Determinants of investorss satisfaction the case of FDI investors in long an province

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

--------------------------

LE QUOC THINH

DETERMINANTS OF INVESTORS’ SATISFACTION THE CASE OF FDI INVESTORS
IN LONG AN PROVINCE

MASTER OF BUSINESS ADMINISTRATION THESIS

HO CHI MINH CITY- 2012


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
--------------------------

LE QUOC THINH

DETERMINANTS OF INVESTORS’ SATISFACTION THE CASE OF FDI INVESTORS
IN LONG AN PROVINCE

Major:

Business Administration

Major code:

60.34.05

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: DR. DINH CONG KHAI

HO CHI MINH CITY- 2012


ACKNOWLEDGEMENT
First, I would like to express my gratitude and deepest appreciation to my research
supervisor, Dr. Dinh Cong Khai for his intensive support, valuable suggestions,
guidance and encouragement during the course of my dissertation.
Then, it is my very much gratitude to Mr. Nguyen Van Hoa – Long An Planning and
Investment Service for all the useful information and documents as well as the
recommendations he did kindly offered. Also, this research could not be done without
the enthusiastic participation of FDI enterprises in Long An who provided me with
valuable feedbacks and questionnaire answers. I especially express and thankfulness
to the following companies: Formosa Taffeta, Bourbon Ben Luc, Vietnam Australia,
Greenfeed, and Golden Bells who helpfully joined my interviews.
My sincere thanks are also to all of my classmates, my friends, and especially Mr
Dang Huu Phuc for his support and guidance.
Finally, I dedicate this study to my beloved family, my wife, and my little Papaya
who have encouraged and supported me during the time.
Ho Chi Minh City, November 22, 2011

Le Quoc Thinh

i

Abstract
Foreign Direct Investment (FDI) is playing important roles in today‟s global
integrated economy, especially for developing countries. This study examines
determinants of FDI Investors‟ satisfaction in the context of Long An province in
order to examine FDI theories in a certain circumstance as well as find out practical
reference for Long An province in their FDI attraction policy. The research combines
three phases: literature review, face to face interviews, and questionnaire surveys to
142 FDI enterprises doing business in Long An. Results of the research show that
market, labor, infrastructure, and investment policies are significant factors
determining foreign investors‟ decision in Long An. Besides, investors who possess
different characteristics also have different viewpoints towards the above mentioned
determinants. Finally, the study poses out some recommendations for both Long An
government for their policy establishment and FDI scholars for further researches on
this topic.
Keywords: Foreign Direct Investment, Investors’ satisfaction, Determinants of FDI,
Long An province, Dunning Eclectic Paradigm

ii


Table of Contents
Acknowledgement................................................................................................... i
Abstract ................................................................................................................... ii
Table of Contents .................................................................................................... iii
List of Tables .......................................................................................................... v
List of Charts and Models ....................................................................................... vi
CHAPTER 1: INTRODUCTION ......................................................................... 1
1.1 Theoretical background ..................................................................................... 1
1.2 Overview of FDI in Vietnam and Long An province ......................................... 3
1.2.1 FDI in Vietnam ......................................................................................... 3

1.2.2 FDI in Long An ......................................................................................... 4
1.3 Problem Statement and Research Objectives ..................................................... 6
1.4 Research Method and Structure ......................................................................... 8
CHAPTER 2: LITERATURE REVIEW ............................................................. 10
2.1. Review of Determinant of FDI Studies ............................................................. 10
2.2. Dunning‟s Eclectic Paradigm and Determinants of FDI ................................... 15
2.3. Determinants of FDI in Developing Countries .................................................. 18
2.4. Investors‟ satisfaction ....................................................................................... 23
CHAPTER 3: METHODOLOGY ........................................................................ 24
3.1 Qualitative Research .......................................................................................... 24
3.1.1 Research Design........................................................................................ 24
3.1. 2 Research Results ...................................................................................... 25
3.2 Quantitative Research ........................................................................................ 27
3.2.1 Population and Sampling........................................................................... 27
iii


