Introduction
Problem Statement
The Provincial Competitiveness Index (PCI) assesses the varying performance of regions in Vietnam regarding private sector growth, job creation, and investment attraction By utilizing survey data from businesses alongside credible official statistics, the PCI evaluates provinces on a 100-point scale Initially established in 2005 with nine sub-indices, the PCI has evolved, incorporating new sub-indices in 2006 to better reflect the Provincial Government's initiatives aimed at improving the local business environment.
Currently, there is a lack of empirical studies examining the independent variables of the Provincial Competitiveness Index (PCI) and their influence on provincial Foreign Direct Investment (FDI) in Vietnam Understanding how these traditional variables affect provincial FDI remains an area that requires further research.
I also did not find any analysis related to the independent variables of PCI whether they have internal relation.
Research Objectives
This research aims to examine the key independent variables of PCI and traditional factors influencing provincial foreign direct investment (FDI) inflows By identifying these significant impacts, the study seeks to provide valuable insights for policymakers to enhance the investment climate at both provincial and national levels.
There exist some previous studies related to attracting FDI to developing countries; most of these have found what factors ofthe country attracting FDI (across countries)
However, the objectives of the thesis are to identify:
The independent variables of the Provincial Competitiveness Index (PCI) and other traditional factors significantly influence foreign direct investment (FDI) across provinces in Vietnam Additionally, the components of the PCI are closely interconnected, indicating the need for a revision of the PCI framework.
(iii) PCI determinants out of the ten original factors should be included in a new, more significant subset base of PCI determinants
(iv) Interaction effects between PCI improvement and FDI growth.
Research questions
This thesis examines the factors influencing provincial foreign direct investment (FDI) in Vietnam, utilizing the Provincial Competitiveness Index (PCI) alongside traditional variables that may attract FDI to various provinces.
This article explores economic theory and empirical studies related to Foreign Direct Investment (FDI), as detailed in Chapter 2 Chapter 3 provides an overview of the independent variables utilized in the PCI project in Vietnam for survey purposes We establish a research model and gather data from the PCI project website and the General Statistics Office of Vietnam's statistical yearbook to address key research questions.
(l)Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?
(2)Factors ofPCI are highly correlated and we should revise PCI set?
(3)Which PCI determinant out of the ten original factors should be included in a new, more significant subset base of PCI determinants?
(4)Are interaction effects between PCI improvement and FDI growth?
Organization of the study
This thesis has five chapters, while the chapter one has presented as above explain the purpose chose the theme The rest of this thesis is organized as follows:
Chapter two outlines the theories of regional development and foreign direct investment (FDI), while summarizing empirical research focused on strategies for attracting FDI, particularly in various provinces of the country.
Chapter three outlines the process of constructing the research model based on the insights from chapter two, focusing on data selection It is essential to define the dependent and independent variables utilized in the PCI project for annual surveys, along with the inclusion of several traditional variables.
Chapter four is the econometric analysis and finding The last chapter will be conclusion and recommendation of the research.
Theoretical Consideration and Literature Review ll 2.1 The regional development and competitive regionalism theory
FDI theories and its applicability
Foreign Direct Investment (FDI) is influenced by various factors, leading to diverse approaches in understanding its determinants Capital theory emphasizes the importance of profit rates and firm risk, while international trade theories examine the complementary or substitutive relationships between FDI and exports Industrial organization theories view FDI as a means to leverage firm-specific advantages, and the OLI paradigm offers dynamic insights into FDI determinants Additionally, agglomeration economies explore the spatial distribution patterns of FDI.
2.2.1 Capital Theory 2.2.1.1 Differential Rate of Return Theory
Until the 1950s, international direct investment was entirely explained within the traditional theory of international capital movements Like other forms of international
II investment, FDI was seen as a response to differences in the rates of return on capital between countries
Investors aim to create an efficient investment portfolio to mitigate risk When selecting between alternative assets, the expected rates of return are closely associated with their respective risk levels, guiding the decision-making process for building a balanced portfolio.
Dunning (1973) argues that portfolio theory only partially accounts for direct foreign investment because it overlooks the fact that direct investment does not change ownership Instead, it focuses on the transfer of resources beyond just financial capital, such as entrepreneurship, technology, and management expertise The effectiveness of these resources can vary significantly across countries, influencing their relative profitability and, consequently, the dynamics of direct foreign investment.
The theory argued that the international diversification of portfolios 1s a way of reducing the firm's risk and hedging the risks
Capital theory shows that some determinants related cost factors in PCI set have potential effects to attracting FDI of provinces
2.2.2 The International Trade Arguments 2.2.2.1 Mundell and the Heckscher-Ohlin Model
Mundell (1975) expanded the foundational economic model by demonstrating that trade and capital movements can act as substitutes He posited that the implementation of trade tariffs would lead to an influx of Foreign Direct Investment (FDI) into protected countries This perspective aligns with the original Heckscher-Ohlin model, which suggests that trade restrictions can be offset by international capital movements, particularly due to the immobility of labor.
Kojima (1973) classifies the motives for foreign direct investment (FDI) into four key categories: first, the pursuit of natural resources; second, the exploitation of lower labor costs in the host country; third, the desire to circumvent tariff and non-tariff barriers; and fourth, the leverage of oligopolistic power derived from technological and knowledge advantages.
