THE EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES

The effects of foreign direct investment FDI on the labor market of ASEAN countries are quite mixed and need to be further analyzed by in-depth models.. The effects offoreign direct inve

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

THE EFFECTS OF FDI ON THE LABOR MARKET

OF ASEAN COUNTRIES

Specialization: International TradePolicy and Law

HO THI HONG NGAN

Hanoi - 2019 MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

THE EFFECTS OF FDI ON THE LABOR MARKET

OF ASEAN COUNTRIES

Specialization: International Trade Policy and Law

Full name: Ho Thi Hong NganSupervisor: Dr Nguyen Thi Viet Hoa

Hanoi - 2019

I hereby declare that this master thesis is the scientific research of my own whichmade on the basis of theoretical studies, field surveys and under the direction andsupervision ofDr Nguyen Thi Viet Hoa The research contents and results of thisthesis are completely honest These data and documents for the analysis, review andevaluation were collected from various sources which are fully listed in thereference list

I am fully responsible for the content of this master thesis as well as thisdeclaration

Hanoi, 21 February 2019

Author

Ho Thi Hong Ngan

During the completion of this master thesis, I received the guidance and valuablehelp from the lecturers, siblings and friends With great respect and deep gratitude, Iwould like to express sincere thanks to:

Dr Nguyen Thi Viet Hoa who wholeheartedly helped, supported and encouraged

me from the initial to the final level of this dissertation She provided me withcomprehensive guide from choosing the topic, outlining the thesis and editing thisresearch

Professors and lecturers from FTU as well as World Trade Institute in the Master ofInternational Trade Policy and Law Intake Four, who not only spread profoundknowledge and information in the fields of economy and law but generated strongmotivation for me while I was taking this course as well

Last but not least, I would like to express my sincere thanks to my family, mycolleagues and my friends, who have always by my side encouraging, supporting,contributing valuable ideas and giving me favorable conditions for me to completethis scientific research

TABLE OF CONTENTS

DECLARATION ii

ACKNOWLEDGEMENT iiii

LIST OF ABBREVIATIONS vivi

LIST OF FIGURES .viiiviii

SUMMARY OF THESIS RESEARCH RESULTS ixix

In some certain aspects, the author has answered all the questions which have been raised when considering about the topic.The characteristics of foreign direct investment and labor market have been listed and analyzed carefully The effects of foreign direct investment (FDI) on the labor market of ASEAN countries are quite mixed and need to be further analyzed by in-depth models In general, FDI has brought positive impacts on the labor market of ASEAN countries, but these effects are not well adapted due to both subjective and objective reasons The labor force of ASEAN still faces a lot of difficulties in taking advantage of huge FDI capital from outside Therefore, some solutions have been proposed to help ASEAN labor force in general and Vietnamese labor in particular get access to this type of investment and gradually raise their capabilities to work abroad ixix

CHAPTER 1: INTRODUCTION 11

1.1 Research Rationale 11

1.2 Literature Review 44

1.3 Research objectives 77

1.4 Research questions 77

1.5 Scope of research 88

1.6 Research methodology 88

1.7 Thesis outline 88

CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR MARKET .1010

2.1 Fundamentals of FDI .1010

2.1.1 The concept of FDI 1010

2.1.2 Characteristics of FDI 1212

2.1.3 Classification of FDI 1313

2.2 Fundamentals of labor market 1515

2.2.1 The concept of labor market 1515

2.2.2 Composition of labor market 1817

2.2.2.1 Labor supply 1817

2.2.2.2 Labor demand 2020

2.2.2.3 Labor cost 2120

2.2.3 Functions of labor market 2221

2.2.4 Characteristics of labor market 2222

2.2.5 Classifications of labor market 2626

2.3 Theoretical framework of the effects of FDI on the labor market 2827

CHAPTER 3: EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES 3030

3.1 Current situation of FDI into ASEAN countries 3030

3.1.1 ASEAN is one of the most attractive destinations for foreign investment of the world 3030

3.1.2 Major Powers in the world invest more in ASEANdue to the strong internal force 3131

3.2 Current situation of the labor market of ASEAN countries 3535

3.2.1 Abundant and young labor force 3535

3.2.2 Lack of skilled workers 3737

3.2.3 Facing a lot of difficulties 3838

3.3 Effects of FDI on the labor market of ASEAN countries 3939

3.3.1 Effects of FDI on labor cost 4040

3.3.2 Effects of FDI on labor demand……….44

3.3.3 Other effects of FDI 4445

3.3.3.1 Effects on productivity 4445

3.3.3.2 Effects on inequality 5252

3.3.3.3 Effects on working environment .5858

CHAPTER 4: RECOMMENDATIONS FOR VIET NAM ‘S LABOR MARKET 6263

4.1 Perspectives of attracting FDI into Viet Nam .6263

4.1.1 Top investment destination in ASEAN 6263

4.1.2 Focus on the quality of FDI projects 6364

4.2 Some experiences from ASEAN countries 6565

4.3 Recommendations for attracting FDI to strengthen the positive effects of FDI on the labor market of Vietnam 6869

4.3.1 Promote the investment environment of Vietnam to attract FDI inflow 6970

4.3.2 Hold annual meetings/seminars to exchange and learn between Vietnamese and foreign businesses and vice versa to increase joint ventures 7171

