Direct, indirect and total effect in spatial analysis of provincial FDI in vietnam

DECLARATION...i ACKNOWLEDGEMENT...ii ABBREVIATION...iii ABSTRACT...iv LISTOFFIGURE...vii LISTOFTALBE...viii CHAPTER1:INTRODUCTION...1 1.1Problem statement...1 1.2.. Researchquestions...3

BY

LEVANTHANG

DIRECT,INDIRECTANDTOTALEFFECTINSP ATIALANALYSISOFPROVINCIALFDIINVIET

HO CHIMINHCITY,November2016

DECLARATION

“Thisistocertifythatthisthesisentitled“Direct,IndirectandTotaleffectInSpatialAnalysisofProvincialFDIinVietnam”,whichissubmittedbymeinfulfillmentoftherequirementsforthedegreeofMasterofArtinDevelopmentEconomicstotheVietnam–TheNetherlandsProgramme(VNP)

Thethesisconstitutesonlymyoriginalworkandduesupervisionandacknowledgementhavebeenm a d e

in thetext toallmaterialsused.”

LeVanThang

ACKNOWLEDGEMENT

Thist h e s i s couldn o t b e accomplishedw i t h o u t t h e s u p p o r t i n g andt h e m o t i v a t i o n t h a t I

h a v e receivedfrommanypeople.Iti s apleasure toc o n v e y mygratitudetothem allinmyhumbleacknowledgment

Foremost,I wo ul d l i k e toexpressmysincereappreciationt o Dr.NguyenLuuBaoD o a n , mysupervisor.Hegavemethegreatestsupporting,energeticassistanceandvaluableguidanceaswellasaninfinitepatienttoencouragemetocompletemyveryfirstresearch.WithoutDr.NguyenLuuBaoDoan, thisstudywouldneverfinish

Besides,IalsowouldliketogivemygratitudetotheVietnam-NetherlandProgramme,especiallyt o alllecturerswhoprovidedmevaluableknowledge,VNPstaffsfortheirrestlessassistantforthet i m e Ihavebeenstudyingin VNP as well as School ofEconomics

IwouldlovetoexpressmygratefulnesstoProf.NguyenTrongHoaiandDr.PhamKhanhNamf o r thefirstsuggestiontoencouragemetodealwithanoveltyfieldofmyknowledge-

spatialanalysis.Moreover,IwouldliketogivemysincerethankfullnesstoDr.PhamKhanhNamwhohasprovidedavaluabledata sourceforme tocompletethis thesis

Besidesthat,Iwouldliketothankallmyfriends,myfellowsattheUniversityofEconomics,HoC h i MinhCity,mygroupsandalltheclassmatesinK20-VNP.A l l ofthemarealwaysbemysideencourage

andsupport metocompletethethesis

Finally,Iwouldliketosendmygratefulnesstomyfather,mymother,mytwolittlebrother,sister-VanNamandThuyLinhfortheirlove,sacrifice,tremendoussupportformenotonlytocompletet h i s

t h e s i s b u t a l s o f o r mywholelife

AIC:AkaikeInformationCriteria

ABBREVIATION

ESDA:ExploratorySpatialDataAnalysisEU:

EuropeanUnionFDI:Foreig

MinisterofPlanningandInvestmentM

VIF:VarianceInflationFactor

ThispaperinvestigatesthespatialpatternofForeignDirectInvestment(FDI)forall63provincesinVietnamfrom2011to2014 EmpiricalstudiesonlocationaldeterminantsofFDIt y p i c a l l

y neglectedthespatialinteractionamongobservationswhichleadtoinefficientandbiasedestimations.Indeed,Moran’sIsuggestedbyMoran,whichisusedtodetectthespatialautocorrelationindatapa tt er

n ofbo th dependentandindependentvariables, givehints oft h e n e c e s s i t y o f spatialeconometrics inanalyzingtheFDIdeterminants

ThroughGeneralToSpecificapproach,theSpatialDurbinModel(SDM)hasbeenchosenast h e m

o s t appropriatem o d e l , comparedw i t h o t h e r m o d e l s l i k e Non-spatialm o d e l ,

studyfindsthattheFDIflowi n t o oneprovincenegativelyspatiallyaffectsFDIinflowinremainingprovinces.Moreover,byapplyingSDM,thispapereconometricallyestimatestheimpactofhostprovince’sdeterminantsanditsneighbordeterminants on itsFDIinflow

