Empirical Results and Analysis

Table 5: The effects of explanatory variables on FDI inflows in ASEAN countries (Model 1) Explanatory variables Dependent variable – FDI inflows

GDP of the source country 1.857399***

(0.298463) Population of the source country 2.037618*

(0.471290) Trade openness of the source country 0.139944

(0.092596)

New DTTs in current year 0.088558*

(0.036373)

Accumulated DTTs -0.012993*

(0.005813)

R-squared 60.098%

*** denotes the significance level of 1%, * denotes the significance level of 10%. The standard errors are reported in parenthesis below the coefficients.

In this Model 1, all five explanatory variables are tested against the dependent variable using the data of the full sample. From Table, one can see that most of the effect of the explanatory variables are statistically significant, except the trade openness of the recipient country. In particular, capital importing countries, whose economy is larger and labor force readiness is higher, are more likely to receive higher FDI inflows from foreign investors. The coefficient of the trade openness of the source country does not appear to be statistically significant, yet, it is positive, signaling that it might not be an important factor when investors consider which country to invest in, but the greater trade openness is still associated with higher FDI inflows.

Regarding the two DTTs variables, as expected, the current year DTTs are statistically

significantly and positively correlated to the FDI inflows. In other words, the capital importing countries, which have entered more bilateral DTTs with several capital exporting countries, receive more inward FDI than the countries that do not have as many DTTs. Lastly, the

coefficient of the accumulated DTTs variable against the dependent variable is negative, which is similar to some previous studies. This statistical result implies that as the DTTs become older and outdated, its significance and effectiveness substantially decline that requires efforts for re-negotiations, and even exerts an adverse effect on the attractiveness of a country as an FDI destination, and hence, its inward FDI volume. According to Jogarajan (2011), most of the existing DTTs of ASEAN countries are relatively old with an average age around 15 years old.

Due to the political, fiscal and economic reforms in several member states, in some cases, the countries’ new tax policies have overtaken the terms of the old treaties, resulting in the

phenomenon of diminishing value of DTTs over time. Furthermore, over the last few decades, there have been numerous economic and technological advancements that created new income streams, which are unlikely to be covered by the old treaties, hence, making them obsolete, (Jogarajan, 2011).

b. Model 2: Lagging Cambodia and Singapore Data

The sample used in Model 2 excludes data from Cambodia and Singapore, as these countries are the anomalous factors in the whole sample. Cambodia is the country that has the least DTTs with only 5 DTTs currently in force. In contrast, Singapore is the jurisdiction, which has 91 DTTs in effect that is the highest level of DTTs in ASEAN with the closest second record of 74 DTTs in Vietnam. The data on the key control variables of these two countries variate extremely from the

sample means, therefore, the author decided to conduct the empirical test without the data from these countries to enhance the model fit and accuracy.

Table 6: The effects of explanatory variables on FDI inflows in ASEAN countries excluding Cambodia and Singapore (Model 2)

Explanatory variables Dependent variable – FDI inflows

GDP of the source country 1.9807953***

(0.3720048) Population of the source country 2.4509392*

(0.5881381) Trade openness of the source country 0.1295555

(0.1019693)

New DTTs in current year 0.1195993**

(0.0421060)

Accumulated DTTs -0.0168825*

(0.0074048)

R-squared 56.864%

*** denotes the significance level of 1%, ** denotes the significance level of 5%, * denotes the significance level of 10%. The standard errors are reported in parenthesis below the coefficients.

Overall, the results from Model 2 are in line with those from Model 1, all explanatory are positively correlated to the dependent variable except for Accumulated DTTs. High GDP of the recipient country, and its population remain statistically significant in increasing FDI inflows with the significance level of 1% and 10% respectively. The coefficient of trade openness in

ASEAN countries excluding Cambodia and Singapore, even though still is not significant, slightly decreases compared to Model 1. The coefficient of New DTTs in current year increases substantially compared to Model 1, and its significance level also increased from 10% to 5%, which suggests that the higher number of new DTTs in ASEAN countries excluding Cambodia and Singapore has a much stronger effect in improving FDI inflows in these eight countries than in ASEAN as a whole. The accumulated DTTs variable still has a negative coefficient (-0.0169), yet slightly lower than that in Model 1 (-0.013), which again indicates that both the number of DTTs in the current year and accumulated number have a stronger effect on the FDI inflows of the ASEAN-8 countries than on the ASEAN-10 countries.

Based on the above empirical testing and analysis, the author accepts the below:

Hypothesis 1: The volume of FDI inflows increases significantly on a yearly basis due to new DTTs signed annually in ASEAN Member States,

and rejects:

Hypothesis 2: Even after years of being in force, DTTs continue to contribute significantly to the increase of FDI inflows, or in other words, the volume of FDI inflows into ASEAN is driven substantially by the accumulated number of DTTs.