4.3.3 Encourage the use of Vietnamese labor at all levels of management in the FDI enterprises 7273

4.3.4 Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam 7374

4.3.5 Promulgate legitimate policies to protect the right of labor force 7475

4.3.6 Raising awareness of the workers about MRAsand exploring the possibility of extending MRAS to more sectors 7576

4.3.7 Reducing protection for domestic labor in AEC 7777

CHAPTER 5: CONCLUSION 7879

REFERENCES .8283

DECLARATION i

ACKNOWLEDGEMENT ii

LIST OF ABBREVIATIONS vi

LIST OF FIGURES viii

SUMMARY OF THESIS RESEARCH RESULTS ix

CHAPTER 1: INTRODUCTION 1

1.1 Research Rationale 1

1.2 Literature Review 4

1.3 Research objectives 7

1.4 Research questions 7

1.5 Scope of research 8

1.6 Research methodology 8

1.7 Thesis outline 9

CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR MARKET 10

2.1 Fundamentals of FDI 10

2.1.1 The concept of FDI .10

2.1.2 Characteristics of FDI .12

2.1.3 Classification of FDI .13

2.2 Fundamentals of labor market 15

2.2.1 The concept of labor market .15

2.2.2 Composition of labor market .17

2.2.2.1 Labor supply .17

2.2.2.2 Labor demand .20

2.2.2.3 Labor cost 20

2.2.3 Functions of labor market .21

2.2.4 Characteristics of labor market .22

2.2.5 Classifications of labor market .26

2.3 Theoretical framework of the effects of FDI on the labor market 27

CHAPTER 3: EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES 30

3.1 Current situation of FDI into ASEAN countries 30

3.1.1 ASEAN is one of the most attractive destinations for foreign investment of the world .30

3.1.2 Major Powers in the world invest more in ASEAN due to the strong internal force .31

3.2 Current situation of the labor market of ASEAN countries 35

3.2.1 Abundant and young labor force .35

3.2.2 Lack of skilled workers .37

3.2.3 Facing a lot of difficulties .38

3.3 Effects of FDI on the labor market of ASEAN countries 39

3.3.1 Effects of FDI on labor costwages .40

3.3.2 Effects of FDI on productivity .43

3.3.2.1 The case of Viet Nam 44

3.3.2.2 The case of Thailand .48

3.3.2.3 The case of Indonesia 49

3.3.3 Effects of FDI on inequality .51

3.3.4 Effects of FDI on working environment .57

CHAPTER 4: RECOMMENDATIONS FOR VIET NAM ‘S LABOR MARKET 61

4.1 Perspectives of attracting FDI into Viet Nam 61

4.1.12 Top investment destination in ASEAN .61

4.1.2.3 Focus on the quality of FDI projects .62

4.2 Some experiences from ASEAN countries 63

4.3 Recommendations for attracting FDI to strengthen the positive effects of FDI on the labor market of Vietnam 67

4.3.1 Promote the investment environment of Vietnam to attract FDI inflow 68

4.3.2 Hold annual meetings/seminars to exchange and learn between Vietnamese and foreign businesses and vice versa to increase joint ventures .69

4.3.3 Encourage the use of Vietnamese labor at all levels of management in the FDI enterprises .71

4.3.4 Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam .72

4.3.5 Promulgate legitimate policies to protect the right of labor force .73

4.3.6 Raising awareness of the workers about MRAs and exploring the possibility of extending MRAS to more sectors .74

4.3.7 Reducing protection for domestic labor in AEC .75

CHAPTER 5: CONCLUSION 77

REFERENCES 81

ADB Asian Development Bank

VCCI Viet Nam Chamber of Commerce and Industry

LIST OF FIGURES

Figure1 Classification of FDI .15

Figure2 The labor market .21

Figure3 FDI flows into ASEAN member states in 2017 .31

Figure4 Intra-ASEAN investment, 1995-2016 .32

Figure5 EU FDI flows in ASEAN, 1995-2015 .32

Figure6 FDI in ASEAN .33

Figure7 EU services FDI flows in ASEAN, 2000-2016 .33

Figure 8 Labor force in ASEAN member states in 2017 .36

Figure 9 Labor force growth .36

Figure10 Employment share of ASEAN in 2017 .37

Figure11 Minimum wage in ASEAN, 2018 .40

Figure 12 Monthly wage of Vietnamese workers in Q2, 2018 .42

Figure13 Monthly average wage of Laotian workers, 2017 .43

Figure14 Productivity growth rate of Viet Nam (in percentage) .46

Figure15 The gap in absolute productivity between economic sectors (times) .47

Figure16 Capital, attracting labor and raising productivity, 2006-2016 .49

Figure17 Indonesian government employment programs .51

Figure18 Labor market conditions in ASEAN .58

Figure19 Best Places to Work in Viet Nam in 2016, 2017 .60

Figure20 Attracting FDI to Viet Nam (1988-2017) .62

Figure21 FDI in Viet Nam by sectors (2018) .63

Figure 22 ASEAN Leaders Statement on Human Resources and Skills Development for Economic Recovery and Sustainable Growth .65

