Foreign direct investment, exports, and economic growth in malaysia, thailand and vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIESVIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FOREIGN DIRECT INVESTMENT, EXPORTS, AND ECONOMIC GROWTH IN MALAYSIA, TH

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

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

First of all, I would like express my deepest gratitude my academic supervisor, Dr.Nguyen Hoang Bao, Dean of Economic Development, HCM City University ofEconomics, 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

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This study exammes the causality relations between foreign direct investment,exports, and economic growth in the three countries including Malaysia, Thailand, andVietnam of the Southeast region for the period of 1989-2010 The paper uses timeseries data for individual countries and panel data for the panel three countries Thestudy 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 threecountries And then, using two different panel unit root tests it is found that all thepanel variables are integrated in order one The cointegration is found for the panelvariables from the Johansen Fisher panel cointegration and Kao tests The panel-Granger test support that there are bidirectional long run causal relations between thevariables but there is only unidirectional from exports to foreign direct investment inthe short run for the panel of three countries

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

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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

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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

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

US$ The United States dollar

VAR Vector Autoregression

VECM Vector Error Correction Model

WTO World Trade Organization

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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, thestructure of the thesis will be presented

1.1 Problem statement

The role foreign direct investment and exports in promoting economic growthhave much recognized in many countries in the world throughout theoretical andempirical literature The new growth theories have showed the importance ofinvestment and openness to trade in economic development Through these factors, thestrategies for foreign direct investment and exports promotion are necessary proposed

to promote economic growth especially for developing countries, so called 'FDI-ledgrowth' or 'export-led growth' Theoretically, international free trade has been called

"engine of growth", which is proved clearly from the classical economists to themodem economists Moreover, many economic studies have indicated that countriesadopt international free trade enjoy higher growth rates than those close theireconomies to trade (Sachs and Warner, 1997; Wacziarg and Welch, 2008) Theapplication of an open economy and free trade, countries will be rewarded greatereconomic growth and leads to raise income levels and living standards (Frankel andRomer, 1999) As above, throughout trade, export sectors can be earned more profit andincreased saving as well as create foreign exchange earnings and jobs opportunities forworkers in export sector (Azam, 2010) Hence, the output growth can be generated notonly by increasing the quantities of labor and capital in economy, but also by expandingexports Furthermore, the competitive of exports markets cause to give export-orientedpolicies contribute positively to economic growth and it also helps the countriesintegrate promptly into the world economy Therefore, the export-led growthhypothesis is in favor of exports expansion is one of the main determinants of economicgrowth However, output also has a positive impact on exports throughout productivitygrowth,

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 theincrease in foreign direct investment flows is expected to become the power for thegrowth of trade and economic growth FDI can promote the economic development ofthe 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 developingcountries Chiara and Sasidharan (2009) also showed that FDI inflows have theimportant role in the process of economic development because they bring in somespecific 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 foreigndirect investment, exports, and economic growth have gained importance and attentionamong policy makers and researchers

From the past to now, many economists and researchers have a great interest inthe relationship between FDI, exports, and economic growth A larger number ofempirical studies have used time series, cross section, and panel data to investigate theimpact of FDI, exports on economic growth or the FDI-led growth and export-ledgrowth hypothesis The methods is applied to explore the relationship of exports andeconomic growth in the early studies includes examining the simple correlationcoefficient between them (Balassa, 1978 and Tyler, 1981) or estimating regressionequations based on the Neoclassical growth with exports is an explanatory variables Inthe recent studies, the causality between FDI, exports growth, and economic growth isemphasized by using cointegration techniques and Granger causality for time series orpanel data Some empirical studies have used the methods that is above mentioned toexamine the causal link of FDI, exports, and

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growth for Asian or Africa regions, developing countries and so on, for instance of timeseries 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 growthrather mixed, it is specified for each of country or other regions So, it is necessary forpolicy makers and researchers to pay attention to relation FDI, exports, and economicgrowth These variables interact with each other, for this reason, needing to clearlydetermine the relationship of them in order to give effective policy to promoteeconomic growth, especially for developing countries in the world Malaysia andThailand are one of the few developing countries that have sustained economic growthwith high rate in the long run According to Todaro and Smith (2003), Malaysia andThailand have been successful in increasing exports and attracting foreign directinvestment to enhance economic growth, particularly in manufacturing sector Vietnamalso has comparative advantage and economy conditions like Malaysia and Thailand,

so the policies which promote economic growth from these countries are the significantlessons for national Hence, this thesis examines the causal relationship between FDI,exports, and economic growth using cointegration and causality techniques for timeseries 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 empiricalliterature with modem methodology

1.2 Research objectives

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.

