Tài liệu Attracting foreign direct investment a critical analysis of vietnam's performance

Attracting Foreign Direct Investment: A Critical Analysis of Vietnam’s Performance A thesis submitted in fulfilment of the requirements for the degree of doctor of philosophy Thanh Hoa Le Master of Management, University of South Australia, Australia Bachelor of Law, University of Law Ho Chi Minh City, Vietnam School of Economics Finance and Marketing College of Business RMIT University March 2015 DECLARATION I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics, procedures, and guidelines have been followed. Thanh Hoa Le March 17, 2015 ii REFEREE REVIEWED PAPERS During his PhD candidature, the researcher has written several papers that have been referee reviewed and accepted for presentation at quality international conferences. These papers are as follows: Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: An analysis of Vietnam’s location advantages in comparison with other ASEAN countries’, Proceedings of the 2014 International Conference on Business and Information (BAI2014) in Osaka, Japan, Paper ID: 3308 (Best Paper Award). Le, TH & Tam, OK 2014, ‘The flows of FDI to Vietnam: From policy to implementation’, Proceedings of the 7th Vietnam Economists’ Annual Meeting (VEAM2014) in Ho Chi Minh, Vietnam, Paper ID:70. Le, TH & Tam, OK 2014, ‘Vietnam’s FDI location advantages: A sub-national level analysis’, Proceedings of the 13th Eurasia Business and Economics Society (EBES) Conference in Istanbul, Turkey, Paper ID: 194. Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: A review of the literature and conceptual framework’, Paper accepted for presentation at the 10th Asian Business Research Conference in Bangkok, Thailand, Paper ID: 212. Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: A critical analysis of Vietnam’s policy framework’, Paper accepted for presentation at the 5th Kuala Lumpur International Business, Economics and Law Conference in Kuala Lumpur, Malaysia, Paper ID: 41. iii ACKNOWLEDGEMENTS This thesis has been completed with professional and spiritual assistance from several people. First and foremost, I am especially indebted to my senior supervisor, Professor On Kit Tam, Deputy Pro Vice-Chancellor, Business International at RMIT University, for his helpful and expert guidance throughout the course of this study. At the formative stage of my research, he helped me to develop my research skills and design the research plan, and encouraged and inspired me to become a good research scholar. He was enthusiastic and provided me with practical feedback on my draft chapters. He has been a very responsible and dedicated supervisor. I could not have finished this study successfully without his careful supervision and support. I would also like to express my profound gratitude to Dr Meg Sato, my associate supervisor. Her generous guidance, support, and understanding have helped me tremendously during my PhD journey. Further, I wish to express my appreciation to Dr Cuong Tat Do at Ho Chi Minh National Political Academy for his advice in selecting and developing the appropriate econometric models for this study. I wish also to express my gratitude to Professor Geoffrey Stokes, Professor Imad Moosa, Professor Lisa Farrell, and Dr Ashton De Silva in the Business College, RMIT University, for their valuable comments on my presentations in PhD seminar series. My special thanks go to Esther, Priyanka, and Prue, who supported me through every stage of my research process. Something that I have most cherished is my friendships with exceptional PhD candidates: Jane, Trang, Tung, Hoa, Bac, Anh, Huong, Hai, Ha, Phuong, Hung, Nga, Duong, Tri, Nguyen, George, Dian, Siti, Jack, Brad, Saiful, and Narjess, whom I met during my PhD journey. Moreover, I express particular thanks to the 165 Vietnamese Project for funding my PhD study. This is a great effort by the Vietnamese Communist Party for improving the quality of leaders and managers in the political system to meet the requirements of the period of accelerated industrialisation and modernisation of Vietnam. Especially, I would like to express deep appreciation to Mr To Huy Rua, Mr Nguyen Van Quynh, and Mr Nguyen Van Du as well as the 165 Vietnamese Project staff for supporting me morally and financially during my study. Furthermore, I extend my utmost thanks to my mother, Mrs Tuyet Thi Kim Nguyen; my brother and brothers in-law, Tam Thanh Le, Hung Tai Le, and Thuc Vinh Pham; and my sisters and sister in-law, Phung Thi Kim Le, Loan Thi Kim Le, and Oanh Thi Nguyen. They greatly encouraged me during challenging moments in Australia. Lastly, and most importantly, my biggest thanks go to my dearest friend Xinh Chi Vo for giving me the encouragement, support, motivation, care, and understanding to complete my PhD study. iv CONTENTS DECLARATION ...................................................................................................... ii REFEREE REVIEWED PAPERS ........................................................................... iii ACKNOWLEDGEMENTS ...................................................................................... iv CONTENTS .............................................................................................................. v LIST OF CHARTS ..................................................................................................xii LIST OF DIAGRAMS AND FIGURES .................................................................xiii LIST OF TABLES .................................................................................................. xiv ABSTRACT .............................................................................................................. 