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 INTERACTION EFFECTS BETWEEN FDI GROWTH AND INSTITUTIONAL ENVIRONMENT - A CASE OF VIETNAM, 2008-2011 A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ART IN DEVELOPMENT ECONOMICS By ĐẶNG VÕ TUẤN Academic Supervisor: TRƯƠNG ĐĂNG THỤY HO CHI MINH CITY, NOVEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com Declaration This thesis is submitted in partial fulfillment of the requirements for the degree of Master of Art in Development Economics to Vietnam – Netherlands Programme. I hereby declare that this thesis has not been submitted for any degree. To the best of my knowledge, the thesis is my own work. All sources used have been cited and acknowledged in the thesis.
Đặng Võ Tuấn i TIEU LUAN MOI download : skknchat@gmail.com Acknowledgement I would like to express my deepest gratitude to my academic supervisor, Dr. Trương Đăng Thụy, for his helpful comments and regular feedback in this thesis. I am also grateful to Assoc. Nguyễn Trọng Hoài and Dr.
Phạm Khánh Nam for their great advice when this thesis is just in form of ideas. I would like to thank all lecturers for the knowledge and lessons they gave me and thank my classmates for their support during the time I studied at the programme. Last but not least, my sincerest thank is for my family, especially my beloved wife. Without their frequent encouragement as well as spiritual support, I would not have been able to complete this thesis.
ii TIEU LUAN MOI download : skknchat@gmail.com Abstract This thesis analyzes the interaction effects between FDI growth and institutional environment in Vietnam in the period of 2008 – 2011. Detailed data of FDI, some traditional FDI-related factors and institutional environment are consolidated from the Provincial Competitiveness Index (PCI) Reports of Vietnamese Chamber of Commerce and Industry (VCCI) and the U. Agency for International Development (USAID) and from Statistical Yearbooks of General Statistics Office of Vietnam. Different functional forms are employed using fix-effects technique to identify the factors affecting FDI flow into provinces in Vietnam.
The major results of the thesis show that there exists a significant relationship between FDI inflow and institutional environment which is proxied by nine sub-indices of PCI Reports. Although not all of those indices are significantly related to FDI in the period 2008-2011, the PCI Reports are becoming more and more popular and a trustworthy reference source for foreign investors prior to investing into Vietnam. Keywords: inward FDI, institutions, Provincial Competitiveness Index (PCI), functional forms, fix-effects technique. iii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS Declaration.
iii Table of contents. iv List of tables. vii List of figures. viii CHAPTER 1: INTRODUCTION.
Organization of the study. 4 CHAPTER 2: LITERATURE REVIEW. Definition of Foreign Direct Investment (FDI). The role of FDI in the economy.
Factors attracting FDI inflows. International trade theory. Market imperfection theory. Concept of Institutions.
The role of institutions in the economy. Theories of Institutions and FDI. 9 iv TIEU LUAN MOI download : skknchat@gmail. Empirical studies on Institutions and FDI.
10 CHAPTER 3: RESEARCH METHODOLOGY, VARIABLES DESCRIPTION AND DATA SOURCE. Foreign Direct Investment (FDI). Provincial Competitiveness Index (PCI) and nine sub-indices. 20 CHAPTER 4: ECONOMETRIC ANALYSIS AND RESULTS.
An overview of Foreign direct investment (FDI) and Provincial competitiveness index (PCI) in Vietnam from 2008 to 2011. Foreign direct investment (FDI). Provincial competitiveness index (PCI). Overall descriptive statistics of variables.
Econometric analysis and results. Entry costs – EC; Land access and security of tenure – LAST; Transparency and access to information – TAI and Proactivity of provincial leadership – PPL. Informal charges – IC; Time costs for administrative procedures and inspection – TCPI; Business support service – BSS; Labor training – LT and Legal institutions – LI.4 Summary of key findings. Conclusion and recommendation.
39 v TIEU LUAN MOI download : skknchat@gmail. 47 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 3.1: Summary of variables .1: FDI of top ten provinces over the period from 2008 to 2011 (in million USD).2: PCI of top ten provinces in Vietnam from 2008 to 2011 (100-point scale) .3: Overall descriptive statistics of variables .4: Econometric results of five regression models with variable Entry costs – EC.5: Econometric results of five regression models with variable Informal charges – IC .6: Regression results of five significant PCI variables .7: Average marginal effects of nine PCI sub-indices. 35 vii TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 4.1: Registered FDI in Vietnam over the period from 2008 to 2011 .2: FDI and Entry costs over period 2008-2011 .3: FDI and Land access and security of tenure over period 2008-2011 .4: FDI and Transparency and access to information over period 2008-2011 .5: FDI and Proactivity of provincial leadership over period 2008-2011.6: FDI and Informal charges score over period 2008-2011 .7: FDI and score of Time costs for administrative procedures and inspections over period 2008-2011 .8: FDI and Business support service score over period 2008-2011 .9: FDI and Labor training score over period 2008-2011 .10: FDI and Legal institutions score over period 2008-2011 .11: Relationship between informal charges score and inward FDI in logarithmic model .12: Relationship between the score of time costs for administrative procedures and inspections and inward FDI in logarithmic model .13: Relationship between business support service score and inward FDI in linear model .14: Relationship between labor training score and inward FDI in logarithmic model .15: Relationship between legal institutions score and inward FDI in quadratic model. 38 viii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 Problem Statement Foreign Direct Investment (FDI) has been playing an important role in economic growth of every country all over the world.
