Khóa luận tốt nghiệp: The impact of macroeconomics factors on FDI in Viet Nam

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.

Hà Nội - 2023

VIETNAM UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

THE IMPACT OF MACROECONOMIC FACTORS ON FDIIN

GUARANTEE

I hereby declare that this thesis “The impact of Macroeconomic Factors on FDI in

Vietnam” is my own scientific research work.

All references are properly sourced, correctly published and cited

The content of the thesis has been researched inan honest and scientific manner and has

not published any research work.

Signature of Instructor Signature of Student

I have been very fortunate to have received the support, advice, and encouragement ofmany people in order to carry out and complete this thesis research project

First of all, I would like to express my sincere gratitude to Tien Chuong, the direct

supervisor of the thesis, who always devoted a lot of time and effort to me throughout the

research process and thesis topics

I would like to thank University of Economics and Business of Vietnam NationalUniversity in Ha Noi for allowing me to participate in the thesis, thus allowing me toexchange and learn from information

Despite many efforts, it is impossible to avoid the limitations of this thesis

I hope that teachers and experts will continue to provide assistance

Again, I sincerely thanks!

Hanoi, Octorber,

2023

le The Mu He

CHAPTER 1 INTRODUCTION csesssssssssssssssssssessssssseessessssseeessssssseesesssssessssssssessessssueensessueeseessnsneessssssssss 10

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CHAPTER 5 CONCLUSIONS AND POLICY RECOMMENDATTIONS ccce 47

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LIST OF ABBREVIATIONS

Abbreviation MeaningADF Augmented Dickey Fuller

AIC Akaike information criterion

AR Autoregressive model

CPI Consumer Price Index

E&E the electrical and electronic

EX Exchange rate

EXR Exchange rate

FDI Foreign Direct Investment

FPE Final prediction error

FTA Free Trade Area

GDP Gross domestic product

GSO General Statistics Office

HQ Hannan-Quinn information criterion

IFS International Financial Statistics

IMF International Monetary Fund

Prob Probability value

SC Schwarz information criterion

Std Dev Standard deviation

UNCTAD United Nations Conference on Trade and Development

USD United States Dollar

VAR Vector Autoregression

VECM Vector Error Correction Model

VND Vietnam Dong

REER Real exchange rates

LIST OF IMAGES, FIGURES

Name 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 3.1 Process of the research 25

Figure 4.1 Dynamically stable test 37

Figure 4.2 Impulse Response of D(D(FDI)) to D(D(FDI)) 40

Figure 4.3 Impulse Response of Exchange Rate to D(D(FDI)) 40

Figure 4.4 Impulse Response of Inflation to D(D(FDI)) 41

Figure 4.5 Impulse Response of GDP to D(D(FDI)) 41Figure 4.6 Multiple graphs for responses of FDI, EXR, INF, and GDP 42

LISTS OF TABLES

Name Page

Table 3.1 Details of variables in the model 27

Table 4.1 Descriptive statistics 31

Table 4.2 Results of Augmented Dickey fuller and Phillips Perron unit 32

root test of the variables

Table 4.3 Final result 33

Table 4.4 Lag Length Selection 34 Table 4.5 VAR model estimation results for the dependent variable FDI 35

Table 4.6 VAR Residual Serial Correlation LM Tests 37Table 4.7 VAR Granger Causality with dependent variable FDI 38Table 4.8 VAR Granger Causality with dependent variable EXR 38Table 4.9 VAR Granger Causality with dependent variable INF 39Table 4.10 | VAR Granger Causality with dependent variable GDP 39Table 4.11 | Variance Decomposition 44

TITLE: The impact of macroeconomics factors on FDI in Vietnam

ABSTRACT: The thesis analyzes the influence of macroeconomics factors such asExchange rate, Inflation and GDP on the foreign direct investment capital inflow intoVietnam during the period 2011 - 2022 The research uses the method VectorAutoregression (VAR) in order to examine and evaluate the impact level of these factors

on FDI in Vietnam The result indicates that Exchange rate have a negative effect on FDI,whereas, GDP affects positively on FDI Inflationimpact negatively on FDI inthe short runbut positively in the long run Besides, FDI also affects significantly on itself Based on theresearch results, policy recommendations and solutions are given to improve theefficiency of FDI, thereby contributing to promoting Vietnam’s economic growth