1 CHAPTER 1: INTRODUCTION ............................................................................... 3 1.1 RESEARCH BACKGROUND ........................................................................... 3 1.2 RESEARCH MOTIVATION AND SCOPE........................................................ 6 1.3 RESEARCH OBJECTIVES AND QUESTIONS ................................................ 8 1.4 RESEARCH DESIGN ........................................................................................ 9 1.5 RESEARCH CONTRIBUTIONS ..................................................................... 12 1.6 STRUCTURE OF THE THESIS ....................................................................... 12 CHAPTER 2: LITERATURE REVIEW ................................................................. 14 2.1 INTRODUCTION ............................................................................................ 14 2.2 DEFINITION OF FDI....................................................................................... 16 2.3 REVIEW OF FDI THEORIES .......................................................................... 19 2.3.1 Ownership Advantage theory ...................................................................... 22 2.3.2 Product Life Cycle theory ........................................................................... 24 2.3.3 Internalisation theory .................................................................................. 27 2.3.4 Dunning’s Eclectic theory ........................................................................... 29 2.4 STUDIES ON FDI POLICIES AND LOCATION FACTORS IN HOST COUNTRIES........................................................................................................... 34 v 2.4.1 FDI inflow effects of government policies and the effectiveness of policies on the utilisation of location factors ...................................................................... 35 2.4.2 Exchange rate uncertainty and FDI inflows ................................................. 38 2.4.3 Market size and FDI inflows ....................................................................... 40 2.4.4 Labour quality and FDI inflows .................................................................. 42 2.4.5 Labour cost and FDI inflows....................................................................... 44 2.4.6 Infrastructure development and FDI inflows ............................................... 46 2.4.7 Trade openness and FDI inflows ................................................................. 48 2.4.8 Inflation rates and FDI inflows ................................................................... 51 2.4.9 Special economic zones and FDI inflows .................................................... 52 2.4.10 Tax incentives and FDI inflows ................................................................ 54 2.5 CONCLUSION ................................................................................................. 62 CHAPTER 3: FDI INFLOWS IN THE GLOBALISATION ERA AND EXPERIENCES OF SELECTED COUNTRIES IN ATTRACTING FDI ............ 63 3.1 INTRODUCTION ............................................................................................ 63 3.2 AN OVERVIEW OF FDI ................................................................................. 65 3.2.1 Trends in global FDI ................................................................................... 65 3.2.2 Impacts of FDI inflows on host countries .................................................... 69 3.2.3 The importance of FDI inflows to developing countries .............................. 74 3.3 DEVELOPING AND UTILISING POLICIES TO ATTRACT FDI IN SELECTED COUNTRIES ...................................................................................... 75 3.3.1 Australia and its FDI policy development ................................................... 76 3.3.2 China and its FDI policy development ........................................................ 78 3.3.3 Malaysia and its FDI policy development ................................................... 81 3.4 CONCLUSION ................................................................................................. 83 CHAPTER 4: THE DOI MOI POLICY AND FDI INFLOWS IN VIETNAM ..... 85 4.1 INTRODUCTION ............................................................................................ 85 4.2 FDI POLICIES IN VIETNAM BEFORE THE DOI MOI POLICY ................... 87 4.2.1 FDI policies in Vietnam under French rule ................................................. 87 4.2.2 FDI policies in Vietnam in the period 1955-1975 ........................................ 88 vi 4.2.3 FDI policies in Vietnam after the country’s reunification, 1976-1985 ......... 90 4.3 FDI POLICIES IN VIETNAM UNDER THE DOI MOI POLICY .................... 95 4.3.1 Purposes of attracting FDI to Vietnam ...................................................... 