An empirical investigation of inward Foreign Direct Investment in Vietnam: A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

This study investigates inward Foreign Direct Investment (FDI) at the national, regional and provincial levels in Vietnam. The focus is to examine the long-run bi-directional relationship between FDI and economic growth (EG), FDI competition, the effects of policies and laws on attracting FDI, and the determinants of FDI location selection. The study employs a three-step approach including Pedroni’s model, ordinary least squares (OLS) estimation, and the error correction model to evaluate the long-term relationship. Retail sales of goods and services are employed instead of Gross Domestic Product (GDP) to represent EG at the regional and provincial levels, which reduces the limitations of GDP calculations at non-national levels. The OLS estimation is used to examine FDI competition, to identify the FDI determinants, especially those determinants affecting FDI location selection from the investors’ perspective. The provincial competitiveness index (PCI) and sub-indices are employed to investigate PCI-based competition in FDI attraction. The investment incentive policies (IIP) index is proposed as an aggregate index of three types of investment incentives (free land, income tax exemption, and import tax exemption) to examine IIP-based competition in FDI attraction. The study investigates the effects of laws, including the release of new investment and enterprise laws in 2005, and participation in the World Trade Organisation (WTO) and Free Trade Agreements (FTA) on FDI in Vietnam. Country risk and website quality indices are proposed to identify the determinants of the FDI location selection. Ranking regions, provinces and cities based on their socio-economic conditions is employed to investigate different effects of the determinants in different areas in Vietnam. The study has several important findings. A long-term bi-directional positive relationship between FDI and EG is found at the Vietnam provincial level. FDI plays a less important role in promoting EG at the national level. Foreign investors are more likely to invest in areas with better economic governance (a higher PCI). Only three of nine PCI sub-indices (assistance to foreign investors to start a business, access to information, and solving legal matters) significantly affect FDI. Assisting the investors to start a business is likely to be the most important PCI sub-index. Higher investment incentives (a higher IIP index) are not attractive FDI factors. Changes to laws and the WTO and FTA memberships may not be important at national and regional levels, but significantly impact on FDI at the provincial level. Provinces with more difficult socio-economic conditions attract less FDI. The positive effects of the new laws in 2005 and infrastructure development on FDI attraction decrease in provinces with more difficult socio-economic conditions. Geographical concentration of FDI exists at the provincial level. Foreign investors tend to invest more in an area with higher EG, better educated labour force, lower value currency, more efficient capital use, lower inflation rate, better economic governance, fewer investment incentives, and better infrastructure. Interestingly, FDI flows into Vietnam increased after the 2008 financial crisis. Investors may have invested in Vietnam after the financial crisis to take advantage of a lower value currency and lower cost in areas offering high IIPThis study investigates inward Foreign Direct Investment (FDI) at the national, regional and provincial levels in Vietnam. The focus is to examine the long-run bi-directional relationship between FDI and economic growth (EG), FDI competition, the effects of policies and laws on attracting FDI, and the determinants of FDI location selection. The study employs a three-step approach including Pedroni’s model, ordinary least squares (OLS) estimation, and the error correction model to evaluate the long-term relationship. Retail sales of goods and services are employed instead of Gross Domestic Product (GDP) to represent EG at the regional and provincial levels, which reduces the limitations of GDP calculations at non-national levels. The OLS estimation is used to examine FDI competition, to identify the FDI determinants, especially those determinants affecting FDI location selection from the investors’ perspective. The provincial competitiveness index (PCI) and sub-indices are employed to investigate PCI-based competition in FDI attraction. The investment incentive policies (IIP) index is proposed as an aggregate index of three types of investment incentives (free land, income tax exemption, and import tax exemption) to examine IIP-based competition in FDI attraction. The study investigates the effects of laws, including the release of new investment and enterprise laws in 2005, and participation in the World Trade Organisation (WTO) and Free Trade Agreements (FTA) on FDI in Vietnam. Country risk and website quality indices are proposed to identify the determinants of the FDI location selection. Ranking regions, provinces and cities based on their socio-economic conditions is employed to investigate different effects of the determinants in different areas in Vietnam. The study has several important findings. A long-term bi-directional positive relationship between FDI and EG is found at the Vietnam provincial level. FDI plays a less important role in promoting EG at the national level. Foreign investors are more likely to invest in areas with better economic governance (a higher PCI). Only three of nine PCI sub-indices (assistance to foreign investors to start a business, access to information, and solving legal matters) significantly affect FDI. Assisting the investors to start a business is likely to be the most important PCI sub-index. Higher investment incentives (a higher IIP index) are not attractive FDI factors. Changes to laws and the WTO and FTA memberships may not be important at national and regional levels, but significantly impact on FDI at the provincial level. Provinces with more difficult socio-economic conditions attract less FDI. The positive effects of the new laws in 2005 and infrastructure development on FDI attraction decrease in provinces with more difficult socio-economic conditions. Geographical concentration of FDI exists at the provincial level. Foreign investors tend to invest more in an area with higher EG, better educated labour force, lower value currency, more efficient capital use, lower inflation rate, better economic governance, fewer investment incentives, and better infrastructure. Interestingly, FDI flows into Vietnam increased after the 2008 financial crisis. Investors may have invested in Vietnam after the financial crisis to take advantage of a lower value currency and lower cost in areas offering high IIP.