Causes and effects of foreign direct investment basis for policy re direction in thanh hoa province in viet nam

76 9 Important Factors Affecting the Process of FDI Investment in Thanh Hoa Province Response from the management 10 Importance of Factors Affecting the Process of FDI Investment in the

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PROVINCE IN VIETNAM

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A DISSERTATION Presented to the Faculty of the Graduate School Southern Luzon State University, Lucban, Quezon, Philippines

in Collaboration with Thai Nguyen University, Socialist Republic of Vietnam

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The researcher would like to thank Thai Nguyen University, the International Centre Education of Thai Nguyen University, and Southern Luzon State University for guiding him throughout this research, providing him with the opportunity to conduct this research and helping him to carry out the necessary revisions to the thesis He would like to extend his gratitude, specifically to the following:

Dr Cecilia N Gascon, President of Southern Luzon State University

and Dr Dang Kim Vui, the President of Thai Nguyen University, who made possible the linkage between Thai Nguyen University with Southern Luzon State University, the offering of Doctor of Business Administration, through the ITC-TUAF;

Dr Tran Dai Nghia, for his support and supervision throughout his

graduate study program His kindness and daily instructions in the last years are greatly appreciated and this dissertation is as much as his work as the researcher;

Dr Nguyen Manh An, President of Hong Duc University, his

colleagues at the Faculty of Economic and Business Administration, Hong Duc

University, and his friends, for their support and encouragement during the

the completion of the dissertation;

His parents, for giving him constant support and encouragement and

for always believing in him;

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study more than anything else;

His energetic daughters (Giang Huong and Tra Giang), who provides

him laughter whenever he is weary and inspires him to pursue his goal;

His dear friends, who instilled within him a love of creative pursuits,

science and language, all of which finds a place in this the dissertation; and

Finally, he would like to thank the local government of Thanh Hoa Province, foreign companies in Thanh Hoa province for providing him with

information to conduct this research, and feedback necessary for making this dissertation successful

LE HOANG BA HUYEN

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This academic pursuit is dedicated to my parents

my wife, Nguyen Thi Tam, and my daughters ,

Giang Huong and Tra Giang

LHBH

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TITLE PAGE ……… i

APPROVAL SHEET ……… ii

CERTIFICATE OF ORIGINALITY ……… iii

ACKNOWLEDGEMENT ……… iv

DEDICATION ……… vi

TABLE OF CONTENTS ……… vii

LIST OF TABLES ……… ix

LIST OF FIGURES ……… x

ABBREVIATIONS ……… xi

LIST OF APPENDICES ……… xiii

ABSTRACT ……… xiv

CHAPTER I INTRODUCTION ……… 1

Background of the Study ……… 2

Objectives of the Study ……… 6

Significance of the Study ……… 7

Scope and Limitations of the Study ……… 7

Definition of Terms ……… 8

II REVIEW OF LITERATURE ……… 14

Research Paradigm ……… 52

III METHODOLOGY Locale of the Study ……… 56

Research Design ……… 56

Population and Sampling ……… ……… 57

Research Instrument ……… 58

Data Gathering Procedure ……… 59

Statistical Treatment ……… …….…… 60

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Trends of FDI inflows in Thanh Hoa Province from 2001 to

2012 ……… 64

Importance of Various Factors in attracting FDI Inflows in Thanh Hoa Province ……… 69

Data Analysis about the Effects of FDI in the Economic Growth of Thanh Hoa Province ……… 77

Analysis of Factors Affecting the Process of FDI in Thanh Hoa Province ……… 83

V SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Summary of Findings ……… 90

Conclusions ……… 92

Recommendations ……… 96

REFERENCES ……… ……… 98

APPENDICES ……… 102

CURRICULUM VITAE ……… 132

3 Level of Importance of Social and Cultural Factors ……… 71

4 Level of Importance of Financial Factors ……… 72

5 Level of Importance of Economic and Marketing Factors … 73

6 Level of Importance of Availability of Resources Factor … 74

7 Level of Importance of Infrastructure Factors ……… 75

8 Results of the Analysis ……… 76

9 Important Factors Affecting the Process of FDI Investment

in Thanh Hoa Province (Response from the management

10 Importance of Factors Affecting the Process of FDI

Investment in the Thanh Hoa Province (Response from the

11 Factors Affecting the Investment Process of FDI

Enterprises in Thanh Hoa Province ……… 86

12 Descriptive Statistics and Correlation ……… 88

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2.1 Theoretical Framework ……… 54

