Chizema, Da ling on
A icle
The impac o o eign di ec in es men on economic
de elopmen in Sou h Asia and Sou heas e n Asia
Economies
P o ided in Coope a ion wi h:
MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel
Sugges ed Ci a ion: Chizema, Da ling on (2025) : The impac o o eign di ec in es men on
economic de elopmen in Sou h Asia and Sou heas e n Asia, Economies, ISSN 2227-7099, MDPI,
Basel, Vol. 13, Iss. 6, pp. 1-15,
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Academic Edi o : Hi oyuki Taguchi
Recei ed: 11 Ap il 2025
Re ised: 29 May 2025
Accep ed: 30 May 2025
Published: 2 June 2025
Ci a ion: Chizema, D. (2025).
The Impac o Fo eign Di ec
In es men on Economic
De elopmen in Sou h Asia and
Sou heas e n Asia. Economies,13(6),
157. h ps://doi.o g/10.3390/
economies13060157
Copy igh : © 2025 by he au ho .
Licensee MDPI, Basel, Swi ze land.
This a icle is an open access a icle
dis ibu ed unde he e ms and
condi ions o he C ea i e Commons
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licenses/by/4.0/).
A icle
The Impac o Fo eign Di ec In es men on Economic
De elopmen in Sou h Asia and Sou heas e n Asia
Da ling on Chizema
Depa men o Accoun ing and Economics, Facul y o Economic and Managemen Sciences,
Sol Plaa je Uni e si y, Cen al Campus, C003 Economics and Managemen Sciences Building,
26 Scanlan S ee , Kimbe ley 8301, Sou h A ica; [email p o ec ed]
Abs ac : This s udy examines he impac o inwa d o eign di ec in es men (FDI) on
economic g ow h in Sou h and Sou heas Asia om 2006 o 2022, using a comp ehensi e
panel da ase and mul iple econome ic echniques. The baseline es ima ion employs Fea-
sible Gene alized Leas Squa es (FGLS), wi h obus ness checks using Fixed E ec s wi h
D iscoll–K aay s anda d e o s, he Common Co ela ed E ec s Mean G oup (CCEMG)
es ima o , and Two-S age Leas Squa es (2SLS). The esul s consis en ly show ha FDI and
G oss Capi al Fo ma ion (GCF) signi ican ly p omo e g ow h, while he Human Capi al
Index (HCI), T ade Openness (TO), and In la ion (I) ha e limi ed o ad e se e ec s. Go -
e nmen spending (GS) is nega i ely associa ed wi h g ow h, sugges ing ine iciencies in
public esou ce alloca ion. The indings unde sco e he impo ance o enhancing abso p i e
capaci y h ough in es men s in educa ion, ins i u ional quali y, and ade acili a ion.
Policy ecommenda ions include adop ing pe o mance-based budge ing and independen
audi s, d awing on Malaysia’s an i-co up ion and audi e o ms. To add ess he weak
impac o human capi al, his s udy ad oca es o expanding public–p i a e pa ne ships
in echnical and oca ional educa ion, modelled on Singapo e’s SkillsFu u e ini ia i e.
Addi ionally, digi al in es men pla o ms like Indonesia’s Online Single Submission (OSS)
sys em and in as uc u e upg ades a e ecommended o educe ade cos s and imp o e
he in es men clima e. Finally, he s udy calls o deepe egional in eg a ion h ough
ha monized in es men egula ions unde he ASEAN Comp ehensi e In es men Ag ee-
men (ACIA) and he de elopmen o c oss-bo de special economic zones (SEZs). These
ecommenda ions a e g ounded in empi ical e idence and ailo ed o he egion’s s uc u al
cha ac e is ics, o e ing ac ionable insigh s o policy-make s.
