THEORETICAL BASIS AND INTERNATIONAL EXPERIENCE IN ATTRACTING FDI IN AGRICULTURAL SECTOR

LIST OF TABLE
Table 3.1 Number and total FDI capital in agricultural sector.................................37
Table 3.2 Structure of FDI invested in Vietnam in economic sectors (2020)...........39
Table 3.3 Structure of FDI in agriculture by localities receiving investment...........45

LIST OF FIGURE

1


Figure 3.1 Structure of FDI in agricultural sector by sub-sectors............................40
Figure 3.2 Structure of FDI in agricultural sector by investment partners...............42
Figure 3.3 Structure of FDI in agricultural sector by form of investment................43

2


TABLE OF CONTENTS
LIST OF TABLES......................................................................................................i
LIST OF FIGURES...................................................................................................ii
1. Rationale...............................................................................................................1
2. Research subjects..................................................................................................2
3. Research objectives...............................................................................................2
4. Research scope......................................................................................................2
5. Research method...................................................................................................3
6. Research structure.................................................................................................3
CHAPTER 1: LITERATURE REVIEW...................................................................5
1.1. Theoretical studies..............................................................................................5
1.1.1 Theory of ownership advantage........................................................................5
1.1.2 Theory of Internalization..................................................................................5
1.1.3 The theory of location advantage......................................................................6

1.1.4 Eclectic theory (OLI).......................................................................................7
1.2 Previous related research.....................................................................................8
CHAPTER 2: THEORETICAL BASIS AND INTERNATIONAL EXPERIENCE
IN ATTRACTING FDI IN AGRICULTURAL SECTOR........................................10
2.1 The concept and characteristics of FDI:............................................................10
2.1.1 The concept of FDI:........................................................................................10
2.1.2 Characteristics of FDI:....................................................................................12
2.1.3 Classification of FDI:.....................................................................................13
2.2. Characteristics of investment in the agricultural sector....................................14
2.3 The role of foreign direct investment in agricultural sector...............................16
2.3.1 Direct role:......................................................................................................16
2.3.2 Indirect Role:..................................................................................................17
2.4 Factors affecting the attraction of FDI in agricultural sector:............................18
2.4.1 Natural condition:...........................................................................................20
3


2.4.2 Population and labor resources.......................................................................20
2.4.3 The infrastructure...........................................................................................20
2.4.4 Legal System..................................................................................................21
2.4.5 Agricultural market.........................................................................................21
2.5 Evaluation criteria for attracting FDI into agricultural sector............................22
2.6 Experiences of some countries in attracting FDI into agricultural sector...........23
2.6.1 Thailand's experience.....................................................................................23
2.6.2 Indonesia’s Experience...................................................................................25
2.6.3 Malaysia’s Experience....................................................................................26
CHAPTER 3: THE STATUS OF ATTRACTING FDI IN AGRICULTURAL
SECTOR IN VIETNAM.........................................................................................28
3.1 Factors affecting FDI attraction to agricultural sector in Vietnam.....................28
3.1.1 Natural Condition...........................................................................................28

3.1.2 Population and labor force:.............................................................................30
3.1.3 The infrastructure...........................................................................................31
3.1.4 Agricultural Market........................................................................................34
3.1.5 Legal System..................................................................................................35
3.2 Situation of attracting FDI into agricultural sector in Vietnam in the period
2010-2020:..............................................................................................................36
3.2.1 Size and proportion of FDI in agricultural sector:..........................................36
3.2.2 Structure of FDI in agricultural sector by sub-sectors....................................40
3.2.3 Structure of FDI in agricultural sector by investment partners.......................41
3.2.4 Structure of FDI in agricultural sector by form of investment:.......................43
3.2.5 Structure of FDI in agriculture by localities receiving investment..................44
3.3 Assessment of limitations in attracting FDI into agricultural sector in Vietnam:
................................................................................................................................. 45
3.3.1 The proportion of FDI in the agricultural sector is still low and unstable:......45
3.3.2 Operational efficiency of FDI projects in agricultural sector is low...............46
3.3.3 Lack of diversity in investment partners:........................................................47
3.4 The causes of limitations in attracting FDI into agricultural sector in Vietnam: 47
4


3.4.2 The infrastructure system for agricultural sector has not met the requirements
................................................................................................................................. 48
3.4.3 Agricultural land is not concentrated..............................................................49
3.4.4 The agricultural production is small, scattered, unconnected, and
unprofessional.........................................................................................................50
3.4.5 There is no clear and appropriate strategy and orientation to attract FDI into
agricultural sector....................................................................................................51
3.4.6 The legal system for foreign investors in agricultural sector is not clear and
transparent...............................................................................................................51
CHAPTER

