Some factors affecting economic growth of ten South-East Asian

countries

Econometrics Final Paper

Vu Hoang Linh

2018/01

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Abstract

This paper researches about three factors, which are Foreign Direct Investment,

Population and Human Capital, affecting economic growth of ten South-East Asian

countries (Brunei, Cambodia, Indonesia, Lao People's DR, Malaysia, Myanmar,

Philippines, Singapore, Thailand and Vietnam) on a regional level for the period of

2005 – 2014. It theoretically analyses the relation and makes use of a panel data set,

which is created by the author. Significant and positive results are found for the relation

between FDI, Population, Human Capital and economic growth in these ten countries.

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1. Introduction

South-East Asian countries (Brunei, Cambodia, Indonesia, Lao People's DR,

Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), nowadays known

as some of the world’s fastest developing economies, has experienced phenomenal

economic growth and development during the last decades. As they became the more

dominant players in the world economy during the years, it becomes more and more

interesting to try and explain this spectacular growth. This paper seeks to contribute to

this section of research and examines the relation between Foreign Direct Investments

(FDI), Population, Human Capital and economic growth of these ten countries and does

so on a regional level for the period 2005 -2014. To research the relationship, data for

each single country and variable for the period of 2005 - 2014 are gathered by the

author in order to make use of a panel data set which can be statistically analysed. The

data that is put in the data set originated from the World Bank, which collects statistics

of all countries in the world. The results from the data analysis suggest a positive and

significant relation between FDI, Population, Human Capital and economic growth. The

rest of the thesis is constructed as followed. In section 2, the research question is

elaborated along with the contribution of this thesis. In section 3, the research

methodology is explained and the model which is used is shown. In section 4 the

variables as they are mentioned in the model and the data from the panel data set are

clarified. In section 5, the main results are discussed. Finally, in section 6, conclusions

are drawn from the main results.

2. Research question

This research intends to investigate the influence of FDI, Population, Human

Capital on the economic growth of ten South-East Asian countries (Brunei, Cambodia,

Indonesia, Lao People's DR, Malaysia, Myanmar, Philippines, Singapore, Thailand and

Vietnam). Therefore the main research question is stated as:

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“How does FDI, Population, Human Capital influence the economic growth

in some South-East Asian countries?”

Considering the size of the South-East Asian economy, the fact that it plays an

influential and noteworthy role in the world economy and the significant effects FDI,

Population and Human Capital have had on these countries in the past emphasizes the

relevance of this topic.

3. Methodology

In this section the research methodology to perform the empirical analysis will

be explained. The main regression will be discussed and decomposed. Each variable

will be clarified and assumptions will be made about their effect in the regression as a

whole.

A regression equation is used to estimate the effect FDI, Population, Human

Capital have on economic growth as below.

Y = β0 + β1POP + β2FDI + β3 HC + u

The model is specified as follows:

Y: GDP per capita

POP: Population (in millions)

FDI: Foreign Direct Investment

HC: Human capital index, based on years of schooling and returns to education

U: Error

The main hypothesis is that the independent variable “FDI”, “POP” and

“HC”will have positive, and significant, effects on the dependent variable “economic

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growth” (GDP) which would represent the importance of FDI, Population and Human

Capital in these South-East Asian countries economies.

4. Data

In this section, each variable that is in the regression will be described, how it is

calculated in order to be used in the regression and how the dataset was made and what

each variable comprises of in the used database.

A brief discussion of the Variables:

- GDP: GDP per capita is gross domestic product divided by

midyear population. GDP is the sum of gross value added by all resident

producers in the economy plus any product taxes and minus any subsidies not

included in the value of the products.”(World Bank) The variable is measured in

constant 2011 US dollars.

- FDI: Foreign direct investment refers to direct investment equity

flows in the reporting country. It is the sum of equity capital, reinvestment of

earnings, and other capital. Direct investment is a category of cross- border

investment associated with a resident in one economy having control or a

significant degree of influence on the management of an enterprise that is

resident in another economy.” (Bank) The variable is measured in current U.S

dollars.

- Human capital: Human capital measured by secondary school

enrolment as percentage of gross enrolment ratio. That is the ratio of total

enrollment regardless of age group that officially corresponds to the level of

education. (World Bank) A higher level of human capital is expected to increase

the potential growth effect of FDI.

- Population: Population per country refers to the total number of

people which reside in the specific time period in the specific country. These

numbers are obtained via surveys and are an estimation made by the World

Bank which leads the numbers to be rounded (measured in millions in this

paper). Although this does not give an exact number, it is specific enough to see

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regional differences and to provide the dataset with growth rates with multiple

decimals.

All of the data is provided by the World Bank. The data is collected for ten

South-East Asian countries which are Brunei, Cambodia, Indonesia, Lao People's DR,

Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam for the period 2005-

2014.

