LIST OF IMAGES, FIGURESName Page Figure 2.1 The FDI capitalinflow into Vietnamin the period 2011 - 2022 16 Figure 2.2 Top 5 largest foreign investors contributing capital in 17 Figure 3.
INTRODUCTION csesssssssssssssssssssessssssseessessssseeessssssseesesssssessssssssessessssueensessueeseessnsneessssssssss 10 1.1 Background to the reSeâarCH ‹eô-ccsxecerktirtkrkiirtrtiirrtiiiiririiiirriiirririrreirrkee 10 1.2 Missions of the reSearch sessssssssscsseesessseeesssteeeesseeessnseeessnesesaseeessueeessnseeeesnteessnneessaseeseaae 11 1.3 Questions Of the reS@arch ssssscsssesssecssecssecssesssecsssessessseesscesscesssesssesseessesssesssessseesseesseesseesaes 11 1.4 Research objectives and Research SCOPES essssssssssstsscssescssesssssteessssessessteesssateessaseeseaae 12 1.4.1 Research ObjeCtiVE esssssscsssssesssssseesssstesssssecssssesesssseesesssecessseesssaseeesssseeeessstesssssesessseesssssseets 12 1.4.2 ReSe arch SCOPES 1 ẽ ẽ ẽẽ
LITERATURE REVIEW cssssssssssssssssssssssssesssssssssesesssssseessssssssesssssssseessessssseeessesssnieetsssnssess 14 2.1 The theoretical frameWOIK sec Hhrrrrrrriie 14 2.1.1 a0
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Dunning's OLI (Ownership, Location, Internalization) model examines the key determinants of Foreign Direct Investment (FDI), offering a valuable theoretical framework for understanding how both micro and macro factors influence the investment motivations and location choices of multinational companies operating internationally.
Dunning's OLI model suggests that a company can gain a competitive edge in foreign direct investment (FDI) by leveraging ownership, location, and internalization advantages This model builds on previous theories of FDI and identifies three essential conditions that motivate businesses to pursue direct investment opportunities.
Ownership advantages refer to unique assets or capabilities that give a business a competitive edge over others These can include superior products, innovative production processes, patents, strategic action plans, advanced technology, and valuable information Additionally, management skills, effective marketing strategies, robust organizational systems, and access to consumer markets or essential raw materials play a crucial role Furthermore, the ability to secure capital at lower costs enhances a business's operational efficiency and growth potential.
Location Advantage (L - Location Advantage) encompasses not only a country's natural resources but also essential socio-economic factors These include the size and growth potential of the market, the level of infrastructure development, cultural aspects, legal frameworks, institutional quality, and government policies.
(3) Internalization advantages (I - Internalization Advantages) include: reducing costs of signing, controlling and implementing contracts.
2.1.3 The theory of marginal profits affects FDI attraction
Dougall (1960) posits that investment capital will migrate from nations with lower interest rates to those offering higher rates, continuing this flow until an equilibrium is established, where interest rates in both countries equalize.
Investment activities lead to profits for both countries involved and contribute to an overall increase in global output While economists recognized this theory in the 1950s, economic instability caused American investment returns abroad to drop below domestic levels Despite this, U.S foreign direct investment (FDI) continued to rise However, this theoretical model fails to explain why some countries experience simultaneous capital inflows and outflows, indicating that the marginal profit theory serves only as a preliminary framework for analyzing FDI activities.
Empirical Studies sssssssssssssssssesssssssesssssssssesessssssesesssnseessesssneeseessssseseeessnnesessssneesseessneeet 19 1 Overview of domestic oCUIMTIES 5< ccseserrxerrtrrrrrrrrirrrrrrrrrrrkerrrr 19 2 Overview of foreign OCUIm€TIES ccsccccxveeeitrrrktirrttttrttirrrrrrieirrrrrkeg 20 2.3 W +20
Dang Van Cuong (2021) highlights that the province's GDP and public investments significantly boost both short-term and long-term foreign direct investment (FDI) inflows Conversely, the province's population negatively affects FDI in both timeframes.
Huynh Thi Dieu Linh and Phan Thi Quynh Nhu (2023) conducted a study examining the impact of exchange rate fluctuations on foreign direct investment (FDI) in Vietnam from 2000 to 2020 Utilizing quarterly data and the Vector Error Correction Model (VECM), their findings indicate that exchange rate volatility adversely affects FDI inflows in Vietnam, with this negative effect intensifying over time.