100 4.3.2 The policy approach of Vietnam to FDI .................................................... 102 4.3.3 The Law on Foreign Investment ............................................................... 106 4.3.4 Other policies for attracting FDI inflows to Vietnam................................. 117 4.4 CONCLUSION ............................................................................................... 125 CHAPTER 5: AN ANALYSIS OF VIETNAM FDI POLICY FRAMEWORK ... 126 5.1 INTRODUCTION .......................................................................................... 126 5.2 THE AIM OF THE LAW ON FOREIGN INVESTMENT IN ATTRACTING FDI INFLOWS TO VIETNAM UNDER THE DOI MOI POLICY........................ 128 5.2.1 The aim of the LFI 1987 in the period 1988–1992 .................................... 130 5.2.2 The aim of the 1992 amended LFI in the period 1993–1996...................... 133 5.2.3 The aim of the 1996 LFI in the period 1997–2000 .................................... 139 5.2.4 The aim of the 2000 amended LFI in the period 2001–2005...................... 144 5.2.5 The aim of the 2005 LI in the period from 2006 ........................................ 146 5.3 THE AIM OF OTHER POLICES FOR FDI INFLOWS TO VIETNAM ......... 153 5.3.1 Tax-incentive policies ............................................................................... 154 5.3.2 Exchange rate policies .............................................................................. 156 5.3.3 Labour policies ......................................................................................... 158 5.3.4 Open trade policies .................................................................................. 162 5.4 CONCLUSION ............................................................................................... 166 CHAPTER 6: THE PATTERNS OF FDI INFLOWS IN VIETNAM: ................. 167 FROM POLICY TO IMPLEMENTATION .......................................................... 167 6.1 INTRODUCTION .......................................................................................... 167 6.2 FDI INFLOWS BY PROVINCIAL DISTRIBUTION ..................................... 169 6.3 FDI INFLOWS BY SOURCE COUNTRY ..................................................... 178 6.4 FDI INFLOWS BY OWNERSHIP STRUCTURE .......................................... 186 6.5 FDI INFLOWS BY SECTORAL COMPOSITION ......................................... 189 vii 6.6 FDI INFLOWS IN SPECIAL ECONOMIC ZONES ....................................... 196 6.7 CONCLUSION ............................................................................................... 200 CHAPTER 7: VIETNAM FDI LOCATION FACTORS: A SUB-NATIONALLEVEL ANALYSIS ................................................................................................ 202 7.1 INTRODUCTION .......................................................................................... 202 7.2 SUB-NATIONAL FDI LOCATION PATTERNS IN THE LITERATURE .... 206 7.3 HYPOTHESIS DEVELOPMENT................................................................... 211 7.3.1 Market size and FDI inflows ..................................................................... 212 7.3.2 Labour cost and FDI inflows..................................................................... 213 7.3.3 Infrastructure development and FDI inflows ............................................. 214 7.3.4 Special economic zones and FDI inflows .................................................. 215 7.3.5 Ease of business establishment and FDI inflows ....................................... 216 7.3.6 Ease of land access and FDI inflows ......................................................... 217 7.3.7 Skilled labour force and FDI inflows ........................................................ 218 7.3.8 Business support services and FDI inflows ............................................... 218 7.4 DATA DESCRIPTION AND SOURCES ....................................................... 220 7.5 RESEARCH METHODOLOGY .................................................................... 225 7.5.1 Analytical approach .................................................................................. 225 7.5.2 Model specification .................................................................................. 226 7.5.3 Model estimation ...................................................................................... 228 7.5.4 Econometric software package.................................................................. 231 7.6 EMPIRICAL RESULTS AND DISCUSSION ................................................ 231 7.6.1 Economic conditions and FDI inflows ...................................................... 233 7.6.2 Local government policies and FDI inflows .............................................. 236 7.6.3 Geographical factors and FDI inflows....................................................... 238 7.7 CONCLUSION ............................................................................................... 240 CHAPTER 8: VIETNAM’S PERFORMANCE IN ATTRACTING FDI: A COMPARATIVE ANALYSIS ................................................................................ 243 8.1 INTRODUCTION .......................................................................................... 243 viii 8.2 ASEAN FDI-LOCATION FACTORS IN THE LITERATURE ...................... 