3.1 Data Collection Framework ……… 59

3.2 Assessment Process to Improve the Investment Environment ……… 63

4.1 Trends in FDI in Thanh Hoa Province from 2001 to 2012 … 65

4.2 Company Position of the Respondents ……… 67

4.3 Company Establishment ……… 67

4.4 Form of Investment ……… 68

4.5 Company Group by Size of Capital ……… 68

4.6 Types of FDI Business ……… 68

4.7 Contribution of FDI in Gross Domestic Product (in Bill.VND) 78 4.8 Investment at Current Prices ……… 79

4.9 Employment in FDI Sector of Thanh Hoa Province ………… 80

4.10 State Budget Revenue from FDI Sector ……… 82

4.11 Export Turnover of FDI Sector ……… 83

Foreign Direct Investment Firm Specific Advantage Gross Domestic Product General Statistics Office Import-Substituting Multinational Corporation Multinational Enterprise Mixed, Fixed and Random Organization for Economic Cooperation and Development

Provincial Competitiveness Index Product Life Cycle

Research and Development Sub-Saharan Africa

Small- and Medium-sized Enterprises Transnational Corporation

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Title of Research : CAUSES AND EFFECTS OF FOREIGN DIRECT

INVESTMENT: BASIS FOR POLICY DIRECTION IN THANH HOA PROVINCE IN VIETNAM

Degree Conferred : DOCTOR OF BUSINESS ADMINISTRATION

Name and Address

of Institution

: Southern Luzon State University Lucban, Quezon, Philippines and Thai Nguyen University, Socialist Republic of Vietnam

Adviser : Dr Tran Dai Nghia

Year Written : 2013

This research was undertaken with the following primary objectives: (1)

to describe the trends in FDI in Thanh Hoa Province in the period from 2001

to 2012; (2) to determine the factors affecting attraction of FDI in Thanh Hoa Province; (3) to analyze the effects of FDI in the economic growth of Thanh Hoa Province; (4) to formulate policy implication to enhance economic growth

of Thanh Hoa Province in Vietnam

The research methodology of the study explained t h e conceptual frame work, research design, population and sample size, questionnaire design, data collection and data analysis methods The research was conducted in two phases The first phase involved secondary date and the second phase was the primary date The population of this research was forty one (41) FDI entrepreneurs and 100 officers

Data processing methods, and survey results are coded; data entry are described by statistical tool Statistical too ls ha ve been used to analyze

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primary data collected through the questionnaires were analyzed using frequency tables and correlation analysis The techniques like simple tabulations have been used for the frequency tables, determination of

r a n k s u m , mean, P Value, Adj Variance and standard deviations

Based on the findings of this research, recommendations were made

to the relevance of the study in Thanh Hoa government in particular and to the central government for the formulation of appropriate investment incentive policies to attract more foreign direct investment opportunities in Thanh Hoa province in the future in-line with the FDI entrepreneur’s perception

Chapter I

INTRODUCTION

In global integration economy, Foreign Direct Investment (FDI) is needed to boost the growth of a country’s economy especially the developing countries It is claimed that FDI can create employment, increase technological development in the host country and improve the economic condition of the country in general

Vietnam implemented its economic reform Doi Moi in the mid -1980s The market-based economic policies and legal frameworks have contributed to open up the country, trade barriers have been removed and FDI is now a fundamental part of the economy

Among various forms of international business, FDI is highly regarded as the most effective way by which transition economies become integrated to

the global economy

Background of the Study

FDI involves the transfers of multiple resources to a host country, especially transfers of knowledge, capital, management skills, marketing know- how and the latest production technology FDI is expected to provide urgently needed capital for t h e country in various fields with limited access

to international capital markets and to generate cash revenues through privatization for limited budgets Furthermore, the entries of foreign companies are projected to foster changes in the economic system, to create competition and to promote the development of many sectors, especially, the private sector Foreign investors also facilitate exports to Western and other

international markets through their knowledge and experience of relevant markets as well as access to distribution networks (Girma et al., 2005; Meyer, 1998; Nguyen and Xing, 2006) Hence, FDI interacts with many aspects of the transition process through its direct impact on macroeconomics namely, the balance of payments and employment, through the transfer of knowledge and through the role of investors as new owners of formerly state-owned enterprises (Meyer, 1998) However, the transition vice versa influences FDI inflows For instance, FDI is gravitated

to countries with furthest progress in economic and institutional reforms

to minimize transaction costs of doing business (Baniak et al., 2002; Meyer, 2001)

