Impact assessment of foreign direct investment (fdi) on the economy of hung yen province (1998-2010)

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IMPACT ASSESSMENT OF FOREIGN DIRECT INVESTMENT (FDI) ON THE ECONOMY OF HUNG YEN PROVINCE (1998-2010). A RESEARCH PRESENTED TO THE FACULTY OF GRADUATE SCHOOL SOUTHERN LUZON STATE UNIVERSITY LUCBAN, QUEZON, PHILIPPINES AND THAI NGUYEN UNIVERSITY, S.R. VIETNAM IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE DOCTOR IN BUSINESS ADMINISTRATION Supervisor: Associate Professor, Dr. TRAN CHI THIEN Student Name: PHAM THI TUYET NHUNG English name: ANNA Thai Nguyen, 2013 i ACKNOWLEDGMENT Throughout the course of research leading to the completion of this dissertation, I would like to express my deep gratitude to many people who have supported me with tremendous help in one way or another, which I think I cannot possibly acknowledge in full. The first and foremost, I would like to thank Associate Professor, Dr. Tran Chi Thien, my advisor, for his invaluable thoughts, insightful suggestions and useful guidance throughout the thesis works. My sincere appreciation also goes to the committee members for their propositions, valuable comments, and constructive suggestions, which were of substantial value to this study. I would like to acknowledge faithfully professors of South Luzon State University (SLSU) and Thai Nguyen University (TNU) at DBA Program at Thai Nguyen University for their insightful lectures in different subjects that provide me knowledge and technique to develop a good research. My sincere thanks are also extended to my friends for their meaningful discussion, hospitality and friendship. Finally, I am profoundly grateful to my family: my parents and brother, who always encourage and help me in every situation. They have been a great source of encouragement and sharing, enhancing my strength to overcome difficulties during my DBA program. ii TABLE OF CONTENT Chapter I: INTRODUCTION ……………………………………………… 1 1.1 Background of the study ……………………………………………… 1 1.2 Statement of the problem ………………..…………………………… 2 1.3 Hypotheses …………………………………………………………… 4 1.4 Significance of the Study……………………….……………………… 5 1.5 Scope and limitation of the study……………………………………… 5 1.6 Definition of Terms ………………………………………………….. 6 Chapter II: REVIEW OF RELATED LITERATURE AND STUDIES …… 7 2.1 REVIEW OF RELATED STUDIES…………………………………. 7 2.2 THEORETICAL AND CONCEPTUAL FRAMWORK……………… 16 2.2.1 Theoretical framework………………………………….…………… 16 2.2.1.1 Provincial Competitiveness Index (PCI) ………………………… 16 2.2.1.2 Foreign direct investment………….……………………………… 17 2.2.1.3 Economy…………………………………………………….…… 24 2.2.1.4 FDI in Vietnam…….. ………………………………………..….… 25 2.2.2 Conceptual Framework ……………………………………………… 28 Chapter III: DATA AND METHODOLOGY………………………………… 3.1 INTRODUCTION ……………………………………………... 29 29 3.2 RESEARCH DESIGN ………………………………………………… 29 3.2.1 The research approach ……………………………………………… 29 3.2.1.1 Scientific beliefs ………………………………………………… 29 iii 3.2.1.2 Research strategies ……………………………………………… 30 3.2.2 The research approach and process design………………………… 31 3.3 DATA COLLECTION METHOD.…………………………………… 31 3.4 DATA COLLECTION PROCEDURE ……………………………… 32 3.5 DATA PROCESSING METHOD …………………………………… 32 3.6 ANALYTICAL FRAMEWORK …………………………………… 43 3.7 CONCLUSION ………………………………………………………… 44 Chapter IV: PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA …………………………………………………………………………. 45 4.1 FDI inflows in Hung Yen province. ……………………………….. 45 4.2 The impacts of FDI on Economy of Hung Yen province …………..… 50 4.2.1 Survey analysis …………………………………………………….. 50 4.2.2 Summary ………………………………………………………...… 68 Chapter V: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS …. 74 5.1 Findings ……………………………………………………………….. 74 5.2 Conclusions…………………………………………..……………….. 75 5.3 Recommendations ……………………………………..…………..… 75 References ……………………………………………………………………..… 77 Appendix ……………………………………………………………………..…… 85 iv ABSTRACT Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in developing countries. It affects the economic growth of the host country by stimulating domestic investment, increasing human capital formation and facilitating technology transfer. Regional Gross Domestic Product, Taxes Generation, Export and FDI Labor are often considered the indicators to evaluate the contribution of FDI on the economy of a province. The main purpose of the study is to investigate impacts of FDI on the economy of Hung Yen, measured by four economic indicators, i.e. Regional Gross Domestic Product, Taxes Generation, Export and FDI Labor. The study uses annual data series for the period of 1998-2010. The relationships between FDI and the indicators are analyzed by using Distributed-Lag models. The results of the study show positive and statistically insignificant relations between FDI inflows and the Regional Gross Domestic Product, Taxes Generation, Export, FDI Labor respectively in Hung Yen. Policy recommendations are suggested in the light of the results obtained, regarding the FDI in the province. v LIST OF FIGURES Figure 1: Foreign Direct Investment in Vietnam in the period 1988-2012 …………….26 Figure 2: Rate of the implemented FDI capita in Vietnam in the period 1988-2012….. 