IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC STRUCTUAL CHANGE IN HO CHI MINH CITY

UNIVERSITY OF ECONOMICS AND LAWNGUYỄN TẤN VINH IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC STRUCTUAL CHANGE IN HO CHI MINH CITY Major: Economics Code: 62.31.03.01 Supervisor: 1.. Vie

UNIVERSITY OF ECONOMICS AND LAW

NGUYỄN TẤN VINH

IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC

STRUCTUAL CHANGE IN HO CHI MINH CITY

Major: Economics Code: 62.31.03.01

Supervisor: 1 Dr Nguyễn Tiến Dũng

2 Dr Lê Tuấn Lộc

DOCTORAL THESIS SUMMARY

Ho Chi Minh City - 2011

1 Problem statement

Industrialization and modernization of the economy and proactive international economic integration are the pressing issues for countries at low level of economic development Raising the level and extent of the resources and building up a modern and sustained economic structure are of the core contents Structural transformation becomes an objective factor of the development of national economy in the globalization era FDI has an important role and through FDI, the host country has an opportunity to participate in the international division of labor, thereby raising the level of development, creating a driving force for structural transformation Vietnam has always paid a great attention to attracting FDI to supplement the investment capital for development, promoting economic structural change FDI has spillover effects to the economic sectors, and contribute to modernization of the economy, but FDI does not always have a positive impact Therefore, if not analyzing of weaknesses in attracting and using FDI,

we cannot draw possible solutions to promote positive and minimize negative impacts from to transfer funds ECONOMIC STUCTURAL

Ho Chi Minh City, a major economic center of the region and the country, has a dominant role over the capability of the country’s economic growth The city is the one that leads the attraction of FDI, has the advantage

in building a modern economic structure and gradually implement development in depth Analyzing whether FDI actually affects the economic structural change or not? If so, to what extent? And how to promote the positive aspects and minimize the negative impact of FDI on the structural change in Ho Chi Minh City are issues that researchers are still not so clear Therefore, the issue "Impact of Foreign Direct Investment on the economic structural change in Ho Chi Minh City" has been chosen to write a PhD thesis

2 Overview of empirical studies

Works related to foreign direct investment and structural change concentrate on the following issues:

2.1 Analysis of current situation of attracting FDI at the provinces and delivery of main solutions Some studies to named, such as: "Improving the investment environment to attract FDI in some Asian countries and lessons for Vietnam" by Duong Thi Binh Minh, Nguyen Thanh Thuy (2009), on Review of Economic Development, (225), p.15-22, “Foreign Investment in Vietnam period 1991-2000” by Nguyen Ngọc Thanh & Nguyen Dinh Mai (Finance Publishing House, Hanoi, 2001)

2.2 Rationale on the nature, the content and the role of FDI for Vietnam's economy A list of works including: “The impact of foreign direct investment

on economic growth in Vietnam” by Le Xuan Ba (Scientific Publishing House, Hanoi, 2006), "The role of foreign direct investment for development and economic growth in Vietnam" by Nguyen Thi Canh (2009), Review of Economic Development, (225), p 2-7 Authors estimate the impact of FDI on economic growth, but not the impact of FDI on economic structural change 2.3 Solutions to improve the system of laws and policies related to foreign investment activities in Vietnam Some studies are: "Foreign Direct Investment in Vietnam - The shortcomings of policy and solutions" of Do Duc Binh (2009), Journal of Economics and Development, (145), p 6-9,

"Transparency of the legal system and policies on foreign investment: Current situation and solutions" by Tran Hoa Hung (2005), Journal of Economics and Forecasting (3), p 6-8

2.4 Summary of the achievements of foreign direct investment in Vietnam Some works are: "Foreign Direct Investment in Vietnam: Achievements and development solutions" of Ho Van Vinh (2003), in Journal Political Theory, (4), p 39, "Foreign Direct Investment in Vietnam: 17 years

looking back" by Bui Hoai Nam (2005), Journal of Press and Propaganda, (2),

p 24-27 The article reviews the results of Vietnam's FDI attraction, indicating the limitations, from which proposing solutions to attract FDI 2.5 Foreign Direct Investment and the process of industrialization and modernization in Vietnam, analysis of the experiences of other countries Some works include: “Foreign direct investment for industrialization in Malaysia and experience for Vietnam” (World Publishing, HN, 2000) of Phung Xuan Nha, “Foreign direct investment with the industrialization and modernization in Vietnam” by Nguyen Trong Xuan (Social Sciences Publishing House, Hanoi 2002)

2.6 The studies on FDI, and the structural change in Ho Chi Minh city

To name some such as: “Final Report on orientation to attract partners for foreign direct investment in structural transformation in Ho Chi Minh city” by Nguyen Van Quang (Project leader, 2007), “On the structural transformation

of economic sectors in Ho Chi Minh city in the process of industrialization and modernization” (Social Sciences Publishing House, Hanoi, 2000) by Truong Thi Minh Sam Overall, the scientific work above mentioned point out problems related to FDI, but they do not study the comprehensive and quantitative impact of FDI on structural transformation

