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FDI Analysis on a Country's Economy: Thailand

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Background & Purpose of the report

FDI has become a key factor in the economic growth of developing countries in the South-East Asian region like India, China, Vietnam & Thailand. The international capital transfer that FDI enables along with the transfer of technology and innovation has been the cornerstone of success for these developing economies. FDI flows in the past have resulted in increased GDP growth, better employment opportunities and infrastructure development. Thailand is one of the developing economies that have benefitted a lot from FDI flows and shown consistent export oriented growth with about expected in 2012 reaching to a high of $238 billion by the year end. The rise of Thailand as a manufacturing based economy is evident and FDI had a major role to play in it. This research attempts to understand the role of FDI in a country?s economy by reviewing the key drivers and key impact of FDI. It further takes the case of Thailand and discusses the trends and patterns of FDI in Thailand, corresponding policy developments and eventually the impact of FDI on the Thai economy.

Structure of the Report

The research starts with the introduction describing the motivation and need for the study, laying out the key aims & objectives and research questions, discussing the value of the research and the outline of dissertation. The next chapter is the literature Review chapter that discusses the key theories related to FDI, the key drivers of FDI and the impact of FDI. The following chapter discusses the methodology used, research design, data collection & analysis. The next chapter discusses the key trends and patterns of FDI in Thailand and its impact on Thai economy. The last chapter summarizes the key findings and provides recommendation for further research.

Methodology of the Report

This dissertation uses secondary research methodology with literature Review as its base as it involves reviewing existing data on a macro level. A vast amount of journal articles, reports, published papers, internet articles and conference proceedings have been reviewed to understand the role of FDI in the development of country?s economy. An LR map was created to show the relation between different sub chapters of the LR.

Key Words
FDI, Trade, Trade Policies, Internationalization Theory, Production Life Cycle theory, Multinational Enterprise, Developing Economies, Thailand Economy, FDI Impact - Economic impact, Technological impact, Social impact, Environmental impact, Market Imperfections, Technology Transfer, Balance of payment effect, International trade, Trade economics, Currency fluctuations.

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  • 1. Fadsd Trends in FDI, its impact on macroeconomic factors and future outlook of Thai economy led by FDI driven growth
  • 2. Abstract Background & Purpose of Dissertation FDI has become a key factor in the economic growth of developing countries in the South-East Asian region like India, China, Vietnam & Thailand. The international capital transfer that FDI enables along with the transfer of technology and innovation has been the cornerstone of success for these developing economies. FDI flows in the past have resulted in increased GDP growth, better employment opportunities and infrastructure development. Thailand is one of the developing economies that have benefitted a lot from FDI flows and shown consistent export oriented growth with about 7.23% expected in 2012 reaching to a high of $238 billion by the year end. The rise of Thailand as a manufacturing based economy is evident and FDI had a major role to play in it. This research attempts to understand the role of FDI in a country‟s economy by reviewing the key drivers and key impact of FDI. It further takes the case of Thailand and discusses the trends and patterns of FDI in Thailand, corresponding policy developments and eventually the impact of FDI on the Thai economy. Structure of the Dissertation The research starts with the introduction describing the motivation and need for the study, laying out the key aims & objectives and research questions, discussing the value of the research and the outline of dissertation. The next chapter is the literature Review chapter that discusses the key theories related to FDI, the key drivers of FDI and the impact of FDI. The following chapter discusses the methodology used, research design, data collection & analysis. The next chapter discusses the key trends and patterns of FDI in Thailand and its impact on Thai economy. The last chapter summarizes the key findings and provides recommendation for further research. Methodology of the Dissertation This dissertation uses secondary research methodology with literature Review as its base as it involves reviewing existing data on a macro level. A vast amount of journal articles, reports, published papers, internet articles and conference proceedings have been reviewed to understand the role of FDI in the development of country‟s economy. An LR map was created to show the relation between different sub chapters of the LR. Key Words FDI, Trade, Trade Policies, Internationalization Theory, Production Life Cycle theory, Multinational Enterprise, Developing Economies, Thailand Economy, FDI Impact - Economic impact, Technological impact, Social impact, Environmental impact, Market Imperfections, Technology Transfer, Balance of payment effect, International trade, Trade economics, Currency fluctuations.
