The impacts of the 2008 financial crisis on the fdi flows to vietnam,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS THE IMPACTS OF THE 2008 FINANCIAL CRISIS ON THE FDI FLOWS TO VIETNAM Student : Nguyen Thi Mai Anh Lecturers : Can Thuy Lien M.A Nguyen Hong Thang Ph.D 1st, June 2012 i ACKNOWLEDGEMENTS First and foremost, I would like to express my heartfelt thanks to Mrs Can Thuy Lien and M.A Mr Nguyen Hong Thang, Ph.D, for the valuable guidance and advice Without their supervision, I can hardly complete the thesis on “The impacts of 2008 financial crisis on the FDI flows to Vietnam” Secondly, I also would like to show my appreciation to my lecturers at Banking Institute, especially the lecturers of Foreign Language Department, who provided me with background knowledge during the last four years At the same time, I am very grateful to my internship supervisors from Military Bank, who assisted me in the process of collecting materials for the thesis Last but not least, I wish to express my sincere gratitude to my beloved parents for their blessings, my classmates for their help and wishes for the successful completion of this graduation thesis Because of time constraints and writer’s limited capacity, this thesis will certainly not be free from defect I hope the teachers and readers will sympathize and contribute to complete the thesis Sincerely! Hanoi, June 2012 ii ABSTRACT Foreign Direct Investment plays an important role in the Vietnam economy FDI companies contributed approximately 20% to the GDP, 35% to the industrial output, 52% to export Indirectly FDI has provided some more employment through sub-contractors or suppliers After Vietnam joined World Trade Organization, Vietnam became one of the Asian countries which are attractive to the investors all over the world to put their capital in Recently, the global financial crisis has caused bad effects to the national economy FDI is not an exception Particularly, the proportion of implemented FDI in registered FDI has recorded a historical decrease from 35% in 2007 to approximately 15% in 2008 In addition, there was a shift in the target sector of FDI from manufacturing to servicing industry The drop of FDI inflows to Vietnam leads to the decline in the contribution to the nation GDP of FDI sectors and the increasing rate of unemployment Although the financial crisis in 2008 has brought about many negative impacts on the FDI attractiveness of Vietnam, from this, Vietnam can also draw a lesson for the future development In order to have a stable source of foreign direct investment, Vietnam should consider iii improve in aspects like economy, legal frame work and human resource and infrastructure TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT ii TABLE OF CONTENTS iii LIST OF FIGURES AND TABLES v LIST OF ABBREVIATIONS vi CHAPTER 1: INTRODUCTION 1.1 Background 1.2 Research objectives 1.3 Research question 1.4 Data sources 1.5 Thesis structure CHAPTER 2: THEORETICAL FRAMEWORK 2.1 An overview of Foreign Direct Investment (FDI) 2.1.1 Definition and classification iv 2.1.2 Benefits and costs of FDI 2.2 Financial crises and their impacts on FDI 11 2.2.1 Definition and classification 11 2.2.2 Causes of financial crises 12 2.2.3 Impacts of financial crises on FDI flows 15 CHAPTER 3: IMPACTS OF 2008 FINANCIAL CRISIS ON FDI THE CASE OF VIETNAM 18 3.1 An overview in 2008 global financial crisis 18 3.1.1 Timeline of global financial crisis in 2008 18 3.1.2 Causes of global financial crisis of 2008 24 3.2 The case of Vietnam 28 3.2.1 The signs of financial crisis in Vietnam 28 3.2.2 Impacts of financial crisis on FDI to Vietnam 35 CHAPTER 4: CONCLUSIONS AND RECOMMENDATIONS 39 4.1 Conclusions 39 4.2 Recommendations 39 REFERENCES 41 v LIST OF FIGURES AND TABLES Figure 3.1: Fed Funds Rate 21 Figure 3.2: US housing price index .25 Figure 3.3: US subprime lending expanded significantly 2004-2006 26 Figure 3.4: Vietnam GDP – real growth rate 29 Figure 3.5: Quarterly GDP of Vietnam in 2007 and 2008 30 Figure 3.6: Inflation rate of Vietnam compared with other economies 31 Figure 3.7: CPI of Vietnam from 2008 to 2010 32 Figure 3.8: Vietnam’s Exports and Imports 33 Figure 3.9: Vietnam’s unemployment rate 34 Figure 3.10: FDI to Vietnam from 2000 to 2010 35 Table 3.1: Registered, implemented FDI .36 Table 3.2: Top industries attracting the highest registered FDI 37 vi LIST OF ABBREVIATIONS FDI Foreign Direct Investment GDP Gross Domestic Product CPI Consumer Price Index MNE Multinational Enterprise MPI Ministry of Planning and Investment LDCs Less Developed Countries NDCs Newly Developed Countries M&A Merger and acquisition TNCs Transnational Corporations MBSs Mortgage-backed Securities CDO Collateralized Debt Obligations CDS Credit Default Swaps CHAPTER 1: INTRODUCTION 1.1 Background One of the striking developments in Vietnam in recent years has been the large external capital inflows which are mostly in the form of foreign direct investment (FDI) Vietnam has emerged as a leading recipient of FDI flows, compared to the size of economy, thanks largely to its initial