The Effect of Foreign Direct Investment on Total Factor Productivity in Selected ASEAN+3 Countries: New Evidence Using A Panel ARDL Study

This study investigates the effects of FDI and other macroeconomic variables on Total Factor Productivity (TFP) in selected ASEAN+3 countries from 1981 till 2016. Total Factor Productivity (TFP) for each ASEAN+3 country was constructed using the Malmquist productivity index method. Then, a panel ARDL framework (dynamic heterogeneous panel), namely Pooled Mean Group (PMG), Mean Group (MG), and Dynamic Fixed Effect (DFE) are employed in examining the effects of FDI and other controlling variables on TFP. The new findings show that FDI has a significant and positive impact on TFP in the long run and the short run in ASEAN+3 countries. Besides, the results also reveal that in the long run, other variables such as the average number of years of schooling and the ratio of high-skilled to low-skilled labor also have a significant and positive effect on TFP. However, economic openness, government expenditure on R&D, and interaction between countries and FDI have a negative and significant impact on TFP. These findings implied that the recipient countries must ensure their political stability and offer various incentives to attract more investors. Furthermore, the influx of foreign investors, especially large ones and lower costs, should be encouraged by each country as FDI inflows can boost their TFP growth.