HOW DOES THE RELATIVE GOVERNMENT QUALITY AFFECT TO FOREIGN DIRECT INVESTMENT INFLOW INTO THAILAND

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HOW DOES THE RELATIVE GOVERNMENT QUALITY AFFECT TO FOREIGN DIRECT INVESTMENT INFLOW INTO THAILAND

PUTTICHA PIRIYASATHIT

MASTER OF ECONOMICS IN APPLIED ECONOMICS MAEJO UNIVERSITY

2022

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HOW DOES THE RELATIVE GOVERNMENT QUALITY AFFECT TO FOREIGN DIRECT INVESTMENT INFLOW INTO THAILAND

PUTTICHA PIRIYASATHIT

A THESIS SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ECONOMICS IN APPLIED ECONOMICS

ACADEMIC ADMINISTRATION AND DEVELOPMENT MAEJO UNIVERSITY 2022

Copyright of Maejo University

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HOW DOES THE RELATIVE GOVERNMENT QUALITY AFFECT TO FOREIGN DIRECT INVESTMENT INFLOW INTO THAILAND

PUTTICHA PIRIYASATHIT

THIS THESIS HAS BEEN APPROVED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ECONOMICS

IN APPLIED ECONOMICS

APPROVED BY Advisory Committee

Chair

(Assistant Professor Dr. Jorge Fidel Barahona Caceres) .../.../ ...

Committee

(Assistant Professor Dr. Wanvilai Chulaphan) .../.../ ...

Committee

(Dr. Kantaporn Chuangchid) .../.../ ...

Program Chair, Master of Economics

in Applied Economics (Assistant Professor Dr. Ke Nunthasen) .../.../ ...

CERTIFIED BY THE OFFICE OF

ACADEMIC ADMINISTRATION (Associate Professor Dr. Yanin Opatpatanakit)

AND DEVELOPMENT Vice President

.../.../ ...

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C

ABSTRACT (THAI)

ชื่อเรื่อง คุณภาพโดยเปรียบเทียบของรัฐบาลส่งผลอย่างไรต่อการลงทุนโดยตรง จากต่างประเทศในประเทศไทย

ชื่อผู้เขียน นางสาวพุทธิชา พิริยสถิต

ชื่อปริญญา เศรษฐศาสตรมหาบัณฑิต สาขาวิชาเศรษฐศาสตร์ประยุกต์

อาจารย์ที่ปรึกษาหลัก Assistant Professor Dr.Jorge Fidel Barahona Caceres

บทคัดย่อ

บทความนี้วิเคราะห์ผลกระทบของคุณภาพโดยเปรียบเทียบของรัฐบาลต่อการลงทุน โดยตรงจากต่างประเทศ (FDI) ที่ไหลเข้าจาก 11 ประเทศต้นทางเข้าสู่ประเทศไทยในช่วงปี พ.ศ.

2548 ถึงปี พ.ศ. 2562 เพื่อศึกษาคุณภาพโดยเปรียบเทียบของรัฐบาลเราได้ศึกษาผ่านตัวชี้วัดคุณภาพ ของรัฐบาล (เสถียรภาพทางการเมือง, ประสิทธิผลของรัฐบาล, การควบคุมการทุจริต และหลักนิติ

ธรรม) โดยใช้แบบจำลองแรงโน้มถ่วง (Gravity model) การศึกษาครั้งนี้พบว่าคุณภาพโดย เปรียบเทียบของตัวชี้วัดคุณภาพของรัฐบาล 2 ใน 4 ตัวชี้วัดที่อ้างอิงถึงคุณภาพของรัฐบาลระหว่าง ประเทศต้นทางการลงทุนและประเทศไทย คือ คุณภาพโดยเปรียบเทียบของประสิทธิผลของรัฐบาล และคุณภาพโดยเปรียบเทียบของหลักนิติธรรมมีผลในเชิงบวกต่อการไหลเข้าของการลงทุนโดยตรง จากต่างประเทศมายังประเทศไทย จากการศึกษาครั้งนี้ผู้กำหนดนโยบายสามารถนำไปพิจารณาเพื่อ กำหนดนโยบายในการปรับปรุงคุณภาพของรัฐบาล

คำสำคัญ : การลงทุนโดยตรงจากต่างประเทศ, คุณภาพของรัฐบาล, Gravity Model

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ABSTRACT (ENGLISH)

Title HOW DOES THE RELATIVE GOVERNMENT

QUALITY AFFECT TO FOREIGN DIRECT INVESTMENT INFLOW INTO THAILAND

Author Miss Putticha Piriyasathit

Degree Master of Economics in Applied Economics Advisory Committee Chairperson Assistant Professor Dr. Jorge Fidel Barahona

Caceres

ABSTRACT

This paper analyzes the impact of relative government quality on Foreign direct investment (FDI) inflows from eleven source countries into Thailand over the period 2005 to 2019. To examine the gap of relative in government quality indicators (political stability, government effectiveness, control of corruption and rule of law) by using a panel Gravity model. The empirical results found two of four indicators that refer relative quality of government between source countries and Thailand are relative government effective and rule of law have positive impact on FDI inflow into Thailand. Based on our study policy maker can launch policies to improve quality of government.

Keywords : Foreign Direct Investment, Government Quality, Gravity Model

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ACKNOWLEDGE MENTS

ACKNOWLEDGEMENTS

I would like to express my very great appreciation to my thesis advisors, Asst.

Prof. Dr. Jorge Fidel Barahona Caceres for his valuable suggestions during develop this research work. I'm grateful for his support time and knowledge. This research it would not have been possible without the exceptional support of my thesis advisors. In addition, I am also grateful for co-advisor, Asst. Prof. Dr. Wanvilai Chulaphan and Dr.

Kantaporn Chuangchid for their insightful comments and suggestions.

Finally, I wish to thank my parents and my friends for their support and encouragement throughout my thesis. My heartfelt thanks.

