INTRODUCTION
Problem statement
Foreign Direct Investment (FDI) is essential for the economic growth of countries worldwide According to UNCTAD (2003), FDI has increasingly become a vital component in the development and integration of the global economy, especially during the last decade of the 20th century Romer (1993) emphasized that FDI is particularly significant for developing countries, as it helps bridge the human capital gap between them and developed nations.
Vietnam, as a developing nation, prioritizes attracting foreign direct investment (FDI) to foster economic growth and job creation The government is focused on implementing strategies to increase FDI inflows, recognizing its vital role in the country’s development.
The institutional environment is widely recognized as a crucial determinant of inward foreign direct investment (FDI) In response, Vietnamese provinces have made efforts to enhance their institutional frameworks to attract more FDI A study by Giang (2008) on FDI in the Northern Mountainous Provinces revealed that a lack of transparency among local authorities contributed to lower levels of inward FDI compared to other regions in Vietnam.
The Provincial Competitiveness Index (PCI), established in 2005 by the Vietnamese Chamber of Commerce and Industry (VCCI) and the U.S Agency for International Development (USAID), evaluates the economic governance standards across Vietnam's 63 provinces It serves as an indicator of the institutional environment's efficiency Notably, in 2009 and 2011, Lao Cai and Bac Ninh implemented innovative economic governance strategies, resulting in significant improvements in their PCI rankings, from third and tenth to first and second, respectively This shift was accompanied by remarkable increases in foreign direct investment (FDI) in both provinces, with Lao Cai and Bac Ninh experiencing growth rates of over 150% and 400% compared to 2009 Recognizing the PCI's importance, the Vietnamese government emphasized the need for provinces to enhance their institutional environments to boost their PCI scores, as outlined in Decision 19/NQ-CP on March 18, 2014.
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
The relationship between institutions and foreign direct investment (FDI) is critical, with various studies highlighting key indicators that influence this dynamic Institutions are defined as systems that protect property rights, enforce laws, and manage corruption (Rodrik & Subramanian, 2003; Hodgson, 2006) Kaufman et al (1999) identified five economic governance indicators—political instability, government efficiency, regulatory issues, rule of law, and corruption—that significantly impact FDI Pajunen (2008) emphasized that the interplay of multiple institutional factors, including corruption and political stability, shapes FDI inflows Wei (1997, 2000) further asserted that corruption negatively affects FDI, while Pournarakis and Varsakelis (2004) posited that higher institutional quality correlates with increased FDI Bevan, Estrin, and Meyer (2004) argued that specific institutional aspects, such as private business ownership and legal system enhancements, are crucial for attracting foreign investors Busse and Hefeker (2006) identified six significant determinants of FDI, including government stability and regulatory frameworks Ultimately, good institutions in the host country positively influence FDI, as demonstrated by Mayer et al (2007).
The "Institutional Profiles" report highlights 26 key indicators from a survey of 52 countries conducted in 2001, revealing that factors such as bureaucracy, corruption, information availability, the banking sector, and legal institutions significantly influence the attraction of inward foreign direct investment (FDI).
Weak capital concentration and inadequate employment protection can hinder foreign direct investment (FDI) Daude and Stein (2007) echo Mayer et al.'s findings, emphasizing that stronger institutions are positively correlated with FDI inflows They identify several institutional factors detrimental to inward FDI, including policy uncertainty, complex regulations, government instability, and a lack of commitment.
This thesis posits that a stronger institutional environment, as indicated by the Provincial Competitiveness Index (PCI), leads to increased foreign direct investment (FDI) in Vietnam Given that provinces are actively working to enhance their institutional frameworks to boost their PCI rankings, it is essential to explore whether a high PCI score genuinely serves as a catalyst for provincial development, particularly in attracting more inward FDI, which is expected to drive economic growth.
The insights gained from this analysis will aid the Vietnamese government and provincial authorities in evaluating whether a robust Provincial Competitiveness Index (PCI) can drive high Foreign Direct Investment (FDI) Additionally, it will identify which specific aspects of the PCI require focused attention to enhance its positive influence on FDI.
Research objective
The main objective of this thesis is to examine the effects of institutional environment reflected by the PCI scores on inward FDI of provinces in Vietnam.
This thesis analyzes a dataset from the annual PCI reports of the Vietnamese Chamber of Commerce and Industry (VCCI) and the General Statistics Office's statistical yearbook from 2008 to 2011 The study employs various econometric models to assess the relationship between PCI sub-indices and foreign direct investment (FDI) in Vietnam Results indicate that only five of the nine PCI sub-indices—namely informal charges, time costs for administrative procedures, business support services, labor training, and legal institutions—significantly influence FDI inflows Despite this, the overall PCI score remains a crucial factor in attracting inward FDI, aligning with government policies aimed at enhancing provincial competitiveness to foster economic growth.
Research question
The research aims to determine if provinces with a higher Provincial Competitiveness Index (PCI) score are more successful in attracting foreign direct investment (FDI) compared to those with lower scores Additionally, it will investigate whether specific sub-indices of the PCI, rather than the overall score, play a more significant role in explaining the variations in inward FDI across different provinces.
Organization of the study
The thesis is structured into five chapters, beginning with an introduction that highlights its significance and rationale Chapter two presents a literature review that includes both theoretical frameworks and empirical studies to underpin the research methodology In chapter three, the methodology is detailed, including the development of the research model, definitions of independent and dependent variables, and the dataset generation process Chapter four focuses on the econometric analysis and key findings of the study Finally, chapter five concludes with a summary and policy recommendations.
LITERATURE REVIEW
Definition of Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is defined by the OECD as a cross-border investment made by a resident entity in one economy with the aim of establishing a lasting interest in an enterprise located in another economy This lasting interest indicates a long-term relationship and significant influence of the direct investor over the enterprise's management A key criterion for this influence is ownership of at least 10% of the voting power in the enterprise.
