A study on the impact of foreign direct investment on economic development of Lao P.D.R.

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This study seeks to analyse FDI inflows into Laos and to investigate their impact on the economic development of Laos. The desired outcome of this research aims at confirming the linkage between FDI inflows in Laos and the economic development indicators including GNI per capita, financial capital, level of technology, human capital, energy and natural resources, transportation and communication. MINISTRY OF EDUCATION LAOS NATIONAL UNIVERSITY MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMICS UNIVERSITY KHAMSEN SISAVONG A STUDY ON THE IMPACT OF FOREIGN DIRECT  INVESTMENT ON ECONOMIC DEVELOPMENT OF LAO  P.D.R (Development Economics) Code: A dissertation summary submitted to the National Economics  University in fulfillment of requirements for the degree of Doctor of Philosophy in Economics Hanoi, 2014 CHAPTER 1: INTRODUCTION 1.1 Research Background Laos is a small landlocked country with an area of 236,800 square  kilometers. It shares its borders with Vietnam in the East, China in the  North, and Cambodia in the South, Thailand and Myanmar in the west.  Two third of the country is mountainous (northern part) thus its geographic  circumstances constrain both the quality and quantity of agriculture and  cause   difficulties   to   the   development   of   trade,   social   infrastructure   and  transportation   and   communication   links   However,   the   country   has  transformed from a landlocked to a land link and cross road to other parts  of the world In   1986,   the   Lao   government   implemented   the   New   Economic  Mechanism   (NEM)   to   open   the   country   and   provided   incentives   for  developers and investors and moved from a centrally planned economy to a  market oriented economic model FDI inflows in Laos have grown dramatically over the past decade  and have played an important role in the growth of the world economy as  well as the ASEAN Nations. In the developing world, FDI has become the  most stable and largest component of capital flows. As a result, FDI has  become   an   important   alternative   in   the   development   finance   process  (Global Development Finance, 2005.) Laos   is   a   small   and   still   poor   country   Therefore,   the   investment  from foreign countries in terms of FDI is needed because FDI plays an  important role in job creation, economic growth, capital inflow, technology  transfer,   human   resource   development,   and   wealth   in   the   host   country.  Thanks   to   the     economic   reform,   the   number   of   FDI   projects   and   the  income on international trade have increased significantly and have had a  direct impact on national income as well as GDP growth 1.2 Rationale for the Research It has been suggested that Foreign Direct Investment (FDI) inflows  have played an important role in promoting economic growth in developing  countries, especially in the Southeast Asian countries (Nguyen, 2008) Given the importance of FDI especially in developing countries like  Laos,  theoretically   as   well   as   practically,   there   are   however   still  inconclusive   arguments   for   and   against   the   role   of   FDI   inflows   in  enhancing economic development in a country (cf., Nguyen, 2008). It has  still   been   debate   about   whether   FDI   inflows   are   beneficial   or   not   to  economic development, and what governments should do to attract and use  FDI   inflows   effectively   (Kokko   et   al.,   2003;   Longani   &   Razin,   2001;  Masina, 2002; Nguyen, 2008). In addition, it has been suggested that the  relationship between FDI and economic growth may be country and period  specific   (cf.,   Adegbite   &   Ayadi,   2010).  Therefore,   this   study   aims   to  explore   the   impact   of   FDI   inflows   on   some   indicators   of   economic  development in the context of Laos, a developing country in Asia 1.3 Research Objectives and Research Questions This study seeks to analyse FDI inflows into Laos and to investigate  their impact on the economic development of Laos. The desired outcome of  this research aims at confirming the linkage between FDI inflows in Laos  and   the   economic   development   indicators   including   GNI   per   capita,  financial capital, level of technology, human capital, energy and natural  resources, transportation and communication This research tried to answer the questions: 1) What are the relevant  literature   and   the   theoretical   background   on   FDI   and   its   impact   on  economic development? and 2) Does FDI have a significant contribution to  economic development of Laos?  