determinants affecting the foreign direct investment fdi of vitenam in the period 1995 2000

There are few research studies on the factors affecting foreign direct investment FDI in Vietnam during various economic periods.. As a result, the working group of writers undertakes in

Team 13 Class: K58CLC1 Lecturer: Le Hang My Hanh

Ho Chi Minh , June 2021

MIDTERM PROJECT

Major: International Business Administration

DETERMINANTS AFFECTING THE FOREIGN DIRECT INVESTMENT (FDI) OF VITENAM IN THE PERIOD 1995 - 2000

FOREIGN TRADE UNIVERSITY

HO CHI MINH CAMPUS

***

TABLE OF FIGURES

Table 1: Variable's description 7

Table 2: Variable's description (Cont.) 8

Table 3: Regression results by Stata 9

Table 4 Correlation coefficients matrix 10 :

Table 5: VIF results 10

Table 6 Regression results after excluding lnGDP variable 11 :

Table 7 VIF results after excluding lnGDP variable 11 :

Table 8 Correlation coefficients matrix after excluding lnGDP variable 12 :

Table 9 Regression results after excluding lnGDP and OPEN variables 12 :

Table 10 VIF results after excluding lnGDP and OPEN variables 13 :

Table 11 Correlation coefficients matrix after excluding lnGDP and OPEN variables 13 :

Table 12 Heteroscedasticity results by Park test 14 :

Table 13: Autocorrelation results by Breusch-Godfrey (B-G) test at AR(1), AR(2), AR(3) 14

Table 14 Curing heteroscedasticity and autocorrelation by Robust 15 :

INTRODUCTION

1 Rationale of the research

Foreign Direct Investment, for the most part, is a type of global investment in which foreign financial specialists (investors) acquire a stake in a domestic corporation in a foreign country with the recognition of long-term objectives in the enterprise or corporation FDI can also be defined as an investment made by citizens of one country in a company located in another country, with the goal of forming a joint venture with the foreign company

As a developing country, Vietnam has been undertaking industrialization and modernization with a poor starting position, limited resources, and a weak economy This is one of the major bottlenecks to development, thus attracting and utilizing foreign direct investment (FDI) capital is critical Attracting FDI serves a variety of purposes, including but not limited to obtaining and transferring technology, advanced management expertise, international business skills, market expansion, and job creation Many articles have been published recently regarding the impact of factors affecting FDI However, the study's scope

is generally global or a group of countries There are few research studies on the factors affecting foreign direct investment (FDI) in Vietnam during various economic periods As a result, the working group of writers undertakes in-depth study in the period 2000-2020 on factors impacting foreign direct investment capital in a country, primarily Vietnam Vietnam's economy has integrated into the global economy since 1986, thanks to the execution of Doi Moi policy, and the opening of the market presents several chances for foreign investors and domestic enterprises

At the end of the research period, the appearance of Covid-19 pandemic has had a significant impact on many parts of the global economy and society, thanks to such good control, a flood of foreign direct investment is and will be "poured" into Vietnam

The corporate investment environment is favorable, and human resources are abundant Those conditions coupled with the accessible assets of our country such as stable macroeconomics, safe business environment, and plentiful human resources would allow localities to welcome the wave of FDI transfer in the approaching period

Holistically, the research team has chosen the thesis: "Determinants affecting FDI of Vietnam in the period 1995-2020" in order to determine the meaning and impact of factors

on Vietnam's FDI, as well as to propose some solutions to promote FDI attraction in Vietnam

2 The novelty of the research

There are currently few research papers on the factors influencing the attraction of foreign direct investment (FDI) in Vietnam between 1995 and 2020 Furthermore, most papers are about the world, a group of countries, or a geographical area Research focusing on

a single country, particularly in developing countries, is quite limited Simultaneously, the Covid-19 pandemic is a new factor that is having the greatest impact on FDI flows into Vietnam The authors conduct this research in order to investigate further about other factors influencing FDI in addition to those already studied, as well as to provide viewers with an authentic view of direct investment attraction, in the period 1995-2020