Keywords:ForeignDirectInvestment,Moran’sI,Spatialanalysis

DECLARATION i

ACKNOWLEDGEMENT ii

ABBREVIATION iii

ABSTRACT iv

LISTOFFIGURE vii

LISTOFTALBE viii

CHAPTER1:INTRODUCTION 1

1.1Problem statement 1

1.2 Researchobjective 3

1.3 Researchquestions 3

1.4Scopeof thestudy 3

1.5.Thesis structure 4

CHAPTER2:OVERVIEWOFFDIINVIETNAM 6

2.1 StagesofforeigndirectinvestmentinVietnam 6

2.2 Distributionofforeigndirectinvestmentamongprovinces 8

2.3 Countryoforigin 10

2.4 Sectorsofforeigndirectinvestment 11

CHAPTER3:LITERATUREREVIEW 14

3.1 Theories aboutlocationchoicesofforeigndirectinvestment 14

3.1.1 Theeclectic paradigmOLI 14

3.1.2 Agglomeration andforeigndirectinvestment 16

3.2 Theinter-dependenceofFDIbetween locations 17

3.2.1 MNEchoicetheory 17

3.2.2 Agglomeration effect 20

3.3 Empiricalstudies 21

3.3.1 Empiricalstudies ofFDIdeterminantsin spatialanalysis 21

3.3.2 Empiricalstudies ofFDIdeterminantsin Vietnam 23

3.3.3 FundamentalFDIdeterminants 26

CHAPTER4:DATA ANDMETHODOLOGY 31

4.1 Datasources 32

4.1.1 Dependent variable 32

4.1.2 Explanatoryvariables 33

4.1.3 Descriptivestatistics 36

4.2 Spatial econometricmodel 37

4.2.1 Spatial AutoregressiveModel 38

4.2.2 Spatial ErrorModel 38

4.2.3 Spatial DurbinModel 38

4.2.4 Marginal effectinSpatialDurbinModel 39

4.2.5 Model selection 40

4.3 Pre-testforspatialexistent withMoran’sI 43

4.4 Spatial weightmatrix 44

4.5 Comparisonsofmodels 46

CHAPTER5:EMPIRICALRESULT 47

5.1 Directeffect 51

5.2 Indirect effect 54

5.3 Totaleffect 55

CHAPTER6:CONCLUSION 56

6.1 Mainfinding 56

6.2 Policyimplication 57

6.3 Limitation andfutureresearch 57

REFERENCES 59

APPENDICES 64

LISTOF FIGURE

Figure2.1:Registered,implementFDI(million USD)andNumberof FDIprojects 7

Figure2.2: Thedistribution ofFDIin Vietnam from 1988 to 2014 9

Figure2.3: Thesector distribution ofFDI 12

Figure3.1:AnalyticalframeworkofFDI anddeterminants 31

Figure4.1:GeneraltoSpecificstrategy 42

Figure5.1:TheLocalMoran’sIofFDIinflow Vietnam in 2011-2012-2014 49

LISTOFTALBE

Table2.1:Sharingof FDIin Vietnamfrom1988to2014 7

Table2.2:Toptencountriesoforiginof FDIin Vietnam 11

Table3.1: MultinationalEnterpriseMotivation 18

Table4.1: Thevariabledescriptive 35

Table4.2:Thesummarystatisticsofvariables 36

Table5.1:TheMoran’sIcoefficientofFDI 47

Table5.2:TheMoran’sIcoefficientofexplanatoryvariables 48

Table5.3:TheAICvalue 50

Table5.4:TheMarginaleffectofSpatialDurbinModel 52

1.1Problemstatement

CHAPTER1:INTRODUCTION

ForeignDirectInvestment(FDI)playsa m a j o r r o l e i n t h e countries’sgrowth,e s p e c i a l l y i n developingcountries,thanktoitsbenefits,includingtechnologicaltransferring,managementskill,j o b creations,ando t

h e r p o s i t i v e externalities.Moreover,t h e FDIi s consideredaso n e o f

t h e essentialelementsforeconomicdevelopment(Cave,1996;Nwaogu,2012)

Awareofthesepositiveeffects,nationshaveimplementedseveralmannerstopromotetheFDIi n f l o w suchasissuingsupportivelawandpolicies,openingtheirmarket,enhancingthehumancapitalorimprovingtheinfrastructurecapability.ParticulartoVietnam,sincethe“DoiMoi”in1 9 8 6 , theeconomysystemwasreconstructedfromplannedeconomyintothemarketeconomy.Theforeignsectorisacceptedasacomponentoftheeconomy.VietnamstarteditsnewpoliciestoattracttheFDIinflowandbecome anattractivedestinationforinvestmentfromabroad.DuetothegrowthofFDIactivities,researchershaspaidconsiderableattentionintofindingtheFDIdeterminantsi n recentyears.Blanc-

Brudeetal

(2014)havereviewedhundredp r e v i o u s studiesonFDIdeterminantswithvaryingscales:countrieswithinaregionorsub-

nationalinacountry.Fors u b

-n a t i o -n a l level,therea r e s o m e remarkablestudiessuchasChe-nga-ndK

w a n (2000),Sun,TongandYu(2002),KangandLee(2007)forChina,Crozetetal

(2005)forFrance,Guimarães,FigguieredoandWoodward(2000)forPortugal.RegardingtoVietnam,theexaminingo n FDI’sdeterminantsattheprovinciallevelarerelativelyinadequate.Thereisonlyfewpapersi n

l i k e Pham(2002),MeyerandNguyen(2005),AnwarandNguyen(2010)

dependsonthetimeofotherstoarrivetheirdestination.Besides,histravellingtimealsodependso n

t h e other’soptionssuchastheirvehicle,theirvelocity,andtheirroad route

TheTolber’slawisalsoappliedinexaminingtheFDIdeterminants.Forinstance,ifHaNoiattractsmoreFDIwouldpossiblyboostordeterioratetheFDIinflowofitsnearbyneighbors,orifHaNoih o l d s agoodinfrastructureorahighlevelofhumancapital,thenitwouldnotonlyassisttoattractm o r e FDIinflowitselfbutalsopossiblymakepositiveexternalitiesonnearbyprovincessuchasN i n h BinhorHaiDuong.Morecomprehensive,thisimpliesthatthelevelofFDIinflowinoneprovincen ot o n l y depends o n i t s determinantsb u t alsoinfluencedbythe FDI inflow o fothern e a r b y provincesaswellastheirdeterminants.Alternatively,thegeographicalproximitybetweenprovincesinVietnamalsocontributes

aparticulareffecton thelevel of thestrongereffect.Theimpactcausedbytheproximitybetweenregionsisknownasspatialeffect.Therefore,d u e t o t h e existenceo f spatiale f f e c t , t h e r e l i a b i l i t y o f p r e v i o u s studies