The product cycle model, introduced by Vernon in 1966, addresses the significant trend of rapid foreign investment by US firms According to Vernon, every product undergoes a life cycle consisting of three distinct phases: innovation, maturity, and standardization.
Domestic demand drives innovation, while international demand boosts exports The theory highlights that the combination of the U.S.'s highly skilled labor and robust R&D resources, along with a sophisticated domestic market, has significantly fostered innovation among American firms.
2.2.3 Market Failures and Industrial Organization 2.2.3.1 The Hymer-Kindleberger hypothesis
Foreign firms face inherent disadvantages compared to domestic companies, such as limited market knowledge and communication barriers, necessitating firm-specific advantages for successful foreign production According to Hymer (1960), foreign direct investment (FDI) transcends mere capital transfer; it involves the international exchange of proprietary rights and intangible assets, including technology, business techniques, and skilled personnel He posits that FDI arises from imperfections in international markets for these assets, prompting firms to "internalize or supersede" these market failures through direct investment.
Certain transactions can be more economical when conducted internally rather than in the market Internalization occurs when the advantages, such as barriers to new entrants, surpass the costs of communication, coordination, and control Foreign Direct Investment (FDI) is often pursued to seize these benefits.
2.2.4 The Eclectic Paradigm and International Investment Path
Dunning ( 1979) suggests that a firm engage in FDI if three conditions are satisfied:
It possesses net ownership (0-) advantage vis-a-vis firms from other countries;
It is beneficial to internalize (I- advantage) those advantages rather than to use the market to pass them to foreign firms;
There are some location (L-) advantages in using the firm's ownership advantages in a foreign location rather than at home
The IDP approach addresses both inward and outward investment within a country, highlighting the correlation between a nation's development level and its international investment stance, as indicated by net outward investment per capita.
The fundamental premise of this approach is that there is a significant relationship between inward and outward investment flows and a country's development As a nation progresses, the environment and conditions encountered by both domestic and foreign firms evolve accordingly.
In today's rapidly globalizing world, the location determinants of Foreign Direct Investment (FDI) in host countries have become increasingly significant for multinational enterprises (MNEs) While traditional factors influencing FDI remain relevant, their importance is declining, especially in dynamic and high-tech industries Instead, the ability of host countries to offer complementary skills, robust infrastructure, reliable suppliers, and supportive institutions is now a key factor driving FDI decisions.
Increasing returns in production activities are needed if we want to explain economic agglomerations without appealing to the attributes of physical geography
Externalities from agglomeration are known to encompass specialized labor markets and supplier networks as well as knowledge spillovers
Table 2.1 summarizes the key determinants of regional economic growth in developing countries, highlighting the importance of geography, infrastructure, and the quality of legal institutions Effective governance and transparent institutions play a crucial role in fostering a competitive business environment Additionally, the capacity to connect to the global economy is influenced by human capital quality and the availability of efficiently supplied public goods A competitive tax regime, secure property rights, and flexible labor markets further contribute to regional competitiveness and economic development.
The competitive advantage of a nation is significantly influenced by the availability of skilled labor, robust infrastructure, and the presence of supportive industries These factors of production, including the nature of domestic demand, play a crucial role in enhancing a country's overall economic performance and competitiveness in the global market.
Capital Theory Higher rate of return , leading to Factor cost: Entry higher attracting FD I Cost, Informal charges, Time Costs of Regulatory
Compliance Mundell and the Trade tariffs would induce a flow Legal Institutions ,
Heckscher-Ohlin ofFDI Proactively of
Kojima's Motiving of FDI into four Labor Training,
Macroeconomic factors play a crucial role in accessing natural resources and land through legal frameworks, leveraging institutions, and utilizing the host country's affordable labor Additionally, avoiding tariff and non-tariff barriers is essential, along with capitalizing on oligopolistic power Domestic market size and labor training can drive innovation, while international demand further enhances export opportunities, supporting provincial industry growth.
Empirical studies on the determinants ofFDI
Conventional empirical studies on the determinants of Foreign Direct Investment (FDI) commonly reference ten key variables identified by Dunning and Narula (1996), which include: natural and created assets, capital intensity, market size and growth, infrastructural development, labor cost and productivity, and the degree of openness.
(vii) government policies; (viii) political stability; (ix) profitability; (x) geographical proximity
Nonnemberg and Mendonya (2004) analyzed the factors influencing foreign direct investment (FDI) in developing countries, utilizing an econometric model that employed panel data from 38 developing economies between 1975 and 2000 Their findings highlight the key determinants that shape FDI trends in these regions.
Research indicates that education is a key determinant of Foreign Direct Investment (FDI), particularly in developing countries where investments are increasingly focused on knowledge-intensive activities Additionally, the degree of an economy's openness plays a crucial role in attracting FDI, proving to be highly significant Furthermore, a causality test revealed that Gross Domestic Product (GDP) tends to lead to FDI, while the reverse relationship does not hold true.
Ali and Guo (2005) conducted a survey on FDI determinants, revealing that market size is a significant factor influencing foreign direct investment (FDI) Additionally, they identified labor costs and global integration as key elements that impact the attraction of FDI.