Putticha Piriyasathit

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LIST OF TABLES

Page Table 1 Thailand’s 13th successful military coups. ... 7 Table 1 (Continue) Thailand’s 13th successful military coups. ... 8 Table 2 Relative quality of Political stability indicators between eleven source countries of FDI and Thailand in 2019. ... 23 Table 3 Relative quality of rule of law indicators between eleven source countries of FDI and Thailand in 2019. ... 24 Table 4 Relative quality of government effectiveness indicators between top eleven source countries of FDI and Thailand in 2019. ... 25 Table 5 Relative quality of control of corruption indicators between top eleven source countries of FDI and Thailand in 2019. ... 26 Table 6 Relative quality of voice and accountability indicators between top eleven source countries of FDI and Thailand in 2019. ... 27 Table 7 Relative quality of regulatory quality indicators between top eleven source countries of FDI and Thailand in 2019. ... 28 Table 8 Summary main finding of political stability impact on foreign direct

investment. ... 31 Table 9 Summary main finding of relationship between governance indicators and foreign direct investment. ... 34 Table 10 Summary the improve and develop of good governance indicators. ... 37 Table 11 Summary gravity method and data of government quality and foreign direct investment. ... 38 Table 12 Result of relative political stability indicator on FDI inflow of Thailand in gravity model estimates. ... 49

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Table 13 Result of relative rule of law indicator on FDI inflow of Thailand in gravity model estimates. ... 50 Table 14 Result of relative government effectiveness indicator on FDI inflow of Thailand in gravity model estimates. ... 51 Table 15 Result of relative control of corruption indicator on FDI inflow of Thailand in gravity model estimates. ... 52

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LIST OF FIGURES

Page

Figure 1 Political stability indicator of Thailand in 2005 to 2019 ... 10

Figure 2 Rule of Law indicator of Thailand in 2005 to 2019 ... 11

Figure 3 Government effectiveness indicator of Thailand in 2005 to 2019 ... 11

Figure 4 Control of corruption indicator of Thailand in 2005 to 2019 ... 12

Figure 5 Voice and accountability indicator of Thailand in 2005 to 2019 ... 13

Figure 6 Regulatory quality indicator of Thailand in 2005 to 2019 ... 14

Figure 7 Foreign direct investment (FDI) inflow into ASEAN countries in 2018. ... 15

Figure 8 Foreign direct investment (FDI) inflow into Thailand in 2005 to 2019 ... 16

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Foreign direct investment (FDI) is defined as an investment from foreigner to host country. Foreign direct investment and entrepreneurship are important factors affecting economic development (De Vita et al., 2021).For past dozens of years, the multinational enterprises (MNEs) and foreign direct investment (FDI) is driver of the production and global markets (Lee et al., 2020).

The emergence of foreign direct investment (FDI) begins when companies from one country invest and operate business in another. by foreigners buying a company in the investment host country or that foreigners come to invest and start a new company or joining the capital in the host country (Moran, 2016). Forms of foreign direct investment (FDI) have four forms are horizontal FDI is the multinational enterprises have the same production activities in multiple countries, vertical FDI is the multinational enterprises that divided the production process and locating each stage of production and produce in country that can produce at lowest cost (Aizenman and Marion, 2004), export-platform FDI and complex-vertical FDI (Trentini and Fugazza, 2014).

The flow of investment and capital from foreign investor to a business in the host country. It is one of the factors that drive economic growth (Soh et al., 2021).

And FDI has an impact on economic growth in (Kotrajaras et al., 2011) because FDI

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increases, make employed labor more and more exports, government revenue and also the development of technological and labor capabilities in host country.

Foreign direct investment (FDI) is the important part of international economic system and promote country development (OECD, 2020). FDI have benefits but it doesn’t accrue automatically. Developing countries will reap the full benefits of FDI.

So, recipient country of FDI must attracting FDI by promote and set policy in many sectors such as the local communities’ policies, national policies that can attracting FDI to developing countries (Lee et al., 2020). Besides FDI is the balance of payments related to cross-border remittances Cross-Border Merger Statistics (UNCTAD, 2007).

Inflows of direct foreign investment impact to influence per capita income growth rates in host countries. The foreign direct investment beneficial for developing countries due to the a start of FDI will allowing more investment and develop human and physical capital in host developing countries (Busse and Groizard, 2008). FDI inflow beneficial to improve new knowledge in host countries domestic through imitation and learning from multinationals (Findlay, 1978).by train and develop skill labor, labor turnover from many countries and develop new technologies (Djankov and Hoekman, 2000).

The multinational enterprises (MNEs) and foreign direct investment are the largest type of capital inflow (Hanson et al., 2001). The multinationals arise to take advantage of international factor-price differences and reducing trade barriers that

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make high export cost (Horstmann and Markusen, 1987). The past few years in developing countries the cross-border capital flows by the foreign direct investment from multinationals has increasing.

Foreign investors from developed countries they interesting to invest into developing economies. Because anticipate they have superior efficiency in technology and knowledge domestic business in host developing countries (Rueschemeyer and Evans, 2011). Low labor costs in developing host countries is one of the most factor that important for decide of foreign direct investment inflows (Bevan and Estrin, 2004).

In developing economies another source of external finance is foreign direct investment (FDI). Global FDI inflows in 2014 inflows to developing economies accounting 56% from all FDI inflows (Song et al., 2021). Technology transfer, inflow of capital, tax revenues, innovations, production efficiency, improve skill labor, and employment from investment inflows of FDI help to develop economic of the host countries (Feenstra and Hanson, 1997). Developing countries therefore want to attract foreign direct investment.

The factors that affect FDI are the percentage of economic growth, population growth, percentage of inflation, interest rates, money supply, Human Development Index, access to internet services, and GDP in the industrial sector, and services sector (Ramdan et al., 2020). However, in developing countries government

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stability is a factor that has affected the volume of FDI (Ghura and Goodwin, 2000).

Foreign investors are concerned about the risk and stability of the government of the host country (Dunning, 2002).

The factor of infrastructure availability will attract foreign direct investment (FDI) inflows especially transport infrastructure availability because investors concern and sensitive to transport capital in host countries (Khadaroo and Seetanah, 2010).

