THAI NGUYEN UNIVERSITY
Socialist Republic of Vietnam
SOUTHERN LUZON STATE UNIVERSITY
Republic of the Philippines
LE HOANG BA HUYEN (JAMES)
CAUSES AND EFFECTS OF FOREIGN DIRECT INVESTMENT:
BASIS FOR POLICY RE-DIRECTION IN THANH HOA PROVINCE
IN VIETNAM
A Dissertation Presented to the Faculty of Graduate School
of Southern Luzon State University, Philippines
and Thai Nguyen University, S.R. Vietnam
In Partial Fulfillment of the Requirement for
the Degree of Doctor in Business Administration
August, 2013
The study was done at:
INTERNATIONAL CENTRE EDUCATION,
THAI NGUYEN UNIVERSITY
Academic supervisor:
TRAN DAI NGHIA Ph.D
The thesis is prevented to the Council held in Southern Luzon State University,
Philippines at the …………, ………… , 2013
Desertation can be found at:
- National Library
- Learning Resource Center, Thai Nguyen University
- Library of International Training Center
- Library of Southern Luzon State University, Philippines
i
ACKNOWLEDGMENTS
I would like to thank Thai Nguyen University, the International Centre
Education of Thai Nguyen University, Southern Luzon State University for guiding
me throughout this research and for providing me with the opportunity to conduct this
research and for helping me to carry out the necessary revisions to the thesis.
I would like to thank Dr. Cecilia N. Gascon, President of Southern Luzon
State University and Dr. Dang Kim Vui, the President of Thai Nguyen University,
who made possible the linkage between Thai Nguyen University with Southern Luzon
State University, the offering of Doctor of Business Administration, through the ITCTUAF;
I would like to thank Dr. Tran Dai Nghia, for his support and supervision
throughout my graduate study program. His kindness and daily instructions in the last
years are greatly appreciated and this dissertation is as much his work as mine;
I would also like to thank Dr. Nguyen Manh An, President of Hong Duc
University, my colleagues at Faculty of Economic and Business Administration, Hong
Duc University, my friends for their support and encouragement during the time I do
my dissertation.
In addition, I would like to thank local government of Thanh Hoa Province,
foreign companies in Thanh Hoa province for providing me with information to
conduct this research, and feedback necessary for making this thesis is successful.
Finally, I would like to thank my family for giving me constant support and
encouragement and for always believing in me. Last but definitely not least, thanks my
wife Nguyen Thi Tam, who has provided a tremendous amount of love and support during
my research. On the final note with love is for my daughters.
ii
ABSTRACT
This research was undertaken with the primary objectives of: (1) To describe
the trends in FDI in Thanh Hoa Province in the period from 2001 to 2012. (2) To
determine the factors affecting attraction of FDI in Thanh Hoa Province. (3) To
analyze the effects of FDI in the economic growth of Thanh Hoa Province. (4) To
formulate policy implication to enhance economic growth of Thanh Hoa Province in
Vietnam. To organize the research questionnaire, the conceptual framework was
adopted from the Eclectic Paradigm or the “OLI” paradigm developed by Dunning
1993 and according to factors which are influencing to choice of a host market of
Gilomre, O’s Donnel, Carson and Cummins (2003). The paper was studied six major
factors such as Political / Government / Legal Factors, Social and Cultural Factors,
Economic and Market Factors, Financial Factors, Availability of resources factors and
Infrastructure Factors which are highly affecting for the inflow of FDI. The variables
under each of the above factors have been included in the questionnaire.
The research methodology of the study which explained conceptual
frame work, research design, population and sample size, questionnaire design,
data collection and data analysis methods. The research was conducted in two phases.
The first phase involved secondary collection, desk tally by review,
literatures,
research, journals, publications, books, official reports from government officials.
The second phase was the primary date collection by doing survey using structured
questionnaires (either through e-mailing, telephone and direct face to face interview).
The population of this research was forty one (41) FDI entrepreneurs and 100 officers.
To obtain the sample size it was used the Slovin formalation and the sample size was
determined as 37 and 80 respondents respectively.