Sahoo (2006) conducted a panel cointegration study on five South Asian countries—India, Pakistan, Bangladesh, Sri Lanka, and Nepal—revealing a long-run equilibrium relationship between Foreign Direct Investment (FDI) and its key determinants The analysis identified market size, labor force growth, infrastructure quality, and trade openness as the primary factors influencing FDI in the region The study concludes that to attract more FDI, South Asian nations must sustain economic growth, implement policies to leverage their labor force, enhance infrastructure, and adopt more open trade practices.
Kozlova and Smajlovic (2008) identified foreign direct investment (FDI) inflows as the dependent variable in their model, while the explanatory variables included GDP per capita, investment freedom, trade openness, and infrastructure Additionally, a dummy variable was used to indicate whether a country is an oil-exporting or non-oil-exporting nation.
FDii = ai + ~1 (GDPperCap)i + ~2 (lnvestmentFreedom)i + ~3 (Infrastructure)i + ~4
The findings indicate a significant relationship between infrastructure and trade openness with foreign direct investment (FDI) in the MENA (Middle East and North Africa) region.
According to Vijayakumar et al (2010), while Economic Stability and Growth prospects, indicated by inflation rates and industrial production, are important, Trade openness, defined as the ratio of total trade to GDP, along with other factors, appears to be significant determinants of Foreign Direct Investment (FDI) inflows in BRICS countries.
Most of FDI researches focused to FDI of a country or some countries but they should be reviewed to compare these potential explanation variables with independent variables of provincial FDI.
Geographical literature on Vietnam, China and ASEAN countries l9
Xu et al (2009) reported that agglomeration economies, labor cost, infrastructures greatly influence the spatial distribution ofFDI in China
According to Dang (2008), several key determinants drive foreign direct investment (FDI) in China Firstly, many investors are attracted to the vast Chinese domestic market Secondly, the availability of low-cost labor in China presents opportunities for reducing production expenses Additionally, the country's robust infrastructure significantly enhances FDI inflows, enabling firms to improve their technology and achieve economies of scale Lastly, the political environment plays a crucial role, as China's leadership has established a clear vision for the nation's growth and development, further enticing foreign investors.
Luo et al (2007) emphasize the importance of investigating how natural resource endowment can drive local economic growth and attract foreign direct investment (FDI) in under-developed regions.
MNEs prioritize locations that facilitate high-value activities over those that simply offer low labor costs, indicating a shift in strategy away from traditional advantages associated with inexpensive labor in China.
Havrylchyk and Poncet (2006) found that the positive impact of agglomeration, high labor productivity and low labor costs, market size, infrastructure density, and market reforms on FDI
Na and Lightfoot (2006) identified three key variables that significantly influence foreign direct investment (FDI) across 30 regions in China Firstly, the market demand and size, measured by GDP, were found to positively impact FDI attraction in 2002 Secondly, regions with higher labor quality were more appealing to foreign investors Lastly, the degree of openness and the level of reform within each region also played a crucial role in attracting FDI.
According to Giang (2008), four key local factors hinder economic development in Vietnam: the remote location from the country's commercial center, underdeveloped infrastructure, a weak foreign direct investment (FDI) policy, and an unfavorable FDI environment compared to other regions.
The foreign direct investment (FDI) environment in Vietnam's mountainous provinces (NMPs) is generally unfavorable, as highlighted by annual surveys conducted by the Vietnam Chamber of Commerce and Industry (VCCI) and the Vietnam National Competitiveness Index (VNCI) Most NMPs, with the exception of Uto Cai, exhibit low levels of transparency, with six of these provinces ranking among the least transparent in the country.
According to Anh and Thang (2007), key factors influencing foreign direct investment (FDI) location decisions in Vietnam include market potential, labor availability, and infrastructure quality However, their research did not reveal any significant evidence linking local government policies to FDI outcomes.
In their 2007 study, Anh et al conducted an empirical evaluation of the effectiveness of incentives in attracting foreign direct investment (FDI) They utilized a two-step difference-in-differences (DD) estimation approach, beginning with regression analysis performed through ordinary least squares (OLS) to assess the impact of various incentives on FDI attraction.
Yst = bO + bl.Xst + b2.Breaks + gst (1)
In year t, the level of per capita Foreign Direct Investment (FDI) attracted to province s is represented by Y st, while Xst denotes the relevant determinants influencing FDI attraction in the same province Additionally, Breaks is a dummy variable that identifies non-breakers (0) and breakers (1) The subsequent step involves estimating the impact of incentives on FDI attraction.
The OLS regression analysis in this two-period panel reveals that the impact of labor costs on foreign direct investment (FDI) varies significantly before and after the implementation of incentives The regression model indicates that while the coefficient for wages is positive and statistically significant after the investment is made, it is negative and statistically insignificant prior to investment This suggests that before investing, foreign investors tend to favor locations with lower labor costs However, once the investment is established, the presence of FDI projects leads to a tighter labor market, increased productivity, and consequently higher wages, which is reflected in the positive wage coefficient observed in the post-investment period.
