Russian Journal of Economics 6 (2020) 162–176

DOI 10.32609/j.ruje.6.48556
Publication date: 30 June 2020
www.rujec.org

The determinants of foreign direct investment in

Central Asian region: A case study of
Tajikistan, Kazakhstan, Kyrgyzstan,
Turkmenistan and Uzbekistan
(A quantitative analysis using GMM)
Sharofiddin Ashurov*, Anwar Hasan Abdullah Othman,
Romzie Bin Rosman, Razali Bin Haron
Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia

Abstract

Foreign direct investment (FDI) is viewed as one of the most crucial forms of capital
inflows and significant drivers of economic growth in numerous countries. In particular,
developing countries, emerging economies and countries engaged in the process of
development have recognized the crucial importance of FDI as a critical contributor to
their economic progress and increasing economic opportunities. The following research
investigated and identified the determinants of FDI in the Central Asian countries, specifi-
cally Tajikistan, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan, between 2000
and 2017. The  methodology employed in the  first part included comparative analysis
of the foreign investment trends and gross domestic product (GDP), as well as an en-
dogenous growth model. The  result showed that five variables are robustly significant
of FDI determinants: FDI (previous year), GDP, labor force, trade openness and tax.
Additionally, this paper demonstrates that among the most significant FDI contributors
are China, Russia and Japan as well as European countries because of the economic
opportunities available; however, the USA is considered by Central Asian countries to
offer the most opportunities for security control considerations rather than economic op-
portunities. Furthermore, the results suggest that the authorities in the Central Asia region
should enhance the stability of their economic growth, labor force, trade openness and tax
regulations to attract more FDI to the region.

Keywords: foreign direct investment, FDI, economic growth, determinants of FDI, GDP, Central
Asian countries.
JEL classification: C02, C23, E22, F21.

* Corresponding author, E-mail address: [email protected]

© 2020 Non-profit partnership “Voprosy Ekonomiki”. This is an open access article distributed under the terms
of the Attribution-NonCommercial-NoDerivatives 4.0 (CC BY-NC-ND 4.0).
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 163

1. Introduction

Since the early 1990s and following the dissolution of the former Soviet Union,

the  economic situation in the  five Central Asian (CA) countries — Tajikistan,
Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan, also known as members
of the Commonwealth of Independent States (CIS),1 has been very unstable.
But from the turn of the 21st century there have been very significant improve-
ments in the economic infrastructure of these countries. Since the beginning
of the  new millennium, the  countries in the  CA region have made efforts to
achieve and maintain macroeconomic stability, raise living standards, provide
more employment and education opportunities, and worked towards enhancing
economic growth (Roaf et al., 2014). In this regard there is general consensus
among economists that foreign direct investment (FDI) is statistically important
in influencing the progress and development of both developing and transition
economies (Acaravci and Ozturk, 2012; Mehic et al., 2013). Developments in
these recently-independent countries are still ongoing and their governments are
doing their best to attract FDI so as to be able to accelerate their development
process (Akhmetzaki and Mukhamediyev, 2017). Meanwhile, the economic
transition of the five independent countries in the CA region has attracted many
international financial institutions and advanced countries such as Russia, China,
USA, Japan and some European countries to invest and help drive developmental
outcomes in the region (Hill, 2002). Furthermore, according to Hill (2002), China
believes that stability and development in the region would make it a significant
market for its goods and services and also a valuable source of raw materials
as well as a  link to the  Middle Eastern countries (Halper, 2010; Gereffi and
Frederick, 2010; Minghao, 2016).
For a few decades now, FDI has been flowing to various developed economies
but, in recent years, developing and transition economies have seen a dramatic
increase in their share of FDI flows (UNCTAD, 2006). In 2010, developing and
transition economies became the recipients of more than 50% of total global
FDIs for the first time (UNCTAD, 2011). It is obvious that FDIs contribute very
significantly to expediting growth, generating employment opportunities, leading
to trade openness, and enhancing national income growth among many other
positive outcomes (Bevan and Estrin, 2000; Shaari et at., 2012). It is universally
recognized that FDIs are one of the  key sources of capital inflow and crucial
factors of driving economic growth in various economies. Consequently, they
are competing for FDI by making major changes in their economic policies
(Demirhan and Masca, 2008).
The process of creating and promoting an attractive environment for FDI
is complex and differs from one country to another. In fact, a number of these
countries, because of the size of their economies, possess natural advantages or
other factors which make them more attractive for FDIs (Kolstad and Wiig, 2012;
Asongu et al., 2018). Various studies have discussed FDI in terms of the deter-
minants, such as economic growth, security of employment, exports, knowledge

