The Important Role of Foreign Direct Investment In BRUNEI: Current Status and Future Direction - Research Paper Example

The Important Role of Foreign Direct Investment In BRUNEI: Current Status and Future Direction Backgroud to the Study Foreign Direct Investment (FDI) takes place when multinational enterprises attempt to exploit their oligopolistic advantages over domestic firms by internalising transactions within the firm which offers an advantage over external market transactions because of savings in transaction costs or because they can achieve better value appropriation or by avoiding uncertainty in the external pricing of information-intensive products (Choi and Jeon, 2007) In an effort to attract foreign direct investments (FDI), governments usually offer incentives such as trade policy concessions, financial assistance and tax breaks. It is generally believed that foreign direct investment can lead to job creation, increase in exports and thus increase in trade surpluses, increase in wage rates. As Davies and Ellies (2006) puts it tax subsidies are directly contingent on the multinational enterprise (MNE) satisfying various performance (PRs). Multinational enterprises may be allowed tax credits on the condition that they create at least 50 new jobs per year, that they export at least 70% of their output and that they maintain environmental protection and many others. Brunei, situated on the Northern part of the Borneo Island in Southeast Asia is one of the smallest countries in the Southeast Asian region. It has a land area of 5,765 square kilometres and a population of 340,200 inhabitants as at 2002. (Anaman, 2004: pp 778). Brunei’s economy is highly dependent on the export of oil and gas as the main source of revenue. For example oil and gas revenue contributed an average about 80.0% and 55.2% in the years 1971 to 1990 and 1991 to 2001 respectively. (Anaman, 2004: pp 778). According to Anaman (2004) the country took a positive upturn as a result of world market oil price shocks of the early to the middle 1970s and the early 1980s when global market oil prices were at record high levels. As a result the government established a virtually complete welfare system in the country (Anaman, 2004 Pp 778), (Nohlen et al, 2001: Pp 49) with free education (from primary school to University) and free health care system for all citizens. Following this development, the country was ranked 31st among 175 countries based on United Nations Development Programme human development index. Brunei remains the wealthiest country of the 57-member countries of the Organisation of Islamic countries in terms of per capita GDP. It is also the fourth richest country in Asia after Japan, Singapore and Hong Kong. (Anaman, 2004 : pp 778). The Brunei dollar ($B) exchange rate relative to the U.S dollar in May 2004 was US$0.59/$B. The Brunei dollar based on a parity agreement between Singapore and Brunei has also been at parity with the Singapore dollar since the 1960s. (Anaman, 2004: pp 778). Brunei has been facing a economic problems due to a stagnant economy since the mid- 1980s and due to issues related to government budget deficits for the majority of the years since independence in 1984. (Anaman, 2004: pp 778). Real GDP growth rate stood at an annual constant rate of 5,1% between 1971 to 1990 whereas the period 1991 to 2001 witnessed a drop in the GDP annual growth rate to –0.9%. The Asian Financial crises also sent negative shock waves to Brunei and the country witnessed a 14% drop in economic growth during the period 1997-1998 and the per capita real gross domestic product has been witnessing a constant drop since 1991. (Anaman, 2004: pp 779). Table one below shows estimated annual constant growth rates of selected macroeconomic variables for Brunei between the period 1971 to 2001 expressed in percentages based on the semi-logarithmic function. These figures show significant differences between the two periods with the period 1991 to 2001 showing very negative impacts on the economy. Source: Anaman (2004: pp 779). Policy makers have shown some concern to this slow growth rates in RGDP in the 1990s. the governments focus has been on the slow down of the economy in 1997 brought about by the recent Asian Financial crises, which began in Thailand. To this effect, the government established a Ministerial task Force of Economic in 1998, involving members of the public and private sector to discuss means of reviving the economy and developing a blue print for the development of long-term plans for economic growth and development. (Anaman, 2004: pp 779). The Brunei Economic Development Board (BEDB) was established in Novevember 2001 by the government to oversee the implementation of policies to establish sustainable economic growth and development in the country. The BDEC has as its main objective, the attraction of foreign investment into Brunei to undertake projects in different areas of the economy. However little Literature exists on how, when and why if any foreign direct investments have been made in Brunei. Also there is no study that produces an evaluation of how foreign direct investment has affected the economy of Brunei since the establishment of the Brunei Economic Development Board. Earlier Literature on Foreign Direct