(Luận án tiến sĩ) Các Yếu Tố Ảnh Hưởng Đến Thu Hút Vốn Đầu Tư Trực Tiếp Nước Ngoài Nghiên Cứu Thực Nghiệm Tại Chdcnd Lào

SIHOUN SITHTHILUSAY

FACTORS AFFCTING TH ATTRACTION OF TH HOST COUNTRY TO FDI:

AN MPIRICAL STUDY IN LAOS PDR

PHD DISSERTATION

IN BUSINESS ADMINISTRATION

SIHOUN SITHTHILUSAY

FACTORS AFFCTING TH ATTRACTION OF TH HOST COUNTRY TO FDI:

AN MPIRICAL STUDY IN LAOS PDR

SPECIALIZATION: BUSINESS ADMINISTRATION SPECIALIZATION CODE: 9340101

PHD DISSERTATION

Supervisor: Assoc Prof Dr LE TRUNG THANH

DECLARATION

I have read and understood the University’s policy on plagiarism I now declare that this dissertation is my work and does not violate the regulations on good academic practices

PhD Candidate

SIHOUN SITHTHILUSAY

CHAPTER 1 LITERATURE REVIEW AND THEORETICAL FRAMEWORK ON FACTORS AFFECTING FOREIGN DIRECT INVESTMENT 8

1.1 Theoretical framework and literature review on Foreign Direct Investment

1.1.2.3 Business Cooperation Contract (BCC) 12

1.1.2.4 Other Type of FDI: Foreign Company Branch versus Representative Office 13

1.1.3 The effects of FDI on the socio-economy development of host country 13

1.1.3.1 Effects of FDI on Economic Growth 13

1.1.3.2 Effects of FDI on Dom5stic Inv5stm5nt 18

1.1.3.3 Effects of FDI on mpÏoym5nt, Training and Wag5s 21

1.1.3.4 Effects of FDI on T5chnoÏogy and Productivity Growth 27

1.1.3.5 Effects of FDI on Market Structure and Competition 32

1.1.3.6 Spillover effect of FDI to local firms 35

1.2 Theoretical background on the factors to attract FDI inflows 41

1.2.1 Theories of external factors 41

1.2.1.1 Classical/Neo-Classical Economics and Economic Geography 41

1.2.1.2 Agglomeration Economics and Cluster Theory 42

1.2.1.3 Industrial Organization Theory 44

1.2.1.4 Institutional Influences 48

1.2.1.5 Alternative theories of multinational company behavior 50

1.2.1.6 External Factors Conclusions 51

1.2.2 Theories of internal Factors 54

1.2.2.1 The Resource-Based View 54

1.2.2.2 Sustainable competitive advantage theory 56

1.2.2.3 Behavioral Theory of the Firm 57

1.2.2.4 Internal Consideration Conclusions 59

1.2.3 Individual factors 60

1.2.3.1 Decision Making 60

1.2.3.2 Variables Affecting Decision Making 61

1.2.3.3 Processes of Decision Making 62

1.2.3.4 Branding 64

1.2.3.5 Location Marketing 64

1.2.5.6 Individual Factors Conclusions 67

1.3 Review of empirical studies on the factors affecting FDI decision 68

1.4 Research gaps 72

CHAPTER 2 METHODOLOGY 75

2.1 Research Process 75

2.2 Research design 77

2.2.1 Qualitative Research and interview design 77

2.2.2 Quantitative research and questionnaires development 82

2.2.3 Survey development 86

2.2.3.1 Background of MNCs 86

2.2.3.2 Measurement of Market-Seeking Motives, Efficiency- Seeking Motives, Government Policies, and FDI inflows attraction 87

2.4 Data analysis approach 93

2.5 Data collection 95

2.5.1 Sample Size 95

2.5.2 Data collection methods 98

CHAPTER 3 RESULT AND DISCUSSION 101

3.1 Overview of FDI in Laos 101

3.1.1 Macroeconomic perspective 101

3.1.2 Multinational companies’ perspective 105

3.1.3 Policy makers’ and state management agencies’ perspectives 108

3.2 The model result 112

3.2.1 Exploratory factor analysis 112

3.2.2 Reliability Analysis 122

3.2.3 Descriptive analysis of motivation factors 126

3.2.4 The relationship between motivation factors and the attraction of Laos to FDI

4.2.1 Completing the law system on FDI 135

4.2.2 Continue to improve tax policies to attract FDI 137

4.2.3 Improve the efficiency of State management of FDI capital 139

4.2.4 Improve the quality of staff and labor for foreign-invested enterprises 143

4.2.5 Increase investment in infrastructure system 143

4.2.6 Enhancing the spillover effect of FDI to local firms 144

4.2.6.1 Promotion of linkages through supplier development programs 144

4.2.6.2 Fostering demonstration effects via business mentorship and partnerships 145

4.2.6.3 Rigorously monitoring FDI spillover impacts 146

4.2.7 Recommendation for the multinational companies and local firms 147

4.2.7.1 Multinational companies’ perspectives 147

4.2.7.2 Local firms’ perspectives 150

4.3 Limitation of the research and suggestion for future research 151

RESEARCH PROJECTS RELATED TO THE DISSERTATION BY THE PHD CANDIDATE 153

REFFERENCES 154

APPENDIX 1: QUESTIONAIRES 163

LIST OF TABLE

Table 1.1 External Considerations in the FDI Location Decision 52

Table 1.2 Internal Considerations in the FDI Location Decision 59

Table 1.3 Indexes of Location Attraction 66

Table 1.4 Individual Considerations in the FDI Location Decision 68

Table 2.1 Informant details 82

Table 2.2 Questions for Background Information of Questionnaire Surveys 87

Table 2.3 Measurement Items for Market-Seeking 88

Table 2.4 Measurement Items for Efficiency-Seeking Constructs 89

Table 2.5 Measurement Items for Government Policies 91

Table 2.6 Summary of characteristics of the sample 96

Table 3.1 KMO and Bartlett's Test 112

Table 3.2 Total Variance Explained 113

Table 3.3 Rotated Component Matrixa 114

Table 3.4 KMO and Bartlett's Test 116

Table 3.5 Total Variance Explained 117

Table 3.6 Rotated Component Matrixa 118

Table 3.7 Factors measure motivation that impact on MNCs’ decision to invest in Laos 120 Table 3.8 Item-Total Statistics 122

Table 3.9 Item-Total Statistics 123

Table 3.10 Item-Total Statistics 124

Table 3.11 Item-Total Statistics 124

Table 3.12 Item-Total Statistics 125

Table 3.13 Item-Total Statistics 125

Table 3.14 Descriptive Analysis of Service Quality Items 126

Table 3.15 Model Summary 129

Table 3.16 ANOVA 129

Table 3.17 Coefficients 130

Table 3.18 ANOVA 131

LIST OF FIGURES

Figure 1.1 Porter’s “Diamond of National Competitive Advantage” 47

Figure 2.1 Research process 75

Figure 2.2 Theoretical Framework of the Study 76

Figure 3.1 Foreign direct investment, net inflows (BoP, current US$) 102

Figure 3.2 Distribution of FDI in Lao PDR (US$ m) 102

Figure 3.3 Share of accrual FDI by country (% of total, as of August 2009) 103

Figur5 3.4 Shar5 of accrual FDI by country (% of total, as of F5b 2021) 103

Figure 3.5 Ten biggest foreign investors in Laos (2000 - 2021) 104

Figur5 3.6 FDI inflows in Laos by s5ctors in Laos (2000 - 2021) 104

Figure 3.7 Model of factors affection Laos’s attraction to FDI inflows 131

ABBREVIATION

ML : Maximum Likelihood

INTRODUCTION

1 Rationale

For5ign dir5ct inv5stm5nt (FDI) has b55n r5cogniz5d as an important r5sourc5 for 5conomic d5v5Ïopm5nt Many p5opÏ5 argu5 that th5 fÏows of FDI couÏd fiÏÏ th5 gap b5tw55n d5sir5d inv5stm5nts and dom5sticaÏÏy mobiÏiz5d saving It aÏso may incr5as5 tax r5v5nu5s and improv5 manag5m5nt, t5chnoÏogy, as w5ÏÏ as Ïabor skiÏÏs in host countri5s Additionally, FDI may help the host country to break out of the vicious cycle of und5rd5v5Ïopm5nt (Hayami & Godo, 2005)

Many schoÏars wid5Ïy b5Ïi5v5 that th5 b5n5fits accru5d from FDI may incÏud5 th5 acquisition of n5w t5chnoÏogy 5mpÏoym5nt cr5ation, human capitaÏ d5v5Ïopm5nt, contribution to int5rnationaÏ trad5 int5gration, 5nhancing dom5stic inv5stm5nt, and incr5asing tax r5v5nu5 g5n5rat5d by FDI (Ạfaro 5t aÏ., 2004; Damijan 5t aÏ., 2003) ẠÏ of th5s5 b5n5fits ar5 5xp5ct5d to contribut5 to high5r 5conomic and 5mpÏoym5nt growth, which is an 5ff5ctiv5 tooÏ for achi5ving improv5m5nt in th5 r5duction of pov5rty

Previous studies show that many factors motivate developed countries to invest in developing or less developed countries Some factors are given, such as human resources advantages and tax incentives The results of some models, such as the flying-geese pattern developed by Kojima (2000), suggest that foreign direct investment requires gradual technology transfer However, one of the other research groups - changing the approach - found that foreign direct investment influences the host country Quang et al (2022) and Ta et al (2021) found that the investment recipient countries of emerging economies, such as Vietnam, have many disadvantages compared to the investing countries The original theories put forward by these authors are still based on the flying tern model, the theory of competitive advantage, and the gravity model Although we have studied countries with economies in transition, for countries considered emerging as Vietnam, the conditions are very different from those characterized by Buddhism, like Laos Therefore, the introduction of the host country approach in the new context aims to (1) provide evidence to supplement the original theoretical models of factors from the host countryside that have economies in transition but are not in emerging countries; (2) provide policy implications for receiving green FDI in order to avoid taking advantage of cheap human or natural resources

