7/23/2019 10.1.1.535.747

1/18

958

DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN VIETNAM

Thu Thi Hoang

Abstract

Since the Vietnamese economic reforms in 1986, Vietnams economy has been among the fastest

growing countries in ASEAN. Foreign direct investment (FDI) flows are an important factor helping economic

growth and development in Vietnam. This paper explores factors that determine foreign direct investment in

Vietnam from 1988 to 2005. The main results show that higher market size, GDP growth, openness to trade and

better infrastructure development are factors attracting FDI inflows into Vietnam. However, at this stage of

research, we have not found a strong relationship between FDI and human capital quality or the timing of joining

ASEAN. More study is needed to gain a better understanding on this aspect.

Key Words:foreign direct investment, determinants, Vietnam

Introduction

Fully independent in 1975, Vietnam has been in transition from a centrally planned to a market oriented

economy since December 1986. These economic renovation policies called doi moiwere very successful at

generating economic growth and reducing poverty. Vietnam had seen remarkable economic achievements in

growing gross domestic product (GDP), GDP per capita, export and foreign investment and important trade and

economic agreements signed with major partners. Large amounts of foreign direct investment (FDI) have flown

into Vietnam. FDI not only brings additional capital to the Vietnamese economy, but can also bring modern

technology, managerial expertise and more industries, products and jobs. Therefore, FDI might promote better

utilization of domestic resources and accelerate economic structural transformation in the direction of

industrialization and modernization. Vietnams economy now is among the fastest growing country in the ASEAN.

The FDI in Vietnam has been expanded along with the countrys rapid economic growth increased

openness to the rest of the world. It is useful to know important factors determining FDI in Vietnam. However,

there are not many studies on determinants of FDI in Vietnam due to the lack of data and information on Vietnam.

The purpose of this study is to examine factors which are most important for increased FDI across Vietnam from

1988 to 2005. The paper first gives a brief background on FDI development in Vietnam. Then, it shortly reviews

empirical evidences of location determinants of FDI and discusses model specification and potential

determinants of FDI in Vietnam. In the final section, the study finds factors attracting FDI in Vietnam using the

quarterly time series data and makes conclusions.

Foreign direct investment in Vietnam: an overview

Right after Vietnams economic reforms in 1986, the first Law on Foreign Investment was introduced by

the National Assembly of Socialist Republic of Vietnam in December 1987. The law states that Vietnam welcomes

and encourages foreign organizations and nationals to invest capital and technology in Vietnam on the basis of

7/23/2019 10.1.1.535.747

2/18

959

respect for national independence and sovereignty, full observance of the Laws of Vietnam, equality and mutual

benefit. The State shall guarantee the ownership of the invested capital and other rights of the foreign investors,

and extend to the latter favorable conditions and easy formalities1. The law was revised to improve the

investment environment and further attract foreign capital in 1990, 1992, 1996, 2000, and 2003 and recently in

the new FDI law in 2005 by the amended tax, land, currency policies and environment.

From the first law on Foreign Investment in the late 1987 that granted legal status for FDI inflows,

Vietnam has been greatly attracted attention from foreign investors. FDI inflow into Vietnam increased rapidly

during the 1990s and in the first half of the 2000s. From 1988 up to December 2005, there were 7279 FDI

projects receiving investment licenses with total registered capital amounting to US $66244.4 million. In 2005

alone, there were 922 projects with registered capital of US$ 4268.4 million. Even though the number of contracts

in the five year 2001-2005 were more than double of that in the five year 1996-2000, the registered capital in

2001-2005 period were smaller than that in 1996-2000 period. The registered capital in 1996 was the highest

amount (US$10164.1 million) and accounted for 1/6 of total capital registered.

Table 1 shows the overall trend of FDI inflows in Vietnam. The opening of the Vietnamese economy to

FDI in 1987 and subsequent measures to liberalize the FDI regime, together with the fast growth of the 1990s, led

to a rapid increase in FDI inflows in the first half of 1990s, peaked in 1996 at 9735.3 million US dollars and

dropped sharply after that. Although showing a gradual increase again at beginning of period 2000-2005, the

registered capital in 2005 was only $4268.4 million, equal to 0.44% of that in 1996. The 1997-1998 East Asian

crises could be one of the interpretations of the downturn in FDI inflows as the volume of FDI in Viet Nam in the

early 1990s had two third come from these countries. Moreover, the lack of transparency in property and land

rights, dispute resolution mechanisms, preferential treatment of local firms and suppliers, corruption, and

infrastructure constraints in Vietnam are the other reasons of the decline in FDI flow(Schaumburg-Muller 2003,

p.48).

To attract FDI inflows into Vietnam, the crucial legal changes were made in Decree 852 of January 1996

and the amended Foreign Investment Law 2000. Decree 852 placed FDI coordination and planning under the

direct control of the provincial People's Committees Department of Planning and Investment (DPI). The Foreign

Investment Law allowed provinces to sign directly small FDI projects (below $10 million). Not coincidentally, the

average size of individual FDI projects has dropped considerably since 1996 despite the fact that the absolute

number of projects increased.

Up to the December 2005, there are 75 different countries and territories had invested in Vietnam with

most capital inflows from Asia. Table 2shows that Taiwan is the biggest foreign investor in term of contractual

FDI value for the period 1988-1995 and with US$ 3134.1 million in early stage, accounted for 17% of total FDI

1Vietnam Permanent Mission to the United Nations,

http://www.un.int/vietnam/dev_bus/Foreign%20direct%20investment%20in%20Vietnam.htm.

