Abstract 300 words or less: Foreign direct investment plays an important role in economic growth and social innovation in developing countries, which are always thirsty for investment c
INTRODUCTION
Overview
Foreign Direct Investment (FDI) involves an investor acquiring assets in a foreign country with the intention of controlling and benefiting from that investment It plays a crucial role in trade liberalization and economic integration by facilitating export activities FDI benefits both host countries and investors: host countries gain economic growth, job creation, investment capital, and technology transfer, while investors expand their reach, earn profits, and increase their global presence Furthermore, FDI contributes to government revenue, balances payments, attracts capital for development, boosts import and export, enhances labor productivity, and allows for greater integration into the global economy.
Vietnam's current standing in terms of enhancing the caliber of FDI attractiveness is demonstrated by the quantitative impact of its infrastructure, policies, and resources to boost FDI in the years to come (Ngo et al., 2017) Drawing successful FDI can bring a range of benefits and is recognized as one of the "pillars" of economic growth The specific advantages will depend on the circumstances of each case Amirahmadi and Wu (1994) find that for developing countries, FDI assists develop human resources, creates employment opportunities, and invests in infrastructure to improve living standards Emerging economies benefit from FDI by accessing advanced technology and enhancing production capacity, business management, and administration skills by approaching the opportunity to learn from foreign investors which can develop markets to heighten competitiveness in the world market and participate in global value chains Developed economies can use FDI to equal out the balance of trade and expand international trade According to Calimanu (2021), countries often have their import tariffs, which makes trading quite difficult Many economic sectors often require the presence of international manufacturers to ensure sales and goals are achieved FDI makes all these aspects of international trade a lot easier It may offer excellent jobs and other chances as foreign investors build new local factories and establish new companies With more jobs and higher wages, national income typically increases This also leads to increasing GDP per capita and purchasing power for local people, thereby bringing about an overall boost to economic goals FDI enables the transfer of resources and the exchange of knowledge, technology, and skills between advanced economies (Chaudhuri et al., 2014) In addition, the top goal of foreign investors is profit, they invest in production and business establishments that bring the highest efficiency to production activities Domestic enterprises that want to survive and develop in today's fiercely competitive market must change, learn, work on management skills, and invest in technical equipment, technology, and capital to improve the efficiency of manufacturing (Baci et al., 2022) Besides positive effects, the process of tempting and operating the FDI sector also has negative effects on the economy of the country attracting FDI Among them, we can mention some potential adverse impacts of FDI include environmental pollution; tax evasion; transfer pricing Therefore, countries need to have clear policies and regulations to manage FDI effectively and protect the interests of the country (OECD, 2002)
As FDI constitutes an integral part of economic growth and development in many countries, especially developing ones, its determinants may be of great and practical importance to policymakers, businesses, and ordinary people etc In addition, fluctuations in the global economy significantly affect FDI flows in countries From 1996 to 2021, the world economy has experienced many variations that can be predicted in advance or come unexpectedly These fluctuations affected both developed and developing countries Developing countries have weaker economies and are more susceptible to economic fluctuations These fluctuations can be caused by various factors such as commodity and service prices, changes in consumer demand, currency exchange rates, changes in trade policies, and most importantly, fluctuations in FDI flows (UNCTAD, 2023) Countries need to monitor and manage these oscillations to ensure economic stability and growth For example, during the 2008 financial crisis, many countries faced an economic recession and reduced consumer demand, leading to a decrease in the amount of FDI invested in countries Many investment projects have been postponed or canceled, and investors have become more cautious about investing in new markets According to a report by the OECD (2011), the amount of global FDI decreased by 21% in 2009 after the 2008 financial crisis occurred Developed countries were hit particularly harder, witnessing a 29% decrease in FDI inflows compared to the previous year Similarly, the COVID-19 pandemic has also caused major fluctuations in FDI globally As the epidemic spreads worldwide, many countries have imposed travel restrictions and social distancing measures, leading to business disruptions and reduced consumer demand This limits FDI into countries or hinders entrepreneurs' investment intentions Developing countries saw a 14% decrease According to a United Nations (UN) report, the amount of global FDI decreased by 42% in the first half of 2020 compared to the same period last year Developed countries have been hit harder, with a 69% drop compared to the first half of 2019 Meanwhile, developing countries have seen a 16% drop FDI can also help countries cope with the influence of the global economy However, for these countries, FDI can have positive or negative impacts depending on how the government and domestic businesses manage and use FDI
Political stability and social security profoundly impact FDI movement Territorial conflicts and large-power rivalries exacerbate risks for businesses and investors, undermining confidence and affecting global FDI trends Governmental interference can hinder private sector performance, and instability hampers the state's ability to guide investments towards national development goals Social unrest and insecurity deter иностранных инвесторов, who prioritize safety and stability in long-term investment decisions Thus, countries seeking to attract quality FDI must prioritize political and social stability to create a secure and profitable environment for investors, boosting FDI effectiveness and sustainability.
Based on the above factors, the authors decided to choose the topic "Are determinants of FDI inflows subject to political and pandemic issues? Evidence from Vietnam" as the research topic The authors found that through many stages, most studies focus on the impact of FDI on different socio-economic aspects while overlooking the determinants of FDI into Vietnam Therefore, our research aims to provide an understanding of the factors which affect FDI inflows in Vietnam Finally, through the time series analysis research with clear research purposes, questions, the authors expect to identify and determine the determinants of FDI inflows in Vietnam It is aimed at providing practical policy implications and recommendations that can be implemented to support
Vietnam's efforts to attract foreign capital investment and enhance its capacity to recover and grow economically following the severe effects of the pandemic.
Research’s background
Since its inception in 1987, Vietnam has attracted $524 billion in FDI, fostering economic development By 2022, over 36,000 projects with $441 billion of invested capital were operational, of which 57% had been disbursed Studies indicate a long-term correlation between GDP growth and FDI, with both factors mutually reinforcing Increased FDI inflows drive economic expansion, while GDP growth attracts foreign capital This relationship is evident in the positive correlation between GDP growth rate and realized FDI capital growth rate in Vietnam from 1996 to 2021.
Figure 1: Relationship between GDP growth and realized FDI capital growth rate (%) 1996-2021
(Data source: Vietnam-GSO and World Bank’s World Development Indicators)
Vietnam carries out economic reforms from a low starting point Considering the importance of FDI to Vietnam's economic and political strategy, previous studies have found that FDI plays an important role and has great significance for Vietnam's growth and identifies the determinants or driving factors of this important resource for the country
Delaunay and Torrisi (2012) used a regression model using time series data with annual FDI from 1991 to 2008 as the dependent variable The explanatory variables include GDP, GDP growth, exchange rate, wage level, tax rate, trade volume and a dummy variable separating the pre-1998 period from the post-1998 period when Asia's economic crisis occurred The authors conclude that Vietnam's domestic market size as measured by GDP has significantly increased Vietnam's attractiveness to foreign investors On the other hand, the 1998 financial crisis and rising wages are negatively correlated with FDI inflows The creators believe that the exchange rate between the Vietnamese dong and the US dollar also negatively impacts FDI attraction In an emerging economy, a weakening currency can indicate economic volatility, causing concern among investors and thus discouraging them from making investment decisions, which coincides with Vo's research (2018)
Regression analysis of data, market size, and GDP growth reveal important factors influencing FDI flows Infrastructure development and trade openness are particularly significant Hoang (2007) highlights the crucial role of infrastructure in attracting foreign investment Additionally, trade openness, measured by the import value of Vietnam from the country of origin, exhibits a strong positive correlation with FDI capital flows (Hoang, 2020) These factors indicate the importance of infrastructure and trade policies in shaping the investment landscape.