Data processing methods, survey results are coded, data entry are described by
iii
statistical tool. The combinations of descr iptive and as we ll as stat ist ica l
tools ha ve been used to analyze the findings of the study. The data were processed
by using SPSS. All primary data collected through the questionnaires were analyzed
by frequency tables and correlation analysis. The techniques like simple tabulations
have been used for the frequency tables, determination of r a n k s u m , mean, P
Value, Adj. Variance and standard deviations. C orrelation analysis was used to
study the linear correlation among the various factors affecting FDI and the level
of significance.
This study focuses on the four main issues: Firstly, about the trends in FDI in
Thanh Hoa Province, FDI in Thanh Hoa increased rapidly in the period from 2001 –
2012. Secondly, about the factors affect the attraction of foreign direct investment in
Thanh Hoa Province. We found that there are two aspects of the Thanh Hoa economic
environments in which international business partners are particularly interested: the
economic and marketing and infrastructure factors. However, the social and cultural
factor seemed not be a significant factor. Most investors put the social and cultural
factor in the least important group. Thirdly, analyze the effects of FDI in the
economic growth of Thanh Hoa Province. FDI has a positive impact on the
industrialization and modernization in Thanh Hoa province in recent years. However,
the current state of foreign direct investment in Thanh Hoa still exist some limited
such as: Total investment project is small, they are not commensurate with the
potential and strengths of provincial; Differences between the registered capital and
performance capital is large, performance capital growth is not high etc. Finally,
evaluate the favorable level of factors affecting the investment process of FDI
enterprises in Thanh Hoa province. The result of the study shows that there are some
iv
factors that have been evaluated as much more favorable, while other factors are
considered more difficult.
Based on the findings of this research, recommendations were made to the
relevant in Thanh Hoa government in particular and as well as to the in the center
government for the formulation of appropriate investment incentive policies to attract
more foreign direct investment opportunities into Thanh Hoa province in the future
in-line with the FDI entrepreneur’s perception.
v
TABLE OF CONTENTS
Page
ACKNOWLDGEMENT...........................................................................................................ii
ABSTRACT…………………………………….......................................................................... .iii
TABLE OF CONTENTS......................................................................................................... vi
LIST OF TABLES ....................................................................................................................ix
LIST OF FIGURES ..................................................................................................................x
ABBREVIATIONS ...................................................................................................................xi
CHAPTER 1. INTRODUCTION................................................................................. 1
1.1 Background .............................................................................................................. 1
1.2 Problem Statement.................................................................................................... 3
1.3 Research Objectives.................................................................................................. 5
1.4 Study Object and Scope ............................................................................................ 6
1.5 Research Questions................................................................................................... 7
1.6 Significance of the Study .......................................................................................... 8
1.7 Research Definitions................................................................................................. 9
1.8 Organization of this study......................................................................................... 14
CHAPTER 2. LITERATURE REVIEW AND STUDIES .......................................... 15
2.1. Theoretical overview: FDI ....................................................................................... 15
2.1.1 Definitions of FDI.................................................................................................. 15
2.1.2 Attract FDI ............................................................................................................ 17
2.1.3 Forms of FDI ......................................................................................................... 18
2.1.4 Effects of FDI ........................................................................................................ 21
2.1.5 Summary of some theories of attraction of FDI ...................................................... 22
2.2 FDI and Motivation .................................................................................................. 28
2.3 Factors Influencing Location of FDI ......................................................................... 35
2.3.1 Political stability and policy mechanisms factors.................................................... 35
vi
2.3.2 Socio-cultural environment factors......................................................................... 35
2.3.3 Financial factors..................................................................................................... 36