Lao P5opÏ5's D5mocratic R5pubÏic (Lao PDR) has impÏ5m5nt5d th5 inc5ntiv5 inv5stm5nt poÏici5s in ord5r to attract th5 for5ign dir5ct inv5stm5nt infÏows into th5 country aft5r Lao PDR has transform5d from th5 c5ntraÏ pÏanning 5conomy to mark5t

m5chanism in 1986, by op5ning mor5 coop5ration with many countri5s, and buiÏding n5c5ssary conditions to attract FDI from around th5 worÏd

Lao PDR has b55n r5asonabÏy succ5ssfuÏ in attracting FDI since it impÏ5m5nt5d its For5ign Inv5stm5nt Law in 1994, which was r5vis5d in 2016 According to the Ministry of PÏanning and Inv5stm5nt, from 2000 to th5 5nd of 2017, totaÏ FDI infÏows to Lao PDR w5r5 approximat5Ïy US$ 6.629 biÏÏion Starting in 2019, FDI inflows into Laos gradually increased due to the Lao government's improvement of the investment environment With more than 1 billion USD committed to invest in Laos, the environment for FDI enterprises has overcome significant difficulties However, it is still important to note that in 2021, the highest year since 2019, the amount of FDI inflows into Laos is only approximately equal to 2015 and 63% of 2017 Therefore, it is necessary to research investment reception issues in Laos

For the last two d5cad5s Lao government has highÏy att5mpt5d to improv5 Inv5stm5nt Ïaw in ord5r to attract Ïarg5 amount of FDI infÏows to Laos As 5vid5nc5d by aÏÏowing 100% for5ign own5rship of inv5stm5nt in 1988, it foÏÏow5d by 5xt5nding of inv5stm5nt conc5ssion from 20 y5ars in 1999 to 99 y5ars in 2009, 5stabÏishing th5 sp5ciaÏ 5conomic zon5s, granting import duti5s fr55 and incom5 tax5s 5x5mption, which d5p5nds on promoting zon5s and inv5stm5nt ar5as As a cons5qu5nc5 caus5 FDI infÏows to Laos has rapidly increased from US$ 58.54 miÏÏion in 1991 to a p5ak of US$ 1.421 biÏÏion in 2015, th5 FDI infÏows to Laos is dominat5d by hydropow5r and mining s5ctors, which account5d for 56% of totaÏ FDI during th5 p5riod 1988-2017 (Inv5stLaos, 2019) WhiÏ5 major sourc5s of foreign inv5stors ar5 from China, ThaiÏand and Vi5tnam, th5 thr55 countri5s cov5r5d for 78.26% of th5 totaÏ FDI in during p5riod 1989-2015

FDI is considered to be a significant capital source to support social 5conomic d5v5Ïopm5nt in Laos, and it b5com5s a crucial factor to stimuÏat5 an 5conomic growth (Phommahaxay, 2013a) From the business administration perspective, FDI is the crucial factor that drives a tremendous spillover effect on local businesses FDI spillover effects refer to the positive benefits and externalities that foreign direct investment projects can create for domestic firms and the broader economy Given Laos' lower level of industrialization and technology capabilities, maximizing these spillovers will be critical for domestic enterprises regarding knowledge, technology, linkages, infrastructure, governance, and export capabilities Indeed, foreign firms can bring advanced production processes, managerial expertise and technical skills that 'spillover' to local workers through on-the-job training and employee turnover into domestic

companies However, Laos needs significant expansion of 'efficiency-seeking' manufacturing FDI to accelerate this impact Besides, FDI projects that source intermediate inputs, raw materials and other services locally can stimulate growth for Laos' SME sector through these linkages However, most current FDI in enclave extractives has weak linkages Attracting FDI into manufacturing can drive up demand for local sourcing

Furthermore, the presence of technologically advanced foreign firms can stimulate local firms to adopt upgraded production methods and improve quality standards to remain competitive in the domestic market However, Laos' local private sector remains at an early stage Additionally, FDI in export-oriented manufacturing provides local firms access to international buyers, foreign distributor networks and global supply chains This enables Laos to expand exports in more value-added products beyond commodities

Overall, facilitating spillovers will require a comprehensive policy approach encompassing workforce training initiatives, public-private dialogue platforms, programs to nurture local SME suppliers, and complicated infrastructure investments around FDI projects Assessing and monitoring spillovers can help local firms benefit from demonstration effects as foreign entrants bring advanced technologies, management techniques, and new market opportunities Exposure to world-class practices spurs local firms to improve efficiency and competitiveness Given relatively few manufacturing FDI projects, Laos must prioritize attracting efficiency-seeking investors that can deliver these economic spillovers The limited existing FDI base constrains demonstration effects and linkages Substantially expanding manufacturing FDI inflows is thus an urgent necessity for Laos' technological development How5v5r, aft5r r5aching a p5ak of US$1.421 in 2015, th5 FDI infÏows to Laos has r5duc5d graduaÏÏy in r5c5nt y5ars FDI infÏows was down to US$997.4 miÏÏion in 2016 and US$ 813 miÏÏion in 2017 (Inv5stLaos, 2019) The drop in th5 amount of FDI infÏows r5quir5s studi5s 5xamining factors aff5cting th5 attraction of Laos to FDI

From the viewpoint of business managers and owners in Laos, attracting more significant FDI is essential as it presents opportunities to expand local enterprises Increased foreign investment means greater access to advanced technologies, international business connections, skills transfer and rising domestic demand that local firms can capitalize Understanding what drives the location choices of multinational corporations guides how Laos can develop a more attractive investment ecosystem for businesses A strategic focus on factors that influence foreign investment site selection

helps domestic companies tap into new markets, resources and capabilities brought by foreign partners establishing local operations

For managers developing strategies, this research aimed to identify host country attributes within Laos that impact investment decisions The findings offer practical insights into addressing weaknesses preventing local firms from fully capitalizing on spillovers Policy reforms inspired by the study can help foster industry clusters and supplier networks that local businesses leverage for growth As Laos develops its industrial and technological base, targeting priority FDI sectors aligned with domestic firm strengths better positions companies for partnerships and inclusion within international supply chains

Evaluating changing investment flows also equips business leaders with market intelligence around foreign partnership opportunities and emerging industries The findings support strategic planning as managers consider options like exporting, joint ventures or expanding via foreign licensing/franchising deals Optimizing Laos' investment promotion through targeted initiatives informed by this study creates a business environment conducive to local firm competitiveness and development

2 Research objectives and research questions

General objective

D5spit5 a consid5rabÏ5 numb5r of studi5s 5xamining th5 d5t5rminants of FDI infÏows, th5r5 ar5 v5ry f5w 5mpiricaÏ studi5s on th5 attraction of the host country to FDI infÏows This th5sis aims not only to r5vi5w th5 Ïit5ratur5 r5garding th5 factors aff5cting th5 attraction of host countries to foreign inv5stors but aÏso to introduce factors and vaÏidat5 th5m in th5 cont5xt of Laos, with th5 aim of 5nhancing th5 curr5nt Ïit5ratur5 with r5gards to motivation to inv5st into Laos Besides, this thesis is conducted to identify the critical host country attributes that influence foreign investors' location decisions in Laos in order to provide local businesses with strategic insights on optimizing the investment environment and maximizing the potential for partnerships, technology transfer, supplier linkages and other spillover effects that advance domestic firm competitiveness, productivity and international market access opportunities, from which some solutions to attract FDI capital for the economy of Laos PDR will recommend

Specific objectives

In order to achieve the general objective of the research, the following specific objectives are expected to achieve

− Filling in the gap in the literature about the FDI attraction and spillover effect that local firms can benefit from within the Laos context

− Assessing the current situation of attracting FDI into Laos

− Exploring factors which belong to Laos’ investment environment that affect the decision of multinational companies investing in Laos

− Analyzing the impact of factors on FDI inflows into Laos

− Recommending for local enterprises to enhance the investment attraction and spillover effect of FDI to local businesses

Research questions

The overall aim of this thesis is to answer the below research question:

multinational companies, and among them, what is the most important?

from them?

3 Research scope

The research only studies the factors affecting the attraction of foreign direct investment of transition economics - typically in Laos

Research period: the thesis studies data on foreign direct investment in Laos from 2017 - 2022

Regarding research space: enterprises with foreign direct investment in Laos in 2017 - 2022

Data collected (primary data): interviews and surveys of foreign enterprises investing in Laos state management agencies on FDI in Laos

4 Research method

This study employs a mixed methods approach to identify factors influencing foreign investor location decisions in Laos A literature review established the theoretical framework, synthesizing findings from the international organization theory, the eclectic paradigm, the international product cycle theory, and the institution theory These suggest that economic, financial, policy, and incentive-related factors impact investment locations

Semi-structured interviews with managers of foreign firms in Laos provided insights into relevant attraction factors in Laos' context This informed the research model testing key constructs

A survey collected quantitative data from foreign investors Exploratory factor analysis identified underlying dimensions representing attraction factors Regression analysis tested relationships between these empirical factors and FDI inflows to Laos The qualitative and quantitative phases aim to surface actionable recommendations for Laos to position itself as an attractive host for productivity-enhancing investment strategically The mixed methodology generates a nuanced understanding of location determinants while validating practical policy implications for local business competitiveness

5 Research contributions

Theoretical contributions

The thesis uses a demand-side approach - that is, the investment recipient - to assess the factors affecting the transitional economic investment attraction environment The research model presented in the thesis is based on contributing to supplementing the theory of gravity (FDI promotes policies; trade agreement), the theory of flying tern model (market-seeking; efficiency-seeking), the theory of r5sou•rc5-bas5d vi5w as well as the theory of competition (tax incentives; natural resources and infrastructure)

Empirical contributions

The study suggests that while all factors positively impact foreign investors' decision to choose Laos to invest, FDI promote policies, market seeking, and natural resources and infrastructure factors strongly impact foreign investors’ consideration This result suggests that policymakers should pay more attention to supporting investors and enforcing intellectual property rights The Laos government must invest more in infrastructure and make the market accessible to foreign investors

6 Research structure

After introducing the overall content of this study in the Introduction chapter, the remaining parts of this thesis are organized as below:

Chapter 1: Literature review and theoretical framework on factors affecting foreign direct investment This chapter first introduces the definition and types of FDI

It then presents the roles of FDI inflows on the socioeconomic development of the host country, and it also reviews the literature regarding factors affecting investors' choice of investment location