Keywo ds: FDI; Feasible Gene alized Leas Squa es (FGLS); economic g ow h; Asia
1. In oduc ion
Fo eign di ec in es men (FDI) has long been ega ded as a c i ical engine o economic
de elopmen , pa icula ly wi hin eme ging and de eloping economies. In he con ex
o Sou h and Sou heas Asia, FDI has signi ican ly con ibu ed o he ad ancemen o
indus ializa ion, he enhancemen o echnological capabili ies, and he in eg a ion o
domes ic economies in o global alue chains. The egion’s s a egic geog aphic posi ioning,
a ou able demog aphic ends, and p og essi ely libe alized policy amewo ks ha e
collec i ely posi ioned i as an a ac i e des ina ion o in e na ional in es o s. FDI in lows
o de eloping Asia mode a ed in 2023, o alling app oxima ely USD 621 billion, ye he
egion emained he la ges global ecipien , accoun ing o nea ly hal o wo ldwide
FDI (WIR,2024). Wi hin he egion, Eas and Sou heas Asia con inued o domina e,
Economies 2025,13, 157 h ps://doi.o g/10.3390/economies13060157
Economies 2025,13, 157 2 o 15
al hough Eas Asia expe ienced a no able con ac ion, pa icula ly in China, whe e a decade-
long upwa d end was e e sed. In con as , Sou heas Asia main ained s able in lows,
suppo ed by esilien economic g ow h and s ong in eg a ion in o global alue chains.
Sou h and Cen al Asia; howe e , wi nessed signi ican declines, wi h India and Kazakhs an
egis e ing sha p educ ions in FDI. Among he de eloping egions, he Associa ion o
Sou heas Asian Na ions (ASEAN) e ained i s posi ion as he leading FDI des ina ion,
a ac ing 17% o global in lows in 2023 wi h an inc ease om 16.5% in 2022 con inuing
a s eady upwa d ajec o y since 2019 (AIR,2024). The egion’s FDI s ock expanded
by 56% o e he pas decade, ising om USD 2.5 illion in 2014 o USD 3.9 illion in
2023, inc easing i s sha e o global FDI s ock om 6.9% o 7.9%. This g ow h has been
unde pinned by consis en ly high annual in lows exceeding USD 200 billion since 2021.
An inc easingly impo an componen o Sou h and Sou heas Asia’s economic g ow h
plans is o eign di ec in es men (FDI). O e he las wo decades, hese egions ha e seen
signi ican FDI in lows, which ha e been uelled by ade openness, labou o ce expansion,
and ma ke size (Emako e al.,2022). In addi ion o inance, FDI p o ides echnology,
managemen know-how, and access o global ma ke s which is c i ical o he de elopmen
o he economy (Ag awal,2015). This is especially impo an in eme ging economies, whe e
local businesses migh no ha e su icien esou ces o in es in inno a i e echnologies.
Asia has ecen ly eme ged as one o he wo ld’s as es g owing economic egions. The
egion’s as economic g ow h is equen ly a ibu ed o he implemen a ion o ou wa d-
o ien ed policies, such as opening o FDI and expanding expo s (Goh e al.,2017). This
is backed by Bhujabal e al. (2024), who indica e ha his egion has one o he as es
expanding economies, wi h an annual g ow h a e o 6.67%. O e he las decade, FDI
in lows o he Associa ion o Sou heas Asian Na ions (ASEAN) ha e inc eased signi ican ly.
Since 2016, annual in lows ha e a e aged USD 170 billion, subs an ially double he USD
92 billion eco ded be ween 2006 and 2015 (UNCTAD,2024). FDI a e aged a s agge ing
USD 220 billion annually be ween 2021 and 2023, secu ing ASEAN’s place among he op
de eloping economies in e ms o FDI bene icia ies o h ee yea s in a ow. ASEAN’s
p opo ion o wo ldwide o eign di ec in es men (FDI) inc eased om an a e age o 6%
be ween 2006 and 2015 o 17% by 2023 (UNCTAD,2024). The egion’s FDI s ock inc eased
om USD 1.7 illion in 2015 o USD 3.9 illion by 2023 because o his accele a ed in usion.
Reg e ully, many de eloping na ions s ill expe ience he icious cycle o unde de el-
opmen , whe eby poo p oduc i i y esul s in low income (Masoud,2014;Wel eji,2018).
Consequen ly, his esul s in poo sa ings, which in u n lead o low in es men , and which
in u n leads o low p oduc i i y. In addi ion, Emako e al. (2022) asse ha apid economic
g ow h and inc eased ou pu a e equi ed o alle ia e po e y and ensu e sus ainable de-
elopmen . As a esul , de eloping coun ies equi e ex e nal esou ces, such as FDI, o
b eak he cycle o unde de elopmen and main ain economic p og ess.
