Fdi in Vietnam
Delaunay and Torrisi: FDI in Vietnam
INDIA, CHINA AND AMERICA INSTITUTE 1549 CLAIRMONT ROAD, SUITE 202 ● DECATUR, GA 30033 USA WWW .ICAINSTITUTE.ORG
FDI in Vietnam: An Empirical Study of an Economy in Transition
Christian Delaunay & C. Richard Torrisi
Journal of Emerging Knowledge on Emerging Markets Volume 4 November 2012
Produced by The Berkeley Electronic Press, 2012
1
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI in Vietnam: An Empirical Study of an Economy in Transition
Christian Delaunay Bridgewater State University C. Richard Torrisi Suffolk University
Journal of Emerging Knowledge on Emerging Markets Volume 4 November 2012
DI has grown rapidly in recent years in an increasingly integrated global economy until the recent financial and economic crisis spread globally. The emerging former Soviet-bloc countries of Central and Eastern Europe, Southeast Asia, China, and India have transitioned to market economies during the last twenty years stimulating global FDI flows which have increased more rapidly than any other international economic or financial transactions. Global FDI inflows in 1985 were estimated to be $53 billion, however, by 1990 aggregate FDI had reached $234 billion and data for 2008 indicate global FDI of $1.8 trillion i. Economic restructuring and liberalization in the major recipient and investing countries, global capital markets, and continued economic transition in emerging command economies strongly influenced investor behavior and strategy. Economic growth has been accompanied by greater political stability and the building of democratic and market institutions in many emerging economies. The acceleration of FDI through 2008 has been fueled by the increasing globalization of transnational organizations of their production networks, the policy liberalization of host countries regarding FDI in service industries and real estate growth in mergers and acquisitions, and the expanding investment opportunities in emerging markets and newly privatized sectors in both industrialized and developing countries.
F
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
2
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
The economic and financial crisis, which developed in 2008, did not have an immediate significant negative impact of 2008 foreign direct investment flows. While loan and capital availability shrank in the U.S. in the latter part of 2007, and subsequently globally, companies took advantage of, on one hand, capital from various funds e.g. wealth and hedge funds, and , on the other hand, the depreciation of the US dollar throughout the year until end 2008. The global pattern of FDI throughout the period of this study has been dominated by OECD countries, particularly by the U.S. and the European Union. In 1989, the “triad” of the U.S. Japan, and the European Union accounted for approximately 77% of outward global FDI and by 2006, for about 65% of FDI inflows. In 2008, record inflows of FDI into developing nations were reported ($630 billion) but the “triad” still dominated both as a home and host nations of new FDI. The U.S. continued to be the largest as well as the preferred host country of FDI, receiving over $316 billion in 2008. As a result of the global financial crisis, global FDI flows declined significantly in 2009 and rose modestly in 2010. Much of the FDI inflows into non Triad host economies during this period were to BRIC countries, Brazil, Russia, India, and China, with their large and growing domestic markets. However, another grouping of developing countries which are attractive to foreign investors has recently received growing attention in the research and analysis of global FDI. The CIVETS, Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, have emerged as interesting and important host countries for FDI ii. In particular, Vietnam has become a major and competitive host in the CIVETS grouping with strong economic growth and relative political stability. Southeast Asia, as a region, is comprised of the 10 current member of ASEAN, the Association of Southeast Asian Nations iii. In Southeast Asia, global FDI inflows peaked at almost $74 billion in 2007, recovering slowly from the Asian Financial crisis and its aftermath. However, the global financial crisis significantly impacted the region as inflows fell to $37 billion in 2009, a 50% decline. Vietnam also experienced a significant decline in FDI inflows, but was not as impacted as its more developed ASEAN partners, Malaysia, Thailand, and Singapore. FDI in Vietnam peaked at $6.74 billion in 2007, but declined almost by a third to approximately $ 4.5 billion in 2009, according to the World Investment Report (2010). While data on the volume and allocation of FDI in Vietnam is generally available during the period of this study from governmental sources, it is somewhat inconsistent and missing in some years. Thus, for our empirical analysis, UNCTAD data on FDI inflows to Vietnam which provide a consistent time series is used. Data provided by the General Statistical Office (20002008) of the government of Vietnam provides some detail on the regional and sectoral allocation of FDI, as well as source country information. As expected in developing countries, FDI clusters in the larger cities with FDI inflows to the Hanoi and Ho Chi Minh City regions amounting to an approximate average of 50% of inflows during the period of this study. Major sectors of registered FDI in the nineties for Vietnam were
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
3
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
primarily industry (manufacturing), construction and communication (infrastructure), tourism and other services. Since 2000, communications, transportation, general infrastructure, and service sectors have accounted for approximately 30% of inward FDI. Country sources of registered FDI in Vietnam were primarily other East Asian economies throughout the period, with an average of between 60-65% of the total registered FDI capital inflow, with the EU and the U.S. accounting for an average of approximately 18% during these same years. The US was the eleventh biggest investor in Vietnam in registered capital from 1990-2005, but in recent years the full impact of the US Vietnam Bilateral Trade Agreement approved in July 2000 has led to increasing U.S. FDI. During the period of this study, implemented FDI as reported in IMF and UNCTD data banks has increased from $375 million in 1991 to approximately $8.5 billion in 2008. However, the Asian financial crisis did impact FDI in Vietnam also, declining from $2.5 billion in 1997 to a low of $1.2 billion in 2002, with a dramatic recovery in FDI inflows since 2002. Vietnam has emerged as an alternative smaller emerging economy market for FDI in the last five years, attracting both domestic market seeking and export oriented FDI. Vietnam continues to attract significant East Asian and OECD investors. This paper analyses the economic determinants of FDI for a smaller Non-BRIC emerging country, undergoing a rapid transition to a market driven economy in a region of great competitiveness among host countries and growing attractiveness to major source countries. Economic and Policy Environment Vietnam, after decades of military conflict and economic stagnation, began economic policy reform to revive economic growth and start a transition from a command economy with central planning to a market-based economy in late 1986. This initiative and commitment to a market economy, referred to as the “Doi Moi” (renovation) process, although implemented gradually, successfully accelerated economic growth and the development of the private sector and transformed Vietnam into an open economy. From 1986 through 2006, real GDP growth averaged 6.8% with moderate inflation. With a population of close to 90 million and a literacy rate of over 90% in 2009, real GDP grew at an average rate at 8.1% during 2007-2009, and nominal GDP in dollars, rose from $45.3 billion to $93.7 billion, more than doubling. In all basic economic measures, Vietnam emerged as an ASEAN “Tiger Cub” in the past decade. Of course, economic growth and FDI were negatively impacted between 1998-2002 as a result of a slowing of economic and FDI policy reforms but also the East Asian financial crisis which began in late 1997. This financial, currency, and economic crisis impacted the economy of every country in East Asia. Foreign investors recalculated the expected risk/return ratios and put many FDI projects on hold. Full economic and
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
4
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
financial recovery and the restoration of foreign investor confidence took years, with regional FDI inflows ending their decline in 2002 as reported by UNCTAD (2008). However, during the crisis and its aftermath, real GDP growth continued in Vietnam, bottoming out at 4.7% in 1999. Vietnam was not as impacted by currency collapse and short term capital flows volatility as the larger, more economically unstable economies in the region. According to UNCTAD, “it (Vietnam) was able to weather the East Asian financial crisis much better than other countries, FDI inflows were increasing again in 2003, to approximately $1.5 billion” iv. As an outcome of Doi Moi initiatives, Vietnam opened its economy with the first “Law on Foreign Investment” in Dec. 1987. As specified, FDI was permitted and welcomed on the basis of respect for sovereignty, existing laws and regulations, and mutual benefit. The laws governing FDI have been revised frequently since then to improve the FDI climate and attract more investment. In 2006, a New Investment Law was approved that further liberalized and simplified FDI regulations and decentralized management of FDI proposals and their implementation. With a favorable FDI climate, political stability, economic growth, and a literate and low cost workforce, Vietnam has increased FDI inflow each year since 2002. In addition to the favorable domestic, economic, financial and legal reforms and economic performance, Vietnam has participated as a member in a number of regional and global organizations since 1995. Vietnam joined ASEAN, The Association of Southeast Asian Nations, in July 1995, with a commitment to regional free trade and a gradual elimination by 2005 of tariffs and to a future ASEAN Economic Community with the free flow of goods, services, and investment. In 1998, it became a member of APEC, the Asian-Pacific Economic Cooperation group, seeking the objective of free and open trade and investment in the Asia-Pacific in the next decade. For the U.S. which had not been a major investor in Vietnam during the nineties, the signing of the “Bilateral Trade Agreement” with the U.S. in 2000 has encouraged rapid growth of FDI by U.S. firms and U.S. regional subsidiaries in Southeast Asia. Also, this has accelerated the normalization of economic and political relations between the two countries. Lastly, Vietnam, although a member of the U.N. since 1977, became a full member of the WTO in January 2007 with a commitment to all WTO multilateral agreements except on Government Procurement Policy. Thus, as a major growing emerging economy, Vietnam has integrated into the global economic and business environment and developed a dynamic open market economy. Literature review Classical models of FDI tend to follow Dunning’s (1980) ownership, location and internalization approach (OLI), relative factor endowments (Helpman, 1984), openness to trade (Hejazi and Safarian 1999), comparative advantage and institutional factors (Bush et al., 2003). Host country determinants of FDI tend to revolve around economic conditions, host country policies and MNE strategies and have been well documented
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
5
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
(Lall, 1997). Specific FDI determinants in developed economies tend to focus on location attractiveness such as market size and infrastructure, risk reducing policies, stability and strength of the currency, membership in international trading organization, and state incentives (Blonigen, 2005). In addition to the “classical” market attractiveness, FDI determinants in emerging markets tend to emphasize labor costs and labor skills and other attractiveness factors as highlighted in Nunnenkamp (2002). Of particular interest are studies focusing on emerging economies previously under socialist rules such as China and Eastern European countries. Given China’s size and unique market considerations, FDI determinants in China mimic both that of emerging and developed economies with domestic market size, cost advantages and openness to the rest of the world as significant determinants (Dees, 1998). Perhaps even more relevant as a comparison to Vietnam is FDI in countries formerly identified as Eastern European. Bevan and Estrin (2004) established that country risk, labor costs, host market size, EU accession and gravity factors were significant determinants in attracting FDI. The significance of market size and labor cost were confirmed by Torrisi et al (2009a) who also found taxes and privatization to be equally relevant in attracting foreign investment in Poland (2009b). There is an abundance of research articles on the impact of FDI in Vietnam. Most of the research underlines the positive effect of FDI on the economy: Lan (2006) notes FDI impact on Vietnam’s rate of growth and additional wealth through exports. Nguyen (2007) points out that the rapid growth is in turn a determinant of new FDI. Hoang (2008) argues that market size, GDP growth, trade openness, and infrastructure development are factors attracting FDI inflows. Pham (2010) described the mutual causality between export and FDI in Vietnam, while Mirza and Giroud (2004) reported that political stability, government policies, size of the local market and quality of the labor force were significant determinants of FDI in Vietnam. Meyer and Nguyen, (2005) found the effect of institutions on FDI to be a statistically significant determinant of FDI, as well as population, transport, GDP growth, wages, and education. While locational factors have played a role in Vietnam’s attractiveness to FDI, (with neighboring China and the relative proximity of Japan), its low labor cost has also been stressed (ODI 1997). Using panel data, Hsieh (2005) found that GDP per capita, and the degree of trade openness were significant positive determinants. Additionally, the Asian financial crisis was found to have deterred FDI inflows. In a sixteen Asian country model, (including Vietnam) Nguyen and Haughton (2002) found that trade openness, currency strength, government budget deficit, and domestic savings were significant factors in attracting FDI. They also linked the increase of FDI in Vietnam with the Bilateral Trade Agreement with the US, a conclusion also reached by Parker et al (2005).
