UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BY VO KHOI NGUYEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, APRIL 2011 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS • PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACTS OF FOREIGN DIRECT INVESTMENT ON LABOR PRODUCTIVITY OF MANUFACTURING INDUSTRY: A CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VO KHOI NGUYEN Academic Supervisor: PhD. NGUYEN VAN PHUONG HO CHI MINH CITY, APRIL 2011 CERTIFICATION I hereby certify this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees. I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis. Signature Vo Khoi Nguyen Date: April, 2011 ACKNOWLEDGEMENT With the valuable guidance and advices from Vietnam-Netherlands program lecturers and friends, I am really grateful to what they have done for my thesis completion.
First of all, I would like to illustrate my largest gratitude to my supervisor, PhD. Nguyen Van Phuong who always gives useful and valuable advices and enthusiastic comments for my thesis. I am grateful for Professor, Peter Calkins for his precious advice and comments from the initial ideas of the thesis. I also express my special thanks to Professor, Nguyen Trong Hoai for his lectures in econometrics and PhD.
Cao Hao Thi, the lecturer of Vietnam- Netherlands project, for his kind help and instructions in data analysis by Eview software. And finally, I would like to show my special thanks to my friends in MDE class 15 for their supports during my research completion. ABSTRACT The paper examines whether foreign direct investment increases the overall labor productivity in Vietnam. Using panel data at firm level from the manufacturing sector, it finds robust evidence of the positive impacts from foreign direct investment on labor productivity.
Moreover, it also confirms the positive correlation of labor productivity and capital intensity, labor quality and economic scale. However, it should fail to establish any significant relationships between productivity and location; and industry. And the findings illustrate foreign enterprises do not make more productive than private firms. TABLE OF CONTENTS CHAPTER I 1.
Research objective and questions----------------------------------------------------------2 1. Organization of the study 2 CHAPTER 2 LITERATURE REVIE 2. Cobb-Douglas production function--------------------------------------------------------4 2. Theoretical framework of FDI impact on labor productivity----------------------5 2.
Channel effects of foreign direct investment---------------------------------------------6 2. Impacts of FDI on labor productivity--------------------------------------------------7 24ua CHAPTER 3 AN OVERVIEW OF FDI IN VIETNAM 9 3. Overview of FDI inflows (1988-2009) 9 3. FDI inflows in period 1988 - 2009-----------------------------------------------------9 3.
Some characteristics of foreign direct investment in Vietnam 11 3. The role of FDI in national economy 19 3. The role of FDI in national economic growth --------------------------------------------------------------------------------------------- 20 ' 3. The role of FDI in employment and human resources 21 3.
Overview of labor productivity in ASEAN ------------------------------------------------------------------------------------------------- 21 CHAPTER 4 RESEARCH METHODOLOGY-------------------------------------------24 4. Description of variables---------------------------------------------------------------24 4. Dependent variable labor productivity (Labprod)---------------------------------24 4. Estimation strategy---------------------------------------------------------------------28 45ua29 CHAPTER 5 RESULT ANALYSIS CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS------------------------45 6.
Limitation-----------------------------------------------------------------------------------47 Reference----------------------------------------------------------------------------------------------48 LIST OF TABLES Table 3.1: FDI projects licensed from 1988 to 2010 by kind of economic activity.2: Employed population by ownership from 2000-2009.3: Average annual labor productivity growth by Industry (%).1: Definition summary of variables.1: Statistical summary of sample.2: Distribution of explanatory variables in logarithm form.3: Correlation matrix spreadsheet without logarithmic form.4: Correlation matrix spreadsheet using logarithmic form.5: Regression result from Pooled Least Square.6: Regression result from fixed effects model.7: Regression result from random effects model.8: Hausman test result.9: Regressed result summary. 10: Distribution of explanatory variables without logarithm form.11: Descriptive statistics of variables in three types of enterprises.12: Result from fixed effects model with PCSE. 13: Result from fixed effects model with Dummy variable Dfshare.60 LIST OF FIGURES Figure 3.1: FDI inflows in period 1988 — 2009---------------------------------------------10 Figure 3.3: FDI inflows licensed by region-----------------------------------------------15 Figure 3.4: FDI inflows (million USD) by country of region------------------------------17 Figure 3.5: FDI inflows in manufacturing sector---------------------------------------------18 Figure 3.6: Industrial output value in manufacturing sector by ownership-----------19 Figure 3.7: Structure of GDP at current prices by ownership period 1995- 2009----20 • Figure 3.8: Comparative Labor Productivity Performance---------------------------------23 Figure 5.1: Distribution of labor productivity without logarithm form-------------------32 Figure 5.2: Distribution of labor productivity in logarithm form----------------------33 Figure 5.3: Correlation between Labprod and Fshare logarithm form----------------36 Figure 5.4: Distribution of correlation between labor productivity Labprod and capital intensity Capint without logarithm form-----------------------------------------------------52 Figure 5.5: Distribution of correlation between labor productivity Labprod and capital intensity Capint in logarithm forms---------------------------------------------------53 Figure 5.6: Distribution of correlation between labor productivity Labprod and material input purchases Scale without logarithm forms----------------------------------------------54 Figure 5.7: Distribution of correlation between labor productivity Labprod and material input purchases Scale in logarithm forms-----------------------------------------------------55 Figure 5.8: Distribution of correlation between labor productivity Labprod and proportion of skilled labor St/// without logarithm forms----------------------------------56 Figure 5.9: Distribution of correlation between labor productivity Labprod and proportion of skilled labor Skill in logarithm forms-----------------------------------------57 CHAPTER 1: INTRODUCTION CHAPTER 1 INTRODUCTION 1. Introduction , The remarkable turnabout in economic fortunes and accelerated growth of Vietnam economy is well known following Doi Moi in 1986.
