67 Chapter 4: Foreign Direct Investment Strategy in Vietnam Real Estates.. Recently, the foreign capital flows into real estates sector have always ranked as top receiving sectors, usual
Introduction
Rationale of Thesis
The real estates are one crucial sector in an economy, for both advanced and developing economies According to the Vietnam Ministry of Construction
(2023) (1) , the real estates account for about 4.5% of output, measured by the gross domestic product (GDP) in 2022 In combination of real estates and the related construction sector, the joint contribution is about 11% of GDP, or about over 30 billion USD in current price This stylized fact proves the importance of the real estates in the context of Vietnam economy
Recently, the foreign capital flows into real estates sector have always ranked as top receiving sectors, usually as second or third position in total foreign direct investment in the Vietnam economy The foreign direct investment (FDI) flows directly affect the real estates sector, and also exert an impact on the Vietnam economic growth rate And on the process of implementing the foreign direct investment, the foreign investors penetrate the real estates market with various strategies, depending on the location and timing of entering the Vietnam economy
The Vietnam economy is currently an open economy with a quite in-depth international integration The trade openness, as the ratio of total exports and imports over GDP, is now nearly 190% (Vietnam General Statistics, 2023) And this economy has signed over 15 free trade agreements (FTAs) and is in process of several trade negotiations with other economies, such as Japan, European Union, China and the Republic of Korea The international integration also raises an optimistic trajectory for Vietnam to attain more foreign capital inflows in the future
The combination of significant contribution by real estates sector with the prospect of increasing foreign investment opens a research gap in the strategy of
7 foreign direct investment into the Vietnam economy And this Master Thesis aims to fill in this gap.
Research Objective
The Master Thesis aims to investigate the strategy of foreign direct investment into the real estates in Vietnam economy In particular, the main research question is stated as follows:
Which strategies do the foreign direct investment firms employ to operate into the real estates in Vietnam economy?
To answer the main research question, the Thesis proposes the following small questions And the clarification of these small questions will constitute the justification for the main research question
What is the concept of foreign direct investment and real estates?
What is the theoretical mechanism underlying the foreign direct investment into the real estate sector?
How can the foreign direct investment firms operate successfully in the Vietnam real estate sector?
What are the practical implications for the strategies by the foreign direct investment firms in the Vietnam real estate sector?
On answering these questions, the Thesis will also review the theoretical and empirical evidence on the foreign direct investment inflows into the real estates sector, as well as the foreign direct investment firms' strategies in the Vietnam economy
On that basis, the investment is the impact of foreign direct investment into the host country, as well as the foreign strategies carried out by the foreign investors in the Vietnam real estates sector
Finally, the Thesis also provides some discussion about the appropriate public policy to enhance the foreign investment into the Vietnam real estates market.