FDIinflowandthecloserproximity-o n F D I determinantswithassumptiFDIinflowandthecloserproximity-onthatregiFDIinflowandthecloserproximity-onsaredistinct,isindFDIinflowandthecloserproximity-oubt.AccFDIinflowandthecloserproximity-ordingtFDIinflowandthecloserproximity-oAnselin(1988),t h e omissionofspatialeffectleadtobiased,inconsistentorinefficientparameterestimates.Asaresult,thesespatialeffectsshouldbecontrolledtoyieldamoreaccurateestimation.Nevertheless,previousworkso n FDIdeterminantso f V i e t n a m provideda usefulsuggestionf o r s e l e c t i n g p o t e n t

i a l determinants.Currently,t h e r e a r e o n l y t w o empiricalstudieso f H o a n g andG o u j o n (2014),EsiyokandUgur(2015),whichembracedthespatialeffect.Byapplyingtwodifferentm o d e l s, theystatedthattheFDIinflowtoprovincesinVietnamhasimpactononeanotherwithdifferentsigns.However,therestraintofusingtwobasicspatialmodelsdoesnotallowthemtodistinguishtherealimpact ofcharacteristicsfromnearbyprovinceson thehostprovince

Thereby,thisstudyisexpectedtopartiallyfulfillthedrawbacksinpreviousstudiesbyaccountingf o r thespatialinteractionbetweenprovincesininvestigatingtheFDIdeterminants,whichmightoffermorepreciseresults.Especially,byapplyingrecentspatialeconometrictechniques,thisstudyaimstorevealnot

onlythespatialdependenceof FDIinVietnambutalsothe effectofalternativeprovincesdeterminantsontheFDIflowinto oneprovince

1.2 Researchobjective

Asdiscussedabove,theFDIinflowtoeachprovincedoesnotsimplyrelyonitsdeterminantsbutalsobe

tootherprovincesandtheirdeterminantsthroughthespatialinteraction.Followedbythat,thisstudy isdesignedtoanalyzetheFDIdeterminants atprovinciallevelandexaminethespatialinteractionbetweenprovincesinattractingFDI

1.3 Researchquestions

Inorder to reach theresearchgoal,this studyfocusesonansweringtwo mainresearchquestions:

(1) Doesthe spatialdependenceofFDIinflowbetweenprovincesin Vietnamexist?

(2) WhichdeterminantswouldaffecttheFDIinflowattheprovinciallevel?

1.4Scopeofthestudy

This

studyadoptsthepaneldataattheprovinciallevelforall63provincesinVietnamfrom2010t o 2014.TheamountofregisteredFDIinUSdollarsasthedependentvariableiscollectedfromVietnamStatisticalYearBookbyt h e GeneralS t a t i s t i c a l Officialo f V i e t n a m (GSO)andt h e ProvincesStatisticalYearbookfrom2011 to 2014

TheGrossDomesticProduct(GDP)proxyfor themarketsize, the sumofexportandimportovert h e GDPproxyforthedegreeofopennessandtheproportionofemploymentinforeignfirmsovert h e totalemploymentproxyfortheagglomeration.ThesedataarecollectedfromtheProvincesStatisticalYearbookfrom2010to2013.Additionally,therateoftrainedlaborforceover15years

o f ageisemployedtoproxyforthelaborqualityandthemonthlyaverageincomeofwageworkersover15yearsofageproxyforthelaborcost.ThedataoflaborqualityandlaborcostaregatheredfromReportonLaborForceSurveyfrom2010

to2013.Inordertoaccountfortheinfrastructure,t h e d u m m y variableo f nationalmarinep o r t i s employed.Thedatao f nationalmarinep o r t i n Vietnama r e retrievedfromt h e VietnamGovernmentWebsite.Finally,t h e ProvincialCompetitivenessIndex(PCI)isusedtoproxyfortheinstitutionvariable.ThePCIdataiscollectedfromVCCIreportsfrom 2010 to 2013

Firstly,thisstudyappliestheMoran’sItodetectthespatialautocorrelationinthedatapatternoft h e dependentvariablea nd e x p l a n a t o r y variables.Ift he spatialautocorrelationexists,t h e n t h e u s i n g

spatialeconometricmodelsarenecessary.ThroughtheGeneraltoSpecificapproach,the3spatialmodelsincludetheSpatialDurbinModel(SDM),SpatialAutoregressiveModel(SAR)and

theSpatialErrorModel(SEM)willbeestimatedwiththebinarycontiguityweightmatrix.Besidest h e b i n a

r y contiguity weight m a t r i x , o t h e r spatialweightm a t r i x e s i n c l u d e t h e inversedistanceweightmatrix,cut-offkmweightmatrixandthek-

nearestweightmatrixwillalsobeestimatedtogivetheAICvaluewhichisusedascriteriaforchoosingthemostefficientweightmatrix Byu s i n g theWaldTest,theSDMshouldbepointedoutasthebestmodeldescribesthedataoverS A R andSEM.Inaddition, anon-spatialmodelwillalsobeestimatedtogivetheinformation forcomparingtheresultsbetweennon-spatialmodelandspatialmodel.Last,theHausmantestwillb e employedto find out if thetime-fixedeffectis morefavorablethantherandomeffect

