Introduction
Problem Statement
The Provincial Competitiveness Index (PCI) evaluates regional performance in private sector growth, job creation, and investment attraction in Vietnam By utilizing survey data from businesses regarding their local environments, alongside reliable data from various sources, the PCI ranks provinces on a 100-point scale Initially established in 2005 with nine sub-indices, the PCI was expanded in 2006 to include additional metrics reflecting government efforts to improve the business climate.
There is a lack of empirical studies examining the impact of independent variables of the Provincial Competitiveness Index (PCI) and other traditional factors on foreign direct investment (FDI) at the provincial level in Vietnam.
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 FDI inflows, known as Regional FDI The findings will assist policymakers in identifying critical areas for enhancing the investment environment at both provincial and governmental levels.
Previous studies have explored the factors influencing foreign direct investment (FDI) in developing countries, revealing key elements that attract FDI across various nations This thesis aims to identify these critical factors in greater detail.
(i) Independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam; and
(ii) Factors of PCI are highly correlated and we should revise PCI set
(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 the relationship between foreign direct investment (FDI) and various independent variables in Vietnam, drawing on economic theories and empirical studies presented in Chapter 2 Chapter 3 details the independent variables used in the PCI project survey We develop a research model and gather data from the PCI project website and the General Statistics Office of Vietnam to address key research questions, specifically identifying which PCI and traditional variables significantly influence FDI across Vietnamese provinces.
(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 also summarizing empirical research focused on strategies for attracting FDI, particularly at the provincial level within the country.
Chapter three outlines the process of constructing the research model based on the methodologies discussed in chapter two, emphasizing the selection of data It is crucial to define the dependent and independent variables utilized in the PCI project for annual surveys, while also incorporating 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 risk for firms, while international trade theories explore the relationship between FDI and exports, highlighting their substitute or complementary effects Theories of industrial organization view FDI as a means to leverage firm-specific advantages The OLI paradigm offers a dynamic perspective on FDI determinants, and agglomeration economies analyze the spatial distribution 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 minimize risk They assess the rates of return associated with various alternative investments, balancing potential gains against the inherent risks involved in selecting substitutable assets for their portfolios.
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 facilitates the transfer of essential resources such as entrepreneurship, technology, and management expertise Additionally, the relative profitability of utilizing these resources across different countries, alongside monetary capital, significantly influences direct investment decisions.
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 to illustrate that trade and capital movements can act as substitutes He posited that implementing trade tariffs would lead to an influx of foreign direct investment (FDI) into the protected nations This perspective aligns with the original Heckscher-Ohlin model, which suggests that trade restrictions can be offset by the international mobility of capital, particularly in scenarios where labor remains immobile.
Kojima (1973) identifies four primary motives for foreign direct investment (FDI): first, the pursuit of natural resources; second, the attraction 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 trend of rapid foreign investment by US firms and outlines that each product undergoes three key phases: innovation, maturity, and standardization Domestic demand drives innovation, while similarities in international demand boost exports The model emphasizes that the US's abundance of skilled labor and research and development resources, combined with a sophisticated domestic market, fosters innovation among American companies.
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 Hymer (1960) emphasizes that foreign direct investment (FDI) involves more than just capital transfer; it encompasses the international transfer of proprietary rights and intangible assets, including technology, business techniques, and skilled personnel He argues that FDI arises primarily due to imperfections in international markets for these assets, prompting firms to "internalize or supersede" market failures through direct investment.
Certain transactions can be more economical when conducted internally within a firm rather than in the external market Internalization occurs when the advantages, including barriers to new entrants, exceed the costs related to communication, coordination, and control Foreign Direct Investment (FDI) is often pursued to leverage these benefits effectively.
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 examines the relationship between a country's development level and its international investment position, specifically through net outward investment per capita It posits that there is a significant interconnection between inward and outward investment flows and a nation's development As a country progresses, the conditions affecting both domestic and foreign firms evolve, influencing their investment dynamics.
