The impacts of foreign direct investment on vietnams economic growth,graduation thesis

ABSTRACT The research work is a critical evaluation of the impacts of Foreign Direct Investment on Vietnam’s economic growth.. In the following section, the impacts of Foreign Direct Inv

BANKING ACADEMY FOREIGN LANGUAGE FACULTY

DECLARATION

I hereby declare that this thesis is the product of my own work and effort It has not been applied or posted for any degree or previously submitted anywhere for any commercial or personal purpose All the sources I have used have been indicated and acknowledged by means of completed references

Signature Nguyen Tuan Manh

ABSTRACT

The research work is a critical evaluation of the impacts of Foreign Direct Investment on Vietnam’s economic growth In this research work, the fundamental impacts of FDI on the economy have been discussed The situation of economic growth including growth model and structure has also been discussed in detailed Also, the investment structure and scale have been analyzed In the following section, the impacts

of Foreign Direct Investment on economic growth in Vietnam has been deeply analyzed including the contribution of FDI to economic growth, the contribution of FDI to employment opportunities and even the technology diffusion and transfer Otherwise, the contribution of FDI to the national treasury cannot be underestimated

Since the important and irreplaceable source of FDI for the Vietnamese economy,

it is necessary to have an in-depth and comprehensive study on the status of FDI attraction and use of FDI in the past time as well as determine the appropriate level of FDI attraction to maximize the benefits from this source Derived from this reality, the

research topic “Impacts of Foreign Direct Investment on Vietnam’s economic growth”

is implemented

DEDICATION

I sincerely dedicate this graduation thesis to my beloved family and my precious friends

for their tremendous spiritual support and encouragement

ACKNOWLEDGEMENT

I feel great happiness in forwarding this research as an image of my sincere efforts The success of this research reflects my work during my academic year

I extent heartfelt gratitude and special thanks to Mrs Nguyen Thanh Nhan, Vice Dean

of the Faculty of Banking, for her valuable corporation and for being the guiding star

of all my queries and support during the run of this research

This research has given me an insight to practical experience that will prove a boon to

me in the near future

Hanoi, May 2017 Nguyen Tuan Manh

LIST OF TABLES AND FIGURES

Table 2.1 Economic growth speed in Vietnam and other nations in

Asia during the period from 2005 to 2015

Table 2.3 Registered capital of top 10 FDI attraction destinations in

2005, 2010 and 2015 Table 2.4 Comparison of FDI structure in fields in 2005, 2010, 2015 Table 2.5 FDI capital in Vietnam by sectoral fields

Figure 2.1 Economic growth speed in Vietnam and the world (%)

Figure 2.2 Investment capital in Vietnam’s economy by economic

sectors in the period of 2005 – 2015 Figure 2.3 Contribution of FDI sector in total national GDP

Figure 2.4 Number of employees in FDI sector

Figure 2.5 Structure of FDI by partner investing in Source technology Figure 2.6 State budget revenues from FDI enterprises

LIST OF ABBREVIATIONS

CEEC Center and East European Countries

CIEM Central Institute for Economic Management

FDI Foreign Direct Investment

GDP Gross Domestic Production

IMF Internation Monetary Fund

MNCs Multinational Corporations

NLP National Linkage Programme

ODA Official Development Assistance

OECD Organisation for Economic Cooperation and Development R&D Research and Development

