Foreign Direct Investment, Exports, and Economic Growth in Malaysia, Thailand and Vietnam

VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FOREIGN DIRECT INVESTMENT, EXPORTS, AND ECONOMIC GROWTH IN MALAYSIA, THAILAND, AND VIETNAM A thesis submitted in partial

VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FOREIGN DIRECT INVESTMENT, EXPORTS, AND ECONOMIC GROWTH IN MALAYSIA,

THAILAND, AND VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By BUI THI KIM HOANG

Academic Supervisor:

DR NGUYEN HOANG BAO

HO CHI MINH CITY, DECEMBER 2012

Acknowledgement

First of all, I would like express my deepest gratitude my academic supervisor, Dr Nguyen Hoang Bao, Dean of Economic Development, HCM City University of Economics, for advice, critical, and helpful comments on the paper

My dearest thanks to the lectures and staff of the project, who helped improve my knowledge and fulfill the programme

I am deeply indebted to my parents, my elder brother and my husband for their love and support of me, keeping me in good condition for learning

And finally, I am also grateful to my close friends for their warm encourgagement

Abstract

This study exammes the causality relations between foreign direct investment, exports, and economic growth in the three countries including Malaysia, Thailand, and Vietnam of the Southeast region for the period of 1989-

2010 The paper uses time series data for individual countries and panel data for the panel three countries The study estimate vector autoregression model (V AR) or vector error correction model (VECM) of the three variables to find Granger causal relationship for each of the three countries And then, using two different panel unit root tests it is found that all the panel variables are integrated in order one The cointegration is found for the panel variables from the Johansen Fisher panel cointegration and Kao tests The panel-Granger test support that there are bidirectional long run causal relations between the variables but there is only unidirectional from exports to foreign direct investment in the short run for the panel of three countries

Contents

Certification 1

Acknowledgement ii

Abstract iii

Contents iv

List of Tables vi

List of Figures vii

List of Abbreviations viii

Chapter 1: Introduction 1

1.1 Problem statement 1

1.2 Research objectives 3

1.3 Research questions 4

1.4 Research methodology 4

1.5 Structure of the thesis 4

Chapter 2: Literature Review 5

2.1 Theoretical Literature 5

2.1.1 Relationship between foreign direct investment and economic growth 5

2.1.2 Relationship between exports and economic growth 6

2.1.3 Relationship between FDI and exports 8

2.2 Empirical studies 9

2.3 Conceptual framework 17

Chapter 3: Foreign Direct Investment, exports, and economic growth in Malaysia, Thailand, and Vietnam: Descriptive and Comparative Analysis 19

3 1 Foreign direct investment, exports, and economic growth in Malaysia 19

and Thailand 19

3.2 Foreign direct investment, exports, and economic growth in Vietnam 26

Chapter 4: Research Methodology 40

4.1 Data sources 40

4.2 Model Specification 40

4.3 , Estimation techniques 41

4.3.1 Individual economy's Granger causality test 41

4.3 1.1 Unit root tests for stationary time series 41

4.3.1.2 Johansen cointegration technique 43

4.3.1.3 Granger causality analysis 45

4.3.2 Panel data Granger causality test 46 4.3 2.1 Panel unit root tests 4 7

4.3.2.2 Panel cointegration test 49

4.3.2.3 Panel causality test 50

Chapter 5 Empirical Results 51

5.1 Unit root tests 51

5.2 Cointegration analysis 53

Chapter 6: Major Findings and Policy Implications 58

6.1 Major findings 58

6.2 Policy implications 60

6.3 Research limitations 60

References 62

Appendices 69

List of Tables

Table 2.1: Summary of empirical studies on causality between FDI, exports, and

economic growth 16

Table 3.1: The contribution of components of total demand to economic growth in Malaysia and Thailand, 1989-2010 (percentage) 20

Table 3.2: Correlation between the growth rates ofthe real GDP and its components in Malaysia and Thailand, 1989-2010 21

Table 3.3: Structural change in Malaysia and Thailand, 1989-2010 25

Table 3.4: The contribution of components of total demand to economic growth in Vietnam (percentage) 27

Table 3.5: Correlation between the growth rates of the real GDP and its components in Vietnam, 1989-2010 27

Table 3.6: GDP growth (g=~Y/Y), Rate of investment (I/Y), ~Y/I, ICOR in Vietnam28 Table 3.7: Structural change in Vietnam, 1989-2010 (percentage) 29

Table 3.8: Exports and Imports in Vietnam (percentage ofGDP) 30

Table 3.9: Export value index in Vietnam, 1989-2010 31

Table 3.10: Foreign direct investment inflows by Vietnam's region and province 34

Table 3.11: Foreign Direct Investment by sector in Vietnam 35

Table 3.12: FDI in industry for Vietnam country 36

Table 3.13: Exports by foreign investment sector in Vietnam 37

Table 5.1: ADF and PP unit root tests on level series for the individuals 51

Table 5.2: ADF and PP unit root tests on the first difference series for the individuals 52 Table 5.3: Panel unit root tests 53

Table 5.4: Results of Johansen cointegration test for individual country 54

Table 5.5: Panel cointegration test 54

Table 5.6: Granger causality test based on VECM for Thailand and Vietnam 55

Table 5.7: Granger causality test based on VAR model for Malaysia 56

Table 5.8: Panel Granger results 56

Table 5.9: The causality relations in this paper 57

List of Figures

Figure 2.1: Conceptual framework in this study 18

Figure 3.1: GDP growth in Malaysia and Thailand, 1989-2010 (percentage) 19

Figure 3.2: Real GDP, Exports and FDI in Malaysia and Thailand ($US) 21

Figure 3.3: The contribution ofFDI inflows in GDP in Malaysia and Thailand, 1989-2010 (percentage) 22