In today's rapidly globalizing world, the location determinants of Foreign Direct Investment (FDI) in host countries have become increasingly crucial for multinational enterprises (MNEs) While traditional factors influencing FDI remain relevant, their significance is waning, especially in dynamic and high-tech industries According to UNCTAD (2001), the focus has shifted towards the ability of host countries to offer complementary skills, robust infrastructure, reliable suppliers, and effective institutions, highlighting the evolving landscape of FDI decision-making.
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
The determinants of regional economic growth in developing countries are influenced by various factors, including geography, infrastructure, legal institutions, and the quality of human capital A transparent economy, characterized by effective governance and strong local institutions, plays a crucial role in fostering a competitive business environment Key elements such as secure property rights, flexible labor markets, a competitive tax regime, and the efficient provision of public goods are essential for promoting regionalism and reducing corruption These factors collectively enhance the capacity of regions to connect with the global economy and drive sustainable growth.
The competitive advantage of a nation is significantly influenced by the quality of its skilled labor and the strength of its infrastructure Key factors in production include not only a well-trained workforce but also robust supporting industries that cater to the needs of the economy Additionally, the nature of domestic demand plays a crucial role in shaping these industries and enhancing overall productivity.
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,
To optimize macroeconomic strategies, businesses should focus on gaining natural access to land and adopting a legal approach to resource management Additionally, leveraging local institutions and the low labor costs in the host country can enhance operational efficiency It is crucial to navigate tariff and non-tariff barriers to facilitate smoother trade Furthermore, utilizing oligopolistic power can drive market influence Domestic market size and labor cycle models can incentivize innovation, while international demand can boost exports, supported by provincial industry training and business support services.
The Hymer-FDI model emphasizes that foreign direct investment (FDI) extends beyond just labor training and capital transfer; it also involves the crucial role of institutions and the international transfer of proprietary rights and intangible assets Additionally, it highlights the importance of proactive provincial leadership in facilitating these processes.
8 The Internalization Approach teclmology, business techniques, Business Supp011 and skill personnel's Service
Certain transactions can be more cost-effective when conducted within an informal firm rather than in the open market The advantages of internalization, such as reduced entry costs and regulatory compliance, must outweigh expenses related to communication, coordination, and control Foreign Direct Investment (FDI) is often pursued to leverage these benefits and navigate barriers faced by new entrants.
Empirical studies on the determinants ofFDI
Conventional empirical studies on the determinants of Foreign Direct Investment (FDI) typically consider ten key variables identified by Dunning and Narula (1996): natural and created assets, capital intensity, market size and growth, infrastructural development, labor cost and productivity, degree of openness, government policies, political stability, profitability, and geographical proximity.
Nonnemberg and Mendonya (2004) analyzed the factors influencing foreign direct investment (FDI) in developing countries using an econometric model Their study utilized panel data from 38 developing economies covering the period from 1975 to 2000, revealing key determinants of 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 often focused on knowledge-intensive activities The openness of an economy significantly influences its ability to attract FDI Additionally, a causality test revealed that Gross Domestic Product (GDP) tends to lead to FDI rather than the other way around Furthermore, a study by Ali and Guo (2005) highlighted that market size, labor costs, and global integration are critical factors impacting FDI attraction.
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 FDI and its key determinants The analysis identified market size, labor force growth, infrastructure index, and trade openness as the primary factors influencing FDI in the region The study emphasizes the need for South Asian countries to sustain growth, enhance market size, develop policies to leverage their labor force, improve infrastructure, and adopt more open trade policies to attract increased FDI.
Kozlova and Smajlovic (2008) identified FDI inflows as the dependent variable in their model, with key explanatory variables including GDP per capita, investment freedom, trade openness, and infrastructure Additionally, the model incorporates a dummy variable to distinguish between oil-exporting and non-oil-exporting countries.