Another important factor that attracting direct investment inflow is infrastructure (Wei, 2000), good of infrastructure in host countries is necessary condition for foreign investors because good infrastructure and available public inputs help the business to minimize the costs (Quazi, 2007).

Stability of government is factors that promote FDI. Foreign investors they concern about risk of corruption, political stability and legal system in host developing country, the decline in the corruption will attract more inflows (Asiedu, 2006). The FDI determinants in host developing countries are GDP, economic growth, exchange rate, infrastructure, political stability (Kok and Acikgoz, 2009). Bénassy- Quéré et al. (2007) examined of impact on FDI inflow in developing countries found political risk, institutions, bureaucracy, corruption and legal institution have statistically significant to reduce FDI inflow.

The relationship between political institutions in developing countries and inward FDI. democratic institutions in host country will protect property rights, low

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risk, have the credibility of the policy and effectively to resolve the business disputes, Then democracy and stability of political can attracting foreign investment inflow into developing country (Li and Resnick, 2003). While the coups d’état, political rights, war and political crisis in developing host country have significant effect on FDI inflows (Borensztein et al., 1998).

One such factor importance to foreign investment is country’s economic performance that determined by political, institutional, legal environment and governance quality (Globerman and Shapiro, 2002). Host country that good governance quality attracts more foreign investment. While another studies find some identifying foreign investors interesting to invest in host country that have low governance quality. (Baek et al., 2019).

The institutional factors cause FDI inflows because foreign investors trust in the strong political, property rights protection, corruption freedom, citizen freedom and business stability (Ibrahim et al., 2020). Another main decisions of direct foreign investment is the rate of return from the institutional factors of government policies and regulations in host country, because institutions indicators promote the efficiency of business in part of sound institutions like clear property rights, economic freedom (Dunning, 2002). Strong institutional and good governance in host country make foreign investors decision and trust to invest.

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The democratic is institutional that impact to foreign direct investment.

country that have democratic transition more than 5 year can control political risk and attract investors (Lacroix et al., 2021). In developing countries, the democracy has relationship with trade liberalization and FDI. The democratization may promote globalization (Kubota and Milner, 2005). The democracies will implement friendly policies to FDI because the democratic give more voice to citizen (Rode and Gwartney, 2012). And fostering education because democracies have positive impact to development education and skill of labour (Gallego, 2010). make investor more decision to invest in democratic country.

Government stability is a great concern in Thailand because it still cannot be called a full-fledged democracy. In 24 June 1932, during the reign of King Prajadhipok (King Rama VII). The Thai People's Party, which consisted of government officials in the Royal Thai Army, Navy, Civilians and the People, joined together to seize power from king and revolution the country. They change of regime to a democratic system and use the constitution as the main governing body of the country (Jermsittiparsert, 2007). But after the change of regime in 1932 Thailand has experienced 13 military coups (Ministry of culture Thailand, 2016) and changed its constitutional 20 times (legislative institutional repository of Thailand, 2020).

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Table 1 Thailand’s 13th successful military coups.

Number of coup d'etat

Date Government was seized power

Leader of coup d'etat

1 April 1, 1933 - Phraya Manopakorn

Nititada 2 June 20, 1933

to September 11, 1938

Phraya Manopakorn Nititada

Phraya

Phahonphonphayuhasena

3 November 8,

1947 to November 10,

1947

Thawan

Thamrongnawasawat

Phin Choonhavan

4 April 6, 1948 to November 29,

1951

Khuang Aphaiwong 1947 coup group

5 November 29,

1951 To February

25, 1957

Plaek

Phibunsongkhram

Plaek Phibunsongkhram

6 September 16, 1957 to September 21,

1957

Plaek

Phibunsongkhram

Sarit Thanarat

7 October 20, 1958 to December 8,

1963

Thanom Kittikachorn Sarit Thanarat

Source: Royal Thai Government (2021)

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Table 2 (Continue) Thailand’s 13th successful military coups.

Number of coup d'etat

Date Government was seized power

Leader of coup d'etat

8 November 17,

1971 to October 14,

1973

Thanom Kittikachorn Thanom Kittikachorn

9 October 6,

1976 to October 22,

1976

M.R. Seni Pramoj Sangad Chaloryu

10 October 20, 1977 to December 21,

1978

Thanin Kraivichien Sangad Chaloryu

11 February 23, 1991 to April 7,

1992

Chatichai Choonhavan Sunthorn Kongsompong

12 September 19, 2006 to October 1,

2006

Thaksin Shinawatra Sonthi Boonyaratglin

13 May 22, 2014 to June 5, 2019

Niwatthamrong Boonsongpaisan

Prayut Chan-o-cha Source: Royal Thai Government (2021)

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Thus, Thailand has lower quality of government which we can see from many situations such as the 2014 military coup by National Council for Peace and Order (NCPO). From WGI index of good governance shows the governance situation in Thailand. In 2014, the political stability indicators of Thailand at the rank at 16.19 from the rank among all countries (rank at lowest at 0 to highest at 100) Worldwide Governance Indicators (WGI) project (2019) because in this year happen situation of protest and military coup. After the military coup situation in 2014 has several evens that happen continually and instability of government in Thailand (Bertelsmann Transformation Index, 2020).

And over the past 14 years, in the period of 2005 to 2019, The quality of Thai government in six indicators are Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption from project reports aggregate and individual governance indicators for over 200 countries and territories over the period 1996–2020 by Worldwide Governance Indicators (WGI) projected. (Worldwide Governance Indicators (WGI) project, 2019).

The data shows most of the Thai government quality indicators were quite low.

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Figure 1 Political stability indicator of Thailand in 2005 to 2019

Source: Worldwide Governance Indicators (WGI) project (2019)

Political Stability indicator is stability of political and Absence of Violence/Terrorism. The government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism (Worldwide Governance Indicators (WGI) project, 2019). From Figure 1 That shows trend of political stability indicator of Thailand is too low.