Figure 3.4: Export structure in Malaysia, 1989-2010 (percentage) 23

Figure 3.5: Export structure in Thailand, 1989-2010 (percentage) 24

Figure 3.6: Export price index in Malaysia and Thailand, 1989-2010 25

Figure 3.7: Vietnam GDP growth(%) 26

Figure 3.8: GDP, exports and investment in Vietnam, 1989-2010 (VND billion) 29

Figure 3.9: The growth of exports in Vietnam, 1990-2010 (percentage) 30

Figure 3.10: Export structure in Vietnam 32

Figure 3.11: FDI inflows in the Southeast countries ($US million) 32

Figure 3.12: Foreign direct investment in the period in Vietnam, 1989-2010 33 Figure 3.13: Foreign direct investment, exports and real GDP growth (%) 3 8

List of Abbreviations

ADF Augmented Dickey-Fuller

AIC Akaike's Information Criterion

AR Autoregression

ECT Error Correction Term

FDI Foreign Direct Investment

GDP (Y) Gross Domestic Product

GMM Generalized Method of Moment

ICOR Incremental Capital-Output Ratio

IPS Im, Pesaran, and Shin

MNCs Multinational Coporations

MNEs Multinational Enterprises

pp Phillips and Perron

SIC Schwarz's Information Criterion

US$ The United States dollar

VAR Vector Autoregression

VECM Vector Error Correction Model

WTO World Trade Organization

Chapter 1: Introduction

This chapter explains the reason for the carrying out the thesis, its objectives, and research questions The methodology is also mentioned in this part Finally, the structure of the thesis will be presented

1.1 Problem statement

The role foreign direct investment and exports in promoting economic growth have much recognized in many countries in the world throughout theoretical and empirical literature The new growth theories have showed the importance of investment and openness to trade in economic development Through these factors, the strategies for foreign direct investment and exports promotion are necessary proposed to promote economic growth especially for developing countries, so called 'FDI-led growth' or 'export-led growth' Theoretically, international free trade has been called "engine of growth", which is proved clearly from the classical economists to the modem economists Moreover, many economic studies have indicated that countries adopt international free trade enjoy higher growth rates than those close their economies to trade (Sachs and Warner, 1997; Wacziarg and Welch, 2008) The application of an open economy and free trade, countries will be rewarded greater economic growth and leads to raise income levels and living standards (Frankel and Romer, 1999) As above, throughout trade, export sectors can be earned more profit and increased saving as well as create foreign exchange earnings and jobs opportunities for workers in export sector (Azam, 2010) Hence, the output growth can be generated not only by increasing the quantities of labor and capital in economy, but also by expanding exports Furthermore, the competitive of exports markets cause to give export-oriented policies contribute positively to economic growth and it also helps the countries integrate promptly into the world economy Therefore, the export-led growth hypothesis is in favor of exports expansion is one of the main determinants of economic growth However, output also has a positive impact on exports throughout productivity growth,

productivity improvement and cost reduction of products which lead to facilitate exports (Krugman, 1984 )

Beside exports, foreign direct investment also shows an upward trend and the increase in foreign direct investment flows is expected to become the power for the growth of trade and economic growth FDI can promote the economic development

of the host country by helping to improve productivity growth and export (UNCT AD, 2002) It has considered a tool for employment generation, technological advancement, social welfare improvement, and poverty alleviation, especially for the developing countries Chiara and Sasidharan (2009) also showed that FDI inflows have the important role in the process of economic development because they bring in some specific technological assets that are not available in the recipient country In general, trade is considered also a vehicle for the transmission

of FDI flows such as capital, technological progress, and managerial skills Economic growth is boosted by FDI and it is more helpful for export promotion In summary, the relationship between foreign direct investment, exports, and economic growth have gained importance and attention among policy makers and researchers

From the past to now, many economists and researchers have a great interest

in the relationship between FDI, exports, and economic growth A larger number of empirical studies have used time series, cross section, and panel data to investigate the impact of FDI, exports on economic growth or the FDI-led growth and export-led growth hypothesis The methods is applied to explore the relationship of exports and economic growth in the early studies includes examining the simple correlation coefficient between them (Balassa, 1978 and Tyler, 1981) or estimating regression equations based on the Neoclassical growth with exports is an explanatory variables In the recent studies, the causality between FDI, exports growth, and economic growth is emphasized by using cointegration techniques and Granger causality for time series or panel data Some empirical studies have used the methods that is above mentioned to examine the causal link of FDI, exports, and

growth for Asian or Africa regions, developing countries and so on, for instance of time series data, Ekanayake (1999), Ismaid and Harjito (2003), Bahmani-Oskooee (2009), Sinoha-Lopete (2006), Pham (2008), Miankhel et al (2009), Eusuf and Ahmed (2010), Sun (2011), Awan et al (2012) and for example for panel data, Hsiao and Hsiao (2006), Won et al (2008), Mehrara and Firouzjaee (20 11 ), Safdari

et al (2011), Hossain (2012) The results indicate that the relation ofFDI, exports, and economic growth rather mixed, it is specified for each of country or other regions So, it is necessary for policy makers and researchers to pay attention to relation FDI, exports, and economic growth These variables interact with each other, for this reason, needing to clearly determine the relationship of them in order

to give effective policy to promote economic growth, especially for developing countries in the world Malaysia and Thailand are one of the few developing countries that have sustained economic growth with high rate in the long run According to Todaro and Smith (2003), Malaysia and Thailand have been successful in increasing exports and attracting foreign direct investment to enhance economic growth, particularly in manufacturing sector Vietnam also has comparative advantage and economy conditions like Malaysia and Thailand, so the policies which promote economic growth from these countries are the significant lessons for national Hence, this thesis examines the causal relationship between FDI, exports, and economic growth using cointegration and causality techniques for time series data and panel data from 1989 to 2010 in three countries including Malaysia, Thailand, and Vietnam of Southeast Asia region where has many countries in the stage of developing It is expected that this paper will contribute evidence to empirical literature with modem methodology

The objectives are as follows:

• To examine the causality relationship between foreign direct investment, exports, and economic growth in these countries

• To suggest appropriate measures for exports expansion and attracting FDI in order to stimulate economic growth in these countries

In order to achieve the research objectives:

• Is there a causal relationship between FDI, exports, and economic growth in Malaysia, Thailand, and Vietnam countries?

