THAI NGUYEN UNIVERSITY Socialist Republic of Vietnam SOUTHERN LUZON STATE UNIVERSITY Republic of the Philippines LE HOANG BA HUYEN (JAMES) CAUSES AND EFFECTS OF FOREIGN DIRECT INVESTMENT: BASIS FOR POLICY RE-DIRECTION IN THANH HOA PROVINCE IN VIETNAM SUMMARY OF DOCTORAL THESIS IN BUSINESS ADMINISTRATION AUGUST, 2013 0 LIST OF AUTHOR’S PUBLISHED STUDY 1. Le Hoang Ba Huyen, “Mobilizing investment for socio – economic development in the western Thanh Hoa”, Journal of Economic & Development, National Economics University, No. 5 of 2009, pp. 44-46. 2. Le Hoang Ba Huyen, “Proposes some major solutions to enhance the rate of progress to draw the balance sheet on construction and investment for 135 projects in Ba Thuoc District”, Journal of Finance & Business Administration No. 11 of 2009, pp. 22-26. 3. Le Hoang Ba Huyen, “To perfect the management of state budget expenses on construction and investment for 135 project in Ba Thuoc District”, Journal of Science, Hong Duc University No. 4 of 2010, pp. 96-102. 4. Le Hoang Ba Huyen, “Developing cultural – ecological tourism in Pu Luong nature reserving zone in Thanh Hoa province”, Journal of Science, Hong Duc University No. 7 of 2011, pp. 114-119. 5. Le Hoang Ba Huyen, Le Quang Huy, “Some suggestion to financial management of 30a program in Ba Thuoc district, Thanh Hoa province”, Journal of Economic & Development, National Economics University, No. 182(II) of 2012, pp. 38-44. 6. Le Hoang Ba Huyen, Nguyen Thi Thanh Xuan, “Some solutions to attract foreign direct investment (FDI) in Thanh Hoa province”, Science and Technology Journal of Agriculture & Rural Development, Ministry of Agriculture and Rural Development, Vietnam, No. 9/2012, pp. 160-165. 7. Le Hoang Ba Huyen, Nguyen Thi Thu Phuong, Nguyen Thu Huong, “Analyzing the factors affecting the investment of FDI companies in Thanh Hoa province”, Journal of Economic & Development, National Economics University, No. 188(II) of 2013, pp. 76-81. 8. Nguyen Thi Thu Phuong, Le Hoang Ba Huyen, Nguyen Thu Huong, “Enhancing the role of internal auditing in preventing risks of foreign direct investment in Thanh Hoa province”, Socio – Economic information and Forecast Journal, Ministry of Planning and Investment, No.87 – March 2013. pp 33 – 37. 9. Le Hoang Ba Huyen, Tran Dai Nghia, “Identification of the main factors affecting the attraction of foreign direct investment into Thanh Hoa province”, Journal of Economic & Development, National Economics University, No. 190(II) of 2013, pp. 34- 39. 1 CHAPTER 1 INTRODUCTION 1.1 Problem Statement According to the decentralization policy started in the FDI law amendment in 1996, each province was decentralized with more power and autonomy in dealing with foreign investments such as in granting investment licenses, leasing land, providing export and import licenses and recruiting labor. This policy, on the one hand, allows provincial authorities to develop in an innovative ways that attract more foreign investors, and also leads to variations in the implementation of the central laws and regulations among provinces. Foreign investors may experience a lot of red tapes namely, corruption or delays in administrative progress if local authorities possess conservative inherited norms and cognitions. In this context, foreign investors have considered many factors when investing in Vietnam such as modes of entry and location choices for their operations so that they can make use of advantages and minimize disadvantages. In order to attract investors to Thanh Hoa and give the most favorable conditions to them, the province has offered many investment priority policies as well as improves administrative procedures. Over the past revised, the province’s investment environment has been significantly improved. With a view to: no restrictions on size, industry, and geographic areas, based on the Investment Law and Enterprise Law, Thanh Hoa is continuing to review and to improve the system of mechanisms and policies towards incentives and making it more convenient for investors. These mechanisms and policies of Thanh Hoa focus on improve and simplify administrative procedures, issue the open and attractive mechanisms and policies, call for investment, create innovative in building essential socio-economic infrastructure, promote the advantages of human resources, improve the quality of human resources in order to meet business’s demands. In addition, resolution No 02/NQ-TU dated 27/6/2011 regarding improvement for investment environment in province in the stage 2011 – 2015 focused on implementing site clearance work in order to meet investors’ requirements, support business development, transparency of information for business, support business development, transparency of information for business. With the above policy should take until 2012 in Thanh Hoa province has 2 41 investment projects involving foreign direct operation with a total registered capital of USD 6,952 million. These results are encouraging, but compared to the potential and advantages of Thanh Hoa province are still limited. The number and sizes of investment projects in Thanh Hoa are low. Thanh Hoa is not one of the top provinces classified based on provincial competitiveness index. We have to describe the trends in FDI in Thanh Hoa Province and identified of factors affecting the attraction of foreign investment in Thanh Hoa. After that we can analysis of the impact of each factor to attract foreign investment is essential for the government in offering policies to attract investment capital and analyze the effects of FDI in the economic growth of Thanh Hoa Province. Therefore, we can formulate policy implication to enhance economic growth of Thanh Hoa Province in Vietnam. This thesis focuses on determinant of “Causes and Effects of Foreign Direct Investment: Basis for Policy Redirection in Thanh Hoa in Vietnam”. 