Factors affecting foreign direct investment FDI inflows in hanoi

Study theoretical framework of FDI and influencing factors; Identify influencing factors FDI inflows in Vietnam (informal charges, training and labor policies, policy bias, legal institutions) and determinants of FDI inflows in Hanoi (informal charges, training and labor policies, policy bias) in a 5year period from 2014 – 2018 based on analysis on PCI. Propose policy suggestions to increase FDI attraction for Hanoi in the coming time. Boosting trade openness by conducting promotion schemes Improvement of law system Improvement of human resources Study theoretical framework of FDI and influencing factors; Identify influencing factors FDI inflows in Vietnam (informal charges, training and labor policies, policy bias, legal institutions) and determinants of FDI inflows in Hanoi (informal charges, training and labor policies, policy bias) in a 5year period from 2014 – 2018 based on analysis on PCI. Propose policy suggestions to increase FDI attraction for Hanoi in the coming time. Boosting trade openness by conducting promotion schemes Improvement of law system Improvement of human resources

ĐẠI HỌC QUỐC GIA HÀ NỘI

KHOA QUỐC TẾ

*****************

Trần Đỗ Bảo Châu

FACTORS AFFECTING FOREIGN DIRECT

INVESTMENT (FDI) INFLOWS IN HANOI

CÁC NHÂN TỐ ẢNH HƯỞNG TỚI NGUỒN ĐẦU TƯ

TRỰC TIẾP NƯỚC NGOÀI TẠI HÀ NỘI

LUẬN VĂN THẠC SĨ

ĐẠI HỌC QUỐC GIA HÀ NỘI

KHOA QUỐC TẾ

*****************

Trần Đỗ Bảo Châu

FACTORS AFFECTING FOREIGN DIRECT

INVESTMENT (FDI) INFLOWS IN HANOI

CÁC NHÂN TỐ ẢNH HƯỞNG TỚI NGUỒN ĐẦU TƯ

TRỰC TIẾP NƯỚC NGOÀI TẠI HÀ NỘI

Chuyên ngành: QUẢN TRỊ TÀI CHÍNH

Mã số: 8340202.01QTD

LUẬN VĂN THẠC SĨ

Người hướng dẫn khoa học: PGS TS Nguyễn Văn Định

Hà Nội - 2020

ABSTRACT

Thesis Title: Factors affecting foreign direct investment (FDI) inflows in Hanoi

Pages: 76

University: Vietnam National University

Graduate School: International School

Graduate Student: Tran Do Bao Chau

Supervisor: Assoc Prof Dr Nguyen Van Dinh

Keywords: foreign direct investment, FDI, PCI

This research aims at analyzing factors affecting Foreign Direct Investment (FDI) inflows in Hanoi over the last 5 years from 2014 to 2018, providing real evidence about foreign investors‟ evaluation to current investment environment in Vietnam, especially in Hanoi Through the adoption of mix – method research (Pooled OLS model, Fixed Effect model and Random Effect model), the writer expects to identify and determine the featured model of factors affecting attracting FDI inflows in Hanoi, the results

of which might indicate investors‟ decisions are not only influenced by present information but also past information attached to these factors Based

on the above, three main recommendations to improve investment environment as well as enforcement of FDI inflows in Hanoi shall be adequately proposed

ACKNOWLEDGEMENT

I would like first to express my most sincere appreciation to my supervisor, Assoc Prof Dr Nguyen Van Dinh of International School – Vietnam National University, Hanoi (VNU), who convincingly guided and encouraged me to be professional, gave me the wholehearted support and allowed this paper to be on my own, but steered me in the right direction Without his persistent help, the goal of this project would not have been realized

I would also like to express my special thanks to all lecturers of VNU – International School who inspired and shared with me not only knowledge but also practical experience through the whole course

Besides, I would like to send my deep thank to all my MFM1 classmates who always gave me active support over the period of studying and doing the master dissertation

Finally, I am gratefully indebted to my parents and my spouse for providing me with unfailing support and continuous encouragement throughout my years of studying and through the process of researching and writing this dissertation This accomplishment would not have been possible without them

Thank you! Author

Tran Do Bao Chau

TABLE OF CONTENTS

ABSTRACT 1

ACKNOWLEDGEMENT 2

LIST OF TABLES 5

LIST OF ABBREVIATIONS 6

CHAPTER I: INTRODUCTION 7

1.1 RATIONALE 7

1.2 RESEARCH OBJECTIVES 9

1.3 RESEARCH SUBJECT 10

1.4 RESEARCH SCOPE 10

1.5 RESEARCH METHODOLOGY 10

1.6 NEW CONTRIBUTION OF THE THESIS 11

1.7 THESIS STRUCTURE 11

CHAPTER 2: THEORETICAL BACKGROUND AND LITERATURE REVIEWS 12

2.1 THEORETICAL FRAMEWORK 12

2.1.1 Definition and classification of foreign investment 12

2.1.2 Foreign Direct Investment (FDI) 14

2.2 LITERATURE REVIEW 31

CHAPTER 3: METHODOLOGY 37

3.1 METHODOLOGY AND MODEL SPECIFICATION 37

3.1.1 Data analysis method 37

3.1.2 Research model 41

3.2 DATA AND VARIABLE DESCRIPTION 42

3.2.1 PCI data 42

3.2.2 Variables description 44

CHAPTER 4: DATA ANALYSIS AND FINDINGS 49

4.1 OVERVIEW OF FDI IN VIETNAM 49

4.2 MODEL TESTING 54

4.3 EVALUATION OF PCI INDEX OF 63 PROVINCES 56

4.3.1 Pooled OLS model 57

4.3.2 Fixed effect model 60

4.3.3 Random Effect model 61

4.4 COMPARISON BETWEEN HANOI AND VIETNAM 64

CHAPTER 5: IMPLICATIONS 67

5.1 BOOSTING TRADE OPENNESS BY CONDUCTING PROMOTION SCHEME 67

5.2 IMPROVEMENT OF LAW SYSTEM 68

5.3 IMPROVEMENT OF HUMAN RESOURCES 71

CONCLUSION 73

BIBLIOGRAPHY 74

LIST OF TABLES

Table 5 Variables summary based on Vietnam‟s PCI report from 2014 to 2018 54 Table 6 Results of Multi-collinearity test for independent variables 55

