Effect Judicial Independence on the Foreign Direct Investment in South and SouthEast Asian Countries

: Judicial Independence is one of the most important characterstics of quality and well functioning judiciary. Efficient and independent courts play crucial role to enforce contract and property rights efficiently and impartially, ensure individual liberty and create favorable environment for domestic as well as foreign investment and facilitate the economic development. It is proved that de facto judicial independence has a robust highly significant impact on economic growth. Foreign Direct Investment, a source of capital and an element of globalization plays an important role in the economic development of the countries. It is one of important source of capital which stimulate domestic investment, creates new employment and expedites the transfer of technology. The objective of this study is to examine whether judicial independence has an impact to attract foreign direct investment in south and south-east asia region.


Introduction:
South and South-East Asian countries, mostly developing countries of the world have keen interests to attract Foreign Direct Investment (FDI) since these countries do not have adequate capital for investments. There has been a growing interest in the determinants of foreign direct investment (FDI) in developing countries, as FDI is considered one of the most stable components of capital inflows to developing countries and can also be a vehicle for technological progress through the use and dissemination of improved production techniques. (Quéré, Coupet, Mayer). Not surprisingly, thus, a number of authors have also studied the link between institutions and FDI. Such a link could be seen as one channel through which institutions promote productivity growth. Indeed, good institutions are supposed to exert their positive influence on development through the promotion of investment in general, which faces less uncertainty and higher expected rates of return.
Because FDI is now a very large share of capital formation in poor countries (UNCTAD, 2004), the FDI-promoting effect of good institutions might be an important channel of their overall effect on growth and development. Understading the determinants of foreign direct investment is very crucial because there is immense growth of foreign direct investment in the developing world over the last twenty years which is around $334 billion in 2005( UNCTAD 2006 Report).
This study answers the questions such as i) what are the determinants that help to attract foreign direct investment in the developing countries particularly in South Asian and South-East Asian countries? And ii) Does the Judicial Independence, an institutional determinant has impact on foreign direct investment in this region? This paper is organized as follows: Section II reviews the previous studies e.g literature about the determinants of foreign direct investment, Section III deals with the data and methodology, Setion IV provides empirical results and Section V presents the conclusion of this study.

Share of FDI among the Southeast Asian countries:
The inflows of FDI among the Southeast Asian countries are uneven. Singapore attracted the largest portion of FDI which is $ 349.6 billion represents 50 percent of total FDI inflows in this region. In 2009 the stock of FDI came to the 6 Southeast Asian countries valuing $666.47 billion. The share of the FDI inflows of other countries of this region are Thailand $99 billion, Indonesia $ 73 billion, Malaysia $ 75 billion, Vietnam $53 billion, Philippines $24 billion. Lao PDR received an small portion of FDI.

Ref: UNCTAD
FDI inflow trend in South East Asia(1990Asia( -2017 Importance of Judicial Independence: Judicial Independence implies that judges can perform their duties as per law free from influence or coercion, control by other actors whether government or private. Judicial Independence is crucial when three scenarios occure such asi) Dispute between citizens or private actors: Impartial and independent judiciary can enforce contracts impartially and thereby reduce transaction costs. Lower transaction costs maximize welfare enhancing transactions.
ii) Dispute between government actors: conflict between the government actors may occur and lead to power game in the absence of an independent and impartial organ. An independent court may help them to play their role as per law provided by the constitution.
iii) Dispute between the Government and Citizen: Independent Judiciary protect the rights of the citizens provided by the constitution. It prevents excutive and legislative encroachment upon those rights. It helps to establish rule of law and ensure good governance, an institutional determinants to attract FDI. It protects the property rights of the citizens from expropriation. Judges can review the constitutionality of the newly passed law. It can also ascertain whether government branch are performing their function with regard to citizen's rights by following due process of law.

Related Literature :
Analysis of Panel data and US CEO's Survey indicates that rule of law and judicial strength are linked to FDI inflows in Latin American countries (Staats and Biglaiser,2012).
Institutional quality has a positive and significant effect on FDI and matters to FDI ( Buchanan at el). Blonigen and Wang (2005) argue that countries that attract strong FDI flows typically have a host of favorable policies-for example, strong property-rights protection, stable macro policies, adequate infrastructure, and a clear and competitive regulatory environment-which can crowd-in domestic investment and improve overall productivity. Empirical literature on the institutional quality and economic growth has also shows a positive link between the quality of institutions and economic growth in a society ( Acemoglu and Verdier,1998). Ali and Fiess concludes that institutional quality exerts a significant role in determining FDI inflows.
Institutional determinants such as political risks factors, the functioning of bureaucracy, corruption and judicial system have considerable impact on the American Firms investing abroad ( Wheeler & Mody,1992). Foreign investments face expropriation risks where protection of property rights are very weak and poor (Henisz, 2000;Henisz & Williamson,1999). Compliance with contracts, protection for property rights, and economic freedom are important determinants to attract more foreign investment (Kapuria-Foreman, 2007). Production as well as transaction costs can be reduced by good institutions (North 1990). An inefficient legal system increases transaction costs by failing to provide cheap mechanism for enforcing legal rights and obligations ( Coase,1988). De jure judicial independence does not have a clear impact on economic growth but de facto judicial independence positively influences real GDP growth per capita ( Feld & Voigt,2003). Reisen and Soto(2001) indicate that foreign direct investment and foreign portfolio investment may increase economic growth. Basu and Guariglia (2007) found positive link between foreign direct investment and economic growth in 119 countries of the world . Inefficient institutions as measured by corruption and weak enforcement of contracts deter foreign investment (Gastanaga et al., 1998;Campos et al.1999;Asiedu and Villamil, 2000;and Wei 2000). Elizabeth Asiedu concludes that large local markets, natural resource endowments, good infrastructure, low inflation, an efficient legal system and a good investment framework promote FDI. Economic theory suggests that effective, independent courts promote investment and economic growth. (Klerman,2007). In most developed countries, constitutional guarantees and powerful courts reduce the risk of expropriation (North,1990). Tajul& Hussin (2010)