3.2.2 Data Collection Process............................................................................. 28
3.2.3 Measurement ............................................................................................. 29
3.2.4 Pilot Test ................................................................................................... 32
CHAPTER 4: RESEARCH RESULTS AND FINDINGS DISCUSSION .......... 34
4.1 Research Results ............................................................................................... 34
4.1.1 Descriptive Statistic of Sample .................................................................. 34
4.1.2 Exploratory Factor Analysis (EFA) ........................................................... 35
4.1.3 Reliability of the questionnaire .................................................................. 39
4.1.4 Research Model ........................................................................................ 40
4.1.5 Research Hypothesis ................................................................................. 42
4.1.6 Regression of Analysis – Determinants of FDI .......................................... 42
4.1.7 Normal Distribution Test........................................................................... 45
4.1.8 Determinants of FDI Investors‟ satisfaction and Enterprises‟ Character .... 47

4.2 Findings Discussion .......................................................................................... 52
CHAPTER 5: CONCLUSIONS AND IMPLICATIONS .................................... 56
5.1 Conclusion ........................................................................................................ 56
5.2 Implications ....................................................................................................... 57
5.2.1 Implications for Policy Maker in Long An province .................................. 57
5.2.2 Implications for Further Research ............................................................. 59
REFERENCES ...................................................................................................... 61
APPENDIX ............................................................................................................ 68

iv


List of Tables
Table 3.1 Scale for economic condition factors ....................................................... 30
Table 3.2 Scale for government policy factors ......................................................... 31
Table 3.3 Scale for Investors‟ satisfaction factors .................................................... 32
Table 4.1 Sample distribution based on FDI enterprises‟ nationality ....................... 34
Table 4.2 Sample distribution based on FDI enterprises‟ target market ................... 35
Table 4.3 KMO and Bartlett‟s Test.......................................................................... 36
Table 4.4 Total Variance Explained for Economic condition and Government policy
variables .................................................................................................................. 36
Table 4.5 Rotated Component Matrix for Economic Condition and Government
Policy Variables ...................................................................................................... 37
Table 4.6 Total Variance Explained for Investors‟ satisfaction variables ................. 38
Table 4.7 Component Matrix for Investors‟ satisfaction variables ........................... 38
Table 4.8 Consolidation of Reliability Analysis – Scale (Alpha) ............................. 39
Table 4.9 Symbols and coding value of research variables ..................................... 41
Table 4.10 Average of Determinants of FDI ............................................................ 42
Table 4.11 Model Summary .................................................................................... 43
Table 4.12 ANOVA(b) ............................................................................................ 43

Table 4.13 Coefficients(a) ....................................................................................... 44
Table 4.14 One way ANOVA for nationality character ........................................... 48
Table 4.15 Post Hoc Tests - Multiple Comparisons for nationality character ........... 49
Table 4.16 Descriptive for nationality character ...................................................... 50
Table 4.17 One way ANOVA for target market character ....................................... 50
Table 4.18 Post Hoc Tests - Multiple Comparisons for target market character ....... 51
Table 4.19 Descriptive for target market character .................................................. 51

v


List of Charts and Models
Chart 1.1 Comparison of GDP growth rate between Vietnam and the world ........... 4
Model 4.1 Research model ...................................................................................... 40
Model 4.2 Summary of research process and results ................................................ 45
Chart 4.1 Regression Standardized Residual............................................................ 46
Chart 4.2 Normal P-P Plot of Regression Standardized Residual ............................. 46
Chart 4.3 Regression Standardized Predicted Value ................................................ 47

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

CHAPTER 1
INTRODUCTION
1.1.

Theoretical background

World Trade Organization (WTO) defines Foreign Direct Investment (FDI) as an
international business activity occurs when an investor based in one country (the
home country) acquires a business in another country (the host country) with the
intention to manage that business. The management dimension is what distinguishes
FDI from portfolio investment in foreign stocks, bonds and other financial
instruments. In most instances, both the investor and the business it manages abroad
are business firms. In such cases, the investor is typically referred to as the “parent
firm” and the business as the “affiliate” or “subsidiary” (WTO, 2011a). From another
perspective, Cavusgil (2008) considered FDI as an internationalization strategy in
which the firm establishes a physical presence abroad through acquisition of
productive assets such as capital, technology, labor, plant and equipment.
The above definitions though remain differences, consensus in two basic
natures of FDI. First, there must be the participation of at least one foreign company
(the investor) and a host country where the investment locates. In this relation, the
investor contributes directly their know-how, technology and other production factors
into the host country as a form of a business firm. The second component is the
pattern of the ownership. This ownership defines the way investors manages their
businesses in host countries in the relation with their mother companies (or parent
firms) in home countries.
According to Hill et al (2008), firms have several options to go global. They
are, among the most recognized ones, Exporting, Licensing, and Foreign Direct
Investment. In this, FDI finds great advantages in preventing the company from
transportation cost, trade barriers (in case of Exporting) and from leakages of
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

technology know-how, operation and business strategy control problem (in case of
Licensing). Shatz and Venables (2000) found two main reasons lead a company to

