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Locational Determinants of FDI:

The Case of Vietnam


Presented by Le Viet Anh
Nagoya University, GSID, 1st year PhD Student
At JVEC’s Meeting 29th May 2004, GRIPS
Outline
 FDI Theories
 Country’s Background

 FDI Development and Characteristics

 Qualitative Assessment of FDI Locations

 Empirical Study

 Conclusions and Policy Implications


Theories on FDI: Which to chose?
 Capital Theory
 International Trade Approach

 Market Imperfections and Industrial


Organization
 Dunning’s Eclectic Paradigm and
International Investment Path
 Agglomeration Economies
The Theory

Dunning’s eclectic paradigm and


agglomeration economies arguments
seems to be the best framework to
explore determinants of FDI in
Vietnam locationally
Vietnam: Country Background
Impressive Macroeconomic
Indicators
 High and sustained
16
economic growth
14
 Rapid growth of
12

10
external trade
8 u r e Increasing rate of
A g r i c u l t
I ndus t r y
6 investment
%

Ser vi ce
4 G r o wt h r a t e Appropriate inflation
2 rate
0
8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 2 0 0 02 0 0 12 0 0 2
-2
-4
FDI Development and
Characteristics
FDI in Vietnam 1988-2002

9 800

8 700
7 No. of projects
600
(right scale)
6 Approved
(left scale) 500
5
USD
bills

400
4
300
3
200
2
Implemented
1 100
(left scale)
0 0
1994

1995

1997

1998
1996

2002
1999

2000

2001
1988

1990

1991
1989

1992

1993

.
By Ownership
(as of the end of February 2003)
N
Country
1. Singapore
2. Taiwan
3. Japan
4.Hong Kong
By Sectors

S ectoral F D I b y C om

S ervic e
4 1 2. 0%
By Forms of Investment
Forms of investment Forms of investment
by committed capital by No of projects

BOT BOT
BCC BCC
3.20% 0.20%
10.70% 4.60%
JV
34.20%

JV
53.30% FE
32.80% FE
61.00%
By Locations
(USD million realizations)

R e g io n 1991 19
N o rth E a st 1 .9 1
N o rth W e s t 0 .2 0
Empirical Study

Locational Determinants of FDI


1991-2001
Literature Review
Dunning’s Suggestion
1) natural and created 6) degree of openness;
assets; 7) government policies;
2) capital intensity; 8) political stability;
3) market size and market
growth;
9) profitability;
4) infrastructural 10) geographical
development; proximity
5) labor cost and
productivity;
Lim’s suggestions
1) economic size of the host market,
2) economic distance (transportation costs),
3) agglomeration effects,
4) factor costs,
5) fiscal incentives,
6) business/investment climate,
7) trade barriers/openness and
8) others.
Studies on Vietnam
 Nguyen Tuan Dung (1996) used cross-sectional
data from 1990-1995
 Do Minh Hoai (1998) applied the data of 1988-
1997 to Dunning’s eclectic approach.
 Nguyen Nhu Binh and Jonathan Houghton (2002)
used cross-country analysis, taking into account
the impact of Bilateral Trade Agreement between
Vietnam and the US.
 Nestor (1997) identified the uneven location of
FDI under the form of joint ventures FDI
Proposed Analytical Framework

Category

(1). Market demand and


market size

Agglomerations (2)+(3)+(4
Pooled Regression

ln ( FDI it ) = α i + β 1 ln( GRPC it −1 ) + β 2 ln( IND it −1 ) + β 3 ln( TEL it −1 ) + + β 4 ln( CFDI it )


+ β 5 ln( WAGE it −1 ) + β 6 ln( PUL it −1 ) + β 7 ln( OPEN it −1 ) + β 8 POL i =1 + ε it
Data
Regressions
 Panel data covering eight economic regions and
from 1991-2001
 OLS regressions with White correction for
heteroschedasticity
 GLS regression with fixed effects, common
intercepts and differenced data
 Regressions for full time period (91-01) and sub-
sample periods (91-96) and (97-01)
 Regressions without Red River Delta and Southeast
Regions
 Regression without cumulative FDI
Main Findings (Commitments)
 Non-market seeking FDI
 Agglomeration effects are strongly
confirmed
 Labor cost is important determinant
 Not much differences between secondary
school labor and others
 Development of numerous IZs and EPZs
seem to be not efficient
Main Findings (Realizations)
 Agglomeration effects are strongly
confirmed
 Labor quality may not be much concerned
since quality are similar across regions
 Investors might be reluctant to invest in
more developed regions
 Openness is a significant determinant
Common-Intercepts
 Market size is significant determinant
 Agglomeration effects are confirmed

 The fixed effects (e.g. administrative


procedures, geographical location, historical
tie, the regional willingness) might be
stronger than market size
Differenced Data
 The results are similar
 Agglomeration effects are confirmed,
especially in the case of cumulative FDI
 The investors might pay more attention to
the rate of change than the present condition
Main Findings (without HN and
HCMC)
 Almost all results are similar
 Openness is significant determinant

 Determinants of FDI in Vietnam are similar


across regions, both developed and less
developed ones
Main Findings (Sub-sample)
 Agglomeration effects are confirmed in
both periods
 Market size become largely negative
significant in 97-01
 Wage became highly significant for 97-01
period
Conclusions
 positiveimpact of agglomeration effects
 there might exist some other important
variables those impacts is larger than the
market size consideration
 importance of FDI determinants moves
through times (especially labor wage)
 The policy does not seem to be effective in
drawing regional FDI
Conclusions (cont.)
A significant differences in determinants of
FDI commitments and that of FDI
realization (openness)
 The model is robust, determinants of FDI
are similar across regions
Policy Implications
For Promotion of FDI
Keeping Stable Political and Economic
Stability, Improving Overall Legal
Framework
 National treatment on possible areas

 Dual price system for infrastructure service

 Foreign Investment Law

 Local content requirement


Cont.
Improve the Quality of Labor, While Keeping
Comparative Advantage of Labor Cost with
Countries in the Regions, Especially China
 more skilled labor is needed
 skilled human capital is crucial for capturing the
positive effects from FDI
 technical training should be enhanced
Cont.
Export-Oriented FDI and Supporting
Industries Development
 WTO accession and bilateral agreements

 it is wise to allow some foreign firms to


produce inputs for exporting foreign
invested firms
Cont.
Complementary Role between National Level
and Regional Level Management
 policy formulation capacity at national level
should be strengthened
 the regional initiatives should also be taken
into account at the national level (Binh Duong
and Dong Nai cases)
For Better Distribution of FDI
Among Regions
 It is difficult to attract FDI to less developed
regions
 It might be wise to develop some regions
first and expect the diffusion to other
regions later
 Regional strategy should be based on their
comparative advantages
 Common measures are necessary
Thank you for your attention!