Figure23 Priority areas for FDI attraction .70

SUMMARY OF THESIS RESEARCH RESULTS

In some certain aspects, the author has answered all the questions which have beenraised when considering about the topic.The characteristics of foreign directinvestment and labor market have been listed and analyzed carefully The effects offoreign direct investment (FDI) on the labor market of ASEAN countries are quitemixed and need to be further analyzed by in-depth models In general, FDI hasbrought positive impacts on the labor market of ASEAN countries, but these effectsare not well adapted due to both subjective and objective reasons The labor force ofASEAN still faces a lot of difficulties in taking advantage of huge FDI capital fromoutside Therefore, some solutions have been proposed to help ASEAN labor force

in general and Vietnamese labor in particular get access to this type of investmentand gradually raise their capaibilities to work abroad

CHAPTER 1: INTRODUCTION

1.1 Research Rationale

Today, in countries with transitional economies, including Vietnam, in parallel with the expansion of business freedom, the development of commodity and service market and securities market, labor market is also being formed.

Economic development is an indispensable goal of all countries to improve the quality of life of the people In order to develop economically, especially in the market economy, it is necessary to develop different types of markets, as the market is the living environment of the commodity economy The labor market is formed and developed in the market economy It has relationship with other types of markets: capital market, science and technology market, information market, monetary market, etc The labor market displays the relations between the employee and the employer, on the principle of agreement through employment.

Under the ASEAN Economic Community (AEC) blueprint signed in 2007, ASEAN will “facilitate the issuance of visas and employment permits for skilled ASEAN and skilled workers engaged in trade activities, cross-border investment” especially in the four priority areas (air, information technology (e-ASEAN), health and tourism) as well as logistics In order to achieve this goal, functional agencies in each country have come to recognize each other's education and qualifications and grant "ASEAN experts" certification through the creation of curricula and acknowledgment of ASEAN In particular, ten ASEAN countries have signed Mutual Recognition Agreements (MRAs) under which ASEAN experts will be allowed to seek employment anywhere in ASEAN In 2005, MRA for technical advisory services was the first to be signed, followed by MRAs in nursing, surveying, architecture, medicine, dentistry, accounting and tourism A total of eight expert certificates have been created Individuals wishing to look for work abroad can obtain "expert" certification through the MRA system and continue to apply for a job visa.

In addition, the ASEAN Movement of Natural Persons Agreement was signed in 2012 Through this agreement, foreign nationals seeking immigration

to a country to carry out work related to current job may be granted a work visa upon completion of certain conditions Although overall progress has been made in the region, it is not easy to apply these complex frameworks and countries' laws have not been updated, limiting the practical implementation of the system

The AEC, a framework for the region's economic integration, focuses on a free labor market that allows skilled professionals to work anywhere they like across the region, which has a population of 620 million people The four objectives of the AEC are: (1) a single market and production base; (2) a competitive economic region; (3) equitable economic development; and (4) fully integrated region in the global economy The free labor market, which began to take shape in 2015, has freed up eight professions, including medicine, dentistry, nursing, engineering, architecture, natural resources and geographical exploration, accounting and tourism, allowing professionals in these areas to move between countries in the region to work ASEAN has about

300 million people of a working age, 70 percent of whom are from Indonesia, the Philippines and Vietnam A common labor market that the AEC is aiming

at will provide opportunities for skilled workers in the ASEAN region to find suitable jobs enabling them to develop their careers and provide a rewarding source of income as well as other benefits.

Currently, in ASEAN, market economy development is placing higher requirements on the development of the market in general and the labor market in particular (because the labor market is a decisive market) In fact, in recent years and now, although the labor markets of these countries have changed positively: labor supply as well as labor demand has gradually increased, labor quality has been improved, gradual decline in unemployment, with the increasing demand of economic development, the labor market of most of the countries in ASEAN is facing many shortcomings Due to the

varying economic conditions among the ASEAN countries, workers often move from low-income countries to higher-income countries in search of higher incomes It is easy to see a lot of Cambodian workers in the construction industry of Singapore or Vietnamese workers in Thailand restaurants Indonesia and the Philippines have a large workforce and are now facing high unemployment and low incomes For these reasons, they tend to move to their neighbors (Push Force) On the other hand, Thailand and Malaysia have high living standards and low unemployment rate, attracting workers from the remaining six countries (Pull Force) The biggest concern for ASEAN enterprises is the shortage of skilled workers This seems to be the most serious problem in finance, ICT and other professional services Moreover, the demand for employment in mid-level managers and professionals is very high.