Investment has either focused on a different country or has treated a series of countries taken as a whole. Buckley et al (2007) studied the The impact of foreign ownership, local ownership and industry characteristics on spillover benefits from foreign direct investment in China. Their results show that some aspects of China’s status as a transition economy have helped its development process. They however, argue that it is possible for non-transition developing economies to implement similar policies. Hu and Simon (2007) also studied foreign direct investment and indigenous technological efforts in China. They find a negative relationship between indigenous Research and development efforts with foreign direct investment (FDI), that is a firm’s expenditure on research and development decreases with the amount of foreign direct investment it receives. This study aims at contribute by extending the Literature on Foreign Direct Investment to Brunei given the BEDC’s commitment in November 2001 to provide incentives that will attract FDI so as to improve economic growth. The aim of the study is therefore to investigate the role of foreign direct investment to the growth of the economy of Brunei by studying the relationship between macroeconomic variables and Foreign Direct Investment. Research Methodology and Design. The study will use time series data for macroeconomic variables such as GDP, GDP growth, Per capita GDP, Employment, Government spending, Government revenue, Exports, Imports have change over the five year period covering January 2002 to December 2005. This period has been selected because it covers five full years from the time when the BEDC committed itself to create incentives that would attract foreign direct investment to Brunei. The research question pertaining to the study can be structured as follows: How has FDI affected Economic growth in Brunei over the past five years? The study will also answer subsequent questions such as What is the impact of foreign direct investment on imports and exports? What is the impact of foreign direct investment on GDP growth? What is the impact of foreign direct investment on government revenue and expenditure? What is the role of FDI in creating jobs? By answering these subsequent questions we would have provided answers to the main research question, which is aimed at assessing FDI’s role in economic development. Data Set The data sets to be used in the study will include: GDP figures for the past five years, unemployment rates for the past five years, import and export figures over the last five years, government revenues from taxes, oil and gas, government expenditure on welfare, research and development etc. Also data on FDI inflow to Brunei for the five years under study is necessary. Data source. The International Monetary Fund (IMF) and World Bank report figures for unemployment, GDP, Tax revenue, oil revenue, imports and exports and FDI on all countries. The IMF and World Bank databases will serve as important sources for such data. Data Analysis The data will be analysed by setting up a linear regression equation with each macroeconomic variable identified above and running a linear regression to test for significance between the relationship between the variable and FDI. Setting the level of significance at 5% it will be possible to test for significant dependence of the variable on FDI. For example if we denote foreign direct investment at time t as FDIt as foreign direct investment at time t and GDPt as Gross domestic product at time t, then we can set up the following relationship between the two variables: measures the part of GDP that is not explained by Foreign direct investment, , which is also the slope of the regression line measures the sensitivity of GDP to foreign direct investment. To test for significance we set the level of significance at 5% and test for the following hypothesis: Null hypothesis: Gross domestic product is not dependent on foreign direct investment. Alternate hypothesis: Gross domestic product is dependent on foreign direct investment. we can write the hypothesis symbolically as follows: : : Setting a level of significance of 5%, we reject the null hypothesis that gross domestic product is dependent on foreign direct investment for values greater than 5% and we cannot reject for values less than or equal to 5%. REFERENCES Anaman K.A. (2004). Determinants of economic growth in Brunei Darussalam. Journal of Asian Economics. Vol. 15, pp 777-796. Davies R. B., Ellis C. J. (2006). Competition in taxes and performance requirements for foreign direct investment. European Economic Review. Vol. Nohlen, Dieter, Florian G., Christof H. (2001) Elections in Asia and the Pacific : A Data Handbook - Volume II: South East Asia, East Asia, and the South Pacific. Oxford: Oxford University Press. Oxford Scholarship Online. Pp 53. Choi J. J., Jeon B. N. (2007). Financial factors in foreign direct investments: A dynamic analysis of international data. Research In International Business And Finance. Vol. 21, Pp 1-18 Buckley P. J., Wang C., Clegg J. (2007). The impact of foreign ownership, local ownership and industry characteristics on spillover benefits from foreign direct investment in China. International Business Review. Read More