0 20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Rule of Law indicators (Rank 0 - 100)

Thailand Highest rank 0

20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Political Stability indicators (Rank 0 - 100)

Thailand Highest rank

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Figure 2 Rule of Law indicator of Thailand in 2005 to 2019

Rule of Law is Principles of law that protect rights The liberties of a person or group of persons shall be by equality under the law. The agents of the law have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, crime and violence (Rodríguez-Pose and Cols, 2017). This indicator Thailand have rank at medium rank around 50 from highest 100. While Thailand's major trading partners in ASEAN countries such as Singapore and Malaysia have a higher rank of the rule of law than Thailand. Especially Singapore ranked as high as 90 to 97 from highest 100.

Figure 3 Government effectiveness indicator of Thailand in 2005 to 2019 Source: Worldwide Governance Indicators (WGI) project (2019)

0 20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Government Effectiveness (Rank 0 - 100)

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Government Effectiveness is quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, the credibility of government and government's commitment to raise these qualities or keeping them high (Rodríguez- Pose and Cols, 2017). From Figure 3, The government effectiveness indicators of Thailand at medium rank around 60 to 70 from highest at 100. While Japan and Singapore, which are the top investment origin countries that have foreign direct investment (FDI) into Thailand. They have a high rank of the quality in the part of government effectiveness. Japan ranked around 85 to 96 from highest at 100, And Singapore gets the highest rank at 100 for 5 consecutive years in period of 2014 to 2019.

Figure 4 Control of corruption indicator of Thailand in 2005 to 2019

0 20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Control of Corruption (Rank 0 - 100)

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Control of corruption is control of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as capture of the state by elites and private interests. It also the implement the policy to prevent and combat corruption (Mengistu and Adhikary, 2011). In this indicator, Thailand ranked around 35 to 50 from the highest at 100, which is a relatively low ranking.

Figure 5 Voice and accountability indicator of Thailand in 2005 to 2019

Voice and accountability are the extent to which a country's citizens are able to participate in selecting their government, freedom of expression, freedom of association, free media and range of ideas about how citizens can express

0 20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Voice and Accountability (Rank 0 - 100)

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preferences, secure their rights (Worldwide Governance Indicators (WGI) project, 2019). From Figure 5, This indicators in 2005 to 2019, it shows that Thailand ranked at low quality in part of voice and accountability.

Figure 6 Regulatory quality indicator of Thailand in 2005 to 2019

Regulatory quality is the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development and the government ability of policies, regulations formulation and implementation (Anwar and Afza, 2014). In period of 2005 to 2019, Thailand at the medium rank around 60 from highest rank at 100.

From Figure 1 to Figure 6. We can see in period of 2005 to 2019 Thailand ranked low quality (lower than 50 from highest rank at 100) in three indicators of six

0 20 40 60 80 100 120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Regulatory quality (Rank 0 - 100)

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indicators are Political stability, Control of corruption, Voice and accountability. And gets rank at medium quality (around 50 to 70 from highest 100) in three indicators of six indicators are Rule of Law, Government effectiveness, and Regulatory quality.

Where Thailand doesn’t have high-ranking (higher than 70 from highest rank at 100) of government quality indicators. So, the Thai’s government quality is quite low.

Developing Asian countries are promote free market and free trade policies, they focusing to attract direct foreign investors (Mephokee et al., 2012). In the Southeast Asia region Thailand was among the first country that interested and recognize of benefit by foreign direct investment, and opening up for foreign investors (OECD, 2021). In 2018 Thailand is the fourth major FDI destination in ASEAN.

Figure 7 Foreign direct investment (FDI) inflow into ASEAN countries in 2018.

Source : World Bank (2018)

0 10 20 30 40 50 60 70 80 90

Singapore Indonesia Vietnam Thailand Malaysia

FDI inflow in ASEAN (Billion US$)

Singapore Indonesia Vietnam Thailand Malaysia

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From figure 7. Shows the foreign direct investment inflow in Thailand around 13.186 billion US dollar behind Singapore, Indonesia and Vietnam. Thailand provides an attractive business and support for foreign investment. it's advantages for foreign investors seeking to do business (Thailand Board of Investment, 2021). The foreign direct investment inflow into Thailand in difference period has fluctuate as we can see on Figure 8.

Figure 8 Foreign direct investment (FDI) inflow into Thailand in 2005 to 2019

Source : World Bank (2019)

From Figure 8. It’s show trend of the FDI in 2005 to 2019, we can see the trend of FDI inflow into Thailand falls in 2014 to 2016 and in the same time Thailand has a political crisis from protest and military coup by NCPO. So, to know the

0 2 4 6 8 10 12 14 16 18

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FDI inflows into Thailand in 2005 - 2019

FDI inflows into Thailand (Billion US$)

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relationship between government quality and FDI inflow into Thailand. It’s important for increase GDP and FDI inflow into Thailand.

However, the study on relationship between government quality and FDI.

(Lien et al., 2005) interest on government and FDI, then finding of relationship between government stability and FDI inflows. A similar result with the study of (Maiti and Mukherjee, 2013)that found positive impact of good governance host countries with can attracts FDI inflows. Mengistuand Adhikary (2011) investigated the relationship of FDI for a group 15 Asian countries by six indicators of good governance for the period of 1996 to 2007. But we still don’t know in the relative government quality impact on FDI inflow into Thailand.

Relative government quality is the difference of government quality in the source and host countries. As the higher gap in government quality, it means that host country high difference institutional characteristics compared source country of FDI (Demir and Gozgor, 2017). Foreign investors will trust and confidence in environment and institutional quality of host country that similar to their home country. The differences in institutional between source and host countries impact to decision of direct foreign investment (Driffield et al., 2009).

Then we interest to study to find “How government quality impact on FDI inflow into Thailand by eleven source countries in 2005 to 2019”. So, we will study in the relative of government quality between eleven source countries and Thailand

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on FDI inflow into Thailand in from 2005 to 2019. This study important to policy maker to determine policies that increase the FDI inflow into Thailand because it is important for Thai economy. Due to FDI can help Thailand to reduce unemployment, reduce poverty and improve technological production and skill of labor which contributes to human capital development in Thailand (OECD, 2020).

1.1 IMPORTANCE OF THIS STUDY

Measure the effect of relative government quality on FDI inflow into Thailand by using the governance indicators to represent quality of government. For use the results to determine policy and regulations to reduce gap of relative quality of Thai government with source countries of FDI and increase FDI inflow into Thailand.