The size of the source country's economy is measured by GDP per capita, and the bilateral trade relationship between Vietnam and the source country has a positive correlation with FDI investment in Vietnam (Vo, 2018) This means that as the GDP per capita of home countries increases, investors from those countries are more likely to invest abroad to expand their markets and gain higher returns This result is quite consistent with previous research by Tampakoudis et.al (2017) On the other hand, distance and inflation rate have a negative correlation with FDI inflows into Vietnam (Vo, 2018) The negative sign of macroeconomic stability variables, specifically the inflation rate, suggests that major economies in Asia including Vietnam cannot manage their monetary policy and financial stability well, affecting FDI flows into countries (Aziz and Mishra,2015) The negative sign of the distance variable is regular with the theoretical view that the farther the distance between the host country and the source country, the greater the cost of capital management and regulation, leading to a decrease in FDI (Frankel et al., 1995; Hoang,
2020) In addition, the vulnerability of the stock market (Vo; 2018) and favorable financial market conditions (Hoang, 2020) are also factors affecting FDI flows in Vietnam
Overview of research articles shows that previous studies mostly used cross- sectional and panel data sets because finding consistent time series data for all factors has proven to be a big challenge (Delaunay and Torrisi, 2012) Recent studies show the connection between FDI flows and independent variables related to the host country, specifically the positive correlation with factors such as trade openness, market size, They are also commonly used factors for research along with taxes, exchange rates, infrastructure, inflation rates However, the natural resources factor and the association between attracting FDI in Vietnam and it have not yet been established The authors found that this factor appears quite rarely in research around the world and has hardly been studied as a factor affecting FDI flows in Vietnam In addition, Delaunay and Torrisi (2012) used dummy variables for the period before 1998 and the period after 1998 when the Asian economic crisis occurred in the data regression model to study the differences in FDI flows in these two separate periods Realizing that in the period 1990-2020, there were many variations in the world, typically the impact of the covid 19 epidemic on the world economy in general and countries in particular, the authors believe that the covid epidemic is suitable to be a dummy variable in the research model Previous researchers also focused on studying policies rather than political factors in studying the reasons for attracting FDI in Vietnam There are many conflicts about the impact of this factor in previous studies Research by Simanjuntak (2018) suggests that political risk has no effect on FDI flows, but the findings of Busse and Hefeker (2005) show that political risks have a significant impact on FDI flows In the current study, the authors try to explain the relationship between factors believed to affect FDI attraction and fluctuations in FDI capital flows in Vietnam using time series analysis, focusing on political factors and the covid epidemic with the desire to resolve shortcomings and contradictions in previous studies, and at the same time propose reasonable policies to contribute to promoting FDI in Vietnam.
Research objective & scope
This study aims to identify the factors influencing Foreign Direct Investment (FDI) in Vietnam, with the intent of providing practical policy recommendations to attract foreign investment capital The research evaluates the extent to which these factors, including political issues and the impact of the pandemic, influence FDI The study will draw upon theoretical frameworks on FDI determinants and their driving factors and analyze data from a 26-year period (1996-2021) to estimate the impact of these factors on FDI in Vietnam.
FDI inflows into Vietnam using econometric methods Then we will propose policy implications and recommendations for relevant authorities to boost FDI attraction in Vietnam
To attain these goals, the following research questions are addressed below ã What are the main determinants of FDI inflows into Vietnam? ã Do political and pandemic issues have a significant effect on FDI inflows?
Research methodology
To achieve the above objectives, a time series analysis methodology will be employed Time series analysis is a statistical technique used to analyze data collected at regular intervals over time Collect time series data on FDI inflows, political stability indicators, pandemic-related variables, and other potential determinants of FDI inflows in Vietnam Gather relevant data for the period from 1996 to 2021 Ensure the data is reliable, consistent, and covers the required time frame Data can be obtained from official sources such as the World Bank, International Monetary Fund (IMF), central banks, and national statistical agencies
By applying this methodology, the research will assess the impact of political and pandemic on FDI determinants over a specific time period in Vietnam The following steps can be undertaken:
New contribution of the thesis & significance of research
Currently, FDI has become the subject of research by many scholars and research groups because of its strong influence on the economy and society Previous research articles mainly focused on how FDI will affect the economy, the social, and political of Vietnam, etc but have not focused too much on the factors that will govern FDI On the other hand, the results of experimental research are also inconsistent In addition, some studies on factors affecting FDI flows in Vietnam only focus on macroeconomic factors and ignore factors related to politics and natural resources This is very difficult to explain because Vietnam is a country with relatively stable politics and relatively abundant resources We believe that these are favorable conditions for attracting foreign investment Moreover, the COVID-19 pandemic that took place around the 2020s brought negative effects on the Vietnamese economy in general and was detrimental to foreign capital flows into our country in particular However, not many researchers have mentioned COVID-19 as a factor affecting FDI flows in Vietnam This is the gap in the research and the direction in which the research team can continue to research deeper Therefore, the authors hope to be able to provide a perspective on how the epidemic and politics impact factors that directly affect FDI
Usually, with other research projects, the use of cross-sectional data or panel data, or both is popular, but for this project, the research team chose the other approach is using time series data to provide an alternative approach to capture the relationship between FDI inflows and its determinants through each period, thereby drawing the most objective conclusions
For Vietnam, this research article aims to contribute more empirical research results on factors affecting FDI flows, in addition to providing recommendations and outlining feasible measures based on research results This is the basis to help the government build and develop appropriate policies to encourage and promote increased foreign direct investment in Vietnam in the current economic context
This study aims to bridge knowledge gaps and provide insights into the relationship between various factors and foreign direct investment (FDI) flow The authors strive to contribute to the existing body of research, highlighting the contributions of their work Additionally, they acknowledge limitations in their study and propose avenues for future research, ensuring that their findings stimulate further exploration and understanding of the topic.
Thesis structure
The remainder of this thesis is structured into 5 main chapters
Provides an overview of study history, objective and scope, methods and structure of research topic Research questions, technology used in order to achieve these objectives are also described in this chapter
In chapter 2, the authors delve deeper into the research landscape by first establishing the theoretical underpinnings The authors will present an overview of concepts related to FDI flow, FDI determinants, political and pandemic issues, and the theoretical framework used to explain the model In addition, the authors also summarize domestic and foreign experimental studies related to theory and research topics, analyze the context and results of previous experimental research From there, the author proceeds to build a model and propose research hypotheses
Chapter 3: Data, model specification and estimation methods
In chapter 3, the authors will in turn present the research design, research process, data sampling method and Time series analysis method that will be used to analyze data in this research article Using this approach, our research will analyze the impact of FDI factors and the influence of political variables and the COVID-19 pandemic on FDI in Vietnam from 1996 to 2021 Steps like Data Preprocessing; Descriptive analysis; Unit root testing; Time series analysis can be performed
In chapter 4, presents the key to the research results after conducting descriptive statistics on the research sample, presenting and analyzing the research results according to the established questions and hypotheses It does not just report the findings but also provide a critical evaluation, assessing whether the results are consistent with research hypotheses and expectations, clarifying the underlying bases and reasons for the observed results
This part provides a brief summary of the study and its results In addition, it also proposes recommendations and outlines possible measures based on research results to encourage and promote an increase in foreign direct investment in Vietnam in the current economic context It clearly states the problems that the research has effectively solved, the problems that have not yet been resolved or have just arisen, the limitations of the topic and proposes further research directions for the topic in the future will be presented by the authors in this chapter.