1.3 Research questions

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?

1.4 Research methodology

This paper uses annual time series data and panel data of three countries inSoutheast Asia region including Malaysia, Thailand, and Vietnam over the period of1989-2010

To examine the relationship between FDI, exports, and economic growth,statistic approach for time series data includes Augmented Dickey-Fuller (ADF) testand the Phillips and Perron (PP) test, Johansen's cointegration technique, Grangercausality test and for panel data involves Im, Perasan, and Shin (IPS) test andAugmented Dickey-Fuller Fisher (ADF-Fisher) test, Johansen Fisher panelcointegration and Kao tests, panel Granger causality test are applied in this study

1.5 Structure of the thesis

This thesis is divided into six chapters Chapter 1 is the problem definition thatleads to the study, the thesis of objectives and research questions, and brieflymethodology Chapter 2 presents theoretical and literature review Chapter 3 introducesoverview of the problem on foreign direct investment, exports, and economic growth.Chapter 4 provides the methodology for carrying out the study Chapter 5 indicatesempirical results corresponding to each estimation technique The last chapter will giveconclusions of empirical results, policy implications, and limitations of the thesis

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Chapter 2: Literature Review

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

2.1 Theoretical Literature

2.1.1 Relationship between foreign direct investment and economic growth

Foreign direct investment is an important source of capital, complementsdomestic private investment which is associated with new job opportunities andenhancement of technology transfer leads to boost economic growth in host countries.There are several ways in which FDI can contribute to economic growth InNeoclassical growth model considers technological progress and labor force asexogenous, and thus FDI increases the volume of investment and promotes economicgrowth FDI inflow only has a short run growth effect, due to the diminishing returns tocapital In the new endogenous growth theory consider long run growth as a function oftechnological 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 etal., 2006) Makki and Somwaru (2004) also have pointed out that FDI has asignificance through technology transfer via diffusion process from developed todeveloping countries

On the other hand, economic growth is one of the determinants of foreign directinvestment inflows in the host country The level of economic growth plays animportant role in attracting FDI, the enhancement of economic growth may createincrease domestic markets and businesses (Agiomirgianakis et al., 2006) Rapideconomic growth leads to large aggregate demand which stimulates to increase demandfor investments including FDI In addition, better economic performances in the hostcountries 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 andthe 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 correlationeach other and exports are a vital factor in promoting economic growth in developingcountries There are several theoretical arguments supporting export-led growthhypothesis

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

Where Xi is country i's GNP, A is a technological constant, Ki is country i'scapital 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 incontribute to growth compared to the model only have capital information and labor

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force And he proved that 17.5% increase in exports is associated with 1% increase ingrowth 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 anddeveloping countries (Medina-Smith, 2001 ) He advocated that exports take advantage

of economies of scale and technological progress leads to increase productivity andcreate employment In addition, exports expansion decreases the pressures of currentaccount for foreign capital goods by increasing the country's external earnings andattracting foreign investment K6nya (2002) also argues that the promotion of exportactivity leads to economic growth base on trade theory It directly encourages theproduction of goods for exports lead to the specialization of economic of scale and thenation'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 forperson which works in the exportable sector, it can cause to increase output Expandingexports can also make the efficient reallocation of resources and the exploitation ofscale economies that can produce greater productivity and output growth Furthermore,the increased for exports can stimulate advanced technologies, skill improvement andmanagement techniques due to foreign market competition (Ben David and Loewy,1998) and provide foreign exchange to increase the imports of capital goods andintermediate goods which enhances output growth The expansion of exports push upoutput growth while at the same time output growth also stimulates exports Exportscreate 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 tohigher exports Economies of scale contribute to cost reduction, comparative

advantage and hence exports increase Moreover, economic growth enhances skills andtechnology in the various sectors of an economy to boost productivity (Krugman,