3 Aims and objectives

The overall goal of this study is to identify factors and assess the degree to which each factor influences the attraction of foreign direct investment in Vietnam Following that, some policy recommendations are made to increase the attractiveness of foreign direct investment capital in Vietnam

The specific goals are as follows:

- Summarizing a theoretical overview of FDI attraction and the factors that influence FDI attraction

- Proposing a model to analyze the factors affecting Vietnam's FDI attraction

- Amplifying the cons and pros of Covid-19 on the flow of FDI into Vietnam’s market

- Recommending policies to improve influencing factors in order to increase Vietnam's FDI attractiveness in the future

4 Scope of the research

The objective of the study: Determinants affecting Foreign Direct Investment in Vietnam during 1995-2020

The scope of the study:

- In terms of Concerning space: Determinants affecting FDI in Vietnam

- In terms of time:

+ Factors influencing FDI in Vietnam from 1995 to 2020;

+ Quantitative model with observed studies from 1995 to 2020;

+ Measures to improve the attractiveness of foreign direct investment in Vietnam are

5 Structure of the research:

The essay will be divided into three chapters:

- Chapter 1 Empirical researches;

- Chapter 2 Findings and discussion ;

- Chapter 3 Recommendations

FDI is normally performed through the construction of a new business, the acquisition

of all or part of an existing business, or the purchase of shares for takeover or merge businesses

Enterprises with 100% foreign capital: A 100% foreign-owned enterprise is also a type

of foreign-invested enterprise, but less ordinary than the type of joint venture in international investment activities

Business cooperation on the basis of a business cooperation contract: This is a form of investment in which the parties assign responsibility and distribute business results to each party to conduct business investment without establishing a novel legal entity

Additionally, there are a few considerable types that are utterly prevailing:

- Investment in the model of Parent-Subsidiary company (Holding company)

- Joint-stock company

- Branch of foreign businesses

- Partnership

- Mergers and Acquisitions

1.1.1.4 The impact of FDI on the economy:

Foreign direct investment offers advantages to both the investor and the host country These incentives encourage both parties to engage in and allow FDI

For investors, most of these benefits are based on cost-cutting and lowering risks such as market diversification, tax incentives, lower labor costs, preferential tariffs, and subsidies For host countries, the benefits are mainly economic such as economic stimulation, development

of human capital, increase in employment, and access to management expertise, skills, and technology

1.1.3 Inflation

Inflation is the gradual loss of a currency's buying value over time The increase in the average price level of a basket of selected goods and services in an economy over time may

be used to calculate a quantitative estimate of the pace at which buying power declines A rise

in the overall level of prices, which is frequently stated as a percentage, signifies that a unit of money now buys less than it did previously

1.1.4 Infrastructure

Infrastructure is the fundamental physical systems that are needed as a means to support an economy, comparatively transportation systems, communication networks, water, road, railways, and electric systems Good infrastructure can advance FDI-related firm productivity by reducing production costs; consequently, make more spillovers for host countries

1.1.5 Trade Openness

Trade openness defines the capability of an economy to obtain funds from other economies, and willingness to invest its surplus to other economies Trade openness is usually measured by the ratio between the sum of exports and imports and gross domestic product (GDP) The larger the ratio, the more the country is exposed to international trade Particularly, if host countries follow a more open policy, they will be more likely to derive benefit from spillovers of FDI, providing a combination of low production costs and an export promoting orientation

1.1.6 Skilled labor

Skilled labor is defined as employment that requires employees to have specific training or an acquired skill set in order to do satisfactorily These employees might be blue-collar or white-collar, with varied degrees of education and training Investors seeking improved efficiency will be captivated by the numerous accessible labors aiming to cheap cost Higher earnings may also reflect changing conditions

