Determinants of provincial FDI in vietnam a cross section data analysis

1.1 Problem Statement The Provincial Competitiveness Index PCI is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job c

VIETNAM-NETHERLANDS PROGRAMME FOR M.AIN DEVELOPMENT ECONOMICS

DETERMINANTS OF PROVINCIAL FDI IN VIETNAM:

A CROSS SECTION DATA ANALYSIS

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By NGUYEN DAI HIEP

Academic Supervisor:

Dr NGUYEN VAN PHUC

HO CHI MINH CITY, JANUARY 2011

DECLARATION

I declare that 'Determinants of provincial FDI in Vietnam: A cross section data analysis' is my own work, that it has not been submitted for any degree or examination at any other University, and that all sources used or quoted are indicated and knowledge by complete references

January 3, 2011

NGUYEN DAI HIEP

I would also like to sincerely thank Prof Dr Peter Calkins for his honest and valuable advices from I begin to choose the topic and TRD completion He is truly a noble teacher, who soonest feedback and detail instruction during TRD establishing

I would also like to thank science committee; all the members of the Dutch Project for MA programme in Development Economics, University of Economics-HCMC, VietNam for their support and goodwill, and to all the lecturers, and also to my friends in the class 15.Thank you a great time!

Vietnamese-Last, I want to thank my family members, friends

Any errors and omissions in this thesis are my sole responsibility

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-TABLE OF CONTENTS Declaration 2

Acknowledgements - 3

Table of contents 4

Table list 6

Abstract 7

Chapter 1: Introduction 8

1.1 Problem Statement 8

1.2 Research Objectives 8

1.3 Research questions 9

1.4 Organization of the study 9

Chapter 2: Theoretical Consideration and Literature Review ll 2.1 The regional development and competitive regionalism theory 11

2.2 FDI theories and its applicability 11

2.2.1 Capital Theory _ 11

2.2.2 The International Trade Arguments _ 12

2.2.3 Market Failures and Industrial Organization 13

2.2.4 The Eclectic Paradigm and International Investment Path 13

2.2.5 Agglomeration Effect 14

2.3 Empirical studies on the determinants ofFDI 17

2.4 Geographical literature on Vietnam, China and ASEAN countries l9 Chapter 3: Research Model, Data Collection and Variable Description 24

3.1 Model Specification 24

3.2 Data Collection 25

3.3 Variables description 26

Chapter 4: Empirical Estimation and Result 34

4.1 Correlation among explanatory variables 34

4.2 Empirical estimation and result .35

Chapter 5: Conclusion and Recommendation 42

5.1 Conclusion and recommendation 42

5.2 Limitation 43

References 45

Appendices 49

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• TABLE LIST

Table 2.1: Theory summary 15

Table 2.2: Empirical Study Reading 22

Table 3.1: The implementation value of provincial FDI .26

Table 3.2: FDI capital of top ten provinces 26

Table 3.3: PCI result in 2009 27

Table 4.1: Matrix of Correlation among explanatory variables 34

Table 4.2: Regression Results 36

Table 4.3: Top five rank of attracting FDI in Viet Nam 38

Table 4.4: The rank of infrastructure in 2009 39

ABSTRACT

FDI is of essential importance for achieving economic growth for developing countries, especially for Vietnam, a country which has just opened more than twenty years There were too many researches about attracting FDI for developing countries However, there are still less researches related to regional competition of FDI Therefore, this paper examines the relationship between provincial FDI in VietNam and explanatory variables base on variable set of PCI project in VietNam and other traditional variables The purpose of thesis is finding why some provinces and cities such as Binh Duong, Dong Nai, Ba Ria Vung Tau, HCMC have had good FDI capital and others have not so From that the thesis suggests policy recommendation for provinces and cities enhancing regional system for developing economics

I had a literature review on regional development, attracting regional FDI and across country, the estimated model was built with collected data and econometric analysis result, I had demonstrated that our hypotheses are right or wrong And then we answered the research questions and objectives of this study Using data collected by the General Statistical Office of VietNam (GSO) and Provincial Competition Index (PCI) project, estimation result shows that gross industrial output, legal institution and infrastructures statistically significant to provincial FDI at the level 1% and 5%; business support service had significance to provincial FDI at the level nearly 10%