4:

SOLUTIONS

TO

INCREASE

FDI

ATTRACTION

IN

AGRICULTURAL SECTOR IN VIETNAM..........................................................53
4.1 Viewpoints and orientations in attracting FDI into agricultural sector:..............53
4.2 Opportunities and challenges in attracting FDI into agricultural sector in
Vietnam................................................................................................................... 54
4.2.1.Opportunities:.................................................................................................54
4.2.2 Challenges:.....................................................................................................55
4.2 Solutions to attract FDI into agricultural sector in Vietnam...............................56
4.2.1 Develop a strategy to attract and use FDI.......................................................56
4.2.2 Complete the legal system in favor of attracting FDI into agricultural sector:56
4.2.3 Upgrade infrastructure for agricultural development......................................57
4.2.4 Improve the quality of labor force..................................................................59
4.2.5 Promote the development of hi-tech agricultural sector:................................60
CONCLUSION.......................................................................................................62

5

INTRODUCTION
1. Rationale
Foreign Direct Investment (FDI) has become a prominent trend of globalization and
regionalization. It is one of the important tools in accelerating economic
development of many countries in the world. FDI has a positive role for both home
country and host country, especially for host country that are in the process of
industrialization. FDI not only adds capital and expands foreign markets to
accelerate economic growth, but also contributes to improving the level of science
and technology in the country, creating jobs and incomes for workers.
Since Vietnam carried out the renovation of its economic development model,
shifting to a market economy, the agricultural sector still plays a particularly
important role. With the advantages as well as available natural conditions,
Vietnam’s agricultural production industry has comparative advantages. In recent
years, Vietnam has paid attention to developing modern agricultural sectors, trying
to catch up and even develop on a par with countries with modern and advanced
agricultural sectors in the world.
Not only accounting for a high proportion (about 13.5%, in 2020) in GDP,
Vietnam's agricultural sector is also the main source of income for the population
living in rural areas. Agricultural production in Vietnam not only meets the needs of
food for domestic consumption, but also provides a large source of goods for
export. Moreover, in difficult times, when industrial production and services
seriously decline, Vietnam's agricultural sector is also the backbone of the economy.
We can see that, despite facing a lot of difficulties caused by the Covid-19
epidemic: manufacturing operations as well as supply chains were severely
disrupted, thousands of factories closed or cut production, the tourism industry
"frozen"… but agricultural production was still maintained. Thanks to that, it has
contributed to ensuring food security, increasing export turnover, and ensuring the
lives of tens of millions of people. Citing specific numbers from General Statistics

Office of Vietnam: rice production reached about 43.52 million tons, an increase of

1


1.7% compared to 2020; meat production of all kinds reached about 5.67 million
tons, up 5.3%; fishery output reached about 8.6 million tons, up 2.4%. Agricultural,
forestry and fishery products increased in both quantity and export value. In the first
nine months of 2021, the export turnover of agricultural, forestry and fishery
products is estimated at 35.5 billion USD, up 17.7% over the same period in 2020.
Despite such an important role, over the years, investment capital in general and
FDI in particular in the the agricultural sector has been modest, not commensurate
with the he potential of this field in the economy, has not yet created rapid
development in the production of goods with the desired high quality. Specifically,
in 2020, FDI in agricultural sector accounts for only 0.97% of total FDI in Vietnam.
In order to achieve the goal of further increasing the amount of FDI invested in
Vietnam, it is necessary to specifically analyze and evaluate the current situation of
attracting FDI in the agricultural sector, and at the same time find directions and
solutions to improve competitiveness and attract FDI in this field.
Therefore, the author decided to implement the topic "Attracting FDI into
Vietnam's agricultural sector: Reality and solutions”
2. Research subjects
With the topic “Attracting FDI into Vietnam's agricultural sector: Reality and
solutions”, the author identifies the specific research subject is the status of
attracting FDI in the agricultural sector of Vietnam
3. Research objectives
The project “Attracting FDI into Vietnam's agricultural sector: Reality and
solutions” is carried out with the following objective:
+ Firstly, analyze and assess the current situation of attracting FDI into agricultural
sector in the period 2010-2020

+ Secondly, propose the main solutions to increase FDI attraction into agricultural
sector in Vietnam in the near future
4. Research scope
+ Research space: Research on activities to attract FDI into agricultural sector
in Vietnam's territory
2


