(1978) and Gupta and Islam (1983) find the effect of FDI inflows on economic growth positive but usually statistically insigmficant Table 111.1 - Cross-Country Studies
(a) the amount of capital that FDI bnngs in could be exaggerated due to
1.1 - Early Analysis about Location of Foreign Firms' Production Though Hymer (1960) did not explicitly address country-specific advantages
1.1.1 - Obstacles to Economic Growth in
1.2 - Human Capital and the Impacts of FDI on Economic Growth 1.2.1 - Human Capital and Economic Growth 220.127.116.11 — Theoretical arguments The term "human capital" probably was first introduced by
1.2 - Production Cost Differential as a Determinant Factor in Choosing a Foreign Location One strand of literature argues that
1" See Section 2
11 See e.g. UNCTAD (2002) 12 The relation between FDI, exports
114Fukaska et al (1994) and Hill
153Table IV.7 - Economic Growth, FDI and Trade Regime: GROWTH EQUATION Dependent Variable: Growth Rate of Real GDP Per Capita (1) (2) (3) (4) (5) (6) (7) In(Invest/GDP)
161.4.2 — Taxation and Tax Incentives Theories of the effect of taxation on firm location decisions are based on a single hypothesis, i.e the corporate income tax rate has
161Chapter V - Human Capital, Economic Growth and Foreign Direct Investment: Evidence from Four ASEAN countries Introduction The previous
171 UNCTAD (1992), Chia (1999), ASEAN (2000) 56- Within a mobility-modality framework in and
1g Sharpton argues that even big differences in labour productivity can be offset by labour cost differences 19 A similar view is shared by London and Ross (1995) 2° Chia (1999) and Nunnemkamp (1997) 201.7 - Theories on Economic
2 - The Economies and FDI of ASEAN Countries during 1975-1995 2.1 - The Economies of ASEAN countries The four
(1996). 2 2 1 3 - Competitiveness Milner and
2 2 2
2.1.2 - Studies on Inward Flows of FDI Scholars show wide interest in investigating the location determining factors of a specific host country, ranging from a big and
2.2.1 - Location Determinants Influencing Business Prospects of Foreign Production 22 11 - Market Size and Growth Market Size A big and prosperous
2.2.2 - Main Findings of the Studies Table III 1 summarises results of the surveyed studies Papanek (1973), Bornschier (1980) and Rana and
2.2.3 - Overall Business Environment in Host Countries 223 1 - Government Policies toward FDI Dramatic changes in policies toward FDI have been witnessed in the last few decades. Since the 1980s policies to promote export-led FDI and FDI
2.3.2 - Evidence from Cross-country Studies Table III 2 and III 3 summanse the fmdings of studies published since 1990 Almost half of the reviewed studies show that the impacts of FDI on growth are either insignificant or significant
2.4.1 - The United Kingdom On a national level, location
2.5 - Evidence on Competition among Countries to attract FDI The issue of competition among governments to attract FDI has been a controversial issue On
20 Tsai (1994) however finds that the stage of development seems not to affect either the short-term or long-term impacts of FDI on growth.
21 See Lucas (1988) and Romer (1987) for further discussion about the role of human capital in economic growth.
23 Chia (1999) 24 Data from World Bank (2000) 25 It should be noted here that the impressive trade
23 Of course there have been exceptional cases where massive spending on education is inefficient such as in the African countries in the 1960s and 1970s (see Todaro, 1992).
24 Only data on MVA in foreign and domestic sectors are available since the early 1990s for Singapore and Malaysia from the National Manufacturing Census.
25 transition economies
28 For example Wheeler and Mody (1992); Jackson and Markowski (1994); Mody and Srinivasan (1996); Head and Ries (1996); Chen C. L. (1997a, b); Cheng and Kwan (2000), for
3.1 - Does FDI Improve the Overall Productivity Level of the Country? As multinational corporations are widely regarded as the source of advanced technology
3.2.1 - Intra-Industry Spillover Effects There is some evidence that foreign firms raise the technology level of their domestic counterparts in the same industry. It is claimed
3.2.3 - Simultaneous-Equation Estimation for Panel Data The empirical work is conducted with
39 Ibid 40 Tham and Mahani (1999) 41 Data from World Bank (2000) 42 Tham and Mahani (ibid.) 131these industries accounted for 44% of total manufacturing output and 72%
4 - Results and Interpretations This
4.1 - Determinants of Economic Growth Table IV.7 shows the Two-Stage-Least-Square simultaneous-equation fixedeffects panel data estimation of the growth equation. The dependent variable is the growth rate of real GDP per capita. Growth
47 The website of the Ministry of Trade and Industry, Singapore: http://www.mti.gov.sg 133High export ratios reflect the small domestic market of Singapore and also the role of Singapore as an export production platform for foreign affiliates. The lack
6 See e.g. Gujarati (1995) 7 See e.g. Davidson and MacKinnon (1993). 138results. Accordingly, Aln(GDPPC) and Aln(FDIStock) are endogenous variables of the system. All other variables are assumed to be exogenous or predetermined variables8.
73 Dent and Randeson (1996) for Korean firms, Almor and Hirsh (1995) for Israeli firms 74 Hettger and Stehn (1990)
9 A study by Dutt (1997) puts forward this hypothesis. See also Section 1.2.2. 175however dependent upon the trade regime. More particularly, the implementation
9 Davidson and MacKinnon (1993) suggest that in a simultaneous equations model the set of all the exogenous and predetermined variables in the model is the natural choice for instruments.
A study by King
Another major contribution of FDI to
As discussed previously, a key contribution of FDI to economic growth is by enhancing the productive capacity of host country
Availability of Workforce There is no doubt that the availability of a workforce is a determinant of the location decision
(1989). Bagchi-Sen and Wheeler
Balasubramanyam et al. (1996, 1999) find that FDI is
Between 1987 and 1995 manufacturing was the sector that attracted most FDI.