Key words: PCI, FDI impact, Provinces in VietNam, cross section data analysis

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1.1 Problem Statement

The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job creation and economic growth and attracting investment (FDI and local) Using new survey data from businesses that describe their perceptions of their local business environments as well as credible and comparable data from official and other sources regarding local conditions, the PCI rates provinces on a 100-point scale In 2005, the overall index is comprised of nine sub-indices that explain much of the variation in performance across provinces in Vietnam In 2006, new sub-indices were developed to capture other aspects of Provincial Government efforts to enhance the business environment

However, we have not found any empirical studies to show that which are independent variables of PCI and other traditional variables effect to provincial FDI and how to impact to provincial FDI in VietNam

I also did not find any analysis related to the independent variables of PCI whether they have internal relation

1.2 Research Objectives

The overall goal of this research is to investigate significant impacts of some independent variables of PCI and other traditional variables which affect provincial FDI inflows (Regional FDI) to help policy makers to focus on key points and the good points to improve their investment environment (by Provinces) and with higher level (by Government)

There exist some previous studies related to attracting FDI to developing countries; most of these have found what factors ofthe country attracting FDI (across countries) However, the objectives of the thesis are to identify:

(i) Independent variables of PCI and other traditional variables are significant

impacts to FDI of Provinces in Vietnam; and

(ii) Factors of PCI are highly correlated and we should revise PCI set

(iii) PCI determinants out of the ten original factors should be included in a new, more significant subset base of PCI determinants

(iv) Interaction effects between PCI improvement and FDI growth

1.3 Research questions

The thesis focus on studying the determinants of provincial FDI in Viet Nam base on the independence variable set of the Provincial Competitiveness Index (PCI) and other some traditional variables could be attracting FDI of provinces in VietNam

We found economic theory, and empirical studies related to FDI (chapter 2), the description of each independence variable which PCI project in Viet Nam use to survey (chapter 3) We build research model (specification) and collect the data from PCI project (www.pcivietnam.org) and statistical yearbook of Vietnam from General Statistics Office (www.gso.gov.vn) to answer some research questions as following: (l)Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?

(2)Factors ofPCI are highly correlated and we should revise PCI set?

(3)Which PCI determinant out of the ten original factors should be included in a new, more significant subset base of PCI determinants?

(4)Are interaction effects between PCI improvement and FDI growth?

1.4 Organization of the study

This thesis has five chapters, while the chapter one has presented as above explain the purpose chose the theme The rest of this thesis is organized as follows:

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Chapter two briefly provides the regional development and FDI theory, and then we also have summarized the empirical researches related to attracting FDI, specially related to attracting FDI across to provinces of the country

Chapter three is presented how to build the research model base on chapter two, the way to choose the data It is important to explain dependent and independent variables which PCI project have used to survey yearly, also including some traditional variables

Chapter four is the econometric analysis and finding The last chapter will be conclusion and recommendation of the research

2.1 The regional development and competitive regionalism theory

According to Balisacan and Hill (2007), detenninants of regional economic growth in developing countries are geography and infrastructure, the capacity to connect to global economy, the quality of local governance and institutions, and the quality of human capital Competition regionalism are low corruption, predictable and transparent businesses environment, secure property rights flexible labor markets, a competitive tax regime and efficiently supplied public goods

To Porter (1990), the determinant of national competitive advantage, the nation's in factors of production are skilled labor, infrastructure, the nature of home demand and supporting industries These are potential variables which they could affect to attract FDI of countries as well of provinces

2.2 FDI theories and its applicability

There are many reasons for FDI to occur This, therefore, results in the wide range of approaches on determinants of FDI The capital theory takes into account the consideration of profit rate and risk of firms In contrast, international trade arguments focus on substitute or complementary effects between FDI and export Theories on industrial organization see FDI as a tool to materialize firm's specific advantages OLI paradigm provides dynamic approaches to the determinants of FDI Finally, agglomeration economies try to investigate the spatial distribution ofFDI

2.2.1 Capital Theory

2.2.1.1 Differential Rate of Return Theory

Until the 1950s, international direct investment was entirely explained within the traditional theory of international capital movements Like other forms of international

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investment, FDI was seen as a response to differences in the rates of return on capital between countries

2.2.1.2 Portfolio Theory

The investors want to build an efficient portfolio of investment to avoid risk The rates

of return of the different alternative investments are matched with an element of risk in the choice between substitutable assets to build an efficient portfolio

