The impact of foreign direct investment capital on the manufacturing industries in vietnam

Ministry of Education and Training
National Economics University

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DANG QUY DUONG



THE IMPACT OF FOREIGN DIRECT INVESTMENT CAPITAL
ON THE MANUFACTURING INDUSTRIES IN VIETNAM



Specialized Reasearch: International economics (External economics)
Code: 62310106



SUMMARY OF DOCTORAL THESIS IN ECONOMICS

Hanoi - 2014

THE RESEARCH IS COMPLETED AT NATIONAL ECONOMICS
UNIVERSITY


Scientific Supervisor: Prof.Dr. Do Duc Binh



Reviewer 1:



Reviewer 2:



Reviewer 3:




The thesis will be reviewed and marked by Government Thesis Examination
Committee
At:…………………
At… On……

You can read and refer more about the contents of research at:

- State library
- Library of National Economics University

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Introduction

1. Reasons to do the research
The economic growth and development are always the aims that many countries
around the world would like to achieve including Vietnam. Since Vietnam regained
independence in 1975 and especially after renewal policy was implemented in 1986,
the Party and State have set goals for economic development to the forefront with the
orientation to 2020 that Vietnam will basically become a modern industrialized
country.
In order to achieve this objective, Vietnam needs to make the best use of existing
resources and simultaneously force international integration in order to attract outside
resources. In recent times, Vietnam has attempted to attract outside resources, mainly
from foreign direct investment (FDI).
Theories and practices show that FDI plays a very important role in the economic
development of Vietnam. First, FDI contributes to the development of economic
sectors through additional funding, technology transfer and restructuring the
economy towards modernization and industrialization. The development of the
economy will facilitate the growth of the entire economy as higher growth rate,
creating more jobs, improving the workforce quality, infrastructure and raise the
technology level etc which helps to elevate the position of Vietnam in the region and
the world.
At the national level, there have been many studies on the impacts of FDI on
economic growth, economic restructuring, export promotion, infrastructure and
workforce quality improvement such as the studies conducted by Nguyen Thi Tue
Anh (2005), Tran Ngoc Thin (2010), Bui Thuy Van (2011) and Nguyen Tien Long

(2012). However, at the sector level, the number of researches on the impacts of FDI
on economic sectors is still modest.
Besides, during the process of economic development, it is found that the
development of the process and manufacture industries, also known as manufacturing
industry, is a key factor to speed up economic growth rate. Industry contributes the
largest amount of money to GDP so the growth of manufacturing industry decides the
growth level of Vietnam economy.


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Therefore, it can be affirmed that both FDI and the growth of the manufacturing
industry are key factors to stimulate the economic growth. This leaves a question for
us: Is there any relationship between FDI and the growth of the manufacturing
industry? and to what extent? What is the role of FDI in developing the
manufacturing industry? For answering these questions helps us allocate and use FDI
reasonably as well as develop manufacturing industry, which contributes to the
growth of Vietnam economy.
In the world, there have been abundant of studies on the impact of FDI on the
manufacturing industry. In Vietnam, there are a number of quantitative studies on the
impact of FDI on the process industry such as the research performed by Le Quoc
Hoi (2008), Nguyen Phi Lan (2008), Nguyen Ngoc Anh (2008). However, almost all
studies in Vietnam on the impact of FDI on manufacturing industry usually tend to
lean heavily toward one side: either quantitative analysis or qualitative analysis. In
summary, up to now, there is no comprehensive and systematical study, combining
both quantitative and qualitative methodology, on the relationship and the impact of
FDI on the manufacturing industry. That is why I selected the topic "The impact of
foreign direct investment capital on the manufacturing industries in Vietnam" for my
thesis.
2. The aims of the research

The purpose of the thesis is to analyse and assess the impact of FDI on the
manufacturing industries in Vietnam. On this basis, the author proposing solutions to
take advantage of the positive effects and mitigate the negative impacts of FDI capital
on the manufacturing industries in Vietnam.
Specifically, the research focuses on the following main points as below:
- To formalize theories of FDI, FDI capital and the impacts of FDI capital on the
manufacturing industries.
- To analyse and assess the impacts of FDI capital on the manufacturing industries in
Vietnam by using methodology of qualitative analyze and econometric models.
- To analyze the causes affecting the impact of FDI capital on the manufacturing
industries in Vietnam.
- Based on the results of research and analysis, to propose solutions that utilize the
positive effects and mitigate the negative impacts of FDI capital on the
manufacturing industries in Vietnam.

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3. The objects and scope
3.1. The objects of the research
The thesis studies the impacts of FDI capital on the manufacturing industries in
Vietnam.
3.2. The scope of the research
- Spatial research: The thesis studies the impacts of FDI capital on the manufacturing
industries in Vietnam.
- Time range: The manufacturing industries in Vietnam: from 1988 to 2013.
4. Research methodology
The thesis has employed a combination of different research methods such as
statistics, analysis and synthesis, modeling method, using references to clarify the
contents of the thesis. The secondary data was collected from the General Statistics
Office, Ministry of Industry and Trade and Foreign Investment Agency. The

theoretical framework contains groups of statistical indicators and econometric
models, used to assess the impacts of FDI capital on manufacturing industries on both
direct and indirect aspect.
5. Contributions of the thesis
5.1. Academic and theoretical contributions
The thesis has proved FDI capital impacts on the manufacturing industries on both
aspects of direct and indirect. Direct impacts includes: (1) The impact on total capital;
(2) The impact on the growth of the manufacturing industry; (3) The impact on
economic restructuring in the manufacturing industry; (4) The impact on promoting
export in manufacturing industry; (5) The impact on the contribution to the state
budget and job creating in the manufacturing industry; (6) The impact on the
formation of new industries in the manufacturing industry; (7) The impact on the
formation and development of supporting industries for the manufacturing industry.
Indirect impacts includes 4 transmission channels: (1) Competition channel by
putting competitive pressure on enterprises in the manufacturing industry (2)
Technology transfer and Research and Development; (3) Training and movement of
human resources; (4) Vertical and horizontal linkages among enterprises.