With regard to  the impact  of   FDI   on economic  development,  the  research aims to answer the following specific questions: Does FDI have a significant role on the GNI per capita? Does FDI have a significant role on the Financial Capital? Does FDI have a significant role on the country's level of technology  of Laos? Does FDI have a significant role on Human Capital of Laos? Does   FDI   have   a   significant   role   on   the   Energy   and   Natural  Resources availability of Laos? Does   FDI   have   a   significant   role   on   the   Transportation   and  Telecommunication infrastructure of Laos?  1.4 Scope of the Study This   study   focuses   on   the   role   of   FDI   on   some   indicators   of  economic   development   in   the   context   of   Laos   Other   aspects   of  development such as social and environmental issues (i.e., poverty ratios of  different   sectors,   education   and   health   care,   environment   pollution   and  damage) are not addressed in this dissertation This   study  mainly  employed  the  data  to  analyse  the  relationships  between FDI and Laos’ economic development indicators during the period  1990­2012. The analyses of correlations were used to serve the objectives  of this research 1.5 Contributions of the Study This study aims to examine the impact of FDI on several economic  development indicators in the context of Laos.  The study is important to  help Laos enjoy further economic development as well as contributes to the  literature   of   FDI   and   economic   growth   in   the   context   of   developing  countries FDI has been suggested as a determinant of economic development  in both developed and developing countries. Its important role in promoting  economic growth and bringing many benefits to the economy is especially  emphasized in the context of developing countries. However, the literature  also provides mix findings pertaining to the effects of FDI, and there has  been suggested that the link between FDI and economic development may  be country and period specific. Therefore, it is important and meaningful to  examine the impact of FDI inflows on economic development in Laos, a  developing country which has received very modest research attention to  date By   focusing   on   six   main   research   questions   pertaining   to   the  relationships   between   FDI   inflows   and   various   indicators   of   economic  development, the research has contributed to both theoretical and practical  sides   From   theoretical   perspective,   the   research  helps   to   enrich   the  knowledge   about   the   important   topic   pertaining   to   FDI’s   impacts   on  economic   development   in   general   and   in   the   context   of   a   developing  country   in   particular   From   practical   perspective,   the   research   findings  provide significant implications to policy makers in Laos The   issue   of   FDI   and   its   important   role   is   more   important   for  developing countries and the countries in transition like Laos because they  lack capital, know how, and managerial skills. Understanding the role of  FDI would help making good policies to attract more FDI for the purpose  of economic development.  1.6 Dissertation Structure This dissertation includes six main chapters as follows.  Chapter 1: Introduction  Chapter   2:   Literature   review   on   the   impact   of   FDI  on   economic  development Chapter 3: Overview of economic development and FDI in Laos Chapter 4: Research methodology Chapter 5: Research findings Chapter 6: Conclusions and discussion  CHAPTER 2: LITERATURE REVIEW ON THE IMPACT OF FDI  ON ECONOMIC DEVELOPMENT This   chapter   reviews   the   literature   on   IJVs’   performance   and   the  factors influencing it. In the first section of the chapter, the literature on the  five common measures of IJV performance were reviewed, followed by the  review of the key determinants of IJV performance. Finally, the proposed  conceptual framework is presented 2.1 Definition and Indicators of Economic Development 2.1.1 Definition of Economic Development Economic   development   is   a   normative   concept   It   means   that   it  applies in the context of people's sense of morality (right and wrong, good  and bad). The definition of economic development given by Todaro (1994)  is an increase in living standards, improvement in self­esteem needs and  freedom from oppression as well as a greater choice. The most accurate  method of measuring development is the Human Development Index which  takes   into   account   the   literacy   rates   and   life   expectancy   which   affect  productivity   and   could   lead   to   economic   growth   It   also   leads   to   the  creation   of   more   opportunities   in   the   sectors   of   education,   healthcare,  employment   and   the   conservation   of   the   environment   It   implies   an  increase in the per capita income of every citizen (Todaro, 1994).  The   terms   economic   development   and   economic   growth   are   used  interchangeably but there is a big difference between the two. Economic  growth   can   be   viewed   as   a   sub   category   of   economic   development.  