Conclusions

The macroeconomic performance of the economies in the Greater Mekong subregion remained strong in 2005. Although GDP growth was lower than in the previous year, it averaged a robust 7.9% as most of the economies, with the notable exception of Thailand, continued their upward trend. Inflationary pressures have increased in recent years because of higher oil and food prices, but they are in the single digits. The fiscal balance remained stable overall. Net capital inflows, with a significant contribution from FDI, are sufficient to finance current account deficits and foreign exchange reserves remain at comfortable levels.

As transitional economies, the CLV countries require substantial amounts of investment to transform their economies and meet the economic, social, and other developmental goals that they have set themselves. The levels of domestic savings in these countries are far from adequate to meet these investment requirements. Support from bilateral and multilateral development agencies in the form of grants, loans (both soft and market-based) and technical assistance have an important role to play in this process. Furthermore, external debt levels in Cambodia and the Lao PDR in particular are already quite high, so borrowings alone cannot be relied upon to fill resource gaps. This is where FDI comes in.

FDI can provide the resources to increase investment beyond domestic savings levels without adding to the external debt burden. But it can do much more than this. FDI can bring with it firm-specific knowledge in the form of technology, managerial expertise, marketing knowhow, and other things such as these that cannot easily be leased or purchased on the market by the host country. Indeed this may well be the key advantage provided by FDI. After all, ideas can be as important as physical inputs, and an economy can grow just because new ideas beget more new ideas, as postulated by endogenous growth theory.

Combining the direct contribution to growth through investment with the various indirect spillover effects suggests that FDI has the potential to play an important catalytic role in countries in the process of transition from command to market economies.

The experience of all three countries confirms this. FDI has played an important role in promoting GDP growth, export expansion and employment generation in the CLV countries. There is empirical evidence that FDI has contributed to productivity growth in Viet Nam, and a host of anecdotal evidence that it has done the same in Cambodia and the Lao PDR.

In Cambodia, the rapid expansion of FDI-driven clothing exports has become a major source of employment and income for women, reducing poverty and helping narrow the vast urban-rural income gap. Recently, FDI has also begun expanding into other labor-intensive export industries, such as shoes, toys, and wood products, which is further contributing to employment generation.

In the Lao PDR, foreign investment in the hydroelectric power and mining sectors are boosting GDP growth and creating substantial employment opportunities in this landlocked country. Furthermore, through taxes, royalties and dividends, the citizens of the Lao PDR stand to be significant beneficiaries of such FDI projects, as long as these revenue streams are well managed. FDI is also behind the rapid increase in mining-related exports, and there appears to be vast untapped potential in this area.

FDI has played an important role in transforming the economy of Viet Nam. There is a substantial amount of evidence that highlights the role that FDI has played in driving growth in GDP, exports and employment, as well as positive spillover effects in the economy through productivity growth. As long as the investment climate remains open and receptive, Viet Nam has the potential to further diversify FDI inflows, shifting it from the light-manufacturing sector to assembly and related activities in the electronics industry. If this happens, Viet Nam looks well placed to emulate the spectacular developmental achievements of its more advanced ASEAN neighbors.

To a large extent, the role that FDI can play in assisting in the transformation of these countries is limited by inherent deficiencies in the investment environment„Ÿpoor physical infrastructure, limited domestic capacity in the form of human capital and entrepreneurial skills, and weaknesses in legal, judicial, and administrative structures. To varying degrees, policy uncertainty and perceived political interference or inability has affected perceptions of risk and hindered investment inflows as well. These are long-term developmental challenges that the CLV countries need to address, and significant progress has been made since the reform process began around the mid-1980s. Much more remains to be done in the future, however, if these countries are to attract the amounts of FDI that their more advanced ASEAN neighbors had done transforming and modernizing their in economies.

The evidence presented here suggests a number of other changes that could be introduced in reforming the system of incentives. The experience of the Lao PDR highlights the fact that incentives geared to promote investment in less developed regions have been rather ineffective. Since there is a real cost associated with administering such a system, and a perceived cost to investors of dealing with a complicated maze of preferences, there is a strong case to be made for simplifying the system by neutralizing it. Furthermore, there will be no loss in benefit since the current system of preferential i ntives based on location has not resulted in any change in the spatial distribution of FDI. The same arguments would equally apply to EPZs in Viet Nam that are designed to attract investment into less developed regions.

There is also a need to ensure that so-called "one-stop shops" for foreign investors operate as such and are effective in practice. In the Lao PDR for instance, FIMC is supposed to play this role but because the process has not been integrated and coordinated across government departments, FIMC has become a "one-more-stop shop", and this serves to delay applications processes to the point where a significant amount of FDI is being denied the country.

Addressing these short-term policy issues are likely to produce immediate results in terms of the volume of FDI. Addressing the longer-term challenges particularly in relation to infrastructure, human capital, and legal, judicial, and administrative structures will affect not only the volume but also the quality and industrial composition of FDI. Longer-term investments in a more diversified array of sectors can be expected, as well as greater productiv ity and other spillovers to the domestic economy. Through the direct involvement of multilateral development agencies such as ADB and the World Bank or through public-private partnerships that are facilitated by them, FDI may also be able to play an important role in addressing these challenges. This is already happening today in the region, with road, energy, and telecommunications infrastructure through the GMS Economic Cooperation program of ADB for instance, as well as other broader regional cooperation initiatives. But the role that FDI can play in this process has yet to be fully tapped.

Comment(s)

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1. Hong, Sung Ho
   (posted 05 November 2006 / 07:05:25 PM)
   
   I think that the country needs to be in the position where they can control the FDI, in other words, they have to attract the foreign countries' investors in many area of industries.
   
   Having a FDI on what the investors think they can have most profit. It may not be the same industry that the country who is getting a FDI wants to improve on.
   
   In the long run, in order to trigger the spillover or synergy effect, the country needs to have a specific and long term economic growth plan so that they know what industry needs FDI. I think that a country that is getting a FDI needs to diversify to attract foreign investors and more importantly they (government) needs to have a long term economic plans.