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Economic Growth Of South East Asian Developing Countries: Vietnam Thailand & Malaysia

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A handful of group-country studies involving Vietnam, Thailand, and Malaysia altogether have been established. Kotrajaras et al. (2011) recognized the positive bond between FDI and GDP in 15 East Asian countries through cointegration techniques and panel data analysis. From their results, the three countries had FDI inflows stimulating economic growth. FDI can enhance economic acceleration in nations with more proper elements such as labour skills, financial market development, infrastructure, greater trade openness, low corruption index, etc. Thailand and Malaysia, classified as middle-income countries and Vietnam, classified as low-income country, due to the lower degrees of mentioned factors, could not benefit from FDI as much as high-income countries in the region like Japan, South Korea, etc. Similarly, Sothan (2015) attempted to test the co-movement and causality between FDI and GDP in 21 Asian countries over the period from 1980 to 2013, including Vietnam, Thailand, and Malaysia.

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With the application of panel cointegration and Granger causality test, they confirmed the steady-state linkage between FDI and GDP in the long run in the three selected countries. Particularly, 1% increase in FDI generated 0.334%, 0.577% and 1.583% in the long-run economic growth of Vietnam, Thailand, and Malaysia respectively at the significance level of 1%. Using the same techniques to examine the three mentioned nations, Srinivasan, Kalaivani & Ibrahim (2010) confirmed the long-term bidirectional relationship between FDI and GDP in Vietnam and Malaysia. In the case of Thailand, their test results showed a one-sided and short-term Granger causal relationship from GDP to FDI.

Meanwhile, Tiwari and Mutascu (2011) conducted a research in panel data from 1986 to 2008 to analyse the effect of FDI on economic growth in 23 developing countries in Asia including Thailand, Vietnam, Malaysia. Investigating the two-way effect and nonlinearities related with FDI and exports in Asian countries’ economic growth, they pointed out that both exports and FDI foster these nations’ growth with the support of workforce and capital in the process. When nonlinearity involved with exclusively FDI was examined, the relationship existed as FDI strengthened growth. However, when the nonlinearities with both FDI and exports were analysed, only the positive relationship between exports and economic growth in panel countries were found.

Hence, the authors preferred export-led growth theory instead of FDI-lead growth hypothesis. Since Thailand and Malaysia are categorized as middle-income countries, there is a high number of studies established with different methodologies to inspect the FDI-economic growth relationship in some sample countries including Thailand and Malaysia, leading to distinguished empirical results. Hsiao et al. (2006) utilized time-series and panel data (1986-2004) to discuss the Granger causality relations between FDI and GDP in eight countries in East and Southeast Asia, including Thailand and Malaysia. Their analysis revealed that there was a unidirectional causality from GDP to FDI and Thailand’s GDP was likely to generate more FDI to it rather than the reverse direction. In the case of Malaysia, there was no causality between FDI and GDP, which could be owing to some downsides of utilizing national time-series dataset with a limited number of observations.

Pradhan, R. P. P. (2009) analysed the relationship between FDI and economic growth from 1970 to 2007 in five ASEAN countries encompassing Malaysia and Thailand with the adoption of univariate and panel cointegration. The results from Johansen’s multivariate cointegration test informs that at the individual level, the cointegration only existed in Singapore and Thailand, not Malaysia and the rest. From the Granger’s causality test, at the individual level, there was the existence of a bidirectional causal relationship between FDI and GDP in Thailand. However, no evidence was found in the case of Malaysia. Since Malaysia was the only exception in this study, it was still concluded that the insufficiency of FDI may hinder economic growth.

In Baharumshah & Thanoon (2006)’s study, the panel data from eight Asian countries encompassing Thailand and Malaysia during the period 1982-2001, it was recognized that FDI had a positive relationship with growth in both the short and long term and its effects on growth were more significant than those of domestic capital. The authors suggested that based on their evidence, countries which managed to attract FDI inflows were more capable of capitalizing investments and developed in a faster way than those obstructing FDI. On the other hand, in an analysis of Chowdhury, A., & Mavrotas, G. (2006), an innovative technique was adopted to examine the causality between FDI and GDP in three developing countries, namely Malaysia, Thailand, and China from 1969 to 2000. Their results based on the Toya-Yamamoto causality test demonstrated a bidirectional relationship between FDI and economic growth in the two countries. It was also recommended that there should be more individual countries in the future research on the mentioned linkage due to the country-specific characteristics of GDP and FDI’s causality.