LITERATURE REVIEW
Introduction
Following World War II, Foreign Direct Investment (FDI) became increasingly important in global economic development The globalization trend has led companies to implement internalization strategies for their operations, which include activities such as FDI This investment facilitates the movement of capital, technology, and expertise across borders, playing a crucial role in economic growth, job creation, and market expansion for both the investing and receiving countries.
UNCTAD (2007) provides a general definition of FDI based on Detailed Benchmark Definition of Foreign Direct Investment, third edition (OECD, 1996), and International Monetary Fund, Balance of Payments Manual, fifth edition (IMF, 1993) Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy over an enterprise located in an economy other than the economy of the initial foreign investor The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise The investment involves the initial transaction between the two entities and the subsequent transactions between them and their foreign affiliates, both incorporated and unincorporated Foreign investment can be made by individuals as well as business organizations and enterprises
Explanations about the reasons for the existence of FDI and the occurrence of transferring capital flows from a country to another have been given It is the reason that there are differences in productive capacity due to increases in marginal productivity, the quantity of harvest a producer can achieve by using one supplemental unit of element of production capital across countries Some countries can be both investors and recipients of foreign capital Capital moves from countries with a low marginal productivity of capital to the country with a higher productivity (Rauscher, 2001) A country with a "capital surplus" in a specific sector frequently has a lower marginal productivity when deploying it in another country, indicating a "tipping point" (Lanchman, 1938) An "undercapitalized" country usually has higher marginal productivity because it has more untapped potential This situation will result in the motion of capital from places of surplus to places of relative scarcity, with the purpose of maximizing profits because the production expenses of
"capital surplus" countries are higher than the production costs of "capital deficit" or
“capital shortage" countries and desire to receive capital
Market-seeking FDI aims to expand into new markets by leveraging existing resources TNCs from developing nations often adopt this strategy as a primary driver for their internationalization efforts By establishing new markets, improving distribution channels, and accessing raw materials, these investments enhance their global reach and revenue potential.
Market size, measured by GDP or population, is a key determinant of FDI inflows A larger market signifies increased demand and revenue potential, driving firms to invest in these regions Market size is categorized as unattractive (with FDI per capita below $1), moderately attractive ($1 to $4.1 FDI per capita), and highly attractive (above $4.1 FDI per capita) The larger the market size, particularly in terms of domestic market demand, the greater the likelihood of substantial FDI inflows.
The purchasing power of consumers is crucial in driving the quality of demand within a market Markets with higher income levels boast increased ability and inclination to purchase goods and services, making them lucrative targets for FDI This purchasing power exerts a significant influence on the potential for revenue generation, driving FDI towards markets with stronger purchasing power.
• Trade Openness: Trade openness, as indicated by the ratio of trade volume to GDP, is another key determinant It determines market-seeking FDI which aims to avoid trade barriers by providing access to larger markets, promoting competition and innovation, and facilitating access to inputs and resources
• Gross Domestic Product: The faster an economy grows, the more market- oriented FDI it attracts The GDP of the host country has been used as an indicator of absolute market size by Grcic and Babic (2003) Agarwal (1980) noticed that outside investors are mostly motivated to invest in the host country by its market size, especially when they took FDI flows to developing countries into consideration The same measure has been applied by many other authors to proxy market-seeking FDI such as using GDP in host nations as a conventional motive of FDI A positive connection between FDI and GDP has been observed
In Dunning's (1980) model, exports are a crucial factor in market-seeking foreign direct investment (FDI) The nature of the FDI determines the relationship between exports and trade If the FDI is market-seeking, it can lead to a shift in exports from the home country to the host country Conversely, if the FDI is efficiency-seeking or resource-seeking, it can increase trade volume overall.
Resources seeking FDI: The main aim of this FDI motive is to boost longstanding supply of natural resources for TNCs These firms mainly do business either in primary industries or in those that employ a great deal of natural resources As it plays such an important role in securing resource supply Natural resource seeking is the main motivation for a significant part of TNCs from developing countries, especially from those that lack natural resources
Access to natural resources, such as oil, gas, minerals, and metals, is a significant factor influencing resource-seeking foreign direct investment (FDI) Multinational corporations invest abroad to secure raw materials for their operations, and the availability of abundant resources, particularly large and high-quality mineral reserves, attracts increased FDI This availability represents long-term revenue potential for investors.
• Infrastructure to Transport Resources: Apart from resource availability, the infrastructure to transport resources like pipelines, roads, rail, and ports is vital Without adequate logistics infrastructure, the costs of resource extraction and transportation remain high regardless of resource abundance For example, landlocked countries in Africa with rich mineral deposits have struggled to attract FDI due to lack of transport infrastructure to seaborne export routes The quality and connectivity of infrastructure drives the profitability of resource investments
• Imports: Dunning (1998) argued that the motivation of FDI forms the basis of the relationship between FDI and trade, thus, theoretically, there is a relationship between imports and FDI A substitute relationship between FDI and imports is established if the host nation earlier used to import from the investing nation but then instead of importing those goods, the host nation now meets its domestic demand through local production In this context, there is a negative relationship between FDI and imports The opposite is accurate as well FDI and imports can be in a complementary relationship if FDI is resource seeking Provided an investing nation needs some types of specific inputs or elements that are unavailable in the host nation and are imported, an increase in production will subsequently make imports of inputs rise In this case, positivity is found in the connection between imports and FDI (Alguacil and Orts, 2002)
Efficiency seeking FDI: Normally, TNCs from comparatively more developed countries, which focus on some specific industries, conduct efficiency seeking investments The value chain of a TNC is broadened through FDI in developing nations where lower production costs can be found
• Low Labor and Material Costs: Efficiency-seeking FDI aims to decrease production costs by transferring operations to locations with lower input costs like labor and raw materials Many multinational corporations establish manufacturing bases in developing countries to leverage the abundant low-cost labor pool Similarly, proximity to cheap raw material sources allows firms to reduce material procurement expenses Therefore, countries with lower wage rates and input costs tend to be more successful in attracting efficiency-seeking FDI projects in labor-intensive manufacturing industries
FDI in VietNam
In the late 1980s, Vietnam embarked on significant economic reforms under the "Doi Moi" initiative Aiming to modernize the nation, Doi Moi transitioned the economy from a centrally planned and subsidized model to a multifaceted market-oriented system This transformation embraced market principles while maintaining state oversight and adherence to socialist principles.
Vietnam's economy transitioned from a centrally planned system to a liberalized market economy in 1986 This involved encouraging private enterprise, attracting foreign investment, and reducing government control The transition was facilitated by Vietnam's labor force and the dominance of agricultural goods in its economy Over the years, Vietnam has signed numerous agreements and joined international organizations, including ASEAN in 1995, which has promoted economic cooperation and integration.
