Environment factors for foreign direct investment for American business corporation in three main commercial centers of Viet Nam

ii This Dissertation of NGUYEN ANH TUAN entitled ENVIRONMENT FACTORS FOR FOREIGN DIRECT INVESTMENT FOR AMERICAN BUSINESS CORPORATION IN THREE MAIN COMMERCIAL CENTERS OF VIETNAM Submi

i

COMMERCIAL CENTERS OF VIETNAM

_

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

ii

This Dissertation of

NGUYEN ANH TUAN

entitled

ENVIRONMENT FACTORS FOR FOREIGN DIRECT INVESTMENT FOR

AMERICAN BUSINESS CORPORATION IN THREE MAIN

COMMERCIAL CENTERS 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 the 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

_ WALBERTO A MACARAAN, EdD

Date Vice President for Academic Affairs

iii

iv

This research was a process of learning that asked for the involvement

of individuals, companies and institutions During the research period, the researcher received unconditional cooperation from individuals/organizations, and their support was a key factor in successfully completing the dissertation

He greatly appreciates the contribution of everyone involved and apologizes

to those he did not mention

Professor Do Anh Tai, who provided him with valuable guidance and

comments throughout the research period giving him the opportunity to work

in the area of his interest;

Officials and Members of the Department of Planning and Investment (Hanoi, Ho Chi Minh city, Da Nang) and Foreign Investment Agency – Ministry of Planning and Investment , for their willingness to be

interviewed and also for spending time and effort in filling questionnaires:

Board of Rectors of Hanoi University of Industry, for permitting him

to pursue this course and accomplish his goals;and

Officials and Professors of Thai Nguyen University and Southern Luzon State University, for organizing and supporting this cooperation

Nguyen Anh Tuan

v

This research endeavor is dedicated to

my family, colleagues and the

Vietnamese People

Nguyen Anh Tuan

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APPROVAL SHEET ……… ii

CERTIFICATE OF ORIGINALITY ……… iii

ACKNOWLEDGMENT ……… iv

DEDICATION ……… v

TABLE OF CONTENTS ……… vi

LIST OF TABLES ……… viii

LIST OF FIGURES ……… ix

LIST OF ABBREVIATIONS ……… x

LIST OF APPENDICES ……… xi

ABSTRACT ……… xii

CHAPTER I INTRODUCTION ……… 1

Background of the Study ……… 1

Statement of the Problem ……… 2

Hypothesis ……… 3

Significance of the Study ……… 4

Scope and Limitations of the Study ……… 5

Definition of Terms ……… 6

II REVIEW OF LITERATURE ……… 11

Conceptual Framework ……….……… 58

III METHODOLOGY Locale of the Study ……… 60

Research Design ……… 60

Treatment of Data ……… 62

Sample Size and Sampling Technique ……… 63

Data Gathering Procedure ……… 64

Statistical Analysis … ……… …….…… 66

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IV RESULTS AND DISCUSSIONS ……… 68

V SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Summary ……….……… 117

Conclusions ……… 118

Recommendations ……… 121

REFERENCES ……… ……… 127

APPENDICES ……… 130

CURRICULUM VITAE ……… 153

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1 Comparison of Transportation Cost ……… 72

