University of Economics International Institution of Social Studies Ho Chi Minh City, Vietnam Eramus University of Rotterdam, The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR MASTER OF ART IN DEVELOPMENT ECONOMICS LOCATION SPECIFIC DETERMINANTS OF JAPANESE FOREIGN DIRECT INVESTMENT IN SELECTED ASIAN COUNTRIES BY HUYNH THAO THUY VI A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Development Economics Under the supervision of Dr. Le Cong Tru HO CHI MINH CITY, 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION This is to certify that the thesis entitled “Location-specific determinants of Japanese foreign direct investment in selected Asian countries”, is submitted by me in fulfillment of the requirement for the degree of Master of Art in Development Economics to Vietnam – Netherlands Programme. This thesis comprises only my original work and due supervision and acknowledgement have been made in the text to all other material used. Huynh Thao Thuy Vi 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT I would not be possible to finish this thesis without the support of people surrounding me.
Firstly, I am really grateful to my supervisor, Dr. Le Cong Tru, for his guidance, comments and supervisions. Secondly, I would like to express my gratitude to Dr. Truong Dang Thuy for his econometric guidance.
Thirdly, I want to acknowledge all lecturers of Vietnam-Netherlands Programme for the wide knowledge they provided me during the time I studied here. Next, I would like to express my gratitude to my parents for all of their sacrifice, encouragement and support for me. Last but not least, I would like to thank my friends and people, who supported for my thesis but were not above-mentioned. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS FE Fixed Effect FDI Foreign Direct Investment GDP Gross Domestic Product JBIC Japan Bank for International Cooperation JFDI Japanese Foreign Direct Investment JETRO Japan External Trade Organization MNE Multinational Enterprises RE Random Effect 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This thesis contributes to examine the location-specific determinants influencing on Japanese foreign direct investment.
This research uses fixed effect method and panel data of ten selected Asian countries in the period from 1995 to 2012. The determinants are classified into three groups: policy factor, business facilitation and economic factor. In this study, except for the variables which belong to policy factor and business facilitation, the others of economic factor are categorized in accordance with three main motives for Japanese enterprises investing abroad. Those motives are market-seeking, resource-seeking and efficiency-seeking.
The study finds that market size, natural resource, inflation rate, exchange rate volatility, political risk and infrastructure development are the significant factors. Moreover, among ten selected Asian countries, there are the differences between intercept coefficients of Vietnam and other countries who are Thailand, Indonesia, Vietnam– Philippines and China. In other words, except for the determinants in the regression model, there would be other factors making those countries to be more dominant than Vietnam. Finally, recognizing the need of Japanese foreign direct investment, the policy makers in host countries should apply the relevant policies to improve the business environment for becoming promising destinations and attract more Japanese foreign direct investment.
Key words: Japanese foreign direct investment, panel data, location-specific, Asian countries, fixed effect. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENT DECLARATION. 4 TABLE OF CONTENT. 5 LIST OF FIGURES.
7 LIST OF TABLES. 11 CHAPTER 2 LITERATURE REVIEW .1 Early concepts & studies of determinants of FDI .2 Neoclassical Trade Theory (Heckscher-Ohlin model & MacDougall-Kemp model) .3 Hymer – Kindleberger Paradigm .5 The OLI paradigm - Eclectic theory. 22 CHAPTER 3 RESEARCH METHODOLOGY.1 VARIABLE DEFINITION AND TESTING HYPOTHESES .4 Exchange rate volatility .2 DATA AND MODEL SPECIFICATION. 32 CHAPTER 4 DATA ANALYSIS .1 THE OVERVIEW OF JAPANESE FDI IN ASIAN COUNTRIES .1 Before the crisis in 1997 .2 After the crisis in 1997 .3 Several remarkable characteristics of recent Japanese FDI in Asia .1 Descriptive analysis and some general tests.
52 CHAPTER 5 CONCLUSION AND POLICY IMPLICATION. 57 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 LIMITATION AND SUGGESTION OF FURTHER RESEARCH. 59 APPENDIX A: RESULT OF HAUSMAN TEST. 60 APPENDIX B: RESULTS OF HETEROSKEDASTICITY &.
61 SERIAL CORRELATION TEST. 61 Table B-1: Heteroskedasticity test. 61 Table B-2: Serial Correlation test. 61 APPENDIX C: REGRESSION RESULTS.
63 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2.1: Japanese FDI by region (billion Yen) .2: Japanese FDI in 10 selected Asian countries (billion Yen).3: Japanese FDI in NIEs (billion Yen) .4: Japanese FDI in ASEAN4 (billion Yen) .5: The correlation between Political Risk (pol) and Trade Openness (TO1) .6: The correlation between trade and GDP .7: The response of Japanese enterprises considering Vietnam, Thailand, Indonesia, Philippines and China as the promising countries. 56 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 2.1: The summaries of some typical theories of FDI .1: Summary of testing hypotheses .2: Summary of expected signs of variables .1: Regional distribution of FDI by Japanese firms .2: Promising countries for overseas business operation over the medium-term in term of Japanese enterprises .3: Summary of variables in the study .4: Correlation coefficients of variables in the study .5: The VIF and TOL factors before excluding trade openness (TO1).6: The VIF and TOL factors after excluding trade openness (TO1) .7: Summary of Estimation Results. 52 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1 INTRODUCTION 1.1 PROBLEM STATEMENT For the time being, because of the immobility and long run profitability, foreign direct investment (FDI) is one of the important factors contributing to the economic growth of countries in the world (Nakamura & Oyama, 1998). Through FDI, the financial resources are transferred to the host countries to set up and expand the production conditions in those countries.
