Effects of Foreign Direct Investment, Trade Openness, and Human Capital Development on the Economic Growth of Thailand

Effects of Foreign Direct Investment, Trade Openness, and Human Capital Development on the Economic Growth of Thailand

Hidekatsu Asada
Copyright: © 2022 |Pages: 14
DOI: 10.4018/IJABIM.309989
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Since the early 1990s, emerging East Asian countries have increasingly integrated with the global economy. Thailand is regarded as an exemplar of achieving remarkable economic growth owing to the outward-oriented industrialisation strategy. This study examines the effects of Thailand's outward-oriented industrialisation strategy, which comprises foreign direct investment inflows and trade openness on its economic growth. Further, the analysis sheds light on the absorption capacity of the economy by focusing on human capital development in particular. The empirical analysis, which applies the autoregressive distributed lag approach, reveals that, from 2000 to 2017, trade openness and human capital development contributed positively to Thailand's GDP growth in the long run, while FDI inflows contributed negatively.
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Since the early 1990s, emerging East Asian countries have increasingly integrated with the global economy. Accordingly, it is important to identify the factors that enable these countries to record successful economic development. The economic growth of these countries is due to a dynamic structural change, namely the shift from an agriculture-based and commodity export-led industrial structure to a more encompassing structure led by the manufacturing sector and the services sector.

The structural transformation is attributable to a set of policy measures, including ensuring macroeconomic stability, promoting regulatory reform conducive to private investment, human capital development with particular emphasis on education, and implementing outward-oriented industrialisation strategies. Outward-oriented industrialisation strategies involve trade and investment liberalisation, development of trade-related infrastructure, and business-friendly regulatory reform measures. These policy measures contribute to improving the quality of inputs and boosting productivity (Kokko, 2006; Stiglitz, 1996; Weiss, 2005).

Foreign direct investment (FDI) and trade are considered essential parts of the outward-oriented industrialisation strategy as highlighted in the context of the East Asian Miracle (Birdsall et al., 1993; Gill & Kharas, 2007; Stiglitz, 1996). In the East Asian region, the importance of FDI and trade openness is amplified by increasing participation in global value chains (GVCs), which is associated with economic development. Countries in the region are increasingly integrated into both global and regional value chains. For example, countries in the South-East Asian region source over 40% of their foreign value-added from neighbouring Asian partners. A positive link exists between countries’ GVC participation and the capacity of attracting FDI (Carril Caccia & Pavlova, 2018). Participation in GVCs is associated with growing productivity, export sophistication, and export diversification (Kowalski et al., 2015; Lopez Gonzalez, 2016).

Prior to the Asian financial crisis in 1997, Thailand experienced rapid growth, at an annual rate of around 8%. In the aftermath of the crisis, the Thai economy recovered in the early 2000s, owing to several structural reforms and an accelerating global economy. The policy approach by the government included two main strategies. On the one hand, the government promoted exports and FDI, with additional tax breaks to attract foreign investors, eliminating local content requirements and allowing full foreign participation in most manufacturing sectors (Organisation for Economic Co-operation and Development [OECD], 2021). Further, the government strengthened the policy for human capital development to increase the number of skilled workers and thus attract foreign investors. On the other hand, in 1999, the government started a reform programme that provided free tuition fees at the elementary and junior high school levels.

In the early 2010s, Thailand joined the group of upper middle-income countries. The outward-oriented industrialisation strategy is considered an integral part of Thailand’s economic development. Till the late 1970s, FDI was predominantly directed to import-substitution industries such as textiles, automobiles, and chemicals. In the mid-1980s, the government moved forward with the next phase of industrial development, that is, manufacturing export-led growth, or the export-oriented development strategy. An increasing share of FDI was directed to more export-oriented activities.

The export-oriented development strategy promotes participation in GVCs. During this phase, Thailand predominantly entered GVCs at the assembly or production stage, and subsequently sought to move towards higher value-added activities. Industries such as parts and components, automobiles, and electrical appliances have exhibited strong growth. This has primarily contributed to the fast growth of the Thai economy, wherein FDI has played an important role as well (ASEAN-Japan Centre, 2019; Kohpaiboon, 2003). Thailand is regarded as an exemplar of achieving remarkable economic growth, owing to the outward-oriented industrialisation strategy (OECD, 2021).

Against this background, this study aims to examine the key drivers of economic growth from 2000 to 2017 by using the latest available data. Numerous theoretical and empirical studies exist on the external and domestic factors that drive the economic growth of the country. The effect of each factor depends on country-specific differences, such as the difference of policy settings and external and domestic circumstances.

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