FDI and Economic Growth in the ASEAN Countries: Evidence from Cointegration Approach and Causality Test

Abstract

Johansen Cointegration technique followed by the Vector Error Correction Model (VECM) and standard Granger Causality test were employed to investigate the causal nexus between Foreign Direct Investment (FDI) and economic growth in Association of Southeast Asian Nations (ASEAN) economies. The Johansen Cointegration result establishes a long run relationship between FDI and Gross Domestic Product (GDP) for the five ASEAN economies, namely, Indonesia, Malaysia, Philippines, Singapore and Vietnam. The empirical results of VECM exhibits a long run causality running from GDP to FDI for Indonesia, Philippines and Singapore. For Malaysia and Vietnam, the results reveal long run bidirectional causal link between GDP and FDI. Besides, the evidence from standard Granger Causality test for rest of the ASEAN economies shows that there was no causality between FDI and GDP for Brunei Darussalam and Lao People’s Democratic Republic. For Myanmar and Thailand, the test results show that there is a one-way short run Granger causal link from FDI to GDP and GDP to FDI, respectively.