Impacts of foreign direct invesment on restructure of exports in the northern coastal region of Viet Nam

TABLE PAGE 4.1 The Economic Indicators of the Northern Coastal Region 4.2 Industrial Growth of the Different Economic Sectors 86 4.3 Registered Businesses in the International Trade from

REGION OF 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

Submitted in Partial Fulfilment of the Requirements for the Degree

DOCTOR OF BUSINESS ADMINISTRATION

A program offered by Southern Luzon State University,

Republic of the Philippines in collaboration with

Thai Nguyen University, Socialist Republic of Vietnam

has been approved by Oral Examination Committee

CECILIA N GASCON, PhD

Chairman Endorsed by: Recommended by:

Accepted in Partial Fulfilment of the Requirements for the Degree

Doctor of Business Administration

Date Vice President for Academic Affairs

One of the joys of completion is to remember all the friends and family who have helped and supported the researcher throughout this long but fulfilling journey to complete this research

He would like to express his heartfelt gratitude to the Thai Nguyen University administrators in Vietnam and Southern Luzon State University administrators in the Philippines who created best conditions for him to complete the course generally and fulfill the dissertation particularly

His sincere gratitude also goes to the professors in the Council of Examiners for Framework of the DBA namely Prof Cecilia N Gascon, Ph D., Prof Walberto A Macaraan, Ph D., Prof Melchor Melo O Placino, Ph D., Prof Nordelina B.Ilano, Prof Do Anh Tai, Dr Hoang Thi Thu, for the encouragement and constructive feedbacks Reviewing a thesis is a tedious and a demanding task so that is why the researcher is very grateful for their detailed and commendable comments

He would like also to send his special thanks to Prof Tran Dai Nghia for guiding him and for giving with his careful and instructive comments throughout the entire process writing the paper for DBA The researcher would never have asked for other mentor because of the inspiration, support, and patience that you have given to the researcher

He will always be proud in his academic roots In return, he aims that

he can also pass on the research values and the dreams that he has given to him

who directly gave him useful and memorable lectures in DBA namely Prof Cecilia N Gascon, Ph.D., Prof Walberto A Macaraan, Ed.D., Prof Melchor Melo O Placino, Ph.D., Prof Alice T Valerio, Ph.D., Prof Do Anh Tai, Ph.D., and Prof Tran Dai Nghia, Ph.D They provided him a very conducive and suitable environment to study and to explore new ideas Furthermore, they gave him a very convenient DBA life, which was a warm and inviting place to work

He was very grateful to the lecturers managed by the International Cooperation Program between Vietnam and the Philippines namely Prof Nguyen Tuan Anh, Prof Dang Xuan Binh, Dr Nguyen Thanh Hai and Ms Trinh Thi Hieu He could not have a chance to join and to fulfill the course without their cooperation

Nguyen Thien Su

I would like to dedicate this study to Hanoi College of Industrial Economics, functional ministries - Ministry of Industry and Trade, and to my colleagues for their generous support Thank you for welcoming me as one of your friends and for helping me to develop ideas for this study

I would not have contemplated this road if not for my supportive parents, my loving wife, my wonderful children, and my dear friends who instilled within me a love of creative pursuits, and science and language, all of which find a place in this dissertation

NTS

TITLE PAGE ……… i

APPROVAL SHEET ……… I CERTIFICATE OF ORIGINALITY ……… iii

ACKNOWLEDGEMENT ……… iv

DEDICATION ……… vi

TABLE OF CONTENTS ……… vii

LIST OF TABLES ……… ix

LIST OF FIGURES ……… xi

LIST OF APPENDICES ……… xii

ABSTRACT ……… xiii

CHAPTER I INTRODUCTION ……… 1

Background of the Study ……… 3

Statement of the Problem ……… 5

Objectives of the Study ……… 5

Hypotheses of the Study ……… …… 6

Significance of the Study ……… 7

Scope and Limitation of the Study ……… ……… 8

Definition of Terms ……… 9

II REVIEW OF LITERATURE ……… 11

Theoretical Framework ……….… 45

Conceptual Framework ……….… 64

III METHODOLOGY ……… 65

Locale of the Study ……… 65

Research Design ……… 69

Data Gathering Procedure ……… 69

Treatment of Data ……….……… 70

Statistical Treatment ……… …….…… 71

V SUMMARY OF FINDINGS, CONCLUSIONS AND

Summary of Findings ……… 131

Conclusions ……… 133

Recommendations ……… 135

REFERENCES ……… ……… 149

APPENDICES ……… 154

CURRICULUM VITAE ……… 166

TABLE PAGE

4.1 The Economic Indicators of the Northern Coastal Region

4.2 Industrial Growth of the Different Economic Sectors 86

4.3 Registered Businesses in the International Trade from

4.6 Export Value of the Ten Main Items with Largest

Proportion of the Total Export in the Northern Coastal

4.8b Shifting Exports from Raw Materials to Processed

Products in the Northern Coastal Region from 2005 to

4.9 PROPY Indicator of Primary Exports of the Northern

4.10 EXPY of the Northern Coastal Region from 2005 to 2012

(For primary goods of the Northern Coastal Region) 99 4.11 Proportion of Exports Goods with Highest PRODY Index 100

