NATIONAL UNIVERSITY HCMC COLLEGE OF ECONOMICS VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS IMPACT OF FOREIGN DIR EC''''f INVESTME[.]
INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS NATIONAL UNIVERSITY- HCMC COLLEGE OF ECONOMICS VIETNAM VIETNAM-THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS IMPACT OF FOREIGN DIR.EC'f INVESTMENT ON E,'{PQRTS CASE FOR VIETNAM (1988-1995) by NGUYEN TO KlEU TRINH KAREL JANSEN, Ph D NGUYEN TRi HUNG, M.A A Lhe,ris submilled in par!ialfoljilmenl if!he T()([lliremenl for !he degree if MASTtR Of ARTS lll tCOMOMICS Of DtlU.OfMUIT I :!_,_ : - • : I Hlf Vlf:: ~ \ii ;; ; ::\:~: /fq•'-~ HO CHI MINH CITY, December 19~ - - ·- CERTIFICATION "I certify that the substance of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that to the best of my knowledge any help received in preparing this dissertation, and all sources used, have been acknowledged in this dissertation" Signature Nguyen To Kieu Trinh Date : December, 20th, 1996 I wish to express my thanks to authors whose thoughts are foundation for my thinking in this research paper ABSTRACT In the context of "'Open door" and "Doi moi" policies, Foreign Direct Investment inflows in Vietnam have been considered, among other things, as having a significant impact (either direct or indirect) on the development process, especially on the export performance of Vietnam The export increases steadily every year from 1988 at annual average growth rate of 32.02%, especially since 1991 Average annual growth rate in period 1988-90 was 44.0% and 44.4% in 1995 The inflows of Foreign Direct Investment firstly concentrated in mineral and services (mainly hotels and tourism) sector, but recently it has been shifted to industrial sector This trend is appropriate for the process of industrialisation and modernisation of Vietnam It increases every year, from only 366 million USD of investment capital (implemented capital of 60 million USD) in 1986 up to 6,400 million USD (implemented capital of 2,000 billion USD) in 1995 Total investment capital approached 18,228 million USD and implemented capital approached 5,878 million USD from 1988-95 Increase in exports in the context of 'Open-door' policy, among other things, in period 1988-1995, reflected the response of nice achievement, not only in short but also in long run, from the positive influence of Foreign Direct Investment although that this influence was still modest Identifying the impact of Foreign Direct Investment on export performance of Vietnam from 1988 till 1995 is the subject of this paper 111 Thanks are due to my classmates Hoang Due Phu, Pham Kien Phuong and Nguyen Anh T uan for their helps and interests, especially, Nguyen The Minh for his tireless assistance in providing useful data Words of thanks are also due to my close friend Do Dinh Nam for his tireless help in providing useful documents I acknowledge with thanks Ms Dang thi Kim Chi, librarian; Ms Dinh Thi Anh Nguyet, Secretary of Project for their interests and material provisions; and my classmates and all friends for their support throughout WorO.S of thanks are due to my family Many are worthy of mention To them, I am eternally grateful Finally, this work is devoted to my parents, Nguyen Huu Duy and Cong Tang Ton Nu Thi Le Hong, who gently bestowed me with curiosity and concern about the world Needless to say, any remaining mistakes or omissions are entirely mine IV TABlE OF CONTENTS Page ABSTRACT ACKNOWLEDGEMENTS 11 TABLE OF COTENTS IV LIST OF TABLES V11 LIST OF CHARTS Chapter Chapter X INTRODUCTION 1.1 General Information 1.2 Statement of the Problem 1.3 Objectives of the Study 1.4 Organisation of the Study THEORETICAL FOUNDATION AND EVIDENCES OF FOREIGN DIRECT INVESTMENT AND ITS IMPACTS ON EXPORTS 2.1 Definition of FDI 2.2 Theoretical Foundation of FDI and evidences of its Impacts on Exports 2.2.1 Theoretical Foundation ofFDI 2.2.1.1 Models and Forms ofFDI a) Models ofFDI a.l Export-Oriented FDI (EO FDI) a.2 Import-Substituting FDI (IS FDI) a.3 Market- and Technology- Accessing FDI \' a.4 Diversified FDI (DI FDI) 2.2.1.2 10 b) Forms ofFDI 10 *Summary 11 Flying-Geese Pattern of FDI in Asia, Globalization of 11 Production, Japanese-Type FDI and Sectoral Composition 2.2.2 *Summary 12 Globalisation of Production 12 Japanese-Type