POLITICAL REGIME, COMPETITIVENESS, AND FOREIGN INVESTMENT: AN EVIDENCE OF THE EURO AREAS’ FDI POLICIES TO SOUTHEAST ASIAN COUNTRIES

Year 2011, Volume: 3 Issue: 1, 35 - 44, 01.06.2011

Ari Warokka Fernando Ubeda Mellina Haim Hilman Abdullah

Abstract

Theory and previous evidences provide conflicting predictions concerning the
growth effects of foreign direct investment (FDI). The mainstream ideas support
FDI as an engine of employment, technological progress, productivity
improvements, and ultimately economic growth. Because of these significant
benefits, attracting FDI has become one of the integral parts of economic
development strategies in many countries. There are two schools of thought that
hypothesize the FDI determinants: economic factors and political factors. For the
latter school of thought, the central questions are directed to determine whether
political regime affect country’s trade policy or not. In the advanced industrial
countries where labour tends to be scarce, are left political regimes more
protectionist than right ones, which represent capital owners? Prior evidence had
demonstrated an association between the type of political regimes and trade
policies (FDI policies)
This paper extends the cross-country and temporal variance in national policies
of FDI. The theory looks at government partisanship, which we define in terms of
left parties or right parties and contesting with global competitiveness index,
which reflects the economics factors’ school of thought. The paper tests two
hypotheses that explore various aspects how the parties in Euro Area and
Southeast Asian countries have competed over trade policy. This study uses Euro
Area countries and Southeast Asian countries that actively do outward and
inward FDI. The time frame of analysis is 2000-2006 period that is believed as a
start of Economic Integration in the European Union, which is symbolized with
the launching of European Single Currency at that time. Statistic methods used
for testing the hypothesis are t-test and multivariate regression model.
The empirical results provide support for an intuitively positive effect of
globalization that makes left parties and right parties converge on its political
economy and preference into open or free trade, which is the main component of
global competitiveness index. After controlling for various factors, political
regime does not matter. In terms of position taking, both types of political regimes
consistently take the free trade stances. In other words, it can be believed that
Euro Area and Southeast Asian governments’ preference on political economic
and foreign investment are becoming more symmetric over time.

Keywords

Political Regime, Foreign Investment, Competitiveness, Euro Area

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