Direct impact of FDI inflows on poverty reduction in vietnam

TABLE OF CONTENTSOverview of FDI and financial development and poverty reduction 3 Overview of Financial Development and Life Expectancy in relation with Economic Summarized empirical li

Direct impact of FDI inflows on poverty reduction in Vietnam

Nguyễn Minh Hiếu - 1810140024

Lê Việt Hoàng - 1811140081

Vương Việt Linh - 1810140034

TABLE OF CONTENTS

Overview of FDI and financial development and poverty reduction 3

Overview of Financial Development and Life Expectancy in relation with Economic

Summarized empirical literature on the influence of foreign direct investment on

Summarized empirical literature on the influence of FDI in transferring new

technology, knowledge, and other intangible assets (spillover effect) 12Summarized empirical literature on the influence of FDI in allocations of tax revenue

Over the last decades, foreign direct investment (FDI) flows to the Association ofSouth-East Asia Nations (ASEAN) have grown significantly Yet, there is noconsensus on whether the region has actually benefited from such investment or not,specifically, regarding the expected positive effect of FDI on poverty reduction In thispaper, we provide an overview of FDI in poverty reduction in ASEAN and attempt toexamine the effect of FDI on poverty reduction in ASEAN countries We use paneldata of 10 member countries over the period of 2000 to 2018 and employ the ordinaryleast squares regression on variables of the proportion of FDI to gross domesticproducts (GDP), GDP per capita of each country, employment rate and governmentspending The results show that FDI has little or even no impact on poverty alleviation

in ASEAN countries and some useful recommendations for policies to boost FDI andreduce poverty by increasing the effect of FDI would be given In addition, our groupwould also recommend some policies specific to the Vietnamese economy, tobootstrap the development speed of our economy in means of increasing FDI andutilizing the effect of FDI on economic growth, thus reducing poverty

Keywords: foreign direct investment, economic growth, poverty reduction

1 Introduction

Foreign Direct Investment - or FDI - plays an essential role in the economicdevelopment of developing countries, supporting them to break out of the era ofunderdevelopment Emerging market’s speed of development depends largely onincoming foreign direct investment, while companies and corporations that investabroad can have higher growth rates and diversify their income, as their revenues

do not only depend on domestic markets but also on foreign markets as well

international trade integration, support domestic investment and consumption, andincrease tax revenue Thus, this is an attractive tool for the government to achievethe reduction of the poverty rate However, the decrease of poverty would not onlydepend on FDI but also depends on other factors such as the assistance in forms

of policies by the host government, the power of labor capital, the economicenvironment in host countries, and the use of Foreign Direct Investment

ASEAN is a special region with many characteristics, which would be briefed belowwith 3 main points: the labor force in ASEAN (about quantity and quality), policies forFDI, and the effectiveness of FDI in ASEAN nations ASEAN as a whole is the sixth-largest economy in the world About the labor force in ASEAN, labor productivity inASEAN increased by 2.96 percent on average annually in the period of 1971-2018according to APO A large portion of the growth is attributable to the growth of capitalper worker, as the capital for production experienced a sharp increase at that time(Donghun Kim and KinChung Woon, 2020) If ASEAN was a single nation, this nationwould have the third-largest labor force in the world behind China and India, at 350million in 2018 Although a high number of people of working age, there are lots ofproblems with the labor force Half of ASEAN nations lack industry-ready skilledworkers, while the other half lack coherent technical education for industrialdevelopment (The ASEAN Post Team, 2018)

In terms of the regulations for FDI in ASEAN, some challenges are faced by ASEAN countries to attract and regulate FDI To quantitatively assess to political FDI facilitation of ASEAN countries, FDI Confidence Index could be review: Singapore stands in top 12 of nations with the highest FDI Confidence Index in 2020 (Kearney, 2020), while Thailand ranks 21 in 2016 (The Nation, 2016) and other nations are out of top 50 This did illustrate the imbalance of FDI distribution between nations in ASEAN.