1.2 Empirical researches:

(2008) The result of the research illustrates that the more market size and growth, the more the FDI would be, which means GDP really has a positive effect on FDI This result is widely accepted because an increase in GDP is what foreign investors seek for when choosing potential markets Furthermore, The research also supports the idea that the development of infrastructure will contribute to the reduction of investors’ expenditure and help investors reduce their expenditure, hence, increase their profit and attract more FDI This can be seen from the tendency of FDI inflow into Vietnam in the most developed regions and provinces of Vietnam such as Red River Delta and South East regions, Hanoi, Ho Chi Minh city, Da Nang, Binh Duong, Hai Phong and Quang Ninh

Minh Ngoc NGO et al (2020) This research uses 2 methodologies which are GMM (Generalized Methods of Moments) and PMG (Pooled Mean Group) in defining factors affecting FDI of Vietnam Under the GMM method, the results confirm the positively significant impact of market size on FDI inflows at the 5% significance level Under PMG, this figure is 1% Considering these outcomes, Minh Ngoc Ngo et al conclude that market size (GDP) is significantly important for attracting lFDI in Vietnam Besides, the research team takes skilled labor (represented by the number of students graduating from universities and colleges) into account According to the PMG method, skilled labor has positive impacts on FDI attraction at the significance level of 1%

(3) Provincial Foreign Direct Investment Absorptive Capacity of Vietnam (Vu

FDI If a host country has low human capital, it could be a barrier for inward investment of foreign investors because of the fact that it is hard to transfer or apply state- -the-art oftechnology to such countries As a result, a country with good human capital would attract more FDI and facilitate further growth in the host country This research also matches with previous studies about the correlation between human capital and FDI inflows (Noorbakhsh

et al., 2001; Axarloglou, 2004; Asiedu, 2006; Seetanah & Rojid, 2011; Iwai & Thompson, 2012)

(4) Institutions and FDI: evidence from developed and developing countries

Authors: Samina Sabir, Anum Rafique and Kamran Abbas (2019) Economic stability in terms of a low inflation rate, to be more specific This study investigated the negative correlation between inflation and FDI Inflation is a term indicating macroeconomic stability

If a host country has a low inflation rate, it would attract more foreign direct investment compared to the higher ones As a result, managing the rate of inflation is a critical task for any administration

(5) “Factors Affecting FDI Intentions of Investors: Empirical Evidence from

answers of FDI investors in Quang Ninh, the provision of advanced quality and developed infrastructure in a host country enables foreign firms to minimize transportation and communication costs in their production activities, and thus increasing the productivity potential of investments in that country Therefore, it stimulates FDI flows towards the country The research shows that it has a significant impact with results

(2003) This research uses the Random Effect Model to illustrate the correlation between FDI

and Trade Openness It could be concluded from the result that there is a positive relationship between FDI and Trade Openness This effect becomes transparent in the upper and lower - middle income countries Foreign investors could have greater encouragement to invest in a country with an open economy compared to those with restricted trade policies Additionally,

as FDI in developing countries is mainly export - oriented, Asia or Latin America has attracted considerable attention for FDI flows

(7) “FDI in Vietnam: An Empirical Study of an Economy in Transition”

Authors: Christian Delaunay and C Richard Torrist (2012). The researchers analyze factors affecting Vietnam’s FDI in the context of Transition (Vietnam applied Doi Moi policy) to the market economy during the period 1986-2009 The Ordinary Least Square

6(OLS) methodology was applied and various regression models were tested The findings illustrate that while macro-economic variables (GDP, labor cost) had significant impacts on FDI in Vietnam, the loss of value of the Dong was a negative factor in the regression models Other variables appearing in the research such as tax rates, trade openness, and growth rate were not shown to be significant factors The researchers also consider the fact that institutional change and gradual trade openness (such as Doi Moi policy) are likely to be positively perceived by foreign investing businesses