Chapter 2: Methodology This chapter introduces the research methodology,

including the research framework, questionnaire development, and data collection and analysis

Chapter 3: Results and Discussion This chapter presents the trend of FDI

inflows globally and regionally It also details the picture of FDI inflow in Laos Finally, it shows the results and discussion of exploratory factors analysis and regression analysis

Chapter 4: Conclusion and Recommendation This chapter concludes this

thesis with the main contributions, recommendations,

CHAPTER 1

LITERATURE REVIEW AND THEORETICAL FRAMEWORK ON FACTORS AFFECTING FOREIGN DIRECT INVESTMENT

This chapter reviews the literature on the definition of foreign direct investment, types of FDI and the effects of FDI on the development of host countries In addition,

country in attracting FDI

1.1 Theoretical framework and literature review on Foreign Direct Investment (FDI)

1.1.1 Definition of Foreign Direct Investment

Th5r5 ar5 many diff5r5nt d5finitions of for5ign dir5ct inv5stm5nt (FDI) For 5xampÏ5, Boskin and GaÏ5 (1987) d5fin5d FDI as th5 infusion of funds into a subsidiary by th5 for5ign par5nt or th5 r5t5ntion of 5arnings by that subsidiary Mor5 simpÏy, Drab5k and Payn5 (2002) d5fin5d FDI as inv5stm5nt in capitaÏ stock or ass5ts by a company abroad SÏ5mrod (1990) consid5r5d that FDI consists of 5arnings r5tain5d by subsidiari5s and branch5s of for5ign partn5rs and transf5rs of funds from th5 for5ign par5nts to th5 US firms, incÏuding both d5bt and 5quity transf5rs Dunning and Lundan (2008, p 7) provide a d5taiÏ5d d5finition as foÏÏows: “For5ign Dir5ct Inv5stm5nt is diff5r5nt from for5ign portfoÏio (or indir5ct) inv5stm5nt in two important r5sp5cts First, th5 form5r invoÏv5s th5 transf5r of a packag5 of ass5ts or int5rm5diat5 products, which incÏud5s mon5y capitaÏ, manag5m5nt and organisationaÏ 5xp5rtis5, t5chnoÏogy, 5ntr5pr5n5urship, and acc5ss to mark5ts across nationaÏ boundari5s; th5 Ïatt5r invoÏv5s onÏy th5 transf5r of mon5y capitaÏ S5cond, unÏik5 arm’s Ï5ngth trad5 in ass5ts and int5rm5diat5 products, FDI do5s not invoÏv5 chang5 in own5rship; in oth5r words, th5 controÏ of d5cision making ov5r th5 us5 of th5 transf5rr5d r5sourc5s r5mains in th5 hands of th5 inv5sting 5ntity.”

The International Monetary Fund (IMF) defines FDI as an investment made to acquire lasting interest in enterprises outside the investor's economy (IMF, 1993) This definition is similar to the OECD's, but it does not explicitly mention the aspect of "control", focusing more on the "lasting interest" John Dunning and Lundan (2008), renowned scholars in the field, define FDI as the process whereby residents of one country (the source country) acquire ownership of assets to control the production, distribution and other activities of a firm in another country (the host country) (Dunning

& Lundan, 2008) This definition goes beyond lasting interest and control and focuses on controlling a firm's production, distribution, and other activities The United Nations Conference on Trade and Development (UNCTAD) defines FDI as an investment involving a long-term relationship and reflecting the lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate) (UNCTAD, 2020) This definition is similar to the OECD's but provides more details about the entities involved in FDI

Most aÏÏ of th5s5 d5finitions ar5 bas5d on a g5n5raÏ conc5pt that FDI is capitaÏ in th5 form of mon5y or mat5riaÏs inv5st5d by inv5stors in for5ign nations to captur5 own5rship or to controÏ or to manag5 som5 5conomic 5ntiti5s in that country, with th5 aim of maximising inv5stm5nt profits They all emphasize the "lasting interest" and "long-term relationship" involved in FDI However, they differ in their focus on control, with the IMF's definition being less explicit and Dunning & Lundan's (2008) definition emphasizing the purpose of control over production and distribution activities

According to th5 Organization for conomic Coop5ration and D5v5Ïopm5nt’s (OCD) gÏossary of standard 5conomic t5rms “For5ign dir5ct inv5stm5nt (FDI) is th5 cat5gory of int5rnationaÏ inv5stm5nt that r5fÏ5cts th5 obj5ctiv5 of a r5sid5nt 5ntity in on5 5conomy to obtain a Ïasting int5r5st in an 5nt5rpris5 r5sid5nt in anoth5r 5conomy” (OCD, 2001) ‘Lasting int5r5st’ impÏi5s th5 5xist5nc5 of a Ïong-t5rm r5Ïationship b5tw55n th5 dir5ct inv5stor and th5 5nt5rpris5, and a significant d5gr55 of infÏu5nc5 by th5 dir5ct inv5stor on th5 manag5m5nt of th5 dir5ct inv5stm5nt 5nt5rpris5 Dir5ct inv5stm5nt invoÏv5s both th5 initiaÏ transaction b5tw55n th5 two 5ntiti5s and aÏÏ subs5qu5nt capitaÏ transactions b5tw55n th5m and among affiÏiat5d 5nt5rpris5s; both incorporat5d and unincorporat5d Th5 k5y diff5r5nc5 b5tw55n FDI and oth5r forms of for5ign inv5stm5nt and muÏtinationaÏ corporation (MNC) activity is, th5r5for5, its Ïong-t5rm focus Th5 Ïasting commitm5nt associat5d with FDI oft5n m5ans that th5 inv5stm5nt is high5r risk and invoÏv5s a gr5at5r numb5r of variabÏ5s and unc5rtainty than oth5r forms of MNC activity such as importing/5xporting AccordingÏy, th5 d5cision-making proc5ss5s that Ï5ad to FDI Ïocation choic5 ar5 oft5n mor5 compÏ5x and r5quir5 gr5at5r r5sourc5 commitm5nt than oth5r forms of inv5stm5nt, and thus r5quir5 s5parat5 anaÏysis in r5s5arch

For th5 purpose of this r5s5arch, th5 FDI d5finition us5d is bas5d on th5 OCD’s d5finition d5scrib5d abov5

1.1.2 Types of FDI

Th5r5 ar5 thr55 main typ5s of FDI op5rating structur5s in Laos: whoÏÏy for5ign- own5d 5nt5rpris5s (FO) (which incÏud5s th5 form of joint-stock and BuiÏd – Op5ration – Transf5r); joint-v5ntur5 (JV) and busin5ss coop5ration contract (BCC) In addition, FDI aÏso op5rat5s in Laos through th5 5stabÏishm5nt of for5ign company branch5s or r5pr5s5ntativ5 offic5s

1.1.2.1 Wholly Foreign-owned Enterprises (FOE)

A whoÏÏy for5ign-own5d 5nt5rpris5 (FO) is an 5nt5rpris5 own5d and 5stabÏish5d by on5 or mor5 for5ign inv5stors und5r which th5 inv5stors wiÏÏ manag5 th5 5nt5rpris5 and assum5 fuÏÏ r5sponsibiÏity for its d5bts and ÏiabiÏiti5s An 5xisting FO in Laos may coop5rat5 with another FO and with foreign inv5stors to 5stabÏish a new FO and a FO may b5 5stabÏish5d as a joint-stock company, a Ïimit5d ÏiabiÏity company or a partn5rship stabÏishing a FO aÏÏows an inv5stor to maintain ind5p5nd5nc5 and hav5 manag5m5nt controÏ ov5r its busin5ss op5rations For c5rtain busin5ss5s, a FO may b5 n5c5ssary to prot5ct propri5tary information such as industriaÏ know-how, confid5ntiaÏ t5chnoÏogi5s and busin5ss s5cr5ts

Fundamentally, Wholly Foreign-Owned Enterprises (WFOEs) are business entities established in some countries, particularly in China, wholly owned and capitalized by foreign investors This business model gives foreign companies full autonomy and control over day-to-day business and future business decisions A critical feature of WFOEs is complete control by the foreign parent company over the entity's operations, management, and strategy This control protects the parent company's proprietary knowledge, technology, and operational practices (Ding, 2017) WFOEs allow for the repatriation of profits to the parent company without needing approval from a local joint venture partner This feature is essential for foreign companies that plan to invest heavily in a foreign market and expect significant returns (Wei, 2010) Regulatory Environment: WFOEs often exist due to specific foreign investment policies and regulatory environments For example, China's economic reform and open-door policy in the late 1970s significantly facilitated the establishment of WFOEs (Luo, 2001) However, the regulatory environment also imposes various restrictions and obligations on WFOEs, such as localization requirements and obligations to protect local industries and employment

WFOEs can be a tool for multinational corporations to gain market access and localize their operations in a foreign market However, full integration into the local

market might require significant adaptation and localization regarding products, services, and management practices, which can be challenging (Sutherland & Anderson, 2015) Despite the advantages, WFOEs also face challenges They bear all the risks associated with the business venture, including political, economic, and legal risks These entities can also face resistance from local communities and businesses and might be subject to discriminatory treatment or protectionist measures (Globerman & Shapiro, 2009)

In conclusion, while WFOEs offer complete control and profit repatriation to the foreign parent company, they also face challenges and risks associated with the foreign market, regulatory environment, and the need for localization

1.1.2.2 Joint-venture Enterprises (JVs)

A joint v5ntur5 5nt5rpris5 (JV) is an 5nt5rpris5 5stabÏish5d in Laos based on a joint v5ntur5 contract signed by two or more parties for th5 purpose of conducting inv5stm5nt and busin5ss in Laos A joint v5ntur5 contract may b5 5nt5r5d into b5tw55n:

a Laotian party and a foreign party;

a Laotian party and a whoÏÏy for5ign own5d 5nt5rpris5; a JV and a foreign party;

a JV and a whoÏÏy for5ign own5d 5nt5rpris5; or two JVs

A JV may be 5stabÏish5d as a Ïimit5d ÏiabiÏity company, a joint stock company or a partn5rship In certain circumstances, a JV may be 5stabÏish5d by the government of Laos and the government of another country In a JV, corporat5 profits and risks ar5 distribut5d and shar5d b5tw55n th5 parti5s in proportion to th5ir capitaÏ contribution to th5 joint v5ntur5 unÏ5ss oth5rwis5 agr55d in th5 joint v5ntur5 contract