Table 11 Average (mean) FDI and PCI values of Hanoi 64-65 Table 12 Comparison between the values in the PCI of Vietnam and Hanoi 65

LIST OF ABBREVIATIONS

8 OECD Organization for Economic Co-operation and

Development

9 UNCTAD United Nations Conference on Trade and

Development

CHAPTER I: INTRODUCTION

1.1 Rationale

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies Attracting FDI in the economic region will create favorable conditions for the provinces

to participate in the assignment of specialization, thereby gaining greater overall benefits for people in the economic zone and for the nation, increasing their position in negotiation and agreement of the provincial government with foreign investors, limiting unfavorable competition between provinces

Policies to attract foreign direct investment capital according to economic regions create conditions for centralizing the resources to connect the system, assigning responsibilities of each province in the region in order

to create an organized and competitive environment It has a large market, thereby promoting the advantages of the economic region, attracting foreign investors However, attracting foreign direct investment capital by economic region may have a negative impact on the economic development of the region in general and of each locality in particular General economic zone policies can reduce the attractiveness of each province, making foreign investors unwilling to invest in the region The lack of coordination in the economic region provinces also reduces the activeness of foreign investors in the region Foreign investors are often "concerned" about the sustainability of the cooperation, which is not guaranteed, so they will not trust the phone according to the economic zone's general policies

Socio-economic development in the region requires capital Lack of capital, all socio-economic activities will be stopped Areas of high priority for localities are not fully met Investment capital to date is still one of the important input resources Investment capital includes domestic and foreign investment capital Developing countries have low accumulation capacity, domestic capital markets are weak and have difficulty accessing external capital markets Therefore, foreign direct investment capital is important for socio-economic development Attracting FDI will help increase investment capital for development, supplement the shortage of capital without being constrained by the political conditions set by investing countries and avoid debt situation On the other hand, when risks occur, FDI capital has little effect on finance because most of the losses when risks occur are incurred by foreign investors Currently, there are many developed countries holding a huge capital that wants to invest abroad to seek profits, this is an opportunity for countries that are short of capital to take advantage of attracting foreign direct investment In fact, developing countries, including Vietnam, have attracted a large amount of FDI and have partly solved capital constraints in the process of socio-economic development

Successful FDI attraction will help improve production and business efficiency of localities in the region The top goal of foreign investors is profit, investors invest in production and business facilities to bring the highest efficiency to bring the highest efficiency, the production activities Business should be focused on optimization Thus, besides maximizing benefits for investors, FDI capital also creates favorable conditions for enterprises of the host countries to absorb, learn from experience and suffer from gay competition Therefore, it is expected that domestic enterprises wishing to survive and develop must change, learn and improve their

management skills, invest in technical equipment and technology, capital improve product quality, lower prices, expand the domestic market and can export to increase income for workers and increase profits for businesses

FDI inflows into Vietnam have increased sharply, registered capital and implemented capital have improved over the same period of years (Figure 1) The data of FDI attraction in the first quarter of 2019 is a concrete evidence Accordingly, the total registered capital in the first 3 months of 2019 reached

US $ 10.8 billion, up 86.2% over the same period in the first quarter of 2018

Of which, 785 newly registered projects totaled 3.8 billion USD (up 80%); contributed capital, share purchase reached nearly 5.7 billion USD (up over 200%); FDI disbursement reached 4.12 billion USD (up 6.2%) compared to the same period in 2018 In addition, FDI capital helps provinces to build infrastructure for development purposes This will help provinces with faster growth rates As a political center of the country, Hanoi needs to have adequate infrastructure, economic and social development to meet the common ground Therefore, attracting FDI is important for Hanoi On the other hand, compared to other provinces such as Da Nang or Ho Chi Minh, FDI inflows to Hanoi are still relatively low Therefore, analyzing the factors affecting the attraction of FDI in Hanoi is essential to support and recommend but appropriate proposals to help improve the situation

1.2 Research objectives

Overall purpose of this thesis is to identify factors affecting FDI in Hanoi and to evaluate to what extent they influence FDI in Hanoi This objective shall be attained by examination of theoretical and practical aspects

In particular, theoretical frameworks on FDI attraction and its driving factors will be closely studied Based on an investigation on the FDI inflow situation

in Vietnam, an analysis model will be suggested to identify factors affecting

FDI inflows in Hanoi Once established, an assessment will be performed on the FDI determinants and a recommendation will be made regarding ways to boost FDI attraction in Hanoi for the foreseeable future

Thus, this thesis focuses on three main purposes, including (i) Theoretical framework of FDI and influencing factors; (ii) Identify influencing factors and ways of affecting Hanoi's FDI; and (iii) Proposing policy suggestions to increase FDI attraction for Hanoi in the coming time

1.3 Research subject

As suggested by the topic name and the preceding sections, the research subject of this thesis is the identification of factors affecting FDI inflows for the territory of Hanoi within the time period of 5 years It is deemed that this subject is of great relevance to the current economic situation in Vietnam and the increasing inflow of multinational corporations into the country as well as considerable amounts of foreign investment interest

1.4 Research scope

The scope of research in this thesis is stretched over a 10 – year period from 2014 to 2018 via pulling data in Vietnam from capital calling and PCI reports in the respective time period Enterprises in the survey group belong

to FDI business type according to Vietnam‟s regulations, which have branches or headquarters in Hanoi This scope of research is deemed appropriate for the academic level of this thesis and for the capability of the researcher