1984 ) This point of view similarly, Ram (2003) also state that the advancement skillsand technology create a comparative advantage for the country in production of anumber of products which can lead to expand exports for those commodities Majeedand Ahmad (2006) proved that GDP and GDP growth has positive effects on exportswith highly significant in developing countries Therefore, it is important to maintain ahigh and sustainable economic growth which is a vital factor to promote exportsbecause 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 growingmarkets FDI affects the host country's export performance through two ways includethe export activities of foreign affiliates or the expansion of exports by domestically-owned firms (Lipsey, 2004) Firstly, MNC's affiliates have factor endowments such asabundant resource or cheaper labor costs to increase export competitiveness in theworld markets and thus boosting export performance Secondly, the local firms' exportsare indirectly affected by FDI through various channels MNCs affiliates may improvelocal firms' competitiveness through the technology transfer, management, skills andlabor lead to increase efficiency production Moreover, Njong (2008) also supportedFDI shift from higher labor cost countries to lower labor cost host countries leads toincrease MNCs' export competitiveness and enhance the export performance

Besides, exports also effect on FDI through trade or various ways According toAkinkugbe (2003 ), the high income per capita, the orientation of outward tointernational trade, infrastructure development and high rate of return on investment arethe significant factors for FDI inflows Similarly, Lim (2004) found that the marketsize, infrastructure quality, economic stability and free trade zone are

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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, andeconomic growth in Nigeria during 1960-2009 The paper show that having sixcointegration vectors among FDI, capital formation, degree of openness, import, andterms of trade based on the results of Johansen co integration test The variables hadthe 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, andeconomic growth in four South Asian countries India, Bangladesh, Sri Lanka andPakistan 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 nationsand similarly for FDI but except Sri-Lanka Besides, domestic investment and laborforce have also positive effect on economic growth

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

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

Hossain (2012) analyzed both the short-run and long-run relationship betweenFDI and economic output in South Asian countries using data from 1972 to 2008 Thestudy used three econometric model (ADF test, Engle-Granger test, and VECM) andGranger causality to find the impact of FDI on economic output and inverse Theresults indicate that there is no cointegration between FDI and GDP in the both shortrun and long run for Bangladesh and India Nonetheless, the cointegration is found in

causality relationship between FDI and GDP in Bangladesh and one way relationshipbetween two variables in Pakistan and India, and FDI cause economic output in thesecountries.

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'seconomic growth makes FDI increase

Erecakar (20 11) investigated the relationship among growth, FDI, trade andinflation in Turkey for the period 1970-2008 Cointegration test also is used in thisstudy to explore the long-run relationship of variables and found out only onecointegration 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, andinward FDI in Least Developing Countries during period 1990- 2009 The study use anew panel - data approach based on SUR systems and Wald tests The Grangercausality relationship is found among these variables The empirical results supportexport-led growth, FDI-led growth, FDI-led exports, inversely

Safdari et al (20 11) tested the causality relationship between export andeconomic 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 panelunit roots of Levin et al (LLC, 2002), Im et al (IPS, 2003), Breitung (2000) andFisher-type test by Maddala and Wu (1999), and Choi (200 1) to investigate forstationary Panel cointegration test proposed by Pedroni ( 1999, 2004) and Kao ( 1999)

is applied to check cointegration between export and output growth A panel-VECMcausality based on Wald test is used for examine causal relation of real export and realGDP The results show that export is not Granger cause of economic growth, but oneway causality from growth to export in the thirteen Asian developing countries isselected in this paper

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Eusuf and Ahmed (20 10) examined causality between export and growth usingEngle-Granger's error correction model with annual time series data in South Asiancountries Seven countries with the different time period for each country is studied inthis 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 exportsand the GDP deflator have been used in this study The ADF and PP test is used fortesting for stationary and Engle-Granger procedure is checked long-run relationshipbetween exports and growth And the causality relationship of two variables is testedbasing on the F -test and the error correction term The results indicate that real exportsand real GDP are cointegrated in Bangladesh, Pakistan and Nepal Export-led growth isfound 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 hadnot proved the presence of feed-back export-led growth relation The study findingssuggest mixed results, and do not give any conclusion to support export-led growth forSouth Asian countries.