Economic   development   refers   to   government   policy   to   increase   the  economic,   social   welfare   and   ensure   a   stable   political   environment.  Economic growth on the other hand refers to the general increase in the  country products and services output (source: whatiseconomics.org) 2.1.2 Indicators of Economic Development In   literature,   previous   studies   have   examined   various   aspects   of  economic development. In this study, the author examines the impact of  FDI   on   economic   development   in   Laos,   focusing   on   some   economic  development indicators including:  ­ Gross National Income (GNI) per capita   ­ Financial Capital ­ Level of technology ­ Human Capital ­ Energy  and Natural  resources ­ Transportation and Communication 2.1.3 Theoretical Economic Overview This section review several economic models such as Lewis' Dual  Economy model (1954), Solow's  model (1956), the Harrod­Domar growth  model, and Dependency theory (Pool & Stamos, 1990) 2.2 FDI and its Impact on Economic Development 2.2.1 Definition and Determinants of FDI 10   Definition   of   FDI   and   reasons   for   FDI   inflows   to   developing   countries FDI is defined as cross­border investment by a resident entity in one  economy with the objective of obtaining a lasting interest in an enterprise  resident in another economy. The lasting interest implies the existence of a  long­term relationship between the direct investor and the enterprise and a  significant degree of influence by the direct investor on the management of  the enterprise. Ownership of at least 10% of the voting power, representing  the influence by the investor, is the basic criterion used (OECD, 2012).  In the same line, according to investopedia.com, FDI refers to an  investment   made   by   a   company   or   entity   based   in   one   country,   into   a  company or entity based in another country Yoonbai   (2000)  examined  the   reasons  behind   the   flow  of   FDI  in  countries like Korea, Malaysia, Chile, and Mexico. The research found that  this flow was influenced by two factors  on a global level: recessions faced  by many industrialized economies and the global interest rate drop. Internal  factors like (a) country­specific productivity   shocks, (b) demand shocks,  (c) inflation shocks,(d) monetary shocks, (e) credit worthiness because of  macroeconomic   stabilization,   (f)   widespread   liberalization   of   financial  market,   and   (g)   a   successful   resolution   of   debt   problems   were   found  relatively less important Determinants of FDI  There   have   been   a   number   of   theories   and   approaches   that   help  explain the motivations of FDI and identify FDI’s determinants.  ­ Internalization ­ Eclectic paradigm 14 incentive   especially   in   tax   policy   and   land   policy   However   with   the  implementation of Investment Law in 2004 which given huge investment  incentive to foreign investors especially tax incentive, as the resulted in  2005 onward the FDI inflow has been significantly increased especially in  mining sectors and hydropower sectors. In 2006 the FDI inflow soared to  US$187 million and reached a peak at US$323.5 million in 2007.  FDI inflows to Lao PDR fell considerably in 2008 due to the impact  of the global economic crisis. The nominal FDI inflow value was decline  from about US$323.5 million in 2007 to US$227.7 million in 2008 (or by  about   30  percent)  due   to  recent   delays  of   new  hydropower   and  mining  projects, as well as slow growth in the non­resource sectors. However, the  FDI inflow to Laos has quickly recovered at around US$300 million in  2009­ 2011 period The majority of FDI goes to natural resource sectors. Major FDI to  Lao PDR in recent years comes from the region, mainly from Thailand,  China,   Vietnam,   Australia,   India,   Japan,   and   Korea   Vietnam   now   has  become   the Laos'   biggest   foreign   investor   during   the   period   since  the Lao Government   first   adopted   foreign   investment   incentive   policies  (1989­2012). The most popular fields for foreign investors are the mining  industry (accounting for 27 percent), electricity production (25 percent),  agriculture, services, processing, hotels,  restaurants, telecommunications,  construction, industry, and banking 15 CHAPTER 4: RESEARCH METHODOLOGY This   chapter   describes   research   methodology   used   in   this   study.  