MACROECONOMIC INSTABILITY, POLICY REFORMS, AND FOREIGN DIRECT INVESTMENT INFLOWS IN ASEAN COUNTRIES: A PILOT STUDY ON INSTRUMENT VALIDITY, DATA FEASIBILITY, AND METHODOLOGICAL CALIBRATION USING PANEL ARDL APPROACH
DOI:
https://doi.org/10.35631/IJEMP.934029Keywords:
FDI Inflows, Macroeconomic Instability, Policy Reforms, ASEAN, ,Panel ARDL, Cross-Sectional Dependence, PCAAbstract
Foreign direct investment continues to be an important source of development and innovation in the Association of Southeast Asian Nations. Many studies examine the effect of FDI on macroeconomic instability and policy reforms separately, but very few examine how policy reforms might be contingent on macroeconomic stability. Such a shortcoming does not allow for a comprehensive examination of how the two interact in affecting investment flows to developing nations. The following is a pilot study examining the feasibility of conducting such research. The assessment of the developed MII takes into account high frequency indicators of macroeconomic instability, whereas the construction of the PRI index makes use of the Principal Component Analysis approach. A Panel ARDL benchmark model allows for further analyses to be conducted. A preliminary analysis using quantitative longitudinal research design and panel data includes five ASEAN economies namely Malaysia, Singapore, Thailand, Vietnam, and Indonesia and spans the period from 2000 to 2024. The data used are taken from the World Bank Development Indicators Database, cross-checked with IMF International Financial Statistics. From the pilot test, it is observed that the data quality is good and there is high consistency across data sources. Diagnostic tests confirm cross-section dependency, necessitating the use of second-generation econometrics in our complete study. Any substantive inference cannot be made out of this pilot exercise, although the methodological aspects need to be considered. Methodologically, the pilot exercise involves identification of a methodology to measure macroeconomic instability, construction of an index for institutional reforms, and applying Panel ARDL approach to pave way for further studies.
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