The Impact of China's Foreign Direct Investment on Economic Growth of Lao PDR

Introduction China has been well known as one of the largest recipients of foreign direct investment (FDI) among developing countries since the mid-1990s, and a global manufacturing hub as well as the second largest investing countries in the world (UNCTAD, 2018). Despite the global slowdown of capital flow, the trends in China’s overseas investment kept a strong growth momentum with the boost of the Belt and Road Initiative, with costs more than 1 trillion US dollars in the construction of railways, roads, bridges and ports across more than 65 countries and regions (UNCTAD, 2018). Laos is a country in Southeast Asia, and has joined China’s Belt and Road Initiative, under the Belt and Road Initiative, making China become the biggest foreign investor in Laos, Capital inflows from Chinese foreign direct investment (FDI) to Laos accounting for 25.2 per cent of the total FDI of the country (Kang, 2019). Chinese investment in Laos are mostly in the resource-related sector, such as mining and hydropower, which two sectors constituted more than 70 per cent of total Chinese investment. From 2005 to 2018, China had over 840 projects in Laos, with a total investment of over 11 billion US dollars. The projects have created a number of generate jobs for Lao nationals. According to World Bank 2018, more than 180 Chinese business units are now doing business at the Development of Special Economic Zones (SEZs) in Laos. The SEZs helps generate jobs and incomes for Lao people, with a record of 11,000 workers in 2014 to 17,000 in 2017 (WB, 2018) Despite Chinese investment have created job opportunities for Lao people, reduced labor migration, contributed to social activities and improved infrastructure. They are also having negative impacts on Lao people. For example[1] Laos-China Railway Project under “China’s Belt and Road Initiative”, more than 4,400 families negatively affected by the project, over 3,300 buildings and more than 3,800 hectares of land, as well as crops and trees also impacted. In addition, Chinese banana plantation negatively impacted on environment and Lao economy by using hazardous chemicals for productions. For example, in 2018, [2]Chinese- owned banana firm released chemicals into a river, killed over 300 kilograms of fishes, local villagers can’t catch fish and bathe in the polluted stream. The chemical leaks from the banana plantations into the river have been blamed for this environmental catastrophe and disrupted appropriate agriculture in local community. On the other hand, [3]the employment of local workers works at the Chinese plantation still receive a low wage of about 50,000 kip (about 7 US dollars) a day. In view of the above discussion, it could be seen that China’s FDI has both positive and negative effects on Lao economy. In other words, it has both advantages and disadvantages on Lao economy. However, the net effect of China’s FDI on Laos in terms of GDP growth remains unknown since not many empirical studies have been undertaken in this regard. Therefore, the research aims to fill this knowledge gap through a case study of Lao PDR. The researcher will focus on the impact of Chinese FDI on economic growth in Laos. Will Chinese FDI inflows stimulate economic growth?. A vital question that will be elaborated in this research Literature Review Theoretical Framework There are many theoretical papers that examine foreign direct investment (FDI) impacts on economic growth in host countries. Some literature identifies that FDI inflows can use a positive influence on economic growth through the transfer of new technology and spillover efficiency. In addition, economists believe that foreign direct investment is an important component of economic development in all country, especially in the developing countries and both governments of developed and developing countries also believed that FDI can help them get through stagnation and even circumvent the poverty trap (Brooks et al., 2010). Theoretically, FDI is not only a source of capital funds and foreign exchange, but also a dynamic and efficient vehicle to secure the much needed industrial technology, managerial expertise and marketing knowledge and networks to improve growth, employment, productivity and export performance. FDI inflows could contribute to high level of investment and employment generation, raising productivity and skill development and sharply improve competitiveness (Mesthrie, 2008). FDI can create technological positive externalities and knowledge spillovers for the local economy (Ang, 2008). And (Rahman, 2012) mentioned the role of the foreign capitals in gaining an increased GDP rate through contribution to human resources development, capital formation, and raising the level of competitiveness on the local market and FDI as a key source of finance for developing economies. Foreign direct investment (FDI) triggers technology spillovers, supports human capital formation and international trade integration. FDI helps create a more competitive business environment and enhances enterprise development (Mencinger, 2003). According to the Solow economic growth model, the capital stock of the country expands due to FDI inflows, and the country would experience economic growth in the short run which is known as capital widening. On the other hand, an endogenous growth model adds a further dimension the latest technology and managerial skills in developed countries can be transferred to all countries via FDI which would also trigger productivity and economic growth in host countries. Review of Related Literature Bhatt (2000) examined foreign direct investment on ASEAN economy. He found that there was a positive influence of the size of the economy (GNP) on FDI inflows in Indonesia and Singapore. In addition, the investment-GNP ratio was a significant factor for FDI inflows in Malaysia, openness of the economy also was significant factor in attracting FDI for Malaysia, the Philippines, Thailand and Cambodia. (Abdullah, 2010) studied the factors of FDI into ASEAN and Latin America in the period 1980-1998. He found that the exchange rate and market sizes were factors influencing significantly on FDI flows into Latin America. Meanwhile, FDI flows into ASEAN were only affected by the exchange rate. Alfaro, (2003), and (Sayek, 2010) analyzed FDI effects on growth in the sectors of primary, manufacturing and service. They used ordinary least square (OLS) for cross-section regressions with 47 countries and data from 1981-1999. They found that FDI in the primary sector tend to have a negative effect on growth, while the investment in manufacturing has a positive one, and evidence from the service sector was ambiguous. (Borensztein, 1997) studied the FDI effect on economic growth in a cross-country regression framework, using data on FDI flows from industrial countries in 69 developing countries over the last two decades. The findings suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. Thus, FDI contributes to economic growth only when a sufficient absorptive capability of the advanced technologies is available in the host economy. [1] Vientiane Times “Laos-China railway ‘20.3 percent complete’, compensation still unpaid”, February 7, 2018 available at: http://jclao.com/laos-china-railway-20-3-percent-complete-compensation-still-unpaid/ [2] Phouvong and Richard Finney, “Chemicals Dumped in River Kill Fish in Laos”, November 30, 2018 available at: https://www.rfa.org/english/news/laos/river-11302018161738.html [3] The banana industry in Laos: dangerous working conditions and environmental destruction, April 20, 2016, Lao workers receive a low wage of about 50,000 kip (U.S. $6.25) a day, available at: http://www.bananalink.org.uk/banana-industry-laos-dangerous-working-conditions-and-environmental-destructio