+ Research period: Research on the status of attracting FDI into agricultural sector
in Vietnam in the period 2010 - 2020.
5. Research method
With the purpose as well as the object and scope of the study as above, the thesis
uses the method of analyzing and synthesizing secondary data collected from
documents, reports, previous studies, statistical data of the Ministry of Agricultural
sector and Rural Development, General Statistics Office, etc. Using historical
statistics on FDI, FDI policy and related issues as a basis to analyze and assess. In
addition, the thesis uses comparative statistical methods and meta-analysis to clarify
the points, and at the same time summarizes the experiences of countries around the
world to solve related problems.
6. Research structure
This article is divided into 6 chapters:
Chapter 1: Research introduction. This chapter presents general
information of the topic such as: rationale, research subjects, research objectives,
research scopes and research methods
Chapter 2: Literature review. This chapter presents and evaluates previous
studies related to the research topic
Chapter 3: Theoretical basis and International experience in attracting FDI
in agricultural sector. Accordingly, chapter 3 focuses on clarifying some concepts
and issues related to FDI in general and FDI in agricultural sector in particular,
including the concept, characteristics, classification of FDI, the role of FDI in

agricultural sector, factors affecting the attraction of FDI in agricultural sector and
criteria for assessing the attraction of FDI in agricultural sector and experiences of
some countries in attracting FDI into agricultural sector
Chapter 4: The reality of attracting FDI into agricultural sector in Vietnam.
Chapter 4 focus on studying the current situation of factors affecting FDI
attraction to agricultural sector in Vietnam. At the same time, chapter 4 also goes
into depth analysis of the specific situation of attracting FDI into agricultural

3


sector in Vietnam in the period 2010-2020 in terms of size, structure as well as
results achieved, remaining limitations and reasons for those limitations.
Chapter 6: Solutions to increase FDI attraction in Vietnam's agricultural
sector

4


CHAPTER 1:LITERATURE REVIEW
1.1. Theoretical studies

1.1.1 Theory of ownership advantage
The founder of the theory of ownership advantages is Canadian Marxist
economist, Stephen Herbert Hymer (1934-1974). This theory [ CITATION
Hym76 \l 1033 ] was first mentioned in his PhD thesis entitled "The International
Operations of National Firms: A Study of Direct Foreign Investment" presented in
1960, analyze the motivations promoting US companies' investments in other
countries through ownership advantages. Through observing the growth and
performance of US companies abroad, he discovered that: foreign companies that

want to overcome international barriers and compete with local companies must
have their own advantages in intellectual property rights, intangible assets and
financial capability. According to him, based on these advantages, the company
can overcome the difficulties they face such as: geographical distance, lack of
understanding about the new environment. Markusen also agrees with this point
of view and gives supplementary ideas: knowledge-based assets that can be easily
moved to any place and provide low-cost means of production, helping the
company to achieve high efficiency in production. Therefore, firms owning these
assets will choose foreign direct investment rather than licensing or transferring
them to local firms (J. R Markusen, 1995).
The breakthrough of the firm-specific ownership advantage theory is that it
negates the old, traditional theoretical framework on foreign investment,
emphasizing the importance of intellectual property rights and technological
advantages of multinational companies when making international market
penetration. However, this theory is impossible to explain why enterprises in
developing countries and/or enterprises without ownership advantages can also
invest abroad

1.1.2 Theory of Internalization

5


The theory of Internalization was introduced by Buckley and Casson in
1976, Internalization means that MNE controls the entire production and business
process from input materials to consumption of output products. The two authors
argue that, in an imperfect market, the company always faces problems: product
quality, cost of enforcing contracts with partners, and product quality control.
Internalization is a way for companies to control the quality of their products and
so they prefer FDI to franchising or technology transfer. According to the theory,

Internal Transaction (IT) is better than Market Transaction (MT) when the market
is imperfect: natural imperfection (distance between countries increases
transportation costs), structural imperfection (trade barriers) such as product
standards, environmental standards, factors related to intellectual property rights,
technology).

When

markets

are

not

perfect,

companies need to pay high transaction costs. As a result, companies tend to
create
their own markets by creating Internal Market, transferring knowledge products
within the parent-subsidiary company, subsidiary - subsidiary instead of
delegating
their knowledge to the local manufacturer of host country. The benefits of
internalization are avoiding time lag, avoiding bargaining when buying and
selling, and overcoming shortages of buyers and sellers. Internalization must have
benefits that outweigh the costs incurred when establishing a network of parent
companies – subsidiaries.

