Determinants of provincial FDI in vietnam a cross section data analysis

INSTITUTE OF SOIAL STUDIES

UNIVERSITY OF ECONOMICS

THE HAGUE

HO CHI MINH CITY

THE NETHERLANDS

VIETNAM

VIETNAM-NETHERLANDS
PROGRAMME FOR M.AIN DEVELOPMENT ECONOMICS

DETERMINANTS OF PROVINCIAL FDI IN VIETNAM:
A CROSS SECTION DATA ANALYSIS
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
_

..

By

NGUYEN DAI HIEP

,_,
1•-.

Academic Supervisor:

Dr. NGUYEN VAN PHUC

HO CHI MINH CITY, JANUARY 2011

...
'

.

'


DECLARATION

I declare that 'Determinants of provincial FDI in Vietnam: A cross section data

analysis' is my own work, that it has not been submitted for any degree or
examination at any other University, and that all sources used or quoted are indicated
and knowledge by complete references.

January 3, 2011
NGUYEN DAI HIEP

2


ACKNOWLEDGMENTS

This thesis would never have been written if had not for the encouragement, support,

and assistance which I received from large number of people.

Specially, I would like to thank my supervisor, Dr. Nguyen Van Phuc, for his
encouragement, kindness, patience and valuable advices, which helped shape and
improve this thesis. I would also like to thank a few anonymous referees and added
explanatory variables who helped me finalize this work.

I would also like to sincerely thank Prof. Dr. Peter Calkins for his honest and valuable
advices from I begin to choose the topic and TRD completion. He is truly a noble
teacher, who soonest feedback and detail instruction during TRD establishing.

I would also like to thank science committee; all the members of the VietnameseDutch Project for MA programme in Development Economics, University of
Economics-HCMC, VietNam for their support and goodwill, and to all the lecturers,
and also to my friends in the class 15.Thank you a great time!
Last, I want to thank my family members, friends.
Any errors and omissions in this thesis are my sole responsibility.

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TABLE OF CONTENTS
Declaration ......................................................................................... 2
Acknowledgements ........................................................................... -... 3
Table of contents .................................................................................. 4
Table list ........................................................................................... 6
Abstract .............................................................................................. 7

Chapter 1: Introduction ........................................................................ 8

1.1 Problem Statement ........................................................................... 8
1.2 Research Objectives ........................................................................... 8
1.3 Research questions ........................................................................... 9
1.4 Organization of the study ..................................................................... 9
Chapter 2: Theoretical Consideration and Literature Review ........................ ll

2.1. The regional development and competitive regionalism theory ..................... 11
2.2 FDI theories and its applicability ......................................................... 11
2.2.1 Capital Theory ............................................................. _....... __ ...... 11

2.2.2 The International Trade Arguments ........................... _....................... .12
2.2.3 Market Failures and Industrial Organization .......................................... 13
2.2.4 The Eclectic Paradigm and International Investment Path ......................... .13
2.2.5 Agglomeration Effect. .................................................................... 14
2.3. Empirical studies on the determinants ofFDI. ......................................... 17
2.4. Geographical literature on Vietnam, China and ASEAN countries ................. l9
Chapter 3: Research Model, Data Collection and Variable Description ............ 24

3.1. Model Specification ......................................................................... 24
3.2 Data Collection ............................................................................... 25
3.3 Variables description ........................................................................ 26
Chapter 4: Empirical Estimation and Result ............................................. 34

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4.1 Correlation among explanatory variables ............................................... 34
4.2 Empirical estimation and result. ......................................................... .35

Chapter 5: Conclusion and Recommendation .......................................... .42

5.1 Conclusion and recommendation ........................................................ .42
5.2 Limitation .................................................................................... 43
References ........................................................................................ 45
Appendices ....................................................................................... 49

5


•

TABLE LIST
Table 2.1: Theory summary .................................................................. 15
Table 2.2: Empirical Study Reading ......................................................... 22
Table 3.1: The implementation value of provincial FDI ................................. .26
Table 3.2: FDI capital of top ten provinces .................................................. 26
Table 3.3: PCI result in 2009 .................................................................. 27
Table 4.1: Matrix of Correlation among explanatory variables ........................... 34
Table 4.2: Regression Results ................................................................. .36
Table 4.3: Top five rank of attracting FDI in Viet Nam ................................... .38
Table 4.4: The rank of infrastructure in 2009 ..................................................... 39

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ABSTRACT
FDI is of essential importance for achieving economic growth for developing
countries, especially for Vietnam, a country which has just opened more than twenty
years. There were too many researches about attracting FDI for developing countries.