As other transition economies, in the period from the late 1970s to

1990, Vietnam was integrated in the trading system of the Soviet Union and its allies with few other linkages During 1980s, Vietnam had experienced severe shortages of food and basic consumer goods, three-digit inflation, a high budget deficit, chronic trade imbalances and deteriorating living standards The sluggish economy forced the Vietnamese government to initiate an overall economic reform from a planned economy to a market one

in 1986 The most important tasks of the reform program w e r e to encourage development of private sector and to reduce the dependence of the overall economy on inefficient state-owned enterprises In this process, FDI had played a crucial role in creating an “imported” private sector and strengthening the competitiveness of the economy

The first Law on Foreign Investment issued in 1987 by the Vietnamese government was considered as one of the first concrete steps

towards FDI encouragement and economic renovation This law was revised several times in 1992, 1996, 2000, and most recently replaced by a new law on investment integrating both domestic and foreign investment (Unified Investment Law 2006) These changes and amendments aimed to remove obstacles against the operation of foreign investors and to improve the environmental investment in Vietnam, creating a fair business environment for both domestic and foreign companies Usually, these changes are providing more tax incentives, promoting transfer of technology and simplifying investment licensing procedures

Besides favorable and open policies toward foreign investments, Vietnam also attracted foreign investors in other ways such as a potential market for consuming and low costs of production factors In particular, Vietnam is a profitable market with population of some 90 million so the demand of consumer goods is huge Moreover, factor-cost advantages arising from relatively low costs of raw materials and low labor costs create the attractiveness of Vietnam compared to neighboring countries, especially in garment, textile, and sea food manufacturing industries (Mirza & Giroud, 2004) However, foreign companies in Vietnam still have to pay high transaction costs associated with searching, negotiating and contracting with domestic partners arising from an incomplete, inconsistent and continuously changing institutional framework According to the Provincial Competitiveness Index Report from 2006 to 2012, many managers in Vietnam have not fully satisfied the resource of information on suppliers, buyers, price trends and changes in policies and regulations, and they have

to use personal relationships with local authorities to get important

information

According to the decentralization policy started in the FDI law amendment in 1996, each province was decentralized with more power and autonomy in dealing with foreign investments such as in granting investment licenses, leasing land, providing export and import licenses and recruiting labor This policy, on the one hand, allows provincial authorities to develop innovative ways that attract more foreign investors, and also leads to variations in the implementation of the central laws and regulations among provinces Foreign investors may experience a lot of red tapes namely, corruption or delays in administrative progress if local authorities possess conservative inherited norms and cognitions In this context, foreign investors have considered many factors when investing in Vietnam such as modes of entry and location choices for their operations so that they can make use of advantages and minimize disadvantages

In order to attract investors to Thanh Hoa and give the most favorable conditions to them, the province has offered many investment priority policies

as well as improved administrative procedures Thus, the province’s investment environment has been significantly improved With a view of no restrictions on size, industry, and geographic areas, based on the Investment Law and Enterprise Law, Thanh Hoa continues to review and to improve the system of mechanisms and policies towards incentives and making it more convenient for investors These mechanisms and policies of Thanh Hoa focus

on improving and simplifying administrative procedures, issuing open and attractive mechanisms and policies, calling for investment, creating

innovations in building essential socio-economic infrastructure, promoting the advantages of human resources, and improving the quality of human resources in order to meet business’s demands In addition, resolution No 02/NQ-TU dated 27/6/2011 regarding improvement for investment environment in province in stage 2011 – 2015 focused on implementing site clearance work in order to meet investors’ requirements, support business development, transparency of information for business, support business development, and transparency of information for business The above policy should be implemented until 2012 in Thanh Hoa province, which has 41 investment projects involving foreign direct operation with a total registered capital of USD 6,952 million

