Attracting foreign direct investment a critical analysis of vietnams performance

Attracting Foreign Direct Investment: A Critical Analysis of
Vietnam’s Performance

A thesis submitted in fulfilment of the requirements
for the degree of doctor of philosophy

Thanh Hoa Le
Master of Management, University of South Australia, Australia
Bachelor of Law, University of Law Ho Chi Minh City, Vietnam

School of Economics Finance and Marketing
College of Business
RMIT University

March 2015


DECLARATION

I certify that except where due acknowledgement has been made, the work is that of the
author alone; the work has not been submitted previously, in whole or in part, to qualify
for any other academic award; the content of the thesis is the result of work which has
been carried out since the official commencement date of the approved research
program; any editorial work, paid or unpaid, carried out by a third party is
acknowledged; and, ethics, procedures, and guidelines have been followed.
Thanh Hoa Le
March 17, 2015

ii

REFEREE REVIEWED PAPERS

During his PhD candidature, the researcher has written several papers that have been
referee reviewed and accepted for presentation at quality international conferences.
These papers are as follows:
Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: An analysis of
Vietnam’s

location

advantages

in

comparison

with

other

ASEAN

countries’, Proceedings of the 2014 International Conference on Business and
Information (BAI2014) in Osaka, Japan, Paper ID: 3308 (Best Paper Award).
Le, TH & Tam, OK 2014, ‘The flows of FDI to Vietnam: From policy to
implementation’, Proceedings of the 7th Vietnam Economists’ Annual Meeting
(VEAM2014) in Ho Chi Minh, Vietnam, Paper ID:70.
Le, TH & Tam, OK 2014, ‘Vietnam’s FDI location advantages: A sub-national level
analysis’, Proceedings of the 13th Eurasia Business and Economics Society (EBES)
Conference in Istanbul, Turkey, Paper ID: 194.

Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: A review of the
literature and conceptual framework’, Paper accepted for presentation at the 10th Asian
Business Research Conference in Bangkok, Thailand, Paper ID: 212.

Le, TH & Tam, OK 2014, ‘Attracting foreign direct investment: A critical analysis of
Vietnam’s policy framework’, Paper accepted for presentation at the 5th Kuala Lumpur
International Business, Economics and Law Conference in Kuala Lumpur, Malaysia,
Paper ID: 41.

iii


ACKNOWLEDGEMENTS

This thesis has been completed with professional and spiritual assistance from several
people. First and foremost, I am especially indebted to my senior supervisor, Professor
On Kit Tam, Deputy Pro Vice-Chancellor, Business International at RMIT University,
for his helpful and expert guidance throughout the course of this study. At the formative
stage of my research, he helped me to develop my research skills and design the
research plan, and encouraged and inspired me to become a good research scholar. He
was enthusiastic and provided me with practical feedback on my draft chapters. He has
been a very responsible and dedicated supervisor. I could not have finished this study
successfully without his careful supervision and support. I would also like to express
my profound gratitude to Dr Meg Sato, my associate supervisor. Her generous
guidance, support, and understanding have helped me tremendously during my PhD
journey.
Further, I wish to express my appreciation to Dr Cuong Tat Do at Ho Chi Minh
National Political Academy for his advice in selecting and developing the appropriate
econometric models for this study. I wish also to express my gratitude to Professor
Geoffrey Stokes, Professor Imad Moosa, Professor Lisa Farrell, and Dr Ashton De Silva

in the Business College, RMIT University, for their valuable comments on my
presentations in PhD seminar series. My special thanks go to Esther, Priyanka, and
Prue, who supported me through every stage of my research process. Something that I
have most cherished is my friendships with exceptional PhD candidates: Jane, Trang,
Tung, Hoa, Bac, Anh, Huong, Hai, Ha, Phuong, Hung, Nga, Duong, Tri, Nguyen,
George, Dian, Siti, Jack, Brad, Saiful, and Narjess, whom I met during my PhD journey.
Moreover, I express particular thanks to the 165 Vietnamese Project for funding my
PhD study. This is a great effort by the Vietnamese Communist Party for improving the
quality of leaders and managers in the political system to meet the requirements of the
period of accelerated industrialisation and modernisation of Vietnam. Especially, I
would like to express deep appreciation to Mr To Huy Rua, Mr Nguyen Van Quynh,
and Mr Nguyen Van Du as well as the 165 Vietnamese Project staff for supporting me
morally and financially during my study.
Furthermore, I extend my utmost thanks to my mother, Mrs Tuyet Thi Kim Nguyen; my
brother and brothers in-law, Tam Thanh Le, Hung Tai Le, and Thuc Vinh Pham; and
my sisters and sister in-law, Phung Thi Kim Le, Loan Thi Kim Le, and Oanh Thi
Nguyen. They greatly encouraged me during challenging moments in Australia. Lastly,
and most importantly, my biggest thanks go to my dearest friend Xinh Chi Vo for
giving me the encouragement, support, motivation, care, and understanding to complete
my PhD study.
iv


