8
in economic growth leads to 0.7 percent increase in FDI from these two sources.
The negative coefficients on
LTWR
Δ
are obtained from all models, though with a
different time lag, which implies that the rapid growth of the real wage rates scares off FDI inflows.
This finding confirms with the common belief that low labor costs in the developing host countries
are the key incentive of inward FDI. We also observe that the negative impact of this variable on FDI
is heaviest for FDI from the European Union, which indicates that the prompt increase in labor costs
leads to the sharp decline in this FDI.
The negatively significant relationships between a current and one period lagged of
LTUC
Δ
and FDI inflows from the US and the EU are obtained, respectively. This implies that a
rise in user cost of capital discourages these FDI inflows. However, the short-run change in the user
cost of capital in Thailand does not significantly affect FDI from Japan. This can be explained by the
fact that investors from the EU and the US have a higher tendency to invest in capital-intensive
sectors, such as financial institutions and trade, than Japanese investors, who tend to concentrate in
manufacturing industries.
The estimated coefficient of the real exchange rate (
LRER
Δ
) shows the predicted positive
sign and is significantly related to FDI from the US and the EU. Though the real exchange rate is
considerably important for Japanese FDI in the long-run, the sharp decline in the value of the baht
against the Japanese yen does not affect FDI from Japan. It is also possible that the number of lag
length allowed in the short-run model is not long enough to capture this relationship.
CONCLUSION
This study aims to examine the different determinants of FDI inflows that originated from
Japan, the United States and the European Union, in Thailand from 1970 to 1996. The Augmented
Engle-Granger (AEG) cointegration test is applied instead of the simple OLS regression since the
results of the unit root test reveal that all series have unit root. The results of the cointegrating test
indicate the existence of the long-run relationships between FDI inflows and the explanatory
variables including the market size, the baht depreciation and the production costs are the key
determinants of FDI from all developed countries. However, the level of influence of these variables
on FDI inflows originating from different sources is diverse. Having established the long-run
relationships, the error correction model (ECM) is applied to capture the short-run relationships
between variables. Similar to the long-run results, FDI inflows from developed countries are
enhanced by the growth of the Thai market, while the rapidly growing real wage rate is putting
excessive downward pressure on FDI from developed countries.
