The Impact of Policy Quality and Political Stability on Foreign Direct Investment in ASEAN Countries: An Institutional Economics Analysis

This investigation pivots on the impact of policy quality and political stability on foreign direct investment within ASEAN countries. Both facets form essential components of a country's political risk profile; a lower risk profile, characterized by sturdy policy quality and political stability, tempts investors to channel their capital into preferred investment destinations. Our research employs a panel data regression analysis across seven ASEAN nations; Indonesia, Malaysia, Singapore, Thailand, Vietnam, the Philippines, and Brunei Darussalam, from 2012 to 2022. The Common Effects Model emerged as the optimal panel model during our study. We found that policy quality negatively impacts foreign direct investment, signifying that investments are perceived unprofitable due to the policy quality in the ASEAN region. In counterpoint, political stability has a positive effect, confirming that stable political circumstances in the ASEAN region draw investor interest. These significant findings validate that policy quality and political stability significantly sway foreign direct investment within ASEAN countries, making them crucial considerations for prospective investors.