As ASEAN has many characteristics, it is not easy to assess the effectiveness of FDI on economic growth Although the impact of FDI on Poverty Reduction is important and significant not only for investors but also for the policymakers in the area, there is still a shortage of narrative and analysis about the effect of FDI on reducing poverty in ASEAN,

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as some conducted researches are poorly investigated Some of the mainreasons for this situation could be the availability of data on FDI, PovertyIndicator, and other determinant data in ASEAN Countries Having realized theimportance of this research on identifying the trend of FDI in our regions, ourgroup decided to investigate and write this paper to find the impact of ForeignDirect Investment on Poverty Decline in ASEAN countries.

The outline of this paper would be organized as follows: Section 3 would give someliterature reviews about related research, point out how meaningful they are insupporting our topics, and the limitations of those documents Section 4 would pointout the theoretical framework that would be used in our paper, as the Ordinary LeastSquares (OLS) regression methods, and the reasons for choosing regressions would

be explained In Section 5, our group would do the data description, in means ofmean, r-square, standard deviation, while in Section 6, our result would beinterpreted Section 6 is about model adjustment and discussion, Section 8 is for theconclusion and policy recommendations as it is expected that this paper would givepolicymakers some insights to better understand the situation of the ASEAN economy

in terms of FDI effects, thus coming up with new policies to promote economic growth

in the region Lastly, Section 8 is about our references used in the paper

2 Overview of FDI and financial development and poverty reduction

2.1 Overview of FDI in ASEAN

This developing region is a potential area for major FDI from developed countriesall over the world In the period of 1970 to 2016, FDI flow in ASEAN rapidlyincreased although it slowed down slightly in 2016 (Tomoo Kikuchi and MasayaSakuragawa, 2019) The most obvious proof for that significant increase is thatFDI to ASEAN in 2015 tripled that in 2005, while FDI in the world in 2015 was just

Source: The World Bank Group, World Development Indicators, 2014

However, looking at the index ASEAN FDI/ Global FDI, this index from 2000experienced a new low level in the last four and a half decades It suggests thatalthough ASEAN does attract more FDI, its attractiveness in comparison with theworld does not increase, that this region is surpassed by other developing nations

in terms of FDI attractiveness

Table 7.1 below shows the overall trend of foreign direct investment (FDI) inflows to ASEAN by host countries for the period 2010 - 2019 FDI flows to ASEAN rose from

$108,420.7 million in 2010 to a new peak of $158,864.4 million in 2019, with a rise in investments in six Member States Inflows to the Philippines increased five-fold, from

$1,298 million in 2010 to $7,685.3 million; flows to Cambodia quadrupled, from $782.6 million in 2010 to $3,663 million in 2019; and flows to Vietnam and the Lao PDR both doubled, to $16,120 million and $755.5 million respectively Combined FDI flows to the four CLMV countries (Cambodia, the Lao People’s Democratic Republic, Myanmar and Vietnam) reached a record level in 2019, increasing to $22,27 million (nearly double that figure in 2010) With flows exceeding $16,120 million, Vietnam was the third largest recipient within ASEAN and accounted for over 72 percent of flows to the CLMV

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countries On the other hand, four Member States (Brunei Darussalam, Malaysia,Myanmar and Thailand) experienced a decrease in FDI flows with Thailandsuffering a triple decrease, to $4,816.6 million in 2019.

In 2019, three Member States (Singapore, Indonesia and Vietnam) accounted for

83 percent of FDI inflows in ASEAN, suggesting a high level of concentration.Singapore remained the region’s largest recipient, accounting for 58 percent oftotal FDI in ASEAN due to the country’s policies about tax exemption, with anincrease from $57,460.6 million in 2010 to $92,078.2 million in 2019

In general, the total foreign investment to ASEAN from top ten source countriesdecreased slightly over the period The EU-28, Japan, China, Hong Kong andAustralia always belonged in the top ten investors Meanwhile, investment fromthe USA and China experienced a downward trend in the period Anothernoticeable point is that the intra-ASEAN investments were always the second-biggest contributor to FDI flows in the region