The role of FDI in the economy
The role of FDI in the economy has been discussed by many researchers in the world Wang
A study by 2009 highlighted the significant role of foreign direct investment (FDI) in the manufacturing sector for economic growth in 12 Asian countries from 1987 to 1997, while non-manufacturing FDI showed no substantial impact Mun et al (2008) conducted a time-series analysis in Malaysia from 1970 to 2005, revealing a strong positive relationship between FDI inflows and both gross domestic production (GDP) and gross national income (GNI), contributing to Malaysia's economic growth Vadlamannati and Tamazian (2009) examined 80 developing countries from 1980 to 2006 and found that increased FDI inflows positively influenced output growth per worker Furthermore, Li and Liu (2005) analyzed a dataset from 84 countries (1970-1999) and determined that FDI directly boosts economic growth, while its combination with human capital promotes growth indirectly, although a technology gap can negatively affect developing countries' growth Nguyen et al (2012) focused on Vietnam and concluded through fixed-effects estimation of a panel dataset from 63 provinces (2000-2010) that FDI inflows positively impact Vietnam's economic growth.
Factors attracting FDI inflows
A cointegration study by Sahoo (2006) on foreign direct investment (FDI) in South Asia, specifically India, Bangladesh, Pakistan, Nepal, and Sri Lanka, reveals a long-run equilibrium relationship between FDI and its determinants, with market size and human capital growth identified as the most significant factors Sahoo emphasizes the need for South Asian countries to enhance their market size, improve labor force policies, develop infrastructure, and promote trade openness to attract more FDI Additionally, research by Nonnemberg and Mendonca (2004) highlights education as a key determinant of FDI in developing countries, which often involves knowledge-intensive activities, while economic openness is crucial for attracting foreign investments In China, Dang (2008) notes that local market advantages, low production costs due to cheap labor, quality infrastructure, and a supportive government environment significantly influence FDI inflows Similarly, Giang (2008) identifies factors affecting FDI in Vietnam's Northern Mountainous Provinces, including proximity to business centers, infrastructure, and the overall FDI environment, which is deemed less favorable compared to other regions Anh and Thang (2007) further emphasize that foreign investors prioritize market potential, human capital, and infrastructure when making location decisions.
FDI theories
The portfolio approach by Markowitz (1952) and Tobin (1958) suggests that surplus profits from international markets compensate for the higher risks associated with capital allocation The returns from various investments should be linked to risk factors when selecting substitutable properties for an effective portfolio However, Dunning (1973) argued that portfolio theory only partially explains foreign direct investment (FDI), as it overlooks the lack of relationship between direct investment and ownership changes Instead, FDI is influenced by the investment in key inputs such as entrepreneurship, technology, and management experience, which can be affected by the relative profitability of these factors across different countries compared to capital investment.
Mundell (1957) established a foundational model illustrating that trade and capital flows can act as substitutes, suggesting that trade tariffs may lead to increased foreign direct investment (FDI) in protected nations This aligns with the original Heckscher-Ohlin model, which posits that trade barriers can be offset by the international movement of capital, particularly in the context of immobile labor Expanding on this, Kojima (1973) identified four primary motivations for FDI: (i) exploiting natural resources, (ii) capitalizing on low labor costs in host countries, (iii) circumventing tariff and non-tariff barriers, and (iv) leveraging oligopolistic advantages through superior technology and knowledge.
Hymer (1960), in the Hymer-Kindleberger hypothesis, posited that foreign firms face disadvantages compared to domestic firms, such as limited market knowledge and experience To successfully engage in foreign production, these firms must possess specific advantages He also highlighted that Foreign Direct Investment (FDI) involves more than just capital transfer; it encompasses the international movement of intangible assets, including techniques, business facilities, and skilled labor Hymer asserted that imperfections in foreign markets for these assets drive the necessity for FDI, allowing firms to internalize or mitigate these market imperfections.
Concept of Institutions
Various theories and approaches have been developed to understand the determinants of Foreign Direct Investment (FDI) due to its significant relevance This thesis posits that the institutional environment plays a critical role in influencing FDI decision-making.
In his 1931 study of institutional economics, Commons defined institutions as "collective action in control, liberation, and expansion of individual action." He emphasized that collective action encompasses not only the regulation of individual behavior but also the freedom from constraints such as compulsion, pressure, prejudice, or injustice that individuals face in competition Furthermore, collective action enhances individual determination, allowing for achievements beyond what one could accomplish alone.
North (1990) describes institutions as the fundamental rules that govern societal interactions, defining them as human-created constraints that influence how individuals engage with one another These institutions play a crucial role in shaping incentives across various exchanges, including political, social, and economic realms.
Hodgson (2006) defines institutions as frameworks of established social rules that govern interactions, emphasizing that these rules are socially transmitted and can spark normative debates when challenged Similarly, Nelson and Sampat (2001) describe institutions as "standard social technologies," highlighting their role in human interaction akin to physical technologies They argue that institutions significantly influence economic performance and growth by integrating both physical and social technologies.
Roversi (2013) proposed a novel approach to the concept of institutions by introducing two supplementary ideas: meta-institutional and para-institutional concepts Meta-institutional concepts are characterized as "aim-oriented" and "value-oriented," where "aim-oriented" focuses on the purposes and internal objectives of social practices, while "value-oriented" relates to the fundamental values underlying these practices In contrast, para-institutional concepts encompass "act-describing" and "fact-describing," with "act-describing" referring to common actions, performances, or planning within social contexts.
"Fact-describing" refers to the detailed examination of real institutional practices, highlighting their specific aspects This concept is closely connected to "constitutive rules," which play a vital role in shaping the creation of institutional reality Together, these elements underscore the importance of understanding how rules influence institutional frameworks.
The role of institutions in the economy
The analysis of the role of institutions in emerging economies has been extensively explored by researchers Scott (1995) emphasized that institutional theory highlights the surrounding systems that shape societal and organizational behaviors Peng and Heath (1996) noted that firms in transition economies encounter challenges in internal growth due to institutional constraints, suggesting that a network-based growth strategy is more viable in these contexts Lau (1998) examined Chinese enterprises and found that they faced similar institutional constraints, including political and market pressures Similarly, Suhomlinova (1999) studied Russian enterprises and identified government institutions as significant constraints on innovation in Russia.
