"Determinants of Viet nam’s outward direct investment: a difference test among entry modes"

Push factors group from Viet Nam include Competitive pressure of Vietnam market, Monetary policy, Interest rates of Vietnam, Regulations and procedures for licensing investment abroad of

Determinants of Vietnam’s outward direct investment:

A difference test among entry modes

VO THANH THU University of Economics HCMC – vothanhthu@ueh.edu.vn

LE QUANG HUY University of Finance and Marketing

Abstract

This article focuses on the determinants of Viet Nam’s Outward FDI by studying simultaneously the influence of two Pull Factors and Push Factors In addition, the work examines the differences in assessing the impact of two factors groups on investment decisions

by market entry method The authors used the mixed research methods: qualitative - quantitative combinations The research results indicate two groups of factors that both Pull Factors and Push Factors to impact Vietnam’s FDI abroad Push factors group from Viet Nam include Competitive pressure of Vietnam market, Monetary policy, Interest rates of Vietnam, Regulations and procedures for licensing investment abroad of Vietnam, Incentive policy, investment incentives to overseas Pull factors group form host country include Culture – Geography, Macroeconomics and market, Infrastructure, Regulations and policies related to investment There have a difference among entry modes significantly in assessing Pull factors from host country

Keywords: FDI; Viet Nam’s OFDI; FDI from Viet Nam

1 Introduction

In the last 30 years, globalization and regionalization of the economy have been rapid, one of the characteristics of the process is that countries promote direct investment abroad, not only developt countries, but also developing countries Outward foreign direct investment (OFDI) has become a trend for the benefit of stakeholders, including the investment side: On the side of the State to invest, helping to increase the economic, social and political influence on the receiving country; To create a stable source of raw materials for domestic production; The return from overseas investment contributes to improving the country's international payment balance, on the part of

investors, through offshore investment, which helps to expand the market in depth, Spreading the risk in business, increasing the efficiency of using capital Having realized the benefits of OFDI, in 1989 when Vietnam did not have legal documents regulating the investment activities abroad, there were projects Firstly, with a total investment of nearly 564 thousand USD invested in Laos, by 2016, Vietnam has had 1,188 projects invested in 70 countries and regions of the five continents and with about 21.44 Billion However, if compared with global’FDI, FDI from Vietnam has not increased significantly recently, the quality of development is not high, so it is necessary

to study the factors affecting the investment of Vietnam abroad; in case, Cambodia is one of the largest and most important market attracting Viet Nam’s FDI

So far, there have been many works in the world that study the factors affecting OFDI According to UNCTAD's World Investment Report (2006), scientists and experts have summarized two groups of factors for impacting on the movement of capital abroad The first group of factors, the enterprises investing overseas, may come from their push factor (domestic factors) such as domestic market characteristics, resource scarcity The second group of factors, companies invest abroad by the attractiveness of foreign markets (also known as Pull Factors) However, none of the works has adequately researched the synergy of assessing both groups of factors on the impact of capital movements on firms Therefore, this study was suggested by the authors on this basis, "Determinants of Viet Nam’s outward direct investment: A difference test among entry modes", to clarify which push factors and pull factors significantly

influences the OFDI of a developing country in another developing economy as well as examine the differences in the general assessment of investment decisions as well as the factors influencing investment decisions among entry modes

2 The theoretical background and proposed models of factors influencing the FDI decision of Vietnam to Cambodia:

2.1 The theoretical background

There are two groups of factors influencing foreign direct investment decisions at the same time, including push factors and pull factors They are:

Pull factors from Host countries:

- First, Macroeconomics and market

First of all, FDI is attracted by the market characteristics of receiving countries, especially for investment projects seeking markets including: Market size and market development speed, low competitive pressure of market makes it easier for foreign businesses to gain market share (Balassa 1966; John H.Dunning 1977, 1979, 1988; Moore 1993; Wang & Swain, 1995; Markusen & Venables 1998, 2000 Ludo Cuyvers et al., 2008; Jing Lin Duanmu & Yilmaz Guney, 2009; Ibrahim Anıl et al., 2011; Cassey Lee et al., 2016; GCI1) In addition, foreign investors were also attracted by stable macroeconomic conditions, low inflation rates, stable exchange rates (UNCTAD 2006, Muhammad Azam et al 2011; Cassey Lee et al Associates 2016; GCI)

- The second, Cost

FDI companies, regardless of their motives for seeking markets or seeking production resources, are concerned about cost factors For them, cheap, quality inputs attracting FDI (John H.Dunning 1977, 1979, 1988; UNCTAD 2006; Ibrahim Anıl et al., 2011) Costs include labor costs, using cost of management personnel, natural resource using costs (Horst, 1972, John H.Dunning 1977, 1979, 1988; Wheeler & Moody, 1990; Petrochilos, 1989), costs relating to obtaining a business or investment license (John H.Dunning 1977, 1979, 1988; EBDI, 2014 & 20152)

