THE EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES

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 Ngan Supervisor: Dr Nguyen Thi Viet Hoa Hanoi - 2019 i DECLARATION I hereby declare that this master thesis is the scientific research of my own which made on the basis of theoretical studies, field surveys and under the direction and supervision ofDr Nguyen Thi Viet Hoa The research contents and results of this thesis are completely honest These data and documents for the analysis, review and evaluation were collected from various sources which are fully listed in the reference list I am fully responsible for the content of this master thesis as well as this declaration Hanoi, 21 February 2019 Author Ho Thi Hong Ngan ii ACKNOWLEDGEMENT During the completion of this master thesis, I received the guidance and valuable help from the lecturers, siblings and friends With great respect and deep gratitude, I would 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 with comprehensive guide from choosing the topic, outlining the thesis and editing this research Professors and lecturers from FTU as well as World Trade Institute in the Master of International Trade Policy and Law Intake Four, who not only spread profound knowledge and information in the fields of economy and law but generated strong motivation 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, my colleagues and my friends, who have always by my side encouraging, supporting, contributing valuable ideas and giving me favorable conditions for me to complete this scientific research iii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii LIST OF ABBREVIATIONS vi LIST OF FIGURES viii SUMMARY OF THESIS RESEARCH RESULTS ix CHAPTER 1: INTRODUCTION 1.1 Research Rationale 1.2 Literature Review 1.3 Research objectives 1.4 Research questions 1.5 Scope of research 1.6 Research methodology 1.7 Thesis outline 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 18 2.2.2.1 Labor supply 18 2.2.2.2 Labor demand .20 2.2.2.3 Labor cost .21 2.2.3 Functions of labor market .22 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 28 iv 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 ASEANdue 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 cost 40 3.3.2 Effects of FDI on labor demand……………………………………….44 3.3.3 Other effects of FDI 44 3.3.3.1 Effects on productivity 44 3.3.3.2 Effects on inequality 52 3.3.3.3 Effects on working environment 58 CHAPTER 4: RECOMMENDATIONS FOR VIET NAM ‘S LABOR MARKET 62 4.1 Perspectives of attracting FDI into Viet Nam 62 4.1.1 Top investment destination in ASEAN 62 4.1.2 Focus on the quality of FDI projects 63 4.2 Some experiences from ASEAN countries 65 4.3 Recommendations for attracting FDI to strengthen the positive effects of FDI on the labor market of Vietnam 68 4.3.1 Promote the investment environment of Vietnam to attract FDI inflow 69 4.3.2 Hold annual meetings/seminars to exchange and learn between Vietnamese and foreign businesses and vice versa to increase joint ventures 71 v 4.3.3 Encourage the use of Vietnamese labor at all levels of management in the FDI enterprises 72 4.3.4 Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam .73 4.3.5 Promulgate legitimate policies to protect the right of labor force 74 4.3.6 Raising awareness of the workers about MRAsand exploring the possibility of extending MRAS to more sectors 75 4.3.7 Reducing protection for domestic labor in AEC 77 CHAPTER 5: CONCLUSION .78 REFERENCES 82 vi LIST OF ABBREVIATIONS Abbreviation Full name ADB Asian Development Bank AEC ASEAN Economic Community ALMM ASEAN CIT CLMV CMS ASEAN Labor Ministers Meeting Association of Southeast Asian Nations Corporate income tax Cambodia, Laos, Myanmar, Viet Nam Centre for Multilateralism Studies EU European Union FDI Foreign Direct Investment GSO General Statistics Office IMF International Monetary Fund ILO International Labor Organization M&A Merger and Acquisition MNEs Multi-national enterprises MSEs Micro and Small Enterprises MoLISA Ministry of Labor – Invalids and Social Affairs MOMT Ministry of Manpower and Transmigration MRAs Mutual Recognition Agreements NTC OECD OLS National Training Council Organization for Economic Cooperation and Development Ordinary Least Square vii SMEs Small and Medium – Sized Enterprises SOEs State – Owned Enterprises PCI Provincial Competitiveness Index TNCs Transnational Corporations TVET Technical and Vocational Education and Training UN UNCTAD United Nation United Nations Conference on Trade and Development USA United States of America VBF Viet Nam Business Forum VCCI Viet Nam Chamber of Commerce and Industry WTO World Trade Organization viii 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 Labor force in ASEAN member states in 2017 36 Figure 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 73 shift from quantity to quality, focus on high-tech and environmentally friendly technology Furthermore, attracting foreign investment with the advantage of cheap labor should be transformed into competing with high quality human resources The authorities had better be active in training and fostering the labor force, meeting the needs of enterprises, especially in the fields that Vietnam is looking to attract investment Supportive industry development will encourage the application and use of high technology Accordingly, the workforce has the opportunity to meet, learn, improve skills, and contribute to accelerate the process of industrialization At the same time, this helps limit the import of products from abroad, enhancing the employment of local people, creating growth in the economy 4.3.4 Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam In order to have a basis for calling