However, there are still less researches related to regional competition of FDI.
Therefore, this paper examines the relationship between provincial FDI in VietNam
and explanatory variables base on variable set of PCI project in VietNam and other
traditional variables. The purpose of thesis is finding why some provinces and cities
such as Binh Duong, Dong Nai, Ba Ria Vung Tau, HCMC ... have had good FDI
capital and others have not so. From that the thesis suggests policy recommendation
for provinces and cities enhancing regional system for developing economics.
I had a literature review on regional development, attracting regional FDI and across
country, the estimated model was built with collected data and econometric analysis
result, I had demonstrated that our hypotheses are right or wrong. And then we
answered the research questions and objectives of this study. Using data collected by
the General Statistical Office of VietNam (GSO) and Provincial Competition Index
(PCI) project, estimation result shows that gross industrial output, legal institution and
infrastructures statistically significant to provincial FDI at the level 1% and 5%;
business support service had significance to provincial FDI at the level nearly 10%.

Key words: PCI, FDI impact, Provinces in VietNam, cross section data analysis.

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1.1 Problem Statement

The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of
the country perform better than others in terms of private sector dynamism, job
creation and economic growth and attracting investment (FDI and local). Using new
survey data from businesses that describe their perceptions of their local business
environments as well as credible and comparable data from official and other sources
regarding local conditions, the PCI rates provinces on a 100-point scale. In 2005, the
overall index is comprised of nine sub-indices that explain much of the variation in

performance across provinces in Vietnam. In 2006, new sub-indices were developed to
capture other aspects of Provincial Government efforts to enhance the business
environment.
However, we have not found any empirical studies to show that which are independent
variables of PCI and other traditional variables effect to provincial FDI and how to
impact to provincial FDI in VietNam.
I also did not find any analysis related to the independent variables of PCI whether
they have internal relation.
1.2 Research Objectives

The overall goal of this research is to investigate significant impacts of some
independent variables of PCI and other traditional variables which affect provincial
FDI inflows (Regional FDI) to help policy makers to focus on key points and the good
points to improve their investment environment (by Provinces) and with higher level
(by Government).

8


There exist some previous studies related to attracting FDI to developing countries;
most of these have found what factors ofthe country attracting FDI (across countries).
However, the objectives of the thesis are to identify:
(i)

Independent variables of PCI and other traditional variables are significant
impacts to FDI of Provinces in Vietnam; and

(ii)

Factors of PCI are highly correlated and we should revise PCI set.

(iii)

PCI determinants out of the ten original factors should be included in a new,
more significant subset base of PCI determinants.

(iv)

Interaction effects between PCI improvement and FDI growth.

1.3 Research questions

The thesis focus on studying the determinants of provincial FDI in Viet Nam base on
the independence variable set of the Provincial Competitiveness Index (PCI) and other
some traditional variables could be attracting FDI of provinces in VietNam.
We found economic theory, and empirical studies related to FDI (chapter 2), the
description of each independence variable which PCI project in Viet Nam use to
survey (chapter 3). We build research model (specification) and collect the data from
PCI project (www.pcivietnam.org) and statistical yearbook of Vietnam from General
Statistics Office (www.gso.gov.vn) to answer some research questions as following:
(l)Which independent variables of PCI and other traditional variables are significant
impacts to FDI of Provinces in Vietnam?
(2)Factors ofPCI are highly correlated and we should revise PCI set?
(3)Which PCI determinant out of the ten original factors should be included in a new,
more significant subset base of PCI determinants?
(4)Are interaction effects between PCI improvement and FDI growth?
1.4 Organization of the study

This thesis has five chapters, while the chapter one has presented as above explain the
purpose chose the theme. The rest of this thesis is organized as follows:

9


Chapter two briefly provides the regional development and FDI theory, and then we
also have summarized the empirical researches related to attracting FDI, specially
related to attracting FDI across to provinces of the country.
Chapter three is presented how to build the research model base on chapter two, the
way to choose the data. It is important to explain dependent and independent variables
which PCI project have used to survey yearly, also including some traditional
variables.
Chapter four is the econometric analysis and finding. The last chapter will be
conclusion and recommendation of the research.

