Analytical models on the relation between foreign direct investment and economic growth in vietnam

In recognizing the importance of the quantitative approach coming from these above arguments to evaluate the relation between FDI and economic growth in Vietnam, the author chose the fol

PREFACE

1 Urgency of the thesis topic

After 25 years of implementing reform (Doi moi), Vietnam has gained

convincing social and economic achievements During the period 2001 – 2010, the

Vietnamese economy achieved fairly high growth with an average increase of 7,26%

in gross domestic product each year During the last decade, Vietnam has always

been included in the group of countries with high growth rate and remarkable results

in poverty reduction, which is an important achievement

This achievement is a positive sign of the transitional economic period thanks to

policies that Vietnam has been implementing in the wake of rapid changes in the

global economy, especially the trend of globalization In particular, Vietnam took an

important step in becoming the 150th member of the World Trade Organization in

2007

Efforts from the Vietnamese government has brought about encouraging results in

FDI attraction As of the end of December 2012, Vietnam attracted 14.522 FDI projects

with the total registered capital of USD 210,5 billion (of which disbursed capital was USD

71,9 billion) from over 100 countries and territories into almost all important sectors such

as: manufacturing, processing, construction, information and communication, mining,

hospitality…

The FDI sector is the most dynamic sector with GDP growth rate higher than the

national GDP growth rate The contribution of the FDI sector to the national GDP

gradually increased from 2% in 1992 to 12,7% in 2000, 16,98% in 2006 and 18,97%

in 2011 The important impact of the FDI sector is also felt in export with USD 3,7

billion in contribution to national budget (excluding crude oil), accounting for 11,9%

of the total national budget revenue

In addition to economic contributions, the FDI sector has also contributed to

economic restructuring through the application of science and technology to

agricultural production and job creation for 2 millions people in direct labour and 3-4

millions people in indirect labour The FDI sector is also considered an important

channel for technology transfer, contributing to improving the technological level of

the economy

Despite certain results, Vietnam has yet ultilized opportunities for FDI attraction

or optimized the benefits of FDI Vietnam has yet been chosen as the investment

destination of most multi-national companies with great potentials in technology that

are willing to share their technology and know-how This situation, together with

increasing pressure of competition in FDI attraction from China and neighbouring

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countries, is creating great challenges for Vietnam

Some countries attracted very large FDI inflows but the spillover effects barely happened In another scenario, FDI capital into a coutry can increase the investment capital for the economy, but its contribution to growth is low Both cases are considered unsuccessful with FDI attraction policies or they failed to utilize this resource from the perspective of economic growth This reality has called for increasing attention from economists about the impact of FDI to economic growth, especially in developing countries including Vietnam

In recognizing the importance of the quantitative approach coming from these above arguments to evaluate the relation between FDI and economic growth in Vietnam, the author chose the following thesis topic basing on the approach of

estimated models: “Analytical models on the relation between Foreign Direct

Investment and economic growth in Vietnam”

2 The research objectives of the thesis

The overall objectives: analyzing the relation between FDI and economic

growth in Vietnam

Specific objectives:

- Studying the rationale of FDI, economic growth and the role of FDI in economic growth

- Analyzing the reality of economic growth and the process of FDI attraction in Vietnam during the period 1990-2012

- Building quantitative models for analyzing the relation between FDI and economic growth in Vietnam, evaluating factors affecting the effectiveness of FDI

on economic growth, productivity and production efficiency of enterprises using data during the 1990-2012 period

- Proposing some recommendations for FDI attraction policies in Vietnam with the aim of enhancing economic growth in the future

3 The objects and scope of the thesis

3.1 The objects of the thesis

The objects of the thesis are models for analyzing the relation between Foreign Direct Investment and economic growth in Vietnam :

- Model for measuring the relation of FDI and economic growth (the approach basing on the vector autoregression (VAR) model)

- Model for evaluating the impact of FDI on local enterprises (the approach basing on Levinsohn-Petrin method)

- Model for evaluating the impact of FDI on output of enterprises (the approach basing on the panel data regression model)

3.2 The scope of the thesis

Scope of content: the study focuses on analyzing the relation between FDI and

economic growth at both macroeconomic and microeconomic levels

The scope of time and space:

- The thesis analyzes the relation between FDI and economic growth during the

period 1990 – 2012

- The thesis evaluates the impact of FDI on local enterprises and on the input of

enterprises during the period 2000-2011

4 Research methodologies

To achieve the research objectives, the thesis applies dialectical materialism and

historical materialism as the basic methods for analyzing the relation between FDI

and economic growth In addition, the thesis also applies a number of other methods,

such as: statistics, mathematical modeling, logic synthesis, historical, systems analysis,

comparative methods

5 Scientific contributions of the thesis

* Academic and theoretical contributions

On the basis of the theoretical and empirical researches, the thesis analyzes and

clarifies the reality of FDI attraction and economic growth in Vietnam during the period