Recen empi ical li e a u e p esen s a nuanced unde s anding o he ela ionship be-
ween o eign di ec in es men (FDI) and economic g ow h, pa icula ly in de eloping
economies. Ghosh and Saha (2025) p o ide obus e idence om a panel o 135 de eloping
coun ies (1996–2020), demons a ing ha FDI posi i ely and signi ican ly con ibu es o
economic g ow h, especially when ins i u ional quali y measu ed by go e nmen e ec-
i eness, egula o y quali y, and he ule o law is s ong. In con as , coun y-speci ic
s udies yield mo e mixed esul s. Obeng-Amponsah and Owusu (2025), ocusing on
Ghana, ind no di ec impac o FDI on g ow h o employmen ; howe e , hey highligh
he mode a ing ole o echnology in enhancing FDI’s sho - un e ec s. Simila ly, Ozili
(2025) epo s ha FDI in lows do no signi ican ly in luence economic g ow h in Nige ia
be ween 2010 and 2019, wi h mac oeconomic a iables such as popula ion size, in e es
a es, and in la ion playing mo e c i ical oles. These indings unde sco e he impo ance
Economies 2025,13, 157 3 o 15
o con ex ual ac o s such as ins i u ional amewo ks in shaping he g ow h ou comes o
FDI in de eloping economies.
Despi e subs an ial in lows o o eign di ec in es men (FDI) in o Asia, he egion
con inues o exhibi une en economic de elopmen , wi h he e ogeneous ou comes ac oss
coun ies. While FDI is widely ecognized as a ca alys o economic g ow h, acili a ing
capi al accumula ion, echnology ans e , and manage ial expe ise—i s e ec i eness is
con ingen upon a ange o s uc u al and ins i u ional ac o s, including poli ical s abili y,
egula o y quali y, and in as uc u e de elopmen (Bo ensz ein e al.,1998;Dunning,2001).
This s udy ocuses on Sou h and Sou heas Asia, sub egions ha ha e a ac ed signi ican
FDI due o hei la ge consume bases, compe i i e labou cos s, and ela i ely a ou able
in es men clima es. Howe e , despi e no able economic achie emen s, hese egions
con inue o ace dispa i ies in income dis ibu ion, ins i u ional quali y, and human capi al
de elopmen . The objec i e o his esea ch is o examine he di e en ial impac o FDI
on economic g ow h ac oss hese economies, wi h he aim o iden i ying he condi ions
unde which FDI con ibu es o inclusi e and sus ainable de elopmen . By analysing he
FDI–g ow h ela ionship in a egionally disagg ega ed con ex , his s udy seeks o in o m
bo h heo e ical discou se and policy o mula ion. Unde s anding he mechanisms h ough
which FDI in luences de elopmen is essen ial o policymake s aiming o ha ness o eign
in es men as a d i e o long- e m, equi able g ow h.
Gap and Con ibu ion
Al hough FDI is widely ecognized as a ca alys o economic g ow h, i s e ec i e-
ness emains highly con ex -dependen , pa icula ly in de eloping egions. In Sou h and
Sou heas Asia, FDI in lows ha e g own subs an ially since he ea ly 2000s, d i en by
expo -o ien ed s a egies, demog aphic ad an ages, and libe alized in es men egimes
(Sjöholm,2013). Howe e , g ow h ou comes emain une en, aising conce ns abou he
abso p i e capaci y o hos economies shaped by human capi al, ins i u ional quali y, and
ade openness (Bo ensz ein e al.,1998;Al a o e al.,2004). The egion’s he e ogenei y in
go e nance, in as uc u e, and sec o al de elopmen p esen s a aluable oppo uni y o
compa a i e analysis (Rao e al.,2023;Sahoo,2006). Ye , exis ing s udies o en ocus on
single-coun y cases o o e look he media ing ole o mac oeconomic s abili y, public sec-
o e iciency, and egula o y quali y in shaping FDI-g ow h dynamics (Makiela & Oua a a,
2018;Iamsi a oj,2016). Gi en hese gaps, a egion-speci ic empi ical in es iga ion is wa -
an ed. This s udy add esses his need by examining he impac o FDI on economic g ow h
in conjunc ion wi h key ins i u ional and policy a iables, using obus panel econome ic
echniques o gene a e con ex ually ele an insigh s o Sou h and Sou heas Asia.