In addition, Marwah, K., & Tavakoli, A. (2004) analysed the influence of FDI on economic growth in four founding members of the ASEAN, including Malaysia and Thailand (1970 -1998). A positive linkage was found in these two countries based on the result of the model using a multifactor Cobb-Douglas production function, transcendental production function and the CES generalized Cobb-Douglas function. Specifically, it was reported that for every growth point, increase in capital stock induced 0.333 in Malaysia and 0.127 in Thailand with growth in foreign capital stock accounting for 25.8% in Malaysia and 20.3% in Thailand of every 1% growth point formulated by the growth of the total capital stock.

Country-specific studiesAlong with multi-nation studies, country-specific analysis was also established through different methodology and techniques, resulting in mixed outcome on the relationship between the two variables, especially in the cases of Thailand and Malaysia. Ang (2009) studied the roles of FDI and financial development in economic growth in Thailand, utilizing yearly time-series data over the period 1970-2004. With an unrestricted error-correction model and an instrumental variable estimator, his analysis demonstrated that financial development exerted a positive impact on economic growth while FDI imposed a negative influence on output in the long term. Nevertheless, a rise in the level of financial development might lead to Thailand’s higher benefit from FDI, thereby stimulating economic growth. It can be implied from the result that FDI had an indirect impact on promoting economic development in Thailand.

The productivity and scale of the financial system in Thailand is necessary to maximize the positive outcome of FDI. Tanna & Topaiboul (2005) inspected the FDI-led growth and export-led growth hypotheses in the case of Thailand from 1973 to 2000. They found out that the evidence for the FDI-led growth was not as strong as export-led growth theory and trade openness played a more important role than FDI in stimulating Thailand’s economic development. However, the indirect impact of FDI was noticeable since technology transfer through FDI affected positively human capital with a spillover effect on domestic enterprises and growth. Malaysia has also witnessed a high number of studies with controversial outcomes. Various models were applied in those papers bringing about non-identical findings. Karimi and Yusop (2009) used Toda-Yamamoto methodology to test the causality relationship as well as the bounds tests (ARDL).

With Malaysia’s time-series data from 1970 to 2005, after conducting two tests, they concluded that there was no bi-directional causality and long-term relationship between FDI and growth. Instead, they claimed that FDI only had an indirect impact on Malaysian economic growth. They also stated that there were numerous factors promoting or hindering economic growth and these factors are possibly different among countries, sectors and types of FDI. Duasa (2007) also tested the causality between FDI and GDP in Malaysia (1990-2002) using Toda-Yamamoto methodology. The analysis indicates that there was no strong evidence on the effect of FDI on economic growth in Malaysia over the period. However, it is worth mentioning from the result of the Generalised Autoregressive Conditional Heteroskedasticity (GARCH) model in the analysis that FDI contributes to the stability of economic growth in the long run. Therefore, policies on FDI inflows attraction should be of consideration for the reduction of the Malaysian economy’s volatility.

Fadhil & Almsafir (2015) carried out an investigation on the impact of FDI on economic development in Malaysia from 1975 to 2010, based on endogenous growth theory models, using Unit root test, Johansen Co-integration test and Multiple Regression. It was revealed that FDI inflows and human capital made a huge contribution to induce the country’s growth. Notwithstanding, there was an insufficient amount of technology spillover effect to accelerate growth together with labour forces. Some suggestions proposed to resolve this issue in Malaysia are appropriate fiscal policies to foster national workforce in order to attract and meet the requirements of FDI inflows, a greater degree of trade openness and better exchange environment. Alzaidy, G., Ahmad, M. N. B. N., & Lacheheb, Z. (2017) adopted ARDL approach for the period 1975 to 2014 and concluded some findings in the case of Malaysia.

According to this analysis, FDI exerted a positive impact on Malaysian economic growth in both the short and long run. Additionally, they claimed that greater local financial intermediaries may have the ability to direct FDI inflows to appropriate sectors, thereby accelerating economic development. Har, Teo & Yee (2008) utilized time series data to conduct ordinary least square (OLS) regressions to examine the relationship between FDI and GDP over the period 1970 -2005. It is concluded that there were sufficiently strong evidence to confirm the positive linkage between the two variables in Malaysia.

