Researching the determinants of the attraction of FDI flows into vietnam

1 INTRODUCTION 1. Research proposal The flow of foreign direct investment (FDI) into Vietnam begun in 1988. This turning-point was considered an achievement of the economic transformation from central planning to socialism market-based (Kokko et  increased dramatically, reaching $ 22.352,2 mil with annual growth rate higher than 30% (General statistics directorate, 2014). The height of this flow was in 2008 with a total of $ 71.000 mil, but there was a steep decline from 2009 to the present (from registered $23.107,3 mil in 2009 to $16.348 mil in 2012, equivalent of 29.3%). Though the decrease was not against the global trend under the impact of economic crisis, when compared with ASEAN and China, the flow showed an increment during the past four years. This begs for questions: What determines  FDI?  regions? Given the importance of FDI to economic growth, the answers for these are necessary for bringing in appropriate suggestions to further improve the encouragement of upcoming FDI into Vietnam in general and into the regions in specific. The reasons stated above urge this author to carry out a thesis for PhD qualification with the topic “Researching the determinants of the attraction of FDI flows into Vietnam”. 2. Research related literature:  a range of both theoretical and empirical researches done on the proposed topic, or similar, worldwide. However, the number of empirical works on the determinants of  determinants are concern, the majority of surveyed authors utilize different variables and methods in accordance with their statistical database. Consequently the overall results were divided into two groups, based on primary and secondary data. Representing the first are Hafiz and Giroud 2 (2004), Lei et al. (2011) and Nguyen et al. (2013). On the other hand, the papers by Parker et al. (2005), Hoàng (2006), Ho (2010), Pham (2011), Nguyen (2011), Hoang et al. (2013) used secondary data. With respect to the factors impacting FDI distribution in Vietnam, due to the limitation of data,    indicates only three typical relevant works of Meyer and Nguyen (2005), Nguyen et al. (2008) and Dinh (2009). 3. Research objectives: The main objective of the thesis is to identify the determinants of FDI flows and regional distribution in Vietnam. The thesis focuses primarily on answering the two questions: -What determines the attraction of FDI into Vietnam? -What are the factors that influences FDI distribution across Vie regions? 4. Research subject and scope: 4.1. Subject The main subjects of the thesis are the determinants of FDI flows and regional distribution in Vietnam. 4.2. Scope  1 . (2) Data on the feedback of 171 FDI firms on the contemporary investment environment (2012  2013). (3) To identify FDI attraction determinants, the thesis uses data of 24 Asian developing countries during 2000  2012. (4) Lastly, to indentify factors impacting FDI distribution, data on 63 of  2013 were gathered. 5. Research methodology: -  environment, qualitative methods were used. 1 2013 data are preliminary. 3 -  determinants, to use an estimating method with unbiased, consistent and effective estimators, I chose the differenced GMM specification rather than the OLS. - Similar to the case of Vietnam as a whole, the method to estimate and testing hypotheses about factors impacting regional FDI distribution is also chosen to be differenced GMM. 6. The innovation and contribution of the thesis:  Theoretical: - With respect to Vietnam, there is no effect of first lagged FDI (FDI_1) on the dependent variable, FDI. - With respect to FDI regional distribution, there exists effect of past information of independent variables on FDI. - The use of interaction terms to analyse the difference in slope coefficients of determinants influencing FDI in comparison with countries in ASIA 24.  