FOREIGN TRADE UNIVERSITY FACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS -*** - GRADUATION THESIS Major: International Business Economics DETERMINANTS OF FOREIGN DIRECT INVESTMENT FROM JAPAN INTO SOUTH EAST ASIAN COUNTRIES AND RECOMMENDATIONS FOR VIETNAM Student's name Student ID Class Cohort Supervisor : Nguyen Dinh Vinh : 1117150123 : A29 - CLCKT - K50 : 50 : MSc Cao Thi Hong Vinh Hanoi, May 2015 TABLE OF CONTENTS ABBREVIATIONS LIST OF FIGURES AND TABLES INTRODUCTION .1 CHAPTER 1: OVERVIEW OF FOREIGN DIRECT INVESTMENT AND JAPAN FOREIGN DIRECT INVESTMENT OUTFLOWS 1.1 Overview of Foreign Direct Investment .3 1.1.1 Concepts .3 1.1.2 Characteristics 1.1.3 Classification 1.1.4 Determinants of FDI .10 1.1.5 Role of FDI towards home and host countries .16 1.2 Overview of Japan Foreign Direct Investment Outflows 20 1.2.1 Total value and number of projects of Japan outward FDI 20 1.2.2 Japan FDI outflows by region 23 CHAPTER 2: DETERMINANTS OF JAPAN OUTWARD FOREIGN DIRECT INVESTMENT TO SOUTH EAST ASIAN COUNTRIES 31 2.1 Overview of Japan FDI outflows to South East Asian countries .31 2.1.1 Japan FDI outflows to the whole South East Asian countries as a unit 31 2.1.2 Japan FDI outflows to individual South East Asian countries 36 2.2 Literature review of empirical research about determinants of outward foreign direct investment 43 2.3 Quantitative analysis about determinants of Japanese outward FDI to South East Asian countries 48 2.3.1 Methodology and model specification 48 2.3.2 Data and variable description .49 2.3.3 Result analysis 54 CHAPTER 3: RECOMMENDATIONS TO VIETNAM ON ATTRACTING FOREIGN DIRECT INVESTMENT FROM JAPAN 60 3.1 Situation of attracting Japan outward FDI to Vietnam .60 3.1.1 Total value of Japan FDI to Vietnam 60 3.1.2 Japan outward FDI to Vietnam by sector 61 3.2 Governmental directions and targets to boost Japan FDI 62 3.3 Recommendations for Vietnam to attract Japan outward FDI 63 3.3.1 Enhancing national economic growth 63 3.3.2 Improving the quantity and quality of human capital 65 3.3.3 Upgrading quality of infrastructure 67 3.3.4 Boosting exchange rate policy 69 3.3.5 Boosting trade openness by conducting promotion schemes 69 CONCLUSION 72 REFERENCES 74 ANNEX 76 ABBREVIATIONS AJCEP ASEAN BOP EU FDI FTA GDP GSO IMF JPY JVEPA LCU M&A MNE OECD OFDI PPP SEA TNC UNCTAD UK US WTO ASEAN-Japan Comprehensive Economic Partnership Association of Southeast Asian Nations Balance of Payment European Union Foreign Direct Investment Free Trade Agreement Gross Domestic Product General Statistics Office International Monetary Fund Japanese Yen Japan-Vietnam Economic Partnership Agreement Local Currency Unit Merge and Acquisition Multinational Enterprise Organization for Economic Co-operation and Development Outward Foreign Direct Investment Public Private Partner Southeast Asian Transnational Corporation United Nations Conference on Trade and Development United Kingdom United States World Trade Organization LIST OF FIGURES AND TABLES Figures Title Figure 1.1 US, Japan, France, United Kingdom, Netherlands and German of Page 21 Figure 1.2 Figure 1.3 Figure 1.4 Figure 1.5 Figure 1.6 Figure 1.7 Figure 1.8 Figure 1.9 Figure 1.10 Figure 2.1 outward FDI flows evolution (1990-2012) Number of projects of Japan outward FDI (1990 - 2004) Number of projects of Japan outward FDI (2005-2013) Japan outward FDI regional distribution (1990-2010) Japan outward FDI to North America (2000-2014) Japan outward FDI to Latin America (2000-2014) Japan outward FDI to Europe (2000-2014) Japan outward FDI to Asia (2000-2014) Japan outward Manufacturing FDI (2005-2014) Japan outward Non-manufacturing FDI (2005-2014) Value of Japan outward FDI in South East Asian countries (1995- 22 23 24 25 26 27 28 29 30 32 Figure 2.2 2013) Japan's rate of return on outward FDI by region/country (2001- 33 Figure 2.3 Figure 2.4 2011) Japan FDI in Asia by region/country Japan's Services FDI in South East Asian countries by sub-sector 35 36 Figure 2.5 (2005-2010) Japan outward FDI to Vietnam, Thailand and Singapore (1995- 37 Figure 2.6 2013) Japan outward FDI to Malaysia, Philippines and Indonesia (1995- 39 Figure 2.7 2013) Japan's manufacturing FDI in South East Asia by country (2005- 40 Figure 2.8 Figure 2.9 2010) Japan's services FDI in South East Asia by country (2005-2010) Japan FDI in South East Asia's Transport sector by country (2005- 41 42 Figure 2.10 2010) Japan 's Finance and Insurance FDI in South East Asia by country 43 (2005-2010) Figure 3.1 Figure 3.2 Table 2.1 Japan FDI outflows to Vietnam (1995-2013) Japan FDI outflows to Vietnam by sector (1995-2013) FDI flows to South East Asian countries (top major source countries, 2001-2005) 61 62 31 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 2.7 Japan FDI in Asia by region/country Abbreviation and expected signs of determinants Summary statistics Result of empirical model Result of normal distribution test Result of multi-collinearity test 34 53 54 55 57 58 INTRODUCTION Rationale Foreign Direct Investment (FDI) is one of the core features of the globalization and the world economy over the past few decades It is considered to be integral to lessdeveloped, developing and