FDii = ai + ~1 (GDPperCap)i + ~2 (lnvestmentFreedom)i + ~3 (Infrastructure)i + ~4
The findings indicate a significant relationship between infrastructure, trade openness, and foreign direct investment (FDI) in the Middle East and North African (MENA) region.
According to Vijayakumar et al (2010), in BRICS countries, factors such as Economic Stability and Growth prospects—assessed through inflation rates and industrial production—along with Trade openness, indicated by the ratio of total trade to GDP, are key determinants influencing Foreign Direct Investment (FDI) inflows.
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, the attractiveness of the Chinese domestic market draws investors Secondly, the availability of low-cost labor significantly reduces production expenses for companies Additionally, China's robust infrastructure plays a crucial role in facilitating FDI, enabling firms to enhance their technology and achieve economies of scale Lastly, the political environment in China, shaped by visionary leadership, is a vital factor in attracting foreign investment.
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 Additionally, the study reveals that multinational enterprises (MNEs) prefer locations that facilitate high-value activities over those that simply offer low labor costs, challenging the notion that China's labor cost advantage is the primary factor in their location decisions.
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 positive correlation between market demand and GDP plays a crucial role in attracting FDI Secondly, regions with a higher quality of labor are more appealing to foreign investors Lastly, the degree of openness and the level of reform within each region also significantly impact FDI attraction.
According to Giang (2008), four key local factors hinder development in Vietnam, including 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 indicated by annual surveys conducted by the Vietnam Chamber of Commerce and Industry (VCCI) and the Vietnam National Competitiveness Index (VNCI) With the exception of Uto Cai, these provinces exhibit low levels of transparency, and six of them rank among the least transparent in Vietnam.
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 effects of local government policies on FDI.
In their 2007 study, Anh et al conducted an empirical evaluation of the effectiveness of incentives in attracting foreign direct investment (FDI) They employed a two-step difference-in-differences (DD) estimation approach, beginning with the application of ordinary least squares (OLS) regression to analyze the data.
Yst = bO + bl.Xst + b2.Breaks + gst (1)
The analysis examines the per capita foreign direct investment (FDI) attracted to provinces over time, with determinants represented by control variables A dummy variable distinguishes between non-breakers and breakers, while the impact of incentives on FDI attraction is assessed using a second regression model Findings indicate that labor costs have differing effects on registered versus implemented FDI; specifically, while wages are positively significant in the implemented FDI model, they are negatively insignificant in the initial attraction model This suggests that before investing, foreign investors prioritize locations with lower labor costs, but after investment, they face higher wages due to increased productivity and labor scarcity driven by their projects.
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
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Determinants of the FDI and market size, economic growth: a summary of recent growth, macroeconomic literature stability, Infrastructure , regulation, economic barrier
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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 national or comparative analyses among countries, with limited studies examining regional FDI in China This thesis specifically investigates provincial FDI in Vietnam, utilizing a set of independent variables derived from the Provincial Competitiveness Index (PCI) alongside other traditional factors.
Base on Vietnam PCI project proposed general framework for determinants of provincial competition index as follows:
The equation PCiit = f(ECit, ALit, TAlit, TCRCit, ICit, PPLit, BSSit, LTit, Liit, INFit, uit) represents the various factors influencing the performance of a business in a given region Key elements include Entry Costs (EC), Access to Land (AL), Transparency and Access to Information (TAl), and the Time Costs of Regulatory Compliance (TCRC) Additionally, Informal Charges (IC), Proactivity of Provincial Leadership (PPL), Business Support Services (BSS), Labor Training (LT), Legal Institutions (LI), and Infrastructure (INF) are critical components that affect business operations and success.
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 significant interaction effects among various factors Consequently, some independent variables may be categorized into two groups: Cost Factors and Province Policy.