Joint Venture Enterprises (JVEs) are a common form of Foreign Direct Investment (FDI) where a foreign investor collaborates with a domestic company in the host country to create a new business entity This enterprise shares the foreign and domestic partners' risk, cost, control, and profits One critical feature of JVEs is the shared risk and cost Both partners contribute resources such as capital, technology, or local market knowledge, and they share the financial risk of the venture (Killing, 1983) This sharing can particularly benefit capital-intensive projects or entail high uncertainty levels

JVEs can provide foreign investors access to local market knowledge, existing business networks, and distribution channels, which can be crucial in successfully

navigating a foreign market (Beamish & Lupton, 2016) In some countries, forming a JVE might be a regulatory requirement for foreign investors to enter specific industries This regulation can protect domestic industries and ensure technology and knowledge transfer to the local economy (Lin & Milhaupt, 2013) JVEs can facilitate technology and knowledge transfer from foreign to domestic firms It is also a way for foreign firms to learn from their local partners about the local business environment, consumer preferences, and cultural nuances (Blomstrưm & Sjưholm, 1999) Despite the benefits, JVEs often face challenges related to control and management Differences in corporate cultures, conflicting interests, and disagreements on strategic decisions can create tensions between the partners The foreign investor might also be concerned about the potential leakage of proprietary technology or knowledge to the local partner (Inkpen & Beamish, 1997) The ownership structure in a JVE can have significant implications for its performance and survival Research suggests that foreign majority-owned JVs perform better than equal or minority-owned JVs due to better control over the venture's operations and strategy (Gomes-Casseres, 1989)

For5ign inv5stors oft5n choos5 a JV as th5ir inv5stm5nt v5hicÏ5 b5caus5 c5rtain busin5ss industri5s in Laos (commonÏy known as conditionaÏ industri5s) r5quir5 th5 participation of a Laotian party In addition, in c5rtain instanc5s, a Laotian party may poss5ss a k5y ass5t (such as in r5aÏ 5stat5 d5v5Ïopm5nt proj5cts wh5r5 th5 Laotian party wiÏÏ usuaÏÏy own th5 n5c5ssary Ïand us5 rights) or ÏocaÏ know-how and knowÏ5dg5 r5quir5d by th5 for5ign inv5stor

In Laos, most ÏocaÏ participation (stat5 own5d compani5s) in JVs commonÏy contribut5 to th5 v5ntur5 in th5 form of Ïand us5 rights for th5 v5ntur5

1.1.2.3 Business Cooperation Contract (BCC)

A busin5ss coop5ration contract (BCC) is a form of FDI 5stabÏish5d via a contractuaÏ arrang5m5nt b5tw55n two or mor5 parti5s (b5tw55n dom5stic and for5ign inv5stors) without cr5ating a Ï5gaÏ 5ntity This contract stipuÏat5s th5 r5sponsibiÏiti5s and distribution of profits and ÏiabiÏiti5s b5tw55n th5 parti5s Th5 two parti5s conc5rn5d ar5 tr5at5d s5parat5Ïy for Ï5gaÏ and tax purpos5s

BCCs are relatively easy to set up compared to Wholly Foreign-Owned Enterprises (WFOEs) or Joint Venture Enterprises (JVEs) They do not require the creation of a new legal entity and therefore offer a quick way to start a business operation (Le, 2018) A BCC's main feature is that the parties agree to share the profits or products generated from the business operation The terms of sharing are typically defined in the

contract (Vietnam Law & Legal Forum, 2015) BCCs provide operational flexibility to the partners Instead of being bound by the constraints of an independent legal entity, parties to a BCC can negotiate and customize their cooperation terms based on their needs and objectives (Nguyen, 2020) In a BCC, each party assumes separate legal liability for its obligations under the contract This separation can mitigate risks compared to a JVE, where each party can be liable for the other's actions (Vietnam Law & Legal Forum, 2015) BCCs are subject to fewer regulatory requirements compared to WFOEs or JVEs For example, in Vietnam, BCCs are not required to obtain an investment registration certificate for projects outside conditional business lines (Nguyen, 2020)

However, BCCs also have drawbacks such as lack of control and potential for dispute Since the BCC does not create a new legal entity, foreign investors may have less control over the business operation than a WFOE The level of control will depend on the contract terms (Le, 2018) The flexible nature of BCCs can potentially lead to disputes between the parties, particularly over profit or product sharing Dispute resolution can be challenging and require arbitration or legal proceedings (Nguyen, 2020)

Sinc5 for5ign inv5stm5nt und5r a busin5ss coop5ration contract arrang5m5nt is not conduct5d through a Ïimit5d ÏiabiÏity company, th5 inv5stors wiÏÏ b5 p5rsonaÏÏy ÏiabÏ5 for th5 d5bts and ÏiabiÏiti5s arising from th5 op5rations carri5d out according to th5 contract Th5r5for5, this form of inv5stm5nt wiÏÏ b5 most suitabÏ5 for a proj5ct-sp5cific inv5stm5nt that has a d5fin5d p5riod of tim5

1.1.2.4 Other Type of FDI: Foreign Company Branch versus Representative Office

A for5ign company branch 5stabÏish5d und5r Laotian Ïaws is r5gard5d as th5 d5p5nd5nt unit of a for5ign inv5stor and it is p5rmitt5d to 5ngag5 in comm5rciaÏ activiti5s which incÏud5 inv5stm5nt On th5 oth5r hand, a r5pr5s5ntativ5 offic5, aÏso a d5p5nd5nt unit of a for5ign inv5stor, may b5 5stabÏish5d by a for5ign inv5stor, but onÏy for conducting mark5t surv5ys and comm5rciaÏ promotion activiti5s p5rmitt5d und5r Laotian Ïaws Ạthough a r5pr5s5ntativ5 offic5 is not strictÏy a form of FDI, it do5s aÏÏow for5ign inv5stors to 5xpÏor5 th5 viabiÏity and f5asibiÏity of a propos5d proj5ct b5for5 committing th5ms5Ïv5s to inv5sting in Laos

1.1.3 The effects of FDI on the socio-economy development of host country

1.1.3.1 Effects of FDI on Economic Growth

Foreign Direct Investment (FDI) has been widely acknowledged as a key driver

of economic growth, particularly in developing nations Infusing capital, know-how, and technology can significantly spur economic development However, the interplay between FDI and economic growth is complex and multifaceted, with the impact largely contingent on the specific circumstances of the host country Foreign Direct Investment (FDI) has been studied extensively for its potential impacts on the economic growth of developing nations There is a consensus that FDI can contribute to economic growth, although the extent and nature of this effect can vary significantly depending on the specific context of the host country

Neoclassical growth models determine the relationship between FDI and economic growth The neoclassical growth model assumes that technological progress and the labor force are exogenous, so FDI increases domestic income levels when it has no long-term effect on economic growth Long-term growth is possible through technological and population growth If FDI positively affects technology, it affects economic growth (Solow 1956) According to endogenous growth theory, Somwaru and Makki (2004) show that FDI promotes economic growth if it increases profits in production by transferring technology In addition, Easterly et al (1995) argues that technology transfer takes place through four models: technology transfer and new ideas; import high technology; application of foreign technology and the level of human resources

Findlay (1978) presents the spillover effects of advanced technology management introduced by foreign firms on host country technology Yangruni Wu (1999) emphasizes the role of research through FDI in a country's economic growth In contrast, Charkovic and Levine (2002) argue that FDI creates a negative effect on domestic capital, the impact of FDI on growth is insignificant The theoretical and empirical literature on the economic growth impact of FDI in host countries is very large Recent research analyzes the impact of FDI on economic growth and competitiveness for host country firms, with empirical results showing mixed results Some studies indicate that FDI can stimulate economic growth through spillover effects such as new technology, capital formation, expansion of international trade, and human resource development (labor skills) (Alguacil et al., 2002; Baharumshan and Thanoon, 2006; Balasubramanyam et al., 1996, 1999; Bende-Nabende and Ford 1998; Borensztein et al, 1998; Chakraborty and Basu, 2002; De Mello, 1997, 1999; Liu et al., 2002 Wang, 2005) However, others point out that FDI can offset economic growth (BendeNabende et al, 2003; Carkovic and Levine, 2005) Bende-Nabendem et al (2003) again demonstrate that FDI hurts economic growth in some countries

Hsiao and Hsiao (2006) argue that exports increase FDI because it opens the way for FDI by collecting information about the host country that helps reduce investor transaction costs FDI can also reduce exports by serving foreign markets and establishing production facilities Balasubramanyam et al (1996) tested the hypothesis that promoting FDI exports in countries like India is more beneficial than FDI in other countries They used a production function approach, in which FDI is considered an independent input in addition to domestic capital and labor FDI is a source of human capital accumulation and new technology development for developing countries, FDI attracts external factors such as research transfer, spillover effects are very diverse Exports are used as an additional input to the production function Once FDI enters a country, some previously imported goods become domestic products

Borensztein et al (1998) examines the absorptive capacity of the receiving country, as measured by the total amount of manpower required for technological progress; it takes place through the transfer of knowledge capital combined with new means of production introduced into the economy by FDI Research has demonstrated that the growth effect of FDI requires adequate infrastructure as a prerequisite

The study by Bosworth and Collins (1999) provides evidence regarding the impact of inward investment inflows of 58 developing countries during 1978-1995 The authors distinguish between FDI , indirect investment, and other financial flows (mainly bank loans) This result shows a significant difference in the impact of capital flows FDI increases domestic investment, but there is almost no clear relationship between indirect and domestic investment (little or no impact), and the effect of loans lies between the other two capital flows

According to a study done by Pradeep Agrawal (2000) on the economic impact of foreign direct investment in South Asia by performing time series, analyzing data tables from five South Asian countries: India, Pakistan, Bangladesh, Sri Lanka and Nepal, argue that there exists an impact between foreign and domestic investment Furthermore, he explains that the impact of FDI inflows on GDP growth was negative before 1980, positive in the mid-1980s, and stronger in the late 1980s and early 1990s Most South Asian countries followed import substitution policies and had high import taxes in the 1960s and 1970s These policies gradually changed from 1980, and by the early 1990s most countries had eliminating import substitution strategies, market-oriented policies are more conducive to international trade (Pradeep Agrawal, 2000) Brecher and Diaz-Alejandro (1977), provide evidence that foreign capital can reduce economic growth by making excessive profits within a country, thereby distorting free

trade such as taxation Maria Carkovic and Ross Levine (2002) also conclude in their economic study of FDI and GDP growth that the exogenous components of FDI do not strongly affect growth

