The Effect of Governance on FDI Inflows in ASEAN

Introduction The world economy has entered a new era in line with globalization. The openness of the world of trade and investment has provided opportunities for multinational companies around the world to be able to regulate their production activities beyond national borders (UNCTAD, 2003). The existence of private capital flows in the form of Foreign Direct Investment (FDI) is one of the characteristics of international economic openness which is one of the important sources of funding for development that contributes to productivity advancement (Sahoo et al., 2014). This is because for most countries FDI is a source of employment, increased business competition, and transfer of technology and skills obtained from home countries (Borensztein et al., 1998; Cambazoglu & Karaalp, 2014; Iamsiraroj, 2016; Xaypanya et al., 2015). The various benefits of FDI make FDI one of the important things for the economies of countries in Asia, including countries that are members of the Association of Southeast Asian Nations (ASEAN). ASEAN is a region with a population of 660 million people with the achievement of Gross Domestic Product (GDP) reaching USD 3.17 trillion in 2019. ASEAN AR TI C LE I N F O AB ST R ACT


Introduction
The world economy has entered a new era in line with globalization. The openness of the world of trade and investment has provided opportunities for multinational companies around the world to be able to regulate their production activities beyond national borders (UNCTAD, 2003). The existence of private capital flows in the form of Foreign Direct Investment (FDI) is one of the characteristics of international economic openness which is one of the important sources of funding for development that contributes to productivity advancement (Sahoo et al., 2014). This is because for most countries FDI is a source of employment, increased business competition, and transfer of technology and skills obtained from home countries (Borensztein et al., 1998;Cambazoglu & Karaalp, 2014;Iamsiraroj, 2016;Xaypanya et al., 2015).  Various factors influence the flow of FDI between countries, the diversity of these factors makes attracting FDI difficult for most countries (Bannaga et al, 2013). Several previous studies have placed economic factors as the main determinants that can attract FDI inflows to a country. However, based on the results of the Executive Opinion Survey analysis conducted by the World Economic Forum (2015) in Table 1, it is revealed that factors related to governance are a major problem in most economies. Government bureaucracy is still a constraining factor in doing business in developed countries and remains one of the three most pressing problems in developing countries. Meanwhile, corruption, which also affects the quality of government, is in second place. Also, the results of the World Investment Prospect Survey 2014-2016 published by UNCTAD (2014) underline that the uncertainty of government policies and geopolitical risks are other factors of governance that affect the entry of FDI in a country.
Most of the literature has examined the eclectic theory of the location advantages approach because the variables can be observed. Whereas the traditional approach in determining the factors that influence FDI flows emphasizes the measurement of marketseeking and resource-seeking motives such as market size (Alam & Shah, 2013;Xaypanya et al., 2015), labor costs (Blaise, 2005;Voyer & Beamish, 2004), level of openness (Alam & Shah, 2013;Asiedu, 2002;Xaypanya et al., 2015), and macroeconomic stability (Kahouli & 10.12928/optimum.v10i2.15012 Maktouf, 2015). Research in the last few years has put forward another opinion which states that the quality of governance / institutional quality plays an important role in explaining the determinants of FDI from the side of efficiency-seeking motive (Bellos & Subasat, 2012;Buchanan et al, 2012;Ullah & Khan, 2017).
There are various types of measurements and data sources in measuring the quality of a country's governance / institutional quality, Bannaga et al., (2013); Buchanan et al., The relationship between governance factors and the entry of FDI can be explained by referring to the cost-effectiveness of investing. When a government can create conditions of stable governance, it will make market conditions predictable and reliable. This is a form of certainty that can be provided by the government to investors and companies so that they can maximize all available resources in the host country to increase efficiency and reduce production costs (Cuervo-cazurra, 2008;Jensen, 2003 ). According to Mengistu & Adhikary (2011) transparency, accountability, and law enforcement are important parts of governance that will motivate investors to channel their capital to a country. No investor is interested in investing in a country that has a complicated bureaucracy and has loopholes of corruption because it is thought to increase transaction costs in investing. It can be concluded that the quality of good governance in a country can help create a conducive business and investment climate to promote economic growth. On the other hand, a country with a low-quality governance infrastructure will make investors reluctant to invest as a result of the uncertainty it creates (Globerman & Sapiro, 2002). This shows that the quality of governance/governance infrastructure in a country is one of the determining factors for the inflow of FDI. Therefore this study focuses on analyzing the relationship between governance infrastructure and FDI inflows.
Optimum Vol. 11. No 1, March 2021 p. 44-58 The Effect of Governance on FDI Inflows in ASEAN (Ranynda Niarachma et al) 47 To analyze the effect of governance on FDI inflows, this study uses a set of governance variables developed and updated by Kaufmann et al. (2011)