Thu (2007) studied the determinants of the FDI in Vietnam, the specific empirical model of the time-series determinants ofFDI inflows in Vietnam is:
LnFDit = po + 81 lnGDPt + 82 lnGDPGt+ 83 lnTELt + 84 lnHKt + 85 lnOPENt + 86 lnEXCHANGEt + 87 Dl998+ 88ASEAN + ut The results reveal that higher market size and higher GDP growth are encouraging FDI inflows into Vietnam
Ali and Ahmad (2008) reported that important factors in determining the location relationship of FDI in Malaysia are the community, availability of raw materials and fuel
Spatial Determinants of Inward agglomeration economies, FDI in China: Evidence from labor cost, infrastructures Provinces
FDI in China Economic Growth and Policy
Market size and growth, Government incentive policies; Cheap labor cost;
Na and Determinants of foreign direct market size (GDP),quality labor degree of openness Lightfoot investment at the regional
Foreign Direct Investment in Market stze, labor force South Asia: Policy, Trends, growth, infrastructure index Impact and Determinants and trade openness
Determinants of the FDI and market size, economic growth: a summary of recent growth, macroeconomic literature stability, Infrastructure , regulation, economic barrier
6 Anh and Foreign direct investment m the marker potential, the
Vietnam: An overview and labour factors, analysis the determinants of infrastructure spatial distribution across provmces and
7 Thu Determinants of the FDI m market size; GDP growth
8 Agiomirgi The determinants of foreign the marker size, the trained anakis et direct investment: a panel data labour , and infrastructure al (2006) study for the oecd countries
Most research on Foreign Direct Investment (FDI) has concentrated on specific countries or regions, with limited studies examining regional FDI in China This thesis focuses on provincial FDI in Vietnam, utilizing independent variables from the Provincial Competitiveness Index (PCI) alongside traditional factors to analyze the dynamics of regional investment.
Base on Vietnam PCI project proposed general framework for determinants of provincial competition index as follows:
The equation PCiit represents the factors influencing business performance, including entry costs (EC), access to land (AL), transparency and access to information (TAl), time costs of regulatory compliance (TCRC), informal charges (IC), proactivity of provincial leadership (PPL), business support services (BSS), labor training (LT), legal institutions (LI), and infrastructure (INF) Each of these elements plays a crucial role in shaping the overall business environment and can significantly impact the success of enterprises in a given region.
Base on empirical studies related to FDI, especially regional FDI, economic theory and base on PCI survey as equation ( 1 ), the research question is
(i) Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?,
The first regression model for this study is suggested as follow:
FDI it= a o +a 1 EC it+ a 2 ALit+ a 3 TAl it+ a 4 TCRC it+ as IC it+ a 6 PPL it+ a
1 BSS it +as LTit +a 9 LI it+ o.w IP u +an INF it+ o.n MS it + o.13 KEA it + u it
Where: IP-Industrial Product of province, MS-Market Size, KEA: northern and southern key economic area KEA = 1, other provinces KEA =0
The OLS technique applies for the first regression model to answer for the first research question
Based on economic theory and principal component analysis, we anticipate discovering multicollinearity or notable interaction effects among certain variables Consequently, some independent variables may be categorized into two groups: Cost Factors and Provincial Policy.
The analysis incorporates the Cost Factor (CF), which encompasses Economic Costs (EC), Total Resource Costs (TCRC), and Investment Costs (IC), alongside Province Policies (PP), including Allocation Laws (AL), Tax Allocation Policies (TAl PPL), Budget Support Systems (BSS), Local Taxes (LT), and Local Incentives (LI) It is essential to review and integrate additional significant variables to enhance the analysis This methodology is specifically utilized to address research questions No 2 and No 3.
The initial regression model in this study focuses on the distribution determinants of total Foreign Direct Investment (FDI) within provinces By utilizing the logarithm of annual provincial FDI as the dependent variable, the model highlights the growth rate of FDI effectively.
Ln (FDI) it = fJJ + f32Ln (PC!) it+ uit (3)
Where, i and t denote sample provinces, and time (year) respectively !.! denotes residuals
To answer for research question No.4, The OLS technique also applies
3.2 Data Collection There are two types of panel data: Balanced versus non-balanced data Balanced case: i = 1, 2, , N t = 1, 2, , T
Unbalanced case: i = 1, 2, , N t = 1, 2, , Ti Or: t = tj 1, tj2 , , tjTi
Two limit cases are a "pure" cross section data with only one time period or a "pure"
Time-series data with only one individual
Research Model, Data Collection and Variable Description
Data Collection
Unbalanced case: i = 1, 2, , N t = 1, 2, , Ti Or: t = tj 1, tj2 , , tjTi
Two limit cases are a "pure" cross section data with only one time period or a "pure"
Time-series data with only one individual
I gathered panel data from the PCI project and the General Statistics Office of Vietnam, covering all provinces from 2006 to 2009, resulting in 252 observations (4 years x 63 provinces) I calculated cross-sectional data by averaging values over the four years, yielding 63 observations Additionally, I obtained registered FDI data for Vietnamese provinces and applied a weight of 0.33 for the three years from 2007 onwards.
2009) of the implementation value of provincial FDI as following:
Table 3.1: the implementation value of provincial FDI
Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):
Table 3.2: FDI capital of top ten provinces
Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai
Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74 FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81 USD
By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)
Above result will be compared with actual survey data (benchmarking) to choose the best output.