1.1.3 The theory of location advantage
The theory of location advantage was proposed by Dunning in 1973 (J. H
Dunning, 1973). Accordingly, the investor's decision to choose a location is based

on the advantages that location can bring to businesses such as maximizing
revenue, minimizing costs, maximizing profits and minimizing risks. Specifically,
with the assumption that the company wants to exploit its ownership advantage
maximally, they will choose the location to establish the company with the lowest
cost. This depends on factors affecting input costs of production and business
6


processes such as information costs, transaction costs, raw material costs,
transportation costs, and wages. Therefore, the international production location is
decided based on the comparison of cost factors. Besides, with the assumption
that production costs are independent of location, market factors, barriers and
competitors will affect revenue maximization, so the international production
location will be decided based on revenue. In addition to cost and revenue factors,
business risks due to the instability of economic, political and social institutions
of the host country are also considered to determine the international production
location. Locations that have an institutional framework close to the host country
and political stability will be the preferred international production locations.
Thus, the theory of location advantage explains the reason for choosing an
investment location based on the factors of revenue, cost, profit and risk. This
theory points to many factors that contribute to an attractive location such as:
geographical location, infrastructure, market size and potential, labor costs, raw
materials, resource availability, support policies aid. However, this theory has a
limitation that it does not mention the specific factors of foreign investors
(industry characteristics, products, motives, relationships with enterprises in the
receiving country. Therefore, it only partially explains the FDI decision

1.1.4 Eclectic theory (OLI)
According to Dunning's eclectic theory, foreign direct investment is
effectively realized when three conditions are satisfied:

- Ownership advantage (O), (as discussed by Hymer): A company's ability
and willingness to participate in FDI depends on owning the type of assets that
the host country company does not have, thereby allowing the FDI company to
have a competitive advantage over the host country's competitors. This type of
asset includes: tangible assets (capital, human resources); intangible assets
(inventions, technologies, know-how, brands, reputation, organizational skills,
management).
- Location advanatges (L) (as discussed by Dunning): Location advantage
means that the host country must possess conditions that allow cost reduction
7


(such as abundant resources, cheap labor) or possess a large enough market size,
favorable legal, political, and social framework. Location advantage implies that
companies need to benefit from investing abroad, otherwise they would not do
- The advantage of Internalization (I) (as discussed by Buckley and
Casson): It is better for an organization to produce a product within the enterprise
than outsourcing to a third party. Dunning said that signing contracts with
companies in foreign markets is a more dangerous option than self-production. It
could lead to revealing specific ownership advantages to foreign companies, and
thus existing joint ventures could be potential competitors in the future
1.2 Previous related research
- Abdullah Khalid's research [ CITATION Abd17 \l 1033 ] indicates that
foreign direct investment is directly affected by 06 factors, including: (1) Gross
national income; (2) Export; (3) Import; (4) Foreign debt; (5) Military spending;
(6) Accumulation of assets. The authors used a quantitative research method
through data collection of FDI inflows, equity capital, gross national income,
export data, import data, military spending, and national debt. Outside of Pakistan
from 1988 to 2012. The results of empirical research show that factors such as:
asset accumulation, exports, and gross national income have a positive influence

on attracting FDI into Pakistan.
- ResLicai Lv Simei Wen Qiquan Xiong’s research [ CITATION Xio10 \l
1033 ] pointed out the factors affecting FDI in China's agricultural sector include:
agricultural market size, agricultural import, agricultural export, agricultural fiscal
expenditure and industrial policy. The results shows there is a significant positive
correlation between agricultural market size and FDI, indicating China’s
relatively huge agricultural market is an important determinant in attracting FDI.
The agricultural import has a significantly negative correlation with agricultural
FDI, which is consistent with our expectation. Industrial policy is not statistically
significant either, but the sign of the coefficient is positive. This shows that, to a
certain extent, joining WTO along with agricultural sector-related industries
opening to foreign investment gradually further increases FDI in China’s
8


agricultural sector. The impact of agricultural fiscal expenditure and agricultural
export on FDI is still uncertain.
- Japan International Cooperation Agency [ CITATION JICA \l 1033 ] has
studied the movement of FDI inflows in the world and in Southeast Asia. The
report has focused on assessing the competitiveness of Vietnam's investment
environment on the basis of reviewing policies for a number of economic sectors
and making recommendations to improve the efficiency of FDI activities - the
policy on investment promotion
- Author Nguyen Phu Nhuan [CITATION Phu17 \l 1033 ] used a
quantitative research method through a survey of 330 foreign direct investors in
the Red River Delta economic region. Research results show that factors such as
investment infrastructure, investment policies, human resources, living and
working environment, competitive input costs, advantages of the investment
industry, local brands Methods affecting the attraction of foreign direct
investment to the economic region of the Red River Delta

