Locational Determinants of FDI: The Case of Vietnam

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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 JVECs Meeting 29th May 2004, GRIPS

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Outline

• FDI Theories
• Countrys Background
• FDI Development and Characteristics
• Qualitative Assessment of FDI Locations
• Empirical Study
• Conclusions and Policy Implications

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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 Theory

• Dunnings eclectic paradigm and agglomeration
  economies arguments seems to be the best
  framework to explore determinants of FDI in
  Vietnam locationally

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Vietnam Country Background
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Impressive Macroeconomic Indicators

• High and sustained economic growth
• Rapid growth of external trade
• Increasing rate of investment
• Appropriate inflation rate

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FDI Development and Characteristics
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FDI in Vietnam 1988-2002
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By Ownership (as of the end of February 2003)
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By Sectors
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By Forms of Investment
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By Locations (USD million realizations)
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Empirical Study

• Locational Determinants of FDI 1991-2001

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Literature ReviewDunnings Suggestion

• natural and created assets
• capital intensity
• market size and market growth
• infrastructural development
• labor cost and productivity

• degree of openness
• government policies
• political stability
• profitability
• geographical proximity

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Lims suggestions

• economic size of the host market,
• economic distance (transportation costs),
• agglomeration effects,
• factor costs,
• fiscal incentives,
• business/investment climate,
• trade barriers/openness and
• others.

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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 Dunnings 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

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Proposed Analytical Framework
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Pooled Regression
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Data
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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

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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

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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

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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

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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

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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

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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

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Conclusions

• positive impact 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

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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 Implications
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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

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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

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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.

• 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)

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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

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Thank you for your attention!