10


2.1 The regional development and competitive regionalism theory

According to Balisacan and Hill (2007), detenninants of regional economic growth in
developing countries are geography and infrastructure, the capacity to connect to
global economy, the quality of local governance and institutions, and the quality of
human capital. Competition regionalism are low corruption, predictable and
transparent businesses environment, secure property rights flexible labor markets, a
competitive tax regime and efficiently supplied public goods.
To Porter (1990), the determinant of national competitive advantage, the nation's in
factors of production are skilled labor, infrastructure, the nature of home demand and
supporting industries. These are potential variables which they could affect to attract
FDI of countries as well of provinces.

2.2 FDI theories and its applicability
There are many reasons for FDI to occur. This, therefore, results in the wide range of
approaches on determinants of FDI. The capital theory takes into account the
consideration of profit rate and risk of firms. In contrast, international trade arguments
focus on substitute or complementary effects between FDI and export. Theories on
industrial organization see FDI as a tool to materialize firm's specific advantages. OLI
paradigm provides dynamic approaches to the determinants of FDI. Finally,
agglomeration economies try to investigate the spatial distribution ofFDI.
2.2.1 Capital Theory
2.2.1.1 Differential Rate of Return Theory

Until the 1950s, international direct investment was entirely explained within the
traditional theory of international capital movements. Like other forms of international

II


investment, FDI was seen as a response to differences in the rates of return on capital
between countries.
2.2.1.2 Portfolio Theory

The investors want to build an efficient portfolio of investment to avoid risk. The rates
of return of the different alternative investments are matched with an element of risk in
the choice between substitutable assets to build an efficient portfolio.
According to Dunning (1973), the reason why portfolio theory can only partially
explain direct foreign investment is that it ignores that "direct investment does not
involve changes in ownership. It does, however, involve the transmission of factor
inputs other than money capital, viz. entrepreneurship, technology, and management
. expertise, and is likely to be affected by the relative profitability of the use of these
resources in different countries as that of money capital".

2.2.1.3 Risk Diversification Theory

The theory argued that the international diversification of portfolios 1s a way of
reducing the firm's risk and hedging the risks.
Capital theory shows that some determinants related cost factors in PCI set have
potential effects to attracting FDI of provinces.
2.2.2 The International Trade Arguments
2.2.2.1 Mundell and the Heckscher-Ohlin Model

Mundell (1975) extended the basic model to show that trade and capital movements
can be substitute. He argued that the introduction of trade tariffs would induce a flow
of FDI towards the protected countries. This argument was the same with original
Heckscher-Ohlin model that restrictions on trade can be modified by international
movements of factors, namely capital, given the immobility of labor.
2.2.2.2 Kojima's "Macroeconomic Approach"

Kojima (1973) groups motives ofFDI into four categories (i) to seek natural resources
(ii) to take advantage of cheap labor cost in the host country (iii) to avoid tariff and

12


non-tariff barriers, and (iv) to take advantage of oligopolistic power owmg to
technology and knowledge advantage.
2.2.2.3 The Product Cycle Model

The product cycle model, developed by Vernon (1966), was a response to the stylized
fact that US firms invested abroad at a rapid rate. Vernon argues that, each product has
a life cycle and will go through three phases: innovation, maturity and standardization.
Domestic demand can be an incentive to innovate, while international demand

similarity stimulates exports. Specifically, the theory described that US endowment of
highly skilled labor and R&D resources, matched with sophisticated domestic demand,
facilitated the innovation among US firms.
2.2.3 Market Failures and Industrial Organization
2.2.3.1 The Hymer-Kindleberger hypothesis