Nguyen Thi My Linh and Nguyen Thi Kim Lien (2019) conducted a study using a VAR model to analyze the impact of Foreign Direct Investment (FDI) on Vietnam's exchange rate from 1996 to 2018 Their findings revealed that past exchange rates significantly influence FDI in Vietnam, highlighting the critical relationship between these economic factors.
Pham Thi Tuyet Trinh and Phi Thi Thu Huong (2017) analyzed quarterly data on multilateral real exchange rates (REER) and inward foreign direct investment (FDI) from 2000 to 2015, incorporating control variables such as economic size, current account balance, and economic openness Their research revealed that, in the long term, a 1% increase in REER significantly impacts economic dynamics.
19 inward FDI to increase by 1,982% In short term, Inward FDI also increases when VND depreciates.
According to Truong An Binh (2015), the depreciation of the VND tends to encourage foreign direct investment (FDI) in Vietnam, with noticeable effects often occurring within the same year or the following year Additionally, fluctuations in exchange rates influence not only the value of FDI but also the growth rates associated with it.
Vu Quang Vinh (2022) examined the risks of inflation on key factors influencing Vietnam's post-COVID-19 economic development, specifically FDI capital flows and exports The analysis suggests that high global inflation could adversely impact the anticipated growth of Vietnam's exports and FDI inflows However, it also highlights a positive correlation between inflation and these economic drivers.
Adil Suliman, Khaled Elmawazini, and Mohammed Zakaullah Shariff (2015) discovered that while a depreciating real exchange rate in Sub-Saharan Africa encourages foreign direct investment (FDI), increased volatility in the real exchange rate raises insecurity around these investments Consequently, pegged exchange rates may lead to heightened price instability, undermining their effectiveness as a tool to attract FDI Thus, the real exchange rate emerges as a critical factor influencing foreign direct investment inflows.
Anthony Kyereboah-Coleman and Kwame F Agyire-Tettey (2008) found that foreign direct investment (FDI) inflows in Ghana were adversely impacted by real exchange rate volatility, and the liberalization process did not enhance these inflows Furthermore, the size of the market is often overlooked by foreign investors when deciding to invest in Ghana, despite the fact that both FDI and political factors are significant in attracting them.
Catalina Amuedo-Dorantes and Susan Pozo (2010) examined the impact of exchange rate fluctuations and uncertainty on foreign direct investment (FDI) in the United States from 1976 to 1998 Their findings indicate that heightened exchange rate uncertainty negatively affects FDI in the short term when assessed with a conditional measure of uncertainty.
Chor Foon Tang, Chee Yin Yip, and Ilhan Ozturk (2014) analyzed the key factors influencing foreign direct investment (FDI) in Malaysia's electrical and electronic (E&E) industry from 1980 to 2008 Their research highlights that FDI in Malaysia's E&E sector is significantly impacted by various driving forces.
A significant long-term relationship exists between GDP, real exchange rate, financial development, macroeconomic uncertainty, and inward foreign direct investment (FDI) in the energy and environment (E&E) sector.
Jannat and Zerin (2020) found that exchange rate volatility significantly hinders foreign direct investment (FDI) inflows in South Asian countries, which require increased FDI to boost economic growth Nevertheless, this adverse effect of volatility can be mitigated through enhanced trade openness.
Joseph D Alba, Peiming Wang, and Donghyun Park (2010) investigated how exchange rates influence foreign direct investment (FDI) inflows into the United States, revealing that FDI is interdependent over time Their research indicates that in a favorable FDI environment, exchange rates positively and significantly affect the average rate of FDI inflows.
Anastasia Chi-Chi Onuorah (2013) investigated the long-term impact of macroeconomic variables on foreign direct investment (FDI) in Nigeria, utilizing World Bank data from 1980 to 2010 The study employed econometric techniques such as unit root tests, co-integration, VAR, and impulse functions Findings revealed a negative correlation between FDI and GDP, suggesting an inverse relationship Key factors affecting FDI included the exchange rate, inflation rate, money supply, and interest rate Additionally, FDI survival was linked to GDP growth, a stable exchange rate, and a regulated money supply The study recommends that the Nigerian government enhance interest rate and inflation policies to foster foreign direct investment.