Bahmani-Oskooee and Economidou (2009) investigated export-led growth andgrowth-led exports using annual data over the period 1960-1999 from 61 countries ofLDCs The paper uses five variables gross domestic product, gross capital formation,exports, imports (in constant 1995 US $) and total labor force in thousands For testingstationary of a variable and giving the number of cointegration vectors uses Johansen'scointegration technique (1988) The results show that no cointegration vector is foundfor 14 countries (Cote d' Ivoire, Mauritania, Mauritius, Morocco, China, Malaysia,Pakistan, the Philippines, Guyana, Haiti, Jamaica, Paraguay, Peru, and Uruguay) andthe null of no cointegration is rejected in the remaining countries showing the existence

of at least one cointegrating vectors among these variables The relationship betweenexports and output is divided into four groups in this paper The first, there is afeedback

between exports and output in the long run for Algeria, Gambia, Ghana, Malawi,Senegal, Hungary, El Salvador, and Honduras The second group includes countriesBurkina Faso, Burundi, Gabon, Kenya, Lesotho, Mali, Niger, Nigeria, Togo, India,Korea, Thailand, Egypt, Israel, Argentina, Bolivia, Brazil, Costa Rica, DominicanRepublic, Guatemala, Mexico, Trinidad, and Tobago have no long run relation betweenoutput and exports The third group that the increasing of exports stimulate output inthe 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 toexport growth in the long run for Benin, Guinea, Bisu, Rwanda, Zambia, Bangladesh,Indonesia, Papua New Guinea, Chile, and Colombia Thus, the results are countryspecific.

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

Miankhel et al (2009) explored the causal relationship between FDI, exportsand 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 variableswith one structure break The paper also used cointegration and Granger causalitybased on V AR or VECM to examine the causal link between these variables Theexport-led growth hypothesis is supported in both India and Pakistan GDP growth alsodrives 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

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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 economicgrowth in Malaysia for the period of 1975- 2005 The analysis is based on boundstesting approach by Pesaran et al (200 1) The results show that the effect of tradeopenness on growth is statistically significant positively, both in the short run as thelong run FDI is positive effect on economic growth in the short run and negatively inthe long run

Pham (2008) applied the structural V AR models to examine the effect ofinvestment 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 didnot support in Vietnam In addition, export also did not contribute to improveproductivity as well as investment

Maneschiold (2008) carried out a study investigated the export-led growth inArgentina (1993Q1 - 2006Q1), Brazil (1991Q1 - 2006Q1) and Mexico (1980Q1 -2006Q 1) using co integration and causality test The quarterly data of GDP at constantprices 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 Johansenprocedure is applied to test cointegration relationship between exports and economicgrowth in above three countries When two variables are cointegrated, this study usecausality 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 break period except Brazil Bidirectional is found for Argentina and Mexico in thepost-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 runcausality test for Brazil So, the paper

post-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 toexamine the causality relations between export, FDI, and GDP in East and SoutheastAsia including Korea, Taiwan, HongKong, Singapore, Malaysia, Philippines, Thailand,and China This study applied ADF, DF-GLS and KPSS unit root tests, Johansencointegration test, and Granger causality test based on VARin time series Twodifferent panel unit root test consist of IPS and ADF-Fisher tests, and Granger causalitytest 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 isalso found, and in addition, GDP has weak impact on exports for the panel countries

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

Kemal et al (2002) investigated the relationship between exports and economicgrowth 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 realexports and real GDP in local currency units The study uses ADF and PP test tochecking for stationary of variables and the long run

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

Ekanayake ( 1999) tested the causal relation between exports and economicgrowth 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 parenthesesincluding 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 theGDP deflator and export price index (1990=100) This study uses the co-integration anderror correction models to examine the causal relationship of two variables ADF test isused to test for unit roots in this paper and the results show the presence of unit roots inall series for all countries in first difference The next, two methods Engle-Granger andJohansen- Juselius is applied to check causal relation between exports and economicgrowth for each of eight Asian countries Granger causality could be detected when twovariables are cointegrated The results indicate that bidirectional causality existsbetween exports and economic growth in all countries except Malaysia The strong longrun 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 nationsexcepted Sri Lanka On the contrary, evidence of short run causality from exportgrowth to economic growth only was found in Indonesia and Sri Lanka

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

EX, FDI, Babalola et al.

