3. Econometric model and data description

The effect of the financial development on foreign direct investment is investigated by using ASEAN-5 countries panel data with the econometric model specified as follows:

$$FDI\_{it} = \beta\_0 + \beta\_1 FinDev\_{it} + \beta' X\_{it} + o\_i + \varepsilon\_{it} \tag{1}$$

where, the FDI in Eq. (1) represents foreign direct investment, and FinDev indicating financial development. The domestic credit of private sector, liquid liabilities and private sector credit to deposit money are used as a proxy for financial development. Parameter X comprises with the vector of control variables: real gross domestic product per capita (RGDPPC) and consumer price index (CPI). The crosssections are denoted by subscript i (i = 1, 2, …, N), the time period by subscript t (t = 1, 2, …,T), ω<sup>i</sup> is the country fixed effect and ε is the stochastic random term.

Incorporating the nonlinear effect of financial development on FDI, Eq. (1) has been extended by using a quadratic specification as expressed in Eq. (2):

$$FDI\_{\text{it}} = a\_0 + a\_1 FinDev\_{\text{it}} + a\_2 FinDev\_{\text{it}}^2 + a'X\_{\text{it}} + \theta\_{\text{i}} + \mu\_{\text{it}} \tag{2}$$

where FinDev<sup>2</sup> it is a square term for financial development that indicates the nonlinearity of the relationship between financial development and FDI inflows. The focal parameters in the quadratic model in Eq. (2) are α<sup>1</sup> and α2. If there exists a nonlinear relationship between financial development and FDI, an anti-Kuznets curve is anticipated since higher the financial development indicating the financial health that can assist the foreign entrepreneur and thus attracting the FDI inflows in ASEAN-5 countries. The anti-Kuznets curve is verified by significantly negative sign in parameter α<sup>1</sup> and significantly positive in α2. The threshold level is computed by first order derivation (δFDI=δFinDev). Based on the quadratic model in Eq. (2), the turning point of financial development can be calculated as �α1=2α2.

This study uses FDI inflows as the percentage of GDP. Real GDP per capita in constant of US dollar (US\$) is used to measure economic development. Domestic credit to private sector by banks as a percentage share of GDP (DCPS), liquid liabilities as a percentage of GDP (LL) and private credit to deposit money (PCDM) are used as proxies for financial development. Five countries have been selected