2.3.4 Economy and market factors.................................................................................. 36
2.3.5 Resource factors..................................................................................................... 37
2.3.6 Infrastructure factors.............................................................................................. 38
2.4 The determinants of the FDI in Vietnam review of literature..................................... 40
2.5 Overview of Thanh Hoa province ............................................................................. 48
2.5.1 Overview of Thanh Hoa’s social - economy........................................................... 48
2.5.2 The mechanisms and policies for attracting FDI in Thanh Hoa province ................ 49
CHAPTER 3. RESEARCH METHODOLOGY ......................................................... 53
3.1. Theoretical framework and hypothesis development ................................................ 53
3.2. The data collection and data analytical framework ................................................... 55
3.3. Sample size and Population determination ............................................................... 60
3.3.1 Population determination ....................................................................................... 60
3.3.2 Sample size determination ..................................................................................... 61
3.3.3 Sampling Method................................................................................................... 62
3.4. Questionnaire Design............................................................................................... 62
3.5. Response Rate ......................................................................................................... 63
CHAPTER 4. DATA ANALYSIS AND RESULTS .................................................... 64
4.1 The trends of FDI inflows in Thanh Hoa Province in the period from 2001 to 2012 .. 64
4.2. Data analysis about the factors affecting the attraction of foreign direct
Investment in Thanh Hoa Province. ................................................................................ 67
4.2.1 The importance of various factors in attracting FDI ìnlows in Thanh Hoa
province ......................................................................................................................... 70
4.2.1.1. Political/governmental/legal factors (F1)............................................................ 70
4.2.1.2. Social and cultural factors (F2)........................................................................... 72
vii
4.2.1.3. Financial factors (F.3) ........................................................................................ 73
4.2.1.4. Economic and marketing factors (F4)................................................................. 74
4.2.1.5. Availability of resources factors (F5) ................................................................. 75
4.2.1.6. Infrastructure factors (F6) .................................................................................. 76
4.2.2 Results of the Analysis......................................................................................... 77
4.3 Data analysis about the effects of FDI in the economic growth of Thanh Hoa
Province ......................................................................................................................... 78
4.3.1 Contributions to development and movement of economic structure ...................... 79
4.3.2 Contributions in mobilizing invested capital for development ................................ 80
4.3.3 Employment change............................................................................................... 81
4.3.4 Contribution of FDI sector in province revenue...................................................... 82
4.3.5 FDI contribution to export turnover........................................................................ 83
4.4 Analysis of factors affecting the process of FDI investment in Thanh Hoa
province ......................................................................................................................... 84
4.2.1 Analysis of research results .................................................................................... 84
4.2.2 Correlations coefficient .......................................................................................... 89
CHAPTER 5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ......... 91
5.1 Summary .................................................................................................................. 91
5.2 Conclusion................................................................................................................ 93
5.3. Policy implications .................................................................................................. 96
5.4. Limitations and further research............................................................................... 99
BIBLIOGRAPHY......................................................................................................... 100
Appendix - A.................................................................................................................. 106
Appendix - B .................................................................................................................. 107
Appendix – C ................................................................................................................. 118
Appendix – D ................................................................................................................. 137
viii
LIST OF TABLES
Table
Page
4.1
