Impact of Business Environment and Political Stability on FDI in Southeast Asia

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5 (1) (2022) 54-62

Journal of Curriculum Indonesia

http://hipkinjateng.org/jurnal/index.php/jci

The Effect of Ease of Doing Business, Market Size and Political Stability on Foreign Direct Investment in Southeast Asia

Endah Noor Hafilah, Masduki Ahmad Universitas Negeri Jakarta, Indonesia

Info Articles

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Keywords:

foreign direct investment, ease of doing business, market size, political stability, investment policy

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Abstract

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This study aims to determine the effect of ease of doing business, market size and political stability on foreign investment as a potential capital flow to achieve the success of economic development in Southeast Asia.. Research data were obtained from the World Bank and ASEAN Secretariat data. For the 2010-2019 data period with five Southeast Asia countries. Panel data multiple regression analysis technique is used to analyze the effect of ease of doing business, market size and political stability on foreign direct investment. By using the random effect model (REM) which is the best model, all the factors studied have a significant effect on FDI.

These results imply that if the ease of doing business, market size and political stability are conducive, the flow of FDI will increase. Therefore, it is necessary to improve a conducive investment climate to encourage increased FDI inflows.

e-ISSN 2549-0338

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Journal of Curriculum Indonesia 5 (1) (2022)

INTRODUCTION

Economic growth is a continuous change in the economic conditions of a country which leads to better conditions for a certain period of time (Sukirno 2012). In achieving good economic growth in the country, quality development is needed in order to create a good economy. Good economic development is the main key in a country's economy. With the creation of good development, it will provide social approval and improve the welfare of the community. Economic development is unlikely to create wide employment opportunities, thereby reducing the unemployment rate and directly reducing poverty levels and a good educational climate in order to produce quality human resources.

Southeast Asia as a country region in Asia with developing countries, namely Cambodia, Vietnam, Myanmar, Laos, the Philippines, Indonesia, Malaysia, Timor Leste, Thailand, Brunei Darussalam, and Singapore as the only developed countries seeks to improve the sustainability of economic growth by increasing components. components in economic development. Among them are natural resources, human resources and capital resources. Efforts to increase this component are the main focus for achieving economic development, especially in developing countries.

Randi and Riant (2007) state that in the theoretical framework of Rostow and Harrod-Domar, the economic growth or development of a country is achieved by several factors, one of the main factors being investment or savings. Suleman et al. (2020) also argues in the Harrod-Domar theory that investment is a factor in the economic development of a country that can increase in the aggregate. If investment has been made in the present, it will have an impact on the future, where the commitment to increase commodity capital goods in a country's economy. Economic growth is supported by investment that can increase the country's productivity.

Investment or investment itself is divided into two ways, namely domestic investment and foreign investment (Igamo 2015). The long term sustainable single direct investment (FDI) is required to be one of the reasons for economic growth in Southeast Asia, especially in developing countries that lack the capital for economic development. FDI is a flow of foreign direct investment that is invested by the home country in the host country. The existence of this kind of capital flow can advance the national economy through input from investment activities carried out by foreign investors (Frisdiantara & Mukhlis 2016). With a large area and a large population, foreign investment (FDI) flowing into Southeast Asia is mainly carried out by investment countries seeking greater market potential. The rapid economic growth in Southeast Asia has stimulated an increase in the flow of foreign direct investment to it (Anwar, Kuswantoro, and Dewi 2016).

Foreign investment which acts as a flow of funds to under-funded sectors. In addition, by increasing state income through taxes, direct investment also creates many new jobs so that it cannot reduce the unemployment rate. Direct investment itself is felt to be able to create higher productivity where the entry of technology transfer replaces outdated technology with newer technology (Jhingan 2014).

Problems related to investment in Southeast Asia are evident from the tendency for the amount of FDI to be reduced or low or not in each country in Southeast Asia. In several countries, geopolitical risk-oriented trade policies have not guaranteed uncertainty on world financial markets and hampered global economic growth in 2019. Based on the Indonesian Economic Report issued by Bank Indonesia in 2019, the global economy only grew 2.9%, slowing down. from a growth rate of 3.6% in 2018 which was the lowest level since the global financial crisis (Hartanti et al., 2019). Where the growth rates of developed and developing countries in 2019 were 1.7% and 3.7%, respectively, lower than the 2.2% and 4.5% in 2018 (Pusparisa 2020).