1973-2010

Trade, FDI,

GMM

EX -> GDP FDI > GDP

Growth,

FDI > GDP, Inflation, trade surplus -> Erecakar (2011) Turkey 1970-2008 FDI, trade, Cointergation test

GDP and inflation

Least

EX, FDI,

EX -> GDP

FDI -> GDP Tekin (20 II) developing 1990-2009 Granger causality

5 Asean countries Rudraet al.

Singapore,

Co integration, FDI +-> GDP Indonesia, 1970-2007 FDI, GDP

Philippines,

FDI 0 GDP (M) Thailand,

Mala sia India,

EX >GDP (l) GOP-> FDI (l) Pakistan,

EX -> GDP (Mexico, C) Trade

openness,

Bounds testing

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

FDI -> GDP approach

Asean countries Philippines,

EX <-+ GOP (P, I) Ismail and Indonesia

Thailand South Asia countries

EX GOP (B, N, S) Kemal et al Bangladesh,

I960-2000 EX, GOP

Cointegration,

EX - GOP (1, P) Sri Lanka,

India, Pakistan

8 Asian O.countries Malaysia

EX- GOP (M) India,

EX <-+ GOP (remaining Ekanayake Philippines,

I960-1997 EX, GOP

Co integration,

countries)

Korea, Pakistan, Sri Lanka, Thailand Notes: + : one-way impacts

+-+ : causality effects, and

0 : not clear pattern

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

2.3 Conceptual framework

A conceptual framework is withdrawn from literature review as mentioned infigure 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

17

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

technology

progress Spillover effects

Foreign exchange

• Panel Granger test

[' F-D-1-~) ~ [ E_x_po_rt_s-~)

18

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

3.1 Foreign direct investment, exports, and economic growth in Malaysia

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

-+-GDP growth in Thailand_._GDP growth in Malaysia

Source: World Development Indicators, World Bank (2012)

19

However, the onset of the Asian financial and economic crisis in 1997 hadseverely impacted to economic growth of Malaysia and Thailand countries Their GDPgrowth 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 economiccrisis.

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 grewapproximately 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 withdownward 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 Thailandhad reached 7.2% and 7.8% in 2010

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

Tahll~ 3.1:The contribution (~/components demand to economic growlll in il1alaysia awl

Table 3.1 shows that exports are main source of economic growth, especiallyfor 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 thereal GDP and private consumption, investment, exports, and imports are very highimplying that Malaysia and Thailand economic growth had been more dependent on thegrowth rate of these variables However, the government

consumption of Malaysia and Thailand had a little correlation with economtc

Notes: Cg, CP, I, E, M are the growth rates of government consumption, household consumption, investment,

exports and imports, respectively.

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

8E+03 7E+03 6E+03 4E+05

5E+03

2E+05

3E+03 2E+03 1E+05

1E+03 OE+OO

, _GOP in Thailand ~Exports in Thailand

, GOP in Malaysia -+-Exports in Malaysia

Source: World Development Indicators, World Bank (2012)

21

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

22

Kingdom and Switzerland Japan is usually the largest source of FDI since the late1970s in Thailand and automotive sector is the main contributors for the industrysector.

Figure 3.2 also show that, exports and economic growth have correlation in bothMalaysia and Thailand Reinhardt (2000, p.59) states that 'exports were divided intofive categories: primary (unprocessed raw materials excluding: natural resource and un-skilled labor intensive), mineral (nonferrous ores: natural resource and capitalintensive), semi-manufactures (simply processed manufactures: natural-resourceintensive, 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)

23

exports dominated in export structures and played an increasingly significant role in

Source: Calculated from World Development Indicators, 2012

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 foreigninvestments On the contrary, the export share of agriculture and food are steadilyfalling in both countries As for mineral in 2009-2010, the share of mineral increasedcompare to the last years for Malaysia and Thailand

Export value index has fluctuated from 25.5 and 29.1 in 1989 to 220.4 and283.3 in Malaysia and Thailand, respectively (figure 3.6)

Table 3.3 presents that agricultural sector produced a small share of GDP which

24

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 theshare of GDP, contributing more than 41% in GDP and especially significance forThailand

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

Source: Calculated from World Development Indicators, 2012

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