7/23/2019 10.1.1.535.747

3/18

960

invested in Vietnam, followed by Hong Kong (10.1%), Japan (9.8%), Singapore (8.5%) and Korea (7.8%).

However, in the period of 1996-2000, the share of investment in Vietnam from source countries changed quickly.

Singapore tops of the list by increasing its share from 8.5% in 1988-1995 up to 21.2% in 1996-2000 period. The

unusual increasing of the investment of Singapore can be explained by the large investment in industrial zone in

Binh Duong, a new province in central Vietnam in 1996. Based on the MPI in Vietnam, the Singapores

investment in Vietnam in 1996 is biggest one, counted about one third of total FDI commitment in 1996. After the

signing of US Vietnam Bilateral Trade Agreement in July 2000, investment from United States has been

increasing. The United States is the eleventh biggest countries invested in Vietnam with $1455 million, accounted

2.85% of total registered capital in period 1988-2005. Most of FDI projects in Vietnam have focused on industry

and construction (oil, gas, food production). Other projects were interested in agro-forestry, fisheries, tourism

and services.

According to the Ministry of Planning and Investment, all 64 provinces and cities in 8 regions of Vietnam

have attracted FDI, but foreign investors predominately concentrate their investments in key economic areas

where they can take advantage of more developed infrastructure. Table 3shows that during 1996-2005, the Red

River Delta and the South East regions have accounted for average rate of 22.2% and 55.5%of total FDI

commitment, respectively. Other sixth regions received only 22.3% of total committed FDI inflows at the same

time. In 2005, South Vietnam has seen the largest influx of FDI totaling US $3.7 billion, which represents 67% of

the total projects and nearly 54.8% of committed capital in Vietnam. The key economic areas in North Vietnam

such as Red River Delta attracted nearly 20% of the total projects and 34.5% of committed capital. FDI only has

a small effect in the mountain provinces in the North, Central, and Central Highlands, which are Vietnams

poorest regions. Ho Chi Minh City and Hanoi accounted for 13.1 and 23.5 percent, respectively, of the total FDI

inflows in 2005. The other southeast provinces such as Dong Nai, Ba Ria-Vung tau, Tay Ninh and Long An

absorbed another 30.8 percent of total FDI, far more than the principal northern provinces of Hai Phong, Ha Tay

and Quang Ninh, which absorbed just 5.7 percent.

The factors caused this spatial concentration of investment is the infrastructure advantages such as

volumes of roads, airports, freight, postal services and telecommunications of Red River Delta region (including

Hanoi, Hai Phong, Ha Tay and Quang Ninh) and the South East region (including Ho Chi Minh, Dong Nai, Ba Ria-

Vung tau, Tay Ninh and Binh Duong). Numbers of telephone lines of South East and Red River Delta regions

accounted for 22.3% and 20.7% of the total telephone lines in the country, respectively (GSO, 2004). Moreover,

about 80 Industrial and Export Processing zones allocated in the two regions, accounted for more than 70% of

total numbers of IZs and EPZs in Vietnam in 2004 (Runckel, 2004).

Table 3 also indicated that the distribution of FDI inflows into provinces over the years is changing to a

large extent to find new locations. FDI registered capital distributed in some major cities such as Ho Chi Minh

city, Hanoi, Hai Phong and Da Nang are reducing, while increasing in some other new provinces such as Ha

7/23/2019 10.1.1.535.747

4/18

961

Tay, Quang Ngai, Binh Duong, Vinh Phuc, Long An , Thanh Hoa and Hai Duong due to those provinces

increasing its competitiveness in attracting FDI. According to Vietnam provincial competitiveness index (PCI),

Binh Duong got highest competitive on the business environment in 2005, followed by Da Nang, Vinh Long, Vinh

Phuc, and Dong Nai and so on. The favor of business environment could lead to an increasing of new FDI

invested.

During the years, Vietnams economy was able to attract FDI in all sectors. The industry sector has

been increasing during the time, from 39.9% in 1988-90, when began having FDI invested in Vietnam, to 52.3%

in the 1990s and up to 74.2% in the first half of the 21 century (Table 4). In which, there are 70% of total FDI was

invested in manufacturing industrial in 1988-2005 (MPI, 2005). Even thought decreased its share in some first

year of the 21 century, the share of industry in total FDI in 2003, 2005 were still high at 72.3% and 60%,

respectively. Following industrial sector is the hotel, restaurants and tourism sector with average 12% of total FDI

capital. By contract, very little FDI went to agriculture and forestry sector.

Moreover, in 2003, FDI sector contributed 14.47% to the GDP, about 73.76% to manufacturing output,

50.4 % to export value and 34.9% to import value. In 2005, it accounted for 57.2 % of total export, 36.9% in total

import and more than 40% in industrial output (GSO, 2003-2005). Furthermore, FDI absorbed more than 667,000

workers directly and hundreds of thousands of workers indirectly in 2005, increased 24.4% compared to 2000.

As a result, FDI increased its contributions to overall employment from 0.6% in 2000 to 1.6% in 2005. With this

increasing rate, FDI can help Vietnamese in increasing the employment rate in the future, especially after

Vietnam joint WTO in 2006.

In short, even though unequally distributed of FDI inflows into different regions and provinces, and

different sectors, foreign direct investment inflows in Vietnam are showing the positive sign in Vietnamese

economy during the its transition. The development of FDI in Vietnam is the main concentrations of this paper.

What are the main determinant factors that attract FDI inflows in Vietnam? The answer of this question could be

appeared in some next parts.