These results are encouraging, but compared to the potential and advantages of Thanh Hoa province, it is still limited The number and sizes of investment projects in Thanh Hoa are low Thanh Hoa is not one of the top provinces classified based on provincial competitiveness index There is a need to describe the trends in FDI in Thanh Hoa Province and identified factors affecting the attraction of foreign investment in Thanh Hoa After that, analyzing the impact of each factor to attract foreign investment is essential for the government in offering policies to attract investment capital and analyze the effects of FDI in the economic growth of Thanh Hoa Province Therefore, policy implication to enhance economic growth of Thanh Hoa Province in Vietnam can be formulated

This dissertation focuses on the “Causes and Effects of Foreign Direct Investment: Basis for Policy Redirection in Thanh Hoa Province in

Vietnam” The research was conducted in two phases The first phase

involved secondary collection and desk review such as reviewing of relevant literatures, journals, publications, books and reports The second phase was

the collection of primary data via structured questionnaire and data analysis

Objectives of the Study

The main objective of this research is to determine the Foreign Direct investment in Thanh Hoa province Thus, it hoped to achieve the following objectives:

1 To describe the trends in FDI in Thanh Hoa Province from 2001 to

2012

2 To determine the factors affecting attraction of FDI in Thanh Hoa Province in terms of the following factors:

1.1 Political and Legal

1.2 Social and Cultural

Significance of the Study

The study is deemed significant for its benefits to certain individuals such as the following:

Foreign Investors This study provided information to foreign investors

by indicating the general picture of foreign direct investment in Thanh Hoa province from 2001 to 2012 At the same time, it also pointed out the trend of foreign direct investment in Thanh Hoa province during this period through the

number of projects, the registered capital and the field of investment projects

Government Officials Since, this study is one of the first studies

implemented in the province of Thanh Hoa about the factors affecting attraction of FDI in the province, it has built models of group factors affecting attraction of FDI in Thanh Hoa Province for future implementation of government projects Furthermore, the author proposed seven groups of solutions in attractting foreign direct investment into the province of Thanh Hoa and promoting the role of FDI projects in contributing to the growth and restructuring of the local economy

Businessmen The assessment and summary of the impact of foreign

direct investment for each field can raise capital of businessmen for development investment, job creation, and contribution to exports in particular and to the growth and economic transformation in general Also, its interpretation of the causes affecting the process of implementation FDI projects in Thanh Hoa province will prompt them to establish more enterprise

Scope and Limitation

From 2001 to 2012, there are forty one (41) FDI entrepreneurs, including 100% foreign ownership, as well as joint ventures These

companies are playing a significant role for the growth of the Thanh Hoa province’s economy today This contribution played an important role in the restructuring of the economy of Thanh Hoa province FDI corporations have created industrial manufacturing value of 4.388.8 billions VND in 2010 The estimated total value of the exports turnover of goods and services was $US

729 million in 2012 This is an indicator that, presently Thanh Hoa province

is moving towards more diversified industrial base industries

With the growth of regional trade agreements the FDI flows in the Thanh Hoa is at a higher rate than found in many other provinces in Vietnam

As such, the scope of this research was extended to gather data from the existing foreign investors only In addition to that, this paper has studied the trends in FDI in Thanh Hoa province, the determinant factors affecting FDI flow to Thanh Hoa province and the effects of FDI in the economic growth of Thanh Hoa Province

Furthermore for this study, the Dunning eclectic paradigm / OLI paradigm model and the factors which are influencing the choice of a host market of Gilomre, O’s Donnel, Carson and Cummins (2003) were applied

Definition of Terms

For clarity and better understanding of the study, the following terminologies are defined both conceptually and operationally:

Competitive Advantage is an advantage that a firm has over its competitors,

allowing it to generate greater sales or margins and/or retain more customers than its competition There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support

Custom’s Duty on Local Sales means in respect of the sale of all finished

products in Viet Nam referred to local sales under the Ministry of Industry and Trade of Vietnam regulations, on the value of imported raw materials component to the product In the case of the machine tool & machinery manufacturing sector, custom’s duty is payable only

on the value of the raw materials imported In respect of garments that are sold in the local market by Board of Investment firms

Dynamic Leaders are persons of good character They tell the truth, keep

promises, and have the moral courage to stand up for their beliefs, even when it is hard to do so They respect others and themselves They accept responsibility and do what they are supposed to do Dynamic leaders are fair and play by the rules They care about others and are considerate and forgiving They cooperate and build a better community