2 GDP Growth in Southeast Asian Countries ……… 75

3 Forecast of GDP of Some Asian Countries in the Coming Years ……… 80

4 U.S FDI Structure by Investment Form ……… 94

5 Cronbach’ Alpha of Political Environment ……… 102

6 Cronbach’ Alpha of Institutional and Management Environment ……… 103

7 Cronbach’ Alpha of Infrastructure and Geographic Environment ……… 104

8 Cronbach’ Alpha of Economical and Financial Environment 104 9 Cronbach’ Alpha of Labor Environment ……… 105

10 Cronbach’ Alpha of Investor's Determination ……… 106

11 Mean Value of Statistic Variables ……… 106

12 Post Hoc Tests on Political Environment ……… 107

13 Post Hoc Tests on Institutional and Management Environment ……… 108

14 Post Hoc Tests on Infrastructure and Geographic ………… 109

15 Post Hoc Tests on Economical and Financial Environment 110 16 Post Hoc Tests on Labor Environment ……… 111

17 Pearson Correlation Coefficient Between Variables ……… 112

18 Statistics of Developed Regression Models ……… 114

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1 Conceptual Framework 59

2 Data Collection Process 65

3 Structure of U.S FDI among G7 Countries ……… 89

4 FDI from the United States in Vietnam during the Period

5 U.S FDI Structure by Investment Form ……… 95

6 The U.S FDI Structure by Investment Sector ……… 97

7 The US FDI Structure by Region (USD/Province) ………… 99

8 The U.S FDI Position in the FDI Structure in Vietnam (USD/

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AFTA ASEAN Free Trade Area

ASEAN Association of Southeast Asian Nations

BCC Business Cooperation Contract

BOT Build – Operation – Transfer Contract

BT Build – Transfer Contract

BTO Build – Transfer – Operation Contract

FDI Foreign Direct Investment

ICOR Incremental Capital - Output Rate

IMF International Monetary Fund

ODA Official Development Assistant

OECD Organization for Economic Cooperation and

Development PCI Provincial Competitiveness Index

PPP Public Private Partnerships

R&D Reserch and Development

TNCs Transnational Companies

UBND People’s Committees

UNCTAD United Nations Conference on Trade and Development

VCCI Chamber of Commerce and Industry of Vietnam

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2 FDI in Vietnam by Investing Countries - Period 1988 –

2012 (As of 31/12/2012-only valid projects) 138

7 Direct Investment Abroad by the United States and Other

8 Total FDI from the United States in Vietnam

9 FDI from the United States in Vietnam by Investment

Form - Period 1988 - 2011 (As of 31/12/2011 - only valid

10 FDI from the United States in Vietnam by Investment

Sector Period 1988 – 2011 (As of 31/12/2011 - only valid projects)

151

11 FDI from the United States in Vietnam by Provinces -

Period 1988 – 2011 (As of 31/12/2011 – only valid projects)

152

`

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Title of Research : ENVIRONMENT FACTORS FOR FOREIGN

DIRECT INVESTMENT FOR AMERICAN BUSINESS CORPORATION IN THREE MAIN COMMERCIAL CENTERS OF VIETNAM

Researcher : NGUYEN ANH TUAN (RAPHAEN)

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 Do Anh Tai

Year Written : 2013

To effectively attract direct investment a country needs to improve the investment environment to enhance the ability to attract and compete with other countries in the region To study this issue, the authors selected the title: Enterprises’ Foreign Direct Investment to the Three Biggest Economic Centers of Vietnam

The dissertation is an empirical research from 99 US FDI enterprises

in three largest economic centers of Vietnam on environmental factors influencing investment, including politics, governmental administration, location-infrastructure, economic -financial mechanism and labor resources Based on these, the researcher offered solutions to improve the environment

to attract FDI in Vietnam in the coming years

Dissertation using the Likert scale questionnaire was utilized to calculate the index and SPSS software for data processing of 5 above factors attracting FDI The statistical analysis methods used are: ANOVA analysis, to

xiii

coefficient(r) to perform statistical hypothesis testing Linear regression was also applied Since then, the author has discovered new major findings: U.S investors are quite worried about the institutional regime in Vietnam, in which all thee economic- social trend development are determined by state-owned enterprises; open market country for foreign investors is a precondition for the inflow of FDI flows into Vietnam from the U.S which can be considered a contribution of both economic and financial factors; and the labor factor is also important role in determining FDI qualifications of employees and labor costs

From the results of research , the following conclusions were formed: the dissertation identifies the impact between the most important factors of investment environment affecting American investors' decision on establishing new FDI enterprise, maintaining FDI and introducing new FDI investors in three major cities of Vietnam like Hanoi, Da Nang and Ho Chi Minh City; in the relationship between the environmental factors that attracts FDI from the U.S into Vietnam, geographical- infrastructure factor dramatically influence decisions of the U.S investors and enterprises; among the observed factors cheap labor in Vietnam has been losing the advantage and have lightly influence decisions of the U.S investors and enterprises;

Based on the conclusions of the dissertation, these are the recommendations: Vietnam is at a position to improve and complete quickly the FDI investment environment factors related to politics, geographical-infrastructure and labor factor to attract FDI from the U.S to the provinces and cities of Vietnam; consider politics, geographical- infrastructure and labor in the operation by prioritizing the first factor group to reform rapidly to improve

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the idea of attracting FDI based on cheap labor force advantage is not suitable to present practice.; and government administrators and policy makers of the central agencies and the local agencies shall not consider it as

a prerequisite to attract FDI and raise the qualification and skills of Vietnam labor

Chapter I INTRODUCTION

Foreign Direct Investment (FDI) is a popular concept wherein a host country have investment from foreign companies to produce goods or supply service in its national boundary The FDI is a significant capital and technical source of economic growth This is also clearly a characteristic of globalization

