Impacts of foreign dirrect investment on labor productivity of manufacturing industry a case of vietnam luận văn thạc sĩ

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BY VO KHOI NGUYEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, APRIL 2011 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM • INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACTS OF FOREIGN DIRECT INVESTMENT ON LABOR PRODUCTIVITY OF MANUFACTURING INDUSTRY: A CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VO KHOI NGUYEN Academic Supervisor: PhD NGUYEN VAN PHUONG HO CHI MINH CITY, APRIL 2011 CERTIFICATION I hereby certify this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis Signature Vo Khoi Nguyen Date: April, 2011 ACKNOWLEDGEMENT With the valuable guidance and advices from Vietnam-Netherlands program lecturers and friends, I am really grateful to what they have done for my thesis completion First of all, I would like to illustrate my largest gratitude to my supervisor, PhD Nguyen Van Phuong who always gives useful and valuable advices and enthusiastic comments for my thesis I am grateful for Professor, Peter Calkins for his precious advice and comments from the initial ideas of the thesis I also express my special thanks to Professor, Nguyen Trong Hoai for his lectures in econometrics and PhD Cao Hao Thi, the lecturer of Vietnam-Netherlands project, for his kind help and instructions in data analysis by Eview software And finally, I would like to show my special thanks to my friends in MDE class 15 for their supports during my research completion ABSTRACT The paper examines whether foreign direct investment increases the overall labor productivity in Vietnam Using panel data at firm level from the manufacturing sector, it finds robust evidence of the positive impacts from foreign direct investment on labor productivity Moreover, it also confirms the positive correlation of labor productivity and capital intensity, labor quality and economic scale However, it should fail to establish any significant relationships between productivity and location; and industry And the findings illustrate foreign enterprises not make more productive than private firms TABLE OF CONTENTS CHAPTER I 1.1 Introduction 1.2 Research objective and questions -2 1.3 Research hypotheses 1.4 Organization of the study CHAPTER LITERATURE REVIE 2.1 Theoretical background -3 2.2 Economic theories -4 2.2.1 Cobb-Douglas production function 2.2.2 Theoretical framework of FDI impact on labor productivity 2.3 Empirical studies 2.3.1 Channel effects of foreign direct investment -6 2.3.2 Impacts of FDI on labor productivity 24ua CHAPTER AN OVERVIEW OF FDI IN VIETNAM ' 3.1 Introduction -9 3.2 Overview of FDI inflows (1988-2009) -9 3.2.1 FDI inflows in period 1988 - 2009 -9 3.2.2 Some characteristics of foreign direct investment in Vietnam 11 3.3 The role of FDI in national economy -19 3.3.1 The role of FDI in national economic growth -20 3.3.2 The role of FDI in employment and human resources 21 3.4 Overview of labor productivity in ASEAN -21 CHAPTER RESEARCH METHODOLOGY -24 4.1 Model specification -24 4.2 Description of variables 24 4.2.1 Dependent variable labor productivity (Labprod) 24 4.2.2 Explanatory variables 25 4.3 Data collection 27 4.4 Estimation strategy - 28 45ua29 CHAPTER RESULT ANALYSIS CHAPTER CONCLUSIONS AND RECOMMENDATIONS 45 6.1 Conclusions 45 6.2 Recommendations 45 6.3 Limitation 47 Reference - 48 LIST OF TABLES Table 3.1: FDI projects licensed from 1988 to 2010 by kind of economic activity 12 Table 3.2: Employed population by ownership from 2000-2009 21 Table 3.3: Average annual labor productivity growth by Industry (%) 22 Table 4.1: Definition summary of variables 27 Table 5.1: Statistical summary of sample 31 Table 5.2: Distribution of explanatory variables in logarithm form 34 Table 5.3: Correlation matrix spreadsheet without logarithmic form 35 Table 5.4: Correlation matrix spreadsheet using