for investment in education services, it is necessary to thoroughly study the demand for education at each educational level, each major and each mode of education, thus planning for the network of schools, education and training establishments The requirements of this plan are to indicate the development demand for each period and on that basis, the educational management agency shall balance the capital portion within the state budget's capacity, the rest are called from other sources, in which there is FDI This will be the most important information for investors to refer when they look for investment opportunities However, this plan should also be understood in a flexible way, meaning that not only the planned projects are allowed to be implemented, but if during the research, the investor finds that one can invest in some education and training establishments which are not yet included in the plan, these ideas and projects still need to be considered and appraised for the granting of investment certificates if they satisfy the conditions prescribed by the current regulations Another issue that needs attention in the process of guiding and supporting investors in education and training is finding a place The quality of international 74 education and training institutions is a requirement of a relatively large area for the construction of lecture halls, classrooms, libraries and research facilities and attractive to students So far, very few educational institutions licensed can meet this requirement, but most of them are small-scale facilities As a result, along with site rent incentives to reduce part of the cost of project construction, localities need to plan the specific location to fit the specific characteristics mentioned above and provide extensive support to foreign investors to research, study, survey those locations With the focus on the construction of welfare facilities and housing for workers, the need for site planning for vocational schools and skill training centers is relatively high In order to promote FDI in the field of education and training, in the immediate future, it is necessary to develop and implement investment promotion activities, which requires good research and preparation of information on the project needed investing as well as information on the investment ability of partners to have appropriate movement, especially follow up, organize guidance, support investors from the time they intend to invest in Vietnam to have the basis for idea formation and project development 4.3.5 Promulgate legitimate policies to protect the right of labor force Relevant authorities should direct all levels to regularly monitor and supervise the use of labor and implement labor law provisions in enterprises to promptly inform and recommend functional agencies to protect the rights of labor; instruct employees about their rights and obligations in labor relations; improve the role of trade unions at enterprises; advise and assist workers to avoid bad elements to entice and provoke insecurity in the locality Specific policies should be in place to protect vulnerable groups, limiting the layoff of workers over 35 years old The government should study and promulgate regulations on tightening, limiting the fact that FDI enterprises lay off workers after the age of 35 Along with that, there are regulations and expansion of insurance benefits, social insurance, health insurance, unemployment insurance when labor is fired after 35 75 In addition, it is necessary to design a comprehensive policy for workers who have lost their jobs, as well as to promote communication activities to increase access to information for workers in seeking employment Labor policies must be developed to respond to social problems arising from the change of production structure and technology innovation of enterprises Besides, local authorities should actively review and grasp the situation of FDI enterprises with a large number of workers in the province having a policy for senior employees to quit their jobs, promptly advise the provincial People's Committee to hold dialogues with FDI enterprises to find reasonable solutions to ensure social security for workers, minimize the work for older workers to leave, affecting the rights and interests of workers in the province Recently, the Prime Minister has agreed to let the MoLISA formulate a project on organizing the training and retraining of unemployed laborers who are unemployed from FDI enterprises or assist in transferring their jobs when these enterprises change the production structure This project will be implemented in a good way, ensuring rights for employees FDI enterprises that make important contributions to the development have created jobs for many workers Therefore, it is necessary to raise the position, role and voice of trade union at FDI enterprises The legal system should contain specific provisions on the protection of trade union officials in relation to business owners, strengthening the training to improve the quality of trade union officials, especially collective bargaining At the same time, it is necessary to raise awareness among business owners about the role, importance of trade unions in enterprises so that trade union is really a link between business and workers, protecting legitimate interests of union members and laborers 4.3.6 Raising awareness of the workers about MRAsand exploring the possibility of extending MRAS to more sectors Currently, ASEAN has MRAs in place for eight sectors, which allow for a worker’s skills, experience, and accreditations to be recognized across ASEAN, 76 permitting them to work outside their home country MRA in engineering service (2005) regulates that an engineer must first hold a license issued by the regulatory body of his or her home country and have at least seven years of work experience following graduation, two of which entail significant work The application would then be submitted to the ASEAN Chartered Professional Engineers Coordinating Committee for review and, if successful, the applicant would be permitted to work in other ASEAN countries as a “Registered Foreign Professional Engineer.” In contrast, case-by-case assessments have been eliminated entirely for the tourism sector, allowing automatic recognition for 32 tourism-related occupations One of the most common weaknesses of Vietnamese workers is language, which leads to their inferiority in working abroad Not understanding or not understanding fully the favorable mechanisms, agreements would make Vietnamese workers lag behind others, even workers in ASEAN such as Filipino Therefore, organizations such as Viet Nam Association of Manpower Supply should be the focal point to educate the workers about those mechanisms including MRAs Job fairs should be held more frequentlyintegrating orientation and introduction about MRAs so that workers can acquire information officially Once they know about the MRAs, they would find opportunities to improve their skills to match the demand of employers Governments of ASEAN countries should take into consideration more sectors to be included in MRAs The more sectors the more choice for workers In ASEAN Economic Ministers Meeting, the agenda should include more labor related issues and discuss the possibility of MRAs in other economic sectors.The government of Viet Nam should build the national qualification framework according to the approved ASEAN framework, promoting the formation and development of credit conversion system and MRA recognitionbetween regional ASEAN and the world At the same time, it should promote the plan to organize training in occupations agreed by ASEAN 77 4.3.7 Reducing protection for domestic labor in AEC ASEAN countries have certain defenses These are the work permit rules and regulations of each country in the AEC That is, when overcoming the skill barrier (common), workers must also overcome the technical barriers of each country (separate) as well as depending on the labor market demand in that country For example: Vietnamese doctors who want to work in Thailand must meet the requirements of mastering Thai This requirement is quite hard for doctors even who possess high professional qualifications Similarly, in many countries, employers must prove that they cannot find good workers in their home country with the same salary to recruit foreign workers AEC should be the mechanism that benefits member countries’ economies Labor force plays an essential part in each economy Facilitating the recruiting process would provide workers more favorable conditions to work abroad 78 CHAPTER 5: CONCLUSION FDI is extremely pivotal to the developing economies, “with the enormous potential to create jobs, raise productivity, enhance exports and transfer technology, FDI is a vital factor in the long-term economic development of the developing countries” (UN, 2000) FDI provides employment open doors and job opportunities for host nation citizens Workers are paid higher wages and this empowers them to have an enhanced way of life New companies arise prompting the expanded improvement in production and manufacturing FDI enhances and improves trading assets and resources of the host nation Examination has demonstrated that, nations that get FDI from worldwide associations have lower financing costs, consequently their traded items are much less expensive and this improves exports Increased capital inflow is generated by taxation in host nations is principally due to FDI as well In order to limit the challenges and grasp high quality labor mobility opportunities in ASEAN, the burden of finding a solution to this conundrum lies within the domain of the government and private sector Each member country's government should have solutions to liberalize the flow of skilled labor in the bloc According to Vineles, since both depend on a skilled labor force, cooperation by both sides is necessary in ensuring the workforce is industry-ready and competitive The solutions may be taken into account are as follows: For the government, it is necessary to promote the information and communication on AEC, especially on highly skilled labor and specific standards announced and applied by other ASEAN countries Each member country's government must vigorously undertake the planning and implementation of crossborder skilled labor liberalization Each country should voluntarily and seriously implement the agreements on mutual recognition Arranging and developing training institutions and vocational training centers to adapt to the conditions of establishment of the AEC, in which attention should be 79 paid to language training in ASEAN countries Certificates of ASEAN-recognized agencies should be published for enterprises and people to access For enterprises, it is necessary to actively study the ASEAN market, including the labor market, in order to better understand the professional standards in order to build the plan of adaptation In addition, it is necessary to establish a system of highly skilled labor training companies of all kinds of trades announced by ASEAN and combine with training institutions and certification bodies to provide the best possible environment for workers entering the labor market in the AEC Coordination between the public and private sectors is necessary in order to help private enterprises meet skill demands The government should play facilitator