developed countries since attracting FDI is a crucial part of their development progress and economic reforms Among leading investing countries such as the United States (US), the United Kingdom (UK), Germany and other developed countries, Japan has experienced a remarkable increase in FDI outflows and became one of the biggest source of FDI since the late 1980s The major beneficiaries of Japan outward FDI range from industrial countries to developing world, especially South East Asia (SEA) region of which member countries has significantly benefited from Japan outward FDI In fact, there are a number of determinants that would explain Japanese investment trend in this region Fully understanding them would help appropriately conduct policies and strategies in order to attract more Japan outward FDI to SEA region That is also the reason why, in this paper, I decide to identify which determinants primarily affect investment decisions of Japanese enterprises in South East Asian countries so as to recommend appropriate strategies to Vietnam to promote and attract more FDI from Japan, hence I choose thesis title: "Determinants of Foreign Direct Investment from Japan into South East Asian countries and Recommendations for Vietnam" for my research Objectives This paper is aimed at identifying the trend of Japan outward FDI to South East Asia region, in general and to Vietnam, in particular, consequently recommending suitable plans and strategies to Vietnam in the hope of attracting more Japan outward FDI Subjects and scope of research - Subjects of research: I would like to determine the trend and determinants of outward FDI from Japan into South East Asian countries - Scope of research: FDI outflows from Japan into countries namely Vietnam, Thailand, Singapore, Malaysia, Indonesia and Philippines will be elaborately analyzed - Time period of research: the thesis will analyze the data from 2004 to 2013 Research methodology The research will employ both qualitative and quantitative methodology First of all, a general analysis about the trend of Japan FDI outward from 1990 to 2013 will be presented to see the movement and changes in location as well as industry decision of Japan investors Afterwards, I would like to use panel regression model to test the impacts of determinants on FDI flows from Japan to South East Asian countries Detail of the empirical model would be mentioned in Chapter I expect that the applied empirical test will help me discover the real typical motivations of Japan outward FDI (OFDI) into South East Asian countries and from that I can propose some appropriate recommendations for Vietnam Research structure The paper would be structured as follows In the first chapter I would like to review the related concept and develop a theoretical background for the empirical analysis After that, in the next section an overview about the general trend of Japan outward FDI will be presented I would like to point out some striking features throughout the years from 1990 to 2013 by regions and sectors Next, the methods and data will be presented Details of the methodology used in our research are explained in this section It describes measurement formula, research model, and variable specifications Then, data and sample are explained The empirical results from an analysis using data from official statistics of publically recognized organizations such as Japan External Trade Organization (JETRO), World Bank, United Nations (UN), International Labor Organization (ILO), and International Monetary Fund (IMF) from 2004 to 2013 This part is followed by discussion of results Finally, recommendations and implications are provided for Vietnamese government and enterprises can exploit advantages of the investing environment and overcome disadvantages to attract more FDI from Japan in the coming years CHAPTER 1: OVERVIEW OF FOREIGN DIRECT INVESTMENT AND JAPAN FOREIGN DIRECT INVESTMENT OUTFLOWS This chapter offers a deep insight into theoretical background regarding general concepts and definition of Foreign Direct Investment (FDI) Additionally, in its last half, Japan's FDI outflows in general will also be discussed so as to bring an indepth understanding about Japan's global investment trend 1.1 Overview of Foreign Direct Investment This section is concerned with theoretical background associated with FDI including concepts, characteristics, classification, determinants and roles of FDI 1.1.1 Concepts The concepts of FDI vary across the nations and applications Each country usually maintains its own definitions and regulations of FDI in the national legislature, particularly the investment law In this part, I would like to focus on the FDI definition and related concepts specified by the three big economic organizations that are International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD) and World Trade Organization (WTO) International Monetary Fund (IMF) (Balance of Payments Manual (BPM5), 5th edn) defines FDI as an investment with long-term relationships where an organization in an economy (direct investor) can gain long-term benefits from a direct investment enterprise that operates in another economy