progress in macroeconomic stabilization, improved investment regime, and outward orientation According to the official statistics released from the Ministry of Planning and Investment (MPI), since March 2007, Vietnam has received a total of 7067 foreign direct investment projects with the total investment capital of US$ 63.5 billion (of which the legal capital is US$ 27.7 billion and the implemented capital is US$30.7 billion) Those figures keep increasing the years after The effect of FDI has been largely positive on Vietnam’s domestic economy, providing an engine of economic growth by increasing productive capacity and enhancing productivity Foreign-invested operations now contribute to nearly 20 percent of Vietnam’s GDP, 52 percent of total exports and millions of jobs Due to various contributions of FDI corporations, it can be said that, FDI is an important factor that affects all economic, cultural and social aspect of the national economy Because of the huge contribution of FDI to the development of Vietnamese economy, any changes in the investment flows will cause specific effects on the whole economy As a result, study on trend of FDI flows will show the government methods to take advantage of the FDI attractiveness of the country in order to ensure a stable development of the economy In addition, in 2007 and 2008, when the global financial crisis struck, Vietnam was not out of the influences The research will bring about a deep insight on the impacts of the economic regression on FDI flows to Vietnam in terms of capital scale and target sectors Once the problems have been pointed out, it is necessary to look at the recommendations for limiting the negative effects in the future More importantly, it will be a precious lesson for Vietnam to consider when the country is currently facing another crisis which is Euro Debt crisis No one can be sure that whether this crisis will affect on the FDI attractiveness of Vietnam or not As a result, looking back at the same situation on the past, the nation will have an overview of what need to be done in order to limit the influences of the crisis on FDI flows to Vietnam during crisis 1.2 Research objectives The thesis aims at finding out to what extent the 2008 global financial crisis can influence the FDI flows to Vietnam Vietnam can learn from this regression in order to ensure the FDI attractiveness of the country in the future 1.3 Research question This thesis aspires to provide answers to the question of concerns for practitioners: What are the impacts of global financial crisis on FDI flows to Vietnam? 1.4 Data sources The analysis is mainly based on reliable sources of secondary data which are collected from a wide range of sources, namely country reports, industry reports, news reports, and database of reliable market data providers such as numbers of universities’ researches 1.5 Thesis structure The thesis consists of four main chapters: I) Introduction II) Theoretical framework III) Analysis and results IV) Recommendations and conclusions 28  Asset-liability mismatch is the situation where the terms of a financial institution’s assets (e.g long-term loans) and liabilities (e.g short-term deposits) not correspond Banks retain only a fraction of the quantity of deposits as reserves, so no bank has enough reserves to deal with all deposits being withdrawn at the same time 3.2 The case of Vietnam The global financial crisis started in 2008 and spread to many countries all over the world The economy of Vietnam is also affected FDI to Vietnam is especially one of the factors that are directly influenced Firstly, the signs of financial crisis in Vietnam need identifying Secondly, its impacts on FDI flows to Vietnam will be assessed 3.2.1 The signs of financial crisis in Vietnam There are main factors indicating that Vietnam is facing crisis in this period including economic growth, inflation rate, import and export and unemployment rate a Economic growth Gross domestic product (GDP) is one of the useful indicators reflecting the health and growth of an economy 29 Figure 3.4: Vietnam GDP – real growth rate (Source: CIA World Factbook) As can be seen on figure 3.4, by 2007, Vietnam maintained a sustainable growth rate with a steady rise from 4.7% in 2001 to 8.5% in 2007 However, in 2008, it dramatically decreases to 6.2% and then 5.3% in 2009 It indicates a regression in the Vietnamese economy which hinders the development of the economy Looking closer to the change in GDP in 2007 and 2008, people can see the differences Figure 3.5 shows that the GDP growth rates of all quarters in 2008 were smaller than of 2007 It started to be significantly different from the 2nd quarter The largest gap was in the 4th quarter, GDP in this period is only 5,74% 38% decreased in comparison with the same period in 2007 30 Figure 3.5: Quarterly GDP of Vietnam in 2007 and 2008 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (Source: Euro Capital Company) b Inflation rate Compared with other economies in the world, the inflation rate of Vietnam experienced a dramatic change during