Research Methods
This study uses panel data regression analysis with the type of data used as secondary and NATENDit is ratio of arable land to the total land area (%) of country i in year t;  is intercept;  is the parameter of each governance indicator;  is the coefficient of the control variable; and i,t, is country i, in the year of t, and error / deviation. So that the final seven equations used in this study are: This is done because based on the results of several previous studies it was found that the six WGI governance indexes are highly correlated with one another (Buchanan et al., 2012;Daude & Stein, 2007;Globerman & Sapiro, 2002 This study uses the estimator Generalized Least Squares (GLS) Cross-section weights. The GLS estimator is an equation that is not biased and consistent but still not BLUE as it meets the OLS basis. The assumptions used in the GLS estimator are the heterogeneity conditions between equations and pay attention to the structure of the different residues between equations (each equation is assumed to be homoscedastic) (Ekananda, 2016).

Result and Discussion
Based on data from the ASEAN Community Statistical System (ACSS), the condition of  brings new problems to the error terms. Therefore, to estimate the model in this study is to use the generalized least squares (GLS) estimator which takes into account the diversity of data. The classic assumption test cannot be applied to the GLS estimator because this estimation method is structured to use the information on the uniformity of data from each group or time (Ekananda, 2016). Then the best model used is the FEM model with the GLS estimator cross-section weights.   Based on the estimation results. it is also obtained information that the VOA variable does not affect FDI inflows. but the VOA variable has a positive direction as indicated by the positive coefficient value of the VOA variable. This may happen because not always countries that have a good democratic system also have good quality governance as well.
On the other hand. not all countries with autocratic/centralistic systems have poor quality governance systems. this result is in line with the research of Daude & Stein (2007) and Mengistu & Adhikary (2011). The regression test results in table 3 show that the PSAB variable has no effect on FDI flows. which is indicated by a significant value that exceeds the 5% significance level. The insignificance of the relationship between political stability and FDI inflows indicates that stable political conditions have not been able to provide security guarantees for investors to invest in a country. The results of this study are different from   (2007) and Bannaga et al. (2013) who prove that the better the quality of laws and regulations produced by the government will have a significant impact on increasing FDI inflows to the host country. The existence of regulation is an important factor for the creation of economic growth. social welfare. and protection for the environment. However. sometimes the existence of regulation can also be a burden both economically and socially. Therefore. it is necessary to develop an efficient and low- Foreign investors generally avoid countries with high levels of corruption because corruption is seen as a bad thing. Besides. an economy with a culture of corruption is also considered to be able to cause inefficiency (Habib & Zurawicki. 2002). Countries that can take decisive actions to eradicate corruption and implement more transparent policies will be able to attract more FDI. in ASEAN countries. This implies that the higher the value of the governance index. the more FDI inflows will be attracted. The quality of good governance is considered to be able to minimize transaction costs. increase long-term commitment from investors. and can be used as a basis for information for investors about how domestic market conditions include conditions of political stability. quality of policy formulation. and law enforcement systems that will ultimately stimulate MNEs. to invest more.
Also. this study provides empirical evidence that regulatory quality. rule of law. and control of corruption are important elements of governance that have a positive relationship to FDI inflows. The existence of regulations serves as a guideline for all stakeholders in carrying out all their activities. including in carrying out business activities or investing in a country. Besides. a good law enforcement system and the existence of a state commitment to eradicate corrupt practices are also considered capable of providing the trust and security that every investor is looking for. If the state can create a regulatory system. law enforcement. and a good corruption control system. it is possible to increase FDI inflows. especially for countries in the ASEAN region. In this study. there was no direct influence on the elements of voice and accountability. political stability. and absence of violence/terrorism and government effectiveness on FDI inflows. However. this does not rule out the possibility that these three variables still have an indirect effect on FDI inflows.
Considering the importance of FDI as a source of external finance that can stimulate economic development in most countries. the success of FDI in driving economic development is very much dependent on the quality of absorption of FDI itself. Therefore.
policymakers or authorities who have the authority need to take firm and proactive action to make the elements of good governance a solid basis to provide assurance and security for domestic and foreign investors. Improvements are needed in all aspects of governance to create a conducive investment climate to increase FDI inflows to a country. including Indonesia. The government needs to pay attention to the quality of the resulting laws and regulations. the quality of law enforcement. and decisive action to eradicate corruption to attract more FDI.
The results of this study have added to the latest information regarding the importance of aspects of governance as one of the factors that attract the entry of FDI into a country.
including countries in the ASEAN region. Considering that the scope of this research only examines one area. therefore this research also provides some input for the development of future research such as using a governance approach with different indicators. using different analytical methods. or expanding the coverage of countries and periods. used and can also include the effects of the Covid-19 pandemic as a variable in further research.