DATA AND METHODOLOGY

The intent of this paper is to look into the determiner of FDI influxs in Malaysia and other ASEAN+3 states. ASEAN+3 states consist of Malaysia, Singapore, Thailand, Indonesia, Vietnam, China, Korea and India. However, Brunei and freshly joint member of ASEAN which are Laos and Cambodia are non included due to restriction of informations and non much FDI in these states. The ground for taking these states is because of the states public presentation in pulling FDI influxs to the states and advantages that the states have which can be used as illustration in order to pull FDI in Malaysia. Therefore, by taking these states it is hope that the differences in determiners of FDI can be highlighted. Data of FDI flows for these states can be obtained from UNCTAD and ASEAN Secretariat.

In order to transport out this survey, panel informations attack will be used. This is because panel informations consist of times series informations and transverse sectional informations. Ordinary Least Square method is the best patterns to see the consequences. This survey will concentrate for a period from the twelvemonth 1990 to 2008 and separated into two clip frames which are from 1990-1998 and 1999 – 2008. The principle of the separation is to analyze the tendencies and forms of FDI flows among ASEAN states before and after the economic crisis. From the surveies it is hope that the differences in determiners of FDI to these states can be identified.

3.1 Model Specification

In order to continue with the surveies, the Gravity Model will be used. The Gravity Model is based on an analogy of Newton ‘s Law of Gravitation and is used to foretell motion of information and trade goods between different topographic points related to the distance between them ( Erlander, 1980 ; Rosenberg, 2004 ) .

In 1962, Jan Tinbergen for the first clip applied gravitation theoretical account to economic sciences by utilizing equation to explicate international trade. After few old ages, the equation has been applied to a broad scope of societal interactions such as migration, foreign direct investing ( FDI ) and touristry. The typical gravitation equation in log signifier ( additive ) is as follows:

ln ( Xij ) = a + B ln ( Yi ) + hundred ln ( Yj ) + vitamin D ln ( Dij )

where ;

Lolo: Gross Domestic Product of Country I represents the entire possible supply for exports of state I

Yj: Gross Domestic Product of Country J presents the entire possible supply for exports of state J

Dij: Distance between state I and J

The equation has been improved for the last 4 decennaries by many economic expert until now has become concrete and solid theoretical footing. The Gravity Theory has been applied to a broad assortment of goods, trades and services traveling across regional and national boundary lines ( Anderson, 1979: Deardorff, 1995 ; Pelletiere and Reinert, 2004 ) . However, in the last few old ages the Gravity Model has become really popular in explicating FDI, including the flow of FDI ( Stone and Jeon, 1999 ) , the effects of distance over FDI ( Egger and Pfaffermayr, 2004a, 2004b ) and the relationship between the FDI and trade in a bilateral context ( Gopinath and Echeverria, 2004 ) . The Gravity Model can capture the comparative market sizes of two economic systems and their distance from each other. Distance can be viewed as a step of the dealing cost in set abouting foreign activities for case, costs of transit and communicating, costs of covering with cultural and linguistic communication differences, costs of directing forces oversea and the informational costs of institutional and legal factors, for illustration belongings rights, ordinances and revenue enhancement systems ( Bevan and Estrin, 2004 ; Deardorff, 1995 ; Sublime portes and Rey, 2005 )

Therefore, in order to look in deepness the beginning and determiners of FDI in ASEAN states, Gravity Model will be used in this paper. This is because the Gravity Model is truly utile in explicating FDI flows, the effects of distance over FDI ( Egger and Pfaffermayr, 2004 ) . Harmonizing to Gravity Model, market size and distance are of import determiners in the pick of the location of beginning states for direct investing. This survey will follow semi-gravity theoretical account and some of the variables that can be used as proposed by Normaz, 2009. However, this survey will be extended by including other variables which are unemployment rate and labour force as determiners of FDI. This is because, from my sentiment unemployment rate and measure of labour force plays important functions in finding FDI. Investors now are really peculiar with the quality and efficiency of host state labour before they decided to do an investing. The theoretical account is as follows:

ln ( FDIit ) = ?0 + ?1ln ( GDPit ) + ?2ln ( GDPjt ) + ?Xij + ?Zjt + ?ijt

Ten

( log DISTij + LANGij + BORDERij )

Omega

( Capital-labor ratio, rising prices rate, existent exchange rate, Government Budget balance, Openness, Trade Policy, Education, Infrastructure and Communication, Economic Freedom Index, Transparency, unemployment rate and labour force )

FDIit

The existent FDI influx host state in clip ( T )

GDPit

Real GDPs in US dollars

3.1.1 Market size

The possible correlativity between the market size of a host state or part ( GDP, GDP Per capita and GDP Growth Rate ) with the volume of inward investing should take into consideration in many FDI empirical surveies ( Anderson, 1979 ; Buch et Al, 2003 ; Dunning, 1980 ; Kim, 2000 ) . For illustration, surveies by Kim ( 2000 ) showed that GDP was important to the determiners of FDI in the host states when he test to Japan and US. Therefore, an increased in GDP will stand for the overall forms of distribution of FDI among states.