Methodology and Data
The research method is based on a combination of qualitative analysis and quantitative analysis The qualitative method examines recent literature on the real estates market, focusing on the context of the Vietnam case as one developing economy Then the quantitative method examines the dynamic pattern in the strategies carried out by the foreign direct investment firms in the Vietnam real estates sector
The research data is an annual time series sample of FDI inflows into Vietnam's real estates sector in the period 2006-2022 2006 was the starting point when Vietnam's economy started joining the World Trade Organization (WTO - World Trade Organization) Since then, Vietnam has experienced two cycles of Vietnamese real estates, the period 2006 - 2014, and the cycle 2014 - 2022 (average of 8 years per cycle) And the endpoint is 2022 when the Vietnamese economy is recovering from the recent Covid-19 pandemic and is also the latest year with data on foreign investment in the real estates sector
Foreign direct investment (FDI) in real estates is measured by disbursement value in billions of USD at current prices The contribution to the importance of FDI in real estates in the economy is measured by the proportion of FDI in the real estates sector to total annual FDI in Vietnam The data on foreign direct investment is obtained from the Foreign Investment Department, Ministry of Planning and Investment (2023) (2)
Economic growth (gGDP) is measured by the growth rate of gross domestic product (GDP) over time at 2010 constant prices This data is collected from an online database line of the General Statistics Office (2023) (3)
With the collected data, the article calculates the correlation coefficient between the amount of FDI invested in the real estates sector with the economic growth rate over time
Pearson correlation coefficient (Pearson correlation coefficient, symbol r) (Wooldridge, 2015) is an index that measures the degree of linear correlation between two variables Usually, the Pearson correlation has a value ranging from -1 to +1 With r = 0: The two variables in the coefficient have no linear correlation With r = 1 or r = -1: The two variables in the coefficient have absolute linear correlation If r < 0: The correlation coefficient is negative This means that the values of the two dependent variables will be opposite, that is, the value of variable x decreases, the value of variable y increases and vice versa, the value of variable x increases, the value of variable y decreases If r > 0: The correlation coefficient is positive This means that the values of two dependent variables go hand in hand, that is, as the value of variable x increases, the value of variable y increases and vice versa, the value of variable y increases, the value of variable x also increases
With, the collected values of two variables x and y, the calculation formula of the correlation coefficient is as follows:
√[𝑁𝛴𝑥 2 − (𝛴𝑥) 2 ][𝑁𝛴𝑦 2 − (𝛴𝑦) 2 ]Finally , on the graph, if r = -1 the data variables will be distributed on a straight line with a negative slope, r = 1 the data will be distributed on a straight line with a positive slope.
Structure of Thesis
The Master Thesis intends to carry out an outline with the main idea in each chapter as following
The section discusses the motivation and associated overview of the Thesis on the foreign direct investment into the Vietnam real estates
The chapter presents the theory about the foreign direct investment and the real estates investment strategy It examines both the recent theoretical and empirical evidence on the foreign direct investment into the real estates sector
Chapter 3: Foreign Direct Investment in Vietnam Real Estates
The chapter deals with the current situation of foreign direct investment into the Vietnam real estates sector with a dataset of Vietnam over 2010-2022 The main trends and key stylized facts about the foreign direct investment would be the focal points in this chapter
Chapter 4: Foreign Direct Investment Strategy in Vietnam Real Estates
The chapter investigates the strategies implemented by the foreign direct investment firms when they enter and operate in the Vietnam economy The content would focus on common strategies, especially regarding large foreign investment firms
The section summarizes the Thesis and provides more discussion on the appropriate public policy to enhance foreign direct investment into the Vietnam real estates
In particular, the Thesis intends to carry out an in-detail outline as follows.
Outlines of Thesis
Theoretical Background
Foreign Direct Investment in Vietnam Real Estates
Foreign Direct Investment Strategy in Vietnam Real Estates 78 4.1 Foreign Direct Investment Strategy in Vietnam Economy
Conclusion
Recommendations
The capital stock is an important component of the economic growth A country's total capital requirements are satisfied by not only the internal sources, but also the foreign sources In particular, the Foreign Direct Investment (FDI) and Foreign Indirect Investment (FII) are the two most common avenues by which foreign investors invest in an economy The FDI is the investment of foreign investors with the right to manage directly the operation of firms in a foreign country, while FPI means the investment of investors in financial assets without the management right such as stocks and bonds in another country