4.12 Quality of Some Exports with High Processed Content

in Export Structure of the Northern Coastal Region 101

4.13 Foreign Investment (Project Implemented before

4.14 FDI Licensed per Region from 1988 to 2012 104

4.15 FDI and Economic Growth in the Northern Coastal Region 108

4.16 Average Wages in the Northern Coastal Region from 2005

4.22 Dependent Variable Export Value by Northern Coastal

FIGURE PAGE

2.1 FDI Input Factors with Shifting Exports Structure 59

2.2 Elements of FDI Towards Impacts on Shifting Exports

4.2 The Export Value of the Three (3) Groups of the Northern

4.3 FDI Attraction in Vietnam from 1988 to 2012 102

3 Growth rate in using FDI and producing exports

4 Proportion of using FDI and producing exports by goods

5 Industrial production value by sitc of the northern coastal

region in 2005 – 2012 (Calculated on real prices) 161

6 Calculation of PRODY of The value of Aquatic product

exports of the Northern Coast Region in 2008 162

7 Laws Concerning FDI activities in Vietnam 163

8 Enterprises Getting Corporate Income Tax-Exemption

`

Title of Research : IMPACTS OF FOREIGN DIRECT INVESTMENT

ON RESTRUCTURE OF EXPORTS IN THE NORTHERN COASTAL REGION OF VIETNAM

Researcher : NGUYEN THIEN SU (SUNT)

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

The study was carried out to explore the impact of FDI on shifting process of exports structure in the Northern Coastal Region of Vietnam Specifically, the study aimed at examining (1) influences of FDI on elements

of the economy, (2) the exports structure of the region, (3) impact of FDI on shifting exports structure, and (4) solutions to attract FDI for shifting exports structure in the region The results of the study provide scientifically basic recommendations and references for policy makers in formulating the most appropriate policy in restructuring export sector to maximize the benefits of exports’ sustainably

Findings showed that there have been visible changes in term of quantity of exports structure in the Northern Coastal Region Also, a new classification of the exports structure and exports restructuring besides the traditional classifications such as SITC, VSIC was revealed from the study Addition, the results from the model analyses showed the significant impacts

of FDI on shifting exports structure in the Northern Coastal Region

quality and quantity of the exports structure The impact on the quality of export structure is greater than that on the quantity The impact of FDI on the exports of processed and refined goods was higher than that of the raw material goods The FDI increases export value of private sector significantly; while it negatively influences State Owned Enterprises; the exchange rate also has a significant effect on the quantity of export than on the quality

Chapter I INTRODUCTION

Vietnam officially became a member of World Trade Organization

(WTO) five years ago Since then, Vietnam’s economy has undergone many

changes and a lot of economic development There are strategies that have been effective to solve problems as a key point after integrating into international economic arena, which is how to make gains more than

"losses." The loss of revenue is due to tariff cuts under WTO integration

commitments that must be offset by revenues earned from exporting goods,

products, and services The economy of Vietnam has made many progresses

as export has increased relative stability However, the economy still faces serious problems including high inflation rate and increase in trade

deficit According to the trade balance data, the growth rate of import has

always been higher than that of export since 2006 While the statistics from the General Statistics Office showed that trade deficit was US $5.07 billion and US $14.2 billion in 2006 and in 2007 respectively; import-export balance continued to be negative at US $12.9 billion in 2009, US $12.4 billion, and US