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
6
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Model Specification and Methodology The dependent variable in the FDI models estimated for Vietnam is annual FDI in dollars from 1991 to 2008 as reported by the IMF and UNCTAD, databases. Thus, the measure includes all reinvested earnings as well as new capital inflow and provides a consistent time series of annual aggregate FDI. Similarly, annual GDP is measured in current dollars for the time period analyzed, as specified by these international sources. Data for additional independent variables examined in our FDI models are primarily from country sources such as the General Statistics Office of Vietnam. Where data from earlier years is missing for some of the variables in our analysis, our time series is supplemented by data provided by other country and international sources such as the Labor Ministry of Vietnam. Models of FDI determinants in emerging economies emphasize two groups of factors. Extending the classical models of FDI and the many empirical studies of FDI in OECD countries, macro-economic variables that are available in consistent time series from international and/or governmental sources most often include market size, market growth, trade openness, etc. This paper examines these economic factors for impact on FDI in Vietnam using a period of rapid economic transition and trade and investment liberalization. Additional, less quantifiable non-economic factors (such as political stability, institutional efficiency, cultural similarity, corruption indicators) are sometimes FDI determinants. However, for the period of this study, indices or consistent measures of these qualitative factors are not available for Vietnam and future research on the topic will require the specification of proxy variable or measures for these factors. This paper does attempt to explore the impact of external events, through the use of dummy variables, that may have influenced the political and economic environment for FDI in Vietnam. Vietnam has experienced significant increases in FDI in the past decades, although primarily Intra-East Asian inflows, linked with real economic growth during this period. Previous empirical studies have examined key macro-economic variables that may influence FDI with mixed and often ambiguous results. This paper extends and updates past research, examining a number of these determinants for Vietnam during its rapid economic transition and transformation. During this same period, two significant events occurred which altered the internal economic linkages of Vietnam and may have had a major impact on the economic and investment climate in Vietnam. Both the entry of Vietnam into ASEAN and its regional free trade agreements in 1995 and the Asian financial and currency crisis in 1997-1998 are examined in our models through the use of dummy variables. FDI in emerging economies can be motivated by a blend of investor objectives. Foreign investors can be seeking new markets for maturing products where the domestic economy and population is growing. Of course, much FDI is also efficiency
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
7
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
seeking and resource seeking in developing economies. Investors may be looking for host countries that have low cost labor and abundant national resources. Thus, this paper includes a number of economic variables that address these possible objectives. Market size is measured by annual Gross Domestic Product in dollars and is expected, as confirmed in many empirical studies, to be a significant and positive determinant of FDI. Market growth measured as the annual growth rate of GDP is also examined, as foreign investors who are market seeking may be more motivated by economic growth experience and potential rather than current economic activity in emerging economies. The strength (or weakness) of the national currency to the dollar has often been used as a proxy for the level of relative inflation, general economic uncertainty, and instability, and the purchasing power of the foreign investor. Our analysis includes the annual market mid-year exchange rate of the Vietnamese Dong to the dollar and, as an alternative, the Dong to the SDR exchange rate variable was also examined. A theoretical expectation would normally be of a positive and significant relationship to FDI inflows. Depreciation of the host country currency might attract foreign investors to acquire more cheaply real and financial assets and to enhance export competitiveness. However, for emerging economies, if FDI is primarily domestic or regional market seeking and sourced by countries and companies in the region as is the case for Vietnam, rather than inflows from U.S. or European investors, the relationship may be insignificant or negative, as previous studies have indicated v. As an emerging economy with a large and literate labor force, Vietnam could attract significant efficiency seeking FDI. Thus, a wage variable from the General Statistics Office of Vietnam, annualized as average income per employee in the private sector, is included in our regressions. During a period of rising wages, as was the case in Vietnam, the theoretical expectation would be that resulting higher costs of production would reduce FDI inflows into the region. Although it certainly could be argued that rising labor costs are an indicator of improving productivity and rising domestic purchasing power, which might attract more FDI. Many previous studies of FDI argue that trade “openness” of the host economy may be positively associated with FDI inflows. If much of FDI is export oriented and requires the import of complementary intermediate and capital goods, trade volume increases overall and as a percentage of economic activity. Also, trade openness can be a proxy for successful economic liberalization and favorable trade policies. Thus, a trade openness variable measured as the annual total of exports plus imports is also included in some of our models estimated, with an expected positive and significant coefficient. Vietnam during the period of this study experienced two significant economic and international “events” as mentioned. In 1995, Vietnam was accepted into ASEAN and the regional free trade agreement and thus significant trade barriers within the region were dismantled. As in EU studies by Bevan and Estrin (2004) and others, accession to ASEAN is represented by a dummy variable, ASEAN Dummy, equal to zero from
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
8
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
1991-1994 and to one for 1995-2008. The academic literature and indeed the experience of smaller economies joining the EU suggests that the benefits of accession and membership to regional free trade blocs include increased FDI inflow as access to a growing regional market enhances a country’s attractiveness to investors. The expectation is of a positive and significant relationship between accession to ASEAN and FDI in Vietnam. Lastly, as is confirmed in much of the studies of the Asian financial and currency crisis in 1998, FDI inflows in the region were negatively impacted by the crisis and its economic impact. FDI data indicates that for ASEAN as a region FDI inflows peaked in 1997 and did not fully recover the past levels until 2005. However, FDI inflows for Vietnam recovered by 2003. This paper tests for the impact of the crisis on Vietnam by using a dummy variable, 1998 DUMMY, equal to 0 for 1991-1998 and equal to 1 for 1999-2008. The expectation is for a negative and significant coefficient for this 1998 Dummy in our FDI regressions. In much of the literature on FDI in advanced economies, empirical studies include a variety of risk factors or proxies, both economic and financial. Given the subjective nature of these measures, the inconclusiveness of the results in many of the previous studies, and the lack of reliable time series data for Vietnam during our period of analysis, our models estimated do not include a specific risk factor. It is however possible that the foreign exchange variable capture some of perceived market risk and uncertainty. Other factors that might influence FDI such as existing FDI stock, privatization levels, and tax rates and incentives have been examined with mixed or insignificant results in studies of FDI inflows in other countries. The authors believe that in a small developing economy undergoing economic liberalization and transition from a command to a market economy at a rapid but uncertain rate, these traditional factors may have little impact. Also, for Vietnam, time series data availability and reliability on FDI position, effective tax rates, and privatization level make inclusion of these variables difficult. In future research, the authors will attempt to measure some of these factors by more extensive data search and the design of proxy variable that may capture some of their potential impact on FDI inflows. Thus, our models included many independent variables examined in past studies of FDI inflows to advanced economies, as well as additional variables specific to an emerging economy such as Vietnam. We specified and estimated a number of FDI models for Vietnam, although constrained by the lack of consistent time series data for the period of 1991-2008. Using OLS multiple regression methodology with lagged and non-lagged variables, we report only those models and results that were robust and consistent, and produced acceptable regression test statistics.