According to Nopirin (2012), there are two things that play an important role in investment, namely the instability of investment volatility that will lead to recession and prosperity, and investment is very important for economic growth and labor productivity.

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Therefore, foreign direct investment in Southeast Asia needs to be encouraged in order to correct the slowdown in economic growth through global investment.

Figure 1. Development of Southeast Asian Country FDI 2015-2019

Based on Figure 1, it can be seen that the development of foreign direct investment (FDI) in 11 Southeast Asian countries from 2015-2019 has generally fluctuated, which means that the data is volatile, where there is instability of foreign direct capital funds received in Southeast Asian countries. Fluctuations in the development of FDI flows can occur in parts of the world, especially in developing countries such as Brunei Darussalam, Indonesia, Cambodia, Laos, Myanmar, Malaysia, the Philippines, Thailand and even developed countries like Singapore in the Southeast Asia region. This is because the capital flows received are funds from investors in various countries in the world. The stability of a country's economic growth is the main key in receiving FDI capital flows itself, and the instability in it is also a determinant for investors to invest. This is not only seen from the perspective of the destination country but also from the country that is the investor.

Overall, the problem can be seen in the difference in FDI flows in the Southeast Asian region, where Singapore is the country with the highest average foreign direct investment growth rate, while Timor Leste is the country with the lowest average foreign direct investment growth rate in 2019.

Meanwhile, Cambodia and Vietnam were countries with an average growth in foreign direct investment that did not decline from 2015 to 2019, but the percentage increase in foreign direct investment was still very small compared to previous years or with other Southeast Asian countries.

If business conditions are relatively poor, government institutions are inefficient, education levels are low, and infrastructure is poor, the inflow of foreign direct investment will be hampered.

(Lipsey & Sjöholm, 2011). This makes each country strive to improve policies in order to attract investors to invest, where this is a major challenge for countries in Southeast Asia, especially developing countries to increase attractiveness and competitiveness to become hosts. a friendly home for investors in an effort to increase foreign direct investment (FDI).

There are many factors that influence the entry of FDI in a country. The ease of making investments is an important factor seen by investors. This is because if there are fewer obstacles and the amount of ease in investing, it will increase the interest of investors to invest. The difference in the ease of doing investment has stimulated the birth of the ease of doing business index. The ease of doing business index is a parameter for investors in making investments. The development of the high ease of doing business index will attract investors to invest in the country (Asmara, Ikhwansyah, and Afriana 2019)

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variables that affect the development of foreign direct investment in a country is the market size. By far, market size is the most widely accepted determinant of foreign direct investment flows. Seeing the importance of market size as the basis for FDI inflows. There is a long tradition of market size in the literature on FDI (Chakrabarti, 2001). The market size proxied by per capita income has increased, high growth and increased exports will increasingly attract foreign investors to invest in Southeast Asian countries (Adi, 2016). High per capita income reflects the high quantity of goods and services produced, which means that the level of social welfare is relatively high.

The next factor that can influence the development of foreign direct investment in a country is political stability (Abdella 2018). In his theory, Alan M. Rugman argues that the non-economic variables that motivate the entry of foreign capital are the overall political, legal and socio-cultural conditions inherent in a country, there are several observers who also include the factor of clean and authoritative governance (Rugman 1985).

LITERATURE REVIEW

Investment is an investment activity that is expected to improve the economy of a country.