TABLE OF CONTENT

DECLARATION 1

ABSTRACT 2

DEDICATION 3

ACKNOWLEDGEMENT 4

LIST OF TABLES AND FIGURES 5

LIST OF ABBREVIATIONS 6

TABLE OF CONTENT 7

INTRODUCTION 9

1 Significances of the research 9

2 Problems of the research 10

3 Reseach objevtives 10

4 Source of data 10

5 The overview of the research 10

CHAPTER ONE: LITERATURE REVIEW 12

1.1 Introduction 12

1.2 Foreign Direct Investment 12

1.3 Impacts of Foreign Direct Investment on the economic growth 12

1.4 The empirical results of Foreign Direct Investment 13

1.4.1 Overview of foreign researches about attracting and allocating Foreign Direct Investment 13

1.4.2 Domestic studies on attracting and allocating FDI 15

CHAPTER TWO: CURRENT SITUATION OF IMPACTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN VIETNAM 17

2.1 Economic growth in Vietnam 17

2.1.1 Growth model 17

2.1.2 Size and structure of growth 18

2.2 Investment structure and the role of Foreign Direct Investment 21

2.2.1 Investment structure in Vietnam 21

2.2.2 The scale of investment capital 23

2.3 The structure of Foreign Direct Investment 24

2.3.1 Provincial and economic regional FDI structure 24

2.3.2 Sectoral FDI structure 26

2.4 Impacts of FDI on economic growth in Vietnam 29

2.4.1 FDI contribution to economic growth 29

2.4.2 FDI contribution to employment opportunities 30

2.4.3 Technology diffusion and transfer 31

2.4.4 FDI contribution to state budget revenue 33

CHAPTER THREE: CONCLUSIONS AND RECOMMENDATIONS TO ATTRACT AND ALLOCATE FDI IN VIETNAM 35

3.1 Conclusion 35

3.2 Limitations of the research 35

3.3 Recommendations 35

LIST OF REFERENCES 41

INTRODUCTION

1 Significances of the research

For developing countries with internal capital accumulation in the economy as low as Vietnam, the attraction of external capital including Foreign Direct Investment

is essential for development and investment FDI is seen as a blow in order to help Vietnam to escape from the vicious cycle of the economy For many years, Vietnam has maintained a high growth rate with an average growth rate of 6.25% in the period from 2005 to 2015 In particular, the FDI factor contributes to over 60% of GDP In fact, FDI has increasingly shown two sides in terms of the socio-economic status On the one hand, FDI has been an important supplement to the economy, meeting the need for investment and economic growth Attracting FDI has created new industries, which contributing to the economic restructuring of Vietnamand helping to improve Vietnam’s exports and infrastructure On the other hand, FDI causes many shorcomings such as environmental pollution, technology transfer backward, domestic enterprise encroachment Looking directly at the results of attracting and using FDI in Vietnam, it can be easily seen that the activities of attracting and using FDI in Vietnam have not achieved the expected results yet

In the context of attracting FDI, there are conflicting arguments between both experts and policy imposers due to the duality of capital itself in the Resolution of the

12th Congress Party (January 2016) It has been through the directiong of the whole society in the period from 2016 to 2020 with a vision to 2030 in tandem with the goal

of “comprehensive renovation, rapid and sustainable development and Vietnam will soon become basically a industrial-modern country, enhance the position and prestige

of Vietnam in the region and the world”

Because of the importance and irreplaceability of FDI in Vietnam’s economy, it

is necessary to have an in-depth and comprehensive study on the status of FDI attracting and usage as well as the policy system.of FDI in Vietnam in recent time Go long with that, it is also important to determine the appropriate level of FDI attraction

to maximize the benefits from this source Derived from this reality, the research topic

“The impacts of Foreign Direct Investment on Vietnam’s economic growth” is implemented

2 Problems of the research

From the overview research in Vietnam and abroad, it can be seen that although the topic of attracting Foreign Direct Investment is not a new problem, there are still research gaps to continue researching:

Initially, there are very few studies on accessing the FDI policy system at three levels: FDI attractiong policy, FDI upgrading policy and linkage between domestic and foreign enterprises In Vietnam, according to author’s understanding, only research by Nguyen Mai (2012, 2013, 2014) refers to this classification

Finally, there is no research in Vietnam to develop a system for assessing FDI policies, but mainly to analyze the effectiveness of specific policies

3 Reseach objevtives

• To study about the Foreign Direct Investment

• To research about attraction and usage FDI policies in Vietnam region

• To discover the impacts and influences of Foreign Direct Investment on the conomic growth of Vietnam

4 Source of data

The data has been gathered in the research was mainly the secondary data It means that the data that was gathered through secondary sources is included in the research These secondary sources include books, articles, journals, reports, newspapers, magazines, Internet, website, etc The major sources of data in the research for the section of literature review were the Internet and the most basically used search engine was the Google The basic source of data for the chapter of data analysis was reports and articles published regarding the topic of interest in the research

5 The overview of the research

The research submitted here consists of mainly three chapters These chapters include literature review, current situation and the conclusions and

many researches in the past This chapter includes theories related to FDI, empirical results and some internal and foreign researches about this topic

After this chapter is the chapter of current situation of FDI in Vietnam Here the case study of FDI economic growth performance, investment structure and the roles of