Variables description
Comparable data from official and other sources regarding local conditions
Following table is PCI result in 2009
Province EC AL TAl TCRC IC PPL BSS LT LI PCI
Source: PCI 2009 3.3.2 Provincial Foreign Direct Investment-pFDI (mill USD)
Is investment which provinces in Viet Nam receive from investors who come from other countries
3.3.3 Entry Costs-EC (point=lO)
A measure of the time and difficulty it takes firms to register, acquire land, and receive all the necessary licenses to start business
This sub-index aims to evaluate the variations in entry costs for new businesses across different provinces Although the Enterprise Law and its implementing regulations were intended to create uniform procedures nationwide, research indicates that discrepancies still persist among provinces.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group Cost Factor
3.3.4 Access to Land-AL (point=lO)
The ease of land access for firms is evaluated through a specific measure In 2006, this sub-index was updated to incorporate a new dimension that assesses the security of tenure after land acquisition Key factors include the possession of official land use rights certificates, the adequacy of land for business expansion, rental agreements with state-owned enterprises (SOEs), and an overall evaluation of land availability.
The second dimension of conversion efforts encompasses perceptions of tenure security risks, including concerns about expropriation, inadequate compensation, alterations to lease agreements, and the overall duration of tenure.
Private firms frequently highlight the significant disparities in land policies across provinces, which can be categorized into two main aspects The first aspect, Access to Land, refers to the challenges businesses face in securing productive land, hindering investment opportunities and limiting access to capital, as land use rights (LURCs) cannot be used as collateral for loans Additionally, firms that cannot secure their own land often resort to renting from state-owned enterprises (SOEs) or provincial agencies, which restricts their growth potential and incurs extra transaction costs The second aspect is Security of Tenure, which pertains to firms' confidence in the long-term stability of their land rights Greater security encourages businesses to invest in the sustained productivity of their land; conversely, concerns over expropriation or changes in lease agreements lead to a short-term investment mindset This 'footloose' approach ultimately undermines provincial welfare by negatively impacting income and job creation.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.5 Transparency and Access to Information-TAl (point=lO)
Access to essential planning and legal documents is vital for businesses to operate effectively It is important that these documents are fairly accessible and that new policies and laws are clearly communicated and consistently implemented Additionally, the usefulness of provincial web pages for businesses plays a significant role in this process Analysts and development practitioners emphasize transparency as a key factor in creating an environment that supports private sector growth.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.6 Time Costs of Regulatory Compliance-TCRC (point=lO)
The article evaluates the time wasted by firms on bureaucratic compliance and the frequency and duration of operational shutdowns for inspections by local regulatory agencies It focuses on two key dimensions of time costs—Bureaucratic Procedures and Time Lost to Inspections—each given equal weight in the analysis.
The examination of transaction costs over time is crucial in the context of economic transition, especially in Vietnamese provinces where the adage 'time is money' holds significant weight Firm managers frequently find themselves diverted from core business activities to address routine bureaucratic issues, resulting in lost time that could otherwise be dedicated to enhancing company operations.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group -Cost Factor
3.3.7 Informal Charges-IC (point=lO)
A measure of how much firms pay in informal charges and how much of an obstacle those extra fees pose for their business operations
This section examines the informal fees, fines, and extraordinary payments that businesses incur as a routine aspect of their operations It utilizes five key indicators to assess the prevalence, types, and amounts of these additional payments The significance of this analysis has increased following the implementation of the Revised Anti-Corruption Law by the National Assembly in August 2007.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group- Cost Factor
3.3.8 Proactivity of Provincial Leadership-PPL (point=lO)
Provinces demonstrate their creativity and ingenuity by effectively implementing central policies, developing unique initiatives for private sector growth, and navigating ambiguous national regulatory frameworks to support and advocate for local businesses.
Ambiguity in legal documents can arise from unclear wording, delays in the implementation of central laws or decrees, and contradictions between various implementing documents and even the central laws This issue is particularly pronounced in industry segments that are new to Vietnam, where a clear legal framework is often lacking.
Delays in business projects due to legal ambiguity can significantly impact their success, with provincial government decisions playing a crucial role When officials require businesses to wait for clarifications or appeals to central authorities, it can lead to substantial time and financial losses Some provinces may exploit these uncertainties to create barriers for potential competitors, favoring local firms However, provinces that navigate central laws creatively can provide valuable support to private sector companies, fostering a more conducive environment for business growth.
Similarly, provinces which have a knack for crafting pro-active provincial initiatives to solve the problems of private firms can have a major impact on private sector development
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.9 Business Support Service-BSS (point=lO)
This article evaluates provincial policies aimed at promoting private sector trade and facilitating business partner matchmaking It assesses the effectiveness of provincial officials in addressing these challenges for businesses, highlighting their performance in resolving issues faced by firms.