Because foreign firms have necessarily some disadvantages vis-a-vis domestic firms
(e.g., knowledge of the market, communication), they must possess some firm-specific
advantages if they are to engage in foreign production. Hymer (1960) argues that, FDI
is not simply about the transfer of capital, it is about the international transfer of
proprietary rights and intangible assets-technology, business techniques, and skill
personnel's. He claimed that the existence of FDI is exclusively resulted from
international market imperfection for these assets. Therefore, the firms "internalizes or
supersedes" these market failures through direct investment (Hymer, 1960).
2.2.3.2 The Internalization Approach

Some transactions are more cost-saving if it is performed inside the firm than in the
market. Internalization will happen as far as the benefits, including those associated
with the barriers to new entrants is not outweighed by the cost of communication, coordination and control. FDI occur to capture this kind of benefits.
2.2.4 The Eclectic Paradigm and International Investment Path

Dunning ( 1979) suggests that a firm engage in FDI if three conditions are satisfied:

13


It possesses net ownership (0-) advantage vis-a-vis firms from other countries;

It is beneficial to internalize (I- advantage) those advantages rather than to use the
market to pass them to foreign firms;

There are some location (L-) advantages in using the firm's ownership advantages in a
foreign location rather than at home.
The IDP approach deals with both inward investment and outward investment of a
country. It suggests an association between development level of country and its
international investment position (measured by net outward investment per capita).
The basic hypothesis of this approach is that, there exists an interrelationship between
the flows of inward and outward investment and country's development. In other
words, as a country develops, the conditions, which domestic firm and foreign firms
face, will change.

2.2.5 Agglomeration Effect
Given rapid rate of globalization in the world today and implicit standardization of
strategies ofMNEs, it is argued that, location determinants ofFDI in host countries are
more important factor determining FDI. In addition, UNCTAD (2001) hypothesizes
that although traditional factors driving FDI may still be relevant; they are diminishing
in importance in the era of globalization, particularly for more dynamic and high-tech
industries. Instead, locations of FDI are seen to be increasingly based on the ability of
host countries to provide complementary skills, infrastructure, suppliers and
institutions (UNCTAD, 2001).
Increasing returns in production activities are needed if we want to explain economic
agglomerations without appealing to the attributes of physical geography.
Externalities from agglomeration are known to encompass specialized labor markets
and supplier networks as well as knowledge spillovers.

14


Table 2.1: Theory summary

1

The regional

modeling of the determinants of Geography,

development

regional

economic

developing

growth

countries

m Infrastructure, Legal
are Institutions, Quality of

geography and infrastructure, the human capital;
capacity to connect to global Transparent
economy, the quality of local businesses
governance and institutions, and environment;
the quality of human capital. Competitive tax
Competition regionalism are low regime and efficiently
corruption,

predictable

transparent

and supplied public goods.

businesses

environment,

secure

property

rights flexible labor markets, a
competitive

tax

regime

and

efficiently supplied public goods.

2

Competitive

The

advantage theory

competitive advantage, the nations infrastructure,

determinant

of

national Skilled labor,

in factors of production is skilled supporting industries.
labor, infrastructure, the nature of
home

demand

and

industries.

15

supporting


3

Capital Theory

Higher rate of return , leading to Factor cost: Entry
Cost, Informal

higher attracting FDI

charges, Time Costs of
Regulatory
Compliance
4

Mundell and the Trade tariffs would induce a flow Legal Institutions ,
Heckscher-Ohlin

Proactively of

ofFDI

Provincial Leadership

Model

5

Kojima's

Motiving

of

FDI

(i)

to

"Macroeconomic categories
Approach"

into

four Labor Training,

seek natural Access to Land, Legal

resources (ii) to take advantage of Institutions,
cheap labor cost in the host country Infrastructure
(iii) to avoid tariff and non-tariff
barriers, and (iv) to take advantage
of oligopolistic power

6

The

Product Domestic

Cycle Model

incentive

demand
to

international

can

be

innovate,
demand

stimulates exports.

an Market size, Labor

while Training, Business

similarity Support Service ,
Provincial Industry
Product

7

The

Hymer- FDI

IS

not simply about the Training labor, Legal

Kindle berger

transfer of capital, it is about the Institutions ,

hypothesis

international transfer of proprietary Proactivity of
rights

and

intangible

16

assets- Provincial Leadership,


teclmology, business techniques, Business Supp011
Service

and skill personnel's.
8

The

Some transactions are more cost- Factor cost: Entry

Internalization

saving if it is performed inside the Cost, Informal

Approach

firm

than

in

the

market. charges, Time Costs of

Internalization will happen as far Regulatory
as the benefits, including those Compliance, Labor
associated with the barriers to new Training
entrants is not outweighed by the
cost

of

communication,

co-

ordination and control. FDI occur
to capture this kind of benefits.

