Tài liệu Luận án tiến sĩ a study on the impact of foreign direct investment on economic development of lao p.d.r.

MINISTRY OF EDUCATION MINISTRY OF EDUCATION AND TRAINING LAOS NATIONAL UNIVERSITY NATIONAL ECONOMICS UNIVERSITY KHAMSEN SISAVONG A STUDY ON THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC DEVELOPMENT OF LAO P.D.R. A thesis submitted to the National Economics University in fulfillment of requirements for the degree of Doctor of Philosophy in Economics Hanoi, 2014 i DECLARATION I hereby declare that this dissertation is my own work and effort. The dissertation has not been submitted anywhere for any award. All the sources of information used have been well acknowledged. Date: Signature KHAMSEN SISAVONG ii ACKNOWLEDGMENTS The Vietnam – Lao Cooperative Program Doctor of Philosophy (PhD) between NEU and NUOL is very important, necessary, valuable and beneficial to our nations because this project allows Lao people to upgrade and enhance their level to Doctorate Degree. Therefore, I would like to acknowledge the leaders, Administrators, Professors of the National Economics University of Vietnam and National University of Laos to give me this excellence opportunities to achieve my dream of PhD. I would like to express my gratitude to Prof. Dr. Tran Tho Dat, Assoc. Prof.Dr. Nguyen Thanh Ha and other professors who were in the committees for evaluation of my dissertation in the early stages of my PhD study. I am deeply indebted to Assoc. Prof. Dr. Nguyen Thi Tuyet Mai, my supervisor who gives me clear guidelines and contributing her advises to my dissertation. I am also grateful to Prof. Dr. Somkod Mangnormek, Governor of Xiengkhuang Province, member of Central Committee Party, Prof. Dr Kikeo Khaikhamphithoun, Head of National Accademic of Politic and Public Administration, member of Central Committee Party, Prof. Dr. Thongsalith Mangnormek, Head of National Economic Research, Prof. Dr. Bounpong Keonoradome, President of Savannakhet University who encouraged and supported me to reach my goal of PhD. My special thanks go to my family, Sengsavanh College’s staff and my friends. They are always pleased to encourage and to assist me during my PhD research. Without your supports I could not complete and realize my dream. iii CONTENTS DECLARATION ..........................................................................................................i ACKNOWLEDGMENTS .......................................................................................... ii ABBREVIATIONS .....................................................................................................v LIST OF FIGURES .................................................................................................. vii LIST OF TABLES ................................................................................................... viii CHAPTER 1. INTRODUCTION................................................................................. 1 1.1 Research Background ............................................................................................1 1.2 Rationale for the Research .....................................................................................3 1.3 Research Objectives and Research Questions .......................................................4 1.4 Scope of the Study .................................................................................................6 1.5 Contributions of the Study .....................................................................................6 1.6 Dissertation Structure ............................................................................................8 CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT .................................................................................. 9 2.1. Definition and Indicators of Economic Development ..........................................9 2.1.1 Definition of Economic Development ...........................................................9 2.1.2 Indicators of Economic Development .........................................................10 2.1.3 Theoretical Economic Overview .................................................................11 2.2 FDI and its Impact on Economic Development ..................................................14 2.2.1 Definition and Determinants of FDI ............................................................15 2.2.2 Impact of FDI on Economic Development ..................................................30 CHAPTER 3. OVERVIEW OF ECONOMIC DEVELOPMENT AND FDI IN LAOS 51 3.1. Overview of Laos’ Economy ..............................................................................51 3.1.1. Economic Growth .......................................................................................52 3.1.2 Economic Structural Changes ......................................................................53 3.1.3 Financial Sector Growth ..............................................................................54 3.1.4 Banking Sector Development .....................................................................55 iv 3.1.5 Inflation has been effectively managed ......................................................55 3.1.7 Workforce and Employment Balance ..........................................................56 3.1.8 Balancing the Sources of Funds for Development ......................................58 3.1.9 Balancing the State Budget ..........................................................................60 3.1.10 Balancing Imports and Exports..................................................................61 3.1.11. Sectoral Development, Regional and International Economic Integration ...............................................................................................................................65 3.1.12 Infrastructure ..............................................................................................88 3.2 Foreign Direct Investment in Laos ......................................................................90 CHAPTER 4. RESEARCH METHODOLOGY ...................................................... 