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
9
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Empirical Results Various regression models were tested. The three most significant are reported below. The first two attempt to capture the effects of the 1997-1998 financial crisis while the third includes the impact of Vietnam’s membership in the ASEAN trade association. Lagging the dependent variable did not change the overall meaning of the regression results but weaken the significance of the determinants, a result that is probably due to the limited time-series available for analysis. It is also worth noting that GDP growth, tax rates and trade openness (usually defined as export plus import as a percentage of GDP), were never significant in any regression model tested. As was noted in the literature review, FDI in Vietnam is as much for domestic consumption as it is for reexports thus the first regression model looks at domestic macro-economic variables. Table 1 shows that, as expected, the size of the domestic market (GDP) is a positive and very significant determinant while labor costs (Wages) and the dummy variable representing the 1997-1998 currency crisis are both negative and very Table 1: Domestic Market and the 1997-1998 Financial Crisis
Independent Variables GDP Growth Rate 1998 Dummy Wages *** Significant at 1% ** Significant at 5% * Significant at 10% Coefficients 3.601 .069 -.420 -2.536 t 3.990 .542 -2.402 -2.965 Adjusted R2 Durbin Watson Significance .002*** .597 .032** .011*** .855 1.952
significant. The GDP growth rate was not significant. For this model, both R square and Durbin Watson are very good, respectively .86 and 1.95, suggesting very good overall explanatory power and very low autocorrelation. This model confirms the importance of the domestic market attractiveness, tempered by the rising labor costs and the significant and negative impact of the 1997-1998 crisis. While the financial crisis of summer 1998 limited FDI attractiveness in Vietnam, it is also true that the most obvious FDI were realized in the early stages of the “Doi Moi” policy when foreign capital was finally allowed. Some have argued that the slowing down of the liberalization reforms were responsible for the tapering FDI in Vietnam (Massina, 2002), but Leproux and Brooks (2004) point out that the relative decline in FDI was due, to a large extend, to the end of the speculative bubble in real estate. This financial crisis issue is further examined in the next model. The second model includes a Dong per SDR value vi. As shown in Table 2, the adjusted R2 for this model is quite high at 0.885 suggesting the model has significant explanatory
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
10
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
value, while the Durbin-Watson statistic is in the appropriate range symptomatic of low autocorrelation. Table 2: Currency Impact and the 1997-1998 Financial Crisis
Independent Coefficients t Significance Variables GDP 1.852 2.736 .017** 1998 Dummy -.326 -1.959 .072* Wages -.233 -.321 .753 Dong per SDR -.600 -1.925 .076* The 1998 dummy variable is set to 0 for 1991-1998 and to 1 for 1999-2008 .885 *** Significant at 1% Adjusted R2 ** Significant at 5% Durbin Watson 1.743 * Significant at 10%
As expected the GDP variable is significant and correctly signed. The currency crisis dummy variable is again negative and significant, confirming the negative impact the 1997-1998 financial crisis. The variable measuring wages is indeed negative as expected but not significant in this model. A better measure of the impact of labor costs on FDI should include productivity measures, but these are not available as a consistent and reliable time series for the period under consideration. It is also possible that the labor cost advantage of Vietnam is such that increases in wages do not significantly impact the attractiveness of Vietnam for FDI, particularly when the Dong depreciation is taken into effect. Perhaps the most puzzling result is the significant but negatively signed “Dong per SDR” variable. This confirms Kin and Oh’s (2007) empirical study of FDI in Vietnam, where the Dong per Dollar was found to be a significant and negatively signed variable. This was also true in another recently emerging market, as a similar result was found in Torrisi et al, (2009) who reported that the Polish Zloty’s appreciation vis-a-vis the US dollar was linked to higher levels of FDI in Poland. Yet traditional models of FDI usually associate the greater purchasing power of the foreign acquiring firms (resulting from a strengthening foreign currency or a weakening the local currency), with a greater ability to invest. However our results suggest that a weakening Dong (the increasing Dong per SDR or per dollar) is negatively impacting FDI. It is possible that in rapidly growing emerging markets, the decreased value of the host currency may deter FDI as it indicates a worsening economy or rising inflation. It should be noted that the limited volatility of the Dong compared to its regional competitors might have boosted foreign investors’ confidence in the Vietnamese economy. Finally, since approximately two third of FDI in Vietnam’s originates from other ASEAN countries, the value of the Dong in dollar or even in terms of SDR may be of limited relative importance in explaining inward FDI.
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
11
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
The third model reported includes a dummy variable representing Vietnam’s membership in the ASEAN trade association in 1995. As shown in Table 3, once again the adjusted R square is very high at 0.914 and the Durbin Watson (1.987) is indicating low autocorrelation. As expected, GDP was a very significant and positive variable. The variables “Growth rate” and “Wages” were not significant. Again, the local currency variable (measured this time as the more common Dong per dollar value) was negative and very significant. As suggested earlier, the uniqueness of newly emerging economies with regard to host currency value in relation to FDI may be responsible for this finding. For a foreign investing company, perhaps domestic growth factors and exchange rate stability prevail over currency valuation. It is not clear what the impact of Vietnam’s membership in the ASEAN trading zone meant in term of increased FDI attractiveness. The ASEAN dummy variable is actually negative but not significant. This corroborates Hoang’s findings (2008). While there was some intra ASEAN trade increase since Vietnam joined this trade association, this intra-trade is actually fairly low, thus the re-export potential from Vietnam to the ASEAN markets is equally limited. This is turn, limits the additional attractiveness of the ASEAN membership for FDI. It is fair to say that ASEAN has not been a very successful trade integration mechanism. Certainly the hopes of matching the success of the EU in that regard have not been realized. With only five observations (1991 to 1995), the limitations of the time-series may be an issue here. Additionally, the close proximity of both Vietnam’s ASEAN membership and the regional currency crisis might have limited the positive impact of the former on FDI attractiveness by the Table 3: Impact of the ASEAN membership
Independent Variables Coefficients t Significance
Growth rate Wages GDP ASEAN dummy Dong per dollar
-.154 -.896 2.524 -.249 -.777
-1.103 -1.000 3.013 -1.402 -2.933
.291 .337 .011*** .186 .013***
The ASEAN Dummy Variable was set to 0 from 1991 to 1995 and to 1 from 1996 to 2008 .914 *** Significant at 1% Adjusted R2 ** Significant at 5% Durbin Watson 1.987 * Significant at 10%
later increased uncertainty on valuation models and returns on investment. Finally, Vietnam’s accession to ASEAN was gradual and the full investment benefits were not available until a few years after 1995. This further compounds the difficulty of separating the impact of ASEAN membership to that of the 1997-1998 currency crisis.
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
12
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Conclusion, Policy Implications and Future Research Research on FDI in Vietnam, such as the one reported in this paper offers a unique perspective on the challenges faced by CIVETS and other newly emerging countries. Understanding the determinants of FDI in Vietnam is instrumental in appreciating the relative success of the Doi Moi policy and offers valuable policy implications for both governments desirous to mimic Vietnam’s success and to foreign companies scanning the globe for investment opportunities. While dwarfed by its Chinese neighbor both in terms of trade and by the volume of inward FDI attracted, Vietnam has, for the most part, successfully managed the transition from a centrally planned economy to that of a “mixed”, more market oriented form of capitalism while avoiding the traditional trappings such changes usually entail. As a nation of 89 million people and a member of ASEAN and WTO, it succeeded in attracting significant inward FDI while avoiding most of the effect of the currency crisis of the late 1990s. Its policies oriented FDI toward domestic priorities (manufacturing, infrastructure, communication and tourism) while keeping natural resources in State’s hands. The regression models presented in this paper show that while macro-economic variables such as GDP and to a lesser extent labor costs were predictably significant as determinants of FDI in Vietnam, (as they are in developed economies), the loss of value of the Dong, both against the dollar and against SDR, was a significant and negative factor in the regression models. It appears the relationship of the value of the host currency to FDI in newly emerging countries may be different from that of the more developed countries. Tax rates, openness to trade and growth rate were not shown to be significant in this empirical analysis. Perhaps the traditional literature on FDI needs to be re-examined for the unique challenges facing the newly emerging economies such as CIVETS countries. In a rapidly changing and growing environment, a stable or gradually depreciating currency relative to more volatile regional host currencies may contribute to the attractiveness to FDI. Institutional change and gradual openness such as the one instituted by the “Doi Moi” policy are likely to be positively perceived by foreign investing companies. The transition from a state controlled economy to that of a market based is not without peril. The “shock therapy” advocated by some and tried in the ex USSR may ultimately yield greater economic benefits, but the cost in terms of unemployment, inflation, potential instability and human hardship are significant. Vietnam, perhaps because of its gradual opening, managed to avoid most of these side effects until recently. vii It also avoided much of the negative consequences of the 19971998 currency crisis. Unfortunately, a consistent a time-series measurement of institutional change and of the openness to investment was not available to further test this variable’s impact on FDI. Countries which are “late-comers” to the global quest for foreign direct investment may be tempted to quickly match the benefits of openness and
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
13
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
deregulations offered by their more economically developed neighbors and competitors. Vietnam, with its unique form of State capitalism, and real annual economic growth may represent a valid alternative to foreign investors, sufficiently attractive to FDI yet resilient enough to a regional currency crisis. When scanning the globe for investment, companies assess the relative merits of each locational advantage. Thus future research should consider a more comprehensive regional FDI analysis such as a model using panel data with other ASEAN countries. Adding comparative labor costs variables, especially if adjusted for productivity gains would also yield valuable insight into the relative determinants of FDI in this region. Other forms of comparative advantage, such as relative currency stability, relative growth of the domestic market, privatization data, risk assessment variables and relative tax rates could also be considered. Insuring these new variables are consistent and reliable during a twenty year time-series and across several countries is a significant challenge. For both host countries and corporations alike, gaining a greater insight into FDI determinants in smaller economies is well worth the challenge. As capital flows to newer and growing markets in non BRIC and CIVETS emerging economies, such undertaking becomes critical.