2. Li e a u e Re iew
2.1. Theo e ical Li e a u e
The nexus be ween o eign di ec in es men (FDI) and economic de elopmen has
been a ocal poin in bo h heo e ical and empi ical economic discou se. The analy ical
ounda ion o his s udy is g ounded in bo h neoclassical and endogenous g ow h heo y,
which o e s dis inc bu complemen a y pe spec i es on he ole o FDI in economic
de elopmen . Wi hin he Solow–Swan (Solow,1956), (Swan,1956) neoclassical g ow h
model, FDI is concep ualized as a componen o capi al accumula ion ha can enhance
ou pu in he sho o medium e m by augmen ing he physical capi al s ock. Howe e , due
o he assump ion o diminishing ma ginal e u ns o capi al and exogenous echnological
p og ess, he long- un g ow h a e emains una ec ed by FDI unless i con ibu es o
echnological ad ancemen .
Economies 2025,13, 157 4 o 15
In con as , endogenous g ow h models, pa icula ly hose de eloped by Lucas (1988)
and Rome (1990), p o ide a mo e obus heo e ical jus i ica ion o he sus ained impac
o FDI on g ow h. Lucas emphasizes he ole o human capi al accumula ion and lea ning-
by-doing, sugges ing ha FDI can enhance labou p oduc i i y h ough skill ans e
and wo k o ce de elopmen . Rome , on he o he hand, highligh s he impo ance o
knowledge spillo e s and inno a ion, posi ing ha FDI can se e as a condui o new
echnologies and manage ial p ac ices ha s imula e o al ac o p oduc i i y (TFP) g ow h.
These models imply ha he g ow h e ec s o FDI a e condi ional on he hos economy’s
abso p i e capaci y, which is shaped by he quali y o ins i u ions, human capi al, and
openness o ade. Bo ensz ein e al. (1998) u he e ine his pe spec i e by asse ing ha
he de elopmen al di idends o FDI a e con ingen upon he hos economy’s abso p i e
capaci y pa icula ly he quali y o human capi al and ins i u ional amewo ks which
media e he ex en o which FDI-induced ex e nali ies a e in e nalized.
2.2. Empi ical Li e a u e
Empi ical in es iga ions in o he FDI–g ow h nexus yield he e ogeneous indings,
o en shaped by coun y-speci ic s uc u al and ins i u ional cha ac e is ics. A g owing
body o li e a u e unde sco es he condi ional na u e o FDI’s de elopmen al impac .
Fo ins ance, Ag awal (2015) and Olagbaju and Akinlo (2018) p o ide e idence ha FDI
con ibu es posi i ely o economic g ow h, pa icula ly in economies wi h well-de eloped
inancial sys ems ha can e icien ly alloca e o eign capi al. Simila ly, Bloms om and
Kokko (2003) emphasize ha he abso p i e capaci y o hos coun ies de e mined by
he quali y o human capi al and ins i u ional obus ness is pi o al in ha nessing he
p oduc i i y-enhancing spillo e s associa ed wi h FDI.
Bhaska a-Rao and Hassan (2011), employing an au o eg essi e dis ibu ed lag (ARDL)
model o Bangladesh, demons a e ha pos -libe aliza ion e o ms in he 1980s, including
ade openness and inc eased FDI in lows, ha e exe ed a posi i e in luence on economic
g ow h. Howe e , hey also iden i y go e nmen expendi u e and in la ion as g ow h-
inhibi ing ac o s. La ge-scale c oss-coun y analyses by Makiela and Oua a a (2018) and
Iamsi a oj (2016) u he co obo a e he posi i e associa ion be ween FDI and g ow h,
albei wi h a ying magni udes ac oss di e en ins i u ional and mac oeconomic con ex s.
None heless, li e a u e is no unequi ocally op imis ic. Ai ken and Ha ison (1999) e eal
ha , while FDI may enhance p oduc i i y in ecipien i ms, i can simul aneously displace
domes ic in es men , esul ing in ambiguous ne g ow h e ec s. In he Asian con ex ,
Fa mawa i e al. (2018) ind ha FDI signi ican ly con ibu es o economic de elopmen
h ough channels such as p oduc i i y enhancemen , employmen gene a ion, echnological
ad ancemen , and po e y alle ia ion.
