Do the third‐country effect and economic integration matter for Intra‐ASEAN FDI?

Abstract

Purpose

The purpose of this paper is to explore theoretical predictions and empirical investigation with respect to bilateral and third‐country determinants of Intra‐Association of Southeast Asian Nations Foreign Direct Investment (ASEAN FDI).

Design/methodology/approach

Theoretically, the augmented knowledge‐capital model of Baltagi et al. is refined by additionally assuming the presence of tariffs and economic integration. Subsequently, the theoretical predictions are hypothesized to be driven by numerical simulation of a derived general equilibrium model. Afterwards, bilateral and third‐country characteristics and economic integration influencing FDI in ASEAN are investigated using a spatial panel data technique, namely maximum likelihood estimator.

Findings

Using data on ASEAN inward FDI stock over the period of 1995‐2006, the results indicate that third‐country effect and economic integration are significant determinants of Intra‐ASEAN FDI. In addition, vertical FDI is proved to be the most effective investment strategy.

Practical implications

Some policy implications of investment policy and legislation in ASEAN economies are also provided. It is suggested that ASEAN investment policies should pay attention to how to enhance vertical FDI rather than the others.

Originality/value

The paper is useful to advance the theory of multinational enterprises. It assists Intra‐ASEAN investors for tracking FDI and location decisions in ASEAN countries.

Citation

Uttama, N. (2009), "Do the third‐country effect and economic integration matter for Intra‐ASEAN FDI?", Journal of International Trade Law and Policy, Vol. 8 No. 3, pp. 213-226. https://doi.org/10.1108/14770020910990623