KEYWORDS: FDI, Macroeconomic factors, Exchange rate, Inflation, GDP, VAR

CHAPTER 1 INTRODUCTION

1.1 Background to the research

The direct investment category refers to a relationship in which a resident entity in oneeconomy acquires a lasting interestin an enterprise in another economy (The resident

entity is the direct investor and the enterprise is the direct investment enterprise) (IMF,

1993) The term foreign direct investment refers to foreign economic organizations andindividuals bringing money or assets into a country to conduct foreign investmentactivities there

Since reforming from a centrally planned economy to a market economy model, oriented, with State management and regulation, Vietnam has become a potentialdestination of foreign investors The increase in capital flows has brought positive signals

socialist-to the economy In 2022, the socialist-total registered foreign direct investment capitalin Vietnamwill reach nearly 27.72 billion USD, the level of realized foreign direct investment capitalwill reach a record of 22.4 billion USD, an increase of 13.5% over the same period 2021

term.

The growth of Vietnam's economy in recent years relies more and more heavily onforeign direct investment (FDI) Like emerging economies, Vietnam has seena significantincrease, in FD] due to economic globalization This influx of investment plays a role indriving Vietnam's economic growth by creating jobs, enhancing human resource,transferring technology and developing infrastructure Moreover, this capital flow is alsoone of the important sources of capital to help countries supplement their limited capitalresources to overcome capital shortages without causing debt to the recipient country

For the economy to grow, attracting FDI capitalis extremely necessary However, foreigninvestors do not always trust capital contributions to the recipient country because theinstability of macroeconomic factors can affect foreign investors’ investment decisions.There have been many studies showing that FDI capitalis affected by macro factors such

as GDP growth, inflation, exchange rate fluctuations, politics, etc Changes in these factorsalso have different impacts on the FDI The study of Dhakal, D., Nag, R., Pradhan, G andUpadhyaya, K.P (2010) concluded that exchange rate volatility has a favorable effect onforeign direct investment P-Enu, EDK-Havi, P-Attah-Obeng (2013) also had the sameresult when concluding that the first past year of foreign direct investment, the last twoyears of exchange rate and trade openness were statistically significant Meanwhile,Catherine S F Ho* and Ahmad Husni Mohd Rashid (2011) found that two important

macroeconomic factors, economic growthrate and openness level, significantly affect FDI

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inflows in most countries Inflation rates play an important role in FDI inflows into

Thailand FDI into Malaysia is driven by the exchange rate while FDI into the Philippines

is driven by manufacturing output On the other hand, Komla Agudze, Oyakhilome

Ibhagui (2020) investigated that the link between inflation and FDI is nonlinear, with evidence of threshold effects in both industrialized and developing economies.

Meanwhile, Inflation tends to reduce FDI in industrialized economies after exceeding its

threshold whereas in developing economies, its impact on FDI is negative even before

exceeding its threshold Rathnayake, S., Jayakody, S., Wannisinghe, P., Wijayasinghe,D., Jayathilaka, R and Madhavika, N (2023) found that Logistics Performance Index,Global Competitiveness Index, and Interest Rates are three major macroeconomic factorsaffecting FDI inflows It was found that Logistics Performance Index positively impactedFDI in Gambia, Lesotho, and Rwanda, but negatively impacted FDI in Mauritius FDI inAlgeria and Lesotho is positively influenced by the Global Competitiveness Index,whereas it is negatively impacted in Rwanda, Mauritius, and Namibia Moreover, InterestRates has a negative impact on FDI in Algeria, Rwanda and Mauritius with a positiveimpactin Lesotho