5. Main results and discussion

In this section, the dataset, which was manually created by combining all the

yearly data from the ten South-East Asian countries (Brunei, Cambodia, Indonesia, Lao

People's DR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), is

statistically examined by applying the model that was stated in the methodology section

above. The results from that regression are represented in a table and will be discussed

and linked to the hypothesis that has been covered. In this manner each variable will be

discussed individually.

a) Regression result

The regression that is stated in the methodology section is the base for the

statistical analysis of the panel data that has been gathered for the time period 2005 until

2014. Three different types of regressions have been generated to see what happens to

the result. The outcome of the statistical analysis can be seen below (Please see the

result in the attached file in the email I sent you).

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From the result above, F-test is used to compare about the performance between

POLS regression and Fixed Effect regression. It can be seen that because Probability is

0.0000, which means Fixed Effect regression is better than POLS regression at 99%.

Breusach and Pagan test is used to compare about the performance between Random

Effect regression and POLS regression. And according to the result, the probability is

0.0000, so it can be believed that Random Effect regression is better than POLS

regression at 99%. Finally, we use Hausman test to compare about the performance

between Fixed Effect regression and Random Effect regression. The result of the

probability is 0.0000, which means Fixed Effect regression is better than Random Effect

regression at 99%. To sum up, it is clear to see that the result of Fixed Effect regression

is the most reliable and suitable for this research data. Therefore, the results drawn by

Fixed Effect will be used to analyse the relation between FDI, Population, Human

Capital and economic growth of t South-East Asian countries.

Therefore, the second regression, which is shown below, is the final outcome of

the statistical analysis and shows the results from the equation on which the research is

based on.

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A multiple regression was calculated to predict GDP based on FDI, Population and

Human Capital. A significant regression equation was found F(3.87) = 239.75,

p<0.0000), with an R2 of 0.7542.

GDP = -2425430 + 53162.37POP + 3.8547FDI – 132919.7HC + u

It can be said that if the population increases 1 unit, GDP will increase

53162.37 units. The same happens with FDI, if FDI goes up 1 unit, GDP will grow up

3.8547 units. Therefore, it can be strongly affirmed that Population and FDI have the

strong positive correlation with economic growth (shown by GDP). However, from the

result, it is clear to see that Human Capital has negative relation with these countries

economic growth, which means if Human Capital increases 1 unit, GDP will decrease

132919.75 units.

b) Discussion

It is easy to see that the larger growth rate in the population would mean a larger

part of the population is ready to join the working population of a country. This larger

accessibility should result in more economic growth. In the result table above, the

coefficients of variance Population is positive as in accordance with the theory which

suggests a positive relation between the labour input of a country and its economic

growth.

The regression result also indicates that FDI has an overall positive effect on

economic growth. It may promote economic growth significantly in the process of

development. It is easy to understand that the more flow of investment a country

receives from other countries, the more chance it has to develop its economy. For

developing countries, FDI is considered to be a way to transfer technology and capital

from other developing and especially developed countries. When FDI comes to a

domestic country, that firm receives competitive advantage due to the usage of new

knowledge, experience, ways of production and management. Therefore, FDI is

considered to be one of the major channels of contributing to ecnonomic growth.

Normally, level of Human Capital and is expected to be positive (+) in

correlation with economic growth. It means that the more educated population can

contribute more to an economy which should cause larger economic growth, through for

example knowledge and know-how (Borensztein, De Gregorio, & Lee, 1998). However,

the variable shows a negative relation which seem to contradict with the theory and are

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insignificant. This insignificance could be interpreted as such that the relation that is

predicted by the theory is inconclusive in the panel data when the contradiction is also

taken into account. In another way, it can be explained that these ten South-East Asian

countries are developing countries which are not attractive enough for some of the

talented people. If they are genius, they often seek for better opportunities from

developed countries where they can demonstrate the best of what they have and be paid

worthily. This phenomenon is called Brain Drain in most of developing countries.

Moreover, the fact is that lots of educated people nowadays are umemployed because of

the lack of jobs. In some developing countries, it can not be said that if you have the

degree, you can have a job. Therefore, though the number of educated people increases,

it does not mean they will or can contribute to home country economy.

6. Conclusion

This paper has studies the relation between Population, FDI, Human Capital and

economic growth in ten South-East Asian countries (Brunei, Cambodia, Indonesia, Lao

People's DR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) on a

country level for the period 2005-2014. The results that are obtained suggest a positive

relation between Population, FDI and economic growth and this relation is found to be

statistically significant. It can be stated that Population and FDI are the large

contributors to economic growth relative to the contribution of the expand of workforce

and domestic investment from foreign countries. However, it also drew that there is a

negative correlation between Human Captial and economic growth, which means

though the number of educated people increases, it does not mean they will or can

contribute to home country economy.

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References

Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How does foreign direct

investment affect economic growth? . Journal of International Economics,

45(1), pp. 115-135.

World Bank Group. (2016). The World Bank. Retrieved in 2016, from

http://www.worldbank.org/en/country