Does FDI Source Matter for Growth? Evidence from Asian FDI Inflows in ASEAN Countries

This study examines whether the source of foreign direct investment (FDI) matters for economic and productivity growth in ten Association of South East Asian Nations (ASEAN) countries from 1995 to 2022. In recent years, the ASEAN countries have increasingly benefited from Chinese foreign investment, yet questions have been raised about the political motives of Chinese FDI. While the politicisation of foreign aid and investment to forward strategic goals, the capital and investment received may not necessarily be growth-enhancing due to lack of knowledge transfer and quality. Meanwhile, recent empirical studies have raised doubts on the growth gains from foreign investment, which has had mixed findings. Against this backdrop, we disaggregate ASEAN FDI data to examine the impact of foreign investment from Japan, China, India, Korea, Hong Kong and Taiwan and its impact on the productivity and growth of the region. Using the system GMM estimator to control for endogeneity, our estimated results show that overall FDI has a positive and significant impact on economic growth, while this effect is insignificant for productivity growth. Furthermore, we find evidence that FDI from Japan, Korea and Hong Kong has a positive and significant impact on both productivity and economic growth. Meanwhile, FDI from China, India and Taiwan is insignificant. Policymakers should ensure that growth from FDI is not only driven by capital input, but through knowledge and technology transmission from foreign firms that are not politically driven.