From growth rates of 3-4% in the 1980s, GDP growth accelerated to an average annual rate of 7-8% for the next 20 years, touching 9% in 2008. These promising achievements of the economic transition resulted from the reform policies in the context of rapid globalization process. After the promulgation of the Law on Foreign Investment in 1987, Vietnam integrated world economy and joined ASEAN in 1995, APEC in 1998, ASEM in 2001 and WTO in 2007. During the economic transition from after 1986 to current years, many investigators stated that foreign direct investment (FDI) played a crucial role helping jumpstart to Vietnam’s economy on its way to accelerating reform and socio-economic growth.
Such a large amount of FDI capital demonstrates that Vietnam’s investment environment is attractive and many foreign investors are interested in the local market. It is consistent with the fact that FDI in Vietnam mainly concentrated on labor- intensive and export-oriented manufacturing activities (accounting for 5,139 projects with total committed capital of 65.7 billion USD in period 2000-2009). Therefore, this research is expected to answer whether FDI increases the overall labor productivity in manufacturing industry. It helps policy makers and enterprise management deliver effective policies for improving and maximizing local labor productivity, enhancing export-oriented manufacturing industry and ensuring the sustainable development among regions.
Research objective and questions The general objective of the research will study whether FDI increases the overall labor productivity in Vietnam, as measured by value added per labor, focusing on three sub- industries; food processing; textile, garment and footwear and electronics and mechanics including state, private (non-state) and foreign firms located over the country. Based on the research objective, the study will investigate the following questions: a) Does FDI significantly impact on labor productivity in Vietnam? b) Does the impact of FDI on labor productivity differ significantly across provinces, the ownership structure of firms? 1. Research hypotheses An expectation in the econometric model is to confirm the sign and statistical significance of following results: a) FDI impacts positively on labor productivity of manufacturing industry in Vietnam. b) Foreign sector makes labor productivity more increasingly than others.
c) The impacts of FDI on labor productivity significantly differ across regions. Organization of the study The research consists of six chapters. First chapter discusses the Introduction. The next _ chapter is the Literature review.
An overview of FDI in Vietnam is discussed in chapter 3. Research methodology in chapter 4 illustrates statistical model and data. Chapter 5 describes the result analysis and discussion. Finally, chapter 6 will be a concluding section.
2 CHAPTER 2: LITERATURE REVIEW CHAPTER 2 LITERATURE REVIEW 2. Theoretical background The key independent variable of this research is foreign direct investment (FDI). There are several ways to understand FDI such as International Monetary Fund’s FDI definition or United Nations’ FDI definition. According to Organization for Economic Co-operation and Development OECD (1996), FDI is clearly defined as follows: “Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (“direct investor”) in an entity resident in an economy other than that of the investor (“direct investment enterprise”).
The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.” Besides OECD’s FDI definition, GSO (2008) also explained FDI as the bringing of capital into the host country in the form of money or any assets by foreign investors for the purpose of carrying on investment activities in accordance with the provisions of the law on foreign investment in Vietnam. The dependent variable in this study is labor productivity. According to OECD (2001), productivity is defined as a ratio of a volume measure of output to a volume measure of input use.
To measure labor productivity, it is commented that the three most ' commonly used ways of input are: hours worked; workforce jobs; and number of people in employment. Output per worker corresponds to the "average product of CHAPTER 2: LITERATURE REVIEW labor" and seemed to be contrast with the marginal product of labor, which refers to the increase in output resulting from a corresponding marginal increase in labor input. Cobb-Douglas production function According to Cobb-Douglas (1928), they use production function as the functional form to represent the relationship of an output to inputs. They estimated an aggregate production function econometrically and the results presented to the economics profession.
It is known as “Cobb-Douglas production function” that is the most simultaneous form in theoretical and empirical analyses of growth and productivity. The production function has the formulation as follows: Y=AL‘K' Where: • Y denotes output, L: labor input, K: capital input • A is a constant depending on the units in which inputs and outputs are measured • o and § are the output elasticities of labor and capital, respectively. These values are constants determined by available technology. Output elasticity measures the responsiveness of output to a change in levels of either labor or capital used in production, ceteris paribus.
For example if o = 0.1, a 1% increase in labor would lead to approximately a 0.1% increase in output. The Cobb- Douglas production function is usually expressed in logarithmic form: log Y—— log A + a log L + J3 log K which is useful and easy when performing a regression analysis. 4 CHAPTER 2: LITERATURE REVIEW 2. Theoretical framework of FDI impact on labor productivity Based on Cobb-Douglas function, Liu et al.
(2001) examine the overall impact of FDI on the Chinese electronics industry. Productivity function model (logarithmic form) is normally suggested as follows: LP = F (CI, FS, LQ, FP) Where LP is used measures firm performance; CI is the capital-labor ratio; firm size FS; LQ labor quality or human capital, and foreign presence FP. Also investigating impacts from FDI, Blomstrom and Sjoholm (1999) examine the effects of FDI on productivity. Y represents values added; K is (physical) capital assets; L and FDI respectively denote labor and contribution by foreign partner in total capital assets of firm /.
The productivity function (log-linear form) will follow: In this productivity function, 5'/ci// measures the skilled labor and Scale denotes the size/scale of the firm in the industry. Dlndustry is the industry-specific dummy variable. The picture is more specific, as the recent work by Peter, Jeremy and Chengqi (2006), to investigate the impact of FDI on the productivity of China’s electronics industry.