Analysis of the impact of determinant factors on foreign direct investment in Cambodia: The ARDL bounds testing approach

This study employs ARDL bounds testing approach and vector error correction model within Granger causality test to examine the time series data over the period of twenty-two years (1993-2014) in order to investigate the long and short-run relationships among Foreign Direct Investment (FDI) and its determinant factors, as well as the direction causality among variables. The study finds that GDP and FER have statistically and significantly positive relationships with FDI for both long- and short-run. This implies that an increasing GDP and foreign exchange reserve lead to an increase in the FDI inflows into Cambodia. But, TON has significant and negative long and short-run relationships with FDI, which is an unexpected result. Higher unskilled labors supplied in Cambodia discourage FDI inflows to the country. The political instability and deadlock in Cambodia have a negative short-run impact on FDI inflows. Moreover, a higher degree of trade openness and labor force in Cambodia cause increase in the GDP in Cambodia. The sign of ECM (t-1) coefficient is negative and significant as expected for all models, which indicates a relative speed of achieving the long-run equilibrium. This study suggests that the government should protect the internal political conflict as well as increased degree of trade openness and skilled labors in order to attract more FDI inflows into Cambodia.