$12.71 billion in 2011 Particularly, in the first quarter of 2012, the trade deficit

was over US $251 million, equal to 1% of the total export value In which, the whole domestic sector was in deficit of US $2.75billion whereas foreign

investment sector was in surplus of $2.5billion According to World Trade

Organization in 2010, Vietnam became the largest importer in the Association

of Southeast Asian countries (ASEAN) for about 1.5 times It equaled to

imports of ASEAN countries combined Therefore, trade surplus target after

joining WTO of Vietnam has not been reached

Upon joining WTO, Vietnam aims to create economic growth in a sustainable way, to solve problems mentioned above and to meet the goals set particularly the global economic integration In general, Vietnam has taken many measures to reduce trade deficit and to accelerate the pace by doing it

in the most radical measures and to improve the competitiveness of export goods However, in recent years, the export value of Vietnam has been very low; one of the reasons is the structure of Vietnam's trade Exports were increased mostly in quantity while the export quality had not been improved, and heavily tilted towards commodities of agriculture, forestry, fisheries, crude oil, coal, and other low-value added processing commodities At present, the export value of crude oil and low-value added goods makes up to over 60% of total export value Industries have high percentage of outsourcing, especially apparel and footwear Heavy industrial goods account for 16% and they are mainly minerals, machinery and high technology products that make up only for 2% and 8.3 % respectively

Based from the economists’ research, it was stated that “together with promoting export quantity, the most important thing that every country would like to have is to form an approptiate export structure consisting of high value added goods with high technological content and a greater proportion in the exports basket” In addition, it was also discussed that “ The reason to focus

on improving export structure towards raising the quality of export structure is that it can affect the economic growth of the country by the amount of exports” In other words, the increasing level of the improvement of export

products can increase economic growth In addition, according to Kassicieh

and Suleiman (2002), “if a country has the quality of exports structure with high technological content products making up a large proportion in the basket of exported products, it will reduce risks from fluctuations in the global trade” Moreover, revenues generated from exports will increase and be

sustained, which is the most efficient condition and the appropriate target to where the export should be directed to

Other countries that are participating in the international trade have always tried to make positive changed in the structure of their exports in order

to gain advantage in their export So Vietnam’s exports are facing a threshold production of traditional export products and a great threat of losing comparative advantage in exports Therefore, Vietnam will face great difficulties in the future if it does not improve significantly in its exports quality This is one of the biggest problems in the reform strategy of exports of Vietnam

Background of the Study

The Northern Coastal Region of Vietnam includes five (5) provinces, i.e., Quang Ninh, Hai Phong, Thai Binh, Nam Dinh, and Ninh Binh According

to Decision No 865/QĐ-TTg of the Prime Minister of Vietnam in 2008, the Northern Coastal Region was oriented to become an important economic region of the nation The goal was to take all of its potentials and advantages for the development of the region to contribute and to play a major role in socio-economic development of Vietnam

Furthermore, the Northern Coastal Region is one of the nine (9) economic regions of Vietnam Its economic contributions do not equal the

potentials and advantages of the region because its export situation is the same in the entire country The export structure is retrograde, poor in quality and facing pressures from the international economic integration

Hence, the issue of improving the export structure has become essential not only to the region, but also for the entire economic development

of the country It only indicates that the shifting exports particularly of the Northern Coastal Region and generally of Vietnam is an indispensable requirement It is also necessary if they want to achieve the desired target; they have to have an appropriate and firm control to promote the said strategy

In recent years, foreign direct investment has played an increasingly

vital role in the economic development of Vietnam especially on its export activities Recently, foreign direct investment has always taken "engine role"

in creating value that made up more than 40% of the total export value of the country Also, it has played essential role in promoting export of Vietnam as well as the Northern Coastal Region" In addition, the foreign direct

investment with advantages of technology, capital investment, production

experiences, marketing skills, etc , confers a great influence in improving the quality of exported goods Aside from that it also meets the requirements of export restructure

The study of the impacts of foreign direct investment on restructuring export sector in the Northern Coastal Region is expected to have significant contribution theoretically and practically The results of this study would provide scientific basic recommendations and references for policy makers in forming the best policy in restructuring export sector to maximize benefits of

exports sustainably This study was conceptualized because of the stated

reasons on the previous discussions So, this study was focused on “Impacts

of Foreign Direct Investment on restructure of exports in the Northern Coastal Region of Vietnam”

Statement of the Problem

Generally, this study aimed to find out the impacts of foreign direct investment on shifting exports structure in the Northern Coastal Region of Vietnam

Specifically, this study sought to answer the following questions:

1 How has foreign direct investment affected the elements of the

economy?

2 What are the quantitative changes present in the export structure?

3 How foreign direct investment has been affecting the shift of export

structure in the Northern Coastal Region of Vietnam?

4 What are the solutions to attract foreign direct investment on shifting export structure of the Northern Coastal Region of Vietnam?