Placing an emphasis on the economic reform of large state-owned enterprises, Child and Lu
In 1996, it was demonstrated that material, relational, and cultural constraints hindered smooth reform processes Jefferson and Rawski (1995) highlighted that the success of China's industrial reform was linked to significant institutional changes, reduced state ownership, and the establishment of private property rights These institutional changes are believed to stimulate a shift in enterprise culture, empowering both private and state-owned firms to improve Similarly, Soulsby and Clark (1996) argued that fundamental institutional changes have facilitated a reinstitutionalization of management by enhancing administrative expertise, which is essential for navigating the new environment and making strategic decisions.
Theories of Institutions and FDI
An important point about the effects of institutions on FDI is related to transaction costs North
Institutions play a crucial role in shaping societal interactions and organizational actions by influencing transaction and information costs, ultimately affecting foreign direct investment (FDI) decisions and their implementation According to North (1990), the effectiveness of political institutions can be evaluated by how closely a political market approaches a zero transaction cost scenario, suggesting that countries with favorable institutional environments are more likely to attract inward FDI Berge (2012) further emphasizes that institutions significantly impact nation-level profitability assessments for multinational enterprises, which include factors such as reduced transportation and communication costs, as well as improved access to resources and facilities The theoretical framework of new institutional economics underpins these insights, highlighting the importance of institutions in the FDI landscape.
In 2005, a study was conducted to explore the interaction between foreign direct investment (FDI) activity and the development of institutions The findings indicated that FDI is significantly affected by macroeconomic, microeconomic, and institutional changes at the country level Notably, these institutional changes play a crucial role in either reducing or increasing the unpredictability and costs associated with long-term capital investments.
The impact of government, legal systems, corruption, and infrastructure is vital in understanding the effects of institutions on inward foreign direct investment (FDI) Meyer (2001) highlights that transitional economies are increasingly modifying their institutional frameworks to attract FDI Blonigen (2005) emphasizes that institutions are a key determinant of FDI, particularly in less-developed countries A lack of legal asset protection can increase the risk of expropriation, deterring investment Furthermore, poor institutional quality and high corruption can raise business costs, negatively affecting FDI Lastly, inadequate institutions often result in weak infrastructure and low expected profitability, further diminishing FDI inflows.
Empirical studies on Institutions and FDI
A typical approach of institutions and FDI has been used by many researchers, which is the analyzing of several countries in some specific regions and pointing out significant institutional
Numerous factors influence inward Foreign Direct Investment (FDI), particularly in Latin America and other regions Ramirez (2010) identifies key institutional elements affecting FDI decision-making, such as political and macroeconomic stability, government policies on infrastructure and labor, and a supportive legal framework Similarly, Gross and Trevino (2005) highlight the detrimental effects of corruption and political risk on FDI inflows in Central and Eastern Europe, while noting that bilateral investment agreements positively influence investment Campos and Kinoshita (2003) emphasize that high institutional quality, characterized by low corruption, a fair judiciary, and efficient bureaucracy, is crucial for attracting foreign investors in transition economies Bissoon (2011) further supports this by demonstrating that strong institutional quality—marked by controlled inflation, effective corruption management, a robust legal system, political stability, and press freedom—positively affects FDI in developing countries across Africa, Latin America, and Asia Additionally, Alemu (2012) finds that corruption significantly undermines FDI attractiveness in 16 Asian economies, underscoring the importance of good governance in enhancing investment flows.
Another type of approaching institutions is the examining of multinational enterprises Using evidence from United State multinationals investing in many different regions in China, Du et al.
A 2008 study examined how economic institutions influence foreign direct investment (FDI) location decisions The findings revealed that U.S companies favor investing in regions that offer strong protection for intellectual property rights, minimal government intervention in business, lower levels of corruption, and efficient contract enforcement.
Researchers have explored the relationship between institutions and foreign direct investment (FDI) in rapidly growing economies, such as India, which experienced significant FDI inflows from 1996 to 2000 Collins et al (2008) proposed a framework encompassing the overall institutional environment and three dimensions: regulative, cognitive, and normative institutions Their findings indicated that a favorable overall institutional environment positively correlates with FDI, with regulative institutions—encompassing rule of law and regulations—having the strongest influence on investments In contrast, cognitive institutions offer firms valuable appraisal knowledge, while normative institutions showed no significant impact on FDI flows in India Conversely, Trevino et al (2008) examined Latin America from 1970 to 2000 and found that cognitive and normative institutions, represented by factors like bilateral investment treaties and educational achievement, significantly influenced FDI, while regulative aspects, such as tax reforms, were less critical in attracting investment to the region.
A province-level and sector-level analysis of institutions and foreign direct investment (FDI) offers alternative insights compared to traditional country-level studies Cole et al (2009) examined the relationship between FDI and governance in Chinese provinces from 1999 to 2003, using public official convictions as a corruption proxy and recorded anti-corruption cases as a measure of governance efforts Their findings indicated that improved governance efficiency correlates with economic growth and attracts more FDI, particularly in provinces with strong anti-corruption measures Similarly, Ali et al (2010) demonstrated through a study of 69 countries from 1981 to 2005 that robust institutions, especially property rights protection, significantly influence FDI inflows Their sector-level analysis revealed that while institutional quality has minimal impact on FDI in the primary sector, it plays a crucial role in attracting investment in the manufacturing and services sectors.
Seyoum (2009) explored the relationship between formal institutions and foreign direct investment (FDI) inflows through an empirical study He defined "formal institutions" as encompassing the independence of the judiciary, the effectiveness of the legal system, protection of property and intellectual property rights, fairness in decision-making, the capability of law-making bodies, and the efficiency of antitrust policies The findings indicate that host countries with robust formal institutions are more successful in attracting FDI Furthermore, Seyoum highlighted that a significant disparity in institutional quality between home and host countries adversely affects FDI inflows.
Masron and Abdullah (2010) examined the relationship between institutional quality and foreign direct investment (FDI) inflows in the ASEAN region from 1996 to 2008, utilizing six World Bank Worldwide Governance Indicators: political freedom, political stability, government effectiveness, regulatory quality, rule of law, and corruption levels Their findings indicated that higher institutional quality correlates with increased FDI inflows; however, the overall impact of institutions on FDI during this period was relatively low due to insufficient focus on institutional improvement by ASEAN countries The authors emphasize that enhancing the institutional environment should be a key policy strategy to significantly attract more FDI to the region.
