Governance and Economic Growth: The Mediating Role of FDI Inflows

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Dani Rahman Hakim
Saksono Budi


Abstract: Many studies have attempted to examine the effect of governance on
economic growth. However, these studies reveal heterogeneities that make it difficult to
implement policy. This current study attempts to fill these gaps by employing foreign
direct investment (FDI) inflows as a mediating variable. This study employs balanced
panel data for the 10 Association of Southeast Asian Nations (ASEAN) between the
period of 2000 to 2021. Based on the mediation framework in a random effect model,
this study reveals that political stability (PV) and government effectiveness (GE) affect
FDI positively. Moreover, this study finds that FDI can mediate the indirect effect of
PV and GE on economic growth. However, this study also reveals that the direct effect
of GE on economic growth is negative. This implies that ASEAN countries should be
practical, effective, and systematic in improving GE to minimise opportunity costs. On
the other hand, ASEAN countries should focus on maintaining PV to attract more FDI
and encourage economic growth.


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