Investment location selection: Strategies for foreign direct investment in Vietnam

Abstract

Foreign direct investment distribution is unequal in terms of economic activities as well as among regions, provinces and cities within countries. Therefore, understanding reasons why foreign investors favour a location over others are necessary for policymakers, governments, and international investors. Although determinants of selecting investment locations have been studied, different determinants are identified in different countries. Additionally, studies on the investment location selection within a country are limited, especially in Vietnam. This gives rise to questions which factors make a location more attractive to the foreign investors and whether they have similar effects in different provinces and cities within a country. This paper aims to investigate the determinants of investment location selection at the provincial level in Vietnam based on foreign investors' perspectives. The four groups of factors include human capital, economic, provincial competition and institutional, and infrastructure. The study uses panel data set with 63 Vietnam provinces and cities from 2000 to 2015. The ordinary least squares estimation supported by the Hausman test is employed in the empirical estimation. The results of models with and without a lag term are robust. Unlike many previous studies, we employs retail sales of goods and services instead of gross domestic product to represent economic growth at the provincial level. The provincial competitiveness index is employed to represent economic governance of provinces and cities. The investment incentive policies index is proposed as the aggregate index of three types of investment incentives (free land, income tax exemption, and import tax exemption) instead of considering only tax incentives. The country risk index is proposed to represent the political stability and security. Ranking of provinces and cities based on their socio-economic conditions is employed to investigate the different effects of the determinants in different areas in Vietnam. Surprisingly, this study shows that foreign investors tend to invest more in areas with fewer investment incentives. Additionally, foreign direct investment flows into Vietnam increased after the financial crisis in 2008 as foreign investors may take advantage of lower value currency and lower cost in the areas offering high investment incentives. The effect of infrastructure development on investment location selection is weaker in areas under more difficult socio-economic conditions. This study suggest that Vietnamese policymakers and provincial governments should invest more in education and training, control exchange rate and inflation rate, enhance investment efficiency, maintain political stability and security, improve infrastructure to boost economic growth, and improve economic governance in addition to offering more investment incentives.