1.1 Problem Statement The Provincial Competitiveness Index PCI is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job c
Introduction
Problem Statement
The Provincial Competitiveness Index (PCI) evaluates why some Vietnamese provinces outperform others in private sector growth, job creation, and attracting both foreign and local investment It utilizes survey data from businesses regarding their perceptions of the local business environment, combined with credible official data on local conditions, to rate provinces on a 100-point scale In 2005, the PCI comprised nine sub-indices that explain much of the performance variation across provinces By 2006, additional sub-indices were introduced to better reflect provincial government efforts to improve the business climate, making the PCI a comprehensive tool for analyzing regional competitiveness in Vietnam.
Currently, there is a lack of empirical research identifying the independent variables of PCI and other traditional factors that influence provincial FDI in Vietnam The impact of these variables on provincial FDI remains unclear, highlighting a significant gap in understanding how various factors affect foreign direct investment at the provincial level.
I also did not find any analysis related to the independent variables of PCI whether they have internal relation.
Research Objectives
This research aims to identify significant impacts of selected independent variables related to Public Credit Institutions (PCI) alongside traditional factors influencing provincial FDI inflows (Regional FDI) The findings are designed to assist policymakers in focusing on key areas to enhance the investment environment at the provincial level and to inform government strategies for attracting higher FDI inflows By understanding these critical determinants, both regional and national authorities can implement targeted policies to stimulate sustainable economic growth through increased foreign direct investment.
Previous studies have examined the factors that attract foreign direct investment (FDI) to developing countries, highlighting key country-specific determinants However, the main objective of this thesis is to identify the most influential factors that affect FDI inflows in developing nations, providing insights to enhance their attractiveness to foreign investors.
(i) Independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam; and
(ii) Factors of PCI are highly correlated and we should revise PCI set
(iii) PCI determinants out of the ten original factors should be included in a new, more significant subset base of PCI determinants
(iv) Interaction effects between PCI improvement and FDI growth.
Research questions
This study investigates the key determinants of provincial FDI in Vietnam, utilizing the Provincial Competitiveness Index (PCI) as a primary independence variable alongside traditional factors influencing FDI attraction The research aims to identify how aspects measured by the PCI, such as administrative procedures, transparency, and business environment, impact foreign direct investment at the provincial level Findings highlight the significance of provincial competitiveness in attracting FDI, providing valuable insights for policymakers seeking to enhance investment climate and regional economic development in Vietnam The analysis underscores the importance of both PCI components and conventional variables, such as infrastructure, human resources, and market size, in explaining provincial FDI inflows.
This study explores economic theories and empirical research related to FDI, focusing on the independence variables used in the PCI project in Vietnam We develop a research model and gather data from the PCI project website (www.pcivietnam.org) and Vietnam's Statistical Yearbook from the General Statistics Office (www.gso.gov.vn) Our primary goal is to identify which independent variables, including PCI and traditional factors, significantly impact FDI across Vietnamese provinces.
(2)Factors ofPCI are highly correlated and we should revise PCI set?
(3)Which PCI determinant out of the ten original factors should be included in a new, more significant subset base of PCI determinants?
(4)Are interaction effects between PCI improvement and FDI growth?
Organization of the study
This thesis has five chapters, while the chapter one has presented as above explain the purpose chose the theme The rest of this thesis is organized as follows:
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Chapter four is the econometric analysis and finding The last chapter will be conclusion and recommendation of the research.
Theoretical Consideration and Literature Review ll 2.1 The regional development and competitive regionalism theory
FDI theories and its applicability
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2.2.1.1 Differential Rate of Return Theory
Until the 1950s, international direct investment was entirely explained within the traditional theory of international capital movements Like other forms of international
II investment, FDI was seen as a response to differences in the rates of return on capital between countries
Investors aim to build efficient investment portfolios that minimize risk while maximizing returns By comparing the rates of return of various alternative investments with their associated risks, investors can select the most suitable assets Balancing substitutable assets ensures the creation of an optimal portfolio that effectively manages risk and enhances potential gains.
According to Dunning (1973), portfolio theory cannot fully explain direct foreign investment because it overlooks that direct investment involves more than just ownership changes Instead, it encompasses the transfer of key resources such as entrepreneurship, technology, and management expertise Additionally, the decision to invest abroad is influenced by the relative profitability of utilizing these intangible assets in different countries, beyond mere financial capital.
The theory argued that the international diversification of portfolios 1s a way of reducing the firm's risk and hedging the risks
Capital theory shows that some determinants related cost factors in PCI set have potential effects to attracting FDI of provinces
2.2.2.1 Mundell and the Heckscher-Ohlin Model
Mundell (1975) expanded the basic economic model to demonstrate that trade and capital flows can serve as substitutes, with trade tariffs prompting increased foreign direct investment (FDI) into protected countries This aligns with the original Heckscher-Ohlin model, which suggests that trade restrictions can be effectively offset by international capital movements, especially considering labor's immobility.