The ole o FDI in acili a ing in eg a ion in o global alue chains and p omo ing
echnological di usion is well documen ed. Chaudhu y e al. (2021) dis inguish be ween
g een ield in es men s and me ge s and acquisi ions in Sou h Asia, inding ha he g ow h
e ec s o FDI a e con ingen upon he mode o en y and hos coun y cha ac e is ics.
Howe e , hei analysis is limi ed in scope, bo h geog aphically and me hodologically,
as i does no accoun o c oss-sec ional dependence o b oade egional he e ogenei y.
Mo e ecen ly, Hussain e al. (2024) explo ed he in e play be ween inancial inclusion
and economic g ow h ac oss 21 Asian economies, highligh ing he impo ance o inclusi e
inancial sys ems in os e ing long- e m de elopmen . While hei indings unde sco e he
signi icance o inancial lows, he s udy does no isola e he speci ic con ibu ion o FDI,
no does i add ess he econome ic complexi ies inhe en in mac o-panel da a.
Economies 2025,13, 157 5 o 15
T ade openness and human capi al de elopmen also eme ge as ecu en hemes
in he g ow h li e a u e. Empi ical s udies such as Male ane and Odhiambo (2019) and
Chimobi (2010)
epo ha inc eased ade libe aliza ion is posi i ely co ela ed wi h eco-
nomic pe o mance in bo h A ican and Asian con ex s. Chang and Mendy (2012), analysing
36 A ican economies, iden i ied posi i e associa ions be ween g ow h and a iables such
as labou o ce pa icipa ion, expo s, impo s, and o eign aid, while no ing nega i e
co ela ions wi h FDI, domes ic in es men , and g oss na ional sa ings—highligh ing he
nuanced and con ex -dependen na u e o hese ela ionships. Human capi al, pa icu-
la ly in he o m o highe educa ion, is consis en ly iden i ied as a c i ical de e minan o
long- un g ow h. Sabu e al. (2021) and Goczek e al. (2021) emphasized he impo ance
o educa ional quali y and equi able access, while Sai maly (2023) ad oca es o a ge ed
policy in e en ions o educe educa ional dispa i ies and enhance he p oduc i i y o
human capi al.
The exis ing body o empi ical li e a u e e eals ha he in luence o FDI on economic
g ow h is con ex -dependen and signi ican ly shaped by a ange o s uc u al and ins i u-
ional a iables. Key among hese is he de elopmen o he inancial sec o , he quali y
o human capi al, ins i u ional e ec i eness, and he deg ee o ade openness. Resea ch
consis en ly demons a es ha coun ies wi h s ong abso p i e capaci ies cha ac e ized by
ad anced educa ional sys ems, e ec i e go e nance, and libe alized ade en i onmen s
a e mo e capable o ansla ing FDI in lows in o long- e m economic gains. In con as ,
whe e hese ounda ional condi ions a e weak o absen , FDI may yield limi ed bene i s o
e en exe de imen al e ec s, such as displacing domes ic in es men .
Despi e he b ead h o exis ing esea ch, he e emains a pauci y o comp ehensi e,
egion-speci ic empi ical analyses ha sys ema ically examine he join e ec s o FDI, hu-
man capi al, ins i u ional quali y, and ade openness wi hin he con ex o Sou h and
Sou heas Asia. Much o he cu en li e a u e is ei he con ined o single-coun y case
s udies o ails o employ econome ic me hodologies capable o add essing he complexi-
ies inhe en in mac o-panel da a, such as c oss-sec ional dependence, endogenei y, and
he e ogenei y ac oss uni s. This s udy seeks o add ess his empi ical gap by in es iga ing
he in e ac i e e ec s o FDI, human capi al, ins i u ional quali y, and ade openness on
economic g ow h ac oss a panel o Sou h and Sou heas Asian economies. U ilizing ad-
anced panel da a es ima ion echniques, he analysis aims o gene a e nuanced, egionally
ailo ed policy insigh s ha can in o m s a egies o maximizing he de elopmen al impac
o FDI in hese eme ging ma ke s.