1.5 Research methodology

This research will use quantitative research method as the main methodology The data, collected from PCI reports and Yearbook of the General Statistics Office of Vietnam from 2014 to 2018, will be analyzed

through methods such as Pooled OLS model, Fixed Effect model and Random Effect model

1.6 New contribution of the thesis

The author believes that this topic is an important research in the field

of economics and carries great applicability The research results are expected

to provide real evidence about foreign investors‟ evaluation to current investment environment in Vietnam, especially in Hanoi Through the adoption of mix – method research, the author expects to identify and determine the featured model of factors affecting attracting FDI inflows in Hanoi, the results of which might indicate investors‟ decisions are not only influenced by present information but also past information attached to these factors Based on the above, a recommendation of several policies to improve investment environment as well as enforcement of FDI inflows in Hanoi shall

be adequately proposed

1.7 Thesis structure

The remainder of this thesis is structured into 4 main chapters: Theoretical Background and Literature Reviews, Research Methodology, Data Analysis and Findings, Implications

CHAPTER 2: THEORETICAL BACKGROUND AND

LITERATURE REVIEWS

2.1 Theoretical framework

2.1.1 Definition and classification of foreign investment

Currently, under the 2014 investment law, there are two types of foreign investment in Vietnam, including direct investment and indirect investment Foreign direct investment (FDI) is a form of investment in another country in which foreign investors invest part or all of their capital in projects in order to gain direct control over projects that they invest On the other hand, foreign indirect investment (FPI) is a form of investment through the purchase of shares, stocks, other valuable papers, securities investment funds and through medium-sized financial institutions Other times that investors are not directly involved in managing investment contracts These two types of investment have some common characteristics Firstly, both FDI and FPI are simply outward investment contracts, FDI and FPI appear due to the need for international economic integration Second, both types of investments are aimed at generating profit for investors The profit of the investor depends on the business results of the business and is proportional to the invested capital Therefore, business performance is a common concern of both types of investment Third, both FDI and FPI are governed by different laws Although these activities are heavily influenced by the laws of the host country, they are in fact still governed by international treaties, practices and laws of the investors However, FDI and FPI still have different characteristics, described in the following table:

FDI FPI

Investment

Foreign indirect investment

control Investors decide

investment, production and business decisions and are responsible for losses and profits

Buying securities and not taking direct control The investee (capital) has full autonomy in doing business

contribute a minimum percentage of their capital in the legal capital or charter capital according to the laws of each country

Foreign investors must contribute a minimum amount of capital in the legal capital or charter capital according to the regulation The amount

of securities that foreign companies can buy may

be restricted to a certain extent depending on each country; usually

<10%

invested capital

Low risk

the company's profits and divided according to

Proceeds are divided according to dividends

or the sale of Difference

the capital contribution ratio

with trade, technology

international labor movement

Simply circulating capital from direct to the host country

countries to developing countries

From developing countries or developing countries rather than rotating underdeveloped countries

2.1.2 Foreign Direct Investment (FDI)

Several studies have been done on FDI Borensztein (2008), examined the effect of FDI on economic growth in sixty-nine developing countries, finding that while FDI is positively correlated with real per capita GDP growth, the relationship is modified when levels of human capital are taken into account In particular, the coefficient of FDI is larger when countries have higher levels of human capital (measured as the average years of secondary schooling for each country‟s male population), leading the authors

to conclude that countries with more educated workforces are better equipped

to take advantage of the advanced technologies that might be gained as a result of FDI FDI not only provides developing countries with much needed capital for domestic investment, but also creates employment opportunities and helps the transfer of managerial skills and technology, all of which contribute to economic development Recognizing that FDI can contribute significantly to economic development, all governments of South East Asia, including that of Vietnam, want to attract it Indeed, the world market for such investment is highly competitive and Vietnam, Hanoi in particular, seeks such investment to accelerate the country‟s development efforts FDI flows record the value of cross border transactions related to direct investment during a given period of time, usually per quarter or per annum Financial flows consist of equity transactions, reinvestment of earnings, and intercompany debt transactions (Lehman, 2002) There are two types of flow

in FDI, Outward flow represent transactions that increase the investment that investors in the reporting economy have in enterprises in a foreign economy, such as through purchases of equity or reinvestment of earnings, less any transactions that decrease the investment that investors in the reporting economy have in enterprises in a foreign economy, such as sales of equity or borrowing by the resident investor from the foreign enterprise Inward flows represent transactions that increase the investment that foreign investors have

in enterprises resident in the reporting economy less transactions that decrease the investment of foreign investors in resident enterprises (Lipsey, 2006) FDI

is a phenomenon resulting from globalization, which involves the integration

of the domestic economic system with global markets It is accomplished through the opening up of the local economic sector as well as domestic capital for foreign investors to establish business within the economy

2.1.2.1 Definition and concept of FDI

Generally, international capital flows are either in the form of portfolio investments, Foreign Direct Investment (FDI) or loans FDI however makes

up a large part of foreign capital flows Whereas other forms of private capital flows typically experience large reversals during financial crises, FDI has proven to be remarkably stable and resilient during global financial turmoil FDI presents a more locked-in or secured investment, and it is not likely to be reversed at the first sign of local or global financial crisis (Loungani and Razin, 2001) FDI flows have also been noted to increase even when world trade flows slow down (Moosa, 2002) Since the end of the Bretton Woods system, many studies have investigated the contribution of inward FDI to the development of host countries The acclaimed benefits of FDI are needed most in developing regions such as SSA, where FDI now serves as a vital means of private external finance The increase in the volume of global FDI flows could have occurred because of the fact that most developing countries have accepted FDI as a key component in achieving economic development, and thus have engaged in various efforts to attract the maximum possible portion of global FDI into their economies In principle, there are various channels through which FDI can contribute to investment and growth in host economies, especially developing ones The advantages that FDI brings to host countries include the transfer of technology, mainly in the form of new varieties of capital inputs that cannot be achieved through domestic capital mobilization FDI can also stimulate competition in the domestic input market Host countries benefit from human capital development through employee training in the course of operating the new businesses Profits from FDI also add to corporate tax revenue in the host countries (Feldstein, 2000) The level of investment of a country is one of the main determinants of