Empirical: - Provide empirical evidence on the evaluation of foreign investors on  - Identify the distinct model for FDI attraction determinants and factors impacting FDI distribution. Results confirm that the decisions of foreign investors are affected not only by current information but also past values of the determinants. - Based on the testing results from differenced GMM, three out of 6 hypotheses related to the determinants are significant at 10%. Accordingly, foreign investors choose Vietnam for the policy, market seeking purpose and resource acquiring motivation. - About the factors impacting FDI distribution, testing results by differenced GMM with current and past data are unable to provide sufficient evidence to reject 4 out of 5 given hypotheses. These involve the 4 quality of regional economic management, market seeking, efficiency  - Based on the results, some policy suggestions aiming for improving investment environment as well as attracting FDI at the country and region levels are proposed. - Lastly, thanks to the analyses based on panel data of ASIA 24, the  to similarities in other countries. As such, the results are hoped to provide a  7. Research structure: Not counting the introduction, conclusion, and policy implications, the thesis is composed of five chapters. CHAPTER 1: FACTORS DECIDE LOCATION OF FOREIGN DIRECT INVESTMENT: THEORY AND EMPIRICAL RESEARCH 1.1. Introduction 1.2. Generalization about Foreign Direct Investment (FDI) Theory has shown that FDI usually is created from the interaction of forces between the host countries and the attractive ones (e.g. Dunning, 1981, 1988, UNCTAD, 2006). Capital flows of FDI will run from countries to countries and FDI could happen thanks to the influences of push factors from host nations and pull factors from attractive ones. Additionally, some investor tends to create motivation push FDI for seeking potential markets or increasing the effectiveness with lower manufacturing cost in attractive ones. 5 1.3. Influences of FDI to economic growth FDI could motivate economic growth into two ways which are direct and indirect. Indirect impact is considered as another term which is pervasive impact. The studie       growth used different methods and approaches. Some of research mentions             impacts to manufacture, international trade, local investment in pervasive- driven. 1.4. Theory about crucial factors of FDI’s position 1.4.1. In national level 1.4.1.1. International Trade Theory The model of first theory explaining foreign investment bases on international trade theory is Heckscher-Ohlin model which was established by Heckscher (1919) and Bertil Ohlin (1933). It concerns that country has better good input factors should export products which is related to those agents and import ones which related to other inputs. 1.4.1.2. The Theory of Firm-Specific Ownership Advantages This theory was taken the initiative by Hymer (1960). This is the first effort to give independent theory to solve foreign investment trends. Hymer gave his view departing from industry economy and maintained that an enterprise which wants to overcome international barriers and participate in production process should have firm-specific ownership advantages. 1.4.1.3. Product Life Cycle Theories This theory was presented firstly in 1965 and developed systematically then by Vernon from 1966. It explains for foreign investment and international trade and considers foreign investment is a stage of product life cycle. 6 1.4.1.4. Internalization Theory Internalization Theory was published by Buckley and Casson in 1976, and it bases on Company Theory of Coase (1937). According to this theory, internal transaction (IT) is better than market transaction (MT) when the  1.4.1.5. Eclectic Paradigm Theory (OLI) This model is established meticulously of Dunning (1977, 1979, 1981, 1988, 1996, 1998, 2000, 2001). According to Dunning, a company decides to invest abroad when it has OLI advantages including Ownership Advantages, Location Advantage and Internalization Incentives.  will be selected as foundation to build theoretical research model about  between regions in Vietnam in Chapter 3 and Chapter 4 of the dissertation. 1.4.2. Distribution of FDI between regions in the nation The first basic theory relating to the distribution of FDI between regions in the nations is Popular Accumulative Impact of Krugman (1991). The second one relates to traditional economic advantages. The final theory is institutional factor. 1.5. Empirical research about attractive factor of FDI The general empirical research reveals that attractive factors of FDI to group of co they are divided into three groups: showing government policy (including: national risk/ inflation, exchange rate, cost of capital in the nation, tax policy, economic reformation, bilateral relationship, financial development,           capacity/human resource, technological level, facilities, geographic distance, cultural distance,etc.) and institutional factors (including: stable politics, quality of laws, corruption/bureaucratic, etc.). Three groups of 7 factors show the concepts representing for the base building the empirical research model about influent fa regions in Vietnam in chapter 3 and 4 of the dissertation. Additionally, general results of empirical research about influent factors of FDI in Vietnam in national and local levels allow defining research gap in Vietnam. 