Financial development in the ASEAN 8: Impact of foreign direct investment and institutional quality

• Main Authors: Batto, Katherine Marie F., Caguioa, Julie T., Cruz, Sophia L., Uy, Sofia Julia S.
• Format: text
• Language: English
• Published: Animo Repository 2022
• Subjects: Investments, Foreign—Southeast Asia; Economic development—Southeast Asia; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etdb_finman/28; https://animorepository.dlsu.edu.ph/context/etdb_finman/article/1035/viewcontent/Financial_Development_in_the_ASEAN_8__Impact_of_Foreign_Direct_In_Redacted2.pdf
• Institution: De La Salle University

Finance is at the heart of today’s economy and is a crucial engine for fostering a country’s economic progress. Foreign direct investment has been considered to be an important source of capital inflow for developing countries, while new institutional economists claim non-economic factors, particularly institutional quality, affect the development of a financial system. With these factors in mind, this paper examined the impact of foreign direct investment and institutional quality, which includes indicators such as control of corruption, political stability and absence of violence/terrorism, voice and accountability, and economic freedom on the financial development index, financial institutions index, and financial markets index of developing countries in ASEAN, with real GDP and inflation rate as the control variables. The study has three objectives. The first is to identify the effect FDI has on financial development. The second is to investigate the effect institutional quality has on financial development by conducting two separate regression models. The third would be to examine the effect FDI and institutional quality have on financial development if the independent variables are to be analyzed conjointly using a panel regression model. The findings of the study exhibited FDI and institutional quality to have no effect on financial development when analyzed separately. Whereas regulatory quality, rule of law, and economic freedom are deemed to have a significant effect on financial development when analyzed conjointly. The inconclusive results recommend ASEAN developing countries enhance their financial regulatory framework, which would help improve governance amongst banks, other financial institutions, and financial markets. In other words, financial transparency and strong institutional frameworks should be prioritized by policymakers through increased investor protection and contract rights as well as activities that promote economic freedom for the country’s citizens and enterprises.