The eighth sub-index builds on the Pro-activity Sub-Index by examining how specific provincial initiatives foster private sector development Surveys conducted among Vietnamese firms reveal key challenges they face, including: i) difficulties accessing information about both domestic and international markets; ii) challenges in comprehending new regulatory changes; and iii) struggles in sourcing adequately skilled employees to support their operations.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
3.3.10 Labor Training-LT (point=lO)
A measure of the efforts by provincial authorities to promote vocational training and skills development for local industries and to assist in the placement of local labor
Vietnam faces the significant challenge of creating employment for 1.4 million new job seekers each year, while businesses consistently report difficulties in finding skilled and semi-skilled workers This highlights a critical gap between labor supply and demand, as the private sector seeks employees who can contribute value rather than just filling positions Consequently, provincial initiatives aimed at enhancing local workforce skills are essential for fostering a conducive business environment Although some firms invest in training their employees, they often lose trained workers to competitors who offer better salaries without incurring training costs, leading to a collective action problem To address this, provinces could implement general labor training programs that benefit both workers and businesses.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
The confidence of the private sector in provincial legal institutions is crucial, as it reflects whether firms view these institutions as effective mechanisms for dispute resolution or merely as avenues for appealing against corrupt practices by officials.
Correlation among explanatory variables
Correlation analysis is used for finding associations between explanatory variable In Table 4.1 illustrates the correlation matrix some of the explanatory variables included in model
Table 4.1 Matrix of Correlation among explanatory variables
AL BSS EC IC INF IP LI LT PPL TAl TCRC MS
See more detail in table 7- Appendices
The analysis reveals several significant correlations among key variables Firstly, there is a strong positive correlation of +0.89 between Industrial Product (IP) and Market Size (MS), indicating that initial market size stocks significantly influence industrial product factors, suggesting that one of these variables may be excluded during hypothesis testing Secondly, a correlation of +0.75 between Transparency and Access to Information (TAl) and Business Support Service (BSS) implies that effective business support services facilitate easier access to information for investors Lastly, Labor Training (LT) shows the highest positive correlation with BSS, highlighting its importance in relation to foreign direct investment (FDI) and suggesting that LT's inclusion in the model can enhance the significance of business support services in the regression analysis.
Empirical estimation and result
This section aims to report and discuss the econometric results of my analysis, utilizing both the provincial competition index and traditional variables to evaluate provincial FDI, as outlined in Table 4.2 The regression results are derived from the empirical framework of the specified equation, employing the OLS technique across a sample of 63 provinces in Vietnam, which includes twelve explanatory variables (detailed in Table 4.2) I assume that the model adheres to all OLS assumptions to ensure that my estimators are Best Linear Unbiased Estimators (BLUE), and I also assume the accuracy of the collected data set.
To limit the FDI value coming later than provincial competition index I have counted to cross section data by getting the average value in four years (63 observations)
The regression analysis was conducted across six different specifications to assess the statistical significance of various explanatory variables By systematically evaluating each scenario, I aimed to refine the model by eliminating less significant independent variables, transitioning from a general equation to a simpler one This approach allowed for the identification of the most effective model, culminating in the application of the Wald test to validate the results.
To evaluate reduced variables like AL, EC, TAl, TCRC, IC, PPL, LT, and KEA, refer to the results presented in Table 5 of the appendices The analysis indicates that a simple model specification yields the best results.
Heteroskedasticity was assessed using the results presented in Table 4 of the appendices to verify the constancy of error variance and the normal distribution of residuals The testing results indicate that the data does not exhibit signs of Heteroskedasticity.
Correlogram Q-Statistics is also done to make sure the Autocorrelation (AR) does not exist in this model (table 6 of appendices)
Generally speaking, regression results are reported in table 4.2 including six regressions shows that four independent variable including IP,LI,INF and BSS are statistically significant at the level 1% , 5% and 10%
See more detail in table R3.1-R3.6- Appendices Note: Sign of *, ** and *** indicate significance at 1%, 5%, and 10% levels, respectively
Regression results of research model (3) shows that PCI distribute the growth rate of provincial FDI (see table 8 of appendices)
Following content, I want to discuss more detail related to each explanatory variable:
Industrial products significantly influence provincial foreign direct investment (FDI), as supported by estimation results The analysis focuses on the top five industrial products from 2006 to 2009, highlighting their role in attracting FDI in Vietnam.
Table 4.3: Top five rank of attracting FDI in VietNam
Binh Province/City BRVT HCMC DongNai HaNoi
Industrial 4 1 3 2 5 product FDI (Mil USD) 1582.97 1236.93 659.58 611.05 606.31
Source: GSO 2006-2009, PCI 2006-2009 This table shows that the higher industrial product totals the higher attracting FDI
Vietnam faces a reduction in foreign capital inflow even as it implements free trade agreements with its partners because its underdeveloped supporting industries will be a discouraging factor
The impact of infrastructure (INF) remains the most significant factor influencing provincial foreign direct investment (FDI), consistent with previous empirical research A comparison of infrastructure rankings from the Provincial Competitiveness Index (PCI) survey and the top five provinces attracting FDI from 2006 to 2009 highlights this correlation.
Table 4.4: the rank of infrastructure in 2009
Province/City BRVT HCMC DongNai HaNoi
Source: GSO 2006-2009, PCI 2009 This shows that INF has the important role to attracting FDI
The Private Confidence Index (PCI) project highlights the importance of the Legal Institutions (LI) in assessing private sector trust in provincial legal frameworks Firms view these institutions as either effective dispute resolution mechanisms or avenues for addressing corruption Scholars and practitioners emphasize that the development of legal systems and formal dispute resolution processes is a critical weakness in Vietnam's economic transformation Therefore, to enhance this independent variable, provinces and cities must focus on significant improvements in administration and corruption prevention.
