Economics World, July-Aug. 218, Vol. 6, No. 4, 295-32 doi: 1.17265/2328-7144/218.4.5 D DAVID PUBLISHING Analysis of he Relaionship Beween GDP and FDI on he Economic Growh of Laos Thane Waanakul Khon Kaen Universiy, Khon Kaen, Thailand In he curren globalizaion sream, he foreign invesmen is an imporan role no only for developed counry bu a all especially he leas developing counry as Laos. This sudy aims o examine he relaionship beween he gross domesic produc (GDP) and foreign direc invesmen (FDI) on economic growh of Laos by using daa from 1985 o 214. The long run relaionship was analyzed by Johansen co-inegraion es and esimaed he speed of adjusmen by Vecor Error Correcion approach. Esimaed resuls indicaed ha here was long run relaionship running from FDI o GDP and he relaion would reurn o he equilibrium in abou 19 when i occurred. This sudy suggess ha policy maker should improve he oher facor for moivaed FDI and accelerae Lao economy. Keywords: GDP, FDI, Laos, co-inegraion, VECM Inroducion Globalizaion is currenly becoming an imporan role in he global economy. All counries are conneced by invisible nework in form of social nework o increase convenien of connecing people in each region. The effecs of Asian crisis in 1997, Hamburger crisis in 28, European deb crisis in 29, European Union leaving of England in 216 have conribued o he fragile and insable of global economy ha has o be cooperaively insulaed. One of he essenial and necessary neworks o connec economy of each sae is invesmen paricularly for foreign direc invesmen (FDI). Invesmen can be regarded as he insrumen and policy o expand and disribue produc as well as service via using massive inpu for manufacuring indusries. Neverheless, In he long run, he resources will no be enough and cos of uilizaion will be higher. As a resul, he invesmen in oher counries in erms of FDI may solve hese problems by seeking lower inpu cos and opimal locaion for producion or disribue produc in oher locaions. Therefore, he sensiiviy of economic changing environmen and compeiion in each counry will affec he linkage counry of hese counries no only home counries bu also hos counries. FDI is araced by many facors of hos counries such as locaion, suiable economic policies and ransparency compeiion environmen as well as oher relaed facors. Dunning (21) proposed hree advanages which moivae foreign invesmen such as locaion advanage, ownership advanage, and Thane Waanakul, Ph.D. of Applied Economics, assisan professor, Deparmen of Economics, Faculy of Inegraed Social Sciences, Nong Khai Campus, Khon Kaen Universiy, Khon Kaen, Thailand; consulan of he Indo-China Inernaional Trade and Economy Research Secor. Correspondence concerning his aricle should be addressed o Thane Waanakul, Faculy of Inegraed Social Sciences, Nong Khai Campus, Khon Kaen Universiy, Khon Kaen 43, Thailand.
296 GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS inernaionalizaion advanage in eclecic (LOI) paradigm of inernaional producion. Meanwhile, hos labor counries will receive ren and hey can buy heir resource o increase invesmen. The win-win relaion beween hos counry and foreign invesor can be emerged. This heory also suppors he new opinion of Selma KURTISHI-KASTRATI in 213 which explains he benefis of FDI for hos counry s economy. In addiion, he coss of FDI o hos counry s economy such as adverse effecs on employmen and he ne number of new jobs effeced via FDI may no be grea as iniially claimed by an MNE (Kurishi-Kasrai, 213). This effec can be considered as adverse effecs on compeiion. I may be monopolized marke if he inernaional organizaion has a lower average cos from he advanage and adverse effecs on balance of paymen because he ouflow from profi of inernaional organizaion reurns o home counries. There is insufficien of domesic invesmen in mos developing counries o accelerae heir economy growh because of boh many low income and saving including capial accumulaion. As a consequence, he need of FDI is of imporan concern. Borenszein, De Gregorio, and Lee (1988) found ha he foreign invesmen effec is essenial facor o drive echnology developmen and suppor economic growh in developing counries. Moreover, FDI is more imporan han local invesmen in developing counry. Carkovic and Levine (22) found he effec of human resource developmen and foreign invesmen on economic growh. High performance of human resource counies and foreign direc invesmen play more imporan