References Abott, P et al. “Trade and Development in Vietnam: Exploring Investment Linkages”, Munich Personal RePEc Archive, 2008. Bevan, A. and Estrin, S. “The Determinants of Foreign Direct Investment into European Transition Economies”, Journal of Comparative Economics, N 32, pp. 775–787, 2004. Blonigen, Bruce A.,“A Review of the Empirical Literature on FDI Determinants”, NBER Working Paper No. 11299, May 2005. Dees S. “Foreign Direct Investment in China: Determinants and Effects”, Economics of Planning, Volume 31, Numbers 2-3, pp.175-104, May, 1998 Dunning, J., “Toward an eclectic theory of international production: some empirical tests“, Journal of International Business Studies, 11, 9-31, 1980. Freeman, Nick J., “Understanding the Decline in Foreign Investor Sentiment Towards Vietnam during the1990s”. Asia Pacific Business Review, 8. 1., London, 2001. Gao, T., “Foreign Direct Investment from Developing Asia: Some Distinctive Features.” Economics Letters 86, 29–35, 2005.
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
14
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
General Statistics Office of Vietnam, Statistical Reports, Hanoi, 2000-2008 Helpman, E., “A Simple Theory of International Trade with Multinational Corporations”, Journal of Political Economy, 92, pp.451–471, 1984, Hejazi, W and Safarian, E., “Trade, Foreign Direct Investment, and R & D Spillovers”, Journal of International Business Studies, 30, pp. 491–511, 1999. Hoang,T., “Determinants of Foreign Direct Investment in Vietnam”, Kasetsart University, Research Paper 76, 2008. Hoang T., et al. “Does Foreign Direct Investment Promote Economic Growth in Vietnam?” ASEAN Economic Bulletin, Volume 27, Number3, 2010. Hsieh Wen-Jen, “The Determinants of Foreign Direct Investment in Southeast Asian Transition Countries”, paper presented at National Cheng Kung University, 2005. Lall S., ”Attracting Foreign Investment: New Trends, Sources and Policies”, Economic Paper 31, Commonwealth Secretariat, 1997. Lan NP, “Foreign Direct Investment in Vietnam: Impact on Economic Growth and Domestic Investment”, Centre for Regulation and Market Analysis, University of South Australia, Adelaide, Australia, 2006. Leproux, V and Brooks, D., “Viet Nam: Foreign Direct Investment and Post-crisis Regional Integration”, ERD Working Paper No. 56, Asian Development Bank, 2004. Lucas, R., “On the Determinants of Direct Foreign Investment: Evidence from East and Southeast Asia”. World Development, Vol.21, No.3, pp.391-406, 1993. Masina, P., Rethinking Development in East Asia. Nordic Insitute of Asian Studies. Surrey: Curzon Press, 2002 Meyer, K. E. and Nguyen, H. V.” Foreign Investment Strategies and Sub-National Institutions in Emerging Markets: Evidence from Vietnam, Journal of Management Studies 42 (1): 63-93, 2005. Mirza H. and Giroud, A., “Regional Integration and Benefits from Foreign Direct Investment in ASEAN Countries: The Case of Vietnam”, Asian Development Economic Review, Vol. 21 (1), pp. 66-98, 2004. Nguyen, N. and Haughton, J., “Trade Liberalization and Foreign Direct Investment in
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
15
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Vietnam”, ASEAN Economic Bulletin, 2002. Nguyen, Ngoc A. and Nguyen, T., “Foreign Direct Investment in Vietnam: An Overview and Analysis; Determinants of Spatial Distribution Across Provinces”, Development and Policies Research Center, MPRA Paper No. 192, 2007. Nunnenkamp, P., “Determinants of FDI in Developing Countries:Has Globalization Changed the Rules of the Game?”, Kiel Working Paper No. 1122, 2002. Overseas Development Institute, “Foreign Direct Investment Flows to Low-Income Countries: A Review of Evidence”, Briefing Paper, No. 3, 1997. Parker, S., Phan, V., and Nguyen, N., “Has the U.S.-Vietnam Bilateral Trade Agreement Led to Higher FDI into Vietnam?, International Journal of Applied Economics, 2 2 pp. 199-223, 2005. Pham, H., “Regional Economic Development and Foreign Direct Investment Flows in Vietnam”. Journal of the Asia Pacific Economy 7(2): 182–202, 2002. Pham, H., “Temporal Causality and the Dynamics of Foreign Direct Investment and Trade in Vietnam” , The Journal of International Trade & Economic Development: An International and Comparative Review, Vol 15, number 2, 2010. Torrisi C., Delaunay C., Kocia A. and Lubieniecka M., “FDI in Transition Economies: The Case of Poland”, Journal of Applied Business and Economics, Vol. 9, No. 3, pp. 46-59, 2009 (a). Torrisi C., Delaunay C., KociaA. and Lubieniecka M.,"FDI in Poland: Determinants and Implications for Countries in Transition", Ekonomia Journal, Warsaw University, No 23, pp.3-14, 2009 (b). i UNCTAD, World Investment Report, Selected Volumes, United Nations, NY. The Economist, August 2010. iii Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. iv UNCTAD, Investment Policy Review of Vietnam, 2009. v Kim and Oh, Determinants of Intra FDI Inflows in East Asia, KIEP, 2005. vi Results from regression analyses using a Dong per US Dollar variable, the more common way of measuring currency strength, were consistent with the model reported here but not as significant. vii In 2010 Vietnam’s inflation was 11.8% and the Dong devalued three times. ii 2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
16
References: 2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG Produced by The Berkeley Electronic Press, 2012 FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION Vietnam”, ASEAN Economic Bulletin, 2002
INDIA, CHINA AND AMERICA INSTITUTE 1549 CLAIRMONT ROAD, SUITE 202 ● DECATUR, GA 30033 USA WWW .ICAINSTITUTE.ORG
FDI in Vietnam: An Empirical Study of an Economy in Transition
Christian Delaunay & C. Richard Torrisi
Journal of Emerging Knowledge on Emerging Markets Volume 4 November 2012
Produced by The Berkeley Electronic Press, 2012
1
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI in Vietnam: An Empirical Study of an Economy in Transition
Christian Delaunay Bridgewater State University C. Richard Torrisi Suffolk University
Journal of Emerging Knowledge on Emerging Markets Volume 4 November 2012
DI has grown rapidly in recent years in an increasingly integrated global economy until the recent financial and economic crisis spread globally. The emerging former Soviet-bloc countries of Central and Eastern Europe, Southeast Asia, China, and India have transitioned to market economies during the last twenty years stimulating global FDI flows which have increased more rapidly than any other international economic or financial transactions. Global FDI inflows in 1985 were estimated to be $53 billion, however, by 1990 aggregate FDI had reached $234 billion and data for 2008 indicate global FDI of $1.8 trillion i. Economic restructuring and liberalization in the major recipient and investing countries, global capital markets, and continued economic transition in emerging command economies strongly influenced investor behavior and strategy. Economic growth has been accompanied by greater political stability and the building of democratic and market institutions in many emerging economies. The acceleration of FDI through 2008 has been fueled by the increasing globalization of transnational organizations of their production networks, the policy liberalization of host countries regarding FDI in service industries and real estate growth in mergers and acquisitions, and the expanding investment opportunities in emerging markets and newly privatized sectors in both industrialized and developing countries.