- Research by Do Thi Kim Tien [CITATION Tie21 \l 1033 ] has shown the
factors and measures of factors that affects FDI into agricultural sector in the Red
River Delta. They are designed based on the selective inheritance between
traditional factors and new factors updated from recent theoretical and
experimental studies, especially studies in the transition economy in accordance
with these research features. Since then, there are 7 factors affecting to FDI
attractiveness in agricultural sector in the Red River Delta, including: (1)
Infrastructure; (2) Investment policy; (3) Regional Linkage; (4) Human resources;
(5) Living and working environment; Quality of public services; (7) Local brands
The above scientific works have focused on studying many different angles
and aspects of FDI such as mentioning the factors affecting FDI and FDI in
agricultural sector. Due to different research scopes and purposes, the above
works only focus on certain localities. Moreover, according to the documents
found by the author, the data used in the study is too outdated, not up-to-date and
does not mean much for the current period.
9


CHAPTER 2: THEORETICAL BASIS AND INTERNATIONAL
EXPERIENCE IN ATTRACTING FDI IN AGRICULTURAL SECTOR
2.1 The concept and characteristics of FDI:
2.1.1 The concept of FDI:
Today, FDI is the main form of international investment that is being
interested by countries around the world. During the past years, FDI plays an
increasingly important role in the economic development of many countries by
being a part of capital structure. In addition to serving the process of
industrialization and modernization of the country, FDI activities also creates
opportunities to receive production techniques, business experiences, inventions,
technological know-how, management and administration capabilities, to help
business entity accelerate the development of industries with new techniques and

technologies, contributing to economic restructuring and rapid growth. In addition,
FDI also makes an important contribution to creating jobs, promoting export
turnover, contributing to healthy macroeconomic balances of the economy.
Therefore, FDI today has become a popular form of investment and has been
defined by international economic organizations as well as national laws. There are
many ways to define FDI, depending on the perspective of economists.
According to United Nations Conference on Trade and Development (UNCTD),
Foreign direct investment (FDI) is defined as an investment reflecting a lasting
interest and control by a foreign direct investor, resident in one economy, in an
enterprise resident in another economy This definition already implies that foreign
direct investors have significantly affect the management and administration of
enterprises in other economies. Such an investment includes both the initial
transactions between the two entities as well as all subsequent transactions between
the two parties and between overseas branch establishments. FDI can be carried out
by individuals as well as by entities.
The IMF’s Balance of Payments Manual, fifth edition (BPM5) defines FDI as a
category of international investment that reflects the objective of a resident in one
10


economy (the direct investor) obtaining a lasting interest in an enterprise resident
in another economy (the direct investment enterprise). This concept emphasizes
three factors: the investor must have a foreign element, the longevity of an
investment activity, and the investment motive is to gain direct control over the
management activities of the enterprise. This is what distinguishes FDI from
indirect investment in the capital market in the modern economy.
According to World Bank (WB) “Foreign direct investment are the net inflows of
investment to acquire a lasting management interest (10 percent or more of voting
stock) in an enterprise operating in an economy other than that of the investor”.
Foreign investors can be individuals or businesses and investments can be wholly

owned by foreigners or joint venture between foreign investors and local investment
partners.
The 2005 Investment Law of Vietnam does not have a specific definition of FDI,
but according to Clause 12, Article 3 defines "Foreign investment means foreign
investors bringing into Vietnam capital in cash and other lawful assets in order to
carry out investment activities"
Thus, although it is interpreted in different ways, the nature of FDI activities from
all points of view has the same consensus that:
First, the nature of FDI activity is the establishment of capital ownership of one
country's firm in another country with the aim of seeking long-term profits. When
carrying out foreign investment activities, investors not only move their financial
resources outside national borders in the long term, but also management skills,
production technology, brand, ... to the country receiving the investment
Second, FDI activities are related to the combination of ownership and management
rights of invested capital. Specifically, foreign investors must have a significant
degree of influence over the operations of foreign-invested enterprises through the
ownership of a certain number of shares, or other factors in their direct relationships
such as the parent company's representative in the subsidiary's board of directors,
participation in voting, decision-making, personnel exchange, etc. are all considered

11


FDI activities. Thus, in essence, FDI is the market expansion of multinational
companies (MNCs).