3. Me hodology
3.1. Me hodology and Da a Speci ica ions
The con ibu ion o FDI on economic g ow h is examined using econome ic eg ession
esea ch. The panel da a analysis app oach is used o analyse he impac o he independen
ac o s (FDI in lows, g oss capi al o ma ion (GCF), human capi al index (HCI), ade
openness (TO), go e nmen spending (GS), and in la ion (I)) on he dependen a iable
(GDP pe capi a) in Sou h and Sou heas Asia. This s udy’s con ol a iable selec ion is
based on bo h heo e ical conside a ions and empi ical p ecedence in he li e a u e on
FDI g ow h. GCF accoun s o domes ic in es men , which suppo s FDI in in as uc u e
de elopmen and capi al accumula ion in line wi h he Solow g ow h model. HCI indica es
human capi al quali y, which is a c ucial p edic o o FDI abso p i e abili y and p oduc i i y
spillo e s, as s essed in endogenous g ow h models (Lucas,1988;Rome ,1990). TO is used
o accoun o he le el o in eg a ion in global ma ke s, which can a ec bo h he olume
and e icacy o FDI. GS is a p oxy o iscal policy and public in es men , which can a ac
Economies 2025,13, 157 6 o 15
o epel p i a e and o eign in es men . In la ion is inco po a ed in mac oeconomic s abili y
con ols, which has an impac on in es o con idence and long- e m g ow h p ospec s.
This s udy in es iga es he in luence o FDI on economic g ow h du ing he pe iod
2006–2022 using da a om he Wo ld Bank’s Wo ld De elopmen Indica o s,
UNCTAD (2025)
o he human capi al index, and Ou Wo ld in Da a
(O iz-Ospina e al.,2016/2025)
o he
go e nmen spending index. The indices a e based on Wo ld Bank (2025), and hei me a-
da a show ha g oss capi al o ma ion is made up o ne changes in in en o y le els as
well as expendi u es on adding o he economy’s ixed asse s. T ade openness is measu ed
by he sum o commodi ies and se ices expo ed and impo ed as a pe cen age o GDP.
The ne in low o o eign capi al in o he epo ing economy, di ided by GDP, is known as
o eign di ec in es men . Go e nmen spending is he sum o all he money spen by he
go e nmen on goods and se ices as a pe cen age o GDP. I includes he go e nmen ’s
in e es expense. The UNCTAD (2025) human capi al index conside s he popula ion’s
educa ion, skills, and heal h s a us, as well as he en i e in eg a ion o esea ch and de el-
opmen in o socie y h ough he numbe o esea che s and esea ch expendi u es. The
pe cen age o GDP ha he gene al go e nmen spends on educa ion (cu en , capi al, and
ans e s) is shown. I co e s spending ha is inanced by money sen o he go e nmen
om o e seas sou ces. Local, egional, and na ional go e nmen s a e ypically e e ed o
as gene al go e nmen s. This s udy uses GDP pe capi a as he dependen a iable, and
he independen ac o s ha a e expec ed o a ec economic g ow h a e ca e ully selec ed
based on he a ailable da a and he li e a u e o he ele an pe iod.
This s udy’s componen s a e all based on seconda y o quan i a i e da a. The s udy
ocuses on en Sou h Asian and Sou heas Asian coun ies: Bangladesh, Bhu an, Cambodia,
India, Indonesia, Malaysia, Pakis an, he Philippines, Thailand, and Vie nam. The p ima y
c i e ia used o choose he coun ies we e he accessibili y and dependabili y o he da a
ac oss he cou se o he sample. The da a could no be ex ended beyond 2022 due o a lack
o da a o key componen s.
3.2. Model Speci ica ion
GDPCi =α+β1FDIi +β2HCIi +β3GCFi +β4Ii +β5TOi +β6GSi +εi ,i=1, . . . , 7; =2006, . . . , 2022 (1)
whe e
•GDPCi GDP pe capi a g ow h (annual %) index o coun y ia ime .
•
All he independen a iables a e de ined on he igh side o he speci ica ion model
as ollows:
•FDIi in lows is a pe cen age o GDP o coun y ia ime .
•HCIi Human capi al index o coun y ia ime .
•
GCF
i
G oss capi al o ma ion pe cen age o GDP (annual %) index o coun y ia
ime .
•Ii In la ion, consume p ices (annual %) index o coun y ia ime .
•TOi T ade openness (% o GDP) index o coun y ia ime .
•GSi Go e nmen spending (% o GDP) index o coun y ia ime .