1.5.Thesisstructure

Thisstudyisorganizedasfollowing:Chapter1presentsthenecessityofusingspatialtechniquesi n investigatingtheFDIdeterminantsasproblemsstatement.Chapter2includesthestagesofFDI,locationaldistributionof FDI,sectorofFDIandc o u n t r y oforigin.Chapter 3introducessome theoriesofFDIthatrelatetothelocationchoiceofMultinationalEnterprises(MNE),ane x t r a o r d i n a r y conceptofagglomerationanditseffectonFDI.ThischapteralsoexplainshowFDIinterdependencei n t h e aspecto

f agglomerationeffectandM N E m o t i v a t i o n s Moreover,t h e empiricalstudypartwillreviewsomeoutstandingstudiesthatexaminedspatialpatternsofFDIfromt h e world.Last,empiricalstudieso

n t h e FDIdeterminantso f Vi et na m w i t h andw i t h o u t spatialinteractionwill bealsodiscussed.Thedatapartintroducesthemeasurementofdependentandexplanatoryvariableaswellastheirsources.Inaddition,t h e m e t h o d o l o g y i n t r o d u c e s t h e threem a i n spatialeconometricm o d e l s includesSAR,SEMandSDM,theirproperties,disadvantages/

advantagesofeachmodelandtheirrelationship.Inaddition,thispartalsodemonstratesthetechnicaltoobtainthemarginaleffectinS D M Besides,thispartalsoprovidesreadersthedetailofMoran’sItestwhichcouldcarryoutt h e spatialautocorrelationo f dependentvariableaswellasexplanatoryvariables.A

s a keycomponentofspatialeconometrics,thispartwillalsointroducetheconstructionofaspatialweightmatrixwhichstandsforthespatiallinkagebetween provinces.Inthis part,fourspatialweightmatrixincludethebinarycontiguityweightmatrix,inversedistanceweightmatrix,binaryc o n t i g u i t y weightmatrixwiththecut-offkmcriteriaandthek-

nearestspatialweightmatrixwillalsob e presented.Chapter5i s t h e resultw h i c h embracest h e M o r a

n ’ s I resultandestimation

spatialregressionresultofSDMincludedirecteffect,indirecteffectandtotaleffect.T h e lastparto f

t h i s s t u d y is theconclusion, policyimplicationandlimitation

CHAPTER2:OVERVIEW OFFDIINVIETNAM

Ithadbeennearly 30yearssince t h e e c o n o m y reformfromplanned economy intothe markete c o n o m y in1986,the Vietnam’s economy hasintegratedintensity witht h e restofworld.The Vietnamhasbecomeoneamongthemostrapideconomiesgrowtharoundtheworld.Undoubtedly,t h

e FDIisanessentialfactortotheimpressivegrowthofVietnam.AsreportedbyNguyenandNguyen(2007),theFDIcapitalcontributesacriticalroleinthedevelopmentofeconomygrowthaswellastheprogressofpovertyreductionandimprovethestandardofliving.Thefollowingpartw i l l introducedetailsofFDIinVietnamintermofstagesofFDIprocess,provincialdistributiono f FDI,countryoforiginofforeigninvestmentandsectorsofforeigninvestment

2.1StagesofforeigndirectinvestmentinVietnam

Parallelw i t h t h e o p e n i n g marketande c o n o m y reforming,Vietnamh a d establishedt h e legalframeworkbylegislatingthefirstinvestmentlaw(FIL)in1987.ThisisconsideredtheearliesteffortofVietnamgovernmentincallingtheforeigncapitalinflow.Withtheadvantageofemergingmarket,Vietnamhasbecomeanewattractivedestinationfortheforeigncapitalfromaroundtheworld.Ingeneral,thetrendofFDIinflowVietnamcouldbeseparatedintofivestagesfrom1988t o 2014asfigure2.1.Thispartwillintroducethedetailsofthefivestagesandsomechangingthatt a k e significantimpactontheFDIin Vietnam.Theinitialstageisfrom1988to1990withthelegislationoftheforeigninvestmentlawin1987.Duringth

is period,theoverallamountofregisteredFDIcapitalintoVietnam hadreached1.8 m i l l i o n dollars.However,theFDIinflowinthistimeremainsquitelowwhichiscausedbyseveralconstraintssuchasthehighinflationrate,theinfrastructure’sabilitiesinadaptingtotherequirementofforeigninvestors.Moreover,according

toThuyLe(2007),foreigninvestorsweres t i l l soanxiousanddoubtedontheVietnamgovernmentcommitmentoneconomyreformingtoguaranteetheirbenefit

Thesecondstageisfrom1991to1997.ThisstageismarkedbytheamendingofFILin1992,1 9 9 6andtheceasingofU.Sembargopolicyin1995.TheamendingofFILin1992hadadjustedt w o basicregulationsincludetheBuild-Operate-

Transfer,whichisconsideredaformofFDIandt h e durationofFDIprojectscould beextendedup to70years.Especially,theamendingof

FILin1 9 9 6 whichpermitstheprovincialauthoritiest o i s s u e investmentlicensesw i t h certain

Registered FDI and implement FDI (million

USD) and Number of FDI projects

Registered FDI Implement FDI Number of projects 80000

requirementso n t h e i r ow n As a result,t h e registeredFD I inflowVietnamf o r th is periodhadaccruedrapidlyandreached9.63 billiondollarsin 1996

Figure2.1:Registered,implementFDI(millionUSD)andNumberofFDIprojects.