FDI which are to better serve the local market of the host country (horizontal FDI),
and is to get lower cost inputs (vertical FDI). Also from Hill et al (2008),
multinational enterprises (MNEs) need to locate their businesses in other markets
because of their “Strategic Behavior”. This behavior requires companies to keep pace
with their competitors in any business movement which happens when an industry
composed of a limited number of large firms (oligopoly). In addition, in today‟s
globalized market, FDI provides MNEs ability to access emerging trends, new
technologies and the best skills worldwide (Cavusgil, 2008).
The benefit for a FDI host country is still controversial. Although there are
remain arguments from anti-globalist who protest against “the invasion” of MNEs to
local business, most of the scholars agree on the huge benefit that FDI could bring to
the host country (Dicken, 2011). Studies in China showed that FDI promoted income
growth and asset formation (Zhang (2001), Ng and Tuan (2002)). Positive impact of
foreign investment on labor productivity growth rate could be found in the study of
Ramirez (2000) in Mexico. Domestic pharmaceutical companies in India are
beneficial from the appearance of foreign companies in this country in terms of
investment, competition and operations (Johri (1983) and Kumar (1996), cited by
Nayak, 2008)
In addition, empirical studies showed positive relations between FDI and
economic growth of host country, even in some indirect ways. Findlay (1978, cited by
Hill et al, 2008) postulated that FDI increase the rate of technical progress in the host
country through a “contagion” effect from the more advance technology and
management practices used by foreign firms. Tsai (1994) found this relationship and
that it varies from periods of time and the patterns of the economy. Then, study of
Sahoo (2006) on FDI in four countries in South Asia also found that FDI has a
significantly positive impact on growth. Hill et al (2008) consolidated at least four
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

main benefits for a host country to receive FDI: resource –transfer effect, employment
effect, balance of payment effect, and effect on competition and economic growth
Understanding the importance of FDI to a host country leads to another
important task for scholars and host country‟s policy makers to understand
Determinants of FDI. According to Faeth (2009, pg. 155), “increased globalization
over the last two decades has led to strong growth of international business activity
and foreign direct investment (FDI), which in turn has led to extensive research on the
phenomenon of multinational enterprises (MNEs) and FDI”.
1.2.

Overview of FDI in Vietnam and Long An province

1.2.1. FDI in Vietnam
Vietnam, a developing country in South East Asia, has been for a long period
struggling with poverty and undeveloped economy due to weaknesses of the centralplanning economy. Since 1986, under the economic reform, Vietnam‟s economy has
taken great achievements. For many years, GDP growth rates are stable and relatively
higher than that of the world (Figure 1.1). On Jan 11th, 2007, Vietnam officially
became the 150th member of World Trade Organization (WTO, 2011b) which marked
a milestone for the participation of Vietnam‟s economy into that of the world. Today,
international economic integration has become one of the most importation strategies
of the country‟s economy, in which Foreign Direct Investment (FDI) attraction has
been put on the top priority (Vietnam Ministry of Planning and Investment, 2011a)

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province
10
8

6

Vietnam

4

World

2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-2

Chart 1.1. Comparison of GDP growth rate between Vietnam and the world.
Source: Indexmundi.com, 2011.
According to Vietnam Ministry of Planning and Investment (2011b), until June
23, 2011, Vietnam has attracted 12,776 FDI projects with the total registered capital is
over 198 billion US dollars (Appendix 1); in this, a very high proportion is for
processing and manufacturing industry (50%). In addition, FDI have had great
contribution into the development of the country. In the period of 2001 – 2005, this
sector contributed approximately 15.5% GDP. Today, FDI accounts for 100%
production in oil drilling, automobile, washing machine, air-conditioner, etc. In
addition, FDI gains 60% of steel production, 28% of cement production, 76% of
medical care equipment production. Especially, FDI also helps Vietnam penetrate
into the world market, improve the capability of production and export, enhance the
country‟s technology. It plays an important role in main exporting industries such as
footwear and electric part manufacture, etc. (Vietnam Ministry of Planning and
Investment, 2011b)
1.2.2. FDI in Long An province
Long An province is the gate from Ho Chi Minh City (the central of the economy) to