Objectives of the Study

General objectives:

To analyze the practical impacts of foreign direct investment and to find

out how the implementation of foreign direct investment can influence the quantitative and qualitative restructure of exports in the Northern Coastal Region of Vietnam

3 To use the models to test the impacts of foreign direct investment on

shifting exports structure in the Northern Coastal Region of Vietnam

4 To provide a set of policy recommendations and proposed solutions in

order to attract and to make effective use of foreign direct investment to

promote the exports restructuring towards the improvement of the quality and quantity of exports in the Northern Coast region

Hypotheses of the study

The following hypotheses were tested in the study:

Hypothesis 1: The foreign direct investment promoted shifting exports

structure in the Northern Coastal Region both quantitatively and qualitatively

Hypothesis 2: The foreign direct investment would significantly

influence export values of private sector and public sector differently

Hypothesis 3: The foreign direct investment made for raw

commodities and processed food increased the value of the exports in both processed products and raw material exported products

Hypothesis 4: Export value of The Foreign direct investment sector

has increased the quality of export products in the Northern Coastal region

Hypothesis 5: The value of industrial productions from foreign direct

investment sector could boost the impact on the complexity of export goods

Significance of the Study

This study has the following significance:

The results of this study can be used as a scientific basis for assessing

the role of foreign direct investment in shifting the region's export structure

The classifications are significant for the study as well as the consideration and review of the quality of exports structure (the export quality

of each group of items, each item in order to have timely evaluation of shifting process) and export adjustments which are very necessary to achieve the objectives

The implications of analyzing the role of the foreign direct investment

to shift export structure in Northern Coastal Region can be utilized as a basic reference for further research with relevant issues in other regions in Vietnam

This research can help policy makers and provincial authorities in making economic policies both in provincial level and in national level with directions, policies, and specific measures to improve the export structure of the country and to achieve the objectives of sustainable export as well as growth and economic development in the context of international integration

The theoretical analysis of this study will open the awareness of those people, who are engaged in this industry, about the status of export activities, the attraction and use of foreign direct investment, and the assessment of the

impacts of foreign direct investment on shifting exports structure Also, this will

give them idea about how they can to accelerate the process of restructuring

in terms of export quantity, and to improve the quality of export structure

The result of the study gives specific and practical application of export management and use of foreign direct investment

Scope and Limitations of the Study

This study was focused on impacts of foreign direct investment on restructure of exports in the Northern Coastal Region of Vietnam The five (5) provinces in the Northern Coastal Region were Quang Ninh, Hai Phong, Thai Binh, Nam Dinh, and Ninh Binh which served as locale of the study

The scope of this research was to analyze the structure of tangible exports Thus, the author focused on studying elements such as the capital

performance by foreign parties, export value of the foreign direct investment sector and value of industrial production of the foreign direct investment

sector

The researcher did not include in the study the data of importing

intermediate goods for the production of exports of foreign direct investment

enterprises in North Coast region to assess the impact of these factors on

improving the quality of exported goods The foreign direct investment data

made by foreign companies for each commodity and commodity group were incomplete and non-systematic so the researcher could not calculate and build the test mode of performing foreign direct investment which affected the export structuring

Definition of Terms

For better understanding of the study, the following terms were defined;

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

Export structure is a whole including many commodities or commodity

groups which account for a certain percentage in terms of quantity as

well as a certain proportion of the total value of export structure

FDI performance is the impact of FDI input elements

Foreign direct investment (FDI) is an investment activity carried out by

economic organizations and individuals in any country which by themselves or combined with other economic organizations or individuals of another country to conduct fund in cash or property in

that country under a certain form of investment

Income per capital is a measure of mean income within an economic

aggregate, such as a country or city It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or

Gross National Income) and dividing it by the total population

Input of FDI is the real capital of foreign investors spent at the time of initial or

added to conduct business activities in a field which is registered and

accredited by investment-receiving countries FDI is an amount of necessary capital to start business activities that foreign investors need

to spend The amount of capital can be expressed in money or property, such as: Tangible fixed assets (machinery, equipment, technological assembly line…) or intangible fixed assets (patents, trade

secret, trademark or current assets (raw materials, spare parts etc)

Output of FDI is referring to the elements which are made after the process

of conducting business in investment-receiving countries such as Gross Output (GO), Gross Domestic Products (GDPFDI), or the contribution of FDI to the export sector (EVFDI)

Shifting exports structure is the change of exports structure from this state

to another state in accordance with requirements of development

(Nguyen Huu Khai, 2007)

The value of industrial production in FDI areas is an independent variable

of FDI output showing gross output of industrial sectors using FDI

The export value in FDI areas is an element of FDI output showing the

contribution of FDI in export sector

Value added (VA) is the difference between gross output (GO) and

intermediate cost (IC)

