Governance and Economic Growth: The Mediating Role of FDI Inflows

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.