FDI in Vietnam are presented The secondary data analysis is used in this chapter

The next and the last chapter is the conclusion and recommendations where the overall summary of the whole research is presented and appropriate suggestions or recommendations are also made

CHAPTER ONE: LITERATURE REVIEW

1.1 Introduction

The literature review is the first chapter after introduction in the research work This chapter will include the previous submitted literatures on the topic of Foreign Direct Investment The data is used in this chapter is taken from secondary sources These resources incude the data from articles, books, reports, journals, periodicals, newspapers, magazines and Internet websites, etc This chapter is the mosrt important one for gathering and acquiring knowledge related to the interested research topic Here complete study about the Foreign Direct Investment, the empirical results of FDI research and the overview impacts of FDI on economic growth

1.2 Foreign Direct Investment

The foreign direct investment can be defined as the investment made by one country’s company in the production of another country directly This can be done in two ways, which are either by directly buying the company of the country that has been targeted or by expanding its existing business and operations into that country that has been focused Foreign Direct Investment is the summation of the investment, which is the reduction of outflow from inflow in order to get the management interest

of ten percent or more in an enterprise of an economy It is the total of short-term capital, long-term capital and equity capital The FDI can be categorized into two types namely inward FDI and outward FDI These two categories are a result of stock

of foreign direct investment and the total (positive and negative) inflow of FDI The direct investment mentioned here does now include the investment made by purchasing shares

On boarder scale a FDI can be categorized into three basic categories, which are

horizontal FDI, vertical FDI and platform FDI

1.3 Impacts of Foreign Direct Investment on the economic growth

Foreign Direct Investment has wide impacts on the economy This factor decides the fate of the economy in any part of the world In this highly competitive and globalized world, the importance of FDI has become imminent and it functions as the major driving force of the industrial and service sector in the country It is actually

provides the necessary investment funds required for functioning and expansion of the

business in various sectors and drives the economy of the driver seat The foreign direct investment is the foreign sourced fund that is invested in various economical activities in a country and it has great impact on the transformation of the economy It has cascading effects on various elements of the economy such as the new source of funds for the investment, infrastructure developments, and revenue source for the local and national government, huge employment opportunities and economic restricting The major impact of FDI is to influence the local investors to invest in various economical activities through direct participation with the domestic sectors It actually helps to develop backward and forward linkages with the local industries that create

high opportunities for the internal development One of the major impact of FDI in an

economy is to assist in bridging the revenue gap and deficits created due to excessive government borrowing and spending of various social and economic activities in the country So it can be said that FDI work as helping agent to bring an economy out of crisis situation especially debt prone situation

1.4 The empirical results of Foreign Direct Investment

1.4.1 Overview of foreign researches about attracting and allocating Foreign Direct Investment

Most studies acknowledge the need for foreign capital to host coutries including capital, know-how, management experience, marketing and global production networks It is also an important driving force for countries to develop and grow According to UNCTAD (1999), FDI can support local development by several methods such as adding financial resources to development, promoting export competitiveness, creating jobs and developing essential skills for workers, imposing environmental protection and social responsibility, enhancing the technological capability (technology transfer, technology diffusion and technology generation) In the same perspective, the OECD (2002) has pointed out the benefits of FDI and suggests the transfer of technology from FDI projects has been through four channels, they are vertical transfer with host country’s suppliers, horizontal transfer with competitors or subsidiary companies, relocating skilled employees and internationalizing R&D activities

About the motive of FDI, World Bank (2011), Rajan (2004) and many other researches show that there is a tendency to race in order to attract FDI worldwide, but the main reason of attracting FDI is not the same Many studies have also summarized some of the main reasons for attracting FDI including finding natural resources and human resources; market searching; finding effective investments by reducing production costs and labor costs; seeking strategic assets in countries such as new technology, branding, distributing channels Accordingly, the studies suggest that countries need to base on their own potentials and advantages in order to have appropriate and effective FDI policies