Foreign direct investment project licensed in period 2001 to 2011
64
4.2
The importance level of political, governmental and legal factors
70
4.3
The importance level of social and cultural factors
72
4.4
The importance level of financial factors
73
4.5
The importance level of economic and marketing factors
74
4.6
The importance level of availability of resources factor
75
4.7
The importance level infrastructure factors
76
4.8
Descriptive Statistics
77
4.9
The important of factors affecting the process of FDI investment in
85
4.10
the Thanh Hoa province ( Response from the management FDI)
The importance of factors affecting the process of FDI investment
86
4.11
in the Thanh Hoa province (Response from the civil servants)
Factors affecting the investment process of FDI enterprises in
87
4.12
Thanh Hoa Province
Descriptive sattistics and correlation (Response from the civil
89
servants)
ix
LIST OF FIGURES
Figure
Page
3.1
Theoretical Framework
54
3.2
Data collection and analytical framework
55
3.3
Steps of the assessment process to improve the investment
60
4.1
environment
The trends in FDI in Thanh Hoa Province in the period from 2001
65
4.2
to 2012
Company’ position by the respondents
67
4.3
Time of company establishment
67
4.4
Form of investment
68
4.5
Company group by size of capital
68
4.6
Types of Business
69
4.7
Contribution of FDI in gross domestic product
79
4.8
Investment at current prices
81
4.9
Employment in FDI sector of Thanh Hoa province
82
4.10
State budget revenue from FDI sector
83
4.11
Export turnover of FDI sector
84
x
Abbreviations
ASEAN
Association of Southeast Asian Nations
BITs
Bilateral Investment Traits
CRS
Corporate Social Responsibility
DPI
Department of Planning & Investment
EP
Export- promoting
FDI
Foreign Direct Investment
FSA
Firm specific advantage
GDP
Gross Domestic Product
GSO
General Statistics Office
IS
Import-substituting
MNC
Multinational Corporation
MNE
Multinational enterprise
MER
Mixed, fixed and random
OECD
Organisation for Economic Co-operation and Development
PCI
Provincial Competitiveness Index
PCL
Product Life Cycle
R&D
Research and Development
SSA
Sub-Saharan Africa
SMEs
Small- and medium-sized enterprises
TNC
Transnational corporation
UN
United Nation
UNCTAD
United Nations Conference on Trade and Development
VCCI
Vietnam Chamber of Commerce and Industry
WTO
World Trade Organization
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CHAPTER 1
INTRODUCTION
1.1 Background
In global integration economy, Foreign Direct Investment (FDI) has been very
much needed to boost the growth of a country’s economy especially the developing
countries. It is claimed that FDI can create employment, increasing technological
development in the host country and improving the economic condition of the
country in general.
Vietnam implemented its economic reform Doi Moi in the mid -1980s. The
market-based economic policies and legal frameworks have contributed to open
up the country, trade barriers have been removed and FDI has been now a
fundamental part of the economy.
Among various forms of international business, FDI is highly regarded as
the most effective way by which transition economies become integrated to the
global economy. FDI involves the transfers of multiple resources to a host country,
especially transfers of knowledge, capital, management skills, marketing knowhow and the latest production technology. FDI is expected to provide urgently
needed capital for country in various fields with limited access to international
capital markets and to generate cash revenues through privatization for limited
budgets. Furthermore, the entries of foreign companies are projected to foster
changes in the economic system, to create competition and to promote the
development of many sectors, especially, private sector.
Foreign investors also
facilitate exports to Western and other international markets through their
knowledge and experience of the relevant markets as well as access to
distribution networks (Girma et al., 2005; Meyer, 1998; Nguyen and Xing,
1
2006). Hence, FDI interacts with many aspects of the transition process through its
direct impact on macroeconomics namely, the balance
of payments
and
employment, through the transfer of knowledge and through the role of investors as
new owners of formerly state-owned enterprises (Meyer, 1998). However, the
transition vice versa influences FDI inflows. For instance, FDI is gravitated to
countries with furthest progress in economic and institutional reforms to
minimize transaction costs of doing business (Baniak et al., 2002; Meyer, 2001).
As other transition economies, in the period from the late 1970s to 1990,
Vietnam was integrated in the trading system of the Soviet Union and its allies with
few other linkages. During 1980s, Vietnam had experienced severe shortages of food
and basic consumer goods, three-digit inflation, a high budget deficit, chronic trade
imbalances and deteriorating living standards. The sluggish economy forced the
Vietnamese government to initiate an overall economic reform from a planned
economy to a market one in 1986. The most important tasks of the reform
program w e r e to encourage development of private sector and to reduce the
dependence of the overall economy on inefficient state-owned enterprises. In this
process, FDI had played a crucial role in creating an “imported” private sector and
strengthening the competitiveness of the economy.
The first Law on Foreign Investment issued in 1987 by the Vietnamese
government was considered as one of the first concrete steps towards FDI
encouragement and economic renovation. This law was revised several times in
1992, 1996, 2000, and most recently replaced by a new law on investment
integrating both domestic and foreign investment (Unified Investment Law 2006).