246 8.2.1 ASEAN countries ..................................................................................... 246 8.2.2 Literature on factors driving ASEAN FDI inflows .................................... 249 8.3 HYPOTHESIS DEVELOPMENT................................................................... 253 8.3.1 Trade openness and FDI inflows ............................................................... 253 8.3.2 Exchange rate uncertainty and FDI inflows ............................................... 254 8.3.3 Market size and FDI inflows ..................................................................... 255 8.3.4 Labour cost and FDI inflows..................................................................... 256 8.3.5 Infrastructure development and FDI inflows ............................................. 256 8.3.6 Price inflation and FDI inflows ................................................................. 257 8.3.7 Labour quality and FDI inflows ................................................................ 258 8.4 DATA DESCRIPTION AND SOURCES ....................................................... 258 8.5 RESEARCH METHODOLOGY .................................................................... 265 8.5.1 Analytical approach .................................................................................. 265 8.5.2 Model specification .................................................................................. 265 8.5.3 Model estimation ...................................................................................... 266 8.6 EMPIRICAL RESULTS AND DISCUSSION ................................................ 267 8.6.1 ASEAN FDI location factors: Results and discussion ............................... 268 8.6.2 The attractiveness of Vietnam as a FDI destination compared with other ASEAN countries as a whole: Results and discussion ......................................... 277 8.7 CONCLUSION ............................................................................................... 281 CHAPTER 9: CONCLUSION ................................................................................ 283 9.1 INTRODUCTION .......................................................................................... 283 9.2 RESEARCH FINDINGS ................................................................................ 285 9.3 RESEARCH CONTRIBUTIONS ................................................................... 289 9.4 POLICY IMPLICATIONS ............................................................................. 290 9.5 RESEARCH LIMITATIONS AND FUTURE RESEARCH ........................... 291 REFERENCES ...................................................................................................... 293 APPENDICES ....................................................................................................... 337 ix LIST OF ABBREVIATIONS AND ACRONYMS AFTA Asian Free Trade Area AIA ASEAN Investment Area APEC Pacific Economic Cooperation Forum ASEAN Association of South East Asian Nations BCC Business-Cooperation Contract BIT Bilateral Investment Treaty BOT Build-Operate-Transfer Contract BRICS Brazil, Russia, India, China and South America BT Build and Transfer Contract BTA Bilateral Trade Agreement BTO Build-Transfer-Operate Contract CIEM Central Institute for Economic Management CPV Communist Party of Vietnam DNPC Document of the National Party Congress of Vietnam DRV Democratic Republic of Vietnam EPZs Export Processing Zones EU European Union FDI Foreign Direct Investment FIE Foreign Invested Enterprise GATS General Agreement on Trade and Services GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GSO General Statistics Office of Vietnam IZs Industrial Zones LFI Law on Foreign Investment x M&A Mergers and Acquisitions MNC Multinational Corporation MNE Multinational Enterprise MPI Ministry of Planning and Investment of Vietnam NICs Newly Industrialised Countries OECD Organisation for Economic Cooperation and Development R&D Research and Development SBV State Bank of Vietnam SOE State-Owned Enterprise TRIMs Trade-Related Investment Measures TRIPs Trade-Related Aspects of Intellectual Property and Rights UK United Kingdom UN United Nations UNCTAD United Nations Conference on Trade and Development US United States USD United States Dollar USSR Union of Soviet Socialist Republics VCCI Vietnam Chamber of Commerce and Industry VPCI Vietnamese Provincial Competitiveness Index VNCI Vietnam Competitiveness Initiative VND Vietnamese Dong VSY Vietnam Statistical Yearbook WB World Bank WTO World Trade Organisation xi LIST OF CHARTS Chart 1.1 Global FDI Inflows in the Period 1986–2012 (Million USD).........................3 Chart 1.2 Trends in the Number of FDI Projects and FDI Inflows in Vietnam in the Period 1988–2012 .........................................................................................................5 Chart 3.1 Global FDI Inflows in 1914 (Billion USD) ..................................................65 Chart 3.2 Global FDI Inflows in the Period 1986–2012 (Million USD).......................67 Chart 5.1 A Comparison between FDI Sector and Other Ownership Sectors in Contributing to Vietnamese GDP in 1996 and 2000................................................... 143 Chart 6.1 The Top Provinces Attracting FDI in the Period 1988–2012...................... 