Determinants of Foreign Direct Investment in ASEAN+3 Countries: The Role of Environmental Degradation

Abstract

Foreign direct investment (FDI) can boost economic growth and provide job opportunities. FDI inflows in ASEAN+3 countries have dropped markedly, which may affect economic development in the region. Many previous studies have investigated a multitude of factors that can influence FDI, such as market size, inflation, trade openness, corruption, and inflation. Previous studies did not, however, consider environmental degradation as a potential factor. Besides corruption and inflation, imposing stringent environmental regulations, such as carbon pricing and taxes to reduce environmental degradation, might deter foreign investors from the country. This is due to heightened costs for foreign investors, which may cause FDI inflows to drop. To shed some light on the reality of this situation, this study examines whether environmental degradation can significantly affect foreign direct investment in the region. This study includes environmental degradation as a potential factor and employs the panel ARDL approach to analyse data from 1995 to 2019. Results show that environmental degradation, infrastructure, and corruption can affect the inflow of FDI in the long run. In the short run, inflation can affect FDI. The findings of this study can be utilized by policymakers in formulating the right policies to attract more investors. An increase in infrastructure facilities should be considered to attract more foreign investment. It is also vital for governments to reduce corruption and inflation to attract more FDI inflows. Environmental incentives should also be introduced to ensure that attempts to reduce environmental degradation do not affect FDI inflows.