Source:GSO

Thenextstageisfrom1997 to 2000thatmarkedbytheAsianfinancialcrisis Duringthisperiod,t h e amountofFDIinflowdroppedsharply tothe levelevenlowerthan1993 T h e amountofregisteredFDIin1997with5.95billiondollarsdeclinedto2.82billiondollarsin1999and2.76b i l l i

o n dollarsi n 2 0 0 0 Accordingt o Nguyena n d Nguyen( 2 0 0 7 ) , e v e n thought h e Vietname c o

n o m y hadnotsufferedtoomanythenegativeimpactfromthecrisis,butalmosttheforeigni n v e s

t o r s originatefromthecountriesthathadtofacethecrisis.Asaresult,foreigninvestorsareforcedtoabandonorslowdownFDIprojectsinVietnam.ThisleadstothedecliningofFDIinflowf o r thisperiod

Thefourthstageisfrom2000to2008andthisstagecouldbeseparatedintotwosmallperiodsfrom2000to2006andfrom2006to2008.TheamendmentofForeignInvestmentLawin2000hastriggeredanewexpansionphaseoftheFDIinVietnam.However,theamountofFDIinflowi n thisperiodisnottoonoteworthyandremainrelativelylow.In2006,Vietnambecameamembero f WTOthatrequiredtheequalitytreatmentbetweenforeign enterprisesanddomesticenterprisesaswellascut-offthetariffbarriers.Asanupshot,thishadencouragedmoreforeigninvestorsto

Vietnam.TheregisteredFDIinflowinthisperiodincreaseddramaticallyandpeakedin2008withm o r e th

an 70 million USdollars

ThelaststageisconsideredasadownwardtrendofFDI,whichcausedtheglobalfinancialcrisisi n 2008.TheFDIinflowin2009haddroppedsharplyandreached23.1billiondollars2009,whichi s justabout32%ofthetotalFDIinflowin2008.TheFDIinflowforthisperiodhasfallenandreachedthebottomat15.6millionUSdollarsin2011.Recently,for2012and2013,theamounto f FDIinflowjust berecoveredbut nottoo remarkable

Itisworthnotingthatthereisco-movementbetweentheamountofFDIregisteredandthenumbero f FDIprojectsasfigure2.1,especiallyintheperiodfrom2007to2014.Meanwhile,theamounto f registeredFDIdeclined, butthenumberofFDIprojectstendstoincreaseduringthisperiod.In2 0 0 8 , theaveragescaleofFDIwasabout61.2millionUSdollarsperprojectwhencomparedwith

19.12millionUSdollarsperprojectin2009and11.89in2014.DespitethegrowthofFDIprojects,asinthereporton25yearsinFDIattractionofMPI,almostFDIprojectsaresmallandmediumscale

2.2 Distributionofforeigndirectinvestmentamongprovinces

ThedistributionofFDIinflowinVietnamthroughyearsisdisplayedasfigure2.2.ThemapofFDIdistributionisdrawnfromthedataofregisteredFDIfrom1988to2014.All63provinceshavereceivedtheFDIcapital,butitiseffortlesstorecognizethatthereisanunevendistributiono f FDIacrosstheseprovinces.ThemoredarkareaimpliesthehigherFDIinflowprovinceandv i c e versa,thelighterareaimpliesthelowerFDIinflowprovince.TheFDImainlyconcentratesi n theRedRiverDeltaandtheSouth-EastVietnam.Ontheotherhand,theNorth-

West,CentralhighlandandM e k o n g Deltae x h i b i t a l o w e r ofFDIi n f l o w Alternatively,t h e

F D I i n f l o w i s clusteredacrossprovincesinVietnam.Morespecifically,provinceswithhighFDIinflowtendstob e closedin distancewitheachotherandviceversa.Forexample,intheSouthEastVietnam,HoC h i MinhCitywiththehighestFDIissurroundedbyprovinceswithhighFDIsuchasDongNai,BinhDuongandBaRia-

VungTau.IntheRedRiverDelta,figure2.2alsoexhibitsthatHaNoiw i t h highFDIinflowisalsosurroundedbyitsneighborprovincessuchasThaiNguyenandBacN i n h Incontrastt o t h e S o u t h EastandRedR i v e r Delta,provincesi n t h e M e k o n g DeltaorprovincesinNorth-

WestexhibitalowFDIwitheachother.Inaddition,theFDIinflowisclusteredi n provincesbelongto

theKEZ

Figure2.2: ThedistributionofFDIinVietnamfrom1988to2014 1

Source:Author’scalculation

Asseenintable2.1,theFDIinflowtendstoconcentrateinprovincesbelongtotheSouthernKEZ2andtheNorthernKEZ.T h e s e provincesarecharacterizedbytheirproximitygeographicalandthes i m i l a r i t yinthedevelopmentof economythantheother.24provincesinKeyEconomicZonereceivednearlythree-

quartersoftotalFDI inflowinVietnamwith 7 3 5 % TheNorthernKeyEconomicZonetakesaccountof28.2%andSouthernEconomicZonetakesaccountof35.55%t h e totalFDI,respectively.Meanwhile,theMekongDeltaKEZandtheCentralKEZjustcapturea smallproportionofFDIinflowas1.7%and8.7%,respectively.Therest39provincesofVietnamj u s t takeashareof26.5%totalFDI.ThiscouldbecausedbytheadvantageofbeingoneoftheKEZwhereprovincesbenefitfromtheeffortofVietnamgovernmentindevelopingthe

