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The role of foreign Direct Investments on trade, including outward and inward FDI

 
Introduction       
Foreign Direct Investment (FDI) has been defined by the International Monetary Fund (2003) as a given category of the international investment reflecting the objectives of a resident in an economy and subsequently obtaining a long-term interest in an enterprise resident, in the other economy. The lasting interest simply indicates the existence of long-standing relationship between the direct investment enterprise and the direct investor, as well as some degree of influence on the management of the enterprise by the investor. Ownership of approximately not less than 10 percent of the voting stock or ordinary shares is the criteria used in the presence of direct investment correlation. Ownership of less than 10 percent on the other hand, is simply considered as a portfolio investment. FDI encompasses not just mergers, acquisitions or takeovers, as well as new investments but also loans, reinvested earnings, and the similar capital transfers between affiliates and parents (Jansen and Stokman 2004; Adam et al. 2003).
The global FDI flows increased extremely in the early 1990s, resulting to approximately 54, 000 transnational corporations, and have consequently grown speedily at a rate considered as being above the overall economic growth rates globally. The reported global inflows increased by an average of 13 percent annually during the year 1990 to 1997, compared to the rates of 7 percent for the nonfactor services and export of goods as well as for the global GDP at the current prices (Mallampally and Sauvant 1999; Carson 2003). As a consequence of the large numbers of the cross-border mergers and acquisitions (M & A), the inflows rose by an average of approximately 50 percent during the year 1998 to 2000 attaining a record of US$ 559.6 billion in the year 2003. This is mostly due to the sharp decline in the cross border M & A among the different developed countries. Furthermore, the cross border M & A value reduced from US$ 678.8 billion to approximately US$ 559.6 billion in the year 2003 (IMF, 2003).
There has been fairly minimal and insufficient empirical studies conducted on the role of FDI inflow to Thailand and outflow from Thailand. Previous research has mainly addressed the various factors that are significant to the FDI in the economy of Thailand (Lauridsen 2004; Sanna-Randaccio 2002). Further, the studies have also concentrated on the effects of FDI in Thailand (Jansen 2003). The general objective of this essay is to carry out analysis of the role of FDI inflow to Thailand and outflow from Thailand. The analysis will be supported by the theories of international economics.
The role of foreign Direct Investments on trade, including outward and inward FDI
The developed countries are reported to be increasingly influential over the FDI outflow and inflow, accounting for an estimated 94 percent of the outflows and approximately over 70 percent of the inflows in the year 2001 (IMF 2003). The inflows of FDI into the developing countries increased by an approximate average if 23 percent in the period of the year 1990 to 2000. In the year 2001, the inflows are reported to have declined tremendously by 13 percent totaling to US$ 215 billion (IMF 2003). The decline was mainly accounted for by the increasing decline in the FDI inflows from three developing economies that included Argentina, Hong Kong, and Brazil. This was accorded to the failures in the government economic policies, in Brazil and Argentina, and outbreak of the severe acute respiratory syndrome (SARS) illness within Hong Kong (UNCTAD 2004). Without these three discussed economies, it is reported that FDI inflows into the developing countries rose by an estimated 18 percent in the year 2001 (IMF 2003). Moreover, during the period of the year 1998 to 2001, FDI inflows to the developing countries were estimated to be 225 million USD (IMF 2003).
Kumar (2003, p. 6) has stated that, “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.”
The skill resources to some extent have spilt over to the domestic enterprises within the host country. Consequently, there is an expectation of FDI contributing more economic growth as compared to the domestic investment within the host country. Therefore, FDI has increasingly become a significant source of the private external financing for the developing countries with insignificant capital. The FDI has also become a means for the transference of skills, technology, innovative capacity, and managerial and organizational practices between the locations as well as being able to access the international marketing networks (Mirza and Giroud 2004). FDI outflow in Thailand has been in the increase particularly in the U.S. and China among several other countries. Indeed, currently Thailand enjoys increased income from their exports and this has contributed to the improved economy.