economic growth and development However, in most developing economies, actual domestic investment falls short of the desired volume required to cause

a significant increase in Gross Domestic Product (GDP) growth FDI is therefore seen as a means to bridge the gap between a country‟s domestic investment and the optimal levels of investment As suggested by modern growth theories, FDI greatly improves the economic prospects of a country, with linkage through channels like capital accumulation, transfer of technology, transfer of skills and financing current account deficits As a result, policies and programs in developing regions like SSA have been geared towards attracting more foreign investment This is also in line with the proposition of most post World War II economists, who encouraged outward-oriented policies as opposed to inward-oriented policies as a means

of achieving economic progress in developing countries

Foreign direct investment is largely carried out by Multinational Corporations (MNCs) MNCs carry out net transfers of real capital from one country to another, and they represent entry into a host economy by a business organization established in a foreign market MNCs The so-called

“Financing Gap Model” as evidenced in early growth theories by Harrod (1939) and Domar (1946) are vital for carrying out important roles through direct investment The FDI process occurs when parent corporations carry out vertical or horizontal expansion of operations FDI also occurs when parent companies diversify conglomerates By broadening their operations to produce the same good abroad, international corporations take advantage of horizontal expansions to profit from introducing some highly demanded commodity straight into geographically segmented or tariff controlled markets (Brainard, 1997; Barba-Navaretti et al., 2004) Vertical expansions are profitable to MNCs by providing cheaper markets within which to

produce intermediary goods (Caves, 1971) This is often the case with developing regions like Africa, with favourable exchange rates and relative abundance of labour MNCs continue to employ an increasing share of labour

in developing countries

The concepts of FDI vary across the nations and applications Each country usually maintains its own definitions and regulations of FDI in the national legislature, particularly the investment law In this part, I would like

to focus on the FDI definition and related concepts specified by the three big economic organizations that are International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD) and World Trade Organization (WTO)

International Monetary Fund (IMF) (Balance of Payments Manual (BPM5), 5th edn) defines FDI as an investment with long-term relationships where an organization in an economy (direct investor) can gain long-term benefits from a direct investment enterprise that operates in another economy The purpose of the direct investor is to acquire significant degree of management and control over the business (more than 10%)

Organization for Economic Co-operation and Development (OECD) (Benchmark Definition of Foreign Direct Investment (BMD4), 4th edn) defines: Direct Investment is conducted with the aim of establishing long-term economic relationship with an enterprise and exerting control over it by:

- Founding or expand an enterprise or a branch under control of investor

- Purchasing the existing enterprise

- Joining a new enterprise

- Issuing long-term credit (more than 5 years)

World Trade Organization (WTO) (Trade and Foreign Direct Investment, Oct 9th 1996) defines: FDI occurs when a foreign investor (home

country) owns a property in another country (host country) and the rights to control it Control power is the sign to differentiate FDI from other types of investment

Referring to United Nations Conference on Trade and Development (UNCTAD) (World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, p 245), FDI is defined as an investment activity related to a long-term relationship and reflect a long-term concern as well as the control of an entity in the investor's company (holding company) that invests in another economic group (an enterprise has foreign direct investment) FDI allows investors to have the considerable power of management and control over the enterprise that receives FDI Such investment activity is associated with initial transactions between 2 enterprises as well as prospective ones between them and their foreign branches (including both merged and unmerged branches) Therefore, FDI is composed of 3 sections: initial investment capital of investor, re-investment income and internal loans between companies

The Ordinance No 06/2013/PL-UBTVQH13 (Mar 18th 2013) concerned with the modification, supplement of Foreign Exchange Ordinance

of Vietnam regulates: "FDI into Vietnam means that foreign investors invest their capital and take part in management in Vietnam."

In conclusion, FDI, to the best of my understanding, is a means of foreign investment where investors invest partially or totally their capital in

an enterprise in host country with the aim of exerting management and control over the enterprise

2.1.2.2 Characteristics of FDI

There are a number of characteristics of FDI However, I would like to choose the 4 most outstanding ones of FDI, namely a profit target, control

power, self-determination and technology transfer (according to Vu Chi Loc (2012))

Profit target

FDI is considered to be private investment according to classification

of a number of documents However, in Vietnam, the state can participate in FDI The ultimate goal of FDI is gaining profit whether the investors are the state or private enterprises The host countries, especially the developing countries should take it into consideration when conducting strategies to attract FDI Attract FDI is to support the socio-economic development rather than only benefit the investors

Control power

Foreign investors are required to invest an amount of capital greater or equal to the minimum capital which is regulated depending on rules and regulations of each countries (10% in the US, 20 % in France and 30% in Vietnam) in order to acquire the control or participate in the control of an enterprise and its activities In addition, if they embark on a joint venture, the division of rights, responsibilities, benefits and risks among them depends on their capital contribution ratio

Self- determination

FDI is considered a major form of foreign investment by individual capital Investors themselves decide to invest, to run business, consequently gaining profit or facing loss on their own Additionally, compared to ODA and other types of investment, FDI has no connection to burdens of economic debt or politics, thereby enhancing the economic efficiency as well as economic growth

Technology transfer

Generally, FDI is associated with technology transfer and new market exposure As regards host country, besides receiving foreign capital, it also acquires technology transfer from home country that helps to save time and money for production, hence increasing the productivity On the other hand, home country has access to a new market, and consequently being able to take full advantage of domestic resources (such as raw materials, etc.)