•εi Idiosync a ic e m.
3.3. Es ima ion S a egy
To es ima e he ela ionship be ween FDI and economic g ow h, he s udy employed
he Feasible Gene alized Leas Squa es (FGLS) es ima o because o i s capaci y o deal
wi h he e oskedas ici y and au oco ela ion in panel da a, which a e common in mac oeco-
nomic s udies on FDI and economic g ow h (Bal agi,2008). Fu he mo e, by in eg a ing
empo al ixed e ec s, he FGLS model accoun s o unobse ed ime-speci ic shocks ha
may a ec all coun ies concu en ly, such as egional economic ends o policy changes
Economies 2025,13, 157 7 o 15
(Woold idge,2010). This app oach gene a es mo e eliable and e icien es ima es han
common ixed-e ec s o andom-e ec s models, which migh no be ele an in FDI-g ow h
esea ch, making FGLS a mo e obus op ion (Bal agi,2008;G eene,2011). Fu he mo e, he
FGLS model suppo s bo h c oss-sec ional and ime-se ies a ia ions, making i ideal o
examining dynamic in e ac ions o e ime in a di e se egion such as Sou h and Sou heas
Asia. This app oach is consis en wi h he p esence o he e oskedas ic and co ela ed
dis u bances, which a e common in mac oeconomic panels in ol ing mul iple coun ies
o e ime.
Diagnos ic es s p esen ed in subsequen sec ions e eal s a is ically signi ican c oss-
sec ional dependence (CSD), sugges ing ha economic shocks o policy in e en ions
in one coun y may exe con empo aneous e ec s on o he s wi hin he egion. This
in e dependence unde mines he assump ion o c oss-sec ional independence, which is
c i ical o he alidi y o con en ional panel es ima o s. Al hough FGLS wi h ime- ixed
e ec s can pa ially mi iga e some o ms o unobse ed he e ogenei y, i does no ully
add ess s ong c oss-sec ional dependence. In such con ex s, s anda d e o s may be biased,
and coe icien es ima es ine icien , he eby comp omising he eliabili y o s a is ical
in e ence. To add ess his limi a ion, he FGLS es ima ion is complemen ed by a ixed–
e ec s model employing D iscoll–K aay (FE-DK) s anda d e o s (D iscoll & K aay,1998).
The FE-DK es ima o is obus o he e oskedas ici y, se ial co ela ion, and c oss-sec ional
dependence, making i pa icula ly well sui ed o mac o-panel da ase s cha ac e ized
by egional spillo e s and common shocks. Mo eo e , simula ion e idence indica es
ha FE-DK s anda d e o s pe o m eliably in small o mode a ely sized samples and
in unbalanced panels (Hoechle,2007). The consis ency o esul s ac oss bo h es ima ion
s a egies enhances he obus ness o he empi ical indings and mi iga es he conce ns
ega ding model misspeci ica ion due o c oss-sec ional dependence.
The common co ela ed e ec s mean g oup (CCEMG) model is also included o ad-
d ess slope he e ogenei y in he p esence o CSD as a obus exe cise (Pesa an,2006).
The CCEMG es ima o elaxes he es ic i e assump ion o slope homogenei y by pe -
mi ing he e ogeneous slope coe icien s ac oss c oss-sec ional uni s, while s ill yielding
consis en es ima es o he a e age e ec s (Ebe ha d & Teal,2011). This me hodological
lexibili y is pa icula ly pe inen in c oss-coun y g ow h eg essions, whe e s uc u al,
ins i u ional, and economic he e ogenei y may esul in di e en ial esponses o explana-
o y a iables such as FDI. By accommoda ing such he e ogenei y, he CCEMG ame-
wo k enhances he empi ical obus ness o g ow h models in di e se economic se ings
(Ebe ha d & P esbi e o,2015).
The Two-S age Leas Squa es (2SLS) model is included o add ess po en ial endogene-
i y due o omi ed a iable bias o e e se causali y whe eby highe economic g ow h
may a ac g ea e FDI in lows. The 2SLS es ima o cons i u es a widely employed ins u-
men al a iable (IV) me hodology aimed a ob aining consis en pa ame e es ima es in
he p esence o endogenous eg esso s ha exhibi co ela ion wi h he s uc u al e o
e m (Woold idge,2010). Endogenei y may s em om a ious sou ces, including omi ed
a iable bias, measu emen e o , o simul anei y, each o which iola es he Gauss–Ma ko
assump ions unde pinning he consis ency o o dina y leas squa es (OLS) es ima o s.