Empirical reviews of determinants of FDI

Table 5 indicates the main veins of determinants of FDI in empirical works that economists have

explored. There are two main group factors of FDIs determinant. The economic factors, such that host market

size, growth, labor, technology, government policies, and infrastructure, are the main sources of several

empirical studies in relationship with FDI. In contract, the non economic factors such that political stability,

international relationship, corruption, transparency and culture distance, and FDI relationship only accounts a

small number.

Some main determinants of FDI such as GDP, economic growth, and per capita GDP, human capital,

labor cost, export, taxes, political stability and openness are most supported in the empirical literature. A country

with large market size and high income that has market oriented policies and stable government is the most likely

7/23/2019 10.1.1.535.747

5/18

962

to attract foreign investment. It is not clear how many scientists, engineers and other skill labors is needed or if

low relative wages are necessary. Taxes have been shown to negatively effect firms location decisions when

taxes are transfers and to positively affect firms decisions when they are used to supply infrastructure and

institutions that ultimately reduce firm costs. A trade deficit may be a signal that there is fiscal laxity or there poor

macroeconomic policies are in operation but net importing market may be an ideal location for foreign

investment.

Identifying main determinants of FDI in Vietnam

There are many factors that could be attracting FDI inflows in a host country as presented in empirical

literatures part. However, what factors determining FDI in a host country is depending on the final goal of

investment: capturing new markets or cheap production to export to the home country. Market-seeking investors

will be attracted to a country with a large and fast growing local market. Efficiency-seeking investors will weigh

more of geographical proximity to the home country to minimize transportation costs and optimize for locations

with lower labor costs. Resource-seeking investors will look for a country with abundant natural resources.

Unfortunately, data of FDI inflows in a host country are normally aggregated at the country level and therefore do

not allow subdividing FDI inflows according to the motives of investors. Moreover, factors that increase the

productivity of capital are also relevant for all types.

Build on many previous findings, together with Vietnam economys situation; I identify some main

potentially important determinants of FDI distribution across Vietnam as follows:

Market size

Market-seeking investors will be attracted to a country with a large and fast growing local market. Even

though Vietnam is a small and developing country in Asia, its GDP were dramatically increasing rapidly since the

transition in 1986 In 2005, the GDP value was more than 3.5 times of that in 1986. Moreover, Vietnam is a market

with the population of about 84 million in 2005 and a vast potential for consumption. The country is expected to

boom in the near future.

Market size has positive impact on the FDI inflows as it directly affects the expected revenue of the

investment. Larger host market provides more opportunities for sales and also profits to foreign firms and

therefore attracts FDI inflows. To proxy for market potential, both expected market size in terms of country

population and income will matter. It is not interesting to invest in a country with a very high GDP per capita but

with a limited amount of population. Vice versa, the same holds for a country with a large number of inhabitants,

but low GDP per capita. Taking into account both GDP per capita and population actually brings us to GDP itself

as a determinant of FDI. I follow the literature and use nominal GDP to proxy for market size. Holding other

factors constant, GDP is expected to be a positive significant relationship with FDI flows. It means that the larger

GDP of Vietnam is, the greater FDI inflows would attract.

7/23/2019 10.1.1.535.747

6/18

963

Market growth

Vietnam has been showing a dramatically increase of GDP growth rates since its economic reform in

1986. The average GDP growth rates were about 7% in the 1900s and 7.5% in the first five years of 21 century.

The rate is expected to 7.5 8% in the next five years, 2006-2010 (MPI, 2005). FDI is at least to some extent

forward looking, expectations may lead the investors to invest to serve the domestic market. Along with marketsize, the prospect of growth, generally measured by growth rates, also has a positive influence on FDI inflows.

Countries that have high and sustained growth rates receive more FDI flows than volatile economies. For this

aspect, I believe that GDP growth rate could also be another positive factor determining FDI inflow in Vietnam.

Human capital

Vietnam is a country having large population. The country has paid great attention to the education of its

people such as twelve-year universal compulsory education. However, skilled managers, engineers and

technicians are still in shortly supply.

Since a more educated labor force is likely to adopt new technologies faster and at a lower training cost,

an indicator of the general level of education can be included among the explanatory variables to capture this

effect. The study uses number of secondary school students per population in Vietnam representing the level of

human capital, as workers who completed secondary school will more easily understand new technology and be

able to better participate in industrial production. It has been expected that FDI flows is positively significant with

the higher quality of labor force.

Infrastructure development

Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication

systems to institutional development (e.g. accounting, legal services, etc.). Good infrastructure allows faster

transport and communication, increasing the productivity of investment and therefore stimulates FDI inflows. In

this paper, we use the number of telephones per 10000 residents (TEL) to measure infrastructure development.

Openness of the host country

Openness of one location is one of the traditional variables for explaining FDI movements. It is defined

as the ratio of total trade (import plus export) to GDP. Multinational firms engaged in export oriented investment

may prefer to locate in a more open economy since increased imperfections that accompany trade protection

generally imply higher transaction costs associated with exporting. Since 1986, even though still having trade

deficit, the share of export on GDP increases every period. In 1996-2000 period, the share of export in GDP was

two times of it in 1986-90. In 2001-2005, it was counted for more than 40% of Vietnams GDP (GSC, 2005). For

this variable, the expected effect the degree of openness on FDI is mixed as the openness is not only attracting

the foreign capital to the host area, but also taking the competition between the foreign and domestic firms on it.