1T h eFDIdistributionacrossVietnamisdrawnbyGeodaSoftware

2Vietnamisdecidedinto4KeyEconomicZonewith

24provincesincludeNorthern,Central,SouthernandMekongDelta

%totalamountofFDIinflow.ExceptforBritishVirginIslandandUS,therest8 countriesarealloriginatedfromAsiacountrieswithmorethan70%totalFDIinflow.SouthKoreai s t h e b i g g e s t s o u r c

e w i t h 4 1 9 0 projectsa n d accountf o r 1 4 9 2 % totalFDI.J a p a n andSingaporealsocontributedahighshareofFDIinVietnamwith14.77%and13.03%,respectively.InSouthEastAsiaarea,Singapore,MalaysiaandThailandalsodominatedapproximately20%totaltheFDIinflowVietnam.TheUSasthelatecomeralsocontributed4.34%oftotalFDIwith7 2 5 projects

THE SECTOR DISTRIBUTION OF FDI IN VIETNAM

Others 16%

Real Estate 19%

theaccommodationandfoodservicetakeasmallshareofFDIcapitalwith 4.51%and4.42%,respectively.A l l o t h e r sectorssuchasminingandquarrying,energy,r e t a i l , education,communication,etceteraaresummedupandtheytakeonly16.02%oftotalFDI.Detailofsectorso f foreigninvestmentisprovidedinappendicespart

Figure2.3 Thesectordistribution ofFDI

Source:Author calculation

Accordingtothereporton25yearsinFDIattractionofMinistryofPlanningandInvestment,FDIhasplayedacrucialroleinVietnam’seconomy.Vietnamhasachievednumerousbenefitintheaspectofsocioeconomicsuchaseconomygrowth,economystructuretransformation,jobcreation,technologicalt r a n s f e r ,enhancet h e competitivea b i l i t y f o r atallt h e n a t i o n a l , enterpriseandproductionlevelandcontributeitseffecttotheprogressinworldeconomyintegration.NguyenandNguyen(2007)p r o p o s

e d sevenreasonsf o r e x p l a i n i n g t h e successesf o r FDIattractingi n Vietnaminclude:t h e s t r a t e

g y l o c a t i o n o f Vietnam,t h e s t a b l e politicalsystemandeconomy,

abundantnaturalresources,youngandqualitylaborforce,largemarketsize,apotentialplatformf o r exportingto EUandUSAanditscommitmenttoeconomic reform.

However,besidesthebenefitcausedbyFDI,therestillaremanyrestraintssuchashighportionFDIenterprisesareoperatedwiththemedium-lowtechnological,lowliving

standardofworkers,p o l l u t i o n , energyresourcewasted,etcetera

ThefollowingpartintroducessometheoriesassociatedwiththelocationchoicesofFDIwiththeparadigmOLIasthemaintheory.Inaddition,thelinkagebetweentheagglomerationeconomiesandFD I alsob e

p re se nt ed Besides,t h i s partalsoe x p l a i n s t h e spatialinterdependenceo f FDIi n f l o w betweenregionsbytheagglomerationeffectandMNEmotivation.Further,thischapteralsoprovides

someempiricalstudies on FDIdeterminantswithandwithoutspatialdimension

3.1 Theoriesaboutlocationchoicesofforeigndirectinvestment

Beforem a k i n g investmentdecisionsi n givencountry/

regions,M N E h a v e t o agitateseveralconsiderationssuchaswhytheyshouldinvest,howshouldtheybeorganizedormanagedorwheres h o u l d theyinvest.ParallelwiththedevelopmentofFDIaroundtheworld,severaltheorieshavebeendevelopedtoexplainitsactivities.SomecommontheoriesaretypicallyusedastheMarketPerfection,MarketImperfectiontheory,Internalizationtheory,TransactionCosttheory,ProductLifeCycletheory,M a c r o Economictheory,Internationalizationtheory,t h e EclecticParadigmOLI.Andasaconsequence,thisalsoleadstoproblematictosearchforonlyonetheory,whichcane x p l a

i n forallissuesrelatedtothe FDI.However, r e g a r d i n g tolocationchoicesofFDI,some theoriescouldbelistedastheProductionLifeCycletheory(Veron,1966),theMacroeconomict h e o r y o f

F D I ( K y o s h i Kojima,1 9 7 3 ) andt h e ParadigmO L I ( D u n n i n g , 1 9 7 9 , 1981).A m o n g theoriesabove,theeclecticOLIparadigm(Dunning,1979,1981)isthemosttypicaltheorythatisemployedtoexplain theFDIlocationchoice

cost.Thismeanst h a t foreignfirmswouldhavetopossessspecificadvantagesthatmakethemmorecompetitive.Theseadvantagescouldb e t h e trademark,s u p e r i o r productiontechniques,managements k i l l s ,

productionskills, marketingsystemortheadvantageofscale.Andthese advantageswouldbe s t r

o n g enoughtocompensatethecostandgainahigherreturn

TheI- Internalization

Byowningitsadvantage,foreignfirmsmayhaveseveralchoicesforproductionabroadincludet h ecollaborationwithotherfirmsinthehostcountries.Theymightsellthelicenseorjointventurew i t h otherslocalfirms.However,foreignfirmswouldhaveanincentivetobelievethat,advantagesbyproductionandoperationinternallymightearnmore benefitratherthanthecollaborationwithothers

