Interaction effects between FDI growth and institutional environment a case of vietnam, 2008 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 INTERACTION EFFECTS BETWEEN FDI GROWTH AND INSTITUTIONAL ENVIRONMENT A CASE OF VIETNAM, 2008-2011 A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ART IN DEVELOPMENT ECONOMICS By ĐẶNG VÕ TUẤN Academic Supervisor: TRƯƠNG ĐĂNG THỤY HO CHI MINH CITY, NOVEMBER 2014 Declaration This thesis is submitted in partial fulfillment of the requirements for the degree of Master of Art in Development Economics to Vietnam – Netherlands Programme I hereby declare that this thesis has not been submitted for any degree To the best of my knowledge, the thesis is my own work All sources used have been cited and acknowledged in the thesis Đặng Võ Tuấn i Acknowledgement I would like to express my deepest gratitude to my academic supervisor, Dr Trương Đăng Thụy, for his helpful comments and regular feedback in this thesis I am also grateful to Assoc Prof Dr Nguyễn Trọng Hoài and Dr Phạm Khánh Nam for their great advice when this thesis is just in form of ideas I would like to thank all lecturers for the knowledge and lessons they gave me and thank my classmates for their support during the time I studied at the programme Last but not least, my sincerest thank is for my family, especially my beloved wife Without their frequent encouragement as well as spiritual support, I would not have been able to complete this thesis ii Abstract This thesis analyzes the interaction effects between FDI growth and institutional environment in Vietnam in the period of 2008 – 2011 Detailed data of FDI, some traditional FDI-related factors and institutional environment are consolidated from the Provincial Competitiveness Index (PCI) Reports of Vietnamese Chamber of Commerce and Industry (VCCI) and the U.S Agency for International Development (USAID) and from Statistical Yearbooks of General Statistics Office of Vietnam Different functional forms are employed using fix-effects technique to identify the factors affecting FDI flow into provinces in Vietnam The major results of the thesis show that there exists a significant relationship between FDI inflow and institutional environment which is proxied by nine sub-indices of PCI Reports Although not all of those indices are significantly related to FDI in the period 2008-2011, the PCI Reports are becoming more and more popular and a trustworthy reference source for foreign investors prior to investing into Vietnam Keywords: inward FDI, institutions, Provincial Competitiveness Index (PCI), functional forms, fix-effects technique TABLE OF CONTENTS Declaration i Acknowledgement .ii Abstract iii Table of contents iv List of tables vii List of figures viii CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objective 1.3 Research question 1.4 Organization of the study CHAPTER 2: LITERATURE REVIEW 2.1 Definition of Foreign Direct Investment (FDI) 2.2 The role of FDI in the economy 2.3 Factors attracting FDI inflows .6 2.4 FDI theories 2.4.1 Portfolio theory 2.4.2 International trade theory 2.4.3 Market imperfection theory 2.5 Concept of Institutions 2.6 The role of institutions in the economy 2.7 Theories of Institutions and FDI 2.8 Empirical studies on Institutions and FDI 10 CHAPTER 3: RESEARCH METHODOLOGY, VARIABLES DESCRIPTION AND DATA SOURCE 15 3.1 Research Methodology 15 3.2 Variables description 17 3.2.1 Foreign Direct Investment (FDI) .17 3.2.2 Provincial Competitiveness Index (PCI) and nine sub-indices 17 3.2.3 Traditional variables 19 3.3 Data source 20 CHAPTER 4: ECONOMETRIC ANALYSIS AND RESULTS 21 4.1 An overview of Foreign direct investment (FDI) and Provincial competitiveness index (PCI) in Vietnam from 2008 to 2011 21 4.1.1 Foreign direct investment (FDI) 21 4.1.2 Provincial competitiveness index (PCI) 22 4.2 Overall descriptive statistics of variables 23 4.3 conometric analysis and results 24 4.3.1 Entry costs – EC; Land access and security of tenure – LAST; Transparency and access to information – TAI and Proactivity of provincial leadership – PPL 25 4.3.2 Informal charges – IC; Time costs for administrative procedures and inspection – TCPI; Business support service – BSS; Labor training – LT and Legal institutions – LI 28 4.4 Summary of key findings 35 CHAPTER 5: CONCLUSION 