1.1.1 Practical background For recent decades, shadow economy, investment from abroad, institutional quality and income inequality have attracted a great deal of attention in development economics because all of them relate to economic growth. Both of foreign direct investment (FDI) and institutional quality (IQ) are considered important determinants of economic growth and development (Borensztein, Gregorio, & Lee, 1998; NairReichert & Weinhold, 2001; Rodrik, Subramanian, & Trebbi, 2004; Acemoglu, Johnson, & Robinson, 2005; Hansen & Rand, 2006; Varsakelis, 2006; and Kandil, 2009). While the official economy is closely related to the shadow economy (Schneider & Bajada, 2003; Vo & Pham, 2014). Moreover, economic growth is associated with income inequality (Kuznets, 1955; Barro, 2000). Especially, these variables and their relationships become worth studying in the context of Asia for its rising thorny features, such as high flow of FDI but low institutional quality, large shadow economy and rising income inequality. First, global foreign direct investment has significantly grown since the 1970s, reached $1.76 trillion in 2015, fell 13% in 2016 ($1.52 trillion) and recovered in 2017; especially, developing Asia is now the largest recipient and accounts for almost onethird of total FDI inflows (UNCTAD, 2017). It is seen as the result of Asian countries in effort to attract FDI for economic development by adopting an open door policy, governance changes & institutional innovation (Haggard, 2004; Lee, 2002). However, the positive impact of FDI on economic growth depends on the institutional quality in the host countries (Brahim & Rachdi, 2014; Jude & Levieuge, 2017). It is also Asia‘s specific concern, especially when there are many countries might be stuck in middle income trap in the region and deficient institutional quality is one of the main causes (Dollar, 2015). Figure 1.1 describes the institutional quality by 5 components (including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, and Rule of Law) in 19 Asian countries 1 on average from 2002-2015. The scale of measurement ranks from -2.5 (lowest quality) to 2.5 (highest quality). In general, the institutional quality in Asian countries is low. The improvement has been seen but it is a slow progress. FDI has flowed into Asian countries in great amounts, but institutional quality is still problematic in the region. Whether institutional quality really helps attracting FDI and FDI in its turn helps improving institutional quality. Does this bidirectional relationship exist in Asian countries?
MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY HUYNH CONG MINH SHADOW ECONOMY IN THE RELATIONSHIP WITH FDI, INSTITUTIONAL QUALITY, AND INCOME INEQUALITY: EMPIRICAL EVIDENCE FROM ASIAN COUNTRIES PhD THESIS Ho Chi Minh City – 2018 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY HUYNH CONG MINH SHADOW ECONOMY IN THE RELATIONSHIP WITH FDI, INSTITUTIONAL QUALITY, AND INCOME INEQUALITY: EMPIRICAL EVIDENCE FROM ASIAN COUNTRIES Major: Development Economics Code: 9310105 PhD THESIS Advisors: Dr Nguyen Hoang Bao Dr Nguyen Vu Hong Thai Ho Chi Minh City – 2018 i This thesis submitted to the School of Economics, University of Economics Ho Chi Minh City, in partial fulfillment of the requirements for the degree of Doctor of Philosophy in development economics ii DECLARATION I hereby declare that this thesis is my own research Data and results are reliable, clearly originated, and have never been published in any other study The author iii ACKNOWLEDGEMENTS First of all, I would like to express my great gratitude to Dr Nguyen Hoang Bao and Dr Nguyen Vu Hong Thai for their invaluable supervision and inspirations Thank you so much for keeping me on track throughout the research process, giving wise comments, advices and encouragement during such a long academic journey Then I am honestly grateful to Dr Pham Khanh Nam, Dr Truong Dang Thuy, Dr Le Van Chon, Dr Vo Tat Thang, Dr Vo Hong Duc, Associate Pro Dr Nguyen Huu Dung, Dr Nguyen Luu Bao Doan, Dr Pham Thi Thu Tra, Dr Pham Thi Bich Ngoc, Associate Pro Dr Vuong Duc Hoang Quan and the two independent Reviewers for their valuable comments and encouragements so that I can improve the quality of my thesis I cannot forget showing my special thanks to lecturers at school of economics as well as those at University of Economics HCMC such as Professor Dr Nguyen Trong Hoai, Dr Pham Khanh Nam, Dr Truong Dang Thuy, Associate Pro Dr.Nguyen Manh Hung, Dr Tran Thi Tuan Anh, Associate Pro Dr Tran Tien Khai… for their academic and practical instructions during my time of study and research at the university Last but not least, I am deeply grateful to my