A comparative analysis of the US and Japan FDI in Thailand.

Author:Boonlua, Sutana

    Global foreign direct investment (FDI) flows began to bottommost in the latter half of 2009. This was followed by a modest recovery in the first half of 2010, sparking some cautious optimism for FDI prospects in the short term. In the longer term, from 2011 to 2012, the recovery in FDI flows is set to gather force. Global inflows are expected to pick up to over US$1.2 trillion in 2010, rise further to US$ 1.3-1.5 trillion in 2011, and head towards US$1.6-2 trillion in 2012. These FDI prospects are, however, fraught with risks and uncertainties arising from the fragility of the global economic recovery (UNCTAD, 2010). The recent recovery is taking place in the wake of a drastic decline in FDI flows worldwide in 20069. After a 16% decline in 2008, global inflows FDI fells a further 37% to US$1, 114 billion while outflows FDI fell some 43% to US$1, 101 billion (UNCTAD, 2010).

    According to Kumar (2003, p. 6) "FDI usually flows as a bundle of resources including, besides capital, production technology, organizational and managerial skills, marketing know-how, and even market access through the marketing networks of multinational enterprises (MNEs) who undertake FDI". These skill-resources tend to spill over to domestic enterprises in the host country. Therefore, FDI is expected to contribute more economic growth than domestic investment in the host country. Consequently, FDI has become an important source of private external financing (besides the source of funds from internal saving) for developing countries with minimal capital. FDI is also a means of transferring production technology, skills, innovative capacity, and organizational and managerial practices between locations as well as accessing international marketing networks.

    The International Monetary Fund (IMF, 1993) defines FDI as a category of international investment that reflects the objectives of a resident in one economy (the direct investor or source economy) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise or host economy). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise, and a significant degree of influence by the investor on the management of the enterprise. The ownership of at least 10% of the ordinary shares or voting stock is the criterion for the existence of a direct investment relationship. Ownership of less than 10% is considered a portfolio investment. FDI comprises not only mergers, takeovers/acquisitions (brownfield investments) and new investments (greenfield investment), but also reinvested earnings and loans and similar capital transfers between parents and affiliates (Thanyakhan, 2008).

    The pattern of FDI can be divided into two types, horizontal FDI and vertical FDI. Horizontal FDI is the investment in the same industry abroad as in the home country or it occurs when the multinational produces the same product or service in multiple countries. Vertical FDI begins when the production of a multinational firm proceeds internationally, locating each stage of production in the country where it can be done at the least cost. Vertical FDI has two forms: backward and forward. Backward FDI is the investment in an industry which supplies the firm in home country. Forward FDI is the investment in an industry which buys from the firm in home country. Therefore, vertical FDI is the way to establish sales and service centres for the products in new markets in different countries (host countries).

    Thailand's real GDP rose by 6.3% in 2004 and increased to 7% in 2005 (BOT, 2005). Growth in 2006 was 7.3% and inflation was 1.3% in 2005, a decrease from 2.7% in 2004 (see Table 1). Since 2003, economic performance in Thailand has recovered fully from the 1997 Asian Financial Crisis. With its first fiscal surplus in 2003, the factors that contributed to the surplus included strong economic growth, improvements in tax administration and collection, falling debt service costs and the expiration of a five-year period when companies were allowed to carry over losses incurred during their insolvency. Exports accelerated in 2004 because global economic conditions keep improving and appreciation of the Thai Baht was kept in check. The increase in government investment in 2005 further contributed to economic growth and development. However, the rises of interest rates to cap inflationary pressures and other measures to curb the rise of household debt dampened the growth toward the end of 2004 and into 2005, including the inflow of FDI.

    Since the Asian Financial Crisis in Thailand (1997), the GDP (both at the current price and per capital were drop dramatically and started to increase gradually in 2001. The FDI in Thailand got tiny flow past the crisis for several years. However, the FDI reached the highest point in 2006-7 and started to dropped more than half in 2009 (see TABLE 2) because of the global economic recession.