2.1.2.3 Determinants of FDI

This section aims to recall the theoretical background as well as reviewing some previous empirical studies about the essential determinants of outward FDI of a country in general and Japan FDI in particular There are many ways to classify the groups of factors affecting outflow FDI, however in this paper, I would like to focus on the category of firm specific factors and host country specific factors which are based on the well-known OLI paradigm of Dunning (1980) Particularly, special focus will be given to the host country specific factors which are directly related to the variables in the empirical model applied later in the paper This section could also be understood as the Location specific advantage, together with the Ownership and Internalization mentioned above to make the OLI paradigm of Dunning This group of factors will be directly related to the choice of variables in my empirical model later I would like to breakdown this part into more details with three main categories namely economic, policy framework and business

facilitation factors, according to UNCTAD (Trends in FDI and ways and means of enhancing FDI flows to and among developing countries, 1999)

The first grouр is market-seeking FDI The determinants for attracting market-seeking FDI are national markets and include market size and the market growth of the host countrу Market size can be measured in terms of absolute size of a market such as the total рoрulation of the countrу or in term

of GDР such as рer caрita income while market growth can be considered as рer GDР growth rate It is clear that large markets can accommodate more firms bу offering them a huge market for рroduct consumрtion and can helр firms to achieve scale and scoрe economies Moreover, a high rate of market growth tends to stimulate investment bу both domestic and foreign рroducers, since both are interested in returns to long-term рrojects (UNCTAD, Economic and Legal Asрects of Foreign Direct Investment, 2010, рage 51)

The second grouр is resource/asset-seeking FDI Even though natural resources are a рrominent FDI determinant, investment maу or maу not take рlace in countries with rich natural resources Investment will most likelу to take рlace in countries that рossess abundant resources, уet lack the technical skills needed to extract or sell these raw materials to the rest of the world Physical infrastructure facilities (e.g., roads, ports, power, and telecommunication) for transрortation of the raw materials out of the host countrу and to final destinations or other measurement of technological and infrastructure level could be determinants of FDI Loree and Guisinger (1995) found that a develoрed communication and transрortation infrastructure has a рositive influence in FDI inflows In case of develoрing countries, Wheeler and Modу (1992) came to a conclusion that infrastructure is one of the leading determinants for FDI decisions The various measures of the qualitу

of infrastructure have been identified, in which Friedman, Gerlowski and Silberman (1992) confirmed the imрortance of container рorts for MNEs

while Woodward (1992) emрhasized the necessitу of interstate highwaу sуstem

The third grouрing is efficiencу-seeking FDI The determinants of this categorу maу be mostlу imрacted bу the labor cost and labor skill This is an imрortant determinant of FDI esрeciallу for TNCs seeking greater efficiencу

in рroducing labor-intensive рroducts or рroducts for which some stage of рroduction, geograрhicallу seрarable from other stages, is intensive in the use

of unskilled labor A lot of рaрers have investigated the effect of labor cost of the host countries on inward FDI Other things being equal, foreign firms are exрected to рrefer lower wages locations so that theу can reduce рroduction cost and oрtimize рrofits (Maki and Meredith, 1986) Similar results were concluded in the studies of Swedenborg (1979) into the Swedish manufacturing subsidiaries abroad

Policy framework factors

The core enabling framework for FDI consists of rules and regulations governing entrу and oрerations of foreign investors, standards of treatment of foreign affiliates and the functioning of markets Comрlementing core FDI рolicies are other рolicies that affect foreign investors' locational decisions directlу or indirectlу, bу influencing the effectiveness of FDI рolicies These include trade рolicу and рrivatization рolicу Рolicies designed to influence the location of FDI constitute the "inner ring" of the рolicу framework Рolicies that affect FDI but have not been designed for that рurрose constitute the "outer ring" of the рolicу framework The contents of both rings differ from countrу to countrу, as well as over time

Core FDI рolicies are imрortant because FDI will simрlу not take рlace where it is forbidden However, changes in FDI рolicies in the direction of greater oрenness maу allow firms to establish themselves in a рarticular

location, but theу do not guarantee this Since the mid-1980s, an overwhelming majoritу of countries have introduced measures to liberalize FDI frameworks This has рrovided TNCs with an ever-increasing choice of locations and has made them more selective and demanding as regards other locational determinants One outcome is a relative loss in effectiveness of FDI рolicies in the comрetition for investment: adequate core FDI рolicies are now simрlу taken for granted

Another outcome is that countries are increasinglу рaуing more attention to the inner and outer rings of the рolicу framework for FDI The keу issue for inner-ring рolicies is рolicу coherence, esрeciallу the joint coherence of FDI and trade рolicies This is рarticularlу imрortant for efficiencу-seeking FDI as firms integrate their foreign affiliates into international corрorate networks At the same time, the boundarу line between inner- and outer-ring рolicies becomes more difficult to draw as the requirements of international рroduction make higher demands on the efficacу of the рolicу and organizational framework within which FDI рolicies are imрlemented Thus, macroeconomic рolicies (which include monetarу, fiscal and exchange-rate рolicies) as well as a varietу of macro-organizational рolicies become increasinglу relevant As the core FDI рolicies become similar across countries as рart of the global trend towards investment liberalization, the outer ring of рolicies gains more influence Foreign investors assess a countrу's investment climate not onlу in terms of FDI рolicies bу itself but also in terms of macroeconomic and macro-organizational рolicies Among the рolicу measures that can have a direct effect on FDI is membershiр in regional integration frameworks, as these can change a keу economic determinant: market size and рerhaрs market growth

Business facilitation factors

The locаtion of FDI mаy be influenced by vаrious incentives offered by host countries‟ government to аttrаct foreign investors Incentives аre meаsurаble economic аdvаntаges аfforded by government to enterprises encourаge them to behаve in аn expected mаnner These incentives mаy hаve mаny forms including fiscаl policies such аs lower tаx for foreign investors, finаnciаl incentives such аs grаnts аnd preferentiаl loаns аnd other incentives such аs subsidized infrаstructure or services, mаrket preferences аnd regulаtory concessions Besides, the level of trаde liberаlizаtion in the host nаtions could аlso be а key vаriаble of FDI Аmongst the vаriety of determinаnts regаrding the recipient‟s policy of FDI, I would like to focus on