Chapter II REVIEW OF LITERATURE

This chapter discusses the different related literature and studies

FDI and Effects of FDI

Forms of FDI

Based from the discussion of Moosa (2002) from the point of view of Caves (1971), FDI is classified as horizontal FDI, vertical FDI, and FDI group Horizontal FDI aims to expand the production of similar products in host country as the product of home country While vertical FDI has another purpose, it aims at the exploitation of raw materials or close to consumers through distribution channels Lastly, FDI group is the sum of the horizontal FDI and vertical FDI

Heopman (1984) mentioned that the multinational companies (MNCs) with the desire to maximize profits and to choose the location to minimize the cost of production, including transport costs, expenses tariff charges Therefore, they would split the production of products in various countries Especially the product phase, should focus on unskilled labor, will

be located in countries with lower wage costs (investment-receiving countries) Meanwhile, these countries would import intermediate goods, machinery and equipment from MNCs (corresponding to the increased export MNCs) and increase export the final product So this FDI was called vertical FDI

From the investment-receiving countries, FDI can be classified into import-substituting FDI, FDI increases exports and FDI under the Government's efforts Import-substituting FDI related to the production of products that were previously imported by the country receiving the investment When that country's imports decrease, investing countries’s exports also decline The type of investment seems to be determined by the scale of market acceptance of the host country, transportation costs and trade barriers.Then, the second type of FDI is motivated by the desire to seek new sources of input for many products such as raw materials and intermediate goods Meanwhile, FDI –recipient countries are driven by the desire to find other resources to invest in production as raw and intermediate goods And FDI recipient countries will increase exports of raw materials, intermediate goods and investment to the investing country and to other countries which have branches of multinational companies While, the third type of FDI is that the governments of countries receiving investment encourage foreign investment in an effort to balance the payment deficit It can be noted that the approach of the investment-receiving countries has become strategic development particularly in countries with developing economies; it is import-substituting FDI and export-oriented FDI

Furthermore, FDI can also be classified by the way of extension to exploit the advantages of investment in the host countries, to increase sales

of investment firms in their home countries and countries receiving investment Besides, FDI is also seeking labor in host countries to reduce production costs Extended FDI is affected mainly by the advantages of firms

in investing countries, such as the size of the firm, the focus for research and development (R & D) and profitability by the advantages of technology

Maitena Duce & Banco de Espana’s (2003) made classifications which were based on the direction of investment, FDI assets and liabilities under the perspectives of the host country The financial expansion of parent company

to its subsidiaries in other countries, is considered as direct investment abroad and vice versa The financial expansion of its affiliates or subsidiaries

in foreign countries, is considered as the reduction in direct foreign investment

in foreign countries Moreover, from the investment-receiving countries, there

is the opposite direction In addition, FDI is also classified based on the investment tool that means fact source of FDI; that is capital property revenues incubation enter and re-investment from other sources such as debt and joint venture Finally, FDI is classified by industry classification, according

to which FDI flows into any sector for that sector shall be calculated without taking into account the investor's capital flow of the industry However, the Organization for Economic Co-operation and Development (OECD) recommended that the FDI would rely on industry sectors where parent companies are active It can be seen, the categorization of FDI is raised above will be used to host countries to invest and will be applied to classify the foreign capital investment

Under Vietnam's Investment Law (2005), FDI has the following forms:

- 100% of capital investment owned by foreign investors

- Joint-venture economic organizations co-owned by domestic and foreign investors

- Investment in the form of Business Contractual Cooperation (BCC); Building Operate Transfer (BOT); Building Transfer-Operate (BTO), and Building transfer (BT)

- Investment in business development

- Purchase of shares or capital contribution to participate in the management of investment activities

- Investment performance with mergers and acquisitions

Previously, Vietnam was mainly a capital-receiving country so it should

be noted the categorization of FDI under the host country's perspective Recently, Vietnam businesses have tended to invest abroad, so the categorization based on the perspective of investors will be effective to help statistical agencies of Vietnam to have appropriate classification

Determinants of FDI

Dunning (1993) gave a systematic and complete explaination about the factors which were likely to affect the expansion of international models produced by Multinational Corporation (MNEs) and capital was sponsored by FDI Conditions to select FDI are that we have to gain the Ownership-specific Advantages (O advantages) for other firms The O advantages include access

to the market dominance or cheap raw materials, the advantages of scale, brand, or ability to manage intangible assets or toxic power In addition, the O advantages also associated with the Internalisation advantage (I advantage) and the Location advantage (L advantage) Meanwhile, the I advantage was the advantage gained from the internal production of the company which would allow firms to overcome external market and the transaction costs

involved, or this was one of things that the company itself could expand or sell rights to other firms Next was the advantage of location (L advantage), it was factor related to the question of whether the expansion was the ingenious design between domestic and broad Once you have the O advantage of a favorable position, FDI will occur