2.1.2 Characteristics of FDI:
According to the textbook of Investment Economics of the National
Economics University by Assoc. Dr. Nguyen Ngoc Mai is the editor, FDI has
some characteristics as follows:

- FDI is mainly private investment with the primary purpose of seeking
profit: While forms of indirect investment obtain stable financial returns, the
revenue of FDI enterprises completely depends on the business results of the
enterprises that are invested, so the income that FDI enterprises receive less
stable. On the positive side, investors have complete autonomy in their business
activities, full control of financial decisions, and are responsible for profits and
losses with their investments. This can be considered as a driving force for
investors to focus on making appropriate decisions to improve business
performance. That is also the reason why FDI projects often achieve higher
business efficiency than other forms of investment
- Foreign investors must contribute a minimum percentage of investment
capital: The right to control or participate in the operation of an investment
enterprise is determined based on the minimum capital contribution ratio
regulated in the laws of each country. Laws of different countries often provide
different provisions on this issue. Some countries only allow foreign investors to
establish 100% foreign-owned enterprises in certain fields and only participate in
joint ventures with a maximum shareholding of 49%. The ratio of each party's
contribution in the charter capital or legal capital will determine the rights and
obligations of the parties, and risks and profits are also divided according to this
ratio. If foreign investors invest 100% of their capital, they have the full right to
manage and run the company. In the case of a joint venture, the foreign investor
has the right to participate in the operation according to the extent of his capital
contribution. However, according to the IMF (2004), there are still cases where

12


foreign investors have a greater influence than domestic investors with equal or
greater capital
- FDI has a direct and long-term impact on the economic structure and

development level of the host country: FDI brings to the host country new
technologies, contributing to the creation of new fields, new profession. The
development of the FDI sector in certain industries and fields directly changes the
economic structure. The development of the FDI in certain industries and fields
directly changes the economic structure. Besides, FDI also has a long-term impact
on the level of development of the host country. On the one hand, when FDI
increases the supply of scarce goods, increases the import of spare parts,
production equipment and advanced technology, FDI contributes to increasing
export potential, competitiveness, improving the balance of payments, increase
budget revenue for the host country. On the other hand, if FDI stimulates the
bubble economy, stimulates high-end consumption beyond economic capacity,
etc., FDI will exhaust resources for economic growth, increase trade deficit, and
cause loss of economic growth. balance of payments, increase inflation,... in the
long run
- FDI is often accompanied with technology transfer to the host country:
When performing foreign investment activities, besides cash capital and tangible
assets such as machinery, equipment, real estate, ... investors also bring advanced
techniques, , inventions, experience and management skills,... to the host country.
This is one of the key points that the host countries aim to when calling for FDI
attraction, especially in developing countries with limited scientific - technical
level and management capacity. This is also the biggest advantage of FDI
compared to other capital flows.

2.1.3 Classification of FDI:
2.1.3.1 Investment Purposes:
In the International investment textbook edited by Assoc. Prof. Dr. Vu Chi
Loc, in terms of investment purposes, FDI is divided into 3 forms:

13

- Horizontal FDI: This is a form of FDI in which a company makes direct
foreign investment in a manufacturing industry in which it is able to compete in a
certain type of product. With this advantage, they want to expand and conquer
foreign markets. FDI activities are conducted to produce the same or similar
products as the investor has produced in the home country
- Vertical FDI: This is a form of investment with the aim of exploiting
natural resources and cheap inputs such as labor and land in the host country.
Investors often pay attention to exploiting the competitive advantages of inputs
between stages in a production process, so the products are usually completed
through assembly in the host country. This product is then imported to the home
country or exported to another country. This is a fairly common FDI activity in
developing countries.
- Conglomerate FDI: Enterprises that invest and receive investments operate
in different industries and fields.
2.1.3.2 Legal form:
- 100% foreign-owned enterprise: An enterprise wholly owned by a foreign
investor, established in the host country. Foreign investors invest, manage and
take responsibility for their operations and business results
- Joint venture enterprise: is an enterprise established by parties in both
home country and host country, in which the parties jointly contribute capital,
jointly operate the business, and jointly share risks and profits in proportion to
their capital contribution on the basis of a joint venture contract or agreement
signed between the government of the host country and the government of the
home country.
- Business cooperation contract: is a document signed between two or more
parties to conduct business investment in Vietnam, which stipulates the
responsibility for each party without establishing a new legal entity. This form is
often applied to some special economic sectors such as telecommunications, oil
and gas, ... or only applied when foreign investors penetrate into a new market