Samuelson and Nordhaus (2004) say that what is included in investment is an effort to increase the inventory in the form of capital or commodities such as production factors or other commodities that will be used for a long period of time or one year. Investment is a step to sacrifice current consumption for future consumption. Investment can be interpreted as a commitment to a number of funds or other resources that are carried out at this time (present time) with the hope of obtaining benefits in the future (in future) (Ilham, Fachrudin, Sinurat, & Khaddafi, 2020). Griffin and Pustay (2015) say that foreign direct investment is an investment that aims to actively control property, assets or companies located in the host country. According to Krugman and Obstfeld (2003) Foreign Direct Investment (FDI) is an international flow of capital where companies from one country establish or expand their companies in other countries. Similarly, according to Madura (2008) foreign direct investment (FDI) is an international flow of capital where companies from one country establish or expand their companies in another country, not only transfer of resources but also the imposition of control over companies abroad. Based on some of the explanations of the research above, the researcher tries to classify the factors that affect the receipt of foreign direct investment in a country as follows:

Ease of Doing Business (EODB): ease of doing business is a business assessment indicator published by the world bank which is seen by investors as a country's business climate so that it becomes a reference in investing. Sivagnanam (2014) states that doing business report (DB) is a delaboration study by the world bank group 2003 each year which aims to measure the costs incurred by business regulation companies in 189 countries 212. This study presents each year a detailed analysis of costs, the requirements, and procedures, of certain types of private companies that are the subject of all countries, and then create a ranking for each country. The study is also supported by extensive communications efforts and to the point of ranking it highlights countries and leaders promoting reform. EODB is one of the indicator factors that influence the business climate. Haryotejo and Rayadiani (2009) state that a bad business climate is influenced by bad institutions. Meanwhile, Aziz (2018) said that EODB was used as a substitute for the institution itself. Therefore, the business climate of a country is represented by the EODB itself.

Market Size (GDPP): GDP per capita is a measure of economic output in a country in the form of the level of people's purchasing power for goods and services as a reflection of the prosperity and level of development of a country. According to Mankiw (2006) gross domestic product (GDP) per capita is the average income of the population of a country in a certain period of time. GDP per capita reflects the level of consumption or purchasing power of people for goods and services. GDP

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per capita is used to measure the value of all goods and services produced by national economic activity, and to measure the economic health of all countries. GDP per capita is a real form of economic growth. In short, GDP per capita is reported as a form of real economic growth. An increase in per capita income may reflect that a country, or more specifically its population, is richer than residents of other countries (Marunung & Rizky 2009).

Political Stability (PSI): Political discussion cannot be separated from the role of a country in which there is a group of people who work together to achieve a common goal, namely to achieve a just and prosperous community life and can live with a safe and peaceful feeling. Related to this, there is the view of a political scientist who puts forward a theory related to this cooperation (Djuyandi, 2017). Political stability is an index that measures the stable political status of a government or country with policies that have been planned beforehand to achieve the goal of government effectiveness. Political stability can be understood as the attitudes and behavior patterns of all components of the political system, which form the structure of power and the reservation of power relations, thereby ensuring the effectiveness of government (Sanit, 1982). According to Crouch (1982), political stability is characterized by two things. In the first place, in a sense, there is a stable government which can rule for years or can carry out its plans according to predetermined limits. Second, a stable government system, in the sense that the system can accept changes in society without changing the existing government system.

METHODS

The research objects chosen were Ease of Doing Business, Market Size, Political Stability and Foreign Direct Investment in 5 Southeast Asian countries. The data used in this research is secondary data. Each variable uses data spanning 10 years, from 2010 to 2019. The scope of this study is to examine the effect of ease of doing business, market size and political stability on foreign direct investment. The area studied is a country in the Southeast Asia region.

Researchers only limit 5 developing countries in Southeast Asia (Philippines, Indonesia, Vietnam, Thailand and Malaysia) to find out how the influence of independent variables on the dependent variable. Researchers examined these 5 countries because they are developing countries with almost the same economic potential and demographic conditions.