Moosa (2002) summarized the pattern yoke Zhejiang of Dunning that explained the general conditions affecting FDI with the assumption, there was

a demand for specific goods, which a specific firm step inside O advantage, then there was only two (2) factors including L and I:

- If there is no I advantage, the firm will allow its O advantage for another company, especially when factors create favorable locations for expansion abroad

- If the firm has the I advantage and the factor of location is convenient for expanding competition in the country, the firm will expand its domestic market and export

- If the firm gains I advantage and the location is convenient to expand competition abroad, FDI will occur

We can say that Zhejiang model of Duning is a typical model which fully explained in terms of FDI theory, in addition to many studies explaining the factors that influence FDI

According to Estrin and Bevan (2000) who studied the effects of the factors such as country’s risk, unit costs of labor, market size and other factors attract FDI in the transition economies in Central and Western Europe, the results of testing model was using a larger FDI which was

suffered by the above factors, apostle of the host country risks including economic and political risks

Based from Maitena Duce and Banco de Espanna (2003) who also studied the factors affecting FDI in the South East and Western Europe concluded, FDI depends on factors such as economic policy in the investment-receiving countries, the level of gravitational background country Also, FDI depends on many factors, such as the scale of the economic reason, national resources of the host country, the level of popular open with international trade and international market access, quality and financial infrastructure technology

In addition, Ali and Guo (2005) mentioned that there were factors affecting FDI into China; (1) the size of the market (it seems to be the factor which mainly effects on the FDI flows into China, especially for U.S firms) and (2) cheap labor in China was the retention of second factor (this is the main factor attracting Asian investment firm in China)

There have been also many other experimental studies on the determinants of the FDI But, it can be concluded that FDI is influenced by the tuber of a complex set of factors Therefore, it requires countries that are calling for investment have to consider and to study to have appropriate policies, to promote effectively, and to attract FDI for their growth and development, especially in the competitive situation of FDI as well as the trends in FDI flows today

Effects of FDI

FDI provides investment capital, increase revenue, improve the balance of payment For developing countries, demand for capital is always the top priority These countries always have the gap between investment and economic development need FDI is thought to have a contribution to offset this gap FDI has the advantage of more stable sources of finance and other financial flows and stable long-term commitments to investment-receiving countries, increasing the state budget

- Impacts of FDI on economic growth, production, capacity growth, export improvement and market expansion

There are many studies about the role of FDI in economic growth Johnson (2005) mentioned that the impact of FDI on economic growth of investment-receiving countries was through the two (2) basic channels of FDI namely the physical capital and technology Meanwhile, technology is the major factor that affects the most to the economic growth of these countries The author used the model of data analysis and concluded that FDI was a key factor promoting economic growth in developing countries and the opposite conclusion for developed countries Alfaro (2003) believed that FDI could yield big advantages for the host country by testing the effect of FDI

on regional growth of crude production, manufacturing and services, during the period from 1981-1999 The results show that the impact of FDI is not clear, namely to have a positive effect on the manufacturing sector, the impact

is not clear in the service sector and has no effect on crude production area The study of Le Xuan Ba (2005) came to a conclusion that FDI generally played a positive role in economic growth However, there were many other

studies in the role of FDI in economic growth, but each study evaluated FDI to

a specific country, industry, or aspect of the economy and had the conclusions for each study and generally affirmed the role of FDI for economic growth in general

Technology is regarded as an essential element of an economy Technology is the product of research and development (R & D) that is the invention of new products or production techniques or both Marin and Bell (2004) studied the transfer of technology from the parent company to affiliate, subsidiaries abroad The authors study FDI data of industrial firms in Argentina in the period 1992-1996 Many other experimental studies in Australia were conducted on the relationship between FDI and technology to confirm the role of FDI in technology transfer in the host country FDI has an important role in forcing domestic businesses to innovate technology to compete, maintain and develop It also gives chances for domestic businesses to approach advanced technology, to use the skill of technology chain, and soft technology from FDI businesses through cooperation activities, and to transfer and move the labor force among businesses

However, this will encounter the limitations, if the original technology is the technology from multinational companies, because this has the rules and conditions associated with the technology which is being transferred

- FDI promotes economic restructure and use internal capital more flexibility and effectively

The developing countries have policies to attract FDI into its economic sectors, regions, provinces and cities under development objective balancing between the branches and economic regions; at the same time, they also

invest into infrastructure development, especially transport infrastructure to facilitate opportunities for disadvantaged areas to develop social and economic life FDI also promotes key economic sectors, increases the processing industries to create products with high economic value, makes structural changes within the industry; FDI also creates spillover effects on stimulating to operate domestic capital source efficiently