The analysis focuses on the Cost Factor (CF), which encompasses Economic Costs (EC), Total Revenue Cost (TCRC), and Investment Costs (IC), as well as Provincial Policies (PP) that include Agricultural Law (AL), Taxation and Agricultural Law (TAl PPL), Business Support Services (BSS), Labor Trends (LT), and Labor Incentives (LI) Additionally, it is essential to consider other significant variables to enhance the study's comprehensiveness This methodology is specifically employed to address research questions No 2 and No 3.
The initial regression model in this study focuses on the determinants of total Foreign Direct Investment (FDI) within provinces By utilizing the logarithm of annual provincial FDI as the dependent variable, the model aims to highlight 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
I collected panel data from the PCI project and the General Statistics Office of Vietnam, covering all provinces from 2006 to 2009, resulting in 252 observations By averaging the data over four years, I obtained cross-sectional data with 63 observations The registered FDI data for Vietnamese provinces was analyzed, applying a weight of 0.33 for the years 2007 to 2009.
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
3.3 Variables description 3.3.1 The Provincial Competitiveness Index-PCI (total point= 100) The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job creation and economic growth Using new survey data from businesses that describe their perceptions of their local business environments, as well as credible and
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
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 By calculating the average values over these four years, I created cross-sectional data comprising 63 observations Additionally, I utilized registered FDI data for Vietnamese provinces, applying a weight of 0.33 for the years 2007 to 2009.
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 standardize these procedures nationwide, research indicates that inconsistencies still exist 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)
Access to land is a critical factor for businesses, reflecting how easily firms can secure the land they need In 2006, the assessment criteria were updated to include a new dimension focused on the security of tenure after land acquisition Key considerations include whether firms hold official land use rights certificates, if they have sufficient land for future expansion, and their rental agreements with state-owned enterprises (SOEs).
Effective conversion strategies must address perceptions of tenure security risks, including potential expropriation, inadequate compensation, alterations in lease agreements, and the overall duration of tenure.
Private firms frequently highlight the significant discrepancies 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 acquiring productive land, hindering new investment opportunities and limiting access to capital, as Land Use Rights Certificates (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 increases transaction costs The second aspect is Security of Tenure, which pertains to the long-term certainty of land rights Firms with secure tenure are more likely to invest in the sustained productivity of their land, while the threat of expropriation or changes in lease agreements prompts a short-term investment approach This 'footloose' strategy can negatively impact provincial welfare by diminishing 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 This includes ensuring equitable availability of these documents, timely communication of new policies and laws, and reliable implementation Additionally, the functionality of provincial web pages plays a significant role in business operations Analysts and development practitioners emphasize that transparency is a key factor in identifying environments that support 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 examines the time wasted by firms on bureaucratic compliance and the interruptions caused by inspections from local regulatory agencies It highlights two key dimensions of time costs: the inefficiencies of bureaucratic procedures and the operational downtime due to inspections, both of which are weighted equally in assessing the overall impact on businesses.
The examination of transaction costs over time plays a crucial role in understanding economic transitions, especially in Vietnamese provinces, where the adage 'time is money' holds significant weight Firm managers frequently find themselves diverted from essential business activities to address routine bureaucratic issues, resulting in lost time that could otherwise be utilized to enhance 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 part of their operations It evaluates five key indicators to assess the frequency, 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 to foster private sector growth, and navigating ambiguous national regulatory frameworks to support and advocate for local businesses.
Ambiguity in legal documents often arises from unclear wording, delays in implementation of central laws, and contradictions among various official directives This lack of clarity can significantly hinder business projects, particularly for industries new to Vietnam, as provincial government decisions can greatly influence the success of ventures Delays caused by ambiguous regulations can lead to substantial time and financial losses for businesses, as they may be forced to wait for clarifications or appeal to central authorities Some provinces may even exploit these uncertainties to create barriers against potential competition Conversely, provinces that creatively navigate central laws and proactively address the challenges faced by private firms can greatly enhance 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 challenges faced by firms in these areas.