CONTENTS

DECLARATION ...................................................................................................... ii
REFEREE REVIEWED PAPERS ........................................................................... iii
ACKNOWLEDGEMENTS ...................................................................................... iv
CONTENTS .............................................................................................................. v
LIST OF CHARTS ..................................................................................................xii

LIST OF DIAGRAMS AND FIGURES .................................................................xiii
LIST OF TABLES .................................................................................................. xiv
ABSTRACT .............................................................................................................. 1
CHAPTER 1: INTRODUCTION ............................................................................... 3
1.1 RESEARCH BACKGROUND ........................................................................... 3
1.2 RESEARCH MOTIVATION AND SCOPE........................................................ 6
1.3 RESEARCH OBJECTIVES AND QUESTIONS ................................................ 8
1.4 RESEARCH DESIGN ........................................................................................ 9
1.5 RESEARCH CONTRIBUTIONS ..................................................................... 12
1.6 STRUCTURE OF THE THESIS ....................................................................... 12
CHAPTER 2: LITERATURE REVIEW ................................................................. 14
2.1 INTRODUCTION ............................................................................................ 14
2.2 DEFINITION OF FDI....................................................................................... 16
2.3 REVIEW OF FDI THEORIES .......................................................................... 19
2.3.1 Ownership Advantage theory ...................................................................... 22
2.3.2 Product Life Cycle theory ........................................................................... 24
2.3.3 Internalisation theory .................................................................................. 27
2.3.4 Dunning’s Eclectic theory ........................................................................... 29
2.4 STUDIES ON FDI POLICIES AND LOCATION FACTORS IN HOST
COUNTRIES........................................................................................................... 34

v


2.4.1 FDI inflow effects of government policies and the effectiveness of policies
on the utilisation of location factors ...................................................................... 35
2.4.2 Exchange rate uncertainty and FDI inflows ................................................. 38
2.4.3 Market size and FDI inflows ....................................................................... 40
2.4.4 Labour quality and FDI inflows .................................................................. 42
2.4.5 Labour cost and FDI inflows....................................................................... 44

2.4.6 Infrastructure development and FDI inflows ............................................... 46
2.4.7 Trade openness and FDI inflows ................................................................. 48
2.4.8 Inflation rates and FDI inflows ................................................................... 51
2.4.9 Special economic zones and FDI inflows .................................................... 52
2.4.10 Tax incentives and FDI inflows ................................................................ 54
2.5 CONCLUSION ................................................................................................. 62
CHAPTER 3: FDI INFLOWS IN THE GLOBALISATION ERA AND
EXPERIENCES OF SELECTED COUNTRIES IN ATTRACTING FDI ............ 63
3.1 INTRODUCTION ............................................................................................ 63
3.2 AN OVERVIEW OF FDI ................................................................................. 65
3.2.1 Trends in global FDI ................................................................................... 65
3.2.2 Impacts of FDI inflows on host countries .................................................... 69
3.2.3 The importance of FDI inflows to developing countries .............................. 74
3.3

DEVELOPING AND UTILISING POLICIES TO ATTRACT FDI IN

SELECTED COUNTRIES ...................................................................................... 75
3.3.1 Australia and its FDI policy development ................................................... 76
3.3.2 China and its FDI policy development ........................................................ 78
3.3.3 Malaysia and its FDI policy development ................................................... 81
3.4 CONCLUSION ................................................................................................. 83
CHAPTER 4: THE DOI MOI POLICY AND FDI INFLOWS IN VIETNAM ..... 85
4.1 INTRODUCTION ............................................................................................ 85
4.2 FDI POLICIES IN VIETNAM BEFORE THE DOI MOI POLICY ................... 87
4.2.1 FDI policies in Vietnam under French rule ................................................. 87
4.2.2 FDI policies in Vietnam in the period 1955-1975 ........................................ 88
vi

4.2.3 FDI policies in Vietnam after the country’s reunification, 1976-1985 ......... 90
4.3 FDI POLICIES IN VIETNAM UNDER THE DOI MOI POLICY .................... 95
4.3.1 Purposes of attracting FDI to Vietnam ...................................................... 100
4.3.2 The policy approach of Vietnam to FDI .................................................... 102
4.3.3 The Law on Foreign Investment ............................................................... 106
4.3.4 Other policies for attracting FDI inflows to Vietnam................................. 117
4.4 CONCLUSION ............................................................................................... 125
CHAPTER 5: AN ANALYSIS OF VIETNAM FDI POLICY FRAMEWORK ... 126
5.1 INTRODUCTION .......................................................................................... 126
5.2 THE AIM OF THE LAW ON FOREIGN INVESTMENT IN ATTRACTING
FDI INFLOWS TO VIETNAM UNDER THE DOI MOI POLICY........................ 128
5.2.1 The aim of the LFI 1987 in the period 1988–1992 .................................... 130
5.2.2 The aim of the 1992 amended LFI in the period 1993–1996...................... 133
5.2.3 The aim of the 1996 LFI in the period 1997–2000 .................................... 139
5.2.4 The aim of the 2000 amended LFI in the period 2001–2005...................... 144
5.2.5 The aim of the 2005 LI in the period from 2006 ........................................ 146
5.3 THE AIM OF OTHER POLICES FOR FDI INFLOWS TO VIETNAM ......... 153
5.3.1 Tax-incentive policies ............................................................................... 154
5.3.2 Exchange rate policies .............................................................................. 156
5.3.3 Labour policies ......................................................................................... 158
5.3.4 Open trade policies .................................................................................. 162
5.4 CONCLUSION ............................................................................................... 166
CHAPTER 6: THE PATTERNS OF FDI INFLOWS IN VIETNAM: ................. 167
FROM POLICY TO IMPLEMENTATION .......................................................... 167
6.1 INTRODUCTION .......................................................................................... 167
6.2 FDI INFLOWS BY PROVINCIAL DISTRIBUTION ..................................... 169
6.3 FDI INFLOWS BY SOURCE COUNTRY ..................................................... 178
6.4 FDI INFLOWS BY OWNERSHIP STRUCTURE .......................................... 186
6.5 FDI INFLOWS BY SECTORAL COMPOSITION ......................................... 189
vii