1.2 ADVANTAGE OF THE STUDY

The result of this study will help to understand the relationship direction of the relative government quality between Thailand and source countries impact to FDI inflow into Thailand.

1.3 OBJECTIVE OF THE STUDY

The aim of this study we investigate the relative government quality impact on FDI inflows into Thailand. To do this we following objectives (1) we measure the relative quality of government indicators are political stability, government effectiveness, control of corruption, and rule of law by using the relative concepts

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(Demir and Gozgor, 2017). And (2) we find the impact of relative government quality indicators on FDI inflow into Thailand from eleven major countries by using the Gravity model following the Panel Estimated Generalized Least Squared (EGLS) method.

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LITERATURE REVIEW

2.1 GOVERNMENT QUALITY IMPACT ON FOREIGN DIRECT INVESTMENT

We attempt to find studies about the relationship between government quality and FDI. Then we found another study that uses many indicators about government to represent the quality of government, such as political risk and stability, corruption, law and good governance.

For instance, Emmert (2004) analyzed the impact of political instability on FDI of the U.S. into Latin America and found negative effects of political instability on U.S. FDI flows during the period of 1979 to 1996. Azzimontiand Sarte (2007) found the low political stability of host countries will reduce FDI because it has higher risk and indirect expropriation. Finding of (Maiti and Mukherjee, 2013) FDI inflow is significant in a negative way by political risk accounting for 94 countries over the period 1986 to 2009.

Deseatnicovand Akiba (2016) using cross-effect analysis to analyze the impact of political risk and exchange rate risk to FDI in 56 countries, and found political risk and exchange rate risk in Japanese has to FDI inflow in Japan. The result from Lacroix et al. (2021) show the of political risk from democratic transitions in early period

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have effect to FDI inflow, But the democratic transitions more than five years can attract FDI inflow.

Bellosand Subasat (2012) investigate the relationship between governance and FDI from 1985 to 2008 in 24 countries in Latin America by using a panel gravity model. The result shows FDI from source countries with good governance also invest more into poor governance host countries and corruption has a positive impact on FDI. A more study of Maitiand Mukherjee (2013) found the result that host countries with good governance has positive impact to attracts FDI. The study from Mengistuand Adhikary (2011) they interesting the impact of six indicators of good governance on FDI investment for a group 15 Asian countries in the period 1996 to 2007 by using a fixed effect model, and found the country which governance environment can attract more FDI.

Finding of Rodríguez-Poseand Cols (2017) governance quality in part of political stability, government effectiveness, lower corruption, voice and accountability, and the rule of law have impact to FDI inflow into countries in sub- Saharan Africa. Gangi (2012) finding the result of three indicators form six indicators of governance are voice and accountability, government effectiveness and rule of law can increase FDI inflow into African countries. A study by Anwarand Afza (2014) explored the relationship between foreign direct investment inflow and governance indicators in Pakistan over the period 1996 to 2010 by using ARMA and Ordinary Least

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Squares (OLS) regression. The empirical results of this study show FDI inflow in Pakistan has impact in positive way from voice and accountability, political stability and absence of violence / terror, government effectiveness, regulatory quality, control of corruption and governance index.

2.2 RELATIVE GOVERNMENT QUALITY BETWEEN THAILAND AND SOURCE COUNTRIES OF FOREIGN DIRECT INVESTMENT

In Eastern Bloc countries that poor governance, unstable institutional, risky and high corruption but can attract for foreign investors to joint venture in this host countries (Javorcik and Wei, 2009). And difference of corruption impact for wholly owned subsidiary preference of source country to invest in Turkey (Tekin-Koru, 2006).

Driffield et al. (2009) investigated the differences in institutional quality in home and host countries during period of 1997-2006, and found the relative gap of institutional quality important determinants of direct foreign investment.

Thailand has differences in institutional quality with source countries of FDI.

Measuring the differences in institutional quality in Thailand and source countries by relative of government quality in six indicators are Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption (Worldwide Governance Indicators (WGI) project, 2019).

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Table 3 Relative quality of Political stability indicators between eleven source countries of FDI and Thailand in 2019.

Country Political stability of source country

Political stability of Thailand

Relative of Political stability

Japan 85.71 26.67 59.04

Singapore 97.62 26.67 70.95

China 38.1 26.67 11.43

USA 57.62 26.67 30.95

Hong Kong 36.67 26.67 10

Malaysia 50.95 26.67 24.28

Germany 66.67 26.67 40

United Kingdom 63.81 26.67 37.14

South Korea 61.43 26.67 34.76

Australia 88.57 26.67 61.9

Indonesia 28.1 26.67 1.43

Note: Relative of political stability is the difference of political stability between source countries and Thailand.

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Table 4 Relative quality of rule of law indicators between eleven source countries of FDI and Thailand in 2019.

Country Rule of law of source country

Rule of law of Thailand

Relative of Rule of law

Japan 90.38 57.69 32.69

Singapore 96.63 57.69 38.94

China 45.19 57.69 -12.5

USA 89.9 57.69 32.21

Hong Kong 91.83 57.69 34.14

Malaysia 73.08 57.69 15.39

Germany 92.31 57.69 34.62

South Korea 86.06 57.69 28.37

Australia 93.27 57.69 35.58

Indonesia 42.31 57.69 -15.38

Note: Relative of rule of law of is the difference of rule of law of between source countries and Thailand

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Table 5 Relative quality of government effectiveness indicators between top eleven source countries of FDI and Thailand in 2019.

Country Government effectiveness of

source country

Government effectiveness of

Thailand

Relative of Government effectiveness

Japan 93.75 65.87 27.88

Singapore 100 65.87 34.13

China 71.63 65.87 5.76

USA 91.35 65.87 25.48

Hong Kong 96.15 65.87 30.28

Malaysia 79.33 65.87 13.46

Germany 93.27 65.87 27.4

South Korea 88.46 65.87 22.59

Australia 92.79 65.87 26.92

Indonesia 60.1 65.87 -5.77

Note: Relative of government effectiveness is the difference of government effectiveness between source countries and Thailand

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Table 6 Relative quality of control of corruption indicators between top eleven source countries of FDI and Thailand in 2019.