The analysis technique in this research is panel data regression using E-Views 11.0. This study has three variables which are the object of research where foreign direct investment is the dependent variable (Y). While the independent variables are Ease of Doing Business (X1), Market Size (X2), and Political Stability (X3). The type of data in the research model is secondary data that is quantitative in nature. Quantitative data is data that is tangible in a collection of numbers. To determine the quantitative relationship of the four or more variables, namely the ease of doing business, market size, and political stability to foreign direct investment with the equation:

FDI =α+ EODB + GDPP + IR +

Keterangan :

FDI = Foreign Direct Investment EODB = Ease of Doing Business GDPP = Market Size (GDP Per Capita) PSI = Political Stability Index

e = error

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Journal of Curriculum Indonesia 5 (1) (2022) RESULTS

The following is an overview of the variables used in this study in Southeast Asian countries which consist of 5 countries in the 2010-2019 period. It seems that Indonesia is a country with the highest average foreign direct investment revenue, followed by Malaysia and Vietnam, where Vietnam only had a decline in 2011, especially since it experienced an upward trend until 2019.

Meanwhile, the Philippines had the lowest amount of foreign direct investment in 2010. The description of the factors that influence foreign direct investment in this study is presented below.

Foreign Direct Investment (FDI)

The development of foreign direct investment in the 5 Southeast Asian countries above in 2010-2019 seems to have fluctuated. This is due to the fact that it is in line with the state of the world economy. Foreign direct investment as the dependent variable in this study illustrates the amount of investment capital flows invested by the home country which enter countries in Southeast Asia as the host country for the period of 2010-2019 by showing an average - an average of 10738.0 billion US dollars, the median of 9674.3 billion US dollars, the minimum value of 1298.0 billion US dollars, the maximum value of 23943.2 billion US dollars, and a standard deviation of 5546.0 billion US dollars.

Ease of Doing Business Index (EODB)

The ease of doing business index as an independent variable in this study illustrates the score of investor parameters in investing that applies in some Southeast Asian countries during the period 2010-2019 by showing an average of 67.5, a median of 65.0, a minimum value of 55.2, a maximum value. of 81.3, and the standard deviation of 9.1. The index of ease of doing business in the 5 Southeast Asian countries above in 2010-2019 seems to have fluctuated slightly but tends to increase. Although in some countries there was a decline in 2016, Vietnam continues to move, experiencing an increase every year. The largest number of scores on the ease of doing business index was obtained by Malaysia in 2019 at 81.3, which indicates that Malaysia has fewer barriers than the other 4 countries. Where Malaysia is ranked 12th among the 190 countries listed. In the same year the second highest score among 4 other countries was also obtained by Thailand, which was ranked 21^st

Mareket Size (GDPP)

Per capita income as the independent variable in this study illustrates the GDPP value in US dollars measured in some Southeast Asian countries during the period 2010-2019 by showing an average of 5066.5 thousand US dollars, the median of 3633.5 US dollars, the minimum value of 1317.9 US Dollars, the maximum value is 11414.8 US Dollars, and the standard deviation is 3149.2 US Dollars. Income per capita in the 5 Southeast Asian countries above in 2010-2019 fluctuated slightly but tended to increase. The largest per capita income value was obtained by Malaysia in 2019 amounting to 11414.8 US dollars. Then followed by Thailand, Indonesia, the Philippines and Vietnam. Even though Vietnam is in the last position, it is stable, it has an increase in the value of per capita income every year.

Political Stability Index (PSI)

The political stability index as an independent variable in this study illustrates the scale prevailing in some Southeast Asian countries during the period 2010-2019 by showing an average of 32.1, a median of 27.9, a minimum value of 5.2, a maximum value of 57.6, and a standard deviation of 17.7. The political stability index in the 5 Southeast Asian countries above in 2010-2019 seems to

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have fluctuated. All countries experienced an increase and decrease in their political stability index score every year. The score decline began to occur in 2015 and 2016, but was then successfully increased again in each country. In 2019 the highest score was owned by Vietnam, then Malaysia ranked second, then Indonesia, Thailand and the Philippines in the last rank. 3 other Southeast Asian countries are still unable to score above 50, this indicates that the level of political stability is still relatively low. The political instability that occurs will result in a loss of investment opportunities for investors, thus hindering economic growth. This is because a country with relatively stable political conditions will create a favorable market environment, and production and consumption households will run the economy safely without being disturbed. This condition is expected to encourage the flow of foreign direct investment.