roles han oher lower counries. There is relaionship beween cos of home counries and benefis of hos counries which are differen from differen counries. However, here is possibly negaive relaionship beween FDI and GDP which could happen especially in developing counries. Therefore, his relaionship should be proved by using empirical sudy paricularly for he developing counries in Greaer Mekong Sub-region such as Laos and by using appropriae economeric model esimaion. The empirical resuls can be used as relaed policy implemenaions guideline for boh Laos and Thailand s public and privae organizaions. This sudy aims o invesigae he relaionship beween FDI and GDP of Laos. I is divided ino four secions: Inroducion in secion 1; he nex secion is mehodology; resuls and discussion are proposed in secion 3; he las secion is conclusion; and policy is in secion 4. Mehodology This sudy examines he relaionship beween FDI and GDP of Laos by using ime series daa from 1985 o 214. The daa of FDI sock of Laos were colleced from UNCTAD while GDP a consan price in 25 was colleced form World Bank. All ime series daa were esed saionary poenial by Augmen-Dickey Fuller es (ADF-es) and Phillip-Perron es (PP-es). In addiion, he ime series daa were esed co-inegraion by using he Johansen co-inegraion approach o invesigae long-run relaionship. Shor-run relaionship and adjusmen o equilibrium were examined by using Vecor Error Correcion Mechanism (VECM). Saionary Tes Almos ime series daa have sochasic rend or uni roo processes (Nelson & Kang, 1981). The resuls from ordinary leas square (OLS) esimaion can be spurious ha is considerably high R 2 bu low Durbin-Wason saisic. This problem is called spurious regression. Besides, he variables have sochasic rend are call non-saionary variables. Therefore, he firs sep of esimaion ime series by using OLS esimaor has o deec he saionary poenial and use mehod calls saionary es or uni roo es.
GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS 297 This sudy invesigaed saionary poenial by using ADF-es and PP-es which radiionally process for uni roo esing. Esimaed model can be presen as follows: X ax ω X ε 1 X δ ax ω X ε 2 X δ γθ ax ω X ε where X is explained variable, δ is consan, γθ is ime rend, ε is error erm, ω X is auoregressive process, and α is coefficien of X in he las previous. Non inercep and rending variables would be esed by equaion (1), inercep variables would be esed by equaion (2), and inercep and rending variable would be esed by equaion (3). Coefficien ( α ) was ransformed ino ADF- saisic as follows: ADF αˆ SE( αˆ ) 3 = (4) ADF- saisic has o be compared wih McKinnon criical value for concluding saionary poenial. Saionary poenial can be acceped when ADF- saisic was less han McKinnon criical value bu he saisic was more han he criical value, he variable was non-saionary. Alhough non-saionary poenial was deeced a level of inegraed or I (), he variable may be saionary a higher order of inegraed (I (1) or I (2)). They probably have long-run relaionship. Thus, hey should be esed again a he higher order of inegraed. Co-inegraion Time series variables are probably be co-inegraed (Engle & Granger, 1987). Some variables may be moved wih he ohers even hough hey had been affeced by exernal facors. This phenomenon is long-run relaionship beween variables. Engle and Granger (1987) presened he approach o deec long-run relaion as Engle Granger 2 sep approach. Laer, Johansen (1988) improved he mehod based on VAR process as he sysem-based reduced rank regression approach. The developed approach can be used o indicae he number of co-inegraion from he hypohesis abou he rank of coefficien marix in he model. However, boh approaches remind he imporan condiion of he saionary a he same order of inegraed of esed variables. This sudy applied and considered he co-inegraion propery by Johansen co-inegraion es as following: ΔFDI β = ΔGDP ϑ β1 ΔFDI 1 u + ϑ 1 ΔGDP 1 v (5) where β ϑ β1 ϑ 1 is vecor of parameer, u v is vecor of error erm. The co-inegraion can be acceped
