Tài liệu The effects of fdi on the labor market of asean countries

MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY MASTER THESIS THE EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES Specialization: International TradePolicy and Law HO THI HONG NGAN Hanoi - 2019 MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY MASTER THESIS THE EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES Specialization: International Trade Policy and Law Full name: Ho Thi Hong Ngan Supervisor: Dr Nguyen Thi Viet Hoa Hanoi - 2019 i DECLARATION I hereby declare that this master thesis is the scientific research of my own which made on the basis of theoretical studies, field surveys and under the direction and supervision ofDr. Nguyen Thi Viet Hoa. The research contents and results of this thesis are completely honest. These data and documents for the analysis, review and evaluation were collected from various sources which are fully listed in the reference list. I am fully responsible for the content of this master thesis as well as this declaration. Hanoi, 21 February 2019 Author Ho Thi Hong Ngan ii ACKNOWLEDGEMENT During the completion of this master thesis, I received the guidance and valuable help from the lecturers, siblings and friends. With great respect and deep gratitude, I would like to express sincere thanks to: Dr. Nguyen Thi Viet Hoa who wholeheartedly helped, supported and encouraged me from the initial to the final level of this dissertation. She provided me with comprehensive guide from choosing the topic, outlining the thesis and editing this research. Professors and lecturers from FTU as well as World Trade Institute in the Master of International Trade Policy and Law Intake Four, who not only spread profound knowledge and information in the fields of economy and law but generated strong motivation for me while I was taking this course as well. Last but not least, I would like to express my sincere thanks to my family, my colleagues and my friends, who have always by my side encouraging, supporting, contributing valuable ideas and giving me favorable conditions for me to complete this scientific research. iii TABLE OF CONTENTS DECLARATION ....................................................................................................... i ACKNOWLEDGEMENT ....................................................................................... ii LIST OF ABBREVIATIONS................................................................................. vi LIST OF FIGURES .............................................................................................. viii SUMMARY OF THESIS RESEARCH RESULTS ............................................. ix CHAPTER 1: INTRODUCTION ............................................................................1 1.1. Research Rationale .........................................................................................1 1.2. Literature Review ...........................................................................................4 1.3. Research objectives .........................................................................................7 1.4. Research questions..........................................................................................7 1.5. Scope of research ............................................................................................8 1.6. Research methodology....................................................................................8 1.7. Thesis outline ...................................................................................................8 CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR MARKET .........................................................................10 2.1. Fundamentals of FDI ....................................................................................10 2.1.1. The concept of FDI .................................................................................10 2.1.2. Characteristics of FDI .............................................................................12 2.1.3. Classification of FDI ...............................................................................13 2.2. Fundamentals of labor market ....................................................................15 2.2.1. The concept of labor market ...................................................................15 2.2.2. Composition of labor market ..................................................................18 2.2.2.1. Labor supply .................................................................................18 2.2.2.2. Labor demand ...............................................................................20 2.2.2.3. Labor cost .....................................................................................21 2.2.3. Functions of labor market.......................................................................22 2.2.4. Characteristics of labor market ..............................................................22 2.2.5. Classifications of labor market ...............................................................26 2.3. Theoretical framework of the effects of FDI on the labor market ...........28 iv CHAPTER 3: EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES ...........................................................................................................30 3.1. Current situation of FDI into ASEAN countries .......................................30 3.1.1. ASEAN is one of the most attractive destinations for foreign investment of the world ........................................................................................................30 3.1.2. Major Powers in the world invest more in ASEANdue to the strong internal force .....................................................................................................31 3.2. Current situation of the labor market of ASEAN countries ....................35 3.2.1. Abundant and young labor force ............................................................35 3.2.2. Lack of