the period of 2007 to 2009 Especially in 2008, as can be seen in figure 3.6, it suddenly plumped up to more than 20% while the inflation rate of other developed countries, Asian developing countries and emerging countries also grew but with a smaller level According to many articles, inflation rate of Vietnam in 2008 is the highest compared with other countries in the same area (vnexpress.net, 2008) The reasons contributing to the increase of inflation in Vietnam consist of both internal and external factors Internal factors could be weak government management and excessive public expenditure Main 31 external factor is the impact of global financial crisis on the economy of Vietnam The combination of these two factors makes Vietnamese economy face deeper regression compared with other countries which have stronger control by the government Figure 3.6: Inflation rate of Vietnam compared with other economies Developing countries Emerging countries Asian developing countries Vietnam (Source: IMF, 2010) Consumer price index (CPI) is an indicator which can reflect the inflation of Vietnam During the first four months of 2008, the price index maintained a very high level in comparison with the year 2009 and 2010 It especially peaked at 3.91% in May 2008 The reason was that in this period, the prices of many product increased significantly, for example, the fuel price grew by 11,5% or the rice price 32 increased from 50% to 100% After that, due to the intervention of government, CPI started to fall in the next months However, the CPI trend was still difficult to control During the last three months, deflation occurs when the inflation rate felt below 0% It can be seen in the figure 3.7 that, compared with the year 2009 and 2010 when the financial crisis has been controlled, in 2008, CPI rate was highly fluctuated The rank was from 3.91to negative 0.91 The fluctuation in CPI indicated the instability in the nation economy Figure 3.7: CPI of Vietnam from 2008 to 2010 (Source: ADB, 2010) c Imports and exports The total trade turnover in 2008 reached USD143.4 billion, increased 28.9% compared with 2007, of which exports reached USD62.69 billion, increased 29.1% 33 over the previous year, exceeding 7% of the annual target and imports totalled USD80.71 billion, increased 28.8% At the end of December 2008, Vietnam's trade deficit reached a record high of USD18.03 billion, increased 27.7% compared with USD14.12 billion in 2007 In 2009, exports reached USD56.5 billion, down 9.9% against 2008 Although at the end of 2009, the world economy in general and Vietnamese economy in particular was basically out of the crisis but the severe damages had not been repaired Figure 3.8: Vietnam’s Exports and imports Exports (bil.USD) Imports (bil.USD) (Source: General Statistics Office of Vietnam) Trade Deficit (bil.USD) 34 d Unemployment It can seen in the figure 3.9 that by 2008, the employment rate of Vietnam maintain a decreasing trend Particularly, from 2004 to 2007, the unemployment rate went down steadily year by year from 5.6% to 4.2% However, when Vietnam had to suffer from the impact of the financial crisis in 2008 which leaded to the regression in the economy, the labour market of the country was also affected It was reflected in the increase in rate of unemployment in 2008 and 2009 from 4.2% in 2007 to 4.6% in 2008 and 4.66% in 2009 Because of the effects of the financial crisis the global economic downturn, manufacturing and business activities declined, consumptions of even essential commodities slowed down, 667,000 people were made redundant According to the Department of Labor, the unemployment rate in Vietnam was about 4.65%, which equivalent of over million people (duytan.edu.vn, nd) Figure 3.9: Vietnam’s unemployment rate 35 (Source: duytan.edu.vn) 3.2.2 Impacts of financial crisis on FDI to Vietnam a Impacts on the registered and implemented FDI to Vietnam The period from 2000 to 2008:  Total registered FDI is: 120.9 billion USD  Total implemented FDI is: 40.16 billion USD  Average proportion of implemented FDI to registered FDI is: 33% Figure 3.10: FDI to Vietnam from 2000 to 2010 (Source: General Statistics of Vietnam) It can be seen on the figure 3.10 that there is a decreasing trend in the proportion of implemented FDI to registered FDI from 2000 to 2008 In order to see the difference, it is necessary to divide this period into two periods: the first one is from 2000 to 2005 and the second one is from 2006 to 2008 36 Table 3.1: Registered, implemented FDI Period Registered FDI Implemented FDI Proportion (billion USD) (billion USD) 2000 to 2005 23.55 16.26 69% 2006 to 2008 97.35 23.9 25% (Source: General Statistics of Vietnam) The difference between these two periods is the proportion of implemented to registered FDI In the former period, this proportion was much higher than the average proportion (33%), while it was down to lower than the average level in the later period One of the factors caused this decreasing trend in FDI was the financial crisis occurring during this period Due to the economic regression, the