Studies have produced different research results on the impact of macroeconomic factors

on FDI as well as differences in research variables Therefore, this topic is researched tofurther strengthen the empirical evidence of the impact of macroeconomic factors on FDI.This research is necessary so that the Government can improve the macroeconomicenvironment to attract FDI more effectively

1.2 Missions of the research

e Identify macro factors which affect FDI investment activities in Vietnam

e Assess the beneficial effects or risks of the factors for FDI investment activities in

Vietnam as well as for the Vietnamese economy in general

e Provide a number of recommendations to regulators and financial institutions to

promote a stable and inclusive financial system in the evolving fintech landscape1.3 Questions of the research

se Howdoes macroeconomic factors affect FDI investment activities?

e Assess whether those impacts are beneficial or negative for FD] investment

activities?

e What recommendations do you suggest for policymakers to minimize risks for

investment activities of FDI enterprises in Vietnam?

II

1.4 Research objectives and Research scopes

The research model used in the studyis VAR (Vector Autoregression).

1.5.2 Method of data collection

The data is taken from the Trading view, Vietstock and the International Monetary Fund

(IMF )and the data is used for model analysis

1.6 Structure of research

In addition to the table of contents, the acronyms list, the tables list, the figures list, andthe reference list, the study is also divided into five chapters, the first chapter being theintroduction and the main content of remaining four chapters, specially:

Chapter 1: Introduction

Chapter 1 supplies the summary of the thesis’s core research topic, such as researchmissions, research questions, research objective and scopes, research methodology andresearch structure

Chapter 2: Literature Review and Theories

In Chapter 2, the researcher provides the theoretical foundation for understanding theFDI and the theory of the macro factors including Exchange Rates, Inflation and GDP Inaddition, the thesis examines prior empirical studies that have examined the impact ofmacroeconomics factors on FDI as well On the basis of the theoretical overview and thefindings of past studies, the author draws out the research gaps at the end of the chapter.From there, as a foundation for selecting research methodologies based on data aboutFDI, Exchange rate USD/VND, Inflation rate and GDP from some reputable sources such

as IMF data, Trading view, from 2011 to 2022

Chapter 3: Research Methodology

The main purpose of chapter 3 of this research is to introduce appropriate researchmethods to measure the impact of macroeconomic factors on FDI inflow into Vietnamand a lot of theories about the VAR model - the model of this research

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Chapter 4: Results and Findings

In Chapter 4, we present the results of research and tests of models that have been used

to measure the impact of the exchange rate fluctuation, the inflation rate and the GDP on

foreign direct investment The last part of the chapter focuses on discussing the impact

of independent variables on the Investment activity of FDI in Vietnam in the research

period 2002-2022

Chapter 5: Conclusions and Policy Recommendations

With reliable research results obtained in chapter 4, the content of chapter 5 includes allthe author's recommendations related to the impact of exchange rate fluctuations on FDIinvestment activities in Vietnam Support policy makers and administrators to developplans to attract foreign direct investmentinto Vietnam in the future, thereby contributing

to more sustainable development of the country's economy

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CHAPTER 2 LITERATURE REVIEW

Chapter 2 provides the theoretical foundation for understanding the FDI and the theory

of the macro factors including Exchange Rates, Inflation and GDP In addition, the thesisexamines prior empirical studies that have examined the impact of macroeconomics

factors on FDI as well On the basis of the theoretical overview and the findings of past

studies, the author draws out the research gaps at the end of the chapter From there, as

a foundation for selecting research methodologies based on data about FDI, Exchange

rate USD/VND, Inflation rate and GDP from some reputable sources such as IMF data,Trading view, from 2011 to 2022

2.1 The theoretical framework

According to the International Monetary Fund (IMF), FDI isan investmentactivity carriedout to achieve long-term benefits in an enterprise operating in the territory of aneconomy other than the investor's economy The investor's purpose is to gain realmanagement rights of the enterprise

UNCTAD defines FDI as a long-term investment activity aimed at obtaining long-termbenefits and control by an entity (foreign direct investor or parent enterprise) of acountry in a country enterprise (overseas branch) in another country The purpose ofthe direct investoris to have more influence in the management of businesses located inthat economy This definition does not tell us exactly what an investmentis

e Role of FDI

Capital Inflow: As a result of FDI, foreign capital enters the country, which aids in the

finance of domestic investment projects, the development of infrastructure, and the

