FOREIGN DIRECT INVESTMENT AND SPILLOVER EFFECTS IN BRUNEI DARUSSALAM

Abstract

For more than half a century, foreign direct investment (FDI) has played a very significant role in the economy of Brunei Darussalam especially with the direct involvement of the Brunei Shell Petroleum Company in oil exploration since 1929. With the economy's current diversification policy, FDI has become even more pivotal. The present study seeks to ascertain whether spillover effects accrued to FDI are present in Brunei Darussalam. Our studies on whether spillover effects have occurred in the economy show “positive” results. First, by comparing the means between foreign firms and locally-owned establishments with regard to labour productivity, average compensation, value-added per capital and capital intensity, we found no statistically significant differences between the two groups of firms. Second, by utilizing the Cobb-Douglas production function, we have discovered that no differences occurred between local and foreign firms operating in Brunei Darussalam. A further examination using the "Chow Test" has also proved that there is no significant differences between the two groups of firms. We believe that the above results are attributed to the existence of a transfer of technology from foreign firms to local firms. In order to be competitive, locally-owned firms have to utilize similar, if not more advanced, techniques of production. Third, we have been able to prove the existence of spillover effects by conducting an ordinary least squares regression analysis. We estimate labour productivity in local firms as a function of capital intensity, average compensation, value added and three proxy variables for the presence of foreign firms. As expected, one of the proxy variables is significant and we have concluded that the establishment of foreign subsidiaries have indeed contributed to the existence of spillovers in the economy, and in particular, labour productivity in locally-owned establishments. Based on the above findings and the fact that the economy is facing labour shortage and dependency on foreign labour, especially in the private sector, we have formulated some policies. First, because there is spillover effects due to the operation of multinational subsidiaries and the fact that a large percentage of these entities invest in wholesale and retail trade, there is a need for some degree of selectivity in approving foreign direct investment. Ideally, activities in the manufacturing sector be given a higher priority as they have a greater potential for the transfer of technology and hence spillover effects. Second, there is a need to create competitiveness especially where foreign affiliates are involved in order to foster continuous imports of technology. Third, because there is spillover effects and the fact that most foreign workers are in the private sector, there is a need to step-up effort in ensuring that the transfer of technology is occurring to local workforce.