Research on the relationship between macroeconomic factors and foreign direct investment (FDI) has garnered significant interest from scholars worldwide This growing body of literature highlights the critical role that macroeconomic conditions play in influencing FDI flows, reflecting a global trend in economic studies.
The theory of macroeconomic factors which influence on FDI
Exchange rates represent the value of one country's currency compared to another's, measured in national currency per US dollar, according to the OECD Fluctuations in exchange rates indicate changes in currency value over time, influenced by factors such as supply and demand, interest rates, inflation, political stability, economic conditions, and market speculation.
Inflation, as measured by the Consumer Price Index (CPI), reflects the price changes of a selected basket of goods and services typically purchased by specific household groups The annual inflation growth rate is indexed to 2015, providing a detailed breakdown by categories such as food and energy, and highlights the erosion of living standards The CPI captures price fluctuations for consumer goods and services utilized by the reference population over time, employing weighted averages of elementary aggregate indices These indices are derived from a sample of prices collected from various outlets within a defined region, as outlined by the OECD.
According to the OECD, Gross Domestic Product (GDP) is a key indicator that measures the value added from the production of goods and services in a country over a specific period, reflecting both income generated and total expenditure on final goods and services, excluding imports While GDP is crucial for assessing economic activity, it does not adequately represent people's material well-being, suggesting the need for alternative indicators This measure is based on nominal GDP, also known as GDP at current prices, and is available in various formats, including US dollars and US dollars per capita.
All OECD countries utilize the 2011 System of National Accounts (SNA) to compile their data on current Purchasing Power Parities (PPPs) However, this indicator is less effective for making temporal comparisons, as changes in the data are influenced not only by real economic growth but also by fluctuations in prices and PPPs.
Research Hypothesis and research mo del xeee+rrxesrxrrerrrrrrrrrrkee 23 M8) )/99Ä0010./.áu0.2277e
Hypothesis 1: “Exchange rates affect foreign direct investment inflow capital into Vietnam”
Hypothesis 2: “Inflation affects foreign direct investment inflow capitalinto Vietnam”
Hypothesis 3: “GDP affects foreign direct investment inflow capital into Vietnam”
Figure 2.4: Model to study factors affecting Investment activity of FDI in Vietnam
Source: Compiled from the author
Chapter 2 presents a theoretical basis consisting of the theory of foreign direct investment (the concept, the role, and the classification of FDI), the theory of exchange rates, the theory of inflation, and the theory of GDP Moreover, the literature review illustrates the relationship between research factors and foreign direct investment A number of studies have concluded that exchange rate fluctuations can affect negatively foreign direct investment in both the short term and the long term, while others simply draw the general conclusion that exchange rate fluctuations can have an impact on foreign direct investment but do not clearly state whether that impact is positive or
23 negative In additionto that, there are some studies that have shown that falling exchange rates can also result in a boost in foreign direct investment in the country as well.
To effectively explore the topic "The impact of macroeconomic factors on FDI in Vietnam," it is essential to identify the research gap and establish a research model along with a hypothesis This chapter presents various experimental studies and hypotheses that will serve as the foundation for developing the research methodology in Chapter 3, while also facilitating comparisons with the research findings discussed in Chapter 4.
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The author chose the VAR research model for the study due to its effectiveness in handling time series and autocorrelated variables This model is well-suited for addressing such issues and also captures the causal and dynamic relationships among various economic variables Additionally, many scholars utilize the VAR model to analyze the influence of macroeconomic factors on foreign direct investment (FDI) flows into a country.
Through Eviews 12 software, the research would process descriptive statistics and test the model using the vector autoregression method.
The study employs key steps including descriptive statistics, stationarity testing, and optimum lag determination It further investigates the VAR model to assess the influence of macroeconomic factors on Foreign Direct Investment (FDI), incorporating checks for dynamical stability, residual correlation, and Granger Causality, along with analyses of Impulse Response and Variance decomposition.
This study aims to analyze the influence of specific macroeconomic factors on Foreign Direct Investment (FDI) in Vietnam from 2011 to 2022 It seeks to quantify the effects of these macroeconomic variables on the influx of FDI capital during this period.
