledků z ekonometrických modelů, vyvodí závěr Autor také poskytuje rozhovor s odborníky o dopadu těchto faktorů na atraktivitu PZI v členských zemích ASEAN, což může politikům pomoci zlepšit atraktivitu PZI jak v členských zemích ASEAN, tak i ve Vietnamu Tato práce shromáždila data z osmi členských zemí ASEAN v průběhu dvou finančních krizí v letech 1996 až 2016 Autor rozděluje členské země ASEAN dvou skupin, ASEAN3 a ASEAN5, na základě úrovně jejich ekonomického rozvoje Výsledky naznačují, že koeficient finanční integrace je pozitivní a statisticky významný pro příliv kapitálu PZI, při statistické hladině významnosti 1% Empirické výsledky také podporují hypotézu, že přímé zahraniční investice ASEAN3 a ASEAN5 pozitivně korelují s velikostí trhu a vybaveností infrastruktury a negativně korelují se mzdovými náklady a otevřeností trhu v ASEAN3 TABLE OF CONTENTS ABSTRACT ABSTRAKT LIST OF FIGURES AND TABLES 10 LIST OF ABBREVIATIONS AND ACRONYMS 12 1.INTRODUCTION 14 1.1 Research background and motivation 14 1.2 Research questions and objectives .18 2.LITERATURE REVIEW 20 2.1 Theories of FDI 20 2.2 Previous empirical studies of FDI determinants .23 2.3 Financial integration 27 2.3.1 Financial integration concept .27 2.3.2 Benefits and risks of financial integration 28 2.3.3 Financial integration in ASEAN countries 30 2.4 Financial integration index of Chinn-Ito 38 3.RESEARCH METHODOLOGY .48 3.1 Stages of research process 48 3.2 Definition of variable 49 3.2.1 Foreign direct investment .49 3.2.2 Financial integration .49 3.2.3 Market size 52 3.2.4 Exchange rate .53 3.2.5 Labor cost .53 3.2.6 Infrastructure facility 53 3.2.7 Institutional stability .54 3.2.8 Interest rate 54 3.2.9 Trade openness .55 3.3 Sampling and data collection 56 3.4 Statistical method 57 4.RESULT FROM QUANTITATIVE ANALYSIS 59 4.1 Descriptive statistics 59 4.2 Correlation between the variables 60 4.3 Result from regression analysis 62 5.RECOMMENDATIONS 73 5.1 Financial integration 73 5.2 Market size 76 5.3 Monetary policy 77 5.4 Trade openness 78 5.5 Institutional stability 78 6.CONTRIBUTION TO SCIENTIFIC AND PRACTICAL KNOWLEDGE 81 6.1 Contribution to scientific knowledge 81 6.1.1 Developing and introducing models, indicators for FDI determinants in ASEAN 81 6.1.2 Providing approaches, findings, and suggestions from previous relevant studies 81 6.1.3 Acquiring a deeper understanding of FDI determinants in ASEAN 81 6.1.4 Adding theoretical contribution to studies of FDI determinants 82 6.2 Contribution to practice knowledge 82 6.2.1 Providing critical evaluation of FDI in ASEAN 82 6.2.2 Practicality of this study’s approach 82 6.3 Contribution to education 83 CONCLUSION AND SUGGESTIONS 84 7.1 Conclusion 84 7.2 Suggestions for future research 84 BIBLIOGRAPHY .86 LIST OF THE PUBLICATIONS BY THE AUTHOR 98 AUTHOR’S PROFESSIONAL CURRICULUM VITAE .100 LIST OF FIGURES AND TABLES Figure 2.1: Gross domestic product: Annual average growth rate, 1995 -2015 32 Figure 2.2: Gross domestic product: Annual average growth rate in selected Asian countries, 1995 -2015 33 Figure 2.3: Exports and imports of goods and services, annual, 2005-2016 (US Dollars at current prices in millions) 35 Figure 2.4: FDI inflows and financial integration in ASEAN 1996-2015 .36 Figure 2.5: Foreign direct investment in ASEAN 1996-2016 37 Figure 2.6: Financial integration measured by the KAOPEN index of ASEAN 47 Figure 3.1: The stages of the research 48 Figure 3.2: FDI inflows into Asean from 1990 to 2016 51 Figure 3.3: The theoretical framework 56 Figure 3.4: The observed and unobserved effects influencing to FDI 58 Figure 5.1: ASEAN 2025 Vision 74 Table.1.1: FDI policies of ASEAN 14 Table 1.2: FDI inflows in ASEAN3 and ASEAN5 countries (millions of USD) 16 Table 2.1: ASEAN Countries: Economic Indicators 34 Table 2.2: Summary of the features of exchange arrangements and regulatory frameworks for current and capital transactions in IMF member countries Examples are taken from Vietnam 39 Table 2.3: Regulations on cross-border portfolio investments in selected ASEAN countries 40 Table 2.4: Comparison of financial integration measures 43 Table 3.1: Top according to the total FDI inflows between 1990 and 1996 .50 Table 3.2: FDI inflows into ASEAN from 1990 to 2016 .50 Table 3.3: Summary of the