Impacts of foreign dirrect investment on labor productivity of manufacturing industry a case of vietnam

., _ ~ ON LABOR PRODUCTIVITY OF , t _i{ IMPACTS OF FOREIGN DIRECT INVESTMENT ·t:· ' ~~~ l't· MANUFACTURING INDUSTRY: {-; ~ -~.·.·, ~ :·~ ~ A CASE OF VIETNAM BY VO KHOI NGUYEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS , HO CHI MINH CITY, APRIL 2011 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ' INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACTS OF FOREIGN DIRECT INVESTMENT ON LABOR PRODUCTIVITY OF MANUFACTURING INDUSTRY: A CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VO KHOI NGUYEN Academic Supervisor: PhD NGUYEN VAN PHUONG HO CHI MINH CITY, APRIL 2011 CERTIFICATION I hereby certify this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis Signature Vo Khoi Nguyen Date: April, 2011 ACKNOWLEDGEMENT With the valuable guidance and advices from Vietnam-Netherlands program lecturers and friends, I am really grateful to what they have done for my thesis completion First of all, I would like to illustrate my largest gratitude to my supervisor, PhD Nguyen Van Phuong who always gives useful and valuable advices and enthusiastic comments for my thesis I am grateful for Professor, Peter Calkins for his precious advice and comments from the initial ideas of the thesis I also express my special thanks to Professor, Nguyen Trong Hoai for his lectures in econometrics and PhD Cao Hao Thi, the lecturer of Vietnam-Netherlands project, for his kind help and instructions in data analysis by Eview software And finally, I would like to show my special thanks to my friends in MDE class 15 for their supports during my research completion ii' II ABSTRACT The paper exammes whether foreign direct investment mcreases the overall labor ' productivity in Vietnam Using panel data at firm level from the manufacturing sector, it finds robust evidence of the positive impacts from foreign direct investment on labor productivity Moreover, it also confirms the positive correlation of labor productivity and capital intensity, labor quality and economic scale However, it should fail to establish any significant relationships between productivity and location; and industry And the findings illustrate foreign enterprises not make more productive than private firms ' Ill TABLE OF CONTENTS CHAPTER INTRO D U CTI0 N 1.1 Introduction - 1.2 Research objective and questions 1.3 Research hypotheses - 1.4 Organization of the study -2 CHAPTER LITERATURE REVIEW - Theoretical background - 2.2 Economic theories 2.2.1 Cobb-Douglas production function 2.2.2 Theoretical framework ofFDI impact on labor productivity Empirical studies - 2.3 Channel effects of foreign direct investment - 2.3 Impacts of FDI on labor productivity - 2.4 Summary CHAPTER AN OVERVIEW OF FDI IN VIE TN AM Introduction - Overview of FDI inflows ( 1988-2009) 3.2.1 FDI inflows in period 1988 - 2009 - 3.2.2 Some characteristics of foreign direct investment in Vietnam - 11 3 The role of FDI in national economy 19 3.3.1 The role ofFDI in national economic growth 20 3.3 The role of FDI in employment and human resources 21 Overview of labor productivity in A SEAN - 21 IV Summary 23 CHAPTER RESEARCH METHODOLOGY 24 4.1 Model specification 24 4.2 Description of variables - 24 4.2.1 Dependent variable labor productivity (Labprod) - 24 4.2.2 Explanatory variables 25 4.3 Data collection 4 Estimation strategy - Summary 29 CHAPTER RESULT ANALYSIS 30 Introduction - 30 1.1 Descriptive statistics of variables 30 5.1.2 Multiple regression result - 37 5.2 Analysis and discussion about the finding results - 41 Summary 44 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 45 6.1 Conclusions - 45 Recommendations Limitation - Reference Appendices - 51 • v LIST OF TABLES Table 3.1: FDI projects licensed from 1988 to 2010 by kind of economic activity 12 Table 3.2: Employed population by ownership from 2000-2009 21 Table 3.3: Average annual labor productivity growth by Industry(%) 22 Table 4.1: Definition summary of variables 27 Table 5.1: Statistical summary of sample 31 Table 5.2: Distribution of explanatory variables in logarithm form 34 Table 5.3: Correlation matrix spreadsheet without logarithmic form 35 Table 5.4: Correlation matrix spreadsheet using logarithmic