Impact asessment of foreign direct investment (FDI) on the economy of hung yen province (1998 2010

The Dissertation of PHAM THI TUYET NHUNG entitled IMPACT ASSESSMENT OF FOREIGN DIRECT INVESTMENT FDI ON THE ECONOMY OF HUNG YEN PROVINCE 1998-2010 Submitted in Partial Fulfilment of t

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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

The Dissertation of

PHAM THI TUYET NHUNG

entitled

IMPACT ASSESSMENT OF FOREIGN DIRECT INVESTMENT (FDI) ON

THE ECONOMY OF HUNG YEN PROVINCE (1998-2010)

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

Accepted in Partial Fulfilment of the Requirements for the Degree

Doctor of Business Administration

This is to certify that the dissertation entitled: “IMPACT ASSESSMENT

OF FOREIGN DIRECT INVESTMENT (FDI) ON THE ECONOMY OF HUNG YEN PROVINCE (1998-2010)”, orally defended under the DBA Program jointly offered by Southern Luzon State University of the Republic of the Philippines and Thai Nguyen University of the Socialist Republic of Vietnam, embodies the result of original and scholarly work carried out by the undersigned

This dissertation does not contain words or ideas taken from published sources or written works by other persons which have been accepted as basis for the award of any degree from other higher education institutions, except where proper referencing and acknowledgement were made

PHAM THI TUYET NHUNG

Candidate

Date Orally Defended: June 24, 2013

Throughout the course of research leading to the completion of this dissertation, the researcher would like to express her deep gratitude to the following persons who have supported her with tremendous help in one way

or another:

Associate Professor, Dr Tran Chi Thien, her advisor, for his

invaluable thoughts, insightful suggestions and useful guidance throughout the writing of the dissertation;

Committee Members, for their propositions, valuable comments, and

constructive suggestions, which were of substantial value to this study;

Professors of Southern Luzon State University (SLSU) and Thai Nguyen University (TNU), for their insightful lectures in different subjects that

provided her knowledge and technique to develop a good research

Friends and colleagues, for their meaningful discussion, hospitality

and friendship;

Finally, her parents, her husband, her sons and her brother, who

always encourage and help her in every situation They have been a great source of encouragement, enhancing her strength to overcome difficulties during the completion of the DBA program