First, research questions are briefly presented and  the statistical method  used to test the impact of FDI on economic development in Laos. Next,  variables and their measures are provided. Finally, the author presents a  detailed description of data employed for this study 4.1 Research Questions In addition to reviewing the relevant literature, the research tried to  answer   the   question:   Does   the   FDI   have   a   significant   contribution   to  economic development for Laos? In particular, the research answers the six  specific questions regarding the relationships between FDI and six aspects  of economic development 4.2 Variables and measures In this section, the author presents key variables used in this study  and   the   indicators   measuring   them  These   indicators   are   adopted   from  World Bank FDI inflows: measured by BoP (current US$) Economic developemnt: A GNI per capita: constant 2005 US$ B Financial   Capital:   Financial   Capital   is   measured     by   the   five  following indicators Gross capital  formation  (% of GDP) Total debt service (% of exports of goods, services and primary   income) 16 Debt service on external debt, long­term (TDS, current US$) Debt service on external debt, total (TDS, current US$) Inflation, GDP deflator (annual %) C Level   of   technology:   Level   of   technology   is   measured   by   the  following indicator Industry, value added (% of GDP) D Human Capital: Human Capital is measured   by the five following  indicators Life expectancy at birth, total (years) Mortality rate, under­5 (per 1,000 live births) School enrollment, secondary (% gross) School enrollment, secondary (% net) School enrollment, tertiary (% gross) E Energy   and Natural   resources: Energy   and Natural   resources is  measured by the following indicator Oil consumption per capita (bbl/day per 1000 people) F Transportation   and   Communication:   Transportation   and  Communication is measured by the six following indicators Air transport ­ passengers carried Air transport ­ registered carrier departures worldwide Mobile cellular subscriptions (per 100 people) Fixed broadband Internet subscribers (per 100 people) Internet users (per 100 people) Roads, total network (km) 17 4.3 Data Description This study employed the secondary data which were collected from  the  World   DataBank   (2013)  queries   from   1990­2012   and   Index   Mundi  website (2013) 18 CHAPTER 5: RESEARCH FINDINGS This   chapter   presents   the   research   findings   Specifically,   the  correlations results regarding the relationships between FDI inflows and  economic development indicators in Laos are provided 5.1 FDI and  GNI per capita Figure 10 presents the graph of correlation   between FDI and GNI  per capita and Table 17 presents coefficient of correlation between FDI and  GNI per capita Figure  Graph of Correlation  between FDI and GNI per capita 19 Table 17. FDI and GNI per capita Coefficient of Correlation   FDI, net inflows (BoP,  current US$) GNI per capita (constant 2005 US$) Pearson Correlation Sig. (2­tailed) N 881** 000 14 As indicated in Table 17, Pearson correlation of   FDI inflows and  GNI   per   capita   is   0.881   (p   <   0.05),   that   confirms   a   strong   correlation  between FDI inflows and GNI per capita. It implies the significant and  important role of growth of FDI inflows on the growth of GNI per capita.  5.2 FDI and  Financial Capital Table 18. FDI and Financial Capital Coefficient of Correlation Financi al  Capital FDI,  net  inflows  (BoP,  current  US$) Total debt  Debt  service  Debt  service on  Gross  Gross  (% of  service on  external  capital  capital  exports of  external  debt,  formation  formation  goods,  debt, total  long­term  (% of  (annual %  services  (TDS,  (TDS,  GDP) growth) and  current  current  primary  US$) US$) income) Pearson  Correlation Sig. (2­ tailed) N Inflation, GDP  deflator (annual %) 819** ­.167 173 820** 812** ­.267 001 623 453 000 000 229 12 11 21 22 22 22   As indicated in Table 18, the results show that  FDI inflows was  significantly correlated with the Gross capital formation (% GDP),  Debt  service on external debt, long­term (TDS, current US$), and Debt service  on external debt, total (TDS, current US$).  Figure 11 presents the graph of correlation  between FDI and long­ term debt service on external debt 20 21 Figure  Graph of Correlation  between FDI and long­term debt service  on external debt 5.3 FDI and Level of Technology Table 19. FDI and Level of Technology Coefficient of Correlation  Techonology Industry, value added (% of GDP) FDI, net inflows  Pearson Correlation (BoP, current  Sig. (2­tailed) US$) N 838** 000 22 As indicated in Table 19, the correlation of FDI inflows and Industry  value added (% of GDP) is 0.838 (> 0.5) that confirms a strong correlation  between these measures 5.4 FDI and Human Capital As indicated in Table 20, in the 1990­2012 period, the FDI inflows of  Laos   had   strongly   positive   relationship   with   the   indicators   of   Human  Capital Table 20. FDI and Human Capital Coefficient of Correlation Human  Capital FDI,   net  inflows  (BoP,  current  US$) Life  expectanc y   at   birth,  total  (years) Mortality  School  School  rate,  enrollmen enrollmen under­5  School   enrollment,  t,  t,  (per   1,000  tertiary (% gross) secondary  secondary  live  (% gross) (% net) births) 665** ­.705** 538* 621** 856** Pearson  Correlatio n Sig   (2­ 001 tailed) N 22 000 012 006 000 22 21 18 20 22 5.5 FDI and Energy and Natural Resources The correlation results indicates a weak correlation between FDI and  Energy and natural resources.  