factors influencing FDI in ASEAN 56 10 Table 2.1: ASEAN Countries: Economic Indicators Source: IMF, World Bank, UNCTAD statistics online database, ADB Indonesia Malaysia Philippines Singapore Thailand Brunei Darussalam Cambodia Lao P.D.R Myanmar Vietnam 861 296 292 296 399 12 18 14 59 193 258 30 101 5.5 68.3 0.41 15.5 6.6 52.4 91.7 GDP in 2015 (US$ billion) Population in 2015 (millions) Poverty gap at $3.20 a day in 2013 (% of population) 9.8 n.a GDP growth (annual %) 2015 4.87 5.02 GDP growth (annual %) 2016 5.01 4.21 Inflation, consumer price (annual %) in 2015 6.36 2.08 Inflation, consumer price (annual %) in 2016 3.52 2.12 Fiscal balance of central government , % of GDP in 2015 -2.6 -3.2 Central government debt, total (% of GDP) in 2015 30.29 54.46 Current account balance (in percent of GDP) in 2015 -2.03 3.05 Total reserves in months of imports 6.45 5.51 Total trade in goods and services in 2015 (millions) 171345 210408 Foreign direct investment, net inflows (% of GDP) in 2015 2.29 3.32 Domestic credit to private sector by banks (% of GDP) in 2015 33.08 125.11 Total of banks in 2012 (foreign and joint banks) 143 46 12 6.06 6.92 n.a 1.93 1.99 0.1 2.94 3.23 n.a -0.56 -2.46 n.a 7.03 6.95 22 7.26 7.02 n.a 6.99 5.87 2.8 6.67 6.21 1.43 -0.5 -0.9 -0.42 1.22 1.27 9.48 0.87 1.76 -0.5 0.18 -0.73 3.02 1.5 6.96 3.24 -0.9 -1.0 -2.5 -15.4 -2.6 -4.7 -4.1 -4.0 45.39 107.2 35.45 n.a n.a n.a n.a n.a 2.48 9.90 18.10 5.73 8.04 7.35 16.76 7.59 -9.37 5.81 -15.82 2.04 -4.10 2.54 0.46 1.87 71987 528166 271949 6766 12400 3416 13823 173362 1.92 23.77 0.75 1.32 9.42 9.87 6.84 41.77 64 127.03 243 116.08 44 41.14 13 62.96 47 n.a 53 18.09 111.93 10 53 34 6.10 Figure 2.3: Exports and imports of goods and services, annual, 2005-2016 (US Dollars at current prices in millions) Source: UNCTAD statistics online database Typically, the degree of financial integration of each country has the tendency to rise along with its degree of trade integration (Figure 2.4) However, Unteroberdoerster and Pongsaparn (2011) indicated that the rapid expansion of most Asian economies into world trade has not come with a commensurate increase in their degree of financial integration It is evident that financial integration makes its way into Asian countries primarily through FDI flows Unteroberdoerster and Pongsaparn (2011) presented a model related to the degrees of financial integration The model used the Generalized Method of Moments (GMM) measuring by ASEAN countries’ bilateral trade flows such as trade openness, growth rates, interest rate differentials, exchange rate movements, and volatility The results of the model reflected the degrees of financial integration of many Asian economies were significantly lower than the average of the world, and in several cases lagged far behind the norm for Latin America and Eastern Europe There were only two exceptions: the financial centers of Hong Kong SAR and Singapore 35 140000 0.45 0.4 120000 0.35 100000 0.3 80000 0.25 60000 0.2 0.15 40000 0.1 20000 0.05 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FDI flow in ASEAN from 1996-2016 Financial integration (KAOPEN) of Chinn and Ito Figure 2.4: FDI inflows and financial integration in ASEAN 1996-2015 Source: UNCTAD statistics online database, Chinn-Ito’s website As detailed in Figure 2.5, the increasing investment to the ASEAN-4 (Vietnam, Malaysia, Thailand, and the Philippines) represents a major advancement Singapore accounts for more than 50% of total FDI of the whole region as it has a higher degree of financial integration than those of other ASEAN countries Meanwhile, the remaining group of ASEAN economies accounts for roughly 11 percent of the inflows of FDI into the region (Almekinders et al., 2015) 36 Figure 2.5: Foreign direct investment in ASEAN 1996-2016 Source: UNCTAD statistics online database The second issue regarding the financial integration of ASEAN is the level of banking integration The ASEAN banking sector is relatively small and limited since most activities cannot extend cross-border (Almekinders et al., 2015) At late 2013, the market capitalization of the all 24 commercial banks of ASEAN together was lower than the market capitalization of either HSBC (Hongkong and Shanghai Banking Corporation) or CIB (China Construction Bank), as stated