Mekong Delta (the central of rice and agricultural products). It is about 45 kms from
HCM City and one hour drive from Tan Son Nhat International Airport. Moreover,
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

Long An has advantages in the system of transportation both by car, by boat and by
sea. The province converges most of necessary conditions to attract FDI. This has
been proved in practice that Long An has been usually a top province attracting FDI
in Mekong Delta. According to Vietnam Ministry of Planning and Investment (2011b,
Appendix 2), until the middle of 2011, Long An has drew 361 registered FDI projects
with the total registered capital is over 3.5 billion US dollars (ranked as the 5th in
number of projects and the 12th in capital nationwide). Up to now, there are more than
300 FDI enterprises doing business in Long An mainly in manufacturing, food
processing and textile. The investors are from 27 countries, most of them are from
Taiwan and other Asian countries (Long An Service of Planning and Investment,
2007).
The participation of FDI investors has made a remarkable contribution to
improve the province in many aspects over the time, especially in exporting, tax, labor
issue, and technology transfer. According to the Long An 20-year FDI report (2007),
until 2007, FDI accounted for 62% total export of the province and consumed 70000
labors. This sector also contributed a remarkable portion for Long An‟s GDP over
several years. Nowadays, Long An is one of not many provinces in Vietnam which
can itself manage financial budget.
Realizing the importance of FDI in the development of the province‟s
economy, in its own development orientation, Long An has chosen this investment
sector as one of the top priorities. In order to ensure all the best conditions for
attracting FDI, alongside with the preferential investment policies, the province
actively has invested in the infrastructure, skilled labor capital, etc. Currently, there

are now 13 industrial zones in the province, and will increase to 15 ones by 2015 with
total surface will be around 9000 ha. Together with the completion of other
infrastructure projects such as the system of electricity, water, and nationwide
highways, Long An is estimated to be the best destination of FDI inward in the South
of Vietnam by then. In July 2010, Tan Tap international sea port project has been
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

inaugurated with total investment is over 1 billion US dollar. All the actions above
just proved for the province‟s commitment to support and create the most favorable
conditions for FDI activities.
1.3.

Problem Statement and research objectives

The literature of Determinants of FDI even sufficient still comprises some limitations.
First, it is the limit in methodology. Most of the research has been done in this field of
Determinants of FDI base mainly on historical figures using the historical movement
of macro factors as the main source of data (Tsai (1994), Sahoo (2006), Le (2004)).
This method, on one hand can provide trustable information about the nature of
Determinants of FDI; however, on the other hand, it is not able to provide objective
ideas about what FDI investors perceive to be meaningful for their investment. By
other words, the current methodology to approach Determinants of FDI is to some
extend ignoring the viewpoint of investors about these determinants. The second limit
can be found in literature of Determinants of FDI studies is the level of research
object. There are a lot of research conducting on national or regional level (Sahoo
(2006), Janicki and Wunnava (2004)); however, applications for provincial level is
quite limited, especially for that of developing countries. Provincial policy makers,

especially in case of Vietnam, tend to use Determinants of FDI as national level as
references for their FDI policy establishment which is not totally reflect their very
specific conditions
Regarding to Long An province, with their great advantages in geography,
resources, and the support from the government, Long An must be the top destination
for FDI in Vietnam. However, the province, in fact, is facing to many fierce
challenges in its path of FDI attraction (Long An Service of Planning and Investment
Services, 2007):
 First, the current FDI achievement has not yet corresponded to the province‟s
potentialities. This is the comment from most of local and international experts
when they encounter the FDI area in Long An. The statistic number of FDI
6


Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

projects and registered capital, on one hand, look very satisfactory in the relation
with other provinces in Mekong Delta, but on the other hand, it shows a big
distance between Long An and other provinces in the Southeast such as Binh
Duong, Dong Nai or further like Danang and other provinces in the North who
have the same condition as Long An. This expresses the fact that the province‟s
FDI attraction policy has not yet been effective as it should have been (appendix
2). In addition, the quality of the projects is also a debated problem. Long An is
ranked as 4th in terms of project quantity but come to 12th in terms of registered
capital (The Vietnam Ministry of Planning and Investment, 2011b).
 The second challenge comes from other provinces in Mekong Delta. Like Long
An, they are also realizing the importance of FDI and trying to improve their
FDI environment as well as attract more FDI to their provinces. They could be
named out as Tien Giang, Dong Thap, Kien Giang, … These are remarkable
Long An‟s competitors in the battle for FDI, which forces Long An to

continuously improve their investment environment, enforce the investment
attraction policies.
Above are the typical problems that Long An are facing to in their process of
attracting and utilizing FDI. In order to break out the image of a very potential
province but not yet developed, to leave behind the chase of and compete from other
neighbor provinces and to recover the drawbacks in existing FDI policy, Long An
needs a full-fledged study which provides a comprehensive view from the investors
about the current environment and policy for FDI. This would be a valuable reference
to build up a break-through FDI policy which accurately expresses the open viewpoint
of the province government, highlight the province‟s advantages and especially
focuses directly on the interested issues of FDI investors.
In this context, the research “Determinants of Investors‟ satisfaction – the case
of FDI investors in Long An” is conducted with the objective to explore the factors
affecting the satisfaction of foreign investors. Results of the research provide us with
7


Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

a complete picture about issues which FDI investors are really interested in, and are
really important for them when making investment decision. Based on this objective,
the thesis aims to answer the following questions:
-

What are determinants of FDI Investors‟ satisfaction in Long An?

-

Are there differences in assessment on above Determinants of FDI Investors‟
satisfaction from FDI investors whose specific characteristics are different

from one another?

1.4.

Research Method and Structure

Deriving from the limitations in literature of Determinants of FDI study as well as its
objectives to specify the factors determining investors‟ satisfaction from viewpoints
of investors, the research employs a combined method comprising three steps:
Step 1: review the literatures on Determinants of FDI with special attention to those
conducted in the context of transitioning or developing countries in the platform of
Dunning Eclectic paradigm. From this, define a list of possible determinants that
could be used for the next step.
Step 2: based on the result of the first step, an in-deep interview will be conducted
with a few FDI enterprises and FDI policy makers in Long An province. Then, a list
of valuable determinants will be drawn corresponding with the situation of the
province. The result of this step will define suitable and valuable variables for the
research model in step 3.
Step 3: With the suitable variables in step 2, the multi variable liner regression model
will be built and tested via a direct e-mailing survey of 200 randomly selected FDI
enterprises doing business in Long An. 5 point Likert scale will be exploited for the
survey. Results in step 3 will provide us a clear and complete view of investors about
Determinants of investors‟ satisfaction in the province.
Corresponding to this process, the below structure is proposed for this research:

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

 Chapter 1. Introduction: discusses the theoretical and practical background of
this research, the rationales for doing and the method is used to reach its
objectives.
 Chapter 2. Literature Review: reviews the literature in Determinants of FDI.
The fundamental theory for this research is OLI paradigm of Dunning and the
theories of vertical and horizontal FDI. Then, reviews on FDI investors‟
satisfaction are followed. Debates will be discussed with focus on the context
of FDI in developing and transitioning countries.
 Chapter 3: Methodology: combines both qualitative research (in-depth
interview) and the quantitative research. This chapter will discuss sampling
method, scaling technique, the method of data collection, measuring technique,
interview and questionnaire structure.
 Chapter 4: Results and Findings discussion: consolidates and analyzes results
of quantitative research. Then, this chapter will discuss these results in
connection to both theory perspective and the case of Long An province.
 Chapter 5: Conclusion and Implications:

concludes the research and its

achievements; refers some implications for Long An FDI policies as well as for
further research on this topic

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

CHAPTER 2
LITERATURE REVIEW
2.1.