Bozensztein et al. (1998) and
Chapter VI applies the theoretical framework developed in Chapter IV and V to study the determinants and impacts on growth of FDI m Vietnam during 1988-2000. Chapter VII studies the
Chart IV.1 - Real GDP Growth Rates of Developing Countries (1960-1995) 1 • • • 12 • • t • • • • • • • * 4 • ••• • •*
Chart IV.2 - Structure of Four ASEAN Economies (1975-1995) (Share of
Chart IV.4 - Real Export and Real Stock of FDI in the ASEAN
Chart IV.4 shows that in the ASEAN countries (except Indonesia before mid 1980s) increases in exports as the result of EOR implementation are closely associated with increases in the stock of FDI, especially in the post-1986 periods 34.
Coeff. of the Condition under which FDI has a positive effect on
Data at 1996 The ASEAN governments have pursued
Empirical literature has been attempting to analyse outward flows of FDI so as to identify host country factors that a group of investors from
Empirical studies are not more conclusive than theoretical arguments. This review shows that empirical findings about the impacts of FDI on economic growth are indeterminate, inconsistent and heterogeneous across countries. Some
Falling prices of oil products, the main component of Indonesian exports, and the search for cheap-production-cost locations by firms from Japan and East Asian NICs, in the early 1980s were driving
FDI from SMEs is small in bulk but large in terms of affiliates (Buckley, 1989).
FDI, especially export-oriented FDI, could increase the exports
For example, it
Goldar and Ishigami (1999)
Growth Growth Comparison Comparison Impacts of FDI impacts of with
Growth Rate of Market A high rate of growth is hypothesised to play a more important role especially in the case of developing countries with the assertion that a high growth rate may offset the disadvantages of a
Gujarati (1995) for further details on simultaneous
Hermes and Lensink (2000) argue that the development of the domestic financial system is a crucial requirement for FDI to have a positive influence
I Some empirical
I° See Davidson and MacKinnon (1993), Greene (2000) for more details on identification.
In developing countries, EOR is designed to encourage exports and includes at least one of the following": 1) Import barriers (tariff and non-tariff)
in the ASEAN countries A number of external challenges in the early and mid 1980s such as the surge of FDI from
In the case of Mexico, Palacios (1995) finds that the electronic multinational corporations operating in Guadalajara, the site where
Insignificant A threshold of human capital andeExport-promoting metal. (1999) strategy Campos and
JSTOR, ScienceDirect and Web of Science The criterion for studies to be included in this review include 1) the study assesses impacts of FDI on economic growth; 2) the study uses quantitative methods, and
Lower Lower (1983) and (1965-1973) Insignificant Rana and Dowling 9 Asian developing (+) Significant
Nevertheless, we find that more than three fourths of countries in the study of Tsai (1994) also satisfy this threshold requirement in 1970s and 1980s, but
of FDI on growth are sigruficantly positive for large groups of developing countries m studies of Blomstrom et al. (1994), Balasubramanyam
Oliva and Rivera-Batiz (2002) suggest that institution quality is of substantial importance in attracting FDI and in creating a favourable environment for FDI to contribute to growth.
Our findings about the role of FDI and
Results from tables IV.7 and W.8 do not reject the first hypothesis that there exists a two-way relationship between economic growth
See Baltagi (1995) for more details 147the real stock of FDI could make some contribution to host country economic growth.
Since the mid 1980s FDI has moved away
Singapore is the most
So far there have not been many
Table 111.3 - Cross-Country Studies on the Growth Impacts of FDI, published since 1990(11) Study Coeff. of FDI
Table 111.4 summaries evidence from causality analyses. A Granger causal relationship from FDI to
Table IV.! - Key Indicators of four ASEAN economies as of
Table IV.4 - The Singaporean Electronic Industries
Table IV.5 - Exports and Imports by 1301-Promoted Foreign Firms in Thailand (1974-1990) Exports (current million Share of Thai exports Imports
the ASEAN Countries (1960-1998) Population with no
The export boom in 1986-1995 (see Table IV.2) was largely based on the presence of FDI in the export
The Hausman misspecification
The linkage between FDI firms and domestic firms is weak. Having high ratios of exports to total
The proportion of low-skill FDI in Mauritius is 98.1% in 1985-1992 and
The rest of this chapter is structured as follows: Section 1 discusses the theoretical framework and hypotheses of the study. Section 2
The shortcoming of the literature about the impacts of FDI on economic growth is that FDI is largely considered as a homogeneous phenomenon. Consequently the
The strategic linkage theories propose that SMEs look for strategic resources such as market intelligence, technological know-how, and management expertise in host countries to offset their weaknesses
the two-way relationship between growth and FDI
The work by Hymer (Hymer, 1960) is a pioneering
Theories suggest a variety
This follows an empirical work of Balasubramanyam et al. (1999).
This model is called Least Square Dummy Variables (LSDV). Given that the classical assumptions hold, E(u)
This shift took place in Thailand and Indonesia later that decade (Chart IV.2). In Singapore this change did not occur because agriculture always played a minor part
Though the leading role as FDI recipients and the comparative advantages of ASEAN countries are well recognized, there is still a lack of statistical evidence from formal empirical studies The three following studies,
To date there have been very few attempts to review this literature'. The existing reviews normally consider various effects of FDI on host economies, including growth, balance of payments and technology. While dealing
(1980). Until the early
With data on Venezuelan industrial plants, Aitken and Harrison (1999) find that domestic plants in sectors with more foreign ownership are significantly less productive than those in sectors with a smaller foreign