WTO accession and benefits from FDI: The case of Vietnam Jean Louis BRILLET (INSEE) TRAN Thi Anh-Dao (CARE, University of Rouen, and CEPN, University of

WTO accession and WTO accession and benefits from FDI:benefits from FDI:The case of VietnamThe case of Vietnam

Jean Louis BRILLET (INSEE)TRAN Thi Anh-Dao (CARE, University of Rouen, and CEPN, University of Paris XIII)

LINK spring meetingSt Petersburg June 4-6, 2009

Outline of the presentationOutline of the presentation

The importance of FDIIntegrating FDI in a macroeconomic model

◦Formalizing its determinants ◦Assessing its impact

Applied to the context of WTO accession◦The direct measures◦The structural changes, the policy

decisions

The determinants of FDIThe determinants of FDI

The level of skills and labor costs, the production costs -> profitability

The infrastructuresThe access to financeThe macroeconomic policy, the

regulatory and legal framework, sound institutions

The potential markets and the regional context

FDI and developmentFDI and developmentFDI should improve the processBy increasing growth

◦Capacity ◦Factor productivity◦Technology transfers◦Exports◦Revenue

But no statistical evidenceThe reason : no complete picture

FDI in VietNamFDI in VietNam

05000

100001500020000

2500030000

3500040000

0200

400600800

10001200

14001600

inward FDI (Mill $) FDI Stock (Mill $) Number licensed projets

FDI distributionFDI distribution

Table 1: FDI distribution by form in Vietnam from 1988 to 2007 (in million USD)

Forms of Investment Number of

Project Investment

capital Registered capital Executed capital

100% foreign capital 6743 52 437, 099 250 21 476, 300 760 11 324, 296 112

Joint-Venture 1640 24 574, 544 436 9 292, 461 262 11 144, 796 904

BCC 226 4 578, 597 287 4 127, 650 407 5 661, 119 003

BOT, BT, BTO 8 1 710, 925 000 456, 185 000 727, 030 774

Joint Stock Company 66 1 657, 659 197 451, 054 442 362, 746 513

Mother-Subsidiary company 1 98, 008 000 82, 958 000 14, 448 000 Total 8684 85 056, 833 170 35 886, 609 871 29 234, 437 306

Source: FIA - MPI BCC: Business Cooperative Contracts BOT: Build-Operate-Transfer ; BT: Build-Transfer ; BTO: Build-Transfer-Operate

FDI composition in 2007FDI composition in 2007

Oil and gas 7%Light industry 17%

Construction 5%Agriculture 6%

Hotel, Tourism 7%

Others services 18%

Service 3%

Transport, Post 8%

Food processing industry 5%

Heavy industry 26%

The modelThe model

A structural, econometric model of the Vietnamese economy

Built with Vietnamese partners : GSO, NCSEIF

Annual, single productEstimated on 1986-2006Cobb-Douglas with explicit role of the

relative costShort term : Keynesian with a strong role of

the output gapLong term : More neo-classical with profit

maximizing

Formalizing FDI determinationFormalizing FDI determination

Relative to total capital evolution, FDI depends on

The output gap◦ Sales prospects on the local and foreign markets

The profits rate◦ Compared implicitly with other countries’◦ Contains the output gap◦ Sensitive also to the margins rate, the productivity of

capital, and the ratio of production and demand deflators (sensitive to tariffs)

◦ PR = Marg / (pk K) = MR . pq / pk . UR . prodkCrowding out substitution : -0.3 (calibrated)

The estimationThe estimation

Dependent Variable: D(KFDI/K(-1))Sample (adjusted): 1990 2004D(KFDI/K(-1))=C_KFDI(1)*LOG(UR)+C_KFDI(2)*0.5*(RPROB+RPROB) +C_KFDI(3)+C_KFDI(4)*(T-2004)

Variable Coefficient Std. Error t-Statistic Prob.