• What policy implications could help improve exports and environment for FDI in these countries?

This thesis is divided into six chapters Chapter 1 is the problem definition that leads to the study, the thesis of objectives and research questions, and briefly methodology Chapter 2 presents theoretical and literature review Chapter 3 introduces overview of the problem on foreign direct investment, exports, and economic growth Chapter 4 provides the methodology for carrying out the study Chapter 5 indicates empirical results corresponding to each estimation technique The last chapter will give conclusions of empirical results, policy implications, and limitations of the thesis

Chapter 2: Literature Review

The chapter firstly presents theoretical literature between foreign direct investment and economic growth, exports and economic growth Then, empirical literature for the causal relationship between foreign direct investment, exports, and economic growth is mentioned

2.1.1 Relationship between foreign direct investment and economic growth

Foreign direct investment is an important source of capital, complements domestic private investment which is associated with new job opportunities and enhancement of technology transfer leads to boost economic growth in host countries There are several ways in which FDI can contribute to economic growth

In Neoclassical growth model considers technological progress and labor force as exogenous, and thus FDI increases the volume of investment and promotes economic growth FDI inflow only has a short run growth effect, due to the diminishing returns to capital In the new endogenous growth theory consider long run growth as a function of technological change, if FDI positively influences technology, it can increase the rate of growth in the host economy through technology transfer, spillover effects FDI have a positive impact on economic growth both in the short run and the long run (Herzer et al., 2006) Makki and Somwaru (2004) also have pointed out that FDI has a significance through technology transfer via diffusion process from developed to developing countries

On the other hand, economic growth is one of the determinants of foreign direct investment inflows in the host country The level of economic growth plays

an important role in attracting FDI, the enhancement of economic growth may create increase domestic markets and businesses (Agiomirgianakis et al., 2006) Rapid economic growth leads to large aggregate demand which stimulates to increase demand for investments including FDI In addition, better economic performances in the host countries also contribute incentive FDI through a better

infrastructural facilities and greater opportunities for making profits (Zhang, 2001 ) Johnson (2006) state that FDI inflows enhance economic growth of a host country and the growth of economic in tum may attract FDI inflows and the cycle continues

2.1.2 Relationship between exports and economic growth

As commonly perceived exports and economic growth can have correlation each other and exports are a vital factor in promoting economic growth in developing countries There are several theoretical arguments supporting export-led growth hypothesis

The early study (Balassa, 1978) show that export growth positively affects the growth of economic based on a relatively high correlation between them In this paper, export and domestic savings also have positively correlated and the expansion of exports may attract lot of foreign capital, contribute to raise labor This paper provides evidence in favor of export-oriented policy for economic growth Tyler (1981) has the same point of view with Balassa, he examined the relation of growth and export expansion using cross sectional data for 55 developing countries He also found a strong positive relationship of growth and exports through highly rank correlation between them But the examination of correlations does not indicate incorporating the effect of other variables So, he estimates a model based on Cobb-Douglas production function with three factors is expressed as follows:

Where Xi is country i's GNP, A is a technological constant, Ki is country i's capital stock services, Li is a country i' s labor force inputs and Ei is country i' s exports

This regression estimate made capital and exports play significant role in contribute to growth compared to the model only have capital information and labor

force And he proved that 17.5% increase in exports is associated with 1% increase

in growth Consequently, this paper results indicate that exports take on an important role in economic growth in developing countries

Export orientation and export promotion are beneficial for both developed and developing countries (Medina-Smith, 2001 ) He advocated that exports take advantage of economies of scale and technological progress leads to increase productivity and create employment In addition, exports expansion decreases the pressures of current account for foreign capital goods by increasing the country's external earnings and attracting foreign investment K6nya (2002) also argues that the promotion of export activity leads to economic growth base on trade theory It

directly encourages the production of goods for exports lead to the specialization of economic of scale and the nation's comparative advantages

Awokuse (2008) supports that export expansion is a vital factor for the growth of output or leads to economic growth Foreign demand is increase for the exportable of domestic products implies that creating employment and improving income for person which works in the exportable sector, it can cause to increase output Expanding exports can also make the efficient reallocation of resources and the exploitation of scale economies that can produce greater productivity and output growth Furthermore, the increased for exports can stimulate advanced technologies, skill improvement and management techniques due to foreign market competition (Ben David and Loewy, 1998) and provide foreign exchange to increase the imports of capital goods and intermediate goods which enhances output growth The expansion of exports push up output growth while at the same time output growth also stimulates exports Exports create more employment and income, leading to more productivity gains and ultimately to more exports

Besides, there are also theoretical reasons to support the growth-led export Particularly, Neoclassical trade theory supports the idea that economic growth leads

to higher exports Economies of scale contribute to cost reduction, comparative

advantage and hence exports increase Moreover, economic growth enhances skills and technology in the various sectors of an economy to boost productivity (Krugman, 1984 ) This point of view similarly, Ram (2003) also state that the advancement skills and technology create a comparative advantage for the country

in production of a number of products which can lead to expand exports for those commodities Majeed and Ahmad (2006) proved that GDP and GDP growth has positive effects on exports with highly significant in developing countries Therefore, it is important to maintain a high and sustainable economic growth which is a vital factor to promote exports because bidirectional causality between exports and output growth can exist

2.1.3 Relationship between FDI and exports

FDI is motivated mainly by the possibility of high profitability in growing markets FDI affects the host country's export performance through two ways include the export activities of foreign affiliates or the expansion of exports by domestically-owned firms (Lipsey, 2004) Firstly, MNC's affiliates have factor endowments such as abundant resource or cheaper labor costs to increase export competitiveness in the world markets and thus boosting export performance Secondly, the local firms' exports are indirectly affected by FDI through various channels MNCs affiliates may improve local firms' competitiveness through the technology transfer, management, skills and labor lead to increase efficiency production Moreover, Njong (2008) also supported FDI shift from higher labor cost countries to lower labor cost host countries leads to increase MNCs' export competitiveness and enhance the export performance