Furthermore, the technological achievements and managerial knowledge are also transferred from the investing countries to the host countries. Those factors would contribute to the economic development of the recipients. Moreover, the host countries may also take advantage of the networks through the sales and distribution networks of foreign investors. As to the destination of FDI, with the available and potential advantages, Asia has been still the leading region in attracting FDI with 3,740 projects tracked in 2012, which increases its global market share to 31.
Many countries in Asia have achieved the dominant economic growth through FDI into many specific industries, such as, business and financial services, ICT, chemicals, plastics and rubber, etc. As to the source country or home country of FDI, Japan is still the dominant one all over the world, especially in Asia. In spite of the decreased number of outward FDI projects from Japan, the ratio of Japanese FDI in Asia still went up from 34. According to the survey conducted by Japan External Trade Organization (JETRO) on 3,397 JETRO member firms and 6,403 enterprises using JETRO services in 2013, 64.9% of firms intend to expand overseas operation by conducting new investments going with existing operation bases whereas 91.7% set up locations in Asia Pacific.
It would be indicated that because of natural disasters and difficult domestic business environment in Japan, for example, labor costs, tax burden, domestic regulations, etc, Japan firms are concentrating on widening their overseas investments (JETRO, 2014). Moreover, as to the conception of Japanese firms, the countries in Asia have been possessing advantages, which would promote them to be promising destinations for JFDI. Those advantages can be listed as current size of local market, inexpensive source of labor, social and political stability, etc. Despite many motives for Japanese firms to invest in Asia, there are many issues in this region, which raised concerns for Japanese enterprises.
As indicated in the report of Japan Bank 9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com for International Cooperation (JBIC) in 2013, the rise in salary, difficult searching for the raw materials, underdeveloped infrastructure, unclear legal system, etc have been the typical issues existing in Asian countries and possibly preventing them from receiving more investment from Japan. Combining the pros. in Asian region, we can examine the determinants affecting JFDI inflows in Asia. In other words, the study of the important factors determining JFDI in Asia is necessary for boosting JFDI into this region and should be based on the empirical studies and the real situations as well.
Since then, the relevant policies can be suggested for the countries in Asia to become more attractive destinations to Japanese investors.2 RESEARCH OBJECTIVES Up to now, there are some studies about factors affecting FDI inflow in Asian countries. It can be stated that the empirical papers presented the different and various factors to demonstrate for the researches and got general findings. A few authors have conducted their studies by basing on data of FDI inflow into specific sectors of specific countries to find out what are called sector-specific determinants of FDI. In this study, the research is concentrated on the total amount of FDI into a specific location or host country and come to contribute to on-going researches by examining the location-specific determinants of Japanese FDI in ten Asian countries.
As to this general objective, this study aims at the following specific objectives: - To provide the descriptive analysis of the changes in the period of before and after 1997 crisis and some recently remarkable characteristics of JFDI in ten selected Asian countries. - To measure the impacts of location-specific determinants on JFDI in ten selected Asian countries. - To suggest some policy implications for attracting JFDI 1.3 RESEARCH QUESTION To conduct research objectives, this study aims to answer the following questions: - What are the characteristics of JFDI in the period of before and after 1997 crisis and the changes in recent JFDI in ten selected Asian countries? - What are the significant factors affecting JFDI inflow in selected Asian countries? Is there any difference between intercept coefficients of ten selected Asian countries? 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - What are the relevant policies that can be suggested basing on the analysis to attract JFDI inflow? 1.4 THESIS STRUCTURE This thesis consists of five chapters. Right after Chapter 1 which aims to present the introduction of JFDI inflows into Asian countries, Chapter 2 will synthesize the remarkable theories about determinants of FDI.
There are five typical theories presented in this chapter from the one with the basic concept to the wider one. They are early studies of FDI, Neoclassical trade theory, Hymer – Kindleberger Paradigm, Internalization theory and OLI paradigm - Eclectic theory. Moreover, some typically empirical studies will also be reviewed in Chapter 2. By considering the combination of theories and empirical studies, the analytical framework of this thesis will be drawn at the end of Chapter 2.
Following Chapter 2, Chapter 3 concentrates on variables definitions and eight testing hypothesis. Furthermore, going with the introduction of empirical model used in this thesis, the source for data and the expected signs of eight variables will be summarized in one table. The final part in Chapter 3 is the research methodology which describes the methods and typical tests in panel data regression. In Chapter 4, an overview of JFDI in Asian countries will be presented to describe the changes in JFDI in the period of before and after the-1997-crisis.
Moreover, the recent trends and characteristics of JFDI in ten selected Asian countries will be also analyzed. The next in this chapter is the findings obtained from the estimation results, which will provide the answers for each hypothesis stated in Chapter 2. Since then, the question of significant factors determining JFDI in selected Asian countries will be also discussed.