impacts of foreign direct investment (fdi) on restructure of exports in the northern coastal region of vietnam

Statement of the problem: The main issue to be addressed in this research is impacts of Foreign direct investment on shifting exports structure in the Northern Coastal Region of Vietnam

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SOUTHERN LUZON STATE UNIVERSITY, THE PHILIPPINES

IN COLLABORATION WITH THAI NGUYEN UNIVERSITY, SOCIALIST REPUBLIC OF VIETNAM

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DISSERTATION ABSTRACT

IMPACTS OF FOREIGN DIRECT INVESTMENT (FDI) ON

RESTRUCTURE OF EXPORTS IN THE NORTHERN COASTAL

DBA Candidate : NGUYEN THIEN SU (SUNT)

Scientific Adviser : Dr TRAN DAI NGHIA

July, 2013

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CHAPTER I: INTRODUCTION

1.1 Background of study:

The study of the impacts of FDI on restructuring exports in the Northern Coastal Region

of Vietnam will be expected to have a significant contribution theoretically and practically The results of the study will provide scientific basic recommendations and references for policy makers in forming the best policy in restructuring export sector to maximize benefits of exports

sustainably This is the reason for carrying out the study of “Impacts of FDI on Restructure of Exports in the Northern Coastal Region of Vietnam”

1.2 Statement of the problem:

The main issue to be addressed in this research is impacts of Foreign direct investment on shifting exports structure in the Northern Coastal Region of Vietnam Specifically, this study intends to answer the following questions:

(1) How has foreign direct investment affected the elements of the economy?

(2) What quantitative factors are changes in export structure?

(3) How foreign direct investment has been affecting the shift in export structure in the

Northern Coastal Region of Vietnam

(4) What are the solutions to attract FDI on shifting exports structure of the Northern Coastal Region of Vietnam?

1.3 Objectives of the study:

The overall objective of this dissertation is to apply theory to analyze the practical impacts

of FDI situation and how the implementation of FDI can influence the restructure of exports quantitatively and qualitatively in the Northern Coastal Region of Vietnam

To achieve the overall objectives, some specific objectives will be attained as follows:To review the impacts of FDI on shifting exports structure and some related matters in order to frame the theoretical basis of the impacts of FDI on shifting exports structure

To analyze the current situation reflecting the quantity and quality of exports structure in the Northern Coastal Region of Vietnam

To use the models to test the impacts of FDI on shifting exports structure in the Northern Coastal Region of Vietnam

And to propose solutions and policies for attracting and using FDI to improve the quality and quantity of exports structure in the Northern Coastal Region of Vietnam

1.4 Scope and limitations of the study:

This research aimed at studying spatial scale of the Northern Coastal Region of Vietnam; including five provinces of Quang Ninh, Hai Phong, Thai Binh, Nam Dinh, and Ninh Binh Research data ranged from 1995 to 2012 The scope of this research was to analyse the structure

of tangible exports

1.5 Organization:

The dissertation is divided into five chapters; the first chapter gives an introduction on the topic, the second chapter of the dissertation provides a methodological overview in terms of theory: FDI affects exports structure both in quantity and in quality Chapter 3 presents information about theoretical models to be developed within the analytical framework of the dissertation selected Chapters 4 indicates the synthesis of data, model testing results along with the present value analysis, interpretation, and evaluation of the impacts of FDI on shifting exports structure in the Northern Coastal Region The final chapter includes a summary of findings, and proposes solutions for attracting and effective usage of FDI and recommendations for further research for shifting exports structure in the Northern Coastal Region of Vietnam

Effects of FDI on economic development:

This section mainly shows a collection of experimental researches on the impact of FDI

on economic factors:

- FDI provides investment capital, increases revenue, and improves the balance of payment

- FDI improves advanced technologies and management experience

- FDI promotes economic restructure and uses internal capital more flexibly and effectively

- FDI promotes to improve the legal system

However, FDI also causes many obstacles and challenges for the investment receiving countries, such as:

- FDI breaks down the overall development planning of the economy, as rapid growth