1.2 Research Objectives The main objective of this research is to determinants Foreign Direct investment in Thanh Hoa province. Thus it hopes to achieve the following objectives: 1. To describe the trends in FDI in Thanh Hoa Province in the period from 2001 to 2012. 2. To determine the factors affecting attraction of FDI in Thanh Hoa Province in terms of the following factors: Political and legal; Social and culture; Financial; Economic and marketing; Availability of resources and Infrastructure requirement 3. To analyze the effects of FDI in the economic growth of Thanh Hoa Province. 4. To formulate policy implication to enhance economic growth of Thanh Hoa Province in Vietnam. 1.3 Study Object and Scope 1.3.1. Object: Causes and Effects of Foreign Direct Investment in locality. 1.3.2. Scope + Spatial limitation Study site: Thanh Hoa province. Field survey was conducted in forty one (41) FDI entrepreneurs and 200 officers. + Time range - Secondary data: collected during the period 2001 - 2012; 3 - Primary data: Surveys were conducted in the period 2012 - 2013; - The solution was studied and proposed up to 2020. 13.3. Limits on Content - Studying the trends in FDI in Thanh Hoa province; - Determinant factors affecting FDI flow to Thanh Hoa province; - Analyzing the effects of FDI in the economic growth of Thanh Hoa Province. 1.4 Research Questions In order to achieve the above objectives, the following research questions were proposed for this study: 1. What are the existing conditions of industry facilities of Thanh Hoa Province 2. What are the existing policies with regards to (Ownership sharing; Stocks distribution & allocation; Permits and Registration; Taxation; Supply of raw materials; Capitalization & other resource; Man power) 3. To what extent that foreign direct investment is affected as course the low FDI. 4. Is there a significant difference on the perceptions of respondents in terms of factors affecting the process of FDI investment in the Thanh Hoa province? 5. What policies investors & incentives can be redirected to encourage and improve performance of FDI? 1.5 Significance of the Study (1). The thesis indicated the general picture of foreign direct investment in Thanh Hoa province in the period from 2001 to 2012. At the same time, it also pointed out the trend of foreign direct investment in Thanh Hoa province during this period through the number of projects, the registered capital and the field of investment projects. (2). The thesis is one of the first studies implemented in the province of Thanh Hoa about the factors affecting attraction of FDI in the province. This thesis has built models of group factors affecting attraction of FDI in Thanh Hoa Province. Based on surveys of foreign investors and the use of statistical analysis software, author assessed the importance of each factor and group factors in attraction of foreign direct investment into this province. (3). The thesis also assessed and summarized the impact of foreign direct investment for each field as raising capital for development investment, job creation, and contribution to exports in particular and to the growth and economic transformation in general. 4 (4). The thesis interpreted the causes affecting the process of implementation FDI projects in Thanh Hoa province. It also assessed the impacts of these factors on the implementation of investment projects of foreign enterprises under the view of foreign investors and of the local government related to this activity. Moreover, the thesis analyzed and interpreted of the causes of that situation. (5). The author proposed seven groups of solutions in attracting foreign direct investment into the province of Thanh Hoa and promoting the role of FDI projects in contributing to the growth and restructuring the local economy. CHAPTER 2 LITERATURE REVIEW AND STUDIES 2.1. Theoretical overview: FDI 2.1.1 Definitions of FDI FDI can be understood as investment activities of economic organizations, individuals in a country by themselves or co-operate with other economic organizations and individuals in another nation to invest money and assets under a certain investment form. They take responsibilities wholly or partially in direct management and administration production and business activities and also business results basing on the rate of control right and of capital ownership. 2.1.2 Attract FDI - Attract FDI is the activity to agitate foreign investors investing in a nation or a regio/ province of the nation. - The attraction has to include lot of measures, proper steps and also participations of many entities from individuals, organizations, companies, local government and central government. - Attracting FDI might be under active and passive forms. 