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Foreign direct investment and economic growth : evidence from Asean countries

By Hang Minh Le
Topics: History Demography
Year: 2004
OAI identifier: oai:etheses.dur.ac.uk:1742
Provided by: Durham e-Theses

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  1. (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
  2. (1997a),
  3. (a) the amount of capital that FDI bnngs in could be exaggerated due to
  4. 1.1 - Early Analysis about Location of Foreign Firms' Production Though Hymer (1960) did not explicitly address country-specific advantages
  5. 1.1.1 - Obstacles to Economic Growth in
  6. 1.2 - Human Capital and the Impacts of FDI on Economic Growth 1.2.1 - Human Capital and Economic Growth 1.2.1.1 — Theoretical arguments The term "human capital" probably was first introduced by
  7. 1.2 - Production Cost Differential as a Determinant Factor in Choosing a Foreign Location One strand of literature argues that
  8. 1.3
  9. 1" See Section 2
  10. 11 See e.g. UNCTAD (2002) 12 The relation between FDI, exports
  11. 114Fukaska et al (1994) and Hill
  12. 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)
  13. 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
  14. 161Chapter V - Human Capital, Economic Growth and Foreign Direct Investment: Evidence from Four ASEAN countries Introduction The previous
  15. 171 UNCTAD (1992), Chia (1999), ASEAN (2000) 56- Within a mobility-modality framework in and
  16. 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
  17. 2 - The Economies and FDI of ASEAN Countries during 1975-1995 2.1 - The Economies of ASEAN countries The four
  18. (1996). 2 2 1 3 - Competitiveness Milner and
  19. 2 2 2
  20. 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
  21. 2.2.1 - Location Determinants Influencing Business Prospects of Foreign Production 22 11 - Market Size and Growth Market Size A big and prosperous
  22. 2.2.2 - Main Findings of the Studies Table III 1 summarises results of the surveyed studies Papanek (1973), Bornschier (1980) and Rana and
  23. 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
  24. 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
  25. 2.4.1 - The United Kingdom On a national level, location
  26. 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
  27. 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.
  28. 21 See Lucas (1988) and Romer (1987) for further discussion about the role of human capital in economic growth.
  29. 23 Chia (1999) 24 Data from World Bank (2000) 25 It should be noted here that the impressive trade
  30. 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).
  31. 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.
  32. 25 transition economies
  33. 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
  34. 3.1 - Does FDI Improve the Overall Productivity Level of the Country? As multinational corporations are widely regarded as the source of advanced technology
  35. 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
  36. 3.2.3 - Simultaneous-Equation Estimation for Panel Data The empirical work is conducted with
  37. 32 Cushman (1985) 33 Smarzynska and Wei (2000) 34 Blair (1987), Heitger
  38. 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%
  39. 4 - Results and Interpretations This
  40. 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
  41. 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
  42. 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.
  43. 73 Dent and Randeson (1996) for Korean firms, Almor and Hirsh (1995) for Israeli firms 74 Hettger and Stehn (1990)
  44. 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
  45. 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.
  46. A study by King
  47. Another major contribution of FDI to
  48. As discussed previously, a key contribution of FDI to economic growth is by enhancing the productive capacity of host country
  49. Availability of Workforce There is no doubt that the availability of a workforce is a determinant of the location decision
  50. (1989). Bagchi-Sen and Wheeler
  51. Balasubramanyam et al. (1996, 1999) find that FDI is
  52. Between 1987 and 1995 manufacturing was the sector that attracted most FDI.
  53. Bozensztein et al. (1998) and
  54. Canada-US Free doi
  55. 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
  56. Chart IV.1 - Real GDP Growth Rates of Developing Countries (1960-1995) 1 • • • 12 • • t • • • • • • • * 4 • ••• • •*
  57. Chart IV.2 - Structure of Four ASEAN Economies (1975-1995) (Share of
  58. Chart IV.4 - Real Export and Real Stock of FDI in the ASEAN
  59. 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.
  60. Coeff. of the Condition under which FDI has a positive effect on
  61. country, particularly
  62. Data at 1996 The ASEAN governments have pursued
  63. Empirical literature has been attempting to analyse outward flows of FDI so as to identify host country factors that a group of investors from
  64. 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
  65. 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
  66. FDI from SMEs is small in bulk but large in terms of affiliates (Buckley, 1989).
  67. FDI, especially export-oriented FDI, could increase the exports
  68. For example, it doi
  69. Goldar and Ishigami (1999)
  70. Growth Growth Comparison Comparison Impacts of FDI impacts of with
  71. 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
  72. Gujarati (1995) for further details on simultaneous
  73. Hermes and Lensink (2000) argue that the development of the domestic financial system is a crucial requirement for FDI to have a positive influence
  74. I Some empirical doi
  75. I° See Davidson and MacKinnon (1993), Greene (2000) for more details on identification.
  76. In developing countries, EOR is designed to encourage exports and includes at least one of the following": 1) Import barriers (tariff and non-tariff)
  77. in the ASEAN countries A number of external challenges in the early and mid 1980s such as the surge of FDI from
  78. In the case of Mexico, Palacios (1995) finds that the electronic multinational corporations operating in Guadalajara, the site where
  79. Insignificant A threshold of human capital andeExport-promoting metal. (1999) strategy Campos and
  80. 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
  81. Lower Lower (1983) and (1965-1973) Insignificant Rana and Dowling 9 Asian developing (+) Significant
  82. 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
  83. of FDI on growth are sigruficantly positive for large groups of developing countries m studies of Blomstrom et al. (1994), Balasubramanyam
  84. 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.
  85. Our findings about the role of FDI and
  86. Results from tables IV.7 and W.8 do not reject the first hypothesis that there exists a two-way relationship between economic growth
  87. See Baltagi (1995) for more details 147the real stock of FDI could make some contribution to host country economic growth.
  88. Since the mid 1980s FDI has moved away
  89. Singapore is the most
  90. So far there have not been many
  91. Table 111.3 - Cross-Country Studies on the Growth Impacts of FDI, published since 1990(11) Study Coeff. of FDI
  92. Table 111.4 summaries evidence from causality analyses. A Granger causal relationship from FDI to
  93. Table IV.! - Key Indicators of four ASEAN economies as of
  94. Table IV.4 - The Singaporean Electronic Industries
  95. Table IV.5 - Exports and Imports by 1301-Promoted Foreign Firms in Thailand (1974-1990) Exports (current million Share of Thai exports Imports
  96. the ASEAN Countries (1960-1998) Population with no
  97. The export boom in 1986-1995 (see Table IV.2) was largely based on the presence of FDI in the export
  98. The Hausman misspecification
  99. The linkage between FDI firms and domestic firms is weak. Having high ratios of exports to total
  100. The proportion of low-skill FDI in Mauritius is 98.1% in 1985-1992 and
  101. The rest of this chapter is structured as follows: Section 1 discusses the theoretical framework and hypotheses of the study. Section 2
  102. 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
  103. 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
  104. The study doi
  105. the two-way relationship between growth and FDI
  106. The work by Hymer (Hymer, 1960) is a pioneering
  107. Theories suggest a variety
  108. This follows an empirical work of Balasubramanyam et al. (1999).
  109. This model is called Least Square Dummy Variables (LSDV). Given that the classical assumptions hold, E(u)
  110. 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
  111. 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,
  112. 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
  113. (1980). Until the early doi
  114. 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

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