1990-2012 as well as the impact of FDI on the Vietnamese economy during that period

From that, quantitative economic models are chosen to analyze the relation between FDI

and economic growth in Vietnam at both macroeconomic and microeconomic levels

The thesis applies the VAR model to measure and analyze the relation between

FDI and economic growth during the 1990-2012 period The thesis’s new approach lies in

the selection of variables in the models, which has not been mentioned in previous

research works

The thesis uses the model for analyzing the impacts of FDI on local enterprises by

appying the Levinsohn and Petrin approach Data used in the thesis are statistics of the

manufacturing sectors from the enterprise survey data of the General Statistics Office

during the 2000-2011 period which has 45.720 cases of observation over 12 years with

3.810 enterprises in operation each year With a microeconomic approach, the model

allows recognition of the role of of enterprises and economic sectors in using FDI

effectively

For better evaluation of FDI to the output of local enterprises, in addition to the

Levinsohn and Petrin approach, the thesis also applies the panel data model with collected

data With General Method of Moments (GMM), the thesis overcomes the cases of error

variance and autocorrelation of the model

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* Recommendations from research results

The thesis results confirm the two-way interaction in a positive direction of FDI and economic growth indicators Increase in FDI affects the increase of socio-economic indicators, except for the GDP, in the first year The process of FDI increase displays an inertia characteristics in itself and can maintain inertial momentum for 2 years; the growth rate may decrease gradually over the following years A set of effective policies for FDI attraction will have positive impacts on growth, capital accumulation, improvement of labor force quality and integration into the global economy

The thesis results show that the presence of FDI positively affect the growth of productivity of all enterprises in the manufacturing sector, including local enterprises, while state ownership does not Therefore, the equitilization of state-owned companies in Vietnam will improve the effectiveness in using resources of local enterprises, creating fair competition between economic sectors and positively influence the productivity of foreign-invested enterprises

The presence of FDI has directly and indirectly enhanced the production efficiency of enterprises and the existence of FDI enterprises has positively affected production and increased efficiency of the whole sector

From research results, the thesis states that for improving economic growth in Vietnam, the government must have FDI attraction policies in the direction of: investing in education and training, enhancing the labour force quality, stimulate saving and investment, accelerating the process of global economic integration; implementing FDI incentives in the manufacturing sector, promoting the development of supporting industries for the foreign-invested sector, creating an attractive environment for FDI, developing the money market, capital market to be on par with other countries in the region

6 Structure of the thesis

Thesis name: “Analytical models on relation between Foreign Direct

Investment and economic growth in Vietnam”

In addition to the preface, conclusion, list of reference materials and annexes, the thesis has 4 chapters :

Chapter 1: Rationale of FDI and economic growth Chapter 2: Overview of theoretical and empirical models of the relation between FDI

and economic growth

Chapter 3: The reality of FDI and economic growth in Vietnam during the period

1990 – 2012

Chapter 4: Empirical estimation results

CHAPTER 1

RATIONALE OF FDI AND ECONOMIC GROWTH

1.1 Rationale of economic growth

1.1.1 The concept of economic growth

Economic growth is considered one of the most critical issues in the study of

economic development Most economists agree that economic growth is the increase

in income or yield calculated for the entire economy in a given time period (usually a

year)

1.1.2 Some views on economic growth

Classialc view on economic growth : Classic theories of economic growth were

put forward by classic economists with Adam Smith and David Ricardo as

representatives since they inherited and further developed the Malthus model

According to Adam Smith, labour used for useful and effective works is the source of

creating social value and capital increase is considered the determining factor of

economic growth It is stressed in David Ricardo’s theory for economic growth that:

Agriculture is the most important sector Basic factors of economic growth are : land,

labor and capital ; depending on each sector and in accordance with a certain level of

technology, these factors combine together in a fixed ratio

Karl Marx’s view on economic growth : According to Karl Marx, capitalists

need more capital for exploiting technology advance and improving labour

productivity ; therefore they have to divide surplus value into two parts :

consumption of the capitalists and accumulation for production development, which

is the accumulative source of capitalism

Neo-classical view on economic growth : Neo-classical economist rejected the

classical view that the production in a specific situation requires certain percentage

of labor and capital They claimed that capital and labor can be substituted for each

other, and that there are multiple combinations between inputs during the production

process Their views focused on input factors of production Neo-classical theories

are also called supply-side theories

Keynes’s view on economic growth : According to John Maynard Keynes, the

aggregate supply curve AS – LR reflects the potential output and the short-run

aggregate demand curve AS-SR reflects the actual capabilities The economy’s

equilibrium is not necessarily at the level of potential output; it is often below that level

