DETERMINANTS OF FDI INTO DEVELOPING COUNTRIES IN THE CIRCUMSTANCE OF FINANCIAL CRISIS, GLOBAL ECONOMIC RECESSION AND POLICY IMPLICATIONS FOR VIETNAM

However, the flux of FDI in the world is influenced by many determinants such as the population, GDP, the education level,the law on intellectual property right… Analyzing these determin

A INTRODUCTION

1 The necessity of thesis

Foreign investment, especially FDI plays a role more and more important foreconomic growth and international intergration However, the flux of FDI in the world

is influenced by many determinants such as the population, GDP, the education level,the law on intellectual property right… Analyzing these determinants of FDI couldcontribute to find out the trend of global FDI and the solutions for developing countries

to attract more FDI for economic growth

Though FDI has a decisive role for economic development and economic growth inrecipient countries, and FDI is one of the key for the global economic intergration ofdeveloping countries, we all know that not all FDI could be beneficial for investors and notall recipient countries could be succesfull in attracting FDI for economic growth.Meanwile, the flux of FDI, which is determined by long term factors, is considered moreimportant than portfolio investment To discover in detail these determinants in thecircumstance of global financial crisis and economic recession is very meaningful forrecipient developing countries, especially when these countries plays more and moreimportant role in the global economic map Therefore, Post-granduate has chosen thesubject «DETERMINANTS OF FDI INTO DEVELOPING COUNTRIES IN THECIRCUMSTANCE OF FINANCIAL CRISIS, GLOBAL ECONOMIC RECESSIONAND POLICY IMPLICATIONS FOR VIETNAM” for my PhD thesis

2 Objective of this thesis

- To discover and synthetize main theory on determinants of FDI

- To analyze the actual situation of these determinant of FDI into developingcountries

- To show the trend, the actual situation of FDI into developing countries beforeand during financial crisis

- To evaluate and measure the impact of these determinants in the flux of FDI inthe circumstance of global economic recession

- To find out some policy implications and specific solutions for Vietnam in order

to attract efficiently FDI in the next future

3 Object to study and the sphere to study

3.1 Object to study

This thesis give high attention to all the determinants of FDI flux into developingcountries in the circumstance of global financial crisis and economic recession

3.2 Sphere to study

 About the contenu: This thesis will discover the determinants of FDI which

include the common determinants, the determinants that have impact on the decision

of investors and the determinants that are important for recipient developingcountries

 About the space: all the data and object to study is discovered in developing

countries in the world (especially those in Africa, in Asia, in Latin America…)

 About the time: To evaluate the impact of current global financial crisis to FDI, I

uses the data collected during the period 1999-2010 All the policy implications andspecific solutions are for an average term 2013- 2030

4 Methods to study

- The method of analyze and synthetize

- The mathematical mehod

- The quantitative methods

The three main data sources used in this thesis are: World Invesment Reports(UNCTAD), the World Bank database and the database of Foreign Invesment Agency(Ministry of Planing and Invesment of Vietnam)

5 New contributions of the thesis

- Contributtion to the theories about determinants of FDI in Vietnamese

- Evaluation of the impact of global financial crisis and recession economic to theflux of FDI into developing countries

- The econometric model with newest data colleted and new method to study forthesis in Vietnamese

- Some main policy implications and specific solutions for Vietnam in order toattract more efficiently FDI

6 Lay out of the thesis

Beside the introduction, the conclusion, and the list of references documents, thethesis has 3 chapter:

Chapter 1: General Theories about determinants of FDI into developing countriesChapter 2: Impact of the determinants of FDI in the circumstance of financial crisisand economic recession

Chapter 3: Policy implications for Vietnam in order to improve the attraction ofFDI in the next future

B GENERALITY OF RESEARCHS RELATING THE OBJECT TO STUDY OF THE THESIS

1 IN ABROAD

1.1 The theoretical researchs

The theoretical researchs mainly discoved all the factors that could give incentives

to foreign investors These works researched the reasons why foreign direct investment

is made by a TNC Although the huge number of theoretical researchs, we could classifythese works by main groups: theories concerning the capital, theories concerninginternational trade, theories concerning the cost and firms, theories concerning the cycle

of product…

1.2 The empirical researchs

Generality about empirical researchs in the world that concerns the object of study

of the thesis, especially by the macroeconomic approach, will be discovered in this part.These studies talks about determinants of FDI such as the market size, the purchasingpower, the quality and price of labor, the economic openness…, and analyzes the impact

of these determinants in econometric models I synthetizes main results of theses studiesconcerning FDI into developing countries, FDI into Vietnam…