by Vinokurov and Libman (2017) Since there are no large banks that can secure economic stability and economic development in each member states and in the whole region, it is very difficult to mitigate the impact of a crisis when it takes place In line with this issue, Vinokurov and Libman (2017) pointed out the dependence of domestic banks on foreign banks In 2015, banks from the EU and the US (29.4%) handled the majority of payment orders Accordingly, 27.2% of payment orders were taken by banks from the EU while banks from the US accounted for 29.4% of payment orders A significant part of regional liabilities was also centralized in the EU and the US at 36.9% and 32.9% respectively Domestic banks sometimes set up barriers for international credit and financial institutions due to concerns over the penetration of foreign banks In order to 37 minimize the risk associated with foreign banks, Singapore implemented its own measure National banks ask foreign market participants to undertake the same requirements for domestic market access as local market participants; the number of foreign bank branches receiving permission to work with individual deposits (savings accounts) is placed under restrictions; branches of foreign banks must apply for bank licenses to operate as separate legal entities (Almekinders et al., 2015) Consequently, every ASEAN member state probably is required to successfully obtain a particular threshold level of development of the banking services sector to exploit its liberalization and integration Otherwise, the benefits of market liberalization negative effects will be outweighed by its negative impacts 2.4 Financial integration index of Chinn-Ito Many studies referred to the impact of financial liberalization policies on economic performance, attempting to measure the benefits and costs of capital controls According to Chinn et al (2009), it is considerably challenging to estimate the extent of capital account controls since it is not feasible to properly figure out the extent of openness or restrictions in cross-border financial transactions Furthermore, the authors asserted that differentiating between de jure and de facto controls on capital transactions is a very complicated matter The de jure measure of capital financial openness as a binary variable is based on the information provided by IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) This variable cannot constitute the actual capital controls resulting because of its internal differences depending on the type of capital flows (inflows or outflows) and the kind of financial transactions The de facto is based on the index of the volume of capital flows relative to GDP (Lane and Milesi-Ferretti, 2007), the equality of real interest rate Chen (1981) or the international capital-asset-pricing model (ICAPM) De Gregorio (1998) Consequently, the researchers often interpret financial integration among countries as de facto restrictions on capital transactions (De Gregorio, 1998; Rajan and Zingales, 2003) To better understand the mechanism of capital control of each country in ASEAN, we should follow Table 2.2 and Table 2.3 below Table 2.4 offers an overview of the main measures such as their main properties, strengths, and weaknesses (Quinn et al., 2011) Additional empirical evidence about the choice of Chinn-Ito's financial integration index is provided in these three tables 38 Table 2.2: Summary of the features of exchange arrangements and regulatory frameworks for current and capital transactions in IMF member countries Examples are taken from Vietnam Source: International monetary fund 2012, https://www.imf.org/external/pubs/nft/2012/eaer/ar2012.pdf Vietnam Status under IMF Articles of Agreement Article VIII Article XIV Exchange Rate Arrangements Stabilized arrangement Exchange rate structure Dual exchange rates Multiple exchange rates Arrangements for Payments and Receipts Bilateral payments arrangements Payments arrears Controls on payments for invisible transactions and current transfers Proceeds from exports and/or invisible transactions Repatriation requirements Surrender requirements Capital Transactions Control on: Capital market securities Money market instruments Collective investment securities Derivatives and other