TheL-Location

Inthescopeofthisstudy,assumethatthecomponent“I”andthe“O”aregiven,thecomponent“L”inOLIshouldbethemostappropriatetheoryforexplainingtheinvestingbasedonthelocationadvantages.TheL-Locationadvantagesincludemanyfactorssuchas:

dt h e abundantresource.Inc o m p a r i s o n w i t h t h e ProductionCycleT h e o r y andtheMacroEconomictheory,the“L” factorinOLItheorycanexplaintheincentiveofFDIinflowbetterandmoresufficient

However,thecomponentL-LocationintheOLIparadigmframeworkisabletoexplaintheFDIattractionbasedonthedifferencesinlocationcharacteristic.ThelocationswiththemorecomparativeadvantagewouldreceivemoreFDI.AssumethatifalltheOLIadvantagesaresimilart o twolocations,buttherestillexistsadisparityintheirFDIinflowbetweenthem.Thisisalsotheweaknessofthe Lcomponent of the OLIparadigmtoexplainsuchsituation

Onetheorythatmaygivethesolutionforthisissuenamed“agglomerationtheory”whichcoulde x p l

a i n theFDIintheaspectoftheclusteringofeconomicactivities.Theagglomerationtheoryanditslinkageto theFDIattractionwill bepresentedasbelow

3.1.2 Agglomerationandforeigndirectinvestment

TheveryfirstideaabouttheconceptofagglomerationwasdefinedbyAlfredMarshallinthe1890sw i t h the“TheprincipleofEconomics”anduntilnow,theagglomerationcontinuestobetheobjectf o r researchingofmanyfieldssuchasurbandevelopment,productivity,laborandalsotheforeigninvestment.Essentially,t h

e agglomerationi s describedast h e p h e n o m e n o n t h a t t h e l o c a l i t y concentrationofparticularcharacteristic.Forexample,theconcentrationofhigh-

techcompaniesi n t h e S i l i c o n V a l l e y int h e U S couldb e consideredast h e a g g l o m e r

a t i o n o f firmsort h e concentrationofFDIinVietnamasillustratedinfigure2.2alsobethesignalofagglomeration.Sow h y agglomerationdoesmatterwithForeignDirectInvestment?

TheanswercomesfromthescaleeffectsoftheagglomerationwhichcontributethepositiveexternalitiesonFDI.AccordingtoFujitaandT h i s s e (2002),t h e s e externalitiesi n c l u d e t h e localizedknowledges p i

l l o v e r , t h e abundantlaborsandthe intermediate inputformanufacturingandcomplementaryservices

Firstly,i n t h e aspecto f localizedknowledges p i l l o v e r , t h e p r o x i m i t y o f g e o g r a p h

17orthatreducestheriskoflaborlacking.Ontheotherhands,laborwouldtendtoconcentrateinagglomerationareawiththeincentiveofjobavailableandbeabletochoosefirmsw i t h a highersalary.

Thel a s t p o s i t i v e externalityo f agglomerationi s t h e intermediatei n p u t formanufacturingandc o

m p l e m e n t a r y services.B y l o c a t i n g i n t h e concentrationarea,firmsw o u l d benefitfrom

t h e backwardlinkageandtheforwardlinkage.Thedifferencebetweenbackwardlinkageandforwardlinkageistheapproachofsupplysideanddemandside.Inaspecttothebackwardlinkage,firmsarebuyersandtheywouldmovetotheareaswhereaclosedrangewithinputsuppliers.Contrastw i t h thebackwardlinkage,theforwardlinkageindicatedthatfirmsassuppliersandwouldmovet o theareaswherebuyerslocatetheirproduction.Theproximityhelpfirmtobenefitthespecializedi n p u t andreducethetransactioncostaswell.Therefore,mostoftheempiricalstudieshavepressedt h e importanceofagglomerationeconomieswhichcontributesthe positiveimpacton theFDI

However,t h e agglomerationn o t o n l y c o n t r i b u t e s t h e p o s i t i v e externalitiesb u t alsonegativeexternalitiesonFDI.AccordingtoBorowiecki(2013),theagglomerationmaycausethediseco

(1995)statedthattheconcentrationoffirmsisn o t alwayscausedbytheagglomerationexternalities,buttheendowmentfactordriven.Bronzini(2004)alsostatedthatwithoutconcerningtothefactorendowment,therewouldbeanerroneousconclusionabouttherelationshipbetweenFDIandagglomeration

3.2 Theinter-dependenceofFDIbetweenlocations.

FollowedtheTolber’sLaw(1970),everythingisrelatedandimpactoneachotherthroughspace.A l s o ,accordingt o Baltagietal

(2007),t h e r e l a t i v e l y s m a l l o f a n y p a i r o f countrieswhencomparingwiththerestoftheworld,thenthethirdcountryeffectdoesmatter.ParticulartotheFDI,whentheMNE

makeinvestmentin the hostcountry,theeffectof othercountriestothehostc o u n t r y inattractingFDIisclearlyexisted.But,howregionsmutuallyimpacttotheFDIinflowandwhichway?