- FDI promotes to improve the legislative system

The presence and development of FDI raises new problems, requiring the investment receiving countries to complete the legal system that complies with international rules and supplement the system of FDI policies related on taxes, banking and finance, land management, resource extraction, environmental protection, labor, customs, etc to increase their competitiveness to attract FDI, serve management, and make the economy operated under market mechanism more efficiently

Thus, for developing countries, FDI plays a huge role in creating capital for the implementation of industrial modernization and international economic integration However, FDI also causes many obstacles and challenges for the investment receiving countries, such as i) break down the overall development planning of the economy, as rapid growth, imbalance in infrastructure demand (transport infrastructure, warehouses, ports, utilities, housing, hospital, school, etc.); ii) for the purposes of profit maximization, foreign investors may only choose those industries, economic sectors, geographical areas which have comparative advantage, and provide higher return on investment (ROI)

- Due to the experience and capacity of the authorities and management staff of the FDI receiving countries is limited, it often happens that there often have violations of the laws, unfair competition, such as tax fraud, lowering interest costs, polluting the environment, etc

- FDI enterprises have advantages of using the power of capital, technology, market information and share, etc., to take competition measures to invite a team of highly qualified workers who have knowledge and highly educated to cause "brain drains '' and widen a gap between the rich and the poor in society, to affect on the cultural life and traditions, to stimulate the psychology of "Culting foreign goods"

- The FDI enterprises enjoy the favorable policies, usually have the advantage, and pressure on receiving countries to yield the investment policy changes or raise priority committed investment such as the local content of products, implementation of land wasting, abet corruption, political and economic pressure, compromise the independence of the investment receiving countries, lead to the dependence on foreign countries

For developing countries, they must recognize the right position and the role of FDI to have appropriate policies in creating an open and attractive investment environment and promote the comparative advantage in order to attract more and more powerful and effective use of FDI, contribute actively to industrialization and modernization of the country It is also an active and positive process of integrating more deeply into the regional and the world economy

The FDI trend in the world

Tendency towards FDI flows: According to the Economist magazine

(UK), as well as the Trade Forum and United Nations Development (Unctad), after the peak reached US$2080 billions in 2007, the world FDI flows declined 17% in 2008 (also US $1720 billions), and further reduced by 41% (to US

$1,000 billions) in 2009 But the reversal of world FDI flows has been recorded in 2010, with projected capital flow that was slow as the global economic recovery, with the average 2.5% of global GDP from 2010 to 2014 Then, in 2014, global FDI flows remained lower than what it achieved in

2007 The emerging countries played a key role to promote global economic recovery in 2010 and an increase in FDI flows into these countries to contribute more positively to impulse new moves In 2008, while FDI flows to developed countries, it reduced by one third, the FDI in emerging markets rose 11% In 2009, the first emerging countries attracted more FDI among developed countries, with the corresponding amount of $US532 billion , as compared with US$ 488 billion However, FDI in emerging markets was expected to decline from 4% to 3% GDP of the country's GDP from 2010-

organizations and governments needed to have breakthroughs in reforming the financial and banking sector, to increase accountability and efficiency of financial institutions, reduce the risk of future instability and make this region more flexible, better management of capital flows needed to re-emerged Also, the requirements and mechanisms for the coordinate multilateral economic operators became more common and more flexible, the influence of individual economic organizations would also be expanded

Improvement of FDI inflows in Vietnam

In 2010, many financial institutions and foreign economic experts identified that FDI in Vietnam had a bright outlook, associated with the increased confidence and new business opportunities of FDI projects In fact, Vietnam was ranked 12th in the over-all ranking of FDI Confidence Index It was also reported by AT Kearney that Vietnam was ranked 93 on the open level of the business environment (Ease of Doing Business Ranking).Then, Southeast Asian countries reached the Top 25 ranking of the FDI Confidence Index in 2010 Vietnam ranked above Indonesia (No.21), Malaysia (No.20), and Singapore (No 24) Recently, financial investment group Goldman Sachs (U.S.) ranked Vietnam among the eleven (11) countries which has fastest growth rate in the world in 2010 It only means that the country is opening up opportunities for investment and better investment destination for investors in the worlds in the next ten (10) years from 2011 – 2020

In addition, Agency of Commerce and British investment based the surveys of more than 500 senior officials of nearly twenty (20) companies from different business sectors, also said if they did not include BRIC group

(Brazil, Russia, India, China), Vietnam would be the most attractive for two (2) consecutive years among the fifteen (15) emerging countries namely the Unified Arab Emirates, Mexico, South Africa, Malaysia, Indonesia, Singapore, Turkey, Philippines, Saudi Arabia, Ukraine and Poland