6.6 FDI INFLOWS IN SPECIAL ECONOMIC ZONES ....................................... 196
6.7 CONCLUSION ............................................................................................... 200
CHAPTER 7: VIETNAM FDI LOCATION FACTORS: A SUB-NATIONALLEVEL ANALYSIS ................................................................................................ 202
7.1 INTRODUCTION .......................................................................................... 202
7.2 SUB-NATIONAL FDI LOCATION PATTERNS IN THE LITERATURE .... 206
7.3 HYPOTHESIS DEVELOPMENT................................................................... 211
7.3.1 Market size and FDI inflows ..................................................................... 212
7.3.2 Labour cost and FDI inflows..................................................................... 213
7.3.3 Infrastructure development and FDI inflows ............................................. 214
7.3.4 Special economic zones and FDI inflows .................................................. 215
7.3.5 Ease of business establishment and FDI inflows ....................................... 216
7.3.6 Ease of land access and FDI inflows ......................................................... 217
7.3.7 Skilled labour force and FDI inflows ........................................................ 218
7.3.8 Business support services and FDI inflows ............................................... 218
7.4 DATA DESCRIPTION AND SOURCES ....................................................... 220
7.5 RESEARCH METHODOLOGY .................................................................... 225
7.5.1 Analytical approach .................................................................................. 225
7.5.2 Model specification .................................................................................. 226
7.5.3 Model estimation ...................................................................................... 228
7.5.4 Econometric software package.................................................................. 231
7.6 EMPIRICAL RESULTS AND DISCUSSION ................................................ 231
7.6.1 Economic conditions and FDI inflows ...................................................... 233
7.6.2 Local government policies and FDI inflows .............................................. 236
7.6.3 Geographical factors and FDI inflows....................................................... 238
7.7 CONCLUSION ............................................................................................... 240
CHAPTER 8: VIETNAM’S PERFORMANCE IN ATTRACTING FDI: A
COMPARATIVE ANALYSIS ................................................................................ 243
8.1 INTRODUCTION .......................................................................................... 243

viii


8.2 ASEAN FDI-LOCATION FACTORS IN THE LITERATURE ...................... 246
8.2.1 ASEAN countries ..................................................................................... 246
8.2.2 Literature on factors driving ASEAN FDI inflows .................................... 249
8.3 HYPOTHESIS DEVELOPMENT................................................................... 253
8.3.1 Trade openness and FDI inflows ............................................................... 253
8.3.2 Exchange rate uncertainty and FDI inflows ............................................... 254
8.3.3 Market size and FDI inflows ..................................................................... 255
8.3.4 Labour cost and FDI inflows..................................................................... 256
8.3.5 Infrastructure development and FDI inflows ............................................. 256
8.3.6 Price inflation and FDI inflows ................................................................. 257
8.3.7 Labour quality and FDI inflows ................................................................ 258
8.4 DATA DESCRIPTION AND SOURCES ....................................................... 258
8.5 RESEARCH METHODOLOGY .................................................................... 265
8.5.1 Analytical approach .................................................................................. 265
8.5.2 Model specification .................................................................................. 265
8.5.3 Model estimation ...................................................................................... 266
8.6 EMPIRICAL RESULTS AND DISCUSSION ................................................ 267
8.6.1 ASEAN FDI location factors: Results and discussion ............................... 268
8.6.2 The attractiveness of Vietnam as a FDI destination compared with other
ASEAN countries as a whole: Results and discussion ......................................... 277
8.7 CONCLUSION ............................................................................................... 281
CHAPTER 9: CONCLUSION ................................................................................ 283
9.1 INTRODUCTION .......................................................................................... 283
9.2 RESEARCH FINDINGS ................................................................................ 285
9.3 RESEARCH CONTRIBUTIONS ................................................................... 289
9.4 POLICY IMPLICATIONS ............................................................................. 290

9.5 RESEARCH LIMITATIONS AND FUTURE RESEARCH ........................... 291
REFERENCES ...................................................................................................... 293
APPENDICES ....................................................................................................... 337
ix