instruments Commercial credits Financial credits Guarantees, sureties, and financial backup facilities Direct investment Liquidation of direct investment Real estate transactions Personal capital transactions Provisions specific to: Commercial banks and other credit institutions Institutional investors 39 • • ■ • • • • • • • • • • • • • KEY: • Indicates that the specified practice is a feature of the exchange system ‒ Indicates that data were not available at the time of publication ■ Indicates that the specified practice is not regulated ⊕ Indicates that the country participates in the euro area Indicates that the country participates in the European Exchange Rate Mechanism (ERM II) Indicates that flexibility is limited vis-à-vis the U.S dollar Indicates that flexibility is limited vis-à-vis the euro Indicates that flexibility is limited vis-à-vis another single currency Indicates that flexibility is limited vis-à-vis the SDR Indicates that flexibility is limited vis-à-vis another basket of currencies Table 2.3: Regulations on cross-border portfolio investments in selected ASEAN countries Source: Adopted from the research of David Cowen (2006), IMF, Asian Bonds Online Indonesia Capital inflow Money Bond Equity market market market Foreign investors are Subject to allowed to regulatory purchase Nonresidents approval shares are allowed Nonresidents without to purchase may not limitations money purchase except for market more than joint instruments percent of an securities locally investment companies fund that are finance companies as well Nonresidents may not purchase more than percent of 40 Capital Outflow Residents Nonresidents Banks' transactions with nonresidents are generally restricted Insurance and reinsurance companies are not allowed to invest abroad except for private placements overseas insurance business No restrictions apply on repatriation of capital or profits All payments must meet reporting requirements an investment fund Malaysia Investments in banks by Not subject Not subject nonresidents to controls to controls are generally limited to 30 percent Registration is required if the foreign exchange needed to service the capital repatriation of dividends, Philippines profits, and earnings is Registration is required if the foreign exchange needed to service the capital repatriation of dividends, profits, and earnings is 41 Registration is required if the foreign exchange needed to service the capital repatriation of dividends, profits, and Residents without domestic credit facilities are allowed to invest abroad Certain limits apply to those with local credit facilities, converting MYR to foreign currency to invest abroad Institutional investors are subject to restrictions Registration required for securities investments exceeding RM 50,000 Resident's investments abroad in excess of USD million annually require prior regulatory approval For the smaller amount, No restrictions on repatriation of capital or profits, subject to the provision of information on amounts exceeding RM 50,000 Repatriation of capital gains, profits, or dividends is allowed without approval, as long as proof of registration for the original investment is sourced from sourced from earnings is investors must local banks local banks sourced submit certain from local documentation banks Singapore Thailand Vietnam Investments in banks above certain limits require regulatory approval Not subject to controls Not subject to controls No limitation apply except for certain short-term instruments issued by local financial institutions No limitation apply except for certain short-term instruments issued by local financial institutions Controls apply to all transactions in money market instruments Subject to various limits Foreign investors are allowed to hold up to 30 percent of an issuer's current shares Free 42 available Approval required if the foreign exchange for the investment will be purchased from domestic banks No restrictions on repatriation of capital or Not subject to profits SGD controls proceeds must be converted to foreign currency Requires regulatory approval Not allowed to invest in shares and bonds abroad Documentation required for repatriation Foreign investors may only transfer investment capital abroad a year after a