European union foreign direct investment : the case of Thailand

Abstract

The European Union (EU) is the largest home region for foreign direct investment (FDI) the world. Interestingly, however, the EU has only 12 percent share of total FDI in Thailand. Therefore, this study explores what determinants have affected the decision-making processes of foreign firms, particularly EU firms, when investing in Thailand. This study can be give a fundamental idea for setting FDI policies in order to induce more FDI into Thailand. This study was conducted by following the FDI models of Pupphavesa and Pussarungsri (1994) and Wang and Swain (1995). In this study, annual time-series data during 1970-1997 were used. Two revised models, total FDI in Thailand, and FDI from the EU to Thailand, were employed in this study by using the Ordinary Least Squares (OLS) technique to estimate coefficients. Pupphavesa and Pussarungsri (1994) found that many factors such as size of domestic market, host country’s tariff rates and Thai and Japanese foreign exchange rate have been the main determinants to induce FDI into Thailand. Moreover, Wang and Swain (1995) found that size of domestic market, host country’s tariff rates, discount rate in host country, exchange rate and wages in host country, have been the main determinants to stimulate FDI from EU into Hungary and China. In terms of the results of the revised models in this research, it was found that total FDI in Thailand can be induced by many factors. Such factors are, for example, larger domestic market, increasing value of Thai exports to developed countries, weakened Thai Baht, lower Thai tariff rates and Thai low-wage workers. In particular reference to EU firms, factors such as larger domestic market, increasing value of Thai exports to EU, weakened Thai Baht, increasing EU countries’ growth rate, a lower Thai tariff rates and lower discount rate from the Bank of Thailand, will induce more FDI from EU into Thailand. The conclusion of this study suggests that some more relevant FDI policies should be set up in order to induce more FDI from the EU into Thailand. Such policies are, for example, lower tax duties on raw and essential materials, especially in the chemical industry, and establishing more bilateral and multilateral agreements with EU countries. There are some limitations to this study, however. For example, this study employs many economic factors to estimate in the models. Nevertheless, non-economic factors, such as geographical factor, language and culture, are not covered in this study, since such noneconomic factors cannot be fitted into the models.