1.6. Research gap in Vietnam Base on the general of empirical research about influent factor of FDI   variance, autocorrelation and endogenous variables. They only limited at initial results of the regression method according to Pooled Ordinary Least  been any research model using delay variables FDI to study impacts to FDI flows. While, the research results of Campos and Kinoshita (2003); Carstensen and Toubal (2004); Bellak et al. (2008); and Anyanwu (2012)              studying attractive factors of FDI.           Vietnam, there are three relating research including Meyer and Nguyen (2005); Nguyen and Nguyen (2007) and Dinh (2009). If these authors used data from many different sources and inhomogeneous time, the dissertation uses secondary data from the only source which is from General Statistic Office in 2005-2013. Thus, the dissertation ensures the consistency and reliability and updated date (especially Provincial Competitiveness Index  PCI). That help regression results will have high reliability. In addition,                      Vietnam. The testing results in chapter 4 prove that it is the essential character in making decision of foreign investors in Vietnam. 8 1.7. Conclusion of Chapter 1 CHAPTER 2 THE CURRENT SITUATION ON FDI ATTRACTION IN VIETNAM 2.1. Introduction 2.2. The current situation on FDI attraction in Vietnam 2.2.1. Current trend of Vietnam’s FDI  FDI trend (both registered and implemented) increased from 1988 to 2013. However the total implemented capital compared to registered capital is very low (until end of 2013 the ratio is estimated to be 51.54%). 2.2.2. Vietnam’s FDI composition With respect to industrial composition, the manufacture and processing sectors are estimated to be dominant both in the number of projects and capital attracted, having more than 54.76% the total of registered FDI in Vietnam (8.725/15.932 projects). With respect to investment partners, cumulative speaking, until 31/12/2013, Japan, Singapore, Korean, Taiwan and Virgin Islands (Britain) are five countries that have the largest registered FDI capital in Vietnam. With respect to regional composition, statistics show that among 63 provinces/cities, Ho Chi Minh city is attracting the most FDI ($32,403.2 mil), followed by Ba Ria  Vung Tau ($26,298 mil) and taken the third place is Hanoi ($21,205.6 mil). 2.3. Comparing FDI attracted by Vietnam to that by other countries in the region In the area of ASEAN, until end of 2013 the ranking of countries based on FDI attraction is as follows: the first place is Singapore ($63,722.3 9 mil), second is Indonesia ($18,444 mil), followed by Thailand ($12,649.7 mil), Malaysia ($11,582.7 mil) and Vietnam at the fifth place (with $8,900 mil). 2.4. Survey results on Vietnam’s investment environment: The results from surveying 171 FDI firms in Vietnam shows 66.1% of the firms agree that they chose Vietnam in comparison with other countries;            firms investing in Vietnam because of market seeking purpose; 86% suggested that Vietnam investment environment has changed positively ever since joining the WTO (this also shows the satisfactory with current environment in Vietnam); 83.6% suggested that they will continue investing in Vietnam and the next choices would be China and Cambodia. 2.5. Conclusions CHAPTER 3 ANALYSING THE FACTORS AFFECTING FDI ATTRACTION IN VIETNAM 3.1. Introduction 3.2. Hypotheses and model Based on the 6 hypotheses given, theoretical research model of determinants of FDI attraction in Vietnam is established as follows: 10 Figure 3.1: theoretical research model of determinants of FDI attraction in Vietnam Based on the summary of empirical researches in Chapter 1 and  social characteristics, the empirical research model on determinants of FDI attraction in Vietnam is established as follows:                                                    And                                                  Where: + i = 1  : is an indicator of time; + FDI: Foreign direct investment attracted (USD); [...]