F
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
2
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
The economic and financial crisis, which developed in 2008, did not have an immediate significant negative impact of 2008 foreign direct investment flows. While loan and capital availability shrank in the U.S. in the latter part of 2007, and subsequently globally, companies took advantage of, on one hand, capital from various funds e.g. wealth and hedge funds, and , on the other hand, the depreciation of the US dollar throughout the year until end 2008. The global pattern of FDI throughout the period of this study has been dominated by OECD countries, particularly by the U.S. and the European Union. In 1989, the “triad” of the U.S. Japan, and the European Union accounted for approximately 77% of outward global FDI and by 2006, for about 65% of FDI inflows. In 2008, record inflows of FDI into developing nations were reported ($630 billion) but the “triad” still dominated both as a home and host nations of new FDI. The U.S. continued to be the largest as well as the preferred host country of FDI, receiving over $316 billion in 2008. As a result of the global financial crisis, global FDI flows declined significantly in 2009 and rose modestly in 2010. Much of the FDI inflows into non Triad host economies during this period were to BRIC countries, Brazil, Russia, India, and China, with their large and growing domestic markets. However, another grouping of developing countries which are attractive to foreign investors has recently received growing attention in the research and analysis of global FDI. The CIVETS, Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, have emerged as interesting and important host countries for FDI ii. In particular, Vietnam has become a major and competitive host in the CIVETS grouping with strong economic growth and relative political stability. Southeast Asia, as a region, is comprised of the 10 current member of ASEAN, the Association of Southeast Asian Nations iii. In Southeast Asia, global FDI inflows peaked at almost $74 billion in 2007, recovering slowly from the Asian Financial crisis and its aftermath. However, the global financial crisis significantly impacted the region as inflows fell to $37 billion in 2009, a 50% decline. Vietnam also experienced a significant decline in FDI inflows, but was not as impacted as its more developed ASEAN partners, Malaysia, Thailand, and Singapore. FDI in Vietnam peaked at $6.74 billion in 2007, but declined almost by a third to approximately $ 4.5 billion in 2009, according to the World Investment Report (2010). While data on the volume and allocation of FDI in Vietnam is generally available during the period of this study from governmental sources, it is somewhat inconsistent and missing in some years. Thus, for our empirical analysis, UNCTAD data on FDI inflows to Vietnam which provide a consistent time series is used. Data provided by the General Statistical Office (20002008) of the government of Vietnam provides some detail on the regional and sectoral allocation of FDI, as well as source country information. As expected in developing countries, FDI clusters in the larger cities with FDI inflows to the Hanoi and Ho Chi Minh City regions amounting to an approximate average of 50% of inflows during the period of this study. Major sectors of registered FDI in the nineties for Vietnam were
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
3
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
primarily industry (manufacturing), construction and communication (infrastructure), tourism and other services. Since 2000, communications, transportation, general infrastructure, and service sectors have accounted for approximately 30% of inward FDI. Country sources of registered FDI in Vietnam were primarily other East Asian economies throughout the period, with an average of between 60-65% of the total registered FDI capital inflow, with the EU and the U.S. accounting for an average of approximately 18% during these same years. The US was the eleventh biggest investor in Vietnam in registered capital from 1990-2005, but in recent years the full impact of the US Vietnam Bilateral Trade Agreement approved in July 2000 has led to increasing U.S. FDI. During the period of this study, implemented FDI as reported in IMF and UNCTD data banks has increased from $375 million in 1991 to approximately $8.5 billion in 2008. However, the Asian financial crisis did impact FDI in Vietnam also, declining from $2.5 billion in 1997 to a low of $1.2 billion in 2002, with a dramatic recovery in FDI inflows since 2002. Vietnam has emerged as an alternative smaller emerging economy market for FDI in the last five years, attracting both domestic market seeking and export oriented FDI. Vietnam continues to attract significant East Asian and OECD investors. This paper analyses the economic determinants of FDI for a smaller Non-BRIC emerging country, undergoing a rapid transition to a market driven economy in a region of great competitiveness among host countries and growing attractiveness to major source countries. Economic and Policy Environment Vietnam, after decades of military conflict and economic stagnation, began economic policy reform to revive economic growth and start a transition from a command economy with central planning to a market-based economy in late 1986. This initiative and commitment to a market economy, referred to as the “Doi Moi” (renovation) process, although implemented gradually, successfully accelerated economic growth and the development of the private sector and transformed Vietnam into an open economy. From 1986 through 2006, real GDP growth averaged 6.8% with moderate inflation. With a population of close to 90 million and a literacy rate of over 90% in 2009, real GDP grew at an average rate at 8.1% during 2007-2009, and nominal GDP in dollars, rose from $45.3 billion to $93.7 billion, more than doubling. In all basic economic measures, Vietnam emerged as an ASEAN “Tiger Cub” in the past decade. Of course, economic growth and FDI were negatively impacted between 1998-2002 as a result of a slowing of economic and FDI policy reforms but also the East Asian financial crisis which began in late 1997. This financial, currency, and economic crisis impacted the economy of every country in East Asia. Foreign investors recalculated the expected risk/return ratios and put many FDI projects on hold. Full economic and
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
4
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
financial recovery and the restoration of foreign investor confidence took years, with regional FDI inflows ending their decline in 2002 as reported by UNCTAD (2008). However, during the crisis and its aftermath, real GDP growth continued in Vietnam, bottoming out at 4.7% in 1999. Vietnam was not as impacted by currency collapse and short term capital flows volatility as the larger, more economically unstable economies in the region. According to UNCTAD, “it (Vietnam) was able to weather the East Asian financial crisis much better than other countries, FDI inflows were increasing again in 2003, to approximately $1.5 billion” iv. As an outcome of Doi Moi initiatives, Vietnam opened its economy with the first “Law on Foreign Investment” in Dec. 1987. As specified, FDI was permitted and welcomed on the basis of respect for sovereignty, existing laws and regulations, and mutual benefit. The laws governing FDI have been revised frequently since then to improve the FDI climate and attract more investment. In 2006, a New Investment Law was approved that further liberalized and simplified FDI regulations and decentralized management of FDI proposals and their implementation. With a favorable FDI climate, political stability, economic growth, and a literate and low cost workforce, Vietnam has increased FDI inflow each year since 2002. In addition to the favorable domestic, economic, financial and legal reforms and economic performance, Vietnam has participated as a member in a number of regional and global organizations since 1995. Vietnam joined ASEAN, The Association of Southeast Asian Nations, in July 1995, with a commitment to regional free trade and a gradual elimination by 2005 of tariffs and to a future ASEAN Economic Community with the free flow of goods, services, and investment. In 1998, it became a member of APEC, the Asian-Pacific Economic Cooperation group, seeking the objective of free and open trade and investment in the Asia-Pacific in the next decade. For the U.S. which had not been a major investor in Vietnam during the nineties, the signing of the “Bilateral Trade Agreement” with the U.S. in 2000 has encouraged rapid growth of FDI by U.S. firms and U.S. regional subsidiaries in Southeast Asia. Also, this has accelerated the normalization of economic and political relations between the two countries. Lastly, Vietnam, although a member of the U.N. since 1977, became a full member of the WTO in January 2007 with a commitment to all WTO multilateral agreements except on Government Procurement Policy. Thus, as a major growing emerging economy, Vietnam has integrated into the global economic and business environment and developed a dynamic open market economy. Literature review Classical models of FDI tend to follow Dunning’s (1980) ownership, location and internalization approach (OLI), relative factor endowments (Helpman, 1984), openness to trade (Hejazi and Safarian 1999), comparative advantage and institutional factors (Bush et al., 2003). Host country determinants of FDI tend to revolve around economic conditions, host country policies and MNE strategies and have been well documented
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
5
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
(Lall, 1997). Specific FDI determinants in developed economies tend to focus on location attractiveness such as market size and infrastructure, risk reducing policies, stability and strength of the currency, membership in international trading organization, and state incentives (Blonigen, 2005). In addition to the “classical” market attractiveness, FDI determinants in emerging markets tend to emphasize labor costs and labor skills and other attractiveness factors as highlighted in Nunnenkamp (2002). Of particular interest are studies focusing on emerging economies previously under socialist rules such as China and Eastern European countries. Given China’s size and unique market considerations, FDI determinants in China mimic both that of emerging and developed economies with domestic market size, cost advantages and openness to the rest of the world as significant determinants (Dees, 1998). Perhaps even more relevant as a comparison to Vietnam is FDI in countries formerly identified as Eastern European. Bevan and Estrin (2004) established that country risk, labor costs, host market size, EU accession and gravity factors were significant determinants in attracting FDI. The significance of market size and labor cost were confirmed by Torrisi et al (2009a) who also found taxes and privatization to be equally relevant in attracting foreign investment in Poland (2009b). There is an abundance of research articles on the impact of FDI in Vietnam. Most of the research underlines the positive effect of FDI on the economy: Lan (2006) notes FDI impact on Vietnam’s rate of growth and additional wealth through exports. Nguyen (2007) points out that the rapid growth is in turn a determinant of new FDI. Hoang (2008) argues that market size, GDP growth, trade openness, and infrastructure development are factors attracting FDI inflows. Pham (2010) described the mutual causality between export and FDI in Vietnam, while Mirza and Giroud (2004) reported that political stability, government policies, size of the local market and quality of the labor force were significant determinants of FDI in Vietnam. Meyer and Nguyen, (2005) found the effect of institutions on FDI to be a statistically significant determinant of FDI, as well as population, transport, GDP growth, wages, and education. While locational factors have played a role in Vietnam’s attractiveness to FDI, (with neighboring China and the relative proximity of Japan), its low labor cost has also been stressed (ODI 1997). Using panel data, Hsieh (2005) found that GDP per capita, and the degree of trade openness were significant positive determinants. Additionally, the Asian financial crisis was found to have deterred FDI inflows. In a sixteen Asian country model, (including Vietnam) Nguyen and Haughton (2002) found that trade openness, currency strength, government budget deficit, and domestic savings were significant factors in attracting FDI. They also linked the increase of FDI in Vietnam with the Bilateral Trade Agreement with the US, a conclusion also reached by Parker et al (2005).