  • 3. Contents 1. Introduction.......................................................................................................................... 3 1.1. Core objectives of the research............................................................................................ 4 1.2. Aims & Objectives of Research........................................................................................... 4 1.3. Key Research Questions ...................................................................................................... 5 1.4. Value & Limitations of Research ........................................................................................ 5 1.5. Methodology Outline........................................................................................................... 5 1.6. Dissertation Outline ............................................................................................................. 6 2. Literature Review................................................................................................................. 7 2.1. Brief Overview of FDI and related theories ........................................................................ 8 2.2. Key Determinants of FDI in a country ................................................................................ 9 2.3. Impact of FDI on the host country‟s Economy.................................................................. 11 3. Research Methodology ...................................................................................................... 15 3.1. Problem Identification & Research Question .................................................................... 15 3.2. Research Design................................................................................................................. 15 3.3. Data Collection .................................................................................................................. 15 3.4. Data Analysis..................................................................................................................... 16 4. Key Findings & Analysis................................................................................................... 17 4.1. Trends in FDI in Thailand.................................................................................................. 17 4.2. Key drivers of FDI in Thailand.......................................................................................... 19 4.3. FDI Policy Formulation in Thailand.................................................................................. 20 4.4. Impact of FDI on Thai Economy....................................................................................... 22 4.5. Performance of other regional countries............................................................................ 26 5. Conclusion, Limitations & Recommendations.................................................................. 28 6. References.......................................................................................................................... 29
  • 4. 1. Introduction In the era of globalization, the international boundaries are getting diminished and firms are focusing on finding new markets that present a new era of growth. This trend has been prevalent since last few decades and continues to rise and shape the international business. In 2011, the Global FDI rose by 17% to $1.5 trillion beating the Economic recession and Euro zone crisis (UNCTAD, 2012). In the same year, the developing and transition economy saw the highest inflow of FDI i.e. $755 billion and accounted for over 50% of FDI inflows (UNCTAD 2012). In 2012, the economic world amidst uncertain financials, turbulent markets, doubt about future of Euro and surrounding debt crisis is projected to have a slow FDI growth and will grow to $1.6 trillion. But despite the uncertainties FDI remains a driving factor in the current economic scenario as it brings together sustainable economic growth, productivity and knowledge transfers. Also as the number of multinational firms is increasing, FDI is getting a boost (Zedwitz, 2008) For a developing country growth without foreign intervention is very slow and does not reach to all the sectors of industry. One of the biggest examples is the retail sector in India, which finally opened doors for FDI with 51% allowance in the retail sector (Economic Times article, 2012). The retail sector was suffering with low penetration levels of 8% in organized retail as compared to US which has 85% of penetration levels (Velagapudi, 2011). Now it is touted to grow to about $675 billion in 2014, highlighting the role of FDI (Velagapudi, 2011) Foreign Direct Investment (FDI) thus has become a key tool and has been instrumental in the economic development of many developing economies. It basically serves mutual purposes – 1) The markets of developed countries are almost saturated and offer low growth and hence organizations need to find new markets with growth potential and hence go for FDI in the developing countries 2) On the other hand due to FDI in a country there are benefits at both Macro level (GDP growth, infrastructure development, job opportunities and others) and Micro level (Development of certain industries, increased competition leading to better products and services). Moreover, the exchange of technical knowhow and expertise is another valuable benefit (Mallampally & Sauvant, 1999) Historically, the markets of Europe and US were the key recipients of foreign investments and the developing markets were not the ideal destinations. But as times changed, the developed markets became less attractive; the economies opened and presented tremendous opportunities for the developing countries. Key reasons of these trends can be attributed to trade liberalization and international cooperation (Nunnenkamp, 2002).International firms mainly from US and Europe needed to find new markets for their products & services. Moreover, to take advantages of the lower cost of labor and capital, to have more control over operations and friendly government policies the international firms started to invest in the developing markets. Among them the countries of Asia and more recently Latin America were the biggest beneficiaries. Southeast region, particularly China and India, the two developing Asian giants have seen tremendous amount of FDI flow post 1990s. For India FDI numbers are expected to be in range of $35 billion in 2012 (Business Today, 2011), while for China the double digit growth of 11% in FDI continues (China Daily, 2011). At the same time the other Southeast Asian developing countries like Malaysia, Indonesia, Vietnam and Thailand have also been very attractive destinations.More and more Multinationals like Arcelor Mittal, Toyota, Nissan, Coca Cola and