2.IN VIETNAM

There is not much studies in Vietnam talking about determinants of FDI There isany vietnammese study talking about determinants of FDI into developing countries.There are some studies that have the close direction than the thesis such as somegraduation thesis of student, some PhD thesis talking about improving the investmentenvironment (Trieu Hong Cam’s Thesis, Nguyen Thi Ai Lien’s Thesis)

C CONTENU OF STUDY

CHAPTER 1: DETERMINANTS OF FDI IN THE SITUATION OF FINANCIAL CRISIS AND ECONOMIC RECESSION

1.1.GENERALITY OF FDI

1.1.1 Some main notions

- Foreign Investment and foreign direct investment

- Determinants of FDI

- Porfolio investment

- Developing countries

- Corruption

1.1.2 Economic roles of FDI for recipient countries

Economic roles of FDI for recipient countries can be seen through the contributions

of FDI for these countries such as creation of job, contribution to state budget, economicgrowht and economic development…

Beside the positive contributions for the recipients economies, there are somenegative effects of FDI for recipient countries, for exemple the pollution ofenvironment, the poverty and inequality…

1.2.FINANCIAL CRISIS AND THE RELATIOSHIP WITH FDI

Financial crisis is a situation in which the supply of money is outpaced by thedemand for money This means that liquidity is quickly evaporated because availablemoney is withdrawn from banks, forcing banks either to sell other investments to make

up for the shortfall or to collapse

Cause and characterisitics of financial crisis : Global imbalance of lending moneyand the relaxation of discipline for financial system managemment Financial crisis

2008 has some characteristics such as the center of crisis is in developepd countries,financial systems at developing countries are suffered indirectly from the crisis and one

of the main consequences of fiancial crisis 2008 is the current economic recession Fiancial crisis 2008 and economic recession had a lot of negative impact on economicdevelopment of the world, the movement of global financial flux and the flux of FDI intodeveloping countries

1.3 GENERALITY OF DETERMINANTS OF FDI

There are common determinants, determinants viewed from investors anddetermiants viewed from recipient countries

- The common determinants which could affect the flux of FDI includes the globalmacroeconomic situation, the international intergration, the international politicsituation and some natural disaster with international impact …

- Determinants viewed from the investors : these determinants which represents allelements affecting the decision of foreign investors, could be differents according to thetypes of FDI The investor of market seeking FDI makes attention to the market size of

the recipient countries, the purchasing power, the posibility of market access,geographical position, government policies… while the investors of ressource seekingFDI refer to the quality and price of labor, the stock of natural ressouces, governmentpolicies…

Table 5: Determinants of FDI viewed from the investors

Market seeking FDI Ressource seeking FDI Efficiency seeking FDI

Market size in the

recipient countries

Natural ressouce inrecipient countries

Possibility of technologicalapplication, economic ofscale in recipient countiresPossiblitity of Market access: geographical position, relative policies in home and host countries…

Other determinants: corruption, political stability, ipr law in host countries

- Factors related to FDI attraction of host countries can be divided into threecategories: economic factors and non-economic factors and other factors (UNCTAD,1998) The economic factors include: domestic market size of the host country, naturalresources, macroeconomic situation, abundant labor resources, low cost labor; situation

of international integration and regional infrastructure status of FDI recipient countries.The non-economic factors including the legal framework of investment in the hostcountry; geographical location, political stability, corruption situation Also there aresome other factors that affect the flux of FDI such as the protection of intellectualproperty rights in the recipient country, the instability of the exchange rate, foreign debt,fiscal deficits, privatization, the promotion strategy investment