The economic crisis of the year 1997 to 1998 that occurred in Southeast Asia created increased pressure within the region into accepting financial aid from the famous International Monetary Fund (IMF). The financial support came with various policy interventions that are reported to have opened up increased opportunities for the multinational enterprises into owning the assets and the Asian firms. The relaxation of the economic restrictions within the countries has resulted in the influx of the FDI to the region. The flow of the FDI inflows into the region after the famous economic crisis is attributed to the unrestricted economic transaction policies and ASEAN investment area (AIA) agreement. The agreement facilitated the production and investment cooperation among the member countries. This opened up increased opportunities of initiating cross-country production cooperation. Consequently, multinational enterprises that were engaged with the local affiliates within the member countries were also likely to benefit greatly from such an agreement (Sally 2007).
Just like the other developing countries following the economic crisis that was experienced globally, the increased depreciation of the Thai currency as well as the regulated economic transaction guidelines attracted remarkable FDI inflows into the Thai economy. Moreover, Thailand has rewarded privileges that include duty exemption on material import, tax incentives, as well as a reduction to the FDI projects that make a contribution to the development of innovation, technology, and skills. The convenient channels of distribution and sufficient infrastructure to the various neighboring countries lure the multinational firms into seeking for the market access and consequently establishing production bases within Thailand. Stone & Jeon (1999) found evidence that supports the precise fact that the foreign companies in Thailand were simply horizontal multinationals. The promotion of export oriented industries within Thailand attracted the different types of the foreign investors. The main weakness of Thailand is the fact that it has always had occasional political chaos within the past decade. According to the Zhang (2001), the political instability witnessed in Thailand is another severe challenge of FDI. Nonetheless, FDI inflows to Thai manufacturing sectors have remained increasingly high relative to the other developing countries within the region.
Another challenge is the fact that Thailand no longer enjoys cheap labor. The same report indicated that the shortage of skilled labor is a main obstacle for carrying out business in Thailand. The two different surveys that were carried out for the World Bank report indicated that an estimated 40 percent of the business within Thailand had lower performance problems as a result of the skilled labor job vacancies that were not filled and the less qualified labor (Wongseree 2012) The existence of FDI may induce the problem since FDI companies are likely to pay higher wages for the workers who are highly skilled and consequently absorb the top quality workers who are skilled within the market (Wongseree 2012). This will result into increased wages of the skilled labor to the extent that the Thai companies do not have the financial resources to enable them hire top quality skilled workers. The incident follows prediction of the capital mobility models. For example, the simple capital inflow model formulated by McCallum (1995) makes a prediction that the capital inflow raises wages into the host country, and consequently Knowledge-Capital Model that was formulated by Markusen and Maskus (2002) has made a prediction that a given increase in the FDI has the ability of raising wages of the skilled labor within the host and home countries. Coca-Cola and Ernest and Young are some of the multinational companies that are involved in FDI within Thailand. For example, Coca-Cola has been given their patent rights in Thailand and this has encouraged their investment within Thailand.
Nonetheless, despite the weaknesses of Thailand, its increased advantages as well as the policies that favor FDI have lured more FDI inflows to Thailand that several other ASEAN countries. Between the year 2000 to 2002, the FDI inflow into Thailand is reported to have fluctuated from the initial 3,000 to 5,000 million USD as a result of the national election that occurred in the year 2000 and the September 11 shock in the U.S. by the terrorist attack in the year 2001, which is reported to have slowed down investment globally (Wongseree 2012).   Nevertheless, in these consecutive years, it is reported that the FDI inflow to Thailand increased with the year 2003 reporting 5,000 million USD and subsequently tripled to an estimated 9,000 million USD in the year 2006 (Wee 2007). Remarkably, the GDP growth rate of Thailand during the year 1998 to 2005 was not considerably different from that of the other countries irrespective of having greater FDI inflows. The evidence available has indicated that Thailand has always hosted FDI within the manufacturing sectors for several decades. Nonetheless, it is not clear whether the FDI inflows have benefited the local companies (Wee 2007).
With respect to the FDI fluctuations within the manufacturing sectors, FDI inflows to the sectors has been declining by more than 40 percent from an estimated 3, 161 million USD in the year 2000 to 1, 633 million USD in the year 2002 as a result of the political instability experienced and consequently rebounded to 3, 675 million USD in the year 2003 and 4, 949 million USD in the year 2004. By the year 2006, several trade agreements were already in place between Thailand and its trade partners which are reported to have gone into effect later. This factor is reported to have attracted increased FDI inflows in the year 2005 (Wee 2007).