and also provide incentives to private companies that provide training to their employees Cooperation across the board – by the government and industry players – would be useful when determining emerging skills that are required by particular industries Vineles points to skills required by small and medium enterprises (SME) which provides between 60 and 97% of employment in the region “Strengthening the skills of the SME workforce should partly be by encouraging multinational companies and corporations to provide training schemes for them, especially that some of these enterprises supply components to the international manufacturers,” he added Besides that, governments should also emphasise the importance of technical and vocational education and training (TVET) It would help youths develop necessary skillsets so that they would be industry-ready upon entry into the workforce Governments in ASEAN should also be encouraged to recognise and enforce internationally accepted labor standards Indeed, to lift standards, local regulations and norms count as much as the activity of the FDI enterprise itself 80 Furthermore, ASEAN should focus on investment in science and technology development, natural science ASEAN countries place importance on the necessity of science and technology in human resource development This is expressed through "ASEAN - Vision 2020" which sets long-term goals for development science and technology In order to overcome the shortage of scientific and technological staff, countries have adopted policies to promote the development of this field Some policies could be taken into consideration are as follows: Firstly, each country should increase the number of teachers in the fields of science and technology to meet the requirements through various measures, such as granting scholarships to science and technology teachers as well as many social benefits for teachers Secondly, each member should increase the percentage of graduates in science and technology every year, while emphasizing the role of private sector in training scientific and technological officials and promote cooperation with foreign educational institutions Thirdly, each country could develop scientific and technological human resources through bringing students abroad to train on the basis of the government scholarship The goal of the project is to create leading science and technology experts in the highest priority areas of materials and energy technology, computers and electronics, basic science and technology Scholars will return to country to work in research and training institutions Gains in productivity are needed to ensure that ASEAN continues to remain competitive in the global economy Many workers in ASEAN have low levels of educational attainment and work in informal micro and small enterprises (MSEs) that are characterized by low levels of labor productivity and unregulated working conditions Moreover, the government's capacity for improving and expanding training facilitates is limited Knowledge of workplace strategies for improving productivity, such as work-time management, ergonomics, and health and safety measures, is also limited Policy interventions and the dissemination of best 81 practices are urgently needed, including quality education and skills investment, as well as investment in improved organizational and managerial capacities, in order to promote productivity improvements Building a culture of workplace training may need to be incentivized by subsidies or grants to drive a more rapid uptake Close cooperation between ASEAN countries should aim to create a highly specialized staff capable of working in an international environment Developing a highly skilled and professional ASEAN workforce is the goal of the AEC as stated in the ASEAN Charter Bilateral cooperation activities between countries in the region are paid attention mainly through project programs and with a number of third partners 82 REFERENCES Books Blundell, R and T MaCurdy (1999|)Handbook of Labor Economics Loc, VC (2012) International Investment, Ha Noi: Hanoi National University Publishing House Ngoc, N.V (2015)Economics Dictionary, Ha Noi: National Economics 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competitiveness in the period 2013 – 2020 Official reports of organizations 51 International Labor Organization, Labour and Social Trends in Indonesia 2014–2015, Indonesia 2015 52 Ministry of Planning and Investment, Proceedings of the 25-year conference of foreign direct investment in Vietnam, Hanoi 2013 53 Ministry of Industry and Trade, Vietnam Export-Import Report 2017, Hanoi 2018 54 Singapore Ministry of Manpower, Singapore Yearbook of Manpower statistics 2018, Singapore 2018 55 UNCTAD, World Investment Report 1998: Trends and Determinants, New York and Geneva 1998 56 World Bank Group, Lao PDR Economic Monitor, Washington DC 2018 57 World Economic Forum, Human Capital Outlook ASEAN, Malaysia 2016 Theses 58 David M (2015) The impact of FDI on labor market measures: evidence from Sub-Saharan Africa [Master thesis] University of San Francisco 87 59 Lukáš B (2007) Impact of Foreign Direct Investment on the Labor Market in the Czech Republic and other European Countries [Diploma thesis]University of Economics 60 Vathana N (2015) The effects of FDI on economic growth and inequality in Laos [PhD dissertation] Reitaku University ... of FDI on the labor market of ASEAN countries Chapter 4: Recommendations for Viet Nam‘s labor market Chapter 5: Conclusion 10 CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR. .. Functions of labor market .22 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. .. 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