Review of Determinant of FDI Studies

One of the most important major of FDI studies is about Determinant of FDI.
“Literature on the factors that motivate foreign firms to invest in host countries,
especially industrially developing countries, is expansive” (Nayak, 2008, p.6).
First, looking for resources in the host countries has been a major reason
behind FDI movement in the late 19th and early 20th century, study of Nayak (2008).
According to Jones (1996), by the end of the Second World War, most of the world‟s
natural resources have fallen into the hands of large MNEs. The idea of resource
seeking as a driving force to move outside MNEs‟ home market is also supported by
Dunning (1998), Rugman and Verbeke (2001). Recent study by Chandrapalert (2000)
with reference to FDI from USA to Thailand provided more evidence for this
argument.
Then, unexplored markets have been another determinant for FDI. Vernon
(1966) proposed the model of international product life cycle which pointed out that
firms in developed countries have to move to new markets in less developed or
developing countries to produce their products. Park and Lee (2003) found similarities
in their study of American firms who invested in China to take advantage of the
potential market of this country. Tsai (1994), Ali and Guo (2005) used different
methods but found the same conclusion that large market size and growth of China is
a key point that influences multinational enterprise‟s investment decisions. The
common point in these researches is that market size of the host country could provide
clues about the potentiality of labor, suppliers and customers the size of host country‟s
market.

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

Apart from the above traditional factors, resource and market seeking, recent
driving forces for FDI could be addressed to efficiency seeking. Vernon (1966)
explained FDI of American firms to UK and Canada based on the low cost of
production in these countries. Tang (2002) indentified comparatively low cost labor in
Asia is the motivation of US MNEs‟ vertical FDI there. Others have argued that host
country openness to trade and business is the main reason of for inward FDI,
especially in developing and transitioning countries (Charkarabarti (2001), Sara and
Newhouse (1995)). (Yang et al (2000) on the other hand, concluded favorable interest
rates and wage rates are main Determinants of FDI in Australia. Ownership advantage
and ownership structure were respectively discussed by Ellis and Fausten (2002) and
Dunning (1998) as other efficiency seeking Determinants of FDI.
Nayak (2008) concluded that foreign firms invest to developing host country
because of the availability of natural resource, potential market and lower factor costs
for production in these countries.
Faeth (2009) has another approach to Determinants of FDI by historically
classifying its studies. According to her, Determinant of FDI studies could be
classified into 9 models.
1. Early Studies of Determinants of FDI
Early empirical studies in Determinants of FDI, typically based on questionnaires in
1960s, concluded that market growth and market share are important Determinants of
FDI (Robinson (1961), Behrman (1962), Basi (1966), Kolde (1968), Brash (1966),
cited by Faeth (2009)). In addition, political stability, foreign exchange stability and
positive attitude to foreign investment are significant motivation for foreign firms to
invest to a host country (Basi (1962), cited by Faeth (2009)).
2. Determinants of FDI according to the Neoclassical Trade Theory
The second theory to explain Determinant of FDI was Neoclassical Theory which was
based on the Heckscher–Ohlin model (Faeth, 2009). Even though wide debates
among scholars in this theory, they basically agree in capital endowment, currency

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

risks, interest rates difference are main driving force for firms to locate their business
in a certain country (Aliber, 1970, cited by Faeth, 2009)
3. Ownership Advantages as Determinants of FDI
Hymer (1976, cited by Faeth (2009)) viewed Determinants of FDI from the
imperfection of the market. His argument based on the concept of monopolistic
advantage to explain why firms enter foreign markets. He argued that foreign firms
need ownership advantages such as product differentiation (imperfect good markets),
managerial expertise, new technology or patents (imperfect factor markets).
Knickerbocker (1973, cited by Faeth (2009)) then proposed the theory of oligopolistic
reaction and pointed out that one of the reasons a US firm invest to a foreign market is
to follow the leader of that industry.
In addition, numerous empirical studies have supported the argument that
ownership advantages are significant determinants of FDI, showing that factors such
as R&D and advertising expenditure, managerial resources, technology, capital
intensity, labor skills, firm size, scale economies and experience had an effect on FDI
or MNE activities (Horst (1972), Wolf (1977), Caves (1974), Baumann (1975), cited
by Faeth, 2009)
4. Aggregate Variables as Determinants of FDI
This type of Determinants of FDI research studied the effect of aggregate variables
such as market size, and market growth on FDI. To this, market size, market growth
and trade barriers could potentially be important determinants of FDI and should be
incorporated into the theoretical models explaining FDI (Faeth, 2009).
5. Determinants of FDI in the OLI Framework
Eclectic paradigm of FDI developed by Dunning (1977, 1979) by bringing together
internalization theory and traditional trade economics. In this paradigm, FDI was

explained by identifying three types of special advantages that MNEs have:
ownership, location and internalization advantages.

