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38

Chapter 4

Adoption

domestic product per capita.

1. Introduction

41

Abstract

Nonlinear Effect of Financial

Economies Among ASEAN-5

Investment in Integration

Countries Following IFRS

Keywords: foreign direct investment, financial development, cross-sectional dependence, nonlinear, financial information quality

Following the financial liberalization attempted, especially during the 1980s, foreign direct investment (FDI) has being as more important catalyst for accelerating the economic growth. The economic activities are integrated during the transition economies among developing countries as well as ASEAN-5 countries. The formation of ASEAN Economic Community (AEC) at the Ninth ASEAN Summit in

Development and Foreign Direct

Elya Nabila Abdul Bahri and Nor Hakimah Haji Mohd Nor

This chapter examines the role of financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980–2017. The ASEAN-5 countries include Malaysia, Thailand, Indonesia, Singapore, and the Philippines. The panel cointegration of second generation is used in order to address the existence of economic integration among ASEAN-5 as proven in cross-sectional dependency test. The results from fully modified ordinary least square (FMOLS) and cross-sectional dependency autoregressive distributed lag (CS-ARDL) consistently shows that the financial development has a nonlinear relationship with FDI of U-shape, whereby the financial development will benefit the FDI after it beyond the threshold point at 70% of total GDP. Investors will make decision based on the financial status as shown in the financial accounting report, whereby the quality of financial accounting representing transparent information that leads on reducing asymmetric information between investor and the financial institutions in host countries. In addition, the causality analysis based on panel vector error correction model (VECM) confirms the presence of both long-run relationship and short-run dynamic among FDI, financial development, consumer price index, and real gross