Pham Thi Tuyet Nhung

This intellectual endeavor is wholeheartedly dedicated

to my friends and colleagues, my parents,

my husband, my sons and my brother

Pham Thi Tuyet Nhung

TITLE PAGE ……… i

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 APPENDICES ……… x

ABSTRACT ……… xi

CHAPTER I INTRODUCTION ……… 1

Background of the Study ……… 2

Objectives of the Study ……… 3

Hypothesis of the Study ……… 4

Significance of the Study ……… 4

Scope and Limitations of the Study ……… 5

Definition of Terms ……… 5

II REVIEW OF LITERATURE ……… 7

Theoretical Framework ……….… 29

III METHODOLOGY Research Design ……… 30

Data Gathering Procedure ……… ……… 32

Statistical Treatment ……… ……… 33

Analytical Framework …….……….…….… 44

IV RESULTS AND DISCUSSIONS ……… 46

RECOMMENDATIONS

Summary ……….……… 79

Conclusions ……… 79

Recommendations ……… 80

REFERENCES ……… 82

APPENDICES ……… 87

CURRICULUM VITAE ……… 95

TABLE PAGE

1 Comparison of the Component Indicators of PCI of Hung

Yen Province to the Highest Score of Vietnam in 2010 … 49

2 Comparison of the Component Indicators of PCI of Hung

Yen Province to the Highest Score of Vietnam In 2012 … 50

3 Summary of ADF Unit Root Test Result ……… 53

4 Summary of PP Unit Root Test Result ……… 54

5 The Result of the Model (I) Estimation ……… 56

6 The Result of the Serial Correlation Test in Model (I) …… 58

7 The Result of the Heteroskedasticity Test in Model (I) …… 59

8 Result of the Model’s (II) Estimation ……… 61

9 Result of the Serial Correction Test in Model (II) ………… 63

10 The Result of the Heteroskedasticity Test in Model (II) …… 64

11 The Result of the Model (III) Estimation ……… 66

12 The Result of the Serial Correction Test in Model (III) …… 68

13 The Result of the Heteroskedasticity Test in Model (III) … 69

14 The Result of the Model (IV) Estimation ……… 70

15 Result of the Serial Correction Test in Model (IV) ………… 73

16 Result of the Heteroskedasticity Test in Model (IV) ……… 74

17 Summary of the Result of the OLS Estimation ……… 76

78

FIGURE PAGE

1 Foreign Direct Investment in Vietnam from 1988-2012 …… 17

2 Rate of the Implemented FDI capita in Vietnam in 1988-2012 ……… 17

3 Theoretical Framework ……… 29

4 Analytical Framework ……… 44

5 PCI of Hung Yen Province from 2005-2012 ……… 48

6 Impact of PCI on FDI Inflows in Hung Yen Province ……… 51

7 The Development Trends of Variables ……… 52

8 Result of the Normal Distribution Test for Residual in Model (I) ……… 57

9 The Result of the Normal Distribution Test for Residual in Model (II) ……… 62

10 The Result of the Normal Distribution Test for Residual in Model (III) ……… 67

11 The Result of the Normal Distribution Test for Residual in Model (IV) ……… 72

APPENDIX PAGE

A Provincial Competitiveness Index of Hung Yen Province 88

B Correlation Matrix of Variables ……… 89

C Data on the Indicators in Hung Yen Province ……… 90

D FDI in Vietnam for the Period 1988-2012 ……… 91

E Descriptive Statistics of Variables ……… 92

F FDI inflows in Vietnam by Province up to December 2012 93

`

Title of Research : IMPACT ASSESSMENT OF FOREIGN DIRECT

INVESTMENT (FDI) ON THE ECONOMY OF HUNG YEN PROVINCE (1998-2010)

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

Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in developing countries It affects the economic growth of the host country by stimulating domestic investment, increasing human capital formation and facilitating technology transfer Regional Gross Domestic Product, Taxes Generation, Export and FDI Labor are often considered the indicators to evaluate the contribution of FDI on the economy of a province

The main purpose of the study is to investigate impacts of FDI on the economy of Hung Yen, measured by four economic indicators, i.e Regional Gross Domestic Product, Taxes Generation, Export and FDI Labor The study used annual data series for the period of 1998-2010 The relationships between FDI and the indicators were analyzed by using Distributed-Lag

models The results of the study showed positive and statistically insignificant

relations between FDI inflows and the Regional Gross Domestic Product, Taxes Generation, Export, FDI Labor respectively in Hung Yen Policy

FDI in the province

Chapter I INTRODUCTION

Today, globalization is an increasingly recognized process and becomes an inevitable trend of development in human history When globalization and international economic integration take place more rapidly in both size and speed, competition becomes tougher in the world market Foreign Direct Investment (FDI) is increasingly important for development of economy of nations It is claimed that FDI can create employment, increase technological development in the host country and improve the economic condition of the country in general FDI is a sign to evaluate the policy and economic outlook of a nation FDI is the motivation to make extensive changes in the development of international relations such as political, economic, diplomatic, etc Simultaneously, FDI becomes a sharp instrument for development and global integration, market extension, cost reduction and enhancement of competitive advantages of nations Townsend (2003) said the relationship between foreign direct investment and economic growth is not so clear There are different views by researchers

on the contributions of FDI to economic growth, based on theoretical and analytical findings Some scholars see FDI as a very important tool for economic growth especially in the less developed countries (LDCs), but others claim that the contribution of FDI to economic development is not as pronounced as most people believe, even some think FDI has no positive contribution to the economic growth of the host country For example,Nuzhat Falki (2009) examined the Impact of FDI on Economic Growth of Pakistan from 1980 to 2006 She concluded that it has a negative and

statically insignificant relationship between GDP and FDI inflows in Pakistan

in this period Pardeep (2000) founded that the increase in FDI inflows in South Asia were associated with a many-fold increase in the investment by national investors, suggesting that there exist linkage effects between FDI and GDP The impact of FDI on GDP growth was found to be negative prior to

1980, mildly positive for early eighties and strongly positive over the late eighties and nineties It could be seen that there has been no consensus opinion on FDI and economic growth

Background of the Study

In Vietnam, the important role of FDI has been acknowledged for the last 20 years Since the launch of market-oriented economic reforms in 1986, Vietnam has been among the fastest growing countries in Southeast Asia with the active participation of foreign investors in all fields of the economy Vietnamese government has quickly jointed the competition for foreign direct investment into regional and global markets by restructuring the domestic economy and opening up the economy to external trade and investment (Hoang Thi Thu, 2013) The FDI capital has been supporting provinces to restructure the economy towards industrialization and modernization to create many new industries and products It also contributed to improving management capacity, increasing labor productivity, developing technology, expanding export markets, creating jobs, and improving living standards of workers However, in recent years, some problems, related to FDI, occurred

in Vietnam For example, Vedan company discharged the waste to the ThiVai

River, over 100 golf course projects were licensed, capacity of cement plants increased rapidly to levels that exceed the domestic demand, etc