Country Control of corruption of source country

Control of corruption of

Thailand

Relative of Control of corruption

Japan 89.9 39.42 50.48

Singapore 99.52 39.42 60.1

China 43.27 39.42 3.85

USA 84.62 39.42 45.2

Hong Kong 92.31 39.42 52.89

Malaysia 62.5 39.42 23.08

Germany 95.19 39.42 55.77

South Korea 76.92 39.42 37.5

Australia 94.23 39.42 54.81

Indonesia 37.98 39.42 -1.44

Note: Relative of control of corruption is the difference of control of corruption between source countries and Thailand

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Table 7 Relative quality of voice and accountability indicators between top eleven source countries of FDI and Thailand in 2019.

Country Voice and Accountability of

source country

Voice and Accountability of

Thailand

Relative of Voice and Accountability

Japan 78.33 24.14 54.19

Singapore 39.41 24.14 15.27

China 6.4 24.14 -17.74

USA 78.82 24.14 54.68

Hong Kong 54.19 24.14 30.05

Malaysia 43.35 24.14 19.21

Germany 95.07 24.14 70.93

South Korea 72.91 24.14 48.77

Australia 93.1 24.14 68.96

Indonesia 52.71 24.14 28.57

Note: Relative of voice and Accountability is the difference of voice and Accountability between source countries and Thailand

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Table 8 Relative quality of regulatory quality indicators between top eleven source countries of FDI and Thailand in 2019.

Country Regulatory Quality of source country

Regulatory Quality of Thailand

Relative of Regulatory Quality

Japan 88.46 60.58 27.88

Singapore 100 60.58 39.42

China 42.79 60.58 -17.79

USA 88.94 60.58 28.36

Hong Kong 99.52 60.58 38.94

Malaysia 73.56 60.58 12.98

Germany 96.15 60.58 35.57

South Korea 82.21 60.58 21.63

Australia 98.56 60.58 37.98

Indonesia 51.44 60.58 -9.14

Note: Relative of regulatory quality is the difference of regulatory quality between source countries and Thailand

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2.3 THE IMPROVING INSTITUTION AND GOOD GOVERNANCE

The good governance infrastructure significantly affect to FDI inflow and outflows (Globerman and Shapiro, 2002). So, countries requires policymakers to improve the quality of their institutions and business climate through implementing sound economic policies and regulations (Younsi and Bechtini, 2019).

Rule of law is one of foundation of good governance (Rodríguez-Pose and Cols, 2017), Improving rule of law can protect people’s rights, freedoms and encourage the international peace (United Nations, 2021). The stability in rule of law can reducing corruption and injustice. To improving the rule of law by provide knowledge and understanding of law to people, build a reliability in human rights, promote discussions on the rule of law and legal empowerment (OECD, 2019).

The importance good governance indicator is government effectiveness. The increasing in effectiveness of government will promote foreign direct investment, economic growth and infrastructure (Sánchez et al., 2013). Improve the government effectiveness by set the public policy, Supervise the quality of civil service and public service, and reducing political pressures (Kim and Voorhees, 2011).

voice and accountability are good governance that can be operationalized in practice. Improve voice and accountability by make citizens have the knowledge and power to respond (Overseas Development Institute, 2007), and using technology to increase channels for people to participate in e-participation in ensuring citizens

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(Waheduzzaman and Khandaker, 2022). Add rights for citizens of a country to express political opinions and using their decisions to participate in the election and selection of governments (Kalsi and Kiran, 2015).

2.4 THEORY AND METHODS

The flow of FDI measuring relationship between flow of two countries are source country and host country by the gravity theory and using the gravity model estimate. Gravity models used to investigate flows of trade between two countries, this can apply to examines the foreign direct investment inflow to host country (Blonigen and Davies, 2004).

For instance, Bellosand Subasat (2011) investigates the relationship between direct foreign investment with governance in 14 countries by using gravity model estimate. Their finding the good governance will promote foreign direct investment.

Eatonand Akiko (1994) study Japanese and U.S. bilateral trade flows and direct foreign investment using sample of around 100 countries over the period of 1985- 1990. They apply a gravity model to analyze, and found that Japan to be much more open to the United States, and level of education significantly U.S. interaction to other countries but insignificant role in Japanese.

From a review study, we find it interesting to find the relationship of government quality and FDI by using the indicators of good governance because good governance has indicators in many parts that can represent the quality of

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government. But in another study before that don't talk about relative of government quality between source countries and host country, then we improve from reviews by follow the concept, theory and add more variable that represent the relative on quality of government to examine our research question.

Table 9 Summary main finding of political stability impact on foreign direct investment.

Author (Year) Title Data Main finding

Emmert (2004) The Political Economy of U.S. Foreign Direct

Investment in Latin America: A Reappraisal

1979 to 1996 The political instability in part of poor human

rights record and military coups d’état has impact on U.S. FDI flows into fifteen Latin American and Caribbean

countries

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Table 8 (Continue) Summary main finding of political stability impact on foreign direct investment.

Azzimontiand Sarte (2007)

Barriers to Foreign Direct Investment Under Political

Instability

Annual Host country that lows political stability has higher risk and indirect

expropriation and negative impact to FDI Maitiand

Mukherjee (2013)

Governance, foreign direct investment and

domestic welfare

1986 to 2009 Annual

The political risk significant in a negative

way to foreign direct investment.

Deseatnicovand Akiba (2016)

Exchange rate, political environment and FDI

decision

1995 to 2012 Annual

The exchange rate risk and political risk in developing countries affect to MNCs, while may accept these risks in developed countries.

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Table 8 (Continue) Summary main finding of political stability impact on foreign direct investment.

Lacroix et al. (2021) Democratic transitions can attract foreign direct investment:

Effect, trajectories, and the role of political

risk

1970 to 2014 Annual

Democratic transitions in early period less

than 5 years have effect to FDI inflow

because that high political risk Waheduzzamanand

Khandaker (2022)

E-participation for combating corruption,

increasing voice and accountability, and

developing government effectiveness: A cross-

country data analysis

2010, 2012, 2014, 2016, and 2018.