Economic System includes various offices, entities that provide the

economic structure that defines the social community These offices are joined by lines of trade and exchange along which goods, services, money etc are continuously flowing An instance of such a system for

a closed economy is indicated in the flow-diagram It involves production, allocation of economic inputs, distribution of economic outputs, landlords and land availability, households (income and expenditure consumption of goods and services in an economy), capitalists, banks (finance institutions) and government It is a set of institutions and their various social relations

Export is derived from the conceptual meaning as to ship the goods and

services out of the port of a country The seller of such goods and services is considered as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"

In international trade, "exports" is defined as selling goods and services produced in the home country to other markets

Financial Regulations are implemented by the government of Viet Nam which

introduced many schemes of tax holidays, wherein exemptions depend

on the location to be chosen, duty free importation of project related items, granting of equal treatment to foreign investors in relation to local counterparts, freedom to repatriate of capital as well as dividends at any

time without having any exchange control regulations or barriers

Foreign Direct Investment (FDI) plays an extraordinary and growing role in

global integration economy It can provide a company with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing For a host country or the foreign company which receives the investment, it can provide various sources of new technologies, organizational technologies, capital, processes, products and management skills, and as such can provide

a strong impetus to economic development

Human resources is one of the key factors of investment environment is

human resources and labor rates Investors will select the area which meets requirements of quantity, quality and price of labor The quality

of labor is a competitive advantage for investors in areas of high technological content or use of modern technology

Infrastructure system includes power systems, water supply,

communications, roads, airports, ports The level of these factors reflects the level of development of a country, a local; creates investment for investment activities Infrastructure affects decisively manufacture and business performance, speed of capital flows This is the top concern of investors when making investment decisions Good infrastructure is one of the important factors that help to reduce the business cost of the investors

Investment, in general terms, is defined as the use of money in the hope of

making more money In business, it means the purchase by a producer

of a physical good, such as durable equipment or inventory, in the hope of improving future business In finance, it refers to the purchase

of a financial product or other item of value with an expectation of favorable future returns.\

Location-Specific Advantage Mean is the ability of an individual, company,

or economy to conduct an activity better than another for reasons related to location Location-specific advantages are important in making decisions such as the products one should make or sell; if a company is unable to make a product as well as another because resources are unavailable or difficult to acquire in a certain location, the company might be well advised to make a different product For example, a lumber company in Oregon has a location-specific advantage to a lumber company in Arizona because there are simply more trees in Oregon This makes it unlikely that the company in Arizona will be able to fill orders as well or as quickly as the company

in Oregon For this reason, the Arizona company's management might consider investing in mining instead of lumberjacking

Multi National Corporation or multinational enterprise (MNE) or

transnational corporation (MNE) is one that has its facilities and other assets in at least one country other than its home country Such enterprises have offices and/or factories or branch plants in different countries and usually have a centralized head office where they co-ordinate global management In addition, very large multinationals have budgets that exeed those of many small countries

Natural Resources refer to the abundance of cheap raw materials as a

positive factor promoting/ attracting foreign investment In case of Malaysia, the natural resources of this country are the strongest FDI attraction The foreign investors are flocking to this country with an object of abundant resources such as oil, gas, rubber, wood In Southeast Asian nations (ASEAN), to exploit natural resources is an important goal of many MNEs in the past decades

Political Stability is the combination of the various “structures, process and

activities by which a nation governs it self” all companies or subsidiaries doing business internationally to confront political risk If a government is undergoing frequent political changes it will adversely affectto any type of investments either foreign or local According to a survey conducted by the freedom of world Organization, Vietnam has been classified under high level of political risk category

Social and Cultural refer to the aspect of a culture’s fundamental organization,

including its groups and institutions, its system of social positions and their relationships, and the process by which its resources are distributed.”

The definition given by United Nation (UN) indicates that FDI is a term investment and long interests getting from control of foreign investors or parent companies with their branches located in different economies

long-Based on Incomterms (International Commerce Terms), FDI is a part of national budget FDI is an investment of foreign assets not including investments on the exchange market FDI brings much more benefits for a country than injecting capital into the stock market of that country This is because the investments on the exchange market will immediately be moved out of that country if in cases of any breakdown happening there, while that matter does not happen to FDI

From the two definitions of IMF and UN about FDI, there are some similarities which emphasize on benefits of investors who inject money into another country and on investors’ controlling role for the investments