A standout amongst the most pivotal parts of foreign direct investment (FDI) is its commitment to the economic growth of the host nation This commitment is essential and is one that is actually expected by any host nation particularly developing ones In the most recent couple of decades, nations have been contending with one another for the reasons of drawing FDI, this is due to the essential commitment it makes to the general growth of economies FDI not just offers a steady capital flows, but long term commitments to host nations, insuring a regular capital inflow to host nations Access to new and cutting edge technological innovation is potentially a standout amongst the most vital reasons why a nation would need to draw FDI.

FDI has always played a strategic role in the economic growth of ASEAN and in many other economic cooperation regions around the world FDI is seen

as an important channel for obtaining employment opportunities, human capital development, higher wages, technology transfer, and infrastructure improvement In other words, FDI is often seen as a vehicle for an increase in productivity and efficiency, and consequently as a driver for economic growth FDI is likely to have direct and indirect effects on host economies Increasing capital formation, employment and trade is the direct effects of FDI, whereas

receiving a beneficial transfer of know-how and technology, and management skills from home country responds to indirect effects of FDI With the advantages of cheap labor and capital resources of member countries, ASEAN has built an attractive business environment for multinational corporations seeking profits through the implementation of different channels of FDI With aforementioned advantages as well as drawbacks of labor market, ASEAN countries need to work closely to reduce transaction costs, strengthen FDI promotion policies and harmonious development of the economy among member countries in order to utilize FDI inflow.

From the above reasons, the topic “The effects of FDI on the labor market

of ASEAN countries” is chosen This thesis shall give information about FDI

and labor market and deepens its analysis of FDI and labor market in ASEAN After that, based on the current status of labor market in Vietnam, the thesis shall give several implications for Vietnam’s labor market

1.2 Literature Review

The effects of FDI on the labor market have been studied carefully worldwide It is still controversial whether FDI could bring advantage to the labor market of host country While some research proves that FDI could lead

to higher wages, higher productivity, and increased wage inequality, the others show that the effect on labor market is more mixed

Chia theo nhóm, trong mỗi nhóm xếp từ nghiên cứu xa nhất đến các nghiêncứu gần đây

Many studies confirm that FDI has more or less a positive impact on employment Lukáš Bežila (2007) indicates that multi-national enterprises (MNEs) increase wages as well as productivity through spillovers in domestic firms Surprisingly productivity grew faster than wages and thus did not cause unemployment MNEs helps to create efficient jobs opportunities, reallocate resources from the less to higher productive and thus enhanced total employment When comparcompareing e? domestic companies with foreign

companies, the author finds that MNEs produce with increasing external returns to scale, whereas domestic firms produce with decreasing external returns to scale, but with increasing internal returns to scale Importantly, employees in foreign companies have higher productivities and are paid more They are usually bigger and employ more people per company comparing with domestic firms .

Karlsson et al (2009) use FDI data on various manufacturing companies

in China between 1998 and 2004 to assess the impact of FDI on employment and come to conclusion that FDI enterprises have high employment growth High employment growth in foreign companies is due to the favorable characteristics of this business, such as capital intensive and high productivity.

Lukáš Bežila (2007) indicates that multi-national enterprises (MNEs) increase wages as well as productivity through spillovers in domestic firms Surprisingly productivity grew faster than wages and thus did not cause unemployment MNEs helps to create efficient jobs opportunities, reallocate resources from the less to higher productive and thus enhanced total employment When compare? domestic companies with foreign companies, the author finds that MNEs produce with increasing external returns to scale, whereas domestic firms produce with decreasing external returns to scale, but with increasing internal returns to scale Importantly, employees in foreign companies have higher productivities and are paid more They are usually bigger and employ more people per company comparing with domestic firms.

More recently, Poole (2013) provides evidence of positive spillovers of FDI

in Brazil by using matched employer–employee data to show that as workers migrate from multinational to domestic firms there is an increase in the wages

of even domestic workers at incumbent firms Further, the transfer of technology is greater the higher the skill level of the worker migrating from the multinational and the higher the skill level of the worker at the incumbent

firm Average wages for incumbent workers at the domestic firm increase as the share of workers from multinationals increase at the domestic firm.

David Mayom (2015) indicates that FDI has a positive and significant effect on employment implying that an increase in the inflow of FDI is associated with higher employment Thus, Sub-Saharan African governments should strongly consider poverty alleviation and employment policies that encourage and direct FDI to the industries where it can significantly reduce unemployment David uses a panel data set for 48 Sub-Saharan African countries for the period ranging from 1991 - 2011 Furthermore, he uses the Ordinary Least Square (OLS) regression estimator, and finds that FDI has the expected sign and significance in all specifications for both the general and youth population, which implies increasing inflow of the FDI to Sub-Saharan African countries, is associated with increase in employment ratio.