In general, the foreign investment capital includes foreign direct investment (FDI), foreign indirect investment (FII) inflows and debt capital flows (Debts), according to the classification of the International Monetary Fund (IMF, 2012)
In addition, other sub-capital flows such as foreign aid (ODA), accumulation of foreign reserves (Foreign Reserves) are also aggregated by the IMF (2012) in the capital account balance of an economy Foreign capital tends to flow to the economies with high rates of return, such as the ones with high economic growth But other factors are also very important such as institutional quality, infrastructure, human resources and responsiveness in terms of technology level Even when institutional quality is poor, a high growth rate is not enough to attract FDI inflows This also leads to the trend that foreign investment flows, especially FDI, often move between developed economies with similar institutions, much more than investment flows from the developed economies into developing economies (Ly Dai Hung & Pham Anh Tuan, 2023) (4)
The FDI is the source of new production activities involving many types of assets such as technology, human resources and management skills And it is a major source of capital accumulation, which is channeled through Multinational Enterprises (MNEs) (Kim, 2019) (5) In another definition, foreign investment is
13 the movement of assets such as capital, technology, management skills from one country to another to do business with the aim of earning high profits on a global scale (Phung Xuan Nha, 2013) (6)
The foreign direct investment is a form of long-term investment by individuals or companies from one country to another by establishing production and business bases That foreign individual or company will take over the management of this production and business establishment About the required conditions, the investment enterprises must own at least 10% of the total number of shares of the capital-receiving enterprise to be recognized as FDI According to the provisions of Clause 22, Article 3 of the Investment Law 2020, Consolidated document 28/VBHN-VPQH (2022), regulations on FDI are as follows: "An economic organization with foreign investment capital is an economic organization with foreign investors as members or shareholders"
Thus, it can be understood that the foreign direct investment is a form of long- term investment of individuals or companies of one country in another country by establishing a base business production for the purpose of profit Differently, the foreign indirect investment is an activity to buy foreign financial assets for the purpose of making a profit, the owner of the capital does not directly operate and manage the process of using capital From a financial perspective, foreign indirect investment (FPI) is the flow of capital that foreign investment funds invest in the stock and bond markets, sometimes for speculative purposes This capital flow is usually short-term, distinct from long-term foreign direct investment Regulations on foreign indirect investment subjects include: Organizations and individuals involved in foreign indirect investment activities in Vietnam; Foreign investors are non-residents conducting indirect investment activities in Vietnam (Article 2 of Circular 05/2014/TT-NHNN )
The International Monetary Fund defines the Foreign Direct Investment (FDI) in its Fifth Balance of Payments handbook as a type of international investment with the aim of being permanently engaged in an enterprise located in another country The concept of long-term involvement implies a long-term
14 relationship between the investor and the foreign company and significantly influences the management of the latter According to these recommendations, FDI data in the Balance of Payments statistics are grouped under the following headings: share buybacks above 10% of equity, intra-company lending and direct investment in real estates property (Carlos Rodríguez & Ricardo Bustillo,2008) (7)
The foreign direct investment improves the economic growth with an enhanced and stronger magnitude in countries that pursue an outward-looking trade policy than in those that adopt an inward-looking policy More open economies, thanks to the neutral trade policy and free movement of market forces, can facilitate the efficient allocation of FDI on the basis of comparative advantage and through competition mechanisms, while encouraging the benefits of learning (positive externalities) such as technology transfer and management skills and innovation Many studies have provided evidence of the positive effects of FDI on emerging open economies
The distinction between direct investment and indirect investment above is relative Today, due to the development of financial markets, the assets of many businesses are not only owned by one person but belong to many people Therefore, a shareholder can own a number of shares that are not large in absolute terms, but relatively large (accounting for a high percentage) compared to many other shareholders, then this shareholder has the right to directly run and manage the business Then, the indirect investors can become direct investors by accumulating enough voting shares of a firm In contrast, those who are directly managing their assets at the enterprise but when others buy them to expand their investment with an overwhelming amount of capital, making the value of their assets not enough to dominate the business, then, become indirect investors In fact, these forms always transform, intertwine with each other and in many cases are difficult to distinguish clearly (Phung Xuan Nha, 2013) (6)
