UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS =====oOo===== VIETNAM- NETHERLANDS PROJECT FOR M. IN DEVELOPMENT ECONOMICS AN ANALYSIS OF FOREIGN DIRECT INVESTMENT IMPACT ON LABOR PRODUCTIVITY AT FIRM LEVEL IN VIETNAM IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ART IN DEVELOPMENT ECONOMICS BO GIAO DUC DAO TAO TRU'ONG D.l;\1 HQC KINH TE'TP. BY PHAM KHAC DUY THUVIEN • ~g ACADEMIC SUPERVISOR: DR. LE THI THANH LOAN Ho Chi Minh City, November 2009 TIEU LUAN MOI download : skknchat@gmail.com CERTIFICATION I hereby certify that the substance of 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 amKhacDuy Date: November, 2009 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT This research is impossibly completed without the valuable guidance, encouragement and advice from numerous individuals including Vietnam-Netherlands program lecturers, friends and my family members. I am really indebted and grateful to what they have done for my thesis completion. First of all, I would like to send my deepest gratitude to my supervisor, Dr.
Le Thi Thanh Loan who always gives valuable instructions, advice and comments during my completion ofthe thesis. I am grateful for Professor, Peter Calkins for his precious advice and comments from the initial ideas ofthe theme for my thesis. I also send my special thanks to Professor, Nguyen Trong Hoai for his lectures in econometrics and Mr. Truong Thanh Vu, the lecturer of Vietnam-Netherlands project, for his kind help and instructions in data analysis by Stata software.
Many especially respectful thanks are sent to my parents and my dear wife for encouraging and providing me with an opportunity to pursue my desires in higher learning and for their love, affection and sympathy that have helped me to gain more strength and motive to complete this thesis. And fmally, I would like to express my special thanks to my friends in MDE class 14 for their supportive friendship from the beginning day I joined in this course and their continuous support during my research completion. Above all, please sympathize for me and do know that I would be so grateful for those who support me a lot in this thesis completion if I forget to mention their names. ii TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This research examines and analyses the impact ofFDI on labor productivity at firm level in Vietnam through applying cross-sectional data from VES-2008 which concentrate on 4,654 firms including FDI and domestically owned enterprises in 4 sub-industrial sectors; food processing, hotels - restaurants, electronics - mechanics and textile - garment - footwear.
The regression model is estimated based on the Cobb-Douglas production function and the labor productivity is modeled as dependent on the variables, namely capital intensity, material input cost per labor, proportion of skilled labor and dummy variables including types of ownership and regions that FDI enterprises locate. OLS (Ordinary Least Square) and various econometric estimation techniques are employed in order to obtain reliable and appropriate results that show the findings based on the scientific analysis. As results, finding results in analysis of FDI impact on labour productivity in the case of this study consequently suggest in general that FDI in 4 sub- industrial sectors plays an important and positive role in enhancing labor productivity at firm level in Vietnam. Moreover, the results seem to be appropriate to answer research's questions as well as confirm expectation for hypotheses of different impacts of FDI across regions and types of ownership, except for skilled labor that does not appear to affect on labor productivity in this research.
iii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION. Objectives of the research. Organization of the research. 3 CHAPTER II: LITERATURE REVIEW.
Concepts and definitions. Foreign direct investment (FDI). Productivity and labor productivity .1 Cobb-Douglas production function. Pindyck and Rubinfeld production theory.
Theoretical background ofFDI impacts. Channel effects of foreign direct investment. Theoretical framework ofFDI impacts on labor productivity. Suggested research model.
FDI impacts enhance labor productivity in host countries. The opposite results ofFDI impacts on labor productivity. 16 CHAPTER III: AN OVERVIEW OF FDI IN VIETNAM SINCE 1988. Overview of FDI inflows and periods of development from 1988 to 2008.
FDI inflows in period 1988- 2008. Some characteristics ofFDI in Vietnam. The role ofFDI in national economy. The summary ofFDI sector's socio-economic affect on national economy.
27 iv TIEU LUAN MOI download : skknchat@gmail.com CHAPTER IV: RESEARCH METHODOLOGY. Dependent variable labor productivity (Labproductivity). Scale ofmaterial input cost (MI_scale). Types of ownership (Fshare).
Firm's sub-industrial sectors (Dindustry). 36 CHAPTER V: RESULT ANNALYSIS. Descriptive statistic analysis of regression sample and variables. Descriptive statistics of sample.
Descriptive statistics ofvariables. Model estimation and finding results. Multiple regression results and diagnostic tests. Interpretation ofthe fmding results.
Analysis and discussion about the finding results. 49 CHAPTER VI: CONCLUSIONS AND RECOMMENDATION. Limitations of the research. 52 v TIEU LUAN MOI download : skknchat@gmail.