39 5.1 Conclusion and recommendation 39 5.2 Limitation 40 REFERENCES .42 APPENDIX 47 LIST OF TABLES Table 3.1: Summary of variables .15 Table 4.1: FDI of top ten provinces over the period from 2008 to 2011 (in million USD) .22 Table 4.2: PCI of top ten provinces in Vietnam from 2008 to 2011 (100-point scale) 23 Table 4.3: Overall descriptive statistics of variables 23 Table 4.4: Econometric results of five regression models with variable Entry costs – EC 25 Table 4.5: Econometric results of five regression models with variable Informal charges – IC 29 Table 4.6: Regression results of five significant PCI variables 31 Table 4.7: Average marginal effects of nine PCI sub-indices 35 vii LIST OF FIGURES Figure 4.1: Registered FDI in Vietnam over the period from 2008 to 2011 21 Figure 4.2: FDI and Entry costs over period 2008-2011 27 Figure 4.3: FDI and Land access and security of tenure over period 2008-2011 27 Figure 4.4: FDI and Transparency and access to information over period 2008-2011 .28 Figure 4.5: FDI and Proactivity of provincial leadership over period 2008-2011 .28 Figure 4.6: FDI and Informal charges score over period 2008-2011 31 Figure 4.7: FDI and score of Time costs for administrative procedures and inspections over period 2008-2011 .34 Figure 4.8: FDI and Business support service score over period 2008-2011 34 Figure 4.9: FDI and Labor training score over period 2008-2011 .34 Figure 4.10: FDI and Legal institutions score over period 2008-2011 34 Figure 4.11: Relationship between informal charges score and inward FDI in logarithmic model 36 Figure 4.12: Relationship between the score of time costs for administrative procedures and inspections and inward FDI in logarithmic model .37 Figure 4.13: Relationship between business support service score and inward FDI in linear model 37 Figure 4.14: Relationship between labor training score and inward FDI in logarithmic model 38 Figure 4.15: Relationship between legal institutions score and inward FDI in quadratic model .38 viii CHAPTER INTRODUCTION 1.1 Problem Statement Foreign Direct Investment (FDI) has been playing an important role in economic growth of every country all over the world As the observation of UNCTAD (2003), FDI became a more and more crucial factor in the development and integration of global economy during the last decade of 20th century Specifically, Romer (1993) asserted the importance of FDI to developing countries in the aspect of removing the gap in human capital in comparison with developed countries Vietnam, a typical developing country, has been paying close attention to FDI for the country’s development How to attract more and more FDI to the country to stimulate job creation and economic growth is considered as one of the top priorities of the country’s government It is generally accepted that institutional environment is a key factor affecting inward FDI Being aware of this matter, provinces in Vietnam have tried to improve their institution environment in order to increase inward FDI Giang (2008), in a study of FDI in the Northern Mountainous Provinces, proved that due to less transparency of local authority, this area was reported to have poor inward FDI compared with provinces in other areas of Vietnam The Provincial Competitiveness Index (PCI) was developed in 2005 by the Vietnamese Chamber of Commerce and Industry (VCCI) and the U.S Agency for International Development (USAID) to measure and assess the standards of economic governance of 63 provinces in Vietnam The PCI is, in other words, believed to reflect the efficiency of institutional environment According to the reports of PCI 2009 and 2011, Lao Cai and Bac Ninh tried to apply new initiatives and solutions in economic governance more efficiently to improve their ranking from the third and the tenth in 2009 into the first and the second in 2011 The inward FDI in Lao Cai and Bac Ninh in 2011 subsequently increased more than 150% and 400% compared to the year 2009 In addition, Vietnam’s government considers PCI one of the most important factors in the enhancement of business environment as stated in Decision 19/NQ-CP dated March 18th 2014 The government subsequently requested all provinces to pay close attention to the improving of institutional environment in order to increase their PCI scores