The impacts of foreign direct investment on economic growth in vietnam

The relationship between development and growth is areciprocal relationship, complementing each other, while maintaining theprinciple of economic growth is an important element of develo

Introduction

1 The necessary of study

After nearly 30 years of Doi Moi, Vietnam has achieved number ofconvincing economic and social achievements In the period 2001 - 2010,VietnanTs economy achieved a relatively good growth rate, the averageannual gross domestic product increased by 7.26%, in which, the Socio-economic Development Plan 5 years from 2001 to 2005 increased by 7.51% /year, the 5-year socio-economic development plan for 2006 - 2010 increased

by 7.01% / year

This achievement is a good sign of the economic transíồrmation processand is the result of the policies that Vietnam has been implementing beíồrethe rapid changes of the world economy, especially the global trend.Chemical On the basis of innovations in economic thinking and managementreíồrm proposed in the 6th Congress of the Communist Party of Vietnam, in

1987, the 8th National Assembly adopted and promulgated the "ForeignInvestment Law at Vietnam "with the goal of continuing to improve the legalenvironment for production and business activities in general and the legalenvironment for foreign investment activities in particular Vietnam hasestablished diplomatic relations with more than 170 countries around theworld, expanding trade relations and exporting goods to more than 230markets of countries and territories In addition, Vietnam also participates inintemational economic and financial organizations such as the United NationsDevelopment Program (UNDP), United Nations Food and AgricultureOrganization (FAO), Public Development Organization the United Nations(UNIDO), the International Labor Organization (ILO), the United Nations

member of the World Trade Organization (WTO) in 2007 after 11 years of negotiations.

Since 1988 when the investment law came into effect, along with theopen-door exchange policy with intemational relations, many foreigninvestors have appeared in Vietnam The presence of foreign investors (thepresence of FDI inflows) has brought our country a huge Capital tosupplement domestic Capital (FDI in Vietnam from 2005 to 2014, an average

of about 1,700 billion VND), providing new technology, solving jobs,training human resources and improving management skills

Although certain results have been achieved, there are still manyopinions that Vietnam still has not taken advantage of opportunities to attractFDI and has not yet maximized the beneíĩts that foreign direct investment canbring The basis for the above remarks is the unusual movement of FDIinflows into Vietnam, the ratio of implemented FDI to the registered Capital isstill low, concentrating FDI in only a few sectors, regions and recruitmentcapacity modest labor, Vietnam has not been selected as an investmentpoint for most multinational companies with great potential in technology andwilling to transíer technology and knowledge This situation, together withincreasingly fierce competition pressure on China and regional countries' FDIattraction, poses a huge challenge for Vietnam

Recognizing the importance of a quantitative approach derived from theabove arguments to assess the relationship between FDI and economic growth

in Vietnam Thereíồre, the research topic in the direction of the models can be

estimated, with the title: "The impacts of íoreign direct investment on

economic growth in vietnam”

3 Subjects and scope of study

Research object: The impact relationship between FDI and economicgrowth

Scope of research: The topic of measuring the relationship of FDI andeconomic growth in Vietnam in the period 1995 - 2017, through studyingsome indicators such as export and govemment spending (shown by GP)

4 Study Methods

To solve the problems mentioned, the study uses some of the followingmethods: General research; Descriptive statistics; Quantitative analysis

The specitĩc approach is:

- Research documents, analyze the status of FDI, economic growth inVietnam

- Collect recent FDI data; using the OLS method to assess the impact ofFDI on economic growth

5 The study layout:

The study layout includes 5 chapters:

Chapter 1: The theoretical basic for FDI and Economic growth

Chapter 2: Foreign direct investment and Economic growth in VietnamChapter 3: Research methodology

Chapter 4: Research resuhs and recommendation

Chapter 1: Theoretical basis for FDI and Economic growth

1.1 General theory of Economic growth

1.1.1 The concept of Economic groMth

Economic growth is considered one of the most important issues ineconomic development research Most economists agree that economicgrowth is an increase in income or output calculated for the entire economyover a certain period of time (usually a year) The increase shown in thegrowth scale retlects a more or less increase, while the growth rate is usedwith relative comparative signitìcance and retlects a rapid or slow increasebetween periods The economy's income can manifest in kind or value Theincome is equal to the value retlected in the indicators of gross domesticproduct (GDP), gross national income (GNI) and calculated for the wholeeconomy or per capita