It does not only provide investment capital and technology, but also provide managerial and technological skills, create jobs, and upgrade infrastructure for host country It is proven that economic isolation is a closed road, especially in globalization and integration of international economy In order to attract foreign investors, especially numerous FDI inflows from Multinational Enterprises (MNEs) and big economies, governments of different countries have been developing and changing their traditional economies by designing and executing relevant policies to open environment for FDI

Background of the Study

In Vietnam, FDI is an important source to help restructure and increase the competitiveness of the economy since the middle of 1980s when Vietnam began to apply new economic mechanism called “Doi Moi” known as “open-door policy” FDI has become an important factor of the economy of Vietnam in the context of deep integration with the world economy and globalization trends For 36 years, Vietnam has gained significant success in attracting foreign investment

In this context, Vietnam has launched several measures, like open-door policy, improved environment to attract foreign investment in order to face the decline of inflows of foreign direct investment and new developments of the globalization process The change in financing and banking policy, labor force, administration, improved geographical and infrastructure factors in the direction of increasing favor for foreign investors by the Vietnam Government, have been considered as an urgent measure to increase the viability of FDI Despite achieving certain results, it was found out that Vietnam did not make use of opportunities to attract FDI and not gain the maximum benefits that foreign direct investment can bring, especially the in flow of investors from U.S., Europe and Japan Also, the application of geographical and infrastructure advantage in attracting foreign direct investment in Vietnam, especially financial and banking elements are limited, and not yet achieved as desired target

This dissertation analyzed factors affecting the FDI source from United States in Vietnam which will improve its socio-economic development purpose Moreover, it also provided comments and suggestions to increase quality of investment environment and attract prospects, as well as promising solution of investment environment for FDI from United States in Vietnam in the future

Statement of the Problem

Foreign direct investment (FDI) is one of the remarkable activities in international economic integration and globalization for many decades It is important for economic development not only for the poor countries, but also

for developed countries Thus, this undertaking needed to find appropriate solutions to improve the investment environment to attract and effectively use FDI, particularly with original technology transfer, and advanced management experience from the U.S MNCs for growth and sustainable development

objectives This dissertation entitled: “Environment Factors for Foreign Direct Investment for American Business Corporation in Three Main Commercial

Centers of Vietnam” specifically aims to answer the following questions:

1 How does stability of political environment of Vietnam affect the U.S.’s FDI attraction?

2 How does convenience in institutional-management environment of Vietnam affect U.S.’s FDI attraction ?

3 How does the advantage of infrastructure- location factor of Vietnam affect U.S.’s FDI attraction ?

4 How does openness in economic and financial mechanism of Vietnam affect U.S.‘s FDI attraction ?

5 How does qualification and skills of Vietnamese labor factor affect U.S.’s FDI attraction ?

Hypothesis

It is difficult to determine and control the percentage of FDI between investment forms and investment countries While collecting and analyzing the FDI data in Vietnam, the researcher provided these hypotheses:

H1: Stable political environment is a factor to attract more FDI

H2: Convenient institutional-management environment affects

investor’s determination positively

H3: Advantage of infrastructure- location is a factor to determine

FDI

H4: Openness of economic and financial mechanism is an incentive

for FDI

H5: Improving qualification and skill labor force is a factor to attract

FDI in the host country

In order to research the above factors, the author assumed that total registered FDI is equivalent to the total effect of FDI and there is no conversion between investment form and no transfer of projects between investment countries or regions

Significance of the Study

The importance of this study lies on the basic arguments of FDI theory, investment environment, and influent factors clarification It is beneficial to the following:

Government Officials Government officials will learn the definition or

concepts, characteristics, classification, elements of the investment environment In addition, it will also point out some international experience

of some countries about the improvement of investment environment in order

to enhance FDI attraction in Vietnam

Business Enterprise Owners Since the Dissertation provided a

general picture of FDI source from United States in Vietnam, it will help heighten the Vietnamese’ awareness of FDI role on socio-economical development in Vietnam, specifically in business enterprises Moreover, this also provides general view of investment environment and attracting

prospects and promising solution of investment environment for FDI from United States in Vietnam in the coming years

