The impacts of Chinese direct investment in Thailand on the Sino-Thai bilateral trade
| Date | 01 February 2016 |
| Published date | 01 February 2016 |
| DOI | https://doi.org/10.1108/JCEFTS-07-2015-0018 |
| Pages | 24-39 |
| Author | Mathavee Keorite,Huang Pan |
| Subject Matter | Economics,International economics |
The impacts of Chinese direct
investment in Thailand on the
Sino-Thai bilateral trade
Mathavee Keorite and Huang Pan
School of Economics, Xiamen University, Xiamen, China
Abstract
Purpose – The purpose of this paper is to investigate the impacts of Chinese direct investment in
Thailand on the Sino-Thai bilateral trade. The economic relationship between Thailand and China has
been strengthened through both trade and Chinese direct investment in Thailand for past decades.
Design/methodology/approach – AR(p) model was used to examine the effects of Chinese direct
investment on both Thailand exports and Thailand imports.
Findings – This paper shows that Chinese direct investment in Thailand has contributed to the
decrease of intermediate goods of Thailand exports to China. On the other hand, Chinese direct
investment has contributed to the increase of nished products of Thailand exports to China. In
addition, Chinese direct investment in Thailand has contributed to increase of Thailand imports from
China. This suggests that strengthening cooperation for economic growth in either of the two countries
can generate mutual benets through trade.
Research limitations/implications – The studies focus only on the effects of foreign direct
investment (FDI) on trade, while the effects of trade on FDI are neglected.
Practical implications – Policies should be devised to reduce reliance on exports of raw and
semi-raw materials by turning on to nal products with more value-added products and should improve
the equality of infrastructure in the country to attract more FDI into the economy.
Originality/value – This paper provides evidence that Chinese direct investment in Thailand is an
important determinant factor of the rapid growth of the bilateral trade. It also shows that the
appreciation of Thai Baht against Chinese RMB is associated with a decrease in Thailand trade surplus
in the bilateral trade.
Keywords Foreign direct investment, Thailand, Exchange rate, Bilateral trade,
Chinese direct investment
Paper type Research paper
1. Introduction
Over the past 10 years, trade between Thailand and People Republic of China (PRC) has
grown approximately sevenfold, outstripping China’s trade with the rest of ASEAN and
other countries. China is now Thailand’s largest trading partner (MOC, 2014). This has
not come about by accident but from a strong commitment on both sides to
strengthening bilateral ties. One of the rst major initiatives was in 1985 when the two
countries signed an Agreement for the Promotion and Protection of Investment. This
gave Thailand a head start over other ASEAN countries, as it supported strong growth
in two-way investment and closer integration in supply chains such as in manufacturing
The authors thank the anonymous referee for helpful comments. All remaining errors or
omissions are the responsibility of the authors.
The current issue and full text archive of this journal is available on Emerald Insight at:
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JCEFTS
9,1
24
Journalof Chinese Economic and
ForeignTrade Studies
Vol.9 No. 1, 2016
pp.24-39
©Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-07-2015-0018
and agriculture. China is now the second-biggest foreign investor in Thailand after
Japan, while Thai companies have invested in thousands of projects in China over the
past decade. According to the report of MOC (2014), this two-way investment has led to
major structural changes in the bilateral trade, with computer components, electronics
and chemicals now major export items from both countries. There are many factors
contributing to the enlargement of the rapid growth of Sino-Thai trade, such as the
technological progress, economic development and China openness over the past three
decades. Theoretically, foreign direct investment (FDI) may generate trade creation or
trade diversion. Even though there are numerous studies on the relationship between
FDI and trade, the relations between FDI and trade remain a controversial topic. Some
studies suggest that trade diversion effect dominates trade creation effect. Some studies
point out that the factor and product movements are substitutes rather than
complements (Mundell, 1957). FDI complementarity may also arise in other
circumstances. For instance, it may lead to higher demand for imported raw materials
and thus lead to greater FDI in primary producers (Latin America may benet from
growth in China in this way, and some of the FDI will come from China itself). Xing
(2007) analyzes the dynamic changes of China’s intra-industry trade with its major
trading partners, Japan and the USA. He suggests that FDI from those two countries
promoted their bilateral intra-industry trade with China.
Some studies suggest that trade diversion effect dominates trade creation effect.
Mundell (1957) points out that the factor and product movements are substitutes rather
than complements. Zhang and Hock (1996) examines the relationship between
international trade and the inows of FDI in ASEAN countries and China. They argue
that FDI is not a signicant factor affecting trade in these countries. Kim and Kang
(1997) also conclude that there is no signicant positive effect of outward FDI on exports
based on their empirical study of Japan. Morikawa (1998) concentrates his study on the
effects of Japanese outward direct investment on trade balances, and he suggests that
FDI decreased Japanese trade surplus in the later half of the 1980s. Blonigen (2001)
argues that the substitution effects are relatively easy to identify in product-level.
Azman-Saini et al. (2010) investigate the systemic link between economic freedom, FDI
and economic growth in a panel of 85 countries. The empirical results reveal that FDI by
itself has no direct (positive) effect on output growth.
However, there are no few studies suggesting the contrary. Eaton and Tamura (1994)
use the US and Japan data to examine the relationship between FDI and trade. They nd
positive correlations between the error terms from the export and outward FDI
equations. In particular, Japanese outward FDI is more correlated to future exports than
past exports. On the other hand, US outward FDI is more correlated with past exports.
Hsiao and Hsiao (2006) examines the Granger causality relations between gross
domestic product (GDP), exports and FDI in eight rapidly developing East and
Southeast Asian economies – China, Korea, Taiwan, Hong Kong, Singapore, Malaysia,
Philippines and Thailand. The results reveal that FDI has unidirectional effects on GDP
directly and also indirectly through exports. Xing (2007) analyzes the dynamic changes
in China’s intra-industry trade with its major trading partners, Japan and the USA. The
empirical results show that Japanese direct investment played a signicant role in
enhancing the bilateral intra-industry trade. However, it nds no evidence that the US
direct investment contributed to the growth of Sino-US intra-industry trade. James and
Ramstetter (2008) examines the important contributions of foreign multinational
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Impacts of
Chinese direct
investment in
Thailand
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