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Locational Determinants of FDI:Locational Determinants of FDI:
The Case of VietnamThe Case of Vietnam
Presented by Le Viet Anh
Nagoya University, GSID, 1st
year PhD StudentAt JVECs Meeting 29th May 2004, GRIPS
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OutlineOutline
FDI Theories
Countrys Background
FDI Development and Characteristics
Qualitative Assessment of FDI Locations
Empirical StudyConclusions and Policy Implications
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Theories on FDI: Which to chose?Theories on FDI: Which to chose?
Capital Theory
International Trade Approach
Market Imperfections and Industrial
Organization
Dunnings Eclectic Paradigm and
International Investment Path
Agglomeration Economies
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The TheoryThe Theory
Dunnings eclectic paradigm andagglomeration economies arguments
seems to be the best framework toexplore determinants of FDI in
Vietnam locationally
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Vietnam: Country BackgroundVietnam: Country Background
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Impressive MacroeconomicImpressive Macroeconomic
IndicatorsIndicators High and sustained
economic growth
Rapid growth of
external trade Increasing rate of
investment
Appropriate inflation
rate
- 4
- 2
0
2
4
6
8
1 0
1 2
1 4
1 6
8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 2 0 0 02 0 0 12 0 0 2
A g r i c u l
I n d u s t r
S e r v i c e
Gr o wt h
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FDI Development andFDI Development and
CharacteristicsCharacteristics
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FDI in Vietnam 1988-2002FDI in Vietnam 1988-2002
0
1
2
3
4
5
6
7
8
9
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
USD
bills
0
100
200
300
400
500
600
700
800
.
Approved
(left scale)
Implemented
(left scale)
No. of projects(right scale)
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By OwnershipBy Ownership
(as of the end of February 2003)(as of the end of February 2003)
Country
1. Singapore
2. Taiwan
3. Japan
4.Hong Kong
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By SectorsBy Sectors
S ectora l F D I b y C o
Serv ic
4 1 .2 0%
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By Forms of InvestmentBy Forms of Investment
Forms of investment
by committed capital
JV
53.30%
BOT
3.20% BCC10.70%
FE32.80%
Forms of investment
by No of projects
JV
34.20%
BOT
0.20% BCC4.60%
FE
61.00%
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By LocationsBy Locations
(USD million realizations)(USD million realizations)
R e g i o n 1 9 9 1 1 9N o r th E a s t 1 .9 1
N o r th W e s t 0 .2 0
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Empirical StudyEmpirical Study
Locational Determinants of FDI
1991-2001
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Literature ReviewLiterature Review
Dunnings SuggestionDunnings Suggestion1) natural and created
assets;
2) capital intensity;
3) market size and marketgrowth;
4) infrastructuraldevelopment;
5) labor cost andproductivity;
6) degree of openness;
7) government policies;
8) political stability;9) profitability;
10) geographicalproximity
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Lims suggestionsLims suggestions
1) economic size of the host market,
2) economic distance (transportation costs),
3) agglomeration effects,4) factor costs,
5) fiscal incentives,
6)
business/investment climate,7) trade barriers/openness and
8) others.
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Proposed Analytical FrameworkProposed Analytical Framework
Category
(1). Market demand and
market size
Agglomerations (2)+(3)+(
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Pooled RegressionPooled Regression
( )
itiititit
ititititiit
POLOPENPULWAGE
CFDITELINDGRPCFDI
+++++
+++++=
=
18171615
4131211
)ln()ln()ln(
)ln()ln()ln()ln(ln
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DataData
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RegressionsRegressions Panel data covering eight economic regions and
from 1991-2001
OLS regressions with White correction for
heteroschedasticity GLS regression with fixed effects, common
intercepts and differenced data Regressions for full time period (91-01) and sub-
sample periods (91-96) and (97-01) Regressions without Red River Delta and Southeast
Regions Regression without cumulative FDI
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Main Findings (Commitments)Main Findings (Commitments)
Non-market seeking FDIAgglomeration effects are strongly
confirmedLabor cost is important determinantNot much differences between secondary
school labor and othersDevelopment of numerous IZs and EPZs
seem to be not efficient
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Main Findings (Realizations)Main Findings (Realizations)
Agglomeration effects are strongly
confirmed
Labor quality may not be much concerned
since quality are similar across regions
Investors might be reluctant to invest in
more developed regionsOpenness is a significant determinant
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Common-InterceptsCommon-Intercepts
Market size is significant determinant
Agglomeration effects are confirmed
The fixed effects (e.g. administrative
procedures, geographical location, historical
tie, the regional willingness) might be
stronger than market size
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Differenced DataDifferenced Data
The results are similar
Agglomeration effects are confirmed,
especially in the case of cumulative FDI
The investors might pay more attention to
the rate of change than the present condition
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Main Findings (without HN andMain Findings (without HN and
HCMC)HCMC)Almost all results are similar
Openness is significant determinant
Determinants of FDI in Vietnam are similar
across regions, both developed and less
developed ones
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Main Findings (Sub-sample)Main Findings (Sub-sample)
Agglomeration effects are confirmed in
both periods
Market size become largely negativesignificant in 97-01
Wage became highly significant for 97-01
period
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Conclusions (cont.)Conclusions (cont.)
A significant differences in determinants of
FDI commitments and that of FDI
realization (openness)The model is robust, determinants of FDI
are similar across regions
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Policy ImplicationsPolicy Implications
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For Promotion of FDIFor Promotion of FDI
Keeping Stable Political and Economic
Stability, Improving Overall Legal
FrameworkNational treatment on possible areas
Dual price system for infrastructure service
Foreign Investment Law Local content requirement
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Cont.Cont.
Improve the Quality of Labor, While KeepingComparative Advantage of Labor Cost withCountries in the Regions, Especially China
more skilled labor is needed
skilled human capital is crucial for capturing thepositive effects from FDI
technical training should be enhanced
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Cont.Cont.
Export-Oriented FDI and Supporting
Industries Development
WTO accession and bilateral agreements
it is wise to allow some foreign firms to
produce inputs for exporting foreign
invested firms
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Cont.Cont.
Complementary Role between National Level
and Regional Level Management
policy formulation capacity at national levelshould be strengthened
the regional initiatives should also be taken
into account at the national level (Binh Duongand Dong Nai cases)
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For Better Distribution of FDIFor Better Distribution of FDI
Among RegionsAmong Regions It is difficult to attract FDI to less developed
regions
It might be wise to develop some regionsfirst and expect the diffusion to otherregions later
Regional strategy should be based on theircomparative advantages
Common measures are necessary
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