RESEARCH METHODOLOGY, VARIABLES DESCRIPTION
Research Methodology
This study aims to explore the relationship between foreign direct investment (FDI) inflows and institutional quality, alongside various traditional factors associated with FDI, across 63 provinces in Vietnam.
In order to achieve this research objective, a general econometric model is proposed as below: f(FDI) it = f(Institutions, Traditional) it + u it
The study utilizes the Provincial Competitiveness Index (PCI) to represent the institutional variable, while traditional variables are based on existing theoretical frameworks and empirical research In this analysis, 'i' refers to the provinces in the dataset, 't' signifies the years from 2008 to 2011, and 'u' represents the residuals A summary of the dependent and independent variables examined in this research is provided in Table 3.1 below.
Concept Variable Definition Measurement Unit Symbol
Institutions Entry costs Costs of starting up firms’ business
Institutions Land access and security of tenure
Difficulty in land access and the stability of acquired business premises.
Institutions Transparency and access to information
Ability of accessing plans and legal documents related to firms’ business
Institutions Informal charges Informal charges that firms are required to pay
Institutions Time costs for administrative procedures and
Time spent for bureaucratic compliance and inspections.
10-point scale TCPI inspections Institutions Proactivity of provincial leadership
Creativity and ingenuity of provinces’ leaders
The availability of provinces’ support services
Institutions Labor training The assessment of provinces’ leaders in labor training
Institutions Legal institutions Private sector’s trust in the provincial legal institutions
Tradition Infrastructure Roads paved with asphalt Percentage INF
Tradition Market size Gross retail sales of goods and services
Tradition Industrial product of province
Gross output of provinces’ industry
Tradition Labor force Population at 15 years of age and above
- Northern, Southern, Central and Mekong Delta.
Dummy variable with value of 0 and 1
To analyze the interaction effects between the institutional environment and FDI inflow, various functional forms can be utilized, including linear, quadratic, and logarithmic models This approach generates five regression models: linear FDI-linear PCI, linear FDI-quadratic PCI, linear FDI-logarithmic PCI, logarithmic FDI-linear PCI, and logarithmic FDI-logarithmic PCI To mitigate the risk of multicollinearity from including all PCI sub-indices in a single model, each sub-index will be examined alongside five traditional variables With nine PCI sub-indices, this results in a total of forty-five regression models derived from the five functional forms, all analyzed using fixed-effects techniques Ultimately, the most suitable model will be determined to identify which PCI sub-indices significantly influence FDI inflows.
Variables description
This thesis focuses on analyzing registered provincial foreign direct investment (FDI) in Vietnam, as there are limitations in collecting precise and comprehensive data on FDI disbursement The study encompasses FDI that has been officially registered and licensed across all 63 provinces in the country.
3.2.2 Provincial Competitiveness Index (PCI) and nine sub-indices
The PCI Report 2011 reveals that the PCI data set is derived from a comprehensive nationwide survey involving nearly 7,000 firms across 63 provinces in Vietnam, supplemented by data from the General Statistics Office of Vietnam Firms are selected through a random sampling method to accurately represent the characteristics of businesses in each province The sample is stratified to ensure a precise reflection of factors such as business operation duration, legal structure, and sector The PCI consists of nine sub-indices, which are calculated and standardized on a 10-point scale, leading to a consolidated PCI score adjusted on a 100-point scale based on the weighted average of these sub-indices.
The following exhibits detailed description of nine PCI sub-indices and some other traditional variables related to the attracting of FDI inflows.
This article evaluates the time and complexity involved in the business startup process, focusing on the challenges of business registration and obtaining land use rights By measuring these factors, it provides a comparative analysis of entry costs for newly established firms across different provinces A higher entry cost (EC) score indicates lower startup expenses and a more efficient process for businesses in that province.
Land Access and Security of Tenure - LAST
Firms often face two significant land-related challenges: difficulties in accessing land and ensuring the stability of their business premises Access issues stem from the need for land use rights certificates and the potential for expanding their facilities Meanwhile, security of tenure highlights concerns such as the risk of expropriation, the adequacy of compensation for seized land, and the volatility of land prices.
Transparency and Access to Information – TAI
This indicator assesses the accessibility of essential planning and legal documents provided by local authorities for businesses It evaluates whether new regulations and policies are effectively communicated to firms and implemented consistently Additionally, it examines the user-friendliness and availability of provincial websites for businesses seeking information.
Informal charges imposed on firms can hinder business operations and reflect a "rent-seeking phenomenon" in administrative procedures, raising concerns about potential corruption by provincial authorities A province with a high informal charge (IC) score indicates a favorable business environment, where companies face fewer obstacles related to these charges, ultimately promoting smoother operations.
Time Costs for administrative Procedures and Inspections - TCPI
The TCPI indicator measures the time businesses spend on administrative procedures and the frequency and duration of temporary closures due to inspections by local authorities It also assesses the efficiency and conduct of government officials in managing these processes A higher TCPI score signifies reduced bureaucratic compliance time, indicating that administrative procedures and inspections are handled more efficiently.
Proactivity of Provincial Leadership - PPL
This indicator assesses the proactivity, creativity, and ingenuity of provincial leaders in implementing government policies and proposing constructive initiatives for private sector development It also evaluates their ability to support and effectively apply ambiguous government policies to benefit local private enterprises.
This measure assesses the availability of provincial support services, including trade promotion for the private sector, local law and regulation consultancy, business partnership facilitation, local industrial zone development, and technological services Additionally, it reflects firms' satisfaction with these services and their willingness to utilize them.
This indicator evaluates the effectiveness of provincial leaders in promoting vocational training and skills development tailored to local industries while aiding the workforce in job searching It reflects firms’ perceptions of general education, vocational training, and labor exchange services Additionally, it assesses companies' investments in labor training and recruitment, alongside their overall satisfaction with labor quality Furthermore, this sub-index measures labor quality in provinces by comparing the ratio of vocational training school graduates to untrained labor and the ratio of secondary school graduates to the overall workforce.