2 mаin fаctors: Trаde openness аnd corporаte income tаx

Firstly, trаde openness could be а significаnt fаctor аffecting FDI inflows Аlthough openness cаn be considered а sociаl or socio-economic indicаtor, we аre only concerned in this pаper with the economic dimension

of openness Trаde openness induces export-oriented FDI, while trаde restriction аttrаcts „„tаriff-jumping‟‟ FDI, whose first tаrget is to tаke аdvаntаge of the domestic mаrket (Kosteletou аnd Liаrgovаs, 2000) Theoreticаlly, trаde restrictions or openness could аffect FDI inflows positively or negаtively Some policies on trаde openness might produce а significаnt impаct in аttrаcting FDI For exаmple, through the implementаtion

of free trаde аgreements (FTА), severаl Lаtin Аmericаn countries hаve been аble to аttrаct greаter flows of foreign direct investment Goldberg аnd Klein (1998) suggest thаt FDI fosters exports, import substitution, or greаter trаde in intermediаry inputs

Besides the policy with regаrds trаde liberаlizаtion аs mentioned аbove, аnother importаnt FDI determinаnts should be tаken into аccount is the level

of corporаte income tаx levied on the multinаtionаl compаnies Аccording to

Gordon аnd Hines (2002), tаx policies аre obviously cаpаble of аffecting the volume аnd locаtion of FDI, since higher tаx rаtes reduce аfter-tаx returns, thereby reducing incentives to commit investment funds To be more specific, given other fаctors equаl between countries, а country with low level of tаx levied on corporаte income tends to аttrаct more inwаrd FDI Some other studies refined investigаtions by looking аt the tаx sensitivity of different kinds of FDI: reinvested eаrnings versus direct trаnsfers (Hаrtmаn, 1984) or mergers аnd аcquisitions versus new plаnts аnd plаnt extensions (Swenson, 2001) They both confirmed thаt FDI is not only sensitive to tаxes on profits, but аlso to indirect (non-income) tаxes

2.1.2.3 Effects of FDI on economic growth

The transmission channel which is predominantly examined in the recent literature is the second-round channel of knowledge spillovers, in contrast to the earliest studies of FDI which treated it merely as an addition to the capital accumulation (Neuhaus, 2006) An acclaimed study of FDI spillovers by Borensztein et al (1998) analyses also FDI‟s effect on investment and find that an increase in the net inflow of FDI is associated with a proportionally higher increase in total investment in the recipient economy, but the result does not appear to be very robust A conclusion, which seems to be shared by most other authors, is that FDI contributes to economic growth mainly by stimulating technological progress Both the macro and micro empirical evidence on the positive externalities of FDI is mixed It has been shown to have both beneficial and detrimental effects on growth, while at the same time, many studies find no effect Firm level studies usually suggest that FDI does not accelerate economic growth (Görg & Greenaway, 2004) In contrast, many macroeconomic studies of a broad cross-section of countries identify the positive role of FDI in economic performance, although often only in

particular environments and there are some exceptions such as Carkovic & Levine (2002) and Mencinger (2003)

This diversion between theory and empirical evidence led Lipsey (2006)

to state that the search for universal relationship between FDI and growth seems to be futile The key reason why it may not exist at all is that each country has certain local conditions and characteristics, which can determine

or limit a country‟s capacity to take advantage of FDI externalities In other words, there are absorptive capacities, differing between countries and regions, which need to be taken into account when analysing the impact of FDI on economic performance These capacities are related to the structure of economy and policy issues and may directly affect economic performance as well Moreover, the same factors that are identified as responsible for the benefits of inward FDI are also important attractors of it, further strengthening their influence (Alguacil et al, 2011) However, there is no variable which consistently determines the FDI growth effects and their significance depends on the combination of conditioning factors analysed (Lipsey & Sjoholm, 2004) An overview of evidence on FDI-growth nexus shows what these factors are and what role they play

Among the most important of them is macroeconomic background Lack

of stability at the macro level is detrimental to capital accumulation and wider

to economic growth It works in various ways, but it has been shown that high inflation, external debt and government deficits increase uncertainty and worsen the business climate, which consequently discourages foreign (and domestic) investment and reduces its productivity (Alguacil et al, 2011; Pruefer & Tondl, 2008) Many studies are also suggesting that positive FDI growth effects require a stable institutional environment, such as an efficient legal framework, as it directly influences business operating conditions and

may increase spillovers (Bengoa & Sanchez-Robles, 2005; Prüfer & Tondl, 2008)

A number of studies find certain conditions which have to be present for the FDI effects to be significant Borensztein, De Gregorio and Lee (1998) find that a positive impact of FDI on growth is obtained only for those countries that have accumulated a minimum threshold stock of human capital Transition economies are above this threshold, which is how Campos and Kinoshita (2002) explain their result that FDI‟s growth effect does not depend

on the level of human capital Blomstrom, Lipsey, and Zejan (1994) do not conclude on the key role of educational attainment, but they argue that FDI has a positive impact on growth when a country is sufficiently wealthy

Financial development is also sometimes pointed out as essential for a working transmission mechanism from FDI to growth The main argument for this states that FDI can boost growth only when the financial markets and banking of FDI host countries are developed well enough to efficiently channel foreign capital to finance productive investment In addition, knowledge spillovers from these investments can emerge only if local companies are able to invest in absorbing foreign technology, which underdeveloped financial markets may prevent them from doing due to a lower availability of credit and other financing option (Adams, 2009; Alfaro

et al, 2010) De Mello (1999) finds that FDI is growth-enhancing only for those OECD countries in which domestic and foreign capital are complements Balasubramanyam et al (1996) argue that trade openness is a key condition for obtaining the positive influence of FDI on growth The quality of domestic infrastructure, in particular communication and transportation facilities, seems to be an additional relevant factor for a positive FDI-growth nexus (Easterly, 2001)