FDI 14 Impacts ofFDI on Exports 16 a) Review of Theories ofFDI 16 * Product-Cycle Theory 16 * Exchange rate FDI Them y 19 * Eclectic Theory 21 *Swnmary 22 b) Evidences about the Impact of FDI on Exports 23 * FDI as a Source of Export Growth 23 * More evidences 25 * Evidences from previous Studies and Surveys 36 c) Evidences from Case Studies 38 c.l Thailand- Implied Policy 38 c.2 China -Implied Policy 42 c.3 Singapore- Implied Policy 45 Summary of the Impact of FDI on Exports of the Host 49 Country and Implied Policy for Attracting FDI Cbapter3 FDI IN VIETNAM AND ITS IMPACT ON VIETNAM'S EXPORTS 3.1 General Information 51 3.2 Impact ofFDI on Exports 66 VI Chapter Chapter * Evidences * More Evidences 66 a Some evidences from industrial and mining sector 77 b Hotels and Tourism 87 c Export Processing Zones (EPZs) 88 *Remarks 91 73 ESTIMATION MODEL *Justification for the Use of the Model 93 Conclusion 96 RESULTS, SUMMARY, IMPLICATIONS AND CONCLUSION, SUGGESTION POLICY FOR THE FURTHER STUDY 5.1 Results of the Study for the Case of Vietnam 97 5.2 Summary and Conclusion 98 5.3 Policy Implications 98 4.4 Suggestion for Further Study 99 Box 100 Box2 102 Table 17.2, 19.2 103 Table 20.2, 23.2 104 Table 46 105 APPENDIX REFERENCES 106 Vll UST OF TABLES Page 01 Selected Capital Flows to Developing Countries 01 02 Top-10 FDI-Received Developing Countries in 1970s and 1980s 03 03 Average Inflows of FDI to Developing Regions, by Region, 13 1970-79, 1980-85 1986-90 04 Monthly Yen Appreciation after The Plaza Accord 20 05 Net FDI, 1982-1989 20 06 Labour Force by Region, 1950-2020 26 07 The Hourly Cost of Labour per Skilled Labour in 1993 27 08 Exchange Rate (Annual Average) and Real Exchange Rate 28 (RER) 09 The Increase of Wage Rate (Monthly earnings) 29 10 Foreign Direct Investment in Selected Asian Countries and 29 China 11 The World's Imports from 1980-94 30 12 Growth Rate of Real GDP 31 13 Merchandise Exports of NIEs, ASEAN4, Asia and the World 32 14 Export Composition of NIEs and ASEAN4 33 15 FDI by Sector 37 16 The Share of Foreign Affiliates in Manufacture Exports, 38 Selected Years and Countries 17 Selected Data for Thailand 39 Vlll 18 Trends in FDI, Thailand 1980-89 40 19 Selected Data for China 43 20 Selected Data for Singapore 46 21 Contribution of Foreign Capital to Singapore's Manufacturing 47 Sector (1975-89) 22 Comparative Performance of Foreign and Local Establishments 48 in the Singaporean Manufacturing Sector, 1989 23 Selected Indicators for Vietnam 52 24 Average Growth Rate of Some Selected Indicators 56 25 The Top-15 Foreign Investors in Vietnam 57 26 Investment Projects by Type of Economic Activity 60 27 Allocation of FDI in Sectors of Vietnam from 1988-95 61 28 Sectoral Shares in GOP by Economic Sector 59 29 Vietnam's Major Exports from 1988-95 62 30 Annual GDP Growth Rate by Sector in Vietnam's Economy 64 31 Forms of FDI, on Annual Basis (by July 7, 1994) 64 32 The 15-Most-Invested Provinces 65 33 Oil Exports from 1986-95 68 34 Estimated Annual Oil Production to the Year 2000 68 35 Planned Real GOP Growth Rate from 1996-2000 69 36 Comparing Incentives for FDI in ASEAN Countries 71 37 The Contribution of FOI projects to the Merchandise Exports of 74 Vietnam, 1988-95 38 Structure of Vietnam Merchandise Exports from 1988-95 78 39 Annual Exports of Textiles and Garments, 1988-95 80 40 Upgrading Projects of Cement Plants 82 41 Cement Joint Ventures Licensed and Proposed Cement Projects 83 42 Existing Steel Joint Ventures 84 lX 43 Moto-Bike Demand in Vietnam, 1996-2000 86 44 Some Indicators of Tourism in Vietnam 88 45 Land Area of EPZs and IZs 89 17.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of Thailand, 1971-92 19.