This measure assesses the private sector's confidence in the provincial judiciary system, evaluating its effectiveness in resolving business disputes It also examines whether these legal institutions provide a viable avenue for companies to report local authority corruption.
Infrastructure development relies on various elements, including electricity, telephone lines, internet, and roads, with roads being a critical factor in Vietnam This thesis measures infrastructure by the percentage of asphalt-paved roads in each province, as detailed in the annual PCI Reports from 2008 to 2011 A well-developed road system significantly enhances transportation and trade of goods and services, providing a competitive edge in attracting foreign direct investment (FDI).
The indicator is derived from the gross retail sales of goods and services at current prices, reflecting the direct sales made by various business entities, including commercial and production units, farmers, hotels, restaurants, and service providers, directly to consumers in the market.
Industrial Product of province - IP
This indicator reflects the gross output of industrial activities within provinces, encompassing the products manufactured at current prices Industrial products are defined as a blend of material goods and services produced over a specific timeframe.
Vietnam's Government, through Decisions 145 and 148 (2004), 159 (2007), and 492 (2009), has established four key economic regions: Northern, Southern, Central, and Mekong Delta Comprising 24 provinces and cities, these regions play a crucial role in the nation's development and often receive prioritized support from the Government and national authorities.
Data source
The study utilizes a balanced panel data set comprising 252 observations from 63 provinces in Vietnam, covering the period from 2008 to 2011 This data integrates the PCI data collected from annual PCI Reports (2008-2011) alongside various independent variables, including infrastructure, market size, industrial output, and labor force, sourced from Vietnam's General Statistics Office Additionally, the dummy variable representing major economic regions is derived from government Decisions 145, 148 (2004), 159 (2007), and 492 (2009) The selected timeframe is significant as the PCI reports from 2008 to 2011 maintain a consistent framework of determinants, featuring nine sub-indices and employing uniform methodologies for data collection and analysis Notably, the infrastructure data utilized in this research is exclusively available in the PCI reports from 2008 to 2011.
ECONOMETRIC ANALYSIS AND RESULTS
An overview of Foreign direct investment (FDI) and Provincial competitiveness index (PCI) in Vietnam from 2008 to 2011
From 2008 to 2011, Foreign Direct Investment (FDI) in Vietnam exhibited a declining trend, as illustrated in Figure 4.1, which shows annual registered FDI figures The peak in 2008 can be attributed to Vietnam's accession as the 150th member of the World Trade Organization in November 2007, significantly enhancing its appeal to foreign investors However, following this high point, FDI began to decrease, likely influenced by the global financial crisis that emerged at the end of 2008.
Figure 4.1: Registered FDI in Vietnam over the period from 2008 to 2011
Table 4.1 illustrates the Foreign Direct Investment (FDI) trends of Vietnam's top ten provinces from 2008 to 2011 The annual fluctuations in the ranking of these provinces are influenced by various factors, including the institutional environment, infrastructure quality, market size, industrial output, and labor force availability, all of which significantly impact the volume of registered FDI in each province.
Table 4.1: FDI of top ten provinces over the period from 2008 to 2011 (in million USD)
Province FDI Province FDI Province FDI Province FDI
1 Ninh Thuan 9,800.3 BRVT 6,803.5 Quang Nam 4,177.1 HCMC 3,144.6
2 BRVT 9,376 Quang Nam 4,175.3 BRVT 2,555 Hai Duong 2,555.8
3 HCMC 9,071.6 Binh Duong 2,722.4 Quang Ninh 2,200.3 Ha Noi 1,106.3
4 Ha Tinh 7,879.1 Dong Nai 2,644.6 HCMC 2,032.3 Binh Duong 1,006.2
5 Thanh Hoa 6,211.3 Phu Yen 1,689 Nghe An 1,327.7 BRVT 954.6
6 Phu Yen 4,345.9 HCMC 1,617.1 Ca Mau 773 Hai Phong 896.8
7 Ha Noi 3,150.9 Ha Noi 642.2 Long An 617.8 Dong Nai 850.9
8 Quang Ngai 2,460 Da Nang 275.6 Dong Nai 541.3 Bac Ninh 609.4
9 Kien Giang 2,304 Hai Duong 217.5 Binh Thuan 523.9 Tay Ninh 538.3
10 Dong Nai 1,928.6 Hung Yen 162.8 Binh Duong 486 Da Nang 477.8
The Provincial Competitiveness Index (PCI), introduced in 2005 by the Vietnamese Chamber of Commerce and Industry (VCCI) and the U.S Agency for International Development (USAID), evaluates the economic governance of 63 provinces in Vietnam through ten key indicators While infrastructure was included as a significant sub-indicator from 2008 to 2011, it was removed in 2012 to allow for a greater emphasis on other critical factors such as labor training and access to capital.
In 2009, the sub-index pertaining to state-owned enterprises was eliminated, as the authors argued that the majority of these enterprises had undergone equitization, thereby no longer hindering the growth of the private sector in provinces.
Table 4.2 showcases the PCI rankings of the top ten provinces in Vietnam from 2008 to 2011, highlighting significant shifts in their standings These changes reflect the enhancements made to the institutional environments within each province.