The expected linkages between FDI and labor productivity of domestic enterprises are one of the main reasons many countries attract investment from multinational companies Increased labor productivity can lead to an increase in wages, jobs and growth Some previous studies have investigated the relationship between FDI and productivity, suggesting that there is a positive relationship Research by Blalock &Gertler (2008) found that FDI helps increase productivity and increase efficiency among companies

However, in other research, the findings are worth considering.Regarding the relationship between FDI and wage inequality, the study by Velde& Morrissey (2002) found no strong evidence that FDI reduced wage inequality in some East Asian countries during the period 1985 - 1998 Although FDI increases wages for both skilled and low skilled workers, this study shows that FDI has increased wage inequality in Thailand Jenkins's study (2006) examines the impact of FDI on employment in Viet Nam in the 1990s that, despite the rapid growth of FDI in these years, direct employment creation is very limited Most

of Vietnam's labor force continues to work in the agricultural and service sectors such as wholesale and retail and transport industries Even the

expansion of foreign companies' investment in the early years of the 21 st

century into labor-intensive industries did not have a significant impact on employment due to the high productivity and low added value of many of these investments Foreign investors in Vietnam have created very limited links with local businesses and imported most of their inputs Domestic enterprises that are under pressure to improve labor productivity to enhance their competitiveness with foreign enterprises have led to a trend of reducing jobs.Nguyen Thi Tue Anh Anh(2006) shows that the productivity of Vietnameseenterprises has changed thanks to the appearance of FDI enterprises, throughpositive spillover effects on components such as firm size, quality of labor, capitalintensity However, the study shows that Vietnam's low labor level is a factorhindering the positive impact of FDI on labor productivity At the enterprise level, alow level of labor will limit the ability to acquire and transfer technology Thus, ifthere is a shortage of workers who meet a certain level, the dissemination oftechnology will be difficult or will not happen Besides, a large gap in technologyand labor productivity is also making it difficult to move skilled labor between FDIenterprises and domestic enterprises

Yussof (2010) studied the impact of FDI on the Malaysian labor market and concluded that FDI has no effect on labor variables Regarding the relationship between FDI and wage inequality, the study by Velde & Morrissey (2002) found no strong evidence that FDI reduced wage inequality in some East Asian countries during the period 1985 - 1998 Although FDI increases wages for both skilled and low skilled workers, this study shows that FDI has increased wage inequality in Thailand.

Jenkins's study (2006) examines the impact of FDI on employment in Viet Nam

in the 1990s that, despite the rapid growth of FDI in these years, direct employment creation is very limited Most of Vietnam's labor force continues

to work in the agricultural and service sectors such as wholesale and retail and transport industries Even the expansion of foreign companies' investment in the early years of the 21 st century into labor-intensive industries did not have a

significant impact on employment due to the high productivity and low added value of many of these investments Foreign investors in Vietnam have created very limited links with local businesses and imported most of their inputs Domestic enterprises that are under pressure to improve labor productivity to enhance their competitiveness with foreign enterprises have led to a trend of reducing jobs.

Nguyen Thi Tue Anh (2006) shows that the productivity of Vietnamese enterpriseshas changed thanks to the appearance of FDI enterprises, through positive spillovereffects on components such as firm size, quality of labor, capital intensity However,the study shows that Vietnam's low labor level is a factor hindering the positiveimpact of FDI on labor productivity At the enterprise level, a low level of labor willlimit the ability to acquire and transfer technology Thus, if there is a shortage ofworkers who meet a certain level, the dissemination of technology will be difficult

or will not happen Besides, a large gap in technology and labor productivity is alsomaking it difficult to move skilled labor between FDI enterprises and domesticenterprises

Galina Hale and Mingzhi Xu (2016) points out that FDI increases income inequality, there is still insufficient evidence on spillover effects of FDI on labor market conditions faced by domestic firms In addition, the majority of positive effects observed are direct effects on target firms and some labor productivity spillovers and higher wages are observed in domestic firms In the paper, the authors first review the empirical literature and analyze the mechanisms by which FDI affects host country labor markets and then present

a stylized model that illustrates these mechanisms They find out that a large empirical literature on the effects of FDI on local economies, with much of it focused on technology transfers and spillovers, while a smaller but still substantial body of literature addresses the effects of FDI on a destination country’s labor markets, primarily on wages and employment.

Thus, empirical studies show the necessity of FDI for economies However, studies on the impact of this capital on labor market vary between

countries in different stages Therefore, this paper focuses on analyzing the labor market of some ASEAN countries with the existence of FDI and how it might affect this type of market and how can ASEAN workers take advantage

of huge FDI capital inflow.

1.3 Research objectives

The research aims to clarify the effects of foreign direct investment on the labor market of ASEAN countries in general and in Viet Nam in particular The research also aims at giving recommendations for improving the quality of the labor market in Viet Nam.

 How can Viet Nam use the FDI capital efficiently to boost its labor market

productivity? Vietnamese labor force boost its productivity to attract more

foreign direct investment?