2.1.3 Forms of FDI According to the Investment Law of Vietnam (2005), the forms of FDI include: + Companies with 100% investment capital from foreign investors. + Joint – venture + Business co-operation under forms of BCC, BOT, BTO, BT, PPP 2.1.4 Effects of FDI 5 FDI affects the economy under following aspects: - FDI provides capital to increase budget - Effects of FDI on economic growth - FDI and technology 2.1.5 Summary of some theories of attraction of FDI 2.1.5.1. Theory of marginal benefits 2.1.5.2. Theory of market power 2.1.5.3 Theory of Ownership advantages – Location advantages – Internalizations advantages 2.1.5.4. Theory of steps for investment development 2.2 FDI and Motivation 2.3 Factors Influencing Location of FDI 2.3.1 Political stability and policy mechanisms factors - Stability of politics - Policy mechanisms 2.3.2 Socio-cultural environment factors 2.3.3 Financial factors 2.3.4 Economy and market factors - Market factor - Profit factor - Cost Factor 2.3.5 Resource factors - Human resources - Natural Resources 2.3.6 Infrastructure factors 2.4 The determinants of the FDI in Vietnam review of literature The contents of the research fields mentioned are controversial. This is because the process of Globalization and the integration of international economy have been widely affecting to the entire nations’ economy and many issues have been being considered differently. These researches are based on the sense of initiative of host countries, and the orientation of the development of economy – society in nation extent only, rarely mentioned local extent. Up to now, there is no research that mentioned sufficiently and systematically about the issues like: determining the factors that affect the attracting FDI into Thanh Hoa. Based on it, the researcher can 6 give the policies solutions for Thanh Hoa in particular and for Vietnam in general. Hence, the thesis contributes the usage of theoretical basis to solve the important real issues of the FDI for Thanh Hoa province. 2.5 The mechanisms and policies for attracting FDI in Thanh Hoa province - The policies that encourage the development of small industries and businesses in the province of Thanh Hoa (Decision No. 2541/2008/QD-UBND on 08.19.2008); - Support to share the costs of the construction of markets, supermarkets, commercial centers (defined in Decision No. 4670 / 2010/QD-UBND on 27/12/2010) - Policies of providing support production, export business (defined in Decision 2545/2009/QD-UBND on 08.06.2009); - Mechanisms and policies were established to encourage the development of non-public establishments operating in the fields of education, vocational training, health care, culture, sports, environment (defined in Decision 4294/2011/QD -2011); - Policy supports investments in Nghi Son economic zone and industrial parks (currently under construction); CHAPTER 3 RESEARCH METHODOLOGY 3.1. Theoretical framework and hypothesis development This study will be conducted based on the theoretical frame work drawn from eclectic paradigm or the “OLI” paradigm develop by “Dunning” as explain under the literature review and studies and according to factors which are influencing to choice of a host market of Gilomre, O’s Donnel, Carson and Cummins (2003). The following factors are considered as maininfluences for attracting FDI to Thanh Hoa province. (1) Political, government and legal factors such as political stability, government tax incentives, province image and the institutional performance by provincial authorities. (2) Social and cultural factors such as level of education, attitudes, b e l i e f s and values, religion, manners and customs, language and communication. (3) Economic and market factors, such as economic growth, domestic investment affect; diversified industrial base, infrastructure; the size of the local market; and market growth. 7 (4) Financial factors such as interest rate, inflation, exchange rate, currency risk, agglomeration effect in attracting FDI. (5) Availability of resources factors such as terrain /topography, natural resources, raw materials, large population size, quality of labor force, low cost skill and unskilled, labor human and development labor. ( 6 ) Infrastructure factors such as communication infrastructure, accessibility, physical infrastructure (roads, sea and air ports, railways, telecommunication systems and institutional development such as legal services, accounting etc), level of technology development, low transport and logistic costs, Figure 3.1 Theoretical Framework 3.2. Sample size and Population determination 3.2.1 Population determination - Business managers of foreign direct investments and the main shareholders of the businesses: There are forty one (41) FDI entrepreneursoperatingin Thanh Hoa province during period from 2001 to 2012. - Government officials: The population of this study is 100 officers who are in Province people’s committees, Department of Planning and Investment, Department of Finance, Department of Industry, Tax Authority, Land Authority, Department of Political, Government and Legal Factors Social and Cultural Factors Economic and Market Factors Financial Factors Availability of resources factors Perceived increase of Foreign Infrastructure Factors 8 Transportation, Department of Agriculture and Rural Development, Investment promotion center of Thanh Hoa province, Branch of State Bank of Thanh Hoa, Union of Cooperatives and Small and Medium Size Enterprises and Vietnam Chamber of Commerce and Industry in Thanh Hoa. 3.2.2 Sample size determination The sample size determination: the sample size is determined using the Slovin formulation as follows: n = N / (1 + Ne 2 ) Where n the sample size of each respondent group N total population of the respondent group e 2 is probability of error - Business managers of foreign direct investments and the main shareholders of the businesses: With the population of this study are forty one (41) FDI entrepreneurs (N = 41), e = 5% (at least 95% confidence level), Therefore the sample size for this study is: n = 41/ {1 + 41 (0.05) 2 } n = 37 Hence the sample size is 37, to collect the required data 37 questionnaires were send to the FDI companies located in Thanh Hoa through the ways of both e - mailing and personally. There is thirty seven (37) respondents were received. - Government officials: With the population of this study are 100 officers (N = 100), e = 5% (at least 95% confidence level), Therefore the sample size for this study is: n = 100/ {1 + 100 (0.05) 2 } n = 80 Hence the sample size is 80, to collect the required data 80 questionnaires were send to the Government officials in Thanh Hoa Province through the ways of both e – mailing, telephone and personally. There are eighty (80) respondents were received. 