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 FDI and Income Inequality: Evidence from panel data of Vietnam’s provinces BY LAM VAN ROI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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 FDI and Income Inequality: Evidence from panel data of Vietnam’s provinces A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LAM VAN ROI Academic Supervisor: PHAM KHANH NAM HO CHI MINH CITY, December 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT DOES FDI AFFECT ON INCOME INEQUALITY? This paper attempts to estimate GINI indices for all provinces of Vietnam and contributes to explore the relationship between FDI and income inequality. The thesis uses a balance panel data for 56 provinces in 5 years which includes GDP, FDI and income distribution. The thesis found that there is no evidence impact of FDI to income inequality. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Contents Chapter 1: INTRODUCTION.
Research Scope and data. Organization of the thesis. 5 Chapter 2: LITERATURE REVIEWS. 10 Chapter 3: RESEARCH METHOLOGY .2 Share of FDI in GDP.
18 Chapter 4: RESULTS OF ANALYSIS ON FDI AND INCOME INEQUALITY. Foreign Direct Investment in Vietnam – An overview. Income inequality in Vietnam. 32 Chapter 5: CONCLUSIONS AND POLICY RECOMENDATION.
Limitation of the thesis and suggestion of further research. 46 A – DATA ON FDI AND GINI. 46 Table 1: Information detail for provinces. 46 Table 2: Vietnam’s 10 leading FDI investors in 11 months of 2014.
47 Table 3: Top 10 provinces in FDI attraction in 11 month of 2014. 48 Table 4: 10 sectors attracting FDI head of VN in 9M-2014. 48 Table 5: Some facts about income distribution and inequality in Vietnam. 49 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com B - DESRRIPTION OF THE DATASET.
49 Table 0: List of provinces and variables detail. 49 Table 6: Summary statistic of variables .1: Results of Pool OLS .2: Result run Random Effect Model .3: Result of Fixed Effect Model. 62 Table 8: Result of Hausman Test. 62 Table 9: Summary of two new regression for Fixed and Random Effect.
63 C- Figure of endogeneity test and solution:. 64 Figure 1: IV estimator 2SLS. 64 Figure 2: First-stage regression and instruments are weak test. 65 Figure 3: Endogeneity Test.
65 Figure 4: Regression for FDI stock in GDP by lagged of FDI stock in GDP. 65 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1: INTRODUCTION This chapter of the thesis will introduce the problem statement and research object under the perspective of the social sciences. It stated why this thesis was formed for the purpose of explaining the relationship between FDI and income inequality. This chapter also presents the essential content and will be explained in detail in the next chapter.
In addition , the structure of the thesis is also stated in this chapter. Problem statements In recent years, Vietnam has made significant achievements in improving the economy and society. The growth of economy is about 7% per year, GDP per capita has increased and poverty ratio has reduced year by year (Mahajan et al. This achievement is a positive signal for the transitional economy, and Vietnam also changes many policies to follow up with the globalization trend.
In 2009, Vietnam was a member of Lower-middle income countries and became a success story. Vietnam’s economic growth made poverty situation decreasing and improving income inequality. Sustainable economic growth is an advantage to attract more FDI from developed countries. Opening economy in Vietnam, after Doi Moi Policy, is also like other developing countries in improving environmental investment in order to attract more FDI from the world.
According to ASEAN Business Outlook Survey in 2012/2013, there were over 50% of foreign investors wanted to expand their businesses in Vietnam, because Vietnam has the political stability and a safety destination. That is the reason why FDI has been increasing year by year. The impact of FDI to Vietnam’s economy is very important because FDI entices the growth rate, alleviate poverty and technology transition. However, FDI is often unevenly distributed among provinces of Vietnam, so the impact of FDI to each 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com province is different from province to province.
The understanding FDI is important to make policy. The empirical study about FDI in provinces of Vietnam focused on researching impact of FDI to economic growth, employment generation and technology spillover effect. Furthermore, the analysis of FDI in inequality has few studies and the most of studies treats impact of FDI between countries in economic growth. In addition, the role of FDI investment in the country as well as the provinces of the country that generated a strong effect in attracting an abundant labor force of that country where FDI decides to make an investment.
Therefore, the creation of jobs for the workforce in place that FDI will create the income distribution in the entire region. The income distribution is uneven, and it depends greatly on the level of technology, skilled labor, skills of the workforce in the environment. So therefore , the required skill level of the labor multinational companies appear and create a greater pressure on the demand of high quality labor but high-quality labor supply in the country has certain restrictions. This leads to large disparities in the distribution of wages between skilled and unskilled manual workers who do not have the skills, and create a rise in inequality of workers’ income.