CHAPTER 2: IMPACT OF DETERMINANTS OF FDI INTO DEVELOPING COUNTRIES

2.1 THE CURRENT SITUATION OF FDI INTO DEVELOPING COUNTRIES INFINANCIAL CRISIS AND ECONOMIC RECESSION

The flux of FDI into developing countries in the world is analyzed according tomain geographical areas : Developing countries in Africa, in Asia, in Latin America and

in Europe In general, developing countries in the world attracts more and more FDIsince the XXI century The share of FDI into developing world has acceded more than50% of the total global FDI Nevertheless, the financial crisis 2008 has heavy negativeimpact on this flux of capital Indeed, FDI into african developing countries has beenmost strongly affected by the crisis, FDI into other develping areas has been alsodecreased but which has returned to the pre-crisis level The crisis has less negativeeffects for FDI into developing asean countries when the value of this flux wasdecreased a little in 2009 but it has returned and reached a new record in 2011 All theavailable data which are showed by graphs and tables in the thesis

Table 12: Flux of FDI into developing countries before and during the crisis by geographical areas (unit: million USD)

World 1.463.351,2 1.975.537,1 1.790.705,7 1.197.823,7 1.309.001,3 1.524.422,2Total developing

countries 427.163,4 574.311,5 650.016,8 519.225 616.660,7 684.399,3Transition

economies 54.318,4 90.800,1 121.040,9 72.386,4 73.754,5 92.162,9African

developing

countries 36.782,9 51.478,9 57.841,5 52.644,9 43.122,1 42.651,9American

developing

countries 98.175,4 172,281 209.517 149.402,4 187.400,7 216.988,3Asian

developing

countries 290.907 349.412,2 380.360,4 315.237,6 384.063 423.157Developing

contries in

Oceania 1.298,2 1.139,5 2.297,8 1.940,1 2.074,9 1.602,1Developing

countries except

China 354.448,4 490.790,5 541.704,8 424.225 501.926,7 560.414,3Developing

countries except

LDCs 415.424,7 559.074,1 631.520 500.882,6 599.761,5 669.388,4Landlocked

developing

countries 11.943 15.637,3 25.010,5 28.016,6 28.190,8 34.836,9Small Islands

developing

countries

(UNCTAD) 5.566,3 6.477,5 8.640,2 4.431,5 4.230,9 4.142,3High income

developing

countires 228.898,8 314.931,3 318.728,4 259.057,3 317.197,9 332.983,1Medium Income

developing

countries 148.312,8 190.326,7 230.795,5 178.247,5 222.544,6 257.223,5Low Income

developing

countries 49.951,8 69.053,5 100.492,9 81.920,3 76.918,2 94.192,8

Souce: WIR 2011 and World Bank Database

2.2.CURRENT SITUATION OF DETERMINANTS OF FDI INTO DEVELOPINGCOUNTRIES

2.2.1.The common determinants

In the 1st chapter, we have analyzed how FDI inflows and outflows are bothaffected by common factors such as economic integration position, macroeconomicssituation In a nutshell, these global factors have an impact on both host countries andhome countries

2.2.1.1 Economic Integration

Economic Integration has a critical impact on the value of FDI flows globally.According to UNCTAD’s annual statement on international investment, in 1991, thefigure was approximately $158.9 billion, which increased to $331.2 billion in 1995 and

$900 billion in 2005, before reaching its peak at nearly $1500 billion in 2007, precedingthe devastating effect by the global economic recession The increasing trend of FDIflows advances along with the globalizing trend, signifying the sound decision ofcountries to blend in with this international tendency In developing countries, inparticular, the boosting power of their WTO adhesion is likely to be most apparent,which also brings in economic growth through FDI attraction The global economicintegration, specifically the free trade and liberalization of international investment,impacts significantly on the movement of FDI flows In time of global economicdownfall, the intensity of liberalization of trade and investment will reduce country risk

as a consequence of global crisis For example, the EU is currently the trading partner ofRussia, while Russia herself, both politically and economically, is enhancing itsrelationship with Asian countries, especially in time of the European debt crisis Theglobal economic integration is referred to each country’s commitment preceding itsWTO adhesion, without which, FDI flows might not meet the targeted expectation.Overall, with its 157 country-and-economic-region members and 27 observers, WTOhas signified the importance of international economic integration In a nutshell, theglobal factors impacting on FDI flows might be summarized into globalization and boththe invested developing countries and their investing host countries might hold somecertain great advantages to attract FDI through liberalization of trade and investment

