Does Corruption and Government Regulation Matter to Foreign Portfolio Investment: Evidence from Asian and the European Union Countries

Abstract

Economic integration in various countries impacts fluctuations in and out of capital and multiple economic cooperation between countries. The investment that is one form of implementation of economic integration positively influences a country's capital reserves. The study analyzed the influence of macroeconomic variables and proxied institutions with corruption variables and government regulations on foreign portfolio investment fluctuations in the twenty Asian and EU countries with the largest funds flows. The data used in this study is a data panel with a period from 2002-2019. The analysis method used in this study uses two methods at once, namely the Generalized Method of Moment (GMM) and the Panel Vector Error Correction Model (PVECM), to analyze the cost of the analysis results. The study found that macroeconomic instruments projected with GDP variables had a positive and significant influence on foreign portfolio investments, while exchange rate variables negatively affected foreign portfolio investments. Important findings in this study that corruption consistently negatively and significantly affects foreign portfolio investments are based on both GMM test results and PVECM tests in the long term. In contrast, the results of PVECM tests in the short term do not have any macroeconomic variables or institutions that significantly affect foreign portfolio investment. This means that investors' consideration in investing in Asian countries and Europe is based on a long-term perspective than on short-term economic dynamics. In addition, regulatory variables have a positive and significant effect on foreign investment portfolios in twenty Asian countries and the European Union with the largest portfolio investment fund flow.