LIST OF ABBREVIATIONS AND ACRONYMS

AFTA

Asian Free Trade Area

AIA

ASEAN Investment Area

APEC

Pacific Economic Cooperation Forum

ASEAN

Association of South East Asian Nations

BCC

Business-Cooperation Contract

BIT

Bilateral Investment Treaty

BOT

Build-Operate-Transfer Contract

BRICS

Brazil, Russia, India, China and South America

BT

Build and Transfer Contract

BTA

Bilateral Trade Agreement

BTO

Build-Transfer-Operate Contract

CIEM

Central Institute for Economic Management

CPV

Communist Party of Vietnam

DNPC

Document of the National Party Congress of Vietnam

DRV

Democratic Republic of Vietnam

EPZs

Export Processing Zones

EU

European Union

FDI

Foreign Direct Investment

FIE

Foreign Invested Enterprise

GATS

General Agreement on Trade and Services

GATT

General Agreement on Tariffs and Trade

GDP

Gross Domestic Product

GSO

General Statistics Office of Vietnam

IZs

Industrial Zones

LFI

Law on Foreign Investment
x


M&A

Mergers and Acquisitions

MNC

Multinational Corporation

MNE

Multinational Enterprise

MPI

Ministry of Planning and Investment of Vietnam

NICs

Newly Industrialised Countries

OECD

Organisation for Economic Cooperation and Development

R&D

Research and Development

SBV

State Bank of Vietnam

SOE

State-Owned Enterprise

TRIMs

Trade-Related Investment Measures

TRIPs

Trade-Related Aspects of Intellectual Property and Rights

UK

United Kingdom

UN

United Nations

UNCTAD

United Nations Conference on Trade and Development

US

United States

USD

United States Dollar

USSR

Union of Soviet Socialist Republics

VCCI

Vietnam Chamber of Commerce and Industry

VPCI

Vietnamese Provincial Competitiveness Index

VNCI

Vietnam Competitiveness Initiative

VND

Vietnamese Dong

VSY

Vietnam Statistical Yearbook

WB

World Bank

WTO

World Trade Organisation

xi


LIST OF CHARTS

Chart 1.1 Global FDI Inflows in the Period 1986–2012 (Million USD).........................3
Chart 1.2 Trends in the Number of FDI Projects and FDI Inflows in Vietnam in the
Period 1988–2012 .........................................................................................................5
Chart 3.1 Global FDI Inflows in 1914 (Billion USD) ..................................................65
Chart 3.2 Global FDI Inflows in the Period 1986–2012 (Million USD).......................67
Chart 5.1

A Comparison between FDI Sector and Other Ownership Sectors in

Contributing to Vietnamese GDP in 1996 and 2000................................................... 143
Chart 6.1 The Top Provinces Attracting FDI in the Period 1988–2012...................... 172
Chart 6.2 Inward FDI to Provinces in Vietnam in 2001, 2006, 2009, and 2012 (Million
USD) ......................................................................................................................... 177
Chart 6.3 The 10 Largest FDI Source Countries in Terms of FDI Inflows in Vietnam in
the Period 1988–2012 ................................................................................................ 178
Chart 6.4 FDI Inflows in Vietnam by Source Countries in 2002, 2005, and 2012 ...... 181
Chart 6.5 Comparisons between FDI Inflows by Sectoral Composition in Vietnam in
1991 and 2000 ........................................................................................................... 192
Chart 6.6 FDI Inflows by Economic Activity in Vietnam in the Period 1988–2012... 193

xii


LIST OF DIAGRAMS AND FIGURES

Figure 1.1 Research Design for the Study ................................................................... 11
Figure 2.1 Structure of Chapter 2 ................................................................................ 15
Diagram 2.1 Product Life Cycle Theory ..................................................................... 25
Diagram 2.2 The Ownership, Location, and Internalisation (OLI) Paradigm ............... 32

Figure 3.1 Structure of Chapter 3 ................................................................................ 64
Figure 4.1 Structure of Chapter 4 ................................................................................ 86
Diagram 4.1 Procedures for Investment Certification................................................ 116
Figure 5.1 Structure of Chapter 5 .............................................................................. 128
Figure 6.1 Structure of Chapter 6 .............................................................................. 168
Figure 6.2 A Comparison of Regional Economic Conditions in Vietnam in 2012 ..... 170
Figure 6.4 FDI Projects with Significant Employment .............................................. 189
Figure 7.1 Structure of Chapter 7 .............................................................................. 205
Figure 7.2 Main Criteria for Assessing FDI Location Choice at the Provincial Level in
Vietnam .................................................................................................................... 210
Figure 7.3 A Summary of FDI Determinants at the Provincial Level in Vietnam ...... 240
Figure 8.1 Structure of Chapter 8 .............................................................................. 245
Figure 8.2 Criteria for Assessing of FDI Inflows at the National Level in Vietnam and
other ASEAN Countries ............................................................................................ 253
Figure 8.4 A Summary of Findings on FDI Location Factors at the National Level in
the ASEAN Region ................................................................................................... 276

xiii


LIST OF TABLES

Table 2.1 Definitions of FDI .......................................................................................17
Table 2.2 Theoretical Frameworks of FDI ..................................................................19
Table 2.3 Main Findings from Selected Empirical Studies on FDI Government Policies
and Location Factors ...................................................................................................57
Table 3.1 Global FDI Inflows to Developing Countries in the First Seven Decades of
the Twentieth Century (Billion USD) ..........................................................................68
Table 4.1 Development Index of Vietnam after the Country’s Reunification, 1976–
1985 ............................................................................................................................92