There are many different definitions about the quality of economicgrowth In a narrow sense, the quality of growth can be understood in terms

of one aspect: the efficiency of investment, the evaluation of the ICOR index,

or the similarity with the concept of productivity factor, TFP index In a broadsense, the quality of growth can advance to the point of sustainabledevelopment, íồcusing on all three elements: economic, social andenvironmental The relationship between development and growth is areciprocal relationship, complementing each other, while maintaining theprinciple of economic growth is an important element of development.Growth in quantity but not maintained stable and not accompanied byimprovements in welfare lead to the development objectives are not achieved.Thus, when studying the growth process, it is necessary to fully consider the

two sides of economic growth phenomenon, the quantity and quality of

growth.

1.1.2 Some perspective on Economic growth

1.1.2.1 Classicalperspective about Economic groMth

During the seventeenth century and earlier, Thomas Robert Malthusexplained that as the supply of food and food increased, the population alsoincreased, even at a faster rate

But in the eighteenth century, when both economies of England and theNetherlands succeeded in raising their average income, under the pressure ofpopulation growth and the law of diminishing retums in agriculture, wealthwas created faster than population growth rate Classical theory of economicgrowth by the classical economists stated that the representative of AdamSmith and David Ricardo that is considered to be the successor has developedMalthus model

Adam Smith (1723-1790) is regarded as the tồunder of the economicsdepartment and was the first to study the theory of economic growth in asystematic way In " The Wealth of Nations", he did research on the natureand causes of economic growth and how to promote economic growththrough the doctrine of the "value of labor", "The invisible hand" and thetheory of income distribution

From early work of Adam Smith, the labor that is used in productive andeffective jobs is a source to create value for society and considers Capitalgrowth as a determinant of economic growth Adam Smith's conclusions wereaccepted by economists until the twentieth century, when the development ofeconomic theory changed the traditional notions and brought economists tosupport cental planning and Gorverment control, considering it a better way

to promote economic growth, especially in developing countries

1.1.2.2 Karl.Marx ’s perspective about Economic groMth

According to Karl Marx, factors affecting the reproduction process areland, labor, Capital and technical progress Karl Marx was particularlyinterested in the role of labor in creating surplus value The labor force forcapitalists is a special commodity, the use value of labor goods is not thesame as the use value of other goods, because it can create a greater valuethan its own value, that value is equal to the value of labor power plus thesurplus value

Karl Marx said that because capitalists needed more Capital to exploittechnological advances to improve workers' productivity, capitalists had todivide the surplus value into two parts: a part of consumption for capitalists,partly to accumulate production development and this is the accumulatedsource of capitalism

Karl Marx rejected the idea of "supply creates its own demand", arguingthat the economic crisis is a solution to restore a disordered balance and thatthe State's economic policies are important to promoting growth, especiallythe policy of encouraging an increase in existing demand

1.1.2.3 The neoclassicalperspective about economic groMth

At the end of the nineteenth century was a period that marked thedramatic transformation of Science and technology A series of scientitĩcinventions were bom, along with many precious resources put intoexploitation, making the world economy have a strong development step.This transformation had a strong intluence on economists, forming a newschool of economics that today is called the neo-classical school, headed byAlfred Marshall (1842 - 1924), his main work is the "Principles ofEconomics", published in 1890, marking the birth of the neo-classical school

Neoclassical economists reject the classical view that production in acertain State requires certain proportions of labor and Capital, they argue thatCapital and labor are interchangeable and the production process may havemultiple combinations of inputs At the same time, they believe that scientitĩcand technical progress is a fundamental element to promote economicdevelopment Therefore, attention should be paid to the inputs of production.Neoclassical theory is also called supply-side economics theory.

1.1.2.4 Modem perspective about economic groMth

Modem economists support the construction of a mixed economy, inwhich the market directly identitĩes the basics of economic activity, theGoverment participates in regulation to limit the downside of the market

Essentially, a mixed economy is the combination of Keynesian economictheory and economic theory in economic regulation The basic ideas of thisstudy are presented in P.Samuelson's book "Economics" published in 1948.Modem economics conceptualizes economic equilibrium according toKeynesian model, meaning that the balance of the economy is often below thepotential, under normal operating conditions of the economy, there is stillintlation and unemployment The Gorvement needs to determine theunemployment rate and the acceptable intlation rate This economicequilibrium is determined at the intersection of the aggregate supply andaggregate demand curve

The theory of modem economic growth holds that the market is thefundamental factor regulating the operation of the economy The interactionbetween total supply and aggregate demand creates real income, jobs -unemployment, price - intlation rate, which is the basis for solving three basic

problems of economy: What to produce? For whom to produce? How to

produce?