  • 5. others are investing in Asia either through joint ventures or whole owned subsidiaries. According to a report by (South Asia Monitor, 2012) the combined FDI flow to South East Asia was about $344 billion with share of South Asia -$43 billion, East Asia - $209 billion and South –East Asia being $92 billion in 2011, while China alone had $124 billion of FDI (growth by 8%) in 2011. The FDI growth numbers are very encouraging and one of the key drivers of the power shift from west to east. Thailand with a growth of 4.5%, a huge manufacturing base and export oriented outlook has also benefitted heavily from FDI flows. This paper attempts to highlight the case of Thai economy and show how FDI has helped in its development. It also attempts to understand the main trends in FDI, its impact on several macroeconomic factors and its future outlook. 1.1.Core objectives of the research Thailand presents an interesting case for the study of FDI flows as far as developing countries are concerned. Like others it has benefitted significantly from FDI over the past few decades. Led by its industrial strategy of export and development of manufacturing industry, it has been boosted significantly by the FDI flows. In 2010 about 70% of Thailand‟s GDP came from export and FDI played an important role in the production of semi-finished goods (Anantarangsi, 2011). Although, FDI remains a hot topic as far its importance in international trade is concerned, but the focus on understanding its impact is limited. There have many studies in the field of FDI and developing countries that focus on FDI growth and other aspects. In case of Thailand as well some researchers (Anantarangsi, 2011), (Wattanakul, n.d.), (Miankhel, 2009) and (Tambunlertchai, 2009) have done few empirical studies. However, there is still a dearth in the studies that try to highlight the impact of FDI on the Thai economy especially in Macroeconomic terms. Also, there is a need to understand the key drivers of FDI in the current economic scenario. There have been many theoretical papers that talk about the key drivers of FDI but they are generic and need to be customized for today‟s economic scenario. The international policies of a country also determine how smoothly FDI can be made in that particular country. A research paper by (Awan et. al, 2010) highlights the key reasons that facilitate FDI – Capital flow from developed countries to developing countries, ownership advantages for a foreign firm in a new market, organizations seek benefits like low labor and cheap raw material to minimize their production costs, currency of both the countries becomes stronger and political stability of the host country is another reason for facilitating FDI. This research paper attempts to review the FDI trends in Thailand, understand the impact of FDI on Macroeconomic factors and eventually speculate on the Future outlook of the Thai Economy. 1.2.Aims & Objectives of Research The main aim of this study is to “to understand the key determinants and impact of FDI on a country’s economy by taking the case of Thailand and studying the latest trends in the FDI, its
  • 6. impact on Macroeconomic factors and the Future outlook of the Thai Economy led by FDI driven growth” The study has following sub objectives –  To understand the importance of FDI in a country, key determinants, impact on the economy by reviewing key theories and concepts  To understand the trends, patterns and drivers of FDI in the case of Thailand  To understand the impact of FDI on the Thai economy by studying Political, Economic & Social factors 1.3.Key Research Questions The Main research question is – “How FDI impacts the political, economic & social aspects in case of a developing country like Thailand”?  What is the importance, key determinants, key drivers and impact of FDI in a country and what are the related theories?  What are the latest trends, patterns in FDI in case of Thailand and how it affects the economy of Thailand? 1.4.Value & Limitations of Research The main attempt of every dissertation is to add value to the existing stream of literature and if possible have some practical implications. From an academic view point, a research should have clear objectives, should be concise and should present a new view point on an existing topic or initiate a new area of discussion. FDI in developing economies and South East Asian economies is a heavily researched topic. The main areas that have interested researchers in this field are Development of contemporary theories, empirical studies, application of theoretical models, country studies, comparison between two countries or regions and others. Hence, it is very hard to create a new stream of research on this topic and hence the present research paper can be considered a good review on Thailand, its FDI trends and impact of FDI on its economy. Overall this paper is a small attempt to study the case of Thailand in perspective as far as FDI flows and its impact is concerned. Although it suffers from some of the above mentioned limitations but it surely adds to existing literature by presenting a more comprehensive view on the topic and discussing a less explored area within the research domain of FDI. 1.5.Methodology Outline The study would be using the Secondary Research Methodology with literature review being the most important part. This study would use a lot of online material in the form of documents, journal articles, industry reports and published papers about FDI in Thailand, its key drivers, latest trends, impact on macroeconomic factors and future outlook. The methodology outline is as follows – Problem Identification & Research Question