2.1.1.2 The Global Macroeconomics Situation

In the first place, the global economy in the recent decades has observed the rises

of China, in specific, the preceding three decades witnessed a rapid growth of thecountry, marked by the year of 2010 when its economy replaced Japan’s to be thesecond largest economy in the world China in the new century also successfullylaunched a manned-mission space-craft into space, making it the only country to breakthe dominance of the US and Russia in the field of manned-mission space exploration Secondly, while the largest economies in the world are suffering, new industrialcountries, particularly in Asia, soared to develop and support the recovery of the globaleconomy, namely, India, Australia – countries having quick recoveries and many otherswhich climbed to the pre-recession economic growth These Asian countries have theeconomic growth expected to be highest in the preceding 2 decades

Finally, the macro economy globally is brooded by the elongation of financial crisis,resulting in challenges for developing countries, government debt crisis, inflation and

unemployment problems The recent economic recession of the period from 2008-2009has been historically recognized as the most deteriorating downfall of global economysince the Great Depression in 1929-1933.

2.2.1.3 Other factors

Apart from international economic integration and macroeconomic situation,global flows of FDI are also impacted by several significant factors such as the globalpolitical situation, natural disasters of great global impacts…etc

2.2.2.Current status of some determinants of FDI into developing countries 2.2.2.1 Economic factors

- Domestic market:

- The market size

The domestic market with some basic characteristics such as size and affordability is themost important factors affecting foreign direct investment in general and developingcountries in particular Domestic market size of each country may go along with its hugeadvantage in attracting market-seeking FDI Some countries have significantly developeddomestic market size are China with population of over 1.3 billion people, India with over1.2 billion people, Indonesia with over 240 million people, etc This is the important source

of demand for products which are produced by firms in countries that receive FDIinvestments

In general, world’s most populous countries locate in Asia, where there are up to 5 ofthe 10 most densely populated countries of all developing countries Theoretically, the totalvalue of registered FDI in these countries is also proportional to the size of the market, ie thesize of the population in these countries This will be verified through econometricsregression The most populous country will have some major advantages in attracting FDI.Table 16 gives us an overview of the theoretical relationship between population size andFDI in 10 developing countries with the largest population in the world Out of 10 mostpopulous developing countries, 5 of them are in the top 11 developing countries to attract thegreatest amount FDI in the world in 2011 Of all developing countries, Vietnam ranked 14th

in the ranking list of registered FDI in 2011 and ranks 11th in population The remainingpopulous countries were also among countries that attract most FDI in recent years or inanother way, the remaining countries are among the top countries attracting FDI Developingcountries are also countries with large population sizes

Table 16: Relationship between population size and FDI

Developing countries with the largest

9 Mexico 114.793.341 9 Kazakhstan 12.910,48

10 Philippines 94.852.030 10 Malaysia 11.966,01

Source: Post-graduante synthesizes from World Bank and UNTAD statistics

- Workforce: skills and labor cost

Workforce investment in the host country affects FDI in two directions A market withcheap labor attracts efficiency-seeking FDI through low cost But cheap labor also means lowquality workers This is also considered an advantage for developing countries in thetraditional competition of attracting FDI The second direction is more modern: FDI that isseeking for a source of high-quality labor Accordingly, the countries having high qualityworkforce will attract more foreign direct investment And this is the new trend of the currentFDI: FDI will focus more on industry with high level of technique and technology instead ofmining industry Foreign direct investment affected by the level of the labor force is not acommon phenomenon as we see in the developing countries, industries that process rawmaterial or the industries that is labor intensive still accounted for an absolute advantage inattracting the attention of foreign direct investment The table below compares the rates ofhigh school graduation per total population in 10 developing countries attracting most FDI in

2011 Vietnam ranks 14th in the top FDI recipient countries in 2011 Among the top FDIrecipient developing countries, Latin America and Eastern Europe have relatively higherlevel education, but this does not entirely mean that the level of education can be a leadingfactors impacting developing countries’ FDI inflow In fact, FDI still prefers cheap laborwhich is synonymous with low quality and low skill levels However, in the future, laborskills will be a key factor in helping increase the competitiveness of FDI recipient developingcountries (see table 17)