Table 4.2: PCI of top ten provinces in Vietnam from 2008 to 2011 (100-point scale)
(Source: PCI Reports from 2008 to 2011)
Province PCI Province PCI Province PCI Province PCI
1 Da Nang 72.18 Da Nang 75.96 Da Nang 69.77 Lao Cai 73.53
2 Binh Duong 71.76 Binh Duong 74.04 Lao Cai 67.97 Bac Ninh 67.27
3 Vinh Phuc 69.37 Lao Cai 70.47 Dong Thap 67.22 Long An 67.12
4 Vinh Long 64.97 Dong Thap 68.54 Tra Vinh 65.80 Dong Thap 67.06
5 Dong Thap 64.64 Vinh Long 67.24 Binh Duong 65.72 Da Nang 66.98
6 Long An 63.99 Vinh Phuc 66.65 Bac Ninh 64.48 BRVT 66.13
7 Ben Tre 62.42 Binh Dinh 65.97 Quang Ninh 64.41 Ha Tinh 65.97
8 Lao Cai 61.22 BRVT 65.96 Hau Giang 63.91 Binh Phuoc 65.87
9 An Giang 61.12 Tien Giang 65.81 Vinh Long 63.40 Dong Nai 64.77
10 TT-Hue 60.71 Bac Ninh 65.70 Ben Tre 63.11 Bac Lieu 63.99
4.2 Overall descriptive statistics of variables
This thesis investigates the impact of PCI sub-indices on FDI inflows, utilizing a dataset comprising 252 observations across 63 provinces over four years, from 2008 to 2011 The study examines 15 variables, including both dependent and independent factors, for each province annually A comprehensive overview of the observed values will be presented in Table 4.3 below.
Table 4.3: Overall descriptive statistics of variables
(Source: PCI Reports and Statistical Yearbooks 2008-2011)
Variables Symbol Mean Median Minimum Maximum
Entry costs (10-point scale) EC 7.93 8.15 5.06 9.52
Land access and security of tenure (10-point scale)
Transparency and access to information
Time costs for administrative procedures and inspections
Proactivity of provincial leadership (10-point scale)
Market size (Billion VND) MS 23,244.4 12,253.6 885.6 437,212.3
Industrial product of province (Billion VND)
As mentioned in Chapter 3, there are five functional forms employed to identify the impact of institutions on FDI inflows, which are:
The linear relationship between Foreign Direct Investment (FDI) and the Political Risk Index (PCI) illustrates how average registered FDI reacts to consistent variations in PCI sub-indices This functional form effectively captures the average behavior of inward FDI in response to changes in PCI scores, providing insights into the impact of political risk on investment decisions.
Linear FDI-quadratic PCI: this functional form is used to measure the trend of inward FDI over the change of score of PCI sub-indices.
Linear FDI-logarithmic PCI: this functional form is used to estimate the absolute change of registered FDI for a percentage change in the score of PCI sub-indices
conometric analysis and results
in the FDI inflows for a unit change in the PCI variables.
Logarithmic FDI-logarithmic PCI: this functional form is used to indicate the percentage change in registered FDI for a percentage change in the score of PCI sub-indices.
In this analysis, not all nine PCI sub-indices are evaluated simultaneously across each functional form Instead, each sub-index will be examined through five distinct functional forms, utilizing all five traditional variables, to identify the most significant factors influencing Foreign Direct Investment (FDI).
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
The regression analysis of Entry Costs (EC) is examined, highlighting five potential regression models based on the established research methodology.
FDIit = α0 + α1ECit+ α2INFit + α3MSit + α4IPit + α5MERit + α6LFit + uit (R.1)
FDIit = β0 + β1ECit + β2EC 2 + β3INFit + β4MSit + β5IPit + β6MERit + β7LFit + uit (R.2)
FDIit = δ0 + δ1lnECit + δ2INFit + δ3MSit + δ4IPit + δ5MERit + δ6LFit + uit (R.3)
Logarithmic FDI-Linear PCI: lnFDIit = γ0 + γ1ECit + γ2INFit + γ3MSit + γ4IPit + γ5MERit + γ6LFit + uit (R.4)
Logarithmic FDI-Logarithmic PCI: lnFDIit = à0 + à1lnECit+ à2INFit + à3MSit + à4IPit + à5MERit + à6LFit + uit (R.5)
By applying fixed-effects technique in running these five regression models, the econometric results are generated as in Table 4.4 below.
Table 4.4: Econometric results of five regression models with variable Entry costs – EC
Note: Sign of * indicates significance level at 5%
The T-test results indicate that entry costs do not significantly affect inward foreign direct investment (FDI) at a 5% significance level Additionally, the Wald test confirms the acceptance of the null hypothesis, suggesting that entry costs are not a significant determinant of inward FDI The only statistically significant variable identified is industrial product, which shows a negative relationship with inward FDI.
Figure 4.2 illustrates the dataset of entry costs and inward foreign direct investment (FDI) from 2008 to 2011, revealing a nonlinear relationship between the two variables While the entry costs score does not exhibit a strong correlation with inward FDI, there is a slight positive relationship indicated in the data.
Figure 4.2: FDI and Entry costs over period 2008-2011
The regression analysis for LAST (Land Access and Security of Tenure), TAI (Transparency and Access to Information), and PPL (Proactivity of Provincial Leadership) indicates that these factors are not significant determinants of inward foreign direct investment (FDI) at the 5% level Further details on these regression results can be found in Appendices 1, 2, and 3, while the accompanying figures below offer a clearer visualization of the relationship between these three variables and inward FDI.
Figure 4.3: FDI and Land access and security of tenure over period 2008-2011
Figure 4.4: FDI and Transparency and access to information over period 2008-2011
Figure 4.5: FDI and Proactivity of provincial leadership over period 2008-2011
Figures 4.3, 4.4, and 4.5 illustrate the relationship between three sub-indices: land access and security of tenure, transparency and access to information, and the proactivity of provincial leadership These figures suggest a weak and nonlinear correlation between these sub-indices and inward foreign direct investment (FDI) Nonetheless, there is a slight positive association between these factors and FDI flow.
4.3.2Informal charges – IC; Time costs for administrative procedures and inspection – TCPI; Business support service – BSS; Labor training – LT and Legal institutions –
The PCI sub-indices are examined through the application of fixed-effects techniques across five regression models, utilizing three functional forms: linear, quadratic, and logarithmic However, the outcomes of these regression analyses differ from those previously discussed Here are the findings from the five models.
L regression models of the variable Informal charges – IC and Table 4.5 which would clearly display the econometric results of this variable.