The purpose of this part, I want to find the basic theory related regional development

and attracting FDI. Although some above theory explains the factors which they attract
FDI in a country but we could review whether or not potential affects to provincial
FDI.
2.3 Empirical studies on the determinants of FDI
In general, the conventional empirical studies on determinants of FDI have used the
following ten variables suggested by Dunning and Narula (1996), namely: (i) natural
and created assets; (ii) capital intensity; (iii) market size and market growth; (iv)
infrastructural development; (v) labor cost and productivity; (vi) degree of openness;
(vii) government policies; (viii) political stability; (ix) profitability; (x) geographical
proximity.
Nonnemberg and Mendonya (2004) conducted an analysis on the determinants of
foreign direct investment in developing countries. The econometric model was based
on panel data analysis for 38 developing economies for the period 1975-2000. The

17

L

~·

.

·•

·- . ...

.

~

. • •.. -. J


result shows that one of the major determinants of FDI is education. This in tum
demonstrated that FDI in developing countries has been directed towards activities that
are knowledge-intensive. The coefficient of an economy's degree of openness was
found to be an important factor in attracting investments, and it proved to be highly
significant. Lastly, the au-thors conducted a causality test between FDI and GDP,
which showed that there was evidence of the GOP leading to FDI, but not vice versa.
Ali and Guo (2005) found that base on FDI determinant survey, the results show that
the market size is a major factor for FDI, labour costs and global integration are the
main factor impact to attracting FDI.
Sahoo (2006) conducted a panel cointegration estimation study on the South Asian
region with the main focus on five countries of the South Asian region (India,
Pakistan, Bangladesh, Sri Lanka and Nepal). The results of his analysis reveal that FDI
and all its potential determinants have a long-run equilibrium relationship. He finds
out that the major determinants of FDI in South Asia are market size, labor force
growth, infrastructure index and trade openness. The author concludes also that South
Asian countries need to maintain growth momentum to improve market size, frame
policies to make better use of their abundant labor forces, improve infrastructure
facilities and follow more open trade policies for attracting more FDI.
Kozlova and Smajlovic (2008) reported that the dependent variable in this model is
FDI inflows and the explanatory variables are: GDP per capita, investment freedom,
trade openness and infrastructure. The fact that the country is oil- or non oil-exporting
is represented by the dummy variable.
FDii = ai +

~1

(GDPperCap)i +

~2

(lnvestmentFreedom)i +

~3

(Infrastructure)i +

~4

(TradeOpenness)i + ~5 D (OilExp)i + ui
The general conclusion from the results demonstrates that the infrastructure and trade
openness are significantly related to FDI in the MENA (the Middle East and North
African) region.

18


Vijayakumar et al (20 10) described that other than Economic Stability and Growth
prospects (measured by inflation rate and Industrial production respectively), Trade
openness (measured by the ratio of total trade to GDP) all other factors seem to be the
potential determinants ofFDI inflows in BRICS countries.
Most of FDI researches focused to FDI of a country or some countries but they should
be reviewed to compare these potential explanation variables with independent
variables of provincial FDI.
2.4 Geographical literature on Vietnam, China and ASEAN countries

Xu et al (2009) reported that agglomeration economies, labor cost, infrastructures
greatly influence the spatial distribution ofFDI in China.

Dang (2008) described that based on the analyses in this report, several determinants
has motivated the FDI in China. First, some FDI investors are interested in the Chinese
domestic market. Second, investors would like to find ways to lower production costs,
typically cheap labor from China. Third, the quality of infrastructures contributes
much to FDI inflows. Good infrastructure helps firms to enhance theirs levels of
technology and reap economies of scale and scope. Fourth, the political environment is
an important factor in attracting FDI. In China, the political leadership imposed a
vision for the path of growth and development of the country.
Luo et al (2007) found that the first contribution lies in the finding of this study is a
reminder of the need to further explore the role of natural resources endowment in
stimulating local economic growth and attracting FDI in under-developed regions.
Secondly, instead of advocating China's low labor cost advantage, we found that
MNEs preferentially choose locations that are capable of supporting high value
activities rather than production sites requiring abundant low cost labour.
Havrylchyk and Poncet (2006) found that the positive impact of agglomeration, high
labor productivity and low labor costs, market size, infrastructure density, and market
reforms on FDI.