7/23/2019 10.1.1.535.747

7/18

964

Exchange rate

Nominal exchange rate, given as VND/US dollar, is measures of competitive. We will also include this

factor in the regressions with hypothesis that a depreciation of Vietnam Dong (VND) favoring price

competitiveness of Vietnams exports and attracting foreign investors using Vietnam as the export base.

The model of FDI determinants in Vietnam

To analysis the location determinants of FDI in Vietnam, for the best result, I build a model based on the

theoretical and empirical researches to examine the important characteristics of the FDI inflows in the host

country as Vietnam. The specific empirical model of the time-series determinants of FDI inflows in Vietnam is:

LnFDIt=

0+

1lnGDP

t+

2lnGDPG

t+

3lnTEL

t+

4lnHK

t+

5lnOPEN

t+

6lnEXCHANGE

t+

7D1998+

8

ASEAN + ut (1)

where subscript t refers to quarters from 1988 to 2005 and s are the regression parameters to be

estimated. The dependent variable FDI is the ratio of net FDI inflows to GDP. GDPG is gross domestic product

growth rate. GDP is gross domestic, proxy for market size of Vietnam. Presented for infrastructure is TEL which is

number of telephone sets per 10000 inhabitants. HK is number of secondary school students per 10000

inhabitants, proxy for human capital. OPEN represented trade openness of the host country and measured by

the ratio total trade to GDP. EXCHANGE is nominal exchange rate of Vietnam as a VND/USD. INFLATION is

inflation rate. There are two dummy variables, D1998 and ASEAN. The year dummy variable (D1998) takes the

value of one if the Vietnam is in the year of 1998 that has effected of Asian financial crises and zero for other

years. ASEAN is a dummy variable to determine the impact of ASEAN on FDI inflows to Vietnam. It takes the

value of one if observation in year of 1995 to 2005 and zero for other years.

Data and empirical results

The empirical analysis was presented by time series model. The time period of analysis is quarter time

series data from 1988 to 2005 in Vietnam. Most of the data on variables used in the test are taken and calculated

from Vietnams Statistical Yearbook of General Statistics Office, Vietnam. Since GDP is denominated in Vietnam

Dong (VND- Vietnamese currency) and the FDI, import and export are in US dollars, the FDI, import and export

data are converted into Dong using yearly average VND/US dollar exchange rate obtained from the socio-

economic data indicators in Vietnam 20 years of renovation and development, General Statistics Office,

Vietnam.

To analysis the determinants of FDI in Vietnam in 1988-2005, I used the ordinary least square (OLS) for

all the estimations. All variables, except dummies, are in natural logarithm form and on the first differences. The

results are reported in Table 6.

7/23/2019 10.1.1.535.747

8/18

965

The results reported in column 1 of Table 6 indicate that a large share of the variation in FDI rate can be

explained by a small number of factors, namely, GDP, GDP growth, infrastructure development and openness to

trade. As a group, these factors account for about 64% of variability in FDI/GDP. The results show that FDI

increases with the degree of GDP, GDP growth rate and openness to trade in Vietnam. A 1% increase of GDP

growth rate and openness to trade leads to 0.5% and 0.7% increase in the share of FDI/GDP, respectively. The

positive relationship between FDI and GDP, GDP growth and openness found in the model is consistent with

most of previous studies supporting that the market size and its growth of the host country and the policies of

openness to world trade can have positive effects on attracting FDI inflows into a host country.

In all estimations, GDP growth and GDP present a positive impact on FDI inflows. This result could be

surprised many research due to multinational that invest in a host developing country are more interesting by low

labor costs and natural resources. However, the signs show that FDI inflows in Vietnam could be also market

seeking FDI. Vietnam is an emergent and undiscovered market with crowded population, about 84 million in

2005 (GSO, 2006) and a vast potential for consumption.

As expected, openness to trade (OPEN) is statistically significant and positive effects in all estimations.

An increase of FDI is equivalent to increase of total trade in Vietnam. Vietnams abundance of cheap labor has it

internationally competitive in many low-cost, labors-intensive manufactures. As a result, manufactured products

constitute an increasingly larger share of Vietnams trade. Fuel and raw materials accounted for more than 60%

share of import commodities each year used for production and investment. The traditional products of Vietnam

exports such as textile and clothing, foot-wear, marine products, coffee, rice, crude oil are still keeping the

important role in exports as they are still remaining high growth rates.

The level of human capital (HK) captured by a number of secondary school students per 10000

populations, shows a negative and statistically insignificant related to FDI. This is consistent with the findings in

several developing countries by Root and Ahmed (1979), Schneider and Frey (1985), Hanson (1996) and Narula

(1996), which saying human capital is not necessarily an important input for inward FDI2. One reason to explain

for the result is that FDI in a developing country as Vietnam was concentrated on market and resource seeking

that cheap labor and abundant natural resources were more important. Thus, demand for higher-educated labor

appears to be less crucial during this period.

The factors of infrastructure (TEL) in column (2)-(6) are shown a positive and statistically significant sign.

It means that infrastructure development promotes FDI inflow to the country. FDI investors are normally looking

2Among the 58 developing countries, Root and Ahmed (1979) shows that none of their proxies for human capital: literacy, school

enrolment, and the availability of technical and professional workers, are statistically significant determinants of inward FDI.

Schneider and Frey ( 1985) , using data for 54 developing countries, find the share of an age group with secondary education to be

a less significant determinant as compared with other economic and political influences. Narula(1996) demonstrates that the

number of tertiary education per population was not a statistically significant explanatory variable for FDI inflows among the 22

developing countries.