FDIit = α0 + α1ICit + α2INFit + α3MSit + α4IPit + α5MERit + α6LFit + uit (R.6)
FDIit = β0 + β1ICit + β2ICit 2+ β3INFit + β4MSit + β5IPit + β6MERit + β7LFit + uit (R.7) Linear FDI-Logarithmic PCI:
The econometric analysis presented in Table 4.5 explores the relationship between Foreign Direct Investment (FDI) and various influencing factors through five regression models The first model utilizes a logarithmic transformation of FDI and a linear representation of Informal Charges (IC), while the second model maintains the logarithmic form for both FDI and IC The third model includes logarithmic FDI and linear representations of other variables, such as Inflation (INF), Market Size (MS), Investment Policy (IP), Merger and Acquisition (MER), and Labor Force (LF) Each model aims to identify the impact of informal charges and other economic variables on FDI, providing insights into their significance and interrelationships.
Note: Sign of * indicates significance level at 5%
The Wald test results indicate that the variable Informal Charges (IC) is essential in models R.6, R.7, and R.8, as the null hypotheses (H0: α1 = 0 and β1 = β2 = 0) are rejected The T-test reveals that IC is statistically significant at the 5% level in models R.6 and R.8, suggesting that both the linear and logarithmic forms of IC effectively explain inward Foreign Direct Investment (FDI) To determine the more suitable functional form, a comparison of R-squared values between models R.6 and R.8 is conducted, leading to the conclusion that the logarithmic IC in model R.8 provides the best explanation for the impact of Informal Charges on inward FDI.
The lnIC slope coefficient of approximately 1.775 indicates that a 1% increase in informal charges within a province correlates with an average increase of about 17.75 million USD in registered FDI flow for that year, assuming all other factors remain constant Informal charges, viewed as a form of corruption, negatively affect the business environment Provinces with high levels of informal charges tend to prioritize the improvement of administrative procedures by local authorities, which can lead to a reduction in these charges Consequently, this enhancement of the business environment facilitates the attraction of more foreign direct investment into the province.
The analysis of informal charges and inward foreign direct investment (FDI) reveals a slightly positive but nonlinear relationship, as illustrated in Figure 4.6.
Figure 4.6: FDI and Informal charges score over period 2008- 2011
The analysis of Informal Charges (IC) sets the foundation for examining other PCI sub-indices, including Time Costs for Administrative Procedures and Inspection (TCPI), Business Support Service (BSS), Labor Training (LT), and Legal Institutions (LI) Regression results reveal that logarithmic TCPI, linear BSS, logarithmic LT, and quadratic LI are the most suitable functional forms for explaining inward Foreign Direct Investment (FDI) For more detailed regression findings, please refer to Appendices 4, 5, 6, and 7.
Here are five regression models which contain five appropriate functional forms of five statistically significant variables analyzed above
FDIit = β0 + β1lnICit + β2INFit + β3MSit + β4IPit + β5MERit + β6LFit + uit (R.11)
FDIit = β0 + β1lnTCPIit + β2INFit + β3MSit + β4IPit + β5MERit + β6LFit + uit (R.12)
FDIit = β0 + β1BSSit + β2INFit + β3MSit + β4IPit + β5MERit + β6LFit + uit (R.13)
FDIit = β0 + β1lnLTit + β2INFit + β3MSit + β4IPit + β5MERit + β6LFit + uit (R.14)
FDIit = β0 + β1LIit + β2LIit 2+ β3INFit + β4MSit + β5IPit + β6MERit + β7LFit + uit (R.15)
The following Table 4.6 would provide summary of results of these five regression models.
Table 4.6: Regression results of five significant PCI variables
(time costs for administrative procedures and inspections)
Note: Sign of * indicates significance level at 5%
The lnTCPI coefficient of approximately -1.156 reveals a negative correlation between the time costs for administrative procedures and inspections (TCPI) and registered inward foreign direct investment (FDI) in a province Specifically, a 1% increase in TCPI results in an average decrease of about 11.56 million USD in FDI flow annually, assuming other variables remain constant This finding contradicts the initial hypothesis that a higher TCPI score would positively influence FDI inflow Despite a high TCPI score being perceived as beneficial for business operations, it appears that foreign investors do not prioritize this factor, indicating that elevated time costs for administrative procedures and inspections are not a significant determinant in attracting FDI to a province.
The business support services score (BSS) exhibits a negative correlation with inward foreign direct investment (FDI), with a coefficient of approximately -178 This indicates that for each additional point in the BSS score, the average registered FDI decreases by 178 million USD, while other factors remain constant Contrary to the thesis's expectation that a higher BSS score would encourage FDI, the findings reveal that BSS does not significantly influence FDI attraction in a province Consequently, improvements in the quality of business support services, as reflected by the BSS score, are insufficient to entice foreign investors to increase their investments in that region.
The lnLT coefficient of approximately -1.305 indicates that a 1% increase in labor training (LT) scores correlates with a decrease of about 13.05 million USD in registered foreign direct investment (FDI) flows into a province, assuming other factors remain constant Contrary to expectations from the literature, which suggests that improved labor training could attract foreign investors, the regression analysis reveals that enhancing labor training scores is not a crucial determinant in attracting FDI to a province.
Summary of key findings
The econometric analysis identifies five key factors influencing FDI inflow: informal charges (IC), time costs for administrative procedures and inspection (TCPI), business support services (BSS), labor training (LT), and legal institutions (LI) Based on a series of regression models, the appropriate functional forms for these sub-indices have been determined, with the final forms being logarithmic for IC and TCPI, linear for BSS, logarithmic for LT, and quadratic for LI Table 4.7 presents the average marginal effects of nine PCI sub-indices, highlighting both significant and insignificant factors impacting inward FDI.
Table 4.7: Average marginal effects of nine PCI sub-indices
PCI sub-indices Average marginal effects
LAST (land access and security of tenure)
TAI (transparency and access to information)
TCPI (time costs for administrative procedures and inspections)
PPL (proactivity of provincial leadership)
The analysis of nine sub-indices reveals that entry costs, land access and security of tenure, transparency and access to information, and proactive provincial leadership have an average marginal effect of zero on foreign direct investment (FDI) inflow Conversely, informal charges significantly impact FDI, with an average increase of approximately 273.1 million USD for each additional score Additionally, various factors such as time costs for administrative procedures and inspections, business support services, labor training, and legal institutions negatively affect FDI inflow, with decreases of about 187.4 million USD, 177.8 million USD, 269.8 million USD, and 133.9 million USD, respectively, for each additional score.
