Table 10.

respectively. The U-shape curve indicating that the financial development exceeded

FinDev 0.21 0.07 0.03 7.98\* 3.78 8.46\* FinDev<sup>2</sup> ——— 0.93\* 0.34 0.93\* RGDPPC 2.38\*\*\* 1.92\*\*\* 2.44\*\*\* 2.57\*\*\* 1.84\*\*\* 2.69\*\*\* CPI 2.22\*\*\* 1.58\*\*\* 2.11\*\*\* 2.80\*\*\* 2.05\*\*\* 2.29\*\*\* Threshold value (% of GDP) 73.00 — 94.48

Accounting and Finance - New Perspectives on Banking, Financial Statements and Reporting

Linear model Quadratic model Model 1 Model 2 Model 3 Model 1 Model 2 Model 3

The result show that the negative effect of low level of financial development below the threshold level, in general at 70% of GDP that portrays the financial illness in host country. Initially, the negative relationship associated with the underdeveloped financial sector that may discourage the investor's decision to invest to the host country for those investors who are preferring on resource-seeking and market-seeking. Low level in credit market will reduce the purchasing power of parity among the citizens, and as a result, the innovative products produced by foreign firms may become unmarketable or over-supplied in the host country.

In the other hand, the high financial development reflects high financial strength

The result from FMOLS is however not considering the cross-sectional dependency among ASEAN-5 countries. The long-run coefficients are further estimated by using CS-ARDL for robustness check as shown in Table 10. Similar with Table 9 previously, the relationship between financial development on FDI inflows are not significant by using linear specification for all models in short-run and long-run estimations as shown in Table 10. The relationship between financial development and FDI inflows is however absence in the short-run estimation. But the relationship is existed in quadratic model specification, but result shows that only Model 2 has significant U-shape relationship between LL and FDI inflows in the long-run. The relationship is significant only in the long-run due to time lag effect in materializing the benefit of FDI inflows influenced by financial development. The Ushape relationship indicates by the negative coefficient for α^1, and positive coefficient for α^<sup>2</sup> (refer to Eq. (2)), which both coefficients are significant at 1% level. It means, when the level of liquid liabilities as a percentage of GDP beyond the

that might attracts the inflows of FDI that related to assist them to set-up new business in host country and survival in their day-to-day business. When the level of financial development that above the 70% of GDP threshold point, it influences the positive impact on FDI inflows. Specifically, based on the quadratic specification of Model 1 in Table 7, the financial development threshold point is 73% of GDP (7.98/(0.93(2))), and Model 3 is 94.48% of GDP (8.46/(0.93(2))). The result showed that the DCPS surpassed the threshold point at median value to accelerate inflows of FDI, while PCDM should beyond the 75% quantile. The nonlinear relationship between financial development and FDI in this study is however differed from those of previous studies which examined the linear relationship (see [25–27]). The U-shape curve commensurate with the argument that well-developed financial

the threshold level, its incremental will attract more FDI inflows.

DCPS is used as a proxy in Model 1, while PCDM in Model 2.

Panel FMOLS long-run estimation (dependent variable: FDI).

\*\*\*Significant at 1% level. \* denotes significant at 10% level.

Table 9.

52

market benefited FDI in host country [28].

Cross-sectional dependence ARDL (CS-ARDL) estimation (dependent variable: FDI).

threshold point at median level, it will attract the FDI inflows to ASEAN-5 countries. Specifically, by considering the cross-sectional dependency among ASEAN-5 countries the liquid liabilities threshold point is 70% of GDP (29.34/(3.46(2))) in long-run.

Although the more financial development can attract the FDI inflows, but the quality of financial reporting is important channel of its information for investors, since the ASEAN-5 countries are committed in complying IFRS rules. The information in financial reporting provided by firms and financial institution in host countries as a canal on presenting it financial position that leads better decision for foreign investors. The foreign investors may unable to make decision of lacking information on financial condition in host countries. A superior financial reporting system lowers the cost of capital and improves capital allocation efficiency [29]. The quality of financial reporting would lead to transparent and clear information that reducing asymmetric information between foreign investors and financial institutions in ASEAN-5 countries.

In further investigation, the causality between variables are tested by using Granger causality test based on VECM model as shown in Table 11. The lag length is based on Akaike information criterion. All models shown the negatively significant of error-correction term for the FDI equation, that suggesting the existence of longrun relationship when the FDI is dependent variable. Similarly, there are exists the long-run causality when financial development and CPI as a dependent variable for all models. The causality between financial development and FDI inflows is however occurred only in the long-run. As shown in Table 11, there is a unidirectional causal effect running from real GDP per capita to DCPS and PCDM, CPI to FDI, CPI

Financial integration among the ASEAN-5 countries strengthened financial development as well as ease transaction activities among the regional players [31]. The integration in the AEC Blueprint 2015 towards strengthening the financial institutions, enhance commitment in implementation and in monitoring and eval-

Nonlinear Effect of Financial Development and Foreign Direct Investment in Integration…

DOI: http://dx.doi.org/10.5772/intechopen.86104

integrated and smoothly functioning ASEAN region financial system, as well as the IFRS accounting standard, that characterized by more liberalized capital account regime and inter-linked capital markets. Strengthening financial integration as well as financial market infrastructure with the quality of financial reporting are therefore aimed at facilitating intra-ASEAN trade and investment by increasing the role of ASEAN indigenous banks. It also augmenting the integrated insurance and capital markets that leading to safe, cost-efficient and more connected regional economy. The attraction of FDI inflows is an important goal of the AEC and largely

\* and Nor Hakimah Haji Mohd Nor2

© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

uation of finance. Since all ASEAN-5 countries are complying the financial accounting standards of IFRS (including Indonesia who committed to comply the IFRS), the quality of financial information is needed in order to monitor and evaluate the financial position. In addition, ASEAN seeks to achieve a well-

conditional to the success of the ASEAN-5 economies efforts.

This chapter has been declared as no conflict of interest.

Conflict of interest

Author details

55

Elya Nabila Abdul Bahri<sup>1</sup>

1 University of Malaya, Kuala Lumpur, Malaysia

provided the original work is properly cited.

2 Kolej Universiti Islam Antarabangsa Selangor, Kajang, Malaysia

\*Address all correspondence to: elyanabila@um.edu.my


ECT is error-correction term.

\*\*\*Significant at 1% level. \*

Significant at 10% level.

#### Table 11.

Granger causality based on panel VECM estimation.

to DCPS and PCDM and CPI to real GDP per capita. The linkage is however broken between financial development-FDI nexus in short term. The error-correction terms presented in the last column of all models demonstrated that the burden of the short-run endogenous adjustment (in long-run trend) to bring the system back to its long-run equilibrium borne by the FDI, financial development and CPI equations.