international business environment turned bad High level of risk and lack of capital made many corporations adjust their investment strategies: narrowing the scope of investment, and cutting capital in order to reduce exposure to risks Furthermore, 2007-2008 financial crises continued to affect the FDI to Vietnam in 2009 which made both the registered and implemented FDI go down considerably this year Particularly, the registered FDI to Vietnam in 2009 was 23,107 million 37 USD which is only equal 36% of register FDI in 2008 In addition, the implemented FDI also decreased from 11.5 billion USD to 10 billion USD in 2009 VN was not out of the same situation as the other developing countries According to the World Bank (WB), FDI flows into developing countries, which reached $ 500 billion (2008), dropped to about $ 400 billion (in 2009) Vietnam accounted for 1.5-2% of global FDI In 2009, FDI in Vietnam was lower than that of the previous years because all the major investors were falling into recession (baomoi.com, 2012) b Impacts on FDI inflows by industries After the global financial crisis, there was a shift in the target sectors of foreign direct investment Table 3.2: top industries attracting the highest registered FDI 2006 2007 2008 2009 Manufacturing Manufacturing Manufacturing Hotels and restaurants Real estate Real estates Real estates Real estates Construction Hotels and Mining and Manufacturing restaurants quarrying Construction Transport; storage Construction Hotels and restaurants and communications Recreational, Education and Hotels and Mining and cultural and training restaurants quarrying sporting activities 38 It can be seen in the table 3.2 that during the period from 2006 to 2008 when the global financial crisis was occurring, manufacturing was still the dominant industry in terms of FDI attraction which often accounted for approximately 50% of registered FDI each year However, in 2009 the impacts of the global financial crisis on the national economy was revealed, there was a shift from the manufacturing industry to a service industry which is hotels and restaurants The reason is that the global financial crisis caused a significant decrease in exporting goods manufactured in Vietnam As a result, firms tended to focus on developing the service industry which aims at serving the local demand instead of exporting to other countries suffering from the bad effects of global financial crisis 39 CHAPTER 4: CONCLUSIONS AND RECOMMENDATIONS 4.1 Conclusions Foreign direct investment has represented an extremely important source for the growth for the Vietnamese economy In recent years, especially after Vietnam joined the World Trade Organization, foreign direct investment has become one of the key factors contributing to the development of Vietnam’s economy and society FDI also plays an important part in helping Vietnam overcome the situation of capital shortage Particularly, FDI accounted 30% of total capital invested in the whole country However, the global financial crisis in 2008 has caused bad effects on the national economy in general and the FDI attractiveness in particular Due to the economic regression, FDI flows to Vietnam experienced a considerable change The proportion of implemented FDI to registered FDI decline significantly in 2008, and two years later, both registered and implemented FDI to Vietnam could still not reach the level as they did before the regression 4.2 Recommendations Although, the global financial crisis has brought about bad effects to Vietnamese economy, it is also a good experience for Vietnam to deal with the same situation in 40 the future In particular, in order to reduce the impacts on the economy in general and the FDI attractiveness in particular, Vietnam should ensure some key factors Firstly, economically, Vietnam should ensure the stable macro economy, maintain a desirable economic growth, control inflation and stabilize monetary and fiscal policy In addition the country should develop market economy and facilitate the financial market formation to meet urgent demands of business, actively promote investment through selection of reputable foreign investors, viable projects, and strategies to attract FDI and diversify and strengthen relations to other countries In addition Vietnam should consider pursuing the policy "Vietnam want to befriend all countries" Secondly, Vietnam should improve the legal environment to ensure preferential terms and protections for foreign investors and ensure strict law enforcement to make foreign investor confident investing in Vietnam Thirdly, Vietnam should pay great attention to educating and training mid-level managers and specialists, renovate and improve infrastructure, focusing on essential systems and structures This is not an easy task due to limited economic resources Therefore we have to mobilize capital from all resources of all Vietnamese people and call for support from other governments 41 REFERENCES Atul Gulrajani No date Hedge Funds and their impact on the Global 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