skilled workers ..........................................................................37 3.2.3. Facing a lot of difficulties .......................................................................38 3.3. Effects of FDI on the labor market of ASEAN countries .........................39 3.3.1. Effects of FDI on labor cost ....................................................................40 3.3.2. Effects of FDI on labor demand……………………………………….44 3.3.3. Other effects of FDI ................................................................................44 3.3.3.1. Effects on productivity ..................................................................44 3.3.3.2. Effects on inequality......................................................................52 3.3.3.3. Effects on working environment ...................................................58 CHAPTER 4: RECOMMENDATIONS FOR VIET NAM ‘S LABOR MARKET .................................................................................................................62 4.1. Perspectives of attracting FDI into Viet Nam ............................................62 4.1.1. Top investment destination in ASEAN ...................................................62 4.1.2. Focus on the quality of FDI projects ......................................................63 4.2. Some experiences from ASEAN countries .................................................65 4.3. Recommendations for attracting FDI to strengthen the positive effects of FDI on the labor market of Vietnam .................................................................68 4.3.1. Promote the investment environment of Vietnam to attract FDI inflow ............................................................................................................................69 4.3.2. Hold annual meetings/seminars to exchange and learn between Vietnamese and foreign businesses and vice versa to increase joint ventures ............................................................................................................................71 v 4.3.3. Encourage the use of Vietnamese labor at all levels of management in the FDI enterprises ............................................................................................72 4.3.4. Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam ...............................................73 4.3.5. Promulgate legitimate policies to protect the right of labor force .........74 4.3.6. Raising awareness of the workers about MRAsand exploring the possibility of extending MRAS to more sectors ................................................75 4.3.7. Reducing protection for domestic labor in AEC ....................................77 CHAPTER 5: CONCLUSION ...............................................................................78 REFERENCES ........................................................................................................82 vi LIST OF ABBREVIATIONS Abbreviation Full name ADB Asian Development Bank AEC ASEAN Economic Community ALMM ASEAN CIT CLMV CMS ASEAN Labor Ministers Meeting Association of Southeast Asian Nations Corporate income tax Cambodia, Laos, Myanmar, Viet Nam Centre for Multilateralism Studies EU European Union FDI Foreign Direct Investment GSO General Statistics Office IMF International Monetary Fund ILO International Labor Organization M&A Merger and Acquisition MNEs Multi-national enterprises MSEs Micro and Small Enterprises MoLISA Ministry of Labor – Invalids and Social Affairs MOMT Ministry of Manpower and Transmigration MRAs Mutual Recognition Agreements NTC OECD OLS National Training Council Organization for Economic Cooperation and Development Ordinary Least Square vii SMEs Small and Medium – Sized Enterprises SOEs State – Owned Enterprises PCI Provincial Competitiveness Index TNCs Transnational Corporations TVET Technical and Vocational Education and Training UN UNCTAD United Nation United Nations Conference on Trade and Development USA United States of America VBF Viet Nam Business Forum VCCI Viet Nam Chamber of Commerce and Industry WTO World Trade Organization viii LIST OF FIGURES Figure1. Classification of FDI...................................................................................15 Figure2. The labor market .........................................................................................21 Figure3. FDI flows into ASEAN member states in 2017 .........................................31 Figure4. Intra-ASEAN investment, 1995-2016 ........................................................32 Figure5. EU FDI flows in ASEAN, 1995-2015 ........................................................32 Figure6. FDI in ASEAN ...........................................................................................33 Figure7. EU services FDI flows in ASEAN, 2000-2016 ..........................................33 Figure 8. Labor force in ASEAN member states in 2017 .........................................36 Figure 9. Labor force growth ....................................................................................36 Figure10. Employment share of ASEAN in 2017 ....................................................37 Figure11. Minimum wage in ASEAN, 2018 ............................................................40 Figure 12. Monthly wage of Vietnamese workers in Q2, 2018 ................................42 Figure13. Monthly average wage of Laotian workers, 2017 ....................................43 Figure14. Productivity growth rate of Viet Nam (in percentage) .............................46 Figure15. The gap in absolute productivity between economic sectors (times) .......47 Figure16. Capital, attracting labor and raising productivity, 2006-2016 ..................49 Figure17. Indonesian government employment programs .......................................51 Figure18. Labor market conditions in ASEAN ........................................................58 Figure19. Best Places to Work in Viet Nam in 2016, 2017 ......................................60 Figure20. Attracting FDI to Viet Nam (1988-2017) .................................................62 Figure21. FDI in Viet Nam by sectors (2018) ..........................................................63 Figure 22. ASEAN Leaders Statement on Human Resources and Skills Development for Economic Recovery and Sustainable Growth ..............................65 Figure23. Priority areas for FDI attraction ................................................................70 ix SUMMARY OF THESIS RESEARCH RESULTS In some certain aspects, the author has answered all the questions which have been raised when considering about the topic.The characteristics of foreign direct investment and labor market have been listed and analyzed carefully. The effects of foreign direct investment (FDI) on the labor market of ASEAN countries are quite mixed and need to be further analyzed by in-depth models. In general, FDI has brought positive impacts on the labor market of ASEAN countries, but these effects are not well adapted due to both subjective and objective reasons. The labor force of ASEAN still faces a lot of difficulties in taking advantage of huge FDI capital from outside. Therefore, some solutions have been proposed to help ASEAN labor force in general and Vietnamese labor in particular get access to this type of investment and gradually raise their capabilities to work abroad. 1 CHAPTER 1: INTRODUCTION 1.1. Research Rationale Today, in countries with transitional economies, including Vietnam, in parallel with the expansion of business freedom, the development of commodity and service market and securities market, labor market is also being formed. Economic development is an indispensable goal of all countries to improve the quality of life of the people. In order to develop economically, especially in the market economy, it is necessary to develop different types of markets, as the market is the living environment of the commodity economy. The labor market is formed and developed in the market economy. It has relationship with other types of markets: capital market, science and technology market, information market, monetary market, etc.. The labor market displays the relations between the employee and the employer, on the principle of agreement through employment. Under the ASEAN Economic Community (AEC) blueprint signed in 2007, ASEAN will “facilitate the issuance of visas and employment permits for skilled ASEAN and skilled workers engaged in trade activities, cross-border investment” especially in the four priority areas (air, information technology (e-ASEAN), health and tourism) as well as logistics. In order to achieve this goal, functional agencies in each country have come to recognize each other's education and qualifications and grant "ASEAN experts" certification through the creation of curricula and acknowledgment of ASEAN. In particular, ten ASEAN countries have signed Mutual Recognition Agreements (MRAs) under which ASEAN experts will be allowed to seek employment anywhere in ASEAN. In 2005, MRA for technical advisory services was the first to be signed, followed by MRAs in nursing, surveying, architecture, medicine, dentistry, accounting and tourism. A total of eight expert certificates have been created. Individuals wishing to look for work abroad can obtain "expert" certification through the MRA system and continue to apply for a job visa. 2 In addition, the ASEAN Movement of Natural Persons Agreement was signed in 2012. Through this agreement, foreign nationals seeking immigration to a country to carry out work related to current job may be granted a work visa upon completion of certain conditions. Although overall progress has been made in the region, it is not easy to apply these complex frameworks and countries' laws have not been updated, limiting the practical implementation of the system. The AEC, a framework for the region's economic integration, focuses on a free labor market that allows skilled professionals to work anywhere they like across the region, which has a population of 620 million people. The four objectives of the AEC are: (1) a single market and production base; (2) a competitive economic region; (3) equitable economic development; and (4) fully integrated region in the global economy. The free labor market, which began to take shape in 2015, has freed up eight professions, including medicine, dentistry, nursing, engineering, architecture, natural resources and geographical exploration, accounting and tourism, allowing professionals in these areas to move between countries in the region to work. ASEAN has about 300 million people of a working age, 70 percent of whom are from Indonesia, the Philippines and Vietnam. A common labor market that the AEC is aiming at will provide opportunities for skilled workers in the ASEAN region to find suitable jobs enabling them to develop their careers and provide a rewarding source of income as well as other benefits. Currently, in ASEAN, market economy development is placing higher requirements on the development of the market in general and the labor market in particular (because the labor market is a decisive market). In fact, in recent years and now, although the labor markets of these countries have changed positively: labor supply as well as labor demand has gradually increased, labor quality has been improved, gradual decline in unemployment, with the increasing demand of economic development, the labor market of most of the countries in ASEAN is facing many shortcomings. Due to the varying economic conditions among the ASEAN countries, workers often move from low-income countries to higherincome countries in search of higher incomes. It is easy to see a lot of Cambodian 3 workers in the construction industry of Singapore or Vietnamese workers in Thailand restaurants. Indonesia and the Philippines have a large workforce and are now facing high unemployment and low incomes. For these reasons, they tend to move to their neighbors (Push Force). On the other hand, Thailand and Malaysia have high living standards and low unemployment rate, attracting workers