FDI, = + é au,FDI,., + ằ đ;ĂERt_Ă + ằ Œ¿INt_Ă + ằ đạĂ;GDP\_Ă + Et i=1 i=1 i=1 n i=l where: tis stationary time series a is the matrix of variable coefficients iis serial numbers
Table 3.1: Details of variables in the model Symbol | Role Variable description | Unit Source
1 | FDI Dependent variable | Foreign direct % Trading investment view
2 | EXR Independent Exchange rate % IFS variable
3 | INF Independent Inflation % IFS variable
4 | GDP Independent Gross domestic % Vietstock variable product
Source: Compiled by the author 3.4.1 Vector Autoregression
Vector autoregression (VAR) is a statistical model designed to analyze linear relationships among multiple time series Unlike univariate autoregressive (AR) models, VAR accommodates multiple variables, each represented by an equation that incorporates its own past values, the past values of other variables, and an error term This approach allows for a comprehensive understanding of how different time series influence one another without necessitating in-depth knowledge of the underlying factors driving these relationships.
27 influence a variable as structural models with simultaneous equations do: The only knowledge needed is a list of variables that can be hypothesized to affect each other.
The VAR model offers several advantages, including its capability to analyze multidimensional variables, which simplifies both analysis and forecasting Additionally, it effectively identifies relationships between variables, enhancing the accuracy of predictions Furthermore, the model demonstrates strong predictive power, particularly when dealing with highly correlated variables.
The VAR model has notable disadvantages, such as the challenge of accurately determining the appropriate amount of lag, which is crucial for reliable results Additionally, these models are sensitive to noise, potentially leading to inaccuracies in the outcomes.
The VAR model is a statistical tool that analyzes the interrelationships among various economic variables, enabling the simultaneous examination of multiple factors This approach emphasizes the correlations and past influences between these variables, providing insights into their mutual interactions over time.
The VAR model utilizes a system of simultaneous equations to illustrate the interdependence of variables within the system Each equation typically represents a dependent variable influenced by its historical values and the values of other variables in the model.
Stationarity in time series refers to a condition where changes over time do not alter the distribution's shape A key indicator of non-stationarity is the presence of unit roots, which can significantly impact the analysis and forecasting of time series data.
The Augmented Dickey-Fuller Test (ADF) is a unit root test for stationarity Analyzing time series with unit roots can lead to unpredictable results.
The Augmented Dickey-Fuller test can be used with serial correlation Compared to Dickey-Fuller, the ADF test is more powerful and can handle complex models.
Nevertheless, it should be used with caution since it has a relatively high Type I error rate, like most unit root tests.
Autocorrelation measures the similarity of a time series with a lagged version of itself across different time intervals It is akin to the correlation between two distinct time series, but instead, it analyzes the same series in its original form and again after being shifted by one or more periods.
To determine the dynamic stability of a model, the Roots of the Characteristic Polynomial are analyzed following the fitting of a Vector Autoregression (VAR) A VAR is considered stable if all eigenvalues are located within the unit circle, indicating that the stability condition is met Consequently, the estimates adhere to the eigenvalue stability condition, as each eigenvalue's modulus remains strictly less than 1.
Granger-Sims causality is founded on the principle that while the past and present can influence the future, the future cannot affect the past A variable x is considered to cause a variable y if, at a given time, x helps predict y in the subsequent time period This predictability indicates stochastic dependence, but it is the temporal ordering that allows us to interpret this dependence as a causal relationship Unlike correlation, which is symmetric and lacks directional influence, the concept of time provides the necessary structure to understand correlations in a causal context.
Impulse response functions analyze the dynamic effects of a "shock" or change in input on a system These functions are widely utilized across various disciplines, but they hold significant importance in the fields of economics and finance.
Variance decomposition (usually referred to as Analysis of Variance - ANOVA) is a statistical technique widely used for analyzing the relative effect of different factors from experimental data.
Chapter 3, titled "Research Methods," outlines the research methodology employed in the thesis, focusing on the Vector Autoregression method and associated tests to validate the selection of an appropriate estimating model for the study.
29 variables thathave the potentialto impact foreign directinvestmentactivities in Vietnam, which were drawn based on the previous theoretical framework described in Chapter 2. Then, gradually execute the established measurement goals.
Chapter 3 "Research Methodology" covers the thesis's data collection, selection, and processing process The data sources are totally reliable because they are derived from the International Monetary Fund, Trading View and Vietstock This chapter also describes the basic details of dependent and independent variables.