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5.2. The findings, new suggestions drawn from the results and surveys of research
FDI capital contributes to productivity growth, export promotion and economic
restructuring in the manufacturing industry in a reasonable way.
In terms of levels: Manufacturing industries at level 2 and 3, the medium and low-
tech manufacturing industries at level 3 are affected negatively by forward linkages
and backward linkages among FDI firms and domestic firms, which is shown through
output decline in these industries. Only the high-tech-3rd-level manufacturing
industry is the exception because thanks to better internal resources and capabilities,
domestic firms in this sector co-operate with FDI enterprises more efficiently than

enterprises in the medium-and-low-3rd-level industries.
The thesis has proposed some viewpoints of taking advantage of the positive effects
and mitigating the negative effects of FDI capital on manufacturing industries,
including some breakthrough points of view such as: (1) FDI capital is an important
strategic capital for manufacturing industries; (2) The manufacturing industry need to
consider modern technology transfer as one of the fundamental interests; (3) FDI
capital in the manufacturing industry must play an important role in the training of
human resources; (4) Do not distinguish between FDI firms and domestic enterprises;
(5) Appreciate the linkages between FDI firms and domestic enterprises; (6) The
industrial clusters supporting manufacturing industry have an important role to take
advantage of the positive impacts of FDI capital; (7) Need to respect both attracting
and using FDI capital effectively in manufacturing industries; (8) The FDI strategy of
manufacturing industry need to be put in relation with the socio-economic policies.
On those bases, the thesis proposes two groups of solutions:
(i) The first is related to taking advantage of the positive impacts of FDI capital
impact on the manufacturing industry in Vietnam. In which the breakpoints are: (1)
strengthening the efficient of linkages and joint venture between enterprises in the
manufacturing industry; (2) the development of industrial clusters supporting for the
manufacturing industry; (3) boosting research and development (R & D)
(ii) The second is related to taking measures for restricting the negative impacts of
FDI capital on the manufacturing industry in Vietnam. In which innovative solutions
are: (1) FDI policy to minimize attracting FDI capital into low-tech and low added
value industries; (2) improving the efficiency of technology transfer activities; (3) the
State support for the fledgling industries.

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6. Organization of the research
Besides the introduction, conclusion, appendices and reference lists, the structure of
the thesis is divided into four chapters as follows:

Chapter 1: Overview of scientific work related to thesis topic.
Chapter 2: Rationale for FDI capital and model for assessing the impacts of FDI
capital on the manufacturing industries.
Chapter 3: The current situations of FDI capital impacts on the manufacturing
industries in Vietnam.
Chapter 4: Viewpoints and solutions for exploring the positive impacts and mitigating
the negative impacts of FDI capital on the manufacturing industries in Vietnam.

Chapter 1
LITERATURE REVIEW
1.1. Literature review conducted in the world
In the world, science works studying on FDI in the manufacturing industry are very
diverse, abundant and on many different aspects.
To set premise for research, the thesis will present an overview of the main research
points relating to the relationship, the impacts of FDI on the manufacturing industry
on some main aspects such as imported technology, research and development, the
spillover effect, vertically associated linkages, technology selection, training and
salary for workers in the manufacturing industry in the developing countries.
- FDI in relation to imported technology and local research & development
India is a country of many studies on the relationship between imported technology
and local research & development (R&D). These works show that the relationship
between imported technology and local R&D is both supplement and alternative.
However, the findings also give many overlapping and unclear conclusion about this
relationship.



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- FDI and spillover effect on knowledge and productivity

Caves are one of the first people studying quantitatively on spillover effect. Since the
study of the Caves, there are many studies on the spillover effect of FDI in the
developing world, including Asia, Latin America. In the most general sense, almost
all studies agree with the spillover effect of FDI on the manufacturing industry.
However, the conclusions of these studies conflict each other because it is unclear
that whether the spillover effect of FDI is positive or negative. Spillover effect
depends on many factors such as the capacity of local businesses, the market share of
foreign investment, the policies of the State and enterprises and others, and the
studies have yet evaluated and compared the extent each factor to create spillover.
- FDI and the linkages of firms
The above studies agree that the relationship between domestic enterprises and
foreign enterprises will affect growth, productivity and export of enterprises.
However, gap in the above study has not determined at what degree, the linkage
proves effective and at what degree the linkage need to reach in order to take full
advantage of the benefits that FDI brings.
- FDI and exports of local manufacturing industries
The studies on evaluating the role of foreign ownership on the export of
manufacturing industry have given quite different results. To explain this, two
important points can be mentioned: export-oriented FDI plays an important role in
improving the export performance of the host country, and different countries have
different policies to attract FD, including export-oriented FDI. Although the
conclusions of the work are diverse on many different aspects, all show that each
country's policy on FDI have a large impact on exports, export promotion, export
expansion of that country.
- FDI with technology selection and local industry
All studies on the technology selection have concluded that technology affects
exports, the growth of the local industry. However, the level of impacts mainly
depends on the technology policy and the absorbsion ability in the industry of the
host country.
- FDI with labour and wages

The research on labor and wages give similar comments about the difference in the

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salaries between foreign firms and local ones. The distinction between unskilled
labors and expertise has provided a good basis for explaining this difference because
it helps to take human capital in the past into account.
1.2. Literature review conducted in Vietnam
Since the foreign investment law came into effect in 1988, studies on FDI began to
appear in Vietnam. In particular, from 2000 onward, the recent researches on FDI
increased rapidly both in terms of qualitative and quantitative research.
The studies related to evaluation of the impacts of FDI on the economic growth,
the productivity of the economic sectors
From 2000 onwards, Vietnam has witnessed the appearance of many quantitative
studies on assessing the impacts of FDI. Initially, they were the assessments of the
FDI impacts on the growth of the economy, then developed into more detailed studies
on the impacts of FDI on the economic sectors. After that, there appeared many more
detailed studies on the spillover effects of FDI such as assessing the impacts of FDI
on productivity, wages, technology transfer, level of linkages
The studies related to attracting and using FDI
The qualitative studies on FDI often research on attracting and using FDI. These
studies offer some solutions to attract FDI, such as creating a favorable investment
environment, preferential policies for foreign investors and giving recommendations
to the State about the innovation mechanism, decentralization of the licensing and
management of using FDI. Recently, to increase the reliability, the qualitative studies
often incorporate quantitative factors.
The studies on the direct impacts of FDI
These studies focus on the analysis of the impacts of FDI on economic restructuring,
export promotion, job creation and contribution to the state budget.
It can be said that, since 2005, the domestic studies on FDI have shown a decrease in

gap between qualitative and quantitative method by using combination of two
methods in research.
Through a review of the studies on FDI, we can see that there are many qualitative
and quantitative studies related to FDI in Vietnam. There also have been some
quantitative studies assessing the impacts of FDI on productivity and growth in the
manufacturing industry. However, the manufacturing industry has been and will be a

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key industrial sector of Vietnam, therefore, it is necessary to have a comprehensive
study on the impacts of FDI in this industry. This thesis will evaluate
comprehensively the impacts of FDI on manufacturing industry in Vietnam by using
both qualitative and quantitative analysis with assessing the impacts of FDI from two
angles of the direct and indirect.