According to Dunning (1973), the reason why portfolio theory can only partially explain direct foreign investment is that it ignores that "direct investment does not involve changes in ownership It does, however, involve the transmission of factor inputs other than money capital, viz entrepreneurship, technology, and management expertise, and is likely to be affected by the relative profitability of the use of these resources in different countries as that of money capital"

2.2.1.3 Risk Diversification Theory

The theory argued that the international diversification of portfolios 1s a way of reducing the firm's risk and hedging the risks

Capital theory shows that some determinants related cost factors in PCI set have potential effects to attracting FDI of provinces

2.2.2 The International Trade Arguments

2.2.2.1 Mundell and the Heckscher-Ohlin Model

Mundell (1975) extended the basic model to show that trade and capital movements can be substitute He argued that the introduction of trade tariffs would induce a flow

of FDI towards the protected countries This argument was the same with original Heckscher-Ohlin model that restrictions on trade can be modified by international movements of factors, namely capital, given the immobility of labor

2.2.2.2 Kojima's "Macroeconomic Approach"

Kojima (1973) groups motives ofFDI into four categories (i) to seek natural resources (ii) to take advantage of cheap labor cost in the host country (iii) to avoid tariff and

non-tariff barriers, and (iv) to take advantage of oligopolistic power owmg to technology and knowledge advantage

2.2.2.3 The Product Cycle Model

The product cycle model, developed by Vernon (1966), was a response to the stylized fact that US firms invested abroad at a rapid rate Vernon argues that, each product has

a life cycle and will go through three phases: innovation, maturity and standardization Domestic demand can be an incentive to innovate, while international demand similarity stimulates exports Specifically, the theory described that US endowment of highly skilled labor and R&D resources, matched with sophisticated domestic demand, facilitated the innovation among US firms

2.2.3 Market Failures and Industrial Organization

2.2.3.1 The Hymer-Kindleberger hypothesis

Because foreign firms have necessarily some disadvantages vis-a-vis domestic firms (e.g., knowledge of the market, communication), they must possess some firm-specific advantages if they are to engage in foreign production Hymer (1960) argues that, FDI

is not simply about the transfer of capital, it is about the international transfer of proprietary rights and intangible assets-technology, business techniques, and skill personnel's He claimed that the existence of FDI is exclusively resulted from international market imperfection for these assets Therefore, the firms "internalizes or supersedes" these market failures through direct investment (Hymer, 1960)

2.2.3.2 The Internalization Approach

Some transactions are more cost-saving if it is performed inside the firm than in the market Internalization will happen as far as the benefits, including those associated with the barriers to new entrants is not outweighed by the cost of communication, co-ordination and control FDI occur to capture this kind of benefits

2.2.4 The Eclectic Paradigm and International Investment Path

Dunning ( 1979) suggests that a firm engage in FDI if three conditions are satisfied:

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It possesses net ownership (0-) advantage vis-a-vis firms from other countries;

It is beneficial to internalize (I- advantage) those advantages rather than to use the market to pass them to foreign firms;

There are some location (L-) advantages in using the firm's ownership advantages in a foreign location rather than at home

The IDP approach deals with both inward investment and outward investment of a country It suggests an association between development level of country and its international investment position (measured by net outward investment per capita) The basic hypothesis of this approach is that, there exists an interrelationship between the flows of inward and outward investment and country's development In other words, as a country develops, the conditions, which domestic firm and foreign firms face, will change

2.2.5 Agglomeration Effect

Given rapid rate of globalization in the world today and implicit standardization of strategies ofMNEs, it is argued that, location determinants ofFDI in host countries are more important factor determining FDI In addition, UNCTAD (2001) hypothesizes that although traditional factors driving FDI may still be relevant; they are diminishing

in importance in the era of globalization, particularly for more dynamic and high-tech industries Instead, locations of FDI are seen to be increasingly based on the ability of host countries to provide complementary skills, infrastructure, suppliers and institutions (UNCTAD, 2001)

Increasing returns in production activities are needed if we want to explain economic agglomerations without appealing to the attributes of physical geography

Externalities from agglomeration are known to encompass specialized labor markets and supplier networks as well as knowledge spillovers

Table 2.1: Theory summary

modeling of the determinants of Geography, regional economic growth m Infrastructure, Legal developing countries are Institutions, Quality of geography and infrastructure, the human capital;

capacity to connect to global Transparent economy, the quality of local businesses governance and institutions, and environment;

the quality of human capital Competitive tax Competition regionalism are low regime and efficiently corruption, predictable and supplied public goods

environment, secure property rights flexible labor markets, a competitive tax regime and efficiently supplied public goods