Log(UR) 0.533291 0.096180 5.544701 0.00020.5*(RPROB+RPROB(-1)) 0.298370 0.062402 4.781386 0.0006C -0.152926 0.032235 -4.744174 0.0006T -0.003641 0.000536 -6.792465 0.0000

R-squared 0.911320 Mean dependent var 0.022053S.E. of regression 0.008822 Akaike info criterion -6.399856F-statistic 37.68063 Durbin-Watson stat 1.608704

The production functionThe production function

Estimation Method: Seemingly Unrelated RegressionSample: 1990 2004

Equation: LOG(K*k_corr/QA)=-b*T-c+alpha*LOG(RELC)+c_fdi*LOG(KFDI(-1)/K(-1))S.E. of regression 0.146 Sum squared resid 0.216

Equation: LOG(LE/QA)=-b*T-c+(alpha-1)*LOG(RELC)+c_fdi*LOG(KFDI(-1)/K(-1))S.E. of regression 0.118 Sum squared resid 0.155

Coefficient Std. Error t-Statistic Prob. Capital correction 0.144 0.008057 17.90685 0.0000Time trend -3.67E-05 0.00425 -0.008613 0.993 Constant 1.776 8.520 0.208508 0.836 Alpha 0.655 0.1825 3.590637 0.0014KFDI elasticity -0.228112 0.05066 -4.502119 0.0001

ExportsExportsDependent Variable: DLOG(X)Sample: 1990 2004Included observations: 15DLOG(X)=0.6*DLOG(WD)+C_X(2)*DLOG(COMPX)+C_X(3)*(LOG(X(-1) /WD(-1))-C_X(4)*LOG(COMPX(-1))-C_X(5)*(T-1)-C_X(6))+C_X(7) *LOG(KFDI(-1)/K(-1))

Variable Coefficient Std. Error t-Statistic Prob.

C_X(2) -0,4312 0.1590 -2.711 0.0239C_X(3) -1.1563 0.2647 -4.367 0.0018C_X(4) -0.3828 0.1135 -3.370 0.0082C_X(5) 0.04037 0.007923 5.095 0.0006C_X(6) -73.43 15.897 -4.618 0.0013C_X(7) 0.3433 0.1030 3.331 0.0088

R-squared 0.7416 Mean dependent var 0.1493S.E. of regression 0.0370 Akaike info criterion -3.466Durbin-Watson stat 1.933

graphgraph

Investment

Global factor

Product

Foreign Direct Invest

Rate of use

Final dema

nd

Capacity

GDP

Prices

Labor

Wage rate

Capital

FDI share

in capital

Factorcost

Profitability

World deman

d

Exports

Imports

FDI in the model

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

08 10 12 14 16 18 20 22 24 98 00

Final demandGDPExportsImportsValue added deflator

G1 : The supply-demand equil ibrium

no FDI impact

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

08 10 12 14 16 18 20 22 24 98 00

Case A : Shock on f oreign quotas

with FDI impact

-.4

-.2

.0

.2

.4

.6

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

exp

orts

Impact of FDI

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

08 10 12 14 16 18 20 22 24 98 00

Value addedCapacityCapitalEmploymentRate of use

G2 : Production

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

08 10 12 14 16 18 20 22 24 98 00-.2

-.1

.0

.1

.2

.3

.4

.5

.6

.7

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

exp

orts

-.1

.0

.1

.2

.3

.4

.5

.6

.7

08 10 12 14 16 18 20 22 24 98 00

Relative costCapital-Labour ratioRate of useProfits rate in pointsUnempl. rate in points

G3 : The ratios

no FDI impact

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

08 10 12 14 16 18 20 22 24 98 00

Case A : Shock on f oreign quotas

with FDI impact

-.3

-.2

-.1

.0

.1

.2

.3

.4

.5

.6

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

exp

orts

Impact of FDI

-.4

-.3

-.2

-.1

.0

.1

.2

.3

.4

08 10 12 14 16 18 20 22 24 98 00

At constant pricesTerms of tradeAt constant prices

G4 : The export - import ratios

-.6

-.4

-.2

.0

.2

.4

.6

08 10 12 14 16 18 20 22 24 98 00-.3

-.2

-.1

.0

.1

.2

.3

.4

08 10 12 14 16 18 20 22 24 98 00

Impact of FDI

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

exp

orts

-1

0

1

2

3

-.1

.0

.1

.2

.3

08 10 12 14 16 18 20 22 24 98 00

Foreign direct investment in points of IPProductive investmentFDI capitalCapitalRate of use / right scaleProfits rate in points / right scale