Table 4.2 Vietnam’s Foreign Trade in the Period 1976–1986 (Million USD) .............94
Table 4.3 Average Percentage Growth Rate of Productivity in Vietnam, 1976–1985 ..95
Table 4.4 Main Indicators under the Doi Moi Economic Policy Process .....................96
Table 4.5

Comparative Indicators for Attracting FDI between Vietnam and its

Neighbouring Countries ..............................................................................................99
Table 4.6 Main Strengths and Weaknesses of the LFI 1987 ...................................... 108
Table 4.7 Sectoral Classifications under the 2005 Law on Investment ...................... 112
Table 4.8 Procedures Required for Types of Projects under the LI 2005 ................... 113
Table 4.9 Selected Agreements on Trade and Investment of Vietnam and its Partners
.................................................................................................................................. 120
Table 5.1 Inward FDI Related to the Amendments of the Law on Foreign Investment
over the Last Two Decades........................................................................................ 127
Table 5.2 Export Performance in the Period 1988–1995 (Million USD).................... 135
Table 5.3 The Sectoral Composition of the Exports in Vietnam in the Period 1988–
1995 .......................................................................................................................... 136
Table 5.4 The Development of FDI Projects and FDI Inflows in the Period 1988–1996
(Million USD) ........................................................................................................... 138
Table 5.5 FDI Inflows by Source Countries in Vietnam by Percentage in the Period
1991–1995 ................................................................................................................ 139
xiv


Table 5.6 Gross Domestic Product of Vietnam in the Period 1996–2000 .................. 142
Table 5.7 FDI Projects and FDI inflows in the Period 1996–2000 (Million USD) ..... 143
Table 5.8 FDI Inflows by Main Source Nations during the Period 2001–2005 .......... 146
Table 5.9 The Development of FDI Projects and FDI Flows in Vietnam in the Period
1988–2012 ................................................................................................................ 149

Table 5.10 Number of Procedures Required to Start a Business in ASEAN Countries
.................................................................................................................................. 151
Table 5.11 The Trading Band for USD and VND Exchange Transactions in the Period
1998–2012 ................................................................................................................ 157
Table 6.1 A Comparison of Some Economic Conditions of Selected Provinces in the
Period 2008–2012 ..................................................................................................... 173
Table 6.2 The Top 10 Source Nations by FDI Projects and FDI in Vietnam in the
Period 1988–2012 ..................................................................................................... 179
Table 6.3 FDI Inflows in Vietnam by Source Countries from 2001 to 2012 (Million
USD) ......................................................................................................................... 184
Table 6.4 Sectoral Compositions of FDI Inflows to Vietnam in the Period 1988–2000
.................................................................................................................................. 191
Table 6.5 FDI Inflows by Sectoral Compositions, Cumulative as at End of 2012 ...... 195
Table 6.6 Number of Special Economic Zones in Vietnam by the End of 2010 ......... 199
Table 7.2 Variables and Data Sources for this Study ................................................. 222
Table 7.3 A Summary of Descriptive Statistics of the Study ..................................... 223
Table 7.4 Correlation Matrix of the Variables of the Study ....................................... 224
Table 7.5 Results of FDI and Location Factors at the Provincial Level in Vietnam ... 232
Table 7.6 Hypotheses and Findings on FDI Factors at the Provincial Level in Vietnam
.................................................................................................................................. 239
Table 8.1 A Comparison between Vietnam and other ASEAN Countries in Attracting
FDI Inflows over the Past Two Decades (Million USD) ............................................ 247
Table 8.2 A Comparison between ASEAN and other Regions in Attracting FDI Inflows
over the Past Decade (Million USD) .......................................................................... 249
Table 8.3 Variables for FDI Location Choice in ASEAN Countries in the Literature 251
xv


Table 8.4 Variables and Data Sources for this Study ................................................. 261
Table 8.5 A Summary of Descriptive Statistics of This Study ................................... 263