In 2017, the USA made the largest investment among the ten countries with avalue of $26,775.3 million which was 17.3 per cent of the total share However, inthe next year, the USA completely vanished from the FDI chart This fall in United

The value of EU-28 direct investment was highest at $25,842.2 million, equivalent to 16.9 per cent of the total investment in 2018, which were led by increases in investment from the nations in the EU-28 FDI from Japan also skyrocketed to $23,337.5 million in 2018 which was concentrated in Thailand, Singapore, Indonesia and Vietnam FDI from Hong Kong started at $6,014.5 million in 2017, then doubled in 2018, making the economy the fourth largest investor in ASEAN in 2018 The investment of China in the ASEAN area showed a rapid decrease over three years from $15,495.4 million in 2017 to $12,240.9 million after a year The overall decline mirrors the global fall in Chinese outward FDI (OFDI) flows in 2018 as well as China’s policy of curbing Chinese OFDI in industries such

as real estate, entertainment and sports And despite a 0.9 percent drop, intra-ASEAN investment was still the second-largest source of FDI with $24,249.6 million in value and accounting for 15.8 percent of inflows in 2018, with Singapore being the largest source of intraregional investment.

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2.2 Overview of Financial Development and Life Expectancy in relation withEconomic Growth and increase in FDI in ASEAN

Domestic credit (DC) and economic growth(EG) of the sixth-highest FDI countries

in ASEAN

In this part, to assess financial development, domestic credit would be reviewed, in relation to the economic growth rate in 6 nations in ASEAN with the highest FDI, including Indonesia, Thailand, Malaysia, Philippines, Singapore, Vietnam The financial sector of all those countries experienced growth through the period (from 2004 to 2016), while the economic growth rate fluctuated Indonesia DC rate increased from 29 to 35% in 12 years, while that of the Philippines grew by 15 percent, Singapore gained by 30% The

DC index of Malaysia stayed nearly the same during that time, whereas Vietnam DC rate grew by about 70% Domestic credit rate in Vietnam is among the highest among these

Life expectancy in ASEAN nations varies in the range of ages, however, all thesecountries have the same trend of life expectancy from 2008 to 2018 In specific,nearly all nations have experienced a growth of approximately 2 - 3 ages in thementioned period Moreover, in relation to the FDI chart above, some relationshipsbetween these two data could be pointed out Singapore - as the nation with thehighest FDI in ASEAN- has the highest life expectancy, did increase from 81 to above

83 in that 10 years The next four nations with the highest life expectancy are Brunei,Vietnam, Thailand, and Malaysia, at about 75 ages (with insignificant differencesamong them), while in the FDI chart, Vietnam, Thailand, and Malaysia also haveabove-average FDI, only Brunei is not in the list The remaining countries includeCambodia, Indonesia, Philippines, Laos, and Myanmar have a life expectancy from

62 to 71 in the period, while all of these countries, except for Indonesia, rank amongthe lowest FDI in the region Therefore, to conclude, the relationship between FDI andlife expectancy in the ASEAN region from 2008 to 2018 is detectable

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3 Literature review

It should be emphasized that many FDI impacts are inherently difficult to measure The academic literature typically approaches the issue in one of three ways The first is in the context of the determinants of economic growth In international comparisons of economic growth, FDI is introduced as an explanatory variable, together with a range of interactive

or conditional variables (e.g., trade orientation, human capital, institutional quality) The hypothesis is that, other things being equal, a larger presence of FDI is associated with a faster economic growth, and the latter is associated with a faster growth of employment, and a rapid reduction of poverty But, whether this assumed relationship between economic growth, employment creation and poverty reduction can be true in reality, it depends on the assumption that the enhanced higher economic growth by FDI is labor intensive This implies that the effective way to transfer the benefits of FDI to the poor is through “labor intensive” economic growth The second methodology focuses on technology spillovers and transfer of other intangible assets from foreign to domestic firms, as measured either through firm-level case studies or an analysis of cross-section industry data This way provides only a proximate and partial picture: the former is limited

by the sample size and the flows are generally not quantified; the latter is presumptive and inferential rather than demonstrated The third way is through analyzing the allocation

of tax revenues collected from foreign firms to economic activities that benefit directly or indirectly the poor.