95 4.1 Research Questions ..............................................................................................95 4.2 Variables and Measures .......................................................................................95 4.3 Data Description ..................................................................................................97 CHAPTER 5. RESEARCH FINDINGS .................................................................. 107 5.1 FDI and GNI per Capita....................................................................................107 5.2 FDI and Financial Capital .................................................................................108 5.3 FDI and Level of Technology............................................................................111 5.4 FDI and Human Capital .....................................................................................112 5.5 FDI and Energy and Natural Resources ............................................................113 5.6 FDI and Transportation and Communication ....................................................114 CHAPTER 6. CONCLUSIONS AND DISCUSSION ............................................ 116 6.1 Conclusions ........................................................................................................116 6.2 Implications of the Study ...................................................................................117 6.3 Limitations of the Study and Future Research Direction ..................................121 REFERENCES .......................................................................................................... 123 v ABBREVIATIONS AFTA Asean Free Trade Area AGOA Africasn Growth and Opportunity Act APTA Asia Pacific Trade Agreement ASEAN Association of South East Asian Nations ATIGA Asean Trade in Goods Agreement BIT Bilateral Investment Treaty BOP Balance of Payments CAP Carribean African Pacific CEPEA Comprehensive Economic Partnership in East Asia EAFTA East Asia Free Trade Area ECE Economic Commission of Europe ECOWAS Economic Organization of West African States EU European Union FDI Foreign Direct Investment FPI Foreign Portfolio Investment FY Financial Year GDI Gross Domsetic Income GDP Gross Domestic Product GNI Gross National Income IMF International Monetary Fund IPRs Intellectual property rights ISCED International Standard Classification of Education ISIC International Standard Industrial Classification Lao PDR the Lao People’s Democratic Republic vi LDCs Least developed countries MFs Multinational firms MIGA Multilateral Investment Guarantee Agency MNC Multinational Corporation NEM New Economic Model NIEs Newly Industrializing Economies NTA National Tourist Authority ODA Official Development Assistance OECD Organization for Economic Co-peration and Development OLI Ownership, Locational, Internalization OLS Ordinary Least Square OPIC Overseas Private Investment Corporation PPP Purchasing Power Parity SAPTA South Asian Preferential Trade Agreement TDS Total Debt UN United Nations US the United States VAT Value Added Tax WTO World Trade Organization vii LIST OF FIGURES Figure 1: Economic structure 2006 – 2010 ...................................................................54 Figure 2 Export and Imports from 2005-2009. .............................................................64 Figure 3 Average size of agricultural land per household.............................................66 Figure 4. Average share of value added in the industrial sector 2006-2010 .................70 Figure 5. Structure of service sector 2006-2010 ...........................................................75 Figure 6 Foreign direct investment, net inflows (BoP, current US$) ...........................92 Figure 7. Distribution of FDI in Lao PDR (US$ m) .....................................................93 Figure 8. Share of accrual FDI by country (% of total, as of August 2009) .................93 Figure 9. Ten biggest foreign investors in Laos (1989 – 2012) ....................................94 Figure 10. Graph of Correlation between FDI and GNI per capita ............................107 Figure 11. Graph of Correlation between FDI and long-term debt service on external debt ..............................................................................................................................110 Figure 12 Graph of Correlation between FDI and level of technology .....................112 Figure 13. Graph of Correlation between FDI and School enrollment, tertiary ........113 Figure 14. Graph of Correlation between FDI and Natural Resources ......................114 Figure 15. Graph of Correlation between FDI and Mobile cellular subscriptions .....115 viii LIST OF TABLES Table 1. Comparison between actual and targeted GDP growth rate in the Sixth Plan (2006-2010) ...................................................................................................................52 Table 2. GDP per capita (plan vs. actual) ......................................................................53 Table 3. Share of labour by sectors ...............................................................................58 Table 4. Private domestic and foreign investment from 2006-2010 (USD billion) ......60 Table 5. Export structure of Lao PDR by commodities 2005-2009 (%).......................62 Table 6. Import structure of Lao PDR by commodities 2005-2009 (%).......................63 Table 7. Inter-Country Comparison on Opened Trade or Integration 2006-2010 ........86 Table 8. Export Market Structure with Main Trade Partners, 2008 ..............................87 Table 9. Foreign direct investment, net inflows ............................................................98 Table 10. GNI per capita ...............................................................................................99 Table 11. Gross capital formation (annual % growth) ................................................100 Table 12. Financial capital ..........................................................................................101 Table 13. Industry, value added (% of GDP) ..............................................................102 Table 14. Human capital..............................................................................................103 Table 15. Oil consumption