On the other hand, the Government plays an important role in theexpansion of the market economy that requires the intervention of theGovernment, not only the market has disabilities but also the society sets atarget that even though the market is operating well, it cannot meet the target

1.1.3 Factors affecting economic groMth

According to modem studies on economic growth, factors affectingeconomic growth can be divided into two groups: the group of economicfactors and the group of non-economic factors Within the scope of the study,author only do research on economic factors

Economic factors are the resources that have a direct impact on the inputand output variables of the economy Represent that relationship byconstructing the general function as follows:

In which: Y is the output value

Xi (i = 1,2, , n) are variables that represent the value of economicfactors that directly generate output value

In a market economy, the output value of the economy depends not only

on the purchasing power and solvency of the economy but also on the inputvariables directly related to production

* Economic factors affecting growth from the supply side

Normally, referring to the aggregate supply factors affecting economicgrowth, it refers to the four major resources: Capital (K), labor (L), landresources (R), and technology The technique (T) is often combined according

to a production function of the form:

In which:

Capital (K): is an important input factor that has directly impact on

economic growth The production Capital stands on the macroscopic scale,which is considered physical Capital rather than in the form of money (value)

It is the total accumulated material of the economy and includes: factories,equipment, machinery,etc In developing countries, the growth is usually inwidth, the contribution of production Capital often occupies the highestproportion in economic growth

Labor (L): In the past, the concept of labor was the input material íactor

as the Capital íactor and determined by the number of people, the labor force

of each country could be calculated working hours However, recent modemeconomic growth models have emphasized both the non-material aspects oflabor called human Capital, which are skills, initiatives and methods ofworkers Considering the labor factor according to these two contents, it isparticularly important in analyzing the advantages and the role of labor ineconomic growth Currently, the economic growth of developing countries interms of labor factor is contributed by the size and quantity of labor ratherthan the contribution of labor quality

Resources (R): an important element in agricultural production and an

indispensable element in the implementation of economic establishments inindustries and Services Natural resources from the ground, air, forest and seaare divided into two categories: renewable resources and non-renewableresources Resources are an important íactor but not the most important íactor

in economic growth A resource-poor economy (Japan) but effectively used,economic growth is still better than resource-rich countries (Vietnam)

Science and technology (T): is considered as a factor that has a strong

impact on economic growth in modern conditions Technological factors need

to be fully understood at two angles: Firstly, Science and technology arescientiíĩc achievements, principles, testing and improvement of Products,technological processes or technical equipment; Secondly, Science andtechnology is the application of research and testing results in order toimprove the general development level of production Accordingly, K Marxsees Science and technology as "a magic wand that adds wealth to socialwealth" Solow argues that "all long-term per capita growth is achievedthrough technical progress." Kuznets or Samuelson affirmed that "technicaltechnology is a red thread throughout the process of sustainable economicgrowth"

Total íactor productivity (TFP): demonstrating the efficiency of

technical technology factors or the effects of technical and scientihc progress

on economic growth is determined by the residual of growth after eliminatingthe impact of Capital and labor factors TFP is considered a quality factor ofgrowth or growth in depth Today, the impact of institutions, open policies,integration or development of human Capital has enabled developing countries

to quickly access the world's leading technologies, creating a Chase based on

on productivity and contribution of TFP is increasing in the process ofimplementing rapid growth targets of countries around the world

It can be seen that the source of growth is due to many constituentfactors, its role depends on the circumstances and development period of allcountries For poor countries, physical Capital plays a vital role The researchworks on Romer's growth origin (1990) all claim that in the context ofchanging the economy from post-industrial to knowledge economy, humanresources (human Capital) and outstanding Science and technology than other

traditional factors such as natural resources, physical Capital and rudimentary

labor.