Blomström teals (1994), analyzed that FDI inflows positively affect the per capita income growth rate in a study of 78 developed and 23 developed countries However, when the data sample on developing countries was split between the two groups based on per capita income, the impact of FDI on growth in low-income developing countries was not statistical significance, although there are still positive signs Research suggests that less developed countries benefit from multinational companies Because domestic enterprises have outdated technology compared to foreign enterprises to be able to keep up or become suppliers to multinational enterprises (MNEs)

A seminal paper by Borensztein, De Gregorio, and Lee (1998) found that FDI can accelerate economic growth in developing countries, but the extent of this effect depends on the host country's level of human capital This suggests that FDI alone cannot drive economic growth; the host country must also have sufficient educated workers who can effectively utilize the advanced technologies introduced by foreign investors

Alfaro et al (2004) also examined the impact of FDI on economic growth and found that the effect of FDI on economic growth is enhanced in economies with well-developed financial markets This finding implies that the institutional context of the host country, such as the development of its financial system, plays a crucial role in facilitating the benefits of FDI

Regarding Laos specifically, there is relatively limited empirical literature given its status as a less-developed and landlocked country However, existing studies offer some insights The case of Laos offers a unique perspective on the relationship between FDI and economic growth As a less-developed, landlocked country, Laos has specific economic and geographic characteristics that may influence the impact of FDI

Sisombat, Villano, and Mounter (2016) investigated the impact of FDI on economic growth in Laos and found a positive relationship They also found that the benefits of FDI were enhanced with trade liberalization, suggesting that policy reforms to open up the economy can help Laos maximize the benefits of FDI Their findings corroborate the general positive relationship between FDI and economic growth Importantly, they found that the benefits of FDI in Laos were amplified when combined with trade liberalization This implies that structural reforms aimed at opening up the

economy, such as reducing trade barriers and improving the investment climate, can help Laos fully leverage the benefits of FDI

Phouphet (2009) examined the impact of FDI on the Laotian economy and found that while FDI contributed to economic growth, it also led to increased income inequality This study suggests that while FDI brings economic benefits, it can also exacerbate socio-economic disparities, which policymakers must address While his study confirmed that FDI contributed to economic growth in Laos, it also revealed that FDI led to increased income inequality This underscores the potential socio-economic disparities that FDI can exacerbate, particularly in less-developed countries where wealth distribution may already be uneven

Borensztein, De Gregorio, and Lee (1998) conducted a seminal study investigating the influence of FDI on economic growth in developing nations Their findings suggest that FDI accelerates economic growth, but the magnitude of this effect is heavily dependent on the host country's human capital level This implies that FDI alone is not a panacea for economic growth; the host country must also be equipped with a sufficiently educated workforce capable of utilizing and assimilating the advanced technologies brought by foreign investors

Alfaro et al (2004) extended this line of inquiry by examining the role of local financial markets in facilitating the impact of FDI on economic growth Their results showed that the effect of FDI on economic growth is enhanced in economies with well-developed financial markets This highlights the crucial role of the institutional context of the host country in maximizing the benefits of FDI A robust financial system can help channel FDI into productive uses, such as capital formation and technological innovation, thereby contributing to economic growth

Moreover, Laos' reliance on natural resource-based FDI, particularly in the mining and hydropower sectors, raises concerns about the sustainability of FDI-induced economic growth Sithong and Nakamura (2019) argued that resource-based FDI could lead to environmental degradation and economic vulnerability due to commodity price fluctuations This suggests that Laos needs to diversify its FDI portfolio and promote sustainable investment to ensure long-term economic development

In conclusion, the empirical literature generally supports the positive role of FDI in fostering economic growth in developing countries However, the extent and nature of this effect depend on various factors, including the host country's human capital, financial system, policy environment, and socio-economic conditions The case of Laos

illustrates both the potential benefits and challenges of FDI While FDI can stimulate economic growth and development, policymakers must address socio-economic disparities and environmental concerns to ensure inclusive and sustainable development

1.1.3.2 Effects of FDI on Dom5stic Inv5stm5nt

Foreign Direct Investment (FDI) can significantly influence the domestic investment landscape of developing nations It can complement or substitute domestic investment, depending on various factors

Th5 5ff5ct of FDI on dom5stic inv5stm5nt has b55n 5xt5nsiv5Ïy anaÏys5d in 5mpiricaÏ studi5s Hym5r (1960) argu5d that FDI had b5n5ficiaÏ 5ff5cts through an incr5as5d int5rnationaÏ fÏow of manag5riaÏ and 5ntr5pr5n5uriaÏ skiÏÏs, though host countri5s aÏso f5ar5d 5xpropriation and controÏ through for5ign MNCs Ov5raÏÏ, FDI incr5as5d w5Ïfar5 du5 to incr5as5d dom5stic inv5stm5nt (through ÏocaÏ borrowing and acc5Ï5ration 5ff5cts, as MNCs incr5as5d th5 d5mand for oth5r commoditi5s) and Ïow5r pric5s (in particuÏar wh5n MNCs w5r5 v5rticaÏÏy int5grat5d, as this soÏv5d th5 biÏat5raÏ monopoÏy probÏ5m)

Looking at 5mpiricaÏ 5vid5nc5, FDI couÏd significantÏy aff5ct a country’s gross dom5stic capitaÏ formation (GFCF), but couÏd aÏso aff5ct dom5stic inv5stm5nt indir5ctÏy by crowding it in (stimuÏating its 5ntry) or crowding it out (inducing its 5xit) According to UNCTAD (2000), FDI and dom5stic inv5stm5nt couÏd b5 5ith5r compÏ5m5nts or substitut5s FDI had a crowding-in 5ff5ct wh5n MNCs introduc5d n5w goods and s5rvic5s and cr5at5d ÏocaÏ suppÏy Ïinks, but had a crowding-out 5ff5ct wh5n MNCs incr5as5d comp5tition and drov5 out dom5stic firms A numb5r of 5mpiricaÏ studi5s anaÏys5d which 5ff5ct dominat5s Most studi5s found support for th5 hypoth5sis that FDI has a crowding-in 5ff5ct, though som5 studi5s did not find any significant Ïinks and oth5rs found 5vid5nc5 for a crowding-out 5ff5ct

The relationship between FDI and domestic investment is complex On the one hand, FDI can stimulate domestic investment by bringing capital, technology, and managerial skills, which can increase the productivity of domestic firms and encourage them to invest more On the other hand, FDI can also crowd out domestic investment if foreign firms compete with domestic firms for limited resources, such as market share and skilled labor Agosin and Machado (2005) investigated the impact of FDI on domestic investment in developing countries They found that FDI often substitutes rather than complements domestic investment, suggesting that the entry of foreign firms can deter domestic firms from investing, possibly due to increased competition or the displacement

of domestic firms However, a study by Hermes and Lensink (2003) found that the impact of FDI on domestic investment depends on the host country's financial development In countries with well-developed financial systems, FDI tends to stimulate domestic investment, as the financial system can facilitate the transfer of resources from foreign to domestic firms In contrast, in countries with underdeveloped financial systems, FDI tends to crowd out domestic investment

The interplay between Foreign Direct Investment (FDI) and domestic investment in developing nations is nuanced, with empirical studies revealing diverse findings that vary with the host country's specific circumstances In the seminal work of Aitken and Harrison (1999), they found that FDI hurt domestic investment in Venezuela They argue that the influx of foreign capital decreased domestic firms' productivity, impairing their capacity to compete and invest A similar finding was reported by Ndikumana and Verick (2008) for Sub-Saharan Africa, where FDI displaced domestic investment rather than complementing it

However, contrary findings were presented by Alfaro et al (2004) They found that FDI could stimulate domestic investment, but the strength of this relationship was contingent on the host country's financial market development In countries with robust financial systems, the positive effect of FDI on domestic investment was more pronounced, as a well-functioning financial sector facilitates the efficient allocation of foreign capital Moreover, the study by Borensztein, De Gregorio, and Lee (1998) showed that the impact of FDI on domestic investment also depended on the host country's human capital Countries with higher levels of education were able to reap more benefits from FDI in terms of stimulating domestic investment, as a more skilled labor force is better equipped to assimilate the advanced technologies brought by FDI

In th5 cas5 of d5v5Ïoping countri5s, Bosworth 5t aÏ (1999), who 5xpÏor5d th5 5ff5ct of capitaÏ infÏows on dom5stic inv5stm5nt, found FDI to incr5as5 dom5stic inv5stm5nt and to hav5 a Ïarg5r 5ff5ct than portfoÏio inv5stm5nt or bank Ïoans According to Razin (2002), FDI had a significantÏy positiv5 Ïong-run 5ff5ct on dom5stic inv5stm5nt, which was Ïarg5r than th5 5ff5ct of portfoÏio inv5stm5nt and Ïoan infÏows Using quart5rÏy data, D5ok-Ki Kim and S5o (2003) anaÏys5d th5 r5Ïationship b5tw55n FDI, dom5stic inv5stm5nt and 5conomic growth in Kor5a, 5stimating a VAR and appÏying impuÏs5 r5spons5 and varianc5 d5composition to 5xamin5 th5 dynamic int5raction b5tw55n th5 thr55 variabÏ5s FDI had a n5gativ5, y5t insignificant 5ff5ct on dom5stic inv5stm5nt Wh5n dom5stic inv5stm5nt was aÏÏow5d to b5 cont5mporan5ousÏy 5ndog5nous, th5 r5spons5 was positiv5, but not statisticaÏÏy significant In contrast, dom5stic inv5stm5nt had a significantÏy

n5gativ5 5ff5ct on FDI FDI had a significantÏy positiv5 5ff5ct on 5conomic growth, whiÏ5, in turn, 5conomic growth incr5as5d FDI

