Trade-off between foreign and domestic investment: Theoretical analysis and empirical investigation for the case of Thailand

This thesis examines the long-run relationship between foreign direct investment (FDI) and domestic investment in Thailand. To explore this relationship, the first part of the thesis develops a sectoral partial equilibrium model that assumes Cournot oligopolistic competition and allows for two important effects emphasized in the industrial organization literature on FDI: technological superiority of foreign firms and spillover of technological knowledge from foreign to domestic firms.; The basic model implies that FDI would completely crowd out domestic investment (i.e., one-to-one replacement) if foreign and domestic firms are identical and there is no spillover effect on domestic firms. FDI would also crowd out domestic investment if foreign firms employ superior technology in the production process and are able to completely appropriate their technology—so that there is no spillover associated with FDL The extent of the crowding out effect in this case would depend on the technological gap between foreign and domestic firms and the difference in real wage-rental ratio. The effect of FDI on domestic investment is, however, ambiguous if the superior technology of foreign firms benefits domestic firms via technological spillover.; In the second part of the thesis, the long-run relationship implied by the theoretical model is implemented empirically for Thailand, using panel data for eight sectors of the economy for the period from 1971 to 1995. The main finding of the empirical analysis is that FDI has a significantly positive long-run effect on domestic; investment in Thailand. This result holds for all the cases examined, using two different estimation methods: the Dynamic Ordinary Least Square (DOLS), and the Seemingly Unrelated Regression (SUR) estimation. An important implication of this empirical result is that the spillover effects associated with FDI in Thailand outweighed its crowding out effects.