Besides, exports also effect on FDI through trade or various ways According

to Akinkugbe (2003 ), the high income per capita, the orientation of outward to international trade, infrastructure development and high rate of return on investment are the significant factors for FDI inflows Similarly, Lim (2004) found that the market size, infrastructure quality, economic stability and free trade zone are

important for FDI and the investment decisions are affected by fiscal incentives, investment environment, labor cost and trade openness

2.2 Empirical studies

Babalola et al (2012) studied the relationship among exports, FDI, and economic growth in Nigeria during 1960-2009 The paper show that having six cointegration vectors among FDI, capital formation, degree of openness, import, and terms of trade based on the results of Johansen co integration test The variables had the relationship in long-run and played an important role in the economy in Nigeria

Javed et al (2012) also examined the relationship among FDI, trade, and economic growth in four South Asian countries India, Bangladesh, Sri Lanka and Pakistan over the period of 1973-2010 using Generalized Method of Moment (GMM) The results show that exports have positive impact on economic growth in all nations and similarly for FDI but except Sri-Lanka Besides, domestic investment and labor force have also positive effect on economic growth

Mangir (2012) used cointegration and Granger causality test to analyze the relationship between export and economic growth in Turkey for the period of 2002

- 20 11 with quarterly time series data Cointegration is found between export and economic growth which these variables have long run relationship Granger causality test results show that there is a unidirectional causality relationship from export to economic growth in the short run and bidirectional in the long run in Turkey

Hossain (2012) analyzed both the short-run and long-run relationship between FDI and economic output in South Asian countries using data from 1972 to

2008 The study used three econometric model (ADF test, Engle-Granger test, and VECM) and Granger causality to find the impact of FDI on economic output and inverse The results indicate that there is no cointegration between FDI and GDP in the both short run and long run for Bangladesh and India Nonetheless, the cointegration is found in Pakistan in the short run as well as long run There is no

causality relationship between FDI and GDP in Bangladesh and one way relationship between two variables in Pakistan and India, and FDI cause economic output in these countries

Sun (20 11) examined relationship between FDI and economic growth in China by a co integration approach over the period of 1985-2010 FDI and economic growth is cointegrated based on cointegration test Granger causality test shows that China's economic growth makes FDI increase

Erecakar (20 11) investigated the relationship among growth, FDI, trade and inflation in Turkey for the period 1970-2008 Cointegration test also is used in this study to explore the long-run relationship of variables and found out only one cointegration vector exists among of them Besides, the results indicated that FDI, inflation and trade surplus have positive effect on economic growth

Tekin (2011) explores Granger causality among real GDP, real Exports, and inward FDI in Least Developing Countries during period 1990- 2009 The study use a new panel - data approach based on SUR systems and Wald tests The Granger causality relationship is found among these variables The empirical results support export-led growth, FDI-led growth, FDI-led exports, inversely

Safdari et al (20 11) tested the causality relationship between export and economic growth in Asian developing countries over from 1988 to 2008 A panel data of thirteen countries and the variables of GDP and exports are measured in constant 2000 US dollars with GDP deflator is applied in this paper The study uses four panel unit roots of Levin et al (LLC, 2002), Im et al (IPS, 2003), Breitung (2000) and Fisher-type test by Maddala and Wu (1999), and Choi (200 1) to investigate for stationary Panel cointegration test proposed by Pedroni ( 1999, 2004) and Kao ( 1999) is applied to check cointegration between export and output growth

A panel-VECM causality based on Wald test is used for examine causal relation of real export and real GDP The results show that export is not Granger cause of economic growth, but one way causality from growth to export in the thirteen Asian developing countries is selected in this paper

Eusuf and Ahmed (20 1 0) examined causality between export and growth using Engle-Granger's error correction model with annual time series data in South Asian countries Seven countries with the different time period for each country is studied in this paper including India (1965-2005), Nepal (1965-2005), Sri Lanka (1965-2005), Pakistan (1965-2005), Bangladesh (1980-2005), Maldives (1980-2005) and Bhutan (1980-2004) The indices of the consumer price index, the unit value index for exports and the GDP deflator have been used in this study The ADF and PP test is used for testing for stationary and Engle-Granger procedure is checked long-run relationship between exports and growth And the causality relationship of two variables is tested basing on the F -test and the error correction term The results indicate that real exports and real GDP are cointegrated in Bangladesh, Pakistan and Nepal Export-led growth is found for Pakistan, Sri Lanka and Bhutan both short term and long term while growth-led exports exist in India, Nepal and Maldives In the Bangladesh's case, the data had not proved the presence

of feed-back export-led growth relation The study findings suggest mixed results, and do not give any conclusion to support export-led growth for South Asian countries

Bahmani-Oskooee and Economidou (2009) investigated export-led growth and growth-led exports using annual data over the period 1960-1999 from 61 countries of LDCs The paper uses five variables gross domestic product, gross capital formation, exports, imports (in constant 1995 US $) and total labor force in thousands For testing stationary of a variable and giving the number of cointegration vectors uses Johansen's cointegration technique (1988) The results show that no cointegration vector is found for 14 countries (Cote d' Ivoire, Mauritania, Mauritius, Morocco, China, Malaysia, Pakistan, the Philippines, Guyana, Haiti, Jamaica, Paraguay, Peru, and Uruguay) and the null of no cointegration is rejected in the remaining countries showing the existence of at least one cointegrating vectors among these variables The relationship between exports and output is divided into four groups in this paper The first, there is a feedback

between exports and output in the long run for Algeria, Gambia, Ghana, Malawi, Senegal, Hungary, El Salvador, and Honduras The second group includes countries Burkina Faso, Burundi, Gabon, Kenya, Lesotho, Mali, Niger, Nigeria, Togo, India, Korea, Thailand, Egypt, Israel, Argentina, Bolivia, Brazil, Costa Rica, Dominican Republic, Guatemala, Mexico, Trinidad, and Tobago have no long run relation between output and exports The third group that the increasing of exports stimulate output in the long run which is occurred in Congo, South Africa, Swaziland, Tunisia, Ecuador, and Nicaragua The finally group, having a one way relation from output growth to export growth in the long run for Benin, Guinea, Bisu, Rwanda, Zambia, Bangladesh, Indonesia, Papua New Guinea, Chile, and Colombia Thus, the results are country specific