4.2.4 Business Support Service This is the main factor which it includes some other factors such as the investors want to find enough skilled employees to conduct their operations( labor training), they meets some difficulties in obtaining information on overseas and domestic markets, difficulties in understanding new changes in regulatory information (Transparency and access to information)
So, the BSS variable is significant to provincial FDI at levellO% is normal case
Land is a critical resource that investors consider when making investment decisions, particularly in the manufacturing sector This thesis suggests that the AL variable has a limited impact on provincial foreign direct investment (FDI) due to the uniformity of policies across provinces in Vietnam.
Despite hopes for a significant competitive advantage in Vietnam's labor force due to low costs, recent estimates reveal a concerning reality The low level of labor training across provinces has hindered this potential, with only Binh Duong, Da Nang, and Vinh Phuc implementing effective regulations and incentives to enhance human resources A report indicates that 64% of the labor force is untrained, and 78% of youth aged 20-24 lack qualifications for the job market This situation is paradoxical, as Vietnam boasts a working-age population of 48 million, yet 50% of enterprises, both domestic and foreign, report an acute labor shortage.
4.2 7 Transparency and Access to Information
Over the past decade, the implementation of grassroots democracy decrees in Vietnam has achieved notable successes, as highlighted in various evaluation reports and journals To further enhance democratic practices at the grassroots level, the National Assembly is currently drafting a law aimed at improving access to information.
This law is to ensure the right to access to information of the people and organizations as well as to increase the transparency and accountability of government's agencies
This law is expected to be passed by the National Assembly in mid 2012
With insignificant result, this is the same floor of all provinces, and transparency and access to information is still weak point
4.2.8 Proactivity of Provincial Leadership Although there are two explanatory variables had significance to provincial FDI but still PPL and TAl less significant, these are explained at point 2.5 of this chapter
4.2.9 Informal Charges This variable is insignificant to attracting provincial FDI, and it is also general status in VietNam as the report "It was confirmed by enterprises in the survey conducted in Binh Dinh to serve the dialogue program on the prevention of corruption was eighth place in Hanoi on 25111
The 8th International Donors Dialogue for Vietnam revealed that 43% of businesses report having to provide gifts and unofficial payments to obtain land use right certificates.
4.2.10 Time Costs of Regulatory Compliance Simplify administrative procedures is improved and better than before but this is the same problem of all provinces in Viet Nam , so administrative reform should be done better as result of hypotheses test
Conclusion and Recommendation
Conclusion and recommendation
This study has analyzed the determinants of provincial FDI in Viet Nam over period
Between 2005 and 2010, I conducted a literature review on regional development and the attraction of foreign direct investment (FDI) across countries Utilizing collected data and econometric analysis, I developed an estimated model to test our hypotheses, demonstrating their validity.
This study addressed its research questions and objectives by analyzing data from the General Statistical Office of Vietnam (GSO) and the Provincial Competition Index (PCI) project The findings indicate that gross industrial output, legal institutions, and infrastructure have a statistically significant impact on provincial foreign direct investment (FDI) at the 1% and 5% levels, while business support services show significance at nearly the 10% level.
To attract foreign direct investment, provinces and cities in Vietnam must identify and enhance the necessary infrastructure to meet the fundamental needs of investors.
Infrastructure encompasses essential elements such as land, transportation, communication, industrial zones, buildings, and workspaces To enhance foreign direct investment (FDI) in Vietnam, it is crucial to strengthen the supporting industries, which currently lag behind those in other ASEAN nations like Thailand, Malaysia, and Indonesia Vietnamese companies are only able to fulfill a minimal portion of the demand for spare parts and accessories from Japanese investors in sectors like automotive and electronics Additionally, provincial authorities must build trust in legal institutions, ensuring that businesses view them as effective for dispute resolution and addressing corruption Scholars highlight that the development of legal frameworks and formal dispute resolution methods remains a weak point in Vietnam's economic transformation Therefore, provinces and cities must prioritize improvements in administration and corruption prevention to foster a more conducive investment environment.
Business support is a critical factor for investors, particularly in the manufacturing and trading sectors Provincial authorities should enhance policies that assist businesses by addressing their challenges, streamlining administrative procedures, and ensuring that new policies and laws are effectively communicated and consistently implemented Additionally, providing targeted labor training programs will further support the private sector These improvements will not only attract foreign investors but also encourage domestic investment.
While factors like labor training, transparency, access to information, land access, and informal charges may appear insignificant due to uniformity across provinces in Vietnam, provincial authorities must focus on improving these areas Addressing differences in these aspects can significantly enhance a province's attractiveness to investors.
Provinces and cities should focus to Improve their PCI rank, this lead to more attracting FDI and local investors
The PCI project should incorporate additional traditional variables, such as total industrial product and GDP, into its annual survey and reporting Simultaneously, it is advisable to minimize the inclusion of certain cost-related factors to enhance the overall effectiveness of the PCI assessment.
Limitation
Due to the unfulfilled Foreign Direct Investment (FDI) value, we analyzed cross-sectional data by compiling registered FDI figures from various provinces in Vietnam We applied a weight of 0.33 based on three years of data (2007-2009) to estimate the effective implementation value of provincial FDI.