logarithmic form .35 Table 5.5: Regression result from Pooled Least Square 37 Table 5.6: Regression result from fixed effects model 38 Table 5.7: Regression result from random effects model 39 Table 5.8: Hausman test result 40 Table 5.9: Regressed result summary .41 Table 10: Distribution of explanatory variables without logarithm form 51 Table 5.11: Descriptive statistics of variables in three types of enterprises .58 Table 5.12: Result from fixed effects model with PCSE 59 Table 13: Result from fixed effects model with Dummy variable Dfshare 60 LIST OF FIGURES Figure 3.1: FDI inflows in period 1988 — 2009 -10 Figure 3.3: FDI inflows licensed by region 15 Figure 3.4: FDI inflows (million USD) by country of region -17 Figure 3.5: FDI inflows in manufacturing sector -18 Figure 3.6: Industrial output value in manufacturing sector by ownership -19 Figure 3.7: Structure of GDP at current prices by ownership period 1995- 2009- - -20 • Figure 3.8: Comparative Labor Productivity Performance 23 Figure 5.1: Distribution of labor productivity without logarithm form -32 Figure 5.2: Distribution of labor productivity in logarithm form 33 Figure 5.3: Correlation between Labprod and Fshare logarithm form 36 Figure 5.4: Distribution of correlation between labor productivity Labprod and capital intensity Capint without logarithm form -52 Figure 5.5: Distribution of correlation between labor productivity Labprod and capital intensity Capint in logarithm forms -53 Figure 5.6: Distribution of correlation between labor productivity Labprod and material input purchases Scale without logarithm forms -54 REFERENCE REFERENCE Aitken B.J and Harrison A.E (1999) Do domestic firms benefit from FDI? Evidence from Venezuela, American Economic Review, 89(3), pp 605-18 - Blomstrom, M and F Sjoholm (1999) Technology Transfer and Spillovers Does local Participation with Multinationals Matter? 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A cc-integration analysis, Eastern Economic Journal, Vol 32, No 2, Trinity College OECD (1996) Benchmark Definition of FDI, 3rd edition, Retrieved May 25 th 2009 from http://www.oecd.orp/dataoecd/10/16/2090148 pdf Peter J B., Jeremy C and Chengqi W (2006) Inward FDI and host country productivity Evidence from China ’s electronics industry, Transnational Corporations, Vol 15, No 1, April 2006 Peter J B., Jeremy C and Chengqi W (2007) Is the relationship between inward FDI and spillover effects linear? An empirical examination of the case of China, Journal of International Business Studies 38, pp 447W59 Statistical Yearbook of Vietnam (GSO): http://www.pso.8ov.vn APPENDICES APPENDICES APPENDIX Table 5.10: Distribution of explanatory variables without logarithm form Mean Median Maximum Minimum Std Dev Skewness Kurtosis Jar ue-Bera Probability Sum Sum Sq Dev Observations FSHARE 0.000102 0.000000 0.040665 0.000000 0.000906 24.28880 772.7119 3.27E+08 0.000000 1.345510 0.010833 13211 CAPINT 233.3007 97.64706 68786.29 0.586207 750.9153 59.60553 5278.466 1.53E*10 0.000000 3082135 7.45E+09 13211 51 SCALE 0.999993 0.113076 174.0530 0.000289 4.973839 18.83022 485.9761 1.29E 08 0.000000 13210.91 326803.2 13211 SKILL 0.194132 0.125000 3.080000 0.000000 0.210173 1.876383 8.781246 26150.11 0.000000 2564.671 583.5185 13211 APPENDICES Figure 5.4: Distribution of correlation between labor productivity Labprod sad capital intensity Capint without logarithm form 70, OOO 40,000 — 10,000 — 2500 SOOO 7500 LABPROD 52 10000 CAPINT 12500 APPENDICES Figure 5.5: Distribution of correlation between labor productivity Labprod and capital intensity Capint ’in logarithm forms 2500 SOOO 7500 LNLABP ROD 53 10000 LNCAPINT 12500 APPENDICES Figure 5.6: Distribution of correlation between labor productivity Labprod and material input purchases Scale without logarithm forms “ 10,000 6, 000 4,000 2500 SOOO 7500 LABPROD 54 10000 SCALE 12500 APPENDICES Figure 5.7: Distribution of correlation between labor productivity