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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

 Ownership advantages is about the production process; the competitive
advantages over domestic firms which includes patents, technical
knowledge, management skills and reputation.
 Location advantages were motives for locating production on a certain
place abroad including the access to protected markets, favorable tax
treatments, lower production and transport costs, lower risk and favorable
structure of competition.
 Internalization is about the advantages of FDI in comparison with licensing
or exporting. In this comparison, FDI offers lower transaction costs,
minimizes technology imitation and maintains the firm‟s reputation through
effective management and quality control.
6. Horizontal and Vertical FDI
Shatz and Venables (2000) summarized two types of FDI. According to them, there
are two reasons lead a company to FDI. One reason is to better serve the local market,
and the other is to get lower cost inputs. FDI to serve local markets is often called
“horizontal” or “market seeking” FDI since it normally involves building duplicate
plants in a foreign location to supply the market there. The motive is to reduce the
cost involved in supplying the market (such as tariff or transport cost) or to become
more competitive in other ways – such as through proximity to the market and being
able to respond to changing circumstances and preferences. Then, FDI in search of
low-cost inputs is often called “vertical” or “production cost-minimizing” FDI since it
involves slicing the vertical chain of production and relocating part of the chain in a

low cost location – for example, assembling electronics goods in Asia, even though
manufacture of sophisticated component parts and final sales might take place in the
United States.
Both horizontal and vertical FDI tend to cluster in a certain location,
(sometimes referred to as “agglomeration”), creating incentives to locate close to
other firms. An example may be regional groupings of services suppliers. More
suppliers, each producing a different service, will create finer divisions of labor in
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

intermediate input markets, thus lowering unit costs for final producers (Wheeler and
Mody, 1992). Alternatively, clustering occurs if firms “herd” uncertain about whether
a country is a good location, firms may wait for the success of the first firm (as a
signal of underlying the national conditions) before entering the fray in a follow-theleader type scenario. Finally, while the distinction between horizontal and vertical
FDI is useful, they are not mutually exclusive; at times, we may find one plant serving
both functions (Shatz and Venables, 2000).
7. Determinants of FDI according to the Diversified FDI and Risk Diversification
Models
Ideas about horizontal and vertical FDI were critiqued by Hanson et al (2001). They
argued that researches should focus more on the choice between production- and
distribution – oriented FDI which does not reflect the export – versus – Investment
decision as the basic of horizontal and vertical FDI. Based on this finding, Ekholm et
al. (2003) derived a theoretical model explaining export-platform FDI. The
intermediate good was produced in one of the two North countries, turning home
countries to MNEs, while assembly was undertaken in either North or South. Exportplatform FDI – with North MNEs produces their goods in South and exports them to
either the other.
Kopits (1979)

measured US MNEs‟s industrial structure from 15

manufacturing industries to analyze the determinants of diversified FDI. He found
exchange rates and interest rates are significant influential factors for FDI location to
spread the business risk. Evidence supporting the hypothesis that firms wanted to
diversify geographically to reduce risk was presented by Hughes et al. (1975), Michel
and Shaked (1986), Miller and Pras (1980) and Thompson (1985) (Faeth, 2000).
8. Policy Variables as Determinants of FDI:
Another approach to Determinants of FDI is to view FDI in the relation
between host country and MNEs or the competition between host countries to attract
FDI. According to Faeth (2000, p. 184), one host country can distinguish the others
from three main types of investment incentives:
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

“fiscal incentives (profit-based, capital investment-based, labor-based, salesbased, value-added-based, import- or export-based and incentives based on
particular expenses), financial incentives (government grants, government
credits at subsidized rates, government equity participation and government
insurance at preferential rates) and other incentives (subsidized dedicated
infrastructure, subsidized services, market preferences and preferential
treatment on foreign exchange)”.
Mudambi (1999) found that in order to reduce risk and uncertainty between the
government and MNE, different supports such as grants, tax abatements, subsidized
loans should be offered by the government to attract MNEs.
2.2.