Table 8.6 Correlation Matrix of the Variables of This Study ..................................... 264
Table 8.7 Results of FDI Location Factor Impact across ASEAN Countries ............. 268
Table 8.8 Hypotheses and Findings: FDI Location Factors across ASEAN Countries
.................................................................................................................................. 276
Table 8.9 Results of Vietnam’s FDI Location Factors Compared with Other ASEAN
Countries as a Whole ................................................................................................. 277

xvi


ABSTRACT
Developing government policies and a business environment aimed at boosting foreign
direct investment (FDI) and attaining a certain pattern and quality of FDI inflows has
not always produced the desired outcomes. In a developing and transition economy such
as Vietnam, where government resources are limited and the setting of FDI-related
policies often involves public investment or tax concessions, the question of the efficacy
of such policies is not a trivial matter. This thesis aims to provide robust evidence-based
analysis and explanations to uncover what drives FDI inflows in Vietnam. It analyses
and assesses the effectiveness of Vietnam’s policies and location factors in attracting
FDI to a country which had practically no FDI inflow prior to the launch of its
economic reform in the mid-1980s.
In addressing the key research question of how well Vietnam has performed in
attracting FDI, this study examines FDI location factors at both provincial and national
levels to provide a comprehensive understanding of Vietnam’s performance as a FDI
destination. The findings of this study reveal that economic factors and commercial
imperatives are more powerful than the investment incentives offered by the
Vietnamese government in attracting FDI. At the provincial level, market size,
infrastructure development, special economic zones, and international sea ports are
found to be the key drivers in attracting FDI; at the national level, the driving FDI
factors are market size, trade openness, labour quality, and exchange rate uncertainty.

Although Vietnam’s effort to develop its policy framework and to introduce policies has
been important in attracting FDI inflows, the outcomes are not always satisfactory from
the perspective of the government’s developmental goals. This is because Vietnam does
not have the appropriate economic conditions and capacity to support the government
policies to attract the desired FDI composition and quality. Although Vietnam has
improved its economic environment to attract inward FDI since the country’s economic
reform, as a member of ASEAN, its economic conditions and investment environment
are, on average, weaker than those of the nine other members.
This research makes an original contribution to the validation of some major elements
of FDI theories, while at the same time providing new evidence and insights for the
future development of FDI policies in Vietnam. Based on the findings in this research, it
may be more productive for government policies to increase the focus on economic
reform and development to improve the competitiveness of the country’s FDI location
advantages.

1


2


CHAPTER 1:
INTRODUCTION

1.1 RESEARCH BACKGROUND
In recent decades, rising foreign direct investment (FDI) (Chart 1.1) has been a major
part of the trend of globalisation. FDI has become a significant competitive strategy for
multinational enterprises. Host country governments at the same time have considered
FDI inflows as a crucial component of the development of their economies because
inward FDI is expected to bring not only capital, but also finished products, materials,

components, new technology and, equally important, intangible assets such as
knowledge about management, production processes, distribution channels, and markets
(Dunning 1993, 1994, 2006; Moosa 2002). Given these expected benefits of inward
FDI, almost all nations, especially developing ones, compete intensely for FDI and
undertake a variety of strategies to attract FDI. In particular, they often try to improve
their attractiveness as a destination for FDI by introducing government policies and
initiating special conditions. The aim is to create a favourable legal and business
environment to attract not only FDI volume, but also the desired FDI composition and
quality.
Chart 1.1 Global FDI Inflows in the Period 1986–2012 (Million USD)

(Sources: UNCTAD 1994, 2003, 2007, 2013)

3


Scholarly research argues that government policies can directly or indirectly affect
levels of FDI inflows (Brewer 1991; Williamson 1981). They play crucial roles not only
in attracting inward FDI, but in effectively utilising location factors in host countries
(Brewer 1993; Dunning & Narula 1996). Dunning (2001, 2006) and OECD (2006) state
that a successful FDI policy has to make the country an attractive location for foreign
investors, while at the same time assuring the conditions for foreign investors to benefit
most from their investment in a host economy. A study by Basile et al. (2008) reveals
that a government policy creating more favourable conditions for investments through
funding for training labour force, infrastructure development, and R&D activities can
contribute to success in attracting FDI inflows.
Although the quest for attracting FDI is not new, competition among countries in
attracting FDI inflows has continued to receive attention from economists, finance
scholars, and policy-makers. Oman (2000) claims that most developing countries have
used investment incentives to compete with their neighbours to attract FDI inflows;

Dobson and Chia (1997) argue that attracting FDI to individual nations is a positivesum game in which each nation can benefit from the success of its neighbouring
countries. In the competition to attract FDI within as well as among countries in Europe,
both regional policy grants and the removal of FDI restrictions have been used (Falk et
al. 2012; Wren & Jones 2011).
Similar to most countries in other regions throughout the world, competition to attract
FDI inflows to develop a country’s economy has been a significant issue in almost all
ASEAN countries. To compete successfully, most ASEAN countries have adopted
policy reforms. For instance, since the 1980s, in the ASEAN countries of Singapore,
Indonesia, Malaysia, the Philippines, and Thailand, governments have spearheaded
corporate regulation reforms and economic restructuring. Since then, and especially
after the Asian financial crisis of 1997–1998, economic reforms have progressed in
Cambodia, Laos, and Myanmar. Through reforms, governments are accelerating
changes in the private sector, providing incentives to new entrepreneurs, and creating
new opportunities for foreign investors to help fuel ASEAN growth for the future. Chia
(1999) argues that the success of an ASEAN country in attracting FDI can be attributed
to a combination of factors: political, social, and economic stability; favourable factor
endowments; and development-oriented governments with sound macroeconomic
policies and pro-FDI policies.