It is also stated in Keynes’s theory that investment plays a crucial role on the scale of

employment and the volume of investment depends on interest rate and the marginal

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productivity of capital

Modern views on economic growth: Modern economists support building a

mixed economy in which the market directly determines the basic issues of economic activities and the government participates in a certain degree to reduce the market downsides

1.1.3 Factors affecting economic growth

Economic factors

* Economic factors affecting growth in terms of aggregate supply

Normally, in talking about aggregate supply factors that influence economic growth,

4 key resources are mentioned: capital (K), labour (L), land (R), and technology (T) They are usually combined in a production function as follows:

( , , , )

* Economic factors affecting growth in terms of aggregate demand

According to macroeconomics, there are 4 direct factors that constitute the aggregate demand, including: personal consumption expenditures, government spending, investment spending, export activity spending

Non-economic factors

Non-economic factors affecting economic growth include: cultural and social characteristics, political institution - economic – social factors, ethnic composition, religious institutions and community involvement

1.1.4 Impact and quality measurement of economic growth

Indicators for measuring economic growth

Measure of economic growth is determined by the criteria in the system of national accounts including the total value of production (GO), the total gross domestic product (GDP), gross national income (GNI), national income (NI), using national income (NDI), the per capita income

Measure of economic growth is determined by the criteria in the system of national accounts including the total value of production (GO), the total gross domestic product (GDP), gross national income (GNI), national income (NI), national disposable income (NDI), the per capita income

Criteria for measuring quality of economic growth

Criteria for measuring quality of economic growth can be divided into three groups: group of criteria reflecting economic restructuring, group of criteria reflecting economic efficiency, and group of criteria reflecting the economy’s competitiveness

1.2 Rationale of capital and FDI

1.2.1 Production capital

The concept of production capital comes from the concept of national assests

Investment capital

Investment capital is created through investment activities under two forms: direct

investment and indirect investment from domestic and international sources

1.2.2 Foreign direct investment (FDI): there are many definitions of FDI but their

concepts are not much different

According to the Organisation for Economic Co-operation and Development

(OECD): direct investment reflects the objective of establishing a lasting interest

by a resident enterprise in one economy (direct investor) in an enterprise (direct

investment enterprise) that is resident in an economy other than that of the direct

investor

According to the United Nations Conference on Trade and Development

(UNCTAD): FDI is an investment involving a long-term relationship and reflecting a

lasting interest and control by a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy other than

that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign

affiliate)

According to the International Monetary Fund: FDI reflects the aim of obtaining a

lasting interest by a resident entity of one economy (direct investor) in an enterprise that is

resident in another economy (the direct investment enterprise)

According to the World Bank (WB): Foreign direct investment are the net

inflows of investment to acquire a lasting management interest (10 percent or more of

ordinary shares) in an enterprise operating in an economy other than that of the

investor

According to Article 2 of the Law on Foreign Investment in Vietnam dated

November 12, 1996: FDI means the transfer of capital in money or any asset into Vietnam

by foreign investors to carry out investment activities in accordance with the provisions of

this Law

1.2.4 Some economic theories of FDI

The theory of international trade: The classical trade theory was initiated by Adam

Smith (1776) He believed that nations could create more benefits through commercial

activities of commodities that they were unable to produce efficiently and instead focused

on commodities that they could produce efficiently Ricardo (1913) proposed the concept

of comparative advantages with a model consisting of 2 countries and 2 types of

commodities to take into account the comparative production efficiency nations in

international trade

Neo-classical theories of capital movement: the movement of foreign capital

flows is considered a part of international factor movements According to model of

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Hecksher – Ohlin (H – O), the international movement of factors of production, including foreign investment, are determined by different ratios of main production inputs available in countries

Method of industrial organization: In the 1960s, economic theories (economics)

begun to explain FDI by applying the method of industrial organization in which FDI was considered a part of international production This method was mainly interested in the characteristics of multi-national enterprises and market structure

Positioning theory: it explains FDI activities related to economic conditions

about investment and invested countries and considered locations for better FDI implementation This method includes: input-oriented method and out-put oriented method

Product life-cycle theory: This theory was created by Vernon (1966) and used

to explain FDI activities According to Vernon, there are 3 phases in the product development life cycle: making, using and standardized phases In response, there are also three phases for FDI enterprises to introduce their products: using, growing and standardized phases