Any reference made towards the FDI inflow has drawn critical questions regarding how the FDI has been able to benefit the economic agents. It has been expected that the local affiliates should work towards improving their productivity because they receive directly technological and financial benefits that are transferred from the FDI. In case of a direct benefit, the companies within the high FDI concentration sectors are expected to receive more as compared to the other sectors. The FDI inflow to Thailand and outflow from Thailand to another country plays several roles. FDI on both the host and source countries impacts on trade and industrial structures, economy, as well as export performances of countries that are involved. In the economic domain, FDI plays a principal role in the pattern of distribution, production, and consumption within the host economy. Indeed, it is extremely difficult for to come up with indisputable classification of that, which can qualify as the economic effect of FDI and what it is not (Liu 2008).
It plays a role in employment and income of Thailand. FDI helps in the generation of income and employment within Thailand as a host economy. More investment has the ability of bringing more production of services and goods which will positively lead to increased demand for labor (Liu 2008). When responding to the increased demand for labor, wages will automatically increase, and this will consequently lead to increased spending power. The increased spending will be beneficial to the Thai economy in the perspective of stimulating the various economic activities, and consequently contributing to the other economic linkages that include improved logistics and production of the raw materials (Liu 2008).
Another role played by FDI is the capital accumulation. FDI leads to the increased capital accumulation in Thailand. The FDI inflows are not just bringing the foreign currencies; rather they also help the economy in accumulating the physical capital from the movement of factors of production that includes machinery, capital, as well as skilled labor from the country of origin. They will clearly lead to an increase of the capital stock of Thailand as the host economy. FDI also plays a role in the efficient utilization of the resources. With the superior knowledge and advanced technology of the multinational corporations, the entrance of these companies into the host country has been efficient in the promotion of more efficient utilization of the existing resources. Moreover, the corporation has the ability of bringing about the new services and goods, that is likely to come up with the uses for Thai’s resources. Increased efficient extraction of the resources, low levels of waste, as well as more ways of employing resources were some of the roles played by FDI (Jaumotte 2004).
Foreign direct investment also plays a role in knowledge and technology spillover. In spite of the reluctance of the multinational corporations to share their knowledge and technologies clearly with the Thai affiliates, knowledge and technology transfer might still take place in the place where there is FDI. Knowledge and technology spillover are also expected to take place through the indirect and direct training and the other channels such as labor turnover, demonstration effect, and backward linkages. The demonstration effect happens whenever the local affiliates try to ensure the accumulation of their techniques of foreign affiliates. In case the local affiliate has learnt considerably concerning the operations, they could have the ability of setting up own company within the industry (Jaumotte 2004).
The spillover through the labor turnover takes place whenever workers in a multinational corporation subordinately transfer to a domestic company within Thailand or simply start their own business after successfully learning the skills, technology, as well as techniques from the multinationals. Finally, the knowledge spillovers via the backward linkages are reported to take place within the industries that belong to the investing foreign firm. The knowledge and technology transfer happen within the industries downstream and upstream to the industries of the foreign companies. This is because foreign direct investors are dependent on the raw materials of the host country in carrying out production process; hence there must be control of the quality of inputs (Root 1978). In doing this, the multinationals have to assist the companies in the downstream and upstream industries generate good quality inputs that will result in knowledge and technology transfers.
Another role played by FDI in Thailand is in the balance of payments and balance of trade effects. When the multinationals set up plants within the host countries which in this case is Thailand and consequently bring with them the large capital base, they will have a truly positive effect on Thai’s balance of payment. Over a given period, the foreign investors could remit their profits and subsequently the effects of FDI on Thai’s balance of payment will unquestionably subside. Nonetheless, there are several other ways through which FDI plays a role both negatively and positively on Thai’s balance of payment through its service and trade balance such as exports, imports, and import substitution (Root 1978).
Whenever multinationals set up their production plants in any foreign countries, they must import raw materials and machinery from the other countries into the host country’s which in this case study is Thailand. However, the increase realized in imports as a result of the multinationals will lead to Thai’s economic loss currency. Consequently, the import substitution will help Thai save on the foreign currency that will consequently be beneficial for its balance of payment. Correspondingly, through the entry of the multinationals, the local industries that were producing and subsequently exporting the raw materials will end up producing and exporting increased levels of finished with the assistance of the multinationals. The GDP per capita of Thai will therefore, increase. As is indicated, the role that FDI plays in the balance of trade and balance of payment of Thailand can be negative and positive, dependent on the circumstance as well as the behavior of the multinational corporation investing (Pain & Lansbury 1997).
