THE UNIVERSITY OF DANANG UNIVERSITY OF ECONOMICS RESEARCH PROPOSAL INVESTIGATING FACTORS THAT ATTRACT FOREIGN DIRECT INVESTMENTS FROM SINGAPORE TO VIETNAM Lecturer: Bui Huynh Nguyen Dec
Trang 1THE UNIVERSITY OF DANANG
UNIVERSITY OF ECONOMICS
RESEARCH PROPOSAL
INVESTIGATING FACTORS THAT ATTRACT FOREIGN DIRECT INVESTMENTS FROM SINGAPORE TO VIETNAM
Lecturer: Bui Huynh Nguyen
December, 2023
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TABLE OF CONTENTS
I/ INTRODUCTION 3
1 Background 3
2 Research questions and research objectives 4
II/ LITERATURE REVIEW 4
1 Overview of FDI 4
2 The role of FDI 5
3 Determinants of FDI 6
III/ RESEARCH METHODS AND MATERIALS 7
1 Research design 7
2 Research data 7
3 Data sources 8
4 Research method 9
4.1 Research model 9
4.2 Research method 9
a.The Unit Root Test 9
b.The Autoregressive-Distributed Lag (ARDL) Model 10
c.Equation 10
5 Data analysis 11
5.1 Estimation procedure 11
5.2 CUSUM and CUSUMSQ test 11
IV/ TIMESCALE AND RESOURCES 12
1 Timescale 12
2 Resources 12
V/ REFERENCES 13
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LIST OF TABLES
Table 1 Data sources 8
LIST OF FIGURES
Figure 1 Research model 9
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I/ INTRODUCTION
1 Background
Since the start of economic reform in 1986, Vietnam has been fairly successful in luring foreign direct investment inflows FDI plays a key role in driving Vietnam’s economic growth and development Vietnam’s customs authority reported that so-called FDI
companies exported $274 billion worth of goods in 2022, representing 74 percent of total goods exports The government, at both central and municipal levels, actively seeks
to attract FDI According to the Ministry of Planning and Investment (MPI), which oversees investment activities, Vietnam’s FDI stock stood at $274 billion at the end of
2022 (U.S Department of State, 2023)
Singapore, a financial powerhouse, strategic location, and cutting-edge infrastructure, has become one of the world's main hubs for foreign direct investment (FDI) In the meantime, Vietnam has grown in popularity among international investors due to its vibrant labor market, expanding consumer base, and dedication to economic reforms The formal establishment of diplomatic ties between Vietnam and Singapore in 1973 set the stage for a beneficial relationship Singapore has played a more significant role as a major investor in Vietnam in recent decades
There were 110 countries and territories investing in Vietnam in the first eleven
months of 2023 Singapore remained Vietnam’s leading source of foreign investment
with about 5.15 billion USD, making up 17.8% of the total FDI registered in the
country (down 0.9% year-on-year) It is the result after the meeting between Prime Minister Pham Minh Chinh and his visiting Singaporean counterpart Lee Hsien Loong
in Hanoi on August 28 During the talks, the two PMs noted that relations between the two countries have developed rapidly over recent years and agreed to consider the possibility of raising bilateral relations to the comprehensive partnership level in the future Singaporean investors are engaged in a wide range of economic sectors in Vietnam However, their primary focus is on manufacturing and processing (Ministry
of Planning and Investment of the Socialist Republic of Vietnam)
Therefore, it is extremely important to understand the attractive factors as well as to continue maintaining and developing those factors in order to attract more and
sustainably FDI inflows into Vietnam from Singapore However, the determinants of FDI inflow and its impacts on the economy of Vietnam are under-researched
Understanding the situation, this research aims to figure out the determinants that play
an important role in attracting FDI from Singapore into Vietnam - creating useful
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information to maintain economic partnership, establishing the foundation for wise policy choices in order to continue to attract FDI inflows from Singapore
2 Research questions and research objectives
The research question is:
Do market size, labor cost, trade openness, monetary policies, tax policies, geographic advantage affect the FDI flows into Vietnam from Singapore and How
do they affect?