Scope and Limitation of the Study

The Dissertation focused only on studying investment environment to attract FDI from USA to Vietnam in three major cities (Hanoi, Danang, Ho Chi Minh city) The investment environment includes investment environment in the host countries, investment environment in domestic country and international investment environment Among three components of investment environment, the receiving country can actively control only the domestic environment if the country wants to attract FDI Among the factors of investment environment of Vietnam, there are stable or barely changeable factors such as the natural and the political environment Therefore, these also include factors of investment environments to which the Government has heavy influence including: environmental policy, law, administrative procedures, economic environment, infrastructure and human resources

Regarding the scope of time, research aimed to study investment environment, impact of investment environment on FDI capital and the status

of FDI from the United States in Vietnam from 1995 - 2012 However, to clarify breakthrough in multi-side relations, the dissertation referred to the problem of relations between the two countries before the normalization of diplomatic relations and provided solutions to improve the investment environment for the future

The findings of this dissertation could be used to forecast quarterly and year in attracting the US FDI if there is sufficient secondary data This source

can be collected or implemented quarterly by competent authorities of the Government of Vietnam

Definition of Terms

For clarity and better understanding, the following terms are conceptually and operationally defined:

Build - Operation - Transfer Contracts (BOT) is a form of investment signed

between state competent agencies and investors to contruct infrastructure projects in a given period

Build - Transfer - Business Contracts (BTO) is a form of investment signed

between state competent agencies and investors to build infrastructure projects After the completion of construction, the investor transfer the facility to the State and the government provide investor’s right to business that works in a certain period to recover the investment and profit

Build - Transfer Contracts (BT) is a form of investment signed between

state competent agencies and investors to build infrastructure projects After completion of construction, the investor shall transfer the facility to the State and the government facilitate the investors implementation of other investment projects to recover the investment and profit or pay to

investors as agreed in the contract

Business Cooperation Contract (BCC) is a form of investment signed

between investors to do business collaboration, profit sharing,

production-sharing without creating a legal entity

Capital Investment refers to cash and other assets to legally implement

investment activities in the form of direct investment or indirect investment

Conditional Investment Sector is a sector invested only with specific

conditions prescribed by law

Direct Investment is a form of investment by investors to invest and

participate in active investment management

Domestic Investment is when domestic investors provide capital in the form

of cash and other assets to conduct investment activities in Vietnam

Economic and Financial Mechanism is the process by which a market

solves a problem allocating resources, especially that of deciding how much of a good or service should be produced, but other such problems as well The market mechanism is an alternative, for example, to having such decisions made by government The financial mechanism is method or source through which funding is made available, such as bank loans, bond or share issue, reserves or savings, and sales revenue

Economy Zone is a zone having specific economic space with strong

favorable investment and business environment for investors, with defined geographical boundaries established under the provisions of the government

Enterprises with Foreign Investment Capital includes enterprises founded

by foreign investors for carrying out investment activities in Vietnam which belong to foreign investors from shares buying, merger, and acquisition activities

Export Processing Zone is an industrial zone specializing in the production

of export goods, the provision of services for the export goods production and export activities, with defined geographical boundaries,

established under the provisions of the government

Foreign Investment is when foreign investors provide capital in ther form of

cash or other legal assets into Vietnam to conduct investment activity

Foreign Investors refers to international organizations and individuals who

will implement investment activities in Vietnam

Governmental Administrative Environment is created by administrative

laws and regulations body of rules, regulations and orders formulated

by a government body (such as an environment management agency)

responsible for carrying out state law

High-tech Zone is an area that develop and apply high technology, creating

hi-tech enterprises, training high-tech manpower, manufacturing and doing business of high-tech products, with defined geographical

boundaries, established under the provisions of the government

Indirect Investment is a form of investment through purchase of shares,

stocks, bonds and other valuable papers, securities and investment funds through other intermediary financial institutions, not directly involved in the management of investment activities

Industry Zone is an area that produce industrial goods and perform services

for industrial production, with defined geographical boundaries, and established under the provisions of the Government

Investment means that an investor provides capital in the form of tangible or

intangible property to conduct investment activities under the

provisions of the Investment Law and other provisions of the relevant legislation

Investment Activities are activities of investor in the investment process,

including investment preparation, implementation and management of investment projects

Investment Project is a collection of proposals on medium and long-term

capital to carry out investment activities on a specific geographical area, for a determined period

Investors are organizations and individuals who own capital or on behalf of

the owner or the borrower and directly manage and use capital to make

investments

Labor Environment is the total number of people employed or seeking

employment in a country or region It is also called work force

Legal Capital is the minimum capital required to set up a business enterprise

Legal capital is authorized by a competent agency It can be considered to be able to implement a project when the enterprise is established Legal capital will vary by business sector