The institutional environment or institutions mentioned in this thesis could be generally defined as the combination of several factors reflecting economic governance as recommended by PCI CHAPTER CONCLUSION 5.1 Conclusion and recommendation Based on the detailed literature background and empirical studies of FDI and institutions, along with the dataset of inward FDI and nine PCI sub-indices and five traditional variables which are collected from the General Statistics Office of Vietnam (GSO) and Provincial Competitiveness Index (PCI) project over the period 2008 to 2011, this thesis’s research question and objectives are believed to be appropriately fulfilled By applying five different functional forms which are Linear FDI-linear PCI, Linear FDI-quadratic PCI, Linear FDI-logarithmic PCI, Logarithmic FDI-linear PCI, Logarithmic FDI-logarithmic PCI, provincial inward FDI as a dependent variable is analyzed with explanatory variables including nine PCI sub-indices and five traditional FDI-related variables Every single PCI sub-index is examined with all five traditional variables in a separate functional form using fix-effects technique The econometric results reveal that not all of nine PCI sub-indices and five traditional variables are determinants of provincial FDI The results demonstrate that five PCI sub-indices including informal charges, time costs for administrative procedures and inspections, business support service, labor training, legal institutions and the traditional variable of industrial product are determinants of provincial FDI Specifically, informal charges score is positively related to provincial FDI inflow; while scores of time costs for administrative procedures and inspections, business support service, labor training, legal institutions and the traditional variable of industrial product have negative relationship with inward FDI The above conclusion reflects practical situation of Vietnam’s provinces over the period of 2008 to 2011 First of all, informal charges score is the only sub-index which is positively affected inward FDI This means foreign investors usually pay close attention to informal charges occurred in daily business operation It could be considered as a common form of corruption and bribery performed by local authorities Therefore, provinces need to reform and to improve the effectiveness of business environment, especially administrative authorities to mitigate bad impact of informal charges A province with high informal charges score demonstrates a good business environment where firms have to encounter less difficulties caused by informal charges, and results in more FDI invested into that province Other two factors related to bureaucracy and corruption are time costs for administrative procedures and inspections and legal institutions These two factors, in fact, not support the attraction of inward FDI In other words, FDI enterprises tend to be indifferent to the interruption of administrative procedure and local inspections and investigations as well as judicial system It is not necessary for provinces to improve these two factors to attract inward FDI Next, the business support service score negatively affects FDI This result shows that FDI enterprises pay no attention to the business support services or not trust the quality of these services performed by local suppliers These services may not meet the requirement of FDI enterprises or foreign investors and not help provinces attract more inward FDI Although work force is an advantage of Vietnam but efforts made by local authorities in labor training such as general education, vocational training not result in more inward FDI Actually, it is negatively related to FDI The reason for this situation is that foreign investors may not trust the quality of labor force from general education and vocational training, which is usually not high quality labor These laborers not meet FDI enterprises’ expectation and it causes bad impact on FDI decision of foreign investors The last indicator having slightly negative relationship with inward FDI is industrial product which describes the size of manufacturing industry of a province Foreign investors can invest their fund into many different industries, not only into manufacturing industries Therefore, they