As the observation of UNCTAD (2003), FDI became a more and more crucial factor in the development and integration of global economy during the last decade of 20th century. Specifically, Romer (1993) asserted the importance of FDI to developing countries in the aspect of removing the gap in human capital in comparison with developed countries. Vietnam, a typical developing country, has been paying close attention to FDI for the country’s development. How to attract more and more FDI to the country to stimulate job creation and economic growth is considered as one of the top priorities of the country’s government.
It is generally accepted that institutional environment is a key factor affecting inward FDI. Being aware of this matter, provinces in Vietnam have tried to improve their institution environment in order to increase inward FDI. Giang (2008), in a study of FDI in the Northern Mountainous Provinces, proved that due to less transparency of local authority, this area was reported to have poor inward FDI compared with provinces in other areas of Vietnam. The Provincial Competitiveness Index (PCI) was developed in 2005 by the Vietnamese Chamber of Commerce and Industry (VCCI) and the U.
Agency for International Development (USAID) to measure and assess the standards of economic governance of 63 provinces in Vietnam. The PCI is, in other words, believed to reflect the efficiency of institutional environment. According to the reports of PCI 2009 and 2011, Lao Cai and Bac Ninh tried to apply new initiatives and solutions in economic governance more efficiently to improve their ranking from the third and the tenth in 2009 into the first and the second in 2011. The inward FDI in Lao Cai and Bac Ninh in 2011 subsequently increased more than 150% and 400% compared to the year 2009.
In addition, Vietnam’s government considers PCI one of the most important factors in the enhancement of business environment as stated in Decision 19/NQ-CP dated March 18th 2014. The government subsequently requested all provinces to pay close attention to the improving of institutional environment in order to increase their PCI scores. The institutional environment or institutions mentioned in this thesis could be generally defined as the combination of several factors reflecting economic governance as recommended by PCI 1 TIEU LUAN MOI download : skknchat@gmail.com sub-indices which are information transparency, informal charges, administrative procedures and inspections, legal system, entry costs, land access and security of tenure, proactivity of provincial leadership, business support service and labor training. In addition, the interpretation of institutions and the effect of institutions on FDI are also broadly argued in the world.
Rodrik and Subramanian (2003) defined institutions as property rights protection, the application of laws and regulations and corruption. Hodgson (2006) argued that institutions could be “as systems of established and prevalent social rules that structure social interactions”. These “prevalent social rules” are explained as conventions and rules. Kaufman et al.
(1999), in a study of institutional determinants of FDI, found five indicators related to economic governance which are political instability, government efficiency, regulatory issue, rule of law and corruption. Conducting a fuzzy-set analysis on institutions and inflows of FDI, Pajunen (2008) suggested that the relationship between institutions and FDI is frequently generated from a combination of several institutional indicators such as corruption, political stability, labor regulation, legal system, civil liberties, property rights and taxation policies. Placing an emphasis on the impact of corruption, Wei (1997, 2000) claimed that corruption and uncertainty related to corruption significantly negatively affects FDI. Pournarakis and Varsakelis (2004) posited a hypothesis that “the higher the institutional quality that a country exhibits the higher FDI inflow”.
The institutional quality is measured by the political institutions (political rights, civil liberties and freedom of the press) and corruption. Arguing that institutions are considered as one of the most important advantages in attracting foreign investors, Bevan, Estrin and Meyer (2004) suggested that FDI is influenced by several particular institutional indicators which are private business ownership, innovation of banking industry, foreign exchange and trade liberalization, and the enhancement of legal system. Busse and Hefeker (2006) conducted a research analyzing the relationship between institutions, political risk and FDI inflows. By investigating 12 institutional indicators derived from the dataset of 83 developing countries, the authors conclude six significant determinants of FDI inflows, which are stability of country’s government, conflict inside and outside the country, corruption and ethnic strain, laws and regulations, democratic responsibility of government, and status of bureaucracy.
“Good institutions in the host country have a positive impact on inward FDI” is the result of an empirical study of Mayer et al. In this study, the authors used “Institutional Profiles” which include 26 institutional indicators derived from a survey conducted in 52 countries in 2001. The result shows that only variables of bureaucracy, corruption, information, banking sector and legal institutions play an important role in attracting inward FDI. 2 TIEU LUAN MOI download : skknchat@gmail.com Besides, weak capital concentration and employment protection tend to deter inward FDI.
Having the same observation as Mayer et al., Daude and Stein (2007) also generally asserted that more enhanced institutions could be positively and economically significantly related to FDI inflows. Especially, the authors claimed that some institutional factors that cause bad impact on inward FDI are the uncertainty of policies, regulations and laws, redundant regulatory difficulty, instability of government and lack of commitment. Based on the argument that more FDI is originated from more enhanced institution environment which is reflected by PCI in this thesis, and based on the fact that provinces in Vietnam have been trying to innovate their institutional environment in order to improve their PCI ranking, it is necessary to investigate whether good PCI result could really be considered as an impetus of provinces’ development especially through the attracting of more inward FDI, which is believed to positively impact on the economic growth.