Determinant factors of gross domestic product (GDP) in Association of Southeast Asian Nations (ASEAN) member countries

Introduction

Economic growth is a process that, over time, raises the population’s real income per capita. It is also accompanied by institutional system modifications that have an impact on structural change and institutional transformation. Poverty, unemployment, low capital formation, sociocultural obstacles, corruption, and outside economic influence are all hurdles to economic progress (Agarwal and Baron, 2023; Duican and Pop, 2015).

The importance of capital ownership is to create economic development in developing countries, but developing countries realize that the availability of capital is not yet a sufficient condition for creating economic development (Asari et al., 2011; Massidda and Etzo, 2012). Several other factors such as the availability of experts in various fields, sufficient entrepreneurs, an efficient government system, the ability to create and use more modern technology, and the attitude of society play an equally important role in creating economic development. Economic development problems are associated with economic growth (Rasool et al., 2021).

The expansion of economic activity results in a rise in the quantity of goods and services generated in society, which is known as economic growth (Baltagi, 2005). Gross domestic product (GDP) is the market worth of all finished goods and services generated in a country within a certain time period (Ganchev et al., 2014; Belloumi, 2010). A high GDP value for a country is seen to suggest that the country has great economic health, whereas a low GDP value is thought to indicate weak economic health (Demetriades and Hussein, 2006).

The entry of Foreign Direct Investment (FDI) into a country certainly has a significant influence on that country (Mc Kinnon, 1964). Not only will capital come in, but technology and experts will also come in, which of course will have an impact on technology transfer and the country’s economic growth (Katusiime, 2018; Borensztein et al., 1998; Mankiw, 2009).

Foreign tourists are one aspect that can increase economic growth in ASEAN member countries. Visa exemptions between member countries also have an impact on increasing tourist visits (Witt and Witt, 1992). Member countries are preparing and seriously building tourism industry infrastructure to serve visiting tourists by offering attractive tour packages. The tourism industry has a significant impact on economic growth (Belloumi, 2010; Hymer et al., 1976; Massidda and Etzo, 2012; Bouzahzah and Menyari, 2013; Rasool et al., 2021).

Economic growth in a country is influenced by the economic conditions of neighboring countries and the condition of the financial infrastructure or infrastructure owned by that country (Kelly et al., 2013). The existence of bank credit can support economic growth in countries that have economic health in the short and long term (Korkmaz, 2015; Mallik and Chowdhury, 2001). The existence of credit provided by banks to finance the development of financial infrastructure and other economic infrastructure has an influence on economic growth (Duican and Pop, 2015; Ananzeh and Eddien, 2016; Hang Le et al., 2021).

There is a feedback loop that has a significant impact between inflation and economic growth, where moderate inflation can help economic growth, but faster economic growth will have an impact on inflation (Mankiw, 2009; Mallik and Chowdhury, 2001). A moderate and stable inflation rate will encourage the development process and economic growth of a country (Pradhan et al., 2013; Massidda and Etzo, 2012). Moderate inflation increases profits for savers, increases investment, and accelerates a country’s economic growth (Saaed, 2008; Hasanov, 2011).

Association of Southeast Asian Nations (ASEAN) member countries are developing countries and have many problems, such as low foreign and domestic investment, high inflation, low levels of foreign and domestic tourists coming and visiting ASEAN countries, low credit disbursement, and development that tends to be uneven (Puah et al., 2018). GDP has not been maximized due to various classic problems in developing countries, so that economic growth is not as planned. The GDP of ASEAN countries can be seen in the table below.

Research on the determinants of GDP in ASEAN countries is crucial for understanding sustainable economic growth in the region. This research can provide an understanding into how factors such as FDI, foreign tourists, bank credit, and inflation impact GDP, aiding policymakers and businesses in making informed decisions. A key research gap is the limited understanding of how specific factors influence GDP in ASEAN countries. By addressing this gap, the study can contribute to the existing knowledge on economic growth in the region. Focusing on seven ASEAN countries allows for a detailed analysis of the unique economic dynamics of each nation and enables comparative analysis. An ideal inflation rate is low and stable, typically within a moderate single-digit range. Moderate inflation rates indicate healthy economic activity without the risk of instability caused by high inflation. Low and stable inflation rates also build confidence among businesses and consumers, encouraging investment and spending while maintaining the currency's purchasing power.