Table 1: Summarized empirical literature on the influence of foreign directinvestment on economic growth

Borensztein Developing 1998 FDI has a positive effect on

et al countries Cross-country economic growth but this impact

framework capital stock of the host country

Most of the effect of FDI oneconomic growth likely derivesfrom efficiency gains rather thanoverall higher induced level ofinvestment

r and countries Mixed, fixed and investment (foreign and domestic)

estimation

and Collins countries Panel data inflow translates into an increase in

when the capital inflows take theform of FDI, there is a nearone-for-one relationship betweenthe FDI and domestic investment.Balasubram Export-promotin 1996 The FDI variable captures theanyam et al g countries Production externalities, learning by watching,

which FDI is important engine for export growthconsidered an in developing countries

additional input

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to domesticcapital and laborAitken at al Mexico 1986 - 90 A domestic firm's exports are

2104 Mexican proximity to FDI-based companiesmanufacturing affiliates Export propensity isfirms uncorrelated with the concentration

of exporters generally

Dollar and A large sample 1960s - 2000 As overall income increases, on

(2000) developed and analysis increase by exactly the same rate

growth tends to lift the incomes ofthe poor proportionately withoverall growth

Ravallion 67 developing 1981 - 1994 Almost always, poverty fell withand Chen and transitional Panel data growth in average living standard

Timmer 27 developing 1960 - 1992 The elasticity of overall growth and(1997) countries Panel data the growth in the per capita income

analysis of the poorest quintile was only 0.8

(and significantly less than 1) androse steadily to slightly greater than

1 for the richest quintile Apparentfailure of growth to reach the poor

in the countries with wide income

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gaps, while disappointing, shouldnot be taken as a general

indictment of economic growth

itself

Morrissey countries ( Literature review wages in developing countries

and Philippines) distribution of gains from FDI,

countries(Cameroon,Ghana, Kenya,Zambia andZimbabwe)

Table 2: Summarized empirical literature on the influence of FDI in transferring new technology, knowledge, and other intangible assets (spillover effect)

Bhorat and Developing No further The transfer of such intangiblePoswell countries information assets in the form of new business

relocating) also often results inhigher wages for production

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workers and is a much lessvolatile form of international

investment flows

Borenzstein Developing Data on FDI FDI is an important vehicle for the

developing contributing relatively more tocountries for economic growth than domestic1970-89 from investment, but the result holdsindustrial countries only when there is some thresholdonly, cross-country stock of human capital

regression

Batra and Malaysia Data from a survey Technology can be effectivelyTan (1997) of 2200 companies acquired besides through licensing

embodied in new equipment, alsovia subcontracting arrangementswith FDI-based firms

Jenkins South Africa Survey of A tendency for foreign firms to

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Bhorat and South Africa No further (1) Both trade and technology

skilled labor, generally at theexpense of those with few skills.(2) Trade flows and technologicalchange strongly reinforce aninequitable distribution ofhousehold income, with FDI's roleremaining marginal

(1995) Kenya and manufacturing firms than wholly domestic owned

Zimbabwe companies in the firms conducted in-house training

early 1990s, using of employees, and both foreign1992-3 RPED ownership and technology transferSurvey data are found to have a significant

impact on firm efficiency

Aitken and Venezuela Panel regressions of An increase in foreign ownership

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Graham Developing Surveys the Positive effects of FDI come about(1995) countries theoretical and largely through the transfer of new

empirical literature technology, knowledge and other

on the economic intangible assets, leading toconsequences of productivity increases and

resource allocation

nde (1998) countries over the period growth by spilling mainly through

1970-94 its impact on workforce training

and skill-upgrading, followed bytechnology transfer, internationaltrade and learning by doing FDIhas also created incentives forhuman skills improvement, andgovernments in the countriesunder review have played animportant role in the process ofimproving human skill quality

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