Rudra et al (2009) study established cointegration and causality relationship, both at the panel level and individual level, between FDI and economic growth of five ASEAN countries, namely, Indonesia, Malaysia, Singapore, Philippines, and Thailand over period 1970-2007 The results indicate that have cointegration between FDI and economic growth for five countries have the presence of long run relation between them at the panel level, but only had Singapore and Thailand at the individual country level Besides, bi-directional causality also has found between two variables both two levels for all countries except Malaysia through Granger causality

Miankhel et al (2009) explored the causal relationship between FDI, exports and GDP in both the short run and long run for six emerging countries consist of India, Pakistan, Malaysia, Thailand, Chile and Mexico during 1970-2005 periods ADF, PP, and Zivot and Andrews tests were employed to check for the stationary of the variables with one structure break The paper also used cointegration and Granger causality based on V AR or VECM to examine the causal link between these variables The export-led growth hypothesis is supported in both India and Pakistan GDP growth also drives growth FDI in India and exports for the case of Pakistan In Mexico and Chile, exports are cause of FDI and output in the long run

For the case of Thailand, bidirectional causality is found between GDP and FDI, however, no causality relationship is found in Malaysia

Baharom et al (2008) study the impact of trade openness and FDI on economic growth in Malaysia for the period of 1975- 2005 The analysis is based

on bounds testing approach by Pesaran et al (200 1 ) The results show that the effect

of trade openness on growth is statistically significant positively, both in the short run as the long run FDI is positive effect on economic growth in the short run and negatively in the long run

Pham (2008) applied the structural V AR models to examine the effect of investment or export on Vietnam's economic growth since the Renovation 'Doi Moi' in 1986 The study used annual data from 1986 to 2007 with four variables GDP, investment, export, and productivity The results indicate that investment has affected to economic growth and supported the investment-led growth but export-led growth did not support in Vietnam In addition, export also did not contribute to improve productivity as well as investment

Maneschiold (2008) carried out a study investigated the export-led growth in Argentina (1993Q1 - 2006Q1), Brazil (1991Q1 - 2006Q1) and Mexico (1980Q1 -2006Q 1) using co integration and causality test The quarterly data of GDP at constant prices and export of goods and services at constant prices with different periods is used in this paper To test for the existence of the unit roots using both ADF test and PP test, besides ZA test (Zivot and Andrews, 1992) is used for a structural break The Johansen procedure is applied to test cointegration relationship between exports and economic growth in above three countries When two variables are cointegrated, this study use causality tests within an error correction model to test causal relation The results show a cointegration relationship in Argentina and Mexico in both a pre-break and post-break period except Brazil Bidirectional is found for Argentina and Mexico in the post-break period and undirectional from export growth to economic growth in the pre-break period Moreover, undirectional link from export to GDP is found in short run causality test for Brazil So, the paper

indicates that exports cause economic growth support to export-led growth hypothesis

Hsiao and Hsiao (2006) used time series and panel data in 1986-2004 to examine the causality relations between export, FDI, and GDP in East and Southeast Asia including Korea, Taiwan, HongKong, Singapore, Malaysia, Philippines, Thailand, and China This study applied ADF, DF-GLS and KPSS unit root tests, Johansen cointegration test, and Granger causality test based on VARin time series Two different panel unit root test consist of IPS and ADF-Fisher tests, and Granger causality test is used in panel data to explore the causality relationship between the variables The results indicate that each country has different causal relationships, however, exports and FDI are cause of economic growth, unidirectional from FDI to exports is also found, and in addition, GDP has weak impact on exports for the panel countries

Ismail and Haijito (2003) examined the causality relationship between exports and economic growth in the Asean countries using annual data of real exports and real GDP during 1966-2000 periods Similarly other many researches, this paper also uses ADF test, Engle and Granger (1987) and Johansen (1988) cointegration test, and Granger causality test The results show that exports and economic growth are cointegrated leads to exist a long run relation between them in Indonesia and Singapore They find that there is a bidirectional, feedback causality relationship between two variables for the Philippines and Indonesia and a undirectional causal link running from exports to economic growth in Singapore In the case of Malaysia and Thailand have no causal link between exports and economic growth

Kemal et al (2002) investigated the relationship between exports and economic growth over the period of 1960-2000 in the South Asia region, namely India, Pakistan, Sri Lanka, Bangladesh, and Nepal The paper uses annual time series data on real exports and real GDP in local currency units The study uses ADF and PP test to checking for stationary of variables and the long run

relationship between real exports and real GDP is found in all countries by Johansen's cointegration technique The results of Granger causality tests based on error correction models indicate that there is bidirectional causality for Bangladesh, Nepal, and Sri Lanka and undirectional causal link from exports to growth for India and Pakistan in the long run In the short run, a one way causal relation running from exports to GDP is found in Bangladesh and Sri Lanka and reserve for India and Nepal while Pakistan have no causal link In general, the results of paper support export-led growth hypothesis for five countries in South Asian region

Ekanayake ( 1999) tested the causal relation between exports and economic growth in Asian developing countries using annual data for the period of 1960-

1997 Eight countries were analyzed in this paper with the period specified in the parentheses including India ( 1960-1996), Indonesia (1965-1997), Korea (1960-1997), Pakistan ( 1960-1997), Philippines ( 1960-1997), Sri Lanka ( 1960-1997) and Thailand (1962-1997) The data on gross domestic product (GDP) and exports for this paper are the GDP deflator and export price index (1990=100) This study uses the co-integration and error correction models to examine the causal relationship of two variables ADF test is used to test for unit roots in this paper and the results show the presence of unit roots in all series for all countries in first difference The next, two methods Engle-Granger and Johansen- Juselius is applied to check causal relation between exports and economic growth for each of eight Asian countries Granger causality could be detected when two variables are cointegrated The results indicate that bidirectional causality exists between exports and economic growth in all countries except Malaysia The strong long run Granger causality was found from export growth to economic growth in all cases There is short run Granger causality from economic growth to exports in all nations excepted Sri Lanka On the contrary, evidence of short run causality from export growth to economic growth only was found in Indonesia and Sri Lanka