- Foreign investors only choose those industries, economic sectors, geographical areas having comparative advantages, and providing higher ROI

- Law violation, unfair competition, such as tax fraud, opening up to lower interest costs, environmental pollution often happens

- FDI causes a "brain drain '' and creates a gap between the rich and the poor in society, affects the cultural life and traditional lifestyle of people, stimulates the psychology of "Culting foreign goods", etc

- FDI leads to the dependence on foreign countries

So, for developing countries, they must recognize the right position and the role of FDI to have appropriate policies in creating an open and attractive investment environment and promote the comparative advantages, in order to attract more and more powerful and effectively use FDI,

and contribute actively to building successful industrialization and modernization of the country

It is also an active and positive process of integrating more deeply into the regional and the world economies Also they need full awareness and more in-depth nature of FDI to see the flip side and the negative effects of FDI, to take measures to prevent and effectively remedy, to reduce to the maximum term processing FDI activities causing

Shifting exports structure:

The exports structure is a whole including many commodities or commodity groups

which account for a certain percentage in terms of quantity, as well as a certain proportion of the total value of the exports structure” It is important to assess the exports structure on both sides of quantity and quality:

The number of export goods structure is the export value of each type of goods in the structure and the total value of export structure Structure or the number of exports is measured

by the number of actual exports in the structure This quantity is measured in units of each type of goods

The quality of exports structure: The change in terms of quality can be evaluated in two ways: First, it is the change in the proportion of items Second, the quality of the goods represented by the proportion of goods by income per capita also increases, or the quality index

of the export structure: PRODY and EXPY

From the reality, it can be said that shifting exports structure is affected by the following factors:

- The target, the opinions and the orientation of socio-economic development in general and of international trade or shifting exports structure in particular

- Policies to encourage export and exports structure restructuring

- The scientific and technical revolution in the world It can be said technology factors play a very important role in creating the exports structure

- The development of the special and high quality services such as finance, insurance and banking

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The relationship between FDI and exports: The theoretical and empirical studies on

relationship between FDI and exports are expressed in the most common way:

- FDI reverses the trade flows into the investing countries and the investment-receiving countries, thus, in a term it will have an impact on the structure of exports and exports restructuring of both countries

- FDI promotes the restructuring of export goods under the directions of improving the quality of the export structure, as shown:

Firstly, FDI increases the proportion of processing goods, deep processing items, items with high technical content as well as high human capital

Secondly, FDI focuseson serving for restructuring or improving structure of export goods, under the direction of enhancing the proportion of highly and deeply processed goods, with the goal of creating export goods of high quality, and highly increasing value

Thirdly, FDI increases the proportion of new export commodities

Fourthly, input FDI increases the number of items in investing sector in the basket of export goods; since then, it increases the proportion of these items both in quantity and export value

Fifthly, output FDI affects shifting export goods that shown more than in changing quality of export goods structure

In summary, in terms of theory, FDI affects exports structure both in quantity and in quality The impact of FDI input elements (FDI performance) may be stronger than that of FDI output factors However, these effects need examining through empirical researches

2.2 CONCEPTUAL FRAMEWORK

Figure 2.2: Elements of FDI towards impacts on shifting exorts structure

Where: - FDI inflows to Northern Coastal Region in research period

- FDImade capital is FDI implemented capital

- EVFDI is the export value from FDI invested sector

- GOindustrial is the value of industrial production of the FDI sector,

- Shifting exports structure is the change in export structure due to FDI investment in the region

FDI

Shifting exports structure

Source: Compiled by the author, 2013

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CHAPTER III: RESEARCH METHODOLOGY 3.1 Locale of study:

Northern Coastal Region includes five provinces of Quang Ninh, Hai Phong, Thai Binh,

Nam Dinh, and Ninh Binh

3.2 Research Design

A comparative research was designed to find out Impacts of FDI on Restructure of Exports in the Northern Coastal Region of Vietnam This type of research design is chosen and appropriate in this dissertation because the region has not undertaken any studies about this topic