CHAPTER 2
THEORETICAL FRAMEWORK OF FOREIGN DIRECT INVESTMENT
AND MODEL FOR ASSESSSING THE IMPACTS OF FOREIGN DIRECT
INVESTMENT CAPITAL ON THE MANUFACTURING INDUSTRIES
2.1. The Theories of foreign direct investment capital
Foreign direct investment (FDI) always closely links with foreign direct investment
capital. Therefore, in order to make the general theory of FDI, first of all, the thesis
will focus and clarify the theoretical issues about the concept of FDI.
2.1.1. The FDI concept
There are many definitions and aspects of FDI, but generally said that: FDI is the
process of moving the long-term capital from one country to another, foreign
investors invest a certain capital ratio and directly involve in the production and
business management in relation to the capital they invest in order to achieve long-
term benefits not only in terms of economic but also the political and socio-cultural
aspect.

2.1.2. Concept and characteristics of FDI capital
Because the concept of foreign direct investment is the movement of capital, it can be
suggested that FDI and FDI capital are linked together.
The conception of FDI capital: FDI is a kind of capital formed in the process of
foreign direct investment, it is also the capital moved from one country to another by
foreign investors. Foreign investors will be directly involved in managing business
and production related to this moving capital with the aim of obtain long-term
benefits not only in terms of economic aspect but also other related benefits
Characteristics of FDI capital: (1) FDI capital can be expressed in many different
forms such as cash, land, machinery, equipment, inventions, patents, trade secret,
trademark; (2) FDI capital is the long-term capital but a loan; (3) FDI capital has a

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minimum and maximum level that a foreign investor has to contribute; (4) FDI
capital link directly with the disposal of foreign investors; (5) The ratio of FDI capital
regulate dividing profits that foreign investors are entitled to; (6) FDI capital often
move into areas that have many priorities and advantages of the host country; (7) FDI
capital may affects the economy of host country positively or negatively; (8) FDI
capital is more common and profitable than indirect investment capital, it means that
FDI is also risker.
2.1.3. Some theories relating to FDI capital
The thesis cover some theories such as the theory of market power; the eclectic
theory; the marginal productivity theory of capital in order to clarify the motive to
invest abroad of countries and multinational firms. These theories will support
analyzing the impacts of FDI on the manufacturing industries.
2.2. The impacts of FDI capital on the manufacturing industries
This thesis examined the impacts of FDI on manufacturing industries in two
dimensions (direct and indirect) through channels to manufacturing industries.
2.2.1. The direct impacts of FDI on the manufacturing industries

2.2.1.1. The impact on the total investment capital in the manufacturing industry
FDI capital not only helps to supplement capital in the manufacturing industry but
also stimulate investment in this sector. This is very important for the manufacturing
industry in the developing countries like Vietnam.
2.2.1.2. The impact on the growth of the manufacturing industry
FDI capital is one of the inputs besides other resources like natural resources and
human resource. As an important input, the scale of FDI capital in manufacturing
industry will affect the scale of the output. In other words, FDI capital has a direct
impact on the growth of manufacturing industry.
2.2.1.3. The impact on economic restructuring in the manufacturing industry
FDI capital flows into the industry from other countries, multinational firms, different
sectors, which alters the overall capital structure in each industry and then alters
structure and economic restructuring in the manufacturing industry


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2.2.1.4. The impact on export promotion in the manufacturing industry
Output growth not only meets domestic demand but also contributes to promote
exports, this is the next step of development because when the manufacturing
industry meets domestic demand or takes advantage of comparative advantages to
obtain more and more profits. Furthermore, FDI enterprises with multiple
relationships with international partners in global market with the brand prestige will
be an important channel for promoting the exports of surplus products.
2.2.1.5. The impact on the contribution to the state budget and job creation for the
national economy
After receiving FDI capital, the manufacturing industry has continuously expanded
production scale, employment, thereby creating greater added value and more jobs
for the economy, increasing more revenues contributed to the state budget and
reducing the pressure on increasing the number of jobs in the economy.

2.2.1.6. Impact on the formation of new industries in the manufacturing industry
FDI flows moving from the developed countries to the developing countries are
characterized by often associated with technology, know-how and technology, better-
qualified workforce than developing countries. FDI capital has helped developing
countries to form new industries, develop and connect the fragmented industries in
the developing countries. Developing countries which make good use of FDI will
quickly complete the process of industrialization and modernization.
2.2.1.7. Impact on the formation and development of supporting industries for
manufacturing industry
FDI flows from developing countries, multinational firms into developing countries
with the aim of finding and increasing profits. They can only earn sustainable profits
when the industry in developing countries reaches a certain threshold of
manufacturing capabilities, production cooperation and competition in the
international market. Thus, FDI flows are not directed at their main production
industry but moving into the supporting industries in order to be able to search for
and exploit the maximum profit. This will help the developing countries have a great
opportunity to shape and develop the support industries.
2.2.2. The indirect impacts of FDI capital on the manufacturing industry
In terms of indirect impacts, FDI capital affects industry through the following

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channels:
2.2.2.1. Competitive channel through creating competitive pressure for firms in the
manufacturing industry
Positively speaking, the presence of FDI enterprises can stimulate local businesses
for innovating technology and creating new initiatives. Negatively speaking, FDI
enterprises with superior dominance have dominated the market of local businesses
and force them to cut down production scale and maintain production activities at
non-optimal scale, which make the productivity decrease.