The inequalities and FDI in many countries have been much a controversial debate in academic literature. Gottschalk and Smeeding (1997) and Acemoglu (2003a) found evidence about FDI which tends to increase the inequalities between skilled and unskilled workers. Hence, the purpose of this paper attempts to analyze the impact of FDI to income inequality in provinces of Vietnam in order to understand deeply what the impact of FDI is and suggest some recommendations in making policy. Inequality in this paper is understood as income inequality.
In other words, this thesis attempts to investigate whether FDI helps provinces to improve income inequality or to make it a larger gap. In addition, the paper also estimates details of Gini Coefficient for provinces in Vietnam to capture inequality overview. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. To estimate GINI Index for provinces in Vietnam.
To examine FDI impact on income inequality in provinces Vietnam. Research Scope and data This thesis concentrates on all provinces in Vietnam because there were few studies which researched about FDI and in equality before. In addition, the main aim of this thesis attempts to explore the impact of FDI to the inequality. The paper calculates GINI index for each province in order to introduce views of income distribution.
The estimation model in this paper is implemented by using panel data with over 50 provinces in Vietnam. The data was collected and estimated from VHLSS, GSO’s Statistical Yearbook various years (2002, 2004, 2006, 2008 and 2010). Organization of the thesis The thesis includes five chapters: Chapter one introduces about the problem statement which is the guideline of this research. Following the introduction, chapter two will collect information from some controversies about FDI and Income inequality.
According to theoretical literatures, FDI departs from multinational companies invested into countries with new technology and management skills, and helped labor forces in this country to improve their skills and productivity performances. FDI is a tool for those multinational companies to expand their powers to the world, but it does help emerging countries to develop and escape from the poorness. FDI also contributes to the economic growth of a country, creates more jobs for the labor forces which should have been jobless without FDI. 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In chapter three, the thesis attempts to introduce the methodology to analyze the panel data.
In this section, we use econometric model to find relationships between FDI and Income inequalities by using panel data provinces of Vietnam. The very next chapter which is chapter four will show the estimation’s result derived from the model introduced in the previous chapter. This result pointed out the correlation as well as the effect of FDI to the Income Inequality in provinces of Vietnam. In addition, this chapter will also show the overview of FDI and Income inequality in Vietnam in recent years.
The final chapter will discuss some conclusions which were brought out from chapter four. In this section, we also suggest some policy recommendations to improve FDI flow and income inequality. 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 2: LITERATURE REVIEWS This program presents some basic theories as the basic for this thesis building the model of elements necessary to explain the relationship between FDI and income inequality. In the first chapter , the thesis will elaborate on the basic economic theory to provide an overview of the role of FDI impact on the economy where it is invested, then lead to the relationship between FDI and the distribution of income to the employee.
The next section of the chapter presents the empirical study of economics scholars have studied about the role of FDI and income inequality. The last part of the chapter will introduce the analytical framework based on empirical research. Theoretical backgrounds Income inequality is distributed unequally among individuals in a group, among groups in a population or among countries. It has always been of the central point of economic theories such as neoclassical theory of Adam Smith (1776) or factors income distribution of Thomas Malthus and David Ricardo (1817).
Modern theories define income inequality as distribution of income across individuals and households. The causes of income inequality have focused on productivity of different groups (Neoclassical economics), conflicting across labor and capital – intensive (Marxian economics), different gap between demand and supply of labor force (modern theories), tax polices (Krugman, 2009; Saez, 2009), accessing education (Standard & Poor’s rating agency, 2014), Finance industries (Jamie Galbraith and Stiglitz, 2012) and globalization (Krugman and Lawrence 1993). Globalization is characterized by an increasing and extending inequality which has been one of the leading research topics in 1990s. There were a lot of researches on the effects of trade to income inequality within countries, like Chakrabarti (2000), Wei and Wu (2001), Carneiro and Arbache (2003).
Globalization is like other definitions would have two side effects, but it scores a remarkable point for developing countries 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com that it offers a good opportunity for those countries to develop and strengthen their economy as well as increasing their national living standards. And FDI, as a heightened factor of economic growth, has been focused on rather than other factors that related to the economic growth. This thesis analyses the relationship between FDI and income inequality in Vietnam. The thesis is based on modernization and globalization theory, which used to explain the process of modernization within societies.
The theory refers to a model which a country can be progressively transformed from traditional country to a modern one. The theory supports that a country cannot be only growing by internal factor but also by external factors which are opening its economy and integrating the world economy. For developing and less-developed countries, including Vietnam, modernization is the best way to develop their economies. And, through FDI, there is a shift on production from developed countries to developing countries which will change the state of production factors.