Locational Determinants of FDI: The Case of Vietnam Presented by Le Viet Anh Nagoya University, GSID, 1 st year PhD Student At JVEC’s Meeting 29 th May.

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 Student

At JVEC’s Meeting 29th May 2004, GRIPS

OutlineOutline

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?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 TheoryThe 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 BackgroundVietnam: Country Background

Impressive Macroeconomic Impressive 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

10

12

14

16

86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 2001 2002

%

Agr i cul tureI ndust ryServi ce

Growth rate

FDI Development and FDI Development and CharacteristicsCharacteristics

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

US

Dbi

lls

0

100

200

300

400

500

600

700

800

.

Approved

(left scale)

Implemented

(left scale)

No. of projects

(right scale)

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

Country Numbers of

projects Committed Capital

(USD million) Scale of Project (USD million)

1. Singapore 310 6119 19.74 2. Taiwan 1081 5863 5.42 3. Japan 434 3848 8.87 4.Hong Kong 416 3634 8.74

5. S. Korea 564 3563 6.32 6. France 186 2604 14.00 7. BVI 170 1944 11.44 8. U.K 62 1756 28.32 9. USA 190 1621 8.53 10. Russia 76 1617 21.28 Total top ten

2120 29499 9.33 Grand Total 2880 39201 9.25 Share of top ten in total

75.31% 75.99%

By SectorsBy Sectors

Sectoral FDI by Committed Capital

Industry 55.16% Agriculture

3.64%

Service 41.20%

Sectoral FDI by No of Projects

Industry, 62.17%

Services, 28.06%

Agriculture 9.77%

By Forms of InvestmentBy Forms of Investment

Forms of investment by committed capital

JV53.30%

BOT3.20%

BCC10.70%

FE32.80%

Forms of investment by No of projects

JV34.20%

BOT0.20%

BCC4.60%

FE61.00%

By Locations By Locations (USD million realizations)(USD million realizations)

Region 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

North East 1.9 1.0 22.1 56.5 60.3 158.3 179.0 114.3 94.8 97.0

North West 0.2 0.1 2.5 6.3 6.7 5.4 6.1 3.9 3.2 3.3

Red River Delta 58.6 192.1 315.3 779.9 1130.8 917.8 862.7 619.4 392.2 298.6

North Central 0.4 10.4 32.4 58.3 67.0 70.2 109.8 130.0 74.1 118.1

Central Coast 4.3 5.2 14.5 67.2 94.9 116.9 91.0 174.9 265.8 280.7

Central Highland 4.3 21.3 11.2 13.4 27.9 20.5 40.8 7.1 13.1 8.9

Southeast 337.7 324.3 682.0 1192.2 1267.6 1508.3 1537.1 1231.6 1285.6 1368.0

Mekong River Delta 20.5 21.3 39.1 69.5 139.6 125.7 310.6 80.4 47.9 55.7

Empirical StudyEmpirical Study

Locational Determinants of FDI 1991-2001

Literature ReviewLiterature ReviewDunning’s SuggestionDunning’s Suggestion

1) natural and created assets;

2) capital intensity; 3) market size and

market growth; 4) infrastructural

development; 5) labor cost and

productivity;

6) degree of openness; 7) government policies; 8) political stability; 9) profitability; 10) geographical

proximity

Lim’s suggestionsLim’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 VietnamStudies 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 FrameworkProposed Analytical FrameworkCategory Proxy Expected

sign (1). Market demand and market size

GRP per capita +

Agglomerations (2)+(3)+(4) (2) Infrastructure Telephone sets per capita + (3) Degree of Industrialization Regional Industrial Output/GRP + (4) Level of foreign investment Cumulative FDI/POP

(Both commitments and realizations) +

(5) Labor cost Monthly average income per capita in state sector under local government

-

(6) Labor quality Number of upper secondary school students ? (7) Openness Import/GRP ? (8) Policy incentives Numbers of industrial zones/regional area

(km2) +

Pooled RegressionPooled Regression

itiititit

ititititiit

POLOPENPULWAGE

CFDITELINDGRPCFDI

18171615

4131211

)ln()ln()ln(

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

(i=1,2,..8, t=1,2…11)

DataData

Provinces: 1. Hanoi 2. Hai Phong 3. Hai Duong 4. Hung Yen 5. Thai Binh 6. Nam Dinh 7. Ninh Binh 8. Ha Nam 9. Ha Tay 10. Cao Bang 11. Lang Son 12. Quang Ninh 13. Thai Nguyen 14. Bac Can 15. Bac Ninh 16. Bac Giang 17. Phu Tho 18. Vinh Phuc 19. Lao Cai 20. Yen Bai 21. Tuyen Quang 22. Ha Giang 23. Son La 24. Lai Chau 25. Hoa Binh 26. Thanh Hoa 27. Nghe An 28. Ha Tinh 29. Quang Binh 30. Quang Tri 31. Thua Thien-Hue

32. Quang Nam 33. Da Nang 34. Quang Ngai 35. Binh Dinh 36. Phu Yen 37. Khanh Hoa 38. Kon Tum 39. Gia Lai 40. Dac Lac 41. Ho Chi Minh 42. Lam Dong 43. Ninh Thuan 44. Binh Phuoc 45. Tay Ninh 46. Binh Duong 47. Dong Nai 48. Binh Thuan 49. Ba Ria - Vung Tau 50. Long An 51. Dong Thap 52. An Giang 53. Tien Giang 54. Vinh Long 55. Ben Tre 56. Kien Giang 57. Can Tho 58. Tra Vinh 59. Soc Trang 60. Bac Lieu 61. Ca Mau

Regions: 1. Red River Delta 2. North East 3. North West 4. North Central Coast 5. South Central Coast 6. Central Highlands 7. South East 8. Mekong River Delta

Focal economic regions

1. NFER: Ha Noi, Hai Phong, Quang Ninh, Hung Yen, Hai Duong, Ha Tay, Bac Ninh, Vinh Phuc (7/2003)

2. CFER: Da Nang, Quang Ngai, Thua Thien-Hue

3. SFER: Ho Chi Minh, Dong Nai, Ba Ria-Vung Tau, Binh Duong, Tay Ninh, Binh Phuoc, Long An (7/2003)

Northern Focal Economic Region

Central Focal Economic

Region

Southern Focal Economic

Region

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

Main Findings (Commitments)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)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-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

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

Main Findings (without HN and Main 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

Main Findings (Sub-sample)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

ConclusionsConclusions

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

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

Policy ImplicationsPolicy Implications

For Promotion of FDIFor 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.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.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.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 For Better Distribution of FDI Among Regions 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!Thank you for your attention!