per capita..........................................................................104 Table 16. Transportation and communication .............................................................105 Table 17. FDI and GNI per capita Coefficient of Correlation ....................................108 Table 18. FDI and Financial Capital Coefficient of Correlation .................................108 Table 19. FDI and Level of Technology Coefficient of Correlation...........................111 Table 20. FDI and Human Capital Coefficient of Correlation ....................................112 Table 21. FDI and Energy and Natural Resources Coefficient of Correlation ...........113 Table 22. FDI and Transportation and Communication Coefficient of Correlation ...114 1 CHAPTER 1. INTRODUCTION 1.1 Research Background Laos is a small landlocked country with an area of 236,800 square kilometers. It shares its borders with Vietnam in the East, China in the North, and Cambodia in the South, Thailand and Myanmar in the west. Two third of the country is mountainous (northern part) thus its geographic circumstances constrain both the quality and quantity of agriculture and cause difficulties to the development of trade, social infrastructure and transportation and communication links. However, the country has transformed from a landlocked to a land link and cross road to other parts of the world. Laos is located in the center of energetic and prosperous region of South East Asia and possesses a high potential of natural resources, raw material and hydropower. The country is divided into three main regions: northern, central and southern regions. The current total population of Laos is 6.9 million (2012) with major of those live in valleys of the Mekong river and its tributaries. The population density is about 27 per. Sq. meter. Vientiane is the capital and the largest city, and its population is about 800,000 residents. After becoming independent in 1975, Laos established control over the economy through the centralized fiscal and socialist government until 1985 but during that period, the government had seen that the performance of the economy was unable to reach expected goals. Economic management was weak due to the lack of skilled labor force. External assistance was provided but projects were not completed at a satisfactory level. In 1986, the Lao government implemented the New Economic Mechanism (NEM) to open the country and provided incentives for developers and investors and moved from a centrally planned economy to a market oriented economic model. 2 The goals of the NEM were: Launching open market policies and the introduction of market economy principles. The reform has attracted FDI projects in the agricultural, industrial, hydropower electricity, mining and the service sectors. These sectors of development have played an important role in the support of the economic development in Lao P.D.R. Laos has continuously pursued significant economic and institutional reforms, aiming at improving social and economic wellbeing of its population by consistently building itself a market oriented economy. Laos has achieved remarkable economic growth and macroeconomic stability. It has witnessed a significant rise in public and private investment. These factors contributed to the annual average growth rate of over 6 percent per annum from 1990 to 2009 and the annual average growth rate of about 8 percent in 2012. In order to promote and attract FDIs in Laos, the government has created Special Economic Zones (SEZ) in compliance with the general investment policies of the government. The government has implemented incentive policies to promote both domestic and foreign investment in the special economic zone by shortening the investment approval process in SEZ, facilitating business operations, production, and services based on the mechanism of “smaller administration units but wider society” or “one stamp mechanism” to generate a good environment for investment. FDI inflows in Laos have grown dramatically over the past decade and have played an important role in the growth of the world economy as well as the ASEAN Nations. In the developing world, FDI has become the most stable and largest component of capital flows. As a result, FDI has become an important alternative in the development finance process (Global Development Finance, 2005.) 3 Laos is a small and still poor country. Therefore, the investment from foreign countries in terms of FDI is needed because FDI plays an important role in job creation, economic growth, capital inflow, technology transfer, human resource development, and wealth in the host country. Thanks to the economic reform, the number of FDI projects and the income on international trade have increased significantly and have had a direct impact on national income as well as GDP growth. 1.2 Rationale for the Research It has been suggested that Foreign Direct Investment (FDI) inflows have played an important role in promoting economic growth in developing countries, especially in the Southeast Asian countries (Nguyen, 2008). They are the source of large capital, knowledge, expertise, technology transfer, and international market access. Since the 1990's, the global flows of FDI have grown phenomenally and have become the largest source of foreign private capital to reach developing countries like Laos. The attraction of the FDI is becoming increasingly important for Laos to bring certain benefits to the national economy like the contribution to the GDP, the total investment, and the balance of payment for the host country. However, the impact of FDI largely depends on the economic conditions. Domestic investment, personal savings, the mode of entry (merger, acquisition, or new investment), the industry sector involved, and the country's ability to regulate foreign investment are all factors affecting the impact size of the FDI (Earth Summit, 2002). FDI has a substantial influence on social and infrastructure development as well as technology transfer. It helps in stimulating employment, raising wages, and replacing declining market sectors, consequently having cultural and social impact if the investment is directed toward non-traditional sophisticated product (Earth Summit, 2002). 