7/23/2019 10.1.1.535.747

9/18

966

for a location that is available and convenient in infrastructure such as road, telecommunication and

transportation. If the location is well developed, investors can reduce their expenditure and then increase their

profit. This could explain why most of FDI inflow into Vietnam located in the most developed regions and

provinces of Vietnam such as Red Rivel Delta and South East regions, Hanoi, HoChi Minh city, Danang, B.inh

Duong, Hai Phong and Quang Ninh.

The positive signs of the nominal exchange rates represent a depreciation of the Vietnam Dong against

the US dollar. It makes lower the price of the local asset and production cost, and therefore leads to higher in FDI

inflows due to lower international competitiveness. It seem to be consistent with many papers of Goldberg and

Klein (1997), Wang and Swain (1997), Blonigen (1997) and Cushman (1985). Goldberg and Klein (1997)

investigated the relationship of FDI and the real exchange rate in ASEAN4 (Malaysia, Philippines, Indonesia and

Thailand) and concluded that a depreciation of ASEAN 4 currencies against the yen was shown to increase FDI

inflows from Japan to ASEAN.

Finally, I include some dummy variables such as ASEAN and D1998 in the regression. The year dummy

variable (D1998) takes the value of one if the Vietnam is in the years since 1998 that have effected of Asian

financial crises and zero for other years. Vietnam jointed Association of South East Asian Nations in July 1995,

so ASEAN is a dummy variable determining the impact of ASEAN on FDI inflows to Vietnam. It takes the value of

one if observation in year of 1995 to 2005 and zero for other years. Based on my estimation results, ASEAN

shows positive sign but not statistically significant related to FDI. It means that even though not clearly support

by evidence, the joining in ASEAN also may not yet help increasing FDI invested in Vietnam during the time of

analysis (1988-2005). As a member of ASEAN, Vietnam signed the Protocol for the Accession to AFTA, a regional

trade arrangement among the ASEAN member states. Under the terms and conditions of its accession to AFTA,

Vietnam is committed to reduce its tariff rates to 0-5 % of several goods and remove non-tariff barriers; however,

the ending period of preparing the lists of goods and reduce effectively is on 1 January 2006. So the benefit of

lower tariff rates when investing in Vietnam was not much effect to foreign investors in Vietnam in 1988-2005,

then not yet attracting FDI inflows.

In all estimations, the dummy variable D1998 turns out with low statistically significant and positive sign.

It means that in the year of 1998, some factors affect positively on FDI inflows. As is well known, the Asian

financial crisis, which spread from Thailand to other countries in the region during the second half of 1997-1998,

plunged the countries affected into deep recessions that brought rising unemployment, poverty and social

dislocation. The countries most strongly affected by Asian crisis were Korea, Indonesia, Hong Kong, Singapore,

Taiwan, Malaysia and Thailand. Investors who were invested in above Asian countries moved their investment to

other countries that have no effect or small effect of the crisis to invest. Vietnam is one of the best choices to

invest in Asia because it has high and much stable economic growths in the region. Moreover, high political and

social stability and less problems related religions, languages or ethnic disputes are guaranteed for the safety of

7/23/2019 10.1.1.535.747

10/18

967

foreign direct investments. According to Vietnam statistical yearbook 1998, some biggest countries increasing its

FDI invested into Vietnam in 1998 and later are Russian, Singapore, United Kingdom, Hong Kong, Channel

Islands, Japan, United States, France and Canada who could be some big FDI invested partners in above

countries.

Conclusion

This paper analyzes the determinants of foreign direct investment in Vietnam during 1988-2005. By

descriptive analysis, the paper shows that FDI inflows into Vietnam increased rapidly during the 1990s and in the

first five years of the 21stcentury. FDI flowed into different sectors and provinces disproportionately. Next, the

paper constructs a model to find out important factors attracting the FDI inflows. The results reveal that higher

market size and higher GDP growth are encouraging FDI inflows into Vietnam. This is consistent with the widely

accepted belief that growing market size creates an incentive for foreign investors to gain market access.

The results also strongly support the hypothesis that well developed infrastructure is an important factor

attracting FDI. Good infrastructure increases the productivity of investment and therefore stimulates FDI inflows.

The result also help explain why most of FDI inflows into Vietnam are located in the most developed regions and

provinces such as Red River Delta and South East regions, Hanoi, Ho Chi Minh City, Danang, Binh Duong, Hai

Phong and Quang Ninh.

In addition, multinational firms engaging in export oriented investments in Vietnam prefer to locate in a

more open economy. This is consistent with the results of most other empirical papers. Moreover, depreciation of

the exchange rate leads to increase FDI inflows into Vietnam due to greater international competitiveness.

Based on our findings, high quality of labor is not an attracting factor of FDI inflows in Vietnam probably

because the industrial sector still consists of industries producing labor intensive goods which have not yet

required a large amount of skilled labor.

Finally, Vietnam has not yet attracted much FDI inflows from ASEAN countries probably because Vietnam had

just jointed ASEAN not long ago. However, as the effect of Asian financial crisis in 1997-1998, foreign investors

moved their capital from the countries having large effects of the crisis to some other less risky countries as

Vietnam to invest because Vietnam has high and much stable economic growths in the region. Moreover, high

political and social stability and less problems related to religions, languages or ethnic disputes are guaranteed

for the safety of FDI inflows in Vietnam.

7/23/2019 10.1.1.535.747

11/18

968

References

Asiedu, E. 2002. On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa

Different? World Development, Vol. 30, No. 1, pp. 107-119

Bende-Nabende, A., Ford. J.L. and Slater, J. 2000. FDI Locational Determinants and the Linkage between FDI

and Other Macro-economic Factors: Long-run dynamics in Pacific Asia. Birmingham Business School

Working Paper Series, http://business.bham.ac.uk.