Kojima (1973) classifies motives for foreign direct investment (FDI) into four key categories: seeking natural resources, capitalizing on low labor costs in the host country, avoiding tariffs and non-tariff barriers, and leveraging oligopolistic power through technological and knowledge advantages Understanding these drivers helps companies make strategic investment decisions and enhances competitive advantages in international markets.
The product cycle model by Vernon (1966) explains the rapid international investment of US firms by emphasizing that each product undergoes three key phases: innovation, maturity, and standardization Domestic demand drives innovation, while similarities in international markets promote exports Vernon highlights that the US’s abundant skilled labor and R&D resources, combined with sophisticated domestic demand, provide a strong foundation for innovation in US companies.
2.2.3 Market Failures and Industrial Organization
Foreign firms face inherent disadvantages compared to domestic companies, such as limited market knowledge and communication barriers To engage in foreign production successfully, they must possess specific firm advantages like proprietary technology, business techniques, and skilled personnel Hymer (1960) highlights that FDI involves more than capital transfer; it encompasses the international transfer of intangible assets and proprietary rights He argues that FDI exists primarily due to market imperfections for these assets, leading firms to internalize or bypass these failures through direct investment to exploit their competitive advantages in foreign markets.
Internalization occurs when certain transactions are more cost-effective to perform within a firm rather than in the open market, as long as the benefits—such as reducing barriers to new entrants—outweigh the costs of communication, coordination, and control Foreign Direct Investment (FDI) is driven by the desire to capture these internalization benefits, enabling firms to optimize operations and maintain competitive advantage.
2.2.4 The Eclectic Paradigm and International Investment Path
Dunning ( 1979) suggests that a firm engage in FDI if three conditions are satisfied:
It possesses net ownership (0-) advantage vis-a-vis firms from other countries;
It is beneficial to internalize (I- advantage) those advantages rather than to use the market to pass them to foreign firms;
There are some location (L-) advantages in using the firm's ownership advantages in a foreign location rather than at home
The IDP approach examines both inward and outward investments of a country, highlighting the connection between a nation's development level and its international investment position, measured by net outward investment per capita This approach is based on the hypothesis that there is an interrelationship between the flows of inward and outward investments and a country's development status As a country progresses, the economic environment and opportunities for domestic and foreign firms evolve, influencing investment patterns accordingly.
In today’s rapidly globalizing world, the location determinants of Foreign Direct Investment (FDI) in host countries have become crucial factors, often outweighing traditional investment drivers According to UNCTAD (2001), while traditional factors influencing FDI remain relevant, their importance is declining in the era of globalization, especially for high-tech and dynamic industries Instead, FDI tends to be increasingly guided by a host country's ability to offer complementary skills, robust infrastructure, reliable suppliers, and strong institutions, highlighting the strategic significance of localized competitive advantages.
Increasing returns in production activities are needed if we want to explain economic agglomerations without appealing to the attributes of physical geography
Externalities from agglomeration are known to encompass specialized labor markets and supplier networks as well as knowledge spillovers
The determinants of regional economic growth in developing countries include geography, infrastructure, legal institutions, and the quality of human capital Effective connectivity to the global economy depends on the quality of local businesses, environmental sustainability, transparent governance, and strong institutions A conducive environment features low corruption, predictable public goods provision, secure property rights, flexible labor markets, and a competitive tax regime These factors collectively enhance regional competitiveness and support sustainable development.
The determinants of a nation's competitive advantage in skilled labor include the quality and availability of skilled workforce, robust infrastructure, and the strength of supporting industries Key factors such as infrastructure development, home demand, and supportive industries play a crucial role in enhancing a country's production capabilities These elements collectively contribute to a nation's ability to sustain a competitive edge in global markets through their influence on factors of production.
Capital Theory Higher rate of return , leading to Factor cost: Entry higher attracting FD I Cost, Informal charges, Time Costs of Regulatory
Compliance Mundell and the Trade tariffs would induce a flow Legal Institutions ,
Heckscher-Ohlin ofFDI Proactively of
Kojima's Motiving of FDI into four Labor Training,
To succeed in the global market, companies should focus on macroeconomic strategies such as accessing land through legal channels, leveraging institutional resources, and benefiting from the host country's low labor costs Additionally, avoiding tariff and non-tariff barriers and utilizing oligopolistic market power can provide competitive advantages Understanding domestic demand and market size, along with labor cycle models and incentives to innovate, are crucial for growth Supporting services like training and fostering international demand similarity can further stimulate exports, while provincial industries can play a vital role in regional economic development.