form 35 Table 5.5: Regression result from Pooled Least Square 37 Table 5.6: Regression result from fixed effects model 38 Table 7: Regression result from random effects model 39 Table 5.8: Hausman test result 40 Table 5.9: Regressed result summary 41 Table 5.10: Distribution of explanatory variables without logarithm form 51 Table 5.11: Descriptive statistics of variables in three types of enterprises 58 • Table 5.12: Result from fixed effects model with PCSE 59 Table 5.13: Result from fixed effects model with Dummy variable Dfshare 60 VI LIST OF FIGURES Figure 3.1: FDI inflows in period 1988- 2009 10 Figure 3.2: Structure of investment at current prices by types of ownership from 19952008 14 Figure 3.3: FDI inflows licensed by region 15 Figure 3.4: FDI inflows (million USD) by country ofregion 17 Figure 5: FDI inflows in manufacturing sector 18 Figure 3.6: Industrial output value in manufacturing sector by ownership 19 Figure 3.7: Structure ofGDP at current prices by ownership period 1995-2009 -20 Figure 3.8: Comparative Labor Productivity Performance -23 Figure 5.1: Distribution of labor productivity without logarithm form -32 Figure 5.2: Distribution of labor productivity in logarithm form 33 Figure 5.3: Correlation between Labprod and Fshare in logarithm form 36 Figure 5.4: Distribution of correlation between labor productivity Labprod and capital intensity Capint without logarithm form 52 Figure 5.5: Distribution of correlation between labor productivity Labprod and capital intensity Capint in logarithm forms -53 Figure 5.6: Distribution of correlation between labor productivity Labprod and material input purchases Scale without logarithm formS 54 Vll Figure 5.7: Distribution of correlation between labor productivity Labprod and material input purchases Scale in logarithm forms 55 Figure 5.8: Distribution of correlation between labor productivity Labprod and proportion of skilled labor Skill without logarithm forms 56 Figure 5.9: Distribution of correlation between labor productivity Labprod and proportion of skilled labor Skill in logarithm forms -51 Vlll CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS economies with the more investment in capital stock, the larger the firms' labor productivity, as the workers are equipped with better equipment Therefore, policy makers should encourage management of small companies producing similar products to consider emerging to increase their competitive capabilities and productive efficiency with large firms and foreign high performance companies, and lead to effective adjustment of firm size structure in manufacturing industry After WTO integration, Vietnam is facing with huge inflows of large foreign enterprises' capital in the near future Therefore, a large pool of relatively cheap labor and low skill will be no longer competitive advantage to attract FDI The positive and significant impacts of skilled labor on the overall labor productivity imply the more investment in education and training, the larger the share of engineers in total employees and the higher the competitive capabilities of firms Thus, the need from government to address improving education quality through universities, colleges or training courses is necessary to develop specific skills required Especially, technical schools should adjust their curriculums to be consistent with employer's needs and requirements Organizing international appointment between industries is to communicate with new knowledge systems It should create essential conditions and incentives for researches to interact closely with industries Policy makers should also make compulsory to workers of industrial zones at least at the twelfth grade of general education in increasing their knowledge and competency Besides that, in front of large FDI inflows, the need from local companies to improve their performance and competitiveness within the same sector from the entrance of any foreign high effective productivity company is a must Hence, government should deliver supporting policies for domestically potential enterprises to easily renovate technology and machines Local firms should have an absolute utilization from these beneficial conditions to improve resource efficiency, import new technology and 46 - CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS machines, make oversea training courses for potential engineers, increase servtce quality and change management methods to increase their competitive abilities under the influences and effects of foreign presence Lastly, the results also confirm that encouraging FDI flows into the manufacturing sector in Vietnam may be expected to have a positive effect on labor productivity Improvement of the business environment in the country may convince foreign investors to set up activities Thus, in front of FDI inflows, Vietnam's government should not only implement an efficient bureaucracy and high institutional quality, but also focus on an active anti-corruption inspection in upgrading infrastructure systems by examining carefully the national budget on improving roads, building hospital, markets and schools in order to highlight country's investment climate under a bright outlook of investors Simultaneously, policymakers should also improve or develop further current policies, incentives and encouragements such as tax, quotas and the removal of administrative barriers to attract foreign investors to bring capital into Vietnam more 6.3 Limitation Although data source gained from General Statistics Office of Vietnam is really updated and reliable, there are still some areas which needed identifying in future research Because dummy variables of industry and region are examined in total five years, it leads to perfect co-linearity (time-invariants) Therefore, it may not conclude whether FDI impacts on labor productivity significantly differ across industry and location It should estimate data every year to identify their correlations with FDI impacts Simultaneously, due to data limitation, it prevented from examining how the different impacts between joint ventures and wholly foreign subsidiaries are (for example, Blomstrom and Sjoholm, 1999; and Aitken and Harrison, 1999) 47 REFERENCE REFERENCE Aitken B J and Harrison A E (1999) Do domestic firms benefit from FDI? 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A co-integration analysis, Eastern Economic Journal, Vol 32, No 2, Trinity College • OECD (1996) Benchmark Definition of FDI, 3rd edition, Retrieved May 25th 2009 from http://www oecd.org/dataoecd/1 0116/2090 148 pdf Peter J B., Jeremy C and Chengqi W (2006) Inward FDI and host country productivity Evidence from China's electronics industry, Transnational Corporations, Vol 15, No 1, April 2006 Peter J B., Jeremy C and Chengqi W (2007) Is the relationship between inward FDI and spillover effects linear? An empirical examination of the case of China, Journal oflnternational Business Studies 38, pp 447-459 Statistical Yearbook ofVietnam (GSO): http://www.gso.gov.vn 50 APPENDICES APPENDICES APPENDIX Table 5.10: Distribution of explanatory variables without logarithm form Mean Median Maximum Minimum Std Dev Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq Dev Observations FSHARE 0.000102 0.000000 0.040665 0.000000 0.000906 24.28880 772.7119 3.27E+08 0.000000 1.345510 0.010833 13211 CAPINT 233.3007 97.64706 68786.29 0.586207 750.9153 59.60553 5278.466 1.53E+10 0.000000 3082135 7.45E+09 13211 51 SCALE 0.999993 0.113076 174.0530 0.000289 4.973839 18.83022 485.9761 1.29E+08 0.000000 13210.91 326803.2 13211 SKILL 0.194132 0.125000 3.080000 0.000000 0.210173 1.876383 8.781246 26150.11 0.000000 2564.671 583.5185 13211 APPENDICES Figure 5.4: Distribution of correlation between labor productivity Labprod and capital intensity Capint without logarithm form 60,000 50,000 40,000 30,000 20,000 10,000 2500 5000 1- 7500 LABPROD - 52 10000 CAPINT I 12500 APPENDICES Figure 5.5: Distribution of correlation between labor productivity Labprod and capital intensity Capint in logarithm forms 2500 1- 5000 7500 LNLABPROD - 53 10000 LNCAPINT I 12500 APPENDICES Figure 5.6: Distribution of correlation between labor productivity Labprod and 'I material input purchases Scale without logarithm forms 2500 5000 1- 7500 LABPROD - 54 10000 SCALE I 12500 APPENDICES Figure 5.7: Distribution of correlation between labor productivity Labprod and material input purchases Scale in logarithm forms 2500 1- 5000 7500 LNLABPROD - • 55 10000 LNSCALE I 12500 APPENDICES r Figure 5.8: Distribution of correlation between labor productivity Labprod and ! proportion of skilled labor Skill without logarithm forms ' 2500 5000 1- 7500 LABPROD - 56 10000 SKILL I 12500 - - - -~~- APPENDICES J Figure 5.9: Distribution of correlation between labor productivity Labprod and proportion of skilled labor Skill in logarithm forms 2500 7500 5000 1- LNLABPROD ·- 57 - 10000 LNSKILL I 12500 APPENDICES APPENDIX2 Table 5.11: Descriptive statistics of variables in three types of enterprises Enterprize I Types I summary of Labor Productivity Mean std Dev Freq + -FDI I Non-state I state I 117 07283 58.788016 101.65737 276.13348 187.70326 165.92284 530 3952 172 Total I 67.009864 199.96207 4654 + Enterprize Types summary of capital Intensity per Labor Mean std Dev Freq + -FDI I Non-state I state I 486.98466 239.28891 429.74149 Tot a I 274 53 527 1402.1144 909 02622 843.46989 530 3952 172 + Enterprize Types 978.97844 4654 summary of Ratio of Material Input cost per Labor Mean std Dev Freq + -FDI I Non-state I state I 110 94046 532114 101.98631 24 54487 215.05401 162.34589 530 3952 172 Tot a I 56 76 55 78 218.11988 46541 + Enterprize Types summary of Proportion of skilled Labor Mean std Dev Freq + -FDI I 39218544 3.7014424 530 Non-state I 92376883 8.6186178 3952 state I 29893917 70714959 172 Total I 84013972 8.0429761 4654 + 58 APPENDICES i Table 5.12: Result from fiXed effects model with PCSE p Dependent Variable: LNLABPROD Method: Panel Least Squares Sample: 13211 Periods included: Cross-sections included: 2955 Total panel (unbalanced) observations: 13211 Cross-section weights (PCSE) standard errors & covariance (no d f correction) Variable Coefficient Std Error t-Statistic Prob c 1.242193 0.410543 0.321316 0.292370 171205 0.039106 0.012099 0.034912 0.010928 0.011633 31.76437 33.93254 9.203714 26.75398 14.71766 0.0000 0.0000 0.0000 0.0000 0.0000 LNCAPJNT LNFSHARE LNSCALE LNSKILL Effects Specification ~ross-section fixed (dummy variables) ~-squared ,I ' f.\djusted R-squared S.E of regression Sum squared resid ~og likelihood ~-statistic Prob(F -statistic) 0.902347 0.874171 0.209577 450.2930 3573.771 32.02553 0.000000 Mean dependent var S.D dependent var Aka.ike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat 1.435686 0.590816 -0.093070 1.584273 0.466931 2.134773 The resulted regression model from table is depicted below: LNLABPROD = 1.242193 + 0.410543*LNCAPINT + 0.321316*LNFSHARE + 0.292370*LNSCALE + 0.171205*LNSKILL + [CX=F] f r 59 APPENDICES Table 5.13: Result from fixed effects model with Dummy variable Dfshare , ~ !Dependent Variable: LNLABPROD !Method: Panel Least Squares ~ample: I 132 11 Periods included : Cross-sections included: 2955 Total panel (unbalanced) observations: 13211 Cross-section weights (PCSE) standard errors & covariance (no d f correction) Variable Coefficient Std Error !-Statistic Pro b c 0.965359 0.406751 0.068977 0.087448 0.309492 0.162881 0.036157 0.011926 0.040329 0.0 18567 0.0 10794 0.01 1403 26.69882 34.10597 1.710366 4.70995 28.67308 14.28348 0.0000 0.0000 0.0872 0.0000 0.0000 0.0000 LNCAPINT DFSHARE1 DFSHARE2 LNSCALE LNSKILL Effects Specification ~ross-section fixed (dummy variables) IR-squared !Adjusted R-squared ~.E of regression Sum squared resid fLOg likelihood F-statistic IProb(F-statistic) 0.898991 0.869835 0.2 13157 465 7640 3350.634 30.83320 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin- Watson stat 1.435686 0.590816 -0.059138 1.618772 0.50 1052 2.175977 The resulted regression model from table 5.10 can be shown as below: LNLABPROD = 0.965359 + 0.406751 *LNCAPINT + 0.068977*DFSHARE1 + 0.087449*DFSHARE2 + 0.309492*LNSCALE + 0.162881 *LNSKILL + [CX=F] 60 ... positively related to capital intensity, skilled labor, capacity utilization and scale of operation And they suggest that foreign ownership takes an important role in term of the impacts on labor productivity. .. negligible gap of labor productivity with exception to Singapore, Hong Kong and Taiwan 22 CHAPTER 3: AN OVERVIEW OF FDI IN VIETNAM Figure 3.8: Comparative Labor Productivity Performance Comparative Labor. .. rates and living standards in the ASEAN region As illustrated on diagram, although Vietnam has lower labor productivity performance than others in Southern East Asia, there is an existence of