According to Inconterms, on the other hand, FDI is defined at a different aspect which emphasizes on interests brought from FDI for received countries

as a very safe investment in comparison with an indirect investment by trading stocks Thus, these definitions above have not mentioned investment results

of FDI

OECD BENCHARK (1999) defines FDI as to the following: FDI shows achievement of objectives about long-term benefits of an entity temporarily located in an economy (direct investors) and a resident of another economy Long-term benefits imply relationship between direct investors and companies and importance of corporate management Foreign direct investment relates

to first transactions between two entities and then transactions of capital among them and co-operated, associated, non-cooperated companies in which direct investors are entities controlled over 10% of a company’s capital

As we can see, the definitions of UN, IMF and OECD emphasize that FDI relates sharing control and ownership of a company of investors, branches or co-operated companies Through, FDI can be distinguished with other investment forms or showing the essence of FDI However, the definitions have not shown purposes of investments

Moosa (2002) also used the FDI’s definitions of IMF (1993) and UN (1999) In addition, author explained and clarified control element in the definitions implied as level and right of making decisions of investors in their business strategies Ducee and Banco de Esoana (2003) also applied FDI’s definitions of IMF and OECD given in 1999

On the other hand, Nguyen Nhu Binh (2004) defined FDI as Foreign direct investment, which is a kind of investment in which investors have rights

to control over production and business activates and also over their benefits

at a foreign firm Foreign direct investment, hence, consists of ownership and business control right abroad Therefore, the definition mentioned above showed the essence of FDI and also underlined “control right” and “ownership right” of investors’ capital spent to make profits

Based on the invesment law of Viet Nam, “Foreign direct investment is the way that foreign investors bring capital in form of money and legal assets

in order to carry out investment activites in Viet Nam

The approach of this definition takes a view of an investment- receiving country (Viet Nam) It mainly stresses the subjects of investments which are brought in by foreign investors to implement investment operations The law does not mention direct investors, and only shows the definition of direct investment as a way of investment in which investors spend capital and participate in managing investment activities

In conclusion, each definition reflects characteristics of FDI Overall, FDI can be understood as investment activities of economic organizations, individuals in a country by themselves or co-operate with other economic organizations and individuals in another nation to invest money and assets under a certain investment form They take responsibilities wholly or partially

in direct management and administration production and business activities and also business results basing on the rate of control right and of capital ownership

Attracting FDI

If FDI is a form of international investment, attracting FDI is activities to agitate encourage and prepare conditions in order to implement FDI Based

on this concept, there are some main points of attracting FDI Attracting FDI is

an activity to motivate foreign investors investing in a nation or a region/province of the nation.The attraction has to include lot of measures, proper steps and also participations of many entities from individuals, organizations, companies, local government and central government

Attracting FDI might be under active and passive forms The active form occur when entities of the nation are active in seeking for business partners; in persuading investors invest in Viet Nam and local areas; in building legal lobby to encourage FDI inflows into industries, fields, and economics sectors in need of attracting investment The passive form is different from active one when entities wait passively for partners, then introduce and propose to investors about advantages and destinations to help them decide where to invest in

Nowadays, a lot of methods of strict competitions in attracting FDI just appear Therefore, exact analysis of conditions and creative measures, innovation in promoting investment and active attracting FDI are really needed

to achieve the most advantageous in attracting FDI Both theory and real practices show that the FDI is a better substitution for international trade Moreover, in the condition of trade liberalization and economic globalization most countries have the tendency to cut barriers of FDI and increase competitions to attract FDI As a result, capital flow of FDI has been increasingly growing

Forms of FDI

Based on various grounds, FDI can be classified into different forms Imad (2002) pointed out that classification of FDI- according to point of view of

Caves (1971) - depends on different views such as from investors and investment – receiving countries

From the countries of investors, FDI is split into 3 kinds: Horizontal FDI, Vertical FDI and corporation FDI The horizontal FDI attempts to expand production activities of products in investment - receiving countries similar to products in nations of investors The vertical FDI has different objectives, which are to exploit material resources or take advantages of proximity to consumers through distribution channels The third form of FDI – the corporation FDI generalizes horizontal and vertical FDI

Helpman (1984) indicated that multinational companies have purposes

of maximizing profits and minimizing production expenses such as transport, taxes expenditure, etc Thus, they would split production activities in various countries in the world The production stage needs a lot of unskilled manpower, the production activities are organized in nations with low labor costs (investment –receiving countries) In this case, these countries will import intermediate merchandises such as machines from multinational companies and export finished products The form of FDI mentioned above is called the vertical FDI