Location Environment is geographical place (such as an airport, seaport,

container freight station or terminal) that provides permanent facilities for movement of goods (such as customs, storage, and other support

services) or is designated for a stated purpose

Political Environment pertains to government actions which affects the

operations of a company or business These actions may be local, regional, national or international level Business owners and

managers pay close attention to the political environment to gauge how government actions will affect their company

Public Private Partnership (PPP) is both public and private investors

investing in projects for development socio-economic infrastructure and public services

State Capital is the development investment capital from state budget, state

credit guarantees, state credit capital for development investment and other investment of the state

Chapter II REVIEW OF LITERATURE

This chapter presents the conceptual/ theoretical framework which bear significance and similarities in this study This also includes the paradigm

of the study that could help the readers to fully understand the context of the study

Foreign Direct Investment (FDI) Theory

Concept

Foreign direct investment has been developed since the ‘50s and has been expanding throughout the world, not limited between developed countries and developing countries

According to UNCTAD, FDI is an investment, including long-term relationship, reflecting interests and long-term control of an entity in one economy (foreign investors or parent foreign companies) in an enterprise in

an economy other than the economy of foreign investors (enterprises with 100% foreign-owned, joint ventures or foreign subsidiaries)

IMFcited that foreign direct investment is investment made to acquire long-term interest in an enterprise which operates in an economy other than the economy of the investor The goal is to have an effective voice in the management of that business

In fact, according to the 2005 Investment Law of Vietnam, "Direct investment is a form of investment when investors invest and participate in an active investment management" and "foreign investors are foreign organizations or individuals that put capital to carry out investment activities in

Vietnam ", which can be understood as forms of foreign investors which invest and participate in the management of investment activities in Vietnam

Thus, from the perspective outlined above, it can be understood that FDI investors shift money, and technologyfrom one country to another, in which the owners of capital is the one to manage and operate directly activities for economic benefit purpose from investment-receiving countries

In addition to this, it might be understood that: FDI is the type of movement of capital between countries, in which the capital owners is both direct management and operation of capital use which is considered under the following assessments:

First, in consideration of the ownership aspect: FDI is the type of

foreign investment in which the property rights associates with ownership of investment assets To identify whether a particular investment activity is a FDI projects or not, each nation has its own determined standards For example, the U.S Department of Commerce defines a U.S investor as FDI company if

it holds at least 10% of registered shares or equivalent assets of a foreign company

Second, in consideration of property flow aspect: FDI is the movement

of investment capital from investors to the investment country In this case, the investment activities in foreign countries are considered as direct investment when the company manages directly assets and shares; investment capital is part of investor company’s assets in the investment countries

Third, in consideration of activity scope: FDI is done mainly in the form

of subsidiaries or joint ventures under multinational companies Thus, FDI can

be defined as the business expanding activities of multinational companies on

an international scale The expansion includes the transfer of capital, technology, productive skills and management key to countries receiving investment for organizing production and business activities

Features

In general, foreign direct investment has the basic characteristics of investment which are as follows:

First, FDI investors are owners of capital, foreign nationality, investing

in another country so foreign investors must abide by the laws of the investment receiving country Investors are involved directly in the organization, management, administration and use of investment capital They have the rights and obligations of business activity corresponding to this capital In the case of investment of 100% capital, foreign investors have full power to decide

Second, FDI includes not only the initial capital investment by foreign

investors in the form of legal capital, but also loans from organizations and individuals to develop and extend projects as well as investment capital is deducted from after-tax profits as a result of production and business activities Thus, the host country must have appropriate financial policies to avoid some cases that some foreign investors put only a small amount of foreign capital but take loan in the receiving country to perform investment; business expansion This affects purposes of attracting foreign investment in the host countries

Third, FDI is a long-term development investment capital, directly from

other countries So, this investment is an essential long-term capital in the economy of recipient countries Its international capital flows is associated with the construction of buildings, factories, and production lines with long-term investment, large capital investment and high stability in host countries FDI differs from indirect foreign investment which is a form of investment that foreign investors invest in other countries, but are not under the power of the management Characteristics of indirect foreign investment is short-term operation, which ismore volatile Due to the nature of the investment forms, FDI capital should be less influenced or controlled by government compared

to other forms of indirect foreign investment

Fourth, FDI is a form of direct investment by foreign investors who

bring capital to invest in other countries So, other than loans, FDI in the host country does not refund and create debt burden on the national debt This is

an advantage over other forms of foreign investment Bringing capital from foreign investors into the country will create more capital for investment, especially in the developing countries and will ensure financial security for the country and is much better capital source than other loans To be known as the FDI, the foreign investor must contribute a certain percentage of capital and this ratio depends on each country's regulations and can change over time