AccordingtoCoughlinandSegev(2000),thespatialinterdependentofFDIcouldbetheresultsofagglomerationeffectorthesimilarityoftopographycharacteristicbetweenregions.Besides,thespatialinterdependenceofFDIcouldbetheresultsofMNEstrategiesasEkholmetal.(2007)andBlonigeletal.(2007).Thefollowingpartwillexplain thespatialinterdependenceofFDIthrought h e MNEmotivation andtheagglomerationeffect

3.2.1 MNEchoicetheory

partpresentsthespatialinterdependenceofFDI,whichreliesontheMNEm o t i v a t i o n theory.ThecorecontentofMNEmotivationillustratesthespatialinterdependentof

FDIthrough2formsinclude:t h e FDIinflowhostregionisinfluencedbytheFDIinflowofnearbyregionsandtheFDIinflowhostcountryisinfluencedbythepotential marketsizeofallothern e a r b y regions

AccordingtoBlonigenet al(2007),motivation of MNEcouldbe summarizedasbelow:

MotivesofFDI SignofneighborFDIinflow Signofsurroundingmarketp

offbetweentheproductionintheircountryandthenexportgoodstothehostcountriesortheyshouldsettletheiraffiliateinthehostcountry.Onehand,iftheyprefertokeepoperating

intheircountryandexportgoods,theywouldhavetofacewith

thetradecost,customduties,legallyissuesofthehostcountry.Ontheotherhand,iftheychoosetomoveo

u t , they wouldhavetofacewi th the fixed costbysettingupanotherproduction affiliate.Bycomparingthecostandthebenefit,theywouldselectthebeststrategies.Thepurposeofmovingo u t isservingthehostdemandonly.Thereisnoimpactofthethirdcountriesontheinvestmentdecisionatall.AccordingtoBlonigenetal

(2007),thesufficientconditionofhorizontalmotivei s thatthehostcountrywouldhaveatraderestrictionhighenoughthatmakeforeigninvestorsonlyproducegoodsfor thehost countryonly, but not forexporting

Unlikelythehorizontalmotive,theverticalmotivebyHelpman(1984)indicatedtheincentiveofi n v e s

t o r s formovingabroadiscausedbythelowinputfactorcost.WhenMNErealizethattheymightproducegoodstoservetheircustomerswithalowerpriceinanothercountryratherthanin

theircountry.SoMNEwouldestablishtheiraffiliatesinthehostcountryandthenexportgoodsbacktotheircountry.Therefore,regardingcost,whichcountryhasthecostadvantageforMNEt h e n itwouldreceivetheFDI.AccordingtoBlonigen(2007),thisformofMNEwouldleadtothecompetitionbetweencountriesinattractingtheFDIinflow.Asaconsequence,thisleadstothenegative

signofnearbycountries on theFDIinflow ofhostcountry

Contrastwiththehorizontalmotive,iftraderestrictionofthehostcountryislow,thenforeigni n v

e s t o r s m a y use th is c o u n t r y asa pl at fo rm t o e x p o r t goodst o o t h e r c o u n t r i e s ast h e e x p

o r t - platformmotivationofEkholmetal

(2007).Ifanycountrieshavealowerinputcostaswellast h e lowerfixedcostofsettingaffiliatethenitwouldmakeitbecomemoreattractiveandhencem a k e anegativeimpactontheFDIinflowofothers.Besides,becausetheincentiveofinvestorstoh o s t countryforexportinggoods,thenthemarketsizeofthethirdcountrywouldtakeapositiveimpactontheFDIinflowofthehostcountry.However,thisstudyusestheprovincialdatathereforet h e M N E w o u l d productt o servef o r n e a r b y provinces.Therefore,f o l l o

y countries, b u t s t i l l keept h e i r productioninthehostcountriesbyadvantagecomparative.So,thisformofFDIwouldcreateap o s i t i v e spatialeffectonneighboringcountries.However,theeffectofmarketpotential isstillambiguous

Insum,theMNEmotivationsuggeststhat,thecostfactorscausedthespatialdependenceofFDIbetweenregions.AccordingtoCoughlinandSegev(2000),ifoneregionhasanincreasingincostt h e n , itwouldmakethecoststructureofnearbyregionsbecomemoreattractiveandhence,itleadst o

t h e spatialdependenceofFDI aswell

3.2.2 Agglomerationeffect

ThespatialdependenceofFDIbetweenregionsisalsoexplainedbytheagglomerationeffect.Byt h e concentrationofFDIactivities,thenitwouldgeneratethepositiveexternalitieswithinregions.Butwhatiftheseexternalitiesarestrongandspill-over thespace?

Firstly,oneneedstobedistinguishedistheconceptofagglomerationandspatialdependence.Accordingt o Nwaogu( 2 0 1 2 ) , t h e spatialdependenceandt h e agglomerationaredifferentb u t interrelatedw

i t h eachother.W h a t makesagglomerationdifferf r o m s p a t i a l dependencei s t h e “distancedecay”.Theagglomerationeffectwouldloseitspowerasthedistanceincrease,meanwhile,thespatialdependencecouldcapturetheeffectofagglomerationthroughdistance.Accordingt o Couglina n d Segev( 2 0

0 0 ) , O r r ( 2 0 0 8 ) , Nwaogu(2012),t h e d e p e n d e n c e o f F D I betweenregionsistheresultofitsagglomerationexternalitieswhenevertheseexternalitiesares t r o n g enoughtocrosstheborderbetweenregions

Onehand,theagglomerationwiththespilloveroftechnical,specializedlabororintermediateinputw o u l dbringapositiveeffectonneighborFDI.Onthecontrary,asCoughlinandSegev(2000),ift h e s e externalitieslimitthemselveswithinregionsas“distancedecay”thenitwoulddecreasetheFDIinflow

ofneighboringregions