In such con ex s, OLS yields biased and inconsis en es ima es, necessi a ing he use o
IV echniques such as 2SLS o add ess hese econome ic challenges. The nex sec ion
examines he esul s o he s udy.
Economies 2025,13, 157 8 o 15
4. Resul s
4.1. Desc ip i e S a is ics
This sec ion con ains a desc ip i e da a analysis o he da a, ollowed by eg ession
indings and discussion. To a oid mis ep esen ing s udy indings, a me hodical app oach
mus be used when publishing ele an desc ip i e and p elimina y analyses. The da a
a e desc ibed and condensed using hese summa y s a is ics o help iden i y unde lying
ends in he aw da a. Al hough desc ip i e s a is ics alone canno be u ilized o d aw
signi ican conclusions, hey a e an essen ial i s s ep in da a analysis o da a isualiza ion
and in e p e a ion. The desc ip i e s a is ics a e highligh ed in Table 1below.
Table 1. Desc ip i e s a is ics.
Va iable Obse a ion Mean S d. De . Min Max
GDPC 170 3.854688 3.249526 −10.82261 14.76314
FDI 170 2.865923 2.650023 −
0.8579895
11.15249
GCF 170 29.64181 10.49799 14.53469 69.44873
HCI 170 37.25706 8.271151 17.7 58.7
TO 170 86.16138 46.43332 24.70158 202.5771
I 170 5.419074 4.103842 −1.241718 24.09685
GS 170 22.18486 6.621323 9.626749 45.38908
Wi h conside able a ia ion ac oss na ions, he a e age GDP g ow h a e is 3.85%.
While he maximum (14.76) indica es apid g ow h in high-pe o ming economies, he
nega i e minimum alue (
−
10.82) indica es ha ce ain coun ies aced signi ican eco-
nomic con ac ions, such as du ing inancial c ises o he COVID-19 pandemic. A 2.87% o
GDP, he a e age FDI in low sugges s a mode a e eliance on o eign capi al. FDI inc eases
in indus ial hubs a e in line wi h he maximum (11.15%), while he nega i e minimum
indica es capi al ligh in ce ain yea s such as du ing poli ical un es .
4.2. Resul s o FGLS, D iscoll–K aay FE, 2SLS and CCEMG
The baseline esul s show he FGLS model which is chosen based on he indings o
he he e oscedas ici y, au oco ela ion, and c oss-sec ional dependence es s demons a ed
in he nex sec ion. The indings highligh ed in Table 2below demons a es a s a is ically
signi ican posi i e co ela ion be ween FDI in lows and GDPC. On a e age, a 1% inc ease
in FDI as a sha e o GDPC esul s in a 0.22% ise in yea ly GDP g ow h. GCF shows a
s a is ically signi ican posi i e associa ion wi h GDPC. A 1% ise in GCF leads o a 0.12%
inc ease in GDPC. The indings o GS indica e a s a is ically signi ican nega i e co ela ion
wi h GDPC. The e is an 0.11% d op in GDPC o e e y 1% inc ease in GS. HCI, TO, and
I p oduced insigni ican ou comes. The analysis included ime- ixed e ec s. Time- ixed
e ec s a e inco po a ed in o FGLS o accoun o unobse ed empo al shocks ha could
skew he esul s, such as policy changes o global inancial c ises (Woold idge,2010). The
indings o he seconda y eg essions he FE-DK es ima o and CCEMG and 2SLS app oach
used o obus ness a e in line wi h hose o he baseline FGLS model and highligh ha
FDI has a signi ican and posi i e e ec on economic g ow h in he egion. The FE-DK
model and 2SLS app oach ha e a s ongly signi ican e ec while he CCEMG model has a
minimally signi ican posi i e e ec on economic g ow h.
Economies 2025,13, 157 15 o 15
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au ho (s) and con ibu o (s) and no o MDPI and/o he edi o (s). MDPI and/o he edi o (s) disclaim esponsibili y o any inju y o
people o p ope y esul ing om any ideas, me hods, ins uc ions o p oduc s e e ed o in he con en .