* Economic factors affect growth from the aggregate demand side

The factor directly related to the output of the economy is the ability tobuy, the purchasing power and the payment capacity (the aggregate demand

of the economy) According to macroeconomics, there are four direct factorsthat constitute aggregate demand, including:

Expenses for personal consumption: including fixed expenses, regular

expenditures and other unexpected expenses Personal consumptionexpenditure is dependent on total disposable income and marginalconsumption trends are determined according to the specific stages ofeconomic development

Government spending: includes expenditure items to buy goods and

Services of the Government Government spending sources depend on theability to collect funds, which mainly include revenues from taxes and fees

Expenditure on investment: this is essentially the expenditure for

investment needs of businesses and economic units, including fixed Capitalinvestment and mobile Capital investment Funds for investment are takenfrom the ability to save from areas of the economy Investment recovery is aninvestment to offset the depreciation value taken from the depreciation fund.Net investment comes from the savings of the public sector, households andbusinesses

Expenditure through import and export activities: In fact, the value

of exported goods is the expenditure that must be used to domestic resourcesand the import value is the value of the goods used in the country but It is notnecessary to spend expenses on domestic resources, so the difference between

export and import is the net expense that must be spent on

relations.

1.1.4 Measuring economic groMth

The measure of economic growth is determined by indicators in thenational account System including: total production value (GO), grossdomestic product (GDP), total national income (GNI), revenue National entry(NI), available national income (NDI), per capita income

Total production value (GO): is the total value of material and Service

Products created in the territory of a country in a certain period (usually oneyear) The target of total production value can be calculated in two ways: first,only the total value of production is the total sales revenue obtained fromunits and branches in the entire national economy; second, the totalproduction value is calculated directly from production and Services includingintermediate costs (IC) and increased value of material and Service Products(VA)

Gross domestic product (GDP): is the total value of the final product

and Service product resulting from the economic activity in the territory of acountry created in a certain period There are three approaches to calculatingGDP:

- According to the approach from production, GDP is an added value forthe entire economy It is measured by the total value added of all permanentproduction units in the economy:

VA = EVAi (with i = 1, w) (1.1.3)

In which VA is the added value of the economy, i VA is the value of theindustry i

- From the expenditure approach, GDP is the total expenditure for finalconsumption of households (C), govemment spending (G), investment inasset accumulation (I) and spending on national trade :

Gross national income (GNI): this is an indicator that appeared in the

SNA table in 1993 instead of the GNP target used in the SNA table in 1968

In terms of content, the GNP and GNI are the same However, when usingGNI is to say according to the approach from income, not from theperspective of production Products such as GNP Thus, GNI is formed fromapproaching GDP in terms of income and adjusted according to the difference

of income factors with foreign countries:

GNI = GDP + difference in income factor with foreign countries (1.1.6)The difference in value between GDP and GNI is in the differencebetween income and foreign factors In developing countries, GNI is usuallysmaller than GDP because usually the difference receives negative value

National income (NI): is the value of newly created material and ServiceProducts in a certain period of time NI is the GNI gross national income aftereliminating the fixed Capital depreciation of the economy (DP):

NI = GNI - DP (1.1.7)

Net disposable income (NDI): is the share of national income for final

consumption and net accumulation in a given period This criterion is formedafter implementing the second income distribution, in fact it is the nationalincome (NI) after adjusting the current transfer and payment revenuesbetween resident and non-resident:

NDI = NI + difference in current transfer to tồreign countries (1.1.8)

Per capita income: (GDP / person, GNI / person) This indicator reílectseconomic growth taking into account population change Scale and speed ofincrease in per capita income are important indicators reílecting the livingstandards of the population The continuous increase of this indicator is a sign

of the sustainable growth of a country Per capita income is also used incomparing living standards among countries Thus, the above criteria are used

as a measure of economic change and are also used to determine the nationaltarget of the country However, the above criteria have some limitations: donot accurately reílect the welfare of different population groups in society, thecalculation of income in developing countries often determines incorrect oromitted, easily lead to misleading assessment in business analysis

1.2 Basic theory of FDI:

The development of investment relations between countries in the world

is very important in economic development, there are many economictheories about FDI that have been researched and developed by theeconomists These theories were built to explain the origins of the formationand development of FDI, the movement of elements in the productionprocess, typically the elements: Capital, labor, technology, especially the role

of multinational companies in intemational investment

1.2.1 Some economics theory about FDI:

1.2.1.1 Neoclassical theory of Capital movement:

Before the 1960s, explanations of major international Capital circulationwere based on neo-classical theory of portfolio lines Under perfect conditions

of competition and non-existent transaction costs, circulating Capital aresubject to changes in interest rate differences Accordingly, Capital is assumed