    Over the past few decades, the FDI inflow into Thailand has accelerated rapidly. There was a large increase in FDI at the end of the 1980s until the late 1990s (before the 1997 Asian Financial Crisis), from US$ 489 million in 1987 through US$ 1,294 million in 1988 to a peak in 1998 (US$ 7 billion). This figure decreased slightly over the following two years, but the value of FDI in 2001 was higher than it was in 1998. Recently, the amount of FDI has been small but the GNP, exports of goods and services (XGS), and reserve money became significantly larger. Thus, this may imply that FDI will play an increasingly important role in Thailand's economy in the future.

    Historically, Thailand has depended heavily on the inflows of FDI from the US and Japan, which accounted for at least 50% of all FDI inflow. This geographic pattern of FDI has changed remarkably since the early 1980s when Japan was looking for production bases abroad to escape appreciating home currencies. Thailand's FDI in recent years is geographically diversified with new partners including ASEAN, EU-15, Australia, and New Zealand. Thailand has been open to the international economy since the 1990s, as indicated by both the increase in FDI and rising GDP. Thailand is among a small group of developing economies classified by Sachs et al. (1995, p. 22) as "always open". That is, it exhibits very high trade orientation, welcomes foreign investors, and has low average tariffs, modest interindustry tariff distribution and investment incidence of nontrade barriers.

    Table 2 shows the annual historic distribution of FDI in Thailand since 1990. The annual FDI flows to Thailand started to exceed US$ 189 million in 1980, and increased to US$ 5,142 million in 1998. The FDI almost 30 times increased during 1980-1998, but decreased considerably to US$ 2,813 million in 2000 because of the Asian Financial Crisis in 1997. The FDI increased slightly again in 2001 with a reduction in 2002. However, because of the US Financial Crisis effect in late-2007, the FDI decreased severely in 2008 and continued to decrease until 2010 (see Figure 2-2). Table 2 also shows that FDI for every year in Thailand's record mainly comes from Japan and the US (single country). Moreover, the EU and ASEAN are the main groups of FDI in Thailand.

    As the US and Japan have led FDI in Thailand, the research focuses on FDI from the US and Japan. However, the argument that Japanese investors may not consider the social and cultural factors, but the US investors does. The research also examine if the two FDI produce different determinants of investment in Thailand.


    2.1 FDI Theoretical Foundation

    Firms' successes consist of market and non-market components. The market refers to 'the suppliers, customers, and competitors who give each other conventional economic signals through prices, product differentiation, advertising, and other forms of market behaviour in the process of generating economic transactions' (Boddewyn, 1988, p. 342). Boddewyn (1988) used politics as an instrumental element to emphasize particular ways of relating to targets located in the non-market environment for firms. The non-market environment refers to any factors that support or do not support the economic transactions through power (authority permission) and other positive or negative noneconomic sanctions such as the granting or withdrawal of legitimacy, and government institutions.

    Studies of FDI have also addressed political behaviour. For example, the Eclectic paradigm refers explicitly to government interventions of various kinds into source of ownership, location, and internalisation advantages. Most studies found positive relationships between governments and their investment or trade policies. However, Reis (2001) found different opinions of policy relevance and FDI by measuring the welfare effect on FDI. Reis argued that producers in the host country will no longer be able to invest in the R&D sector after the opening of the economy to FDI, which has a negative effect on national income and profits.

    Boddewyn (1988) enriched the Eclectic paradigm by explicitly incorporating political elements in the consideration of ownership, internalisation, and location advantages. The author largely focused on government as the target of political behaviour. The author stated that Dunning's Eclectic paradigm can be readily expanded to include the political element in its consideration of firm-specific, location, and internalisation advantages. Boddewyn's results conclude that all advantages are necessary for FDI, "such as market imperfections may also be enacted through political behaviour in order to raise the transaction costs of competitors and to exploit various rents arising from these imperfections" (Boddewyn, 1988, p...

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