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
6
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Model Specification and Methodology The dependent variable in the FDI models estimated for Vietnam is annual FDI in dollars from 1991 to 2008 as reported by the IMF and UNCTAD, databases. Thus, the measure includes all reinvested earnings as well as new capital inflow and provides a consistent time series of annual aggregate FDI. Similarly, annual GDP is measured in current dollars for the time period analyzed, as specified by these international sources. Data for additional independent variables examined in our FDI models are primarily from country sources such as the General Statistics Office of Vietnam. Where data from earlier years is missing for some of the variables in our analysis, our time series is supplemented by data provided by other country and international sources such as the Labor Ministry of Vietnam. Models of FDI determinants in emerging economies emphasize two groups of factors. Extending the classical models of FDI and the many empirical studies of FDI in OECD countries, macro-economic variables that are available in consistent time series from international and/or governmental sources most often include market size, market growth, trade openness, etc. This paper examines these economic factors for impact on FDI in Vietnam using a period of rapid economic transition and trade and investment liberalization. Additional, less quantifiable non-economic factors (such as political stability, institutional efficiency, cultural similarity, corruption indicators) are sometimes FDI determinants. However, for the period of this study, indices or consistent measures of these qualitative factors are not available for Vietnam and future research on the topic will require the specification of proxy variable or measures for these factors. This paper does attempt to explore the impact of external events, through the use of dummy variables, that may have influenced the political and economic environment for FDI in Vietnam. Vietnam has experienced significant increases in FDI in the past decades, although primarily Intra-East Asian inflows, linked with real economic growth during this period. Previous empirical studies have examined key macro-economic variables that may influence FDI with mixed and often ambiguous results. This paper extends and updates past research, examining a number of these determinants for Vietnam during its rapid economic transition and transformation. During this same period, two significant events occurred which altered the internal economic linkages of Vietnam and may have had a major impact on the economic and investment climate in Vietnam. Both the entry of Vietnam into ASEAN and its regional free trade agreements in 1995 and the Asian financial and currency crisis in 1997-1998 are examined in our models through the use of dummy variables. FDI in emerging economies can be motivated by a blend of investor objectives. Foreign investors can be seeking new markets for maturing products where the domestic economy and population is growing. Of course, much FDI is also efficiency
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
7
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
seeking and resource seeking in developing economies. Investors may be looking for host countries that have low cost labor and abundant national resources. Thus, this paper includes a number of economic variables that address these possible objectives. Market size is measured by annual Gross Domestic Product in dollars and is expected, as confirmed in many empirical studies, to be a significant and positive determinant of FDI. Market growth measured as the annual growth rate of GDP is also examined, as foreign investors who are market seeking may be more motivated by economic growth experience and potential rather than current economic activity in emerging economies. The strength (or weakness) of the national currency to the dollar has often been used as a proxy for the level of relative inflation, general economic uncertainty, and instability, and the purchasing power of the foreign investor. Our analysis includes the annual market mid-year exchange rate of the Vietnamese Dong to the dollar and, as an alternative, the Dong to the SDR exchange rate variable was also examined. A theoretical expectation would normally be of a positive and significant relationship to FDI inflows. Depreciation of the host country currency might attract foreign investors to acquire more cheaply real and financial assets and to enhance export competitiveness. However, for emerging economies, if FDI is primarily domestic or regional market seeking and sourced by countries and companies in the region as is the case for Vietnam, rather than inflows from U.S. or European investors, the relationship may be insignificant or negative, as previous studies have indicated v. As an emerging economy with a large and literate labor force, Vietnam could attract significant efficiency seeking FDI. Thus, a wage variable from the General Statistics Office of Vietnam, annualized as average income per employee in the private sector, is included in our regressions. During a period of rising wages, as was the case in Vietnam, the theoretical expectation would be that resulting higher costs of production would reduce FDI inflows into the region. Although it certainly could be argued that rising labor costs are an indicator of improving productivity and rising domestic purchasing power, which might attract more FDI. Many previous studies of FDI argue that trade “openness” of the host economy may be positively associated with FDI inflows. If much of FDI is export oriented and requires the import of complementary intermediate and capital goods, trade volume increases overall and as a percentage of economic activity. Also, trade openness can be a proxy for successful economic liberalization and favorable trade policies. Thus, a trade openness variable measured as the annual total of exports plus imports is also included in some of our models estimated, with an expected positive and significant coefficient. Vietnam during the period of this study experienced two significant economic and international “events” as mentioned. In 1995, Vietnam was accepted into ASEAN and the regional free trade agreement and thus significant trade barriers within the region were dismantled. As in EU studies by Bevan and Estrin (2004) and others, accession to ASEAN is represented by a dummy variable, ASEAN Dummy, equal to zero from
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
8
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
1991-1994 and to one for 1995-2008. The academic literature and indeed the experience of smaller economies joining the EU suggests that the benefits of accession and membership to regional free trade blocs include increased FDI inflow as access to a growing regional market enhances a country’s attractiveness to investors. The expectation is of a positive and significant relationship between accession to ASEAN and FDI in Vietnam. Lastly, as is confirmed in much of the studies of the Asian financial and currency crisis in 1998, FDI inflows in the region were negatively impacted by the crisis and its economic impact. FDI data indicates that for ASEAN as a region FDI inflows peaked in 1997 and did not fully recover the past levels until 2005. However, FDI inflows for Vietnam recovered by 2003. This paper tests for the impact of the crisis on Vietnam by using a dummy variable, 1998 DUMMY, equal to 0 for 1991-1998 and equal to 1 for 1999-2008. The expectation is for a negative and significant coefficient for this 1998 Dummy in our FDI regressions. In much of the literature on FDI in advanced economies, empirical studies include a variety of risk factors or proxies, both economic and financial. Given the subjective nature of these measures, the inconclusiveness of the results in many of the previous studies, and the lack of reliable time series data for Vietnam during our period of analysis, our models estimated do not include a specific risk factor. It is however possible that the foreign exchange variable capture some of perceived market risk and uncertainty. Other factors that might influence FDI such as existing FDI stock, privatization levels, and tax rates and incentives have been examined with mixed or insignificant results in studies of FDI inflows in other countries. The authors believe that in a small developing economy undergoing economic liberalization and transition from a command to a market economy at a rapid but uncertain rate, these traditional factors may have little impact. Also, for Vietnam, time series data availability and reliability on FDI position, effective tax rates, and privatization level make inclusion of these variables difficult. In future research, the authors will attempt to measure some of these factors by more extensive data search and the design of proxy variable that may capture some of their potential impact on FDI inflows. Thus, our models included many independent variables examined in past studies of FDI inflows to advanced economies, as well as additional variables specific to an emerging economy such as Vietnam. We specified and estimated a number of FDI models for Vietnam, although constrained by the lack of consistent time series data for the period of 1991-2008. Using OLS multiple regression methodology with lagged and non-lagged variables, we report only those models and results that were robust and consistent, and produced acceptable regression test statistics.
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
9
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Empirical Results Various regression models were tested. The three most significant are reported below. The first two attempt to capture the effects of the 1997-1998 financial crisis while the third includes the impact of Vietnam’s membership in the ASEAN trade association. Lagging the dependent variable did not change the overall meaning of the regression results but weaken the significance of the determinants, a result that is probably due to the limited time-series available for analysis. It is also worth noting that GDP growth, tax rates and trade openness (usually defined as export plus import as a percentage of GDP), were never significant in any regression model tested. As was noted in the literature review, FDI in Vietnam is as much for domestic consumption as it is for reexports thus the first regression model looks at domestic macro-economic variables. Table 1 shows that, as expected, the size of the domestic market (GDP) is a positive and very significant determinant while labor costs (Wages) and the dummy variable representing the 1997-1998 currency crisis are both negative and very Table 1: Domestic Market and the 1997-1998 Financial Crisis
Independent Variables GDP Growth Rate 1998 Dummy Wages *** Significant at 1% ** Significant at 5% * Significant at 10% Coefficients 3.601 .069 -.420 -2.536 t 3.990 .542 -2.402 -2.965 Adjusted R2 Durbin Watson Significance .002*** .597 .032** .011*** .855 1.952
significant. The GDP growth rate was not significant. For this model, both R square and Durbin Watson are very good, respectively .86 and 1.95, suggesting very good overall explanatory power and very low autocorrelation. This model confirms the importance of the domestic market attractiveness, tempered by the rising labor costs and the significant and negative impact of the 1997-1998 crisis. While the financial crisis of summer 1998 limited FDI attractiveness in Vietnam, it is also true that the most obvious FDI were realized in the early stages of the “Doi Moi” policy when foreign capital was finally allowed. Some have argued that the slowing down of the liberalization reforms were responsible for the tapering FDI in Vietnam (Massina, 2002), but Leproux and Brooks (2004) point out that the relative decline in FDI was due, to a large extend, to the end of the speculative bubble in real estate. This financial crisis issue is further examined in the next model. The second model includes a Dong per SDR value vi. As shown in Table 2, the adjusted R2 for this model is quite high at 0.885 suggesting the model has significant explanatory
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
10
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
value, while the Durbin-Watson statistic is in the appropriate range symptomatic of low autocorrelation. Table 2: Currency Impact and the 1997-1998 Financial Crisis
Independent Coefficients t Significance Variables GDP 1.852 2.736 .017** 1998 Dummy -.326 -1.959 .072* Wages -.233 -.321 .753 Dong per SDR -.600 -1.925 .076* The 1998 dummy variable is set to 0 for 1991-1998 and to 1 for 1999-2008 .885 *** Significant at 1% Adjusted R2 ** Significant at 5% Durbin Watson 1.743 * Significant at 10%
As expected the GDP variable is significant and correctly signed. The currency crisis dummy variable is again negative and significant, confirming the negative impact the 1997-1998 financial crisis. The variable measuring wages is indeed negative as expected but not significant in this model. A better measure of the impact of labor costs on FDI should include productivity measures, but these are not available as a consistent and reliable time series for the period under consideration. It is also possible that the labor cost advantage of Vietnam is such that increases in wages do not significantly impact the attractiveness of Vietnam for FDI, particularly when the Dong depreciation is taken into effect. Perhaps the most puzzling result is the significant but negatively signed “Dong per SDR” variable. This confirms Kin and Oh’s (2007) empirical study of FDI in Vietnam, where the Dong per Dollar was found to be a significant and negatively signed variable. This was also true in another recently emerging market, as a similar result was found in Torrisi et al, (2009) who reported that the Polish Zloty’s appreciation vis-a-vis the US dollar was linked to higher levels of FDI in Poland. Yet traditional models of FDI usually associate the greater purchasing power of the foreign acquiring firms (resulting from a strengthening foreign currency or a weakening the local currency), with a greater ability to invest. However our results suggest that a weakening Dong (the increasing Dong per SDR or per dollar) is negatively impacting FDI. It is possible that in rapidly growing emerging markets, the decreased value of the host currency may deter FDI as it indicates a worsening economy or rising inflation. It should be noted that the limited volatility of the Dong compared to its regional competitors might have boosted foreign investors’ confidence in the Vietnamese economy. Finally, since approximately two third of FDI in Vietnam’s originates from other ASEAN countries, the value of the Dong in dollar or even in terms of SDR may be of limited relative importance in explaining inward FDI.
