tóm tắt luận án a study on the impact of foreign direct investment on economic development of lao p.d.r.

Therefore, the investmentfrom foreign countries in terms of FDI is needed because FDI plays animportant role in job creation, economic growth, capital inflow, technologytransfer, human r

KHAMSEN SISAVONG

A STUDY ON THE IMPACT OF FOREIGN DIRECT INVESTMENT

ON ECONOMIC DEVELOPMENT OF LAO P.D.R.

(Development Economics) Code: 62.31.01.05

A dissertation summary submitted to the National Economics

University

in fulfillment of requirements for the degree of

Doctor of Philosophy in Economics

CHAPTER 1: INTRODUCTION 1.1 Research Background

Laos is a small landlocked country with an area of 236,800 squarekilometers It shares its borders with Vietnam in the East, China in theNorth, and Cambodia in the South, Thailand and Myanmar in the west.Two third of the country is mountainous (northern part) thus its geographiccircumstances constrain both the quality and quantity of agriculture andcause difficulties to the development of trade, social infrastructure andtransportation and communication links However, the country hastransformed from a landlocked to a land link and cross road to other parts

of the world

In 1986, the Lao government implemented the New EconomicMechanism (NEM) to open the country and provided incentives fordevelopers and investors and moved from a centrally planned economy to amarket oriented economic model

FDI inflows in Laos have grown dramatically over the past decadeand have played an important role in the growth of the world economy aswell as the ASEAN Nations In the developing world, FDI has become themost stable and largest component of capital flows As a result, FDI hasbecome an important alternative in the development finance process(Global Development Finance, 2005.)

Laos is a small and still poor country Therefore, the investmentfrom foreign countries in terms of FDI is needed because FDI plays animportant role in job creation, economic growth, capital inflow, technologytransfer, human resource development, and wealth in the host country.Thanks to the economic reform, the number of FDI projects and theincome on international trade have increased significantly and have had adirect impact on national income as well as GDP growth

1.2 Rationale for the Research

It has been suggested that Foreign Direct Investment (FDI) inflowshave played an important role in promoting economic growth in developingcountries, especially in the Southeast Asian countries (Nguyen, 2008)

Given the importance of FDI especially in developing countries likeLaos, theoretically as well as practically, there are however stillinconclusive arguments for and against the role of FDI inflows inenhancing economic development in a country (cf., Nguyen, 2008) It hasstill been debate about whether FDI inflows are beneficial or not toeconomic development, and what governments should do to attract and useFDI inflows effectively (Kokko et al., 2003; Longani & Razin, 2001;Masina, 2002; Nguyen, 2008) In addition, it has been suggested that therelationship between FDI and economic growth may be country and periodspecific (cf., Adegbite & Ayadi, 2010) Therefore, this study aims toexplore the impact of FDI inflows on some indicators of economicdevelopment 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 investigatetheir impact on the economic development of Laos The desired outcome ofthis research aims at confirming the linkage between FDI inflows in Laosand the economic development indicators including GNI per capita,financial capital, level of technology, human capital, energy and naturalresources, transportation and communication

This research tried to answer the questions: 1) What are the relevantliterature and the theoretical background on FDI and its impact oneconomic development? and 2) Does FDI have a significant contribution toeconomic development of Laos?

With regard to the impact of FDI on economic development, theresearch 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 NaturalResources availability of Laos?

 Does FDI have a significant role on the Transportation andTelecommunication infrastructure of Laos?

1.4 Scope of the Study

This study focuses on the role of FDI on some indicators ofeconomic development in the context of Laos Other aspects ofdevelopment such as social and environmental issues (i.e., poverty ratios ofdifferent sectors, education and health care, environment pollution anddamage) are not addressed in this dissertation

This study mainly employed the data to analyse the relationshipsbetween FDI and Laos’ economic development indicators during the period1990-2012 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 economicdevelopment indicators in the context of Laos The study is important tohelp Laos enjoy further economic development as well as contributes to theliterature of FDI and economic growth in the context of developingcountries

FDI has been suggested as a determinant of economic development

in both developed and developing countries Its important role in promotingeconomic growth and bringing many benefits to the economy is especially

emphasized in the context of developing countries However, the literaturealso provides mix findings pertaining to the effects of FDI, and there hasbeen suggested that the link between FDI and economic development may

be country and period specific Therefore, it is important and meaningful toexamine the impact of FDI inflows on economic development in Laos, adeveloping country which has received very modest research attention todate

By focusing on six main research questions pertaining to therelationships between FDI inflows and various indicators of economicdevelopment, the research has contributed to both theoretical and practicalsides From theoretical perspective, the research helps to enrich theknowledge about the important topic pertaining to FDI’s impacts oneconomic development in general and in the context of a developingcountry in particular From practical perspective, the research findingsprovide significant implications to policy makers in Laos

The issue of FDI and its important role is more important fordeveloping countries and the countries in transition like Laos because theylack capital, know how, and managerial skills Understanding the role ofFDI would help making good policies to attract more FDI for the purpose

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 thefactors influencing it In the first section of the chapter, the literature on thefive common measures of IJV performance were reviewed, followed by thereview of the key determinants of IJV performance Finally, the proposedconceptual 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 itapplies in the context of people's sense of morality (right and wrong, goodand bad) The definition of economic development given by Todaro (1994)

is an increase in living standards, improvement in self-esteem needs andfreedom from oppression as well as a greater choice The most accuratemethod of measuring development is the Human Development Index whichtakes into account the literacy rates and life expectancy which affectproductivity and could lead to economic growth It also leads to thecreation of more opportunities in the sectors of education, healthcare,employment and the conservation of the environment It implies anincrease in the per capita income of every citizen (Todaro, 1994)