4


Vietnam is no exception. To develop the country’s economy, Vietnam has made efforts
to shift towards a market-oriented economy and opened the door to FDI following the
country’s economic reform policy known as the Renovation (Doi Moi) policy which
was adopted in 1986. As Hill (2013, p. 114) argues, ‘Vietnam’s major reforms from the
mid-1980s are of particular interest since they have been successful’. To attract FDI to
meet the goal of the Doi Moi policy, Vietnam has made efforts to improve its legal
framework and to introduce policies on FDI (OECD 2009). Inflows of FDI to Vietnam
have increased from almost nil in the late 1980s to a total cumulative planned FDI of

USD229.9 billion and realised FDI of USD88.9 billion. The number of projects
increased similarly from less than 50 projects per year in the late 1980s to a total of
14,998 FDI projects in 2011 (see Chart 1.2). In line with the increases of FDI inflows,
GDP in Vietnam rose from USD15 billion in 1990 to USD91.8 billion in 2011 with an
average annual growth rate of 7 per cent (UNIDO & MPI 2012).
Chart 1.2 Trends in the Number of FDI Projects and
FDI Inflows in Vietnam in the Period 1988–2012

(Source: GSO 2013)
Vietnam’s FDI policies are aimed at broadening the geographical spread of FDI
inflows—especially to remote provinces and regions—as well as encouraging
investment in the targeted sectors of agriculture, human health, and education. The
outcomes, however, are not always satisfactory from the perspective of the
government’s developmental goals. There have been unbalanced provincial, regional,
and industrial sector distributions of FDI. Although FDI policies have aimed to
5


encourage investing in large and high-tech projects, most FDI projects remain small
scale with moderate usage of technology and originate mainly from one region—Asia.
There was also a considerable decline in FDI inflows in 2009 and 2011, and the gap
between planned and implemented FDI is still wide (see Chart 1.2).
Although Vietnam’s recent Law on Investment and other related policies have
attempted to create a consistent and favourable policy framework for attracting FDI,
they have exhibited several faults such as contradictions between the Law on
Investment and other laws, a short life of the law due to frequent changes, a lack of
transparency and explicit instructions for market access, and unclear phrasing of the
law. Moreover, the changing economic contexts at both national and international
levels, the rapidly changing global FDI scene, and the increasing competition from
other countries in attracting FDI inflows are posing considerable challenges for

Vietnam.

1.2 RESEARCH MOTIVATION AND SCOPE
The rising significance of FDI inflows for nations wishing to develop their economies
has generated a substantial literature on FDI. The literature on FDI includes a sizeable
body of work to explain the reasons for foreign investors engaging in FDI by answering
the three key questions of: (1) what are the motivations of an enterprise in deciding to
invest through FDI in other countries (Caves 1971; Hymer 1960; Vernon 1966, 1974,
1979), (2) why does an enterprise prefer FDI to other types of international business
activities such as exporting and licensing (Buckley & Casson 1976; Caves 1971; Coase
1937; Rugman 1996; Williamson 1975), and (3) what host-nation factors influence the
location choice of a foreign enterprise when investing internationally (Dunning 1973,
1993, 1988a, 2002, 2010). Based on different FDI theoretical frameworks but mainly on
Dunning’s (1993, 2001, 2006) Eclectic theory, a large number of empirical studies on
FDI inflows have been conducted (Banga 2003; Chandprapalert 2000; Deichman 2004;
Hogenbirk 2002; Galan & Gonzalez-Benito 2001; Zhang 2001).
Most empirical studies on FDI (Anwar & Nguyen 2008; Athukorala & Tran 2011; Fan
& Dickie 2000; Li & Liu 2005) have focused on investigating the relationship between
FDI inflows and their impact on economic development at the macroeconomic level;
there are few detailed or systematic studies on the effectiveness of government policies
in attracting FDI, and especially on the interplay of policy and location factors at the
sub-national level. There are even fewer studies on the actual effects of government
6


policies and location factors on FDI inflows in the ASEAN context, although
Vietnam—together with other ASEAN countries—has been actively promoting and
attracting FDI inflows. ASEAN is a regional trade group with which Vietnam mostly
trades. Singapore, Thailand, and Malaysia are three ASEAN member countries in the
top 10 trading partners of Vietnam (WB 2014). An investigation of how successful