172 Chart 6.2 Inward FDI to Provinces in Vietnam in 2001, 2006, 2009, and 2012 (Million USD) ......................................................................................................................... 177 Chart 6.3 The 10 Largest FDI Source Countries in Terms of FDI Inflows in Vietnam in the Period 1988–2012 ................................................................................................ 178 Chart 6.4 FDI Inflows in Vietnam by Source Countries in 2002, 2005, and 2012 ...... 181 Chart 6.5 Comparisons between FDI Inflows by Sectoral Composition in Vietnam in 1991 and 2000 ........................................................................................................... 192 Chart 6.6 FDI Inflows by Economic Activity in Vietnam in the Period 1988–2012... 193 xii LIST OF DIAGRAMS AND FIGURES Figure 1.1 Research Design for the Study ................................................................... 11 Figure 2.1 Structure of Chapter 2 ................................................................................ 15 Diagram 2.1 Product Life Cycle Theory ..................................................................... 25 Diagram 2.2 The Ownership, Location, and Internalisation (OLI) Paradigm ............... 32 Figure 3.1 Structure of Chapter 3 ................................................................................ 64 Figure 4.1 Structure of Chapter 4 ................................................................................ 86 Diagram 4.1 Procedures for Investment Certification................................................ 116 Figure 5.1 Structure of Chapter 5 .............................................................................. 128 Figure 6.1 Structure of Chapter 6 .............................................................................. 168 Figure 6.2 A Comparison of Regional Economic Conditions in Vietnam in 2012 ..... 170 Figure 6.4 FDI Projects with Significant Employment .............................................. 189 Figure 7.1 Structure of Chapter 7 .............................................................................. 205 Figure 7.2 Main Criteria for Assessing FDI Location Choice at the Provincial Level in Vietnam .................................................................................................................... 210 Figure 7.3 A Summary of FDI Determinants at the Provincial Level in Vietnam ...... 240 Figure 8.1 Structure of Chapter 8 .............................................................................. 245 Figure 8.2 Criteria for Assessing of FDI Inflows at the National Level in Vietnam and other ASEAN Countries ............................................................................................ 253 Figure 8.4 A Summary of Findings on FDI Location Factors at the National Level in the ASEAN Region ................................................................................................... 276 xiii LIST OF TABLES Table 2.1 Definitions of FDI .......................................................................................17 Table 2.2 Theoretical Frameworks of FDI ..................................................................19 Table 2.3 Main Findings from Selected Empirical Studies on FDI Government Policies and Location Factors ...................................................................................................57 Table 3.1 Global FDI Inflows to Developing Countries in the First Seven Decades of the Twentieth Century (Billion USD) ..........................................................................68 Table 4.1 Development Index of Vietnam after the Country’s Reunification, 1976– 1985 ............................................................................................................................92 Table 4.2 Vietnam’s Foreign Trade in the Period 1976–1986 (Million USD) .............94 Table 4.3 Average Percentage Growth Rate of Productivity in Vietnam, 1976–1985 ..95 Table 4.4 Main Indicators under the Doi Moi Economic Policy Process .....................96 Table 4.5 Comparative Indicators for Attracting FDI between Vietnam and its Neighbouring Countries ..............................................................................................99 Table 4.6 Main Strengths and Weaknesses of the LFI 1987 ...................................... 108 Table 4.7 Sectoral Classifications under the 2005 Law on Investment ...................... 112 Table 4.8 Procedures Required for Types of Projects under the LI 2005 ................... 113 Table 4.9 Selected Agreements on Trade and Investment of Vietnam and its Partners .................................................................................................................................. 120 Table 5.1 Inward FDI Related to the Amendments of the Law on Foreign Investment over the Last Two Decades........................................................................................ 127 Table 5.2 Export Performance in the Period 1988–1995 (Million USD).................... 135 Table 5.3 The Sectoral Composition of the Exports in Vietnam in the Period 1988– 1995 .......................................................................................................................... 