The Hymer-FDI concept emphasizes that Foreign Direct Investment is more than just labor training, legal considerations, or capital transfer—it's fundamentally about institutions, the international transfer of proprietary rights, and intangible assets Effective FDI involves proactive management of intellectual property, leadership at the provincial level, and strong institutional frameworks that support sustainable economic growth.
Approach teclmology, business techniques, Business Supp011 and skill personnel's Service
Internalization occurs when firms perform transactions internally rather than through the market to save on costs such as charges, time, and regulatory compliance This approach is advantageous as long as the benefits—like reducing barriers to entry and avoiding costly communication, coordination, and control—outweigh the internalization costs Foreign Direct Investment (FDI) is driven by firms seeking to capture these benefits by internalizing transactions within the firm, thereby enhancing efficiency and competitiveness.
Empirical studies on the determinants ofFDI
Conventional empirical studies on the determinants of Foreign Direct Investment (FDI) typically focus on ten key variables identified by Dunning and Narula (1996) These include natural and created assets, capital intensity, market size and growth, infrastructural development, labor cost and productivity, degree of openness, government policies, political stability, profitability, and geographical proximity These factors collectively influence the decision-making process and investment flow across borders, making them essential for understanding FDI dynamics Understanding these variables is crucial for policymakers aiming to attract foreign investment and foster economic growth.
Nonnemberg and Mendonya (2004) analyzed the determinants of foreign direct investment (FDI) in developing countries using panel data analysis Their econometric model focused on 38 developing economies over the period from 1975 to 2000, providing insights into the key factors that influence FDI inflows in these regions.
The study highlights that education is a key determinant of foreign direct investment (FDI), indicating that FDI in developing countries tends to focus on knowledge-intensive activities Additionally, the degree of economic openness significantly influences FDI attraction, with higher openness leading to increased investment inflows A causality test revealed that gross domestic product (GDP) growth tends to drive FDI rather than the other way around According to Ali and Guo (2005), market size is a major factor attracting FDI, while labor costs and global integration significantly impact investment decisions.
Sahoo (2006) conducted a panel cointegration study on five South Asian countries—India, Pakistan, Bangladesh, Sri Lanka, and Nepal—revealing that FDI and its key determinants have a long-term equilibrium relationship The study identified market size, labor force growth, infrastructure development, and trade openness as the primary factors influencing FDI in the region To attract more foreign investment, South Asian nations should sustain economic growth, develop policies to leverage their abundant labor forces, enhance infrastructure, and adopt more open trade frameworks.
Kozlova and Smajlovic (2008) identified FDI inflows as the dependent variable, influenced by key explanatory factors such as GDP per capita, investment freedom, trade openness, and infrastructure Additionally, the model accounts for whether a country is an oil-exporting or non-oil-exporting nation through a dummy variable, highlighting the impact of resource dependence on foreign direct investment.
FDii = ai + ~1 (GDPperCap)i + ~2 (lnvestmentFreedom)i + ~3 (Infrastructure)i + ~4
The general conclusion from the results demonstrates that the infrastructure and trade openness are significantly related to FDI in the MENA (the Middle East and North African) region
Vijayakumar et al (2010) identified trade openness, measured by the ratio of total trade to GDP, as a key determinant of FDI inflows in BRICS countries Besides economic stability and growth prospects, such as inflation rate and industrial production, trade openness significantly influences foreign direct investment Their findings suggest that among various factors, increased trade openness plays a crucial role in attracting FDI to these emerging economies.
Most of FDI researches focused to FDI of a country or some countries but they should be reviewed to compare these potential explanation variables with independent variables of provincial FDI.
Geographical literature on Vietnam, China and ASEAN countries l9
Xu et al (2009) reported that agglomeration economies, labor cost, infrastructures greatly influence the spatial distribution ofFDI in China
According to Dang (2008), several key determinants motivate FDI in China These include investors’ interest in the domestic market, efforts to reduce production costs through access to inexpensive Chinese labor, and the quality of infrastructure which supports technological advancement and economies of scale Additionally, China's stable political environment and clear development vision play a crucial role in attracting foreign investment.
Luo et al (2007) highlight the importance of further exploring how natural resource endowments influence local economic growth and attract foreign direct investment (FDI) in underdeveloped regions Additionally, our study reveals that multinational enterprises (MNEs) prefer locations capable of supporting high-value activities rather than solely relying on China's traditional low labor cost advantage for manufacturing.
Havrylchyk and Poncet (2006) found that the positive impact of agglomeration, high labor productivity and low labor costs, market size, infrastructure density, and market reforms on FDI
Na and Lightfoot (2006) identified three key variables that significantly influence Foreign Direct Investment (FDI) across 30 regions in China Their study found that regional market demand and market size (GDP) positively impact FDI attraction, particularly in 2002 Additionally, higher labor quality enhances a region's attractiveness to FDI The degree of openness and the level of institutional reforms also play a crucial role in attracting FDI, underscoring the importance of liberalization and reform policies for regional investment inflows.