And the research objectives are:
1 To identify factors affecting Singapore FDI inflows into Vietnam;
2 To evaluate the impact of those factors, whether it be positive or negative to the FDI inflows into Vietnam from Singapore;
3 To suggest solutions to maintain or develop those determinants so that they boost FDI inflows from Singapore in the future
II/ LITERATURE REVIEW
1 Overview of FDI
FDI flows record the value of cross-border transactions related to direct investment during a given period of time, usually a quarter or a year Financial flows consist of equity transactions, reinvestment of earnings, and intercompany debt transactions Outward flows represent transactions that increase the investment that investors in the reporting economy have in enterprises in a foreign economy Inward flows represent transactions that increase the investment that foreign investors hav e in enterprises resident in the reporting economy less transactions that decrease the investment of foreign investors in resident enterprises FDI creates stable and long-lasting links between economies FDI flows are measured in USD and as a share of GDP (Loi et al., 2020)
This research explores the factors influencing Foreign Direct Investments from Singapore to Vietnam over the period 1998-2022 To establish a foundation for my investigation, it is important to be intensive in the general principles and theories surrounding FDI Scholars such as Dunning (1988) and Hymer (1960) have laid the groundwork for understanding the fundamental drivers of FDI, forming the theoretical framework for my analysis
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2 The role of FDI
The important role of FDI is shown in many aspects Firstly, economic growth Numerous studies have underscored the positive correlation between FDI and economic growth Researchers such as Borensztein et al (1998) and Alfaro et al (2004) have argued that FDI not only infuses capital into host countries but also brings
in managerial expertise and advanced technologies, fostering productivity and stimulating overall economic expansion
Next, about Technology, Findlay (1978) discovered that FDI contributes to improving the technological progress in the recipient country Scholars like Blomstrom and Kokko (1998) and Markusen (2002) have explored how multinational corporations, through FDI, facilitate the dissemination of advanced technologies and managerial know-how, contributing to increased innovation and competitiveness in host
economies
Multiple benefits of FDI for the host nation, including productivity growth, the
transfer of cutting-edge technologies and production methods, management expertise, and labor training were pointed out in the study of Caves (1996) De Mello (1999) further contends that FDI enhances the reservoir of knowledge in the host country through a variety of channels, such as new organizational management, labor and skills training, and other similar initiatives Furthermore, De Gregorio (2005) uses his empirical analysis of Latin American nations to demonstrate that FDI is significantly more efficient than local investment (Giang, 2017) Research by Carkovic and Levine (2005) and Sjoholm (1999) has highlighted the positive impact of FDI on employment levels, both directly through new job opportunities in foreign-owned enterprises and indirectly through the spillover effects on local industries
The relationship between FDI and trade liberalization is also important According to Blomstrom et al (1994) and Wei (2000), FDI can act as a complement to trade liberalization policies, fostering greater integration into the global economy and enhancing a country's export competitiveness
However, FDI brings many concerns related to the environment The works of Dunning (2002) and Moran (2005) explore the environmental consequences of FDI, considering issues such as resource utilization, pollution, and sustainable
development
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3 Determinants of FDI
The literature on the determinants of FDI is extensive
Numerous studies highlight the significance of the economic conditions of the host nation, such as those conducted by Alfaro et al (2004) and Cushman (1985) Foreign investors looking for prospects for expansion and increasing market share are frequently drawn to countries with solid GDP growth rates and substantial market sizes
There has been a lot of study done on how exchange rates affect foreign direct investment Researchers like Helpman (1984) and Goldberg and Klein (1999)
investigate how a more open trade environment and stable currency rates might reduce uncertainty for multinational firms, which in turn can favorably affect foreign direct investment inflows Trade openness is a crucial factor in determining FDI inflows, according to Chakrabarti (2001), since it reveals how simple it is for investors to transfer money in and out of a nation Chakrabarti (2001) investigated the factors that influence FDI in 135 nations, including Vietnam According to the research, a nation's trade openness significantly boosts FDI inflows Similar findings were obtained by Campos and Kinoshita (2003), Ta, Le, Nguyen, Phan, and Do (2020), Le, and Kim (2020), demonstrating the beneficial effects of greater trade openness to FDI inflows
