Impact of Foreign Direct Investment on Exports Case for Vietnam (1988-1995)

INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS NATIONAL UNIVERSITY- HCMC COLLEGE OF ECONOMICS VIETNAM VIETNAM-THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS IMPACT OF FOREIGN DIR.EC'f INVESTMENT ON E,'{PQRTS CASE FOR VIETNAM (1988-1995) by NGUYEN TO KlEU TRINH KAREL JANSEN, Ph D NGUYEN TRi HUNG, M.A A Lhe,ris submilled in par!ialfoljilmenl if!he T()([lliremenl for !he degree if MASTtR Of ARTS lll tCOMOMICS Of DtlU.OfMUIT I :!_,_ : - • : I Hlf Vlf:: ~ \ii ;; ; ::\:~: /fq•'-~ HO CHI MINH CITY, December 19~ - - ·- CERTIFICATION "I certify that the substance of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that to the best of my knowledge any help received in preparing this dissertation, and all sources used, have been acknowledged in this dissertation" Signature Nguyen To Kieu Trinh Date : December, 20th, 1996 I wish to express my thanks to authors whose thoughts are foundation for my thinking in this research paper ABSTRACT In the context of "'Open door" and "Doi moi" policies, Foreign Direct Investment inflows in Vietnam have been considered, among other things, as having a significant impact (either direct or indirect) on the development process, especially on the export performance of Vietnam The export increases steadily every year from 1988 at annual average growth rate of 32.02%, especially since 1991 Average annual growth rate in period 1988-90 was 44.0% and 44.4% in 1995 The inflows of Foreign Direct Investment firstly concentrated in mineral and services (mainly hotels and tourism) sector, but recently it has been shifted to industrial sector This trend is appropriate for the process of industrialisation and modernisation of Vietnam It increases every year, from only 366 million USD of investment capital (implemented capital of 60 million USD) in 1986 up to 6,400 million USD (implemented capital of 2,000 billion USD) in 1995 Total investment capital approached 18,228 million USD and implemented capital approached 5,878 million USD from 1988-95 Increase in exports in the context of 'Open-door' policy, among other things, in period 1988-1995, reflected the response of nice achievement, not only in short but also in long run, from the positive influence of Foreign Direct Investment although that this influence was still modest Identifying the impact of Foreign Direct Investment on export performance of Vietnam from 1988 till 1995 is the subject of this paper 111 Thanks are due to my classmates Hoang Due Phu, Pham Kien Phuong and Nguyen Anh T uan for their helps and interests, especially, Nguyen The Minh for his tireless assistance in providing useful data Words of thanks are also due to my close friend Do Dinh Nam for his tireless help in providing useful documents I acknowledge with thanks Ms Dang thi Kim Chi, librarian; Ms Dinh Thi Anh Nguyet, Secretary of Project for their interests and material provisions; and my classmates and all friends for their support throughout WorO.S of thanks are due to my family Many are worthy of mention To them, I am eternally grateful Finally, this work is devoted to my parents, Nguyen Huu Duy and Cong Tang Ton Nu Thi Le Hong, who gently bestowed me with curiosity and concern about the world Needless to say, any remaining mistakes or omissions are entirely mine IV TABlE OF CONTENTS Page ABSTRACT ACKNOWLEDGEMENTS 11 TABLE OF COTENTS IV LIST OF TABLES V11 LIST OF CHARTS Chapter Chapter X INTRODUCTION 1.1 General Information 1.2 Statement of the Problem 1.3 Objectives of the Study 1.4 Organisation of the Study THEORETICAL FOUNDATION AND EVIDENCES OF FOREIGN DIRECT INVESTMENT AND ITS IMPACTS ON EXPORTS 2.1 Definition of FDI 2.2 Theoretical Foundation of FDI and evidences of its Impacts on Exports 2.2.1 Theoretical Foundation ofFDI 2.2.1.1 Models and Forms ofFDI a) Models ofFDI a.l Export-Oriented FDI (EO FDI) a.2 Import-Substituting FDI (IS FDI) a.3 Market- and Technology- Accessing