DETERMINANTS OF INWARD FOREIGN DIRECT INVESTMENT FROM CHINA, SOUTH KOREA AND JAPAN AND ITS CONTRIBUTION TO ECONOMIC GROWTH IN CAMBODIA

Abstract

Foreign direct investment (FDI) has increased globally since the late 1980s. It increased rapidly in Cambodia in the past two decades. This paper aims to examine the determinants of inward FDI from China, South Korea and Japan and its contribution to economic growth in Cambodia during 1994-2014, using both time series analysis by country and the panel data analysis. The results on the determinants of FDI show that real GDP, bilateral trade between the countries, exchange rate, inflation rate, and relative labor productivity are statistically significant and have positive impact on inward FDI flows into Cambodia, and inward FDI from those three investing countries contribute to Cambodia’s economic growth respectively. The findings from the study on the impact of FDI indicate that there are positive relationships between inward FDI from China, South Korea and Japan and Cambodia’s economic growth. Labor force, domestic investment, human capital, infrastructure and trade openness are the important factors leading to economic growth in Cambodia when receiving inward FDI from those three investing countries. However, the positive effect on the Cambodia’s economic growth could have been greater if the country had greater capability to absorb advanced technology from the FDI. Besides, Cambodian policy makers should focus more on the policies that are friendly and attractive to inward FDI. Moreover, to attract more inward FDI, the government should promote encouraging environment for trade and investment for both local and foreign investors, remove restrictions against FDI and develop physical infrastructure. Finally, policy makers should not forget the development of human capital because the variable represents the absorption capacity from which the Cambodian economy could benefit from the FDI.