Hung Yen is a delta province, located in the key economic zone of Northern Vietnam It has advantages of natural conditions and infrastructure After the Foreign Investment Law was issued (in December, 1987), Hung Yen has attracted a flow of FDI capital to some of its key industries, and this contributed significantly to the restructuring of the province economy The attraction and use of FDI capital not only contribute to economic development

of the province, but also the entire key economic zone in Northern Vietnam

Hung Yen’s economy has greatly transformed since FDI activities were implemented Therefore, it is highly necessary to conduct assessment of the impact of FDI on the economy of Hung Yen province This assessment would

be a good basis for the authority to issue appropriate policies on economic development of the province

Objectives of the Study

In this study, the relationship between FDI and the economy in the province was discussed, and the contribution of FDI to growth was investigated To perform this analysis, scholarly opinions and suggestions were discussed and empirical analysis on FDI was carried out

The objectives of the study are:

1 Investigate the effect of PCI on FDI inflows in Hung Yen Province

2 Assess the contribution of FDI on the economy of Hung Yen Province

in terms of economic indicators namely:

2.1 RGDP

Significance of the Study

The study shall become noteworthy to the following subjects:

Officials of the Province The result of the study can serve as a basis

to revise some policies as well as devise an appropriate attraction towards FDI strategy for the development of the province

Investors The result of the study may help investors realize the

advantages they can have in doing business in the province, so that they may get interested to make new or expand existing investments in the province

Business students and Future Researchers This study can serve

as benchmark information for related studies

Researcher This work is a test of her knowledge in business and her

ability to engage in a research work

Scope and Limitation of the Study

Hung Yen province is located next to Hanoi, the capital of Vietnam Hung Yen province includes nine districts: Van Lam, My Hao, Yen My, Kim Dong, Phu Cu, Tien Lu, Van Giang, Khoai Chau, An Thi, and one city under province is Hung Yen

The author studied the influences of PCI on the FDI attraction and the impacts of FDI on fours economic indicators: Regional Gross Domestic

Product, Export, Taxes Generation and FDI Labor

The thesis concentrated on the period between 1998 and 2010 based

on the secondary data

Definition of Terms

For better understanding of the study, the following terms were

operationally defined:

Domestic Investment Investment in the companies and products of the host

country rather than in those of foreign countries

Export The value of goods and services sold overseas

Foreign Direct Investment (FDI) Investment directed to production or

services in a country by a company located in another country, either

by buying a company of the host country or expanding the existing business to the host country

FDI Labor These are the total employees working in FDI enterprises The

FDI Labor is one of the economic indicators to evaluate the contribution

of FDI inflows in the economy

Provincial Competitiveness Index (PCI) An index used to evaluate and

rank the performance of economic governance including the construction of a favorable business environment for enterprise development of Vietnam’s provinces

Regional Gross Domestic Product (RGDP) The market value of all officially

recognized final goods and services produced within a region in a given period of time

Taxes Generation The total tax revenue of the province’ budget contributed

by the FDI enterprise

Chapter II REVIEW OF LITERATURE

In analyzing the contribution of FDI on economy, it is necessary to know the type of investment that is qualified as FDI This section discusses the investments that can be called FDI and those involved in it Simultaneously, the factors of economy are effected by FDI will be discussed

It also reviews previous researches on the relationship between FDI and economic growth on FDI flows to developing countries in general and to Vietnam in particular

Provincial Competitiveness Index (PCI)

The Provincial Competitiveness Index (PCI) was developed in 2005

by the Vietnamese Chamber of Commerce and Industry (VCCI) and the U.S Agency for International Development-supported Vietnam Competitiveness Initiative (USAID/VNCI) As one of the largest and most comprehensive social surveys in Vietnam, the PCI became a critical tool for measuring and assessing the standards of economic governance in Vietnam’s 63 provinces from the perspective of private sector businesses, covering business-critical issues of entry costs, compliance costs, land access, informal charges and governance qualities on pro-activity, transparency, labor development and legal institutions The PCI also includes an index assessing quality of provinces’ infrastructure as one of the most critical barriers to investment and growth in the country The PCI exercise is not intended to be a purely academic exercise, nor to ‘point fingers’ at individual provinces that rank lowest or highest Rather, the PCI attempts to provide provinces robust

information that can help provinces and municipalities to identify where and how they can pursue economic governance reforms to optimal effect The PCI has triggered a radical change in motivating provincial reform efforts with over

40 provinces conducting PCI diagnostic workshops to engage public-private dialogue or issue resolutions to improve governance performance To position the PCI on a higher level, surveys have been expanded to reach FDI business voices to draw a more comprehensive picture of Vietnam business climate for policy-makers during their decision-making process (www.pcivietnam.org)