These changes
and amendments
aimed
to remove obstacles against the
operation of foreign investors and to improve the environmental investment in
2
Vietnam, creating a fair business environment for both domestic and foreign
companies. Usually, these changes are providing more tax incentives, promote
transfer of technology and simplify investment licensing procedures.
Besides favorable and open policies toward foreign investments, Vietnam
also attracted foreign investors in another ways such as a potencial market for
consuming and low costs of production factors. In particular, Vietnam is a
profitable market with population of some 90 million so the demand of consumer
goods is huge. Moreover, factor-cost advantages arising from relatively low costs
of raw materials and low labor costs create the attractiveness of Vietnam
compared to neighboring countries, especially in garment, textile, and sea food
manufacturing industries (Mirza & Giroud, 2004). However, foreign companies in
Vietnam still have to pay high transaction costs associated with searching,
negotiating and contracting with domestic partners arising from an incomplete,
inconsistent and continuously changing institutional framework. Acording to the
Provincial Competitiveness Index Report from 2006 to 2012, many managers in
Vietnam have not fully satisfied with the resource of information on suppliers,
buyers, price trends and changes in policies and regulations, and they have to use
personal relationships with local authorities to get important information.
1.2
Problem Statement
According
to
the
decentralization
policy started in
the
FDI
law
amendment in 1996, each province was decentralized with more power and
autonomy in dealing with foreign investments
such as in granting investment
licenses, leasing land, providing export and import licenses and recruiting labor.
This policy, on the one hand, allows provincial authorities to develop in an
innovative ways that attract more foreign investors, and also leads to variations
3
in the implementation of the central laws and regulations among provinces. Foreign
investors may experience a lot of red tapes namely, corruption or delays in
administrative progress if local authorities possess conservative inherited norms
and cognitions. In this context, foreign investors have considered many factors
when investing in Vietnam such as modes of entry and location choices for their
operations so that they can make use of advantages and minimize disadvantages.
In order to attract investors to Thanh Hoa and give the most favorable
conditions to them, the province has offered many investment priority policies as well
as improves administrative procedures. Over the past revised, the province’s
investment environment has been significantly improved. With a view to: no
restrictions on size, industry, and geographic areas, based on the Investment Law and
Enterprise Law, Thanh Hoa is continuing to review and to improve the system of
mechanisms and policies towards incentives and making it more convenient for
investors. These mechanisms and policies of Thanh Hoa focus on improve and
simplify administrative procedures, issue the open and attractive mechanisms and
policies, call for investment, create innovative in building essential socio-economic
infrastructure, promote the advantages of human resources, improve the quality of
human resources in order to meet business’s demands. In addition, resolution No
02/NQ-TU dated 27/6/2011 regarding improvement for investment environment in
province in the stage 2011 – 2015 focused on implementing site clearance work in
order to meet investors’ requirements, support business development, transparency of
information for business, support business development, transparency of information
for business. With the above policy should take until 2012 in Thanh Hoa province has
41 investment projects involving foreign direct operation with a total registered
capital of USD 6,952 million.
4
These results are encouraging, but compared to the potential and advantages of
Thanh Hoa province are still limited. The number and sizes of investment projects in
Thanh Hoa are low. Thanh Hoa is not one of the top provinces classified based on
provincial competitiveness index. We have to describe the trends in FDI in Thanh
Hoa Province and identified of factors affecting the attraction of foreign investment in
Thanh Hoa. After that we can analysis of the impact of each factor to attract foreign
investment is essential for the government in offering policies to attract investment
capital and analyze the effects of FDI in the economic growth of Thanh Hoa Province.
Therefore, we can formulate policy implication to enhance economic growth of Thanh
Hoa Province in Vietnam.
This thesis focuses on determinant of “Causes and Effects of Foreign Direct
Investment: Basis for Policy Redirection in Thanh Hoa province in Vietnam”.
The research was conducted in two phases. The first phase involves secondary
collection and desk review such as reviewing of relevant literatures, journals,
publications, books and reports. The second phase is the collection of primary data via
structured questionnaire and data analysis.