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of China, 1979-92 20.1 Regression Estimates of the Impact of FDI on the Exports 96 Performance of Singapore, 1971-93 23.1 Regression Estimates of the Impact of FDI on the Exports 97 Performance of Vietnam, 1988-95 17.2 Full Results for Thailand Case 103 19.2 Full Results for China Case 103 20.2 Full Results for Singapore Case 104 23.2 Full Results for Vietnam Case 104 46 105 Selected Data for United States - - 36 end of this chapter * Evidences from previous studies and surveys * Streeten, P (1991) reported on an empirical study by Blomstrom, Kravis and Lipsey, which indicated that MNCs can make an important and increasing contribution to manufactured exports of developing countries According to this study, the share of US, Japanese and 11 Swedish :MNCs in manufactured exports of developing countries has increased steadily *In the empirical study of Carlos E Santiago (1991) 12 about the impact ofFDI on exports of the host count:Iy he found out that FDI had a positive impact on export It is the same can be concluded about the effect ofFDI on inter-industry differences in export shares His empirical results also suggest that a one percentage point increase in export-oriented FDI will result in a 7% increase in the average share of manufacturing exports * Grieco (1986) reported on work by Lall, S and Mohammed, who found that industries in India characterized by a relative high presence of foreign firms were more export oriented than industries in which the foreign presence was low The presence of foreign firms in manufacturing has made the host countries be able to generate a high share of manufactured exports For example, foreign firms account for more than half the manufactured exports in Malaysia, Mexico, and the Philippines, and a recent survey of firms in Thailand found the share to be nearly three-quarters 13 14 *According to the research of Reuber (1973), Encarnation, D J and Wells, L T (1986) , EO FDI projects had lower production costs and, therefore, gained a higher social profitability than the average projects that were IS FDI ones , Table 15 shows the composition ofFDI flows by sector for the five countries for which data ue available It can be seen, as aforementioned, that manufacturing is the major sectoral recipient in each of these countries, except in the case of mining in the Indonesia in the mid1960s More over, it can also be seen from the above discussion, the impact of FDI either directly and indirectly, in exports of the host count:Iy is very important and vital, especially for the developing countries The indirect impact ofFDI on export of the host country, in general, 11 Streeten, P 1991, •The role of direct private foreign investment in poor countries', Foreign Direct Investments, Singer, H W., Ratti, N and Tandon, R (ed.), Indus Publishing Company, New Delhi, 1991, Part B, pp.l91) 12 Santiago C E 1991, 'The impact offoreign direct investment on export structure and employment generation', Foreign Direct Investments, Singer, H W., Hatti, N , Tandon, R (ed.), Indus Publishing Company, New Delhi, 1991, Part D, pp.501) 13 14 World Bank, Development Brie£ No 14, April1993, Encamation, D J and Wells, L T (1986), 'Evaluating foreign investment', Investing in Development: New Roles for Private Capital ?, Overseas Development Council, Washington DC, ch 2, pp 63 & 68 37 as aforementioned, is rather difficult to estimate or analyse Due to these reason, in the next part I will consider in the manufactured goods for exports to have more evidence about the impact ofFDI on exports Table 15 FDI by Sector (percent) Asriculture Korea Taiwan Indonesia Philippines 1.3 0.2 24.1 1.1 Korea Taiwan Indonesia Philippines Thailand 0.9 0.6 5.8 3.6 22.4 Korea Taiwan Indonesia Philippines Thailnd 1.0 0.2 5.7 8.6 14.1 Minine 1967-1971 0 39.6 23.4 1972-1976 0.3 15.4 1.7 n.a 1977-1982 0.2 9.0 2.8 n.a Manufacturing Services 82.5 77.7 28.1 33.0 16.2 22.1 8.2 42.6 75.4 82.0 67.7 54.9 63.6 23.5 17.5 11.1 39.8 14.0 66.3 72.0 79.6 37.9 75.0 32.5 27.8 5.6 50.8 10.9 Source: Hill, H., and Johns B (1991), 'The role of direct investment in developing East Asian countries' In Singer, H W, Hatti, Nand Twldon, R (ed), Foreign Direct Investment, Indus Publishing Company, New Delhi, pp 275, table The most recent estimates available for the share of MNCs in LDCs' manufactured exports are given in Table 16 From this table, it can be seen more clearly the role of MNCs in the manufactured exports of many Asian countries such as Malaysia, the Philippines, Sri Lanka, Singapore, Mexico, Costa Rica, "The UN (1988, ch.10; 1992, ch.B) takes the view that US and Japanese affiliates in particular (for which the most comprehensive data are available) have played a positive role in raising the share of LDCs in world trade if? manufactured goods and that in some cases, US affiliates outperform domestic enterprises, that is the