1
The Commonwealth of Independent States (CIS) was established following the collapse of the Soviet Union
in 1991. Initially it comprised 10 former Soviet republics: Armenia, Belarus, Kazakhstan, Kyrgyzstan,
Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
164 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176

capital, location, technology transfer and other factors (Moran, 2006; Hermes and
Lensink, 2003; Saggi, 2002; Chen et al., 2012; Ho and Rashid, 2011; Osano and
Koine, 2016). However, the current research explored the determinants of FDI
in Central Asian countries using panel quantile regression to determine the most
advanced countries with investments in the Central Asian region. Previous litera-
ture showed that most past studies focused more on either the adoption of a micro
approach using company data (Alfaro, 2017; Damijan et al., 2013; Ghali and
Rezgui, 2011) or a macro approach utilizing country data (ADB Institute, 2014;
Fernandes and Paunov, 2011). This study therefore utilized the macro approach
to examine the determinants of FDI in the five CA countries as relevant data are
currently available. Furthermore, the econometric approach of this study utilized
the panel quantile model and considered the heterogenous nature of the nations
being studied to explain how differences in relations have resulted in FDI going
to various countries in Central Asia.
In the following section we will discuss the historical view of investment and
economic flows into CA countries while the CIS region was undergoing a transi-
tion from socialism to capitalism. We will also be looking at those countries that
expressed an interest in investing in the region. Then we will do a critical review
about the variables that are going to be used in this paper. Hence the section
composed of methodology is going to discuss the study that applies the GMM
system as suggested by Arellano and Bover (1995) and Blundell and Bond (1998),
building on Arellano and Bond (1991). Then we will analyse the results and offer
a conclusion for the paper.

2. Historical investment and economic flow background in Central Asian

countries

After the USSR was dissolved in 1991, the countries under examination

experienced various levels of recession that are only now bottoming out due to
efforts made in economic restructuring and increasing inflows of FDI. Besides
Russia, their long-time economic and political ally, several other nations includ-
ing Turkey, Iran, China, Pakistan, India and the United States have had their eyes
on these CA countries mainly because of their abundance of natural resources
such as crude oil and natural gas (Haron-Feiertag, 2010; Gur, 2014). For instance,
according to the ICS (2013), in particular, China has kept close watch on events
in the CA region with an eye on the energy and oil politics via the Shanghai
Cooperation Organization; and to this end, China’s plans were boosted by its
enhanced ­authority over Tibet and Xinjiang which has bordered Afghanistan,
Kazakhstan, Kyrgyzstan, Tajikistan, India and Pakistan since the early 1950s
(Schneider, 2008). Controlling these regions enables China to ensure international
trade via its new western neighborhood highways (Kort, 2004; Cuttler, 2009;
Doytch and Eren, 2012; Gabuev, 2015; Tiezzi, 2015).
Furthermore, the CA region is viewed as a strategic region for regional and
international superpowers because of its strategic location and untapped natural
wealth. Besides, the region’s significance to the US is not for fortification against
the region’s powerful nations like Russia, China, or even Iran. There is also no
necessity for the protection of US business interests in relation to the Caspian
energy resources (Cooley, 2015). In fact, the main American concern is with
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 165