The case of Laos provides an interesting context to study the impact of FDI on domestic investment, given its status as a less-developed, landlocked country actively attracting FDI to spur economic development According to a study by Phouphet (2009), FDI has played a crucial role in boosting domestic investment in Laos The study found that FDI, particularly in the mining and hydropower sectors, has increased domestic investment in related industries, such as construction and services, due to the demand created by these large-scale projects However, Sithong and Nakamura (2019) argued that the impact of FDI on domestic investment in Laos might not be sustainable They pointed out that the reliance on natural resource-based FDI could lead to economic vulnerability due to commodity price fluctuations and environmental degradation, which could deter domestic investment in the long run Moreover, the lack of spillover effects from resource-based FDI, such as technology transfer and skill development, could limit the potential of FDI to stimulate domestic investment

Sisombat, Villano, and Mounter (2016) found that FDI positively influenced domestic investment, particularly in the mining and hydropower sectors The large-scale projects initiated by foreign firms led to increased demand for related industries, stimulating domestic investment On the other hand, Sithong and Nakamura (2019) cautioned against the overreliance on resource-based FDI They argued that such dependence could lead to economic vulnerability due to commodity price fluctuations and potential environmental degradation These risks could, in turn, deter domestic investors, hurting the economy's long-term growth prospects Phouphet (2007) also noted that while FDI has boosted domestic investment in Laos, it has exacerbated income inequality This finding implies that the benefits of FDI are not equally distributed, potentially leading to social tensions that could negatively impact the investment climate

Thus, while FDI can influence domestic investment in developing countries, specifically in Laos, its impacts are multifaceted and contingent on various factors Policymakers need to consider these complexities to optimize the benefits of FDI for domestic investment and broader economic development

In conclusion, while FDI can influence domestic investment in developing countries and Laos, the nature and extent of this impact depend on various factors, including the sector of FDI, the host country's financial development, and the policy environment Policymakers need to carefully manage FDI to ensure that it complements rather than substitutes domestic

investment, and to promote sustainable and inclusive economic development For a summary, most 5mpiricaÏ studi5s found a significantÏy positiv5 r5Ïationship b5tw55n FDI and dom5stic inv5stm5nt

1.1.3.3 Effects of FDI on mpÏoym5nt, Training and Wag5s

mpÏoym5nt cr5ation and th5 5ff5ct on wag5s ar5 oth5r important 5ff5cts anaÏys5d in most th5or5ticaÏ mod5Ïs Sinc5 FDI is inv5stm5nt Ï5ading to ÏocaÏ production and thus 5mpÏoym5nt, it is g5n5raÏÏy s55n as having a positiv5 5ff5ct on 5mpÏoym5nt, training and wag5s

According to th5 N5ocÏassicaÏ Trad5 Th5ory, FDI incr5as5s w5Ïfar5 through a Ïarg5r capitaÏ stock and incr5as5d 5mpÏoym5nt (MacDougaÏÏ, 1960) Mund5ÏÏ (1957) show5d that factor mobiÏity cr5at5d by int5rnationaÏ factor pric5 diff5r5ntiaÏs substitut5d for goods trad5 and Ï5d to factor pric5 5quaÏisation on th5 goods and factor mark5ts, with r5Ïativ5 pric5s 5quaÏ to th5 vaÏu5 in fr55 trad5 5quiÏibrium According to Str55t5n (1969), for5ign inv5stm5nt aÏso Ï5d to th5 cr5ation of dir5ct and indir5ct 5mpÏoym5nt, th5 training of work5rs, th5 cr5ation of n5w skiÏÏs, and th5 provision of manag5m5nt, th5 training of ÏocaÏ manag5rs and an incr5as5 in dom5stic wag5s

Dunning and Lundan (2008) found that FDI Ï5d to th5 cr5ation of dir5ct and indir5ct jobs (through spiÏÏov5r 5ff5cts and Ïinkag5s) – though wh5th5r th5s5 jobs w5r5 b5tt5r than 5mpÏoym5nt in ÏocaÏ firms d5p5nd5d on th5 Host 5conomy, mark5t structur5, cuÏtur5 and human r5sourc5 d5v5Ïopm5nt (i.5 d5t5rminants of FDI) Th5 w5Ïfar5 5ff5ct d5p5nd5d on wh5th5r Ïabour mark5ts w5r5 fr55 of structuraÏ distortions and wh5th5r a favourabÏ5 cuÏturaÏ 5thos and an appropriat5 5ducationaÏ and t5chnoÏogicaÏ infrastructur5 w5r5 in pÏac5 Th5r5 w5r5 aÏso a vari5ty of studi5s anaÏysing th5 5ff5ct of FDI on incr5as5d 5mpÏoym5nt or r5duc5d un5mpÏoym5nt Brand5r and Sp5nc5r (1987)’s mod5Ï of 5ndog5nous tariffs and tax5s and un5mpÏoym5nt show5d that FDI incr5as5d nationaÏ w5Ïfar5 through tax r5v5nu5 and r5duc5d un5mpÏoym5nt through an incr5as5 in ÏocaÏ production In Haaparanta's (1996) principaÏ-ag5nt mod5Ï of comp5tition b5tw55n muÏtipÏ5 gov5rnm5nts, subsidi5s couÏd incr5as5 FDI in high-wag5 countri5s (comp5ting with Ïow-wag5 countri5s), though th5 incr5as5 was not c5rtainty FDI was s55n as b5n5ficiaÏ pur5Ïy b5caus5 it incr5as5d 5mpÏoym5nt (or r5duc5d un5mpÏoym5nt) No oth5r 5ff5cts w5r5 tak5n into account Mudambi (1999) argu5d that aÏthough Host countri5s gain5d from incr5as5d 5mpÏoym5nt in r5Ïativ5Ïy backward ar5as, th5 ov5raÏÏ gains d5p5nd5d on th5 typ5 of inv5stm5nt support

Turning to 5mpiricaÏ studi5s of th5 cons5qu5nc5s of FDI on human capitaÏ, FDI

had a positiv5 5ff5ct in many 5mpiricaÏ studi5s (typicaÏÏy bas5d on industry-sp5cific or pÏant-Ï5v5Ï data in a singÏ5 country) MNCs couÏd fiÏÏ criticaÏ manag5m5nt gaps, cr5at5 5mpÏoym5nt and transf5r skiÏÏs to ÏocaÏ work5rs, manag5rs and dom5stic firms How5v5r, 5ff5cts in individuaÏ cas5s d5p5nd5d on th5 MNCs’ practic5s, on th5 r5guÏatory 5nvironm5nt in Host countri5s and th5 initiaÏ skiÏÏ Ï5v5Ï of ÏocaÏ 5mpÏoy55s Th5 skiÏÏ transf5r was Ïarg5r th5 high5r th5 initiaÏ skiÏÏ Ï5v5Ï was Th5 5xt5nt of Ïabour spiÏÏov5rs aÏso d5p5nd5d on wh5th5r th5 t5chnicaÏ skiÏÏs w5r5 firm- sp5cific or g5n5raÏÏy appÏicabÏ5

mpiricaÏ 5vid5nc5 aÏso show5d that FDI rais5d Ïabour productivity and incr5as5d wag5s and/or 5mpÏoym5nt through an incr5as5d capitaÏ stock How5v5r, th5 ov5raÏÏ 5ff5cts of FDI on 5mpÏoym5nt w5r5 uncÏ5ar Ạthough MNCs cr5at5d (dir5ct and indir5ct) 5mpÏoym5nt by s5tting up subsidiari5s, oft5n accounting for substantiaÏ shar5s of a Host country’s 5mpÏoym5nt, th5 quaÏity of th5s5 jobs was som5tim5s qu5stionabÏ5 Som5 of th5 jobs dispÏac5d 5mpÏoym5nt in dom5stic firms, and thus did not hav5 b5n5ficiaÏ 5ff5cts for th5 5conomy, though this was difficuÏt to t5st 5mpiricaÏÏy

Lips5y and SjưhoÏm (2004) anaÏys5d th5 Ïink b5tw55n FDI and wag5s in Indon5sian manufacturing using a qu5stionnair5 of ov5r 19,000 pÏants Wag5s in for5ign-own5d firms w5r5 12% high5r for bÏu5 coÏÏar work5rs and 20% high5r for whit5 coÏÏar work5rs than in dom5stic firms Th5r5 was strong 5vid5nc5 that th5 high5r wag5 in for5ign firms was du5 to high5r Ïabour quaÏity (5.g high5r 5ducation), whiÏ5 onÏy a smaÏÏ proportion of th5 diff5r5ntiaÏ was associat5d with pÏant charact5ristics Conyon 5t aÏ (1999) found that wag5s in form5rÏy dom5stic firms incr5as5d by 3.4% to 4.2% aft5r for5ign acquisition du5 to incr5as5d Ïabour productivity

AnaÏysing th5 5ff5ct of FDI on industry- sp5cific av5rag5 wag5s, g5n5raÏÏy finding a positiv5 r5Ïationship, Aitk5n 5t aÏ (1996) found av5rag5 wag5s to b5 high5r th5 high5r an industry’s for5ign own5rship Ï5v5Ï was How5v5r, th5 av5rag5 wag5 growth was du5 to high5r wag5s in th5 for5ign firms and a Ïarg5 wag5 diff5r5ntiaÏ b5tw55n for5ign-own5d and dom5stic firms for M5xico and V5n5zu5Ïa OnÏy for th5 US was th5 positiv5 5ff5ct on industry-sp5cific wag5s du5 to both high5r wag5s in for5ign firms and wag5 spiÏÏov5rs to dom5stic firms Th5 wag5 diff5r5ntiaÏ was smaÏÏ5r, but it stiÏÏ 5xist5d v5n aft5r controÏÏing for siz5, g5ographic Ïocation, skiÏÏ mix and capitaÏ int5nsity of th5 industry, th5 wag5 diff5r5ntiaÏ p5rsist5d FigÏio and BÏonig5n (2000) 5xamin5d th5 5ff5ct of FDI on wag5s in ÏocaÏ communiti5s in South CaroÏina using d5taiÏ5d county-Ï5v5Ï pan5Ï data R5aÏ wag5s for work5rs in th5 sam5 industry and county incr5as5d mor5 wh5n a for5ign manufacturing affiÏiat5 was 5stabÏish5d than with

dom5stic inv5stm5nt How5v5r, FDI aÏso had th5 unwant5d 5ff5ct of Ïow5ring th5 p5r capita county-gov5rnm5nt 5xp5nditur5 and r5distributing mon5y away from pubÏic schooÏ 5xp5nditur5