beloved family, including my deceased father, my 83-year-old mother as well as my sisters and brothers who always support and encourage me in time for completing the thesis iv TABLE OF CONTENTS Declaration Acknowledgements Table of contents List of Abbreviations List of Tables List of Figures Pages Chapter 1: Introduction 1.1 Research context and gaps 1.2 Research objectives 13 1.3 Research questions……………………………………………… 13 1.4 Research subjects and scope 13 1.5 Research methodology and data ………………………………… 14 1.6 Contributions 15 1.7 Limitations 17 1.8 Thesis outline 18 Chapter 2: Literature review and hypotheses 19 2.1 Shadow economy 20 2.1.1 Theories on shadow economy 20 2.1.1.1 Definition 20 2.1.1.2 Schools of thought 21 2.1.2 Empirical studies on shadow economy 31 2.1.2.1 Methods to estimate the size of the shadow economy 31 v 2.1.2.2 Determinants (causes) 35 2.1.2.3 The impacts of shadow economy (effects) 40 2.2 Shadow economy, FDI and Institutional quality 44 2.2.1 FDI and institutional quality 44 2.2.1.1 Theories on FDI (Definition, Theories, Determinants) 44 2.2.1.2 Theories of institutional quality (Definition, Theories, Determinants) 47 2.2.1.3 The relationship between institutional quality and FDI 48 2.2.2 Institutional quality and shadow economy 54 2.2.2.1 The effect of institutional quality on shadow economy 55 2.2.2.2 The effect of shadow economy on institutional quality 57 2.2.3 Shadow economy and FDI 59 2.2.3.1 The effects of FDI and FDI-institutional quality interaction on shadow economy 59 2.2.3.2 The effects of shadow economy on FDI 59 2.3 Shadow economy and income inequality 61 2.3.1 Income inequality 61 2.3.1.1 Definition 61 2.3.1.2 Theories 62 2.3.1.3 Measurements 65 2.3.1.4 Determinants 66 2.3.2 The impact of shadow economy on income inequality 67 Chapter 3: Methodology, model specifications, and data 73 3.1 Analytical framework 74 3.2 Empirical models and data 77 3.3 Econometric methodology 88 3.4 The sample selection of 19 Asian countries and their backgrounds on research problems 93 vi Chapter 4: Shadow economy, FDI and Institutional quality: empirical evidence from Asian countries 96 4.1 Introduction 96 4.2 Data analysis 97 4.2.1 Data descriptive statistics 97 4.2.2 Unit-root test 99 4.2.3 Correlation analysis 101 4.3 Estimation results and discussions 102 Chapter 5: The impacts of shadow economy on income inequality in developing Asia 113 5.1 Introduction 113 5.2 Data descriptive statistics 116 5.3 Empirical results and discussions 119 Chapter 6: Conclusions and policy implications 125 6.1 Conclusions 125 6.2 Policy implications 128 6.3 Limitations and further research implications 129 List of publications 130 References 131 Appendices 158 vii LIST OF ABBREVIATIONS 2SLS: Two-stage Least Squares 3SLS: Three-stage Least Squares ARDL: Autoregressive-distributed lag model AR1: First-order Autocorrelation AR2: Second-order Autocorrelation ECM: Error correction model EFR: Economic Freedom Report FDI: Foreign direct investment FE: Fixed Effects FH: The Freedom House GCI: Global Competitiveness Index GDP: Gross Domestic Products GLS: Generalized Least Squares GNI: Gross National Income MENA: Middle East and North Africa MIMIC: Multiple Indicators Multiple Causes MNCs: Multinational Corporations HDR: Human Development Report HF: The Heritage Foundation ICRG: The International Country Risk Guide IEF: Index of Economic Freedom viii ILO: International Labor Organization IMF: International Monetary Fund IQ: Institutional quality JGLS: Joint Generalized Least Squares OLI: Ownership, Location, and Internalization OLS: Ordinary Least Squares POLS: Pooled Ordinary Least Squares PRS: Political Risk Services Group RE: Random Effects SEM: Simultaneous equation model SGMM: Two Steps System Generalized Method of Moments SURE: Seemingly Unrelated Regression UNESCO: United Nations Educational Scientific and Cultural Organization UNCTAD: United Nations Conference on Trade and Development UNDP: United Nations Development Programme WB: World Bank WDI: World Development Indicators WEF: World Economic Forum WGIs: Worldwide Governance Indicators ... Thuy, Dr Le Van Chon, Dr Vo Tat Thang, Dr Vo Hong Duc, Associate Pro Dr Nguyen Huu Dung, Dr Nguyen Luu Bao Doan, Dr Pham Thi Thu Tra, Dr Pham Thi Bich Ngoc, Associate Pro Dr Vuong Duc Hoang Quan. .. well as those at University of Economics HCMC such as Professor Dr Nguyen Trong Hoai, Dr Pham Khanh Nam, Dr Truong Dang Thuy, Associate Pro Dr.Nguyen Manh Hung, Dr Tran Thi Tuan Anh, Associate... 19992015 1.5 Research methodology and data The quantitative methodology is employed to deal with both research objectives To examine the relationship among FDI, institutional quality and shadow economy