The terms economic development and economic growth are usedinterchangeably but there is a big difference between the two Economicgrowth can be viewed as a sub category of economic development.Economic development refers to government policy to increase theeconomic, social welfare and ensure a stable political environment.Economic growth on the other hand refers to the general increase in thecountry products and services output (source: whatiseconomics.org)

2.1.2 Indicators of Economic Development

In literature, previous studies have examined various aspects ofeconomic development In this study, the author examines the impact ofFDI on economic development in Laos, focusing on some economicdevelopment 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' DualEconomy model (1954), Solow's model (1956), the Harrod-Domar growthmodel, and Dependency theory (Pool & Stamos, 1990)

2.2 FDI and its Impact on Economic Development

2.2.1 Definition and Determinants of FDI

2.2.1.1 Definition of FDI and reasons for FDI inflows to developing countries

FDI is defined as cross-border investment by a resident entity in oneeconomy with the objective of obtaining a lasting interest in an enterpriseresident in another economy The lasting interest implies the existence of along-term relationship between the direct investor and the enterprise and asignificant degree of influence by the direct investor on the management of

the enterprise Ownership of at least 10% of the voting power, representingthe influence by the investor, is the basic criterion used (OECD, 2012)

In the same line, according to investopedia.com, FDI refers to aninvestment made by a company or entity based in one country, into acompany or entity based in another country

Yoonbai (2000) examined the reasons behind the flow of FDI incountries like Korea, Malaysia, Chile, and Mexico The research found thatthis flow was influenced by two factors on a global level: recessions faced

by many industrialized economies and the global interest rate drop Internalfactors like (a) country-specific productivity shocks, (b) demand shocks,(c) inflation shocks,(d) monetary shocks, (e) credit worthiness because ofmacroeconomic stabilization, (f) widespread liberalization of financialmarket, and (g) a successful resolution of debt problems were foundrelatively less important

- Complement Theory of FDI

- The Resource-Based Theory

- The Theory of New Economic Geography

- Diversified FDI and risk diversified model

- Policy determinants of FDI

2.2.2 Impact of FDI on economic development

In this section, first the author review previous studies on the impact

of FDI on economic growth and some other aspects of economic

development, mainly in the context of developing countries After that, areview of the studies on the impact of FDI on economic developmentthrough human capital and technology is provided Finally, the authorpresents FDI and its spillover effects.

2.2.2.1 Impact of FDI on economic growth and other economic development aspects

2.2.2.2 Impact of FDI on Economic Development through Human Capital 2.2.2.3 Impact of FDI on Economic Development through Technology 2.2.2.4 Foreign Direct Investment and Spillovers

CHAPTER 3: OVERVIEW OF ECONOMIC DEVELOPMENT AND

FDI IN LAOS

3.1 Overview of Laos’ Economy

This section presents various aspects of Laos’s economy, inclusing economic growth, economic structural changes, etc

3.1.1 Economic growth

On average, the Gross Domestic Product (GDP) during the SixthPlan period was 219,853 billion kip, approximately 43,970 billion kip peryear GDP grew at an annual rate of 7.9%, which was higher than the SixthFive-Year Plan target (the plan target was 7.5%) In FY 2009-2010, thevalue of GDP was 54,282 billion Kip which was 1.89 times higher than FY2004-2005 The growth in share of agriculture in GDP was 4%, of industrywas 12.6%, and of services was 8.4%

3.1.2 Economic structural changes

The economic structure has changed as an economy transforms from

a subsistence agriculture economy based on raw materials to a oriented economy based on processing

market-3.1.3 Financial sector growth

During the past years, the banking sector has contributed to financialstability, and the foreign exchange rate has remained stable This isreflected in the money supply growth at 23% per year which contributedto19.6% of GDP Foreign exchange grew and contributed to approximately35% of GDP in 2009-2010 An increase in the money supply or M2 wascontributed by the increasing numbers of foreign investors

3.1.4 Banking sector development

The banking sector is one of the sectors that grew rapidly anddistinctly during the period of the Sixth Five-Year Plan

3.1.5 Inflation has been effectively managed

3.1.6 The appreciation of the Kip currency

3.1.7 Workforce and employment balance

3.1.8 Balancing the sources of funds for development

3.1.9 Balancing the State budget

3.1.10 Balancing imports and exports

3.1.11 Sectoral development, regional and international economic

integration

3.1.12 Infrastructure

3.2 Foreign Direct Investment in Laos

FDI plays very important role in many developing countries ingenerating capital, job employment and technology transferring As a trend

of FDI moves forward to country which rich in natural resources and haveadvantage in cheap labor, in the case of Lao PDR it is also no exception

Before 1985, there was not any FDI inflow to Lao PDR With theInvestment Law in 1994 onward the government of Laos PDR has paidattention in attracting FDI by improving business environment, politicalstability and macroeconomic policy, its commitment to be member ofWTO and AFTA which giving foreign investors in flavor of investmentincentive especially in tax policy and land policy However with theimplementation of Investment Law in 2004 which given huge investmentincentive to foreign investors especially tax incentive, as the resulted in