Catching–up product cycle theory: Basing on Japan’s experience, Akamatsu

(1962) initiated an approach called “flying geese paradigm” to explain the reason for FDI in developing countries He divided the product life cycle at developing countries into 3 phases: import, domestic production and export

Eclectic Theory: This view is developed by Dunning (1981), incorporating industrial organization approaches and theories about location and localization to clarify the concept of FDI and international production This theory states that a company participating in FDI activities needs to combine ownership advantages, location advantages and internalization advantages

Kojima’s theory: Kojima (1973) – a Japanese economist – expanded

Akamatsu’s paradigm and provided the macroeconomic theory of FDI in the framework of relative factors of productions from Heckscher-Ohlin’s international trade theory and based on post-war experiences of Japan According to this theory, FDI is divided to trade-biased FDI (Japanese-type FDI) and anti-trade FDI (American-type FDI)

1.2.5 Characteristics of FDI

FDI has the following basic characteristics: FDI is the type of foreign capital movement with the capital owner carrying out investment activity overseas; FDI is the type of direct investment with the foreign investor having the rights to manage the invested enterprise; income of the investor depends on the business results and profit

or loss is divided among investors according to the capital contribution ratio with little

influence from the governments and especially little dependence on the political

relation between the investor’s country and the host country; FDI is the relative

long-term and stable source of capital and is not a loan so it contributes to the domestic

investment of the host country with no worry of repayment; investors must abide to legal

regulations for foreign-invested enterprises at the host country; the aim of foreign investor

is profit so FDI mainly concentrates in highly profitable fields

1.2.6 Forms of FDI

FDI activities can be classified in many ways: reciprocal trade, business

co-operation contract, joint venture, 100% foreign invested enterprise,

build-operate-transfer (BOT) contract, build-build-operate-transfer-operate (BTO) contract, builD-build-operate-transfer (BT)

contract

1.3 The role of FDI in the economy

1.3.1 The benefits of FDI

For the investor’s country : FDI can help to bring about the following basic

benefits: improving efficient use of capital; expanding product market; ensuring material

source; improving economic restructuring towards international co-operation and

integration; diversifying investor’s risk; utilizing differences in tax regime in countries to

increase profit

For the host country: generating large revenue; coming along with advance

technology and know-how transfer; generating jobs and training employees;

connecting enterprises in the host country with the international market via joint

co-oporation, production network and supply chain in the region and in the word;

shaping the structure of economic sector and industry;

1.3.2 Downsides of FDI

To the investor’s country : creating high risk due to uncertainties in the political

and economic environment of the host country; causing imbalance of payment;

reducing domestic investment source for economic development; causing human

capital flight, outflow of technology which can lead to a potential loss of technological

monopoly or leading role in sectors with foreign investment participation; creating

direct competitors of investor’s products for export or domestic consumption FDI can

create negative impact on domestic production and cause loss of jobs

To the host country: creating uneven development or serious imbalance for

sector, industry or products in the host country; creating fierce competitors for

domestic investors; causing a decline in production or bankruptcy in the host country

in case of no proper preparation; accidentally converting the host country into a

market for product consumption

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CHAPTER 2

OVERVIEW OF THEORETICAL AND EMPIRICAL MODELS ON THE RELATION BETWEEN FDI AND ECONOMIC GROWTH 2.1 Overview of theoretical models on the relation between FDI and economic growth

2.1.1 VAR model

2.1.2 Semiparametric method by Levinsohn-Petrin 2.1.3 Panel data regression model

2.1.4 Multiple-equation model 2.1.5 General Method of Moments (GMM)

2.2 Overview of empirical researches

2.2.1 Empirical researches in the world: Most researches show that the impact of

FDI on economic growth and the role of FDI in each country are different They can

be positive, negative or negligible depending on economic, institutional or technological conditions in the host country Even when the cope of research is within a country only, a clear conclusion is still controversial

2.2.2 Empirical researches in Vietnam: There are not many in-depth analysis about

FDI using the model approach available These studies main apply the multivariate regression models, panel data regression model and VAR model There is a lack of linked assessment at both macro and micro levels during the research progress Most empirical researches on FDI in Vietnam do not go through the testing process for the models’shortcomings