Based on the results of the t-test, all independent variables (Ease of Doing Business, Market Size and Political Stability) partially affect import demand in 5 Southeast Asian countries, with different levels of significance. Meanwhile, simultaneously all independent variables have a significant effect on direct foreign investment. These results also indicate that foreign direct investment is negative or close to zero if it is not influenced by other variables. Meanwhile, EODB, GDPP and PSI have a positive effect. If EODB, GDPP and PSI increase, FDI will increase. Based on the value of the regression coefficient, EODB has the greatest influence on foreign direct investment, followed by GDPP, and political stability. Thus, the three variables, namely ease of doing business, market size and political stability greatly influence foreign direct investment in Southeast Asia. This result is in line with the hypothesis that EODB, GDPP and PSI affect foreign direct investment in 5 Southeast Asian countries in 2010-2019.

Tabel 1. Hypothesis Test-T with REM equation

Variable Coefficient Std. Error t-Statistic Prob.

C -8.012801 3.195169 -2.507786 0.0157 EODB 3.144607 0.851624 3.692483 0.0006 GDPP 0.330889 0.124554 2.656602 0.0108 PSI 0.347541 0.219792 1.581226 0.1207

Note: significant at 5% and 20% level Source: Eviews11 Output (own study)

The results of this study reinforce the theory that if a country increases its government regulations in order to improve the business climate, it will increase the index of ease of doing business in that country. With the high index of business ease in a country, it will become a measuring tool for investors to open international capital flows where companies from a country will establish or expand their companies in the destination country. This is in line with research conducted by Djankov, Mcliesh and Ramalho (2006) which shows that countries with better regulations experience faster growth. The effects of regulatory improvements have been profound.

Likewise, Busse and Groizard (2008) emphasize that regulation can have a beneficial effect on FDI, leading to economic development in FDI recipient countries. Meanwhile, Corcoran and Gillanders

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institutional environment and regulatory framework to enjoy the potential positive effects of FDI inflows.

Then the size of the investment is strongly influenced by the level of income per capita. If per capita income increases, the demand for goods and services will also increase, in this case investors see the country in a prosperous state because it has high purchasing power potential, which is then considered to be able to provide benefits to their business. In line with Petrović-Ranđelović, Janković-Milić, & Kostadinović (2017) it also shows that a statistically significant impact on foreign direct investment inflows is recorded for market size and market growth (significance ˂0.001 and

˂0.015, respectively) where market size occupies a very important place among the determinants of foreign direct investment inflows.

With regard to foreign direct investment political stability allows governments to maintain a low risk of expropriation of private property for public use and transform their resources to support financial markets to access internalization gains through increased FDI inflows. This is because stability will increase the confidence of foreign investors in bringing more capital to the host country (Sharmin & Khandaker, 2015). Compared to other factors, political stability has the greatest impact on FDI inflows in most competitive Asia Pacific countries (Rashid, Looi, & Wong, 2017).

Moreover, a study covering OECD countries has supported a large part of the literature as it was found that political instability deters foreign direct investment into the country (Goswami & Haider, 2014).

CONCLUSION

Based on the description of the results and discussion of the research it can be concluded that partially the ease of doing business, market size and political stability have a significant positive effect on foreign direct investment in 5 Southeast Asian countries in 2010-2019 with different levels of significance. The significant influence of the three independent variables explains that in order to increase foreign direct investment, countries in Southeast Asia need to improve existing investment policies in order to attract investors to invest. To increase the ease of doing business, countries in Southeast Asia need to improve regulations in various sectors to carry out effective dissemination of these regulations in order to demonstrate the government's efforts to create a conducive business climate so that it can attract investors to invest. In legal and regulatory investment policies to promote investment, governments can consult with interested parties, simplify and modify laws, use simple language drafting, develop registers of existing and proposed regulations, disseminate electronic regulatory materials, and publish and review administrative decisions. Then the market size, which is the proxy for the value of per capita income of countries in Southeast Asia, must be increased either through increasing the level of education, expanding employment by the government and reducing population growth. That way a large per capita income value will be more attractive to investors. The government should also be able to encourage and spur an increase in the country's political stability index by taking into account the strengthening of democratic institutions to creating safe and responsive conditions so that the absorption of foreign direct investment flows can increase.

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