Labprod and material input purchases S'ciife in logarithm forms 2500 SOOO 7500 LNLABP ROD 55 10000 LNSCALE 12500 APPENDICES Figure 5.8: Distribution of correlation between labor productivity LabR•od and proportion of skilled labor Skill without logarithm forms 10,OOO 6, 000 4, OOO 2, 000 2500 5000 7500 LABPROD 56 10000 SKILL 12500 APPENDICES Figure 5.9: Distribution of correlation between labor productivity Labprod and proportion of skilled labor S'fiifl in logarithm forms 2500 ' SOOO 7500 LNLABPROD 57 10000 LNS K ILL 12500 APPENDICES APPENDIX Table 5.11: Descriptive statistics of variables in three types of enterprises rnierprJ ze | Types zy Surrrr ar y of LabDr Pr oduct ? v? 530 FDI | | | 117 07283 58 7B8016 101.65737 276.13348 187.70326 165.92284 | 67 009864 199 962 07 Summary | mean ?t d Dev Fr eg FDI | Non-siaie | state | 486.98466 239.28891 429.74149 1402.1144 909 02622 843.46989 530 3952 172 74 5 978 97844 54 f4 ean st: d DEV Pr eg FDI | Non-state | state | 110.94046 47.532114 101.9B631 245.54487 215.05401 162.34589 530 3952 172 | 56.765578 218.11988 54| | | surrrr ary of En t er pr ze Types | | | Labor 923768B3 8.61B6178 39J 84 013 972 04 9761 54 29893917 707l4959 172 58 APPENDICES Table 5.12: Result from fixed effects model with PCSE Dependent Variable: LNLABPROD Method: Panel Least Squares Sample: 1321 I Periods included: ’ Cross-sections included: 2955 Total panel (unbalanced) observations: 13211 Cross-section weights (PCSE) standard errors & covariance (no d.f correction) Variable Coefficient Std Error t-Statistic Prob C LNCAPINT 1.242193 0.410543 0.321316 0.292370 0.171205 0.039106 0.012099 0.034912 0.010928 0.011633 31.76437 33.93254 9.203714 26.75398 14.71766 0.0000 0.0000 0.0000 0.0000 0.0000 LNFSHARE LNSCALE LNSKILL Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared 0.902347 0.874 17 Mean dependent var S.D dependent var S.E of regression 0.209577 Akaike info criterion Sum squared resid Log likelihood F-statistic Prob(F-statistic) 450.2930 3573.77 I 32.025 53 0.000000 Schwarz criterion Hannan-Quinn criter Durbin-Watson stat I 435686 0.590816 -0.093070 1.584273 0.46693 I 134773 The resulted regression model from table 5.9 is depicted below: LNLABPROD = 1.242193 0.410543*LNCAPINT + 0.321316*LNFSHARE 0.292370*LNSCALE 0.171205*LNSKILL + [CX=F] 59 APPENDICES Table 5.13: Result from fixed effects model with Dummy variable Dfshare Dependent Variable: LNLABPROD Method: Panel Least Squares Sample: 132 l I Periods included: Cross-sections included: 2955 Total panel (unbalanced) observations: 132 I l Cross-section weights (PCSE) standard errors & covariance (no d f correction) Variable Coefficient Std Error t-Statistic Prob C LNCAPINT DFSHARE DFSHARE2 LNSCALE LNSKI LL 0.965359 0.406751 0.068977 0.087448 0.309492 0.162881 0.036157 0.011926 0.040329 0.018567 0.010794 0.01 1403 26.69882 34.10597 1.710366 4.709951 28.67308 14.28348 0.0000 0.0000 0.0872 0.0000 0.0000 0.0000 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.898991 0.869835 0.2 13157 465.7640 3350.634 30.83320 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat I 435686 0.5908 16 -0.059 138 I 618772 0.501052 175977 The resulted regression model from table 10 can be shown as below: LNLABPROD = 0.965359 + 0.406751*LNCAPINT + 0.068977*DFSHARE1 + 0.087449*DFSHARE2 + 0.309492*LNSCALE + 162881*LNSKILL + [CX=F] 60 ... negligible gap of labor productivity with exception to Singapore, Hong Kong and Taiwan 22 CHAPTER 3: AN OVERVIEW OF FDI IN VIETNAM Figure 3.8: Comparative Labor Productivity Performance Comparative Labor. .. undertaken annually by General Statistics Office (GSO) of Vietnam Labor productivity? ??— Value addeoAverage number of labor infirms 4.2.2 Explanatory variables 4.2.2.1 Capital intensity (Capint) Capint... rates and living standards in the ASEAN region As illustrated on diagram, although Vietnam has lower labor productivity performance than others in Southern East Asia, there is an existence of