FDI \' a.4 Diversified FDI (DI FDI) 2.2.1.2 10 b) Forms ofFDI 10 *Summary 11 Flying-Geese Pattern of FDI in Asia, Globalization of 11 Production, Japanese-Type FDI and Sectoral Composition 2.2.2 *Summary 12 Globalisation of Production 12 Japanese-Type FDI 14 Impacts ofFDI on Exports 16 a) Review of Theories ofFDI 16 * Product-Cycle Theory 16 * Exchange rate FDI Them y 19 * Eclectic Theory 21 *Swnmary 22 b) Evidences about the Impact of FDI on Exports 23 * FDI as a Source of Export Growth 23 * More evidences 25 * Evidences from previous Studies and Surveys 36 c) Evidences from Case Studies 38 c.l Thailand- Implied Policy 38 c.2 China -Implied Policy 42 c.3 Singapore- Implied Policy 45 Summary of the Impact of FDI on Exports of the Host 49 Country and Implied Policy for Attracting FDI Cbapter3 FDI IN VIETNAM AND ITS IMPACT ON VIETNAM'S EXPORTS 3.1 General Information 51 3.2 Impact ofFDI on Exports 66 VI Chapter Chapter * Evidences * More Evidences 66 a Some evidences from industrial and mining sector 77 b Hotels and Tourism 87 c Export Processing Zones (EPZs) 88 *Remarks 91 73 ESTIMATION MODEL *Justification for the Use of the Model 93 Conclusion 96 RESULTS, SUMMARY, IMPLICATIONS AND CONCLUSION, SUGGESTION POLICY FOR THE FURTHER STUDY 5.1 Results of the Study for the Case of Vietnam 97 5.2 Summary and Conclusion 98 5.3 Policy Implications 98 4.4 Suggestion for Further Study 99 Box 100 Box2 102 Table 17.2, 19.2 103 Table 20.2, 23.2 104 Table 46 105 APPENDIX REFERENCES 106 Vll UST OF TABLES Page 01 Selected Capital Flows to Developing Countries 01 02 Top-10 FDI-Received Developing Countries in 1970s and 1980s 03 03 Average Inflows of FDI to Developing Regions, by Region, 13 1970-79, 1980-85 1986-90 04 Monthly Yen Appreciation after The Plaza Accord 20 05 Net FDI, 1982-1989 20 06 Labour Force by Region, 1950-2020 26 07 The Hourly Cost of Labour per Skilled Labour in 1993 27 08 Exchange Rate (Annual Average) and Real Exchange Rate 28 (RER) 09 The Increase of Wage Rate (Monthly earnings) 29 10 Foreign Direct Investment in Selected Asian Countries and 29 China 11 The World's Imports from 1980-94 30 12 Growth Rate of Real GDP 31 13 Merchandise Exports of NIEs, ASEAN4, Asia and the World 32 14 Export Composition of NIEs and ASEAN4 33 15 FDI by Sector 37 16 The Share of Foreign Affiliates in Manufacture Exports, 38 Selected Years and Countries 17 Selected Data for Thailand 39 Vlll 18 Trends in FDI, Thailand 1980-89 40 19 Selected Data for China 43 20 Selected Data for Singapore 46 21 Contribution of Foreign Capital to Singapore's Manufacturing 47 Sector (1975-89) 22 Comparative Performance of Foreign and Local Establishments 48 in the Singaporean Manufacturing Sector, 1989 23 Selected Indicators for Vietnam 52 24 Average Growth Rate of Some Selected Indicators 56 25 The Top-15 Foreign Investors in Vietnam 57 26 Investment Projects by Type of Economic Activity 60 27 Allocation of FDI in Sectors of Vietnam from 1988-95 61 28 Sectoral Shares in GOP by Economic Sector 59 29 Vietnam's Major Exports from 1988-95 62 30 Annual GDP Growth Rate by Sector in Vietnam's Economy 64 31 Forms of FDI, on Annual Basis (by July 7, 1994) 64 32 The 15-Most-Invested Provinces 65 33 Oil Exports from 1986-95 68 34 Estimated Annual Oil Production to the Year 2000 68 35 Planned Real GOP Growth Rate from 1996-2000 69 36 Comparing Incentives for FDI in ASEAN Countries 71 37 The Contribution of FOI projects to the Merchandise Exports of 74 Vietnam, 1988-95 38 Structure of Vietnam Merchandise Exports from 1988-95 78 39 Annual Exports of Textiles and Garments, 1988-95 80 40 Upgrading Projects of Cement Plants 82 41 Cement Joint Ventures Licensed and Proposed Cement Projects 83 42 Existing Steel Joint Ventures 84 lX 43 Moto-Bike Demand in Vietnam, 1996-2000 86 44 Some Indicators of Tourism in Vietnam 88 45 Land Area of EPZs and IZs 89 17.