to be traded between independent buyers and sellers Multinational companieshave no role nor do they have a separate theory of tồreign direct investment.The neo-classical theory of circulation has seen the flow of tồreigninvestment as part of the intemational flow of elements Based on theHecksher - Ohlin (H - O) model, the intemational circulation of productionfactors, including tồreign investment, is determined by the other ratios of themain production inputs available in countries The intemational flow ofCapital suggests that there is a flow of investment from countries with a largeamount of relative Capital to countries with relatively scarce Capital In otherwords, Capital flows from countries with low marginal Capital productivity tocountries with higher marginal Capital productivity Accordingly,intemational investments may be benetĩcial to both the investment countryand the receiving country The country receiving investment Capital may have

an advantage in increasing income from tồreign investment activities to theextent that the productivity of the investment activity exceeds what theinvestor moves out of the host country according to the form of protĩt orinterest However, the assumptions of neo-classical theory hardly exist inreality due to imperfect market competition, incomplete circulation of laborand Capital, exist imperfect transaction and information costs Therefore, neo-classical theory failed to explain behavior, especially the case of two-wayCapital flows between countries, such as FDI between developed countries

such as the us and Japan Moreover, this theory cannot distinguish

other forms of Capital.

1.2.1.2 Positioning theory:

Contrary to industrial organization method, positioning theory focuses

on national characteristic This theory explains FDI activities related toeconomic conditions associated with investment and investment recipients aswell as consideration of positions in which FDI implementation is moreeffective This method consists of two subdivisions: input-oriented andoutput-oriented methods Oriented inputs are supply-side variables, such asinput costs, including labor, raw materials, energy and Capital The output-oriented factors focus on the determinants of market demand, includingpopulation size, per capita income, and market opening in the recipientcountries Therefore, the national specitĩc factors not only help multinationalenterprises determine their location for FDI investment, but also createfavorable conditions for them to distinguish different types of FDI such asinvestment Capital to search for markets and investment Capital effectively,seeking export orientation

1.2.1.3 Production Cycle theory ofVenon

The theory of product life cycle was built by economist Vemon (1966)and used to explain FDI In Vemon's view, the period of developmentProducts consists of three phases: building Products, Products into the process

of use and Products going into the standardization stage Corresponding to thethree stages of product development are three steps that FDI enterprises carryout Products to use, expand product consumption and standardize Products.Specitĩcally, the life cycle of a product consists of three stages as follows:

Phase 1: Products are manufactured and manufactured in the investmentcountry During this period, new Products that appear to need quick feedbackare intended to look at Products that satisfy customer needs and Products thatare only sold to the domestic market for the purpose of minimizingProduction expense Market reaction is the basis for manufacturers to adjustProducts for more suitable The product mainly serves domestic demand, theexport of Products to other countries is negligible, the production process ismainly small production Demand for new Products in this period is inelasticand businesses often sell Products at high prices and small quantities.

Phase 2: after going through the fabrication stage, the product is moretlexible During this period, the product is mature, the demand increases, thedemand for Products in importing countries increases, leading to stimulation

of production, creating a high level of competition among businesses Muchexported and peaked, overseas factories began to be built by businesses anddemand the price of elastic Products Price becomes an important factor forconsumers' decisions

Phase 3: Products have been standardized in quality, the market is stable,goods become popular Businesses no longer play an exclusive role in theproduction and distribution of Products, including production technology.Businesses bear a lot of pressure to reduce costs as much as possible toincrease protĩts or reduce prices to increase competitiveness In order tosearch for consumption and comparative markets in terms of productproduction costs, product manufacturers have made investments indeveloping countries Products are continued to be produced in developingcountries and imported back to the countries that have invested Then, thecountry that invests becomes a pure importer (because domestic Products donot have edges) compete on intemational market prices and the country thatreceives investment has become an exporter

1.2.1.4 The Intemalization Theory

Based on the Japanese experience, Akamatsu (1962) initiated anapproach called "flying ílock model" to explain why FDI investment indeveloping countries is He divided the product cycle in developing countriesinto three phases: import, domestic production and export For developingcountries, a specific product cycle begins with the import of new Products Asdemand increases, import substitution by domestic production will createeconomic value With the support of technology imports and skills acquiredfrom FDI activities, developing countries will now start producing Productsfor domestic demand Expanding production leads to increased productivity,improved quality and reduced product costs, thereby replacing importation.However, when domestic costs reach intemational thresholds, tồreign marketsdevelop, domestic production needs to be improved to keep up with newstandards For that reason, the initial export expansion was carried out byincreasing domestic demand, which then became a factor to stimulate thedevelopment of industries