Fifth, FDI is a form of capital export to get high profits and foreign

investors decide on its size and use Foreign investors always aim to get high profit so they can bring many disadvantages for national interests and objectives to attract investment capital of receiving country

Sixth, foreign direct investment is often accompanied by technology

transfer and management experience for the investment-receiving countries

As a summary, foreign direct investment is the type of international investment, in which a foreign investor distributes capital to build or buy (in whole or in part) the business establishments in foreign countries and become the owner property that manages, operates or participates in the operating management of the establishments

FDI classification

Joint – Venture Company

This is a form of international business organization in which participants have different nationalities between home country’s investors and the rest of the foreign partner This form is characterized by new enterprises established under the laws of the host country, having a legal entity under the laws of the host country, the partners have different nationalities contribute capital, and manage business activity, distribute profit, and share risks together Capital contribution rate is agreed by the partners based on the law

of the host countries This is the type of business that the investment receiving country has advantage not only to take the benefits of receiving capital contribution, but also to learn management experience, to train a team

of skilled laborers and to obtain high technologies To get these benefits, it requires local capable contribution, qualified managers involved with foreigners For foreign investors, this form is only suitable in the early stages when they are not knowledgeable about the local country, its legal and investment environment in order to understand and get support from host country partner to lessen the risk during investment process However, when

foreign investors know well the country, this investment form is not very popular, because they already know and understand the laws, procedures and policies related to the investment problem Thus, they want their own investment decisions without going through the consent of the partners

Enterprise with 100% Foreign Capital

This type of business is when foreign investors invest capital for wholly formed, organized and operating management set up as a limited company, having a legal entity under the laws of the host country Foreign investor manages themselves and is responsible for production and business results, for interests and obligations in the business, but being controlled by the laws

of the host country

This form is the preferred foreign investment and is expanded in international economic relations as their own decisions, and management to get benefit from investing activities

Business Cooperation Contract

This is a form of joint venture between a local partner with foreign investors characterized by a contract signed that presents an agreement to conduct one or more business activities in the investment countries, based on clearly defined objects, business content, obligations, responsibilities and division of business results for the partners without setting new entity This type of contract is most commonly applied in the field of searching,

exploration and exploitation of oil and some other resources

Other forms of FDI

In practice, FDI is also implemented under these other forms:

BOT ( Build – Operate – Transfer): BOT is an investment form signed

between the authorized state agency in the host country and foreign investors

in order to invest infrastructure construction (including expansion, upgrading and modernization works), and trade in certain time to recover capital and a reasonable profit, then, transfer the entire work to the host country without compensation This forms can create a new legal entity and may be 100% foreign-owned or joint ventures The scope of application is infrastructure

projects, in particular in the field of rail transport, roads, ports, hydroelectric

Build - Transfer - Business Contracts (BTO) is "a form of investment

signed between state competent agencies and investors to build infrastructure projects After the completion of construction, the investor transfer the facility

to the State, while the government provide investor’s right to business that works in certain period to recover the investment and profit This form is similar to BOT, but after the completion of construction works, they are transferred immediately to the host country before the business is done

Build – Transfer - Contracts (BT) is "a form of investment signed

between state competent agencies and investors to build infrastructure projects After completion of construction, the investor shall transfer the facility to the State and facilitate the investors to implement other investment projects to recover the investment and profit or pay to investors as agreed BT

in the contract

Public Private Partnership (PPP) is a contract signed between

authorized local agencies and investors to build public construction and

services Both public and private investors invest projects for development of socio-economic infrastructure and public services Competent state agencies make a list of priority annual investment PPP projects and conduct competitive bidding to select foreign investors who are qualified and experienced This form of cooperation aims to optimize investment performance and provide high-quality public services; it will be beneficial for both the state and the people to take advantage of financial resources, management of the investment, while ensuring benefits to the people Each PPP project will make two contributions at the certain rate depending on the regulations of each country and each period

The form of BOT, BTO, BT and PPP is very suitable for developing conutries due to their weakness in infrastructure and capital resources

In addition to the above, there are other forms as follows but conditions for these forms depend on each country's laws