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advancement of technology This influx of capital can contribute to the growth of the

economy and the creation of new jobs

Technology Transfer: FDI often involves the transfer of advanced technologies,

management practices, and specific technical knowledge from foreign companies to domestic firms in order to facilitate the development of local enterprises This helps

enhance productivity, improve product quality, and upgrade local industries

Employment Opportunities: FDI can create new job opportunities by establishing orexpanding businesses in the host country This leads to increased employment rates andreduced unemployment levels A study shows that in Vietnam, the FDI enterprise sectorhas a higher employment creation capability than the domestic enterprise sector (DaoThi Bich Thuy (2020))

Export Promotion: Foreign companies that invest ina country often establish productionfacilities for export-oriented industries This boosts exports, improves the trade balance,and generates foreign exchange earnings for the host country

Infrastructure Development: In some cases, FDI contributes to infrastructuredevelopment as investors may need reliable transportation networks, power supplysystems, telecommunications facilities, which indirectly benefits the overall economy

by improving connectivity and efficiency

Vertical FDI involves a business acquiring an enterprise in another country To illustratethis consider an American manufacturer acquiring shares in a company that supplies itwith the raw materials

Conglomerate FDI refers to when a company invests in a business that's unrelated, to itscore operations Since the investing company lacks experience in the field of expertise ofthe foreign business this often takes the form ofa joint venture

e Real situation of FDI in the period 2011 - 2022

Vietnam is one of the most attractive countries for foreign investors in recent years withcompetitive advantages such as a stable macroeconomic environment, a stable politicalenvironment, a plentiful workforce with low cost and so on As a result, the FDI inflow

15

into Vietnam has been increasing, especially after Vietnam joined the free trade associations (FTA).

The period from 2011 to 2014 witnessed fluctuations in foreign direct investment in

Vietnam and a slight increase from 15.6 billion USD in 2011 to 21.92 billion USD in 2014 The period from 2015 onwards witnessed stable and continuous growth with the total

FDI registered in Vietnam in 2015 being 22.7 billion USD, only two years later, this figureincreased by 8.1 billion USD, reaching 30.8 billion USD in 2017 However, this source of

investment capital decreased slightly in 2018 to 26.3 billion USD but by 2019, this figure increased strongly again to 38.95 billion USD.

W Total registered FDI capital | 15.6 16.35 22.35 21.92 22.7 26.9 30.8 26.3 38.95 28.53 31.15 27.72

B Implemented FDI capital 11 10.46 115 12.5 145 15.8 17.5 19.1 20.38 19.98 19.74 22.4

UNIT: BILLION USD

Figure 2.1: The FDI capital inflow into Vietnam 2011 - 2022

Source: The author compiled data taken from Vietnam GSO

In 2020, due to the impact of the global Covid-19 pandemic, the world economy was severely affected, leading to a decrease in foreign investment capital registered in Vietnam, reaching only 28.53 billion USD, down 25% compared to 2019 However, with the effective policies and directions of the state in preventing the epidemic, Vietnam’s economy was still relatively stable and still attracted a large amount of foreign direct investment The total FDI registered in Vietnam reached 31.15 billion USD, up 9.2% compared to 2020 However, the implemented capital was only 19.74 billion USD By

2022, the total FDI registered in Vietnam reached nearly 27.72 billion USD, the

implemented FDI capital reached a record of 22.4 billion USD, up 13.5% over the same

period in 2021 This is the highest implemented FDI capitalin 5 years (2017 - 2022)

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According to the Foreign Investment Agency - Ministry of Planning and Investment, the below table is the top 5 largest foreign investors contributing capital in Vietnam in 2022

list:

Unit: Billion USD

7 6:46

4.88 478

Total registered FDI capital

Singapore MHKorea ElJapan EiChina MH Hong Kong

Figure 2.2: Top 5 largest foreign investors contributing capital in Vietnam in 2022