Blonigen, A. B. 2005. A Review of the Empirical Literature on FDI Determinants. NBER Working Paper No. 11299

Campos, F. N. and Kinoshita, Y. 2003. Why Does FDI Go Where it Goes? New Evidence from the

Transition Economies. IMF working paper 03/288

Chakrabarti, A. 2001. The determinants of foreign direct investment: Sensitivity analyses of cross-country

regression. Kyklos, 54, 89-114.

Cheng, L. and Kwan, Y. 2000. What are the determinants of the location of foreign direct investment? The

Chinese experience. Journal of International Economics, 51, 379-400

Freeman, Nick J. 2001. Understanding the decline in foreign investor sentiment towards Vietnam during the

1990s. Asia Pacific Business Review 8. 1., London.

Froot, A. K., and Stein, C. J. 1991. Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets

Approach. The Quarterly Journal of Economics, Vol. 106, No.4, pp. 1191-1217

Fung, K. C., Iizaka, H. Lin, C. & Siu, Alan 2002. An econometric estimation of locational choices of foreign

direct investment: The case of Hong Kong and U.S. firms in China, manuscript.

Fung, K. C., Iizaka, H., & Parker, S. 2002. Determinants of U.S. and Japanese foreign direct investment in China.

Journal of Comparative Economics, 30(3), 567 578.

Gao, T. 2004. Foreign direct investment from developing Asia: some distinctive features. Economics Letters 86

(2005) 2935

General Statistical Office, 1995-2005. Statistical Yearbook. Statistical Publishing House, Hanoi.

Hanson, J.R. 1996. Human Capital and Direct Investment in Poor Countries. Explorations in Economic History33:

86-106.

Kyrkilis, D. et al. 2003. Macroeconomic Determinants of Outward FDI. International Journal of Social

Economics, Vol. 30 No. 7, pp. 827-836

Le, D. 2002. Foreign Direct Investment in Vietnam: Results, Achievements, Challenges and Prospect.

International Monetary Fund Conference on Foreign Direct investment. Hanoi, Vietnam.

Li, X. and Liu, X. 2005. Foreign Direct Investment and Economic Growth: An Increasingly Endogenous

Relationship. World Development Vol. 33, No. 3, pp. 393407

Lim, E. 2001. Determinants of, and the Relation between, Foreign Direct Investment and Growth: A Summary of

the Recent Literature. IMF Working Paper WP/01/175, Washington, D.C.

7/23/2019 10.1.1.535.747

12/18

969

Lipsey R.E. and Weiss, M.Y, 1984. Foreign Production and Exports of Individual firms. The Review of Economics

and Statistics, vol. 66, pp.304-308.

Lucas, R. 1993. On the Determinants of Direct Foreign Investment: Evidence from East and Southeast Asia.

World Development, Vol.21, No.3, pp.391-406

Ministry of Planning and Investment of Vietnam www.mpi.gov.vn

Narula, R. 1996. Multinational Investment and Economic Structure: Globalization and Competitiveness.

Routledge, London.

Nonnemberg, M. and Mendonca, M.J. 2003. The determinants of foreign direct investment in developing

countries. Working paper

Noobrakhsh, F., Paloni, A., and Youssef, A. 2001. Human Capital and FDI to Developing Countries: New

Empirical Evidence. World Development, Vol. 29, Issue 9, pp. 1593-1610.

Nunnenkamp, P., and Spatz, J. 2002. Determinants of FDI in Developing Countries: Has Globalization Changed

the Rules of the Game? Transnational Corporations, Vol. 2, No. 2,

Pham, H. 2002. Regional Economic Development and Foreign Direct Investment Flows in Vietnam. Journal of the

Asia Pacific Economy 7(2) 2002: 182202

Root, F. and Ahmed, A. 1979. Empirical Determinants of Manufacturing Direct Foreign Investment in

Developing Countries. Economic Development and Cultural Change 27: 751-767.

Schaumburg-Mller, H. 2003. Rise and fall of foreign direct investment in Vietnam and its impact on local

manufacturing upgrading. European Journal of Development Research, Vol. 15, No. 2, December

2003: 44-66.

Schneider, F. and Frey, B. 1985. Economic and Political Determinants of Foreign Direct Investment. World

Development 13: 161-175.

Sun, Q., Tong, W., and Yu, Q. 1999. Determinants of foreign direct investment across China. CREFS working

paper No. 99-06

7/23/2019 10.1.1.535.747

13/18

970

Table 1: Development of FDI 1988-2005

Year Number of

projects

Registered capital

(million USD)

Implemented capital

(million USD)

Total 7279 66244.4 33315.4

1988 - 1990 211 1602.2

1991 - 1995 1409 17663 6517.8

1991 152 1291.5 328.8

1992 196 2208.5 574.9

1993 274 3037.4 1017.5

1994 372 4188.4 2040.6

1995 415 6937.2 2556

1996 - 2000 1724 26259 12944.8

1996 372 10164.1 2714

1997 349 5590.7 3115

1998 285 5099.9 2367.4

1999 327 2565.4 2334.9

2000 391 2838.9 2413.5

2001 - 2005 3935 20720.2 13852.8

2001 555 3142.8 2450.5

2002 808 2998.8 2591

2003 791 3191.2 2650

2004 811 4547.6 2852.5

2005 970 6839.8 3308.8

Source: General Statistics Office (GSO) and Ministry of Planning and Investment (MPI) 2005 and revised in

