THE EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN COUNTRIES

The effects of foreign direct investment FDI on the labor market of ASEAN countries are quite mixed and need to be further analyzed by in-depth models.. In fact, in recent years and now,

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

THE EFFECTS OF FDI ON THE LABOR MARKET

OF ASEAN COUNTRIES

Specialization: International TradePolicy and Law

HO THI HONG NGAN

Hanoi - 2019

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

THE EFFECTS OF FDI ON THE LABOR MARKET

OF ASEAN COUNTRIES

Specialization: International Trade Policy and Law

Full name: Ho Thi Hong Ngan Supervisor: Dr Nguyen Thi Viet Hoa

Hanoi - 2019

DECLARATION

I hereby declare that this master thesis is the scientific research of my own which made on the basis of theoretical studies, field surveys and under the direction and supervision ofDr Nguyen Thi Viet Hoa The research contents and results of this thesis are completely honest These data and documents for the analysis, review and evaluation were collected from various sources which are fully listed in the reference list

I am fully responsible for the content of this master thesis as well as this declaration

Hanoi, 21 February 2019

Author

Ho Thi Hong Ngan

ACKNOWLEDGEMENT

During the completion of this master thesis, I received the guidance and valuable help from the lecturers, siblings and friends With great respect and deep gratitude, I would like to express sincere thanks to:

Dr Nguyen Thi Viet Hoa who wholeheartedly helped, supported and encouraged me from the initial to the final level of this dissertation She provided

me with comprehensive guide from choosing the topic, outlining the thesis and editing this research

Professors and lecturers from FTU as well as World Trade Institute in the Master of International Trade Policy and Law Intake Four, who not only spread profound knowledge and information in the fields of economy and law but generated strong motivation for me while I was taking this course as well

Last but not least, I would like to express my sincere thanks to my family, my colleagues and my friends, who have always by my side encouraging, supporting, contributing valuable ideas and giving me favorable conditions for me to complete this scientific research

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENT ii

LIST OF ABBREVIATIONS vi

LIST OF FIGURES viii

SUMMARY OF THESIS RESEARCH RESULTS ix

CHAPTER 1: INTRODUCTION 1

1.1 Research Rationale 1

1.2 Literature Review 4

1.3 Research objectives 7

1.4 Research questions 7

1.5 Scope of research 8

1.6 Research methodology 8

1.7 Thesis outline 8

CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR MARKET 10

2.1 Fundamentals of FDI 10

2.1.1 The concept of FDI 10

2.1.2 Characteristics of FDI 12

2.1.3 Classification of FDI 13

2.2 Fundamentals of labor market 15

2.2.1 The concept of labor market 15

2.2.2 Composition of labor market 18

2.2.2.1 Labor supply 18

2.2.2.2 Labor demand 20

2.2.2.3 Labor cost 21

2.2.3 Functions of labor market 22

2.2.4 Characteristics of labor market 22

2.2.5 Classifications of labor market 26

2.3 Theoretical framework of the effects of FDI on the labor market 28

CHAPTER 3: EFFECTS OF FDI ON THE LABOR MARKET OF ASEAN

COUNTRIES 30

3.1 Current situation of FDI into ASEAN countries 30

3.1.1 ASEAN is one of the most attractive destinations for foreign investment of the world 30

3.1.2 Major Powers in the world invest more in ASEANdue to the strong internal force 31

3.2 Current situation of the labor market of ASEAN countries 35

3.2.1 Abundant and young labor force 35

3.2.2 Lack of skilled workers 37

3.2.3 Facing a lot of difficulties 38

3.3 Effects of FDI on the labor market of ASEAN countries 39

3.3.1 Effects of FDI on labor cost 40

3.3.2 Effects of FDI on labor demand……….44

3.3.3 Other effects of FDI 44

3.3.3.1 Effects on productivity 44

3.3.3.2 Effects on inequality 52

3.3.3.3 Effects on working environment 58

CHAPTER 4: RECOMMENDATIONS FOR VIET NAM ‘S LABOR MARKET 62

4.1 Perspectives of attracting FDI into Viet Nam 62

4.1.1 Top investment destination in ASEAN 62

4.1.2 Focus on the quality of FDI projects 63

4.2 Some experiences from ASEAN countries 65

4.3 Recommendations for attracting FDI to strengthen the positive effects of FDI on the labor market of Vietnam 68

4.3.1 Promote the investment environment of Vietnam to attract FDI inflow 69

4.3.2 Hold annual meetings/seminars to exchange and learn between Vietnamese and foreign businesses and vice versa to increase joint ventures 71

4.3.3 Encourage the use of Vietnamese labor at all levels of management in

the FDI enterprises 72

4.3.4 Introduce foreign universities / vocational schools to invest in Vietnam to improve the quality of education in Vietnam 73

4.3.5 Promulgate legitimate policies to protect the right of labor force 74

4.3.6 Raising awareness of the workers about MRAsand exploring the possibility of extending MRAS to more sectors 75

4.3.7 Reducing protection for domestic labor in AEC 77

CHAPTER 5: CONCLUSION 78

REFERENCES 82

LIST OF ABBREVIATIONS

ADB Asian Development Bank

ALMM ASEAN Labor Ministers Meeting

ASEAN Association of Southeast Asian Nations

CIT Corporate income tax

CLMV Cambodia, Laos, Myanmar, Viet Nam

CMS Centre for Multilateralism Studies

FDI Foreign Direct Investment

GSO General Statistics Office

IMF International Monetary Fund

ILO International Labor Organization

M&A Merger and Acquisition

MNEs Multi-national enterprises

MSEs Micro and Small Enterprises

MoLISA Ministry of Labor – Invalids and Social Affairs MOMT Ministry of Manpower and Transmigration MRAs Mutual Recognition Agreements

NTC National Training Council

OECD Organization for Economic Cooperation and

Development OLS Ordinary Least Square

SMEs Small and Medium – Sized Enterprises

SOEs State – Owned Enterprises

PCI Provincial Competitiveness Index

VBF Viet Nam Business Forum

VCCI Viet Nam Chamber of Commerce and Industry

WTO World Trade Organization

LIST OF FIGURES

Figure1 Classification of FDI 15

Figure2 The labor market 21

Figure3 FDI flows into ASEAN member states in 2017 31

Figure4 Intra-ASEAN investment, 1995-2016 32

Figure5 EU FDI flows in ASEAN, 1995-2015 32

Figure6 FDI in ASEAN 33

Figure7 EU services FDI flows in ASEAN, 2000-2016 33

Figure 8 Labor force in ASEAN member states in 2017 36

Figure 9 Labor force growth 36

Figure10 Employment share of ASEAN in 2017 37

Figure11 Minimum wage in ASEAN, 2018 40

Figure 12 Monthly wage of Vietnamese workers in Q2, 2018 42

Figure13 Monthly average wage of Laotian workers, 2017 43

Figure14 Productivity growth rate of Viet Nam (in percentage) 46

Figure15 The gap in absolute productivity between economic sectors (times) 47

Figure16 Capital, attracting labor and raising productivity, 2006-2016 49

Figure17 Indonesian government employment programs 51

Figure18 Labor market conditions in ASEAN 58

Figure19 Best Places to Work in Viet Nam in 2016, 2017 60

Figure20 Attracting FDI to Viet Nam (1988-2017) 62

Figure21 FDI in Viet Nam by sectors (2018) 63

Figure 22 ASEAN Leaders Statement on Human Resources and Skills Development for Economic Recovery and Sustainable Growth 65

Figure23 Priority areas for FDI attraction 70

SUMMARY OF THESIS RESEARCH RESULTS

In some certain aspects, the author has answered all the questions which have been raised when considering about the topic.The characteristics of foreign direct investment and labor market have been listed and analyzed carefully The effects of foreign direct investment (FDI) on the labor market of ASEAN countries are quite mixed and need to be further analyzed by in-depth models In general, FDI has brought positive impacts on the labor market of ASEAN countries, but these effects are not well adapted due to both subjective and objective reasons The labor force of ASEAN still faces a lot of difficulties in taking advantage of huge FDI capital from outside Therefore, some solutions have been proposed to help ASEAN labor force

in general and Vietnamese labor in particular get access to this type of investment and gradually raise their capabilities to work abroad

CHAPTER 1: INTRODUCTION

1.1 Research Rationale

Today, in countries with transitional economies, including Vietnam, in parallel with the expansion of business freedom, the development of commodity and service market and securities market, labor market is also being formed

Economic development is an indispensable goal of all countries to improve the quality of life of the people In order to develop economically, especially in the market economy, it is necessary to develop different types of markets, as the market is the living environment of the commodity economy The labor market is formed and developed in the market economy It has relationship with other types

of markets: capital market, science and technology market, information market, monetary market, etc The labor market displays the relations between the employee and the employer, on the principle of agreement through employment Under the ASEAN Economic Community (AEC) blueprint signed in 2007, ASEAN will “facilitate the issuance of visas and employment permits for skilled ASEAN and skilled workers engaged in trade activities, cross-border investment” especially in the four priority areas (air, information technology (e-ASEAN), health and tourism) as well as logistics In order to achieve this goal, functional agencies in each country have come to recognize each other's education and qualifications and grant "ASEAN experts" certification through the creation of curricula and acknowledgment of ASEAN In particular, ten ASEAN countries have signed Mutual Recognition Agreements (MRAs) under which ASEAN experts will be allowed to seek employment anywhere in ASEAN In 2005, MRA for technical advisory services was the first to be signed, followed by MRAs in nursing, surveying, architecture, medicine, dentistry, accounting and tourism A total of eight expert certificates have been created Individuals wishing to look for work abroad can obtain "expert" certification through the MRA system and continue to apply for

a job visa

In addition, the ASEAN Movement of Natural Persons Agreement was signed

in 2012 Through this agreement, foreign nationals seeking immigration to a country to carry out work related to current job may be granted a work visa upon completion of certain conditions Although overall progress has been made in the region, it is not easy to apply these complex frameworks and countries' laws have not been updated, limiting the practical implementation of the system

The AEC, a framework for the region's economic integration, focuses on a free labor market that allows skilled professionals to work anywhere they like across the region, which has a population of 620 million people The four objectives of the AEC are: (1) a single market and production base; (2) a competitive economic region; (3) equitable economic development; and (4) fully integrated region in the global economy The free labor market, which began to take shape in 2015, has freed up eight professions, including medicine, dentistry, nursing, engineering, architecture, natural resources and geographical exploration, accounting and tourism, allowing professionals in these areas to move between countries in the region to work ASEAN has about 300 million people of a working age, 70 percent

of whom are from Indonesia, the Philippines and Vietnam A common labor market that the AEC is aiming at will provide opportunities for skilled workers in the ASEAN region to find suitable jobs enabling them to develop their careers and provide a rewarding source of income as well as other benefits

Currently, in ASEAN, market economy development is placing higher requirements on the development of the market in general and the labor market in particular (because the labor market is a decisive market) In fact, in recent years and now, although the labor markets of these countries have changed positively: labor supply as well as labor demand has gradually increased, labor quality has been improved, gradual decline in unemployment, with the increasing demand of economic development, the labor market of most of the countries in ASEAN is facing many shortcomings Due to the varying economic conditions among the ASEAN countries, workers often move from low-income countries to higher-income countries in search of higher incomes It is easy to see a lot of Cambodian

workers in the construction industry of Singapore or Vietnamese workers in Thailand restaurants Indonesia and the Philippines have a large workforce and are now facing high unemployment and low incomes For these reasons, they tend to move to their neighbors (Push Force) On the other hand, Thailand and Malaysia have high living standards and low unemployment rate, attracting workers from the remaining six countries (Pull Force) The biggest concern for ASEAN enterprises is the shortage of skilled workers This seems to be the most serious problem in finance, ICT and other professional services Moreover, the demand for employment in mid-level managers and professionals is very high

A standout amongst the most pivotal parts of foreign direct investment (FDI)

is its commitment to the economic growth of the host nation This commitment is essential and is one that is actually expected by any host nation particularly developing ones In the most recent couple of decades, nations have been contending with one another for the reasons of drawing FDI, this is due to the essential commitment it makes to the general growth of economies FDI not just offers a steady capital flows, but long term commitments to host nations, insuring a regular capital inflow to host nations Access to new and cutting edge technological innovation is potentially a standout amongst the most vital reasons why a nation would need to draw FDI

FDI has always played a strategic role in the economic growth of ASEAN and

in many other economic cooperation regions around the world FDI is seen as an important channel for obtaining employment opportunities, human capital development, higher wages, technology transfer, and infrastructure improvement In other words, FDI is often seen as a vehicle for an increase in productivity and efficiency, and consequently as a driver for economic growth FDI is likely to have direct and indirect effects on host economies Increasing capital formation, employment and trade is the direct effects of FDI, whereas receiving a beneficial transfer of know-how and technology, and management skills from home country responds to indirect effects of FDI With the advantages of cheap labor and capital resources of member countries, ASEAN has built an attractive business

environment for multinational corporations seeking profits through the implementation of different channels of FDI With aforementioned advantages as well as drawbacks of labor market, ASEAN countries need to work closely to reduce transaction costs, strengthen FDI promotion policies and harmonious development of the economy among member countries in order to utilize FDI inflow

From the above reasons, the topic “The effects of FDI on the labor market of

ASEAN countries” is chosen This thesis shall give information about FDI and labor

market and deepens its analysis of FDI and labor market in ASEAN After that, based on the current status of labor market in Vietnam, the thesis shall give several implications for Vietnam’s labor market

1.2 Literature Review

The effects of FDI on the labor market have been studied carefully worldwide It is still controversial whether FDI could bring advantage to the labor market of host country While some research proves that FDI could lead to higher wages, higher productivity, and increased wage inequality, the others show that the effect on labor market is more mixed

Many studies confirm that FDI has more or less a positive impact on employment Lukáš B (2007) indicates that multi-national enterprises (MNEs) increase wages as well as productivity through spillovers in domestic firms Surprisingly productivity grew faster than wages and thus did not cause unemployment MNEs helps to create efficient jobs opportunities, reallocate resources from the less to higher productive and thus enhanced total employment When compareing domestic companies with foreign companies, the author finds that MNEs produce with increasing external returns to scale, whereas domestic firms produce with decreasing external returns to scale, but with increasing internal returns to scale Importantly, employees in foreign companies have higher productivities and are paid more They are usually bigger and employ more people per company comparing with domestic firms Karlsson et al (2009) use FDI data on various manufacturing companies in China

between 1998 and 2004 to assess the impact of FDI on employment and come to conclusion that FDI enterprises have high employment growth High employment growth in foreign companies is due to the favorable characteristics of this business, such as capital intensive and high productivity

More recently, Poole (2013) provides evidence of positive spillovers of FDI in Brazil by using matched employer–employee data to show that as workers migrate from multinational to domestic firms there is an increase in the wages of even domestic workers at incumbent firms Further, the transfer of technology is greater the higher the skill level of the worker migrating from the multinational and the higher the skill level of the worker at the incumbent firm Average wages for incumbent workers at the domestic firm increase as the share of workers from multinationals increase at the domestic firm.David M (2015) indicates that FDI has

a positive and significant effect on employment implying that an increase in the inflow of FDI is associated with higher employment Thus, Sub-Saharan African governments should strongly consider poverty alleviation and employment policies that encourage and direct FDI to the industries where it can significantly reduce unemployment David uses a panel data set for 48 Sub-Saharan African countries for the period ranging from 1991 - 2011 Furthermore, he uses the Ordinary Least Square (OLS) regression estimator, and finds that FDI has the expected sign and significance in all specifications for both the general and youth population, which implies increasing inflow of the FDI to Sub-Saharan African countries, is associated with increase in employment ratio.The expected linkages between FDI and labor productivity of domestic enterprises are one of the main reasons many countries attract investment from multinational companies Increased labor productivity can lead to an increase in wages, jobs and growth Some previous studies have investigated the relationship between FDI and productivity, suggesting that there is

a positive relationship Research by Blalock &Gertler (2008) found that FDI helps increase productivity and increase efficiency among companies

However, in other research, the findings are worth considering.Regarding the relationship between FDI and wage inequality, the study by Velde& Morrissey

(2002) found no strong evidence that FDI reduced wage inequality in some East Asian countries during the period 1985 - 1998 Although FDI increases wages for both skilled and low skilled workers, this study shows that FDI has increased wage inequality in Thailand Jenkins's study (2006) examines the impact of FDI on employment in Viet Nam in the 1990s that, despite the rapid growth of FDI in these years, direct employment creation is very limited Most of Vietnam's labor force continues to work in the agricultural and service sectors such as wholesale and retail and transport industries Even the expansion of foreign companies' investment in the early years of the 21st century into labor-intensive industries did not have a significant impact on employment due to the high productivity and low added value

of many of these investments Foreign investors in Vietnam have created very limited links with local businesses and imported most of their inputs Domestic enterprises that are under pressure to improve labor productivity to enhance their competitiveness with foreign enterprises have led to a trend of reducing jobs.Anh(2006) shows that the productivity of Vietnamese enterprises has changed thanks to the appearance of FDI enterprises, through positive spillover effects on components such as firm size, quality of labor, capital intensity However, the study shows that Vietnam's low labor level is a factor hindering the positive impact of FDI on labor productivity At the enterprise level, a low level of labor will limit the ability to acquire and transfer technology Thus, if there is a shortage of workers who meet a certain level, the dissemination of technology will be difficult or will not happen Besides, a large gap in technology and labor productivity is also making it difficult to move skilled labor between FDI enterprises and domestic enterprises

Yussof (2010) studied the impact of FDI on the Malaysian labor market and concluded that FDI has no effect on labor variables

Galina H and Mingzhi X (2016) points out that FDI increases income inequality, there is still insufficient evidence on spillover effects of FDI on labor market conditions faced by domestic firms In addition, the majority of positive effects observed are direct effects on target firms and some labor productivity

spillovers and higher wages are observed in domestic firms In the paper, the authors first review the empirical literature and analyze the mechanisms by which FDI affects host country labor markets and then present a stylized model that illustrates these mechanisms They find out that a large empirical literature on the effects of FDI on local economies, with much of it focused on technology transfers and spillovers, while a smaller but still substantial body of literature addresses the effects of FDI on a destination country’s labor markets, primarily on wages and employment

Thus, empirical studies show the necessity of FDI for economies However, studies on the impact of this capital on labor market vary between countries in different stages Therefore, this paper focuses on analyzing the labor market of some ASEAN countries with the existence of FDI and how it might affect this type

of market and how can ASEAN workers take advantage of huge FDI capital inflow

1.3 Research objectives

The research aims to clarify the effects of foreign direct investment on the labor market of ASEAN countries in general and in Viet Nam in particular The research also aims at giving recommendations for improving the quality of the labor market in Viet Nam

1.4 Research questions

The objectives of the research are derived from the research questions as follows:

✓ What are the characteristics of foreign direct investment and labor market?

✓ What are the effects of foreign direct investment on the labor market of ASEAN countries?

✓ What are the strength and the weakness of Vietnamese labor force and with the presence of AEC, whether they could take advantage of it?

✓ How can Viet Nam use the FDI capital efficiently to boost its labor market productivity??

1.5 Scope of research

Regarding the content of the dissertation, it focuses on the real situation of effects of foreign direct investment on the labor market of ASEAN countries The scope of this thesis is as follows:

As for geographical scope, the research is intended to conduct a depth practical view concerning effects of foreign direct investment on the labor market

of some ASEAN countries including Laos, Thailand, and Indonesia Then, the research deepens its study by a case of Viet Nam

As for time scope, the research focuses its analysis and synthesis on the period mainly from 2006 to 2016 This period has many events affecting the economies of ASEAN countries such as economic crisis in 2007, the establishment

of AEC in 2015 We may see the level of effect on labor market of ASEAN countries

1.6 Research methodology

During the research process of this thesis, the author has combined different research methods as follows:

- Theoretical research methods:

The thesis will collect legal documents, economic information through historical research method and then classify and systematize them Moreover, the thesis also analyzes and synthesizes all data and documents

- Practical research methods:

The thesis will observe the real situation of effects of foreign direct investment on the labor market of some ASEAN countries and base on particular experiences from these countries, giving recommendations for Viet Nam by professional solution method

1.7 Thesis outline

Chapter 1: Introduction

Chapter 2: The theoretical framework of the effects of FDI on the labor market

Chapter 3: Effects of FDI on the labor market of ASEAN countries

Chapter 4: Recommendations for Viet Nam‘s labor market

Chapter 5: Conclusion

CHAPTER 2: THE THEORETICAL FRAMEWORK OF THE EFFECTS OF FDI ON THE LABOR MARKET

2.1 Fundamentals of FDI

2.1.1 The concept of FDI

Foreign direct investment (FDI) occurs when a foreign investor purchases a property in another country for the purpose of managing it Property management is considered a criterion for distinguishing between FDI and other forms of foreign investment The concept of FDI depends on each organization and country Some

of them are listed as follows

According to the International Monetary Fund (IMF) (2003): FDI reflects the

aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise) The ‘lasting interest’ implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter

According to the Organization for Economic Co-operation and Development

(OECD) (2001): Direct investment aims to establish long-term economic

relationships with a business, especially investments that have the potential to influence management (i) Establish or expand a business or subsidiary under the sole control of the owner, (ii) Acquire the entire existing business, (iii) Engage to a new business, (iv) Long-term credit (> 5 years)

According to the World Trade Organization (WTO) (1996): FDI occurs when

an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset The management dimension is what distinguishes FDI from portfolio investment in foreign stocks, bonds and other financial instruments In most instances, both the investor and the asset it manages abroad are business firms In such cases, the investor is typically referred to as the “parent firm” and the asset as the “affiliate” or “subsidiary

The above three concepts on FDI emphasize that the owner must have real management or real control of the business Management is involved in making important decisions regarding the company's development strategies and policies However, the IMF and the OECD make it clear that the goal of FDI is the long-term benefit that the direct investor has acquired through long-term cooperation with the direct investment enterprise The concept defined by the OECD also outlines four forms of foreign direct investment: establishment or expansion of an enterprise or a subsidiary under the management of the owner, acquisition of the entire existing enterprise, enter into a new business, long-term credit (> 5 years) According to the standards of these organizations, FDI is defined broadly

The Investment Law 2005 of Vietnam does not introduce the concept of

"foreign direct investment", however, the definitions of "direct investment" and

"foreign investor" are specified at Clause 2 and Clause 5 of Article 3 The Investment Law 2014 of Vietnam only covers the concepts of "foreign investor",

"foreign-invested business organization" and does not provide specific explanations for "foreign direct investment" However, from the above, it can be understood that

FDI is a form of investment where foreign investors invest capital and participate in controlling investment activities in Vietnam or Vietnamese investors invest capital and participate in controlling overseas investment activities in accordance with the provisions of this Law and other relevant laws (Vu Chi Loc, 2012)

The current investment law applied in Viet Nam is the Investment Law 2014, which takes effect on 1 July 2015 Clause 14 and Clause 17 of Article 3 regulates

“Foreign investor means an individual holding a foreign nationality or an organization established under foreign laws and making business investment in Vietnam” and “Foreigninvested business organization means a business whose members or shareholders are foreign investors”

In summary, FDI is a form of international investment in which the amount of capital invested by investors is enough to participate in controlling the activities of investment enterprises with the goal of gaining long-term benefits

2.1.2 Characteristics of FDI

FDI has the following characteristics

Firstly, FDI is primarily private investment with a primary purpose of seeking

profits Therefore, the receiving countries should pay attention to the receipt of FDI

so that they can attract and select FDI projects to meet their economic, social and environmental development objectives instead of projects only serving profitability

of investors

Secondly, the capital contribution ratio determines the rights and obligations

of investors as well as the distribution of profits and risks According to the

regulations of each country, the minimum capital contribution that foreign investors have to contribute to the legal capital or charter capital to take control of the investment enterprises also varies This rate is 10% in the United States, 20% in Great Britain and France, and 10% in OECD (1996) In Vietnam, according to Investment Law 2014, the charter capital of foreign invested enterprises is “51% of charter capital or more is held by foreign investors, or the majority of the general partners are foreigners if the business organization is a partnership”

Thirdly, the investor decides to invest, decides on production and business and

self-responsibility for loss of profit, the income is the business result This is a

feasible and economically viable form of investment, with no political constraints The income of the investor depends on the business performance of the enterprise in which he contributes capital

Fourthly, FDI is often accompanied by technology transfer In order to carry

out the project, the investor often transfers the machines, equipment, patents, inventions, technical know-how, management experience, etc to the enterprises in the receiving countries This feature is important for the recipient countries, especially developing countries because the technology is key, the driving force for

development Acquisition of advanced technology from abroad will have a spillover effect on the economic and social development of the receiving country

2.1.3 Classification of FDI

FDI can be classified in the following forms

By way of entry, FDI is divided into two forms: Greenfield investment, border merger and acquisition

cross-Greenfield investment: Foreign investors contribute capital to build a new

production and business base in the receiving country The advantage of this form is the opportunities to create new products in the market of receiving country, helping investors protect their business secrets This is highly appreciated by the receiving country, which gives them more employment opportunities, as well as increased capital and added value for the country However, this is a very risky investment form which requires high investment cost and more time to access the market

Cross-border merger & acquisition (M&A): A foreign investor acquires or

merges an existing manufacturing base in the receiving country In fact, FDI is mainly carried out through this method because of its advantages: low investment cost, the use of brand names, backgrounds, experience as well as market insight of M&A enterprises in the receiving country, allowing the investor to access the market faster

In terms of sectoral relations between the investor and the recipient, FDI is divided into three forms: vertical FDI, horizontal FDI and conglomorate FDI

Vertical FDI: The investing enterprise and the receiving enterprise are in the

same value chain Vertical FDI is carried out for two main purposes, one is the exploitation of raw materials and fuels (Backward vertical FDI) and the other is through the acquisition of distribution channels in the receiving country to get closer to the customer, helping cosume the output of the enterprise's domestic production processes (Forward vertical FDI) Backward vertical FDI activity is more commonly applied, concentrated in the mining industry

Horizontal FDI: FDI activity is conducted to produce the same products or

similar products as the investor has produced in the home country Horizontal FDI helps FDI enterprise to overcome risks when exporting or licensing, reduce costs especially transportation cost, make sure to keep business know-how and take advantage of group monopoly

Conglomerate FDI: The investing enterprise and receiving enterprise operate

in different sectors This form helps diversify business lines, spread risk as well as increase opportunities to penetrate into high profitable industries

By legal form, FDI can be divided into different forms depending on the law

of the receiving country The common forms are business cooperation contract, joint venture enterprise, enterprise with 100% foreign owned capital

Business cooperation contract means a written agreement between two parties

or more than one party to conduct investment in the receiving country, which regulates the responsibility to divide the business results to each party without setting up new entity

Joint venture enterprise is an enterprise established in the receiving country on

the basis of a joint venture contract signed between two or more parties, or it may

be established on the basis of a treaty concluded among the Governments of these countries This form requires establishment of a new legal entity in the receiving country

Enterprise with 100% foreign owned capital shall be enterprise owned by

foreign investor, established by foreign investor in the receiving country, managed

by himself and responsible for his business results As in the case of joint venture enterprise, this also forms a new legal entity

In addition, FDI has been implemented in the forms of Build - Operate - Transfer (BOT), Build – Transfer - Operate (BTO), Build - Transfer (BT), etc

Figure1 Classification of FDI

Source: Amit Kumar(2010)

2.2 Fundamentals of labor market

2.2.1 The concept of labor market

There are currently many different definitions of labor market Each definition emphasizes a certain aspect of labor market The labor market differs from the commodity market in that it represents the majority of the socio-economic manifestations of the whole society and there are many factors influencing its development Thus, the labor markets of the United States, Japan, Western Europe, Russia, China and Vietnam differ

Labor market is the space for the exchange of labor services (labor goods) between labor buyers (employers) and labors (employees) (Adam Smith, 1776) Thus, Adam Smith emphasizes that the object of market exchange is labor service Labor market is the market in which labor services are purchased and sold through the process of determining the level of employment of workers as well as the level of wage (ILO, 1995) This concept emphasizes the identified labor services through paid employment

Labor market is where labor demand and supply interact This definition emphasizes the supply and demand of the labor market as other market types (MIT Economic Dictionary, 2018)

Labor market is the place to buy and sell services of labor, in fact, buy labor

in a certain scope (The Politburo, 2001)

Many American scientists put forward “The market that guarantees employment for workers and integrates work in the employment sector is called the labor market" or “it's a mechanism, with the help of it the coefficient between the worker and the number of jobs are regulated.” (William P Bridges and Wayne J Villemez, 1991)

“The labor market is understood as a system of social relations, norms and social institutions (including the law), ensuring the re-production, exchange and use

of labor”; or “the system of relationships is formed on the basis of value between the employer (the owner of the productive agent) and the employee on the issue of satisfying labor demand and the next issue is to hire as a means to survive.”; or

“labor market - it is a special kind of commodity market, whose content is the purchase and sale of goods of special significance - labor power, or the ability to work of human As an economic category, labor market expresses the economic relationship between the person who owns the commodity, labor ownership - the seller of it and the other, with the owner of the capital - buys labor "( R.H Yagudin and E.V Fakhrutdinova, 2015)

This concept is far more diversified in Viet Nam “The labor market is all labor relations established in the field of labor hiring (including the most basic form

of labor, such as hiring and firing labor, salaries and wages, social insurance, labor disputes, etc.), where there is an exchange between free labor and an employer.”; or: “Labor market is formed in the context of liberating workers from factories and increasing unemployment The job market itself is consistent with unemployment, and people who are unemployed are looking for it.”; or “Labor market is the place where social relations between employees and labor buyers (labor users) are made, through various forms of agreement on prices (wages) and other working conditions, on the basis of a written, oral or contractual employment contract”; or

"Labor market is the place where the social relations between the employers and employees are realized through the adjustment of wage prices”; or “Labor market demonstrates the relationship between the labor force and the labor user in determining the quantity and quality of labor to be exchanged and the corresponding remuneration.” (Nguyen Van Ngoc, 2015)

Although there are different characteristics, it is possible to see the basic agreement of the labor market definitions on the content and conditions of the labor market: buyers, labors, price of labor service, space of sale, ties among parties From that, it is possible to understand: “The labor market is part of the market system, where there is a process of exchange between a freelancer and a person with a demand for labor This exchange is agreed on the basis of labor relations such as wages, working conditions, social security, etc through a written or oral labor contract” Labor market is the largest and most important markets in the market system because labor is the most time consuming activity and the result of exchange on labor market is paid employment

2.2.2 Composition of labor market

2.2.2.1 Labor supply

Labor supply refers to the number of workers that are “willing” and able to work in a particular job or industry at a given wage rate (Richard Blundell and Thomas Macurdy, 1999)

When analyzing labor supply, people pay attention to the age structure of the population Young population structure will provide large and potential labor force

in the future From a managerial and statistic perspective, labor supply does not cover workers under age 15, but refers to workers aged 15 and over When labor supply is considered, factors needs taking into account: quantity, quality, structure, shift of labor supply in the labor market

- The quantity of labor supply can be considered in two aspects:

Labor supply includes all persons aged 15 and above, working and unemployed The actual labor supply is the labor force or the economically active population

Potential labor includes all working-age persons aged 15 years and over and those who are unemployed and persons of the age group

- The quality of labor supply is considered in the following criteria: health, education level, professional qualification, attitude of labor

- The structure of labor supply is expressed in the structure of the labor force

on the market, according to age, sex, occupational level, economic component, territory, etc

The supply of labor is influenced by many factors, which may include the following factors:

- Population size and growth rate: This factor is directly proportional to the labor supply in the labor market

The large size of the labor market is also large If the population growth rate is high, the supply of labor in the future will be supplemented much, again

- Proportion of population in working age: The proportion of the population aged 15 and above who participate in the labor force increases, the labor supply increases and vice versa

- Wage, actual wage increase will lead to labor supply tend to increase and reverse

- Living conditions affect labor supply If the living conditions are low, labors tend to increase working time to increase their income, leading to increased labor supply and vice versa

- Government policies can increase or decrease the supply of labor, such as immigration, household registration, household registration, labor migration, etc

- Education - training is the factor affecting the quality of labor supply If the quality of education - training is good, the quality and structure of labor supply will

be high and vice versa

There are also other factors affecting labor supply such as administrative reform, reform of the state-owned sector, etc

The labor force participating in the labor market is mainly and directly employed (wage earners or labor relations) There are also unemployed people, people who are not in working age but there is a need to find a job, to work, people

in working age but not ready or temporary entry into the labor market but at some point the number of people can enter the labor market due to living conditions, salary level, psychology, work, etc

Labor supply is one of the elements of the labor market, labor supply must always meet the requirements of the labor market, in particular the employer, in terms of the amount of labor quality, labor structure In labor markets where there is labor surplus (such as Vietnam), labor supply tends to be weak, the role of workers

is quite passive In labor markets where there is no labor surplus, the role of the labor force is very important and positively influences the development of the labor market such as balancing the supply- demand of labor force; increasing the quality

of labor force, the structure of labor distributed in branches, fields and areas;

employees are quick to adapt to new market changes and requirements, thus boosting labor demand, contributing to boosting the labor market

In addition, the role of labor supply is expressed through its representative organization, the union, in ensuring the rights and interests of workers, participating

in building and perfecting the mechanism, labor market legislation; resolving disputes in labor relations, collective labor agreement, contributing to healthy labor markets and labor market development Labor unions generate market power by controlling the supply of labor available to employers; unions do this for the purpose of raising wages and increasing non-wage compensation (benefits) to workers

2.2.2.2 Labor demand

Labor demand can be defined as set of decisions that the employers must take

in relation to their workers in terms of hiring, wages, ascents and training (Hamermesh, 1993) In neoclassical terms, the labor demand would have like objective to identify the principles that explains the amount of workers demanded

by the companies, the type of workers required and the wages that they are prepared

to pay to these workers The labor demand, in this sense, should be understood like

a derived demand because is a factor, between others, into a productive process for

goods and services (Hamermesh, 1993)

Employment is a state in which labor activities take place (incorporating factors of production for a specific purpose) that bring about income and are not prohibited by law

In the market economy, labor demand is derived Labor is a necessary input to produce a certain quantity of goods, so its size depends on the level of demand for goods produced by labor and the price of goods in the market Labor demand is formed from enterprises, agencies, organizations or from the demand for labor imported from abroad Labor demand depends on many factors such as a country's resources, size, and level of technology, economic structure, wage levels, customs and religions, economic development

Figure2 The labor market

Qe: Number of employees

We: Labor cost

E

0

2.2.3 Functions of labor market

It is believed that the labor market presents a complex content, highlighted by the functions that it performs in the market economy, functions of economic, social and educational nature, consisting of:

- Distribution function of employment on sectors, industries, professions (occupations), qualifications, territorial areas in line with volume and structure of the labor demand;

- Social function; through the labor market the supply and demand of labor meet, the improvement of labor conditions, the humanization of labor, social protection of the unemployed and their retraining are done;

- Educational and training function; this feature provides the information necessary for education, vocational training, retraining and reintegration of labor, the accumulation of work experience;

- Political function; the feature that reinforces social and political stability The labor market ensures the balance between the needs for labor resources of the national economy and the possibilities for their coverage It features a self-regulation mechanism, which in principle is the same on all markets Common elements of this mechanism are supply, demand and price

2.2.4 Characteristics of labor market

Having as main transaction objective the labor factor, the labor market by its structure and operation is detached from other markets through specific characteristics

- The labor market is segmented Arthur Cecil Pigou, a classical economist, said that the labor market is segmented due to restricted mobility within the industry and between industries (Leontaridi, 1998) In the broadest sense, the labor market is composed of three "levels": primary, secondary and tertiary (the tertiary contains undeclared work, determined by the evolution of the underground economy) The first level includes the workers who benefited from a higher education and training, where incomes and employment stability are higher and where there are real

professional growth opportunities (Reich et.al 1973) Large companies are especially found in this sector, companies that promote individuals, their career and salary, levels are determined largely by their evolution on the "internal markets" Doeringer and Piore (1971) and Saint-Paul (1996) consider this term as a manner of organizing the labor, that consists of filling vacancies resorting to internal promotions rather than hiring new employees Such an explanation leads to considering each sector as a group of companies, while primary/secondary segmentation can be found even within the economic entity In the secondary sector

we find a completely different situation, namely high staff turnover, low income, low level of skills of employees, without many chances of promotion, a place where

in most cases there are few professional growth prospects Due to this segmentation,

on the secondary market, employees have low wages and wage differences are due

to minimal access to education and training (Bae, 2014)

- Structuring the market in two or more levels, make labor mobility very high within each sector, but less between them due to a lack of homogeneity in employment conditions and remuneration This segmentation of the labor market between jobs that are "good", well paid and "bad", low paid, not only deepen the gap between the two sectors but even determine employees in the secondary sector

to resort to illegal labor to get higher income, even if on the medium and long term the losses are higher than current earnings Authors like Glen Cain (1976), Bulow and Summers (1985) proposed a segmentation of the labor market in three dimensions where the primary sector is divided into two parts referring to an upper part and a “secondary” part, belonging to the primary sector The upper part refers

to persons on top of the hierarchy that have autonomy, innovation and making capacities, and the secondary refers to people who need medium-level qualifications, with relatively high levels of pay and promotion opportunities (Jaoul-Grammar, 2007) The secondary sector refers to low skilled and low paid people, with little chance of promotion To a lesser extent, labor market segmentation can be seen both in terms of labor supply and labor demand In terms

decision-of labor supply, the segmentation can be made by: gender, differentiated between

men and women; age groups of working age (15-64 years, 16-65 years, 20-65 years, etc.); territorial - urban, rural; professional categories; qualification degrees; level of education (primary, secondary, tertiary) In terms of demand for labor following segmentation criteria may be encountered: according to specialities or their chosen professions; depending on the jurisdiction - urban, rural, cities, towns and communes; depending on the working schedule - full or part time; depending on the duration of the contract - indefinite or fixed; depending on the location of the labor - inside or outside the company

- The labor market is rigid and inflexible The labor market rigidity is natural,

as a result of geographical evolution, lifestyle, professional training, as well as by legal and institutional aspects that are determined by gaps within these systems The differences between salaries exist not only between companies/industries but also between various regions of the country These rigidities are met especially where unemployment and inflation are high The minimum wage could also be a factor of the rigidity in the labor market because it leaves no room for a fast adjustment to market conditions (Serban & Aceleanu, 2015) For employers, the obligation of giving this minimum wage takes into consideration the need to hire new employees reported to the level of productivity If the employee's productivity level is below the minimum wage, the employer may decide to dismiss or not hire new personnel

If the minimum wage is set at a high level, the negative consequences related to employment are higher for people with low productivity such as young people without experience or education, who are somewhat directly excluded from the workforce market, being forced to perform work without legal forms If the labor market would be a flexible and dynamic one, employees would be able to change jobs quickly enough, therefore creating high quality working places, leaving aside the jobs that are not so productive Moreover, on such a market, companies would

be encouraged to create better paid jobs that would result in a growth of the number

of employees Flexibility means promoting employment and accepting atypical positions: part-time jobs (reduced working hours), jobs with variable work schedule, working at home, self-employment etc., employment with temporary

contracts, occasional contracts, contracts per project or fixed contracts The need for flexibility is determined by increasing competition on a national level, but mostly internationally Due to the use of flexible labor there is an increase in the workforce efficiency by reducing labor costs but mostly balancing supply and demand of labor

- The labor market is a secondary market from other markets (capital market, goods and services market), receiving the influences of both, being constantly linked with them, anticipating trends in the labor supply and demand, the reaction

of economic operators, receiving and transmitting, in return, medium and long term signals and determining effects that are fund in all social-economic sectors The structure and volume of the workforce supply are dependent on the demand for labor, just as the demand for labor is dependent on the demand of goods and services, and how they are produced

- The labor market is regulated; this feature results from the particularity of the workforce as well as from the requirement to ensure employee protection, control the loyal competition through trade unions, allowing the grouping of entrepreneurs who hire wage labor The labor market legislation must be constantly improved to fight unemployment and ensure the better management of population employment

- The labor market is a contractual and participatory market The contract and negotiations between employers and employees give the instruments for the mechanism of regulating supply and demand of labor with quantitative, qualitative and structural aspects The relations between sellers and buyers are governed by laws and agreements between representatives of employees, employers and public power Education, training, demographic factors determine the value of labor The labor market is very "alive" and in a constant change

- The labor market is an administrative market because at this level companies manage their available resources according to the demand for necessary goods and services, which involves the workforce and considering the personnel wage plan

- The labor market has a multidimensional character given by the geographic, economic, educational and social scale The geographical scale is given by the

profile of the available workforce, population on age categories and the working population The economic scale refers to the population distribution by areas of activity, professions, the public participation in the economic process, the costs implied by the inactivity of the population The educational scale refers to average duration of learning, the population level of training, the number of people that are

in a particular form of learning The social scale refers to the costs of social protection, reconversion or insertion of employees on the labor market

- The labor market is inconsistent, workers having different levels of training, education, qualification, coming from different geographical areas, of different ages, genders, aspirations and standards

- The labor market is an imperfect market - in the contemporary economy, the labor market is not perfectly competitive and it probably never was The price of labor, which is the wage, is not formed in relation with the supply and demand on the market, as it would be natural, but is determined by factors such as the state of the national and international economies, state intervention, the bargaining power of trade unions or patronage intervention (Ghişoiu, 2000) It is very important for the performance of the labor market, to be close to the conditions of the perfect competition The state could intervene to orient the labor market as close to perfect competition as possible or to limit the negative trends of imperfect competition Most often trade unions are pressuring companies to increase wages regardless of the financial situation of the companies or the state of national economy, taken as a whole, which leads to low economic efficiency of companies and rising inflation

2.2.5 Classifications of labor market

Depending on the purpose of the study, the interaction between labor supply and labor demand, the impact of the Government, the labor market is classified as follows:

- According to the competitiveness of the market: Perfectly competitive market

In this market, labor supply and labor demand are adjusted flexibly at the price

of labor, and there exists only one market The demand curve is the aggregate demand curve of the individuals, moving relative to the supply curve of labor The supply curve is the aggregate supply curve of the business, however wages can be lowered arbitrarily

- Segmented market

In this market, labor supply and demand is divided into separate markets (industry, occupation, training level, gender, etc) Each market has its own demand curve and supply curve with different motions In this market there exists simultaneously tangible unemployment and low unemployment structure The pay gap has a great distinction between regions, occupations, gender, etc

- According to the level of correlation between labor supply and labor demand: Excessive labor market

When the increasing rate of supply is much higher than that of demand, it will lead to labor surplus on the labor market In this case, labor supply is almost a horizontal line Labor demand is very weak and wages is at a very low point, no response to demand and labor prices

- According to the level of state intervention in the market system:

Free market system: Individuals are responsible for decisions about wages and employment Economic efficiency in this market is ensured through the distribution and reasonable use of resources

Centralized market system: The state is an important and direct entity in regulating social labor relations with the goal of ensuring full employment for every member of the society The role of workers, employers (enterprises, organizations)

is very weak, leading to the inefficient use of labor resources

Mixed market system: This is a market where the government intervenes through centralized planning and the regulation of the market system Depending on the economic and political characteristics, the mixed market system in each country

is not the same

2.3 Theoretical framework of the effects of FDI on the labor market

- A foreign investor can increase employment either by Greenfield investment

or M&A of a company (Lukáš B, 2007) The former is supposed to be more enriching MNEs have usually higher productivity and can offer higher wages relative to domestic enterprises (Driffield, 1996), hence take over employees from local companies This process is known in the literature as the labor substitution or displacement effect Narrow definition includes only the employees who left domestic firm and started to work in a MNE Broad definition involves all jobs lost

in domestic sector due to FDIs In other words, not only the workers who were drawn by MNEs (narrow definition) but also jobs that were cancelled due to the competitive effect (Lukáš B, 2007) One could argue that these new job opportunities are then offered to less skilled unemployed, but as Pavlinek (2004) states ”… in southern Bohemia where unemployment rate stood at 5 percent in

2001, domestic firms were fighting for skilled workers such as locksmiths, turners, toolmakers and welders, with MNEs being much more successful”

- Higher wages are spilled to domestic sector, but the domestic productivity does not grow that fast With an entry of FIE, domestic firms have to increase wages immediately, in order not to lose employees, whereas spillovers and linkages need some time to come into effect With a limited budget an entrepreneur must lay off some workers (Lukáš B, 2007).Apart from the labor substitution there is also factor substitution at work Because of higher costs of labor, an employer substitutes the labor for capital and thus increases the domestic productivity of labor This can offset the current loss in employment (Driffield, 1999)

- FDI has tendency to increase the wage inequality, which can be a result of the use of more advanced technology and the orientation of MNEs on sectors with higher value added, which in turn demands skilled workers However, the most plausible explanation seems the capital-accumulation-outsourcing hypothesis Rich MNEs from the North move their low-skilled production to the poor South, because

of lower costs From the Southern perspective, that is on a lower level of development, these activities present a production with high-skilled workers This

outsourcing leads to an increase of demand for skilled workers on both sides and

expand scissors between skilled and unskilled wages (Lukáš B, 2007)

- With the presence of advanced technologies transferred from developed

countries to developing countries or experts moving from home country to host

country, it is supposed that the working environment could be improved Once the

conditions are better do the workers contribute to the companies and they compete

with others to raise the productivity

- Receiving FDI, this means that the host country has opened its doors to

exchange with other cultures of the world FDI has a strong impact on the

relationship between preserving the cultural identity of the nation and receiving

external culture in such areas as innovating thinking, attitude and professional

ethics, lifestyles, customs, gender equality and other social issues Due to

differences in concepts and norms in the management system (time, labor

discipline, payroll system between domestic enterprises and FDI enterprises),

workers of FDI enterprises is not satisfied with the behavior of employers The

status of foreign investors violating the contract such as making workers work

overtime but not paying extra wages or paying incorrectly according to the time unit

price, cutting wages, not ensuring working conditions and other benefits for

employees may result in labor conflicts between employers and employees with

strikes This can lead to certain fluctuations in the labor market, a phenomenon of

moving workers from one enterprise to another affecting the operation of

businesses, increasing costs, damages and risks to investment activities of both

investors and receiving countries

The reciprocal connection between wage, productivity, inequality as well as

working environment is easily seen Wage increase, better working environment

leads to the fact that workers feel being appreciated by employees and are eager to

contribute more Thus, they would find how to deal with the tasks effectively and

higher productivity comes as a result On the other hand, there has a tendency to

favor FDI enterprises, which may hamper the relationship between FDI enterprises

and domestic enterprises Increased inequality between these enterprises exists