Case A : Shock on foreign quotas Foreign Direct Investment - with FDI impact

in p

erc

enta

ge

shock : +1% of ex ante exports

Comments on Shock A : neutral FDIComments on Shock A : neutral FDI

Quite usual results, with a high openness to world trade (GDP # Exports, Final demand # Imports)

Imports increase more than exportsThis comes from tensions and

competitivenessLower unemployment causes substitutionWith inflation, the current trade balance

improves

Comments on Shock A : specific Comments on Shock A : specific FDIFDIMore investment, even more FDI (UR), more factor

productivity : more capacitiesMore factor productivity, more capacities : lower

pricesMore demand (investment, exports) but lower UR.Capital more than employment : direct effect,

substitution favors capitalMore cyclic : the higher speed of adaptation

generates overshootingLong run : return to normal (no incentive).FDI speeds up the process : this can be interpreted

as an additional way to enter the world economy.◦ But substitution to imports?

-1.6

-1.2

-0.8

-0.4

0.0

0.4

08 10 12 14 16 18 20 22 24 98 00



no FDI impact

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

08 10 12 14 16 18 20 22 24 98 00

Case B : Shock on local quotas

with FDI impact

-.8

-.6

-.4

-.2

.0

.2

.4

.6

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

imp

orts

Impact of FDI

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

08 10 12 14 16 18 20 22 24 98 00


G2 : Production

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

08 10 12 14 16 18 20 22 24 98 00-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

imp

orts

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

08 10 12 14 16 18 20 22 24 98 00


G3 : The ratios

no FDI impact

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

08 10 12 14 16 18 20 22 24 98 00

Case B : Shock on local quotas

with FDI impact

-.8

-.6

-.4

-.2

.0

.2

.4

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

imp

orts

Impact of FDI

-.4

-.2

.0

.2

.4

.6

08 10 12 14 16 18 20 22 24 98 00



-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

08 10 12 14 16 18 20 22 24 98 00-.6

-.4

-.2

.0

.2

.4

.6

08 10 12 14 16 18 20 22 24 98 00

Impact of FDI

in p

erce

nta

ge

, sho

ck : +1

% o

f ex a

nte

imp

orts

-4

-3

-2

-1

0

1

-.4

-.3

-.2

-.1

.0

.1

.2

08 10 12 14 16 18 20 22 24 98 00


Case B : Shock on local quotas Foreign Direct Investment - with FDI impact

in p

erc

enta

ge

shock : +1% of ex ante im

ports

Comments on Shock BComments on Shock B

Ex ante increase of imports, ex post negative demand shock

This closes the explanationAlso for FDI (only ex post effect)