The e-participation form will support and increasing the channel to make citizens have

more voices and accountability.

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Table 10 Summary main finding of relationship between governance indicators and foreign direct investment.

Bellosand Subasat (2012)

Governance and foreign direct investment: a panel gravity model

approach

1985 to 2008 Annual

In 24 countries in Latin America the corruption has a positive impact to

FDI inflows, and the source countries with good governance also invest to host countries

with poor governance.

Mengistuand Adhikary

(2011)

Does good governance matter for FDI inflows?

Evidence from Asian economies

1996 to 2007 Annual

The six indicators of good governance are determinants flow of FDI, and governance environment in host country attract more

FDI.

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Table 9 (Continue) Summary main finding of relationship between governance indicators and foreign direct investment.

Rodríguez- Poseand Cols

(2017)

The determinants of foreign direct investment in sub‐

Saharan Africa: What role for governance?

1996 to 2005 Annual

Governance indicators in part of political stability,

government effectiveness, control of

corruption, voice and accountability, and rule of law are determinants

of FDI inflow.

Gangi (2012) The Impact of Governance on FDI

flows to African Countries

1996 to 2010 Annual

Three indicators are voice and accountability,

government effectiveness and rule of law significant to the inflow of FDI in African.

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Table 9 (Continue) Summary main finding of relationship between governance indicators and foreign direct investment.

Anwarand Afza (2014)

Impact of Governance Indicators on FDI Inflows: Empirical Evidence from Pakistan

1996 to 2010 Annual

FDI inflows into Pakistan have relationship with

voice and accountability, political stability and absence of

violence / terror, government effectiveness, regulatory

quality, control of corruption and governance index.

These indicators affect in positive way.

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Table 11 Summary the improve and develop of good governance indicators.

United Nations (2021)

United nations and rule of law; What is rule of

law

- rule of law can improve by encourage the empower legal, provide

the understanding of law to people, build a

reliability in people's rights, and credibility of

judiciary.

Kimand Voorhees

(2011)

Asia Barometer

surveys in 2003

The public policy, quality of civil service and public service, trust

in parliament, and reducing political pressures will increasing

the effectiveness of government

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Table 12 Summary gravity method and data of government quality and foreign direct investment.

Bellosand Subasat (2011)

Governance and foreign direct investment: a panel gravity model

approach

1990 to 2003 Annual

Using panel gravity model approach to investigates the relationship between

direct foreign investment with governance, and found

the good governance will promote foreign

direct investment.

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2.5 CONCEPTUAL FRAMEWORK

How does the relative government quality affect to foreign direct investment inflow into Thailand

measuring the relative quality of government by using the relative concepts from Demirand Gozgor (2017)

The aim of this study to investigate the relative government quality impact on FDI

inflows into Thailand

Empirical model is modified Gravity model from Leibrechtand Riedl (2012) to

study effect of government quality on foreign direct

investment inflow Dependent variable: foreign direct

investment inflow inflows into Thailand (Y)

Independent variable: GDP of source countries, inflation rate, oil price, real effective exchange rate and relative government quality

indicators

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METHODOLOGY

3.1 DATA

In this study we used data based on panel data in the annual period 2005 to 2019. The sample space includes eleven countries (Japan, Singapore, China, USA, Hongkong, Malaysia, Germany, United Kingdom, South Korea, Australia, Indonesia) that have FDI to Thailand. Data of FDI inflow we taken from the Bank of Thailand database. The data on GDP and inflation are from the database of World Bank World Development Indicators. Data on oil price and real effective exchange rate are taken from the Federal Reserve Bank of ST. Louis. The data on governance indicators are political stability, government effectiveness, control of corruption, and rule of law we taken from World Bank World Governance Indicators.

3.2 THEORETICAL MODEL

This research we study how relative government quality impacts on FDI inflow. So, the theory that we use to measure the impact on flow of FDI between two countries based on gravity model. The gravity model it used for expand the flow of trade between two countries (Koo et al., 1994). The flow of trade is a function of the economic size of both trading countries and cost of trading or transaction

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between both trading countries (Krugman et al., 2014). The gravity model (in its log form) is show in Equation 1. (Castillo et al., 2016).

𝑙𝑛𝑇_𝑖𝑗 = 𝛽₀+ 𝛽₁𝑙𝑛𝑀_𝑖+ 𝛽₂𝑙𝑛𝑀_𝑗+ 𝛽₃𝑙𝑛𝑇𝐶_𝑖𝑗 (1) Where ^𝑙𝑛𝑇𝑖𝑗,𝑡 is natural logarithm of the flow of trade between exporting country and importing country, ^𝛽0is the constant, ^𝑙𝑛𝑀𝑖 is natural logarithm of market size of exporting and ^𝑙𝑛𝑀𝑗 is natural logarithm of market size of importing countries, and 𝑙𝑛𝑇𝐶_𝑖𝑗 is a total cost of trading between trading countries (Matteis et al., 2018). From the assumption of gravity theory, we fit the equation to a specific model that relates to our problem by using proxy trade value between trading countries to FDI inflow because FDI flow between large countries will be larger than FDI flow in small countries. And FDI flows will be high if the host and home countries are closer (Leibrecht and Riedl, 2012). market size on trade flow. It affects FDI inflow in terms of income, wealth, productivity and economic size including potential to save and invest in the source country (Lipsey, 2006). We exclude the market size of host country because our study is mainly interested in impact of government quality on FDI inflow (Zheng et al., 2017).

The variables that represent cost of trading flow are oil price, real effective exchange rate and inflation rate. First oil price variables affect FDI inflow because oil is an important energy to transport and transfer of FDI flow between source and host countries. If the price of oil increases the FDI flow cost will increase (Nanovsky, 2019).

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While real effective exchange rate is also the one of variables that affect the cost of FDI flow because the real effective exchange rate change will make the value of currency of source and host countries change too that impacts cost of trade and flow between two countries (Irandoust, 2019). And the last variable that we use to represent the cost effect on FDI flow is the inflation rate of the host country, Inflation is an indicator that represents the economic stability and price level of a country (Chu et al., 2017).