Figure 2: FDI in Viet Nam from 1988 to 2005
From the graph, it can be observed that immediately after joining ASEAN in 1995, Vietnam attracted a significant increase in FDI into the country The ASEAN member countries have consistently been important partners and one of the top priorities for Vietnam, contributing to maintaining a high growth rate even during challenging periods and crises In 2022, Singapore invested $6551.0 million, accounting for 22.4% of total FDI; Korea invested $5086.6 million, accounting for 17.4%; Japan invested $5017.3 million, accounting for 17.1%; China invested $2616.6 million, accounting for 8.9%; and the Hong Kong Special Administrative Region (China) invested $1429.6, accounting for 7.9% (GSO,2022)
Figure 3: FDI licensed in 2022 divided by investment partner
The year 2007 witnessed a significant milestone in Vietnam's efforts to attract FDI with its accession to the World Trade Organization (WTO) This event served as a breakthrough moment, opening new avenues for FDI inflows into the country After ten years of WTO accession, FDI has played an important role for economic growth, job creation and trade balance improvement (Phung, 2018)
Figure 4: Foreign direct investment (FDI) in Viet Nam 2006-2021
It can be said that within one year of joining the WTO, Vietnam experienced a surge in FDI inflows Additionally, the commencement of the Vietnam-EU Free Trade Agreement (EVFTA) on August 1, 2020, served as a momentous milestone in the 30-year history of cooperation and development between Vietnam and the European Union (EU) This agreement opened up a new promising phase for a comprehensive, substantial, and effective partnership between the two parties (A.N, 2021)
Foreign Direct Investment (FDI) has become a driving force in Vietnam's economic development, facilitating the growth of the private sector and the modernization of industries FDI capital has contributed to the creation of joint ventures with state-owned enterprises, leading to a shift towards industrialization and modernization Notably, investments in the industry-construction sector have played a significant role in the development of key industries such as telecommunications, oil and gas, and electronics FDI has also influenced the agricultural sector, promoting product diversification and the adoption of advanced technologies In the services sector, foreign investment has brought about new methods of distribution and consumption, invigorating domestic trade and boosting export turnover.
The economic sector structure has shifted towards rearrangement and innovation State-owned enterprises switched to holding only key areas of the national economy such as oil and gas, energy, construction materials, chemicals, mechanics After 1995 when the process of equitization of state-owned enterprises was widely deployed, the proportion of the state economy has tended to decrease significantly Internally, the non-state economy has changed in a positive direction, which is increasing the proportion of the private economy, gradually decreasing the proportion of the individual economy and the collective economy The foreign investment sector always has the fastest growth rate and is able to recover from the effects of economic recession faster than other economic sectors (Ninh,
In terms of labor structure, in the period 2015-2020 there is a large difference between economic sectors Specifically, during this period there was a clear shift in the labor structure between regions: a decrease in the proportion in Zone 1 and an increase in the proportion in Zones 2 and 3 (Nguyen, 2021) The labor structure has shifted positively, consistent with the shift in industry structure, components and economic regions (Chu,
Vietnam's economic transition has fostered a sizeable and vibrant consumer market, despite its ongoing limitations Multinational enterprises (MNEs) are drawn to Vietnam due to its burgeoning middle class and heightened purchasing power, presenting ample opportunities for business expansion.
2.2 Current Status of linkage of FDI enterprises and Domestic enterprises
Foreign direct investment enterprises are always considered an important resource to promote Vietnam's economic development, create more jobs, increase industrial production value and boost exports However, the expectation of a strong connection, supporting domestic businesses to develop together, participate in the global supply chain and increase the value of Vietnamese goods has not yet been achieved
Vietnam mainly forms links with a number of FDI enterprises in the form of vertical links, including backward and forward links But both backward and forward links between FDI enterprises and Vietnamese enterprises are weak The links between them are quite weak and only focus on a few industries such as pharmaceuticals, paper products, rubber and plastic products The three industry groups with the strongest links are: pharmaceuticals, pharmaceutical chemistry and plant products; other non-metallic mineral products; motor vehicles, trailers and semi-trailers The spillover effects from the FDI sector to domestic enterprises in terms of technology and skills are still limited According to the 2018 PCI report, the majority of these businesses sell goods and provide services to Vietnamese individuals, domestic private companies, and other state-owned enterprises But this number is too different from the number of Vietnamese businesses currently doing business with foreign partners, who are most likely to integrate into global supply chains The proportion of Vietnamese private enterprises selling goods and services to foreign enterprises in Vietnam, in addition to exporting products directly and exporting indirectly through sales to purchasing enterprises, accounts for quite a low rate
SOE State agencies Individual Private enterprise
Table 1.1 & 1.2: Main customers of Vietnamese private enterprises at home and abroad (2018)
Vietnam has not been able to participate in the ecosystem and value chain of chain- leading enterprises and foreign enterprises In particular, compared to FDI enterprises operating in the low-tech sector, FDI enterprises operating in the high-tech manufacturing sector often prefer to import goods originating from their own country instead of taking advantage of private Vietnamese suppliers
Table 2: Suppliers to FDI enterprises (with a certain percentage share of revenue from at least one customer group)
Source: Dieu tra PCI-FDI (2022)
As for the reason, first, FDI enterprises operating in Vietnam are not satisfied with the ability to fulfill the desiderata of domestic suppliers They do not meet the localization rate requirements and miss out on trade incentives due to problems with the quality and capacity of domestic enterprises Enterprises can only complete small orders, but large orders are difficult to meet on time due to lack of quality processing steps, appropriate management standards, distribution channels, and limited trade as well as deficiency of information about trends, technology, markets, products, competitors or suppliers This is reflected in the fact that domestic supporting industry products have a low localization rate and face many limitations, especially in the field of technology Support industry products are still simple, with medium and low technology content, have small value in the product value structure Moreover, supporting industry enterprises are facing a lack of resources to innovate and do not have enough capacity to provide components, spare parts with high technology content and complex techniques to participate in the global production chain (VEPR,2023) The annual volume of components imported to Vietnam for assembly, manufacturing, and production for export reaches tens of billions of dollars Due to an underdeveloped supporting industry, Vietnam's processing and manufacturing industries rely heavily on the supply of imported raw materials and components - especially key industries such as electronics; textile; automobile fabrication and erection (MOIT,2021) Typically, in the industry of supplying electrical and electronic constituents to assembly companies in Vietnam, up to 47% of components still have to be imported , 40% are provided by FDI enterprises in Vietnam, only 1% are provided by Vietnamese enterprises (VEPR,2023) Second, policy mechanisms from the central to local levels with many incentives for FDI enterprises such as tax exemptions or land support have created conditions for FDI enterprises to bring suppliers along with their businesses when investing in Vietnam (Nguyen,2018)
After the Law on Foreign Investment in Vietnam was established in 1987, marking a historical milestone in its formation, the Law on Foreign Investment in Vietnam went through amendments marked milestones in the development and completion of the Foreign Investment Law in Vietnam because of the need to make the country more attractive and suitable for foreign investment
Foreign Investment Law 1987 passed by the National Assembly in December 1987 has 42 articles, 6 chapters, regulating the following issues:
- Foreign investors can only cooperate with state-owned enterprises
- Foreign investors can invest in Vietnam through 3 forms: business cooperation contract; joint venture companies, 100% foreign-owned companies
- The 1987 Law on Foreign Investment in Vietnam only allows joint ventures between two parties, including the Foreign Party and the Vietnamese Party (Foreign Investment Law, 1987, Clause 1, Article 2 and Article 6)
- The Vietnamese Government commits not to nationalize the assets of foreign investors (Article 21) The 1987 Foreign Investment Law stipulates ensuring fair and satisfactory treatment for investors (Article 20); Allow foreign investors to repatriate capital, profits and all other funds under their legal ownership (Article 22); Allows foreign employees working in joint venture enterprises, enterprises with 100% foreign capital or to carry out business cooperation contracts to remit their legal income back to their country, after paying enough income tax (Article 23)
- Foreign enterprises are exempted from import tax on machinery, equipment, and raw materials for production and business
2.3.2 Foreign Investment Law in period 1990-2000
• The issue of private participation in cooperation with foreign countries: By
Conclusion
Thus, in the literature review, the research team reviewed existing documents on FDI in general and factors affecting FDI in particular, and then came up with practical perspectives on FDI First, the research team provides basic knowledge such as the definition and concept of FDI, so that readers have a more general view of FDI Second, the research team provides arguments to explain the necessity and important position of FDI in economic development Besides, the research team also pointed out the effects of FDI on host countries and home countries, along with the correlation between FDI and economic development Next, our team summarizes the situation of FDI during the period
1990 - 2020, illustrating Vietnam's change when moving from a centrally planned economy to a socialist-oriented market economy with the emergence of MNEs In this section, additional information is also provided about the contributions that FDI brings to the economic alteration process in Vietnam In addition, we also use actual data to clearly reflect the loose connection between FDI enterprises and Vietnam's domestic enterprises as well as the accompanying reasons.In the next section, the Law on FDI in the period 1990
- 2021 is studied very carefully, the author analyzed and described the positive changes in foreign investment promotion laws because it is the basis for the research team's later comments Finally, we provide perspectives on the situation and factors affecting FDI in Vietnam and internationally This chapter once again confirms what was proposed in the introduction of the research article, which is that there exist gaps in previous data and research, such as many studies in Vietnam on influencing factors FDI is ignored or data for research is lacking Our research attempted to overcome this by accessing reliable data sources to find missing data Many neglected factors will be investigated and researched to draw conclusions, thereby bringing contributions to fill the void of FDI research literature in Vietnam and making recommendations for policymakers with the desire to solve shortcoming problems, promote FDI flows into Vietnam to create momentum for economic development.