Table 2.1 summarizes empirical studies on the causal relationship between foreign direct investment, exports, and economic growth which are mentioned in this paper

Table 2.1: Summary(~( empirica/.wulies on causali(r between Fl)f, exports am/ economic xrowth

Previous studies

Time (time series and Countries Variables Methodology Results

EX, FDI, Babalola et al

Nigeria 1960-2009 GDP, Co integration Six cointegration vectors

Granger causality South Asian

Hossain (2012) countries 1972-2008 FDI, GDP Cointegration, FDI 0 GDP (B)

Bangladesh, Granger causality FDI -> GDP (I,P) India, Pakistan

Sun (2011) China 1985-2010 FDI, GDP Cointegration, GDP -> FDI

5 Asean countries Rudraet al Singapore, Co integration, FDI +-> GDP

(2009) Indonesia, 1970-2007 FDI, GDP Granger causality (S, I, P, T)

Thailand, Mala sia

Miankhel et al Malaysia,

1970-2005 EX, FDI, Cointegration, GDP 0 FDI 0 EX (M) (2009) Thailand, GDP Granger causality FDI +-> GDP (T)

Trade openness,

Bounds testing Trade openness -> GDP Baharom (2008) Malaysia 1975-2005 FDI, GDP

approach FDI -> GDP

8 Asian O.countries Malaysia India, Philippines, Indonesia, Korea, Pakistan, Sri Lanka, Thailand Notes: + : one-way impacts

+-+ : causality effects, and

0 : not clear pattern

GOP, investment, 1986-2007

export, and productivity 1993Ql-

GOP, EX 2006QI

Cointegration, Granger causality

Cointegration, Granger causality

Co integration, Granger causality

I- GOP, EX 0 GOP

EX 0 FOI,

EX 0 productivity

EX <-+ GOP (A, M) EX- GOP (B) EX- GOP FOI- GOP FOI- EX

EX <-+ GOP (P, I) EX- GOP (S)

The different results might depend on stage of development, period of study, countries of consideration, policies and institution, model specifications, quality of data sets, and might non-economic factors

A conceptual framework is withdrawn from literature review as mentioned in figure 2.1 This figure shows that the relationship between foreign direct investment, exports, and economic growth Research methodologies using time series or panel data to examine the causal links between the variables is also presented in figure 2.1 Conceptual framework has given a summary about contents ofthis study

Fi~un: 2.1: Conceptual fnmu.•nm·k in this stud~

progress Spillover effects

Chapter 3: Foreign Direct Investment, exports, and economic growth in Malaysia, Thailand, and Vietnam: Descriptive and Comparative Analysis

This chapter presents the characteristics of foreign direct investment, exports, and economic growth variables for the period of 1989-2010 in Malaysia, Thailand and Vietnam in order to see the interrelation between the variables in those countries This chapter has two sections Section one presents economic growth, FDI and exports characteristics in Malaysia and Thailand Section two provides similar problems for Vietnam

and Thailand

Malaysia and Thailand are natural resource based countries that have experienced above-average GDP growth rates for over many decades Their annual average GDP growth rate is very high 9.4% and 9.1% respectively for the period of 1989-1996 In particular, for the case of Malaysia, per capita gross national product reached $3,843 in 1996

Fi~u rc 3.1: G D P growth in J1ah~rsia ami Thailand 1989-10 I 0 (percentage)

-+-GDP growth in Thailand _._GDP growth in Malaysia

Source: World Development Indicators, World Bank (2012)

However, the onset of the Asian financial and economic crisis in 1997 had severely impacted to economic growth of Malaysia and Thailand countries Their GDP growth rate had decreased to -7.4% and -10.5% respectively in 1998 Surprisingly, Malaysia and Thailand were also among the first countries recovery from the economic crisis

Malaysia's GDP growth has attained to 8.9% in 2000 and average about 5.9% in a year during 2002 - 2007 periods and for the case of Thailand, GDP grew approximately 5.0% per year in 1999-2007 periods with GDP per capita at US$ 3,643 (2007) Once again, the global crisis in 2008 has drawn Malaysia's economy with downward trend in economic growth which is decreased to -1.6% in 2009 Nevertheless, only one year after the crisis, the growth rate of Malaysia and Thailand had reached 7.2% and 7.8% in 2010

Economic growth can be analyzed from the composition of total demand including household consumption (Cp), government consumption (Cg), gross fixed capital formation (1), exports (E) and imports (M) Their contribution to economic growth is presented in table 3 1

1989-2()]()

Source: Calculated from World Development Indicators, World Bank (2012)

Table 3.1 shows that exports are main source of economic growth, especially for the case of Malaysia Besides, private consumption and investment also contribute to economic growth

As is seen from table 3 2, the correlation coefficients of the growth rates of the real GDP and private consumption, investment, exports, and imports are very high implying that Malaysia and Thailand economic growth had been more dependent on the growth rate of these variables However, the government

consumption of Malaysia and Thailand had a little correlation with economtc growth

Table 3.2: Correlation between the'"''""'" rates oftlte real GDP ami its component.~ in ;Halaysia

Source: Calculated from World Development Indicators, World Bank (2012)

The increase of investment stimulates economic growth by creating more capitals stock and expanding production capacity In there, foreign direct investment has a vital role in the contribution to economic growth as well as exports

Figu1·c 3.2: Real G'DP, Exports and FDI in Malaysia and Thai/am! ($US million)

7E+05 -r -~ -· -~ -· -, 9E+03 6E+05

Source: World Development Indicators, World Bank (2012)