4 Attracting FDI is the major concern and a desired outcome of Laos to catch up and achieve economic growth. Since investors have certain requirements to invest abroad, the host countries must posscess a standard macroeconomic environment to attract those investors to bring their capital, technology, and expertise. Hence, the role of the government in devising policies and building economic infrastructure is a pre-determinant to attract FDI. Location-specific attractiveness, political and economic stability, the property and profit tax system, the market size and labor-force composition, geographic proximity, the number of competitors, freedom of entry and exit from domestic financial markets are all factors influencing the volume and the type of capital inflows to Laos. In addition, energy and water resources, transportation and telecommunication infrastructure are critical elements that have a great influence on capital inflows and investments in the host countries. Given the importance of FDI especially in developing countries like Laos, theoretically as well as practically, there are however still inconclusive arguments for and against the role of FDI inflows in enhancing economic development in a country (cf., Nguyen, 2008). It has still been debate about whether FDI inflows are beneficial or not to economic development, and what governments should do to attract and use FDI inflows effectively (Kokko et al., 2003; Longani & Razin, 2001; Masina, 2002; Nguyen, 2008). In addition, it has been suggested that the relationship between FDI and economic growth may be country and period specific (cf., Adegbite & Ayadi, 2010). Therefore, this study aims to explore the impact of FDI inflows on some indicators of economic development in the context of Laos, a developing country in Asia. 1.3 Research Objectives and Research Questions This study seeks to analyse FDI inflows into Laos and to investigate their impact on the economic development of Laos. It identified this impact by responding to the country's characteristics and infrastructure as determinants for 5 capital inflows, transfer of technology, augmentation of human capital, and other spillover benefits. The desired outcome of this research aims at confirming the linkage between FDI inflows in Laos and the economic development indicators including GNI per capita, financial capital, level of technology, human capital, energy and natural resources, transportation and communication. The major economic development theories and models such as The Stage Theory of Rostow, the Harrod-Domar model of savings and productivity of investment, the Lewis Model of Dual Economy, the Dependency Theory, and other scholarly models in the field assisted in establishing the base theory for the research. The research problem revolves around the notion that Laos is incapable to achieve economic growth. Natural resources, human capital, financial capital, transportation and communication, level of technology, and leadership, are all important elements of sustainable economic growth. They are the foundation for any economic development stimulation. The scarcity of these resources will stall the economy and make it difficult to make growth progression. Research Questions This research tried to answer the questions: 1) What are the relevant literature and the theoretical background on FDI and its impact on economic development? and 2) Does FDI have a significant contribution to economic development of Laos? With regard to the impact of FDI on economic development, the research aims to answer the following specific questions: • Does FDI have a significant role on the GNI per capita? • Does FDI have a significant role on the Financial Capital? 6 • Does FDI have a significant role on the country's level of technology of Laos? • Does FDI have a significant role on Human Capital of Laos? • Does FDI have a significant role on the Energy and Natural Resources availability of Laos? • Does FDI have a significant role on the Transportation and Telecommunication infrastructure of Laos? 1.4 Scope of the Study This study focuses on the role of FDI on some indicators of economic development in the context of Laos. Other aspects of development such as social and environmental issues (i.e., poverty ratios of different sectors, education and health care, environment pollution and damage) are not addressed in this dissertation. This study mainly employed the data to analyse the relationships between FDI and Laos’ economic development indicators during the period 1990-2012. The analyses of correlations were used to serve the objectives of this research. 1.5 Contributions of the Study Investigation into the effects of FDI on the economies of host countries is considered one of the two most important and most researched issues in international business (Driffield & Love, 2007). This study aims to examine the impact of FDI on several economic development indicators in the context of Laos. The study is important to help Laos enjoy further economic development as well as contributes to the literature of FDI and economic growth in the context of developing countries. 7 FDI has been suggested as a determinant of economic development in both developed and developing countries. Its important role in promoting economic growth and bringing many benefits to the economy is especially emphasized in the context of developing countries. However, the literature also provides mix findings pertaining to the effects of FDI, and there has been suggested that the link between FDI and economic development may be country and period specific. Therefore, it is important and meaningful to examine the impact of FDI inflows on economic development in Laos, a developing country which has received very modest research attention to date. By focusing on six main research questions pertaining to the relationships between FDI inflows and various indicators of economic development, the research has contributed to both theoretical and practical sides. From theoretical perspective, the research helps to enrich the knowledge about the important topic pertaining to FDI’s impacts on economic development in general and in the context of a developing country in particular. From