1.5 Scope of research

Regarding the content of the dissertation, it focuses on the real situation

of effects of foreign direct investment on the labor market of ASEAN countries The scope of this thesis is as follows:

As for geographical scope, the research is intended to conduct a depth practical view concerning effects of foreign direct investment on the labor market of some ASEAN countries including Laos, Thailand, Indonesiaand

Indonesia Then, the research deepens its study by a case of Viet Nam

As for time scope, the research focuses its analysis and synthesis on the period mainly from 2006 to 2016 This period has many events affecting the economies of ASEAN countries such as economic crisis in 2007, the establishment of AEC in 2015 We may see the level of effect on labor market

of ASEAN countries

1.6 Research methodology

During the research process of this thesis, the author has combined different research methods as follows:

-Theoretical research methods:

The thesis will collect legal documents, economic information through historical research method and then classify and systematize them Moreover, the thesis also analyzes and synthesizes all data and documents

-Practical research methods:

The thesis will observe the real situation of effects of foreign direct investment on the labor market of some ASEAN countries and base on particular experiences from these countries, giving recommendations for Viet Nam by professional solution method

Chapter 4: Recommendations for Viet Nam‘s labor market Chapter 5: ConclusConclusionclusionion

2.1 Fundamentals of FDI

2.1.1 The concept of FDI

Foreign direct investment (FDI) occurs when a foreign investor purchases

a property in another country for the purpose of managing it Property management is considered a criterion for distinguishing between FDI and other forms of foreign investment The concept of FDI depends on each organization and country Some of them are listed as follows.

According to the International Monetary Fund (IMF) (2003): FDI reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise) The ‘lasting interest’ implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter.

According to the Organization for Economic Co-operation and

Development (OECD) (2001): Direct investment aims to establish long-term economic relationships with a business, especially investments that have the potential to influence management (i) Establish or expand a business or subsidiary under the sole control of the owner, (ii) Acquire the entire existing business, (iii) Engage to a new business, (iv) Long-term credit (> 5 years).

According to the World Trade Organization (WTO) (1996): FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset The management dimension is what distinguishes FDI from portfolio investment in foreign stocks, bonds and other financial instruments In most instances, both the investor and the asset it manages abroad are business firms In such cases, the investor is typically referred to as the “parent firm” and the asset as the

“affiliate” or “subsidiary.

The above three concepts on FDI emphasize that the owner must have real management or real control of the business Management is involved in making important decisions regarding the company's development strategies and policies However, the IMF and the OECD make it clear that the goal of FDI is the long-term benefit that the direct investor has acquired through long- term cooperation with the direct investment enterprise The concept defined by the OECD also outlines four forms of foreign direct investment: establishment

or expansion of an enterprise or a subsidiary under the management of the owner, acquisition of the entire existing enterprise, enter into a new business, long-term credit (> 5 years) According to the standards of these organizations, FDI is defined broadly.

The Investment Law 2005 of Vietnam does not introduce the concept of

"foreign direct investment", however, the definitions of "direct investment" and "foreign investor" are specified at Clause 2 and Clause 5 of Article 3 The Investment Law 2014 of Vietnam only covers the concepts of "foreign investor", "foreign-invested business organization" and does not provide specific explanations for "foreign direct investment" However, from the

above, it can be understood that FDI is a form of investment where foreign investors invest capital and participate in controlling investment activities in Vietnam or Vietnamese investors invest capital and participate in controlling overseas investment activities in accordance with the provisions of this Law and other relevant laws (Vu Chi Loc, 2012).

The current investment law applied in Viet Nam is the Investment Law

2014, which takes effect on 1 July 2015 Clause 14 and Clause 17 of Article 3 regulates “Foreign investor means an individual holding a foreign nationality

or an organization established under foreign laws and making business investment in Vietnam” and “Foreigninvested business organization means a business whose members or shareholders are foreign investors”

In summary, FDI is a form of international investment in which the amount of capital invested by investors is enough to participate in controlling the activities of investment enterprises with the goal of gaining long-term benefits.

2.1.2 Characteristics of FDI

FDI has the following characteristics.

Firstly, FDI is primarily private investment with a primary purpose of seeking profits Therefore, the receiving countries should pay attention to the

receipt of FDI so that they can attract and select FDI projects to meet their economic, social and environmental development objectives instead of projects only serving profitability of investors.

Secondly, the capital contribution ratio determines the rights and obligations of investors as well as the distribution of profits and risks According

to the regulations of each country, the minimum capital contribution that foreign investors have to contribute to the legal capital or charter capital to take control of the investment enterprises also varies This rate is 10% in the United States, 20% in Great Britain and France, and 10% in OECD (1996) In Vietnam, according to Investment Law 2014, the charter capital of foreign invested enterprises is “51% of charter capital or more is held by foreign investors,

or the majority of the general partners are foreigners if the business organization is apartnership”unlimited, except in some other cases

Thirdly, the investor decides to invest, decides on production and business and self-responsibility for loss of profit, the income is the business result This is

a feasible and economically viable form of investment, with no political constraints The income of the investor depends on the business performance of the enterprise in which he contributes capital.

Fourthly, FDI is often accompanied by technology transfer In order to

carry out the project, the investor often transfers the machines, equipment,

patents, inventions, technical know-how, management experience, etc to the enterprises in the receiving countries This feature is important for the recipient countries, especially developing countries because the technology is key, the driving force for development Acquisition of advanced technology from abroad will have a spillover effect on the economic and social development of the receiving country.

