THE EFFECT OF CHINA AND THE FACTORS AFFECTING FOREIGN DIRECT INVESTMENTS IN ASEAN COUNTRIES

Foreign direct investment (FDI) plays an important role in bolstering economic growth. It acts as a pillar in supporting the industrialization and economic development of countries. The objectives of this study are to: (a) Recognise factors affecting FDI in countries in the Association of Southeast Asian Nations (ASEAN) region and (b) examine the effect of China’s entry into the World Trade Organisation (WTO) on the FDI in ASEAN countries. The Vector Autoregressive method (VAR) was applied to establish the factors that had significant impacts on FDI inflows over the period 1980–2010 for these countries. Apart from the conventional variables, such as market size, labour cost, interest rates, exchanges rates, corporate tax rates, and degree of openness, this study incorporates another variable, that is, the event of China joining the WTO. This is to determine whether the entry of China into WTO had any impact on FDI in the ASEAN region. The result reveals that, firstly, only market size is not a significant factor in determining the FDI inflows for all the ASEAN countries being studied (i.e. Indonesia, Malaysia, Philippines, Singapore and, Thailand). Secondly, most of the ASEAN member countries’ FDI are influenced by China’s entry into WTO in 2001.