19


Na and Lightfoot (2006) emphasized that three of the variables have a statistically
significant relationship with FDI in the 30 different regions studied in China. The
relationship between a regions market demand and market size (GDP) was a
significant and positive factor in attracting FDI in 2002 and The higher the quality of
labor the more attractive a region was to FDI, The final variable that exhibited a
significant relationship with FDI was the degree of openness and level of reform in
each region.
Giang (2008) reported that there are four local factors including the remote location
from a commercial center of the country, under developed infrastructure, weak FDI

policy and unfavorable FDI environment in comparison with other regions in

Vi~t

Nam. FDI environment in NMPs (Mountainous Provinces) are not favorable as
demonstrated in the result of annual surveys done by VCCI and VNCI. NMPs except
Uto Cai are of less transparency provinces in

Vi~t

Nam. And six of them are of least

transparency provinces.
Anh and Thang (2007) found that several factors that are important in the location
decision by foreign direct investors in Vietnam such as the marker potential, the labour
factors, and infrastructure. They are unable to find evidence of the impact of local
government policy on FDI.
Anh et al (2007) studied empirical evaluation of incentives effectiveness in attracting
FDI. Implementing the DD estimation in two steps. First, they estimate the following
regression using the method of OLS:
Yst = bO + bl.Xst + b2.Breaks + gst (1)
In which Yst is the level of per capita FDI attracted to provinces in year t; Xst
represents the relevant determinants (or control variables) ofFDI attraction to province
s in year t; Breaks is a dummy (equal to 0 for non-breakers and 1 for breakers.) .The
second step is estimated the impact of the incentives on FDI attraction by using an

20


OLS regression in this two period panel. The regression has a very simple form as

follow:
gsi = b3 + b4.Timesi + usi (2)
Where Timesi represents a dummy (equal 0 for the period before the issuance of the
incentives, and 1 for the period after that). The results are the impact of labour costs
(or wages) appears to be different for registered and implemented FDI. While the
Coefficient of wages is positive and statistically significant in regression (2), it is
negative and statistically insignificant in regression (1 ). This may reflect the different
ways in which labour costs enter the calculation of foreign investors before and after
they actually invest. The negative sign of the wage coefficient in regression ( 1) implies
that, all else being equal, investors tend to choose the investment location where they
can economize on labour costs. Nevertheless, once the investment has already been
implemented, the investor no longer has the luxury of selecting the location with the
lowest labour cost. Moreover, his presence of FDI projects contributes to relatively
scarcer labour, higher productivity, and therefore, higher wages. This explains why the
coefficient of wage in regression (2) is positive.
Thu (2007) studied the determinants of the FDI in Vietnam, the specific empirical
model of the time-series determinants ofFDI inflows in Vietnam is:
LnFDit =

po + 81 lnGDPt + 82 lnGDPGt+ 83 lnTELt + 84 lnHKt + 85 lnOPENt + 86

lnEXCHANGEt + 87 Dl998+ 88ASEAN + ut. The results reveal that higher market
size and higher GDP growth are encouraging FDI inflows into Vietnam.
Ali and Ahmad (2008) reported that important factors in determining the location
relationship of FDI in Malaysia are the community, availability of raw materials and
fuel.

21

Table 2.2: Empirical Study Reading

1

Xu et al

Spatial Determinants of Inward agglomeration

economies,

(2009)

FDI in China: Evidence from labor cost, infrastructures
Provinces

2

David

FDI in China

Market size and growth,

(2008)

Economic Growth and Policy

Government incentive
policies; Cheap labor cost;
High investment return

3

4

Na and

Determinants of foreign direct

market

Lightfoot

investment at the regional

labor degree of openness

(2006)

level in China

Sahoo

Foreign Direct Investment in Market

(2006)

South Asia: Policy, Trends, growth, infrastructure index
Impact and Determinants

5

size

stze,

(GDP),quality

labor

force

and trade openness.