CHAPTER 3

REALITY OF FDI AND ECONOMIC GROWTH IN VIETNAM DURING

THE PERIOD 1990 - 2012 3.1 FDI in Vietnam during the period 1990 – 2012

According to statistics from the Foreign Investment Agency (under the Ministry

of Foreign Investment), as of December 2012, Vietnam attracted 14.522 FDI projects with the total registered capital of USD 210,5 billion (of which disbursed capital was USD 71,9 billion) from over 100 countries and territories into almost all important sectors such as: manufacturing, processing, construction, information and communication, mining, hospitality…FDI in Vietnam was mostly in the form of 100% foreign capital After 25 years of calling for FDI, all province in Vietnam succeeded in attracting FDI but investment capital mainly focused on key areas with advantages, helping the economic restructuring in these areas, turning them into dynamic areas and, promoting

economic development in neighbouring areas

3.2 Economic growth in Vietnam during the period 1990 – 2012

During the period 1990-2012, unexpected economic events occurred in Vietnam,

the region and the world, namely the two economic crises in 1997-1998 and

2008-2009 As a small economy opening its door for regional and global integration,

Vietnam was also affected by these crises

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20

Graph : Vietnam's GDP growth during the period 1990-2012

Changes in population during this period contributed to an on-going increase in

GDP per capital over the years The rate of poor households gradually decreased (at

approximately 2%/year)

Graph: Changes in GDP per capital in Vietnam during the period 1990-2012

The economy gradually switched towards a market economy with sustainable

economic restructuring The ratio of industry and service sectors accounted for over 80%

in the whole country’s GDP Investment for the economy showed an on-going increase

during the period 1996-2012, even though the increase rate was not stable due to crisis

impacts The number of employments also increased from 30 millions in 1990 to 52

millions in 2012 This was one of the achievements that Vietnam gained thanks to its

socio-economic strategies Before the reform process, even during the years from 1986 to

1990, production did not the demand, trade deficit occurred and the amount of debt was

huge From 1991, domestic production met most of the growing demand for

consumption It could also be said that export was on the rise However, export growth

rate was also affected by the crises in 1997-1998 and 2008-2009 FDI has been

contributed actively to the national income at an increasing ratio In addition, FDI also has

positive influence in promoting economic growth

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Graph: Proportion of economic sectors in GDP during thE period 1995-2012 3.3 Impacts of FDI on the Vietnamese economy

3.3.1 Positive impacts

Economic impacts: FDI contributes to improving economic growth in Vietnam,

increasing efficiency in utilizing domestic investment resources; assisting the economic restructuring process towards industrialization and modernization; enhancing industrial production capacity FDI plays an outstanding role in technology innovation and transfer in Vietnam It also helps to enhance economic and enterprise management capability and creates more pressure for improvement in the business environment

Social impacts: FDI creates jobs, improve the quality of the human resource and

changes the labour structure It also plays a role in expanding foreign relations and promoting proactive economic integration with the region and the world

3.3.2 Shortcomings

In addition to the above positive outcomes, unexpected shortcomings regarding FDI in Vietnam appeared: imbalance occurred in sectors and regions; the overall effect

of foreign investment was not high; the result of attracting high-tech and technology resources ans technology transfer was not satisfactory; the number of jobs created did not match the potential, the living standard of the labor force was not high, disputes and strikes tended to be on the rise; the spillover effects of the FDI sector to other sectors in the economy were limited; there were evidences of crowding out effect, transfer pricing and tax evasion; negative impacts on the ecological environment was present

CHAPTER 4

RESULTS OF EMPIRICAL ESTIMATION 4.1 Model for measuring the relation between FDI and economic growth

* Data: to measure the relation between FDI and economic growth in Vietnam,

the thesis applies the VAR model with secondary data source from 1990-2012

including 23 cases of observation Variables in the model are built as follows : GDP

(gross domestic products); EM (average employment per year) HK (number of high

school graduates); OPEN (openness of the economy); KAP (domestic capital each

year); FDI (value of direct investment capital in Vietnam used each year); LIB: a

dummy variable built to evaluate the impact of world financial crisis on the

Vietnamese economy This variable takes on value 1 in 2008-2009 and 0 in other

years

* Empirical model:

In which: Y=( DLNFDI DLNGDP DLNEM DLNHK DLNKAP DLNOPEN); C

= (c1, c2,…, c6)

* Unit Root Test

Results of unit root test show that the hypotheses of variables are not rejected

However, first differences are found to be stationary – all variables are integrated of

order 1 Thus, upon inspection, data series in the model are at first difference level

* Determining lag length

With AIC, PPE, SC, HQ as selected criteria, there are two lag valueS suitable

with the model

* Analyzing the impact from reaction functions

Reaction of FDI regarding the shocks of growth targets

It is observed that FDI immediately and solely reacts to GDP shock (positive

reaction in the first year) while late reactions occur open impacts of other variables on