Classification of FDI by investment purpose
By investment purpose, the FDI can be classified as the horizontal integration (HI) and vertical integration (VI) The horizontal investment (HI) is suitable for investors who have competitive advantages, such as technology, management skills in the production of a certain type of product With this advantage, they can control high profits when moving production of products abroad The purpose of this form is to expand and annex foreign markets for the same products that have a competitive advantage abroad, thereby leading to monopolistic competition In reality, this is a typical form of American outward investment and is made mainly among developed countries Moreover, the vertical investment (VI) is the investment abroad with the purpose of exploiting natural raw materials and cheap input production factors such as labor and land When investing abroad, investors often pay attention to exploiting the competitive advantages of the inputs between the production stages of a product Thus, the products are usually completed through assembly stages in the host country
By investment strategy, the FDI can be classified as the greenfleld investment (GI), and mergers and acquisitions (M&A) According to the degree of shareholding and the degree of participation in investment activities of foreign investors, FDI can be implemented in the form of enterprises with 100 percent foreign capital, joint venture enterprises, business cooperation contracts, build- operate-transfer (BOT) contracts, foreign-invested joint stock companies, mergers and acquisitions, parent and subsidiary companies, branches foreign company
Theories of foreign direct investment
The foreign direct investment can be explained by various theories In particular, the macroeconomic theory of foreign investment accounts for the total net foreign investment of an economy With the Open Economy Economic Growth Model, a country invests in another country if it has a higher marginal product of capital The marginal product of capital is the driving force behind
16 investment between countries In particular, upon integration, the marginal product of capital must be balanced between the two economies Capital flows from an economy with a low marginal product to an economy with a high marginal product Capital will move between countries until the level of capital accumulation is equalized and the marginal product of capital is also equalized across countries Vietnam is a developing and fast-growing economy, so it will have lower capital accumulation in the long-run equilibrium, along with a higher marginal product of capital compared to developed countries develop Therefore, Vietnam is an attractive economy for foreign direct investment
There are also other microeconomic theories of foreign direct investment
Suggestions
The results in Thesis can be extended by various directions First, the foreign direct investment in real estates can exhibits special characteristics in each different market segments, such as the real estates for health, real estates for
100 tourism The research on each niche market can provide more insightful ideas about the implementation of foreign direct investment in the Vietnam economy
Second, there exists both the benefit and riskiness attached to the strategies in the foreign direct investment in the real estates One of leading concern is the riskiness to the change of legal framework such as the new law on real estates On accessing the riskiness of the strategies by foreign firms in the real estates, the extended research can provide some suggestions for these firms to contain the riskiness associated with new investment or some public policy implications for the Vietnam government to manage effectively the real estates market
[1] Vietnam Ministry of Construction (2023) Quarterly reports on real estates Avaiable at https://batdongsan.xaydung.gov.vn/TinTuc.aspx?vID)
[2] Ministry of Planning and Investment (2023) Monthly foreign investment report
Accessed online on 15/02/2023 at website: https://www.mpi.gov.vn/Pages/ktxh.aspx?idcm 8
[3] General Statistics Office (2023) Online database Accessed online on February 15, 2023 at website: www.gso.gov.vn
[4] Ly Dai Hung & Pham Anh Tuan, (2023) Attracting foreign direct investment flows into Vietnam real estates Annual Economic Conference, Vietnam Economic Association
[5] Hyung Min Kim, (2019) Twenty fifth anual pacific-rim real estate society conference Melbourne, Australia, 14-16 January 2019
[6] Phung Xuan Nha, (2013) “Foreign Direct Investment in Vietnam – Theory and Practice” National University Publishing House
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[12] Mohamed Salem & Andrew Baum, (2015) “Determinants of foreign directreal estate investment inselected MENA countries” Journal is available on Emerald Insight at: www.emeraldinsight.com/1463-578X.htm
[13] CF Sirmans and Elaine Worzala, 2002 “International Direct Real Estate Investment: A Review of the Literature” Urban Studies, Vol 40, Nos 5–6, 1081–1114, 2003
[14] Nelson Chan, 2007 Should Foreign Real Estate Investment be Controlled in China? Pacific Rim Property Research Journal, 13:4, 473-492, DOI: 10.1080/14445921.2007.11104242.