Foreign Direct Investment

Foreign Direct Investment (FDI) is investment flowing directly into

production or services in a country by a company located in another country, either by buying a company in the target country or by expanding operations

of an existing business in that country Foreign direct investment is made for many reasons including to take advantage of cheaper wages in the host country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the market of the host country or of the host region Foreign direct investment is in contrast to portfolio investment, which is a passive investment in the securities of another country such as stocks and bonds

As a part of the national accounts of a country, FDI refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that

of the investor It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown on the balance of

payments It usually involves participation in management, joint-venture, and transfer of technology and expertise There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a

net FDI inflows (positive or negative) and "stock of foreign direct investment",

which is the cumulative number for a given period Direct investment does not include investment through the purchase of shares FDI is one example of international factor movements, which are movements of labor, capital, and other factors of production between countries (en.wikipedia.org)

The International Monetary Fund’s Balance of Payment Manual defined FDI as an investment made with the purpose of acquiring a lasting interest in

an enterprise operating outside of the country of the investor It further clarifies that the investor’s purpose is to gain an effective voice in the management of the enterprise Hence, the investor must have 10% or more in the management Based on this definition, the minimum contribution to management and control by the enterprise should be at least 10% for such to be considered as FDI

Nature and Characteristics of Foreign Drect investment

Le Thi Nga (2008) summarized that the nature of FDI is the maximizing benefits or the looking for profit in investment-receiving countries through moving capital (money, asset, technology and level of manager) from the investment countries to the investment-receiving countries Investors may be organizations or individuals, who are only willing to invest if they see that the investment can give them a benefit or a profit larger than in their own countries

FDI has the following characteristics:

FDI is a long-term project This is a characteristic which distinguishes

foreign direct investment and portfolio investment Foreign investors have the right to manage FDI enterprises while the portfolio investment does not need the investor’s right of management Portfolio investment is the capital flow within short operating time and generates income through buying and selling stocks The liquidity of portfolio investment is higher than that of FDI

FDI is a project, which has management of foreign investors

According to OECD (Organization for Economic Co-operation and Development) and United State Department of Commerce, the foreign investors, who have at least 10% of the stocks of a company have the right to manage FDI enterprises

FDI project attaches three factors: commercial activities import), technology transfer, and international labor migration The

(export-international labor migration contributes to the management skills transfer in

FDI enterprises Also, FDI is the junction on demands of the investor and the investment- receiving country and associates with the process of international economic integration

Types of foreign direct investment

FDI can be classified based on perspectives of the investor (or the home country) or of the host country From the perspective of the investor, Caves (1971) distinguishes vertical FDI, horizontal FDI and conglomerate FDI

Horizontal FDI is undertaken for the purpose of horizontal expansion to

produce the same or similar kinds of goods abroad (in the host country) as in

the home country The product differentiation is the critical element of market structure for horizontal FDI Generally, horizontal FDI is made in order to more fully exploit certain monopolistic or oligopolistic advantages, such as patents

or differentiated products, particularly if expansion at home were to violate anti-trust laws

Vertical FDI is undertaken for the purpose of exploiting raw materials or

to be nearer to the consumers through the acquisition of distribution outlets place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in

a vertical fashion in a host country

Conglomerate FDI involves both horizontal and vertical FDI

Under the perspective of the host country, FDI includes three types: Import- substituting FDI, Export-increasing FDI, and Government-initiated FDI

Import-substituting FDI involves the production of goods previously

imported by the host country, necessarily implying that imports by the host country and exports by the investing country will decline This type of FDI is likely to be determined by the size of the host country’s market, transportation costs and trade barriers

Export-increasing FDI is motivated by the desire to seek new sources

of input, such as raw materials and intermediate goods

Government-initiated FDI is a subsidized investment set by the host

country, to enhance employment, shorten disparities within the recipient country's regions, as well as lower the balance of payment deficit (UNCTAD)

Role of FDI

There are two types of FDI flows: FDI flows to developed countries and FDI flows to developing countries For developed countries, FDI contributes to solving unemployment and inflation issues FDI creates favorable condition for increasing revenue, creating a competitive environment, and promoting the economic and trade development For developing countries, FDI creates new enterprises and attracts employees FDI helps developing countries overcome their underfunding

Import and export have a causal relationship to economic growth This relationship is reflected in how exporting exploits comparative advantage and enhance specialization of production It can be seen that FDI inflows play an

important role in the export sector

Aside from reducing unemployment rate, FDI improves the

management capacity of host countries through various forms such as formal courses, non-formal learning and work process The modern knowledge of management was introduced to the developing countries, which helps management organizations keep in pace with modern industrial business

Due to the impact of science and technology, FDI will influence economic restructuring Developing countries are mostly agricultural countries, so the share of agriculture in GDP is large FDI typically invests in sectors such as commercial, industrial, services, and therefore it facilitates restructuring in an economy