Table 17: High school graduation rates per total population in top 10 FDI recipients in 2011

No Countries High school graduation rates

Source: Post-graduante synthesizes from World Bank statistics

- Income per capita:

Theoretically, a country with relatively high per capita income has more advantages inattracting market-seeking FDI This type of FDI prefers markets with large population size,affordability and high per capita income is a good variable reflecting the purchasing power ofthe recipients’ markets Research on the per capita income in developing countries shows that

although there are similarities in income per capita, there are still differences in the standard

of living or per capital GDP Table 18 shows that the theoretical correlation of per capitaincome and FDI for the top 10 FDI recipients in 2011, which includes Vietnam, is not clear.This may indicate that the main reason of the FDI inflows into developing countries isaffected by sources of cheap labor rather than markets with higher affordability Manycompanies with foreign direct investment focus on the industries which process raw material

or produce goods for exporting instead of consuming on the domestic market in the hostcountry This is the fact of many companies with foreign direct investment in Vietnam (seeTable 18)

Table 18: Per capita income in top 10 FDI recipients in

2011 (unit: million USD)

No Countries Registered FDI in 2011 Per capital income in

of concentration in China and central Siberia Tin in Southeast Asia is focused in oneextended length from Yunnan Plateau through China-India peninsula to Bangka andBilliton belonging to Indonesia Tin here accounts for 70% of world reserves Currently,output of tin mining in China, Indonesia and Malaysia is standing second, third andfourth respectively, after Brazil The charcoal mines with huge reserves are called coalbasins, which exists much in China, India, Mongolia and Central Siberia-Russia Oil andgas mines are at high level of concentration at West Siberian Delta, Central Asia,Sakhalin island and Japan In China, oil concentrates in basins such as Tarim, Saidam,Dungari, Sichuan and Gobi Plateau The China’s resources value mainly belongs to

coal, mineral and rare earth These two resources account for more than 90% of totalvalue of natural resources of China Second-largest economy of the world also has manybig coal mines, accounting for more than 13% of total world coal reserves Recently,China has discovered many large shale mines (An Huy, 2012) The continental shelves

of South “East Sea”, Indonesia, Myanma, Indo-Ganges Delta, Mesopotamian Plain andalong the Persian Gulf are the areas with leading reserves in Asia

African countries have very large oil reserves and are the attracting investmentpoints of large oil corporations in the world (see table 19) Among 12 current members

of OPEC, there are up to 4 members being African developing countries: Algeria,Angola, Libya, Nigeria Africa is also famous for essential and diverse resources:accounting for 8% oil, 7% fuel reserves (BP statistical review, 2012) In addition, Africamanufactures 46% chromium, 48% diamond, 48% platinum of the world (JenneManion, 2006)

Table 19: Oil reserves of developing countries of 3 continents in the world 2011 (unit: billion tanks)

Argentina 2.5 0.2% Algeria 12.2 0.7% Brunei 1.1 0.1%Brazil 15.1 0.9% Angola 13.5 0.8% China 14.7 0.9%

Ecuador 6.2 0.4% Rep of

Congo 1.9 0.1% Indonesia 4.0 0.2%Mexico 11.4 0.7% Egypt 4.3 0.3% Malaysia 5.9 0.4%Peru 1.2 0.1% EquatorGuinea 1.7 0.1% Thailand 0.4

(Source: BP Statistical Review of World Energy 2012)

Latin America is still famous for oil in Venezuela and Argentina; forest and iron inBrazil Thanks to huge reserves of gold and platinum, Brazil was shortlisted thecountries with most resources in the world This country holds 17% iron reserves of theworld, taking second position in terms of this resource The most valuable resource ofBrazil is forest, with 485,6 million hectares which are worth nearly 17,5 thousandbillion USD This rank has not been considered pre-salt oil reserves, which is up to 44billion tanks discovered recently Venezuela belongs to the group of 10 countries withlargest iron reserves, natural gas and petrol Natural gas reserves of Venezuela stand in8th position of the world, despite accounting for 2.7% of global supply Petrol reserves