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of Thailand, 1971-92 19.1 Regression Estimates of the Impact of FDI on the Exports 95 Performance of China, 1979-92 20.1 Regression Estimates of the Impact of FDI on the Exports 96 Performance of Singapore, 1971-93 23.1 Regression Estimates of the Impact of FDI on the Exports 97 Performance of Vietnam, 1988-95 17.2 Full Results for Thailand Case 103 19.2 Full Results for China Case 103 20.2 Full Results for Singapore Case 104 23.2 Full Results for Vietnam Case 104 46 105 Selected Data for United States 96 Table 20.1 Regression Estimates of the Impact of FDI on the Exports Performance of Singapore (1971-1993) Explanatory Variable Coefficient CONSTANT 1.3998216 (3.0387152)* 7.4792123 FDIGl (6.8029588)** RER -0.2847473 (-1.2218533) Notes: * ** R-squared 0.716134 F-statistic 25.22791 Durbin-Watson Stat Number of observations 1.898790 23 Significant at 1% Significant at 2% FDIGJ: FD/IGDP {both FDI and GDP at 1987 USD price) The results from table 17.1 19.1 and 20.1 for Thailand, China and Singapore cases above, show that the estimated coefficients of FDI are significantly different at zero at 10%, 1% and 0.2% significance level In addition, the estimated coefficient of FDI have the expected positive sign, and is highly statistically significant In all three cases, although the estimated coefficients ofRER have the wrong signs, they are all very statistically insignificant Based on the results presented in the table 17.1, 19.1 and 20.1, the model explains more than 71% of the variation of Exports (92% for Thailand, 86% for China and more than 71% for Singapore) in the period studied One can conclude that FDI can have a positive and significant effect on the export performance of the host country: Thailand, China and Singapore Conclusion: After the justification for the use of model basing on aforementioned analysis, related theories of exports and then the case study of Thailand, China and Singapore It can be seen that this model can be used to test the expected positive impact of FDI on the export performance of the Vietnam The result of the in three case studies of Thailand, Singapore and China are high confidential The next subsequent part, this model will be used to test for the case of Vietnam from 1988 till 1995 to confirm our expectation aforementioned that FDI has the positive impact on exports of Vietnam 97 CHAPTERS RESULTS, SUMMARY, CONCLUSION, POLICY IMPICATIONS AND SUGGESTION FOR FURTHER STUDY 5.1 Results of tbe Study for tbe Case of Vietnam As being discussed earlier, the equation (5) will be used to test the impact ofFDI on export of Vietnam from 1988-1995, with observations The data are from table 23 and results are presented in the following table 23.1 (the full results are in table 23.2 in Appendix): Table23 Regression Estimates of the Impact of FDI on the Exports Performance of Vietnam (1988-1995) Explanatory Variable Coefficient CONSTANT 0.0888531 (1.4995954) 1.1127084 (6.1303781)* 5.414E-06 (1.0669144) FDIGI RER R-squared F-statistic Durbin-Watson Stat Number of observations Notes: 0.883791 7.605215 2.436933 *Significant at 0.2% FDIGI: FDIIGDP (both FDI and GDP at 1987 USD price) The result of table 23.1 , for Vietnam case above, shows that the estimated coefficient for FDI, is significantly different at zero at 0.2% significance level On the whole, the estimated coefficient of FDI has the expected positive sign, and is highly statistically significant Although that RER has the expected positive sign, it is not statistically significant This situation means that in the period studied (88-95), RER does not have any impact on the exports of the economy or its influence to exports is insignificant This thing is appropriate with the result being analysed in chapter three The coefficient of FDI is smaller than in the cases of Thailand, China and Singapore because in Vietnam, as aforementioned, FDI has just flown into the country from 1988, therefore, its impact on export of Vietnam is rather modest 98 5.2 Summary and Conclusion The main purposes of this study are to: (i) review the theoretical foundation ofFDI and argue its impact on export performance of the host country, (ii) estimate this impact for Vietnam case and (iii) recommend some policy options through implied policy while studying I begin with the discussion of theoretical foundation of FDI and its impacts on exports of the host country The discussion includes an explanation of FDI and the possibility of FDI can influence the export performance of the host country, then I draw out some main characteristics of host country and factors that can make FDI become more export-oriented and in that case FDI does really have the influence on exports of the host country In addition, the discussion also consists of various evidences from previous fmdings on the impact of FDI on exports to case studies (Thailand, China, Singapore) with the brief implied policy for each case of how to attract more FDI in a beneficial way and with the aim of making the exports of the host country become better Then, the discussion goes into details the FDI in Vietnam and its impact on exports of Vietnam and from this discussion, I also point out some remarks which can help policy makers in giving out an efficient policies The estimation model is export function ofFDI/GDP and RER Following the promulgation of Foreign Investment Law in December 29, 1987 and the following related laws and adjustments in the context of "Open door" and "Doi moi" policies, Vietnam has received more and more FDI in all sectors in the economy, especially with the more and more proportion for industrial sector This inflow of FDI does have a positive impact on exports although this impact is not on high level that it would be due to many reasons discussed above Based on the results of the econometric analysis, the inflows of FDI have had a positive and significant effect on export performance of the Vietnam However, these results also point out that its impact on exports of Vietnam is not high as it is in other countries such as Thailand, China and Singapore 5.3 Policy Implications Besides providing a further understanding the impact of FDI on export performance of Vietnam, this study also points out the importance, in both short and long run, of "Open door" and "Doi moi" policies in Vietnam with trade liberalisation; as well as the other related policies, among other policies, that have been mentioned at the end the chapter two; and some important remarks in the chapter three helping the policy makers; with the only aim of attracting more FDI in a beneficial way both for the economy and for the exports 99 5.4 Suggestion for Further Study As we have already known, FDI, day by day, shows its important role in the process of industrialization and modernization of Vietnam Besides the its contribution to exports of Vietnam, it also brings along many marketing or managerial skills, technology or machines, employment, It also helps host country to economise a larger amount of foreign exchange by substituting the imports of some commodities (such as beer, cement, auto, ) In addition, FDI often accompanies with the import of machineries (often with well-known phenomenon of 'transfer price'), remittance of profits, One then wonders ourselves the impact ofFDI on balance of payments of host country in the short run as well as in the long run This problem will be my suggestion for the further study for the host country: Vietnam 100 APPENDIX Box Main Foreign Investment related Laws a MBin Laws and Decrees related to Foreign Investment • Foreign Investment law dated December 29, 1987 and thereafter amendments dated July 30, 1990 and December 23, 1992 • Land law was passed by National Assembly dated July 14, 1993 and went into force from October 15, 1993 • Law of Corporation Bankcruptcy, National Assembly passed in December 30, 1993 • Labour Law dated June 23, 1994 • Law of Revenue Tax, amendment thereafter in July 5, 1993 and October 28, 1995 • Law of Special Sales Tax, amendment thereafter in