VND denominated securities trading account is opened with a custody agent Table 2.4: Comparison of financial integration measures Source: Quinn et al (2011) Measure CAPITAL eGlobe-KOF EQUITY Description Advantages De jure, Interval, Capital account Coding of AREAER text Includes information about restrictions on residents and nonresidents Blended de facto/de jure, Categorical/ordinal, Based on “actual flows” of trade, FDI, portfolio, and remittances, plus “restrictions” on imports, tariffs, taxes on trade and capital account restrictions Resident, nonresident; severity of restrictions balancing across all categories of financial transactions Broad sample size Longest period available Extensive measure covering trade and financial variables Disadvantages Intercoder reliability (text); costly to replicate Too broad a measure for some financial globalization applications 50% of information trade based Persistent serial correlation De jure, Categorical, Equity markets Binary Smaller sample measure based on size; specific to chronology of Official equity Equity Market Provides precise liberalizations; Liberalization events chronology of binary measure compiled by BHL (2005) clearly defined does not “1” indicates the date by capture 43 which foreign investors may own equity in a market equity liberalizations variations in liberalization Reversals not accounted for Resident, nonresident; severity of restrictions balancing De jure, Interval, Current Intercoder across all account Coding of reliability categories of AREAER text Includes (text); costly to financial FIN_CURRENT information about replicate transactions restrictions on residents Broad sample and nonresidents size One of few data sets on services restrictions Longest period availability FOI De jure, Categorical, Financial Current and Broad country Intercoder Capital account and time reliability (table Extension of Johnston coverage; and text) and Tamirisa (1998) inward/outward Nontransparent methodology backward distinction; coding from 1997 to 1965 gradated index methods; not Binary subcomponents of publicly AREAER are added to available produce a score Blended de facto/de jure Measures degree of 44 Monthly frequency; FORU KA KAOPEN restriction on foreign access to a countries equity markets clearly defined measure of equity market investability Limited sample size; specific to equity market liberalization Transparent coding and construction; De jure, Ordinal, Capital Intercoder multiple account Coding of reliability dimensions: AREAER text from 1995 (text) More controls by to 2005 Information limited sample residency, about restrictions on six coverage (91 direction of types of instruments; the countries flows and by direction of flows; and asset categories; during 1995– the residency of agents 2005); aggregates 19 discrete categories expensive to provide replicate/extend gradated available extensive information De jure, Categorical, Easy to Intercoder Financial current and replicate; reliability Capital account Based on comprehensive (table) principal component measure of Structural break analysis of binary overall de jure in the Tables indicators in AREAER,: financial 1995–1996; “multiple exchange globalization; five-year rates,” “current account,” available for all moving average “surrender of export IMF member of proceeds,” and five year countries IMF_Dummy; average of represented in mixes different IMF_BINARY AREAER Table types of financial restrictions De jure, Categorical/ordinal, 45 IF_HERITAGE Inward FDI TOTAL “Investment Freedoms.” Assessment of policies governing domestic and international investments including investment restrictions, national treatment, and payment restrictions Scale intervals change in 2007 and 2010 De facto An extensive measure of a country’s inward FDI as a % of either gross domestic product or World FDI, from UNCTAD Three differing definitions of FDI are embedded, creating structural breaks in the data Not recommended for use in panel studies Easily accessed online Large sample size Changing thresholds of FDI and Portfolio; inconsistent definitions of FDI and portfolio investment; may not measure financial globalization De facto A country’s aggregate assets and liabilities (summed) over Comprehensive- Banking center its gross