In order to achieve the research objectives, the following methodology was used: Historical research, system analysis, fieldwork, comparison, quantitative, forecasting and making models and multiples regression for testing of hypotheses; making tables, charts, figures to analyze data and to review changes in percentage of the commodity, the commodity groups in the export structure and the impacts of FDI on shifting exports structure struct in both terms of quality and quantity Since then the study proposes solutions to promote positive effects of FDI

on shifting exports structure in the Northern Coastal Region of Vietnam

Variables used in the research:

The study used the export value (EV) to evaluate the quantity of exports structure in the region It is the change in exports value of the region over the years for whole structure

In terms of quality: analyzing the shift from the raw commodity group to the processed and refined goods To quantify the above process: calculate the coefficient PRODY and EXPY

in the period from 1995 to 2012 for the export of goods under sub-sector standards of Vietnam

3.3 Data sources used for analysing and testing models

Data sources the thesis used are secondary data sources explored and collected from the Department of Trade and Prices-General Statistics Office of Vietnam, Statistical Yearbook of Statistics of five provinces in northern coastal region including Hai Phong, Quang Ninh, Nam Dinh, Ninh Binh, and Thai Binh, and other relevant ministries, as follows:

The first, source is the one used to calculate the PRODY and EXPY indice and to evaluate

the impacts of FDI on shifting exports structure in the northern coastal region in terms of quantity, including: Data of export value of the northern coastal region, and d ata of Vietnam's export under the standard of international trade SITC3 and sub-sectors under VSIC93

The second source is the one related to FDI and elements of FDI or the input and output

of FDI, including: Data of FDI flow which has separation for the foreign parties in the Northern

Coastal region and in the field of major exports in the region Data on production value of industry of FDI sector (GOindustrial) Data on export value of FDI for each year (EVt) Data on GDP per capita And data on the value added (VA) of the production sector

3.4 Models used in the study "The impact of FDI on shifting exports structure in the Northern Coastal Region of Vietnam"

To the extent permitted, two multiple regression models were used to assess the impacts

of FDI on the restructure of exports in the Northern Coastal Region as follows:

(3.4) Where: LogEVt is the natural logarith of the export value in thousand $US in the period t; Log FDIt-1 is the natural logarith of utilized FDI in thousand $US in the period t-1 Log R t-1 is the real exchange rate in the period t-1 (VND/$1US)

αi is scalar (coefficient), and t: time (year)

EXPYmg = a + bFDImade + c EV FDI + dGOindustrial (3.5)

Where: EXPYmg is index of export quality of main goods;

FDImade is the capital performed;

EVFDI is Export value of the FDI sector;

GOindustrial is value of industrial production of the FDI sector,

And a, b, c is coefficient of the estimated variable

In short, the synthesis of data, model testing results along with the analysis, interpretation, and evaluation of the impacts of FDI on shifting exports structure in the Northern Coastal Region will be discussed further in Chapter 4

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CHAPTER IV PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.1 Role of the Northern Coastal Region in the economic development of the country

The Northern Coastal economic region is focusing on development and investment with the role of a leading economic region in the country, In addition, the Northern Coastal Region is also known as a "motivation region" significantly contributing to the economic growth of Vietnam as well as promoting the economic development of other regions

4.2 The situation of enterprises and export goods :

4.2.1 Industrial development and Economic situations in period 1986-1995 (before having FDI)

During the period from 1986-1995, the export value had been a driving force to push economic growth The growth rate of exports was, on average, 2.5 times of the growth rate of the GDP (20% was compared to 7%) The exports had also contributed to solving urgent social problems such as unemployment, poverty, promoting the transition to a market economy and restructuring the economy in accordance with changes of the world market All the above contributions of export activities had enhanced the position of Vietnam in the international market, sped up the integration process of Vietnam, and to create the initial basis for the economic growth in the following period

4.2.2 Export analysis in period of 1995-2004:

- The Industrial production of the private sector also sharply increased In 2004, there was an increase of 22.6% higher than that of the public sector (12.9%) and foreign-invested sector (16.2%)