Besides analyzing commodity Products as in Vemon's model, Akamatsualso introduced another model of the industrialization development process,arguing that industrialization follows the "tlying tlock" model from oneindustry to another and led by developed countries with advanced technology.Keeping up and promoting industry in developed countries will improve thecompetitive advantage of investment Capital, management and technologyskills, thereby promoting economic development

1.2.1.5 The Electic Paradigm of Dunning

This is the view developed by Dunning (1981), combining methods ofapproaching industrial organizations and regional theory and intemal theory

to clarify the concept of Foreign Direct Investment (FDI) and intemationalproduction This theory raises the notion that a company engaged in FDIactivities should have a combination of specific ownership advantages andlocal advantages and regional advantages in the target market

Ownership advantages require companies to possess specific resources

to conduct FDI activities, such as technology, management resources andmarketing skills, which are the factors that create efficiency in produce andbring international competitive advantages to firms that are higher thandomestic competition The selection of FDI investment areas requires the hostcountries to have regional advantages In order to achieve this, it is necessary

to consider factors such as a large or potential domestic market, low-costefficient production based on high-quality, cheap and abundant labor, andtransportation costs, widespread investment incentives and favorablemacroeconomic policies Regional advantages depend greatly on thedevelopment stage and industrialization strategy of the host country Finally,the localization advantage will allow companies to consider risks and costsbetween direct investment and other forms such as licensing or franchising.Only in the context of having all three new FDI ownership advantages can beimplemented in a specific country The approach to generalization leads tounity in discussing the determinants of FDI investment and explaining theregional economic integration

The eclectic theory and the approaches given above are all focused onmacroeconomic analysis to explain the behavior of multinational companies,specialties, engines and FDI investments Therefore, it is difficult to explainthe macroeconomic effects of FDI on the host country

1.3 Features of FDI

Foreign direct investment has the following basic characteristics:

- FDI is the type of intemational Capital transfer, the Capital ownerconducts investment activities abroad, which means that the enterprisereceives non-national FDI of the investor

- FDI is a type of direct investment, tồreign investors have the right toadminister enterprises that receive Capital This right depends on the Capitalcontribution ratio of investors to legal Capital In the case of 100% legalCapital contribution, investors have full rights to decide the businessoperations of the enterprise

- The investor's income depends on the business results and the protĩt orloss is divided among the investors according to the Capital contribution ratio

of the parties

- Compared to other types of intemational investment, FDI is lessaffected by the Government, especially less dependent on the politicalrelationship between the host country and investment Capital

- FDI is a type of long-term and direct investment Therefore, FDI is arelatively stable term and not a loan, so the host country has an additionallong-term Capital source for domestic investment and does not have to worryabout repayment Moreover, tồreign direct investment includes not onlyinitial investment but also additional Capital in the investment process oftồreign parties

- Investors must comply with the laws of the host country for tồreigninvested enterprises

- Because the purpose of íồreign investors is profit, the production andbusiness sectors of FDI are mostly those that can bring high protĩts.

- In terms of form, investors can implement FDI in such ways as Capitalwithdrawal to set up new businesses abroad or to buy a part or all of theexisting businesses or buy stocks to take over, close import

- The trend of multi-polarity, multilateral and multifaceted in FDI isbecoming more and more clear, often many parties join with different Capitalcontribution ratios and different forms of Capital such as public and privateCapital together

1.4 TypesofFDI

There are many ways to classify FDI activities as follows:

Counterpart trade: is the simplest form of FDI and applies only to

countries with strict import restrictions and investment restrictions InVietnam, this form was applied beíồre the Foreign Investment Law (in 1987)and until now almost no longer used

Business cooperation contract: is a form of investment whereby the

íồreign party and the landlord are committed to fulfilling their obligations andare entitled to the adequate beneíĩts stated in a business cooperation contract.This is a simple, easy to implement form, so it is often appropriate to the íĩrstphase of opening up for FDI investment Foreign parties often contributeequipment, technology, supplies, participate in quality control; andhomeowners often organize production according to foreign instructions

Joint venture: is an enterprise established by foreign parties and the

host country, in which the parties contribute Capital, jointly run the business,share the risks and proíĩts according to the Capital contribution ratio on thebasis of joint venture contracts or agreement signed between the host countrygovemment and the foreign government This form prioritizes the form of

business cooperation contract due to closer cohesion of

major projects in important industries and Services, agro-forestry

resource-intensive projects.