are interested in the size of other industries such as service industry, agriculture Only focusing on developing manufacturing industry will not help provinces attract more FDI These econometric results prove that provincial inward FDI in Vietnam over the period 20082011 is strongly related to institutional environment, which is represented by PCI sub-indices The relationship includes both positive and negative effect which depends on nature of each factor and the current expectation and requirement of foreign investors as well as FDI enterprises 5.2 Limitation The main limitation of this thesis is about the data of registered inward FDI An ideal dataset of inward FDI should be implemented FDI or disbursed FDI However, due to the difficulty in collecting the data of implemented FDI, the registered FDI is used instead The using of implemented inward FDI could make the regression results more related to current situation 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Statistics APPENDIX Appendix – Econometric results of five regression models with variable Land access and security of tenure – LAST Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linLAST quadraticLAST lnLAST linLAST lnLAST C 1,687.32 -1,614.68 1,356.84 0.64 1.33 LAST -0.07 967.18 -0.27 (t-stat) (-0.0006) (1.15) (-1.22) LAST2 -77.56 (t-stat) (-1.16) lnLAST 134.91 -1.35 (t-stat) (0.19) (-1.01) INF 535.53 388.26 538.06 1.8 -1.86 (t-stat) (0.68) (0.48) (0.68) (1.24) (1.27) MS 0.004 0.004 0.004 0.00 0.00 (t-stat) (0.48) (0.49) (0.48) (0.54) (0.54) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.65)* (-3.7)* (-3.67)* (-1.3) (-1.31) MER -532.72 -450.86 -528.6 -1.03 -1.04 (t-stat) (-0.78) (-0.66) (-0.77) (-0.82) (-0.82) LF -0.76 -0.22 -0.65 0.0 0.0 (t-stat) (-0.24) (-0.07) (-0.2) (0.78) (0.78) R2 Wald Test 0.513 0.517 0.513 0.7 0.7 Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 2.83* 2.82* 2.84* 6.37* 6.35* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Accept H0: Accept H0: Accept H0: Appendix – Econometric results of five regression models with variable Transparency and access to information – TAI Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linTAI quadraticTAI lnTAI linTAI lnTAI C 1,694.22 1,316.48 1,641.25 0.07 -0.59 TAI -1.03 173.73 -0.28 (t-stat) (-0.007) (0.21) (-1.02) TAI2 -15.95 (t-stat) (-0.22) lnTAI 23.51 -0.71 (t-stat) (0.03) (-0.5) INF 535.33 533.06 536.43 1.82 1.86 (t-stat) (0.68) (0.67) (0.68) (1.25) (1.27) MS 0.004 0.004 0.004 0.00 0.00 (t-stat) (0.48) (0.49) (0.48) (0.57) (0.56) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.64)* (-3.63)* (-3.64)* (-1.5) (-1.42) MER -533.13 -545.27 -531.22 -1.11 -1.04 (t-stat) (-0.78) (-0.79) (-0.77) (-0.87) (-0.82) LF -0.76 -0.85 -0.75 0.005 0.005 (t-stat) (-0.24) (-0.26) (-0.24) (0.9) (0.95) R2 Wald Test 0.513 0.513 0.513 0.7 0.7 Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 2.84* 2.78* 2.84* 6.35* 6.31* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Accept H0: Accept H0: Accept H0: Appendix – Econometric results of five regression models with variable Proactivity of provincial leadership – PPL Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linPPL quadraticPPL lnPPL linPPL lnPPL C 1,877.25 1,378.36 1,742.56 -0.32 -0.61 PPL -23.82 229.75 -0.20 (t-stat) (-0.28) (0.66) (-1.3) PPL2 -25.76 (t-stat) (-0.76) lnPPL -25.62 -0.62 (t-stat) (-0.07) (-0.92) INF 507.59 616.75 525.66 1.64 1.64 (t-stat) (0.64) (0.76) (0.65) (1.12) (1.11) MS 0.004 0.004 0.004 0.00 0.00 (t-stat) (0.46) (0.48) (0.47) (0.43) (0.46) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.66)* (-3.69)* (-3.66)* (-1.39) (-1.38) MER -542.12 -586.11 -533.76 -1.08 -1.02 (t-stat) (-0.79) (-0.85) (-0.78) (-0.85) (-0.81) LF -0.81 -0.95 -0.77 0.005 0.005 (t-stat) (-0.26) (-0.29) (-0.24) (0.88) (0.92) R2 Wald Test 0.513 0.515 0.513 0.7 0.7 Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 2.84* 2.80* 2.84* 6.38* 6.34* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Accept H0: Accept H0: Accept H0: Appendix – Econometric results of five regression models with variable Time costs for administrative procedures and inspection – TCPI Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linTCPI quadraticTCPI lnTCPI linTCPI lnTCPI C 1,653.84 3,375.75 2,478.04 -1.99 -1.34 TCPI -191.23 -840.2 -0.15 (t-stat) (-2.14)* (-1.31) (-0.91) TCPI2 