Structural Drivers Versus Short-Run Fluctuations: A Time-Varying Analysis of FDI Determinants in Selected Asian Economies
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Abstract
This study examines the determinants of foreign direct investment (FDI) in selected Asian economies (1970–2022) by comparing the influence of structural drivers with that of short-term fluctuations. Employing a comprehensive empirical framework—Fully Modified OLS (FMOLS), Dynamic OLS (DOLS), and Vector Error Correction Model (VECM)—we distinguish long-run equilibrium relationships from transient dynamics. The long-run estimates identify key structural drivers: economic growth exerts a strong positive effect, affirming the market-size hypothesis, whereas inflation and trade openness exhibit significant negative effects, pointing to the deterrents of macroeconomic instability and intense competitive pressures from liberalization, respectively. Conversely, short-run analysis reveals limited transient effects. The VECM indicates no short-run convergence to equilibrium, and Granger causality tests show that only trade openness has a significant short-run causal impact on FDI. This dichotomy is further elucidated by time-varying impulse response functions, which confirm that FDI reactions to macroeconomic shocks are asymmetric and period-specific. Notably, trade innovations generate the most substantial short-term gains, despite their negative long-term effects. Overall, the findings robustly demonstrate that FDI in the region is fundamentally anchored by long-term structural conditions—namely, stable prices, managed trade integration, and sustained economic expansion—while being only marginally influenced by short-run fluctuations.
Keywords
- Economic Growth
- Foreign Direct Investment
- Inflation
- Long-Run Correction Mechanisms
- Short-run Adjustments
- Trade Openness
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