43 specification (model) may still have problems that with our current understanding of econometrics
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APPENDICES Table 1: Sources of Table
Provincial Foreign Direct Investment- pFDI (mill USD)
Access to Land of each province, survey yearly, point= I to 10
Business Support Service of each province, survey yearly, point= 1 to 1 0
Entry Costs of each province, survey yearly, point=1 to 10
Informal Charge of each province, survey yearly, point= I to 10
Infrastructure of each province, survey yearly, point to 100
Gross output of industry at constant
1994 prices by province ( Bil VND)
Legal Institution of each province, survey yearly, point=1 to 10
Labour Training of each province,
VietNam Average from PCI 2006-2009 project-
VietNam Average from PCI 2006-2009 project-
VietNam Average from PCI 2006-2009 project-
VietNam Value at 2008 PCI project- VietNam Average from GSO 2006-2009
VietNam Average from PCI survey yearly, point= 1 to 10 2006-2009 project-
10 Proactivity of Provincial Leadership of Average from PCI each province, survey yearly, point=1 to 2006-2009 project-
II Transparency and Access to Average from PCI
Information of each province, survey 2006-2009 project-
TAl yearly, point=l to 10 VietNam
12 Time Costs of Regulatory Compliance Average from PCI of each province, survey yearly, point=1 2006-2009 project-
Retail sales of goods and services at Average from GSO
13 MS current prices by province 2006-2009
Table 2: Expected effect of independent variables
No Notation Name ofVariables Expected sign
1 AL Access to Land of each province +
2 BSS Business Support Service of each province, +
3 EC Entry Costs of each province -
4 IC Infonnal Charge of each province -
5 INF Infrastructure of each province +
6 IP Gross output of industry +
7 LI Legal Institution of each province +
8 LT Labour Training of each province +
9 PPL Proactivity of Provincial Leadership of each + province
10 TAl Transparency and Access to Infonnation of each + province
II TCRC Time Costs of Regulatory Compliance of each - province
Table R3.1 OLS result: General Estimation
Dependent Variable: FDI Method: Least Squares Date: 11/28110 Time: 07:52 Sample: 1 63
Variable Coefficient Std Error t-Statistic Pro b c -549.2492 473.3872 -1.160254 0.2515
Adjusted R-squared 0.698029 S.D dependent var 277.7646 S.E ofregression 152.6369 Akaike info criterion 13.07559 Sum squared resid 1164902 Schwarz criterion 13.51782 Log likelihood -398.8810 Hannan-Quinn criter 13.24952
Dependent Variable: FDI Method: Least Squares Date: 11/28/10 Time: 07:55 Sample: 1 63
Variable Coefficient Std Error t-Statistic Pro b c -480.5299 410.8795 -1.169515 0.2475
Adjusted R-squared 0.709013 S.D dependent var 277.7646 S.E ofregression 149.8351 Akaike info criterion 13.01426 Sum squared resid 1167428 Schwarz criterion 13.38846 Log likelihood -398.9493 Hannan-Quinn criter 13.16144
Dependent Variable: FDI Method: Least Squares Date: 11/28/10 Time: 07:57 Sample: I 63
Variable Coefficient Std Error t-Statistic Pro b c -447.5560 368.1538 -1.215677 0.2294
Adjusted R-squared 0.717582 S.D dependent var 277.7646 S.E ofregression 147.6124 Akaike info criterion 12.95862
Sum squared resid 1176629 Schwarz criterion 13.26478
Log likelihood -399.1965 Hannan-Quinn criter 13.07904
Dependent Variable: FDI Method: Least Squares Date: 11/28/10 Time: 07:58 Sample: 1 63
Variable Coefficient Std Error t-Statistic Pro b c -211.4629 203.2044 -1.040641 0.3025
Adjusted R-squared 0.723554 S.D dependent var 277.7646 S.E of regression 146.0434 Akaike info criterion 12.91012
Sum squared resid 1194406 Schwarz criterion 13.14825
Log likelihood -399.6689 Hannan-Quinn criter 13.00378
Dependent Variable: FDI Method: Least Squares Date: 11/28/10 Time: 08:00 Sample: I 63
Adjusted R-squared S.E ofregression Sum squared resid Log likelihood
Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter
Dependent Variable: FDI Method: Least Squares Date: 11128/10 Time: 08:03 Sample: I 63
Adjusted R-squared S.E ofregression Sum squared resid Log likelihood
Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter
Table 4: The White Heteroskedasticity Test (No cross terms)
Dependent Variable: RESID/\2 Method: Least Squares
Variable Coefficient Std Error t-Statistic Pro b c 1181520 3221604 0.366749 0.7158
S.E of regression 84840.28 Akaike info criterion 25.81726
Sum squared resid 2.81E+11 Schwarz criterion 26.63369
Durbin-Watson stat 1.501341 Prob(F -statistic) 0.080879
P-value = 0 I I 9> 5% , No HET in this model
Test Statistic Value df Probability
Normalized Restriction(= 0) Value Std Err
Restrictions are linear in coefficients
P-value F = 0.2279 > 5% ~ Fail to reject Ho ~ Sellecting the simple model
Autocorrelation Partial Correlation AC PAC Q-Stat Prob
AR does not exist in this model
Table 7: Matrix of Correlation among Explanatory variables
AL BSS EC IC INF IP LI LT PPL TAl TCRC MS