Lim

Determinants of the FDI and market size, economic

(2001)

growth: a summary of recent growth, macroeconomic
literature

stability, Infrastructure ,
regulation, economic barrier

6

Anh and

Foreign direct investment m the

Thang

Vietnam:

(2007)

analysis the determinants of infrastructure
spatial

marker

An overview and labour

distribution

provmces

22

across

potential,
factors,

the
and

7

8

Thu

Determinants of the FDI m market size; GDP growth

(2007)

Vietnam

Agiomirgi The determinants of foreign the marker size, the trained
anakis et direct investment: a panel data labour , and infrastructure
al (2006)

study for the oecd countries

Most of FDI researches focused to FDI of a country or some countries, there are some
researches from China related regional FDI. My thesis focus to provincial FDI in
Vietnam (regional FDI) base on independent variables of PCI set and other some
traditional variable.

23


3.1 Research Model

Base on Vietnam PCI project proposed general framework for determinants of
provincial competition index as follows:

PCiit= f(EC it. ALit. TAl it. TCRC it. IC it. PPL it. BSS it. LT it. Liit. INF it. uit) (1)
Where: EC-Entry Costs, AL-Access to Land , TAl-Transparency and Access to
Information , TCRC-Time Costs of Regulatory Compliance , IC_Informal Charges ,
PPL-Proactivity of Provincial Leadership ,BSS- Business Support Service ,LT- Labor
Training, LI-Legal Institutions, INF- infrastructure.
Base on empirical studies related to FDI, especially regional FDI, economic theory and

base on PCI survey as equation ( 1), the research question is
(i) Which independent variables of PCI and other traditional variables are significant
impacts to FDI of Provinces in Vietnam?,
The first regression model for this study is suggested as follow:
FDI it= a o +a 1 EC it+ a

2

ALit+ a

3

TAl it+ a

4

TCRC it+ as IC it+ a 6 PPL it+ a

1 BSS it +as LTit +a 9 LI it+ o.w IP u +an INF it+ o.n MS it

+

o.13 KEA it

+

u it

(2)

Where: IP-Industrial Product of province, MS-Market Size, KEA: northern and
southern key economic area KEA = 1, other provinces KEA=0
The OLS technique applies for the first regression model to answer for the first
research question
Base on economic theory and principle component analysis we expect to find
multicollinearity or significant interaction effects among some of these as following

24


explanation. Some independent variables can be dropped off to two group Cost Factors
and Province Policy
Where: CF: Cost Factor (including EC, TCRC, and IC), PP: Province Policies
(including AL, TAl PPL, BSS, LT, and LI). And it should be reviewed to add other
significant variables. This method is applied to answer for research question No.2 and
No.3.
The first regression model (2) for this study is a distribution determinants model of
total FDI in province; we use the logarithm of annual FDI of province as a dependent
variable in order to emphasize the growth rate of FDI:
Ln (FDI)

it =

fJJ + f32Ln (PC!)

Where, i and

t

it+

uit (3)

denote sample provinces, and time (year) respectively. !.! denotes

residuals.
To answer for research question No.4, The OLS technique also applies.
3.2 Data Collection
There are two types of panel data: Balanced versus non-balanced data
Balanced case: i = 1, 2, ... , N t = 1, 2, ... , T
Unbalanced case: i = 1, 2, ... , N t = 1, 2, ... , Ti
Or: t = tj 1, tj2 , ... , tjTi
Two limit cases are a "pure" cross section data with only one time period or a "pure"
Time-series data with only one individual
I collected the panel data (dependent and independent variables) from PCI project
(www.pcivietnam.org) and statistical yearbook of Vietnam from General Statistics
Office(www.gso.gov.vn) for all provinces in Vietnam in years 2006 to 2009 with 252
observations( 4 years x 63 provinces ) and have counted to cross section data by
getting the average value in four years (63 observations) .We only can get registered
FDI data of provinces in VietNam and use the weight ( 0.33) in three years (20072009) of the implementation value of provincial FDI as following:

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