Giang (2008) identified four key local factors affecting investment: remote location from major commercial centers, underdeveloped infrastructure, weak foreign direct investment (FDI) policies, and an unfavorable FDI environment compared to other regions in Vietnam.
The FDI environment in mountainous provinces (NMPs) across Vietnam is generally unfavorable, as evidenced by annual surveys conducted by VCCI and VNCI Most NMPs, except Uto Cai, are characterized by low transparency, with six of these provinces ranking among the least transparent regions in the country.
Anh and Thang (2007) identified key factors influencing foreign direct investment (FDI) location decisions in Vietnam, including market potential, labor availability, and infrastructure quality Their research highlights the significance of these economic and logistical factors in attracting FDI However, they found no substantial evidence indicating that local government policies significantly impact FDI inflows into Vietnam This suggests that policymakers should focus on enhancing market opportunities, workforce skills, and infrastructure to attract more foreign investment.
Anh et al (2007) conducted an empirical evaluation of the effectiveness of incentives in attracting foreign direct investment (FDI) They employed a two-step difference-in-differences (DD) estimation approach, beginning with the estimation of a regression model using the Ordinary Least Squares (OLS) method This analysis aimed to determine how various incentive policies influenced FDI inflows, providing insights into the effectiveness of such measures in fostering foreign investment.
Yst = bO + bl.Xst + b2.Breaks + gst (1)
This study examines the level of per capita foreign direct investment (FDI) attracted to provinces in year t, denoted by Y_st, while considering relevant determinants and control variables, represented by X_st The analysis accounts for structural changes using a dummy variable, Breaks, which equals 0 for non-breakers and 1 for breakers In the second step, the impact of various incentives on FDI attraction is estimated through an appropriate econometric approach to provide insights into how different factors influence provincial FDI flows.
OLS regression in this two period panel The regression has a very simple form as follow: gsi = b3 + b4.Timesi + usi (2)
Timesi is a dummy variable indicating the period before (0) and after (1) incentive issuance The impact of labor costs on foreign direct investment (FDI) differs between registered and implemented projects; the wage coefficient is positive and significant post-investment (regression 2), but negative and insignificant pre-investment (regression 1) This suggests that prior to investing, investors tend to choose locations with lower labor costs, whereas after investment, higher wages are associated with increased productivity and labor scarcity The negative coefficient in regression 1 reflects investors' preference for cost-saving locations before committing, while the positive coefficient in regression 2 reveals that FDI projects contribute to higher wages due to increased productivity and labor market competition.
Thu (2007) studied the determinants of the FDI in Vietnam, the specific empirical model of the time-series determinants ofFDI inflows in Vietnam is:
LnFDit = po + 81 lnGDPt + 82 lnGDPGt+ 83 lnTELt + 84 lnHKt + 85 lnOPENt + 86 lnEXCHANGEt + 87 Dl998+ 88ASEAN + ut The results reveal that higher market size and higher GDP growth are encouraging FDI inflows into Vietnam
Ali and Ahmad (2008) reported that important factors in determining the location relationship of FDI in Malaysia are the community, availability of raw materials and fuel
Spatial Determinants of Inward agglomeration economies, FDI in China: Evidence from labor cost, infrastructures Provinces
FDI in China Economic Growth and Policy
Market size and growth, Government incentive policies; Cheap labor cost; High investment return
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Foreign Direct Investment in Market stze, labor force South Asia: Policy, Trends, growth, infrastructure index Impact and Determinants and trade openness
Determinants of the FDI and market size, economic growth: a summary of recent growth, macroeconomic literature stability, Infrastructure , regulation, economic barrier
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Vietnam: An overview and labour factors, analysis the determinants of infrastructure spatial distribution across provmces and
7 Thu Determinants of the FDI m market size; GDP growth
8 Agiomirgi The determinants of foreign the marker size, the trained anakis et direct investment: a panel data labour , and infrastructure al (2006) study for the oecd countries
While most FDI research has traditionally focused on country-level or regional analyses, limited studies have explored provincial FDI dynamics, particularly in China This thesis shifts the focus to provincial FDI in Vietnam, examining how independent variables from the PCI set and other traditional factors influence foreign direct investment at the regional level.