FDI Specifically:

- The rate of national income increases in correlations with FDI rate from 1 to 3

years, then growth rate gradually declines Especially, an increase of 1% in GDP can

bring about an increase of 0, 101% in FDI right in the first year and an increase of

0,04% to 0,06% in the next 2 years; then the sign of increase dies down in following

years (the absolute value is too small) This indicates that FDI capital resources tend to

favor short-term effect

- The increase in domestic capital accumulation stimulates the growth rate of

FDI in the second year but a contradictory effect is show in following years It

indicates that the increase in domestic capital accumulation shows signs of

competition in the investment market In the long run, domestic capital accumulation

seems to decrease the growth rate of FDI

- Job creation has corresponding impacts on the growth rate of FDI after one

year but opposite impacts in the following years Is it because the economy is still

under impact of sectors with low productivity? Thus, job creation is not an obvious

sign of FDI attraction in the long in This result may need to be examined further in

other analyses

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- Similarily, the increase of high school graduates can go hand in hand with FDI increase after one year but show opposite impact afterwards Thus, it is possible that the decrease of high school graduates in recent years stimulates an increase of about 0,087% in FDI (3% decrease in the number of high school graduates x 0,029) Estimation results from the VAR model show that in the short term, the increase of high school graduates stimulates growth rate of FDI at first, which then tends to decline Foreign investors do not have long-term expectation about the potentially high-quality human resource in Vietnam

- The openness of the economy has corresponding impact on FDI but the result

is not very clear

Impacts of FDI shock on indicators of economic growth:

An impact of FDI growth rate affects the growth rate of socio-economic indicators right in the first year, except for GDP An FDI shock will :

- Affect the GDP growth rate in the second year and prolong the impact for 4 years However, an increase of 1% in FDI does not have remarkable impacts on GDP growth rate (in positive but small ratio) It matches with Vietnam’s objective in FDI attraction, which is to promote growth But actual data show that while FDI does have positive impact on GDP growth, its role as the stepping stone for GDP growth does not meet expectation

- FDI shock stimulates domestic capital accumulation from the first year to the third year but also slows it down in the following years It indicates that the increase in FDI creates competition with domestic capital accumulation and thus, domestic capital accumulation also increases as counter-balance to the FDI sector, at least in the first three years of higher FDI growth rate Domestic capital accumulation in the fourth and fifth year reflects an opposite tendency to FDI increase rate

- FDI increase results in job creation in the first year but has opposite impact in the second and third year By the fourth and fifth year, the impact is not longer felt An increase of 1% in FDI volume in Vietnam results in an increase of 0,174% in employment of the economy in the first year due to demand for labour force of enterprises when joining the market Due to competition of the FDI sector with the domestic sector, however, negative impact is felt in production and employment of the domestic sector in the second and third years

- For the human resource (HK), FDI has a positive impact on education and creates potential resources for the labour market However, the impact is not remarkable and tends to decline over time Thus, the increase in high school graduates does not have a positive impact on FDI attraction But FDI results in the increase in high school graduates due to the actual demand for quality of the labour

force in the FDI sector

- Stimulating the openness of the economy right in the first year Negative impact

is felt in the second year The following years experiences positive but declining

impacts This reflects the reality about the objectives of foreign investors: in the short

run, they want to take over and compete with local enterprises and in the medium and

long terms, they want to utilize advantages in natural resources and cheap labour in

the host country to produce their products and sell to international markets Therefore,

the openness of the economy after an FDI shock experiences a positive impact from

the third year

* Variance decomposition

- Unstable GDP growth rate is caused by its external volatility Volatilities of

other variables such as FDI, KAP, EM, HK and OPEN have very little impact on the

instability of GDP growth rate So the instability of GDP mainly depends on the

volatility of this variable itself

- Change in FDI growth is influenced from 39% to 51% by this variable Other

factors contribute 39% -61% in influence, with 45%-49% from economic growth and

little impact from the remaining factors

- Change in domestic capital is mainly caused by its external volatility (about

70%) and GDP (about 29%) Other factors, including FDI, have very little impact (less

than 2%) Employment contributes considerably to domestic capital contribution

- Change of employment growth rate (DLNEM) is mainly caused by changes in

GDP (59- 67%) and FDI (18 -28%) Other variables have little impacts on

employment in the economy

- Change in the number of high school graduates is mainly caused by such factors

as FDI, KAP, FDI and HK Other factors such as GDP and OPEN show little impact

- Change in the openness of the economy is mainly influenced by GDP (about

32- 36%), its external volatility (24- 30%) and KAP (about 20%) Impact from FDI

accounts for only 5 to 7% HK and EM barely make an impact So production is

aiming towards export and the economy targets integration under the positive

influence of capital resources and GDP growth

4.2 Model for evaluating the impact of FDI on local enterprises – Levinsohn -

Petrin semiparametric approach

Data: to assess the impact of FDI on local enterprises, the thesis applies data for

the manufacturing sector from the enterprise survey data of the General Statistics Office

during the 2000-2011 period which has 45.720 cases of observation over 12 years with

