The Effects of Foreign Direct Investment And Imports on Economic Growth: A Comparative Analysis of Thailand and the Philippines (1970-1998)

Abstract

The main objective of this paper is to estimate the output elasticity of foreign direct investment (FDI) and imports in Thailand and in the Philippines during the period 1970–1998. Applying a CES generalization of Cobb-Douglas production function, the output response to FDI is the same in both countries, but imports affect Thailand more than the Philippines. The FDI contribution to every one percentage growth point is about 0.05 of a percentage point in each country where imports contribute about 0.47 of a percentage point in Thailand and 0.31 of a percentage point in the Philippines. As a result, the foreign investment and imports contribute about 52 percent of every one percentage growth point in Thailand compared to a lower 36 percent in the Philippines. The remaining effects on the economic growth are from labor and domestic investment. Both countries are labor intensive, but the impact of labor is more significant in the Philippines. The Philippine economy is also more domestic capital intensive than the Thai economy. Furthermore, the FDI path shows that the effect of foreign investment is more pronounced in the Philippines during the second half of the 1990s, whereas the imports are more effective in Thailand since 1994. Therefore, the Philippine economy could gain more from directing its economic policies to further liberalize its foreign investments. The Thai economy, on the other hand, should continue its reliance on imported foreign technology in order to accelerate its economic growth.