2.1.3 Classification of FDI

FDI can be classified in the following forms.

By way of entry, FDI is divided into two forms: Greenfield investment, cross-border merger and acquisition.

Greenfield investment: Foreign investors contribute capital to build a new

production and business base in the receiving country The advantage of this form is the opportunities to create new products in the market of receiving country, helping investors protect their business secrets This is highly appreciated by the receiving country, which gives them more employment opportunities, as well as increased capital and added value for the country However, this is a very risky investment form which requires high investment cost and more time to access the market.

Cross-border merger & acquisition (M&A): A foreign investor acquires or

merges an existing manufacturing base in the receiving country In fact, FDI is mainly carried out through this method because of its advantages: low investment cost, the use of brand names, backgrounds, experience as well as market insight of M&A enterprises in the receiving country, allowing the investor to access the market faster.

In terms of sectoral relations between the investor and the recipient, FDI

is divided into three forms: vertical FDI, horizontal FDI and conglomorate FDI.

Vertical FDI: The investing enterprise and the receiving enterprise are in

the same value chain Vertical FDI is carried out for two main purposes, one is

the exploitation of raw materials and fuels (Backward vertical FDI) and the other is through the acquisition of distribution channels in the receiving country to get closer to the customer, helping cosume the output of the enterprise's domestic production processes (Forward vertical FDI) Backward vertical FDI activity is more commonly applied, concentrated in the mining industry.

Horizontal FDI: FDI activity is conducted to produce the same products

or similar products as the investor has produced in the home country Horizontal FDI helps FDI enterprise to overcome risks when exporting or licensing, reduce costs especially transportation cost, make sure to keep business know-how and take advantage of group monopoly.

Conglomerate FDI: The investing enterprise and receiving enterprise

operate in different sectors This form helps diversify business lines, spread risk as well as increase opportunities to penetrate into high profitable industries.

By legal form, FDI can be divided into different forms depending on the law of the receiving country The common forms are business cooperation contract, joint venture enterprise, enterprise with 100% foreign owned capital.

Business cooperation contract means a written agreement between two

parties or more than one party to conduct investment in the receiving country, which regulates the responsibility to divide the business results to each party without setting up new entity.

Joint venture enterprise is an enterprise established in the receiving

country on the basis of a joint venture contract signed between two or more parties, or it may be established on the basis of a treaty concluded among the Governments of these countries This form requires establishment of a new legal entity in the receiving country.

Enterprise with 100% foreign owned capital shall be enterprise owned by

foreign investor, established by foreign investor in the receiving country,

managed by himself and responsible for his business results As in the case of joint venture enterprise, this also forms a new legal entity.

In addition, FDI has been implemented in the forms of Build Operate Transfer (BOT), Build – Transfer - Operate (BTO), Build - Transfer (BT), etc.

-Figure1 Classification of FDI

Figure1 Classification of FDI

Source: Amit Kumar(2010)

2.2 Fundamentals of labor market

2.2.1 The concept of labor market

There are currently many different definitions of labor market Each definition emphasizes a certain aspect of labor market The labor market differs from the commodity market in that it represents the majority of the socio-economic manifestations of the whole society and there are many factors

influencing its development Thus, the labor markets of the United States, Japan, Western Europe, Russia, China and Vietnam differ.

Labor market is the space for the exchange of labor services (labor goods) between labor buyers (employers) and labors (employees) (Adam Smith, 1776) Thus, Adam Smith emphasizes that the object of market exchange is labor service.

Labor market is the market in which labor services are purchased and sold through the process of determining the level of employment of workers as well as the level of wage (ILO, 1995) This concept emphasizes the identified labor services through paid employment.

Labor market is where labor demand and supply interact This definition emphasizes the supply and demand of the labor market as other market types (MIT Economic Dictionary, 2018).

Labor market is the place to buy and sell services of labor, in fact, buy labor in a certain scope (The Politburo, 2001).

Many American scientists put forward “The market that guarantees employment for workers and integrates work in the employment sector is called the labor market" or “it's a mechanism, with the help of it the coefficient between the worker and the number of jobs are regulated.” (William P Bridges and Wayne J Villemez, 1991)

“The labor market is understood as a system of social relations, norms and social institutions (including the law), ensuring the re-production, exchange and use of labor”; or “the system of relationships is formed on the basis of value between the employer (the owner of the productive agent) and the employee on the issue of satisfying labor demand and the next issue is to hire as a means to survive.”; or “labor market - it is a special kind of commodity market, whose content is the purchase and sale of goods of special significance - labor power, or the ability to work of human As an economic category, labor market expresses the economic relationship between the person

who owns the commodity, labor ownership - the seller of it and the other, with the owner of the capital - buys labor "( R.H Yagudin and E.V Fakhrutdinova, 2015).