security, to prevent the  “Afghanicization” of the  CA region and the  spread of

extremist ideologies to various countries that could destabilize all the connected
regions and attack the US (Nichol, 2010, pp. 2, 43–45). On the other hand,
Russia’s reason for being interested in the region is related to the CA energy de-
velopment, and a new emphasis on gas following the expansion of European and
Asian markets. Collectively, Russia, Iran, and the CA nations possess in excess
of 50% of the world’s gas reserves. The mobility of gas is limited compared to
oil and is meant more for regional rather than world markets. Therefore, playing
a leading role in the CA region, in order to produce and export gas, is of crucial
importance to Russia’s energy industry (Bradshaw, 2010).
In this regard, since the 1990s, Central Asian countries have experienced
the negative impact of economic upheavals that other former communist countries­
undergoing transition have faced, such as hyperinflation, banking and monetary
default and the collapse of Soviet-type welfare systems. The focus of these
countries is therefore to attract more FDIs to facilitate the transition process, as
the countries struggled to transform major and significant enterprises into more
productive ones and contribute positively to their national economies and in-
vestment cycle. Furthermore, the recently-independent countries in Central Asia
are viewed as great opportunities for investment and FDI flow, albeit in varying
degrees according to the country concerned. In this respect, however, the World
Bank (2017) highlighted the fact that there are some potential investment sectors
common to all five countries such as agriculture and food exports with consider-
able mineral resources. However, some potential investments are available only
in particular countries — such as a  regional hub of logistics, with Kazakhstan
offering the fourth-largest gas reserves together with Turkmenistan, and power
export with regard to Kyrgyzstan and Tajikistan. However, in 2017, Uzbekistan
started a major political and economic reform which focuses mainly on the digi-
tal agenda, and an entrepreneurial population (Gulamov and Shermukhamedov,
2018; Raimondi, 2019; Poelhekke and Pleog, 2013).
Collectively, the Asian region is the biggest FDI host recipient globally, with
FDI inflows totalling $541  billion in 2015, the  main reason being extensive
investment liberalization policies of the developing and transition economies in
Asia. For example, in 2015, 85% of investment policy measures were considered
as favorable for foreign firms (UNCTAD, 2016). Some details on the dynamics of
FDI inflows in the CA region from 2000–2013 are provided below.
The  dynamic forces of FDI inflows in the  CA countries from 2000–2013
were characterized by three distinct features. Firstly, the CA countries demon-
strated an unequal pattern as FDI recipients. For instance, during the study time
frame, Kazakhstan’s FDI inflows rose sharply from about $2 billion to exceed
$10  billion­. In contrast, Tajikistan and Kyrgyzstan only managed to receive
more modest levels of FDI inflows that have hovered between $1 million and
$2 billion­. Kazakhstan and Turkmenistan have proved to be comparatively unat-
tractive countries for global FDI inflows.
In light of the above, it does appear that these five members of the CIS in general­
are relatively undiscovered by investors, with perhaps the exception of Kazakhstan.
The reason could be the collapse of communism in the former socialist­countries
which received practically no FDI because of their closed political regimes.
However, from the time of Mikhail Gorbachev’s economic transformation initiative­
166 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176

(perestroika) and Boris Yeltsin’s aggressively-oriented policies to privatize­

the economy and open it up to FDI, many investors have shown an interest­in
investing in the CIS countries following the change of the closed policy (Parletun,
2008). Although after 1989, there were signs of foreign­ capital inflow, but invest-
ments were modest. With FDI activity increasing worldwide, foreign investments
into Eastern Europe and the CIS countries have risen dramatically, and countries
in these regions have become significant FDI hosts (Bandelj, 2002). Kudina and
Jakubiak (2012) mention that this region is now the second fastest growing one
in percentage terms, of FDI growth. In this respect, the track record of foreign
investment in CA countries suggests the urgency of strengthening governance,
transparency, stability and the just implementation of the rule of law in the region
to attract even more international investors (Paswan, 2013; Yildirim and Tosuner,
2014; UNCTAD, 2018).

3. Literature review

This paper focuses on selected CA countries — the  five members of

the CIS — which, due to their strategic location, are developing trade openness, in
an effort to attract foreign investment crucially needed to achieve sustainable eco-
nomic growth. Another justification for selecting the CA countries is the political
aspect, as these countries were pioneers among post-socialist states in opting for
independence, and starting with a focus on the economic transformation provides
an insight into the achievements of these countries in attracting FDIs.
In this regard, there is ample evidence in the literature by various scholars
on the  determinants of FDI from different perspectives in different countries.
The availability of the local labor force has been studied as a determinant of FDI
by Mayom (2015), who explored the impact of foreign investment on the labor
market measures employing panel data of 48 sub-Saharan African countries from
1991 to 2009. The outcome showed that foreign direct investment positively and
significantly affected employment, suggesting that higher FDI inflow resulted
in increased employment. Besides, according to Phung (2016), availability of
labor force is among the determinants that make developing countries more
attractive as an end point for FDI. In addition, labor cost has been determined
to be positively associated with FDI in Wheeler and Mody (1992) and Feenstra
and Hanson (1997), but in contrast the impact is negative in Culem (1988),
Glickman and Woodward (1988), and insignificant in Ondrich and Wasylenko
(1993). However, the different results may imply that the significance of these
FDI determinants may be dependent on different related factors from one ­country
to another.
On the other hand, Mottaleb (2007), using panel data from 60 low-income
and lower-middle income economies, reported that nations with greater GDP and
more rapid GDP successfully attracted FDI. According to Cahyono (2013), who
conducted a study on Indonesia, a rise in GDP resulting in an expansion of market
size was the major influence in attracting FDI inflow into Indonesia. Likewise,
Çeviş and Çamurdan (2007) studied developing economies in Latin America,
Asia, and Eastern Europe, using a panel data set of 17 developing countries and
transition economies from 1989 to 2006, and reported that GDP was among
the main determinants of FDI being attracted to transition regions.
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 167