2.2.2.2. Technology transfer and research and development
In order to use transferred technology effectively, both FDI and local businesses
should have to research and develop technologies, modify technologies to suit the
local environment. The research may take place abroad or locally, but common
purpose is to serve local production of technology-receiving country.
2.2.2.3. Investment in developing human resource and labor movement
FDI enterprises help in training highly-qualified workforce for local businesses.
Initially, human resources are trained to become professional and skilled ones. After
that, some will be moved to work for local businesses and so they become high-
quality human resources of local businesses.
2.2.3.4. Linkages of firms
Horizontal linkages: Links between FDI firms and domestic firms in the same
industry. For local businesses, they can increase market share, learn experiences and
expand business co-operation.
Vertical linkages: Links between FDI firms and domestic firms in different industry.
Forward linkage is a form of vertical linkage in case the FDI enterprises are the
providers for domestic enterprises. Backward linkage is a form of vertical linkage in
case FDI enterprises are the distributors of domestic enterprises. Local businesses can
also benefit from the increase in demand of their products, the expansion of
consumption market and thus they will increase production scale and achieve
economies of scale.



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2.3. The statistical indicator groups of direct impacts and model of assessing
indirect impacts of FDI capital on the manufacturing industries
2.3.1. The groups of statistical indicators of the FDI’s direct impacts on the
manufacturing industry

2.3.1.1. The statistical indicators reflecting the scope of FDI capital in the
manufacturing industry: they are the absolute indicators, calculated by money,
indicate the number of FDI projects, total value of FDI capital and average value of
FDI capital per project.
2.3.1.2. The statistical indicators reflecting the structure of FDI capital in the
industry: FDI structure is divided by the form of investment criteria, investment
sectors, economic sectors, economic zones, investment partners.
2.3.1.3. The statistical indicators reflecting the effect of FDI capital on the
manufacturing industry: the proportion of gross output of the manufacturing industry
sponsored by FDI in total FDI capital; the proportion of export value of FDI sector
to the realized capital in the manufacturing industry; the proportion of contribution
to the state budget of FDI sector to the realized capital in the manufacturing industry.
2.3.1.4. The statistical indicators reflecting the impacts of FDI on the manufacturing
industry: promoting growth and economic restructuring and export.
2.3.2. The model of assessing the impacts of FDI on the manufacturing industry
To assess the impact of FDI on the manufacturing industry in both aspects of direct
and indirect, the thesis uses 4 groups of statistical indicators as described above and
applies econometric models of impacts of FDI capital. This will also be the basis to
use a combination of the two research methods of qualitative and quantitative in
assessing the impacts of FDI to the manufacturing industry.
Regression Model:
1 2 3 4 5
jt jt jt jt jt jt jt
Y K L horizontal Backward Forw
α β β β β β ε
= + + + + + +

1 2 3 4 5
ln ln
jt jt jt jt jt jt jt

LnY K L horizontal Backward Forw
α β β β β β ε
= + + + + + +

Yjt: Output of industry j in year t, Kjt: Capital of industry j in year t; Ljt: Labor of
industry j in year t.
Horizontaljt: horizontal linkages between domestic firms and FDI firms of industry j
in year t, it shows the relationship between FDI firms and domestic firms in the same
(2.1)
(2.2)

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industry j.
Backwardjt: Backward linkages between domestic firms and FDI firms of industry j
in year t, in this case FDI enterprises are downstream buyers of domestic enterprises.
The increase in backward variable shows that domestic suppliers are involved more
in the production and business activites of FDI enterprises.
Forwardjt: Forward linkages between domestic firms and FDI firms of industry j in
year t, in this case FDI firms are upstream suppliers to domestic firms. Thus, the
value of vertical linkage variable increases in case the output of foreign firms and
the proportion of intermediate products that foreign firms supply to domestic firms
increased.
2.3. The factors affecting the impacts of FDI capital on the manufacturing
industries
(1) the investment environment; (2) the strategy for developing the manufacturing
industry; (3) the characteristics of the manufacturing industry; (4) the characteristics
of international investors and (5) the characteristic of movements of FDI inflows.
CHAPTER 3
THE CURRENT SITUATIONS OF FOREIGN DIRECT INVESTMENT

CAPITAL IMPACTS ON THE MANUFACTURING INDUSTRIES IN
VIETNAM
3.1. Overview of the manufacturing industry in Vietnam
3.1.1. The manufacturing industry in Vietnam
“Manufacturing industry” is the term commonly used to refer to the processing and
fabricating industries. By this means, the manufacturing industry in Vietnam includes
24 industrial sectors; each is encoded by two numbers according to the sub-sector
panel of the General Statistics Office (GSO).
Food products and beverages; tobacco products; textiles; etc; tanning and dressing
leather; wood and wood products; paper and paper products; publishing, printing etc;
refined petroleum etc; chemical products; rubber and plastic products; non-metallic
mineral products; basic metals; fabricated metal products (except machinery and
equipment); machinery (incl. Office electrical; vehicles; transport equipment;
furniture; other manufacturing; repairing, maintaining and installing of machinery
and equipment.

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3.1.2. The role of the manufacturing industry in the economy
Compared to the whole economy, the number of employees working in the
manufacturing industry always accounts for over 15%, especially nearly 20% in some
periods. Manufacturing industries account for nearly 50% of the number of
enterprises. Compared to the entire industry, the proportion of employees and
enterprises is always so far the greatest at over 90%.
3.1.3. The role of the manufacturing industry in industry sector
The contribution of the manufacturing sector in the industry tends to increase during
the period from 2008 to 2013 and always accounts for over 80%. Until 2013, this
proportion had reached a high of 88.23%. The growth rate of gross output in the
manufacturing sector is always higher than the growth rate of the manufacturing
industry’s contribution to GDP.