27 Figure 3: Conceptual Framework………………………………………………………. 28 Figure 4: Analytical Framework ........................................................................….…….44 Figure 5: PCI of Hung Yen province in the period of 2005-2012……………….….…..48 Figure 6: Impact of PCI on FDI inflows in Hung Yen province ……………….……..51 Figure 7: The development trend of variables …………………..……………….….….52 Figure 8: The result of the Normal Distribution test for residual in model (I)…….…... 59 Figure 9: The result of the Normal Distribution test for residual in model (II) ……..…60 Figure 10: The result of the Normal Distribution test for residual in model (III) …..….61 Figure 11: The result of the Normal Distribution test for residual in model (IV) ….….61 vi LIST OF TABLES Table 1: Comparison of the component indicators of PCI of Hung Yen province to the highest score of the province in 2010 ………………………………….…………….…49 Table 2: Comparison of the component indicators of PCI of Hung Yen province to the highest score of the province in 2012 ………………………….…………………….…50 Table 3: Summary of ADF Unit Root Test Result……………………….…..…………53 Table 4: Summary of PP Unit Root Test Result………………………….……………..54 Table 5: The result of the model (I) estimation………………………………...……….55 Table 6: The result of the model (II) estimation……………………..………...………..56 Table 7: The result of the model (III) estimation………………………………...……..57 Table 8: The result of the model (IV) estimation……………………..…….....………..58 Table 9: The result of the Serial Correlation test in model (I)…………………...……..59 Table 10: The result of the Serial Correlation test in model (II)……..…………...……..63 Table 11: The result of the Serial Correlation test in model (III)….….…………..……..63 Table 12: The result of the Serial Correlation test in model (IV)………..….……...……64 Table 13: The result of the Heteroskedasticity test in model (I)……………………….65 Table 14: The result of the Heteroskedasticity test in model (II)……………………….66 Table 15: The result of the Heteroskedasticity test in model (III)……………………….67 Table 16: The result of the Heteroskedasticity test in model (IV)……………………….68 Table 17: Summary the result of the OLS estimation……………………………………70 vii Chapter I: INTRODUCTION 1.1 Background of the study Today, globalization is more and more increasingly recognized process and becomes an inevitable trend of development in human history. When globalization and international economic integration take place more rapidly in both size and speed, competition becomes tougher in the world market. Foreign Direct Investment (FDI) is increasingly important for development of economy of nations. It is claimed that FDI can create employment, increase technological development in the host country and improve the economic condition of the country in general. FDI is a sign to evaluate the policy and economic outlook of a nation. FDI is the motivation to make extensive changes in the development of international relations such as political, economic, diplomatic, etc. Simultaneously, FDI becomes a sharp instrument for development and global integration, market extension, cost reduction and enhancement of competitive advantages of nations. Townsend (2003) said the relationship between foreign direct investment and economic growth is not so clear. There are different views by researchers on the contributions of FDI to economic growth, based on theoretical and analytical findings. Some scholars see FDI as a very important tool for economic growth especially in the less developed countries (LDCs), but others claim that the contribution of FDI to economic development is not as pronounced as most people believe, even some think FDI has no positive contribution to the economic growth of the host country. For example, Nuzhat Falki (2009) examined the Impact of FDI on Economic 1 Growth of Pakistan from 1980 to 2006. She concluded that FDI has negative statically insignificant relationship between GDP and FDI inflows in Pakistan in this period. Pardeep (2000) founded that the increase in FDI inflows in South Asia were associated with a many-fold increase in the investment by national investors, suggesting that there exist linkage effects between FDI and GDP. The impact of FDI on GDP growth is found to be negative prior to 1980, mildly positive for early eighties and strongly positive over the late eighties and nineties. It can be seen that there has been no consensus opinion on FDI and economic growth. 