domestic time and nations exhibit product The composition country extreme values includes FDI, equity coverage; in many cases; investment, external debt, differentiation Many series and official reserves by key asset characterized controlling for valuation categories by explosive properties 46 In their research, Chinn et al (2009) pointed out that governments of developing countries have converged to the middle ground of ‘Impossible Trinity’: managed exchange rate flexibility, controlled financial integration, and limited monetary autonomy Moreover, they introduced the scale of ‘Impossible Trinity’ and developed a set of “trilemma indexes.” This study has used the data of financial integration measured by KAOPEN Index for research purposes KAOPEN is based on the data reported in the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) By looking at the KAOPEN index of a nation, an economist or a researcher can tell whether the country is implementing a multiple exchange rate policy or not This is the mechanism that forms certain rates for transactions on the current account and a type of exchange rate applied to the capital account The KAOPEN index is computed from binary dummy variables Subsequently, it is constructed by applying the principal component analysis This technique is summed up by the matrix (4xn) in which is the number of turns, and n is the set of data over the years into a matrix (1xn) expressing the KAOPEN index through the year KAOPEN varies between and Higher values of the index mean that a country is more open to cross-border capital transactions Figure 2.6 shows an overall picture of financial integration in ASEAN measured by KAOPEN index 3.5 2.5 1.5 0.5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Vietnam Thailand Singapore Lao Campodia Myanmar Malaysia Philippines Figure 2.6: Financial integration measured by the KAOPEN index of ASEAN Source: Chinn-Ito’s website 47 3.RESEARCH METHODOLOGY To resolve the research problem and identify FDI determinants in ASEAN3 and ASEAN5, this study uses quantitative research strategy The research would attempt to solve above-mentioned specific research questions and objectives This chapter begins with the research stages, the next part contains methodology and data collection techniques, and all main variables are defined 3.1 Stages of research process To carry out the study, the research stages of the dissertation are shown in Figure 3.1 The study is distributed into three stages Stage Stage • Reviewing theories and previous research related to the thesis topic • Finding the research problem and gaps concerning a comparison of FDI determinants in ASEAN and ASEAN with new evidence from financial integration factor measure by KAOPEN index • Developing the hypothesis • Building the models for testing hypothesis • Discussing research findings, recommendations, and conclusions Stage Figure 3.1: The stages of the research Source: Own research In the first stage, the author identifies FDI determinants in ASEAN3 and ASEAN5 countries Based on the OLI theory of Dunning (1988), the factors affecting FDI inflows can be separated into observable and unobservable effects as shown in Figure 3.4 The author defines the location-specific advantages as the observable effects, and two advantages of the ownership-specific and internalization as unobservable effects, which can be time-variant or time-invariant According to the OLI condition, the observable effects are composed of macroeconomic stability (measured by the exchange rate, interest rate, institutional stability and financial integration), market size (measured by GDP), infrastructure facility (measured by 48 ... identify and compare FDI determinants between ASEAN3 and ASEAN5 RO1: To identify FDI determinants in ASEAN3 and ASEAN5 based on eclectic paradigm theory of Dunning (1988) RO2: To test financial integration... 2015 FDI flow in ASEAN from 199 6-2 016 Financial integration (KAOPEN) of Chinn and Ito Figure 2.4: FDI inflows and financial integration in ASEAN 199 6-2 015 Source: UNCTAD statistics online database,... the thesis topic • Finding the research problem and gaps concerning a comparison of FDI determinants in ASEAN and ASEAN with new evidence from financial integration factor measure by KAOPEN index