The increase in FDI inflows might lead to greater employment, higher productivity and labour skills. However, there also might be some downsides such as the reduction in market power of local firms, economic instability and inappropriate governmental policies. In the case of Vietnam, the majorities of the studies leap to an identical confirmation of the positive connection between two analysed variables. Trinh and Nguyen (2015) stated that 1% increase in FDI inflows would induce 0.24% increase in Vietnam’s economic growth in the long term, considering Johansen co-integration technique based on annual series data from 1990 to 2013.

Anwar & Nguyen (2010), with the utilization of a panel dataset covering 61 Vietnamese provinces in seven regions during the period of 1996 to 2005, based on a simultaneous equations model, supported the idea that FDI reinforced growth in Vietnam. Nevertheless, the indirect effect (considered as the economy’s capacity features such as the development of financial market, expense on education and technology gap, etc.) was affirmed to be negative. The connection between FDI and economic growth also only existed in four regions, not the entire country: Red River Delta, North East, South East and Mekong River Delta. The study suggested that the influence could be more dramatical if a greater amount of capitals and resources were invested in education, financial development and solutions to narrow the technology gap between foreign and domestic enterprises.

Nguyen (2017) studied both the short and long-term influence of FDI on Vietnam’s growth from 1986 (Doi Moi period) to 2015 through Autoregressive distributed lag (ARDL) model and cointegration to examine the long-run linkage and ARDL error correction model for the short-run one. The author found out that FDI had a long-term positive impact on Vietnam’s economic growth but there was no evidence for this connection in the short term. It can be implied that to exert significant positive results, it might take a long duration in the case of Vietnam. Hence, it is of importance for Vietnam to apply suitable policies to attract more FDI and ensure social, political sustainability, government bureaucracy diminishing and stable macroeconomic environment.

Incorporating panel data of 61 provinces from 1995 to 2006, the analysis of Hoang et al. (2010) informed the existence of the positive relationship between FDI and economic growth in Vietnam. It is implied from the study that this influence did not activate through human capital, trade, technology and knowledge transfer since Vietnam had not been developed yet to absorb those inputs. The only factor contributing to this linkage was the additional capital from FDI inflows.

Drawing the same conclusion, the analysis conducted by Hung (2005) is based on panel data of Vietnam from 1993 to 2002 in the form of two regressions in growth model and poverty model. At the province level, the FDI inflows were revealed to have a positive impact on economic growth and poverty reduction over that period. On the other hand, with an augmented production function to investigate the relationship in Vietnam and China, it is pointed out in the study by Vu et al. (2008) that FDI directly influenced growth and indirectly through labour productivity enhancement. Although the direction was positive, the impact was not equally allocated across sectors. In Vietnam, the sectors benefiting from FDI significantly were manufacturing, oil and gas. Accordingly, more sectoral data and studies should be implemented to clarify this issue and promote the role of FDI inflows in other sectors in the future.


This paper has presented two main parts of the literature on the relationship between FDI and economic growth in three South East Asian developing countries: Vietnam, Thailand and Malaysia. These countries have attracted a large amount of FDI inflows over the years, however, whether this investment has translated into the desired level of economic growth is still ambivalent. The theoretical review includes two key theories laying foundation for the link, which are growth theory and dependency theory. However, in most of the studies on this relationship between the two analysed variables in developing countries, growth theory was selected as the basis to develop methodological approaches. Intriguingly, the results from both cross-country and country-specific studies are still far from conclusive, particularly in the cases of Thailand and Malaysia. Some scholars recognized the positive relationship but some either denied or stated that the evidence was not strong enough to support the contribution of FDI to economic development.

Meanwhile, studies on Vietnam – the only low-income country in the selected group, reached a more similar outcome, reinforcing the influence of FDI on growth but some researchers claimed that the effect was not distributed equally across regions and sectors. Explanations for the variation in the empirical findings might be the difference in selected type of data (time-series versus panel data), and methodologies (OLS regression, Johansen cointegration technique, Granger causality test, etc.). Due to the fact that these three countries are among the biggest FDI recipients in the region, even though the role of FDI is controversial, it is of importance to conduct more country-specific studies on the direction of this relationship, determinants of the link, sectors and channels through which host countries can manifest FDI inflows’ expected benefit. Therefore, appropriate policies to promote economic growth can be suggested and analysed in a thorough way.

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