1.2 Statement of the problem In Vietnam, the important role of FDI has been acknowledged for the last 20 years. Since the launch of market-oriented economic reforms in 1986, Vietnam has been among the fastest growing countries in Southeast Asia with the active participation of foreign investors in all fields of the economy. Vietnamese government has quickly jointed the competition for foreign direct investment into regional and global markets by restructuring the domestic economy and opening up the economy to external trade and investment (Hoang Thi Thu, 2013). The FDI capital has been supporting provinces to restructure the economy towards industrialization and modernization, to create many new industries and products. It also contributed to improving management capacity, increasing labor productivity, developing technology, expanding export markets, creating jobs, and improving living standards of workers. However, in recent years, some problems, which related to FDI, occurred in Vietnam. For example, Vedan company discharged the waste to the ThiVai River, over 100 golf course projects were licensed, 2 capacity of cement plants increased rapidly to levels that exceed the domestic demand, etc. Hung Yen is a delta province, located in the key economic zone of Northern Vietnam. It has advantages of natural conditions and infrastructure. After the Foreign Investment Law was issued (in December, 1987), Hung Yen has attracted a flow of FDI capital to some of its key industries, and this contributed significantly to the restructuring of the province economy. The attraction and use of FDI capital not only contribute to economic development of the province, but also promote economic development of the whole key economic zone in Northern Vietnam. Hung Yen’s economy has greatly transformed since the FDI activities were implemented. Therefore, it is highly necessary to conduct assessment of the impact of FDI on the economy of Hung Yen province . This assessment would be a good basis for the authority to issue appropriate policies on economic development of the province. In this study, the relationship between FDI and the economy in the province will be discussed, and the contribution of FDI to growth will be investigated. To perform this analysis scholarly opinions and suggestions will be discussed and empirical analysis on FDI will be carried out. This study attempts to answer the follow questions: 1. How does FDI effect on the existing status and flow of FDI in Hung Yen province from 1998 to 2010? 2. What have the FDI inflows contributed to the economy of Hung Yen province? 3. Have the contributions been positive or not? 3 To answer above questions, the objectives of the study are:  To investigate the effect of PCI on FDI inflows in Hung Yen province;  To assess the contribution of FDI to the economy in Hung Yen province by assessing the impacts of FDI on fours economic indicators: + Regional Gross Domestic Product + Taxes Generation + Export + FDI Labor  To determine the positive and negative effects of FDI on the economy of Hung Yen province 1.3 Hypotheses Because PCI includes the component indicators affect on the FDI attraction, so to investigate the FDI attraction in Hung Yen province, the effect of PCI on FDI inflows will be researched. Hypothesis 1: PCI affects FDI in Hung Yen province in the period of 1998-2010. Fours economic indicators: Regional Gross Domestic Product, Taxes Generation, Export, FDI Labor can represent the economic growth. To assess the contribution of FDI to the economy in Hung Yen province, the following hypotheses will be tested: Hypothesis 2: FDI inflows positively contribute to RGDP of Hung Yen province. Hypothesis 3: FDI inflows positively contribute to Taxes Generation of Hung Yen province. Hypothesis 4: FDI inflows positively contribute to Export of Hung Yen province. 4 Hypothesis 5: FDI inflows positively contribute to FDI Labor of Hung Yen province. 1.4 Significance of the Study The study shall become noteworthy to the following subjects: 1. To the management of the province: The result of the study can serve as a basis to revise some policies as well as devise an appropriate attraction FDI strategy for the development of the province. 2. To investors: The result of the study may help investors realize the advantages they can have in doing business in the province, so that they may get interested to make new or expand existing investments in the province. 3. To business students and future researchers: This study can serve as benchmark information for related studies. 