3.810 enterprises in operation each year

Model structure: the semiparametric method based on the approach of

16

Levinshon-Petrin is as follows:

9

in which:

j it

Y , j it

K , j it

L , j it

FS are: actual output, capital, good quality labour, share of capital from the foreign investor in enterprise i , sector j , year t , respectively

jt

Horizonal variable shows the level of foreign participation in the sector

jt

Backward variable indicates the level of foreign participation in the sector in

sectors where their input sectors include enterprises in the research In will reflect the level of co-operation between the domestic supplier with customers as multinational enterprises

l khi l j

≠

ratio δjlt of the input sector of the sector j buys from sector l at the point of time t Herf variable (Herfindahl index)

Von ngoai (external capital) is measured by 1 subtracting the coefficient of

equity

Dummy variable region (V1: the Red River Delta; V2: the Northeast; V4: North Central; V5: South Central region; V6: the Highlands; V7: the South East; V8: the South West region)

Estimation results

- The value of of variable FS is positive and the statistical significance is at the

1% level for all samples, indicating that the presence of foreign direct investment has positive impacts on productivity growth of all enterprises in the manufacturing sector, including local enterprises This can be explained that the wave of new technology from foreign enterprises can create spillover effects for local enterprises

- Horizontal spillovers occur when the presence of FDI improves productivity of local enterprises in the same industry According to estimation results, the coefficient

of Horizontal variable (showing the impact of horizontal spillovers) is negative and the statistical significance is at the 1% level for all samples and separate samples of local enterprises It means the impacts of horizontal spillovers reduce the efficiency and productivity of enterprises in general This can be explained that by growing competition for Vietnamese enterprises, weak management, outdated technology, crowding out effect, participation of FDI enterprises resulting in increase of labour cost

in the market

Eatimation results according to Levinsohn – Petrin method

Independent

***

(0.040)

***

(0.052)

(0.057)

***

(0.028)

(0.038)

***

(0.110)

(0.140)

***

(0.149)

(0.202)

***

(0.034)

(0.035)

Von ngoai

(External

capital)

(0.027)

(0.036)

***

(0.190)

(0.221)

***

(0.190)

(0.210)

**

(0.195)

(0.215)

***

(0.184)

(0.221)

(0.213)

0.354 (0.233)

***

(0.182)

(0.214)

***

(0.182)

(0.209)

***

(0.014)

(0.016)

***

(0.010)

(0.015)

Nguồn: ước lượng từ số liệu

is at 1%, 5% and 10%, respectively Standard errors are put in parentheses below variables

- Positive Backward variable with statistical significance at 1% for all samples

and separate samples for local enterprises indicates that the spillovers occur due to the

co-operation between FDI enterprises and local suppliers in Vietnam These impacts

can be done through direct knowledge transfer from foreign customers to domestic

supplier, higher requirements about product quality and timely supply…, thus

motivating local suppliers to upgrade technology for better management and

production

- Coefficient of variable Forw is negative with statistical significance for all

18

samples and separate samples of local enterprises By definition, variable Forw indicates the presence of foreign factors in upstream industries, in which industry j purchases intermediate products as inputs Thus, there is better availability of inputs because foreign investment increase usage of these inputs and may help to improve productivity

of local enterprises However, inputs produced at localities by foreign enterprises are more expensive and less suitable for requirements of enterprises in Vietnam

- Variable Herf is positive with statistical significance for all samples and separate

samples of local enterprises

- Variable Gownship is negative with statistical significance for all samples and

separate samples of local enterprises, which indicates that state ownership causes setback for the industry’s productivity growth This results from weak management, heavy and ineffective apparatus of owned enterprises The equitization of state-owned enterprises in Vietnam, therefore, does not only improve the efficiency in using resources of local enterprises but also has positive impacts on the productivity of FDI enterprises The equitization process creates a fairer competitive environment for local and foreign enterprises, stimulates innovation and improve productivity of local enterprises Foreign enterprises do not suffer from unfair treatment as compared to local enterprises, thus increasing their productivity also

