1. Locational Determinants of FDI: The Case of Vietnam Presented by Le Viet Anh Nagoya University, GSID, 1 st year PhD Student At JVEC’s Meeting 29 th May 2004, GRIPS

2. Outline FDI Theories Country’s Background FDI Development and Characteristics Qualitative Assessment of FDI Locations Empirical Study Conclusions and Policy Implications

3. Theories on FDI: Which to chose? Capital Theory International Trade Approach Market Imperfections and Industrial Organization Dunning’s Eclectic Paradigm and International Investment Path Agglomeration Economies

4. The Theory Dunning’s eclectic paradigm and agglomeration economies arguments seems to be the best framework to explore determinants of FDI in Vietnam locationally

5. Vietnam: Country Background

6. Impressive Macroeconomic Indicators High and sustained economic growth Rapid growth of external trade Increasing rate of investment Appropriate inflation rate

7. FDI Development and Characteristics

8. FDI in Vietnam 1988-2002 0 1 2 3 4 5 6 7 8 9 1988198919901991 1992 1993 19941995 1996 19971998 199920002001 2002 USD bills 0 100 200 300 400 500 600 700 800. Approved (left scale) Implemented (left scale) No. of projects (right scale)

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

10. By Sectors

11. By Forms of Investment

12. By Locations (USD million realizations)

13. Empirical Study Locational Determinants of FDI 1991-2001

14. Literature Review Dunning’s Suggestion 1) natural and created assets; 2) capital intensity; 3) market size and market growth; 4) infrastructural development; 5) labor cost and productivity; 6) degree of openness; 7) government policies; 8) political stability; 9) profitability; 10) geographical proximity

15. Lim’s suggestions 1) economic size of the host market, 2) economic distance (transportation costs), 3) agglomeration effects, 4) factor costs, 5) fiscal incentives, 6) business/investment climate, 7) trade barriers/openness and 8) others.

16. Studies on Vietnam Nguyen Tuan Dung (1996) used cross-sectional data from 1990-1995 Do Minh Hoai (1998) applied the data of 1988- 1997 to Dunning’s eclectic approach. Nguyen Nhu Binh and Jonathan Houghton (2002) used cross-country analysis, taking into account the impact of Bilateral Trade Agreement between Vietnam and the US. Nestor (1997) identified the uneven location of FDI under the form of joint ventures FDI

17. Proposed Analytical Framework

18. Pooled Regression

19. Data

20. Regressions Panel data covering eight economic regions and from 1991-2001 OLS regressions with White correction for heteroschedasticity GLS regression with fixed effects, common intercepts and differenced data Regressions for full time period (91-01) and sub- sample periods (91-96) and (97-01) Regressions without Red River Delta and Southeast Regions Regression without cumulative FDI

21. Main Findings (Commitments) Non-market seeking FDI Agglomeration effects are strongly confirmed Labor cost is important determinant Not much differences between secondary school labor and others Development of numerous IZs and EPZs seem to be not efficient

22. Main Findings (Realizations) Agglomeration effects are strongly confirmed Labor quality may not be much concerned since quality are similar across regions Investors might be reluctant to invest in more developed regions Openness is a significant determinant

23. Common-Intercepts Market size is significant determinant Agglomeration effects are confirmed The fixed effects (e.g. administrative procedures, geographical location, historical tie, the regional willingness) might be stronger than market size

24. Differenced Data The results are similar Agglomeration effects are confirmed, especially in the case of cumulative FDI The investors might pay more attention to the rate of change than the present condition

25. Main Findings (without HN and HCMC) Almost all results are similar Openness is significant determinant Determinants of FDI in Vietnam are similar across regions, both developed and less developed ones

26. Main Findings (Sub-sample) Agglomeration effects are confirmed in both periods Market size become largely negative significant in 97-01 Wage became highly significant for 97-01 period

27. Conclusions positive impact of agglomeration effects there might exist some other important variables those impacts is larger than the market size consideration importance of FDI determinants moves through times (especially labor wage) The policy does not seem to be effective in drawing regional FDI

28. Conclusions (cont.) A significant differences in determinants of FDI commitments and that of FDI realization (openness) The model is robust, determinants of FDI are similar across regions

29. Policy Implications

30. For Promotion of FDI Keeping Stable Political and Economic Stability, Improving Overall Legal Framework National treatment on possible areas Dual price system for infrastructure service Foreign Investment Law Local content requirement

31. Cont. Improve the Quality of Labor, While Keeping Comparative Advantage of Labor Cost with Countries in the Regions, Especially China more skilled labor is needed skilled human capital is crucial for capturing the positive effects from FDI technical training should be enhanced

32. Cont. Export-Oriented FDI and Supporting Industries Development WTO accession and bilateral agreements it is wise to allow some foreign firms to produce inputs for exporting foreign invested firms

33. Cont. Complementary Role between National Level and Regional Level Management policy formulation capacity at national level should be strengthened the regional initiatives should also be taken into account at the national level (Binh Duong and Dong Nai cases)

34. For Better Distribution of FDI Among Regions It is difficult to attract FDI to less developed regions It might be wise to develop some regions first and expect the diffusion to other regions later Regional strategy should be based on their comparative advantages Common measures are necessary

35. Thank you for your attention!