METHOD
Data, Model specification
To serve the research model, the authors use secondary data, specifically time series data from two different sources The first source is the World Development Indicators (WDI: World Development Indicators) Data System of the World Bank The World Development Index reflects the development progress of economies through economic, social, financial, natural resources, and environmental indicators The second source is the General Statistics Office of Vietnam For the purpose of our study, we used time series data monitored annually from 1996 to 2021 in Vietnam For consistency, all currency-related data is expressed in US dollars However, due to limited data updates in Vietnam, some indicators (variables in the model) are not available for certain specific years In such cases, we employed the Eviews X10 software to estimate and adjust the data To address missing data, we adopted a method of filling in the gaps with average values obtained from the nearest available survey year For instance, if the data for the Political Stability Index is absent for the years 1997, 1999, and 2001, we would use the average value from the nearest available years to fill in those gaps Similarly, we would apply a similar approach for other indicators such as Control of Corruption and Access to Electricity While filling in average values may not be completely accurate compared to the actual data for the missing years, it helps us maintain consistency and continue analyzing the data in our research model We have acknowledged the use of this data and the limitations associated with it when drawing conclusions and conducting analysis in our study
FDI capital flows into Vietnam in the period 1996-2021 FDI is defined as capital flows of foreign investors investing in the host country According to the World Bank, FDI includes total equity capital, reinvestment of profits, other long-term capital sources and short-term capital as in the balance of payments In the study, FDI is measured by total implemented capital of licensed Foreign Direct Investment (current US$)
Political stability is a particularly important 'weapon' for international investors to place great trust in Vietnam's link in the global supply chain It is an important variable in the macroeconomic balance and favorable business environment in a country Instability of it is extremely worrying because of its negative impact on the country's economic development and growth process by having an unhealthy impact on resources, both material and human Foreign investors will hesitate to carry out any project when investing in a country with internal conflicts, power struggles, and frequent riots According to a French economic doctor, Philippe Delalande, political stability is one of the indispensable factors that helps Vietnam persevere in its economic development policy Stable politics gives Vietnam peace and prosperity In the research paper, the authors will use PS & Absence of
Violence/Terrorism data to represent political stability and expect a positive relationship with foreign investment flows
H1: Political stability has a positive and significant impact on FDI inflow
In addition, trade openness has a significant role in drawing in international investment This is valid for multinational companies who frequently broaden their markets to include nearby markets One of the conventional variables used to explain FDI movements is a location's openness, as a nation's foreign economic relations are both a result of its capital mobilization strategy and a means of attracting investors Dunning
(2002) asserts that FDI can seek more successfully in an environment where commerce is more open Due to the higher defects associated with trade protection, multinational corporations that invest with an eye on exporting typically have their headquarters in more open economies This is because lower costs are generally involved Exports are related to higher transaction fees Since 1986, Vietnam's import-to-GDP ratio has grown with time, despite the country's ongoing trade deficit In comparison to the 1986–1990 era, the share of exports in GDP doubled between 1996 and 2000 It was estimated to have contributed more than 40% of Vietnam's GDP between 2001 and 2005 (GSC, 2005) It is anticipated that this variable will have the dual effects of lessening competitiveness between domestic and international corporate nations and luring foreign capital to the host region The study's authors used the ratio of export plus import over GDP to represent Trade Openness and anticipated that trade openness and FDI will be positively correlated
H2: Trade Openness has a positive and significant impact on FDI inflows
Market-seeking is the main motivation of investors when making foreign investments Because FDI is always an investment with a long-term commitment, a country with a promising business environment, specifically GDP per capita representing a high, stable market size, will motivate MNCs to invest This fits perfectly with the L-advantage in Dunning's eclectic theory Since market size directly impacts predicted investment revenue, it beneficially impacts FDI inflows (Hoang, (2007)) Vietnam is a country in the region with the fastest-growing economy in ASEAN According to data from the United Nations and the Census, Vietnam's population in 2021 is 98.3 million people, ranking 15th in the world and third in Southeast Asia This proves that Vietnam is a potential market, moreover, Vietnam's GDP per capita in 2021 is 3,694.02 USD/person according to the latest data from the World Bank, GDP growth rate over the years is impressive Therefore, GDP per capita is used in the paper to represent market size and is expected to have a positive relationship with FDI inflows
H3: Market size has a positive and significant impact on FDI inflows
Theoretically and practically, the economy cannot guarantee high and stable growth if the inflation index surpasses the real development requirements This can lead to internal economic crises like the financial crisis of 2008, high inflation, and economic recession This will have an impact on FDI capital flows' attractiveness The impact mechanism results in a slowdown in FDI capital flows Foreign investors will need to find alternative opportunities or relocate to other markets if the inflation index remains high and persists Vietnam's economy has seen double-digit inflation for a number of years For example, it was roughly 23.12% in 2008 and 13.46% in 2011 Nevertheless, the average is only roughly 6% by 2021 (GSO, 2021) Vietnam's economy is thought to be reasonably safe for foreign investors if one merely takes into account the correlation between the inflation index and FDI The average rate of inflation is comparatively steady, and total implemented capital as well as total registered capital show increases in foreign direct investment capital flows into Vietnam Based on our analysis, we anticipate that there will be a positive correlation between FDI and the inflation (consumer prices (annual %))
H4: Inflation has a negative and significant impact on FDI inflow
Electricity, roads, ports, airports, railroads, and telecommunications systems—such as phone lines and the internet—as well as institutional development—such as accounting and legal services—are just a few of the numerous elements that make up infrastructure
An effective infrastructure plays a key role in lowering indirect production and business costs for foreign investors and enabling them to implement investment activities that, in particular, promote commerce with certain regions easier and prevent the production process from pausing, which boosts investment efficiency and encourages capital inflows from foreign direct investment Companies typically gravitate toward nations with greater investment in infrastructure This implies that higher levels of FDI are anticipated in nations with more established infrastructure In the context of today's information explosion, when data regarding all market swings worldwide is regularly transmitted, the communication infrastructure is crucial Communication breakdowns result in lost chances to draw in funding The article measures Vietnam's infrastructure metrics using electricity Access to electricity (% of population) data In this analysis, the authors anticipated that FDI and infrastructure will have a positive relationship
H5: Infrastructure has a positive and significant impact on FDI inflow
Natural resources are primary sources of material wealth, formed and existing in nature that humans can use to meet life's needs Natural resources are an important element of the production process, especially in the development of processing industries, exploitation and supply of raw materials, fuel for other economic sectors Vietnam's natural resources are rich and have much potential to exploit and use such as climate resources, land resources, mineral resources, water resources, forest resources, marine resources and biodiversity Vietnam also has the potential to develop available renewable energy sources including small-scale hydropower, wind energy, biomass energy, biogas energy, biofuel, energy from household waste sources, solar energy, and geothermal energy The current situation of natural resources in Vietnam is going in a negative direction, and is currently shrinking in both quantity and quality With these advantages, the authors use natural resource rent/GDP data to estimate the correlation between FDI flows in Vietnam and available natural resources We expect this relationship to exist
H6: Natural Resources has a significant impact on FDI inflows
Corruption, as a form of "tax" on foreign investors, not only diminishes their profits but also exposes the weaknesses in the host country's legal system and government intervention The resulting lack of choice for investors limits their optimal business plans Moreover, corruption diverts investment capital sources, deterring foreign donors and reducing the inflow of foreign investment Vietnam's ranking of 77th in Transparency International's Corruption Perception Index indicates the prevalence of corruption in the country and its negative impact on attracting foreign investment This issue necessitates the implementation of effective anti-corruption measures.