3.1.2 Geographic distance

In this survey, geographical distance represents the navigable distance between capital of ASEAN+3 states with the beginning states. Bougheas et Al ( 1999 ) stated that distance can be indirectly give impact to the dealing flow by increased in transit and other dealing costs. Therefore, distance can hold direct and indirect effects on the investing clime between ASEAN+3 states with their other puting spouse. For Portes and Rey ( 2005 ) , suggested that distance is the most of import determiner of dealing flows in foreign investing and should be included in Gravity Model.

3.1.3 Common linguistic communication and boundary lines

Language and boundary lines besides play an of import function in finding FDI. It is belief when the neighbouring spouse or other states shared common linguistic communication and boundary lines, therefore it will be much easier to cover with every bit easy to do dealing.

3.1.4 Macroeconomic indexs

About all macroeconomic indexs are of import in finding FDI. For illustration, exchange rate will give impact to the foreign investing. This is because volatile exchange rate might cut down investing. Exchange rate motions are relevant and important to FDI in malice of exchange rate volatility. This is because the volatility of exchange rate straight contributes to uncertainness on the returning dealing program from the investment states ( Guerin, 2006 ; Hubert and Pain, 2002 ; Rose, 2000 ) .

Openness to merchandise besides can be deciding of FDI. The higher degree of the openness of the ASEAN+3 states economic system, the easier it is for the investors to put in and trade with the states.

3.1.5 Non-economic Indexs

Non-economic indexs can come from assorted signifiers such as policy, political stableness, transparence, instruction, substructure and many other signifiers. These variables indirectly will give impact to the volume of investing in the states. For illustration, degree of instruction will stand for the quality of human capital that the state have. Besides that, good quality of substructure will advance growing and pull more investors utilizing the installations.

3.2 Expected mark

It is expected that the coefficients of the existent GDP of the beginning and finish states to both be positive.

A common boundary line and a common linguistic communication are expected to be positively related to FDI particularly for intra-regional FDI since foreign investors from neighbouring states might take the chance to put in a state which portions a common civilization, linguistic communication and boundary line.

Real involvement rate and rising prices rate are expected to be negative.

Exchange rate, many surveies ( Kohlagen 1977, Cushman 1985 ; Froot and Stein 1991 ) concluded that devaluation in the host state ‘s currency induces a decrease in local production costs in term of foreign currency and hence stimulates the influxs of FDI. Therefore, the exchange rate is expected to be positively related with FDI.

Entire trade, is a placeholder for openness mensurating how a state has liberalized trade to the universe market and is expected to exhibit a positive relationship with FDI.

The telecommunications act as a placeholder for substructure which encourage more investors to run concern. It is expected to be positive with FDI.

Transparency International Corruption Index is measured on a scale ranging from 0 to 10 with higher values stand foring the cleanest and most crystalline states. This variable is expected to be positively correlated with FDI flows.

The Economic Freedom Index is a rating based on as mark from 1 to 5 with lower tonss stand foring greater economic freedom. Therefore, the relationship with FDI is expected to be negative, bespeaking that the freer a host state is, the greater is the flow of FDI that it attracts.

Unemployment rate is expected to veto with FDI as high unemployment rate, less FDI will come to the state.

Labor Force as a placeholder of skilled worker. It is expected to be positive as high labour force index will pull more investors.

3.3 Data Beginning

The information which will be used in this survey is based on assorted beginnings. The drumhead are as follows:

Table: Variables Included in the Dataset

No.

Variables

Beginning

1.

FDI influxs

Dependent Variable

ASEAN Statistical Yearbook 2008 ASEAN Secretariat

( web site: hypertext transfer protocol: //www.aseansec.org )

2.

Real GDP

Proxy for size market

Beginning: World Bank

3.

Population

World Bank, World Development Indexs

4.

Gross domestic merchandise per capita

World Bank, World Development Indexs

5.

Distance

Centre D’etudes Prospectives Et D’informations International ( CEPII )

6.

Common boundary line and common linguistic communication

Centre D’etudes Prospectives Et D’informations International ( CEPII )

7.

Real Interest Rate

ASEAN Statistical Yearbook 2008

8.

Real exchange rate

International Monetary Fund, IMF Balance of Payment Statistics

9.

Inflation rate

World Bank, World Development Indexs

10.

Openness

The amount of import and export

World Bank, World Development Indexs

11.

Economic Freedom index

The Heritage Foundation

hypertext transfer protocol: //www.heritage.org/index/

12.

Transparency corruptness perceptual experience index

hypertext transfer protocol: //www.transparency.org/

13.

Telecommunication

ASEAN Statistical Yearbook 2008

14.

Unemployment

ASEAN Statistical Yearbook 2008

15.

Labor Force

ASEAN Statistical Yearbook 2008