298 GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS when he rank of coefficien or vecor of parameer is no zero. This concep can be proved by rank of vecor of parameer wih λ race and λ max eigenvalue value. Null hypohesis of λ race eigenvalue is he number of co-inegraion vecor which is rank < k while he alernaive is rank = k. Null hypohesis of λmax eigenvalue is rank < k while he alernaive hypohesis is rank = k+1. VECM According o he previous process, long-run relaionship of variables was verified by co-inegraed esing. This process can be used o exend he propery of long-run relaion as speed of adjusmen running from he deviaion of explained variable when he exernal facor occurred o he long-run equilibrium, he shor-run relaion, and long-run relaion of he ineresed variables. The mehod used o analyse is VECM by he followings: where ΔFDI ΔGDP A = B ΔFDI is consan marix, ΔGDP A + B 1 1 EC 1 A + B 2 2 A B 3 3 ΔFDI ΔGDP 1 1 p + q A 1 is coefficien marix of error correcion componen and presened B 1 he speed of adjusmen of model, p is error erm in each model and EC 1 is a vecor of error erm in q he Johansen es. The long-run relaion is acceped when he coefficien of vecor error correcion was negaive significanly. Speed of adjusmen is presened by value of parameer in he coefficien marix of error correcion. Resuls and Discussion According o he saionary resuls from Table 1 o Table 3, i is found ha FDI and GDP are non-saionary bu saionary a second difference. In Table 1, i can be affirmed ha all esimaed saisics from ADF-es and PP-es a level are more han he McKinnon criical value. This siuaion indicaed ha boh variables were non-saionary a level. Table 1 Saionary Tes a Level ADF-es PP-es Variable Inercep and Inercep and Inercep Inercep ending ending FDI 2.9654 2.9735 3.5643 11.35 8.3996 5.542 GDP 3.2784 19.3751 5.4122 21.5481 21.5332 5.812 Source: From he calculaion. From he resuls in Table 2, boh variables were non-saionary a he firs difference on ADF-es and PP-es. ADF- saisics esimaed by ADF and PP es were less han McKinnon saisic a all. However, he saionary propery was differen from he second difference. Table 3 showed ha FDI was saionary on ADF es by inercep and ending model and on PP es by wihou inercep and ending model. Moreover, GDP was saionary on ADF es by inercep model and inercep and ending model as PP es on wihou inercep and ending model and inercep and ending model. (6)
GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS 299 Table 2 Saionary Tes a Fis Difference Variable ADF-es Inercep Inercep and ending Inercep PP-es Inercep and ending FDI 3.34 2.2941.8145 4.7464 3.886.6521 GDP 2.1412.2796-1.591 3.666.7566-2.6849 Source: From he calculaion. Table 3 Saionary Tes a Second Difference Variable ADF-es Inercep Inercep and ending Inercep PP-es Inercep and ending FDI -.1936 -.6431-3.8541** -1.656* -1.7229-1.7374 GDP -2.7317-7.4286*** -7.399*** -6.4164*** -8.1668-13.3229*** Noes. *** significan a.1; ** significan a.5; * significan a.1. Source: From he calculaion. The saionary resuls shows ha FDI and GDP were saionary a he second difference and in he same order of inegraed. Thus, boh probably deec he long-run relaionship by using Johansen co-inegraion es. Afer deecing he saionary propery, long-run relaion of boh variable was proved and presened in Table 4. The resul shows ha λ race and λ max were.4743 and significanly a.5. Moreover, he resuls indicaed ha here is 1 co-inegraion in he sysem. Table 4 Co-inegraion Resul Lag Eigenvalue Number of co-inegraion Trace Maximum Trace Maximum 1.4743**.4743** 1 1 Noe. ** significan a.5. Source: From he calculaion. According he VECM resuls in Table 5, long-run relaionship is confirmed by he value in coefficien of EC marix. There is long-run relaion running from FDI o GDP. On he oher hand, here is no long-run relaionship running from GDP o FDI. The relaionship beween FDI and GDP will reurn o equilibrium if here are occurrences by exernal facor abou five percen of he year or abou 19 days. The VECM resuls conflic he eclecic paradigm of inernaional producion of Dunning (21) in some facor on par of locaion advanage. Dunning presened ha some facor in hos counry which creaed he advanage for foreign invesor such as hos counry economy would arac foreign invesor o inves on hos counry. In Lao case, his sudy was analysed by using he informaion during 1985 o 215 (see Appendix 1) which included he effec on he earlies sae of foreign invesmen in Lao as he low value of foreign invesmen and insabiliy of invesmen policy while he scale of economy in Lao was very low because here was low domesic invesmen and saving. Thus, foreign invesor was overlooked on he economy facor bu araced by he oher facor which made he advanages in Lao. Moreover, his problem made he foreign invesmen in Laos as an imporan role for booing he economy presened in he resuls of VECM.