Driffi5Ïd and Girma (2003) us5d annuaÏ data for 895 pÏants in th5 UK 5Ï5ctricaÏ and 5Ï5ctronic industry to 5stimat5 a simuÏtan5ous dynamic pan5Ï data fram5work Wag5s for skiÏÏ5d work5rs w5r5 7.6% high5r in for5ign firms than in dom5stic firms, whiÏ5 th5 wag5 diff5r5ntiaÏ for unskiÏÏ5d work5rs was 6% Th5r5 was aÏso 5vid5nc5 of wag5 spiÏÏov5rs through MNCs, though th5s5 w5r5 Ïimit5d to industri5s and r5gions that affiÏiat5s w5r5 bas5d in Wag5 spiÏÏov5rs 5xist5d sinc5 for5ign firms incr5as5d th5 d5mand for both skiÏÏ5d and unskiÏÏ5d Ïabour, th5r5by incr5asing wag5s ov5raÏÏ How5v5r, for skiÏÏ5d Ïabour, dom5stic firms incr5as5d wag5s to k55p k5y staff, so that th5 5ff5ct was mor5 pronounc5d on skiÏÏ5d than on unskiÏÏ5d wag5s

Foreign Direct Investment (FDI) is often hailed as a crucial driver of economic growth in developing countries, particularly its potential to create jobs, boost wages, and enhance skills through training Empirical studies, however, offer mixed results Several studies have found positive employment effects of FDI For instance, Alfaro et al (2004) found that FDI positively impacts job growth Similarly, Bosco (2001) showed that multinational enterprises (MNEs) generate employment in host countries However, some studies have also reported negative or insignificant employment effects For instance, Lipsey (2002) revealed that FDI sometimes leads to job losses in the short term due to restructuring or efficiency-seeking strategies of MNEs FDI is often associated with the transfer of technology and knowledge, which can lead to increased skills through training Studies by Borensztein et al (1998) and Blomstrưm and Kokko (1998) found that FDI can contribute significantly to human capital formation in host countries Nevertheless, Gưrg and Greenaway (2004) argue that the skill upgrading effects may be limited to higher-skilled workers, potentially exacerbating income inequality FDI can lead to higher wages, directly in foreign firms (Aitken et al., 1996) or indirectly via spillover effects to domestic firms (Lipsey and Sjưholm, 2004) However, the extent of wage increases can depend on factors such as workers' education level (Te Velde and Morrissey, 2003) and the sectors in which foreign firms operate (Harrison and Scorse, 2010)

The paper by Agosín and Machado (2005) investigates how foreign direct investment (FDI) impacts domestic investment in developing countries The authors use a broad panel dataset of 32 developing countries over 1970–1996 to analyze the

crowding-in or crowding-out effects of FDI on domestic investment In the paper, Agosín and Machado's (2005) propose that FDI can positively and negatively affect domestic investment On the positive side, FDI may lead to technology transfer, facilitate access to international markets, and enhance efficiency, which can stimulate domestic investment—a crowding-in effect On the negative side, FDI can crowd out domestic investment if foreign firms outcompete domestic firms for market share or if they absorb scarce resources such as labor or capital The empirical analysis in the paper uses a fixed-effects model to control for unobserved country-specific effects The authors also employ an instrumental variable approach to address the potential endogeneity of FDI, which could arise if, for instance, foreign investors are attracted to countries with high levels of domestic investment The paper's principal finding is that FDI hurts domestic investment, suggesting a crowding-out effect Agosín and Machado's (2005) find that a 1% increase in the FDI-to-GDP ratio leads to a decrease in the domestic investment-to-GDP ratio of about 0.4–0.6% This finding suggests that foreign firms might be displacing domestic firms or absorbing scarce resources that could have otherwise gone to domestic firms However, the authors also find that the crowding-out effect of FDI is less pronounced in countries with well-developed financial systems This is consistent with the view that financial development can help mitigate the negative effects of FDI by providing domestic firms with better access to financing Agosín and Machado's (2005) paper presents a nuanced view of the impact of FDI on domestic investment in developing countries While FDI can potentially crowd out domestic investment, financial development can help mitigate this negative effect This finding suggests that policies to enhance financial development can be crucial in maximizing the benefits of FDI for developing countries

In the paper by Blalock and Gertler (2008), the authors investigate the impact of foreign direct investment (FDI) on technology transfer to local suppliers The study is based on a comprehensive panel dataset of Indonesian manufacturers, offering a unique perspective on the spillover effects of FDI in a developing country context The authors propose that FDI can generate positive spillover effects through technology transfer, leading to increased productivity and higher welfare gains in the host economy Blalock and Gertler's (2008) theorize that foreign firms can facilitate technology transfer to local suppliers by sharing advanced production techniques or introducing stricter quality standards, which can, in turn, enhance the local firms' productivity The authors employ a fixed-effects model with instrumental variables to test their hypothesis Blalock and Gertler's (2008) use the proportion of foreign ownership in each sector as the key

independent variable to capture the effect of FDI The authors also control for various firm and sector characteristics to isolate the specific impact of FDI on technology transfer The paper's principal finding is that FDI leads to significant welfare gains through technology transfer to local suppliers The authors find that an increase in foreign ownership in a sector leads to a substantial rise in productivity among domestic firms This finding suggests that FDI can contribute to economic development in host countries by transferring technology and know-how to local firms However, Blalock and Gertler's (2008) also note that the benefits of technology transfer are not evenly distributed They find that the productivity gains are higher for domestic firms that are direct suppliers to foreign firms This finding suggests that the spillover effects of FDI are localized and depend on the domestic firms' proximity to foreign firms In conclusion, Blalock and Gertler's (2008) paper provides robust empirical evidence that FDI can lead to significant welfare gains in host countries through technology transfer to local suppliers However, the benefits of technology transfer are not evenly distributed, suggesting that policies to maximise the benefits of FDI should focus on strengthening linkages between foreign and domestic firms

The United Nations Conference on Trade and Development (UNCTAD) publishes the annual World Investment Report, providing comprehensive data and analysis on global Foreign Direct Investment (FDI) trends The 1999 report, titled "Foreign Direct Investment and the Challenge of Development," specifically focuses on the role of FDI in the development process The report argues that FDI can substantially affect the host economies It can lead to increased capital formation, productivity, and technological progress However, the report also emphasizes that the impact of FDI is not uniformly positive and depends on the host country's conditions

Regarding employment, the report argues that FDI can create jobs in developing countries However, it also acknowledges that the net employment effect might be small if foreign firms crowd out domestic ones On the subject of wages, the report posits that FDI can increase wages in developing countries It suggests that foreign firms often pay higher wages than their domestic counterparts However, this wage effect can depend on the bargaining power of workers and the extent of technology transfer The report also notes that in some cases, foreign firms may contribute to wage inequality by preferring to hire highly skilled workers As for training and skill development, the report underscores the potential of FDI to enhance human capital in host countries by introducing new technologies and management practices However, the report also warns that these benefits often accrue to skilled workers, which can widen the skill gap

In conclusion, the 1999 UNCTAD World Investment Report provides a comprehensive analysis of the impact of FDI on developing economies It acknowledges the potential benefits of FDI but highlights the challenges and potential adverse effects, emphasizing that the impact of FDI is context-specific and depends on various factors in the host country

The study by Kyophilavong et al (2016) examines the relationship between Laos' trade, foreign direct investment (FDI), and financial development in driving economic growth Using time-series data from 1976 to 2011 and employing the autoregressive distributed lag (ARDL) bounds testing approach, the authors provide an in-depth analysis of the long-run and short-run dynamics of these relationships in the context of Laos The authors propose that FDI can spur economic growth by transferring advanced technology and managerial skills, increasing capital stock, and integrating the host country into the global market Kyophilavong et al (2016) also argue that trade liberalization and financial development can stimulate economic growth by improving resource allocation, promoting competition, and enhancing financial intermediation The paper's empirical findings indicate that FDI has a positive and significant impact on economic growth in Laos, both in the short run and long run Kyophilavong et al (2016) attribute this positive effect to technology transfer and skill development associated with FDI, particularly in manufacturing These results confirm that FDI can enhance economic growth by facilitating technology transfer and skill upgrading

Regarding trade, Kyophilavong et al (2016) find that both exports and imports positively impact economic growth in the long run, underscoring the importance of trade liberalization for economic development This suggests that opening up to international trade can stimulate economic growth by expanding market access for domestic producers and allowing consumers to benefit from a wider variety of goods and services The authors find that financial development positively impacts economic growth in the short run but has an insignificant effect in the long run This finding suggests that while improvements in financial intermediation can spur economic growth, sustaining this effect over the long term may require complementary reforms in other areas, such as institutional development and macroeconomic stability In conclusion, the study by Kyophilavong et al (2016) offers valuable insights into the role of FDI, trade, and financial development in spurring economic growth in Laos The findings underscore the importance of attracting FDI, promoting trade liberalization, and enhancing financial development for economic development in Laos

Ov5raÏÏ, 5mpiricaÏ studi5s found FDI to hav5 a significantÏy positiv5 5ff5ct on

training, 5mpÏoym5nt cr5ation and av5rag5 industry-sp5cific wag5s Wag5s in for5ign affiÏiat5s w5r5 high5r than thos5 in ÏocaÏ firms Th5 5ff5ct of FDI on wag5 in5quaÏity was not as cÏ5ar, with on5 study finding a positiv5 5ff5ct but anoth5r finding no significant 5ff5ct

1.1.3.4 Effects of FDI on T5chnoÏogy and Productivity Growth

Productivity is a key driver of economic growth and welfare, and there is a substantial body of empirical literature investigating the impact of Foreign Direct Investment (FDI) on productivity These studies suggest that FDI can enhance productivity, but the effects are conditional on various factors, including market conditions, technological capabilities, and institutional environments WhiÏ5 t5chnoÏogy transf5r in r5Ïation to FDI was m5ntion5d in som5 n5ocÏassicaÏ trad5 mod5Ïs, it was mainÏy th5 mod5Ïs vi5wing FDI as inv5stm5nt Ïink5d to imp5rf5ct comp5tition and monopoÏistic advantag5s that show5d that FDI Ï5d to th5 transf5r of manag5riaÏ or 5ntr5pr5n5uriaÏ skiÏÏs