This concept is far more diversified in Viet Nam “The labor market is all labor relations established in the field of labor hiring (including the most basic form of labor, such as hiring and firing labor, salaries and wages, social insurance, labor disputes, etc.), where there is an exchange between free labor and an employer.”; or: “Labor market is formed in the context of liberating workers from factories and increasing unemployment The job market itself is consistent with unemployment, and people who are unemployed are looking for it.”; or “Labor market is the place where social relations between employees and labor buyers (labor users) are made, through various forms of agreement on prices (wages) and other working conditions, on the basis of a written, oral or contractual employment contract”; or "Labor market is the place where the social relations between the employers and employees are realized through the adjustment of wage prices”; or “Labor market demonstrates the relationship between the labor force and the labor user in determining the quantity and quality of labor to be exchanged and the corresponding remuneration.” (Nguyen Van Ngoc, 2015)

Although there are different characteristics, it is possible to see the basic agreement of the labor market definitions on the content and conditions of the labor market: buyers, labors, price of labor service, space of sale, ties among parties From that, it is possible to understand: “The labor market is part of the market system, where there is a process of exchange between a freelancer and a person with a demand for labor This exchange is agreed on the basis of labor relations such as wages, working conditions, social security, etc through

a written or oral labor contract” Labor market is the largest and most important markets in the market system because labor is the most time consuming activity and the result of exchange on labor market is paid employment.

Labor supply refers to the number of workers that are “willing” and able

to work in a particular job or industry at a given wage rate (Richard Blundell and Thomas Macurdy, 1999).

When analyzing labor supply, people pay attention to the age structure of the population Young population structure will provide large and potential labor force in the future From a managerial and statistic perspective, labor supply does not cover workers under age 15, but refers to workers aged 15 and over When labor supply is considered, factors needs taking into account: quantity, quality, structure, shift of labor supply in the labor market.

-The quantity of labor supply can be considered in two aspects:

Labor supply includes all persons aged 15 and above, working and unemployed The actual labor supply is the labor force or the economically active population.

Potential labor includes all working-age persons aged 15 years and over and those who are unemployed and persons of the age group.

-The quality of labor supply is considered in the following criteria: health, education level, professional qualification, attitude of labor

- The structure of labor supply is expressed in the structure of the labor force on the market, according to age, sex, occupational level, economic component, territory, etc.

The supply of labor is influenced by many factors, which may include the following factors:

- Population size and growth rate: This factor is directly proportional to the labor supply in the labor market.

The large size of the labor market is also large If the population growth rate is high, the supply of labor in the future will be supplemented much, again.

-Proportion of population in working age: The proportion of the population aged 15 and above who participate in the labor force increases, the labor supply increases and vice versa.

-Wage, actual wage increase will lead to labor supply tend to increase and reverse.

- Living conditions affect labor supply If the living conditions are low, labors tend to increase working time to increase their income, leading to increased labor supply and vice versa.

-Government policies can increase or decrease the supply of labor, such

as immigration, household registration, household registration, labor migration, etc.

-Education - training is the factor affecting the quality of labor supply If the quality of education - training is good, the quality and structure of labor supply will be high and vice versa.

There are also other factors affecting labor supply such as administrative reform, reform of the state-owned sector, etc.

The labor force participating in the labor market is mainly and directly employed (wage earners or labor relations) There are also unemployed people, people who are not in working age but there is a need to find a job, to work, people in working age but not ready or temporary entry into the labor market but at some point the number of people can enter the labor market due to living conditions, salary level, psychology, work, etc.

Labor supply is one of the elements of the labor market, labor supply must always meet the requirements of the labor market, in particular the employer, in terms of the amount of labor quality, labor structure In labor

markets where there is labor surplus (such as Vietnam), labor supply tends to

be weak, the role of workers is quite passive In labor markets where there is

no labor surplus, the role of the labor force is very important and positively influences the development of the labor market such as balancing the supply- demand of labor force; increasing the quality of labor force, the structure of labor distributed in branches, fields and areas; employees are quick to adapt to new market changes and requirements, thus boosting labor demand, contributing to boosting the labor market.

In addition, the role of labor supply is expressed through its representative organization, the union, in ensuring the rights and interests of workers, participating in building and perfecting the mechanism, labor market legislation; resolving disputes in labor relations, collective labor agreement, contributing to healthy labor markets and labor market development Labor unions generate market power by controlling the supply of labor available to employers; unions do this for the purpose of raising wages and increasing non- wage compensation (benefits) to workers

2.2.2.2 Labor demand

Labor demand can be defined as set of decisions that the employers must take in relation to their workers in terms of hiring, wages, ascents and training (Hamermesh, 1993) In neoclassical terms, the labor demand would have like objective to identify the principles that explains the amount of workers demanded by the companies, the type of workers required and the wages that they are prepared to pay to these workers The labor demand, in this sense, should be understood like a derived demand because is a factor, between others, into a productive process for goods and services (Hamermesh, 1993).

Employment is a state in which labor activities take place (incorporating factors of production for a specific purpose) that bring about income and are not prohibited by law.