Banking Development Management in the Process of Economic Integration and FDI Attraction in ASEAN

Abstract

This study investigates the mediating role of banking sector development in the relationship between economic integration and foreign direct investment (FDI) inflows among 10 ASEAN countries during 2000–2023. The research is motivated by the increasing importance of financial intermediation in transforming the benefits of globalization into sustainable investment flows. It fills a theoretical and practical gap by examining how domestic financial systems strengthen the linkage between international economic integration and FDI attraction. Using a quantitative approach, the study employs secondary panel data and applies the Structural Equation Modeling (SEM) technique combined with the medsem procedure in Stata to test the mediation effect. The results reveal that economic integration positively and significantly influences both banking development and FDI inflows. Furthermore, banking sector development partially mediates the relationship between economic integration and FDI, with about 39% of the total effect transmitted through the banking channel. This finding underscores the crucial role of the banking system as an institutional bridge connecting integration with investment performance. The study concludes that strengthening financial systems and enhancing banking governance are key strategies for ASEAN countries to fully leverage economic integration. Policymakers should focus on improving transparency, expanding access to credit, and coordinating trade, finance and investment policies to build a stable and attractive investment environment.