Vietnam is in FDI attraction in comparison with those of other ASEAN countries is
relevant and important to provide at the practical disaggregated level of evidence-based
analysis of how Vietnam’s FDI location factor works.
With the increasing role of FDI in Vietnam’s economic development, there are studies
on the influence of FDI on various aspects of economic development, but there has been
scant detailed systematic study by either Vietnamese or Western researchers on the
impact of government policies and location factors on attracting FDI, especially across
provinces in Vietnam. There are very few detailed studies of the location factors in
attracting FDI inflows to Vietnam in comparison with other ASEAN countries. Most
FDI location-factor studies in Vietnam and ASEAN countries have been conducted in
short period of investigation and using limited variables to establish statistical
relationship between a particular variable and FDI inflows.
Government policies aimed at attaining certain patterns of FDI inflows have not always
produced the desired outcomes, and there is scant empirical research on the underlying
economic reasons that could provide better and more robust evidence-based theoretical
explanations with reference to Vietnam in particular. In an emerging and transition
economy such as Vietnam, where government resources are limited and the setting of
FDI-related policies often involve public investment or tax concessions, the question of
the cost and benefit, and the efficacy, of government policies is not a trivial matter.
There is, therefore, a research opportunity for undertaking systematic applied research
that can contribute to the validation of some major elements of FDI theories, while at
the same time providing evidence and insights on the performance of current policies
and on the future development of FDI policies in Vietnam.
An investigation of the evolution of FDI policies and their performance and location
factors at the provincial level in Vietnam provides important empirical evidence to help
us to understand the factors affecting FDI inflows across provinces in this host country.
This province-level analysis adds to the FDI literature, which is mainly focused on
investigating the relationship between FDI inflows and various location factors at the
national level, and which provides analytical insights, especially for policy-makers in
7

Vietnam who seek to achieve a more even spatial distribution of FDI inflows across
provinces. To provide a more comprehensive analysis of Vietnam’s FDI policy and
location factors in attracting FDI, as well as validating the key theoretical propositions,
an analysis of Vietnam’s performance vis-à-vis ASEAN is undertaken in this study.
This thesis, therefore, investigates the performance of Vietnam’s attraction of FDI by
analysing and assessing how effectively its policies and location factors at both national
and sub-national levels have performed to attract FDI to the economy. It consists of
three main analytical parts. It first critically analyses the policies used to attract FDI to
Vietnam since the introduction of 1986 Doi Moi policy, as well as investigating whether
the patterns of FDI inflows in Vietnam have achieved the aims and targets of the
Vietnamese government’s policies. Second, it empirically examines the location factors
that might explain the observed actual outcomes of FDI location choices across
provinces in Vietnam. For a comparative perspective and analysis, this study then
empirically examines the location factors of Vietnam in attracting FDI inflows by
testing their impacts on FDI inflows in comparison with those of other ASEAN
countries to ascertain whether Vietnam’s FDI location factors have made it an attractive
destination for FDI in the ASEAN region.

1.3 RESEARCH OBJECTIVES AND QUESTIONS
The aim of this thesis is to provide robust evidence-based analysis and explanations to
uncover what drives FDI inflows in Vietnam after having had practically no FDI inflow
prior to the launch of its economic reform in the mid-1980s. Specifically, the objectives
are:
1. to examine the patterns of FDI in Vietnam to evaluate to what extent they have
achieved the aims and targets of Vietnam’s government policies on FDI;
2. to identify and estimate location factors and their impact on FDI location
choices across provinces in Vietnam, in order to provide evidence-based
explanations for FDI location pattern at the provincial level;

3. to assess how Vietnam has performed in attracting FDI inflows in comparison
with other ASEAN countries.
To achieve these three objectives, the key research question raised in this thesis is: How
have Vietnam’s policies and location factors performed in the attraction of FDI
inflows?

8


In addressing this key research question, the following sub-questions are raised:
1. Have the patterns of FDI inflows achieved the aims and targets of Vietnam’s
government policies on FDI, and why?
2. What are the location factors determining FDI at the provincial level in
Vietnam? And to what extent, and why, have these factors influenced FDI
location distribution across provinces?
3. What are the FDI location factors of Vietnam at the national level? And have
these location factors made it an attractive destination for FDI location choices
in comparison with other ASEAN countries?

1.4 RESEARCH DESIGN
In answering these questions, this research is designed as follows. It first surveys the
relevant literature on FDI theories and previous empirical studies on the role of
government policies and location factors in attracting FDI inflows. This is done to
develop an analytical framework to set out key theoretical considerations in
constructing criteria for assessment of the performance of Vietnam’s attraction of FDI.
It then investigates the effectiveness of Vietnam’s policies and location factors in
attracting inward FDI to the country by empirically testing the effects of these factors
on FDI inflows using both province-level data in all 63 provinces in Vietnam, and
national-level data in all ASEAN countries.
Provincial performance of FDI attraction is investigated before the performance of FDI

attraction at the national level, as findings from the provincial-level analysis will
provide, at the practical disaggregated level, an evidence-based analysis of how
Vietnam’s FDI location factors work, as well as providing a basis and solid foundation
to help tell a full story on the performance of Vietnam’s attraction of FDI at the national
level from a comparative perspective against other countries, and to help validate some
key theoretical propositions.
The empirical work of this thesis consists of three main parts. The first part analyses
and assesses the policies which were used to attract FDI to Vietnam from when the
economic reform started in 1986, as well as investigating whether the patterns of FDI
inflows in Vietnam have achieved the aims and targets of Vietnam’s government
policies. The analysis in this part is mainly based on data for the period 1986 to 2012,
compiled from the Vietnam Statistical Yearbooks (VSY) published by the General
9