Base on Vietnam PCI project proposed general framework for determinants of provincial competition index as follows:
The productivity of a firm (PCiit) is influenced by multiple interconnected factors including entry costs (EC), access to land (AL), transparency and access to information (TAl), and the time costs associated with regulatory compliance (TCRC) Additionally, informal charges (IC), the proactivity of provincial leadership (PPL), availability of business support services (BSS), labor training (LT), strength of legal institutions (LI), and overall infrastructure (INF) all play crucial roles in shaping business performance These variables collectively determine the ease of doing business and the competitiveness of firms within a given region Incorporating these factors into strategic planning ensures improved operational efficiency and sustainable growth.
Base on empirical studies related to FDI, especially regional FDI, economic theory and base on PCI survey as equation ( 1 ), the research question is
(i) Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?,
The first regression model for this study is suggested as follow:
FDI it= a o +a 1 EC it+ a 2 ALit+ a 3 TAl it+ a 4 TCRC it+ as IC it+ a 6 PPL it+ a
1 BSS it +as LTit +a 9 LI it+ o.w IP u +an INF it+ o.n MS it + o.13 KEA it + u it
Where: IP-Industrial Product of province, MS-Market Size, KEA: northern and southern key economic area KEA = 1, other provinces KEA =0
The OLS technique applies for the first regression model to answer for the first research question
Based on economic theory and principal component analysis, we anticipate detecting multicollinearity or significant interaction effects among certain variables As a result, some independent variables can be consolidated into two main groups: Cost Factors and Province Policy This approach streamlines the analysis while maintaining key insights into the underlying relationships influencing the studied outcomes.
This study assesses the impact of cost factors and provincial policies on the research outcomes by analyzing the Cost Factor (CF), which includes EC, TCRC, and IC, alongside Province Policies (PP) such as AL, TAl PPL, BSS, LT, and LI The model is designed to be reviewed and expanded by incorporating additional relevant variables to enhance accuracy This methodology effectively addresses Research Questions No 2 and No 3, providing comprehensive insights into the influence of economic and policy-related factors on the study's focal points.
This study develops a regression model to analyze the distribution determinants of total foreign direct investment (FDI) across provinces The model employs the logarithm of annual provincial FDI as the dependent variable to highlight the growth rate of FDI ventures By examining these factors, the research aims to identify key drivers influencing FDI distribution and analyze regional investment patterns This approach provides valuable insights into the factors shaping FDI flows, which are crucial for policymakers aiming to attract more foreign investment.
Ln (FDI) it = fJJ + f32Ln (PC!) it+ uit (3)
Where, i and t denote sample provinces, and time (year) respectively !.! denotes residuals
To answer for research question No.4, The OLS technique also applies
There are two types of panel data: Balanced versus non-balanced data
Two limit cases are a "pure" cross section data with only one time period or a "pure" Time-series data with only one individual
This study utilizes panel data on dependent and independent variables sourced from the PCI project (www.pcivietnam.org) and the Vietnam Statistical Yearbook (www.gso.gov.vn) covering all provinces from 2006 to 2009, totaling 252 observations (4 years x 63 provinces) To analyze trends over time, the data were aggregated into cross-sectional averages by computing the mean value for each province across the four-year period Due to data limitations, only registered FDI figures at the provincial level were available, and a weight of 0.33 was applied to FDI data for the years 2007 to 2009 to account for variations in data reporting.
2009) of the implementation value of provincial FDI as following:
Table 3.1: the implementation value of provincial FDI
Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):
Table 3.2: FDI capital of top ten provinces
Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai
Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74 FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81 USD
By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)
Above result will be compared with actual survey data (benchmarking) to choose the best output
3.3.1 The Provincial Competitiveness Index-PCI (total point= 100)
Research Model, Data Collection and Variable Description
Data Collection
There are two types of panel data: Balanced versus non-balanced data
Two limit cases are a "pure" cross section data with only one time period or a "pure" Time-series data with only one individual
I collected panel data, including dependent and independent variables, from the PCI project (www.pcivietnam.org) and Vietnam’s statistical yearbook (www.gso.gov.vn) for all provinces from 2006 to 2009, totaling 252 observations (4 years x 63 provinces) To create cross-sectional data, I calculated the average values over the four-year period for each province Due to data limitations, only registered FDI data at the provincial level in Vietnam was available, and a weight of 0.33 was applied for the years 2007 to 2009 to account for temporal variations.
2009) of the implementation value of provincial FDI as following:
Table 3.1: the implementation value of provincial FDI
Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):
Table 3.2: FDI capital of top ten provinces
Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai
Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74 FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81 USD
By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)
Above result will be compared with actual survey data (benchmarking) to choose the best output.
Variables description
3.3.1 The Provincial Competitiveness Index-PCI (total point= 100)
The Provincial Competitiveness Index (PCI) assesses why certain regions outperform others in private sector dynamism, job creation, and economic growth Based on new survey data from local businesses, the PCI captures their perceptions of the business environment, providing valuable insights into regional economic competitiveness.