- Coefficient Von ngoai (external capital) is positive with statistical significance

for all samples and separate samples of local enterprises It indicates that increasing the ratio of external capital can improve the production value and income of enterprises in the manufacturing sector

- Coefficient V6is positive but without statistical significance for all samples and separate samples of local enterprises This shows ineffective impact of FDI in the Highland regions

4.3 Model for evaluating impacts of FDI on output of enterprises - the panel data regression approach

In addition to the semiparametric-based approach of Levinshon-Petrin, the thesis also applies the panel data regression approach with the same collected data The structure of the panel data regression model is presented through the following production function:

9

Vonngoai

Estimation results is done according to the mix-data method with Fixed Effect

Model (FEM) and Random Effects Model (REM ) This method is applied for both

group of samples: one group of all enterprises and one group of non-FDI enterprises

Estimation results according to the mix data method

Independent

variable

***

(0.027)

0.113 **

(0.035)

Horizontal -0.0010

(0.030)

-0.066 (0.034)

0.024 (0.031)

-0.027 (0.036)

Backward 0.339

***

(0.015)

0.314 ***

(0.016)

0.285 ***

(0.015)

0.257 ***

(0.016)

Forw -0.065

(0.061)

-0.106 (0.069)

0.146* (0.063)

0.035 (0.072)

Herf -0.446

***

(0.075)

-0.522***

(0.086)

-0.634***

(0.075)

-0.672***

(0.088)

Gownship -0.127

***

(0.020)

-0.102 ***

(0.020)

-0.218 ***

(0.022)

-0.216 ***

(0.023)

Von ngoai

(external

capital)

0.069 ***

(0.012)

0.061 ***

(0.013)

0.075 ***

(0.012)

0.063 ***

(0.013)

***

(0.006)

0.599***

(0.006)

0.601***

(0.006)

0.572***

(0.007)

***

(0.004)

0.414***

(0.004)

0.294***

(0.004)

0.320***

(0.005)

In deciding between FEM and REM models, Hausman test is carred out with the

result of p-value = 0.000< 0.005 Therefore, REM model is not suitable and FEM

model is chosen

Test is carried out for error variance and serial correlation in the

newly-constructed FEM model as follows:

+ Results of testing error variance in FEM model shows that p-value = 0.000<

0.005 It is concluded that the FEM model has error variance

+ Results of testing serial correlation in the FEM model shows that p-value =

0.000< 0.005 It is concluded that the FEM model has serial correlation

The set of data for regression is only collected from 2000 to 2011 (T=12) but

there are too many enterprises (n= 3.810); therefore the general method of moments is

applied in the thesis

Correction results according to the GMM method

Independent variable

Ảnh hưởng cố định (FEM) đã hiệu chỉnh

***

(0.032)

20

Horizontal 0.263

***

(0.034)

0.255***

(0.039)

Backward 0.249

***

(0.017)

0.229 ***

(0.019)

Forw 0.588

***

(0.064)

0.536 ***

(0.075)

Herf -0.520

***

(0.077)

-0.674 ***

(0.089)

Gownship -0.236

***

(0.030)

-0.210***

(0.032)

Von ngoai (External capital)

0.018 (0.015)

-0.000 (0.017)

***

(0.008)

0.350 ***

(0.009)

***

(0.005)

0.233 ***

(0.006)

Upon testing the endogenous phenomenon in the FEM model, results show that the GMM model is acceptable With the correction result of regression according to the GMM method for FEM model, it is observed that:

- The coefficient of variable FS is positive 0,352 with statistical significance at

1% for all samples, which indicates that the presence of foreign capital directly and indirectly improve production efficiency of enterprises

- The coefficient of the horizontal variable Horizontal is 0,263 for all samples

and 0,255 for samples of non-FDI enterprises, which indicates that foreign investment stimulates technology innovation and effective internal organization in the same sector via direct and indirect impacts

- The coefficient of the backward variable Backward is 0,249 for all samples and

0,229 for samples of non-FDI enterprises, which indicates that foreign investment has positive impacts on related industries (enterprises providing material input, those in the supporting industries…)

- The coefficient of variable Forw has statistical significance and positive value

( 0,588 for all samples and 0,536 for samples of non-FDI enterprises), showing that the presence of FDI enterprises has positive impacts on production and efficiency of the whole sector

- Herf coefficient has negative value of - 0,52 for all samples and - 0,764 for local

enterprises, which indicates fiercer competition in the wake of foreign investment, causing a decline in the market strength of enterprises

- Similar to estimation results before, the coefficient of variable Gownship is

negative for all samples and samples of non-FDI enterprises, which indicates that the state sector has negative impacts on the output of all enterprises