Foreign direct investment also plays a principal role in the improvement of Thai’s industrial structure. The role played by FDI on the Thai’s industrial structure is inclusive of the introduction of new services and goods, new industrial groups, structural changes in exports and production, as well as effects on the competitive edge of the industry. In the context of the competitive edge of an industry, the role played by a Multinational Corporation will vary a great deal. This could lead to negative or positive effect on Thailand. Despite the fact that FDI has the ability of generating employment, income, as well as better utilization of resources, it can make the local firms totally go out of business if not monitored properly.
Within the early sentries, the individual advantages of the different economic theories that include investment, trade, capital, and location concepts as well as the beginning of the phenomenon of the international production is reported to have occurred in two different streams of the theory on the international production (Ragazzi 1973; Calvet 1981; Kim 2000; Hymer 1972). One of these theories is the macro-oriented theory, which simply provides an explanation of why various companies choose a location of a value-added activity within the different host countries on the basis of absolute benefit and cost comparison (Dunning 1976). Casson (1982) came up with a school of thought stating that the theory of FDI consists of three theories that are integrated that include theory of the firm, theory of the international markets, as well as theory of trade. The integration of these theories is reported to provide answers to the FDI issues that appear complicated. Theory of international capital markets plays a role of answering the issues of the roots of finance that include utilization risks, funding, ownership, and risk bearing. Theory of the firm on the other hand, provides clarification of the problems within the location of control that include the cultural affiliation, country of origin or registration, headquarters location, as well as management source. Finally, theory of trade provides an explanation of the destination and location of the final sales.
A company that is facing increased demand abroad will begin through the exportation of their products to the foreign markets. The will does take advantage of the exportation as a result of the capital expenditure and low risk, as well as the minimum start-up costs that are involved with almost immediate profits (Shapiro 2003). Moreover, the initial step will assist the company in learning about the future and the present demand and supply conditions, channels of distribution, competition, financial institutions, payment conventions, as well as financial analysis. In case the company succeeds, it will positively expand its marketing organization overseas by switching from the use of export agents as well as other intermediaries into dealing directly with distributors and foreign agents. Consequently, the company can easily be able to sustain the market development and subsequently adapt its production and products to overseas. After successfully setting up the local production unit, it will unmistakably show its commitment to Thai’s local market, which will unquestionably bring the added sales and the provision of increased assurance of the supply stability (Shapiro 2003). Rugman (1980) stated that,
Firms producing and marketing abroad will consider the foreign markets by: 1) simply wishing to export to foreign markets when there is no barrier to free trade; 2) engaging I FDI when the barriers exist; or 3) licensing a foreign producer when foreign markets are fully separated (p. 17).
However, multinational organizations are business enterprises that own and have control over income generating assets in several countries e.g. General motors, IBM, Shell and many others. Their goals are primarily growth and profits. These entities are a creation of globalization. They are as a result of imperfections in the structural and inherent markets such as import restrictions, subsidies, marketing costs and exchange rates that are unstable due to economies of scale and their bust through customs, national boundaries and ideologies (Edwards & Rees 2011). Any state is capable of being in possession of political, diplomatic, economic and military powers. These powers constitute the ability to lead to a course of action in several manners. Multinational organizations are more capable of being in possession of economic powers and some political powers as well (Said & Simmons 2004). The MNCs are a principal source of foreign investment, and this is believed to result to higher rates of growth for the developing countries. The states are therefore, always advised by the United Nations to attract such kinds of entities. This is the reason why a number of developing countries heavily depend on these entities economically. Because of this, these entities have gained minimal political powers. The interdependency between these entities and the state in this case appear to be balanced fairly (Carroll & Buchholtz 2010). Thailand therefore, should come up with strategies that will ensure that they benefit from the FDI with minimal interference in its internal affairs by the multinational corporations.
Conclusion
The general objective of this essay was to carry out analysis of the role of FDI inflow to Thailand and outflow from Thailand. The essay has indicated that FDI plays an essential role in Thailand on both the outflow and inflow. Moreover, FDI has the overall ability of improving the economic status of the whole of Thailand. However, strategies should be incorporated aimed at ensuring that the multinational corporations do not take over or interfere with the local operations and policies in Thailand.

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