4. To the researcher: This work is a test of his/her knowledge in business and his/her ability to engage in a research work. 1.5 Scope and limitation of the study Scope of the study: Hung Yen province Hung Yen province is located next to Hanoi, the capital of Vietnam. Hung Yen province includes nine districts: Van Lam, My Hao, Yen My, Kim Dong, Phu Cu, Tien Lu, Van Giang, Khoai Chau, An Thi, and one city under province is Hung Yen. Limitation of the study: The author studied the influences of PCI on the FDI attraction and the impacts of FDI on fours economic indicators: Regional Gross Domestic Product, Export, Taxes Generation and FDI Labor. 5 The thesis will concentrate on the period between 1998 and 2010 based on the secondary data. 1.6 Definition of Terms 1. Domestic investment - Investment in the companies and products of the host country rather than in those of foreign countries. 2. Export - The value of goods and services sold to overseas. 3. FDI Labor - Total of employees working in the FDI enterprises. The FDI Labor is one of the economic indicators to evaluate the contribution of FDI inflows on the economy. 4. Foreign Direct Investment (FDI) – Investment directly into production or services in a country by a company located in another country, either by buying a company of the host country or expanding the existing business to the host country. 5. Provincial Competitiveness Index (PCI) - An index used to evaluate and rank the performance of economic governance including the construction of a favorable business environment for enterprise development of Vietnam’s provinces. 6. Regional Gross Domestic Product (RGDP) – The market value of all officially recognized final goods and services produced within a region in a given period 7. Taxes Generation – The total tax revenue of the province’ budget contributed by the FDI enterprise. 6 Chapter II: REVIEW OF RELATED LITERATURE AND STUDIES In analyzing the contribution of FDI on economy, it is necessary to know the type of investment that is qualified as FDI. This section discusses the investments that can be called FDI and those involved in it. Simultaneously, the factors of economy are effected by FDI will be discussed. It also reviews previous researches on the relationship between FDI and economic growth on FDI flows to developing countries in general and to Vietnam in particular. 2.1 REVIEW OF RELATED STUDIES There have been numerous research works on the effects of FDI on economic growth with varied conclusions on the role of FDI on economic growth. Alfaro (2003) applies linear regression method to study the relationship between FDI and labor productivity in various industries, base on the panel data of 47 countries from 1981 to 1999. The research found out that, FDI has positive effects on the productivity in manufacturing industries, whereas its effects on growth of agricultural and mining sectors are negative. Mencinger (2003) pointed out, from the panel data of eight East European transition economies from 1994 to 2001, that FDI undermines these countries’ ability in catching up with EU. The possible reasons include the small scales of such economies and over-concentration of FDI on trade and finance which reduce the spillover effects in terms of labor productivity in economic sectors as a whole. FDI may not necessarily put further competition pressures, since the competitors in receiving countries are likely to be 7 small and new, and thus, are easily forced to exit the market. Haddad and Harrison (1993) also found evidence of spillover effects on productivity in the case of Morocco’s manufacturing industries, yet the magnitude of such effects was smaller in industries with more foreign enterprises. The OECD (2002) stated that FDI increases efficiency of resources and raises factor productivity in the host country, so it saw the influence of FDI on growth as positive. Alfaro et al (2003) concluded that for the service sector, the effect of FDI inflows is not so clear. However, an economy with a well-developed financial sector gains more from FDI. The impact of FDI on growth also depends on the local condition of the host country. Chowdhury and Mavrotas (2003) said FDI’s condition to growth depends on factors such as human capital base in the host country and the degree of openness in the economy, and even when FDI is contributing to the economy, its impacts might not be easily noticed in the short run. Lall (2002) even said that FDI inflows affect many factors in the economy, and these factors, in turn affects economic growth. Therefore, the impacts of FDI on growth can not be measured directly since the impact is assessed through its contributions to other factors. Countries with high growth can attract FDI better than countries where the economy is not in good shape. This confirms the fact that even though FDI contributes to growth, growth also influences