Market size:
The aim of FDI in emerging developing countries is to tap the domestic market, and thus market size does matter for domestic market oriented FDI. Market size is generally measured by GDP, per capita income or size of the middle class. The size of the market or per capita income are indicators of the sophistication and breath of the domestic market.
Thus, an economy with a large market size (along with other factors) should attract more FDI. Market size is important for FDI as it provides potential for local sales, greater profitability of local sales to export sales and relatively diverseresources, which make local sourcing more feasible (Pfefferman and Madarassy 1992). Thus, a large market size provides more opportunities for sales and also profits to foreign firms, and therefore attracts FDI (Wang andSwain, 1995: Moore, 1993;Schneider and Frey, 1985;Frey, 1984). FDI inflow in any period is a function of market size (Wang and Swain,1995).

Human capital:
The availability of a cheap workforce, particularly an educated one,influences investment decisions and thus is one of the determinants of FDI inflow. In this study, human capital is calculated on the basif of years of schooling & return to education.

GDP Per Capita:
Since Foreign Direct Investment is used in domestic production, it is added to GDP. It helps to measure the market prospect of the host country.
Expenditure side real GDP at chained PPPs( rgdpe): Expenditure method, a common method to calculate a country's GDP which includes consumer spending, investment, government expenditure and net exports. The real GDP considers inflation. It includes changes in general price level in a given year to provide an accurate picture of an economy's growth using base year prices.

Trade:
Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product. Trade is one of the important macroeconomic variables to attract Foreign Direct Investment. Torissi (1985) observed that a trade surplus is indicative of a dynamic and healthy economy with export potential and thereby more likely to attract foreign direct investment.

Protection of Property Rights:
Protection of property rights encourage large scale investment in a country. Investor will invest in a country when they feel confident about the property rights. Strong property rights reduce the risks of expropriation. Both physical property rights and intellectual property rights promote investment and nurture economic growth.

Results:
In table 1 results of simple Ordinary Least Square (OLS) and Panel regrssion with fixed effect as well as well random effect is given.In OLS, the P value of Latent Judicial Independence is significant at 5% level and t statistics is 1.96. R-squared is 0.6198 that means the model explained the variation with dependent variable is more than 69%. P value of regression of Protection of Property Rights (PPR) is 0.034 which is significant at 5% level.P value of trade is 0.000 which is significant at 1% level and t statistics is 8.59. The P value of real gdp by expenditure is 0.000 which appears to be significant at 1% confidence level and t statistics is 11.34 and F statistics is 0.000.
Data of 18 South and Southeast asian countries from 1990-2017 is taken for panel regression. In panel regression with fixed effect model, it is observed that p value of LJI is 0.027 which is significant at 5% level and t statistics is 2.23 and P value of another variable named protection of property rights is 0.010 and t statistics is 2.59 which appears to be significant at 1% level.
Panel data is also regressed with random effect. In random effect, P value of latent judicial independence and protection of property rights is 0.050 and 0.033 respectively and P value of both variables is significant at 5% level. The coefficient of judicial independence and protection of property rights both are positive which indicate that judicial independece has positive effect on the foreign direct investment. P value of trade and rgdpe is 0.000 and 0.000 respectively and both P value are significant at 1% confidence level. In sum, the result in table 1 shows that judicial independence has positive and significant effect on foreign direct investment in South and Southeast Asian countries. Conclusion: FDI inflows have close economic integration with the process of globalization and is generally assumed to be a major preceding factor of economic development. On the basis of panel data of 18 countries of South and Southeast Asia Region for 28 years , the association between FDI and Judicial independence has been examined. Econometric result indicates that judicial independence and protection of property rights have positive effect on FDI. The impact of Judicial Independence on the inflow of foreign direct investment in South and Southeast Asia is statistically significant. Judicial independence, an institutional determinant is necessary for rule of law and good governance in a country. The results of this paper supports the view of empirical growth literature that has emphasized the importance of institutions for economic growth. Since judicial independence has effect on foreign direct investment inflows to home countries of South and Southeast Asian countries, policy makers of those countries may feel interest to improve the level of judicial independence.