Source: The author compiled data from Ministry of Planning and InvestmentFigure 2.2 and 2.3 show that Singapore led the way witha total investment of nearly 6.46billion USD, higher than 1.58 billion USD compared to South Korea, which ranked secondwith nearly 4.88 billion USD The investment share of Singapore and South Korea inVietnam recorded 23.3% and 17.6%, respectively Japan ranked third with a totalregistered investment of over 4.78 billion USD, accounting for 17.2%, only 0.4% lowerthan South Korea The following ranks were China and Hong Kong with total investments

of 2.52 billion USD and 2.22 billion USD, respectively The foreign investment share inVietnam of China reached 9.1%, higher than 1.1% compared to Hong Kong, which was8.0% Besides, the remaining 25% is from other countries

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Investment proportion of countries

Singapore Korea Japan EiChina EIHong Kong RlOthers

Figure 2.3: The percentage of foreign investors contributing capital in Vietnam in

2022

Source: The author compiled data from Ministry of Planning and Investment 2.1.2 Eclectic Theory (OLI Model)

Dunning studied the determinants of FDI through the OLI (Ownership, Location,

Internalization) model This model provides a relevant theoretical framework to analyze

the impact of micro and macro factors on investment motivation and investmentlocation selection of multinational companies abroad.

According to Dunning's view, a company has an advantage in conducting foreign direct

investment when it has advantages in ownership, location and internalization The OLI model was built by Dunning and inherits the advantages of other theories of foreign

direct investment, and proposes that there are 3 necessary conditions for a business tohave the motivation to conduct direct investment:

(1) Ownership Advantages (0 - Ownership Advantages) ofa business can be a product or

a production process that is superior to other businesses or that other businesses cannotaccess, that is, can be patents, action plans, technology and information, managementskills, marketing, organizational systems and access to final consumer markets orintermediate goods or sources raw materials, or the ability to access capital at low cost

(2) Location Advantage (L - Location Advantage) in addition to the country's resources

and resources, there are also socio-economic factors such as market size and the growthand development of the country market, infrastructure development, culture, law,institutions and Government policies

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(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) believes that investment capital flows will move from countries with low interest rates to countries with high-interest rates until equilibrium is reached (interest

rates in both countries are equal)

The result of investment activities is that both countries earn profits and cause the

world's overall output to increase compared to before the investment The relevance ofthis theory was recognized by economists in the 1950s, but as the economic situationbecame unstable, the rate of return on American investment abroad fell to levels belowthe rate ofreturn domestic investment profits, but US FDI activities abroad stillincreasecontinuously However, this theoretical model cannot explain the phenomenon of whysome countries have capital inflows and outflows at the same time Therefore, themarginal profit theoretical model can only be considered an effective starting step tostudy FDI activities

2.2 Empirical Studies

2.2.1 Overview of domestic documents

According to Dang Van Cuong (2021), the province's GDP and public investments have

a positive impact on FDI inflows both short- and long-term On the other hand, theprovince's population is detrimental to FDI in the both term

Huynh Thi Dieu Linh and Phan Thi Quynh Nhu (2023) researched about therelationship between exchange risk and foreign direct investment (FDI) in Vietnam intheperiod 2000 - 2020 Quarterly experimental data are settled and the Vector ErrorCorrection Model (VECM) is applied Estimated results from the model showed thatexchange rate oscillations have a negative effect on FDI attraction in Vietnam, and thisnegative impact becomes increasingly stronger over time

Nguyen Thi My Linh and Nguyen Thi Kim Lien (2019) estimated Viet Nam FDI's impact

on the exchange rate by using VAR model (between 1996 and 2018) They found that theimpacts of the exchange rate on FDI in Vietnam are significant Results indicate that theones in the past have an impact on FDI

Pham Thi Tuyet Trinh, Phi Thi Thu Huong (2017), had used quarterly frequency data

on multilateral real exchange rates (REER) and inward FDI along with other controlvariables including economy size and current balance future and economic openness in

the period 2000-2015 Research showed in the long run, a 1% increase in REER causes

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inward FDI to increase by 1,982% In short term, Inward FDI also increases when VNDdepreciates.

