Nhan to Tac Dong Fdi Viet Nam

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Locational Determinants of FDI:Locational Determinants of FDI:

The Case of VietnamThe Case of Vietnam

Presented by Le Viet Anh

Nagoya University, GSID, 1st

year PhD StudentAt JVECs Meeting 29th May 2004, GRIPS


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OutlineOutline

FDI Theories

Countrys Background

FDI Development and Characteristics

Qualitative Assessment of FDI Locations

Empirical StudyConclusions and Policy Implications


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Theories on FDI: Which to chose?Theories on FDI: Which to chose?

Capital Theory

International Trade Approach

Market Imperfections and Industrial

Organization

Dunnings Eclectic Paradigm and

International Investment Path

Agglomeration Economies


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The TheoryThe Theory

Dunnings eclectic paradigm andagglomeration economies arguments

seems to be the best framework toexplore determinants of FDI in

Vietnam locationally


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Vietnam: Country BackgroundVietnam: Country Background


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Impressive MacroeconomicImpressive Macroeconomic

IndicatorsIndicators High and sustained

economic growth

Rapid growth of

external trade Increasing rate of

investment

Appropriate inflation

rate

- 4

- 2

0

2

4

6

8

1 0

1 2

1 4

1 6

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

A g r i c u l

I n d u s t r

S e r v i c e

Gr o wt h


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FDI Development andFDI Development and

CharacteristicsCharacteristics


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FDI in Vietnam 1988-2002FDI in Vietnam 1988-2002

0

1

2

3

4

5

6

7

8

9

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

USD

bills

0

100

200

300

400

500

600

700

800

.

Approved

(left scale)

Implemented

(left scale)

No. of projects(right scale)


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By OwnershipBy Ownership

(as of the end of February 2003)(as of the end of February 2003)

Country

1. Singapore

2. Taiwan

3. Japan

4.Hong Kong


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By SectorsBy Sectors

S ectora l F D I b y C o

Serv ic

4 1 .2 0%


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By Forms of InvestmentBy Forms of Investment

Forms of investment

by committed capital

JV

53.30%

BOT

3.20% BCC10.70%

FE32.80%

Forms of investment

by No of projects

JV

34.20%

BOT

0.20% BCC4.60%

FE

61.00%


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By LocationsBy Locations

(USD million realizations)(USD million realizations)

R e g i o n 1 9 9 1 1 9N o r th E a s t 1 .9 1

N o r th W e s t 0 .2 0


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Empirical StudyEmpirical Study

Locational Determinants of FDI

1991-2001


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Literature ReviewLiterature Review

Dunnings SuggestionDunnings Suggestion1) natural and created

assets;

2) capital intensity;

3) market size and marketgrowth;

4) infrastructuraldevelopment;

5) labor cost andproductivity;

6) degree of openness;

7) government policies;

8) political stability;9) profitability;

10) geographicalproximity


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Lims suggestionsLims 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.


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Proposed Analytical FrameworkProposed Analytical Framework

Category

(1). Market demand and

market size

Agglomerations (2)+(3)+(


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Pooled RegressionPooled Regression

( )

itiititit

ititititiit

POLOPENPULWAGE

CFDITELINDGRPCFDI

+++++

+++++=

=

18171615

4131211

)ln()ln()ln(

)ln()ln()ln()ln(ln


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DataData


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RegressionsRegressions 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


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Main Findings (Commitments)Main Findings (Commitments)

Non-market seeking FDIAgglomeration effects are strongly

confirmedLabor cost is important determinantNot much differences between secondary

school labor and othersDevelopment of numerous IZs and EPZs

seem to be not efficient


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Main Findings (Realizations)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 regionsOpenness is a significant determinant


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Common-InterceptsCommon-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


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Differenced DataDifferenced 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


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Main Findings (without HN andMain Findings (without HN and

HCMC)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


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Main Findings (Sub-sample)Main Findings (Sub-sample)

Agglomeration effects are confirmed in

both periods

Market size become largely negativesignificant in 97-01

Wage became highly significant for 97-01

period


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Conclusions (cont.)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


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Policy ImplicationsPolicy Implications


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For Promotion of FDIFor Promotion of FDI

Keeping Stable Political and Economic

Stability, Improving Overall Legal

FrameworkNational treatment on possible areas

Dual price system for infrastructure service

Foreign Investment Law Local content requirement


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Cont.Cont.

Improve the Quality of Labor, While KeepingComparative Advantage of Labor Cost withCountries in the Regions, Especially China

more skilled labor is needed

skilled human capital is crucial for capturing thepositive effects from FDI

technical training should be enhanced


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Cont.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


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Cont.Cont.

Complementary Role between National Level

and Regional Level Management

policy formulation capacity at national levelshould be strengthened

the regional initiatives should also be taken

into account at the national level (Binh Duongand Dong Nai cases)


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For Better Distribution of FDIFor Better Distribution of FDI

Among RegionsAmong Regions It is difficult to attract FDI to less developed

regions

It might be wise to develop some regionsfirst and expect the diffusion to otherregions later

Regional strategy should be based on theircomparative advantages

Common measures are necessary


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Nhan to Tac Dong Fdi Viet Nam