Locational Determinants of FDI:
The Case of Vietnam
Presented by Le Viet Anh
Nagoya University, GSID, 1st year PhD Student
At JVEC’s Meeting 29th May 2004, GRIPS
Outline
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FDI Theories
Country’s Background
FDI Development and Characteristics
Qualitative Assessment of FDI Locations
Empirical Study
Conclusions and Policy Implications
Theories on FDI: Which to chose?
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Capital Theory
International Trade Approach
Market Imperfections and Industrial
Organization
Dunning’s Eclectic Paradigm and
International Investment Path
Agglomeration Economies
The Theory
Dunning’s eclectic paradigm and
agglomeration economies arguments
seems to be the best framework to
explore determinants of FDI in
Vietnam locationally
Vietnam: Country Background
Impressive Macroeconomic
Indicators

16
14

12
10
Agriculture
Industry
Service
Growth rate
%
8
6
4
2
0
-2
-4
86
87 88 89 90 91 92 93 94 95 96 97 98 99 2000 2001 2002


High and sustained
economic growth
Rapid growth of
external trade
Increasing rate of
investment
Appropriate inflation
rate
FDI Development and
Characteristics
FDI in Vietnam 1988-2002
9
800
8
700
No. of projects
(right scale)
7
Approved
(left scale)
USD
bills
6
600
500
5
400
4
300
3
200
2
Implemented
(left scale)
1
100
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
.
0
1988
0
By Ownership
(as of the end of February 2003)
Country
1. Singapore
2. Taiwan
3. Japan
4.Hong Kong
5. S. Korea
6. France
7. BVI
8. U.K
9. USA
10. Russia
Total top ten
Grand Total
Share of top ten in total
Numbers of
projects
310
1081
434
416
Committed Capital
(USD million)
6119
5863
3848
3634
Scale of Project
(USD million)
19.74
5.42
8.87
8.74
564
186
170
62
190
76
3563
2604
1944
1756
1621
1617
2120
2880
29499
39201
6.32
14.00
11.44
28.32
8.53
21.28
9.33
9.25
75.31%
75.99%
By Sectors
Sectoral FDI by Committed Capital
Sectoral FDI by No of Projects
Services,
Service
41.20%
Agriculture
3.64%
28.06%
Industry
55.16%
Agriculture
9.77%
Industry,
62.17%
By Forms of Investment
Forms of investment
by No of projects
Forms of investment
by committed capital
BOT
3.20%
JV
53.30%
BCC
10.70%
FE
32.80%
BOT
0.20%
JV
34.20%
BCC
4.60%
FE
61.00%
By Locations
(USD million realizations)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
North East
1.9
1.0
22.1
56.5
60.3
158.3
179.0
114.3
94.8
97.0
North West
0.2
0.1
2.5
6.3
6.7
5.4
6.1
3.9
3.2
3.3
58.6
192.1
315.3
779.9
1130.8
917.8
862.7
619.4
392.2
298.6
North Central
0.4
10.4
32.4
58.3
67.0
70.2
109.8
130.0
74.1
118.1
Central Coast
4.3
5.2
14.5
67.2
94.9
116.9
91.0
174.9
265.8
280.7
Central Highland
4.3
21.3
11.2
13.4
27.9
20.5
40.8
7.1
13.1
8.9
337.7
324.3
682.0
1192.2
1267.6
1508.3
1537.1
1231.6
1285.6
1368.0
20.5
21.3
39.1
69.5
139.6
125.7
310.6
80.4
47.9
55.7
Region
Red River Delta
Southeast
Mekong River Delta
Empirical Study
Locational Determinants of FDI
1991-2001
Literature Review
Dunning’s Suggestion
1)
2)
3)
4)
5)
natural and created
assets;
capital intensity;
market size and
market growth;
infrastructural
development;
labor cost and
productivity;
6)
7)
8)
9)
10)
degree of openness;
government policies;
political stability;
profitability;
geographical
proximity
Lim’s suggestions
1)
2)
3)
4)
5)
6)
7)
8)
economic size of the host market,
economic distance (transportation costs),
agglomeration effects,
factor costs,
fiscal incentives,
business/investment climate,
trade barriers/openness and
others.
Studies on Vietnam
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Nguyen Tuan Dung (1996) used cross-sectional
data from 1990-1995
Do Minh Hoai (1998) applied the data of 19881997 to Dunning’s eclectic approach.
Nguyen Nhu Binh and Jonathan Houghton (2002)
used cross-country analysis, taking into account
the impact of Bilateral Trade Agreement between
Vietnam and the US.
Nestor (1997) identified the uneven location of
FDI under the form of joint ventures FDI
Proposed Analytical Framework
Category
(1). Market demand and
market size
Proxy
GRP per capita
Agglomerations (2)+(3)+(4)
(2) Infrastructure
Telephone sets per capita
(3) Degree of Industrialization Regional Industrial Output/GRP
(4) Level of foreign investment Cumulative FDI/POP
(Both commitments and realizations)
(5) Labor cost
Monthly average income per capita in state
sector under local government
(6) Labor quality
Number of upper secondary school students
(7) Openness
Import/GRP
(8) Policy incentives
Numbers of industrial zones/regional area
(km2)
Expected
sign
+
+
+
+
?
?
+
Pooled Regression
ln FDI it    i  1 ln( GRPCit1 )   2 ln( INDit1 )   3 ln( TELit1 )    4 ln( CFDI it )
  5 ln( WAGEit1 )   6 ln( PULit1 )   7 ln( OPEN it1 )   8 POLi 1   it
(i=1,2,..8, t=1,2…11)
Data
Northern Focal
Economic Region
Central Focal
Economic
Region
Southern Focal
Economic
Region
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
Provinces:
Hanoi
Hai Phong
Hai Duong
Hung Yen
Thai Binh
Nam Dinh
Ninh Binh
Ha Nam
Ha Tay
Cao Bang
Lang Son
Quang Ninh