- The third, Infrastructure

Infrastructure are Facilities that enable economic activity and markets, such as transportation, communication and distribution networks, utilities, water, sewer, and energy supply systems (Michael P.Todaro và Stephen C.Smith, 2012) Infrastructure include physical infrastructure and social infrastructure In which physical infrastructure include bridges, communications, electricity, water, banking and financial systems; The social infrastructure system relating to education, health care, entertainment (Michael P Todaro và Stephen C Smith, 2012; Thu T.Vo & Huyen T.N.Ngo, 2008; GCI; EDBI) Good infrastructure helps companies invest in lower costs (Michael P.Todaro và Stephen C.Smith, 2012) According to UNCTAD (2006), transnational companies investing in Africa are very interested in the development of their infrastructure

- The fourth, Resource endowment

Resources are a nation’s supplies of usable factors of production including mineral deposits, raw materials and labor (Michael P.Todaro & Stephen C.Smith, 2012) According to Locational theory, labor and natural resources are non mobility factors (Horst (1972); Wheeler & Moody (1990); Petrochilos (1989), H.Dunning (1977, 1979, 1988), UNCTAD 2006); Peter J Buckley et al (2007); Shujie Yao et al (2010); Ibrahim Anıl et al (2011))

- The fifth, institutional environment

The institutional environment influences investment decisions and production organization and plays an important role in the ways that society distributes benefits and is subject to the costs of development strategies and policies (Klaus Schwab and Et al., 2016) According to Bénassy Quéré et al (2007) and Cleeve (2008), the extent to which new companies are established, low levels of corruption, high transparency, contract law, Property protection is a determinant of FDI attraction Also, according to Constantinos Choromides (2015), factors such as low personal and corporate income taxes, market access (trade and investment liberalization) levels have positive implications for attracting FDI into Greece

Muhammad Azam et al (2011) with similar research also points out that good institutional quality and macroeconomic policies play a major role in attracting FDI into seven South Asian countries

- The sixth, Culture and geography

Culture and geography between host countries and home countries help attract FDI (Peter J Buckley et al., 2007; H.Dunning 1977, 1979, 1988) Ludo cuyvers et al (2008) also assert that geographic distance affects FDI into Cambodia and Southeast Asian countries account for a large proportion of Cambodia's capital

- The seventh, political risk

Where political stability is more attractive to FDI and vice versa (Peter J Buckley et al., 2007; Jing Lin Duanmu & Yilmaz Guney, 2009; UNCTAD, 2006)

Push factors from Home countries:

Firstly, supportive policies from home countries’s government are important factors

in the OFDI decision (UNCTAD, 2006; Shujie Yao et al, 2010) These policies include the

rules and procedures for licensing of offshore investment as well as investment incentives for their investors (Aykut & Ratha, 2004)

The second, the economy size and level of competition in the domestic market are also the driving force behind FDI firms (SS Kayam (2009), UNCTAD (2006), Tajul Ariffin Masron & Amirul Shah Md Shahbudin (2010)

In addition, factors such as an increase in input costs or a domestic resource shortage also motivate domestic firms to invest abroad (Horst (1972), Wheeler & Moody (1990), Petrochilos (1989), H.Dunning (1977, 1979, 1988, 2002))

2.2 Research model

Research model on the factors affecting Viet Nam’s FDI abroad according to chart below:

3 Research design

3.1 Rearch method and procedure

The research model of the author is not isolated when studying each factor influencing the FDI decision from Vietnam, but also studying the impact of two groups

of factors in a model Therefore, the author selects Explanatory Sequential Mixed

Methods Design (Creswell, 2014) This study consists of two main steps: preliminary research and official study Then, the authors constructed and evaluated the scale according to Churchill's process (1997) Specifically:

Step 1 Preliminary Qualitative Research: This was conducted through discussion and interviewing with 6 administrators in decision making and directly related to FDI of Vietnamese enterprises to Cambodia

Step 2 The official study was conducted by quantitative research with a convenient sampling method, giving out 300 questionnaires to enterprises operating in Vietnam-Cambodia Friendship Association and AVIC Authors sent survey directly to businesses participating in the 3rd and 4rd Investment Promotion Conference Vietnam - Cambodia (248 suitable feedback votes) Survey period from 06/2015 - 9/2016

3.2 Scale adjustment

However, according to the results of qualitative research, experts say that monetary policy and interest rates of Vietnam are fluctuating as one of the reasons for their investment abroad (Additional variable named as KT6) and Cambodia enjoys a lot of tariff preferences of other countries than Vietnam (GSP program, Import Tax = 0) also motivates Vietnamese investors to make investment decisions in this country (Additional variable named as KT7) The cost of skilled labor (governance and experts)

in Cambodia is low

3.3 Official study

This study was conducted by quantitative research with a convenient sampling method Through the question of filtering, the sample identifying the participants in the survey is the enterprises have been investing in the Cambodian market and enterprises intend to invest in Cambodia (business activities to Cambodia such as import and export, Bidding, transportation services, tourism ) Specifically, the sample structure is

as follows:

Table 1

The character of sample

Number of enterprises Percentage (%)

Source: The authors

The collected data were processed and analyzed using software SPSS 20 Through this data, the scales were evaluated for reliability using the Cronbach's Alpha coefficient The scale is accepted when the Cronbach's Alpha coefficient is greater than 0.6 (Nunnally & Bernstein, 1994, Tho D.Nguyen, 2011) and the coefficient of correlation - total ≥ 0.3 Next, observable variables are validated through factor analysis (EFA) Factor loads are less than 0.35 and weight differences less than 0.3 (Hair et al., 2009) will continue to be rejected The method used to extract the coefficients is Principal Components with Varimax rotation The scale is accepted when the deviation total is ≥ 50% (Nunnaly & Bernstein, 1994, Tho D.Nguyen, 2011)

The linear multiple regression model (with Stepwise method) is used to determine what factors actually influence the decision to invest in Cambodia of Vietnamese enterprises and consider the magnitude of this impact

Levene test and One way ANOVA were used to examine the differences in the general assessment of investment decisions as well as the factors influencing investment decisions among other modes of entry of Vietnamese enterprises into Cambodia

4 Analysing result of official research

After assessing scale reliability with general/partial Crobach's Alpha's and assessing scale validity through 2 EFA, the results of the analysis showed that 33 observation variables were grouped into seven factors

Next, in order to determine which group of factors influenced the decision of direct investment of Vietnamese enterprises to Cambodia, the author conducted a multiple regression analysis In particular, dependent variable is DT - Enterprises will invest / increase investment in Cambodia; 7 independent variables are the mean values corresponding to the seven groups of factors (33 variables) above

Stepwise regression results were obtained using four regression models as shown in the table below, with the fourth model achieving the highest adjusted R2 (83.8% )

Table 2

Coefficientsa

Model

Unstandardized Coefficients

a Dependent Variable: DT - Enterprises will invest / increase investment in Cambodia

Source: The authors

In summary, the main determinants of Viet Nam’ FDI decision in Cambodia are rewritten as follows:

Investments in Cambodia = - 0.184 + 0.336 * Culture - Geography + 0.266 * Macroeconomics and market + 0.264 * Infrastructure + 0.180 * Regulations and policies related to investment

The results of the impacting factor groups which rearranged according to push and pull factors as follows:

adverse changes for investors

Regulations and

policies related to

investment

QC1 Regulations and procedures for licensing investment

abroad of Vietnam is increasingly convenient

QC3

The incentive policy, investment incentives to overseas, especially with Cambodia of Vietnam increasingly improved

VD3 Customs and practices of the two countries are similar VD5 Cambodia and Vietnam are geographically close to each

other

Macroeconomics

and market

KT1 Cambodia market size is big enough for Vietnamese

businesses to expand their investment abroad

KT2 The low competitive pressure of the Cambodia market KT3 Growth speed of the Cambodia market is fast

KT4 The macroeconomic environment of Cambodia is

stable

Infrastructure

HT1 The traffic system (bridges, ports, yards, vehicles ) of

Cambodia is convenient HT2 Transport system connecting Vietnam and Cambodia is

convenient (water, air, ) HT4 Information system, internet of Cambodia are

convenient HT5 Cambodia's electricity and water supply system meets

the requirements of FDI enterprises

HT6 Human resources in Cambodia meet the project

requirements of Vietnam HT7 Cambodia medical services meet the requirements of

FDI enterprises

Regulations and

policies related to

investment

QC2 Regulations and procedures for FDI licensing of

Cambodia are easy

QC4 Cambodia's low resource regulation

QC5 The incentive policy, investment incentives for FDI of

Cambodia are increasingly improved Source: The authors

According to Levene’s test shown as Table 4 below, the sig value is 0.092 (> 0.05), there is no difference in the overall assessment of the investment decision between entry modes

Table 4

Independent Samples Test

Levene's Test for Equality of Variances

t-test for Equality of Means

Source: The authors

On the other hand, according to the value of sig value (at Table 5), there is no significant difference in the assessment of the decision factors between the entry mode

by Vietnamese enterprises However, based on the descriptive statistics for each factor evaluation in the push factors for each mode of entry (Table 6), the firms that have invested in Cambodia are more likely to value 3 factors: Monetary and monetary policy

of Vietnam or adverse change for investors (Mean =3.88/5), Regulation on procedures for licensing of overseas investment of Vietnam on The more convenient (Mean = 3.33/5), Incentive policies, investment incentives to overseas, especially Cambodia of Vietnam is improving (Mean = 3.76 / 5) Thus, there has been a slight difference in the impact of the two modes of entry

Table 5

ANOVA result for Push factors

Sum of Squares df

Mean Square F Sig

KT5

Between Groups

Bound

Upper Bound