An investigation on the role of good governance as a mediating factor in the FDI-Growth nexus: An ASEAN Perspective

This study involves an investigation into the FDI-Good Governance-Economic growth nexus for ASEAN for the period of14 years from 2002-2015. All ten ASEAN Member Countries (AMC) are included in this study. The governance variables are obtained from the World Governance Indicators (WGI). Since the data used in this study involves both cross-sectional and time series, a panel statistical analysis is carried out using the Pooled Mean Group (PMG) estimation method. A preliminary test of the unit root is carried out to verify stationarity level of the variables chosen. The PMG results show that FDI has a positive and significant effect on economic growth as expected. When FDIIQ variable is included in the estimation model, it is found that its impact on economic growth is stronger suggesting that FDI although is seen to be beneficial to economic growth, its impact via good governance, as signified by the FDIIQ coefficient value seems to have a greater impact on growth. Hence, the study implies that the presence of good governance in FDI host countries acts as an important absorptive capacity to harness the benefits of FDI on growth. Therefore, the policy implication from this study points towards creating a good governance environment for optimal benefit from FDI inflows.