  • 7. This is the first step of the research in which the focus is to identify a specific issue and define the research problem. It is of paramount importance to consider a study that is relevant in the present context and is significant addition to the existing literature (Saunders et. al, 2007). The research question should be concise and clear. After this, the aims and objectives of the research are decided to define the boundaries of the research. This section mainly explains the “why” and “what” part of the research. Research Design After deciding the research question and explaining the relevance of it the next step is to define the “How” part. Research design explains the type of methodology used to undertake the whole research. It explains the various stages that are involved in the whole study. It also gives reasoning about why a particular methodology was used (Saunders et. al, 2007) Data Collection This part deals with significance of the data collection process through the chosen method. Data collection has to be accurate and relevant to the topic of research. The major sources used should be clearly mentioned. Data Analysis In this stage the collected data needs to be analyzed as per the defined research question. The findings have to be clearly presented without any bias. Based on the findings, suggestions and recommendations can be made that are relevant to the topic. 1.6.Dissertation Outline Chapter 2 Literature Review This is the core of the dissertation and discusses the importance of FDI and main theories explaining the evolution, key reasons and characteristics of FDI from various authors. A literature Map has been used to present the structure of LR. This chapter further discusses the key determinants of FDI flow in a country and the impact of FDI on a country‟s economy Chapter 3 Research Methodology This chapter explains the methodology used, research design, data collection and data analysis techniques Chapter 4 Key Findings & Discussion This chapter applies the theoretical concepts reviewed in the LR on the economy of Thailand. It further presents the main trends and patterns in FDI and its impact on the economy of Thailand. Chapter 5 Conclusion & Recommendation The last chapter summarizes the key findings and presents a future outlook on FDI flow and various challenges that Thailand might face in attracting FDI. It also gives recommendations for further research on this topic.
  • 8. 2. Literature Review Literature Review is the most important section of the dissertation as it provides the independent views of previous studies done on the topic, helps in defining the scope and boundaries of the research, presents a balanced view, helps in justifying the research questions (Bowker, 2006). This section helps in understanding the sub topics through an array of readings and builds the base of the dissertation. LR map also helps in defining the structure, flow and the relationship between various sub sections of the literature review. The literature review map of this dissertation has been presented below – Figure: LR map. Source (Created by the author) The LR map drawn above basically shows the structure of the LR, how each section is related to other and the key literature used. From the map it can be seen that the first section forms the base of the review and also provides the theoretical concepts related to FDI. This is the most important section as it discusses the evolution of theories relating to FDI that explain how FDI LR MAP FDI overview & related theories FDI in international trade, Production Life cycle theory, Internationalization theory, OLI theory, Market Imperfections theory, Multinational Enterprise theory Key Determinants of FDI Market Size and growth opportunities, trade and non-trade barriers, exchange rate, interest rate, trade potential, country risk profile, investment insurance, Labor cost, inflation rate and others Impact of FDI on Host Country Political impact, Economic impact on Output and growth, trade flows, employment, labor cost, market structure, social impact on welfare and skills, environmental impact, technological impact Key Literature reviewed (Farell et. al, 2004), (Choong et. al, 2004), (Jackson & Markowski, 1996), (Clegg, 1998), (Kiyota & Utara, 2004), (Moosa, 2002), (Wang & Swain, 1995). Key Literature reviewed (Balassa, 1978), (Lipsey, 2002) (Vernon, 1996), (Kindleberger, 1969), (Hymer, 1976), (Buckely & Casson, 1976), (Hennart,1982), (Dunning, 1981) , (Casson, 1998) (Cave, 1996) Key Literature reviewed (Moosa, 2002), (Sun, 2009), (Lipsey, 2001), (UNCTAD, 2005), (Tambunlertchai,2009), (Dunning, 1981), (Sangiam, 2006)
  • 9. came into place and the reasons behind it. The next section discusses the key determinants of FDI, which is basically a derivation from the first part and uses the theoretical concepts reviewed. Similarly, the third section discusses the impact of FDI on host countries and uses the main FDI theories. The arrows describe the relation between different parts. The corresponding authors for each section have been mentioned. 