14


that they do not know well. Business cooperation contracts can be implemented in
many specific forms such as: BOT, BTO, BT...
2.2. Characteristics of investment in the agricultural sector
(1) Investment in agricultural sector is heavily influenced by natural
conditions:
Soil has a strong influence on the results obtained, so we have to study very
carefully about the conditions, the quality and the characteristics of the soil and
the topography. The climate also affects the investment process, for example
when we invest in a certain food crop, such as rice, we cannot grow rice in the
cold winter because rice is not suitable for this climate. Therefore, investors must
study very carefully the natural characteristics of each region to be able to have
highly effective investments or take measures to avoid the adverse effects of
natural disasters effectively
(2) Investment in agricultural sector requires a large amount of capital
When we invest in infrastructure systems (such as irrigation systems) or
science technology, we need a large amount of investment capital. For example,
to discover a new plant, the amount of capital and the number of scientists needed
for research is not inferior to that of a new industrial product. Or the cost to build
an irrigation system is no less than the construction cost of a factory or a tourist
hotel.. Therefore, investors are required to have policies to mobilize sufficient
capital on schedule.
(3) Agricultural production has a high risk
Agricultural production depends greatly on factors of the natural
environment such as soil quality, climate, water sources, light, and air. To be able
to conduct agricultural production, these factors must combine with each other.
However, the natural environment often fluctuates and changes unlike forecasts,

causing crop failures and losses. On the other hand, the activities of other
economic sectors may cause unfavorable impacts on the living environment of
animals and plants, thereby negatively affecting the results of agricultural
production.
15


Today, the application of science and technology to production has partly
limited the risks of agricultural production. However, a higher level of risk than
other industries is still an important factor affecting the efficiency and business
results of the industry, thereby affecting the attraction of capital to this industry.
(4) The profitability of the agricultural industry is not high
Agricultural products are income inelastic goods. Meanwhile, agricultural
products are often difficult to keep for a long time. Investment capital in land
reclamation is quite large, requiring a long amortization cycle. Production cycle is
long, depends on nature. If the season is good, the price tends to decrease due to
the law of supply and demand, if the crop fails, the price will increase but farmers
do not benefit due to low output. All these factors determine the low level of
profit of agribusiness people, which is not attractive to investors
2.3 The role of foreign direct investment in agricultural sector
2.3.1 Direct role:
(1) FDI contributes to the growth of the agricultural sector:
The investment multiplier theory has shown that the growth rate depends on
the amount of new investment capital and the efficiency of using new capital
according to the formula:

In which: Y additional output; K: the amount of additional capital; x:
coefficient of additional output on invested capital. That is, if more FDI is added
to the agricultural sector, assuming the capital efficiency is either the same as
before, or increased (usually increased) will increase x units of output, boosting

the agricultural sector growth rate, thereby contributing to overall economic
growth. This efficient use of capital assumes that everything else remains
unchanged and that only an increase in capital leads to an increase in output.

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For countries in the process of industrialization, domestic accumulation is low and
agricultural accumulation is lower, FDI is an extremely important new source of
additional capital to promote faster agricultural growth.
(2) FDI contributes to creating new jobs and higher incomes for
agricultural
workers:
FDI projects in agricultural sector will create demand for the labor market in
Vietnam
rural areas according to the needs of the project. In fact, most FDI projects
in agricultural sector are often more effective than domestic investment projects,
so the income of workers working for FDI projects is often higher than the
general level and more stable than the average income in the same industry
(3) FDI creates favorable conditions for foreign investors to transfer new
technologies into the host country
FDI enterprises, wanting to compete with domestic enterprises, must: one is
import their know-how into the host country, thereby creating new products and
training local workers with skills to use that technology; The second is to bring
technology to a higher level than domestic enterprises to have higher business
efficiency. For developing countries like Vietnam, when human resources and
scientific and technological potentials are not yet capable of self-investing in
research and development of new technologies or technology transfer from
abroad, FDI is a effective way to raise the level of technology in general and
agricultural production technology in particular.

(4) FDI projects create opportunities to export agricultural products
Foreign investors often have a market in their home country or another
country for the product of the project they want to develop in the host country.
Therefore, if the production cost of agricultural products of FDI projects in the
host country is lower than in other countries and the products are suitable for the
needs of foreign people, then these agricultural products have a good chance in
export to serve other countries. Some foreign investors also use FDI projects to
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invest in agricultural sector to supply raw materials to enterprises in their own or
other countries. As a result, FDI capital creates more and better opportunities for
the agricultural sector to export agricultural products abroad
2.3.2 Indirect Role:
(1) FDI contributes to the restructuring of the agricultural and rural
economy
FDI inflows, when used appropriately, contribute to agricultural
restructuring in all three areas:
- Internal restructuring of the agricultural sector: FDI projects contribute to the
diversification of products and production technologies such as the introduction of
new, high-yield plant varieties and livestock; practice new production technology;
strengthening agricultural production service activities
- Facilitating the development of agricultural sector-related industries such as
fertilizer production, high-tech agricultural machinery and equipment, animal feed,
especially the development of the agricultural product processing industry.
- Transforming labor structure and rural economy through indirect impacts on
the development of the service sector in rural areas such as banking, insurance,
transportation, construction, commerce, etc.
(2) FDI in agricultural sector creates competitive pressure forcing other
agricultural production organizations to innovate