Thai Nguyen
Bac Can
Bac Ninh
Bac Giang
Phu Tho
Vinh Phuc
Lao Cai
Yen Bai
Tuyen Quang
Ha Giang
Son La
Lai Chau
Hoa Binh
Thanh Hoa
Nghe An
Ha Tinh
Quang Binh
Quang Tri
Thua Thien-Hue
Regions:
1. Red River Delta
2. North East
3. North West
4. North Central Coast
5. South Central Coast
6. Central Highlands
7. South East
8. Mekong River Delta
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
Quang Nam
Da Nang
Quang Ngai
Binh Dinh
Phu Yen
Khanh Hoa
Kon Tum
Gia Lai
Dac Lac
Ho Chi Minh
Lam Dong
Ninh Thuan
Binh Phuoc
Tay Ninh
Binh Duong
Dong Nai
Binh Thuan
Ba Ria - Vung Tau
Long An
Dong Thap
An Giang
Tien Giang
Vinh Long
Ben Tre
Kien Giang
Can Tho
Tra Vinh
Soc Trang
Bac Lieu
Ca Mau
Focal economic regions
1.
NFER: Ha Noi, Hai
Phong, Quang Ninh,
Hung Yen, Hai
Duong, Ha Tay, Bac
Ninh, Vinh Phuc
(7/2003)
2.
CFER: Da Nang,
Quang Ngai, Thua
Thien-Hue
3.
SFER: Ho Chi Minh,
Dong Nai, Ba RiaVung Tau, Binh
Duong, Tay Ninh,
Binh Phuoc, Long
An (7/2003)
Regressions
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Panel data covering eight economic regions and
from 1991-2001
OLS regressions with White correction for
heteroschedasticity
GLS regression with fixed effects, common
intercepts and differenced data
Regressions for full time period (91-01) and subsample periods (91-96) and (97-01)
Regressions without Red River Delta and Southeast
Regions
Regression without cumulative FDI
Main Findings (Commitments)
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Non-market seeking FDI
Agglomeration effects are strongly
confirmed
Labor cost is important determinant
Not much differences between secondary
school labor and others
Development of numerous IZs and EPZs
seem to be not efficient
Main Findings (Realizations)
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Agglomeration effects are strongly
confirmed
Labor quality may not be much concerned
since quality are similar across regions
Investors might be reluctant to invest in
more developed regions
Openness is a significant determinant
Common-Intercepts
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Market size is significant determinant
Agglomeration effects are confirmed
The fixed effects (e.g. administrative
procedures, geographical location, historical
tie, the regional willingness) might be
stronger than market size
Differenced Data
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The results are similar
Agglomeration effects are confirmed,
especially in the case of cumulative FDI
The investors might pay more attention to
the rate of change than the present condition
Main Findings (without HN and
HCMC)
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Almost all results are similar
Openness is significant determinant
Determinants of FDI in Vietnam are similar
across regions, both developed and less
developed ones
Main Findings (Sub-sample)
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Agglomeration effects are confirmed in
both periods
Market size become largely negative
significant in 97-01
Wage became highly significant for 97-01
period
Conclusions
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positive impact of agglomeration effects
there might exist some other important
variables those impacts is larger than the
market size consideration
importance of FDI determinants moves
through times (especially labor wage)
The policy does not seem to be effective in
drawing regional FDI
Conclusions (cont.)
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A significant differences in determinants of
FDI commitments and that of FDI
realization (openness)
The model is robust, determinants of FDI
are similar across regions
Policy Implications
For Promotion of FDI
Keeping Stable Political and Economic
Stability, Improving Overall Legal
Framework
 National treatment on possible areas
 Dual price system for infrastructure service
 Foreign Investment Law
 Local content requirement
Cont.
Improve the Quality of Labor, While
Keeping Comparative Advantage of
Labor Cost with Countries in the Regions,
Especially China
 more skilled labor is needed
 skilled human capital is crucial for
capturing the positive effects from FDI
 technical training should be enhanced
Cont.
Export-Oriented FDI and Supporting
Industries Development
 WTO accession and bilateral agreements
 it is wise to allow some foreign firms to
produce inputs for exporting foreign
invested firms
Cont.
Complementary Role between National
Level and Regional Level Management
 policy formulation capacity at national level
should be strengthened
 the regional initiatives should also be taken
into account at the national level (Binh
Duong and Dong Nai cases)
For Better Distribution of FDI
Among Regions
It is difficult to attract FDI to less developed
regions
 It might be wise to develop some regions
first and expect the diffusion to other
regions later
 Regional strategy should be based on their
comparative advantages
 Common measures are necessary

Thank you for your attention!