July 5, 1993 and October 28, 1995 • Export and Import Law dated December 26, 1991 and amendment thereafter in July 5, 1993 • Oil Law dated July 6, 1993 • Law of Environment dated December 7, 1993 • Decree of·Technology Transfer dated December 5, 1988 • Decree of industrial-possessed right protection dated January 1, 1989 • Decree of right and obligation of foreign individuals and organisations who (which) rent land in Vietnam., dated October 14, 1994 • Decree ofland tax and amendment thereafter in May 19, 1994 • Decree of natural resources dated December 28, 1989 • Decree of income tax with high-income person amendment in May 19, 1994 • Decree of Customs dated February 2, 1990 • Decree of immigration, migration, residence, transportation of foreigners m Vietnam, dated February 21, 1992 b Regulations, Agreements and other sub-law Documents • Regulation No 29/CP dated May 27, 1993 about the measures to encourage overseas Vietnamese investment • Regulation No 39/CP dated June 9, 1993 regulated function, obligation, authority and mechanism organising of SCCL • Regulation 322-HDBT of the Council of Ministers dated October 18, 1991 promulgated the Export Processing Zones Regulation • Regulation 87-CP dated February 18, 1993 of Government about the investment rules of BuidOperate-Transfer (BOT) 101 • Regulation 177/CP dated October 20, 1994 of Government about the rules of managing building • investment Regulation 191/CP dated December 28, 1994 of Government about the rules of establishment, estimation and implementation the foreign invested projects • Regulation 192/CP dated December 28, 1994 of Government about the rules of Industrial Zones • • Regulation 201-HDBT dated December 28, 1988 about rules of licence trade (trade mark, knowhow, ) Circular 1034/HTD-TD dated August 1, 1992 ofSCCI about reploughing by profit • Circular 31ffC-TCDN dated July 18, 1992 of Ministry of Finance about depreciation rule of • foreign invested enterprises Decision 1417ffC-TCDN dated December 31, 1994 of Ministry of Finance about the rental for land, water surface, sea surface applicable for the forms foreign investment in Vietnam • Circular 48ffC-TCT dated June 30, 1993 of Ministry of Finance about instructing the implementation the benefit tax rate and exemption or reduction for foreign invested projects • Circular 30ffC-TCT dated July 18, 1992 of Ministry of Finance about instructing the implementation tax obligation for foreign individuals or organisations investment forms not in foreign investment law in Vietnam • Circular No 02/BXD-QLXD dated January 26, 1993 of Ministry of Building about instructing the management construction the foreign invested projects in Vietnam • Circular 90ffC-TCf dated November 4, 1994 of Ministry of Finance about instruction the consideration the cases of tax exemption, tax drawback for foreign invested enterprises • Circular 215-UB/LXT dated February 8, 1995 of SCCI instructing direct the foreign investment activities in Vietnam • Agreements about avoiding double taxing Sources: Tran Xuan Dinh (1995), Tim Hieu Phap Luat ve Dau Tu Nuoc Ngoai Tai Vietnam Dong Nai Publishing House, Vietnam; and Cac Qui Ding Phap Luat ve Dau Tu va Bao Ho Dau Tu Nuoc Ngoai Tai Vietnam Nha Xuat Ban Chinh Tri Quoc Gia, tap 111994 and tap If/1995 102 Box2 Incentives of EPZs and IZs The main reasons for investors to locate in EPZs or IZs is to gain access to infrastructure that would otherwise be lacking, as well as simplification of administrative procedures for investment, which remain otherwise complicated and burdensome In addition to these basic benefits of investing in EPZs or IZs, investors are offered a list of other incentives Incentives offered to investors in EPZs are different from IZs Main incentives available for EPZ investors are as follows: • Exemption from import duty for equipment and materials needed for project construction as well as for the manufacture of goods or provision of services • Exemption from export