role offoreign affiliates in exports has increased in importance since the late 1970s and early 1980s JvfNCs' affiliates have been partly responsible for changing the composition ofLDC manufactured exports towards technologically more advanced products (in the case of US affiliates, these include electrical and electronic equipment and to a Jesser extent non-electrical machinery, chemicals and transport equipment) Japanese affiliates in Asia and Latin America have also played an important role in raising the share of electrical and electronic products in total manufacture exports (UN 1992, pp.203) JvfNCs also contribute to the growth of manufactured exports from LDCs through a variety of non-equity arrangements between them and indigenous producers A major form of non-equity relationship is subcontracting aforementioned (for example garments from Hong Kong, Singapore, Thailand and Taiwan; bicycles and footwear from Tatwan and Korea) Subcontracting is also important in the Mexican maquiladora, Colombia and Morocco (see UN 1992, ch.B) These arrangements are particularly important for 38 trading companies the best known ofwhich is probably the Japanese " 15 Table 16 The Share of Foreign Affiliates in Manufactured Exports, Selected Years and Countries Country Ivory Coast Tunisia Fiji Hong Kong Malaysia Philippines Republic OfKorea Sri Lanka Singapore Taiwan Thailand Axgentina Brazil Chile Colombia Costa Rica Mexico P~y un ;;.'lay 1984 1986 1985 1984 1986 1983 1978 1987 1988 1986 1980 1983 1987 1979 1980 1980 1986 1988 1988 % of Total manufactured exports 15.0 a 37.0 21.5 16.5 b 51.2 51.5 24.6 51.3 86.0 18.5 37.3 26.6 26.7 21.7 16.9 70.1 58.0 46.3 10.0 Notes: a Including only majority-owned French companies bAs a percentage ofprofits Source: UN, Annex Table 9, pp.334 (taken from Colman, D and Nixson, F (199-1) 'The Transnational Corporation and LDCs · Economies of Change in Less Developed Countries Harvester Wheatsheaf Great Britain, Ch 10, pp 372, Table 10.15.) c Evidences from case studies c.l Thailand FDI increased gradually from 1971 to 1992 according to table 17, from only 0.0988 billion USD in 1971 to 1.0531 billion USD in 1988, and 1.6261 billion USD in 1992 Export increased accordingly from only billion USD in 1971 to 19.4 billion USD in 1988 and to 31 billion USD in 1992 (USD in 1987 price in table 17) The number, registered capital and investment of new foreign firms that export 80-100 percent of their output from 1987-90 serves to indicate MNCs' role and contributions to export growth and expansion in the Thai economy A total of 583 or 82 percent of total number of MNCs, representing 65 percent of 15 Colman, D and NJXSOn, F (1994), Economics of Change in Less Developed Countries the University Press, Cambridge, Great Britain, pp.372 I UUL _; I I Selected Data For Thailand 1971 1972 1973 1974 1975 1976 1977 1979 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 GDP1 18.758 19.574 21.582 22.530 23.642 25.806 28.248 31.184 32.754 34.404 36.450 38.357 40.479 42.806 44.809 47.310 51.851 58.741 65.887 73.628 79.355 85.266 X1 2.996 3.556 4.013 4.866 4.342 5.221 5.636 6.202 7.396 8.293 8.691 8.792 8.140 9.375 10.404 12.114 14.982 19.391 23.009 25.044 28.099 30.995 CPI 29.888 31.334 36.193 44.993 47.392 49.358 53.110 57.318 62.991 75.403 84.951 89.419 92.751 93.553 95.828 97.593 100.000 103.863 109.425 115.914 122.518 127.592 NER RER FDJ1 20.928 20.928 20.375 20.375 20.400 20.400 20.400 20.390 20.425 20.630 23.000 23.000 23.000 27.150 26.650 26.130 25.070 25.240 25.690 25.290 25.280 25.520 24.931 24.567 21.994 19.645 20.379 20.689 20.475 20.412 20.702 19.828 21.645 21.831 21.722 26.520 26.318 25.809 25.070 25.276 25.597 25.072 24.715 24.683 0.099 0.164 0.156 0.310 0.136 0.120 0.151 0.065 0.061 0.198 0.305 0.198 0.360 0.417 0.186 0.287 0.361 1.053 1.621 2.101 1.613 1.626 Notes: AI d.~ta in Bill ion of USIJ in constant price /.9,,"? exc~>pt Real ExdMil!l'' Rate (RER/ is expre,.""Sed in curno>ntcy of the host country to lf.>IJ (Biiht per U:::.LJ,I CPI: Consumer pric Index (1.987=100) X1 GDP1 FDI1: £yports 6'.n~ss Domestic Prc>duct Foreign Direct InvestmG>nt Sources: l.ll.t.!ll:~U'io.dl.J C:.i.i1.L :ilA.t.;.'sti.J.~ IHF 1.9.9;? & N.:Iy ,S].?J:i.Q.-::E.c:.Q/l.Q1lli.JLiilniLS!7iles and l?.ri! t:Llil Jtdi_:£}.-"ff t.PJJl._ The &nk of Th