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
11
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
The third model reported includes a dummy variable representing Vietnam’s membership in the ASEAN trade association in 1995. As shown in Table 3, once again the adjusted R square is very high at 0.914 and the Durbin Watson (1.987) is indicating low autocorrelation. As expected, GDP was a very significant and positive variable. The variables “Growth rate” and “Wages” were not significant. Again, the local currency variable (measured this time as the more common Dong per dollar value) was negative and very significant. As suggested earlier, the uniqueness of newly emerging economies with regard to host currency value in relation to FDI may be responsible for this finding. For a foreign investing company, perhaps domestic growth factors and exchange rate stability prevail over currency valuation. It is not clear what the impact of Vietnam’s membership in the ASEAN trading zone meant in term of increased FDI attractiveness. The ASEAN dummy variable is actually negative but not significant. This corroborates Hoang’s findings (2008). While there was some intra ASEAN trade increase since Vietnam joined this trade association, this intra-trade is actually fairly low, thus the re-export potential from Vietnam to the ASEAN markets is equally limited. This is turn, limits the additional attractiveness of the ASEAN membership for FDI. It is fair to say that ASEAN has not been a very successful trade integration mechanism. Certainly the hopes of matching the success of the EU in that regard have not been realized. With only five observations (1991 to 1995), the limitations of the time-series may be an issue here. Additionally, the close proximity of both Vietnam’s ASEAN membership and the regional currency crisis might have limited the positive impact of the former on FDI attractiveness by the Table 3: Impact of the ASEAN membership
Independent Variables Coefficients t Significance
Growth rate Wages GDP ASEAN dummy Dong per dollar
-.154 -.896 2.524 -.249 -.777
-1.103 -1.000 3.013 -1.402 -2.933
.291 .337 .011*** .186 .013***
The ASEAN Dummy Variable was set to 0 from 1991 to 1995 and to 1 from 1996 to 2008 .914 *** Significant at 1% Adjusted R2 ** Significant at 5% Durbin Watson 1.987 * Significant at 10%
later increased uncertainty on valuation models and returns on investment. Finally, Vietnam’s accession to ASEAN was gradual and the full investment benefits were not available until a few years after 1995. This further compounds the difficulty of separating the impact of ASEAN membership to that of the 1997-1998 currency crisis.
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
12
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Conclusion, Policy Implications and Future Research Research on FDI in Vietnam, such as the one reported in this paper offers a unique perspective on the challenges faced by CIVETS and other newly emerging countries. Understanding the determinants of FDI in Vietnam is instrumental in appreciating the relative success of the Doi Moi policy and offers valuable policy implications for both governments desirous to mimic Vietnam’s success and to foreign companies scanning the globe for investment opportunities. While dwarfed by its Chinese neighbor both in terms of trade and by the volume of inward FDI attracted, Vietnam has, for the most part, successfully managed the transition from a centrally planned economy to that of a “mixed”, more market oriented form of capitalism while avoiding the traditional trappings such changes usually entail. As a nation of 89 million people and a member of ASEAN and WTO, it succeeded in attracting significant inward FDI while avoiding most of the effect of the currency crisis of the late 1990s. Its policies oriented FDI toward domestic priorities (manufacturing, infrastructure, communication and tourism) while keeping natural resources in State’s hands. The regression models presented in this paper show that while macro-economic variables such as GDP and to a lesser extent labor costs were predictably significant as determinants of FDI in Vietnam, (as they are in developed economies), the loss of value of the Dong, both against the dollar and against SDR, was a significant and negative factor in the regression models. It appears the relationship of the value of the host currency to FDI in newly emerging countries may be different from that of the more developed countries. Tax rates, openness to trade and growth rate were not shown to be significant in this empirical analysis. Perhaps the traditional literature on FDI needs to be re-examined for the unique challenges facing the newly emerging economies such as CIVETS countries. In a rapidly changing and growing environment, a stable or gradually depreciating currency relative to more volatile regional host currencies may contribute to the attractiveness to FDI. Institutional change and gradual openness such as the one instituted by the “Doi Moi” policy are likely to be positively perceived by foreign investing companies. The transition from a state controlled economy to that of a market based is not without peril. The “shock therapy” advocated by some and tried in the ex USSR may ultimately yield greater economic benefits, but the cost in terms of unemployment, inflation, potential instability and human hardship are significant. Vietnam, perhaps because of its gradual opening, managed to avoid most of these side effects until recently. vii It also avoided much of the negative consequences of the 19971998 currency crisis. Unfortunately, a consistent a time-series measurement of institutional change and of the openness to investment was not available to further test this variable’s impact on FDI. Countries which are “late-comers” to the global quest for foreign direct investment may be tempted to quickly match the benefits of openness and
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
13
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
deregulations offered by their more economically developed neighbors and competitors. Vietnam, with its unique form of State capitalism, and real annual economic growth may represent a valid alternative to foreign investors, sufficiently attractive to FDI yet resilient enough to a regional currency crisis. When scanning the globe for investment, companies assess the relative merits of each locational advantage. Thus future research should consider a more comprehensive regional FDI analysis such as a model using panel data with other ASEAN countries. Adding comparative labor costs variables, especially if adjusted for productivity gains would also yield valuable insight into the relative determinants of FDI in this region. Other forms of comparative advantage, such as relative currency stability, relative growth of the domestic market, privatization data, risk assessment variables and relative tax rates could also be considered. Insuring these new variables are consistent and reliable during a twenty year time-series and across several countries is a significant challenge. For both host countries and corporations alike, gaining a greater insight into FDI determinants in smaller economies is well worth the challenge. As capital flows to newer and growing markets in non BRIC and CIVETS emerging economies, such undertaking becomes critical.
References Abott, P et al. “Trade and Development in Vietnam: Exploring Investment Linkages”, Munich Personal RePEc Archive, 2008. Bevan, A. and Estrin, S. “The Determinants of Foreign Direct Investment into European Transition Economies”, Journal of Comparative Economics, N 32, pp. 775–787, 2004. Blonigen, Bruce A.,“A Review of the Empirical Literature on FDI Determinants”, NBER Working Paper No. 11299, May 2005. Dees S. “Foreign Direct Investment in China: Determinants and Effects”, Economics of Planning, Volume 31, Numbers 2-3, pp.175-104, May, 1998 Dunning, J., “Toward an eclectic theory of international production: some empirical tests“, Journal of International Business Studies, 11, 9-31, 1980. Freeman, Nick J., “Understanding the Decline in Foreign Investor Sentiment Towards Vietnam during the1990s”. Asia Pacific Business Review, 8. 1., London, 2001. Gao, T., “Foreign Direct Investment from Developing Asia: Some Distinctive Features.” Economics Letters 86, 29–35, 2005.
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
14
Delaunay and Torrisi: FDI in Vietnam
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
General Statistics Office of Vietnam, Statistical Reports, Hanoi, 2000-2008 Helpman, E., “A Simple Theory of International Trade with Multinational Corporations”, Journal of Political Economy, 92, pp.451–471, 1984, Hejazi, W and Safarian, E., “Trade, Foreign Direct Investment, and R & D Spillovers”, Journal of International Business Studies, 30, pp. 491–511, 1999. Hoang,T., “Determinants of Foreign Direct Investment in Vietnam”, Kasetsart University, Research Paper 76, 2008. Hoang T., et al. “Does Foreign Direct Investment Promote Economic Growth in Vietnam?” ASEAN Economic Bulletin, Volume 27, Number3, 2010. Hsieh Wen-Jen, “The Determinants of Foreign Direct Investment in Southeast Asian Transition Countries”, paper presented at National Cheng Kung University, 2005. Lall S., ”Attracting Foreign Investment: New Trends, Sources and Policies”, Economic Paper 31, Commonwealth Secretariat, 1997. Lan NP, “Foreign Direct Investment in Vietnam: Impact on Economic Growth and Domestic Investment”, Centre for Regulation and Market Analysis, University of South Australia, Adelaide, Australia, 2006. Leproux, V and Brooks, D., “Viet Nam: Foreign Direct Investment and Post-crisis Regional Integration”, ERD Working Paper No. 56, Asian Development Bank, 2004. Lucas, R., “On the Determinants of Direct Foreign Investment: Evidence from East and Southeast Asia”. World Development, Vol.21, No.3, pp.391-406, 1993. Masina, P., Rethinking Development in East Asia. Nordic Insitute of Asian Studies. Surrey: Curzon Press, 2002 Meyer, K. E. and Nguyen, H. V.” Foreign Investment Strategies and Sub-National Institutions in Emerging Markets: Evidence from Vietnam, Journal of Management Studies 42 (1): 63-93, 2005. Mirza H. and Giroud, A., “Regional Integration and Benefits from Foreign Direct Investment in ASEAN Countries: The Case of Vietnam”, Asian Development Economic Review, Vol. 21 (1), pp. 66-98, 2004. Nguyen, N. and Haughton, J., “Trade Liberalization and Foreign Direct Investment in
PAGE
2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
Produced by The Berkeley Electronic Press, 2012
15
Journal of Emerging Knowledge on Emerging Markets, Vol. 4 [2012], Art. 4
FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION
Vietnam”, ASEAN Economic Bulletin, 2002. Nguyen, Ngoc A. and Nguyen, T., “Foreign Direct Investment in Vietnam: An Overview and Analysis; Determinants of Spatial Distribution Across Provinces”, Development and Policies Research Center, MPRA Paper No. 192, 2007. Nunnenkamp, P., “Determinants of FDI in Developing Countries:Has Globalization Changed the Rules of the Game?”, Kiel Working Paper No. 1122, 2002. Overseas Development Institute, “Foreign Direct Investment Flows to Low-Income Countries: A Review of Evidence”, Briefing Paper, No. 3, 1997. Parker, S., Phan, V., and Nguyen, N., “Has the U.S.-Vietnam Bilateral Trade Agreement Led to Higher FDI into Vietnam?, International Journal of Applied Economics, 2 2 pp. 199-223, 2005. Pham, H., “Regional Economic Development and Foreign Direct Investment Flows in Vietnam”. Journal of the Asia Pacific Economy 7(2): 182–202, 2002. Pham, H., “Temporal Causality and the Dynamics of Foreign Direct Investment and Trade in Vietnam” , The Journal of International Trade & Economic Development: An International and Comparative Review, Vol 15, number 2, 2010. Torrisi C., Delaunay C., Kocia A. and Lubieniecka M., “FDI in Transition Economies: The Case of Poland”, Journal of Applied Business and Economics, Vol. 9, No. 3, pp. 46-59, 2009 (a). Torrisi C., Delaunay C., KociaA. and Lubieniecka M.,"FDI in Poland: Determinants and Implications for Countries in Transition", Ekonomia Journal, Warsaw University, No 23, pp.3-14, 2009 (b). i UNCTAD, World Investment Report, Selected Volumes, United Nations, NY. The Economist, August 2010. iii Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. iv UNCTAD, Investment Policy Review of Vietnam, 2009. v Kim and Oh, Determinants of Intra FDI Inflows in East Asia, KIEP, 2005. vi Results from regression analyses using a Dong per US Dollar variable, the more common way of measuring currency strength, were consistent with the model reported here but not as significant. vii In 2010 Vietnam’s inflation was 11.8% and the Dong devalued three times. ii 2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG
PAGE
http://digitalcommons.kennesaw.edu/jekem/vol4/iss1/4 DOI: 10.7885/1946-651X.1089
16
References: 2012 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG Produced by The Berkeley Electronic Press, 2012 FDI IN VIETNAM: AN EMPIRICAL STUDY OF AN ECONOMY IN TRANSITION Vietnam”, ASEAN Economic Bulletin, 2002
You May Also Find These Documents Helpful
-
The integration of the global economy has strengthened the international integration of goods, technology, labour and capital. This process of cross-border restrictions eliminations on international capital flows has increased the growth of foreign direct investment (FDI) activity. Many countries make every effort to attract FDI because it will bring a substantial growth to their economy, in addition to its function as the principal vehicle of international capital movement.…
- 3528 Words
- 15 Pages
Powerful Essays -
1. The concept of Foreign Direct Investment refers to the practice of a company from one particular company making physical investments in another country either through acquisitions or purchase of physical machinery, buildings and/or equipment. (Graham & Spaulding, 2005) Over the past decade alone FDI has placed a major role in the globalization of business and is seen largely in developing countries rising from 481 billion in 1998 to 636 billion last year. (UNCTAD) Since the end of WWII the definition of FDI has expanded and evolved into what we see today and thus has allowed for the globalization of industries into unforeseen markets and the establishment of relationships that have added in foreign trades etc. (Bureau of Economic Analysis)…
- 2131 Words
- 9 Pages
Powerful Essays -
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home…
- 4982 Words
- 20 Pages
Powerful Essays -
FDI tends to increase in the current decade. According to the recent data the amount of FDI in different countries is considerable. Firms throughout the world are interested in FDI…
- 9956 Words
- 40 Pages
Powerful Essays -
A World Bank report on China’s foreign direct investment (FDI) policy praised the country for its success in attracting foreign capital and suggests it further encourage FDI inflows. China has attracted about one-quarter of FDI flowing into developing countries in the past decade.…
- 2838 Words
- 12 Pages
Powerful Essays -
The 2012, A.T. Kearney FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover from the global recession and continued economic uncertainty in Europe and the United States. The Index, which first appeared in 1998, assesses the impact of political, economic, and regulatory changes on the FDI Intentions and preferences of the leaders of top companies around the world.…
- 875 Words
- 4 Pages
Good Essays -
The United States is the largest destination of foreign direct investment (FDI). This article analyse the reason why the United States is so attractive to foreign investors. The analysis can be divided into two parts. In the first part, the author discusses the open economy of the United States in the global environment. The political and economic environment enables the United States to absorb large amount of FDI. The second part focuses on domestic level. The United States is the third largest country in both size and population. It also has rich natural resources, and occupies 27% of the world’s coal reservation. The huge domestic market enables the United States to attract and digest FDI. Another important factor of FDI flows is the financial markets of the United States. At the end of the article, the author discusses the challenges the United States faced especially after the Global Financial Crisis (GFC).…
- 1275 Words
- 6 Pages
Powerful Essays -
Driving FDI growth are more than 82,000 multinational companies with more than 810,000 affiliates abroad, roughly half of which are in developing countries. Developed countries remain the prime destination for FDI because cross-border M&A’s are concentrated in developed nations (Deresky Pg.190). Developed countries account for about 57 percent of Global inflow, on the other hand the FDI inflow to developing countries was 37 percent. Some of the developed countries are U.S., Japan, and Europe Union Nations; in which the three account for the vast majority of world inflows.…
- 307 Words
- 2 Pages
Satisfactory Essays -
However, the component of FDI inflows changes among these popular countries, as the textbook mentioned that FDI inflows to China had dramatically increased in 2004-2008, during period of 2009 to 2012, the inflows keep increasing tremendously, and China replaced the United Kingdom as the second most popular FDI inflow just next to the United States. On the other hand, as we see from the average FDI inflows of the other popular countries, such as France, the Netherlands, Spain and the United Kingdom reduced dramatically.…
- 828 Words
- 4 Pages
Powerful Essays -
Vietnam has had an impressive economic growth over the last two decades and continues to grow rapidly. Over a short period of time Vietnam has gone from a starving country to a major exporter of agricultural goods. Today Vietnam is considered one of the most open economies in the world, with total import and export value corresponding to roughly 160 percent of GDP. In 2007 Vietnam joined WTO and since then numerous reforms have helped the investment climate improve significantly, resulting in a growing inflow of foreign investments and companies.…
- 554 Words
- 3 Pages
Good Essays -
Foreign direct investment (FDI) has grown dramatically as a major form of international capital transfer over the past decade. Between 1980 and 1990,world flows of FDI-defined as cross-border expenditures to acquire or expandcorporate control of productive assets-have approximately tripled. FDI has become a major form of net international borrowing for Japan and the United States (the world’s largest international lender and borrower, respectively). Direct investment has grown even more rapidly of late within Europe. To what extent is this sudden worldwide surge in FDI explained by traditional theories? These theories predict the scale and scope of multinational enterprises by looking to differences in competitive advantage, across firms or countries, that might lead to the extension of corporate control across borders. So, for example, better technology, management capability, and product design; stronger consumer allegiance; and greater complementarities in production or use of technology can allow a domestic firm to control foreign assets more productively than would a foreign firm and could therefore predicate direct investment. In many cases, these theories also explain why an enterprise’s alternatives to FDI-domestically based production or licensing of foreign-based production-are less efficient than direct control of foreign based operations (see, e.g., Caves 1982; Vernon 1966).Traditional theories are very useful for explaining basic long-term patterns of FDI. For example, they help understand the behavior of U.S. firms during the post-World War I1 period (the experience on which these theories were honed). At that time, advanced U.S. firms were superior in technology and well established in foreign markets. U.S. firms tended to move overseas to retain competitive access (or to preempt competitors’ access) to those markets and, in the process, met with relatively little competition. These theories also help us understand why the tide of U.S.…
- 3839 Words
- 16 Pages
Powerful Essays -
Foreign Direct Investment (FDI) is a key component of the global capital flow that entails world economic growth through investment opportunities. As an investment tool FDI also affect the aggregated growth of the host country. FDI as a share of GDP has become the largest source of capital moving from developed nations to developing ones. FDI inflow usually involves starting new production facilities namely Greenfield investments or purchase of existing business through mergers and acquisitions. In developing nations, equity investments as a percentage of gross national income have been growing in recent years.…
- 1404 Words
- 6 Pages
Powerful Essays -
Examining the impact of FDI, the earliest empirical study, the International cooperation of National Firms: A study of Direct Foreign Investment, S.H Hymer broadly describes FDI as not simply a transfer of capital but the transfer of a package of capital, management and new technology. Thus the host countries can benefits from the inflow of FDI into capital, management and new technology. Therefore, FDI should be understood in the form of transfer of capital, management and new technology from…
- 2667 Words
- 11 Pages
Powerful Essays -
At a conference to summarize 25 years of new FDI was organized, Deputy Minister of Planning and Investment said Dao Quang Thu, 80% FDI technology used currently in Viet Nam is average, 5 6 % used is high-tech, 14% low and backward, there are individual cases using outdated technology. Technology transfer is mainly done horizontally - between business enterprises, with little change in the level and technological capacity. Despite the fact that there would be no corporations, they now carry the No. 1 technology, latest technology investment to other countries, however, the majority of FDI projects in Vietnam only average tech show FDI mainly to take advantage of cheap labor, investment in infrastructure in the form of production assembly line, or product improvements. Consequently, Vietnam businesses create low added value, hard to participate in global production networks. There is little FDI funded projects in the field of science and technology. R & D activities in FDI enterprises in the technology only small,…
- 2573 Words
- 8 Pages
Powerful Essays -
significantly reduced. Most countries offer incentives to attract FDI, such as tax concessions, tax holidays, accelerated depreciation on plants and machinery, export subsidies, import entitlements, etc. Many theoretical and empirical studies have attempted to account for the reasons of FDI movement across the globe. As a developing country, Bangladesh needs FDI for its ongoing development process.…
- 3767 Words
- 16 Pages
Powerful Essays