Factors affecting FDI Attraction

Political and Regulation Factors

When a firm wants to operate business overseas, it is necessary to consider many reasons and factors or advantages that the host country offer

or available to foreign investors Asiedu and Brempong (2000) mentioned that any country with more open policies especially in terms of trade and investment would attract larger foreign investment inflows Tahir and Larimo (2004) found the main factors that can attract FDI in the country are not only taxes but also good infrastructure, economic growth and political system, market size and labor cost

Economy and Market factors

The economic strength of a country is the main indicator showing the wealthy status of that country, which is demonstrated by a number of indexes such as GDP growth, people’s living and purchasing power, new technology, and economic stability Trade barriers such as tariffs, restrictive import quotas, and domestic content legislation can be replaced under both the Economic and Political rubric that include economic factors, as they had played an important role in the price comparativeness and market share of foreign goods (Baldwin and Robert, 1971) The Heckscher-Ohlin theory predicted in term of FDI inflows that if there were three factors such as labor, capital and natural resources, investors would consider a country whose factors endowment allow the source country to minimize its labor, capital, and natural resources cost while maximize it return on capital (Asiedu, 2006) A large domestic market and chances to exploit economies of scale is important for the timing of the decision of FDI (Dunning, 2000)

Geographical Location Factors

Geographical location is very important to the foreign investor to make investment decision Hollenstein (2005) stated that the improvement of infrastructure and the low level of government impediments in a host country play an important role in increasing FDI inflows and making a foothold to investors in the country

Financial Factors

FDI is an international capital flow that provides the parent firm and Foreign Multinational Enterprises (MNEs) with control over foreign resources and cooperation with foreign affiliates Ahn, Adji and Willett (1998) mentioned that different “high” and “low” of inflation rate, which is not distinct, can be used as an indicator of the economic and political condition in the host country Qazi Muhammad Adnan Hye (2011) certified that financial factor plays a very important role of all investment and business in one place, in which it can help to increase formation and economic growth by introduction

of new technologies namely managerial skills, ideas, new production techniques, and varieties of capital goods

Social and Culture Factors

Successful businesses in many countries need cross-culture literacy to understand the differences between cultures across and within the nations that can have an effect on the way in which business performs

Economy

An economy consists of the economic system in a certain region, comprising the production, distribution or trade, and consumption of goods

and services in that region or country An economy is the total aggregate sum

of all transactions of value between two agents, such as one individual to one other individual, or between groups of individual activity, such as in organizations to other organizations, and between one nation and another nation Transactions only occur when both parties agree to the value, commonly expressed in some currency, or price Then and only then is the sale of good or service acted on in the transaction An economy represents the diverse activity of all agents engaged in the production of valuable goods and services for other agents in the economy

In the past, economic activity is binded by natural resources, labor, and capital This view ignores the value of technology (automation, accelerator of process, reduction of cost functions), and creativity (new products, services, processes, new markets, expands markets, diversification of markets, niche markets, increases revenue functions), especially which produces intellectual property

A given economy is the result of a set of processes that involves its culture, values, education, technological evolution, history, social organization, political structure and legal systems, as well as its geography, natural resource endowment, and ecology, as main factors These factors provide the context, content, and set the conditions and parameters in which

an economy functions Some cultures create more productive economies and function better than others, creating higher value, or GDP

A market-based economy is where goods and services are produced without obstruction or interference, and exchanged according to demand and

supply between participants (economic agents) by barter or a medium of exchange with a credit or debit value accepted within the network, such as a unit of currency and at some free market or market clearing price Capital and labor can move freely to any area of emerging shortage, signaled by rising price, and thus dynamically and automatically relieve any such threat Market-based economies require transparency on information, such as true prices, to work, and may include various kinds of immaterial production, such as affective labor that describes work carried out that is intended to produce or modify emotional experiences in people, but does not have a tangible, physical product as a result

A command-based economy is where a central political agent commands what is produced and how it is sold and distributed Shortages are common problems with a command-based economy, as there is no mechanism to manage the information (prices) about the systems natural supply and demand dynamics (Wikipedia.org)

FDI in Vietnam

The foreign-invested sector is consolidating its important role in Vietnam’s economy FDI has been an important supplementary source of funds for gross national investment and improved the balance of payment for the past years According to recent studies, such as Freeman (2000), MPI (2003), Nguyen Mai (2004), FDI sector is having an increasing share in GDP This sector also helps to strengthen production capacity and technological innovation in a number of industries, international market penetration, raising revenues for the State budget and generating employment, etc In addition,

FDI enterprises enable technology transfer, and the increased competitive pressures require domestic firms to renovate their technologies and to raise production efficiency

