Luận án tiến sĩ a study on the impact of foreign direct investment on economic d

Header Page 1 of 132. 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. A thesis submitted to the National Economics University in fulfillment of requirements for the degree of Doctor of Philosophy in Economics Hanoi, 2014 Footer Page 1 of 132. Header Page 2 of 132.

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 Footer Page 2 of 132.

Header Page 3 of 132. 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.

Tran Tho Dat, Assoc. 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. Nguyen Thi Tuyet Mai, my supervisor who gives me clear guidelines and contributing her advises to my dissertation.

I am also grateful to Prof. 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. Thongsalith Mangnormek, Head of National Economic Research, Prof.

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.

Footer Page 3 of 132. Header Page 4 of 132. iii CONTENTS DECLARATION .v LIST OF FIGURES. vii LIST OF TABLES .2 Rationale for the Research .3 Research Objectives and Research Questions .4 Scope of the Study .5 Contributions of the Study.

LITERATURE REVIEW ON THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT. Definition and Indicators of Economic Development .1 Definition of Economic Development .2 Indicators of Economic Development .3 Theoretical Economic Overview .2 FDI and its Impact on Economic Development .1 Definition and Determinants of FDI .2 Impact of FDI on Economic Development. OVERVIEW OF ECONOMIC DEVELOPMENT AND FDI IN LAOS 51 3. Overview of Laos’ Economy .2 Economic Structural Changes .3 Financial Sector Growth .4 Banking Sector Development .55 Footer Page 4 of 132.

Header Page 5 of 132.5 Inflation has been effectively managed .7 Workforce and Employment Balance .8 Balancing the Sources of Funds for Development .9 Balancing the State Budget .10 Balancing Imports and Exports. Sectoral Development, Regional and International Economic Integration .2 Foreign Direct Investment in Laos .2 Variables and Measures .1 FDI and GNI per Capita.2 FDI and Financial Capital .3 FDI and Level of Technology.4 FDI and Human Capital .5 FDI and Energy and Natural Resources .6 FDI and Transportation and Communication. CONCLUSIONS AND DISCUSSION .2 Implications of the Study .3 Limitations of the Study and Future Research Direction. 123 Footer Page 5 of 132.

Header Page 6 of 132. 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 Footer Page 6 of 132. Header Page 7 of 132. 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 Footer Page 7 of 132.

Header Page 8 of 132. 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. Average share of value added in the industrial sector 2006-2010. Structure of service sector 2006-2010 .75 Figure 6 Foreign direct investment, net inflows (BoP, current US$).

Distribution of FDI in Lao PDR (US$ m). Share of accrual FDI by country (% of total, as of August 2009). Ten biggest foreign investors in Laos (1989 – 2012). Graph of Correlation between FDI and GNI per capita.

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. Graph of Correlation between FDI and School enrollment, tertiary. Graph of Correlation between FDI and Natural Resources. Graph of Correlation between FDI and Mobile cellular subscriptions .115 Footer Page 8 of 132.

Header Page 9 of 132. viii LIST OF TABLES Table 1. Comparison between actual and targeted GDP growth rate in the Sixth Plan (2006-2010). GDP per capita (plan vs.

Share of labour by sectors. Private domestic and foreign investment from 2006-2010 (USD billion). Export structure of Lao PDR by commodities 2005-2009 (%). Import structure of Lao PDR by commodities 2005-2009 (%).

Inter-Country Comparison on Opened Trade or Integration 2006-2010. Export Market Structure with Main Trade Partners, 2008. Foreign direct investment, net inflows. GNI per capita.

Gross capital formation (annual % growth). Industry, value added (% of GDP). Oil consumption per capita. Transportation and communication.

FDI and GNI per capita Coefficient of Correlation. FDI and Financial Capital Coefficient of Correlation. FDI and Level of Technology Coefficient of Correlation. FDI and Human Capital Coefficient of Correlation.

FDI and Energy and Natural Resources Coefficient of Correlation. FDI and Transportation and Communication Coefficient of Correlation .114 Footer Page 9 of 132. Header Page 10 of 132.1 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. 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. Footer Page 10 of 132.

Header Page 11 of 132. 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.

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.) Footer Page 11 of 132. Header Page 12 of 132. 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.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.