Do FDI and exports boost economic growth in Laos? A Study of Exports, FDI, and Control Variables Using the ARDL Approach
Abstract
Currently, foreign direct investment (FDI) and exports to ultimately be significant driving forces in the economy of Laos. But their effectiveness hinges on the country’s capacity to solve systemic problems and improve its absorptive capacity. Laos will therefore have to utilize these engines of growth effectively through diversification of FDI sources, a more diversified export sector, and macroeconomic stability. The ARDL method employs a robust approach to exploring such phenomena, and its application here presents useful findings for policymakers trying to encourage sustainable economic growth in Laos.
Using World Development Indicators data from 1990 to 2022, this study presents the economic dynamics of the Lao PDR. The analysis examines the primary contributors to this positive correlation between real GDP (RGDPT), foreign direct investment (FDI), and the values of both exported goods and services (EXPR) while controlling for other possible variables of interest such as exchange rate (EXCH), inflation rate (INF), and labor force participation (LBFR). In addition, the adoption of the ARDL bounds testing approach is utilized to investigate the short- and long-run dynamics of economic growth.
The results, FDI, and labor force participation are the most crucial driver of long run economic growth, while exports, exchange rate, and inflation do not have a statistically significant effect. Export, FDI, and labor force as short-term determinants positively contribute to economic growth, and there is a robust error correction mechanism to bring long-term equilibrium. Moreover, the ARDL model passes a series of diagnostic tests.
Such findings offer important policy implications, suggesting the necessity for prudent economic planning that encourages investment diversification, promotes the competitiveness of trade, and fortifies macroeconomic stability. Laos can develop a more resilient economic system through more precise policy recommendations that this sector needs to be able to support the long-lasting, sustainable development of the Lao economy as a whole through these two dimensions (FDI and exports).
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