62 LIST OF BOXES BOX 5.1: Ramsey RESET test using powers of the independent variables .1: Breusch-Pagan I Cook-We is berg test for heteroskedasticity. 44 LIST OF FIGURES FIGURE 3.1: Foreign direct investment projects licensed in period 1988- 2008 .2: Foreign direct investment projects licensed in period 1988 - 2008 by region .3: Structure of investment at current prices by types of ownership from 1995 - 2008 .4: Structure of investment at current prices by types of ownership in 2008 .5: Structure of gross domestic product at current prices by ownership period 1995- 2008 .1: Correlation between proportion of skilled labor and labor productivity .2: Distribution of labor productivity (Labproductivity) before transforming into logarithm form .3: Distribution oflabor productivity in logarithm form .4: Distribution of Capital intensity in logarithm form .5: Distribution of material input cost per labor in logarithm form .6: Distribution of proportion or skilled labor in logarithm form. 60 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES TABLE 3.1: Foreign direct investment projects licensed from 1988 to 2008 by kind of economic activity .2: Employed population as of annual I July by ownership from 2000-2008 .1: Statistics summary of four sub-industries firms in regions according to three types of ownership .2: Distribution oflabor productivity in logarithm form (Lnlabproductivity) .3: Distribution of explanatory variables in logarithm form .4: Distribution of skilled labor in 4 sub-industries according to ownership .5: Correlation matrix from the variables in the regression function .6: The result ofrunning regression (Model5.7: Diagnostic test for multicollinearity .8: The result of running regression (Model5.9: Distribution oflabor productivity (Labproductivity) before transforming into logarithm form .10: Distribution oflabor productivity in logarithm form (Lnlabproductivity) 57 TABLE 5.11: Distribution of explanatory variables in logarithm form .12: Descriptive statistics ofvariables in three types ofenterprises .13: The result of regression with beta number (Model5. 62 vii TIEU LUAN MOI download : skknchat@gmail.com ACRONYMS ASEAN Association of South East-Asian Nations APEC Asia-Pacific Economic Cooperation BLUE Best Linear Unbiased Estimator BTA Bilateral Trade Agreement FDI Foreign Direct Investment FE Fixed Effects GDP Gross Domestic Product GECS General Enterprise's Cost Survey GO Gross Output GSO General Statistics Office IC Intermediate Cost IMF International Monetary Fund NGO Non-Governmental Organization NICs Newly Industrial Countries OECD Organization for Economic Co-operation and Development OLS Ordinary Least Square RE Random Effects RESET Regression Specification Error Test SUR Seemingly Unrelated Regression us United States USD United States Dollar VA Value Added VES Vietnam Enterprise Survey VIF Variance Inflation Factor VND Vietnamese Dong WTO World Trade Organization viii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER I INTRODUCTION 1.
Problem Statement Since the late 1980s, on the basis of Doi Moi or the government's socio-economic reforms which started in 1986, Vietnam has initially transited from a centrally planned to a market- oriented economy. Typically for this process, Vietnam has advocated economic integration, in addition to its five "tions": urbanization, globalization, industrialization, modernization and privatization to spearhead this process. Beginning with the promulgation of the Law on Foreign Investment in 1987 and the signing of bilateral and multilateral trade agreements, Vietnam became a member of the Association of South East-Asian Nations (ASEAN) in 1995 and joined the Asia-Pacific Economic Cooperation (APEC) in 1998. In July 2000, Vietnam signed the Vietnam-US Bilateral Trade Agreement (BTA) and then joined Asia Europe Meeting in the following year, 2001.
The most recent and notable event was Vietnam's WTO integration in 2007. During the economic transition from after 1986 to current years, many observers, policy makers and academics contend that foreign direct investment (FDI) played a crucial role which can help jumpstart to Vietnam's economy on its way to accelerating reform and socio-economic growth, Mai (2004). In addition, FDI may affect all economic, cultural and social aspects of the economy and is an indispensable capital source to developing countries including Vietnam, especially Asia's Newly Industrializing Countries (NICs). Through FDI flows, these countries can cover the saving-investment, foreign exchange and fiscal gaps and hence promote socio-economic growth, Taylor (1993).
It may seem natural to argue that FDI can convey great advantages to host countries. That is why policymakers of developing countries including Vietnam always pay much attention to effects from FDI flows to country's economic growth. However this study does not focus on FDI by examining the effects of foreign direct investment on Vietnam's socio-economic growth in a general respect, this research wants to test the impact of FDI on the labor productivity at firm level in Vietnam as a whole and to 1 TIEU LUAN MOI download : skknchat@gmail.com identify main significant determinants of the FDI impacts to examine whether they vary due to different forms of ownership as well as different locations. Specifically, the present research aims to answer whether FDI increases the overall labor productivity which is helpful for Vietnamese policymakers in planning effective policies to improve and maximize local labor productivity that can serve to develop and monitor the effects of local labor market policies, to ensure the equitable development among regions as well as achieve sustainable development.
Research objectives The general objective of the research will investigate whether FDI increases the overall labor productivity in Vietnam, as measured by term of value added per labor, focusing on enterprises of four sub-industries; food processing, hotels and restaurants, textile, garment and footwear and electronics and mechanics including domestic and FDI firms located over the country. To meet this overall objective, the research will also target two specific objectives, to evaluate whether: (i) The impact of FDI has enhanced on labor productivity in Vietnam more than domestically-owned firms including state owned firms and non-state owned firms? (ii) Make recommendations to policy-makers in Vietnam as to how to best channel FDI so as to improve and maximize the value added oflabor. Research questions Based on the research objectives, the study will aim to find out the answers for the following questions: 1) Does FDI significantly impact on labor productivity in Vietnam? 2) Does the impact ofFDI on labor productivity in Vietnam differ significantly across regions as well as the ownership structure of firms? 2 TIEU LUAN MOI download : skknchat@gmail.com 3) Are there any significant differences and gaps of FDI impacts on labor productivity among these four sub-industries in this research? 1. Research hypotheses As mentioned in the beginning, the econometric model is expected to confirm the sign and statistical significance of following results: 1) The determinants on the labor productivity in Vietnam has significantly positive relation and depend on the terms of industry's capital intensity, proportion of labor skills and frrm's scale of material input purchases.