3.2.3 Sampling Method [...]... a year FDI in Thanh Hoa province is concentrated in the field of industrial processing and manufacturing In addition, FDI also concentrated in industrial parks and Nghi Son Economic Zone 20 Secondly, about the factors affect the attraction of foreign direct investment in Thanh Hoa Province We found that there are two aspects of the Thanh Hoa economic environments in which international business partners... in Thanh Hoa including Province people’s committees, Department of Planning and Investment, Department of Finance, Department of Industry, Tax Authority, Land Authority, Department of Transportation, Department of Agriculture and Rural Development, Investment promotion center of Thanh Hoa province … In addition, selecting the District 6 representative to mountainous areas, coastal and plains 3.3 Questionnaire... level of factors affecting the investment process of FDI enterprises in Thanh Hoa province Accordingly, companies appreciate the value of shortening the time investment licensing, the dynamics of provincial leaders; access to investment information and investment policies Group factors are evaluated at the level rather were time of evaluation the basis design, planning and construction licensing; government... Analysis of factors affecting the process of FDI investment in Thanh Hoa province 4.4.1 Analysis of research results Table 4.11 Factors affecting the investment process of FDI enterprises in Thanh Hoa Province TT The factors affecting the investment process of FDI companies Assess levels of FDI 2 Evaluating basis design time, planning and (%) 85 Granting investment licenses time Not Good (%) 1 Good 15... availability of infrastructure of industry zone is considered less important in comparison to 2 above factors Thirdly, analyze the effects of FDI in the economic growth of Thanh Hoa Province FDI has a positive impact on the industrialization and modernization in Thanh Hoa province in recent years Especially, it has added investment capital for development, contributing to maintain the pace of economic... the Random Sampling Method was applied as the respondents for this research was focused base on the existing FDI entrepreneurs who established their business in Thanh Hoa from 2001 up to 2012 As for the investigation, interviewing staff in state agencies Thanh Hoa province, proceed as follows: First of all authors 12 provincial agencies most relevant to foreign direct investment in addition to in Thanh. .. 2011 5 42,10 - Source: Thanh Hoa Statistics Office 2012 4.2 Data analysis about the factors affecting the attraction of foreign direct investment in Thanh Hoa Province 4.2.1 The importance of various factors in attracting FDI ìnlows in Thanh Hoa province 4.2.1.1 Political/governmental/legal factors (F1) The importance of this factor is reflected in analytical results represented in Table 4.2 below: 10... importance of the factors is considered differently by foreign investors when they decide to invest in Thanh Hoa The conclusions for each group are following: (1) The group of the factors of political stability and policy mechanisms: the results of this study shows that these following factors can affect the decisions of foreign investors: tax and used land incentives; investments safety; intellectual... process well, inventory of assets on land (5) To promote administrative reform, elimination of unnecessary licenses and procedures for investment A synchronized administrative reform program includes: reducing the administrative apparatus, training staff, eliminating troublesome procedures and salary reform (6) To reform education and training systems to develop human resources, to increase high qualified... correlation with X3 indicating that granting investment licenses time, evaluating basis design time, planning and construction permits factor do not influence on clearance compensation, land tax or land CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusion Firstly, about the trends in FDI in Thanh Hoa Province, FDI in Thanh Hoa increased rapidly in the period from 2001 - 2012, the invested capital, . economic growth of Thanh Hoa Province in Vietnam. This thesis focuses on determinant of Causes and Effects of Foreign Direct Investment: Basis for Policy Redirection in Thanh Hoa in Vietnam . 1.2. FDI in Thanh Hoa Province and identified of factors affecting the attraction of foreign investment in Thanh Hoa. After that we can analysis of the impact of each factor to attract foreign investment. attraction of foreign direct investment into this province. (3). The thesis also assessed and summarized the impact of foreign direct investment for each field as raising capital for development investment,