FDI activities are summarized by the two following figures

Figure 1 Foreign Direct Investment in Vietnam from 1988-2012

Source: Ministry of Planning and Investment portal (MPI)

Figure 2 Rate of the Implemented FDI capita in Vietnam in 1988-2012

FDI projects in Vietnam are generally of small and medium scales from 1988-2012 Those projects took the form of joint venture between State-Owned Enterprises and foreign investors FDI projects are mainly implemented in industrial sector, which considerably contributes to shifting economic structure toward industrialization However, the majority of FDI projects are located in urban areas and industrial zones, with favorable infrastructures, sizeable and skilled labor force Figure 1 and Figure 2 show that during the period from 1999 to 2004, the implemented capital and the registered capital were stable, and the implemented capital rate was high Although the registered capital was very high in 2008, the implemented capital rate reduced strongly due to the impact of the economic crisis

The number of FDI projects tends to increase in this period, especially

in 2007 and 2008 As reported by the Bureau of Foreign Investment, Ministry

of Planning and Investment (MPI), the realized FDI in 2010 reached $11 billion, equivalent to 11% higher than that in 2009 In the context that the crisis has not really recovered, this continues to affirm that Vietnam is an attractive address for foreign investors to undertake their investments

Related Studies

There have been numerous research works on the effects of FDI on economic growth with varied conclusions on the role of FDI on economic growth Alfaro (2003) applies linear regression method to study the relationship between FDI and labor productivity in various industries, base on the panel data of 47 countries from 1981 to 1999 The researcher found out that, FDI has positive effects on the productivity in manufacturing industries,

whereas its effects on growth of agricultural and mining sectors are negative Mencinger (2003) pointed out, from the panel data of eight East European transition economies from 1994 to 2001, that FDI undermines these countries’ ability in catching up with EU The possible reasons include the small scales

of such economies and over-concentration of FDI on trade and finance which reduce the spillover effects in terms of labor productivity in economic sectors

as a whole FDI may not necessarily put further competition pressures, since the competitors in receiving countries are likely to be small and new, and thus, are easily forced to exit the market Haddad and Harrison (1993) also found evidence of spillover effects on productivity in the case of Morocco’s manufacturing industries, yet the magnitude of such effects was smaller in industries with more foreign enterprises The OECD (2002) stated that FDI increases efficiency of resources and raises factor productivity in the host country, so it saw the influence of FDI on growth as positive Alfaro et al (2003) concluded that for the service sector, the effect of FDI inflows is not so clear However, an economy with a well-developed financial sector gains more from FDI The impact of FDI on growth also depends on the local condition of the host country Chowdhury and Mavrotas (2003) said FDI’s condition to growth depends on factors such as human capital base in the host country and the degree of openness in the economy, and even when FDI

is contributing to the economy, its impacts might not be easily noticed in the short run Lall (2002) even said that FDI inflows affect many factors in the economy, and these factors, in turn affects economic growth Therefore, the impacts of FDI on growth can not be measured directly since the impact is assessed through its contributions to other factors

Countries with high growth can attract FDI better than countries where the economy is not in good shape This confirms the fact that even though FDI contributes to growth, growth also influences the level of FDI in a country The positive effects of FDI on growth were also verified in Kumar and Pradhan (2002), which used panel data of 107 developing countries from

1980 to 1999 They discovered that in the majority of cases, the direction of causation between growth and FDI is not pronounced Furthermore, in poor countries the direction seemed to be running from growth to FDI in an equal number of cases as from FDI to growth This conclusion is similar to that of Hansen and Rand (2004), which said that foreign direct investment and growth have a positive relationship, but the direction of causality is not clear Understanding this direction of causality is very important for the formulation

of economic policy Despite the contribution of FDI to growth might be positive, Ray (2005) does not think it helps to develop the local industries in the host country Hence, the multinational companies can be flourishing in the host country while the local firms are not developing It is worth noting that some research works have claimed that contribution of FDI to growth is not positive In a study of Carkovic and Levine (2002), it was concluded that FDI does not have a robust independent influence on growth The study employed two models for the empirical work and used data from 75 countries Mwlima (2003) also did not see FDI as an important tool for development He claimed that the incentives and tax holiday adopted by most African countries to attract foreign investment had not been successful; instead, it is adding to the economic problems of some countries He said most African countries were competing to attract FDI to the level that each country wanted by giving the

best incentives This sometimes leads to the situation where the loss from the incentive offer could be more than the gain from the foreign investment and this could leave the country worse off than it was before the investment Most studies generally indicate that the effect of FDI on growth depends on other factors such as the degree of complementarity and substitution between domestic investment and FDI, and other country-specific characteristics Buckley, Clegg and Wang (2002) argued that the extent to which FDI contributed to growth depends on the economic and social conditions in the recipient country Countries with high rate of savings, open trade regime and high technological levels would benefit from increase FDI to their economies However, FDI may have negative effects on the growth prospects of the recipient economy if they result in a substantial reverse flows in the form of remittances of profits, and dividends and/or if the multinational corporations (MNCs) obtain substantial or other concessions from the host country

Although most countries offered a large number of incentives to attract FDI, experience from other countries shows that such plans often have limited impact on new investments, reduce transparency of the business climate, and lead to higher taxes for other taxpayers Tax incentives or free trade zones were used by some countries to attract investors, despite mixed evidence about their impact on FDI flows and the potentially high costs compared to the benefits (Sorsa, 2003)

Nuzhat (2009) examined the impact of FDI on Economic Growth of Pakistan She collected the data of FDI from the Handbook of Pakistan Economy-2005 published by the State of Pakistan and the World Bank Development indicators-2008 from 1980 to 2006 with variables of domestic

capital, foreign owned capital, and labor force With the help of endogenous growth theory and applying the regression analysis, she concluded that there existed a negative statically insignificant relationship between GDP and FDI inflows in Pakistan Anokye and George (2009) examined the Foreign Direct Investment and Stock Market Development in Ghana by collecting the data of market capitalization as a proportion of GDP, Ghana cedi-Dollar exchange rate, and Net FDI inflow quarterly data from 1991 to 2006 Applying multivariate cointegration analysis and Vector Error Correction Model (VECM), they concluded that FDI has significant influence in the development

of Ghana stock market, and there was a long-run relationship between FDI, nominal exchange rate, and stock market in Ghana perspective Wu, Jyun-Yi and Hsu Chin-Chiang (2008) examined whether the FDI promote economic growth by using threshold regression analysis The empirical analysis showed that FDI alone played an ambiguous role in contributing to economic growth based on a sample of 62 countries covering the period from 1975 to 2000, and found out that initial GDP and human capital were important factors in explaining FDI FDI is found to have a positive and significant impact on growth when host countries have better level of initial GDP and human capital

Nguyen Nhu Binh and Haughton (2002) said that the Bilateral Trade Agreement has led to 30 per cent increase in FDI into Vietnam in the first year, and an eventual doubling of the flow This would boost economic growth

by 0.6 percentage points annually Carkovic and Levine (2002) used level data to find little support for the importance of FDI in stimulating growth They argued that previous studies, which showed the benefits of FDI on

macro-economic growth, had not fully taken into account the endogeneity problem Countries with good economic performance tended to attract more FDI Therefore, if the endogeneity problem is not taken into account, it is unclear whether FDI drives economic growth, or vice versa They also concluded in their econometric study on FDI and GDP growth that the exogenous component of FDI does not exert a robust, independent influence on growth Li and Liu (2005) used a large sample of developed and developing countries, found that since the mid-1980s the relationship between FDI and economic growth has become increasingly endogenous

Choe (2003), in a large sample of 80 countries, found evidence of a two-way causality between FDI and economic growth In addition, he also stated that the effects were more apparent from economic growth to FDI

Busse and Groizard (2006) found that FDI does not have any impact

on economic growth in a very highly regulated country However, it seems that there could be a wide range of regulatory regimes, under which, FDI could still prove beneficial This is encouraging as it suggests most countries, even those with a rather restrictive regulatory environment, can benefit from FDI

According to Nguyen Thi Tue Anh et al (2006), FDI may affect economic growth in a number of ways From a narrow perspective, the effect

of FDI on growth is direct via investment channel In a broader approach, FDI puts pressure on the host countries to improve their competitiveness, particularly investment environment, thereby reducing transaction costs to foreign investors, increasing return to capital, and ultimately fostering economic growth FDI inflows may also be argued to increase investment of

domestic firms, especially those suppliers of inputs to FDI enterprises or those using inputs from FDI enterprises In this respect, FDI positively affects domestic investment Simultaneously, policies to improve infrastructure facilities, to attract more FDI, are also significant in promoting the establishment and development of domestic enterprises They stated that there is also a concern that FDI inflows may negatively affect economic growth The reason for such concern is that competition from FDI enterprises

is arguably fierce, and domestic firms are very likely to lose

Kiss (2003) and Hippert (2002) examined FDI from a social standpoint, provided a negative perspective on the impact of FDI in developing countries Kiss (2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that eventually led to the social and political exclusion of Hungarian women The author argues that governments must address gender issues as well as implement official measures and institutional changes to facilitate women's inclusion into production and social systems Hippert (2002) examines the effect of FDI on women's health The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and states that it is women, who bear the brunt of human rights abuses because of their social positions in developing countries, especially in parts of Mexico and Asia The author also discusses solutions to these problems that have failed because they have been primarily

"top-down approaches," and proposes that the only plausible solutions are to hold corporations accountable for their employees

In contrast to the researchers who presented negative view of FDI, Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence governments and provide for the social welfare of host-country citizens By focusing on their roles as philanthropists and political activists, MNCs provide foreign aid to developing countries, expand international trade and investment, and influence public policy The author provides several instances in which an MNC stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased

Alfaro (2003) said that in addition to the direct source of capital financing, FDI could serve as a source of valuable technology and know-how to the host developing countries by fostering linkages with local firms These technological innovations by MNEs played a central role in the economy, and they were among the most important areas where MNEs serves as catalyst for growth in developing countries

In general, a number of studies have confirmed the positive relationship between FDI and labor productivity in domestic enterprises, yet negative relationship was also found in some circumstances Such researches commonly employed quantitative methods to test and quantify those effects

In Vietnam, there is also the existence of a number of researches on FDI in general, yet only a few of them examine the effects of FDI on economic growth deeply For example, Nguyen Mai (2003) considered the effects of FDI

on economic growth, both vertically and horizontally, based on Vietnam’s FDI statistics from 1988 to 2003, with additional forecasts for 2005 He indicated

that FDI has positive effects on economic growth at the national level, and therefore, Vietnam needs to expand the market and seek new partners in order to attract more FDI inflows

Freeman (2002) presented another comprehensive research on FDI in Vietnam by 2003 The author reviewed recent experience in attracting FDI and pointed out some weaknesses in Vietnam’s FDI policy regimes, as well

as made inference on determinants of FDI in Vietnam The conclusion drawn from the research is that the policies related to economic reform and trade liberalization positively affect the business environment for the investors

Nguyen Thi Phuong Hoa (2004) studied the effects of FDI on productivity growth in the whole economy, under the analytical framework of relationship between FDI and poverty She concluded that FDI has positive effects on provincial economic growth, via formation and accumulation of capital assets In addition, there is evidence of positive interrelationship between FDI and human resources

Nguyen Thi Lien Hoa (2002) analyzed the itinerary for FDI attraction in Vietnam from 1996 to 2001 Nguyen Thi Huong and Bui Huy Nhuong (2003) drew out some lessons to Vietnam from the comparing FDI policies in Vietnam and China from 1979 to 2002 They verified the important role of FDI

on Vietnam’s development in terms of economic growth, economic structure improvement, state budget revenues, employment generation, etc In order to attract FDI, they agreed unanimously that synchronizing the promulgation of laws, policies, development plans for industries is necessary

Doan Ngoc Phuc (2004) analyzed FDI situation in the period

1988-2003 and concluded that economic growth in Vietnam largely depends on the

FDI sector The changes in this sector, hence, directly affect the growth rate

of the national economy In particular, FDI has considerable contribution in adding value to industry sector, capital formulation, job creation, promoting commodity production and exports, improving the balance of payments and strengthening the competitiveness of the national economy

Nguyen Thanh Xuan and Xing (2006) used the database covered FDI flows into Vietnam from 23 countries from 1990 to 2004 to analyze the impact

of FDI on exports of Vietnam The empirical results showed that the rapid expansion of Vietnamese exports was substantially attributed to FDI inflows Furthermore, the devaluation of the VND, high GDP of Vietnam and its trading countries were also important factors that led to increase in Vietnam’s exports

There were some researches about FDI in Hung Yen province Do Minh Tri (2010) researched the FDI activities in Hung Yen from 1997 to 2009 using descriptive statistical method, comparison method, and graphical analysis He pointed out that the increase in GDP and per capital income in Hung Yen has a strong relationship with the annual economic development in Hung Yen with an important role of FDI

Bui Manh Dat (2009) studied the FDI activities in Hung Yen from 2003

to 2009 using descriptive statistical method and comparison method He concluded that the FDI capital increasingly and significantly promotes efficiency of the process of industrialization and modernization in Hung Yen However, the investment structure was unreasonable, and the overall economic - social performance of direct investment activities is still low

FDI inflows not only strongly affected the process of economic restructuring, but also caused changes in the industry structure For example, the more the high technology sector grew, the more the number of workers with highly qualified skills increased The exporting goods of FDI sector accounted for a quarter of total export value of the province FDI helped local enterprises access foreign market more easily (Phung Quoc Chi, 2004)

However, the research about FDI in Hung Yen was implemented with the descriptive statistical method, the comparing method, and the graphical analysis The conclusions were based on simple analysis without testing the statistically significance, hence they might be highly subjective Therefore, it is necessary to assess the impacts of FDI on the economy by the quantitative research methodology with the support of the Eviews software Using the result of the regression analysis, we can investigate the impacts of FDI on the economy, which previous studies have not done