3 Objectives and tasks of the dissertation

Thesis aims at unveiling theoretical and practical basis of the impact of FDI on the structural transformation through sectoral economic growth in Ho Chi Minh City, and thereafter proposes fundamental solution to attract and use FDI to promote an efficient and sustainable transformation of economic structure in Ho Chi Minh city To achieve this purpose, the thesis has the following tasks: (1) Overview of issues related to FDI and structural change, including a clarification of concepts, theories on the impact of FDI over sectoral transformation of economic structure, (2) Analysis of current situation in attracting and using FDI and its impact over structural change in

Ho Chi Minh city (3) Determination of the objectives, direction and proposed solutions in terms of mechanisms and policies to attract and use FDI so as to speed up structural change in Ho Chi Minh city efficiently and sustainably

4 Object, scope and methodology

4.1 Study objects

Study objects of the thesis is to analyze the impacts of FDI on the sectoral structural change in Ho Chi Minh city, to present objectives, directions and solutions on the mechanism and policies so as to attract and use

of FDI to promotion structural change

4.2 Scope of research

The thesis focuses on the impact of FDI on sectoral structural change (including: agriculture, industry and services) and the internal structure of industrial sector in Ho Chi Minh city Data used to examine FDI, structural change are taken from 1988 to 2009 and solutions are proposed till 2020

4.3 Research Methodology

The thesis uses dialectic materialism of Marxism - Leninism in combination with using a particular methodology consistent with the content analysis of the thesis, including:

- The method of historical materialism of Marxism - Leninism to draw perspectives, the rationale of attracting FDI, and the experience of economic structural change

- Methods of analysis and synthesis in order to find the quantitative relationship between FDI and economic structural change

- Methods of descriptive statistics to assess the role, and limitations of FDI in the economic structural change and socio - economic development as well The method of multivariate regression analysis is used to examine the impact of FDI on sectoral change of economic structure

5 The contributions of the thesis

- Develop theoretical framework and propose a model to analyze the impact of FDI on structural change and internal structural change of the industrial sector

- Propose fundamental solutions for attracting and using FDI to promote the structural change in Ho Chi Minh city, provide a basis for modeling and planning policies to attract FDI

6 Title and structure of the thesis:

Title of thesis: Impact of Foreign Direct Investment on structural change

in Ho Chi Minh city

The thesis is organized into three chapters:

Chapter 1 THEORIES OF FOREIGN DIRECT INVESTMENT IN

STRUCTURAL CHANGE 1.1 Theories of FDI and structural change

1.1.1 The concept of FDI

In this thesis, the concept of foreign direct investment is as follows:

"Foreign direct investment is the movement of capital, technology or any other lawful property goes from a country to host country and participate in the administration, investment management activities aimed at profit"

1.1.2 The Concept of structural change

There are many different concepts of structural change, but in this thesis, structural change is understood as follows: Structural change is an economic system consisting of several parts which closely tie to each other; they interact with each other in certain conditions of space, time and economic -social situation These parts are interrelated through the contents of quantitative and qualitative ones

1.1.3 The concept of structural transformation

Structural transformation is the shift of factors of resources from agriculture to industry and services in order to meet the growing needs of people in the process of socio - economic development

1.2 The impact channels of FDI over structural change of economic sectors

FDI affects structural change through the following channels: (1) FDI affects sectoral economic growth, (2) FDI is an important channel of technology transfer, contributing to sectoral economic growth, (3) labor and FDI affect sectoral economic growth, (4) FDI interacts with domestic investment and affect sectoral economic growth, (5) Productivity externalities affect sectoral economic growth, (6) Export externalities from FDI affect sectoral economic growth

1.3 Theoretical model assessing the impacts of FDI on sectoral change of economic structure

Economic growth model by Robert Solow uses the production function Cobb - Douglas Yt= Ktα (AtLt)1 - α (0 <α <1), where At = A0egt, g, A0 is constant, capital accumulation at time t is Kt and dKt/dt = sYt - Kt, Yt is income at time t and s is the savings rate Suppose that y and k are the income and capital accumulation standardized by the number of employees "effective" (regardless of the time, y = Y/AL và k = K/AL), therefore:

dk/dt = sy - (n + g + )k = skα - (n + g + )k (1.1)

The solution of equation (1.1) over time, dk/dt  0, mean: skα - (n + g +

)k  0 or k reaches a stable value: k* = [s/(n + g + )]1 / (1-α) If the current rate

on capital is lower than the rate of labor stability, capital is enhanced and thus creating income growth per capita at the steady rate until the ratio of capital over labor reached a stable value, at which point growth will reach steady state - the growth rate remained unchanged Mankiw, Romer and Weil (1992)

extend the basic Solow model and the production function takes the following form: Y = KH(AL)1 -  -   (,  > 0; 0 < + <1) (1.2)

