Analysis on Macroeconomic Factors Influencing Foreign Direct Investments in Thailand

Assignment Requirements: Dissertation Chapter – Literature Review

 

Analysis on Macroeconomic Factors Influencing Foreign Direct Investments in Thailand

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To write chapter 2 – Literature review

Title:Analysis on Macroeconomic Factors Influencing Foreign Direct Investments in Thailand

 Background

Foreign Direct Investment (FDI) has become one of the significant phenomena in international businesses. In global business environment, FDIs result from profit maximization of firms, both at regional or global level, upon their further expansion of their operations to seek out new production location with more cost effective resource endowments as well as new potential markets for their products/ services. Meanwhile, South East Asian economies (such as Indonesia, Myanmar, the Philippines, Thailand, and Vietnam) have been well regarded as the most popular FDI recipient countries. These emerging/transitional economies are proved to be able to provide MNEs with great business opportunities with their cheap labour, abundant natural resources, adequate infrastructure and logistics system development.

Take Thailand, for instance. The country has been well regarded as one of the top investment ‘hot spot’ destinations for FDIs. (IMF, 2014)With Thailand’s strong external trades and its unique, strategic role as regional production hub for key manufacturing sectors such as automobiles and electronics, FDI has played such important role upon the developments of Thai economy since late 1950’s. Such strong FDI inflows was resulted from the country’s several key macroeconomic indicators; for instance, high GDP growth, stable inflation rate, relatively higher interest rates, low labour cost, to name a few.

Aims and objectives

 Aim:This research aims to investigate key macroeconomic indicators which serve as key determinants of inward FDI in Thailand. Main focus would be placed upon relationships between FDI inflows with various selected macro indicators. For instance, variables which represents size of Thai economy (such as GDP growth, per capita income, stable exchange rate, low inflation, low production cost (minimum wage) and return on capital (relative interest rate differentials).

Objectives:

 To identify the key factors determining inward Foreign Direct Investment (FDI) for Thailand economy.

• To analyse correlations between FDI inflows and these variables: for instance, GDP growth and FDI inflows should be positively correlated while high and consistent inflation should slow down FDI inflows etc.

Research questions:

Following are the research questions of the study;

• Which macro factors serve as key determinants on inward FDI in Thailand?
• What macro factors affect has positive and negative impact on inward FDI in Thailand?
• For each of these variables, what is the relationship/correlation to FDI in Thailand?
• Based on the research findings, what are the policy recommendation(s) for related government entities upon encouraging more FDIs inflows?
  

Methodology

 Hypothesis formulation: Selected macro variables can be categorized into (i) indicators of Thai economy ‘size’ such as GDP growth and per capital income (ii) price indicators such as minimum wage, inflation, interest rates, corporate tax rate etc.

Then, for each of these variable, can be formed and test hypothesis on their correlations with FDI inflows. For instance, relatively higher domestic interest rates tend to attract more FDI inflows and hence should reveal strong positive correlation to inward FDI but vice versa for minimum wage variable as production cost (i.e., cost of using resources) in Thailand become too expensive as minimum wage rises.

Statistic model: The aforementioned research questions and hypothesis would be formulated and tested through the concept of regression method, with FDI flows in Thailand as dependent variables and selected macroeconomic variables as independent variables. Linear regression equations will be experimented in order to obtain the best regression results to illustrate explicit correlation and significance of these variables to developments of FDI. While quantitative analysis will be conducted utilizing Ordinary Least Squares (OLS) regression method. Several OLS equations will be formulated and tested using SPSS statistics tool.

Data used and availability: This study will be based on Time Series Data since 2009-2013 pertaining to all selected key variables such as FDI in Thailand, GDP, minimum wage, etc.

All relevant data and information can be found over public sources, For instance, all Macroeconomics data and FDI statistics can be found from Thai monetary authorities’ data (The Bank of Thailand). FDI (approved FDI project) data can be found from the Board of Investment (BOI). Some of other time series data is already available through their respective websites (for example, proxy for foreign interest rates, and exchange rates from www.imf.org) while some can be obtained based on special request basis.

 Outline dissertation plan

 Chapter 1: Introduction. This chapter elucidates a very succinct introduction about the FDI topic to be addressed for the readers. The chapter describes in detail the background of the research study. This chapter also encompasses the aim and objectives and research questions of the research. Additionally it briefly describes the overview of the chapter outlines.

 Chapter 2: Literature review. This chapter summarize the literature reviews of the research study related to FDI phenomena. The literature review explains the topic of research that is conducted and is relevant to the topic. This chapter also provides the discussion and crucial thinking related to the topic on FDI.

 Chapter 3: Methodology. This chapter involves the description of research methodology approach. It also clearly defines data collection methods, data sources, and developments of quantitative, empirical models/equations to test the hypothesis.In this study, the Ordinary Least Square (OLS) regression method will be employed, using SPSS software to obtain statistical results.

 Chapter 4: The research findings and analysis. This chapter explains and conducts analysis of the research results. The hypothesis on relationship between FDI flows and selected variables will be discussed in details. This chapter summarise key empirical research findings, with key focus upon the contributions to FDI by each of selected macro indicators.

Chapter 5: Conclusions and recommendations.The research results would help to draw conclusion upon policy recommendation by prescribing measures to support and to attract foreign direct investment into Thailand, or to help sustain level of FDI flows in the future. For instance, FDI flows is negatively correlated to corporate tax rate indicating that the Board of Investment (BOI) need to revise tax privileges to attract more foreign investments. Or, FDI flows are strongly negatively related to exchange rate volatility suggest that the Bank of Thailand need to implement strong exchange control policy to ensure stable exchange rate conversion in the long run.

 

Tippawan Balee                                                                                                       May 2014

References

 

Asiedu, E. (2006) “Foreign Direct Investments in Africa: The Role of Natural Resources,

Market Size, Government Policy, Institutions and Political Stability” Journal of World

Economy, 29(1) pg 63-77.

Imf.org, (2014). IMF Videos – Program of Seminars: Taxing Times. [online] Available at:

http://www.imf.org/external/am/2013/mmedia/view.aspx?vid=2733735570001

[Accessed 29 May. 2014].

 

MorrissetP.(2000),“ForeignDirectInvestmenttoAfrica:PoliciesalsoMatter.”

Transnational Corporation,Vol.9(2):107-125.

Omanwa, S. M. (n.d.). Determinants of FDI in Kenya : An Empirical Study *.

 

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