With the view of investment – receiving countries, FDI may be classified into FDI substituting import, FDI increasing export and FDI by government’s effort FDI substituting import relates to production of products which are imported from investment - receiving countries Thus, it causes decreases in the countries’s import and decreases in exporst of the countries

of investors This form depends on size of market of investment - receiving countries, transports expenses, and trading barriers The second form is

encouraged because the desire of seeking new input for production such as materials and intermediate products

The FDI is also classified based on the expanding way for exploiting advantages of the investment - receiving countries to increase sales of investment firms in the receiving countries Besides, FDI seeks for cheap labor resources in receiving countries to reduce production expenses FDI expansion is affected by advantages of firms operating in countries of investors such as: size of firms, concentration of research and development (R & D) and profitable ability by technological advantages

Duce (2003) classified FDI according to investment of assets and legal responsibilities from the view of investors Financial expansion from parent companies to their branches at other countries is considered as direct investment abroad and conversely financial expansion of branches or subsidiary companies overseas is the decrease of direct investment From investment – receiving countries, it has a reverse tendency Moreover, FDI is also classified based on source of FDI such as owner’s equity, revenues form reinvestment and other sources: loans, joint –venture Finally, FDI is classified

by industry which FDI flows in, no matter of the field of investment of investors However, OECD warns that FDI by industry should base on the operating industry of parent companies In short, the classification above is used by courtiers of investors to classify capital flow investing abroad

According to the Investment law of Vietnam (2005), the forms of FDI include: Companies with 100% investment capital from foreign investors; Joint – venture; and Business co-operation under forms of BCC, BOT, BTO, BT, PPP

In addition to popular forms mentioned above, there are some others such as joint-stock companies with foreign investment, branches of foreign companies or subsidiary companies at other countries, businesses holding shares of multi-purposes or multi-projects companies to invest for business development, purchase shares or contribution money in order to participate in management of investment activities

In conclusion, FDI can be classified in different forms depending on the purposes of analysis and the criteria used Thus, it is necessary to diversify forms to fit with general structure of the economy, with plans for development

of production forces of a coutry, each industry, and each local area for the objective of using effectively FDI inflows to shift economic structure, growth and develop sustainably

Effects of FDI

In this part, the author mainly gathered practical research of the affects

of FDI on elements of the economy Thus, FDI affects the economy under the following aspects:

FDI provides capital to increase budget

For developing countries, the demand of capital is always imperative These countries always have distances between investment and saving FDI plays the role of offsetting the distances FDI has advantages that the financial capital is more stable than others and is committed for a long term with investment - receiving countries

Effects of FDI on economic growth

There are a lot of researches about the roles of FDI to economic growth in the world Johnson (2005) did a research on the effects of FDI to

economic growth of investment – receiving countries through two basic channels: material capital and technology Technology is a main element impacting powerfully on economic growth of these countries Author uses models and analysis data to make a conclusion that FDI is a factor to propel economic growth of developing countries and the conclusion is reversed in the developed countries Alfaro (2003) verified arguments that FDI may bring

a lot of advantages to FDI receiving countries by verifying effects of FDI on growth of production of crude products and manufacture and services in the period of 1981 – 1999 The result shows that effects of FDI are not clear, particularly having positive effects on manufacture, unclear effects on services area and no effect on production of crude products The research of Le Xuan

Ba (2005) shows that FDI has positive effects on the economic growth of Vietnam There are some other researches of the effects of FDI on economic growth, but each research has different ways of evaluation FDI at a certain country, branch, or local area and has particular conclusions In general, the researches once again affirm roles of FDI on economic growth

FDI and Technology

Technology is considered as essential element of the economy Technology is the product of R & D and an invention of new products or production techniques or both Anbel & Martin (2004) did a research about handing over technology from parent companies to branches or subsidiary companies abroad A lot of practical researches implemented on relationship between FDI and technology showing the roles of FDI on handing over technology However, this faces restrictions if the source of technology is the multinational corporations

Moreover, FDI affects job opportunities of countries of investors and investment – receiving countries, and also have effects on flowing labor and capital of FDI region