... CONCLUSIONS The thesis is build for two main purposes: (1) Identify FDI attraction factors, (2) Identify regional FDI distribution factors With respect to the first objective, the flow of FDI in Vietnam is affected by exchange rates, attracted ODA, GDP, export value and extracted resource The results are unable to reject the impact of policy frameworks, market seeking and resource seeking of Vietnam FDI As of. .. smaller than 1%, so that we can reject the null hypothesis of jointly insignificant coefficients This shows that GMM method is suitable for explaining the impact on FDI On the other hand, the results of Sagan and Arellano-Bond GMM method for three models with both types of data are significant at the 5% level There is not enough evidence to reject the null hypotheses of exogenous instrument variables and... and 0 otherwise; + FDIit-1 or FDI_ 1: FDI s first lag 4.3 Data and research methodology 4.3.1 Data Data on 63 provinces of Viet Nam during 2005 – 2013 were gathered from the yearbooks of General statistics department and the yearbooks of provinces/cities From original 64 provinces/cities, Ha Tay and Hanoi were merged in 2007, thereby these regions’ data is incorporated under the name of Hanoi in the period... Conclusion 17 CHAPTER 4 ANALYSES OF FACTORS INFLUENCING FDI DISTRIBUTION IN VIETNAM 4.1 Introduction 4.2 Hypotheses and research model From the five given hypotheses, theoretical research model of factors influencing FDI distribution across Vietnam s regions is established as follows: Figure 4.2: Theoretical research model of factors influencing FDI distribution across Vietnam s regions Based on summary... + FDIit-1 or FDI_ 1: FDI s first lag + FDIVNt-1: the first lag of the interaction between FDI and the dummy variable 3.3 Data and research methodology 3.3.1 Variables 3.3.2 Data The data on the dependent variable, FDI, are gathered from summary statistics of UNCTAD during 2000 – 2012 With respect to independent variables related to policy frameworks, economics and institutional quality, the author collected... impacting Vietnam s FDI attraction, the thesis still has some limitations, primarily involving data First, with the survey data reflecting foreign investors’ opinions, despite the author’s effort to collect sufficient data, the number of survey forms collected is limited On the other hand, the sampling is based on convenient sampling method, with implementation time is one year These drawbacks reduce the. .. general statistic department, due to the fact that major macro-economics data published annually (and Vietnam only reforms from 1986), the data collected for Vietnam is extremely limited, at 27 years maximum This great limitation prompts the author to use data of ASIA 24 to examine the determinants of FDI attraction to Vietnam This approach does not allow for direct study of Vietnam thus research results... from the source of World Bank (during 2000 – 2012) Of those, Corrupt, Regul and Law are ranked from 0 to 100 (with 0 as the lowest rank and 100 as the highest rank) 3.3.3 Research method In the empirical models established, in addition to other independent variables, the first lag of FDI is considered an independent variable, and the data used are panel data from 24 of Asia’s developing countries Therefore... to 177,000 Overall the South Eastern and the Cuu Long River delta are the most prominent areas in all surveyed variables 4.4.2 Computing the correlation coefficient matrix among variables In comparison with the dependent variable FDI, the correlation coefficients of independent variables are all quite small (less than 0.6) In contrast to other variables, the sign of the coefficient of Infla is not as... is 40.7% and the rate of ODA to GNI is 3.26% For the economic factors, averaged GDP is $294,000 mil annually with a growth rate of 6.14%, averaged rate of urban population to total population is 46.2% and the regional rate of foreign trade is 88.28% of GDP In addition, the averaged rate of exporting ore and metal value to total exporting value is more than 7.17% GDP The averaged number of mobile phone . with the topic Researching the determinants of the attraction of FDI flows into Vietnam . 2. Research related literature:  a range of both. Research objectives: The main objective of the thesis is to identify the determinants of FDI flows and regional distribution in Vietnam. The thesis focuses primarily on answering the two questions:. on the 6 hypotheses given, theoretical research model of determinants of FDI attraction in Vietnam is established as follows: 10 Figure 3.1: theoretical research model of determinants of