the level of FDI in a country. The positive effects of FDI on growth were also verified in Kumar and Pradhan (2002), which used panel data of 107 developing countries from 1980 to 1999. They discovered that in the majority of cases, the direction of causation between growth and FDI is not pronounced. Furthermore, in poor countries the direction seemed to be running from growth to FDI in an equal number of cases as from FDI to growth. This conclusion is similar to that of Hansen and Rand 8 (2004), which said that foreign direct investment and growth have a positive relationship, but the direction of causality is not clear. Understanding this direction of causality is very important for the formulation of economic policy. Despite the contribution of FDI to growth might be positive, Ray (2005) does not think it helps to develop the local industries in the host country. Hence, the multinational companies can be flourishing in the host country while the local firms are not developing. It is worth noting that some research works have claimed that contribution of FDI to growth is not positive. In a study of Carkovic and Levine (2002), it was concluded that FDI does not have a robust independent influence on growth. The study employed two models for the empirical work and used data from 75 countries. Mwlima (2003) also did not see FDI as an important tool for development. He claimed that the incentives and tax holiday adopted by most African countries to attract foreign investment had not been successful; instead, it is adding to the economic problems of some countries. He said most African countries were competing to attract FDI to the level that each country wanted by giving the best incentives. This sometimes leads to the situation where the loss from the incentive offer could be more than the gain from the foreign investment and this could leave the country worse off than it was before the investment. Most studies generally indicate that the effect of FDI on growth depends on other factors such as the degree of complementarity and substitution between domestic investment and FDI, and other country-specific characteristics. Buckley, Clegg and Wang (2002) argued that the extent to which FDI contributed to growth depends on the economic and social conditions in the recipient country. Countries with high rate of savings, open trade regime and high technological levels would benefit from increase FDI to their economies. However, FDI may have 9 negative effects on the growth prospects of the recipient economy if they result in a substantial reverse flows in the form of remittances of profits, and dividends and/or if the multinational corporations (MNCs) obtain substantial or other concessions from the host country. Although most countries offered a large number of incentives to attract FDI, experience from other countries shows that such plans often have limited impact on new investments, reduce transparency of the business climate, and lead to higher taxes for other taxpayers. Tax incentives or free trade zones are used by some countries to attract investors, despite mixed evidence about their impact on FDI flows and the potentially high costs compared to the benefits (Sorsa, 2003). Nuzhat (2009) examined the Impact of FDI on Economic Growth of Pakistan. She collected the data of FDI from the Handbook of Pakistan Economy-2005 published by the State of Pakistan and the World Bank Development indicators-2008 from 1980 to 2006 with variables of domestic capital, foreign owned capital, and labor force. With the help of endogenous growth theory and applying the regression analysis, she concluded that there existed a negative statically insignificant relationship between GDP and FDI inflows in Pakistan. Anokye and George (2009) examined the Foreign Direct Investment and Stock Market Development in Ghana by collecting the data of market capitalization as a proportion of GDP, Ghana cedi-Dollar exchange rate, and Net FDI inflow quarterly data from 1991 to 2006. Applying multivariate cointegration analysis and Vector Error Correction Model (VECM), they concluded that FDI has significant influence in the development of Ghana stock market, and there was a long-run relationship between FDI, nominal exchange rate, and stock market in Ghana perspective. Wu, Jyun-Yi and Hsu 10 Chin-Chiang (2008) examined whether the FDI promote economic growth by using threshold regression analysis. The empirical analysis showed that FDI alone played an ambiguous role in contributing to economic growth based on a sample of 62 countries covering the period from 1975 to 2000, and found out that initial GDP and human capital were important factors in explaining FDI. FDI is found to have a positive and significant impact on growth when host