8E+03 7E+03 6E+03 5E+03 4E+03 3E+03 2E+03 1E+03 OE+OO

As depicted in figure 3 2, foreign direct investment inflows had strongly increased after the financial and economic crises in 1997, and highest in 2007 In the period of 1989-1997, Malaysia has foreign direct investment inflows higher Thailand country but inverse for the later years (1998-2010) The share of FDI sector in GDP is highest about 8.8% in Malaysia in 1992 and 6.5% in Thailand in

1998 The above figure is in dollars, they are affected by exchange rate movements

So, the FDI inflows have grown remarkably into Thailand in spite of the depreciation of the currency in dollar terms The global economic crises had decreased severely FDI inflows to Malaysia and Thailand countries and only contribute to GDP approximately 0.7% and 1.8% in 2009 respectively However, in

2010, the contribution of FDI sector had increased back again and accounted for 3.9% and 3.0% ofGDP in Malaysia and Thailand (figure 3.3)

Figure 3.3: 7Jze contribution of" FDI il~flow\ in(;[)!> in Ha/aysia autl11wilund, 1989-::!f)J() (percenta{;e)

10.0

9.0

··· 7.0

-.-FDI( %GDP) in Malaysia -FDI( %GDP) in Thailand

Sources of FDI in Malaysia and Thailand have generally been quite diversified, including Japan, the United States, Singapore, Hong Kong, the United

Kingdom and Switzerland Japan is usually the largest source of FDI since the late 1970s in Thailand and automotive sector is the main contributors for the industry sector

Figure 3.2 also show that, exports and economic growth have correlation in both Malaysia and Thailand Reinhardt (2000, p.59) states that 'exports were divided into five categories: primary (unprocessed raw materials excluding: natural resource and un-skilled labor intensive), mineral (nonferrous ores: natural resource and capital intensive), semi-manufactures (simply processed manufactures: natural-resource intensive, but higher value-added than unprocessed primary products), manufactures (low natural resource value as share of total value), and other goods (works of art etc.)'

Figun.' 3.4: Export structure in ltJalaysia, 1989-20 I 0 (percentage)

• others

Figure 3.4 and 3.5 presents the development of export structures between 1989-2010 in Malaysia and Thailand Two year average is used to minimize the effect of year-to-year variations The data show that, in both cases, manufacture

exports dominated in export structures and played an increasingly significant role in the period of 1989-2010

Figure 3.5: Export structure iu 1Jwilaud 1989-20 I fJ (percentage)

mineral • food • agricultural • others Thailand

Source: Calculated from World Development Indicators, 2012

0.0 2009-2010

Manufactured exports grew more rapidly than overall exports in 1996-1997 and the export share of manufactures was relatively stable in the later year The change of export structure in Malaysia and Thailand has been strongly attributed to foreign investments On the contrary, the export share of agriculture and food are steadily falling in both countries As for mineral in 2009-2010, the share of mineral increased compare to the last years for Malaysia and Thailand

Export value index has fluctuated from 25.5 and 29.1 in 1989 to 220.4 and 283.3 in Malaysia and Thailand, respectively (figure 3.6)

Table 3.3 presents that agricultural sector produced a small share of GDP which is only less than 15% in both Malaysia and Thailand for the period 1989-

2010 Industry sector has accounted for over 40% of total GDP in both countries and attained to approximately 50% in 2006 in Malaysia

Figun: 3.6: Export pria index in Jl!alay.\ia ami Thailand, l981J-2fJ I 0

-+-Export value index in Malaysia -e- Export value index in Thailand

Source: World Development Indicators, 2012

As well as industry sector, services sector has played a significant role in the share of GDP, contributing more than 41% in GDP and especially significance for Thailand

Table 3.3: Structural change in ilJalaysia am/ Tlwiland, 1989-20 I 0

89-94 95-2000 2005 2006 2007 2008 2009 2010 Malaysia

2001-Industry 40.90 44.69 47.23 49.69 47.50 47.93 43.81 44.41 Services 44.16 43.89 43.98 41.53 42.39 41.89 46.67 44.97 Agriculture 14.95 11.41 8.79 8.78 10.12 10.18 9.52 10.63 Thailand

Industry 38.54 40.71 43.12 44.35 44.74 44.05 43.34 44.65 Services 49.75 49.68 46.98 44.88 44.59 44.39 45.20 42.96 Agriculture 11.71 9.61 9.91 10.77 10.68 11.56 11.46 12.39

Source: Calculated from World Development Indicators, 2012

In general, Malaysia and Thailand have many similar characteristics in the growth and development processing Thomsen (1999) presented that Malaysia and Thailand have a similar ranking of investors, the favor of sectors by foreign investors, and dominantly manufacturing sector Bao (2003, p.31) proved that 'Malaysia and Thailand crises (1997) have five similar characteristic: (1) there were

an increase in exchange rates; (2) a large number of banks went bankrupt; (3) a

large number of enterprises went bankrupt; ( 4) there were an increase of employment rates; and (5) economic growth is severely slowed down' (Appendix 1)

In summary, FDI and exports have a vital role in economic growth and the variables have closely related for Malaysia and Thailand countries in the period 1989-2010 The contribution of manufacturing in exports is very significant, accounting for over 70% in during 1996-2010 both Malaysia and Thailand countries For two these countries, industry and services sector is dominated than agricultural sector and the share of them in GDP is about 87% for this study period

Economic growth

The 'Doi Moi' reform launched in 1986 has made Vietnam a successful example of transitional economies which is generally recognized as a watershed in the country's economic and social development The Vietnam's economy is the one

of the fastest growing economies in the world (Ishii, 2007)

Figure 3.7: Vietnam GDP growth t!11)

12.0

8.0

6.8 6.0

Source: World Development Indicators, 2012

The average growth rate is about 7.4% annually for period 1994 - 2010, nominal GDP of US$ 106,427 million, and GDP per capita ofUS$ 1,224.3 (2010)