3 GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS Table 5 Vecor Error Correcion Mechanism Dependen variable EC Coefficien -saisic FDI -.12 -.483 GDP -.518 4.5936*** Noe. *** significan a.1. Source: From he calculaion. The siuaion is inconsisen wih he effec of human capial and echnology and on he relaionship from FDI ino GDP as Carkovic and Levine (22) and Borenszein e al. (1998) explained. The foreign invesmen on he earlies sage is human inensive in he secion wihou more skill labor as Freeman (22) and Gunawardana (28) presened. The effec of human capial and echnology in his sudy is no he evidence, alhough he economic boos policies implemenaion has more direcly effecs on employmen han he value added from produciviy of human capial or echnology. In conrary, he relaionship can probably be differen if he earlies year is omied. Conclusion and Policy Implicaions Based on he empirical resuls, his sudy found only he effec of FDI on GDP in he long run in case of Laos. The resul is inconsisen wih he oher previous sudies and heories because his sudy included he informaion in earlies conribue o he effec. As a consequence, he model improvemen can be done by neglecing he earlies period esimaion. However, hese resuls confirm ha FDI aracive policies of Laos can accelerae economy and simulae economic growh. Policy makers should concern he oher facors o arac FDI as he foreign invesmen law adjusmen o encourage he more ransparency compeiion and he invesmen promoion policies. Invesmen ax rae should be lower. The infra-srucure of ransporaion should be more developed. More specifically, i is srongly confirmed ha Lao s economy remains high FDI dependen. Laos is naural resources and labor abundan counry bu low domesic capial formaion compared o oher GMS neighbor counries. Massive capial from aboard including Thailand moves o Laos o inves in differen indusries for risk diversificaion and decreasing cos of producion. This policy leads o creaing effecive regional producion hub and nework as well as producs disribuion. Labor skill is crucial suppor policy implemenaion o upgrade he human resources poenial. FDI in service secors can be regarded as essenial engine o enhance employmen. Therefore, rade and invesmen liberalizaion and single marke under he AEC ulimae goal is he mos imporan supporing elemen. Furhermore, he effecs of FDI in service secors on employmen and economic growh of Loas can be examined by furher research o explore he resuls. References Borenszein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direc invesmen affec economic growh? Journal of Inernaional Economics, 45(1), 115-135. Carkovic, M., & Levine, R. (22). Does foreign direc invesmen accelerae economic growh? Universiy of Minnesoa, Working Paper. Dunning, J. H. (21). The eclecic (OLI) paradigm of inernaional producion: Pas, presen and fuure. Inernaional Journal of he Economics of Business, 8(2), 173-19.
GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS 31 Engle, R. F., & Granger, C. W. J. (1987). Co-inegraion and error correcion: Represenaion, esimaion and esing. Economerica, 55, 251-276. Freeman, N. J. (22). Foreign direc invesmen in Cambodia, Laos and Vienam: A regional overview. Paper prepared for he Conference on Foreign Direc Invesmen: Opporuniies and Challenges for Cambodia, Laos and Vienam. Hanoi, 16-17h Augus 22. Gunawardana, P. J. (28). Trends and paerns of foreign direc invesmen in Lao PDR. Inernaional Journal of Business and Managemen, 3(1), 41-57. doi: hp://dx.doi.org/1.5539/ijbm.v3n1p41 Johansen, S. (1988). Saisical analysis of co-inegraion vecors. Journal of Economic Dynamics and Conrol, 12(2-3), 231-254. Kurishi-Kasrai, S. (213). The effecs of foreign direc invesmens for hos counry s economy. European Journal of Inerdisciplinary Sudies, 1. Nelson, C. R., & Kang, H. (1981). Spurious periodiciy in inappropriaely derended ime series. Eccnomerica, 49, 741-751. UNCTAD Saisic. (215). Foreign direc invesmen. (Online). Rerieved Ocober 2, 215 from hp://uncadsa.uncad.org/wds/reporfolders/reporfolders.aspx World Bank. (216). Lao PDR. Rerieved Ocober 2, 216 from hp://daa.worldbank.org/counry/lao-pdr?view=char
32 GDP AND FDI ON THE ECONOMIC GROWTH OF LAOS Appendix 1 Table 1 Gross Domesic Produc and Foreign Direc Invesmen Changing in Loa PDR Since 1985 o 214 Year Gross domesic produc a 25 price Foreign direc invesmen (sock) (US$ million) (US$ million) 1985 899.28.55 1986 943.21.55 1987 929.76.55 1988 911.7 2.55 1989 1,4.36 6.55 199 1,11.11 12.55 1991 1,157.81 19.45 1992 1,222.18 27.25 1993 1,294.44 57.15 1994 1,4.6 116.35 1995 1,498.5 211.45 1996 1,62.32 371.25 1997 1,712.43 457.55 1998 1,78.37 52.85 1999 1,91.46 554.458 2 2,21.24 588.348 21 2,137.49 612.248 22 2,264 616.748 23 2,41.36 636.148 24 2,554.3 653.148 25 2,735.56 68.848 26 2,971.34 868.248 27 3,197.7 1,191.748 28 3,447.24 1,419.448 29 3,75.84 1,68.948 21 4,21.84 1,887.748 211 4,345.14 2,188.498 212 4,693.8 2,482.878 213 5,91.42 2,99.548 214 5,474.5 3,63.388 Source: CEIC DATABASE (215).