H7: Corruption has a negative and significant impact on FDI inflow
COVID-19 is an infectious acute respiratory disease caused by the coronavirus SARS-CoV-2 and its variants On March 11, 2020, the World Health Organization (WHO) confirmed that Covid-19 infection in the world had become a global pandemic The COVID-19 pandemic has had a significant impact on the production and business activities of many businesses in Vietnam, especially businesses in the southern region Policies to control the Covid-19 epidemic had made it difficult for foreign investors to travel to Vietnam to explore investment opportunities as well as carry out procedures for registering new investment projects, which affected the number of newly granted investment projects The authors decided to use Covid 19 as a dummy variable and expected a negative correlation with FDI
H8: Covid 19 have a negative and significant impact on FDI inflows
To examine the factors influencing Foreign Direct Investment (FDI) in Vietnam, researchers constructed a realistic model drawing inspiration from existing literature and employed the Robust Least Squares (RLS) framework The regression model employed aimed to analyze the relationship between FDI and key economic indicators, including economic growth, inflation, exchange rate, and infrastructure development.
: log of total implemented capital of licensed Foreign Direct Investment (current US$)
: the intercept coefficient of the model (the value of FDI when all both other variable values are 0)
: Political Stability and Absence of Violence/Terrorism: Estimate
: The ratio of export plus import over GDP
: Log of GDP per ca pita (current US$)
: Access to electricity (% of population) : Total natural resources rents (% of GDP)
COVID: Dummy variable representing the COVID-19 pandemic event (COVID = 1: after COVID-19;
The empirical analysis is presented using an econometric model To research the data, the authors used regression for all estimates Table 1 contains a list of the pertinent variables' descriptions and data sources
Classification Variable Definition/Interpretation with expectations Source
Logarithm of total implemented capital of licensed Foreign Direct Investment
A measure of the level of political stability World Bank and the absence of violence or terrorism within a specific country or region (+)
The estimate provides a score indicating the level of control over corruption, ranging from approximately -2.5 to 2.5
Logarithm of gross domestic product divided by midyear population (+)
The annual percentage change in consumer prices (-)
The ratio of exports plus imports over GDP (+) World Bank
Total natural resources rents over GDP World Bank
The percentage of population with access to electricity (+)
COVID pandemic event (no COVID=0;
Table 3: Summarizes the characteristics of the variables in the research model; and expectations about the impact of the independent variable and control variables on the dependent variable
The empirical research results presented in the subsequent section were subjected to detailed analysis This analysis focused on examining the improvements made to the Eclectic Theory as applied to the Vietnamese context Furthermore, a comparison was conducted to determine if these results aligned with previous research findings on the same topic.
Results and Discussion
FDI CC ELEC MS TO PS INF RES
PP test -21,366 -19,966 -31,403 -11,958 -16,316 -44,677 -28,955 -17,026 Prob (0.5019) (0.5749) (0.1191) (0.8895) (0.7508) ( 0.0082) (0.1804) (0.7198) ADF test -24,328 -21,633 -27,995 -0.4661 -16,316 -57,575 -29,449 -18,305 Prob (0.3536) (0.4881) (0.2102) (0.9784) (0.7508) (0.0005) (0.1664) (0.6594)
FDI CC ELEC MS TO PS INF RES
Table 5: Correlation of Variables in the study
Variable FDI2 CC CS ELEC MS PS TO RES
Variable Coefficien t Std Error z-Statistic Prob
Table 6: The regression results by Robust method
Corruption negatively affects FDI inflows in Vietnam The positive and statistically significant coefficient of Control of Corruption implies that increased corruption levels hinder FDI This finding aligns with Dut and Nga's (2015) study, suggesting that a higher degree of corruption control reduces corrupt business practices and enhances FDI attraction The concept of "sand the wheel" represents the removal of corruption obstacles, promoting economic efficiency and attracting FDI.
Rw-squared 0.991929 Adjust Rw- squared 0.991929
Akaike info criterion 5613253 Schwarz criterion 6649313
0.000000 barriers and the establishment of a transparent business environment, a critical determinant for FDI attraction emerges The amelioration of the business climate through anti- corruption measures engenders a competitive advantage and fosters the confidence of foreign investors, thereby stimulating economic progress and fostering FDI inflows into Vietnam
Similarly, FDI also has a positive relationship with past FDI inflows The coefficient of Access to electricity produces a result contrary to expectations Although it is statistically significant at 1%, it has a negative sign An explanation for the negative coefficient between Access to electricity and FDI attraction in Vietnam may be related to Vietnam's predominantly non-renewable energy sources for electricity, while the global trend is shifting towards renewable energy In practice, foreign investors are increasingly interested in investing in clean and sustainable industries, where renewable energy plays a crucial role The use of electricity from non-renewable energy sources in production and business can cause environmental issues and generate a large carbon footprint This may lead foreign investors to perceive that Vietnam does not meet international environmental standards and requirements for renewable and sustainable energy use Prior to 2005, electricity production from renewable sources was almost 0%, and by 2015, it reached 12% (% total) according to the World Bank (2015) Therefore, the heavy reliance on electricity from non-renewable energy sources may impose limitations and hinder the attraction of FDI to Vietnam Foreign investors may seek other countries with more favorable policies and business environments in terms of renewable energy use and participation in sustainable projects
In the study, it can be observed that market size has a positive and significant impact on FDI with a coefficient of 0.2%, in contrast with the finding reported by Nguyen (2007) This reflects the importance of a large market for effectively utilizing resources and exploiting the scale of the economy, thereby positively influencing FDI inflows This is in complete agreement with the L-advantage theory in Dunning's OLI framework This result is because foreign investors, especially those in industries relying on economies of scale, such as manufacturing and retail, tend to choose countries with large market sizes to access a large customer base With a large population and increasing GDP per capita over the years, Vietnam is considered a potential consumer market in the expansion and development strategies of multinational corporations The market tends to expand rapidly in scale, people's living standards are increasingly improving, leading to an increase in demand for new goods and services, creating favorable conditions for conducting selling new products in the Vietnamese market, increasing profits for foreign investors
Furthermore, the empirical results also show that the degree of trade openness has a positive and statistically significant impact on attracting FDI at an approximate level of 0% This study once again confirms that economic openness contributes to a positive force in attracting FDI to a country Using the Johansen cointegration test, Granger causality test,
Le (2014) also yielded the same result: "The relationship between FDI and trade openness in Vietnam is positive (proportional) in both the short and long run" Large trade openness would be a better option to attract more FDI inflows of efficiency-seeking multinational corporations through reduced taxes and import duties, directly allowing foreign investors to take advantage of low production costs, thereby enabling them to offer competitive prices in both domestic and international markets Furthermore, Vietnam is aiming to find efficiency in promoting trade openness Trade openness is combined with government policy actions aimed at implementing investment-friendly policies, reducing transaction costs and eliminating quantitative restrictions on imports This creates favorable conditions and encourages foreign MNCs to invest in Vietnam
The regression results show that the impact of inflation on FDI flows is positive and statistically significant at 7% This is contrary to the study of Vo (2018) but has the same results as Nguyen (2020) and Nguyen et al (2022) To explain this, we believe that FDI invested in Southeast Asia is a type of profit-seeking FDI These differences in results may occur because the impact of inflation on FDI varies depending on the nature of the host economy and the current level of inflation High inflation will go along with high economic growth and high rates of return When there is inflation, many debts may be reduced/devalued, even lower than the original loan value Not to mention in nominal terms, if inflation increases, the nominal budget will also increase A rise in inflation can increase savings and investment, part of this capital can be borrowed by FDI enterprises to serve the process of expanding investment and production, so in this study found that an increase in inflation promotes the attraction of FDI inflows Nguyen (2020) believes that inflation has a good or bad effect depending on the rate it represents Moderate inflation can benefit foreign investors by helping to boost domestic growth, resulting in lower debt to suppliers and increased export competition Inflation rate exceeding the economy's optimal threshold will reduce FDI capital flowing into any country Thus, the level of inflation in the period 1996-2021 is still suitable for a developed country like Vietnam
Contrary to expectations, research results show that natural resources in Vietnam do not correlate with attracting FDI investment This agrees with the study of Asongu et al