Truong An Binh (2015), indicated the model results that when VND depreciates, itsomehow promotes FDI into Vietnam and this promotion usually shows clearly within

the year or one year after Fluctuations in exchange rates not only bring changes in FDI

value, but also affect changes in FDI growth rates

Vu Quang Vinh (2022) analyzed the risks that inflation can impact on two of theimportant drivers that help Vietnam's economy develop after the COVID-19 pandemic,are FDI capital flows and Vietnam's exports The analysis predicts the expected growth

in the value of Vietnam's exports to other countries and the amount of FDI capital intoVietnam may be negatively affected by high inflation globally Nonetheless, the analysisfound that inflation has a positive effect on the mentioned drivers

2.2.2 Overview of foreign documents

Adil Suliman, Khaled Elmawazini and Mohammed Zakaullah Shariff (2015) foundthat despite the depreciation of the real exchange rate in Sub-Saharan Africa resulting ingreater inflows of foreign direct investment, the volatility of the real exchange rate inthese countries increased the level of insecurity related to foreign direct investment As

a result, pegged exchange rates will result in increased price instability if they are used

as an incentive to attract foreign directinvestment based on increasing real exchange rateinstability, so the real exchange rate will be a major determinant of foreign directinvestment inflows

Anthony Kyereboah-Coleman, Kwame F Agyire-Tettey (2008) indicated that FDIinflows were negatively affected by real exchange rate volatility and the liberalizationprocess had not increased FDI inflows Additionally, most foreign investors do notconsider the size of the market when making a decision to invest or not in Ghana, eventhough both FDI and political factors are likely to attract them

Catalina Amuedo-Dorantes, Susan Pozo (2010) tested the hypothesis that foreigndirect investmentin the United States is subject to exchange rate changes and exchangerate uncertainty for the period 1976-1998 When using a conditional measure ofexchange-rate uncertainty, foreign direct investment decreases inresponse to increasedexchange-rate uncertainty in the short run

Chor Foon Tang, Chee Yin Yip, Ilhan Ozturk (2014) examined the driving forces ofinward foreign direct investment in Malaysia's electrical and electronic (E&E) industry

for the 1980-2008 period FDI in the E&E sector in Malaysia is significantly affected by

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GDP, real exchange rate, financial development, corporate income tax, macroeconomic

uncertainty, and social uncertainty factors A long-term relationship was found betweenGDP, real exchange rate, financial development, and macroeconomic uncertainty and

inward FDI in the E&E sector

Jannat, Zerin (2020) concluded that exchange rate volatility has a significant negativeimpact on foreign direct investment inflows in South Asian countries, which are in need

of more FDI inflows to accelerate their economic growth However, the negative impact

of volatility may be offset via greater trade openness

Joseph D Alba, Peiming Wang, and Donghyun Park (2010) examined the impact ofexchange rates on foreign direct investment (FDI) inflows into the United States in thecontext of a model that allows for the interdependence of FDI over time The resultresearch found that FDI is interdependent over time and under a favorable FDIenvironment, the exchange rate has a positive and significant effect on the average rate

of FDI inflows

Onuorah, Anastasia Chi-Chi (2013) examined how macroeconomicvariables may affectforeign direct investments in Nigeria over the long run The study made use of data fromthe database of World Bank between 1980 to 2010 Unit root testand co-integration wereconducted with VAR and Impulse Functions as the major econometrics techniques.According to the results, there is a negative relationship between foreign directinvestment and GDP in the country, indicating an inverse relationship FDI is directlyaffected by the exchange rate, inflation rate, money supply, and interest rate Moreover,there is a correlation between FDI survival and GDP growth, an exchange rate that isresilient, and a regulated money supply It is also recommended that the governmentwork on interest rate and inflation rate policies to encourage foreign direct investment.2.3 The gap of research