The eighth sub-index builds on the Pro-activity Sub-Index by evaluating how provincial initiatives foster private sector growth Surveys of Vietnamese firms reveal key challenges they face, including: i) difficulties accessing information about domestic and international markets; ii) challenges in keeping up with regulatory changes; and iii) a shortage of skilled workers necessary for 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 a significant challenge in creating jobs for 1.4 million new labor entrants each year, while businesses struggle to find skilled workers This highlights a critical issue: the private sector seeks employees with valuable skill sets rather than just filling positions out of obligation Consequently, provincial initiatives aimed at enhancing local workforce skills are essential for fostering a favorable business climate Although some firms invest in training their employees, they often lose trained workers to competitors who offer higher wages without incurring training costs, leading to a collective action problem Therefore, provinces should implement general labor training programs to address this issue effectively.
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 reflected in how firms perceive these institutions, either as effective mechanisms for dispute resolution or as avenues for addressing corrupt official behavior.
As Vietnam's accession to the WTO emphasizes the importance of robust legal institutions and local courts, significant efforts are still required to enhance their effectiveness Despite this necessity, many individuals and private firms continue to prefer informal mechanisms for resolving disputes.
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 significant correlations among key variables impacting industrial growth Firstly, a strong correlation of +0.89 between Industrial Product (IP) and Market Size (MS) indicates that initial market stock significantly influences industrial product factors, suggesting that one of these variables may be excluded during hypothesis testing Secondly, the correlation of +0.75 between Transparency and Access to Information (TAl) and Business Support Service (BSS) implies that effective business support enhances investors' access to crucial information Lastly, Labor Training (LT) shows the highest positive correlation with BSS, highlighting its importance in relation to Foreign Direct Investment (FDI) and emphasizing the role of LT in enhancing the significance of business support services in 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 assess foreign direct investment (FDI) across 63 provinces in Vietnam Table 4.2 presents the regression outcomes based on the empirical framework outlined in the specified equation, incorporating twelve explanatory variables All regressions employ the Ordinary Least Squares (OLS) technique, adhering to the assumptions of the OLS method to ensure that the estimators are Best Linear Unbiased Estimators (BLUE) Additionally, the accuracy of the collected dataset is assumed to be reliable.
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 distinct specifications to assess the statistical significance of various explanatory variables Each scenario was examined to identify and potentially eliminate less significant independent variables, transitioning from a general equation to a simplified model This iterative process aims to determine the optimal model, necessitating the application of the Wald test for validation.
To evaluate reduced variables including 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 most effective results.
Heteroskedasticity was assessed using the results presented in Table 4 of the appendices to ensure that the error variance remains constant and that the residuals adhere to a normal distribution The testing results indicate that the data does not exhibit 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) in Vietnam, as evidenced by the estimation results The analysis focuses on the top five industrial products from 2006 to 2009 and their corresponding rankings in attracting FDI.
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
According to data from GSO and PCI (2006-2009), there is a clear correlation between higher industrial product totals and increased foreign direct investment (FDI) in Vietnam However, despite the implementation of free trade agreements, Vietnam is experiencing a decline in foreign capital inflow, primarily due to its underdeveloped supporting industries, which serve as a significant deterrent for potential investors.
The impact of infrastructure (INF) remains the most significant factor influencing provincial foreign direct investment (FDI), consistent with previous empirical research A comparison of the infrastructure rankings from the Provincial Competitiveness Index (PCI) survey alongside the top five provinces for 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 Legal Index (LI) measures private sector confidence in provincial legal institutions, assessing whether firms view these institutions as effective for dispute resolution or as a means to address corrupt practices Scholars and practitioners highlight the shortcomings of legal development and formal dispute resolution in Vietnam's economic transformation Consequently, it is crucial for provinces and cities to enhance their administrative capabilities and strengthen corruption prevention efforts.
Investors face several challenges in their operations, including the need to find skilled employees for effective labor training Additionally, they encounter difficulties in accessing information about both domestic and overseas markets, as well as navigating new regulatory changes that require transparency and improved access to information.