April 2006

7/23/2019 10.1.1.535.747

14/18

971

Table 2: Top 10 countries classified by FDI commitment, 1988-2005

(Registered capital at current prices)

1988-1995 1996-2000 2001-2005Source country

Mill. USD % Mill. USD % Mill. USD %

Total 18438 100 20437.9 100 14442.6 100Taiwan 3134.1 17.0 1744.6 8.5 2580.4 17.9

Japan 1808.9 9.8 1550.3 7.6 1762.9 12.2

Korea 1435.1 7.8 1790.3 8.8 1623.7 11.2

Hong Kong 1858.4 10.1 1776.1 8.7 1034.9 7.2

Singapore 1558.7 8.5 4324.7 21.2 919 6.4

United States 756.1 4.1 581.2 2.8 576 4.0

Malaysia 685.3 3.7 446.1 2.2 556.8 3.9

France 877.6 4.8 1197.6 5.9 464.7 3.2

Thailand 505.8 2.7 586.3 2.9 196.4 1.4

United Kingdom 518.4 2.8 1255.1 6.1 64 0.4

Source: Vietnam GSO 1995-2004 and MPI 2005

Table 3: Structure of FDI inflows in Vietnam by allocation (%)

1996 1998 2000 2002 2004 2005

Whole country 100.0 100.0 100.0 100.0 100.0 100.0

Red River Delta 40.1 15.0 5.2 19.6 19.1 34.5

North East 5.3 2.0 2.2 4.8 8.7 2.3

North West 0.0 0.3 0.1 0.4 0.5 0.1

North Central Coast 1.0 0.5 1.9 0.3 6.6 1.2

South Central Coast 4.0 35.1 5.0 9.0 2.5 4.2

Central Highlands 0.2 19.1 0.2 0.3 0.5 0.5

South East 48.2 26.6 84.7 57.8 59.0 54.8

Mekong River Delta 1.2 1.5 0.7 7.8 2.8 2.2

Hanoi 30.8 14.1 4.0 9.3 7.3 23.5

Hai Phong 1.7 0.3 0.3 2.4 6.6 4.2

Ha Tay 2.8 0.3 0.0 0.6 0.0 0.1

7/23/2019 10.1.1.535.747

15/18

972

Table 3: (Cont.)

1996 1998 2000 2002 2004 2005

Quang Ninh 4.3 1.6 0.7 2.6 2.3 1.4

TT Hue 0.1 0.1 0.6 0.3 0.1 0.7

Da Nang 2.3 0.9 0.2 4.4 1.1 2.4

Khanh Hoa 1.7 0.5 3.6 0.7 0.2 0.2

Dong Nai 6.3 3.0 13.4 18.1 20.8 16.9

Baria Vungtau 10.9 0.5 4.3 1.7 1.4 10.8

Ho Chi Minh city 25.1 17.7 23.5 16.6 16.4 13.1

Source: statistical yearbook, 1997-2005

Table 4: FDI registered capital by economic sectors, 1988-2005 (%)

Sectors 1988-90 1991-95 1996-2000 2001-05 1995 2000 2003 2005

Agriculture and forestry 20.8 2.9 2.4 1.9 4.16 2.52 1.12 0.6

Fishery 1.4 1.0 0.3 0.7 0.44 0.40 1.27 0.2

Industry 39.9 49.7 54.8 74.2 36.46 89.26 72.36 71.5

Construction 0.0 7.7 9.1 2.6 9.54 1.19 1.27 2.5

Hotel, restaurants and

Tourism 16.6 19.3 7.9 4.5 13.51 1.13 7.05 0.9

Transport, storage and

communications 15.3 2.5 8.7 5.7 5.89 0.40 0.77 10.0

Finance and Banking 0.0 1.4 0.7 3.3 0.22 0.49 9.28 2.1

Culture, Health and

Education 0.0 0.4 1.9 2.9 1.90 3.77 1.68 3.7

Other services 5.9 15.2 14.1 4.2 27.88 0.84 5.20 8.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: IMF paper 135(1996), GSO 1995, 2000, 2003 and MPI 2005

7/23/2019 10.1.1.535.747

16/18

973

Table 5: Determinants of FDI Empirical evidence

FDI

determinant

factors

Proxy Empirical

finding

Authors

A. Economic factors

GDP, GDP

growth

+ Agarwal (1980), Tsai (1994), Wheeler and Mody (1992), Grosse and

Trevino (1996), Wang and Swain (1997), Wei (1997, 2000), Billington

(1999), Globerman and Shapiro (1999), Taylor (2000), Fung et al(2000),

Farrell et al (2000), Bevan and Estrin (2000), Chakrabarti (2001), Ito and

Rose (2002), Smarzynska and Wei (2002), Campos and Kinoshita (2003)

Per capita

GDP

+ Coughlin et al (1991), Lorce and Guisinger (1995), Chakrabarti (2001),

Habib and Zurawicki (2002), Smarzynska and Wei (2002), Nunnenkamp

and Spatz (2002), Wezel (2003)

1. Host market

sizes

GNP; per

capita GNP

+ Bandera and White (1968), Schmitz and Bieri (1972), Lunn (1980),

Woodward and Rolfe (1993), Wei (1995), Barell and Pain (1996), Beer and

Cory (1996)

+ Smith and Florida (1994), ), Noorbakhsk et al (2001), Strobl and Thornton

(2001), Te Velde and Morrissey (2001, 2002), Matsuoka (2002)

- Urata and Hawai (1999), Blonigen and Slaughter (2001)