Geicke (2010) also said that Vietnam was still attractive to foreign investors” And the FDI sector in Vietnam thrived in the years to include medical services, manufacturing, consumer goods, financial services, energy sector, particularly clean energy, friendly environment and high-tech industries

According to Yip Hoong Mun (2010), the business environment assessment in Vietnam is higher than that in other countries If given the scale

of ten (10), Vietnam will score 7-8 In fact, FDI inflow in Vietnam in 2010 was the new positive action which was quite clear about the scale of registered capital / project, capital structure and the sign of forum about actual disbursement

Hence, according to the General Statistics Office, disbursement of FDI was approximately US$ 900 million in April, bringing the total realized FDI

in the first four (4) months of 2010 to $ 3.4 billion, up to 36% over the same period in 2009 From year-to-day 2010, Vietnam attracted nearly U.S $ 11.3 billion, only 78% over the same period last year and was still the target of US$

20 billion Total FDI disbursement reached US $ 9.1 billion, up 1% over the same period last year On the average, FDI disbursement reached US $ 851 million dollars per month; but both immediate and medium term, Vietnam should be actively synchronized with the solution and adapt effectively to

overcome the shortcomings and consequences such as the imbalance in investment in other sectors, territories, pollution environment, industry plan to break, threatening the energy security, increasing speculation on estate market and the uncertainty on the capital market and the transfer and using outdated technology; abusive tax incentives and land

Weak grassroots and human resources, high input costs, lack of the investment promotion and professionalism the dropped in confidence of foreign investors together with instability of the world economy were the reasons that the specialists cited for reducing FDI inflows into Vietnam

Facing this trend, Vietnam needs to have appropriate policies to utilize FDI as a general trend to best serve the economic development in the country However, it is noted that we will encounter the very tough competition from other countries in the region in further attracting capital sources

Export Structure

Classification

Concept of export structure

There already have been many studies on the export structure in the country and abroad as well However, the concept of the export structure is mentioned in the less formal way According to Nguyen Huu Khai (2007), it can be understood that "the export structure is the overall of commodity group, the exports in all exports with the equivalent position and proportion and the relatively stable constituent relationship "

Moreover, if they consider the overall export of a country is a "basket of export goods," the basket of goods has a variety of goods different of in type, design, and product characteristics Each commodity has a certain role, contributing in terms of quantity and value of goods for export basket The study only takes into account the structure of tangible goods So, it can be

understood that “the export structure is a whole including many commodities

or commodity group which account for a certain percentage in terms of quantity, as well as a certain proportion of the total value of the export structure.”

Worldwide, there are some main classifications of the export structure

such as:

Firstly, goods were classified according to the goods describing list

and Harmonized Commodity Describe and Coding System, referred to as Harmonized System (HS) which was established by World Customs Organization (WCO) in 1972, amended and officially issued in June 1983 The basis of classification of export goods of HS is based on the nature of the goods and is ranked in order of the production and processing level: raw materials, under processed products, unfinished products and finished products In 1992, Vietnam Statistics Organization issued lists of imported goods under HS standard and in 1997, it was added and modified at 8-digit level

Secondly, the Standard International Trade Classification (SITC), was

published by the Secretariat of the United Nations in 1950 and revised three (3) times in 1969, in 1975 and in 1986 This classification was intended to be used for the purpose of economic statistical analysis of nations, economic

organizations, as well as comparison of international trade between countries The basis of classification of exported imported goods under SITC standard is based on certain conditions such as; the nature of the goods and materials used to produce goods, production processes, condition of market and use of the product, the role of commodities in international trade and technological change At 1 digit SITC level, export goods are divided into three (3) groups:

- Raw or processed goods (including 4 small groups SITC0 to SITC4);

- Processed or refined goods (including 4 small group SITC5 to SITC 8);

- Commodities which are not classified in two (2) groups

In Vietnam, the statistical agency adopted the classification of foreign trade standard (SITC REV 3) to serve the purpose of research and economic analysis in the country and abroad

The SITC standard classification is consistent with the purpose of analysis and comparison of international trade, more specifically, the analysis

of the export structure and the calculation of comparative advantage

Thirdly, classification of goods according to International Standard

Industrial Classification of All Economic Activities (ISIC) by the UN Statistics Office was first issued in 1984 and amended in 1958, 1968 and 1989 Taxonomy stipulates that “the content and scope of each sector, each sector participation in economic activities, as a basis for determining the size and the role of each branch and economic structure of a country Trade statistics are used to classify exports by industry sources to produce them” In 1997, the