of 99 thousand billion tanks of Venezuela stands in 6th position in the world, notmentioning about positive reserves of heavy sour oil which is up to 97 billion tanks Although Vietnam is not a large country, we have rich and diverse mineralresources, with nearly 40 types from power minerals (petrol, coal, uranium,geothermal), Non-metallic mineral, building materials to metal minerals However, most

of minerals in Vietnam has not much reserves Vietnam is rich in triassic coal (6.6billion tons), titanium ore (O34.5 billion tons), bauxite (more than 2 billion tons), scareearth (more than 22 million tons) Apatite was discovered in Lao Cai with reservesbeing 1700 million tons Limestone Cement, concentrating from Quang Binh toNorthern Vietnam, has area of nearly 30,000 square kilometers, with 96 building stonemines which includes manganese rocks (granite, xienite, diorite, gabro, andezits, bazan,riolit), sedimentary rocks (limestone, dolomite) and metamorphic like shale, quaczit(According to General Geological Society, Vietnam Minerals Congress) In addition,Vietnam is also rich in forest and sea resources This is the big advantage for ourcountry to foster the economy Details of natural resources of all the developingcountries, including Vietnam, are summarized in Annex 3 of the thesis.

-The economic openness of recipient countries.

Among the factors affecting the FDI attractiveness of each country, the opening ofthe economy must be included Economic openness can be understood as the ability of acountry's integration into the world market which is expressed in a number of criteriasuch as the participation in the international organizations or bilateral and multilateralagreements to protect investment Each developing country can be the member of manyorganizations, forums or international associations For example, Vietnam is a member

of ASEAN, APEC, ASEM, WTO; the developing countries in Africa region may be amember of WAEMU ( West African Monetary Union), CAEMC ( Central AfricanEconomic and Monetary Union), ECOWAS ( West African Monetary Zone)… Thelargest organization, which most of the developing countries in the world are the officialmembers, is the World Trade Organization WTO

Nowadays, about two thirds of the World Trade Organization-WTO members aredeveloping countries That the developing countries try to integrate deeply into theworld economy represents the dynamics of each country when participating in the largeplayground in the world Because most developing countries have been participatinginto the WTO, it would not be easy to determine the degree of integration into the worldeconomy of each country to find out that how the elements impact on attracting FDI.Some researchers consider and comment on the opening of the economy through exportturnover targets or total imports, exports turnover compared to GDP However, thismeasurement cannot considered as an accurate method because GDP and exports (orexports, imports) turnover are two different criteria on the scope and the calculation sothat these index should not be compared together Furthermore, the heterogeneousstructure of export in each country is different, even if there are some cases of overlapwhen calculating (egg raw materials imported for production then export is calculated

in the import and export turnover)

-The infrastructure condition of recipient countries.

The essence of FDI is the private investment with the aim to seek profit The FDIenterprises would save a lot of costs in the investment environment having favorableinfrastructure, especially in the traffic system (table 21) FDI towards the marketprioritizes the good infrastructure market, especially in the inland transportation system,whereas the export-oriented FDI prioritizes the locations near ports, airports, with thefavorable national and international transportation system In general, all foreign

investors prefer the investment locations near the market, the major economic centerand the market access is easy via the high quality infrastructure system Besides thetransportation system, the infrastructure situation also reflects in a number of othercriteria such as power, water, telecom and internet supply situation in the recipientcountries The comprehensive data on the developing countries related to the criteria ofinfrastructure is included in the appendix of the thesis.

It can be said that these criteria have not demonstrated the superiority of thiscountry compared with other countries concerning the infrastructure in attracting FDI.For example, India and China are the two most populous countries in the world;therefore the travel need of the people is much higher than in many other countries.Moreover, the area of the two countries is also ranked as the world’s largest so thenumbers of kilometers of roads, railways, waterways also are relatively larger incomparison with many other countries The kilometer per capita can help to eliminatethe factors such as population size criterion or the number of kilometers of roads overthe total land area can remove the national scale element However,a simplecomparison between two recipient countries related to one or only a few criteria ofinfrastructure is not sufficient for an investor to make decision in selecting that countryover the other countries Therefore, the fine infrastructure system is a big advantage fordeveloping recipient countries but the investors still base on many different factors tomake their decision

Table 21: Some criterias of infrastructure in top10 developing recipient countries

in 2011 1

No of airports and places for air landing