from the remaining six countries (Pull Force). The biggest concern for ASEAN enterprises is the shortage of skilled workers. This seems to be the most serious problem in finance, ICT and other professional services. Moreover, the demand for employment in mid-level managers and professionals is very high. A standout amongst the most pivotal parts of foreign direct investment (FDI) is its commitment to the economic growth of the host nation. This commitment is essential and is one that is actually expected by any host nation particularly developing ones. In the most recent couple of decades, nations have been contending with one another for the reasons of drawing FDI, this is due to the essential commitment it makes to the general growth of economies. FDI not just offers a steady capital flows, but long term commitments to host nations, insuring a regular capital inflow to host nations. Access to new and cutting edge technological innovation is potentially a standout amongst the most vital reasons why a nation would need to draw FDI. FDI has always played a strategic role in the economic growth of ASEAN and in many other economic cooperation regions around the world. FDI is seen as an important channel for obtaining employment opportunities, human capital development, higher wages, technology transfer, and infrastructure improvement. In other words, FDI is often seen as a vehicle for an increase in productivity and efficiency, and consequently as a driver for economic growth. FDI is likely to have direct and indirect effects on host economies. Increasing capital formation, employment and trade is the direct effects of FDI, whereas receiving a beneficial transfer of know-how and technology, and management skills from home country responds to indirect effects of FDI. With the advantages of cheap labor and capital resources of member countries, ASEAN has built an attractive business 4 environment for multinational corporations seeking profits through the implementation of different channels of FDI. With aforementioned advantages as well as drawbacks of labor market, ASEAN countries need to work closely to reduce transaction costs, strengthen FDI promotion policies and harmonious development of the economy among member countries in order to utilize FDI inflow. From the above reasons, the topic “The effects of FDI on the labor market of ASEAN countries” is chosen. This thesis shall give information about FDI and labor market and deepens its analysis of FDI and labor market in ASEAN. After that, based on the current status of labor market in Vietnam, the thesis shall give several implications for Vietnam’s labor market. 1.2. Literature Review The effects of FDI on the labor market have been studied carefully worldwide. It is still controversial whether FDI could bring advantage to the labor market of host country. While some research proves that FDI could lead to higher wages, higher productivity, and increased wage inequality, the others show that the effect on labor market is more mixed. Many studies confirm that FDI has more or less a positive impact on employment. Lukáš B (2007) indicates that multi-national enterprises (MNEs) increase wages as well as productivity through spillovers in domestic firms. Surprisingly productivity grew faster than wages and thus did not cause unemployment. MNEs helps to create efficient jobs opportunities, reallocate resources from the less to higher productive and thus enhanced total employment. When compareing domestic companies with foreign companies, the author finds that MNEs produce with increasing external returns to scale, whereas domestic firms produce with decreasing external returns to scale, but with increasing internal returns to scale. Importantly, employees in foreign companies have higher productivities and are paid more. They are usually bigger and employ more people per company comparing with domestic firms. Karlsson et al. (2009) use FDI data on various manufacturing companies in China 5 between 1998 and 2004 to assess the impact of FDI on employment and come to conclusion that FDI enterprises have high employment growth. High employment growth in foreign companies is due to the favorable characteristics of this business, such as capital intensive and high productivity. More recently, Poole (2013) provides evidence of positive spillovers of FDI in Brazil by using matched employer–employee data to show that as workers migrate from multinational to domestic firms there is an increase in the wages of even domestic workers at incumbent firms. Further, the transfer of technology is greater the higher the skill level of the worker migrating from the multinational and the higher the skill level of the worker at the incumbent firm. Average wages for incumbent workers at the domestic firm increase as the share of workers from multinationals increase at the domestic firm.David M (2015) indicates that FDI has a positive and significant effect on employment implying that an increase in the inflow of FDI is associated with higher employment. Thus, Sub-Saharan African governments should strongly consider poverty alleviation and employment policies that encourage and direct FDI to the industries where it can significantly reduce unemployment. David uses a panel data set for 48 Sub-Saharan African countries for the period ranging from 1991 - 2011. Furthermore, he uses the Ordinary Least Square (OLS) regression estimator, and finds that FDI has the expected sign and significance in all specifications for both the general and youth population, which implies increasing inflow of the FDI to Sub-Saharan African countries, is associated with increase in employment ratio.The expected linkages between FDI and labor productivity of domestic enterprises are one of the main reasons many countries attract investment from multinational companies. Increased labor productivity can lead to an increase in wages, jobs and growth. Some previous studies have investigated the relationship between FDI and productivity, suggesting that there is a positive relationship. Research by