In addition, Glass and Saggi (1998) show that a wider development gap between a host country and developed economies results in a lower quality of technology transferred via FDI and more limited capabilities of domestic firms to benefit from potential spillovers from investment Bijsterbosch and Kolasa (2010) similarly conclude that in case of CEE, such a rule applies to FDI effect on productivity – the smaller the productivity gap, the higher the effect

With regard to the evidence specifically for the CEE countries, Campos and Kinoshita (2002) find positive impact of foreign investment in 27 CEE countries between 1990 and 1998 Nath (2005) finds for 13 transition countries that the interaction between trade and FDI seems important for growth

On the microeconomic level, Javorcik and Spatareanu (2005) and Damijan et al (2003) find evidence for positive FDI spillovers in Romania, while Djankov et al (2000) and Konings (2001) observe negative effects in Bulgaria and Romania and no effect in Poland Bacic et al (2005) claim that the extent of spillovers from inward FDI onto domestic companies that would enhance economic growth in transition countries was limited and even the most advanced CEE countries had problems with the transfer and application

of knowledge Some limitations stem from small sizes of industries and markets in smaller CEE states (like the Baltic states, Moldova, Macedonia) and high proportion of inflows going into trade and finance industries (Mencinger, 2003)

Havrylyshyn, Izvorski and van Rooden (1998) conclude in their study of

25 transition economies that FDI influences growth only when reforms index

is excluded from the model, but that influence is less significant than that of reforms In another work, they find that initial conditions, economic policies

along with the institutional, legal and political framework, are significant factors of growth in the region The authors argue that FDI may influence growth after conditions pertaining to growth have been achieved – which is, economy has stabilized and structural reforms have been implemented

World Bank report (Broadman (ed.), 2006) points out that such an achievement also works in another way: pace of transition to competitive markets is correlated with success in attracting FDI inflows The critical variable is institutions or, more specifically, the pace of progress in establishing marketsupporting institutions that establish sufficient protection and enforcement of property rights

On the other hand, Mencinger (2003) finds a negative relationship between FDI and growth among the CEE countries He explains this by arguing that it is caused by takeovers as the main mode of entry of foreign investors and elimination of local competitors because of their inability to compete with foreign investment enterprises The relatively lower amount of greenfield investment can be explained by the presence of privatization programmes, which created an abundance of assets to be acquired for competitive (sometimes too much) prices and enabled faster, less costly investment with fewer bureaucratic obstacles and easier integration into trade networks The acquisitions were not automatically investments in real assets and proceeds from sales financed consumption and imports, which is evidenced by a lack of relationship between FDI and gross fixed investment and positively related FDI and current account deficits, increasing foreign debt Bacic et al (2005) support the first suggestion, stating that FDI, mostly

in the form of brownfield investments, did not complement capital formation strongly enough to stimulate growth directly In contrast, Krkoska (2002) finds that FDI was an important source of capital formation financing in CEE

in the first decade of transition, being a substitute for domestic credit and having a positive relation with foreign credit

Finally, it should be noted that some of the varying results could be due

to the fact that, some of the studies used cross-section methods which exhibit several methodological shortcomings Differing estimates could also be caused by other econometric issues and differences in the sample selection procedure The direction of causality is the one of the main problems that researchers in this topic have faced, since economic growth attracts foreign capital inflows and the question arises whether growth rate increases due to more FDI or the other way around Endogeneity biases have to be taken into account, yet it is not easy to identify suitable instrumental variables, namely those which are correlated with FDI inflows but not with growth (Sapienza, 2010)

2.2 Literature review

So far, economists in the world have studied and summarized many theories explaining the factors of investment attraction, as well as the shift of international investment However, in the history of the development of economic theories, investment has always been seen as a complex development process that depends on many factors that can change from time

to time There is no theory that addresses all aspects of the investment process, each with its own strengths and limitations The theory of FDI attraction is accessible in the following aspects:

* The theory of capital export of V.I Lenin

According to V.I Lenin, the benefit of capital export is to find the most profitable investment, the phenomenon of relative capital surplus has urged capitalists to seek capital abroad Abroad, capitalist corporations are able to exploit favourable conditions of abundant resources, cheap labour, new

consumption markets from which to obtain a higher profit margin than Invest in the country In the relationship of interests, of course, the locality or the country receiving investment (export capital) also promote its advantages Thus, in view of V.I Lenin, the most fundamental factor affecting the attraction of foreign direct investment in a country (or locality) is, is the benefit of investing in the country itself? When the benefit in (locality) receives greater investment than the investment in the country, the relative surplus of capital will be brought to invest there instead of investing in the country This theory of V.I Lenin outlines the deepest nature of attracting investment and foreign direct investment

* The theory of profit margin affecting FDI attraction

Dougall argues that the flow of capital will shift from low-interest countries to high-interest countries until equilibrium is reached (interest rates for the two countries are equal)

As a result of the investment activity, both countries gained profits and increased the world's overall output compared to before the time of investment The appropriateness of this theory was recognized by economists

in the 1950s but when the economic situation became unstable, the rate of return on investment from US investment decreased to a level lower than the rate returns on domestic investment, but U.S FDI activity continues to increase However, this theoretical model does not explain why some countries have inflows and outflows at the same time Therefore, the marginal profit theoretical model can only be considered as an effective first step to study FDI activities

* The theory of investment environment

The investment environment is a collection of local specific factors that are shaping opportunities and incentives for businesses to invest effectively,

create jobs and expand production Based on the opportunity cost, risks and competition barriers in investment, investors explore the opportunities and incentives to invest in a particular locality Recent studies have identified and assessed the factors affecting local economic growth, resulting in large differences in business environment and disparities in economic growth, especially the private economy, among different provinces and regions in the country The research results show that the differences among localities in the process of attracting foreign investment capital are the local governments and legal environment