(2018) but is contrary to Dunning's (1977, 1988, 1993) view on the type of resource-seeking FDI We believe that most FDI flows into Vietnam are market-seeking FDI Furthermore, natural resources in Vietnam are at an alarming level due to the ineffective and unsustainable use of resources for economic development in the previous period Because natural resources have been overexploited and overused, causing some types of resources to be seriously depleted, the Vietnamese government has had policies to redirect foreign investment into more developed and potential industries, so FDI investment attracting in our country does not depend on the abundance of resources, but instead depends on current policies and market orientation
Consistent with initial expectations, COVID-19 variable has a negative and significant impact on the amount of FDI participating in Vietnam, agreeing with the research results of Nguyen et al (2020) During the 2020-2021 period, the epidemic situation was tense with unpredictable and dangerous developments globally, and the Vietnamese government took actions to close the economy To ensure health, the entire population must practice social distancing and the economy is almost blocked Public health solutions require the closure of non-essential businesses and durable goods manufacturing Covid also dealt a strong blow to businesses that depend on imports and exports as blockades and economic stagnation reduced domestic and foreign demand, disrupted input supplies, and reduced liquidity Reduced credit availability affects access to finance, funding opportunities are narrowed, moreover, Covid 19 causes uncertainty that reduces investment Besides the supply chain, the movement of investors is almost completely restricted, capital is affected globally, which has a negative impact, preventing the intention to carry out a new project or expand a business of foreign investors
Political stability has a positive correlation with FDI flows, as stated by Dunning's OLI theory Vietnam's political stability is advantageous compared to neighboring countries and ASEAN members, making it a trusted investment destination Political stability strengthens Vietnam's international position, increasing its potential for attracting high-quality investment It is crucial for expanding domestic and foreign investments due to the forward-looking nature of investment and the risks associated with political instability, such as civil war, political conflicts, and currency devaluation.
IMPLICATIONS AND RECOMMENDATIONS
Based on the results of analyzing the effects of the above factors on attracting foreign investment, the authors propose a number of recommendations for policymakers to consider and combine with the real economic situation of Vietnam today in order to build appropriate and effective strategies for attracting foreign investment capital in the current context when Vietnam has just overcome the COVID-19 pandemic and has gradually stabilized since then contributing to economic and developing the country in the future
First, because the legal system and enforcement process in Vietnam are not very strict, it causes hidden corners in the investment process of foreign investors, which is largely detrimental to our country,so what needs to be done is to complete and supplement the policy and legal system Since Doi Moi, Vietnam has gone through many times promulgating and amending the Investment Law (previously including the Law on Domestic Investment Promotion and the Law on Foreign Investment) On June 17, 2020, at the 9th session of the XIV National Assembly, the Investment Law 2020 took effect from January 1, 2021, and replaced the Investment Law 2014 As analyzed in the literature review, the latest investment laws and theories have been improved, completed, and issued many incentives to attract foreign investment capital, but certain legal shortcomings still exist, we should continue to modify them to minimize inadequacies
- Build a strict legal system, tighten the prevention of corruption, bribery to avoid taking advantage of investment incentives to ensure that FDI enterprises do not have
"stains" in their business operations, and have no problems with tax evasion, transfer pricing, or trade fraud
- The current investment law is not consistent with a number of other related laws such as the Land Law, Housing Law, this is an important point that needs to be improved for stability, consistency and synchronization by the authorities Legal regulations need to be consistent to avoid misunderstandings that affect business plans and general trust of businesses
Second, it is necessary to maintain political stability at home and abroad Faced with the current volatile world situation, Vietnam needs to choose appropriate plans and implement "unchangeable adaptability" so as not to be dominated in international relations and promote relations with many stakeholders, especially with major countries, on issues of strategic interest The year 2024 will be in a state of instability with escalating geopolitical tensions, causing upheaval globally, typically the trade tensions between the world's two largest economies, the US and China, which will have a significant impact on Vietnam Even in the optimistic case that this tension subsides, an immediate end is completely impossible In the short term, Vietnam can benefit from the investment shift of the US and China, the opportunity for Vietnamese goods to enter the US market is huge In the opposite direction, due to a very large amount of goods which unable to be exported due to barriers imposed by the US, China will have to find a way to release this inventory to countries where it has a competitive advantage to consume goods Therefore, it will cause devaluation and market distortion, greatly affecting foreign investment Therefore, the urgent issue is that we must have appropriate policies to protect domestic political stability and security and avoid negative impacts from the external situation affecting the country in general and attracting foreign investment capital in particular
Thirdly, the results of the study indicate existing limitations regarding access to electricity in Vietnam Developing the renewable energy sector is crucial, not only to attract investment from businesses pursuing sustainable development but also to have positive environmental impacts Based on this, the authors propose several policies:
- The government should promptly improve comprehensive policies on the construction and upgrading of electricity infrastructure, including transmission and distribution grids
- To effectively mobilize resources for the development of renewable energy sources, the proposed Renewable Energy Law should be quickly enacted This law can provide guidance and support for renewable energy activities in Vietnam, creating favorable conditions for businesses and attracting FDI to this sector
- The government should incentivize businesses to invest in renewable energy development, such as wind power, solar energy, LNG, and biomass These energy sources have the potential to reduce greenhouse gas emissions Incentives can be provided through measures like loan support and tax reductions
The research indicates that inflation has a negative impact on FDI, with the post- COVID-19 period leading to an increase in inflation rates We are concerned that if this trend continues and inflation exceeds the threshold, it could have negative consequences Based on this finding, the study proposes some policy implications related to reducing inflation in Vietnam post-pandemic:
- Central banks can maintain flexible monetary policies and reasonably adjust interest rates to control inflation and stabilize prices This helps maintain stability in the financial system and support economic activities
- It is necessary to regularly monitor and manage the prices of input materials for production while strengthening supply chain management In production, due to dependence on imported input sources, it is encouraged to reduce reliance on imports and be more proactive in securing input materials to mitigate inflation risks
- The government should enhance fiscal management, ensure national financial security, and control inflation Additionally, efforts should be made to restructure and enhance internal capacity, self-reliance, and resilience of the economy
Research has also shown a significant and positive relationship between market size, trade openness, and FDI attractiveness In addition to implementing policies supporting tariff and trade facilitation, globalization has led to increasingly interconnected and open markets, creating new opportunities for countries and businesses Therefore, we propose several policies that Vietnam should implement:
- Enhance economic institutions: Continue building and improving the legal and policy framework to fully implement and align with international economic integration obligations and commitments, especially with new-generation FTAs according to the outlined roadmap
- Comprehensive integration in cultural, social, scientific, and defense fields: Proactively participate in the construction and shaping of regional and global economic- trade structures, particularly in emerging areas of cooperation such as digital transformation, green growth, inclusive and sustainable development Coordinate closely with ASEAN, ASEM, APEC members on policy cooperation, initiatives, and collaboration directions in the post-COVID-19 period Actively engage in these forums to ensure continuous and effective cooperation
- Strengthen forecasting, analysis, evaluation, and timely understanding of the situation to formulate swift, decisive, and appropriate policies and actions Harmonize international integration with domestic innovation; maximize and combine domestic and foreign resources effectively
CONCLUSION
Concluding remarks
FDI has been lauded for its benefits in developing economies like Vietnam, including capital provision, technology transfer, and job creation However, concerns arise regarding excessive preferential policies that may lead to dependency and underdevelopment Investors may exploit lax legal systems for tax evasion and transfer pricing, maximizing profits at the expense of host countries Bui et al (2019) found that in Vietnam, FDI has overshadowed state investment in crucial sectors, resulting in a fragmented economy that hinders productivity maximization This highlights the need for balanced FDI policies that prioritize domestic investment and prevent excessive dependence on foreign capital.