Comparable data from official and other sources regarding local conditions Following table is PCI result in 2009
Province EC AL TAl TCRC IC PPL BSS LT LI PCI
Source: PCI 2009 3.3.2 Provincial Foreign Direct Investment-pFDI (mill USD)
Is investment which provinces in Viet Nam receive from investors who come from other countries
3.3.3 Entry Costs-EC (point=lO)
A measure of the time and difficulty it takes firms to register, acquire land, and receive all the necessary licenses to start business
This sub-index evaluates the variation in entry costs for new firms across different provinces Although the Enterprise Law and its implementing guidelines aim to standardize procedures nationwide, studies indicate that provincial differences still persist Understanding these discrepancies is crucial for assessing the ease of business and regulatory environment in various regions.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group Cost Factor
3.3.4 Access to Land-AL (point=lO)
The ease of access to land for firms is a key indicator of business environment, with the sub-index being updated in 2006 to incorporate a new dimension focused on land security after acquisition This dimension evaluates whether firms hold official land use rights certificates, have sufficient land for expansion, rent from state-owned enterprises (SOEs), and assesses the overall security of land tenure to ensure stability and confidence for ongoing business operations.
The second dimension of our analysis focuses on perceptions of tenure security risks, including concerns over expropriation, unfair compensation valuations, and modifications to lease agreements Additionally, it considers the impact of lease duration on overall tenure security, highlighting how these factors influence investors' confidence and decision-making processes Understanding these risks is crucial for enhancing investment safety and fostering sustainable land use policies.
Private firms often cite the wide variance in land policies across provinces as a major issue, affecting their ability to invest and expand Access to Land, a key factor in the PCI, refers to the difficulty in locating and obtaining productive land, which hinders investment opportunities and limits access to capital, as firms cannot use land Use Rights Certificates (LURCs) as collateral for bank loans Additionally, firms unable to secure their own land are forced to rent from State-Owned Enterprises (SOEs) or provincial agencies, increasing transaction costs and restricting growth potential Security of Tenure is another critical dimension; firms need confidence that their land rights will remain protected over the long term to invest in the land’s productivity When land rights are uncertain due to risks of expropriation or contract changes, firms tend to adopt a short-term approach, leading to reduced investment, lower income, and limited employment creation, ultimately undermining provincial economic welfare.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.5 Transparency and Access to Information-TAl (point=lO)
Transparency is a vital factor that determines a favorable business environment, encompassing a firm's access to essential planning and legal documents, equitable availability of these resources, effective communication and consistent implementation of new policies and laws, and the usability of the provincial web page Analysts and development practitioners emphasize that clear and accessible information, along with predictable policy enforcement, significantly influence private sector growth and sustainability.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.6 Time Costs of Regulatory Compliance-TCRC (point=lO)
This article examines the extent of time firms spend on bureaucratic compliance and the frequency and duration of shutdowns for inspections by local regulatory agencies It evaluates two key dimensions of time costs: bureaucratic procedures and time lost to inspections, both of which are weighted equally These factors highlight the impact of administrative burdens and regulatory inspections on business operations, emphasizing the importance of streamlining processes to reduce operational disruptions Understanding these time costs can help policymakers and business leaders identify opportunities to improve efficiency and foster a more conducive environment for business growth.
The study of transaction costs over time plays a crucial role in understanding economic transition, especially in Vietnamese provinces Firm managers frequently face the challenge of balancing business operations with mundane bureaucratic tasks, which diverts their attention away from productive management This allocation of time results in lost opportunities for efficiency and growth, highlighting the importance of minimizing transaction costs to foster a more dynamic and competitive business environment.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group -Cost Factor
3.3.7 Informal Charges-IC (point=lO)
A measure of how much firms pay in informal charges and how much of an obstacle those extra fees pose for their business operations
This section analyzes the extent to which firms incur informal fees, fines, and extraordinary payments, which are often lost as a normal part of doing business It focuses on five key indicators that measure the frequency, type, and amount of these extra payments, providing a comprehensive understanding of the issue The importance of this analysis has increased notably following the enactment of the Revised Anti-Corruption Law by the National Assembly in August 2007, emphasizing the need to address informal payments in the business environment.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group- Cost Factor
3.3.8 Proactivity of Provincial Leadership-PPL (point=lO)
The level of creativity and ingenuity among provinces is key to effectively implementing central policies, developing innovative initiatives to support private sector growth, and navigating often complex or unclear national regulations By adeptly interpreting and working within these regulatory frameworks, provinces can better assist local private firms, fostering economic development and resilience at the regional level.
