Connected but Not Invested: What BRICS and ASEAN Reveal About FDI

Digital connectivity has become shorthand for economic readiness across emerging markets, but the link between better connectivity and stronger foreign investment is far less automatic than that narrative suggests. New evidence from BRICS and ASEAN economies shows that internet expansion does not consistently translate into higher FDI, and that governance only alters the relationship under specific institutional and statistical conditions.

Published in Economies, "Digital Connectivity and Foreign Direct Investment in BRICS and ASEAN-5: The Moderating Role of Institutional Quality," by Polyxeni Kechagia of the International Hellenic University, examines the period from 2003 to 2023 to test whether institutions strengthen the investment value of digital connectivity. The study compares six governance dimensions and finds that the answer differs sharply across country groups, model specifications and measures of foreign investment.

Its most revealing conclusion is not that connectivity or institutions fail to matter, but that neither behaves like a reliable standalone investment lever. In BRICS, rule of law and voice and accountability retain some statistical support as conditions that shape the connectivity-FDI relationship, while ASEAN-5 shows no comparable institutional moderation.

Connectivity is not automatically an investment advantage

The study is grounded in the idea that digital connectivity can reduce information, communication and transaction costs for multinational enterprises. Better internet access can make it easier to coordinate cross-border operations, communicate with suppliers and customers, and participate in digitally enabled markets.

Still, the empirical results do not produce the straightforward positive relationship that policymakers might expect. Across the baseline BRICS models, digital connectivity carries negative coefficients and becomes statistically significant in some specifications. ASEAN-5 shows a similar negative pattern, again with significance in several models.

The authors do not interpret these findings as proof that expanding internet access discourages foreign investment. The analysis identifies associations rather than causal effects, and the direction of the relationship changes when the study uses a different measure of FDI. Under an alternative Inverse Hyperbolic Sine transformation of FDI inflows, digital connectivity becomes positive and statistically significant in BRICS.

The reversal is important because it exposes how sensitive the digital connectivity-FDI relationship is to measurement. A country can become more connected without necessarily becoming more attractive to foreign investors in a predictable or uniform way. Internet penetration captures access, but it does not capture the broader commercial ecosystem needed to turn connectivity into a location advantage.

For governments, this complicates strategies that equate higher connectivity with greater investment readiness. Digital access may be part of the investment proposition, but the study suggests it cannot be treated as a sufficient condition for attracting foreign capital.

Governance matters, but not as a single institutional force

The research breaks institutional quality into six separate dimensions rather than relying on a single governance score. The study examines voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption.

The baseline models show that none of these institutional indicators has a statistically significant standalone relationship with FDI in either BRICS or ASEAN-5. This does not mean institutions are irrelevant. Instead, it suggests their role may emerge through interactions with other economic conditions rather than through a simple direct effect.

In BRICS, the interaction between digital connectivity and three institutional dimensions produces stronger results. Rule of law, regulatory quality and voice and accountability are positively and significantly associated with the connectivity-FDI relationship in the baseline models.

The marginal-effects analysis adds an important layer to that result. The estimated relationship between digital connectivity and FDI remains negative across the observed institutional range, but it becomes progressively less negative as rule of law, voice and accountability, and regulatory quality improve.

This suggests that institutional quality may help reduce some of the disadvantages or frictions associated with digital expansion, even if it does not transform connectivity into an automatic investment magnet. The effect, however, is not uniform across all governance dimensions.

ASEAN-5 produces no equivalent moderation pattern. None of the interaction terms between digital connectivity and the six institutional indicators reaches statistical significance in the baseline models. Even here, the study cautions against overstating the difference between the two blocs, because formal cross-group tests generally do not confirm that the interaction effects are systematically stronger in BRICS.

Robustness checks weaken the case for a universal governance effect

The initial BRICS findings could easily be read as evidence that stronger rule of law, regulatory quality and voice and accountability help economies extract more investment value from digital connectivity. Subsequent robustness checks make that interpretation less secure.

After adjusting for multiple hypothesis testing, voice and accountability retains stronger statistical support, while rule of law and regulatory quality survive only at weaker levels. A Wild Cluster Bootstrap, introduced because both country groups contain only five cross-sectional units, preserves the significance of voice and accountability and rule of law but not regulatory quality.

The alternative FDI specification produces an even larger qualification. When the study changes the measurement of FDI, all institutional interaction terms lose statistical significance. The evidence for governance moderation is therefore highly sensitive to how foreign investment is defined and how statistical inference is conducted.

The expanded ASEAN-6 sensitivity test also reveals instability in some coefficients. Adding Vietnam does not generate significant institutional interaction effects, while other relationships, including inflation and digital connectivity, change in statistical significance.

The study also tests lagged explanatory variables to examine whether some results persist when timing is altered. Several BRICS interaction effects remain under the lagged specification, but the authors stress that this does not eliminate concerns about reverse causality or endogeneity.

Taken together, these exercises undermine any claim that stronger institutions systematically convert digital connectivity into higher FDI. The evidence is better understood as conditional and dimension-specific, with results that depend on the sample, model, investment measure and inferential method.

Investment strategy needs more than broadband and governance rankings

Governments seeking foreign investment cannot assume that increasing internet access will automatically improve investment attractiveness, nor can they assume that improvements in governance will generate the same effect across countries and institutional dimensions.

Investment policy may therefore need to move beyond headline indicators. Internet penetration reveals how widely connectivity has spread through a population, but it does not capture enterprise digitalisation, e-government capability, digital finance, platform development, infrastructure quality or how firms integrate technology into production and trade.

The same logic applies to governance. Institutional quality is not a single variable with one predictable effect. Legal reliability, regulation, administrative effectiveness, political stability and accountability may interact differently with investment depending on the economic structure of the host country.

The study also raises questions about the composition of FDI itself. Its analysis uses aggregate inflows rather than distinguishing between market-seeking, efficiency-seeking, resource-seeking or strategic asset-seeking investment. Different forms of capital may respond very differently to connectivity and institutional conditions.

A resource-oriented investment may depend heavily on natural endowments, while a digital services investment may place greater weight on connectivity, legal certainty and technological infrastructure. Aggregating those investment motives into one measure can obscure the mechanisms policymakers actually need to understand.

The research is also constrained by its geographic scope. The analysis covers BRICS and ASEAN-5, with ASEAN-6 used as a sensitivity check, so its conclusions should not be generalized automatically to other developing or advanced economies.

Its digital measure is equally narrow. Internet use provides a consistent indicator across countries and years, but it represents only one dimension of digital transformation. The authors therefore identify broader digitalisation indices, larger country samples and alternative econometric approaches as important directions for further research.