100% FDI Entreprise: is an enterprise completely owned by tồreign

investors, established in the country receiving investment, managing andtaking responsibility for operations and business results .This is a preferredform of many FDI investors, especially in cross-country companies Thisform is very developed in countries with a clear, stable investmentenvironment and suitable for many different industries

Build-operate-transíer (BOT) contract: is a document signed between

tồreign investors and a competent agency of the host country to invest in theconstruction of infrastructure projects (including expansion, upgrading,modemizing works) and doing business for a certain period of time to recoverCapital and obtain reasonable protĩts, then transfer without compensation thewhole work of the host

Build-Transíer-Operate (BTO) contract: is formed similar to the BOT

contract but after the construction is completed, the tồreign investor willtransfer it back to the host country and be granted by the host countrygovemment the right to trade that building or another project for a period oftime to retum all invested Capital and have a satisfactory retum on theconstructed and transferred project

Build-Transíer (BT) contract: is formed similar to BOT contract but

after the construction is completed, tồreign investors will transfer back to the

host country and be paid by the Government of the host country or

assets commensurate with the invested Capital and a reasonable rate of retum.

/ 5 Literature review on effects of FDI on economic growth

The rapid growth of FDI inflows worldwide has spurred research todetermine whether attracting FDI can be seen as an important strategy topromote economic growth in developing countries or not Answering thisquestion will help countries see how FDI has become a driving force for thedevelopment of the economy, thereby directing preferential policies to tồreigninvestors

In this chapter, I will present and discuss some experimental studieswhich were selected on the impact of FDI on economic growth, in which theauthors have used the same methods and variables to my research

1.5.1 Studies on the relationship between FDI and groMth

Based on Endogenous growth theory and Eclectic theory, economicanalysts have found a two-way relationship of FDI and economic growth.One of the pioneering researchers in this relationship is Tsai (1994) Tsai(1994) applied a model simultaneously to test the two-way relationshipbetween FDI and economic growth for 62 countries during 1975-1978 and for

51 countries in the period 1983 - 1986 The author has íồund that FDI andeconomic growth had a two-way relationship in the 1980s

In a benchmark article for my study, Abdulghader Ali (2014) examinesthe contribution of FDI to economic growth to Algeria the effect of FDI andother foreign Capital inflows on economic growth and domestic investment inthe receiving economies so as to establish whether the call for more FDI istruly justified The main purpose of this thesis is to empirically examine theimplications of the relationship and complementary between FDI and DI, andthe contribution of these íactors to economic growth She uses the "Cobb-

Douglas" production íìmction to measure and describe the effect of íồreign

direct investment on economic growth in Algeria during the period

2000-2011 In her "Cobb-Douglas" model, she uses the “annual growth rate of real

per capita GDP” as the Capital, labor, and the imports as production factors

and a distinction has been made between the domestic Capital and tồreign

Capital as independent factors, where the latter is measured by the tồreign

direct investment She performs the empirical analysis by transferring basic

model to linear model by logarithmic conversion, and tested by squares

least-estimate The results show that FDI has a signitĩcant effect on economic growth in Algeria, import and domestic investment also play important

the growth of economy in Algeria.

Neuhaus (2006) makes an important contribution to the literature of led growth In his book, he formally introduces the FDI discussion into theendogenous growth models In addition, he makes an empirical investigation

FDI-by using the data of 13 Central and Eastern Europe Countries over the periodfrom 1991 to 2002 While constructing his empirical model, he substitutes the

“human Capital variable” of Mankiw, Romer and Weil (1992) growth modelwith “FDI variable” Furthermore, he includes some additional explanatoryvariables such as the lag of per capita income, trade openness, inHationvolatility, govemment consumption, government balance, and domesticinvestment to improve the explanatory power of his model And he uses thegrowth rate of per capita income as the dependent variable He runs hisARDL (autoregressive distributed lag) type regression model by using pooledmean group estimation method As a result of estimations, he concludes that

“FDI had a significant positive impact on the rate of economic growth inCentral and Eastem Europe Countries” (Neuhaus, 2006, p.81) Moreover, heclaims that FDI is an important determinant of growth especially for transitioneconomies Thereíồre, he supports pro-FDI policies of govemments to attract

more FDI inflows for growth and development.