2.1.Brief Overview of FDI and related theories FDI has always been an important factor in the international trade growth and hence many researchers have developed various models and theories explaining the need for FDI, motivations, key determinants and entry modes (Vasyechko, 2012). Interesting thing about FDI theories is that they concentrate on different aspects and are incomplete when viewed in isolation and overlap each other by using concepts from each other (Vasyechko, 2012). There have been certain key focus areas on which researchers have based their FDI views upon. Mains ones are – Production Cycle Theory – This theory was proposed by Vernon in 1966 and focuses on four major stages of production cycle: innovation, growth, maturity and decline (Denisia, 2010). It was a first major attempt in the field of modern FDI theories. The basic ideas is that when the product reaches maturity in a developed country, there is a need to find new markets in developing countries and hence export increases and eventually to take advantage of low cost of production, investments happen in the foreign country (Sangiam, 2006).It very well explained the investments made by many US companies in the European market from 1950s to 1970s. Although it was one of the first theories to be discussed upon FDI, it is no longer relevant in the current scenario and is only limited to high innovation industries. It was mainly developed for the US economy and its technological leadership, and does not take into account the increasing influence of China, India and other developing countries (Vernon, 1971) & (Casson, 1976) Market Imperfections Theory – This theory presents the microeconomic view on FDI and mainly relates to the motives of MNC‟s to extend their businesses beyond their home countries and propagate their knowledge and technology all over the world (Vasyechko, 2012). The theory was first proposed by (Kindleberger, 1969) and was later developed by (Hymer, 1976). The basic idea of this theory is that markets are imperfect and without that FDI won‟t occur. It‟s the differences in markets like labor costs, capital investments, government policies and access issues that drive FDI growth. This theory has its own limitations in the sense that it fails to explain why foreign production is consideredthe most desirable means of harnessing thefirm‟s advantage (Morgan & Katsikeas, 1997). Internationalization Theory – This theory concentrates on the growth in the transnational companies and their motivations to invest abroad. This theory was first propagated by (Buckely & Casson, 1976) and further developed by (Hennart,1982). The main tenets of this theory are – firms improve their internal processes to create specific advantages, then firms use their competitive advantages to maximize profits in other markets and international trade leads to FDI and creation of multinational enterprise (Denisia, 2010)&(Sangiam, 2006). One of the arguments
  • 10. against this theory is done by (Dunning, 1981) who argues that it only explains a part of FDI flows. OLI Theory by Dunning–This theory developed by (Dunning, 1981) is a mix of various theories. It basically combines Ownership advantages (O), Location advantages (L) and Internationalization (I). It is also known as eclectic or systematic theory of international production (Sangiam, 2006). By ownership advantages a firm seeks to develop competencies not available to the competitors. They could be technological advantage, government support, economies of scale, favored access to the markets, supplier networks and others. By location advantages it means that a firm should receive more benefits by opening up a production facility in the host country as compared to the home country. They include better transportation, tax subsidies, infrastructure, low input prices like labor, energy and raw material, culture, business customs, and language. The benefit of internationalization means that benefits should outweigh other forms of business like export, licensing & franchise. They include better control of market, better control on ownership, to capture wider market, reduction of costs and others. The Multinational Enterprise Theory – This theory can be considered as a conglomeration of Market Imperfections& Internationalization theory in a way that it combines the motives of organizations for going abroad and the underlying benefits (Buckley & Casson, 1976). It was explained in detailed by (Casson, 1998) by taking three perspectives viz. Investment occur either in advanced industrialized countries or rapidly developing countries, Cheap raw materials and cost reduction in the form of reduced labor costs. It also suggests that the structure of equity ownership in foreign ownership is related to the degree of control the host company wants (Sangiam, 2006). Other sub theories are also present that focus on topics like - impact on local industries (Blomstrom et al., 1994)&(Smarzynska, 2002), FDI‟s role in macroeconomic factors like employment, production, technology transfer and economic growth(Borensztein et al., 1998)&(Caves, 1996), Importance of technology transfer (Findlay, 1978), Negative impact or delimiting impacts of FDI on a nation‟s economy (Lipsey, 2002), (Hanson, 2001) and (Greenwood, 2002). 2.2.Key Determinants of FDI in a country There are certain factors that determine the attractiveness of a country for FDI. These factors also ascertain why certain countries receive more FDI than other countries. Various factors like location, labor cost, FDI policies, investment potential of companies and many others macroeconomic factors like exchange rates, interest rates, trade potential and political structure. The key determinants of FDI are as follows – Market Size & Growth Opportunities This is the first and foremost driver of FDI as large markets present value in terms of resource allocation and achieving economies of scale. Some of the authors have presented a positive relationship between the GDP growth and FDI in a country(Bandera & White, 1968), (Dunning 1981) & (Root & Ahmed, 1979).Especially for developing countries, after their market size