The determinant of national Skilled labor, advantage theory competitive advantage, the nations infrastructure,

in factors of production is skilled supporting industries labor, infrastructure, the nature of

home demand and supporting industries

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Capital Theory Higher rate of return , leading to Factor cost: Entry

higher attracting FD I Cost, Informal

charges, Time Costs of Regulatory

Compliance Mundell and the Trade tariffs would induce a flow Legal Institutions ,

Kojima's Motiving of FDI into four Labor Training,

"Macroeconomic categories (i) to seek natural Access to Land, Legal Approach" resources (ii) to take advantage of Institutions,

cheap labor cost in the host country Infrastructure (iii) to avoid tariff and non-tariff

barriers, and (iv) to take advantage

of oligopolistic power The Product Domestic demand can be an Market size, Labor Cycle Model incentive to innovate, while Training, Business

international demand similarity Support Service , stimulates exports Provincial Industry

Product The Hymer- FDI IS not simply about the Training labor, Legal Kindle berger

hypothesis

transfer of capital, it is about the Institutions , international transfer of proprietary Proactivity of rights and intangible assets- Provincial Leadership,

as the benefits, including those Compliance, Labor associated with the barriers to new Training

entrants is not outweighed by the cost of communication, co-ordination and control FDI occur

to capture this kind of benefits

The purpose of this part, I want to find the basic theory related regional development and attracting FDI Although some above theory explains the factors which they attract FDI in a country but we could review whether or not potential affects to provincial FDI

2.3 Empirical studies on the determinants of FDI

In general, the conventional empirical studies on determinants of FDI have used the following ten variables suggested by Dunning and Narula (1996), namely: (i) natural and created assets; (ii) capital intensity; (iii) market size and market growth; (iv) infrastructural development; (v) labor cost and productivity; (vi) degree of openness; (vii) government policies; (viii) political stability; (ix) profitability; (x) geographical proximity

Nonnemberg and Mendonya (2004) conducted an analysis on the determinants of foreign direct investment in developing countries The econometric model was based

on panel data analysis for 38 developing economies for the period 1975-2000 The

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result shows that one of the major determinants of FDI is education This in tum demonstrated that FDI in developing countries has been directed towards activities that are knowledge-intensive The coefficient of an economy's degree of openness was found to be an important factor in attracting investments, and it proved to be highly significant Lastly, the au-thors conducted a causality test between FDI and GDP, which showed that there was evidence of the GOP leading to FDI, but not vice versa Ali and Guo (2005) found that base on FDI determinant survey, the results show that the market size is a major factor for FDI, labour costs and global integration are the main factor impact to attracting FDI

Sahoo (2006) conducted a panel cointegration estimation study on the South Asian region with the main focus on five countries of the South Asian region (India, Pakistan, Bangladesh, Sri Lanka and Nepal) The results of his analysis reveal that FDI and all its potential determinants have a long-run equilibrium relationship He finds out that the major determinants of FDI in South Asia are market size, labor force growth, infrastructure index and trade openness The author concludes also that South Asian countries need to maintain growth momentum to improve market size, frame policies to make better use of their abundant labor forces, improve infrastructure facilities and follow more open trade policies for attracting more FDI

Kozlova and Smajlovic (2008) reported that the dependent variable in this model is FDI inflows and the explanatory variables are: GDP per capita, investment freedom, trade openness and infrastructure The fact that the country is oil- or non oil-exporting

is represented by the dummy variable

FDii = ai + ~1 (GDPperCap)i + ~2 (lnvestmentFreedom)i + ~3 (Infrastructure)i + ~4

(TradeOpenness)i + ~5 D (OilExp)i + ui

The general conclusion from the results demonstrates that the infrastructure and trade openness are significantly related to FDI in the MENA (the Middle East and North African) region

Vijayakumar et al (20 1 0) described that other than Economic Stability and Growth prospects (measured by inflation rate and Industrial production respectively), Trade openness (measured by the ratio of total trade to GDP) all other factors seem to be the potential determinants ofFDI inflows in BRICS countries

Most of FDI researches focused to FDI of a country or some countries but they should

be reviewed to compare these potential explanation variables with independent variables of provincial FDI