3.1.4. The role of the manufacturing industry in exports
From 2008 to 2013, the proportion of processed and refined products always stands at
above 50% of Vietnam export structure classified according to the SITC, in 2012 and
2013, this ratio turns respectively 69% and 70%; light industry and handicraft always
account for over 75%, by 2013 the proportion has reached a peak at 82.4%.
3.2. Foreign direct investment in the manufacturing industry in Vietnam
In this section, the thesis will analyze and gather statistics on the attraction of FDI
into the Vietnam manufacturing industry. This is the basis for the assessment of the
FDI impacts on the manufacturing industry.
3.2.1. Attracting FDI into Vietnam
By 15/12/2013, the manufacturing industry has attracted the largest FDI capital with
8620 projects equivalent to 122.71 billion US dollars, accounting for 53.32% of the
total registered FDI capital in Vietnam from 1988 to present.
3.2.2. Attracting FDI into the manufacturing industry
In this section, the thesis will go into a detailed analysis of attracting FDI into the
manufacturing industry based on timeline, forms, geographical areas and technology
degrees.
3.2.2.1. Foreign direct investment in the manufacturing industries in Vietnam over
the years

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During the period 2000-2013, the amount of registered FDI capital in the
manufacturing industry tends to increase, the proportion of FDI in the manufacturing
industry in total registered FDI capital in Vietnam was commonly at 60%. By 2012,
this proportion was over 70% and in particular in 2013 the percentage of registered
capital in the manufacturing industry reached a peak at 86.24%., which equivalent to
11.7 billion USD; 18.6 billion USD in 2012 and 2013 respectively. The number of
FDI projects in 2012 and 2013 are 561 and 662 respectively.
3.2.2.2. Foreign direct investment in Vietnam manufacturing industry in the form of

investment
In recent times, FDI inflows into the manufacturing industry are mostly in the
form of 100% foreign investment. By 31/12/2013, the proportion of projects and
registered capital of 100% foreign investment are 82,73% and 82,73%
respectively; the corresponding figures of joint ventures are 14.96% and 28.25%;
the remaining belongs to cooperation contracts, BOT, BT and BTO.
3.2.2.3. Foreign direct investment in the Vietnamese manufacturing industry in local
areas
Up to now, there are 25 provinces that have attracted over 1 billion USD of registered
FDI capital in the manufacturing industry, accounting for 93.48% of the total
registered FDI in this sector. FDI mainly concentrates in the two major cities of
HCMC and Hanoi, and the vicinity of these cities. The mountainous or remote
provinces, the amount of FDI capital flowing into the manufacturing industry is very
small.
3.2.2.4. The proportion of FDI capital in the Vietnamese manufacturing industry
according to the technological level of industry
The low-level manufacturing industries: In general, FDI inflows in these industries
tend to decrease over the period from 2000 to 2012. However, this proportion
remains high in some fabricating, food processing and textile industries.
The medium-level manufacturing industries: Beside the metal production industry,
only the industry of manufacturing products from rubber and plastic attracted high
and stable proportion of FDI capital over the period 2000-2012.
The high-level manufacturing industries: Manufacturing of electronic products,
computer and optical products are the sectors that have the largest proportion of
registered FDI capital compared with other high-level manufacturing industries. In

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2011 and 2012, this ratio was above 10% and remained highly stable in the following
years. The registered FDI proportion of remaining industries is still low, which is

inconsistent with the priority development of high-tech industry in the period of
industrialization and modernization. In 2012, 4 out of 8 high-level manufacturing
industries had the ratio of register FDI capital under 1%.
3.3. The current situations of the FDI capital impacts on the manufacturing
industry in Vietnam
3.3.1. The current situations of the direct impacts of FDI capital on the
manufacturing industries in Vietnam
3.3.1.1. The impact on the growth of the manufacturing industry
FDI sector has always contributed more than 30% of gross output of the
manufacturing industry. From 2010 up to now, this proportion has remained high at
40% or more.
3.3.1.2. The impact on economic restructuring in the manufacturing industry
The proportion of gross output in the FDI sector classified by the level in the period
from 2005 to 2011: despite being at low level, the food the manufacturing industry
accounts for the highest yields in the FDI sector, during the period of 2005-2012, this
ratio remained stable at the highest point (above 14%). Regarding sectors with the
ratio over 8%, the high-tech industry has two branches and the low-tech industry has
two branches, whereas the medium-level industry has no branch.
The proportion of gross output of the FDI sub-manufacturing industries in the total
gross output of these during the period from 2005 to 2011: In almost all the high-
level industries, the gross output ratio of the FDI sector are above 40%; not any
medium-level industries have the ratio over 50% ; considering the low-tech industries,
there are two branches that FDI gross output account for over 60% of the total, they are
the other the manufacturing industry and the leather and related products manufacturing.
In the remaining industries, this proportion is mainly below 40%.
3.3.1.3. The impact on export promotion in the manufacturing industry
The manufacturing industries with low-technological content such as textiles,
footwear and furniture, the FDI export proportion of these sectors in comparison with
export value is fairly high and in the range of 50% - 70%. This proportion of the
manufacturing industries with high-technological content such as electronics and

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electrical equipment is also very high - above 90% and even just under 100% in some
years.
3.3.1.4. The impact on additional investment capital in the manufacturing industry
According to the Foreign Investment Agency, FDI capital accounts for about 25% of
the total investment capital in the manufacturing industry for the period from 1988 to
2013. Besides, FDI capital stimulates the increase in investment in the manufacturing
industry; for example, the manufacture and assembly of motorcycles and spare parts.
FDI invested into this sector increased by 1.5 times, but domestic investment has
increased by 7.9 times during the same period.
3.3.1.5. The impact on the formation of new industries in the manufacturing industry
The formation and development of the automobile industry in Vietnam
By the end of 2009, there were 17 firms operating in the automotive assembly
industry in Vietnam. The annual gross output continuously grows from 18,000
vehicles in 2001 to 120,000 ones in 2009, within 9 years the output of Vietnamese
automobile industry had increased by 6.7 times. However, since 2010, auto
production has showed sign of a slowdown and a downward trend. In 2010, the
number of assembled autos was 112.3 thousand, which dropped to 108.2 thousand
units in 2011, and until 2012 only 99.2 thousand autos was assembled.
The formation and development of the electronic industry in Vietnam
With an annual average growth rate of 20-25%, the electronics industry has more
than 500 enterprises accounting for 1/3 of the FDI enterprises. The export value of
electronics industry was about $100 million in 1996 and in recent times, this figure
has increased significantly. According to statistics from the General Department of
Vietnam Customs, in the first 9 months of 2013, the export value of phones and
accessories reached $15.5 billion, increased 79.8% compared to 2012. Computers,
electronic products and components reached $7.7 billion, increased by 43.9%
compared to the same period in 2012.