  • 11. grows to some critical value they will start getting more FDI. Case of China and India and their huge regional markets is also the main reason for their tremendous FDI growth (Farell et. al, 2004) & (Choong et. al, 2004). Trade and Non- trade Barriers As far as trade barriers are concerned, there are two schools of thoughts that have been established as far as their role as one of the key determinants of FDI is concerned. Some authors suggest that countries that are less open and have high trade barriers would be receiving more FDI given all other conditions equal. One of the reasons is that FDI is considered an alternative to normal export import scenario. Thus, presence of trade barriers and their avoidance has been a key factor for FDI increase in countriesthat have introduced export promotion schemes such as India, China & Thailand (Moosa, 2002) & (Wang & Swain, 1995). On the other hand high trade barriers also make some countries less attractive to foreign investors and studies have shown that barrier reduction does nothave negative impact on FDI (Jackson & Markowski, 1996)& (Clegg, 1998). In general it is seen that countries that are perceived to be more open to trade would receive more FDI. The effect of non-trade barriers is analogous asthere reduction results in realization of FDI (Clegg, 1998). Trade Potential Trade balance is also considered to be a key driver for the growth of FDI. When a country is under trade deficit it will try to attract more investment and hence facilitating FDI. Factors like export promotion and import substitution also play a role in driving FDI. Interrelation between FDI and trade have been examined thoroughly by many scholars and they have formed varied conclusions but all agree that understanding the relation between trade and FDI flow is important for any organization (Balassa, 1978). Exchange Rate & Interest Rate Other Macroeconomic factors that determine the flow of FDI in a country are Exchange rate & interest rate. Strong and stable currency is one of the benefits that are enjoyed by foreign investors. It is generally understood that countries with weaker currencies are recipients of FDI while countries with stronger currencies are providers of FDI. Countries with currencies that are expected to rise in future receive more FDI in terms of capital investment and real estate development. Exchange rate volatility brings out both opportunities and problems for companies. Hence, a strong but flexible currency would be most suitable for attracting FDI (Kiyota & Utara, 2004). Interest rate differences are considered one of the primary reasons of international capital movements and hence impact FDI although only for a temporary period (Boatwright & Renton, 1975). Lower interest rates leads to increased FDI, as companies find it cheaper and more convenient to borrow in the host country and avoid exchange rate transaction costs. Interest rate changes in the home country relative to the host country also play a role in determining the flow of FDI (Yang et. al, 2000) Labor cost After the macroeconomic factors have been sorted out one of the key determinants is the labor cost in the host country. For developing countries it is one of the key attractions that help them in receiving FDI. Some of the related factors along with the labor cost include manpower skills,
  • 12. education level, language skills, technical skills and other skills. Countries like India and Philippines with high skills in English language and technical capabilities have been able to attract significant FDI in the Information Technology Services and Business Process Outsourcing industries. Other labor force characteristics such as flexibility, minimum wage rates and work ethics in the host country as compared to the home country also decide the flow of FDI (Javorick & Spatareanu, 2005). Some authors like (Chen & Ku, 2000) & (Resmini, 2000) propagate that cheap labor and cost reduction is the key reason of FDI in some traditional manufacturing sectors. Country Risk Profile Country Risk profile is another important that judges the overall characteristics of a country based on Political, Economic, Social and Technological factors. A stable, friendly and trade promotion government is something that most of the international firms look for while investing in a new country. Moreover, the host countries relationship with the home country, its regional political influence and type of government control are other factors that determine the risk factors. Economic risk involves unstable currency, high inflation, low GDP growth and others. The social factors like consumer behavior, work culture, power distance and others are some microeconomic factors that also most of the companies look at before deciding to invest. Finally, in the current world every kind of business is driven by technology and hence it is very important that the host country is open to technological innovations. The manpower should be skilled enough to learn and work on new technology. A conglomeration of all these factors determines the risk profile of a country and overall determines the flow of FDI (Moosa, 2002) Other key factors Inflation rate is another economic indicator that is considered important in determining FDI flows in a country. High inflation rate in a country shows that the government does not have strong policies to curb the money supply and balance the budget. A lower inflation rate certainly provides a better investment environment and hence increases FDI.Investment insurance determined by government and political structure is another intangible consideration that international firms need to make. Factors like Human Development Index and Equality index might induce FDI in the country. Finally, Government Policies can shape the flow of FDI in a highly significant way. For e.g. policies like limited investments, higher taxes and complex procedures are deterrent to FDI flows while policies like 100% in certain industries, tax havens and simple low bureaucratic processes certain boost FDI. 2.3.Impact of FDI on the host country’s Economy FDI flows have led to the development of the economy of various countries. FDI flow involves international transfer of capital, human resources, skills, technological knowhow and raw materialsand results in costs and benefits for both host and home country (Moosa, 2002).The impact on various factors needs to be studied in order to understand the overall impact of FDI. Moreover, there are certain negative effects of FDI that need to be studied. The impact can be classified into Economic, Political, Technological and Social& Environmental categories. Economic impact