2.4 Geographical literature on Vietnam, China and ASEAN countries

Xu et al (2009) reported that agglomeration economies, labor cost, infrastructures greatly influence the spatial distribution ofFDI in China

Dang (2008) described that based on the analyses in this report, several determinants has motivated the FDI in China First, some FDI investors are interested in the Chinese domestic market Second, investors would like to find ways to lower production costs, typically cheap labor from China Third, the quality of infrastructures contributes much to FDI inflows Good infrastructure helps firms to enhance theirs levels of technology and reap economies of scale and scope Fourth, the political environment is

an important factor in attracting FDI In China, the political leadership imposed a vision for the path of growth and development of the country

Luo et al (2007) found that the first contribution lies in the finding of this study is a reminder of the need to further explore the role of natural resources endowment in stimulating local economic growth and attracting FDI in under-developed regions Secondly, instead of advocating China's low labor cost advantage, we found that MNEs preferentially choose locations that are capable of supporting high value activities rather than production sites requiring abundant low cost labour

Havrylchyk and Poncet (2006) found that the positive impact of agglomeration, high labor productivity and low labor costs, market size, infrastructure density, and market reforms on FDI

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Na and Lightfoot (2006) emphasized that three of the variables have a statistically significant relationship with FDI in the 30 different regions studied in China The relationship between a regions market demand and market size (GDP) was a significant and positive factor in attracting FDI in 2002 and The higher the quality of labor the more attractive a region was to FDI, The final variable that exhibited a significant relationship with FDI was the degree of openness and level of reform in each region

Giang (2008) reported that there are four local factors including the remote location from a commercial center of the country, under developed infrastructure, weak FDI policy and unfavorable FDI environment in comparison with other regions in Vi~t

Nam FDI environment in NMPs (Mountainous Provinces) are not favorable as demonstrated in the result of annual surveys done by VCCI and VNCI NMPs except Uto Cai are of less transparency provinces in Vi~t Nam And six of them are of least transparency provinces

Anh and Thang (2007) found that several factors that are important in the location decision by foreign direct investors in Vietnam such as the marker potential, the labour factors, and infrastructure They are unable to find evidence of the impact of local government policy on FDI

Anh et al (2007) studied empirical evaluation of incentives effectiveness in attracting FDI Implementing the DD estimation in two steps First, they estimate the following regression using the method of OLS:

OLS regression in this two period panel The regression has a very simple form as follow:

gsi = b3 + b4.Timesi + usi (2)

Where Timesi represents a dummy (equal 0 for the period before the issuance of the incentives, and 1 for the period after that) The results are the impact of labour costs (or wages) appears to be different for registered and implemented FDI While the Coefficient of wages is positive and statistically significant in regression (2), it is negative and statistically insignificant in regression (1 ) This may reflect the different ways in which labour costs enter the calculation of foreign investors before and after they actually invest The negative sign of the wage coefficient in regression ( 1) implies that, all else being equal, investors tend to choose the investment location where they can economize on labour costs Nevertheless, once the investment has already been implemented, the investor no longer has the luxury of selecting the location with the lowest labour cost Moreover, his presence of FDI projects contributes to relatively scarcer labour, higher productivity, and therefore, higher wages This explains why the coefficient of wage in regression (2) is positive

Thu (2007) studied the determinants of the FDI in Vietnam, the specific empirical model of the time-series determinants ofFDI inflows in Vietnam is:

LnFDit = po + 81 lnGDPt + 82 lnGDPGt+ 83 lnTELt + 84 lnHKt + 85 lnOPENt + 86 lnEXCHANGEt + 87 Dl998+ 88ASEAN + ut The results reveal that higher market size and higher GDP growth are encouraging FDI inflows into Vietnam

Ali and Ahmad (2008) reported that important factors in determining the location relationship of FDI in Malaysia are the community, availability of raw materials and fuel

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Table 2.2: Empirical Study Reading

Spatial Determinants of Inward agglomeration economies, FDI in China: Evidence from labor cost, infrastructures Provinces

FDI in China Economic Growth and Policy

Market size and growth, Government incentive policies; Cheap labor cost; High investment return