in emerging countries, including Vietnam (Lien, 2021)
Blonigen (2005) focusses on location attractiveness include size of the market and its infrastructure, risk-reduction measures, currency strength and stability, participation in global trading organizations, and state incentives as specific FDI determinants (Loi et al., 2020)
The regulatory landscape has a big impact on FDI choices Studies conducted by Jensen (2003) and Blomstrom et al (1994) indicate that stable and encouraging business environments, along with financial incentives and clear investment rules, can draw in international investors
Trade policy liberalization is frequently associated with more FDI According to research by Li and Resnick (2003) and Edwards (1990), nations that practice trade openness have a higher probability of drawing foreign direct investment (FDI) from companies looking to join global value chains
For Vietnam, there are some studies about the factors attracting FDI into Vietnam: Anh and Thang (2007) provide an overview of foreign direct investment (FDI) in
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Vietnam and attempt to review of the current status of economic research on the determinants of FDI and its impacts on the economy of Vietnam; Tra (2019) shows how Vietnam become the more appealing market than some of the other ASEAN countries through the country’s competitive economic strengths; Quang et al (2022)
investigating the determining factors of sustainable FDI in Vietnam;…
III/ RESEARCH METHODS AND MATERIALS
1 Research design
The research design is based on quantitative methodology that uses secondary data collected from trustworthy sources: the World Bank, the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the General Statistics Office of Vietnam and the Foreign Investment Agency of the Ministry
of Planning and Investment of Vietnam
2 Research data
In order to have a thorough understanding of how Singapore FDI has evolved over time and to forecast its future trend, the following factors are likely to have an impact
on inbound Singapore FDI and should be gathered and analyzed:
Market size: can be measured by GDP of the nation
Labor cost: can be measured by the wage gap between the home country and host country
Trade openness: can be based on international trade (total exports and imports of goods and services) divided by GDP
Monetary policies: measured by the inflation rate gap between the two countries Tax policies: measured by the tax rate gap between the two countries
Geographic advantage: consider the location of the two countries, and can be measured by the distance
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3 Data sources
Wage gap The World Bank
Total export + import World Bank national accounts data
OECD National Accounts data files The Foreign Investment Agency of the Ministry of Planning and Investment of Vietnam
Inflation rate gap The World Bank
International Monetary Fund International Financial Statistics Tax rate gap The World Bank
International Monetary Fund General Statistics Office of Vietnam Distance Distance Calculator
Table 1 Data sources
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4 Research method
4.1 Research model
Figure 1 Research model 4.2 Research method
a The Unit Root Test
To examine the unit root of data series with each variable with two methods, which are Augmented Dickey-Fuller (ADF) of Dickey-Fuller (1979) and Phillips-Perron (PP) with the indicator Akaike (AIC) and information of Schwartz (SIC) for the lag (Loi et al., 2020)
The formula of ADF model unit root test is:
∆𝑦𝑡= 𝜇 + 𝛿𝑦𝑡−1+ ∑ 𝑘𝛽𝑖∆𝑦𝑡−1+ 𝑒𝑡
𝑖=1
H0: δ = 0 -> the series is non-stationary
H1: δ < 0 -> the series is stationary
The formula of PP unit root test is:
∆𝑦𝑡= 𝜋𝑦𝑡−1+ 𝛽𝑖𝐷𝑡−𝑖+ 𝑒𝑡
H0: π = 0 -> the series is non-stationary
H1: π < 0 -> the series is stationary
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b The Autoregressive-Distributed Lag (ARDL) Model
To examine whether there are long-term or short-term relationships between
dependent variables (FDI inflows) and independent variables (economic indicators), the ARDL (Autoregressive-Distributed Lag) model is used in this study with time-series data
The ARDL model was developed in 1998 by Pesaran and Smith Then, it was popularized by Pesaran et al in 2001 The ARDL approach is suitable for obtaining short-run and long-run elasticities for a small sample size simultaneously and utilizes the ordinary least square (OLS) approach for cointegration between variables (Duasa, 2007) (Nasrullah et al., 2021)
There have been prior studies that use the ARDL model or variants of ADRL model to examine long-term relationships between dependent variables and independent variables, such as Rehman et al., 2011; Ren, 2012, Alshamsi et al., 2015, etc (Loi et al., 2020)
c Equation
The equation of the research is as follows:
In which:
FDIt : Singapore FDI into Vietnam in year t
𝐺𝐷𝑃𝑡 : GDP of Singapore in year t
WAGEt : Wage gap between Vietnam and Singapore in year t
TRADEt : The ratio of Trade on GDP of Singapore in year t
𝐼𝑁𝐹𝐿𝐴𝑡 : Inflation rate gap between Vietnam and Singapore in year t 𝑇𝐴𝑋𝑡 : Tax rate gap between Vietnam and Singapore in year t
lnFDIt = β + β0 1lnGDPt + β2WAGEt + β3TRADEt + β4INFLAt + β5TAXt + εt