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

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE THE NETHERLANDS 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 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 Certification "I certificate that the substance of the thesis has not already been submitted for any degree and is not currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing the thesis and all sources used have been acknowledged in the thesis." Signature Bui Thi Kim Hoang Date: 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 ii 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 19892010 The paper uses time series data for individual countries and panel data for the panel three countries The study estimate vector autoregression model (VAR) 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 iii Contents Certification Acknowledgement ii Abstract iii Contents iv List of Tables vi List of Figures vii List of Abbreviations viii Chapter 1: Introduction 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Research methodology 1.5 Structure of the thesis Chapter 2: Literature Review 2.1 Theoretical Literature 2.1.1 Relationship between foreign direct investment and economic growth 2.1.2 Relationship between exports and economic growth 2.1.3 Relationship between FDI and exports 2.2 Empirical studies 2.3 Conceptual framework 17 Chapter 3: Foreign Direct Investment, exports, and economic growth in Malaysia, Thailand, and Vietnam: Descriptive and Comparative Analysis 19 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 iv 4.3.2.2 Panel cointegration test 49 4.3.2.3 Panel causality test 50 Chapter 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 v 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 vi 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 (%) vii List of Abbreviations ADF Augmented Dickey-Fuller AIC Akaike's Information Criterion AR Autoregression ECT Error Correction Term EX Exports FDI Foreign Direct Investment GDP (Y) Gross Domestic Product GMM Generalized Method of Moment I Investment 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 VND Vietnam dong WB World Bank WTO World Trade Organization viii 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, in Malaysia The thesis only examines the causality relationship between foreign direct investment, exports, and economic growth in three countries including Malaysia, Thailand, and Vietnam The effect ofFDI or exports on economic growth have not determined in this thesis Hence, further research performs the short run and long run marginal impact of foreign direct investment and exports on economic growth 61 References Agiomirgianakis, G.M., D Asteriou and K 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