tax • Exemption from corporate income tax for four years for manufacturing enterprises and two years for service enterprises starting from first profit-making year After the second year or fourth year, whichever is applicable, the enterprises will pay its tax liability at a much lower rate compared to those applicable to enterprises outside the EPZs For production enterprises, the rate is 10% in EPZ versus 15% outside the EPZ; and 15% for service enterprises in EPZ versus 25% for those projects outside the EPZ • Drawback for corporate tax, if any, paid on the sum of profit which has been replough in Vietnam for a duration of three years • Lower withholding tax for repatriated profit; 5% for EPZ firm versus 10% for those outside EPZs • Export goods produced for exports are exempt from turnover and special sales tax Main incentives for investors in IZs include • Exemption from profit tax for the first two years of its profit making years for manufacturing enterprises Thereafter, firms producing for the domestic market shall pay a profit tax of 18% while those which export 800/o of their products will pay a profit tax of 12% • Exemption from profit tax for the first year of its profit making years for service enterprises Thereafter, firms will pay a profit tax of22% • Other taxes will be paid in accordance with existing regulations applicable to firms outside the EZ Source: Vietnam Business News July-August 1996, pp 14 103 Table 17.2 Full Results for Thailand Case Variable c FDIGGl RER AR(l) R-squared Adjusted R-squared S.E of regression Log LikeLihood Durbin-Watson stat Coefficient 1.4073607 1.6901132 -0.0007826 0.9926620 0.922691 0.909048 0.018630 56.06335 2.014430 T-Stat STD Error 0.1181142 11.915257 1.8887920 0.8948117 -0.2688726 0.0029108 11.837784 0.0838554 Mean of dependent var S.D of dependent var Sum of squared resid F-statistic Prob (F-statistice) 2-Tail Sig 0.9074 0.0761 0.7913 0.00000 0.249369 0.061775 0.005900 67.63198 0.000000 Notes: FDIG1: FDIIGDP, both FDI and GDP in USD 1987 price Table 19.2 Full Results for China Case Variable c FDIGGl RER AR(1) R-squared Adjusted R-squared S.E of regression Log LikeLihood Durbin-Watson stat Coefficient 7.7980557 1.2116585 -0.0070154 0.9986448 0.864275 0.819033 0.020726 34.33679 2.003573 STD Error T-Stat 624.37380 0.0124894 2.1629675 2.5601834 0.0170427 -0.4116401 5.8800089 0.1698373 Mean of dependent var S.D of dependent var Sum of squared resid F-statistic Prob (F-statistice) Notes: FDIG1: FDJ/GDP, both FDI and GDP in USD 1987 price 2-Tail Sig 0.9903 0.5890 0.6902 0.0002 0.155264 0.048721 0.003866 19.10346 0.000305 104 Table 20.2 Full Results for Singapore Case Variable Coefficient STD Error c 1.3998216 7.4792133 -0.2847473 0.716134 0.687748 0.225676 3.210715 1.898790 3.038152 6.8029588 1.0994058 -1.2218533 0.2330454 Mean of dependent var S.D of dependent var Sum of squared resid F-statistic Prob (F-statistice) FDIGGl RER R-squared Adjusted R-squared S.E of regression Log LikeLihood Durbin-Watson stat T-Stat 0.4606623 2-Tail Sig 0.0065 0.0000 0.2360 1.611120 0.403862 1.018595 25.22791 0.000003 Notes: FDIGI: FDIIGDP, both FDI and GDP in USD 1987 price Table 23.2 Full Results for Vietnam Case Variable Coefficient STD Error T-Stat 2-Tail Sig c 0.0888531 1.1127084 5.414E-06 -0.3514266 0.883791 0.767583 0.027063 18.30003 2.436933 0.0592514 0.1815073 5.075E-06 0.4995608 1.4995954 0.2307 0.0087 0.3642 0.5324 0.219174 0.056137 0.002197 7.605215 0.064857 FDIGG1 RER AR(1) R-squared Adjusted R-squared S.E of regression Log LikeLihood Durbin-Watson stat 6.1303781 1.0669144 -0.7034712 Mean of dependent var S.D of dependent var Sum of squared resid F-statistic Prob (F-statistice) Notes: FDIGJ: FDIIGDP, both FDI and GDP in USD 1987 price 105 Tabte46 Selected Data for United States GOP def 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 35.76 37.84 39.89 41.95 45.52 50.14 53.38 56.46 60.86 66.25 72.55 79.48 84.38 87.90 91.43 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