The effect of liberalisation of foreign direct investment on the economic development of Thailand: an empirical and political economy approach

This study seeks to assess the impact of the liberalisation of Foreign Direct Investment (FDI) on the Thai economic development. The case study of Thailand is interesting because the country has embraced market-driven development policies, particularly FDI and export-led growth strategy, for nearly forty years but her economic performance is far from being excellent. The need for assessing these policies is critical because it is observed that Transnational Corporations (TNCs) have increasingly benefited from the government‟s investment incentive scheme more than domestic investment projects.

This study offers a multi-disciplinary literature review showing that FDI not only generates an inflow of resources into the host economy but also creates an outflow of other types of resources. While FDI may bring additional capital and advanced technology that contributing to economic growth, the introduction of superior firms into the domestic markets in developing countries may also amplify the magnitude of market imperfections. These imperfections may be found to be more beneficial to TNCs than to domestic entrepreneurs. Thus, without sufficient and appropriate government interventions, domestic entrepreneurs may find difficulties in developing their ownership-specific advantages. This advantage at the aggregate level can be regarded as the productive capability of the nation that helps to increase the country‟s competitive advantages along its development path. Thus, liberalising FDI without strategic planning may cause an unfavourable impact on economic development. Under these circumstances, the dependency remains tenable to explain the phenomenon.

The study‟s proposition is approached and validated by the use of political economy and empirical analyses. From political economy analysis, it shows that Thailand has a number of economic features suggesting it to be a capital-dependent state as argued by dependency theory. The empirical analysis is then carried out to assess the impact of inward FDI on the Thai GNI. The framework and methods used in empirical study are borrowed from the Growth Economics. The income regressions, using the quarterly time series data from Q1:1970 - Q4:2009, show that in the case of Thailand, inward FDI has been beneficial to the growth of the economy only in the short run but has a negative impact on the GNI in the long run. Moreover, the study found that the empirical evidence appears to support the claim of Thailand being a capital-dependent state. It found that inward FDI empirically explains an increase in income deficits and totals imports. These impacts render the balance of payments in a vulnerable position. The study then concludes that, given the nature of the Thai political economy, the liberalisation of FDI seems to make Thailand a capital dependent state, and that Thailand has not fully benefited from FDI.