Although there are about 500 enterprises in the electronics industry, the investment in
this sector still poses many drawbacks such as limited investment capital,
spontaneous, incoherent and unprofessional operation.
3.3.1.6. The impact on the formation and development of supporting industries in the
manufacturing industry

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The formation and development of the electronics supporting industry: Recently,
many major electronics manufacturers such as Samsung, Canon, Intel, Foxconn
undertook to invest in Vietnam. Most recently in 2009, Samsung had invested $670
million to conduct the first mobile phone manufacturing complex in Vietnam (Bac
Ninh) (later raised to $1.5 billion and $2.5 billion at present) and continuously
invested $2 billion to build the 2nd complex in Thai Nguyen. According to Samsung,
there are about 4 Korean firms that have signed commitments and they are building
the plants. In addition, about 10 other Korean satellite firms of Samsung are
promoting investment projects to build factories producing spare parts to supply to
Samsung.
The formation and development of the autos supporting industry
Typically, Toyota Vietnam has attempted to invite successfully other firms supplying
components owned by Toyota to invest in Vietnam as Denso, Toyota Boshoku Hai
Phong, Hai Phong Toyota Gosei and others to produce parts and at the same time
export auto parts to the whole world, the supplier has provided Toyota more than 300
diverse categories of details, including the normal details and the functional details
requiring high technology and quality.
3.3.1.7. The impact on the contribution to the state budget and creating jobs for the
economy of the manufacturing industry
The FDI enterprises play a huge role in creating jobs and contributing to the State
Budget. By 31/12/2013, the FDI sector had created 2.2 million jobs, about 70% of
this came from the Vietnamese manufacturing industry. In addition to solve job

problem, the FDI sector helps to increase the contribution to the State Budget of the
manufacturing industry. By 31/12/2013, this sector had contributed $19.5 billion to
the state budget, in which FDI-manufacturing industry accounted for about 50%.
3.3.2. The current situations of indirect impacts of FDI capital on the
manufacturing industries in Vietnam through the channels
3.3.2.1. Competition channels - creating pressure on domestic firms to improve
productivity
In the manufacturing industry, the joint venture local businesses are more productive
than the normal ones. The impact of FDI through competition channels is very clear
in the Vietnamese textile industry. For example, the Garco 10 Firm has invested
much for renovation, advanced technology and highly-skilled workers recruitment in

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order to convert the production of common garments to the manufacturing and
trading of products that are expensive but of higher quality.
3.3.2.2. The investment in developing human resources and labor movement
The 2011 Industrial Investment Report showed that about 11% of FDI enterprises
cooperating with domestic enterprises to improve the quality of such firms. Thus,
beside the goal of enhancing the quality of FDI enterprises, a larger proportion of
these enterprises set goals to improve the quality of domestic enterprises and
specially focus on training human resources.
3.3.2.3. The linkages between firms
According to the 2011 Industrial Investment Report, the proportion of input supply of
local businesses was 26.6%. This level is relatively low, in the developed countries; it
is averagely above 50% for all industries. In some specific industries, this ratio can be
up to 90%. Along with this conclusion, according to the Japanese External Trade
Organization (JETRO), the current rate of inputs materials and spare parts purchase
that Japanese firms found in Vietnam reach 28%, meanwhile in Indonesia, Thailand
and China, this rate is 43%, 53% and 61% respectively. The trending forward

linkages as well as backward linkages when domestic firms accounted for 20.8% of
sales of FDI firms while accounted for over 33% of total FDI’s customers.
3.3.2.4. The channel of technology transfer and research and development
The number of FDI projects that have technology transfer contracts accounts for a
small proportion, less than 7% of the total FDI projects being implemented
manufacturing business in Vietnam. In addition, only 5-6% FDI enterprises using
advanced technologies, 80% using medium technology and some using outdated
technology.
Enterprises in the manufacturing industry in FDI sector invest in R&D more than
domestic firms, especially in sectors with high technological level.
3.3.3. Applying the econometric model of assessing the impacts of FDI on the
manufacturing industries in Vietnam
3.3.3.1. Data description
In order to assess the impacts of FDI on the manufacturing industry, the business
dates surveyed in the period of 2003-2009 were aggregated and classified by the
categories of manufacturing industries level 2 and level 3. In particular, the industry

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level 2 consists of 23 branches and the industry level 3 consists of 59 branches.
3.3.3.2. Results of regression estimates by ordinary differential equations
The estimation for the 23 manufacturing industries level 2 in Vietnam, including 161
observations classified into 13 groups shows that:
The test result from the FE model shows that the coefficients of L, K are positive
and have highly statistical significance at 1%, which means when labor and
investment capital in the industries level 2 increases, the yield in these industries also
increases. Forward linkages variables (forw), backward linkages variables (back)
have negative coefficients and have high statistical significance at 1%, which reflects
the linkages between FDI firms and domestic enterprises in the industries level 2
makes the yield of these industries decline. Coefficient of horizontal linkages (Hori)

is positive but not statistically significant, there has been no evidence proving that the
presence of FDI firms in the industry level 2 increases the output of this sector.
The estimation result for the 59 manufacturing industries level 3, including 410
observations classified into 59 groups shows that:
In the sectors level 3, the coefficient of the variables L, K are positive and highly
statistically significant at 1%. The coefficient of Hori is positive but not statistically
significant. Similar to the sectors level 2, the coefficients of Backwards and forwards
variables are negative and statistically significant at 1% and 5%, which continuously
reflects the negative impact of the linkages between FDI and domestic firms in level
3 on output decrease.
The estimation result for the manufacturing industries level 3 classified by level
(high, medium and low)
The test results show that in the low-tech industries level 3, Forward and Backward
variables have negative coefficients and the statistical significance o 5%. The
linkages between FDI firms and domestic firms in the sectors level 3 make the output
of these industries decline. For the medium-tech industries level 3, the Back and Hori
variables have negative coefficients and highly statistical significance at 1%. The test
results are greatly different between the high-tech industries level 3 because the
backward and forward linkages variables are not statistically significant at 5%.
3.3.3.3. Summary of estimation results
The variables of labor (L) and capital (K) have positive coefficients and statistical
significance in both level 2 and level 3 sectors, reflecting capital and labor have a
positive impact on increasing the output of the manufacturing industry.

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The Horizongtal variable doesn’t have positive coefficient but no statistical
significance in the level 2 and level 3 sectors, there is any evidence proving that the
presence of foreign parties has positive impact on output increase in the
manufacturing industry.