Na and Determinants of foreign direct market size (GDP),quality

labor degree of openness Lightfoot investment at the regional

Determinants of the FDI and market size, economic growth: a summary of recent growth, macroeconomic

regulation, economic barrier

6 Anh and Foreign direct investment m the marker potential, the

7 Thu Determinants of the FDI m market size; GDP growth

(2007) Vietnam

8 Agiomirgi The determinants of foreign the marker size, the trained

anakis et direct investment: a panel data labour , and infrastructure

al (2006) study for the oecd countries

Most of FDI researches focused to FDI of a country or some countries, there are some researches from China related regional FDI My thesis focus to provincial FDI in Vietnam (regional FDI) base on independent variables of PCI set and other some traditional variable

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Base on empirical studies related to FDI, especially regional FDI, economic theory and

base on PCI survey as equation ( 1 ), the research question is

(i) Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?,

The first regression model for this study is suggested as follow:

FDI it= a o +a 1 EC it+ a 2 ALit+ a 3 TAl it+ a 4 TCRC it+ as IC it+ a 6 PPL it+ a

1 BSS it +as LTit +a 9 LI it+ o.w IP u +an INF it+ o.n MS it + o.13 KEA it + u it (2)

Where: IP-Industrial Product of province, MS-Market Size, KEA: northern and southern key economic area KEA = 1, other provinces KEA =0

The OLS technique applies for the first regression model to answer for the first research question

Base on economic theory and principle component analysis we expect to find multicollinearity or significant interaction effects among some of these as following

explanation Some independent variables can be dropped off to two group Cost Factors and Province Policy

Where: CF: Cost Factor (including EC, TCRC, and IC), PP: Province Policies (including AL, TAl PPL, BSS, LT, and LI) And it should be reviewed to add other significant variables This method is applied to answer for research question No.2 and No.3

The first regression model (2) for this study is a distribution determinants model of total FDI in province; we use the logarithm of annual FDI of province as a dependent variable in order to emphasize the growth rate of FDI:

Ln (FDI) it = fJJ + f32Ln (PC!) it+ uit (3)

Where, i and t denote sample provinces, and time (year) respectively !.! denotes residuals

To answer for research question No.4, The OLS technique also applies

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Table 3.1: the implementation value of provincial FDI

Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):

Table 3.2: FDI capital of top ten provinces

Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai

Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74

FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81

USD

Source: GSO 2006-2009, PCI 2006-2009

By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)

Above result will be compared with actual survey data (benchmarking) to choose the best output

3.3 Variables description

3.3.1 The Provincial Competitiveness Index-PCI (total point= 100)

The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job creation and economic growth Using new survey data from businesses that describe their perceptions of their local business environments, as well as credible and

Comparable data from official and other sources regarding local conditions Following table is PCI result in 2009

Table 3.3: PCI result in 2009

Province EC AL TAl TCRC IC PPL BSS LT LI PCI

Is investment which provinces in Viet Nam receive from investors who come from other countries

3.3.3 Entry Costs-EC (point=lO)

A measure of the time and difficulty it takes firms to register, acquire land, and receive all the necessary licenses to start business

The goal of this sub-index is to assess the differences in entry costs for new firms across provinces According to the Enterprise Law and its subsequent implementing documents, these procedures should have become uniform across all provinces, but some studies suggest that this is not yet the case

This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group Cost Factor

3.3.4 Access to Land-AL (point=lO)

A measure of how easy it is for firms to access land In 2006, this sub-index has been amended to include one new dimension to measure the security of tenure once land is acquired The first dimension comprises whether firms possess their official land use rights certificates, whether they have enough land for their business expansion requirements, whether they are renting from SOEs and an assessment of land

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conversion efforts The second dimension includes perceptions of various tenure security risks such as expropriation, unfair compensation values or changes in the lease contract as well as the duration of tenure

Another issue often cited by private firms is the wide variance in land policies across the provinces Essentially, land issues can be divided into two dimensions First, the PCI considers Access to Land, as the inability to locate and obtain productive land, which not only reduces opportunities for investment in a new business, but also limits access to capital, as firms cannot use LURCs as collateral for bank loans Moreover, many firms unable to obtain their own land must rent from SOEs or provincial agencies, limiting their opportunities for expansion and often exposing themselves to additional transactions costs A second dimension of land policy is Security of Tenure;

do firms feel that their land rights are certain over the long term? The more secure the tenure, the more firms will be emboldened to invest in the long-term productivity of their land allocation But if expropriation or fundamental changes in lease contracts are

a possibility, firms will take a more short-term outlook with their investment and business plans and decisions Employing such a short-term or 'footloose' approach tends to undermine overall provincial welfare in terms of income and employment creation