Blalock &Gertler (2008) found that FDI helps increase productivity and increase efficiency among companies. However, in other research, the findings are worth considering.Regarding the relationship between FDI and wage inequality, the study by Velde& Morrissey 6 (2002) found no strong evidence that FDI reduced wage inequality in some East Asian countries during the period 1985 - 1998. Although FDI increases wages for both skilled and low skilled workers, this study shows that FDI has increased wage inequality in Thailand. Jenkins's study (2006) examines the impact of FDI on employment in Viet Nam in the 1990s that, despite the rapid growth of FDI in these years, direct employment creation is very limited. Most of Vietnam's labor force continues to work in the agricultural and service sectors such as wholesale and retail and transport industries. Even the expansion of foreign companies' investment in the early years of the 21st century into labor-intensive industries did not have a significant impact on employment due to the high productivity and low added value of many of these investments. Foreign investors in Vietnam have created very limited links with local businesses and imported most of their inputs. Domestic enterprises that are under pressure to improve labor productivity to enhance their competitiveness with foreign enterprises have led to a trend of reducing jobs.Anh(2006) shows that the productivity of Vietnamese enterprises has changed thanks to the appearance of FDI enterprises, through positive spillover effects on components such as firm size, quality of labor, capital intensity. However, the study shows that Vietnam's low labor level is a factor hindering the positive impact of FDI on labor productivity. At the enterprise level, a low level of labor will limit the ability to acquire and transfer technology. Thus, if there is a shortage of workers who meet a certain level, the dissemination of technology will be difficult or will not happen. Besides, a large gap in technology and labor productivity is also making it difficult to move skilled labor between FDI enterprises and domestic enterprises. Yussof (2010) studied the impact of FDI on the Malaysian labor market and concluded that FDI has no effect on labor variables. Galina H and Mingzhi X (2016) points out that FDI increases income inequality, there is still insufficient evidence on spillover effects of FDI on labor market conditions faced by domestic firms. In addition, the majority of positive effects observed are direct effects on target firms and some labor productivity 7 spillovers and higher wages are observed in domestic firms. In the paper, the authors first review the empirical literature and analyze the mechanisms by which FDI affects host country labor markets and then present a stylized model that illustrates these mechanisms. They find out that a large empirical literature on the effects of FDI on local economies, with much of it focused on technology transfers and spillovers, while a smaller but still substantial body of literature addresses the effects of FDI on a destination country’s labor markets, primarily on wages and employment. Thus, empirical studies show the necessity of FDI for economies. However, studies on the impact of this capital on labor market vary between countries in different stages. Therefore, this paper focuses on analyzing the labor market of some ASEAN countries with the existence of FDI and how it might affect this type of market and how can ASEAN workers take advantage of huge FDI capital inflow. 1.3. Research objectives The research aims to clarify the effects of foreign direct investment on the labor market of ASEAN countries in general and in Viet Nam in particular. The research also aims at giving recommendations for improving the quality of the labor market in Viet Nam. 1.4. Research questions The objectives of the research are derived from the research questions as follows: ✓ What are the characteristics of foreign direct investment and labor market? ✓ What are the effects of foreign direct investment on the labor market of ASEAN countries? ✓ What are the strength and the weakness of Vietnamese labor force and with the presence of AEC, whether they could take advantage of it? ✓ How can Viet Nam use the FDI capital efficiently to boost its labor market productivity?? 8 1.5. Scope of research Regarding the content of the dissertation, it focuses on the real situation of effects of foreign direct investment on the labor market of ASEAN countries. The scope of this thesis is as follows: As for geographical scope, the research is intended to conduct a depth practical view concerning effects of foreign direct investment on the labor market of some ASEAN countries including Laos, Thailand, and Indonesia. Then, the research deepens its study by a case of Viet Nam. As for time scope, the research focuses its analysis and synthesis on the period mainly from 2006 to 2016. This period has many events affecting the economies of ASEAN countries such as economic crisis in 2007, the establishment of AEC in 2015. We may see the level of effect on labor market of ASEAN countries. 1.6. Research methodology During the research process of this thesis, the author has combined different research methods as follows: - Theoretical research methods: The thesis will collect legal documents, economic information through historical research method and then classify and systematize them. Moreover, the thesis also analyzes and synthesizes all data and documents. - Practical research methods: The thesis will observe the real situation of effects of foreign direct investment on the labor market of some ASEAN countries and base on particular experiences from these countries, giving recommendations for Viet Nam by professional solution method. 1.7. Thesis outline Chapter 1: Introduction 9 Chapter 2: The theoretical framework of the effects of FDI on the labor market Chapter 3: Effects of FDI on the labor market of ASEAN countries Chapter 4: Recommendations for Viet Nam‘s labor market Chapter 5: Conclusion