So, the BSS variable is significant to provincial FDI at levellO% is normal case
Land is a crucial resource that investors consider when making investment decisions, particularly in the manufacturing sector This thesis suggests that the AL variable is less significant for provincial foreign direct investment (FDI) in Vietnam, as there is little variation in provincial policies across the country.
Despite hopes for a significant competitive advantage in Vietnam's labor force due to low wages, recent findings reveal a troubling reality: a lack of adequate training across the country Research indicates that only Binh Duong, Da Nang, and Vinh Phuc have implemented effective regulations and incentives to enhance human resources, addressing the needs of foreign investors and local businesses Alarmingly, 64% of the labor force remains untrained, and 78% of youth aged 20 to 24 lack qualifications for the job market With a working-age population of 48 million, it is paradoxical that 50% of enterprises, both domestic and foreign, report acute labor shortages.
4.2 7 Transparency and Access to Information
Over the past decade, significant progress has been made in the preparation and implementation of grassroots democracy decrees, as highlighted in various evaluation reports across Vietnam To further enhance grassroots democracy, the National Assembly has proposed a law on access to information aimed at guaranteeing the public's right to information and improving the transparency and accountability of government agencies This law is anticipated to be approved by the National Assembly by 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
The variable in question has been found to have little impact on attracting provincial foreign direct investment (FDI) in Vietnam This finding aligns with the results of a survey conducted in Binh Dinh, which highlighted that enterprises ranked this issue eighth among concerns during a dialogue program focused on corruption prevention, as noted in a report from Hanoi involving 25,111 participants.
The 8th International Donors Dialogue for Vietnam revealed that 43% of businesses reported providing gifts and incurring unofficial costs to obtain land use right certificates.
Conclusion and Recommendation
Conclusion and recommendation
This study has analyzed the determinants of provincial FDI in Viet Nam over period
From 2005 to 2010, I conducted a literature review on regional development and foreign direct investment (FDI), developing an estimated model based on collected data and econometric analysis This research validated our hypotheses and addressed the study's objectives Utilizing data from the General Statistical Office of Vietnam (GSO) and the Provincial Competition Index (PCI) project, the estimation results revealed that gross industrial output, legal institutions, and infrastructure significantly impact provincial FDI at the 1% and 5% levels, while business support services show a nearly 10% significance in relation to provincial FDI.
To attract foreign direct investment (FDI), Vietnamese provinces and cities must enhance their infrastructure, including land, transportation, communication, and industrial zones, to meet investor expectations Additionally, improving supporting industries is crucial, as Vietnam's current capabilities lag behind those of other ASEAN nations like Thailand and Malaysia, particularly in supplying spare parts for the automotive and electronics sectors Building trust in provincial legal institutions is essential for fostering private sector confidence, as effective dispute resolution and corruption prevention are vital for economic transformation Lastly, business support is a key consideration for investors, particularly in manufacturing and trade; thus, provincial authorities should streamline administrative procedures, ensure clear communication of new policies, and provide labor training programs to attract both foreign and domestic investors.
While factors like labor training, transparency, access to information, land access, and informal charges may appear uniform across provinces in Vietnam, enhancing provincial authority in these areas is crucial Addressing discrepancies in these variables can significantly attract investors and foster economic growth in the provinces.
Provinces and cities should focus to Improve their PCI rank, this lead to more attracting FDI and local investors
To enhance the PCI project's effectiveness, it is essential to incorporate additional traditional variables, such as total industrial product and GDP, into the annual survey and reporting framework Simultaneously, it is advisable to minimize the inclusion of certain cost-related factors to streamline the analysis.
Limitation
Due to the unfulfilled Foreign Direct Investment (FDI) value, we utilized registered FDI data from provinces in Vietnam and applied a weight of 0.33 over three years (2007-2009) to estimate the actual 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 Date: 11128110 Time: 23:25 Sample: I 63
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
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