  • 13. The biggest impact of FDI on the host country is the economic impact on several factors like productivity, growth, trade flow, employment, market structure and others. Impact on Output & Growth – This effect can be understood in terms of the GDP and its economic growth. Naturally, with increased investment in the production related infrastructure, the output of the country would increase leading to an increase in the GDP. Also, the multinationals pay taxes to the government leading to increase in the country‟s revenue. The extent of impact of FDI is also dependent on the availability of human capital, government policies and other resources. Impact on Employment – As far as impact on employment is concerned different authors have different views on employment and FDI relation. There are mainly three ways FDI impacts employment – FDI can increase employment by setting up new production facilities, preserve employment by acquiring existing infrastructure or reduce employment by closure of certain facilities (Baldwin, 1995). A related effect of FDI is that on labor costs and wages. Some authors like (Feenstra & Hanson, 1995) examined that FDI lead to increase in the wages. They found some positive correlation between FDI and skilled labor in a study about Mexico. Another factor to be studied here is the elasticity in the demand of labor. Although FDI leads to increase in wages, but at some point of time it could be deterrent for the economy as the demand for labor would decrease and companies might relocate to other location offering higher benefits. Impact on Trade flows–The relation between FDI and trade flows was first discussed by (Romer, 1975) based on the economic history of US, UK, Germany and Japan. It was observed that there are four stages of relation between Trade & FDI – 1) Trade increases as the economy grows 2) Trade share stabilizes and the FDI share increases 3) Trade share falls 4) FDI share falls. Developing countries like India & China could be somewhere between stage 1 and stage 2. One of the points of discussion is that whether trade and FDI are complementary or substitutes. On one hand FDI and trade are alternative modes of entry into a new country deeming them as substitutes while on the other hand it cannot be denied that FDI does lead to increase in exports. Also, it leads to import of machinery and technology from the home country. Another view is that the relationship between two countries (home and host) determines whether FDI impacts the trade flow or not. Impact on Market Structure–This is one of the microeconomic effects of FDI. Multinational firms bring with them superior technology, financial muscle and governance structures leading to high competition in the market. This competitive rivalry among the domestic producers and foreign producers plays an important role in shaping the market dynamics. Although this competition leads to advantages for consumers in terms of decreased costs and wider options, but it may also result in complete dominance of MNCs in the domestic market. Mergers and acquisitions are a very likely result of opening up of market. Political impact The economic impact of FDI leads to a political impact increasing the host country‟s prosperity and importance in the world political and economic affairs (Lipsey, 2002). FDI growth has also become a key agenda for most of the political leaders of the developing countries. Their participation in WTO and other blocs like ASEAN & SAARC have led to the further opening of economies and lifting of trade barriers. For some countries FDI also helps in development of governance, public accountability, transparency and increased responsiveness in the political
  • 14. systems (UNCTAD, 2005). Some researchers also suggest that FDI has helped in the development of democracy in many countries (Sun, 2009). Socialimpact The positive impact of FDI on the society is that it leads to better utilization of human resources. In developing countries increased job opportunities and decrease in poverty could be considered as indirect effects of FDI. Another aspect is Social activities and investments in education done by some of the multinationals as a part of their Corporate Social Responsibility activities. Finally, access to better training and technology does result in an increase in the skill levels of the human resources. In long run, it impacts the intellect and education levels of the society. Technological Impact The technological impact of FDI acts as a key accelerator in the economic growth and is one of the key factors that have been discussed a lot in FDI discussion. Technology diffusion has become a dominant issue in the 21st century discussions of FDI (Nelson & Phelps, 1966) & (Segerstrom, 1991). The growth rate of a developing country increases depending upon its adoption and implementation of new technologies available in the developed countries. Some authors concur that the technological impact of FDI can be negligible if the host country does not absorb it fully. One of the drawbacks of technological diffusion is substitution of man power leading to loss of jobs. Considering both sides of the coin, it can be denied that technology is an important driver in the modern day economy of any country and thus, FDI is an important vehicle for the transfer of technology from home country to host country. Environmental Impacts of FDI The development associated with FDI comes at a cost that is being paid by the environment. Lots of natural resources are being used for the development leading to pollution and contamination. Moreover, a lot of forest land and agriculture land is being used in making infrastructure leading to environmental hazards. One of the reasons why multinationals choose developing countries for their production facilities is that they have less stringent environmental requirements. Also, dumping of wastes is not regulated leading to air and water pollution. One of the positive impacts on environment is that MNCs are