The following figures would present clearer relationship between the five significant variables and inward FDI
Figure 4.11: Relationship between informal charges score and inward FDI in logarithmic model This figure explains a nonlinear and positive relationship between the variable Informal charges and FDI inflow.
Score of time costs for administrative procedures and inspections
Figure 4.12: Relationship between the score of time costs for administrative procedures and inspections and inward FDI in logarithmic model.
This figure explains a nonlinear and negative relationship between the variable time costs for administrative procedures and inspections and FDI inflow
Figure 4.13: Relationship between business support service score and inward FDI in linear model.
This figure explains a linear and negative relationship between the variable business support service and FDI inflow.
Figure 4.14: Relationship between labor training score and inward FDI in logarithmic model This figure explains a nonlinear and negative relationship between the variable labor training and FDI inflow.
Figure 4.15: Relationship between legal institutions score and inward FDI in quadratic model This figure explains a nonlinear and negative relationship between the variable legal institutions score and FDI inflow.
CONCLUSION
Conclusion and recommendation
This thesis examines the relationship between foreign direct investment (FDI) and institutional factors in Vietnam, utilizing data from the General Statistics Office and the Provincial Competitiveness Index (PCI) from 2008 to 2011 By employing five functional forms to analyze provincial inward FDI as a dependent variable against nine PCI sub-indices and five traditional variables, the study reveals that not all factors significantly influence provincial FDI Key findings indicate that five PCI sub-indices—informal charges, time costs for administrative procedures and inspections, business support services, labor training, and legal institutions—along with the traditional variable of industrial product, are determinants of provincial FDI Notably, while informal charges positively correlate with FDI inflow, the other factors exhibit a negative relationship with inward FDI.
The analysis of Vietnam's provinces from 2008 to 2011 highlights that informal charges significantly influence foreign direct investment (FDI) Specifically, a lower incidence of informal charges, often associated with corruption and bribery by local authorities, creates a more attractive business environment for foreign investors To enhance FDI, provinces must focus on reforming and improving their administrative processes to reduce the negative impact of these charges A province that effectively minimizes informal charges is likely to foster a conducive environment for businesses, ultimately attracting more FDI.
Bureaucracy and corruption significantly impact the attraction of inward Foreign Direct Investment (FDI), particularly through the time costs associated with administrative procedures and inspections, as well as the effectiveness of legal institutions FDI enterprises often remain indifferent to interruptions in administrative processes and local investigations, indicating that improving these factors is not essential for provinces seeking to enhance their FDI appeal.
The negative impact of business support services on foreign direct investment (FDI) indicates that FDI enterprises either disregard these services or lack confidence in their quality provided by local suppliers Consequently, these services often fail to meet the expectations of foreign investors, hindering provinces' ability to attract increased inward FDI.
Despite Vietnam's abundant workforce being an advantage, local authorities' efforts in labor training, including general education and vocational training, have not led to an increase in foreign direct investment (FDI) In fact, there is a negative correlation between these training initiatives and FDI This situation arises because foreign investors often lack confidence in the quality of labor produced by these programs, which typically do not meet the expectations of FDI enterprises Consequently, this perceived inadequacy adversely affects foreign investors' decisions regarding FDI in Vietnam.
The size of a province's manufacturing industry shows a slightly negative correlation with inward foreign direct investment (FDI), as foreign investors seek opportunities across various sectors, including services and agriculture This indicates that an exclusive focus on enhancing the manufacturing sector may not be sufficient for provinces aiming to attract more FDI To successfully draw foreign investment, it is essential to consider and develop a diverse range of industries beyond just manufacturing.
These econometric results prove that provincial inward FDI in Vietnam over the period 2008-
The year 2011 is closely linked to the institutional environment, as indicated by the PCI sub-indices This relationship exhibits both positive and negative effects, influenced by the specific characteristics of each factor and the expectations and needs of foreign investors and FDI enterprises.
The primary limitation of this thesis lies in the reliance on registered inward foreign direct investment (FDI) data, as the ideal dataset would include implemented or disbursed FDI Due to challenges in obtaining implemented FDI data, registered FDI is utilized, which may not accurately reflect the current situation Additionally, the traditional variable of infrastructure, measured by the percentage of asphalt-paved roads in each province, is constrained by limited availability, as this information is only found in PCI reports from 2008 to 2011 Consequently, the regression analysis conducted over just four years could impact the reliability of the results.
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Appendix 1 – Econometric results of five regression models with variable
Land access and security of tenure – LAST
Variables linFDI- linLAST linFDI- quadraticLAST linFDI- lnLAST lnFDI- linLAST lnFDI- lnLAST
Note: Sign of * indicates significance level at 5%
Appendix 2 – Econometric results of five regression models with variable
Transparency and access to information – TAI
Variables linFDI- linTAI linFDI- quadraticTAI linFDI- lnTAI lnFDI- linTAI lnFDI- lnTAI
Note: Sign of * indicates significance level at 5%
Appendix 3 – Econometric results of five regression models with variable
Proactivity of provincial leadership – PPL
Variables linFDI- linPPL linFDI- quadraticPPL linFDI- lnPPL lnFDI- linPPL lnFDI- lnPPL
Note: Sign of * indicates significance level at 5%
Appendix 4 – Econometric results of five regression models with variable
Time costs for administrative procedures and inspection – TCPI
Variables linFDI- linTCPI linFDI- quadraticTCPI linFDI- lnTCPI lnFDI- linTCPI lnFDI- lnTCPI
Note: Sign of * indicates significance level at 5%
Appendix 5 – Econometric results of five regression models with variable
Variables linFDI- linBSS linFDI- quadraticBSS linFDI- lnBSS lnFDI- linBSS lnFDI- lnBSS
Note: Sign of * indicates significance level at 5%
Appendix 6 – Econometric results of five regression models with variable Labor training – LT
Variables linFDI- linLT linFDI- quadraticLT linFDI- lnLT lnFDI- linLT lnFDI- lnLT
Note: Sign of * indicates significance level at 5%