Table 21. FDI and Energy and Natural Resources Coefficient of Correlation  Energy and Natural  Resources FDI, net inflows  (BoP, current  US$) Oil consumption per capita (bbl/day per 1000  people) Pearson Correlation ­.271 Sig. (2­tailed) 481 N 5.6 FDI and Transportation and Communication As indicated in Table 22, in general, the FDI inflows of Laos had  strongly   positive   relationship   with   indicators   of   the   Transportation   and  Communication Table 22. FDI and Transportation and Communication Coefficient of  Correlation Air  transport,  Fixed  registered  Mobile  broadban carrier  cellular  d Internet  Air  departure subscripti subscribe Internet  transport,  s  ons (per  rs (per  users (per  passenger worldwid 100  100  100  Roads, total network  s carried e people) people) people) (km) ** ** ** FDI,  Pearson  721 707 833 593 815** 896** net  Correlatio inflows  n (BoP,  Sig. (2­ 000 000 000 055 000 006 current  tailed) US$) N 22 22 22 11 15  Transpo rtation  and  Commun ication In   summary,   in   this   study   the   author   employed   the   method   of  correlation   analysis   to   test   the   relationship   between   FDI   inflows   and  various indicators measuring six aspects of economic development in the  23 context of Laos over the period 1990­2012. The research findings in general  provide empirical evidence to support the important and positive role of  FDI inflows on economic development 24 CHAPTER 6: CONCLUSIONS AND DISCUSION 6.1 Conclusions This research aims to explore the role of FDI inflows on economic  development   in   Laos,   a   developing   country   which   has   received   very  mosdest research attention to date. The correlation analysis method was  employed to serve this purpose. The research results show that in general,  FDI plays a significant role on economic development. Specifically, FDI  inflows were found to be positively correlated with almost all indicators  measuring six aspects of economic developent. The research findings are  summarized in the following FDI and GNI per capita: The findings suggest an important role of FDI  inflows on GNI per capita by showing a strongly positive correlation  between the two measures FDI   and   Financial   Capital:   The   findings   show   that   FDI   inflows   are  significantly and positively correlated with some indicators of financial  capital   including   the   Gross   capital   formation   (%   of   GDP),   the   Debt  service on external debt, long­term (TDS, current US$), and the Debt  service on external debt, total (TDS, current US$) FDI and Level of Techonology: The findings show that FDI inflows has  a positive and important role on level of techonology, based on a strong  and positive correlation between FDI and the Industry value added (%  of GDP) FDI   and   Human   Capital:   The   findings   show   that   FDI   inflows   are  significantly correlated with all five indicators of  human capital. All  correlation coefficients are positive, except the one between FDI and  Mortality rate, under­5 (per 1,000 live births). This results may need to  have further study for clarify the relationship between the two measures.  25 The strongest correlation is the one between FDI and School enrollment,  tertiary (% gross) FDI and Energy and Natural Resources: The findings failed to provide  empirical evidence for the significant role of FDI inflows on Energy and  Natural Resources. Perhaps, it is partly due to the measure limittaion of  Energy   and   Natural   Resources  with   only   one   indicator   ­   the   oil  consumption per capita. This may need further exploration with more  comprehensive measure FDI and Transportation and Communication: The findings suggest that  in   general   FDI   inflows   have   an   important   and   positive   role   on   the  Transportation and Communication, by showing significantly positive  correlations   between   FDI   and   five   indicators   of   Transportation   and  Communication   including  Air   transport,   passengers   carried,  Air  transport,   registered   carrier   departures   worldwide,   Mobile   cellular  subscriptions   (per   100   people),   Internet   users   (per   100   people),   and  Roads   (total   network   ­   km)   The   strongest   correlations   are   those  between   FDI   and  Roads   (total   network   ­   km),   Mobile   cellular  subscriptions, and Internet users.  6.2 Implications of the Study Theoretical implications From   theoretical   perspective,   this   study   is   important   because   it  contributes to better understanding the relationship between FDI inflows  and economic development in the context of a developing country. This is  especially   interstesing   and   important   since   the   research   context   in   this  study   is   Lao   P.D.R.,   a   country   that   has   received   very   little   research  attention from scholars up to date. Therefore, the findings from this study  26 help to enrich the literature on FDI and its role on economic development  in general and in developing countries, in particular.  