(8) “Determinants of FDI inflows to developing countries: a panel data analysis”

that foreign investors did not take open economy as a top priority when selecting a location for their projects This is not commensurate with some of the empirical studies and theories (Garibaldi et al 2001; Compos, et al 2003) notwithstanding it is considered to match with tariff jumping hypothesis, which indicates that inward FDI to developing countries is mainly market-seeking type or tariff- jumping type and hence such countries are least influenced by trade restrictions

Catherine S F Ho* and Ahmad Husni Mohd Rashid, Universiti Teknologi MARA, Malaysia (2011) The findings of this study suggest that there is another factor that influences inbound FDI: inflation Inflation has been found to have a statistically significant impact on FDI inflows in Thailand Inflation increases current consumption, which represents the opportunity cost of investment, and also erodes consumers' buying power, producing uncertainty in net investment returns

(10) “The influence of analytical factors on FDI of provinces and cities in

Vietnam using the model of space econometrics” Authors: Le Van Thang and Nguyen Luu Bao Doan (2017) From the result, the researcher emphasizes that the FDI of a locality will depend on its market size (GDP), skilled labor, and infrastructure The conclusion that underlies market size (GDP) is the greater the market size is, the more profits can be brought

to FDI enterprises In terms of infrastructure and skilled labor, they both have positive influences in attracting FDI Another remarkable finding is that close provinces tend to compete with each other in attracting FDI and the phenomenon of FDI investing in a province decreases FDI in others

CHAPTER 2 FINDINGS AND DISCUSSION

2.1 Model:

Based on the previous researches of Christian Delaunay and C Richard Torrisi (2012),

Le Van Thang and Nguyen Luu Bao Doan (2017), Duong Thanh Vu and Tri Thanh Ho (2020), Majeed et al (2008), Minh Ngoc Ngo et al (2020), Thu Thi Hoang (2007), the group chooses five independent variables affecting FDI including: inflation, market size (GDP), trade openness, skilled labor and infrastructure Hence, the group suggests the model:

2.2 Dependent and independent variables:

Table 1: Variable's description

variable

A rise in the overall level of prices (Unit: percent)

Dr Catherine

S F Ho* and Ahmad Husni Mohd Rashid, Universiti Teknologi MARA, Malaysia (2011)

(-) An increase in the average price level leads to decrease in power

of money will repel FDI capita

variable

Logarithm of real GDP (Unit: USD)

Thu Thi Hoang (2007)

(+) Larger host markets provide opportunities for sales and also profits to foreign firms

Table 2: Variable's description (Cont.)

Trade

Independent variable

Percentage of total export and import divided

by real GDP (Unit: percent)

Duong Hoang Vu, Tri Thanh Ho (2020)

(+) The more open policy a host country follows, the more likely it can benefit from spillovers of FDI

Skilled

Independent variable

The number of students graduating from universities and colleges (Unit: man)

Minh Ngoc NGO et al (2020)

(+) Skilled labor has positive impacts on FDI attraction

Independent variable

Mobile cellular subscriptions (per 100 people) (Unit: percent)

Le Van Thang and Nguyen Luu Bao Doan (2017)

(+) Good infrastructure allows faster transport and communication, increasing the productivity of investment

2.3 Methodology:

In the project, the Ordinary Least Square (OLS) methodology was chosen to define determinants affecting the Foreign Direct Investment (FDI) of Vietnam during the 1995-2020 period

The model's data is collected from reliable quantitative reports produced by state agencies such as the General Statistics Office and World Bank The statistical optimization algorithm is referenced in Econometrics textbooks and research papers in Vietnam and around the world At the end, the research team also proposes solutions to enhance the attractiveness

of foreign direct investment in Vietnam pending the results of quantitative research and the orientations, strategies, and goals set for Vietnam in the coming period

2.4 Result of research:

2.4.1 Identify the regression model:

Table 3: Regression results by Stata

2.4.2.1 First way: using correlation coefficient

Checking for multicollinearity by checking the correlation coefficient between the independent variables, we get the following results: