Summary of economics Doctoral thesis: Attracting foreign direct investment towards sustainable development in Vietnam

Clarify the theoretical and practical basis and objectively assess the situation of FDI attraction in view of sustainable development in Vietnam; Propose orientations and measures to attract and evaluate FDI projects towards sustainable development in Vietnam in coming time.

VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES

DINH KHANH LE

ATTRACTING FOREIGN DIRECT INVESTMENT TOWARDS

SUSTAINABLE DEVELOPMENT IN VIETNAM

The study is completed at:

VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES

Supervisor: 1 Assoc Prof Dr Tran Đinh Thien

2 Dr Pham Van Cong

Reviewer 1: Assoc Prof Phi Manh Hong

Reviewer 2: Assoc Prof Vu Thanh Son

Reviewer 3: Assoc Prof Tran Minh Tuan

The thesis is upheld in the presence of Academy Doctoral Thesis

Assessment Board at , Hanoi

at h day month year

The thesis can be found at the library:

- Library ………

- National Library of the Graduate Academy of Social Sciences

INTRODUCTION

1 The urgency of the thesis

Attracting foreign direct investment (FDI) has become a trend of most countries in the context of international integration nowadays FDI has made immense and undeniable contribution to the socio-economic development of the countries, especially developing countries

In recent years, the issue of sustainable development has become an indispensable and irreversible trend in all areas, including FDI attraction In many developing countries, including Vietnam, FDI attraction has brought positive results However, it also has significant consequences, especially social and environmental consequences The quality of FDI in Vietnam remains low, mainly processing and assembly The linkage between FDI enterprises and domestic enterprises seems to be very poor, while technology transfer remains limited

Given increasing demand for investment capital attraction, as well as FDI significant consequences, especially in industrial activities, it is required for a number of countries, including Vietnam, to consider FDI attraction in the direction of sustainable development

Therefore, the thesis research: Attracting foreign direct investment towards sustainable development in Vietnam proves to be very essential, and

has theoretical and practical significance for Vietnam in the new context

2 The objectives of the thesis

2.1 Overall objectives

Clarify the theoretical and practical basis and objectively assess the situation of FDI attraction in view of sustainable development in Vietnam; Propose orientations and measures to attract and evaluate FDI projects towards sustainable development in Vietnam in coming time

2.2 Specific objectives

Firstly, systematize the theoretical background on sustainable

development, FDI attraction and FDI attraction towards sustainable development; develop a theoretical framework for analyzing and evaluating FDI flows towards sustainable development in Vietnam;

Secondly, study the experience of FDI attraction in some countries such

Thirdly, objectively assess the FDI status in Vietnam over the past years

in two aspects: achievements and existing shortcomings; impacts of FDI on Vietnam in terms of sustainable development; identify causes of ineffectiveness

in FDI attraction and usage in Vietnam

Fourthly, propose solutions to attract and maintain positive impacts of

FDI in Vietnam in the direction of sustainable development

3 Objects and scope of research

3.1 Research objects

The research object of the thesis is foreign direct investment attraction towards sustainable development in Vietnam from 2006 to 2016

3.2 Scope of research

+) In terms of content: The thesis focuses on analyzing the effects of FDI

on sustainable development in Vietnam in terms of main pillars: economic, social and environmental In the "economic" pillar, the thesis examines the positive and negative effects of FDI on economic development In the "social" pillar, the thesis focuses on the effects of FDI on labor and wages In the

"environment" pillar, the thesis analyzes some negative impacts of FDI on the environment and its causes

+) In spatial terms: The thesis examines the general situation of FDI

towards sustainable development in Vietnam, not limited to geographic locations in terms of regions and territories in Vietnam

+) In temporal terms: The thesis focuses on FDI towards sustainable

development in Vietnam in the period from 2006 to 2016

4 Approach and Methodology

The thesis topic in Economic Management major is a comprehensive research that includes explanatory research, research on current situation and practical reviews, anticipatory research and research on solutions to clarify theoretical and practical bases on FDI and FDI towards sustainable development in Vietnam

5 New scientific contributions of the thesis

- To a certain extent, conducted an overview of both domestic and foreign researches related to the thesis topic to identify research gaps and issues to be studied by the thesis;

- Systematized some contents related to general basis on FDI attraction towards sustainable development, including concepts, contents, evaluation criteria and factors affecting FDI attraction in the direction of sustainable development;

- Assessed the actual situation of FDI attraction towards sustainable development in Vietnam in the period 2006-2016; from which causes of shortcomings were identified

- Based on the analysis of opportunities and challenges of FDI attraction and targets of FDI attraction in the direction of sustainable development in Vietnam towards 2025, the thesis proposes a system of solutions to improve the attraction of foreign direct investment into Vietnam in the following years

6 Theoretical and practical significances of the thesis

7 The structure of the thesis

Apart from the introduction, conclusion, appendices and references, the thesis consists of four chapters:

Chapter I: Overview of researches related to foreign direct investment

towards sustainable development

Chapter II: Theoretical and practical bases for foreign direct investment

towards sustainable development

Chapter III: FDI attraction from sustainable development perspective in

Vietnam in the period 2006-2016

Chapter IV: Orientations and solutions to attract FDI in the direction of

sustainable development towards 2025 with a vision to 2030

CHAPTER 1 OVERVIEW OF RESEARCHES RELATED TO FOREIGN DIRECT INVESTMENT TOWARDS SUSTAINABLE DEVELOPMENT

1.1 Overview of published domestic and foreign studies about FDI and impacts of FDI from sustainable development perspective

1.1.1 Overview of foreign researches

a) FDI and economic issues

The relationship and impacts of FDI on the economy has no longer been a new issue and has been studied by various researches

Studies by Moosa, Imad A (2002) in Foreign Direct Investment: Theory, Evidence and Practice; the study by Laura Alfaro (2003) named "Foreign Direct Investment and Growth: Does the Sector Matter?" and the study by Mohammad

AA & Mahmoud KA (2013) titled "Foreign Direct Investment and Economic Growth Review Literature from 1994 to 2012" focus on the impacts of FDI on various aspects of economic development and growth, including both positive and negative impacts The OECD Benchmark Definition of Foreign Direct Investment (2008) sets measurement & statistics standards of FDI impacts on balance of payments, and analyzes the relationship between FDI, trade and trade policy In the International Business: Theory of the Multinational Enterprise edited by Alan M Rugman, Richard E Caves analyzes the effects of FDI on the recipient country’s market

b) FDI and social issues

The relationship between FDI and social issues is mostly mentioned in terms of labor, wages and welfare

Arnal, E & A Hijzen (2008) in the study “The impact of Foreign Direct Investment on Wages and Working Conditions” argues that FDI firms tend to pay higher wages than domestic firms, and the impact of FDI on wages is positive, and most evident in developing countries In the study named "Foreign direct investment and welfare", Olaf J de Groot (2014) examines the relationship between FDI and general welfare, which shows that FDI increases inequality, and brings benefits for the rich more than for the poor In the study titled "Rising Income Inequality: Technology, or Trade and Financial

Globalization?” Jaumotte, F., S Lall, and C Papageorgiou (2008) also find that FDI results in higher income inequality

c) FDI and environmental issues

Most studies on the relationship between FDI and environmental issues show that FDI has negative impacts on the environment of the recipient country, increases CO2 emissions and water pollution, and so on A number of studies can be cited such as the study by Theodore H Moran (2011) titled

"Foreign Direct Investment and Development: Launching a Second Generation

of Policy Research”, the study by Jiajia Zheng & Pengfei Sheng (2017) named

“The Impact of Foreign Direct Investment (FDI) on the Environment: Market Perspectives and Evidence from China" and the study by Mohammad S.A., Fatemeh Z., Reza S., Nader H & Marjan D (2013) titled "The Impact of FDI

on environmental resources in selected countries"

1.1.2 Overview of domestic researches

a) FDI and economic issues

The role of FDI in economic growth, production capacity, budget revenue and macroeconomic balance is analyzed in "Foreign direct investment in Vietnam Theory and Practice" by Phung Xuan Nha (2013), and "Impact of Foreign Direct Investment on Economic Growth in Vietnam" by Nguyen Thi Tue Anh et al The impacts of FDI on the economy are also influenced by various factors For example, Nick J Freeman (2002) in the study titled

"Foreign Direct Investment in Vietnam: An Overview" points out how policies affect FDI impacts on economy growth; the study named “Foreign direct investment and economic growth in Vietnam” by Anwar, S & Phi Lan, N (2010) specifies other factors such as education, training, financial markets, etc

In addition to the positive impacts, the author, Tran Phien (2012) in the study titled "The Negative Impacts of Foreign Direct Investment on Socio-Economic Development in Viet Nam", highlights the negative effect of FDI on the recipient country in terms of economic aspect

b) FDI and social issues

The Report "Viet Nam Industrial Investment Report 2011: Understanding the impact of Foreign Direct Investment on industrial development” by MPI confirms that FDI has positive impacts on Vietnam's labor market such as

creating more jobs, but no significant impacts on the improvement of skills and qualifications The "Annual Report on Vietnam Business Forum 2016" of the World Bank identifies the reasons for the limitations in promoting the spillover effects on technology and labor productivity of FDI enterprises, and proposes several solutions John Mc & Myunghwan Y (2016) in the study named "FDI and inequality in Vietnam: An approach with census data" suggest that the increase in FDI in a province is related to the reduction in living conditions of households if they have no members working for foreign businesses; Other studies also mention the spillover effects of FDI on social dimensions such as education, technological level, labor skills, etc

c) FDI and environmental issues

In the study titled “Impacts of FDI on Sustainable Development Objectives of Vietnam in International Economic Integration”, Doan Tranh, & Thoa NT (2016) identify some positive effects of FDI projects in Vietnam on the environment such as the investments in the field of water supply and waste treatment However, there are few investment projects in the environment-friendly areas which account for about 0.2% of the total number of projects Meanwhile, Vietnam faces negative environmental impacts caused by FDI projects More and more FDI projects are found polluting the environment in the North, Central and South of Vietnam, which pollute the water, air, destroy biodiversity, degrade the environment and cause serious impacts on human life and health

1.2 The issues of the thesis not having been addressed by published researches (research gaps)

FDI is no longer a new topic and has been studied from various perspectives However, the researches focus on analyzing individual factors only such as the impact of FDI on economic development, the impact of FDI on export market, capital market, labor and employment, technological factor, the relationship between FDI and labor Therefore, none of the researches has actually provided a proper and comprehensive concept, framework and procedure about FDI in the direction of sustainable development; nor proposed

a set of criteria to assess FDI towards sustainable development in Vietnam; nor

assessed the status of FDI in Vietnam from the sustainable development perspective, thereby appropriate solutions are recommended

1.3 Key issues addressed by the thesis

The thesis will focus on clarifying the theoretical framework of FDI attraction towards sustainable development, thereby presenting the definition and approach of FDI attraction towards sustainable development in line with the

context of socio-economic development in Vietnam

Based on the assessment of the current status of FDI attraction and usage

in Vietnam from the sustainable development perspective, the thesis analyzes shortcomings and causes, and then recommends orientations and solutions to overcome and improve the quality of FDI attraction in the coming period

CHAPTER 2 THEORETICAL AND PRACTICAL BASES FOR FOREIGN DIRECT INVESTMENT TOWARDS SUSTAINABLE DEVELOPMENT

2.1 The concept of FDI attraction

2.1.1 In the world

"Foreign direct investment is an amount of capital invested to obtain long-term benefits in a business operating in an economy different from the economy of the investor Apart from profitability purpose, the investor also wants to gain a foothold in the management of the enterprise and market expansion” The growing importance of FDI is due to the recognition of the tremendous contribution of FDI to the economic development, and the provision of capital, technology, and modern management skills to the host countries FDI is affected by specific factors in the host country and the investor’s country Regarding the host country, these FDI attraction factors include natural resources such as mineral, while cheap labor is seen as a no-less-important factor, especially when an import substitution policy is adopted which brings a great opportunity for investors

Several theories of foreign direct investment are as follows:

Theory of marginal profit: The theory mentions that the capital inflow will move from a country with low interest rate to a country with a high interest rate until an equilibrium is reached (the two countries' interest rates are the same) After the investment, both countries earned profits and the world's output increases higher than before investment

activities should have three advantages: (1) Ownership advantages (O); (2) Locational advantages (L) and (3) Internalization advantages (I)

(ii) Theory of Investment Development Path (IDP) consists of 5 phases:

(1) L advantage of a less attractive country, the inflow of FDI is negligible due

to the local market limitations; (2) the inflow of FDI starts to increase as the L advantage attracts investors; (3) the FDI inflow begins to decrease and outflow begins to increase; (4) O advantage of domestic companies increases Labor-intensive technologies are gradually being replaced by capital-intensive technologies; (5) the outflow and inflow of FDI continue and their volume is

similar

2.1.2 In Vietnam

FDI constitutes an important resource of the economy and joins the domestic resources in creating the aggregate strength for the attainment of the objectives of national industrialization and modernization and economic restructuring

FDI attraction must ensure conformity with planning and the concentrated and unified direction of the central government in couple with rational decentralization to localities on the basis of socio-economic conditions and the capability and quality of officers, ; special importance must be attached to the effectiveness of the state management through inspection and supervision to ensure the strictness of law

2.2 Perspectives on Sustainable Development

2.2.1 In the world

Sustainable development is "development that meets the needs of the

present without compromising the ability of future generations to meet their own needs" (Worldbank, 2016)

In general, sustainable development can be seen as a balance between social, economic, and environmental 'objectives' or 'needs', as summarized in the figure below:

Figure 2.1 Sustainable Development Goals

Source: Unctad (2016),

Definition of Foreign Direct Investment’ Third Edition (BD3) Paris, Organization for Economic Co-operation and Development, 1996

2.2.2 In Vietnam

In Vietnam, sustainable development is defined as "fast, efficient and sustainable development, and economic growth is consistent with the realization of social progress, equality, and environmental protection", "socio-economic development is closely combined with the protection and improvement of environmental resources, ensuring a harmony between the artificial environment and natural one, which maintain biodiversity."

2.3 Impact of FDI on sustainable development

2.3.1 Impact of FDI on environmental issues

On the one hand, investment activities accompanied by modern, environment-friendly technologies and the production of clean products to serve the host country market will have a positive impact on the environment On the other hand, FDI inflows focusing on profits only, without attention to waste water treatment, emissions, industrial waste and so on will seriously threaten the environment In addition to the impact of FDI on the environment, environmental factor is also an important factor influencing the investment decisions of FDI investors The relationship between FDI and environmental pollution is a two-way linkage and is inconsistent in all countries

2.3.2 Impact of FDI on social issues

Labor issue: FDI can bring about significant benefits by creating a

number of high quality jobs and bringing modern production lines and

professional management models to the recipient countries However, activities

of multinational companies are also causing controversies and worries about the social impact For example, some multinational companies are said to make unfair competition when taking advantage of low-wage and low-standard employments in foreign countries

Inequality and regional imbalance: Investors often invest in advantageous

locations, thus the more developed they are, the more likely they are to develop This means there is an increasing risk of inequality and regional imbalance

2.3.3 Impact of FDI on economic development

Besides contribution to the economic development, FDI inflow also presents potential risks to the economy such as trade deficits, transfer pricing, money laundering, and imbalances among sectors, industries, etc

2.4 FDI attraction towards sustainable development

FDI attraction towards sustainable development is the attraction of profitable FDI projects to maintain the efficient operation of FDI enterprises without compromising the important interests of the recipient country, while positively benefiting the country's long-term development goals as measured in the economic, environmental, social and governance priorities indicators

2.5 Criteria for assessing the effectiveness and quality of FDI flow towards sustainable development

a) Evaluation criteria of "economic" pillar:

- Profitability of FDI: Normally, the ICOR is used for the evaluation

Incremental Capital-Output Ratio (ICOR) shows the marginal amount of investment capital necessary to generate the next unit of production

- Contribution of FDI to total social investment:

Contribution of FDI to total social investment = (Scale of implemented capital / total social investment) x 100%

- Contribution of FDI to national GDP:

Contribution of FDI to national GDP = (GDP of FDI sector / total GDP) x 100%

- Contribution of FDI to the state budget: illustrated through the criteria

of (1) income efficiency (calculated as the average salary of a worker in the FDI

sector in relation to other economic sectors); (2) state budget revenues, and (3) ability to assist the recipient country to restructure its economy in line with its

economic development strategy

- Savings and increasing net foreign currency earnings:

- Contribution of FDI to export: It is shown in the net export value of the FDI sector in the host country

b) Evaluation criteria of "social" pillar:

- Ability to create jobs:

Proportion of employments created by FDI sector = Number of employees in FDI sector / total employees of the whole country x 100%

- Income of labor:

- Labor productivity:

Productivity of social labor = Gross domestic product (GDP) / Average number of employees

- Level of technology transfer: shown in (1) the number of technology

transfer contracts in the host country; (2) the proportion of investment projects coming from source technology countries; (3) the level of modernity and up-to-date of technologies transferred; (4) TFP of FDI sector; (5) localization rate The higher the indicators are, the greater level of technology transfer of FDI

enterprises to the recipient country is

c) Evaluation criteria of "environmental" pillar:

- Impact of FDI on environment:

FDI enterprises polluting the environment = (Number of enterprises failing to comply with regulations on environmental protection / Total number

of FDI enterprises) x 100%

In addition, the level of impact of FDI projects on the environment of the recipient country can be assessed based on: Values of environmental indicators (emissions, waste, noise, etc.), the ratio of the cost of FDI enterprises spent on