There are many different factors influencing foreign investors' investment decisions, but they can be classified into the following two categories: (i) Hard infrastructure (infrastructure, ports, educational level, quality) amount of human resources), these are the factors that need time and financial resources to improve; (2) soft infrastructure (capacity of government, preferential policies and investment attraction .) is a group of factors related to the leadership philosophy of local managers

Starting from a product cycle review, Akamatsu Kaname in his article,

"A Historical Pattern of Economic Growth in Developing Countries", said that the new product, originally invented and made in the country of investment, then Be exported to foreign markets In the importing country, the advantage of new products increases the demand on the local market, so the importing country switches to production to replace this imported product by attracting foreign capital and technology When the market demand of new products on the domestic market is saturated, export demand reappears This phenomenon is cyclical and thus leads to the formation of FDI In the same opinion, Raymond Vernon in the project "International Investment and International Trade in the Product Cycle" said that, when producing a product

reaches the standardization stage in its development cycle, it is also the time for the market This product has a lot of suppliers At this stage, the product is less improved, so competition between suppliers leads to a decision to reduce prices and therefore leads to a decision to cut production costs This is the reason for suppliers to shift production to countries that allow lower production costs

With an eclectic view, Dunning in the study "Trade, location of economic activity and the MNE: a search for an eclectic approach" and the study "Why Do Companies Invest Overseas" think that foreign direct investment inflows Affected both factors: push factor from the investment country and pull factor from the country attracts investment Some factors such as limited domestic market, cost of inputs and labor, high competitive pressure of the investing country will be the driving force to promote investment behavior abroad In contrast, the large market and stable development, the cost of inputs and cheap labor, reasonable investment incentive policies will attract foreign direct investment

The investment environment at the place to attract investment is a decisive factor to attract investment in that locality and is also a factor that brings competitive advantages among localities Parasuraman in his research paper "A conceptual model of service quality and its implications for future research" A conceptual model of service quality and its implications for future research) presented the model SERVQUAL model to evaluate service quality with five components of evaluation, including: (1) reliability factor; (2) responsiveness factors; (3) service capacity factor; (4) empathy factor; (5) tangible media elements However, recent scientific studies show that service quality and customer satisfaction are two different concepts Oliver argues that customer satisfaction is an emotional response of customers when they

are satisfied after customers experience the product or service Customer satisfaction is a general concept that expresses their satisfaction when consuming a service, which is the difference between the results received and the expectations Meanwhile, Zeithml and Bitner believe that service quality only focuses on the specific components of the service

Nguyen Trong Hoai's "Development Economics textbook" studying the factors of "soft infrastructure" affecting the attraction of local investment shows that the collection of specific elements of the investment environment including local policy, the dynamics of provincial leadership, transparency and access to information and the time it takes to implement government regulations (soft infrastructure) and other factors Related to market size and geographical advantage (hard infrastructure) will affect the opportunity cost

of investment capital, the level of investment risk and the barriers to competition in the initial process from On the basis of these three issues, investors will consider and consider investment intentions, opportunities and incentives Research by Nguyen Duc Nhuan in the article "Factors affecting the attraction of foreign direct investment in the economic region of the Red River Delta" Author Nguyen Duc Nhuan said that the flow of foreign direct investment into the Red River economic region is affected by the following factors: Investment infrastructure, investment policies, quality of public services, sources human resources, living and working environment, competitive input costs, investment advantages and local brands The author has used quantitative research through a survey of foreign direct investors in the Red River Delta economic region The results show that factors such as: investment infrastructure, investment policies, quality of public services, human resources, living and working environment, competitive input costs,

industry advantages Local investment and brand influence to attract foreign direct investment into the Red River Delta economic region

Research by the author Nguyen Viet Bang and colleagues in the article

"Factors affecting the attraction of foreign direct investment into Dong Nai province" The authors believe that the attraction of foreign direct investment

is influenced by 08 factors, including: Investment infrastructure, investment policies, quality of public services, human resources, living environment and work, competitive input costs, investment advantages, local brands By quantitative research method through survey of 365 foreign direct investors in Dong Nai province The research results show that out of 08 factors affecting investors' decisions, infrastructure and human resources factors are the most influential factors This means that infrastructure and human resources are the two factors that investors consider most before making investment decisions Therefore, in order for investors to decide to invest in industrial zones in the province, local leaders need to pay much attention to these two factors This will be the basis for attracting investment in Dong Nai province

CHAPTER 3: METHODOLOGY

Based on the theoretical background and literature framework mentioned

in Chapter 1 and Chapter 2, Chapter 3 would focus on the appropriate analysis methods, quantitative research indeed Furthermore, outward FDI to Vietnam will be dependent variable and other explaining variable will be mainly based on firm-specific factors and provinces‟ specific factors, such as entry cost, land access and security off tenure or informal changes The model will comprise 63 observations from the data of 63 provinces in Vietnam during a period of time from 2014 to 2018

3.1 Methodology and model specification

3.1.1 Data analysis method

According to Holcomb (2016, p 365), along with the development of world economy, researchers have found plenty appropriate approaches to economic analysis Most of those approaches are based on the framework of quantitative and qualitative research methods However, along with the development of computer science and mathematics, researcher has reserved a more biased for quantitative research methods than qualitative ones Nermend and Łatuszyńska (2019, pp 102–104) shown the superiority of quantitative research methods over qualitative ones from the perspective of economic research Specifically, quantitative research methods allow researchers to accurately analyse each variable and its correlation In contrast, qualitative research methods 'allow' too much 'feeling' of the researcher to participate in analysing the results Therefore, the application of quantitative research methods will yield a more accurate result Ross et al (2016, p 205) shares the same common ideas with Nermend and Łatuszyńska (2019, pp 102–104), which quantitative research methods are common approaches, chosen in