The appearance of projects using FDI capital in agricultural sector creates new
competitors, forcing other agricultural production organizations, especially
domestic agricultural enterprises, to compete and prevail, to innovate technology,
innovating corporate governance towards modernity to increase productivity,
increase product quality, increase competitiveness, support the development of
national agricultural product brands in the world market. As a result, the agricultural
sector has more opportunities to export their products from the growth of the
national brand. On the other hand, the export activities of FDI enterprises also affect
domestic enterprises such as promoting information exchange between enterprises
and the market, making them more aware of the possibility of exporting agricultural
products, enhancing understanding know marketing activities, promote participation
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in the global distribution system. The export of agricultural products of domestic
enterprises is also partly enhanced by this externality.
2.4 Factors affecting the attraction of FDI in agricultural sector:
Up to now, there have been many theories to study and explain the factors
affecting FDI flows such as Agarwal (1980), Parry (1985), Itaki (1991), Dunning
(1977, 1993). Among them, the most famous and well known is Dunning's OLI
model. This theory synthesizes and inherits many advantages from other theories
about FDI, and is considered the most complete explanation of FDI.
According to Dunning (1993), FDI inflows depend on three basic factors: (1)
Ownership advantage (O); (2) Location advantage (L) (3) the advantage of
Internalization (I). In which, the advantage of ownership and the advantage of
internalization are factors decided by the foreign investor side, including:
experience in multinational business operations, advantage in holding a a product or
a manufacturing process, international business strategy, the ability of FDI
enterprises to control the production and consumption of products. Location
advantage is a factor that depends on the host country, including the host country's

resource factors in terms of labor, market size and structure, market growth, and
level of development. development, cultural environment, political law, institutions.
From the perspective of the host country, location advantage (L) is a
subjective factor that determines the attraction and use of FDI. In other words, this
is a factor that the host country can adjust and orient to achieve efficiency in
attracting and using FDI in its country. Depending on the purpose, location
advantage can be viewed from different angles:
- Based on the motivation behind investment activities, factors from the host
country that affect FDI attraction and use include: economic factors (market, profits,
costs); resources (human resources, resources, geographical location); infrastructure
(technology, engineering, traffic, health, society); and policy institutions.
- Based on the host country's interoperability, factors are classified into two
groups: (1) policy factors (investment incentives, enforcement requirements,
incentives and financial support); (2) non-policy factors (resources, political
stability, economy, culture, infrastructure, market characteristics, wage costs).
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Starting from the above theoretical background, many different factors have
been proposed in empirical studies to explain FDI inflows. Most of the studies have
a consensus on the factors affecting FDI including: (1) Market factors; (2)
Resources; (3) Infrastructure; (4) Institutions and policies. In agricultural sector, the
above factors are expressed in the following forms:
2.4.1 Natural condition:
Agricultural sector is the economic sector that bears the most risk because it is
greatly affected by natural and seasonal factors; In a year where the rain is
favorable, the agricultural products will be bountiful and vice versa. The plants and
animals themselves develop according to certain biological laws (growth,
development and death), are very sensitive to external influences, Any change in
weather conditions and climate directly affects the growth of plants and animals.

Due to this feature, natural factors such as climate, humidity, soil, etc. have a great
impact on the ability of agricultural sector to attract FDI. Taking advantage of
favorable natural conditions can not only reduce input costs, thereby reducing
product costs, but also limit risks such as natural disasters, storms and floods, etc.
(one of the first factors considered by investors when deciding to invest in
agricultural sector)
2.4.2 Population and labor resources
Agricultural sector is a labor-intensive economic sector, requiring a relatively
abundant labor source. In developing countries, where the level of scientific and
technical development is not high, labor and land resources are the main factors
promoting the development of agricultural sector. In addition, the population and
labor force also act as markets for agricultural products.
2.4.3 The infrastructure
Infrastructure serving economic sectors in general such as transportation
system, post and telecommunications, electronics,... and infrastructure serving
agricultural production in particular such as irrigation system, dike system ... is the
basis for the development of agricultural production. In particular, irrigation
systems play an important role in production and life; ensure irrigation and drainage
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