-1.2

-0.8

-0.4

0.0

0.4

0.8

08 10 12 14 16 18 20 22 24 98 00



no FDI impact

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

08 10 12 14 16 18 20 22 24 98 00

Case C : Shock on local tarif f s

with FDI impact

-.3

-.2

-.1

.0

.1

.2

.3

.4

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : -1 p

oin

t of th

e ra

te

Impact of FDI

-.1

.0

.1

.2

.3

.4

.5

.6

.7

.8

08 10 12 14 16 18 20 22 24 98 00


G2 : Production

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

08 10 12 14 16 18 20 22 24 98 00-.2

-.1

.0

.1

.2

.3

.4

.5

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : -1 p

oin

t of th

e ra

te

-.1

.0

.1

.2

.3

.4

.5

.6

08 10 12 14 16 18 20 22 24 98 00


G3 : The ratios

no FDI impact

-.1

.0

.1

.2

.3

.4

.5

.6

.7

.8

08 10 12 14 16 18 20 22 24 98 00

Case C : Shock on local tarif f s

with FDI impact

-.2

-.1

.0

.1

.2

.3

.4

.5

08 10 12 14 16 18 20 22 24 98 00

in p

erce

nta

ge

, sho

ck : -1 p

oin

t of th

e ra

te

Impact of FDI

-.8

-.7

-.6

-.5

-.4

-.3

-.2

-.1

.0

08 10 12 14 16 18 20 22 24 98 00



-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

08 10 12 14 16 18 20 22 24 98 00-.3

-.2

-.1

.0

.1

.2

.3

08 10 12 14 16 18 20 22 24 98 00

Impact of FDI

in p

erce

nta

ge

, sho

ck : -1 p

oin

t of th

e ra

te

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-.10

-.05

.00

.05

.10

.15

.20

08 10 12 14 16 18 20 22 24 98 00


Case C : Shock on local tariffs Foreign Direct Investment - with FDI impact

in p

erc

enta

ge

shock : -1 point of the rate

Comments on Shock C : neutral FDIComments on Shock C : neutral FDI

Again, ex ante increase of imports, ex post negative demand shock

With an additional positive supply shock The cost of wages and equipment goes down Creating competitiveness, exports, but also a need

for equipment and consumption goodsAgain, imports increase more than exportsBut GDP and local demand improveLimiting disinflation in the long runBut both real trade balance and terms of

trade worsenAnd of course the State budget

Comments on Shock C : specific Comments on Shock C : specific FDIFDI

Actually similar to shock ABut the increase comes mostly from

profitabilityAnd less (but some) from the rate of useProfitability lasts longerSo GDP is never negatively affectedGlobal impact is stronger

Conclusions on shock A (and Conclusions on shock A (and A’)A’)The access to world markets through quotas and tariffs

produces gains which attract FDI, directly, and indirectly through local demand. FDI increases capacities, limits inflation and helps to satisfy foreign demand.

Both types of shock have the same consequences, at a variable level.

But to really gain from the situation, the conditions of local profitability must be met. Demand is only part of the game. Inflation and costs limit the gains in the medium term.

Conclusions on shock BConclusions on shock B Increasing local quotas depresses the

economy. FDI worsens the situation, as firms prefer exporting to investing in a depressed market. Lower FDI reduces capacities and productivity, limits disinflation and substitution by exports.

These results are trivial, as opposite to the above shocks

Conclusions on shock CConclusions on shock C

Decreasing local tariffs will also increase imports, but create profitability and gradually growth. Foreign firms invest in the country, primarily to export, but local conditions improve too (due to FDI...). Losses in competitiveness are limited.

Conclusions on all shocks (1)Conclusions on all shocks (1)

An initial increase in FDI can be short (medium) lived. More investment and improved factor productivity make capacities adapt faster to demand. The need for additional capacities disappears if profitability does too.

The improvement of exports can sustain the effect, the reduction of costs causes deflation and gains in profitability.

The inertia on FDI, investment and capacities can actually create overshooting, and sometimes negative medium run consequences. But the actualized gain on GDP is almost always positive.


FDI has a positive impact on local (non FDI led) activity, including local firms (except when it comes from the reduction of local subsidies).

On the trade balance, the impact of FDI is generally positive, but it can increase the import of equipment goods in the short run.

But when capacities build up, they will be more productive, more profitable, and create more export potential.

Also, a higher disinflation has a cost on the terms of trade.


Increasing FDI will have a reduced effect on employment, as it increases the role of capital, and the gains in global productivity will limit job creation,

However, employment will generally grow.That all these mechanisms interact with each

other, with generally expanding properties. For instance, FDI increases factor productivity which creates profitability and FDI. Or FDI creates exports and the need for additional capacities and FDI, which increases productivity and helps satisfy export potential….

Final conclusion (did we need a Final conclusion (did we need a model???)model???)For a pure demand shock, FDI increases the

speed of adaptation and makes it smoother◦ By generating capacities through size and

efficiencyBut the impact disappears in the medium

runHowever, the global impact is positiveTo sustain the gains, we need ex ante

profitability (like local tariffs).But even then, more growth and

employment will make profitability disappear in the long run.

Documents

WTO accession and benefits from FDI: The case of Vietnam Jean Louis BRILLET (INSEE) TRAN Thi Anh-Dao (CARE, University of Rouen, and CEPN, University of