The Role Of Institutional Quality And CPI In The Relationship Between FDI, Fixed Capital Formation, And Economic Growth In ASEAN

Abstract

This study examines the relationship of foreign direct investment (FDI) and gross fixed capital formation (GFCF) with economic growth and tests the corruption perceptions index (CPI) as a moderating variable in seven ASEAN countries over 2012-2024. The study employs a quantitative approach using secondary panel data from the World Bank and Transparency International. Estimation is conducted using the Common Effect Model (CEM) with robust standard errors. The results show that FDI has a negative but statistically insignificant coefficient for economic growth (β = -0.3705; p = 0.134). In contrast, GFCF has a positive coefficient that is significant at the 10% level (β = 0.1954; p = 0.065). The FDI×CPI interaction is positive and statistically significant (β = 0.0201; p = 0.029), indicating that a higher CPI score which reflects a lower perceived level of public-sector corruption is associated with a stronger contribution of FDI to economic growth. Meanwhile, the GFCF×CPI interaction is negative and statistically significant (β = -0.0047; p = 0.002). These findings suggest that the effects of investment depend not only on the volume of capital flows but also on the institutional context and the effectiveness of investment management. The GFCF×CPI interaction should be interpreted cautiously and does not necessarily mean that better governance always reduces the benefits of capital formation.