Ambiguity in Vietnam's legal landscape often stems from unclear wording in legal documents, delays in implementing central laws or decrees, and contradictions between various implementing documents or even with central legislation For new industry segments entering Vietnam, the absence of a clear legal regime can pose significant challenges When legal ambiguities delay business projects, provincial governments can significantly influence the success of ventures; some may cause delays or raise barriers for firms that threaten local market dominance Conversely, provinces that demonstrate creativity and proactive initiatives within the framework of central law can greatly support private sector growth, helping businesses navigate legal uncertainties and fostering economic development.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.9 Business Support Service-BSS (point=lO)
This article evaluates provincial policies aimed at promoting private sector trade, business partner matchmaking, and related initiatives It assesses how effectively provincial officials address these challenges to support local businesses The measure reflects the performance of government efforts in facilitating trade expansion and fostering successful business partnerships for firms.
The eighth sub-index advances beyond the Pro-activity Sub-Index by assessing how specific provincial initiatives support private sector development Surveys of Vietnamese private firms reveal key obstacles, including difficulties in accessing information on both international and domestic markets, challenges in understanding evolving regulatory changes, and shortages of skilled employees to effectively manage operations.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
3.3.10 Labor Training-LT (point=lO)
A measure of the efforts by provincial authorities to promote vocational training and skills development for local industries and to assist in the placement of local labor
Vietnam faces a major challenge in creating employment for 1.4 million new job seekers annually, yet firms consistently complain about the low skill levels of the available workforce This paradox highlights the private sector's need for skilled workers who can add value, rather than just filling vacancies Provincial efforts to enhance local labor skills are critical for a healthy business environment, as firms seek employees with relevant skill sets While some companies invest in their own training, a collective action problem arises because trained workers are often poached by competitors offering higher wages, and the costs of training are not shared To address this issue, provincial governments should offer comprehensive labor training programs to develop a skilled and stable workforce.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
The private sector's confidence in provincial legal institutions is a key indicator of their effectiveness in dispute resolution and their role in upholding justice Firms view these institutions either as reliable mechanisms for resolving conflicts or as venues to challenge corrupt official behavior Strengthening the integrity and efficiency of provincial legal systems is essential to foster trust and ensure fair treatment for businesses Enhancing transparency and reducing corruption within these institutions can significantly improve their credibility and promote a more favorable environment for economic growth.
Correlation among explanatory variables
Correlation analysis is used for finding associations between explanatory variable In
Table 4.1 illustrates the correlation matrix some of the explanatory variables included in model
Table 4.1 Matrix of Correlation among explanatory variables
AL BSS EC IC INF IP LI LT PPL TAl TCRC MS
See more detail in table 7- Appendices
The correlation between Industrial Product (IP) and Market Size (MS) is +0.89, indicating a strong relationship where initial market size significantly influences industrial production factors, potentially affecting model inclusion during hypothesis testing Additionally, a correlation of +0.75 between Transparency and Access to Information (TAl) and Business Support Service (BSS) suggests that effective business support services enhance investors' access to vital information Furthermore, labor training variable (LT) shows the highest positive correlation with BSS, highlighting the importance of skilled labor development in attracting foreign direct investment (FDI); this relationship also impacts the significance of business support services within the regression analysis.
Empirical estimation and result
This section summarizes the econometric results of the study, where I analyze the impact of the provincial competition index set and traditional variables on provincial FDI in Vietnam, as shown in Table 4.2 The regression analysis employs OLS methodology on a sample of 63 provinces, incorporating twelve explanatory variables to ensure robustness I assume that all OLS assumptions are met, guaranteeing that the estimators are BLUE, and that the collected data is accurate to support reliable findings.
To limit the FDI value coming later than provincial competition index I have counted to cross section data by getting the average value in four years (63 observations)
Regression results were obtained for six different specifications to address the uncertainty regarding the statistical significance of the general equation's explanatory variables To identify the most appropriate model, I evaluated each scenario by progressively reducing less significant independent variables, transitioning from a comprehensive to a simpler model This systematic approach ensures that only the most significant variables are retained, ultimately guiding the selection of the best-fitting model using the Wald test for robustness and validity.
Test to check reduced variables such as AL, EC, TAl, TCRC, IC, PPL, LT, KEA, refer to the result of testing (table 5 of appendices)
); simple model specification is the best model
Heteroskedasticity was tested using Table 4 in the appendices to verify whether the error variance is constant and if the residuals follow a normal distribution The results indicate that the model does not suffer from heteroskedasticity, confirming the stability and reliability of the regression analysis.