This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy

3.3.5 Transparency and Access to Information-TAl (point=lO)

A measure of whether firms have access to the proper planning and legal documents necessary to run their business, whether those documents are equitably available, whether new policies and laws are communicated to firms and predictably implemented, and the business utility of the provincial web page Transparency is one

of the most crucial factors highlighted by analysts and development practitioners alike

in distinguishing between environments conducive to private sector business

This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy

3.3.6 Time Costs of Regulatory Compliance-TCRC (point=lO)

A measure of how much time firms waste on bureaucratic compliance as well as how often and how long firms must shut down their operations for inspections by local regulatory agencies As such, it considers two dimensions of time costs, which are weighted equally: Bureaucratic Procedures and Time Lost to Inspections

The study of transaction costs in time has been an important element of the economic transition literature, and the old maxim 'time is money' is particularly relevant in Vietnamese provinces Firm managers are often torn away from their business operations in order to deal with, and attend to, mundane bureaucratic problems; time that could be more productively spent managing the operations of the company is then lost

This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group -Cost Factor

3.3.7 Informal Charges-IC (point=lO)

A measure of how much firms pay in informal charges and how much of an obstacle those extra fees pose for their business operations

This section analyses the amount that firms pay m informal fees, fines and extraordinary payments, and which are lost as a normal part of doing business This group of five indicators measures the extent of the problem by gauging the frequency, type and amount of extra payments This section has taken on renewed importance as a result of the Revised Ant-Corruption Law, which was passed by the National Assembly in August 2007

This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group- Cost Factor

3.3.8 Proactivity of Provincial Leadership-PPL (point=lO)

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A measure of the creativity and cleverness of provinces in both implementing central policy, designing their own initiatives for private sector development, and working within sometimes unclear national regulatory frameworks to assist and interpret in favor of local private firms

Ambiguity is often the result of: i) unclear wording in legal documents; ii) long delays

in implementing documents being promulgated for central laws or decrees; and iii) contradictions between implementing documents (circulars, directives, official letters and People's Committee decisions), and even central laws themselves Indeed, for industry segments new to Vietnam, there is often a lack of any clear legal regime When business projects are delayed because of legal ambiguity, the choices of the provincial government can make a huge difference in the success of a business venture Provincial officials may cost businesses considerable time and money by forcing them to wait until the ambiguity is cleared up by subsequently implementing documents, or an appeal to central authorities A few provinces may even use these uncertainties as an entry barrier to firms that might offer competition to their local champions In such a context, provinces which are creative and clever about working within the confines of central law can be of major assistance to private sector firms Similarly, provinces which have a knack for crafting pro-active provincial initiatives to solve the problems of private firms can have a major impact on private sector development

This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy

3.3.9 Business Support Service-BSS (point=lO)

A measure of provincial policies for private sector trade promotion, business partner matchmaking, etc It attempts to measure how well provincial officials are performing

in resolving these problems on behalf of firms

The eighth sub-index goes one step further than the Pro-activity Sub-Index, by asking how specific provincial initiatives promote private sector development In arrange of surveys of the private sector in Vietnam, firms have listed among their chief obstacles: i) difficulties in obtaining information on overseas and domestic markets; ii) difficulties in understanding new changes in regulatory information; and iii) problems finding enough skilled employees to conduct their operations

This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy

3.3.10 Labor Training-LT (point=lO)

A measure of the efforts by provincial authorities to promote vocational training and skills development for local industries and to assist in the placement of local labor

It is commonly stressed that a major challenge confronting Vietnam is to create employment for the 1.4 million new job seekers entering the labor force each year Yet

at the same time, one of the most consistent complaints from firms over the past few years has been the low capacity of the workforce, and their inability to find and recruit skilled and semi-skilled workers The juxtaposition of these two commonly cited statements is telling Vietnam is relying on its private sector to absorb new labor entrants, but the private sector is not willing to simply employ warm bodies as a civic duty; they want employees with the skill sets to add value to their businesses As a result, provincial efforts to improve the skills of their local labor forces are a critical determinant of a successful business environment Neoclassical economists might argue that firms should invest in their own labor training and many have The problem

is that once workers are trained, they are often poached by other companies offering higher wages, but do not shoulder the up-front costs of training As a result, there is a collective action problem that can be solved by provinces offering general labor training

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