It is evident from an overview of domesticand foreign research documents that the topic

of macroeconomic factors and foreign direct investment has attracted a great deal ofattention from researchers in both domestic and foreign countries

In Vietnam, there are a number of studies on the impact of macroeconomic factors onFDI capital in Vietnam, but the studies have differences in researchvariables In addition,research data is taken from different sources and different research periods, so there is

no uniformityin research data Asa result, the research has been chosen in order to alignwith the research technique and research model

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Furthermore, the studies in Vietnam presented in the previous literature review showedmixed results, implying that more research is needed on this topic with diverse samples

of research variables, economic period, research period, and so on in order to clarify the impact of macroeconomic factors on FDI investment activities in Vietnam.

From the literature review compiled above, the author decided to select three factorsaffecting foreign direct investment: exchange rate, inflation and GDP economic growth

2.4 The theory of macroeconomic factors which influence on FDI

2.4.1 Exchange rate

According to OECD, Exchange rates are defined as the price of one country's’ currency inrelation to another country's currency This indicator is measured in terms of nationalcurrency per US dollar The fluctuations of exchange rate refer to the changes in valuebetween one currency and another over a period Various factors like supply and demanddynamics, interest rates, inflation rates, political stability, economic conditions andmarket speculations contribute to foreign exchange rate fluctuations

2.4.2 Inflation

Inflation measured by consumer price index (CPI) is defined as the change in the prices of

a basket of goods and services that are typically purchased by specific groups ofhouseholds The annual growth rate of inflation is expressed as an index for 2015, withabreakdown by food, energy, and total Inflation measures the erosion of living standards.The consumer price index measures the change in the price of a set of consumer goodsand services that the reference population acquires, uses, or pays for over a certain period

of time In the construction of summary measures, elementary aggregate indices areweighted averaged together An elementary aggregate index is calculated based on asample of prices for a set of goods and services obtained from a specific set of outlets orother sources of consumptionin a specific region (according to OECD)

2.4.3 GDP

According to the OECD, Gross domestic product (GDP) is the standard measure of thevalue added created through the production of goods and services in a country during acertain period As such, it also measures the income earned from that production, or thetotalamountspent on final goods and services (less imports) While GDP is the single mostimportant indicator to capture economic activity, it falls short of providing a suitablemeasure of people's material well-being for which alternative indicators may be moreappropriate This indicator is based on nominal GDP (also called GDP at current prices or

GDP in value) and is available in different measures: US dollars and US dollars per capita

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(current PPPs) All OECD countries compile their data according to the 2011 System of

National Accounts (SNA) This indicator is less suited for comparisons over time, as

developments are not only caused by real growth, but also by changes in prices and PPPs.

2.5 Research Hypothesis and research model

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”

Exchange rate

Figure 2.4: Model to study factors affecting Investment activity of FDI in Vietnam

Source: Compiled from the author

SUMMARY OF CHAPTER 2

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 negativelyforeign 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

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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

As a result, one has to identify the research gap, and then set up a research model and a

hypothesis for the topic: “The impact of macroeconomics factors on FDI in Viet Nam” This chapter covers a lot of experimental studies and hypotheses that will form the basis

for building a research methodology in chapter 3, as well as comparing it with the

research results in chapter 4.

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CHAPTER 3 RESEARCH METHODOLOGY

Based on Chapter 2, the theory of exchange rates, the theory of inflation, and the theory

of GDP are made clear Chapter 3 continues to provide techniques for selection andapplication in the research process based on research objectives, research scope, and

research object The following section of Chapter 3 contains the process of research,

Determining the Research Methodology, the method of collection and analysis data, the

research method theory and a lot of related tests theory.

3.1 Research process

The figure below demonstrates six steps of the research process

Identifying research problem

Research models The theoretical framework

Figure 3.1: Process of the research

Source: Compiled from the authorFirst step: Identify the research problem, research model and theoretical basis At thisstep, the researcher identifies the problem to be researched, questions and researchobjectives Nextis to determine the research model and theoretical basis

Second step: Identifying variables

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