RISK MANAGEMENT IN INVESTMENTS: MACRO-ECONOMIC INSTABILITY, REGULATORY REFORM, AND FOREIGN DIRECT INVESTMENT IN ASEAN
DOI:
https://doi.org/10.35631/AIJBES.828023Keywords:
FDI, Macroeconomic Instability, Policy Reforms, Strategic Financial Management, ASEAN and Panel ARDLAbstract
Foreign Direct Investment (FDI) represents one of the key factors driving economic development in the Association of Southeast Asian Nations (ASEAN). However, managing FDI strategically becomes complicated due to the persistent occurrence of macroeconomic shocks and different institutional structures. While there exists abundant literature on FDI, few studies have attempted to explore FDI's determinants and the interaction effect between them, in which, these have serious implications for finance management and investment strategies. This study explores the direct impact of macroeconomic instability and policy reforms, and their interaction effect on FDI inflows in ten ASEAN countries from 1990 to 2024, particularly comparing Malaysia's situation. Furthermore, this study will analyses the interaction effect using the Panel ARDL method with Pooled Mean Group, Mean Group, and Dynamic Fixed Effects estimations to jointly capture the dynamics of the adjustment and equilibrium processes. Macroeconomic instability is measured by the within year variance of six macroeconomic variables, whereas a composite Policy Reform Index (PRI) will be developed using Principal Component Analysis based on five governance dimensions. Three hypotheses formulated in this study are as follows: (H1) Macro instability has a significant adverse impact on FDI; (H2) Policy reforms significantly boost FDI; and (H3) Policy reforms mitigate the adverse effect of instability on FDI as a strategic instrument of managing investment risks. The expected results provide useful implications not only for FDI promotion agencies but also for finance managers evaluating the ASEAN markets' risks and policymakers formulating reform packages that attract the highest amount of FDI.
Downloads
References
Abaidoo, R., & Agyapong, E. K. (2024). Institutional framework, macroeconomic instability and financial markets: perspective from emerging economies. Journal of Economic and Administrative Sciences.
Akardeniz, E., & Özocaklı, D. (2026). Financial crisis severity and reform efficiency indices and their effect on economic growth: evidence from Turkey using PCA and ARDL. Journal of Financial Economic Policy, 18(2), 347-393.
Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2008). How does foreign direct investment promote economic growth? Exploring the effects of financial markets on linkages. Journal of Development Economics, 91(2), 242–256. https://doi.org/10.1016/j.jdeveco.2009.01.004
Asamoah, L. A., Adjasi, C. K., & Alhassan, A. L. (2016). Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa. Economic Systems, 40(4), 612–621.
Atento, R. G., & Espelita, C. A. M. (2026). PPP Income Convergence in Asia: Evidence from ASEAN-10 and Selected Asian Comparators, 1995–2019. Asian Financial Economics and Policy, 1(1).
Azman-Saini, W. N. W., Law, S. H., & Ahmad, A. H. (2010). FDI and economic growth: New evidence on the role of financial markets. Economics Letters, 107(2), 211–213.
Bagh, T., Hunjra, A. I., Guo, Y., & Bouri, E. (2025). Corporate capital structure in BRICS economies: an integrated analysis of ESG, firm, industry, and macroeconomic determinants. International Journal of Finance & Economics, 30(3), 2682-2704.
Baldacci, E., Gupta, S., & Mulas-Granados, C. (2011). Restoring debt sustainability after crises: Implications for the fiscal mix. World Development, 40(8), 1699–1714.
Buchanan, B. G., Le, Q. V., & Rishi, M. (2012). Foreign direct investment and institutional quality: Some empirical evidence. International Review of Financial Analysis, 21, 81–89.
Chudik, A., & Pesaran, M. H. (2015). Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. Journal of Econometrics, 188(2), 393–420.
Corcoran, A., & Gillanders, R. (2015). Foreign direct investment and the ease of doing business. Review of World Economics, 151(1), 103–126.
Dang, V. C., & Trinh, M. Q. (2025). Economic freedom and foreign direct investment: A global meta-analysis. Journal of International Economics, 148, 103895.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton University Press.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117(1), 1–37.
Dong, L., Hidthiir, M. H. B., & Mansur, M. B. (2025). Economic policy uncertainty and China’s FDI inflows: Moderating effects of financial development and political stability. Journal of Risk and Financial Management, 18(7), 354.
Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1–31.
Dunning, J. H. (2001). The eclectic (OLI) paradigm of international production: Past, present and future. International Journal of the Economics of Business, 8(2), 173–190.
Farah, A. M. (2025). Examining the Impact of Institutional Quality and Exchange Rate Volatility on FDI Inflows and Economic Growth in Somalia: A Systematic Literature Review Analysis Under Prisma Guidelines.
Fontalvo, H. R., de la Puente, M., Torres, J., Guzmán, H., & Navarro, D. (2026). Foreign Direct Investment Under Uncertainty: A Regime-switching, Threshold and Dynamic Correlation Analysis of Emerging Economies. Global Business Review, 09721509261418489.
Galindo, A., & Izquierdo, A. (2024). 2024 Latin American and Caribbean Macroeconomic Report: Ready for Take-Off? Building on Macroeconomic Stability for Growth.