Regarding to the FDI policy system, policies can be divided into three levels including attractiong policy, FDI enhancement policy, domestic and foreign enterprises linkage policy In particular, the policy of attracting FDI is formed by tax and land incentives, favorable mechanism of capital flow, importation and exportation, doing business on the domestic market and legal rights guarantees on capital and assets and intellectual property of investors The policy of FDI upgrading is formed according to the orientation of FDI attraction according to the national development strategy In some cases, some countries apply a form of government subsidy for investors to carry out large-scale and widespread projects that are the highest priority category Policies encouraging linkages between domestic and foreign enterprises are established as part of the country’s industrial and service policy to enable domestic firms to benefit from FDI through cooperative relationships and technology allocation with MNCS market This policy also encourage international TNCs to cooperate with training institutions, especially tertiary and higher level, organize national scientific research to further improve the level and capacity of such establishments and organizations In most developing countries, FDI attraction policies are given top priority, while developed countries pursue similar levels of policy At the study in Vietnam, the approach to the FDI policy system at three levels such as analysis was relatively uncommon in the studies

Regarding the effectiveness of FDI policies, studies show that effective FDI policies depend on the specific characteristics of each country Some researches analyzed the sectoral data of two groups of states is the United States and six EU

countries (US + EU6) and other four Western European countries (CEEC 4) The conclusion is that in the CEECs, the expenditure of governments on R&D will generate significant increases in FDI, while in the US + EU6 countries the improvement in unit labor costs and tax policy will attract more FDI Yet, according to Rajan (2004), a country that wants to attract foreign investors needs to create a favorable environment by reducing the hassle cost The study also systematized these costs in 32 developing countries, thus pointing to a divergent relationship between management and FDI costs and the country’s GDP growth rate after controlling for other weak factors To assess the system of FDI policies, the SESRIC study (2014) suggests the use of potential FDI indicators and performance FDI indicators developed and enhanced by UNCTAD (2002)

About the FDI attraction, based on the idea of the dependence of the relationship between FDI and economic growth and the absorptive capacity of the host country, many studies in the world have been launched However, most studies have come to the conclusion that one or more of the threshold values exist, once the threshold values are reached, the effect of FDI on economic growth will be reserved

1.4.2 Domestic studies on attracting and allocating FDI

In Vietnam, there have been a lot of studies on the attraction and use of FDI under a variety of different approaches On research subjects and spaces, major studies were conducted at national level or local area For research data, the main researches were conducted with time series data, and some other researches mainly used quantitative data by economic or regional linkages However, research is still focused

on issues such as the current status of FDI inflows, factors affecting FDI or the FDI policy system, and the experience of attracting FDI in some countries There are a few who used the quantitative model to explain the relationship between FDI and growth,

as well as the need to attract more FDI in Vietnam

In terms of FDI inflows, in general, most of the research results have been highly consistent that FDI inflows in Vietnam have seen steady growth over the years, and show significant importance of revenue streams in order to attract FDI for

economic growth at both the national and local levels Some in-depth studies have also

shown that FDI has a positive effect on growth in both short and long term and some

other researches shows that total stock, facilities, labor costs and trade openness are factors influencing FDI flowing into the developing countries, including Vietnam There are also studies analyzed inadequancies in attracting FDI in Vietnam, but the study only stops at qualitative analysis that is not quantified or shown how much FDI attracting is enough

Regarding the FDI policy system of Vietnam, the main research focuses on general theoretical issues on FDI policy system, experiences of FDI attraction of other countries; however, these studies just mainly based on qualitative analysis In terms of policy systems, the study focuses on FDI attraction policies without any coverage of other levels of FDI policy such as FDI upgrading policy, domestic and foreign enterprises linkages policy However, indicators of FDI policies in Vietnam are almost unspecified in the studies

CHAPTER TWO: CURRENT SITUATION OF IMPACTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN

Firstly, basically, the model of economic growth is still based on capital investment In this period, Vietnam has maintained a high growth rate but in order to achieve this growth, the total investment capital for development is always higher than 30% The highest was in 2007 with an investment ratio of 42.68%, lower than China (44.2%), while other countries were much lower For example, the rate in Korea is 29.4%, Malaysia 21.9%, Philippines 15.3% and the total investment capital/ GDP per capita in Vietnam for the period of 2005 – 2015 is approximately 35.69%, compared with 30.7% in the period of 1991 – 2000, which is the highest in East and Southest Asia according to the General Statistics Office In the year of 2010, this proportion has tended to decrease, but remained above 30% By 2015, investment/GDP will reach 32.61% The high proportion of investment capital/ GDP has helped Vietnam’s economic growth rate to be calssified as quite high However, compared to other transition economies, Vietnam is the only country with 10 years growth (6.12% in the