Dunning’s Eclectic Paradigm and Determinants of FDI

The Eclectic paradigm is developed in 1970s in order to explain foreign activities of
MNEs which could not be done by the contemporary theories at that time. It offers a
general framework for determining the extent and pattern of both foreign-owned
production undertaken by a country‟s own enterprises, and that of domestic
production owned or controlled by foreign enterprises (Dunning and Lundan, 2008)
The main hypothesis on which the Eclectic paradigm of international
production is built up is that the level and structure of a firm‟s foreign value-adding
activities will depend on four conditions (Dunning and Lundan, 2008). They are:
1. The extent to which it possess unique and sustainable ownership-specific (O)
advantages. These O advantages take the form of the privileged possession of
or access to intangible assets which arise as a result of cross-border valueadded activities. These advantages are assumed to increase the wealth-creating
capacity of a firm, and hence the value of its assets.
2. Assuming that condition (1) is satisfied, the extent to which the enterprise
perceives it to be in its best interest to add value to its O advantages rather than
to sell them, or their right of use, to independent foreign firms. These
advantages are so called market internationalization (I) advantages. They could
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

provide the firm with greater efficiency of superior incentive structures of
hierarchies, or their ability to exercise monopoly power over the assets under
their governance.
3. When conditions (1) and (2) are satisfied, the extent to which the global
interest of the enterprise are served by creating, accessing or utilizing, its O
advantages in a foreign location. The spatial distribution of L-bound resources
and capabilities are assumed to be uneven and, therefore, will confer a
competitive advantage on the countries possessing them over those that do not.
4. Given the configuration of the ownership, location and internalization (OLI)

advantages facing a particular firm, the extent to which a firm believes that
foreign production is consistent with the long-term objectives of its
stakeholders and organizational strategy.
Regarding to the type international production, Dunning and Lundan (2008)
proposed some determining factors for investors who seeking for resource (vertical
FDI) or market (horizontal FDI) in related to this OLI advantages
 Ownership advantages (the “why” of MNE activity):
o For foreign investors who go abroad for natural resource seeking (Vertical
FDI), the ownership advantages could be seen via: capital, technology, and
access to markets; complementary assets; size and bargaining strengths.
o For foreign investors looking for market: capital, technology, information,
management, and organizational skills; surplus R&D and other capacity;
economies of scale; ability to generate brand loyalty.
 Location advantages (the “where” if production)
o Natural resource seeking investor (vertical FDI): possession of natural
resource, and related transport and communications infrastructure; tax and
other incentives
o Market seeking (horizontal FDI): material and labor costs; market size and
characteristics; government policy (e.g. with respect to regulations and to
import controls, investment incentives, etc.)
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Determinants of Investors’ satisfaction – the case of FDI Investors in Long An province

 Internationalization advantages (the “how” of involvement)
o Vertical FDI: to ensure stability of supplies at right price; to control markets
o Horizontal FDI: a desire to reduce transaction or information costs, buyer
ignorance or uncertainty; to protect property rights.
Then, from the country level, there are some illustrations of how OLI

characteristics may vary from one country to the others (Dunning and Lundan, 2008).
First, about Ownership advantages, they are factor endowments (e.g. resources and
skilled labor) and market size and character; government policy towards innovation,
protection of proprietary rights, competition, education and training, and industrial
structure; government attitudes towards internationalization of business and crossborder alliances; the organizational culture and wealth-creating ethos of a country; the
nature of corporate governance and inter-firm rivalry and/or cooperation; quality of
financial institutions; role of the state in favoring national champions.
Location advantages focus on physical, psychic and institutional distance
between countries; government intervention (e.g. tariffs, quotas, taxes, assistance to
foreign investors or to own MNEs); availability/promotion of clusters of related
activities, science parks etc.
Finally, the internationalization advantages mention about government
intervention and extent to which policies encourage MNEs to internalize cross-border
transactions; government policy towards mergers; differences in market structures
between countries with respect to transaction costs, enforcement of contracts, buyer
uncertainty etc; adequacy of technological, educational, communications and
institutional infrastructure in host countries, and their ability to absorb contractual
resource transfers.
Dunning (2006) based on this OLI paradigm, consolidated a list of factors
determining FDI from the perspective of host country:
 General policy framework
 Economic, political and social stability
17