getting more concerned about sustainable development and some of them introduce this research and philosophy to the developing countries as well. Other Negative Impacts of FDI Although FDI leads a developing country to economic growth and political strength but there are certain negative impacts of FDI too. For instance, in smaller countries there is a high chance that giant conglomerates start dictating the rules and regulations of FDI considering their strong financial muscle. This type of development is detrimental for any country as it might weaken the control over economic policies (Moosa, 2002)& (Lipsey, 2002). Also, increased presence of Multinationals in the country is not a good sign for domestic companies. For the small scale industry it‟s a cautionary sign as giant international organizations can easily overshadow them in terms of price and quality. Multinationals might also indulge in unfair trade practices like transfer pricing and dumping (Moosa, 2002). As far as social impact is concerned, one has to understand that the primary motive of Multinationals is to generate profit and there activities might not necessarily result in social
  • 15. welfare. Too much of globalization is undesirable and leads to erosion of cultures and indigenous identity. This section provided an overview about FDI and its related theories and existing limitations of those theories. Further, the key determinants of FDI for a country and the impact of FDI on its economy have been discussed and will help in providing answers to our main research question. The tenants of the theories discussed in this section would be used to determine the key trends and drivers of FDI in the Thai economy and how it affects the various aspects of the country. One of the gaps realized is that current studies lack a framework for evaluating the impact of FDI on a country‟s economy and most of them are limited to economic & technological impacts. By adding, the social, political & environmental impact some gaps in the existing literature would be filled.
  • 16. 3. Research Methodology The research Methodology used in this paper would be Secondary Research Methodology with huge focus on the literature review. The main objective of secondary research is to provide a base and a background to the research by analyzing established facts about the chosen topic. It helps to analyze the information from both theoretical sources like author reviews and reports and also from Management books, Journals, Management articles, case studies, analyst reports, News website, Newsletters, website articles, press releases, expert opinions and industry reports The first step in the Secondary Research Methodology is to identify the main sub topics within the research and create a structure of the dissertation. The next step is to choose variety of sources about that present a comprehensive understanding of the subtopic. It is imperative that the chosen opinions or reports about the topic are factually correct and hence it is advisable to use Journal articles, books, Management articles from known databases rather than individual blogs. The final step is to assimilate the information, add individual understanding and present it in a logical flow in the dissertation. 3.1.Problem Identification & Research Question Generating research ideas and ultimately converting them into a specific research question is a multistage process. In other words it‟s a funneling approach where the approach is to start from a broad idea and narrow it down to a very clear and accurate research question. Some authors argue that research question may not develop until the actual research process has started and is therefore a part of “progressive illumination” (McNiff & Whitehead, 2000). In the present study, a preliminary literature review was conducted that gave some insight about the topic and the studies that have been conducted so far. Moreover a statistical analysis was done to understand the trends of FDI in Thailand, major countries that invest in Thailand and the scale of FDI in numerical terms. 3.2.Research Design The research design gives an overall view of the method chosen and the stages in the research process (Saunders et. al, 2007). After deciding the research question and the objectives the next step is to create the design part that describes how the research would be undertaken. In this study, the literature review forms the most important part of the research design. The literature review was divided into several parts according to the flow of research. 3.3.Data Collection For a secondary resources based dissertation accurate data collection is the most important factor. The data collection section goes into much detail about how specifically the data are to be collected (Saunders et. al, 2007). In this research all variety of secondary sources were used. Extensive use of internet and library sources was undertaken to come up with a highly detailed report. An attempt has been made to review as many relevant sources as possible so that no information is missed.
  • 17. 3.4.Data Analysis Data analysis was carried out by a simple review process. It included analyzing the key trends of FDI in Thailand and examining its impact on the economy of Thailand by studying various Political, Economic, Social, Technological & Environmental factors. Secondary research methodology is the most appropriate one as opposed to the primary research methodology as this is a country level research. Primary data would be normally be opinion based and it would be hard to collect strong facts about FDI, Thai economy growth, key drivers of FDI and impact on various factors. Moreover, determining the current audience for collecting primary data is a humongous task. Primary data methodology in such topics would suffer from sampling design and data collection issues. Within the qualitative research domain, thematic analysis is most appropriate when the research involves reviewing a huge amount of data, identifying patterns and developing conclusions based on acquired information.