2006 – 2016 period), which is lower tha 10 years ago (6.93% from 1996 to 2006)

Secondly, the model of economic growth shows the unsustainability This is reflected in the national treasury deficit The national treasury deficit ratio between

2005 and 2010 has been consistently below 5% and has reached approximately 7% (2009) The average for the period of 2005 – 2015 is 5.57% Of which, the government’s debt is over 50% of GDP Remarkably, the annual state budget retrospectively exceeds the plan, the scale of state budget revenue has been increasing over the years, but the state budget expenditure has increased so that the deficit is increasing and the compensation deficit is not increasing though In addition, the investment structure, especially public investment is not reasonable In particular, public investment is highly concentrated on the economy, accounting for more than 70% of total state investment Meanwhile, investment in social fields is directly related

to human development such as science, education, training, health, social relief, culture and sports is low and tends to decrease

Thirdly, growth patterns are subject to a great deal of political ideology In order to reach the goal of building a socialist-oriented market economy (2001), Vietnam has made many reforms and facilitated the development of the market economy However, the reforms are not strong enough to impact the market, especially

as the socialist connotation has not been thoroughly addressed, leaving the country to miss many golden opportunities for development A typical example is the diversification of Doi Moi policy in produced materials would take fourteen years to

be specified in the law Meanwhile, with the same development path, China is steadfastly pursuing developmentism without letting political ideologies cling to developing In particular, although the socialist market economy has been under development, but for the sake of production growth, China has temporarily shelved its rationale for the development of private economic freedom, creating favorable conditions for FDI activities, and take the reform results first to persuade the conservatives and get the momentum to continue to implement the reform

2.1.2 Size and structure of growth

In general, during the period from 2005 until now, Vietnam’s economy is relatively stable and maintains the economic growth chain even when affected by the

global financial crisis While world economic growth is as well as strong fluctuations

in difficult conditions of natural calamities, epidemics, global price fluctuations and global economic crisis, the increase in Vietnam’s economic growth is gradually high,

at an average annual rate of 6.25%, and it only fluctuates in narrow margins This can

be considers as an important achievement of the Vietnamses economy

Figure 2.1 Economic growth speed in Vietnam and the world (%)

However, interms of Vietnam’s economic growth in each stage, it can be seen that Vietnam’s economy is also affected by the global recession This is reflected by the slowdown in economic growth, which is on the downward trend, especially since

2008 If the growth rate of GDP in the period of 2000 to 2005 was 6.88%, and then in the period of 2006 to 2010 dropped to 6.32% and finally in the period of 2011 to 2015 only 5.92% in the 2011 – 2015 period, Vietnam’s economy faces many obstacles due

to internal problems as well as the impact of the economic recession More important,

in the years from 2011 to 2012, economic growth continues to fall from 6.42% in 2010

to 6.24% in 2011 and 5.25% in 2012 However, the IMF (2016) and the World Bank (2016) expects that Vietnam can reach the top of the list of fastest-growing economies

in Southest Asia region with an expected growth of 6.3% in 2016 due to a quarterly domestic demand The upward trend and good prospects of the new manufacturing industry towars export

Regarding the resilience of the economy, it can be seen that Vietnam’s economy is recovering more slowly in the post-crisis period of the world economy

from 2011 to 2013 Specifically, the growth rate of countries such as Cambodia, Philippines and Laos has been consistently higher than the same period Indonesia’s growth rate is also declining in 2012 like Vietnam, but the level of decline is lower than that in Vietnam More specific, Indonesia decreased by 0.2% compared to the same period in 2011, while Vietnam decrease this time and almost up to 1% In recent period from 2014 to 2015, Vietnam’s economic growth has gradually improved, but the growth is still lower than in some countries like Cambodia, Laos, and the Philippines

Table 2.1 Economic growth speed in Vietnam and other nations in Asia

during the period from 2005 to 2015

(Source: Databank, WorldBank, 2017)

Considering industrial growth, although it can be seen that the growth structure

is shifting positively, in line with the growth and development needs of the construction sector, but overall, economic structure shows backwardness, inefficiency and slow movement In particular, the industrial and construction sectors have gradually regained their momentum, while the growth of the service sector has slowed down The construction industry has been the driving force for general growth, however, so far, Vietnam is still lacking and weak in the intermediary industry,