In the research article, the authors focus on the benefits that FDI brought to Vietnam in the period 1996-2021 such as Creating jobs, Generating revenue, technology transfer, Enhanced competitiveness, We provide information about FDI in general and Vietnam’s FDI in particular The authors focus on the process of FDI penetrating Vietnam, its impacts on the progress of economic development and transition, and the policies Vietnam has introduced to attract FDI The study uses an econometric model to build a model to test the factors affecting FDI attraction into Vietnam, including market size, trade openness, natural resources, corruption, and political stability, infrastructure, Covid-19, inflation The role of the research is to complement the Eclectic Theory of John Dunning, focusing on the L advantage in the OLI model The research results show what aspects investors care about when deciding to invest in Vietnam We also use the types of FDI that Dunning proposed, along with the results obtained, to explain the correlations between selected variables and current FDI flows From there, we propose policies that the authors consider reasonable and practical for the current Vietnamese context Research on factors that promote FDI needs to be conducted regularly because it still plays an important role in the economic development of developing countries like Vietnam Furthermore, the degree of influence of factors changes over time and a proper understanding of their impact is closely related to the planning of appropriate policies.
Limitations and recommendations for future studies
Despite validating the proposed hypotheses and advancing the theoretical and practical understanding of the topic, the research has limitations in implementation, analysis, and evaluation To address these, the authors outline future research directions, enabling other studies to further investigate and extend the scope of inquiry on this subject.
First, the authors collected data over a period of time from 1996 to 2021 and Vietnam still does not have complete data on the selected variables during this period, leading to the conclusion of the relationship between the variables and FDI are still not really objective
In order to have more certain results, future research should seek solutions if variables are still selected in the study so that this relationship can be accurately assessed
The study's limitations include its inability to capture all relevant determinants of FDI inflows, such as human resources (e.g., education levels, vocational training, skilled labor, labor costs, unemployment), as well as other economic factors (e.g., taxation, legal systems, government spending, R&D intensity, R&D expenses) These factors have significant influence on FDI flows, and their inclusion in future research could enhance the accuracy and depth of the analysis.
Third, in our research, we have not shown a correlation between natural resources and FDI flows into Vietnam This is in contrast to some previous studies around the world
We have not found a study in Vietnam testing the correlation between these two aspects
This can also be a new research direction for the next groups when participating in researching the factors that govern FDI
Furthermore, this study collects results regardless of region while the amount of FDI is distributed differently with different levels by region in Vietnam Therefore, future studies can conduct tests in different geographical areas in Vietnam to have a more comprehensive perspective on the impact of factors in Vietnam on investment decisions of investors or businesses
To enhance FDI policymaking, it is crucial to explore the reciprocal relationship between FDI flows and their various influencing factors By understanding the bidirectional causality, policymakers can craft more targeted and effective policies that support foreign investment and foster economic growth.
APPENDIX
Laws, Decrees Related subjects Direct regulations on FDI
Enterprise; Agencies, organizations and individuals involved in the establishment, management, reorganization, dissolution and related activities of enterprises
• Establishing economic organizations with foreign investment
• Management organization and operations of enterprises, including all types of foreign-invested enterprises
• Scope of operations of foreign- invested enterprises
Traders with commercial activities, other organizations and individuals with commercial-related activities, including foreign traders in Vietnam
• Rights and obligations of representative offices, branches, and foreign-invested commercial enterprises
• Adding two forms of foreign- invested commercial enterprises including joint venture enterprises and enterprises with 100% foreign capital
The Government Regulations on business investment conditions; industries, occupations, and market access conditions for foreign investors; ensuring business investment; investment incentives and support; Investment procedures; investment activities abroad; investment Promotion; State management of business investment activities in Vietnam and investment abroad
Industrial parks and economic zones
Specifically regulations on planning, establishment, operations, policies and management of housing water for industrial parks and economic zones
The order and procedures For appraisal of important national projects and investment supervision and assessment
Regulations govern the land use rights of foreign-invested economic organizations in industrial parks, clusters, and high-tech zones Land use due to real estate project transfers is also regulated Specialized regulations apply to land with water surfaces, such as rivers, streams, and canals.
Ownership (i) Economic organizations with foreign investment capital can own housing in the housing construction investment project of that enterprise in Vietnam, with The condition is that the organization must be the investor of the housing construction project ã(ii) Economic organizations with foreign investment capital, branches, and representative offices of foreign enterprises can own housing through purchasing or leasing commercial housing from investment project investors housing construction, if there is a valid investment certificate at the time of signing the housing transaction; ã(iii) Economic organizations with foreign investment capital, branches, and representative offices of foreign enterprises can own housing through purchasing or leasing housing from foreign organizations and individuals that have purchased housing own affordable housing.
ABBREVIATION
ASEAN: Association of Southeast Asian Nations
BRICS: Brazil, Russia, India, China, and South Africa
EVFTA: EU-Vietnam Free Trade Agreement
GSO: General Statistics Office of Vietnam
MIC Strategy: Made in China Strategy
MINT: Mexico, Indonesia, Nigeria, Turkey
MOIT: Ministry of Industry and Trade
NAV: National Assembly of Vietnam
OECD: The Organization for Economic Cooperation and Development
SSA: Vector Error Correction Models
UNCTAD: The United Nations Conference on Trade and Development
VCEM: Vector Error Correction Models
VEPR: Vietnam Institute for Economic and Policy Research