From the literature on FDI factors, trade openness is most frequently measured

by the share of trade in the GDP. Hence, when trade volumes and FDI are positively
related, the implication is that countries planning on attracting a greater level of
FDI need to increase trade according to Asiedu (2013). There are many studies
that have conducted analyses of trade as an important determinant of FDI being
drawn to host countries such as the one by Ojong et al. (2015), who investigated
macroeconomic determinants of FDI in Nigeria. Relative to trade, exports and
imports have an association with FDI. In addition, Feridun and Sissoko (2011)
arrived at the  conclusion that in Singapore trade policy affected FDI inflows,
and Nasir (2016) reported a similar result in the Malaysian context. On the other
hand, liberalizing trade could have an uncertain impact on FDI. In fact, trade
restrictions may enhance inflows from market-seeking investors, whose intention
is serving the local market as a way of solving the trade restriction issue and
in the case of open trade, they would merely focus on exporting their goods.
However, trade barriers will put off vertical type and export-oriented investors,
as vertical type investors will face problems with purchasing intermediate goods
and export-oriented investors will have a problem exporting their products to
foreign markets (Shukurov et al., 2016).
Although a government’s budget deficit can be offset using profit taxes from
transnational corporations, in most cases the level of tax imposed deters inves-
tors and negatively affects FDI flow to the host country. Numerous researchers
have studied the impact of tax rates on FDI flow and drawn different conclusions
based on countries concerned and different situations. Nevertheless, there are
indications that small enterprises in general respond more readily to tax incen-
tives compared to larger companies (Wells et al., 2001). Research to determine if
generous tax policies can compensate for flaws in the commercial environment
and attract FDIs has resulted in a conclusion that tax exemptions are able to
affect some of the  investors some of the  time, but are in general of little sig-
nificance (Morisset and Pirnia, 2000). As quoted by Morisset and Pirnia (2000),
“tax exemption is like a dessert; it is good to have, but it does not help very much
if the meal is not there.” The efficiency of these policy variables in determining
FDI has sparked much discourse (Zee et al., 2002). Furthermore, the impacts
of tax policy on investment decisions enter the investment function as the user
cost of capital. Changes in tax policy influence investment by way of its ef-
fect on user cost of capital (OECD, 2006). Similarly, the taxes and incentives
may also have a significant impact (Donnelly, 2014). Hanson and Olofsdotter
(2010) computed tax elasticity in the EU and found it to be approximately equal
to 3 and there were differences in the determinants of FDI between new and
old member states. However, taxes are of little significance in terms of FDI in
the old member states.
The impact of debt has been studied by many researchers who have reported
different results according to the nature of debt and its conditions. For example,
Wamboye (2012) made an evaluation of the effect of public external debt on
long term economic growth of 40 least developed countries and the  findings
suggested that high external debt decreased economic growth, no matter what
type of debt it is. Similarly, Oke and Sulaiman (2012) investigated the effect of
external debt on the level of economic growth and the level of investment in
Nigeria from 1980–2008. In analyzing the outcomes, they found that external
168 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176