The Table 1 above shows GDP from ASEAN countries that experienced fluctuations in the period 2016–2020. As a developing country, Indonesia’s economic situation in 2016 experienced an improvement, when compared to other ASEAN countries. The government of each country must be able to increase its country’s Gross Domestic Product (GDP) in order to increase its national development strength. Apart from that, domestic production must also continue to be increased with the contribution of labor. As the country’s development increases, new jobs will be created, thereby absorbing more new workers and reducing existing unemployment.

The following Table 2 shows the foreign direct investment (FDI) using net inflows (Balance of payments, current USD) from seven ASEAN member countries.

As seen in Table 2, FDI from ASEAN member countries in the period from 2016–2020 experienced fluctuations. During 2016–2019, the country most in demand for providing FDI was Singapore, because this country is the center of world trade (exports and imports), international financial services, and transportation services for world services and can be said to be ranked first (Takahashi, 2020); however, in 2020, FDI experienced a drastic decline. FDI in Vietnam is ranked second and Indonesia is ranked third. Meanwhile, fourth place is occupied by Malaysia, the Philippines and Thailand (Vicente et al., 2017). Specifically, FDI in Brunei Darussalam increased during 2019–2020.

An overview of foreign tourists using international tourism, receipts (% of total exports) from seven ASEAN member countries can be seen below.

As seen in Table 3, Indonesia and the Philippines experienced an increase in foreign tourists from 2016 to 2019. In Vietnam, the number of foreign tourists decreased from 2016 to 2017 and remained stable from 2017 to 2018. In the countries of Malaysia, Singapore, Brunei Darussalam, and Thailand, the number of foreign tourists fluctuated from 2016 to 2020. The percentage of foreign tourists dropped significantly in ASEAN member countries in 2020.

Bank credit from seven ASEAN member countries using the domestic credit to private sector (% of GDP) indicator can be seen in the Table 4 below.

In Table 4, banking credit in Indonesia, Malaysia, Singapore, Thailand and Brunei Darussalam experienced fluctuations during the period 2016–2020. In 2020, the highest banking credit position was owned by Thailand and the lowest banking credit position was owned by Indonesia.

The fourth determining factor of GDP is inflation. The term “inflation” refers to an increase in commodity prices generally as a result of a misalignment between commodity procurement plans, production, price setting, money printing, and the amount of income held by the population. If the price of just one or two items rises, it is not considered inflation unless the increase spreads to other items or drives up the cost of the majority of other items (Roy and Rahman, 2014). The issue is that prices have a propensity to rise consistently. In addition, price rises that happen seasonally, just before religious festivals, or that happen once and have no lasting effects are not considered inflation.

The inflation rate of seven ASEAN member countries that use consumer prices (annual %) as an indicator can be seen in Table 5 below.

In Table 5, inflation in ASEAN member countries tends to fluctuate during the period 2016–2020. Overall, the inflation category experienced by ASEAN member countries is mild inflation. Mild inflation is inflation that has not yet disrupted the economic situation. This inflation can be controlled because prices are rising in general, but has not yet resulted in a crisis in the economic sector. Light inflation is below 10% per year.

Research purposes

The purpose of the research is to examine and analyze the influence of FDI, foreign tourists visiting ASEAN member countries, banking credit, and inflation simultaneously on GDP in each ASEAN member country.

The framework of thought can be seen in Figure 1 below:

Figure 1. Framework.

Figure 1 presents the framework of the research, which includes the model for examining the influence of FDI, foreign tourists, bank credit, and inflation on GDP in each ASEAN member country. The framework outlines the simultaneous analysis of these factors to understand their combined impact on GDP. The model equation provided below the figure illustrates the variables and their relationship to GDP, with each variable representing a specific aspect of economic influence.

The following is the research model:

$$\text{GDPit}=\mathrm{\alpha }+\text{lnFDIit}+\text{TOURit}+\text{lnCRDit}+\text{INFLit}+\mathrm{\mu it}$$

Note:

GDP = Gross Domestic Product

lnFDI = Logaritma Natural Foreign Direct Investment

TOUR = Foreign Tourists

lnCRD = Logaritma Natural Bank Credit

INFL = Inflation

μ = error

I = Observation

T = Time

Methods

In total, seven ASEAN member countries were studied, namely Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. The sample data period covers 19 years, from 2002 to 2020, resulting in a total of 133 samples (Karno et al., 2023). The research methods involve examining each of the 7 ASEAN countries individually to understand the unique economic dynamics of each nation. It is recommended that the data collected be up to the year 2022 to ensure that the analysis encompasses recent economic trends and developments. The research considered the period from 2002 to 2020 for several reasons. First, this timeframe allows for a comprehensive analysis of long-term economic patterns, including periods of economic growth and potential downturns. Additionally, by focusing on a consistent time frame for all countries, the research can provide a more balanced comparative analysis. Moreover, utilizing historical data up to 2020 allows for the examination of economic trends before the onset of the global COVID-19 pandemic, providing valuable insights into pre-pandemic economic conditions. The type of data used is panel data, and the analysis tool used is STATA Version 14.0. Data collection involved tracing sources from websites related to the variables studied. Below is Table 6, which presents a description of the variables, definitions, indicators, scale, and data sources used.

Results

The results of panel data regression using the Ordinary Least Squares, Fixed Effects, and Random Effects method are presented below.

The table above was carried out with the aim of comparing the regression results in three ways. It can be seen from the regression results in the OLS column above that the FDI and foreign tourist variables have a significant positive influence on GDP in each ASEAN member country (Table 7). The banking credit variable has a significant negative influence on GDP in each ASEAN member country.

The regression results in the Fixed Effect column above show that the variables FDI, foreign tourists and banking credit have a significant positive influence on GDP in each ASEAN member country. The inflation variable has a significant negative influence on GDP in each ASEAN member country (Tamilselvan and Manikandan, 2015).

The regression results in the Random Effects column above show that the variables FDI, foreign tourists and banking credit have a significant positive influence on GDP in each ASEAN member country. The inflation variable has a significant negative influence on GDP in each ASEAN member country. If we compare the three test results, in the OLS method, the Inflation variable is not significant above 5%, while in the test results using the Fixed Effects and Random Effects methods all variables are significant below 5%. Next, the Fixed Effects and Random Effects methods were tested again to determine the best regression model using the Hausman Test method. Below are presented the results of the Hausman test.

From the regression results above, the variables FDI, foreign tourists and banking credit have a significant positive influence on GDP in each ASEAN member country. The inflation variable has a significant negative influence on GDP in each ASEAN member country.

From the description of the regression results using the Fixed Effects and Random Effects methods, the Hausman test was carried out to determine the best model. Below are presented the results of the Hausman test (Table 8).

Based on the table above, the results of the Hausman test between Fixed Effect and Random Effect show that the value in the Prob column (0.0012) is less than the critical value of 0.05 (chi 2 = 0.05). Therefore, the Alternative Hypothesis is accepted, namely Fixed Effect. If the value in the Prob > chi 2 column is significantly greater than 0.05, then the null hypothesis is accepted, or Random Effects is accepted. Therefore, the best model to be chosen is Fixed Effects.

Discussion

The results of the data analysis confirm the hypothesis that all variables have a significant influence on the GDP variable in ASEAN member countries. Specifically:

A detailed discussion of each variable’s impact on the GDP variable is provided below.

Conclusion

Based on the results of the research and discussion, conclusions can be drawn, namely that FDI, foreign tourists, banking credit, and inflation have a significant effect simultaneously on GDP in seven ASEAN member countries. High FDI flows in the form of physical capital, technology and skilled workers to ASEAN member countries can increase GDP. The strategy carried out by countries in the Southeast Asia region is to increase tourism competitiveness through developing aspects of attractions, accessibility and amenities so that foreign tourist visits can increase GDP in each ASEAN member country. In increasing GDP in ASEAN member countries, the banking sector as an intermediary can trigger economic movements in all sectors including the industrial sector, in this case, the government provides banking credit through banks. ASEAN member countries would want to achieve low inflation so that GDP does not fall.

Data taken from several sources, namely:

World Bank (https://data.worldbank.org/)

CEIC Data (https://www.ceicdata.com/id)

United Nation Data/UN Data (http://data.un.org/)

Statista (https://www.statista.com/)

International Monetary Fund (https://www.imf.org/)

Indexmundi (https://www.indexmundi.com/)

Knoema (https://knoema.com/)

International Labor Organization/ILO (https://www.ilo.org)

Filipina: https://psa.gov.ph/ (Philippine Statistic Authority)

Myanmar: https://tourism.gov.mm/statistics/ (Myanmar Tourism Statistic)

Singapura: https://www.mas.gov.sg/statistics (Monetary Authority of Singapore)

https://countryeconomy.com/

https://www.theglobaleconomy.com/

Economic Research Institute for ASEAN and East Asia (https://www.eria.org/)

https://www.government.nl/