Vietnam was also one of the countries that were affected by 1997 - 1998 financial and economic crises GDP growth in 1998 was 5.8%, lower than 1996 by 3.6% The following year 1999, GDP growth was decreased approximately 1% compare to last year Vietnamese economy had recovered so quickly from the economic crisis and GDP growth had reached 7.1% in 2002

The main drivers of the economic growth were household consumption, investment and total exports in the period of 1989 - 2010 (Table 3.4 )

Table 3.4: 11te contribution l~{'compouents of' total demand to economic xrowlh iu Vietnam

Source: Calculated from World Development Indicators, World Bank (2012)

The growth of fixed capital formation rose to 24.2% m 2007 and fixed capital investment to GDP ratio attain to 38.3% in the same period and over 30.0% for last decade (World Bank, 2012) Investment growth has been driven by an increase in domestic credit, falling inflation, and interest rate Table 3.4 shows that consumption expenditure, becoming the largest contributor to the country's GDP growth Household consumption accounted about 71% of GDP in the period of 1989-2010 Exports also contribute to GDP over 51% in this period

THble 3.5: Correlation between the ~:rowth rafei; l~/'the real GDP and its components in Vietnam,

Source: Calculated from Government Statistics Office, 20 12

Table 3.5 presents government investment has a correlation closely with economic growth and foreign, private investment have a negative relationship with

GDP growth in 1990-1997, however, for the period of 1998-2010, foreign, private investment and economic growth have a strong positive correlation Inversely, for government investment and GDP growth have a negative correlation in 1998-2010 Exports have also positively relation to economic growth in the period of 1998-

2010 Therefore, in the first period after 'Doi Moi' reform, government investment promotes economic growth, nevertheless, in the later years, it has negative effect on economic growth and Vietnam's economy grow dependent on foreign investment and exports In short, national economy grows mainly based on external force in this period

Table 3.6: G'DP growth (g=A}/}), Rate r~f investment (Ill), ;:1}//, /COR in Vietnam

Source: Calculated from Government Statistics Office, 2012

The increase of investment stimulates economic growth by creating more capital stock and expanding production capacity The contribution of investment to economic growth depends on the rate of investment (I/GDP) and the investment efficient (i1GDP/I)

Table 3.6 shows that, the major contribution to economic growth is the rate

of investment rather than investment efficient implying that economic growth is mainly based on the number of investors than the quality of investment Investment rate increased to over 42% is too high and tends to saturation In addition, ICOR

indicators are increasing in during the study period, it is mean that the efficient of investment is severely reduced or goes from bad to worse

Figun' 3.8: G~DP, exports and investmellf in Viellutm, 1989-2010 (VND billion)

Source: Government Statistics Office, 2012

Figure 3.8 also indicates that, the correlation between real GDP, exports and investment is relative clearly

As can be seen in table 3.7, the Vietnamese economy has gone through a major transformation which has changed from traditional agricultural to industry and services The decline of agricultural sector can be explained by the reduction of agricultural prices and agricultural terms of trade in international markets

Table 3.7: Structural change iu Vietnam /989-21JJ(J (percentage)

89- Sector 94 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Industry 25.74 32.38 38.13 38.49 39.47 40.21 41.02 41.54 41.48 39.84 40.24 41.10 Services 38.84 41.54 38.63 38.49 37.99 37.98 38.01 38.06 38.18 37.95 38.85 38.33 Agriculture 35.42 26.08 23.24 23.03 22.54 21.81 20.97 20.40 20.36 22.21 20.91 20.58

95-Source: Calculated from World Development Indicators, 2012

Moreover, the demand for food rises slowly compared with other goods and services The share of industry in GDP is more and more increasing and attains over

Figure 3.9: The J.:rowth t~fexports in Vietnam, 1990-2()/(J (percenlaJ.:I!)

35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0

-10.1 -15.0

-+-Exports growth

Source: World Development Indicators, 2012

In addition, exports increased slowly by the management of immanent shortcomings of economy

Joining in WTO in 2007 had helped exports back grew and reached to 11.3% (2007) Nevertheless, Vietnamese exports also have suffered the strongest negative impact and the export of growth is decline from 11.29% in 2007 to 5.05% in 2008

by the global crisis (World Bank, 2012)

Table 3.8: E.\]JOrfs and Imports in Vietnam (perccnlaJ.:e of' GDP)

Year 89-94 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ExEorts 29.8 45.1 54.6 56.8 59.3 65.7 69.0 73.6 76.9 77.9 68.3 77.5 lmEorts 37.5 53.0 56.9 62.0 67.7 73.3 73.2 78.2 92.8 93.1 78.7 87.8

95-Source: Government Statistics Office, 2012

'

The decline of export revenues has caused great difficulties for exporting companies, especially, manufactured exports including garments, footwear, furniture and seafood, agricultural products, many of them are at risk of closing down

During the post-reform period, exports are lower than imports all the time meaning that trade balance is always negative position (table 3.8) There are many causes of the trade deficit Firstly, the domestic consumption goods have imported with high content while exports have had low added value Secondly, many countries in the world have imported barriers from Vietnam's goods, but Vietnam hasn't used Thirdly, the competitiveness of Vietnam's goods in the domestic and foreign market is still low

Vietnam is still an agricultural and natural resource based economy So, the major exports of Vietnam is agricultural products, raw materials, processing and assembly with low added value because using the unskilled labor, in addition, the export value index increased slowly in the period of 1989-2001, but it has gone up rapidly in later years (table 3.9)

Table 3.9: Export mlue iudex iu Vietnam, 1989-2010

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Export 13.5 16.6 14.4 17.9 20.7 28.1 37.7 50.3 63.3 64.8 79.9 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Export 100.0 104.0 115.6 139.5 183.3 224.6 275.7 336.1 433.9 395.2 496.0

Source: World Development Indicators, 2012

Moreover, Vietnamese exports depended on raw materials and intermediate goods which were imported from foreign countries with high price The major exports of Vietnam were mineral and food in 1997, afterwards these commodities export reduced and manufactures exports increased In 2009, manufactures had contributed to exports account for over 60%, however, manufactures in Vietnam is mainly infant industry