In   addition,   in   this   study   the   author   empirically   examined   the  relationship between FDI inflows with a number of aspects of economic  development, rather than just focusing on one aspect as in many previous  studies Implications for policy makers On the basis of the findings, this study is also expected to provide a  number   of   implications   for   policy   makers   in   Laos   with   the   purpose   of  making effective use of FDI for enhancing economic development in this  country. Some implications and suggestions are presented in the following Promoting and attracting FDI inflows: it is important for policy makers to  develop appropriate policies to create favorable environment to attract FDI  inflows Maximizing the effective impact of FDI on economic development:  Laos  government   may   need   to   put   sufficient   investment   into   upgrading  infrastructure   and   developing   human   capital   so   that   the   country   can  maximize the techonological spillovers and other benefits associated with  FDI inflows. Policy makers in Laos also need to work on the necessary  activities   and   developing   relevant   policies   to   promote   favorable  environment   for   FDI   and   enhance   the   government’s     capability   to  maximize the benefits of FDI inflows Enhancing   capabilities   of   controlling   and   regulating   FDI   for   better   economic development: Laos government needs to develop its capabilities  of controlling and regulating FDI for better economic development. FDI  27 should be directed to the right sectors and areas so that the economy can  have sustainable development. The government also needs to have ability  to   select   the   appropriate   FDI   projects,   develop   relevant   policies   toward  different   types   of   FDI   projects,   and   have   ability   to   make   decision   of  rejecting some inappropriate projects Developing   an   effective   mechanism   affecting   foreign   direct   investors   to   ensure   mutual   benefits   of   the   foreign   investors   and   the   host   country’s   development 6.3 Limitations of the Study and Future Research Direction First, regardless of the long period of the data collected (1990­2012),  some variables had limited and small number of observations, like  the Energy and Natural Resources data which gave mixed results of  the unavailability of that data Second, with regard to measurement issue, there is some limitation  in terms of a limited number of indicators measuring some variables  in this study. For example, Level of Techonology and Energy and  Natural resources each was measured by only one indicator. Future  research should use more comprehensive scales with multiple items  to increase the validity of the results Third,   many   other   aspects   of   economic   developemnt   could   be  affected by FDI inflows other than the ones selected in this study.  The future research could explore the impact of FDI on more aspects  of economic developemnt.   Fourth,   in  this   study   the  author   just   explored   the  role  of   FDI   on  economic   development   by   empirically   examined   the   correlations  28 between   FDI   inflows   and   various   indicators   of   economic  development in Laos. It would be desirable for future research to test  the   impact   of   FDI   on   economic   development   employing   more  advanced technique such as regression Another   suggestion   for   future   research   would   be   having   a   micro  level  analysis   for  Laos   to come  up with a reform strategy   for  improving  their GNI per capita following  the path in accomplishing  that goal. Future research could also examine the factors influwncing  the attraction of FDI inflow to Laos ... projects   and   the income on international trade have increased significantly and have had a direct impact on national income as well as GDP growth 1.2 Rationale for the Research It has been suggested that Foreign Direct Investment (FDI) inflows ... 1.5 Contributions of the Study This study aims to examine the impact of FDI on several economic development indicators in the context of Laos.  The study is important to  help Laos enjoy further economic development as well as contributes to the ... its   impact   on economic development?  and 2) Does FDI have a significant contribution to  economic development of Laos?  With regard to  the impact of   FDI   on economic development, the
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Xem thêm: A study on the impact of foreign direct investment on economic development of Lao P.D.R., A study on the impact of foreign direct investment on economic development of Lao P.D.R., This chapter presents the research findings. Specifically, the correlations results regarding the relationships between FDI inflows and economic development indicators in Laos are provided.

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