52.86 (t-stat) (1.02) lnTCPI -1,156.15 -0.91 (t-stat) (-2.21)* (-0.93) INF 647.02 642.97 644.16 1.97 1.97 (t-stat) (0.83) (0.82) (0.82) (1.35) (1.34) MS 0.002 0.003 0.002 0.00 0.00 (t-stat) (0.31) (0.35) (0.32) (0.47) (0.48) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.55)* (-3.62)* (-3.59)* (-1.32) (-1.33) MER -254.96 -295.08 -264.76 -0.78 -0.79 (t-stat) (-0.37) (-0.43) (-0.39) (-0.6) (-0.61) LF 0.567 0.86 0.68 0.007 0.009 (t-stat) (0.18) (0.27) (0.21) (1.12) (1.13) R2 Wald Test 0.525 0.528 0.526 0.7 0.7 Reject H0: Accept H0: Reject H0: Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 2.98* 2.95* 2.99* 6.34* 6.34* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Appendix – Econometric results of five regression models with variable Business support service – BSS Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linBSS quadraticBSS lnBSS linBSS lnBSS C 1,649.47 1,470.11 1,633.34 -1.98 -1.98 BSS -177.81 162.11 -0.09 (t-stat) (-2.96)* (0.47) (-0.79) BSS2 -38.41 (t-stat) (-1.01) lnBSS -685.13 -0.26 (t-stat) (-2.85)* (-0.58) INF 336.79 464.05 270.72 1.78 1.78 (t-stat) (0.43) (0.59) (0.35) (1.21) (1.21) MS 0.004 0.005 0.003 0.00 0.00 (t-stat) (0.53) (0.67) (0.46) (0.56) (0.54) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.89)* (-3.89)* (-3.88)* (-1.42) (-1.41) MER -363.76 -396.17 -357.27 -0.91 -0.93 (t-stat) (-0.54) (-0.59) (-0.53) (-0.72) (-0.73) LF 0.39 -0.34 0.71 0.006 0.006 (t-stat) (0.13) (-0.1) (0.23) (1.06) (1.05) R2 Wald Test 0.535 0.538 0.534 0.7 0.7 Reject H0: Reject H0: Reject H0: Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 3.1* 3.07* 3.08* 6.33* 6.31* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Appendix – Econometric results of five regression models with variable Labor training – LT Variables linFDI- linFDI- linFDI- lnFDI- lnFDI- linLT quadraticLT lnLT linLT lnLT C 1,539.97 2,066.43 1,792.48 -2.1 -1.85 LT -282.35 -780.45 -0.27 (t-stat) (-2.48)* (-1.37) (-1.24) LT2 52.49 (t-stat) (0.89) lnLT -1,304.98 -1.36 (t-stat) (-2.63)* (-1.46) INF 340.84 353.47 351.43 1.69 1.69 (t-stat) (0.44) (0.45) (0.45) (1.16) (1.16) MS 0.004 0.004 0.004 0.00 0.00 (t-stat) (0.53) (0.46) (0.48) (0.57) (0.54) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.99)* (-3.98)* (-4.01)* (-1.53) (-1.55) MER -535.87 -483.79 -498.69 -1.00 -0.96 (t-stat) (-0.79) (-0.72) (-0.74) (-0.79) (-0.76) LF 1.37 2.12 1.88 0.008 0.008 (t-stat) (0.42) (0.63) (0.57) (1.26) (1.37) R2 Wald Test 0.529 0.531 0.531 0.7 0.7 Reject H0: Reject H0: Reject H0: Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 3.02* 2.99* 3.05* 6.37* 6.4* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% Appendix – Econometric results of five regression models with variable Legal institutions – LI Variables linFDI- linFDI- linFDI- lnFDI- linLI quadraticLI lnLI linLI C 1,931.27 5,027.5 2,514.84 -1.87 LI -220.37 -1,734.61 -0.08 (t-stat) (-2.15)* (-2.58)* (-0.42) LI2 155.61 (t-stat) (2.28)* lnFDI-lnLI -1.47 lnLI -1,179.65 -0.69 (t-stat) (-2.53)* (-0.79) INF 405.62 414.22 390.48 1.83 1.79 (t-stat) (0.52) (0.53) (0.5) (1.25) (1.23) MS 0.004 0.007 0.005 0.00 0.00 (t-stat) (0.58) (0.91) (0.65) (0.56) (0.59) IP -0.02 -0.02 -0.02 0.00 0.00 (t-stat) (-3.48)* (-3.94)* (-3.56)* (-1.33) (-1.33) MER -480.38 -560.08 -485.54 -0.98 -0.97 (t-stat) (-0.71) (-0.84) (-0.72) (-0.77) (-0.77) LF 0.35 0.97 0.61 0.006 0.006 (t-stat) (0.11) (0.31) (0.19) (1.02) (1.08) R2 Wald Test 0.525 0.538 0.529 0.7 0.7 Reject H0: Reject H0: Reject H0: Accept H0: Accept H0: α1 = β1 = β2 = δ1 = γ1 = µ1 = 2.98* 3.08* 3.03* 6.31* 6.33* (infrastructure) (market size) (industrial product) (major economic region) (labor force) F-ratio Note: Sign of * indicates significance level at 5% ... ii Abstract This thesis analyzes the interaction effects between FDI growth and institutional environment in Vietnam in the period of 2008 – 2011 Detailed data of FDI, some traditional FDI- related... decision-making, which include political and macroeconomic stability, the nature and extent of governmental policies related to infrastructure and labor force and an organization of a legalinstitutional... institutional changes, Soulsby and Clark (1996) demonstrated that basic and primary institutional changes have contributed to a reinstitutionalization of management through the acquirement of administrative