Another variable that impacts on FDI inflow is government quality. Instability of government is high risk for business, domestic investors and also be risk for foreign investors to have FDI flow into that country. Due to the government has low reliability and high corruption make them have power to set and change rule, law and tax (Gani, 2007). The investors from source countries of FDI they sensitive to stability, political risk and quality of government in host countries Mengistuand Adhikary (2011) because the good government quality will improve economic development and launch good policy that increase productivity , rising the employment and improve technology and infrastructures in developing country (Hossain and Rahman, 2017).

So, we include this variable because the government quality can represent the stability of the source countries and host countries and impacts the investment costs and risks of the MNEs. And government regulations and law also affect foreign

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business operations (Lien et al., 2005) to measure the relationship between government and FDI inflow. Then we add this variable that effect on FDI inflow to modify in Equation 2:

𝑙𝑛𝐹𝐷𝐼_{𝑖𝑗,𝑡} = 𝛽₀+ 𝛽₁𝑙𝑛𝐺𝐷𝑃_𝑖,𝑡+ 𝛽₂𝑙𝑛𝑂𝐼𝐿_{𝑖𝑗,𝑡} + 𝛽₃𝑙𝑛𝑅𝐸𝐸𝑅_{𝑖𝑗,𝑡}+ 𝛽₄𝑙𝑛𝐼𝑁𝐹𝐿_𝑗,𝑡 + 𝛽₅𝐺𝑂𝑉𝑇_{𝑖𝑗,𝑡}

(2) Where 𝐹𝐷𝐼_{𝑖𝑗,𝑡}is the FDI inflow from source country to host country at time 𝑡. Where ^𝐺𝐷𝑃𝑖,𝑡 is gross domestic product that represent the economics size of source countries at time ^𝑡. We expect GDP of source countries will have a positive relationship with FDI inflow into host countries that receive investment because if GDP is high, it means that the country has high income and has more potential to save and invest. So, GDP of the source country of FDI can drive investors to have more FDI outflow into other countries (Bano and Tabbada, 2015).

On three variables of cost on FDI. ^𝑂𝐼𝐿𝑖𝑗,𝑡 we expected the oil price variable to have a negative relationship with FDI inflow because the high cost of transportation affects flow of trade and investment falls because the partner of trading or investors needs the low cost to get high profit (Nilsson and Nilsson, 2000).

For the ^{𝑅𝐸𝐸𝑅}𝑖𝑗,𝑡exchange rate is one of the factors that impacts cost of tourism and trade flow between two countries (Irandoust, 2019). So, we expected the real exchange rate to have a negative impact on FDI inflow because the exchange rate can affect the cost of trading and investing then if cost increases trade and

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investment from foreigners will fall (Kaufmann et al., 2003). While ^{𝐼𝑁𝐹𝐿}𝑗,𝑡We expect this variable to have a negative relationship to FDI inflow (Younsi and Bechtini, 2019).

The variable of government quality ^{𝐺𝑂𝑉𝑇}𝑖𝑗,𝑡 We expected government quality has positive impact on FDI inflow because the country that with transparent regulations and good governance are able to attract more of FDI (Dunning, 2002). And the quality of government is one of risk on investment because the poor quality of government makes instability of rule, law, tax and requirements of investment by foreigners and can change by power of government, then the investors they concern about this risk before decide to invest (Maiti and Mukherjee, 2013). Government quality is important to economic growth and economic growth is the one factors that can attack FDI from developed countries, due to government quality strong can attack more of FDI (Afza et al., 2014).

3.3 EMPIRICAL MODEL

Baes on the theoretical analysis on Equation 2 we get the following regression model:

𝑙𝑛𝐹𝐷𝐼_{𝑖𝑗,𝑡} = 𝛽₀+ 𝛽₁𝑙𝑛𝐺𝐷𝑃_𝑖,𝑡+ 𝛽₂𝑙𝑛𝑂𝐼𝐿_{𝑖𝑗,𝑡} + 𝛽₃𝑙𝑛𝑅𝐸𝐸𝑅_{𝑖𝑗,𝑡}+ 𝛽₄𝑙𝑛𝐼𝑁𝐹𝐿_𝑗,𝑡 + 𝛽₅𝐺𝑂𝑉𝑇_{𝑖𝑗,𝑡}+ 𝛽₆𝐹𝐷𝐼_{𝑖𝑗,𝑡−1}+ 𝜀_{𝑖𝑗,𝑡}

(3)

Where 𝑖 is home countries that have direct investment to other country (^𝑖= Japan, Singapore, China, USA, Hongkong, Malaysia, Germany, United Kingdom, South

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Korea, Australia, Indonesia), ^𝑗 is a host country that receive the direct investment from foreign (^𝑗= Thailand), And ^𝑡 is time in annual (^𝑡=2005, 2006, ..., 2019).

Our study is focused on finding the impact of relative government quality on FDI in Thailand. To represent the quality of government in this study we use the governance indicators from good governance concept based on measuring four dimensions of governance by the research project of World Governance Indicators Gani (2007) are political stability, government effectiveness, control of corruption and rule of law Kaufmann et al. (2003) but we not included two of good governance indicators are voice and accountability and regulatory quality because on some despotism countries that lower voice and accountability of people has high FDI inflow, and many countries with democratic governments has lower FDI inflow (Mengistu and Adhikary, 2011). Then we use the relative concept on variables of good governance that represent the quality of government of the host country to modify the variable to fit our study. Relative concepts are measured by the difference between variables of source and host countries (Demir and Gozgor, 2017).

Relative of government quality between source and host countries measure by:

𝑅𝐺𝑂𝑉𝑇_{𝑖𝑗,𝑡} = 𝐺𝑂𝑉𝑇_𝑖,𝑡− 𝐺𝑂𝑉𝑇_𝑗,𝑡 (4) In Equation 4 we apply the relative concept to find relative government quality between source and host countries of FDI. Measuring by the data of