The variables of Forward linkages (forw) and backward linkages (Back) have
negative coefficients and statistical significance for almost all the cases in the
industry level 2 and entire level 3. The coefficients of these variables indicate no
statistical significance in the high-qualified industries level 3. Thus, it can be
affirmed that forward linkages and backward linkages (vertical linkages) between
FDI firms and domestic firms have negative impacts on the output decline of the
manufacturing industry. This is due to the internal resources and capabilities of most
local firms are still weak, so they cannot effectively cooperate with FDI enterprises.
3.4. Overall assessment of the impacts of foreign direct investment on the
manufacturing industry in Vietnam
3.4.1. Achievements: (1) The gross output of the manufacturing industry has
increased; (2) Promoting export and economic restructuring in the manufacturing
industry; (3) Contributing to the formation and development of new industries; (4)
Improving the competitiveness of the manufacturing industry; (5) Contributing to
train skilled human resources; (6) Contributing to the technology transfer; (7)
Contributing to the research and development.
3.4.2. Weaknesses: (1) The impact of FDI on productivity and output of the
manufacturing industry is low; (2) The growth rate of the export value is still low; (3)
The supporting industries the manufacturing industry remain underdeveloped; (4)
Investment in research and development (R & D) of domestic enterprises in the
manufacturing industry are modest; (5) FDI cannot create tight and effective linkages
between enterprises in the manufacturing industry in Vietnam; (6) The transfer of
modern technology in FDI is still limited; (7) The competition effect tends to cause
negative impacts.
3.4.3. The causes of weaknesses: (1) FDI policy is inadequate; (2) The human
resources of local enterprises in the manufacturing industry is still insufficient in
quantity and poor in quality; (3)The industrial clusters supporting for the
manufacturing industry are underperforming capabilities; (4) The potential of
enterprises in the manufacturing industry is still weak; (5) The technological level is
still low; (6) The infrastructure serving the development of the manufacturing

industry are asynchronous.

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CHAPTER 4
VIEWPOINTS, SOLUTIONS TO TAKING ADVANTAGE OF POSITIVE
IMPACTS AND MITIGATE NEGATIVE IMPACTS OF FOREIGN DIRECT
INVESTMENT CAPITAL ON THE MANUFACTURING INDUSTRIES IN
VIETNAM
4.1. International and internal context
4.1.1. International context
To clearly analyze the world context, the thesis analyzes the context of the
following international issues: (1)The trend of shifting global FDI flows; (2) The
trend of shifting FDI in industry and service; (3) The adjustments in the development
model of China and ASEAN.
4.1.2. Internal context
To clearly analyze of the internal context, the thesis analyzes the following
issues: (1) The economic development strategy until 2020; (2) Make the international
integration commitment; (3) Some of the internal factors of the economy
4.2. The viewpoints of utilize the positive impacts, mitigate the negative impact
of FDI on the manufacturing industry in Vietnam
(1) FDI is an important strategic capital for manufacturing industries; (2) The
manufacturing industry need to consider modern technology transfer as one of the
fundamental interests; (3) FDI in the manufacturing industry must play an important role
in the training of human resources; (4) Do not distinguish between FDI firms and
domestic enterprises; (5) Appreciate the linkages between FDI firms and domestic
enterprises; (6) The industrial clusters supporting manufacturing industry have an
important role to take advantage of the positive impacts of FDI; (7) Need to respect both
attracting and using FDI effectively in manufacturing industries; (8) The FDI strategy of

manufacturing industry need to be put in relation with the socio-economic policies.
4.3. The orientation and goals of attracting foreign direct investment into the
manufacturing industry in Vietnam
4.3.1. Strategic development of the manufacturing industry
- To focus on developing the potential manufacturing industries to compete in the
future.

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- To attract foreign direct investment to meet the requirements of industrialization
and modernization of the country.
- To implement technology import policy, should be seen as one of the strategic
policies to quickly obtain advanced and modern technology.
- To invest in developing human resources for the industry.
4.3.2. General orientation for attracting FDI
Based on the situational analysis of FDI in recent times, the internal and international
context in the future, FDI should be directed to the following directions: (1) Moving
slowly to appreciate the structure and quality of FDI; (2) Attracting low-carbon FDI
(FDI Green).
(3) Attracting and effectively exploiting FDI of modern technology; (4) Attracting
FDI to developing high-quality human resources; (5) Attracting FDI to strengthen
linkages with local businesses, connect and leverage the value chain.
4.3.3. The orientation of attracting foreign direct investment in the manufacturing
industry
Selectively develop, prioritize the development of products with competitive
advantages, thrive supporting industries for the manufacturing industry.
4.3.4. The goals of attracting foreign direct investment into the manufacturing
industry
To serving the renovation of growth model; to promote competitiveness, to produce
some stages using high technology in Vietnam, FDI should be responsible for widely

and deeply harmonious development of the manufacturing industry and the whole
economy.
4.4. The solutions for utilizing the positive impacts and mitigating the negative
impacts of foreign direct investment capital on the manufacturing industry in
Vietnam
4.4.1. The solutions for utilizing the positive impacts of foreign direct investment
capital on the manufacturing industry in Vietnam
4.4.1.1. Attracting FDI into the manufacturing industries with high technological
content and attracting MNCs/TNCs that have the potential of technology into the
manufacturing industry.