Ghodsi, M., Felbermayr, G., Kariem, H., Stehrer, R., & Yotov, Y. V. (2026, February). Economic Implications for Europe of a Potential Reintegration of Iran into the World Economy.
Gold, K. L., & Anagun, A. M. (2026). Climate change, macroeconomic stability, institutions, and sectoral resilience in Nigeria’s agriculture and industry sectors. Discover Sustainability.
Henri, A. O., & Youssouf, N. N. (2026). Macroeconomic Instabilities and Foreign Direct Investment in Developing countries: Theoretical and Empirical Validation.
Heritage Foundation. (2025). Index of economic freedom 2025. The Heritage Foundation. https://www.heritage.org/index
Ishikawa, K. (2021). The ASEAN Economic Community and ASEAN economic integration. Journal of Contemporary East Asia Studies, 10(1), 24–41.
Islam, M. S., & Beloucif, A. (2024). Determinants of foreign direct investment: A systematic review of the empirical studies. Foreign Trade Review, 59(2), 309-337.
Jolliffe, I. T., & Cadima, J. (2016). Principal component analysis: A review and recent developments. Philosophical Transactions of the Royal Society A, 374(2065), 20150202.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220–246.
Khan, H., Dong, Y., Bibi, R., & Khan, I. (2024). Institutional quality and foreign direct investment: Global evidence. Journal of the Knowledge Economy, 15(3), 10547-10591.
Kumari, R., & Sharma, A. K. (2017). Determinants of foreign direct investment in developing countries: A panel data study. International Journal of Emerging Markets, 12(4), 658–682.
Li, Z., & Wang, H. (2023). Exploring risk factors affecting sustainable outcomes of global public–private partnership (PPP) projects: a stakeholder perspective. Buildings, 13(9), 2140.
Moore, R. J. (2021). Emerging from war: Public policy and patterns of foreign direct investment recovery in postwar environments. Journal of International Business Policy, 4(4), 455-475.
North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.
Obuobi, B., Nketiah, E., Adu-Gyamfi, G., Adjei, M., & Ampon-Wireko, S. (2022). Trade openness and FDI inflows: A comparative study of African and Asia-Pacific economies. Heliyon, 8(3), e09114.
Ojumu, O., Osho, G. S., & Amadi, V. (2026). Assessing the impact of monetary policy on economic growth: An empirical study of money supply and economic expansion in Nigeria. International Journal of Economics and Finance, 18(4).
Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621–634.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.
Sabir, S., Rafique, A., & Abbas, K. (2019). Institutions and FDI: Evidence from developed and developing countries. Financial Innovation, 5(1), 1–20.
Saha, S., Bhatt, M., & Bhandari, A. K. (2022). Institutional quality and FDI inflows: A panel study of lower middle-income countries. Journal of Policy Modelling, 44(3), 651–669.
Samuels, J. I. (2024, February). Enhancing investment management strategies: A comprehensive analysis of financial instruments and risk mitigation techniques.
Sarkutė, L., Sina, D., Bello, K., & Vercuni, A. (2024). Strategic management decisions in the context of foreign direct investment. The role of institutions and economic determinants. Sustainable Regional Development Scientific Journal, 1(1), 40-54.
Soe, T. N. (2026). The Impact of Foreign Exchange Risk Management on the Competitiveness of Finnish Import Businesses.
Tahir, M., Abdullah, A., Albahouth, A. A., & Burki, U. (2026). Trade Openness, Foreign Direct Investment and Industrial Growth: Panel Data Evidence from the ASEAN Region. Economies, 14(2), 48.
Tan, H.-B., Hooy, C.-W., & Yee, C. S. (2019). Exchange rates and FDI: Evidence from ASEAN. International Journal of Economics and Finance, 11(7), 1–12.
Thangavelu, S. M., & Findlay, C. (2011). The impact of free trade agreements on foreign direct investment in the Asia-Pacific region. In C. Findlay (Ed.), ASEAN+1 FTAs and global value chains in East Asia (pp. 112–131). ERIA.
Touchton, M. (2023). Government Checks and Balances, Policy Credibility, and Foreign Direct Investment: A Cross-National Investigation. Economies, 11(10), 249.
UNCTAD. (2021). World investment report 2021: Investing in sustainable recovery. United Nations.
UNCTAD. (2022). World investment report 2022: International tax reforms and sustainable investment. United Nations.
Uguru, N. E., Chika, A. D., & Ngwobia, E. U. (2025). The Role of Macroeconomic Stability and Institutional Quality In Attracting Foreign Direct Investment In Nigeria. Accounting and Business, 2(4), 9-17.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748.
Williamson, O. E. (1981). The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3), 548–577.
World Bank Data (WBD). (2025). World development indicators. The World Bank Group. https://data.worldbank.org
Yahaya, O. A. (2026). Tax Incentives and Foreign Direct Investment Inflows in Nigeria: A Time Series Analysis. International Journal of Economics, Public Finance, and Development Studies, 21(2), 119-151.
Yahaya, O. A. (2026). The impact of public sector debt management on inflation and exchange rate stability in Nigeria. Journal of Economics Business Management and Accounting, 2(03), 48-97.
Zaifoglu, O., & Arslan, A. (2026). Exchange Rate Movements and the Sustainability of Long-Run Economic Growth. Sustainability, 18(3), 1682.