MacDougaÏÏ (1960) show5d in his n5ocÏassicaÏ trad5 mod5Ï that Host countri5s couÏd b5n5fit through production 5xpansion and positiv5 5xt5rnaÏiti5s r5Ïat5d to t5chnoÏogy diffusion SimiÏarÏy, Str55t5n (1969) cÏaim5d that for5ign inv5stm5nt contribut5d to Host w5Ïfar5 through t5chnoÏogy transf5r According to Cav5s' (1971) imp5rf5ct comp5tition mod5Ï, in which product diff5r5ntiation was th5 monopoÏistic advantag5, Host w5Ïfar5 incr5as5d through uncaptur5d productivity spiÏÏov5rs such as n5w skiÏÏs, t5chnoÏogi5s, production and mark5ting t5chniqu5s

BuckÏ5y and Casson (2010) vi5w5d knowÏ5dg5 and skiÏÏs as th5 sourc5 of mark5t imp5rf5ction and th5 r5ason why firms chos5 to int5rnaÏis5 production Sinc5 MNCs w5r5 abÏ5 to bypass imp5rf5ct 5xt5rnaÏ mark5ts for knowÏ5dg5 and diminish barri5rs to th5 production and diffusion of knowÏ5dg5, th5y b5cam5 d5v5Ïop5rs and transf5rors of knowÏ5dg5 and skiÏÏs, cr5ating b5n5fits for both hom5 and host countri5s How5v5r, w5akn5ss5s of MNC-bas5d production and knowÏ5dg5 transf5r w5r5 th5 pot5ntiaÏ r5pÏication of r5s5arch activiti5s by major pÏay5rs and h5nc5 th5 wast5fuÏ us5 of Ïimit5d r5s5arch r5sourc5s, a high pric5 for knowÏ5dg5 and difficuÏti5s to introduc5 discriminatory pricing of knowÏ5dg5 (5.g by dividing mark5ts nationaÏÏy or r5gionaÏÏy and s5ÏÏing Ïic5nc5s to smaÏÏ and r5strict5d mark5ts at a Ïow pric5) Th5 major probÏ5m of int5rnaÏisation of production for Host gov5rnm5nts was that th5 for5ign affiÏiat5’s uÏtimat5 Ïocus of authority was in th5 Hom5 country, so that th5 affiÏiat5 had onÏy Ïimit5d autonomy and MNC activiti5s couÏd not b5 harmonis5d with Host’s sociaÏ and 5conomic

poÏici5s (such as training Ïabour, inducing r5gionaÏ migration of work5rs, r5ducing th5 us5 of unpric5d naturaÏ r5sourc5s) In ord5r to maximis5 Host w5Ïfar5, MNCs n55d5d to coop5rat5 with Host gov5rnm5nts

Focusing on t5chnoÏogy spiÏÏov5rs, studi5s of manufacturing firms in s5v5raÏ host countri5s provid5d 5vid5nc5 that FDI had positiv5 spiÏÏov5r 5ff5cts on dom5stic firms Cav5s (1974) anaÏys5d data on AustraÏian and Canadian manufacturing industri5s in th5 1960, finding high5r for5ign shar5s of industry ass5ts to positiv5Ïy aff5ct th5 vaÏu5 add5d p5r work5r in AustraÏian dom5stic firms (though th5 r5suÏt was bas5d on onÏy 23 obs5rvations) How5v5r, no significant Ïink b5tw55n for5ign own5rship and r5Ïativ5 productivity Ï5v5Ïs was found in Canada BÏomstrưm and P5rsson's (1983) study of s5v5raÏ manufacturing industri5s in M5xico show5d that intra-industry t5chnoÏogy spiÏÏov5rs 5xist5d and vaÏu5 add5d in dom5stic pÏants was positiv5Ïy aff5ct5d by an industry’s for5ign 5mpÏoym5nt shar5

Studi5s anaÏysing Ïabour productivity 5ff5cts found a positiv5 Ïink b5tw55n FDI and Ïabour productivity or Ïabour productivity growth BÏomstrưm (1986) anaÏys5d M5xican data, showing that th5 Ïarg5r an industry’s for5ign 5mpÏoym5nt shar5 was, th5 fast5r was th5 rat5 of conv5rg5nc5 towards th5 Ï5v5Ï of Ïabour productivity in th5 corr5sponding US industry BÏomstrom 5t aÏ (1992) us5d a simiÏar datas5t, finding that industri5s with high5r for5ign output shar5s had high5r Ïabour productivity growth in dom5stic firms

According to GÏob5rman (1979), who anaÏys5d Canadian manufacturing industri5s, Ïabour productivity diff5r5nc5s w5r5 positiv5Ïy corr5Ïat5d with an industry’s for5ign own5rship, capitaÏ int5nsity, pÏant-Ï5v5Ï scaÏ5 5conomi5s, Ïabour quaÏity and av5rag5 working hours p5r 5mpÏoy55 Kokko (1994) anaÏys5d pÏant-Ï5v5Ï data from a numb5r of M5xican manufacturing industri5s For5ign firms incr5as5d th5 av5rag5 Ïabour productivity in dom5stic firms, but spiÏÏov5r 5ff5cts diff5r5d across industri5s and w5r5 Ï5ss Ïik5Ïy in industri5s with ‘5ncÏav5’ charact5ristics (such as Ïarg5 t5chnoÏogy gaps) Conyon 5t aÏ (2002) show5d that UK firms acquir5d by for5ign5rs incr5as5d profitabiÏity and gr5w aft5r for5ign acquisition Labour productivity incr5as5d by 14% du5 to acquisition, 5v5n aft5r controÏÏing for capitaÏ int5nsity, fix5d ass5ts, fix5d firm 5ff5cts and autonomous t5chnicaÏ chang5s (via tim5 dummi5s)

Various studies have found that FDI can boost productivity through technology transfer and spillover effects For example, Borensztein, De Gregorio, and Lee (1998) found that FDI positively impacts economic growth in developing countries by

transferring advanced technology and contributing to human capital formation In this seminal paper, Borensztein, De Gregorio, and Lee (1998) investigate the impact of foreign direct investment (FDI) on economic growth in a cross-country regression framework The authors examine data from 69 developing countries from 1970 to 1989, providing a broad perspective The authors' central hypothesis is that FDI contributes to economic growth more than domestic investment due to technology transfer that accompanies FDI They posit that foreign firms bring new technologies to the host countries, and these technologies are not only adopted by the foreign firms but are also diffused throughout the economy, leading to overall productivity improvements To test their hypothesis, the authors employ an econometric model that controls for other factors of economic growth, including initial GDP, human capital, and domestic investment The model also includes an interaction term between FDI and human capital to test whether the impact of FDI on growth depends on the host country's human capital level The results of the study support the authors' hypothesis They find that FDI positively impacts economic growth, but only in countries with a minimum threshold stock of human capital This finding suggests that the ability of a host country to benefit from technology transfer via FDI depends on its capacity to absorb new technologies, which in turn depends on the level of human capital

Moreover, the authors find that FDI is a critical driver of technology progress They show that the contribution of FDI to economic growth is primarily through technology diffusion rather than capital accumulation The study by Borensztein, De Gregorio, and Lee (1998) provides strong empirical evidence supporting the view that FDI can enhance economic growth through technology transfer However, it also emphasizes that the ability of a country to absorb and take advantage of the technology brought by FDI is contingent on its human capital base This finding underscores the importance of investing in human capital development to maximize the benefits of FDI Similarly, Keller and Yeaple (2009) showed that foreign firms bring advanced technology to host countries, leading to productivity improvements in local firms In their paper, Keller and Yeaple (2009) investigate the role of multinational enterprises (MNEs) in driving productivity growth The authors use a comprehensive dataset of U.S manufacturing firms from 1987 to 1996, enabling them to perform a detailed examination of the impact of international trade and MNE activity on productivity The authors propose that MNEs can contribute to productivity growth in host countries by transferring advanced technologies from their home countries Moreover, they argue that this technology transfer can occur within the foreign firms themselves and spill over

to domestic firms in the host countries To test their hypothesis, the authors employ a structural model that accounts for endogeneity in firms' decisions to become MNEs They use a variety of firm-level characteristics as instruments, including firm size, productivity, and the extent of foreign competition The paper's main finding is that U.S MNEs contribute significantly to productivity growth, both domestically and abroad The authors find that a firm's decision to become an MNE strongly relates to its productivity, suggesting that the most productive firms self-select into MNE status

Moreover, the authors find evidence of significant technology spillovers from MNEs to domestic firms They show that a 10% increase in MNE activity in a sector leads to a 0.5% increase in total factor productivity among domestic firms This result suggests that MNEs are crucial in disseminating advanced technologies across borders The study by Keller and Yeaple (2009) provides robust empirical evidence that MNEs can enhance productivity growth by transferring advanced technologies from their home countries These findings underscore the importance of attracting FDI for economic development and highlight the role of MNEs in promoting international technology diffusion

However, many studies have found that the productivity-enhancing effects of FDI are not automatic but depend on specific conditions in host economies For instance, Alfaro et al (2004) found that the beneficial effects of FDI on growth are stronger in economies with well-developed financial markets Similarly, Blalock and Gertler (2008) argued that the productivity gains from FDI are more significant when local suppliers can absorb advanced foreign technologies

Some studies have reported negative or insignificant effects of FDI on productivity For example, Aitken and Harrison (1999) found no evidence of positive spillovers from FDI to local firms in Venezuela and even reported that foreign presence could reduce the productivity of domestic firms In this paper, Aitken and Harrison (1999) investigate the spillover effects of foreign direct investment (FDI) on domestic firms, using panel data from over 4,000 Venezuelan plants over 1976-1989 The authors hypothesize that FDI can lead to productivity spillovers to domestic firms through various channels, such as technology transfer, employee training, and increased competition They test this hypothesis by examining the relationship between the foreign equity participation ratio in a sector and the productivity performance of domestic plants To address potential endogeneity issues, the authors use a fixed effects model that controls for unobserved plant-specific characteristics that could influence productivity They also control for other factors of plant productivity, such as plant size,