Where: H is the "human capital" The dynamics of the growth was dominated by two equations similar to Solow model, but now explain the parallel development of human capital and physical capital:

dk/dt = sky - (n + g + ) k (1.3)

dh/dt = shy - (n + g + ) h (1.4)

The two equations imply the convergence of the dk/dt and dh/dt towards

0, meaning that the convergence of k and h to the equilibrium value k* and h* defined: k* = [sk 1-sh/(n + g + )]1/(1--) và h* = [sksh1-/(n + g + )]1/(1--) Convergence is determined by the equation: ln(Yt/Lt) = lnA0 + gt +

[/(1-)]lnsk - [/(1- )]ln(n+g+)+[/(1-)]lnh* (1.5)

Left hand side of equation (1.5) is the per capita income of labor at time t that positively depends on TFP A0 , the TFP growth, savings rates and human capital Convergence is approximately as:

lnyt =(1- e-t) lny* + e-t lny0 (1.6)

Where  is the speed of convergence,  = (n + g + )/(1 -  - ) Replace

y * and subtract lny0 for both sides of equation (1.6), we obtaine:

lnyt - lny0 =[(1- e-t)][lnsk+lnsh - ( +)ln(n+g+)]-(1- e-t)lny0 (1.7) Rewrite the model in the form of econometric models of economic growth for the sectors as follows:

lnyit – lnyi0 = C – (1-e-t)yi0 + xit + eit (1.8)

Where, yit is GDP sector i year t, yi0 is GDP of sector i at base year , C is

a constant of all sectors and xit is a vector of other explanatory variables, eit is the error According to the model of Mankiw, Romer, Weil, xit includes population growth, savings rate, depreciation rate, the ratio of investment on GDP Suggested that y is the city GDP in t, subtract the two side of the

equation (1.8) from lnYt, we obtaine equation (1.11):

lnyit – lnyi0 - lnYt = C – (1-e-t)yi0 - lnYt+ xit + eit(1.9)

<=> lnyit - lnYt = C + e-tyi0 - lnYt+ xit + eit (1.10)

<=> ln (yit/Yt) = C + e-tyi0 - lnYt+ xit + eit (1.11) Left - hand side of equation (1.11) becomes the variable representative for sectoral change of economic structure

Chapter 2 IMPACT OF FDI ON STRUCTURAL CHANGE IN HO CHI MINH

CITY 2.1 An overview of structural change and FDI

2.1.1 Structural change and changing FDI in Vietnam

In the period 1988 - 1990, economic growth rate is low and unstable, at about 5.4%, and it is time to begin to attract FDI In the period 1991 - 1995, economic growth rate is higher, on average 8% per year, in which the contribution of FDI is very important This period attracted over 17 billion USD In the period 1996 - 2000, the results drawn in the previous period has set the stage for the capital flowing into Vietnam (the first wave of FDI) In the period 2001 - 2005, FDI activitied faced many difficulties due to the impact from the international context and the fact that many countries in the region improved the investment environment The period 2006 - 2010 marked the period of prosperity of FDI inflows, and the year 2008 appeared to start the "second wave OF fdi " in Vietnam

Data show that FDI is an important factor promoting the development of many industries and new products FDI accounts for 100% in crude oil, automobiles, washing machines, refrigerators, air conditioning, office equipment, FDI accounts for 60% of steel, 28% of cement , 33% of power supplies/electronic, 76% of medical devices, contributing to increased production capacity of the national economy due to more progressive

economic structure.

2.1.2 Dynamics of the economic growth of Ho Chi Minh city

Ho Chi Minh city is one of a few big cities in the world having economic growth at an annual average of 2 numbers (except for the period 1998 to 2001 and from 2008 to 2010 due to the impact of the economic crisis in the world) The achievement of economic growth of the city not only has important implications for the city itself, for the Southeastern region but also for the country However, the quality of growth and economic efficiency are still low compared to potentials: growth in width, mainly from increased investment and production machining and assembly, depending greatly on equipment and raw materials imported

2.1.3 Structural change and FDI in Ho Chi Minh city

FDI asserts its position in the economy of Ho Chi Minh city; in 2009 it contributed to 20% of GDP As of 31/12/2009, the city also has 3,536 FDI projects with total investment of 27.4 billion Industry and construction accounted for 48.4% and 32.2% of project investment Services accounted for 51.3% of the project, 67.7% of capital (including the real estate sector, accounting for 46.7% is consultants), agriculture accounts for a little proportion in the FDI On investment structure, investment projects in the agriculture sector is declining; the real estate sector attracted more and more projects to create mutations in the business of real estate Top countries in terms of average invested capital on valid projects are Malaysia with USD 49.79 million, second is Hong Kong with 16.18 million, followed by Switzerland, British Virgin Islands, UK, Singapore

2.2 The impact of FDI on structural trsnformation in Ho Chi Minh city

2.2.1 A descpription

FDI plays an important role in establishing a progressive and