Wages

Insig Looree and Guisinger (1994), Wang and swain (1997), Billington (1999),

Globerman and Shapiro (1999), Noorbakhsk et al (2001)

+ Woodward (1993), Broadman and Spatz (1997), Bende-Nabende et al

(2000),

Nachum (2000), Fung et al (2000), Nooebakhsk (2001), UNCTAD (2002)

- Root and Ahmed (1979), Schneider and Frey (1985), Hanson (1996),

Narula (1996),

2. Labor sector

Human capital

Mixed Buckley et al (2002)

Trade volume

- Grosse and Trevino (1996), Wang and Swain (1997),- Import

+ Billington (1999), Farel et al (2000)

+ Lipsey and Weiss (1981, 1984), Grosse and Trevino (1996), Goldberg

and Klein (1999), Bajo-Rubio and Montero-Munoz (1999), Mankovska

(2000), Blonigen (2001),

-Export

- Teo and Wang (2001)

-Trade

volume/GDP

+ Noorbakhsk (2001), Habib and Zurawicki (2002)

+ Woodward and Rolfe (1993), Taylor (2000), Asiedu (2002), Chakrabarti

(2001), Kyrkilis et al (2003)

3. International

trade

Degree of

economic

openness - Billington (1999), Deabek and Payne (2001), Smarzynska and Wei (2002)

7/23/2019 10.1.1.535.747

17/18

974

Table 5: (Cont.)

+ Goldberg and Klein (1997), Wang and Swain (1997), Blonigen (1997),

Cushman (1985)

- Campa (1993), Froot and Stein (1991), Blonigen (1995), Blonigen and

Feenstra (1996), Gastanaga (2000),

Bilateral

exchange rate

Insig Dewenter (1995), Kishinota (1998), Globerman and Shapiro (1999),

Drabek and Payne (2001)

+ Loree and Guisinger (1994), Hartman (1981, 1984), Frisch and Hartman

(1983), Cummins and Hubbard (1995), Ondrich and Wasylenko (1993)

- Slemrod (1990), Wei (1997), Billington (1999), Hines (1996)

Taxes policies

Insig Coughlin et al (1991)

- Woodward and Rolfe (1993), Loree and Guisinger (1994)Investment

policy Insig Globerman and Shapiro (1999)

- Woodward and Rolfe (1993), Taylor (2000), Chakrabarti (2001),

4. Government

policies

Inflation rate

Insig Asiedu (2001), Drabek and Payne (2001)

B. Non economic factos

- Smith and Florida (1994), Grosse and Trevino (1996), Wei (1997), Ito and

Rose (2002), Smarzynska and wei (2002)

5. Geographic

distance

Distance of

capital city

Insig Habib and Zurawicki (2002)

+ Lucas (1990), Schneider and Frey (1985), Looree and Guisinger (1996),

Bevan and Estrin (2000), Habib and Zurawicki (2002), Singh and Jun

(1995)

Political

stability

Insig Bennett and Green (1972), Asiedu (2001), Morisset (2000), Grosse and

Trevino (1996),

6. Political

stability

Mixed Levis (1979), Nigh (1985),

- Hines (1995), Wei (1997, 2000, 2000a, 2000b), Habib and Zurawicki

(2002), Smarzynska and Wei (2000)

7. Corruption Corruption

Mixed Wheeler and Mody (1992), Henisz (2000), Akcay (2001), Teksz (2003)

+ Globerman and Shapiro (2002), Levchenko (2004),8. Others Other qualities

of institution - Aizenman and Spiegel (2002)

7/23/2019 10.1.1.535.747

18/18

975

Table 6:OLS estimation results-quarterly data

Dependent variable: FDI

Variable (1) (2) (3) (4) (5) (6)

Intercept -0.1396 -0.1365 -0.1286 -0.2096 -0.2733 -0.2918

(-3.3862)*** (-3.2693)*** (-3.3966)*** (-2.8182)*** (-3.9933)*** (-3.5554)***

GDP 1.7138 1.5016 1.1565 1.5240 1.8175 1.9095

(5.0480)*** (4.0499)*** (3.2685)*** (3.2442)*** (4.1667)*** (3.8828)***

GDPG 0.5105 0.4861 0.5423 0.6454 0.6742 0.7028

(2.0541)** (1.9590)* (2.3941)** (2.6704)*** (2.9977)*** (2.9695)***

OPEN 0.7235 0.6775 0.3843 0.3872 0.4393 0.4364

(7.8132)*** (6.8043)*** (3.2174)*** (3.2504)*** (3.7476)*** (3.6922)***

TEL 0.6419 0.8035 0.9441 1.1699 1.4605 1.5081

(1.3862) (1.6737)* (2.1526)** (2.4574)** (3.0877)*** (3.0790)***

HK -1.0979 -1.1630 -1.0427 -0.1501 -0.1692

(-1.2598) (-1.4623) (-1.3050) (-0.1721) (-0.1924)

EXCHANGE 0.3365 0.3378 0.3201 0.3218

(3.7604)*** (3.7835)*** (3.6998)*** (3.6905)***

ASEAN 0.0526 0.0187

(1.2103) (0.4153)

D1998 0.0976 0.0913

(2.4413)** (2.1225)**

Adjusted R2

0.6385 0.6417 0.7026 0.7045 0.7241 0.7204

DW star1.4769 1.4903 1.4288 1.4442 1.5354 1.5408

No. of Obs.70 70 70 70 70 70

t statistics are in parentheses *, **, *** Significance at the 0.10, 0.05 level and 0.01 level