- In area of international trade, the number of registered enterprises has also dramatically increased By the end of 2004, the number of registered enterprises to participate in export business was 21,256, increased more than 17 times as compared to that of 1995, of which the private sector had sky-rocketed from 156 in 1995 to 15,246 businesses in 2004 This shows that policies of global integration and participation into international trade brought positive effects

- The average export growth rate in the period of 2000-2004 was only 7%/year, much lower than that of the previous period (20%)

- The export value of preliminary agricultural products and raw materials accounted for large proportion; while processed, industrial goods and high technology exports increased (47%

in 2002), it was still, however, extremely lower than many Southeast Asian countries (from 70% to 80%), especially value-added products was too low

- Competitive capacity: In terms of competitive criteria for a product such as price, quality, sale organization, business reputation, Vietnam’s exports have been in lower level than those of other countries in the region and the world Many items considered to have the lowest (e.g rice, coffee, textiles, etc.)

To overcome limitations in export, one of the strategic solutions is to expand the private sector, and encourage FDI enterprises The important thing is how to increase market share of Vietnam's exports on the world market and create favorable conditions to attract and appropriately use FDI Development of private sectors to promote Vietnam's exports restructure

of the country in general, and of the Northern Coastal Region in particular, is crucial to solve issues mentioned above

4.3 Impacts of FDI on restructuring exports in the Northern Coastal Region in the period 2005 - 2012

4.3.1 Exports of the Northern Coastal Region: In the period 2005-2012, the export

value of the region increased continuously from U.S $1,800.4 million in 2005 to US $3,899 million, and US $6,525 million in 2008 and 2012 respectively Within the region, Quang Ninh was ranked the first in contributing to the total export value of the region On average in the period of 2005-2012, export value of Quang Ninh accounted for 45.6% of the total export value

of the region Hai Phong was in the second place with 39.3% The three remaining provinces

contributed only 15.2 % of the total export value of the region Export growth rate of the region

in the period of 2005-2012 is shown in Figure 4.1

Export growth rate Proportion compared to other countries

Figure 4.1: Export growth rate of the Northern Coastal Region in the period of 2005-2012

The figure 4.1 shows that in 2005 the export value accounted for 5.54% of the total export turnover of the country, and it was 7.43% in 2009.Two years later (2011-2012), even though the total export value increased the proportion in the whole country fell to 5.69% The export growth rate of the region in the period from 2005-2012 was on increasing trend, but not stable

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Theaverage growth rate reached 15.16% for whole period The highest growth rate was 16.9% in 2012and the lowest growth rate was only 8.9% in 2009 This shows that the movement trend of export value in the Northern Coastal Region has been flutuated over time

Shifting exports structure in the Northern Coastal region

Proportion of raw , prelim inary goods (%) Proportion of proce ss ed

or re fined goods

Figure 4.2: Comparing export value of 3 groups of the Northern Coastal Region in the period of 2005-2012

Figure 4.2 shows that groups of processed and refined goods in the period from

2005-2012 always accounted for the dominant proportion of export structure of the region In addition, the group was also on increasing trend (50.4% in 2005 to 64.4% in 2012 Meanwhile, the group

of raw and preliminary products decreased gradually from 38.4% in 2005, then increased to 43.1% in 2007, and fell to 31.5%(2012)

The growth rate of Group A and B is unstable, for instance, the group A’s growth rate was 52.8% in 2006, 21.8 % in 2009, and only 10,2% in 2012; the Group B’s growth rate was declining from 47.3% in 2006 to 14.5% in 2009 The proportion of the group A and group B changed inversely

Exports structure movement in the Northern Coastal Region

Analysis of calculating PRODY indicator and results of calculating EXPY for primary goods of the Northern Coastal Region in the period of 2006-2012 is indicated in the table 4.9, 4.10, 4.11 and 4.12 shows that:

- In the above structure, raw goods and preliminary products accounted relatively for high proportion (5/10 items) and processed items such as fine art, electronic products have the export quality index which is not high

- EXPY index is on the trend of increase from 2006-2012 Average Expy of this period reached 2,892,000 VND (U.S $ 146,5)

4.0