A recent study by the group of researchers (Ghaith Alzaidy, MohdNaseem Bin Niaz Ahmad, Zakaria Lacheheb) finds evidence that FDI haspositive impacts on growth by using the data in Malaysia over the period1980-1990 In their model, the dependent variable is the growth rate of realGDP per capita whereas the main independent variable is FDI which denotesFDI net inflow as a ratio to GDP They also employ some control variablesnamely; LFD represents financial development POP represents populationsize (proxy of labour force), (INV) which is a measure of domesticinvestment as proxies of gross Capital formation in the percentage of realGDP (represent Capital), (GE) govemment expenditure, (FDI*FD) representsthe interaction term between FDI and financial development They performsthe empirical analysis by using OLS method both for cross-section and paneldata and finds out that “FDI has a significant positive impact on economicgrowth in Malaysia for the short and long run” They also find out thatfinancial development indicator as well as the interaction term between FDIand financial development are highly significant with the expected positivesigns As both results of financial development indicators as well as theinteraction term between FDI and financial development are highlysignificant with the expected positive signs; this show that better domesticfinancial intermediaries may channel the inflows of FDI to productive sectors,and hence to further stimulate economic growth

Haskel et al (2002) figures out a positive correlation between FDI andTotal Factor Productivity (TFP) of domestic enterprises This finding has alsobeen confirmed in the case of Lithuania by Smarzynska B.K (2002).Smarzynska argues that domestic marketoriented foreign enterprises hadstronger positive effect on the productivity of domestic firms than export-

oriented íồreign enterprises Haddad and Harrison (1993) also find evidence

of spillover effects on productivity in the case of Morocco’s manufacturing

industries, yet the magnitude of such effect was smaller in industries with

more tồreign enterprises In general, a number of researches have confirmed

the positive relationship between FDI and labor productivity in domestic enterprises, yet negative relationship is also found in some circumstances.

Not all studies, as presented above, are in favor of FDI in assessing thepositive impacts of FDI on productivity and economic growth For instance,Kumar and Pradhan (2002) employ panel cointegration techniques insearching for a long-run relation between FDI and growth by using a panel of

107 developing countries in 1980-1999 period In their model, the dependentvariable is the growth rate of real GDP whereas the main independentvariable are the gross Capital formation (which is the same as gross domesticinvestment) and net export Their regression results reveal that “Thecontribution of FDI was positive in some countries and not positive inothers” In most of the countries and for the continent as a whole, the relevantcoefficient estimate is not significant They put forward that only in the high-income developing countries FDI triggers growth whereas the low-incomecountries cannot enjoy the growth effect of FDI

In Vietnam, despite of the vast literature on FDI, in-depth research onthe relationship between FDI and economic growth, especially usingquantitative methods, are still limited in number Among them is Ngoe AnhThu (2001), which considers the effect of FDI on the growth and economicdevelopment, based on VietnanTs FDI statistics in the period after theSoutheast Asian financial crisis but the results have not yet comprehensivelyassessed the positive and limited impact of FDI on the VietnanTs economy.Tran Nguyên Thi Ai Lien (2007) analyzes the mechanism of impact ofthe investment environment to attract FDI through three aspects: investment

costs, investment risks and fences, competition barriers also stop at

of qualitative research.

Pham Van Hung (2008) studies the status of transparency in economicactivities as well as the effects of transparency in economic activities toattract FDI of Vietnam again at the level of qualitative research

Economic doctoral thesis of Trieu Hong Cam (2004), by statisticalmethods, qualitative and using multivariate regression method, the thesis hasbuilt a model (including 5 variables) to analyze the factors affecting theattraction of FDI in Vietnam in the period of 1988 - 2001 The results showthat the variables: real growth rate, domestic investment, real exchange rate,foreign aid affect the attracting FDI in Vietnam and the thesis has establishedSolutions to promote FDI attraction in Vietnam, proposed somerecommendations to improve these Solutions However, the author does nothandle the endogeneity of the variables in the model and does not test thedefects of the model

Economic doctoral thesis of Ho Nhut Quang (2010), using multivariateregression method to study the impact of macroeconomic factors on FDIattraction in Vietnam in the period 1989 - 2009, The results show that thereare four important macroeconomic factors affecting FDI attraction: real GDPvalue, annual final consumption value in the economy, total intemationaltrade value, etc The thesis also makes recommendations on policies related toattracting FDI into Vietnam However, the model that the author built has notyet been connected to the macro-micro approach to study and analyze morefully the economic relations in the growth process This model is also nottested for defects to ensure accurate estimates