debt, economic growth and investment were positively related. Their outcomes
showed that external debt ratio of GDP stimulated short term growth but led
to a decline in private investment which is an indicator of real and perceptible
development. Some parties doubt whether foreign capital, especially foreign
debt, can provide long term benefits to the  recipient country. Nevertheless,
a  clear distinction exists between foreign debt and FDI as foreign financing
in addition to domestic savings. FDI can complement domestic financial re-
sources and enable a country to effectively implement its development program
and improve the welfare of its citizens (Osinubi and Amaghionyeodiwe, 2010).
External debt and FDI are macroeconomic variables that can raise the rate of
capital formation for economic growth in addition to domestic savings and they
are utilized to help finance budget deficit and accelerate economic activity.
Therefore, both domestic and foreign financing must be managed to increase
the growth of the economy. Hence, the originality of this research is the use of
the error correction model in comparing the impact of funding sources on CA
countries’ FDI determinants (Laldjebaev, 2017).
In empirical terms, the importance of the features involved in attracting FDI
to these countries has been extensively explored. Researchers have employed
various methodologies. A  number of investigations have utilized micro firm
level data to obtain greater insight into the reasons that influence FDI decisions.
Other researchers have focused on bilateral FDI flows between countries, usually
employing a gravity type model from the trade literature. Lastly, there are some
studies which focused on total FDI inflows into a country or a panel of countries.
The diversity of methodologies reflects the availability of data and the research
focus while at the same time indicates the absence of a general agreement on how
to model FDI activity.

4. Methodology

This study investigates the FDI determinants in CA countries (Tajikistan,

Uzbekistan, Kazakhstan, Kyrgyzstan and Turkmenistan) using a panel data set
analysis. These countries were selected due to their many similarities such as
demographics, stages of growth, and geographic location. The annual data of
the study covering the period from 1990–2017 were obtained from the World
Bank database, whereas the FDI is applied as a dependent variable (DV) while
the GDP, total dept service, labor force, trade openness and tax collected as
independent variables (IVs). For this reason, the  regression equation thus is
expressed as:

FDIi,t = a + β1 FDIi,t–1+ β2 GDPi,t + β3 TDSi,t + β4 TOPENi,t +

+ β5 LBFi,t +β6 TAXi,t + ϵi,t,

where: FDI — foreign direct investment; GDP — gross domestic product;

TDS — total­debt services (the sum of principal repayments and interest actually
paid in currency, goods, or services on long-term debt; interest paid on short-
term debt, and repayments); TOPEN — trade openness (measured in the  form
of exports and imports in relation to the country’s GDP); LBF — labor force
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 169

(comprising­people who provide workers to produce goods and services over

a particular frame); TAX — total tax rate (which is an indicator of the  amount
of taxes and mandatory contributions to be paid by businesses). Furthermore,
we utilized i to index the countries and t to index time and the justification for
the inclusion of these variables is elucidated next.
We start with pre-tests for our data such as descriptive statistics, unit roots in
various ways including the Augmented Dickey–Fuller (ADF) and Philips–Peron
(PP), and standard panel models of fixed and random effects and pooled OLS.
There would be bias in the estimated results since the error term has a correla-
tion with the explanatory variables. Thus, the study applies the GMM system as
suggested by Arellano and Bover (1995) and Blundell and Bond (1998), building
on Arellano and Bond (1991). The GMM was carried out to verify for potential
dynamic impacts in the proposed model regressions. In other words, we examined
whether FDI time series data are correlated with past information. Thus, the GMM
system is applied as we found the  lagged dependent variable is significantly
presented and the problem of heteroscedasticity is eliminated. Hence, the GMM
estimator shows greater efficiency than the standard panel models of fixed and
random effects or pooled OLS estimator. Additionally, the study applied Sargan
test to check if the one-step difference GMM is valid or not. Finally, the study
conducted a diagnostic test check for the homoscedasticity as recommended by
(Pagan and Hall 1983; Sargan, 1988).

5. Results

The analysis was conducted using descriptive statistics to determine the statis-

tics of every variable involved which were FDI, GDP (in U.S. dollars), TDS, LBF,
TOPEN, and TAX. Then, it also encompassed the mean of the data of the variable
including the standard deviation square root of the mean. In addition, it also had
the lowest and highest values of the data that is being run.
The descriptive statistics and correlation matrix of variables utilized in this
study are presented in Tables 1 and 2. The highest average result which is 11.238
belonged to TAX in all countries in the region and the lowest average which is
4.541 belonged to TOPEN with regard to FDI overall panel during the study pe-
riod. The skewness and kurtosis results showed that these were normally distrib-
uted. However, the result indicated that TAX was very volatile during the study
period. Lastly, the correlation matrix revealed that all IVs and FDI net inflows as
a DV were positively correlated.