Parent –Subsidiary Company: A company owned capital in another

company at a sufficient level, and control the management and operating activity of the company through the influence on board member or the board member selection

Collective Name Company: An enterprise must have at least two members of collective name or other collective name members which may

have capital contributing partners

Mergers & Acquisitions Company: The majority of acquisitions and

mergers are made between large MNCs and focus on such fields as automotive, pharmaceutical, telecommunications and finance in the developed countries

Company Branches Abroad: This form is distinguished from the form of

the company with 100% foreign investment based on the point that subsidiary

is not considered an independent legal entity while the company is usually a single legal entity

Every form of investment of foreign investors has both advantages and disadvantages Therefore, harmony combination of interests of the partner involved in accordance with the objectives, each country will have the priority form of FDI investment to promote country's potential as well as benefits for foreign investors

In addition,FDI is divided in the following sectors based on the business sectors of FDI project, such as:

Industry Sector: foreign investors invest in producing and trading lines

for industrial products

Agriculture Sector: foreign investors invest in the production and

business sectors for agricultural, forestry and fishery product

Service Sector: foreign investors invest in business services, such as

banking and finance, hotels, tourism, telecommunications, culture, education, and health

Roles of Foreign Direct Investment

Impact of FDI on investors and investor’s country

a) Positive Impacts

First, improve efficient capital use by exploiting the advantages of the

investment-receiving countries such as, sources of cheap labor or near

sources of raw materials and markets for product consumption

Second, restructure the national economy towards a modern and more

efficient orientation In the period 1975 - 1995, the Yen appreciation has prompted Japanese companies to move production abroad; the context has created better conditions for the horizontal links between countries in the region The parent company in Japan focused on producing high commodity and necessary equipment to provide for affiliates throughout Asia The branches are located in the countries, producing labor intensive goods, medium- and low-level technology to substitute for imported product from Japan for the host country market, or to export to the third countries or back to Japan

Third, avoid trading or non-trading protection Through direct

investment abroad, the investor will establish the production and business establishments located in the local country which is implementing policies of trading or non-trading protection

Fourth, increase business profits through "transfer pricing" Through

FDI activities in many different countries, multinational companies will take advantage of the mechanism of tax administration in each country to effectuate the "transfer pricing" to evade taxes, increase profits for the company

Fifth, risk diversification for investors due to economic conditions and

domestic political instability

b) Negative Impacts

First, if the Governments of the investment exporting countries does not

have appropriate investment policies in the domestic countries, this will encourage the attention of foreign investment over domestic investment to have

higher profit Meanwhile, the domestic economy could fall into recession, political and social instability

Second, foreign investors may be on a risk of being affected by economic

policy, politics, society of the investment receiving country

Impact of FDI on Investment Receiving Country

a) Positive Impacts

First, the additional investment funds for social and economic

development: The British economist Roy Harrod (1940) and Americans economist Domar Evsey (1940) proved that GDP growth depends on investment, as follows:

Second, technology transfer, economic management experience:

Foreign direct investment is an important resource for the development of technological capabilities of the host country FDI, accompanied by available technology transfer from outside, develop technological capability of the research facilities and application in the country, and stimulate local business

GDP I

∆

enterprises to invest in innovation technology to create products which are capable of competing with FDI In addition, the management model and the modern business methods used in FDI domestic firms promote innovation in management thinking and acquire advanced management experience

Third, create jobs, raise living standards and quality of human

resources: FDI projects create jobs by attracting the host country's labor work directly and indirectly by promoting the activities of related services FDI project invests to produce and distribute pharmaceuticals, medical devices and process quality food in the host country that contribute to improve health and nutrition for people of the local country

In addition, foreign investors provide financial grants or directly open vocational training classes, or send human resources for training abroad Thus, they play an important role in the development of vocational education, and improvement of management capacity for labors in the investment-receiving countries

Fourth, expand markets, promote exports of goods: FDI enterprises

contribute significantly in enhancing the export capacity and expanding markets abroad Through the cooperation with foreign investors, host countries have opportunities to enter the world market, where investors have considerable position (because most investors are transnational companies that have consumption networks in many countries around the world)

Fifth, promote economic restructuring: FDI projects focus mainly on

investment in industries and services In particular, FDI projects in developing countries form new industry and services that contribute to restructure the economy by increasing the proportion of industry and services in the

economy structure, associated with the change of technological structure, product structure, labor structure, and the structure of the territory in accordance with the needs of social and economic development of countries receiving investment

Sixth, contribute to increasing national budget and improving trade

balances: FDI enterprises contribute to increase in national budget through direct taxes and other taxing charges In addition, FDI inflows into the investment receiving country and indirect foreign currency through tourism, and payment of products and services provided by the host countries will improve the current account balance and international balance of payment

b) Negative Impacts

First,the phenomenon of "transfer pricing" is quite common in foreign

direct investment: The price transition behavior has negative impact on the economy, causing huge losses to the State, distorting the business environment, creating unequal and detrimental pressure to the good investors who follow right commitment; and lessen effective management of the state in the implementation of the investment policy for economical and social development This is also one of the causes of trade gap increased do to the greater use of foreign currency for raw material importation than foreign currency gained from product exportation

Second, causing some imbalance and instability in the investment:

The highest goal of investors is profit Investors are interested in the project having a high rate of return In contrast, the projects, that are important for people's needs and welfare, but provide low or no profits, will be difficult to attract FDI

The foreign investors often invest in the sector, areas which are not coincident with the objectives of the host country in attracting FDI If there are

no effective mechanisms and effective planning, it will lead to investment inefficient and rampant status of investment, over exploited of natural resources Foreign investors also distort economic structure, slow improvment, might build overall risk of destabilizing socio-economic life of countries such as FDI inflows abruptly withdrawn and mass dismissing of workers

Third, causing negative result of labor and finance in the investment

receiving country: The international investors are the most experienced and savvy in business, so in many cases the host country will bear much disadvantage In addition, the host country may also suffer from "brain drain" because FDI projects often attract good managers due to good income or good and highly professional working environment Due to the presence of FDI firms, especially skilled workers who move from local economical sector

to FDI sectors with higher income levels Moreover, foreign investors will bring benefits into their country from investment activities, tax exemption and also from other activities Many foreign investors still have tax arrears, bank lending in the country in large quantities and then, have secretly fled out of the host country

Fourth, may be introduced by the outdated technology: Foreign

investors take advantage of weaknesses in management expertise and technology of the host country They might introduce the out dated technology with expensive prices, causing huge waste for removal, replacement or other consequences later Recently in Vietnam, there have been many projects

bringing obsolete equipment and technologies, which affects seriously the environmental and community benefits to the host country but foreign investors gain high benefits

Fifth, increase the risk of bankruptcy of local economy and traditional

industries, increase risk of competitive inequality: Status of labor disputes in the FDI sector is inevitable, especially in the time of starting a new business activity, or in the certain time when business activity has met difficulty Some employers pay for workers in the minimum salary, require overtime working, the salary is not enough to reproduce labor power, arising conflicts between employers and employees, leading to strikes or production stagnation

Sixth, it is losing more jobs from the traditional manufacturing industries

and being not properly respected to train employees: The foreign investors have created many jobs for the host country, especially for developing countries like Vietnam, which have young population and abundant labor source and the creation of work to workers with a stable income is extremely important In fact, FDI has created million workers directly and indirectly in recent years Besides, FDI activity has also caused much loss of the agricultural land, leading to loss of many jobs in the traditional sectors With goal of maximizing profits and minimizing costs, foreign investors still favor exploitation and use seasonally of cheap and less training labor bur pay less attention to the training and use of skilled manpower who can work for long time for investors

Seventh, negatve impact on the environment and natural resource

over-exploitation: It can be said that one of the most negative effects of FDI

on host countries is the impact on the environment especially, the situation of

"pollution export" from developed countries to developing countries through

increased FDI The developing countries are in danger of becoming the country having high "imported" pollution, including China, India, Vietnam

Eighth, it is the risk of money laundering:

FDI can be a convenient channel for money laundering organizations The illegal organizations can conduct investments abroad in the form of 100% foreign capital, which not to act any legal business, but legalized the illegal payments In particular, in the country which has weak inspection, monitoring, accounting andcustomer underdeveloped leaning systems, the use of unofficial cash and its flows are high

Overview of Investment Enviroment

Concept

The concept of the investment environment has been studied and reviewed by many different aspects depending on the purpose, scope and subjects of research

Concept one: The investment environment reflects specific factors of

alocation, which can provide opportunities and incentives for business enterprise to invest efficiently, for job creation and development (World Bank,

2005)

This concept only considers the investment environment of aplace (a country, aregion, alocal) The investment environmentis a combination of specific factors of alocation that affect investment decisions These specific factors affect costs, risks and competition barriers of enterprises, and as a

consequence, it affects expected returns