Summary of Theories of Attraction of FDI

Theory of Marginal Benefits

In the beginning years of 1950s, the FDI outsourcing of US to Europe increased strongly Economists pointed out that causes of this phenomenon was profits from foreign countries was much higher than from domestic market under the investors After the Second World War, with new opinions of management of macroeconomics, instead of requiring defeated countries making up for the war, the victorious countries especially US carried out plans

of Marshall in order to recover the economy of European countries and Japan destroyed by the war The economy was recovered very fast, flow of FDI moving into Europe countries rocketed up The appearance of a series of new industries, goods and services, the condition was the same as free competition market In this period, monetary system of Bretton Woods operated which led to a fix rate among major currency, made a comparative basis between different levels of profits This stage is also a period of science and technology revolution breaking out and opening great prospects In this context, economic school of neoclassical reckoned that investors realized profits received overseas were much bigger than their countries and also the others benefits can be taken advantages of

In 1960, MacDougall gave a theoretical model based on the following assumptions: (1)The world only has two nations; (2)Perfectly competitive market, the first nation has a huge amount of investment capital (surplus of

capital), but profitability of owner’s investment is low; the second one has a small amount of capital (deficit of capital) and profitability of owner’s investment is high; capital flows will move from the first nation to the second one.; (3) There is no limit of investment.; (4) Information is perfect, both importers and exporters of capital have full information of investment activities Import and export of capital will continue carrying out until marginal profits are equal to average profitable ratio of the world

Thus, from the view that the world has two nations consisted of, international investment (including FDI) contribute in increase of total products from each branch, leading to increase of GDP of investment-receiving FDI countries – these are profitable benefits of FDI Therefore, FDI increases ability of distribution of international economic potential and welfare and international products

Operations of moving international capital in reality in 1950s confirmed supposed trends of Mac-Dougall This situation became unstable when appearance of a series of new industries which made statistical data not to reflect real situations Practical researches did not provide clear evidence to verify the theory of Mac –Dougall

Drawbacks of this model were not given explanations of changes of various aspects of FDI and collapse of monetary system of Bretton Woods Changes and risks restrict FDI operations In this situation, US’s investment activities overseas still increased The theory exposed some points unsuitable with real conditions

The model focused on the aspect of institutions of FDI and risks factor from investment activities Besides, the model did not explain elements

controlling situation happening in a country which has both in and out of capital

flow-However, theory of marginal benefits might be considered as the first steps to germinate new features of FDI, and build a foundation for developing deeper researches of FDI

Theory of Market Power

Theory of market power points out that FDI is implemented by special behaviors of oligopoly companies in the international scale, including reaction

of oligopoly businesses, economic effects due to size and association of vertical FDI All behaviors are in an attempt to restrict competition, expand market and prevent other competitors from penetrating the industries and the market of oligopoly companies

FDI vertical (association of vertical FDI) exists when companies invest abroad to produce intermediate products Then, these goods are exported back to the countries of investors and used to invest in productions of these nations FDI vertical is the popular way in manufacture industry, and industries which use a lot of natural resources

Based on the theory, companies carry out FDI for the following reasons: source of materials supply has become scarce and companies in the local areas do not have enough ability to probe and exploit new materials; thus multinational companies take advantages of competition in exploiting materials of the local countries This also explains why FDI vertical is normally implemented in developing countries; through vertical FDI, oligopoly companies may build barriers to prevent others companies from using source

of materials; vertical FDI also creates advantages of expenses through

improving techniques by coordinating production and transferring products among various stages of production process This is a greater advantage over the advantage of getting from co-coordinating between individual producers

by price assessment

On a basis of the theory, multinational companies are the center of FDI

in order to develop local economy Hence, it is necessary to take full advantage of all importantly theoretical foundations in attracting FDI to develop Thanh Hoa’s economy

Theory of Ownership Advantages – Location Advantages – Internalization Advantages

Although there are a lot of various ways to explain FDI, no theory gives

a full and complete explanation Dunning (1977, 1979, and 1988) gave the

theory of Ownership advantages – Location advantages – Internalization

advantages, which can combine all theories above Based on Dunning, a company that intends to participate in FDI activities needs to have three advantages: ownership advantages, location advantages and internalization advantages

These three advantages point out that what countries of investors possess, what local investment –receiving countries have and combination between these two things depend on the third advantages It means that FDI companies are able to control FDI operations as it happens at a nation or not

In order to control activities at a country, countries of investors have to invest money in industries which bring much more profits than others