Table 1
Descriptive statistics (N = 85).
  LFDI GDP LLBF TDS LTOPEN TAX
Mean 19.655 7.066 15.266 7.666 4.575 11.238
Median 19.851 7.400 14.820 5.625 4.541 8.000
Sd 4.228 3.311 0.729 8.041 0.304 7.430
Min –14.674 –0.472 14.416 0.036 3.966 1.100
Max 23.546 14.700 16.526 30.677 5.297 24.700
Skewness –6.363 –0.234 0.450 1.105 0.152 0.333
Kurtosis 52.487 2.981 1.445 3.443 2.290 1.811
Source: Authors calculations.
170 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176

Table 2
Correlation matrix results.
 Variable GDP LLBF TDS LTOPEN TAX
GDP 1
LLBF 0.062 1
TDS –0.136 0.1129 1
LTOPEN 0.1024 –0.502 –0.187 1
TAX 0.2149 0.0331 0.6186 –0.2125 1
Source: Authors calculations.

Table 3
Multicollinearity test results.
Variable VIF 1/VIF
TAX 2.04 0.490939
TDS 1.90 0.527291
LTOPEN 1.48 0.674262
LLBF 1.42 0.705170
GDP 1.27 0.786128
Source: Authors calculations.

5.1. Correlation of variables in the study

Tables 2 and 3 show the correlation among the variables comprised the DV and

IVs that are analyzed in the study. The presence of high correlation among the IVs
causes the issue of multi-collinearity in the estimation. Therefore, correlation
among IVs must be low to address the issue of multi-collinearity. Variance infla-
tionary index (VIF) is computed for the purpose of supporting the correlation test
for the pooled regression model. According to Table 3, all VIFs of our regression
fall well within the threshold limit recommended by Chatterjee and Price (1991),
thus showing that there is no multi-collinearity. The result in Table 2 below shows
no high correlation among the variables with values of below­0.5 except for
a slightly high correlation between TAX and TDS with a score of 0.6186, which
is above 0.05. Thus, the range value of the correlation 0.21 to 0.062 is considered
a good correlation between the variables.

5.2. Random and fixed effects method

The  random and fixed effects method (RFEM) assumes that the  differences
across entities are random and have no correlation with the  predictor or IVs
in the  model. The  benefit of the  RFEM is its ability to include time invariant
variables. This method is employed to investigate how the predictor and outcome
variables are related. Individual entities have their own individual characteristic
that may or may not affect the opinion.
In this study, one-step GMM rather than two-step GMM is used. The obvious­
difference between these two estimators is that the  two-step estimator uses
the weighting matrix. Based on it in the criterion function, GMM can be made robust­
to heteroskedasticity and/or autocorrelation of unknown form. The one-step GMM
estimator is characterized with standard errors that are not only asymptotically robust­
to heteroskedasticity but also have been revealed to offer greater reliability for finite
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 171

Table 4
Determinants of FDI using one-step difference GMM.

Cons 19.1364500***
L1.LFDI 0.0301058***
GDP 0.0333726**
LLBF 1.1736930***
TDS 0.0291790
LTOPEN 0.5192397***
TAX 0.0386577***
Sargan Test
χ 81.64477
p-value 0.05780
AR(1) –1.93610
p-value 0.05290
AR(2) 0.41143
p-value 0.68080
N 80
T 16
Note: Considering FDI, GDP, trade openness, labor force, total debts and tax; * p < 0.1; ** p < 0.05; *** p < 0.01.
Source: Authors calculations.

sample inference. Further, Roodman (2009) reported that there is downward bias in
the computed standard errors in two-step results compared to the one-step. The dif-
ference between the one-step and two-step specifications, however, is not very large.
Note that the significance of variables declines if we use two-step dif­ferences instead
of one-step and this is not preferred, but the previous and current tests show that
heteroscedasticity and time dummies need to be accounted for.
Based on the findings in Table 4, it is revealed that there is a long-term positive
relationship between FDI growth and GDP growth rate. This relationship is sig-
nificantly positive. From Table 4, the estimated coefficients, which are 0.0301058
and 0.0333726, correspondigly, indicate that when GDP growth rate increases
by 1%, FDI will be increased by 3%. This also means if the FDI flow is $1 mil-
lion, GDP would be increased by $301,058. This result is in line with the find-
ings of previous studies by Dabrowski (2019) and Arazmuradov (2011), that in
most cases GDP growth will attract FDI. Hence, all CA countries must stabilize
their GDP growth to attract continuous FDI to the region for the betterment of
the investment status. Furthermore, the result demonstrated in Table 4 shows
that there is a positive relationship between LLBF and FDI — labor force value
is 1.173693 and FDI is 0.0301058. This result concurs with the findings reported
by Estrin (2017) that FDI levels are high for Central and Eastern Europe and for
some resource-rich transition countries such as Russia and some of the Central
Asian countries, which brought primarily significant benefits such as employment
opportunities for the populations of the host countries. Besides that, the result also
reveals that there is a positive impact between TDS and FDI. However, economic
theory indicates that high debt service is harmful to an economy since it results in
higher taxes which discourage foreign investors (Mugambi and Murunga, 2017).
Empirical investigation into this area has uncovered contradictory findings, thus
suggesting that in the long run, too much borrowing in the form of FDI is not
favorable for some countries. Therefore, this study recommends that CA country
governments should not rely heavily on external debt which leads to high external
debt servicing. They should instead focus on reducing the level of corruption and
172 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176