136 Table 5.4 The Development of FDI Projects and FDI Inflows in the Period 1988–1996 (Million USD) ........................................................................................................... 138 Table 5.5 FDI Inflows by Source Countries in Vietnam by Percentage in the Period 1991–1995 ................................................................................................................ 139 xiv Table 5.6 Gross Domestic Product of Vietnam in the Period 1996–2000 .................. 142 Table 5.7 FDI Projects and FDI inflows in the Period 1996–2000 (Million USD) ..... 143 Table 5.8 FDI Inflows by Main Source Nations during the Period 2001–2005 .......... 146 Table 5.9 The Development of FDI Projects and FDI Flows in Vietnam in the Period 1988–2012 ................................................................................................................ 149 Table 5.10 Number of Procedures Required to Start a Business in ASEAN Countries .................................................................................................................................. 151 Table 5.11 The Trading Band for USD and VND Exchange Transactions in the Period 1998–2012 ................................................................................................................ 157 Table 6.1 A Comparison of Some Economic Conditions of Selected Provinces in the Period 2008–2012 ..................................................................................................... 173 Table 6.2 The Top 10 Source Nations by FDI Projects and FDI in Vietnam in the Period 1988–2012 ..................................................................................................... 179 Table 6.3 FDI Inflows in Vietnam by Source Countries from 2001 to 2012 (Million USD) ......................................................................................................................... 184 Table 6.4 Sectoral Compositions of FDI Inflows to Vietnam in the Period 1988–2000 .................................................................................................................................. 191 Table 6.5 FDI Inflows by Sectoral Compositions, Cumulative as at End of 2012 ...... 195 Table 6.6 Number of Special Economic Zones in Vietnam by the End of 2010 ......... 199 Table 7.2 Variables and Data Sources for this Study ................................................. 222 Table 7.3 A Summary of Descriptive Statistics of the Study ..................................... 223 Table 7.4 Correlation Matrix of the Variables of the Study ....................................... 224 Table 7.5 Results of FDI and Location Factors at the Provincial Level in Vietnam ... 232 Table 7.6 Hypotheses and Findings on FDI Factors at the Provincial Level in Vietnam .................................................................................................................................. 239 Table 8.1 A Comparison between Vietnam and other ASEAN Countries in Attracting FDI Inflows over the Past Two Decades (Million USD) ............................................ 247 Table 8.2 A Comparison between ASEAN and other Regions in Attracting FDI Inflows over the Past Decade (Million USD) .......................................................................... 249 Table 8.3 Variables for FDI Location Choice in ASEAN Countries in the Literature 251 xv Table 8.4 Variables and Data Sources for this Study ................................................. 261 Table 8.5 A Summary of Descriptive Statistics of This Study ................................... 263 Table 8.6 Correlation Matrix of the Variables of This Study ..................................... 264 Table 8.7 Results of FDI Location Factor Impact across ASEAN Countries ............. 268 Table 8.8 Hypotheses and Findings: FDI Location Factors across ASEAN Countries .................................................................................................................................. 276 Table 8.9 Results of Vietnam’s FDI Location Factors Compared with Other ASEAN Countries as a Whole ................................................................................................. 277 xvi ABSTRACT Developing government policies and a business environment aimed at boosting foreign direct investment (FDI) and attaining a certain pattern and quality of FDI inflows has not always produced the desired outcomes. In a developing and transition economy such as Vietnam, where government resources are limited and the setting of FDI-related policies often involves public investment or tax concessions, the question of the efficacy of such policies is not a trivial matter. This thesis aims to provide robust evidence-based analysis and explanations to uncover what drives FDI inflows in Vietnam. It analyses and assesses the effectiveness of Vietnam’s policies and location factors in attracting FDI to a country which had practically no FDI inflow prior to the launch of its economic reform in the mid-1980s. In addressing the key research question of how well Vietnam has performed in attracting FDI, this study examines FDI location factors at both provincial and national levels to provide a comprehensive understanding of Vietnam’s performance as a FDI destination. The findings of this study reveal that economic factors and commercial imperatives are more powerful than the