Correlogram Q-Statistics is also done to make sure the Autocorrelation (AR) does not exist in this model (table 6 of appendices)
Generally speaking, regression results are reported in table 4.2 including six regressions shows that four independent variable including IP,LI,INF and BSS are statistically significant at the level 1% , 5% and 10%
See more detail in table R3.1-R3.6- Appendices Note: Sign of *, ** and *** indicate significance at 1%, 5%, and 10% levels, respectively
Regression results of research model (3) shows that PCI distribute the growth rate of provincial FDI (see table 8 of appendices)
Following content, I want to discuss more detail related to each explanatory variable:
Industrial products significantly influence provincial FDI attraction, as demonstrated by our estimation results Analyzing data from 2006 to 2009, the top five industrial products play a crucial role in drawing foreign direct investment in Vietnam The following table highlights the leading industrial sectors that ranked highest in attracting FDI during this period, emphasizing their key contribution to regional economic development.
Table 4.3: Top five rank of attracting FDI in VietNam
Binh Province/City BRVT HCMC DongNai HaNoi
According to data from GSO 2006-2009 and PCI 2006-2009, higher industrial product output correlates with increased foreign direct investment (FDI) attraction However, despite Vietnam's implementation of free trade agreements, the country experiences a decline in foreign capital inflow, primarily due to underdeveloped supporting industries that deter foreign investors Strengthening supportive industries is essential for boosting FDI and sustaining economic growth.
The impact of infrastructure (INF) remains the most significant factor influencing provincial FDI, consistent with previous empirical research Analyzing the data, the table comparing the infrastructure rank from the PCI survey with the top five provincial FDI levels from 2006 to 2009 clearly illustrates this relationship.
Table 4.4: the rank of infrastructure in 2009
Province/City BRVT HCMC DongNai HaNoi
Source: GSO 2006-2009, PCI 2009 This shows that INF has the important role to attracting FDI
The PCI project measures the private sector’s confidence in provincial legal institutions, assessing whether firms view these institutions as effective for dispute resolution or as avenues to challenge corrupt officials Scholars and practitioners highlight that legal development and formal dispute resolution mechanisms are weak links in Vietnam’s economic transformation To improve this, provinces and cities must strengthen administrative capacity and corruption prevention efforts, emphasizing the importance of effective business support services.
The main factor influencing this issue includes several key elements, such as investors seeking skilled employees through labor training to support their operations Additionally, they face challenges in obtaining reliable information about both domestic and international markets Difficulties in understanding new regulatory changes, due to limited transparency and access to accurate information, further complicate their decision-making process.
So, the BSS variable is significant to provincial FDI at levellO% is normal case
Land is a crucial resource that investors often prioritize when making investment decisions, particularly in the manufacturing sector However, in this analysis, the AL variable shows limited significance regarding provincial FDI, as there are no significant policy differences among Vietnamese provinces impacting this factor.
Despite expectations, the variable did not show the anticipated significance, suggesting that Vietnam's competitive advantage in low-cost labor is diminishing due to inadequate skill development nationwide Recent research and articles highlight that only Binh Duong, Da Nang, and Vinh Phuc have implemented effective regulations and incentives to improve human resources and meet the skilled labor demands of foreign investors and local businesses The overall labor force in Vietnam faces significant challenges, with 64% untrained and 78% of youth aged 20-24 lacking the qualifications needed for the job market, creating a paradox where a workforce of 48 million people experiences a 50% shortage reported by enterprises This situation underscores the urgent need for targeted workforce development to address the skills gap and sustain economic growth.
4.2 7 Transparency and Access to Information
Over the past decade, Vietnam has seen notable progress in the development and implementation of grassroots democracy, as documented in various evaluation reports and academic journals To further enhance grassroots participation, the National Assembly has drafted the Law on Access to Information, aimed at safeguarding citizens' rights to information and promoting government transparency and accountability This law is anticipated to be approved by the National Assembly around mid-2012, marking a significant step toward strengthening democracy at the local level.
With insignificant result, this is the same floor of all provinces, and transparency and access to information is still weak point
Although there are two explanatory variables had significance to provincial FDI but still PPL and TAl less significant, these are explained at point 2.5 of this chapter 4.2.9 Informal Charges
The variable in question has an insignificant impact on attracting provincial FDI in Vietnam According to survey results from enterprises in Binh Dinh, this issue ranks eighth among concerns discussed during the anti-corruption dialogue program held in Hanoi on November 25, 2011.
According to the 8th International Donors Dialogue for Vietnam, 43% of businesses reported incurring unofficial costs and gifts to obtain land use right certificates.
4.2.10 Time Costs of Regulatory Compliance
Simplifying administrative procedures has improved compared to previous years; however, this challenge remains consistent across all provinces in Vietnam To ensure significant progress, administrative reform must be enhanced further, supported by hypothesis testing to identify effective strategies for sustainable development.
4.2.11 other variable group related to cost factors such as Entry Cost
Estimation results indicate that two significant explanatory variables are related to provincial policies, while cost factors are less significant This suggests that cost factors serve as a common baseline and do not vary significantly across different provinces, highlighting the prominent role of provincial policies in shaping the outcomes.