1.3
Research Objectives
The main objective of this research is to determinants Foreign Direct
investment in Thanh Hoa province. Thus it hopes to achieve the following objectives:
1. To describe the trends in FDI in Thanh Hoa Province in the period from
2001 to 2012.
2. To determine the factors affecting attraction of FDI in Thanh Hoa Province
in terms of the following factors:
Political and legal
Social and culture
5
Financial
Economic and marketing
Availability of resources
Infrastructure requirement
3. To analyze the effects of FDI in the economic growth of Thanh Hoa
Province.
4. To formulate policy implication to enhance economic growth of Thanh Hoa
Province in Vietnam.
1.4 Study Object and Scope
Since year 2001 up to 2012 there are forty one (41) FDI entrepreneurs,
including 100% foreign ownership and as well as joint ventures. These companies
are playing a significant role for the growth of the Thanh Hoa province’s economy
today. This contribution played an important role restructuring of Thanh Hoa
province's
economic
structure.
FDI
corporations
have
created
industrial
manufacturing value of 4.388.8 billions VND in 2010. The estimated total value of
the exports turnover of goods and services was $US 729 million in 2012. This is an
indicator that, presently Thanh Hoa province is moving towards more diversified
industrial base industries.
With the growth of regional trade agreements the FDI flows in the Thanh Hoa
is at a higher rate than found in many other provinces in Vietnam. As such, the scope
of this research was extended to gather data from the existing foreign investors only.
In addition to that, this paper has been studied the trends in FDI in Thanh Hoa
province, the determinant factors affecting FDI flow to Thanh Hoa province and the
effects of FDI in the economic growth of Thanh Hoa Province.
6
Further more for this study, the Dunning eclectic paradigm / OLI
paradigm model and the factors which are influencing to choice of a host market of
Gilomre, O’s Donnel, Carson and Cummins (2003) are being applied.
14.1. Object
Causes and Effects of Foreign Direct Investment.
1.4.2. Scope
+ Spatial limitation Study site: Thanh Hoa province. Field survey was
conducted in forty one (41) FDI entrepreneurs and 200 officers.
+ Time range:
- Secondary data: collected during the period 2001 - 2012;
- Primary data: Surveys were conducted in the period 2012 - 2013;
- The solution was studied and proposed up to 2020.
1.4.3. Limits on Content
- Studying the trends in FDI in Thanh Hoa province;
- Determinant factors affecting FDI flow to Thanh Hoa province;
- Analyzing the effects of FDI in the economic growth of Thanh Hoa Province.
1.5
Research Questions
In order to achieve the above objectives, the following research questions were
proposed for this study:
1. What are the existing conditions of industry facilities of Thanh Hoa Province
in terms of (Land facilities (industrial park / location); Lights and water; Road
networks; Communication facilities; etc & buildings)
2. What are the existing policies with regards to (Ownership sharing; Stocks
distribution & allocation; Permits and Registration; Taxation; Supply of raw materials;
Capitalization & other resource; Man power)
7
3. To what extent that foreign direct investment are affected as course the low
FDI in terms of (Political/Government/Legal; Social and cultural; Financial; Economic
and Market; Availability of resources; Infrastructure)
4. Is there a significant difference on the perceptions of respondents in terms of
factors affecting the process of FDI investment in the Thanh Hoa province?
- Time investment licensing
- Time of evaluation the basis design, planning and construction licensing
- Compensation for land acquisition, land allocation
- Government intervention in the operation of enterprises (check by police, taxcollector, etc.)
- Labor recruitment
- The dynamics of provincial leaders
- Access to policy-makers to resolve firm issues
- Control of corruption
- The environmental factors.
- Access to information on investment policy and investment.
5. What policies investors & incentives can be redirected to encourage and
improve performance of FDI?
1.6 Significance of the Study
The study is deemed significant for its benefits to certain individuals such as
the following.
(1). The thesis indicated the general picture of foreign direct investment in
Thanh Hoa province in the period from 2001 to 2012. At the same time, it also
pointed out the trend of foreign direct investment in Thanh Hoa province during this
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