eliminating irrelevant expenditure to limit external debt servicing and attract FDI
inflows (Doytch and Eren, 2012; Cooley and Sharman, 2015).
Table 4 shows that the trade openness (LTOPEN) value is 0.5192397 and has
a positive relationship with FDI value (0.0301058). Furthermore, despite the fact
that the coefficient of LTOPEN shows the expected positive value, it is not statisti-
cally significant. Therefore, this study suggests that trade openness has a positive
effect to some extent but it is not an important factor that influences FDI inflows in
the region. This is in line with the study by Sattarov (2012) regarding the determi-
nants of FDI in transition economies as indicated in a case study of Kazakhstan and
Uzbekistan. Additionally, the result reveales that there is a positive relationship be-
tween TAX with value of 0.0386577 and FDI (0.0301058), which means the level
of taxes is considered one of the important factors in attracting FDI to the region.
Tax incentives are more effective in attracting efficiency-seeking FDIs motivated
by lower production costs than for other types of investment. Nevertheless, many
developing countries offer incentives to all investors, including those motivated by
access to natural resources or the domestic market, who are normally less likely
to respond to incentives (Andersen et al., 2017). This is in line with the study
by OECD (2013), in which incentives are in place to attract foreign investors to
Central Asia. These include total or partial exemptions from a range of taxes, du-
ties, levies and charges for the whole period of operation in Free Economic Zones
(FEZs). The export of goods manufactured in the FEZ, the import of goods into
the FEZ and the re-export of goods are totally exempt from any tax duties, quotas
or licensing. In the case of Tajikistan, the Investment Promotion Agency, Tajinvest
or the Chamber of Commerce and Industry should be involved in revising the tax
rate development in order to provide a tax intensive environment for FDI flow.

6. Conclusion

This study sets out to reorganize the determinants of FDI flows in several CIS
countries and identify the FDI contributing countries, improving on the methodo­
logies that have been used in previous research and making a key contribution
to the application topic by taking control of all possible endogeneity, which, to
the authors’ knowledge, has not been done before in this particular region. Two
types of findings are of interest. The first is with regard to the methodology. This
study has found that carefully specified GMM estimators provide a much more
accurate means for such a macroeconomic estimation than OLS, FE, and RE
estimators that have been commonly used in the literature. The second is with
regard to the empirical application and outcome. This study has found that five
variables are robustly significant — FDI (previous year), GDP (in USD), LBF,
TOPEN, and TAX. However, the result shows that TDS does not significantly
affect the attraction of FDI to the CA countries.
Key policy implications from this study are as follows. Governments of CA
countries that wish to attract more FDI should focus on their institutions. Primarily,
they must ensure: effective enforcement of taxation, labor force market, and
the improvement of trade openness in terms of transparency, flexibility and other
mechanisms that will improve trade openness. Policy makers should also be aware
of enhancing, and continuously keeping GDP on an upward trajectory. This will
make the countries concerned more of a target for FDI.
 S. Ashurov et al. / Russian Journal of Economics 6 (2020) 162−176 173

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Supplementary material
Arellano–Bond dynamic panel-data estimation
Authors: Sharofiddin Ashurov, Anwar Hasan Abdullah Othman, Romzie Bin Rosman,
­Razali Bin Haron
Data type: Table
This dataset is made available under the Open Database License (http://opendatacommons.org/
licenses/odbl/1.0/). The Open Database License (ODbL) is a license agreement intended to
allow­users to freely share, modify, and use this Dataset while maintaining this same freedom
for others, provided that the original source and author(s) are credited.
Link: https://doi.org/10.32609/j.ruje.6.48556.suppl1