countries have better level of initial GDP and human capital. Nguyen Nhu Binh and Haughton (2002) said that the Bilateral Trade Agreement has led to 30 per cent increase in FDI into Vietnam in the first year, and an eventual doubling of the flow. This would boost economic growth by 0.6 percentage points annually. Carkovic and Levine (2002) used macro-level data to find little support for the importance of FDI in stimulating growth. They argued that previous studies, which showed the benefits of FDI on economic growth, had not fully taken into account the endogeneity problem. Countries with good economic performance tended to attract more FDI. Therefore, if the endogeneity problem is not taken into account, it is unclear whether FDI drives economic growth, or vice versa. They also concluded in their econometric study on FDI and GDP growth that the exogenous component of FDI does not exert a robust, independent influence on growth. Li and Liu (2005) used a large sample of developed and developing countries, found that since the mid-1980s the relationship between FDI and economic growth has become increasingly endogenous. Choe (2003), in a large sample of 80 countries, found evidence of a two-way causality between FDI and economic growth. In addition, he also stated that the effects were more apparent from economic growth to FDI. 11 Busse and Groizard (2006) found that FDI does not have any impact on economic growth in a very highly regulated country. However, it seemed that there could be a wide range of regulatory regimes, under which, FDI could still prove beneficial. This is encouraging as it suggests most countries, even those with a rather restrictive regulatory environment, can benefit from FDI. According to Nguyen Thi Tue Anh et al (2006), FDI may affect economic growth in a number of ways. From a narrow perspective, the effect of FDI on growth is direct via investment channel. In a broader approach, FDI puts pressure on the host countries to improve their competitiveness, particularly investment environment, thereby reducing transaction costs to foreign investors, increasing return to capital, and ultimately fostering economic growth. FDI inflows may also be argued to increase investment of domestic firms, especially those suppliers of inputs to FDI enterprises or those using inputs from FDI enterprises. In this respect, FDI positively affects domestic investment. Simultaneously, policies to improve infrastructure facilities, to attract more FDI, are also significant in promoting the establishment and development of domestic enterprises. They stated that there is also a concern that FDI inflows may negatively affect economic growth. The reason for such concern is that competition from FDI enterprises is arguably fierce, and domestic firms are very likely to lose. Kiss (2003) and Hippert (2002) examined FDI from a social standpoint, provided a negative perspective on the impact of FDI in developing countries. Kiss (2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that eventually led to the social and political exclusion of Hungarian women. The author argues that governments must 12 address gender issues as well as implement official measures and institutional changes to facilitate women's inclusion into production and social systems. examines the effect of FDI on women's health. Hippert (2002) The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and states that it is women, who bear the brunt of human rights abuses because of their social positions in developing countries, especially in parts of Mexico and Asia. The author also discusses solutions to these problems that have failed because they have been primarily "top-down approaches," and proposes that the only plausible solutions are to hold corporations accountable for their employees. In contrast to the researchers who presented negative view of FDI, Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence governments and provide for the social welfare of hostcountry citizens. By focusing on their roles as philanthropists and political activists, MNCs provide foreign aid to developing countries, expand international trade and investment, and influence public policy. The author provides several instances in which an MNC stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased. Alfaro (2003) said that in addition to the direct source of capital financing, FDI could serve as a source of valuable technology and know-how to the host developing countries by fostering linkages with local firms. These technological innovations by MNEs played a central role in the economy, and they were among the most important areas where MNEs serves as catalyst for growth in developing countries. 13
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