practical perspective, the research findings provide significant implications to policy makers in Laos. The issue of FDI and its important role is more important for developing countries and the countries in transition like Laos because they lack capital, know how, and managerial skills. Understanding the role of FDI would help making good policies to attract more FDI for the purpose of economic development. Therefore, the results of this dissertation are expected to provide significant implications for policy makers. The results can be applied in the area of attracting the FDI flows. The dissertation can also provide recommendations for a better business conditions for investment and doing business. Briefly, the findings of this study help to enrich the knowledge about the important topic pertaining to FDI’s impacts on economic development in general and in the context of a developing country in particular. The study also provides implications to policy makers. 8 1.6 Dissertation Structure This dissertation includes six main chapters. The brief content of each chapter is presented in the following. CHAPTER 1. INTRODUCTION Chapter 1 briefly introduces the research background, research motivations, the objectives, and the structure of the dissertation. CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT This chapter reviews the literature on economic development, FDI and focuses on the impact of FDI on economic development. CHAPTER 3. OVERVIEW OF ECONOMIC DEVELOPMENT AND FDI IN LAOS Chapter 3 focuses on providing an overview of the state of FDI in Lao P.D.R., Lao government policies and Laos’ economic growth since 1990. CHAPTER 4. RESEARCH METHODOLOGY This chapter outlines the research methodology and data sources used to answer the research questions. CHAPTER 5. RESEARCH FINDINGS This chapter presents the key findings on the relationships between FDI inflows and various indicators of economic development in Laos over the period 1990-2012. CHAPTER 6. CONCLUSIONS AND DISCUSSION The final chapter summarizes the research findings, provides implications, and discusses limitations of the study and offers suggestions for future research. 9 CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT 2.1. Definition and Indicators of Economic Development 2.1.1 Definition of Economic Development Economic Development is the progress in an economy and is a measure of the welfare of humans in a society. It usually refers to the adoption of new technologies, transition from agriculture-based economy to industry - based economy, and general improvement in living standards (Businessdictionnary.com). Similarly, the International Economic Development Council defines economic development as an “activity that seeks to improve the economic well-being and quality of life for a community, by creating and/or retaining jobs…” (smallbusiness.chron.com). Economic development is a normative concept. It means that it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Todaro (1994) is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates and life expectancy which affect productivity and could lead to economic growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment. It implies an increase in the per capita income of every citizen (Todaro, 1994). Economic development can also be referred to as the quantitative and qualitative changes in an existing economy. Economic development involves development of human capital, increasing the literacy ratio, improve important infrastructure, improvement of health and safety and others areas that aims at 10 increasing the general welfare of the citizens. The terms economic development and economic growth are used interchangeably but there is a big difference between the two. Economic growth can be viewed as a sub category of economic development. Economic development refers to government policy to increase the economic, social welfare and ensure a stable political environment. Economic growth on the other hand refers to the general increase in the country products and services output (source: whatiseconomics.org). 2.1.2 Indicators of Economic Development According to United Nations Human Development Report (2001) and report research of bbc.co.uk, some key indicators of economic development are presented as follows. - GDP per capita (Gross Domestic Product- the value of all the finished goods and services produced within a country’s borders in a specific time period). - Human Development Indicators (life expectancy, Infant mortality rate, Poverty, Access to basic services, Risk of disease) - Literacy rates (Access to education ) - Measures of poverty - Demographic indicators - Unemployment - Government spending priorities - Gender equality - Infrastructure development In literature, previous studies have examined various aspects of economic development such as economic growth, GDP per capita, transportation (road 11 access), information network, industry establishment, techonology, financial capital flow, foreign trade, and human capital (e.g., Adegbite & Ayadi, 2010; Kotrajaras et al., 2011; Mengistu & Adams, 2007; Phimphanthavong, 2012; Prasad & Sharma, 2012). In this study, the author examines the impact of FDI on economic development in Laos, focusing on some economic development indicators including: - Gross National Income (GNI) per capita The GNI per capita is the dollar value of a country’s final income in a year, divided by its population. It reflects the average income of a country’s citizens. Knowing a country’s GNI per capita is a good first step toward understanding the country’s economic strengths and needs, as well as the general standard of living enjoyed by the average citizen (Wikipedia). - Financial Capital - Level of technology - Human Capital - Energy and Natural resources - Transportation and Communication 2.1.3 Theoretical Economic Overview Rostow (1960) argued that all countries passed through the same historical stages of economic development and underdeveloped countries were at an early stage compared to the advanced world (e.g., Europe and North America). He identified societies in their economic status as passing through one of five stages: the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of high mass- consumption.