investment incentives offered by the Vietnamese government in attracting FDI. At the provincial level, market size, infrastructure development, special economic zones, and international sea ports are found to be the key drivers in attracting FDI; at the national level, the driving FDI factors are market size, trade openness, labour quality, and exchange rate uncertainty. Although Vietnam’s effort to develop its policy framework and to introduce policies has been important in attracting FDI inflows, the outcomes are not always satisfactory from the perspective of the government’s developmental goals. This is because Vietnam does not have the appropriate economic conditions and capacity to support the government policies to attract the desired FDI composition and quality. Although Vietnam has improved its economic environment to attract inward FDI since the country’s economic reform, as a member of ASEAN, its economic conditions and investment environment are, on average, weaker than those of the nine other members. This research makes an original contribution to the validation of some major elements of FDI theories, while at the same time providing new evidence and insights for the future development of FDI policies in Vietnam. Based on the findings in this research, it may be more productive for government policies to increase the focus on economic reform and development to improve the competitiveness of the country’s FDI location advantages. 1 2 CHAPTER 1: INTRODUCTION 1.1 RESEARCH BACKGROUND In recent decades, rising foreign direct investment (FDI) (Chart 1.1) has been a major part of the trend of globalisation. FDI has become a significant competitive strategy for multinational enterprises. Host country governments at the same time have considered FDI inflows as a crucial component of the development of their economies because inward FDI is expected to bring not only capital, but also finished products, materials, components, new technology and, equally important, intangible assets such as knowledge about management, production processes, distribution channels, and markets (Dunning 1993, 1994, 2006; Moosa 2002). Given these expected benefits of inward FDI, almost all nations, especially developing ones, compete intensely for FDI and undertake a variety of strategies to attract FDI. In particular, they often try to improve their attractiveness as a destination for FDI by introducing government policies and initiating special conditions. The aim is to create a favourable legal and business environment to attract not only FDI volume, but also the desired FDI composition and quality. Chart 1.1 Global FDI Inflows in the Period 1986–2012 (Million USD) (Sources: UNCTAD 1994, 2003, 2007, 2013) 3 Scholarly research argues that government policies can directly or indirectly affect levels of FDI inflows (Brewer 1991; Williamson 1981). They play crucial roles not only in attracting inward FDI, but in effectively utilising location factors in host countries (Brewer 1993; Dunning & Narula 1996). Dunning (2001, 2006) and OECD (2006) state that a successful FDI policy has to make the country an attractive location for foreign investors, while at the same time assuring the conditions for foreign investors to benefit most from their investment in a host economy. A study by Basile et al. (2008) reveals that a government policy creating more favourable conditions for investments through funding for training labour force, infrastructure development, and R&D activities can contribute to success in attracting FDI inflows. Although the quest for attracting FDI is not new, competition among countries in attracting FDI inflows has continued to receive attention from economists, finance scholars, and policy-makers. Oman (2000) claims that most developing countries have used investment incentives to compete with their neighbours to attract FDI inflows; Dobson and Chia (1997) argue that attracting FDI to individual nations is a positivesum game in which each nation can benefit from the success of its neighbouring countries. In the competition to attract FDI within as well as among countries in Europe, both regional policy grants and the removal of FDI restrictions have been used (Falk et al. 2012; Wren & Jones 2011). Similar to most countries in other regions throughout the world, competition to attract FDI inflows to develop a country’s economy has been a significant issue in almost all ASEAN countries. To compete successfully, most ASEAN countries have adopted policy reforms. For instance, since the 1980s, in the ASEAN countries of Singapore, Indonesia, Malaysia, the Philippines, and Thailand, governments have spearheaded corporate regulation reforms and economic restructuring. Since then, and especially after the Asian financial crisis of 1997–1998, economic reforms have progressed in Cambodia, Laos, and Myanmar. Through reforms, governments are accelerating changes in the private sector, providing incentives to new entrepreneurs, and creating new opportunities for foreign investors to help fuel ASEAN growth for the future. Chia (1999) argues that the success of an ASEAN country in attracting FDI can be attributed to a combination of factors: political, social, and economic stability; favourable factor endowments; and development-oriented governments with sound macroeconomic policies and pro-FDI policies. 4