24

Need to attract FDI into the manufacturing industries with high technological content
such as oil refining, chemical, electronics and equipment producing industries. The
manufacturing industry in Vietnam should also attract the investment of MNCs firms.
4.4.1.2. Strengthening the efficient linkages and joint venture between firms in the
manufacturing industry
- Raise awareness of international production linkages
- Raise the technological level in a variety of methods, thereby facilitating
participating and expanding international relations.
- Select partners and form of relevant linkage.
4.4.1.3. Developing industrial clusters supporting for the manufacturing industry
First of all, there should be proper awareness about industrial clusters. Second, the
implementation of the industrial cluster development is as sequential as forming
industrial zones: building capacity for industrial parks, attracting major businesses
and the next is attracting more businesses involved. Third, when completely building
the capacity of industrial parks (infrastructure, human resources ), it is necessary to
have a clear incentive policy in order to attract major businesses; the majority of
these businesses are FDI enterprises. Fourth, in the next phase, Vietnamese

enterprises need to replace FDI to supply spare parts directly to the FDI assembly
enterprises.
4.4.1.4. Promoting research and development
In the immediate future, it is necessary to form and develop the technology market,
especially the type of technology and equipment markets; create mechanisms to
encourage the production base application of high-tech products.
State increases the capital and human resources support for enterprises in the
technological application, renewal, purchase and improvements. At the same time,
enterprises themselves should have to enhance additional capital for research and
development, increase the average expenditures of research and development.
4.4.1.5. The policy of developing human resources serving the manufacturing
industry
Based on the strategic development of the manufacturing industry, selecting the key
industries to focus on training human resources in terms of both technology and
business management knowledge. Focused and selective training and avoiding

25

training spread. Besides, the vocational training needs to incorporate effectively and
appropriately theoretical teaching and practical training in the factories. Need to train
more skilled engineers, having capabilities of business and production management.
To boost the training of middle level managers. International cooperation in training
is considered as the important and necessary measures in the development of human
resources. Increasing investment in science and technology and human resources
training are necessary.
4.4.1.6. The policy on supporting the development of science and technology
To boost technology and business incubators based on technology; implement
technology import policy; strengthen technological cooperation with foreign
countries.
4.4.1.7. Infrastructure improvement

Infrastructure building needs to focus on the two routes of economic development is
Hanoi - Hai Phong and Ho Chi Minh City - Vung Tau. Developing a comprehensive
system of sea, river, railway and air transport.
4.4.2. The solutions for mitigating the negative impacts of foreign direct investment
on the manufacturing industry in Vietnam
4.4.2.1. FDI policy needs to minimize attracting FDI into low-tech and low added
value sectors
Some low-tech industries need to restrict attracting FDI as the food processing,
tobacco, leather and imitation leather industry. The textile industry has been given
priority to attract FDI because this industry remains one of the industries contributing
to solve the employment for many workers in the economy. FDI policy needs to
focus on the new shifting trend of FDI inflows in the world today. Vietnam should
avoid outdated technology, environmental pollution technology from China.
4.4.2.2. Enhancing the efficiency of technology transfer
Ensuring favorable trading environment, rapidly forming technology markets;
developing some services for advisory, brokerage and technology trading, expertise,
technology valuation; developing legal services for intellectual property and other
legal services related to technology trading.
4.4.2.3. The support of the State to the fledgling industries
In order to help these industries enhance the competitiveness, survive and develop, it

26

is necessary for the government to support them in some areas such as marketing,
infrastructure, science and technology, information, finance, and human resources
training.
4.4.2.4. Supporting small and medium enterprises in the manufacturing industry
- Capital support
Therefore, the establishment of credit guarantee funds in order to connect banks with
the SMEs is essential. Establish policy bank for SMEs. Create favorable conditions

for SMEs by having suitable production space.
- Technology support
In terms of finance, the state budget should increase investment in developing
technological capability for enterprises. From the aspect of cooperation with foreign
investment firms in technology transfer, the state promotes technology transfer
activities from large corporations to SMEs. In terms of legal support in technology, it
is needed to develop standards of product quality oriented to approach to
international level as a basis for the development orientation.

27


Conclusions
In presence and future, the manufacturing industry is a key sector in the economy and
the industry in Vietnam. FDI capital is always viewed as the critical external
resources to promote the economic development in Vietnam. Therefore, the studies of
FDI in the manufacturing industry will be continued received a lot of attentions.
1. Overview of international and internal research related to FDI in the manufacturing
industries. Affirm the position and role of the manufacturing industry in Vietnam in
the whole economy and industry in Vietnam. Simultaneously analyzing and
presenting the reality of FDI attracting in the manufacturing industry in Vietnam with
updated and complete data.
2. The thesis has codified the general theory of FDI capital and built the theoretical
framework for analyzing the impacts of FDI on the manufacturing industry on both
direct and indirect aspects.
Direct impacts includes: (1) The impact on total capital; (2) The impact on the growth
of the manufacturing industry; (3) The impact on economic restructuring in the
manufacturing industry; (4) The impact on promoting export in manufacturing
industry; (5) The impact on the contribution to the state budget and job creating in the
manufacturing industry; (6) The impact on the formation of new industries in the

manufacturing industry; (7) The impact on the formation and development of
supporting industries for the manufacturing industry. Indirect impacts includes 4
transmission channels: (1) Competition channel by putting competitive pressure on
enterprises in the manufacturing industry (2) Technology transfer and Research and
Development; (3) Training and movement of human resources; (4) Vertical and
horizontal linkages among enterprises.
Simultaneously thesis has also developed the statistical norm groups and the
econometric model as a tool to analyze the impacts of direct and indirect FDI on the
manufacturing industry.
3. Analyzing and assessing the impacts of FDI on the manufacturing industry in
Vietnam on direct and indirect aspect. By analyzing the reality and test results of the
impacts of FDI, it is shown that FDI contributes to productivity growth, export
promotion and economic restructuring of the industry reasonably. On the sector
levels: Manufacturing industry level 2, level 3, the low and medium-tech
manufacturing industry level 3, forward linkages and backward linkages between FDI

28

firms and domestic firms have negative impacts on reducing the output of this sector.
Only high-qualified manufacturing industry is not negatively impacted.
4. The thesis points out and analyzes some limitations and causes of these limitations
of the FDT impacts on the manufacturing industry in Vietnam.
5. The thesis has clearly analyzed the influence of the national and international
context to FDI inflows into the manufacturing industry in Vietnam. At the same time,
the thesis also indicates development strategy, oriented to attract FDI into the
manufacturing industry in Vietnam.
6. The thesis gives viewpoints on utilizing the positive impacts and mitigating the
negative impacts of FDI on the manufacturing industry
7. The thesis also suggests a system of solutions: (1) The solutions on utilizing the
positive impacts and (2) The solutions on limiting the negative impacts of FDI on the

manufacturing industry in Vietnam.
In the course of the study, although the authors had difficulty in data and research
methods because this is the first study to systematically research the manufacturing
industry in Vietnam, with all efforts and the help from the mentor and the agency
involved, the thesis was completed to provide a useful tool for the managers, the
policy makers to apply to develop the manufacturing industry, contributing to the
industry development towards modernization in Vietnam.