The purpose of the direct investor is to acquire significant degree of management and control over the business (more than 10%) Organization for Economic Co-operation and Development (OECD) (Benchmark Definition of Foreign Direct Investment (BMD4), 4th edn) defines: Direct Investment is conducted with the aim of establishing long-term economic relationship with an enterprise and exerting control over it by: - founding or expand an enterprise or a branch under control of investor purchasing the existing enterprise joining a new enterprise issuing long-term credit (more than years) World Trade Organization (WTO) (Trade and Foreign Direct Investment, Oct 9th 1996) defines: FDI occurs when a foreign investor (home country) owns a property in another country (host country) and the rights to control it Control power is the sign to differentiate FDI from other types of investment Referring to United Nations Conference on Trade and Development (UNCTAD) (World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, p 245), FDI is defined as an investment activity related to a long-term relationship and reflect a long-term concern as well as the control of an entity in the investor's company (holding company) that invests in another economic group (an enterprise has foreign direct investment) FDI allows investors to have the considerable power of management and control over the enterprise that receives FDI Such investment activity is associated with initial transactions between enterprises as well as prospective ones between them and their foreign branches (including both merged and unmerged branches) Therefore, FDI is composed of sections: initial investment capital of investor, re-investment income and internal loans between companies The Ordinance No 06/2013/PL-UBTVQH13 (Mar 18th 2013) concerned with the modification, supplement of Foreign Exchange Ordinance of Vietnam regulates: "FDI into Vietnam means that foreign investors invest their capital and take part in management in Vietnam." In conclusion, FDI, to the best of my understanding, is a means of foreign investment where investors invest partially or totally their capital in an enterprise in host country with the aim of exerting management and control over the enterprise 1.1.2 Characteristics There are a number of characteristics of FDI However, I would like to choose the most outstanding ones of FDI, namely a profit target, control power, selfdetermination and technology transfer (according to Vu Chi Loc (2012)) Profit target FDI is considered to be private investment according to classification of a number of documents However, in Vietnam, the state can participate in FDI The ultimate goal of FDI is gaining profit whether the investors are the state or private enterprises The host countries, especially the developing countries should take it into consideration when conducting strategies to attract FDI Attract FDI is to support the socio-economic development rather than only benefit the investors Control power Foreign investors are required to invest an amount of capital greater or equal to the minimum capital which is regulated depending on rules and regulations of each countries (10% in the US, 20 % in France and 30% in Vietnam) in order to acquire the control or participate in the control of an enterprise and its activities In addition, if they embark on a joint venture, the division of rights, responsibilities, benefits and risks among them depends on their capital contribution ratio Self- determination FDI is considered a major form of foreign investment by individual capital Investors themselves decide to invest, to run business, consequently gaining profit or facing loss on their own Additionally, compared to ODA and other types of investment, FDI has no connection to burdens of economic debt or politics, thereby enhancing the economic efficiency as well as economic growth Technology transfer Generally, FDI is associated with technology transfer and new market exposure As regards host country, besides receiving foreign capital, it also acquires technology transfer from home country that helps to save time and money for production, hence increasing the productivity On the other hand, home country has access to a new market, and consequently being able to take full advantage of domestic resources (such as raw materials, etc.) 1.1.3 Classification There are distinct criteria to classify FDI In this section, I base on modes of FDI entry, motivation of investors, perspectives of host countries and product/production process to categorize it (according to UNCTAD) 1.1.3.1 Based on modes of FDI entry Foreign direct investors would consider different methods to invest in other countries through Greenfield investment, Joint venture or merger/acquisition of an enterprise that already exists in the receiving country In their decisions, firms take into account several local conditions in the receiving country, including those regarding domestic firms and factors at industry and country levels Greenfield investment Greenfield investment refers to а form of foreign direct investment in which а holding compаny stаrts а new venture in а foreign nаtion by estаblishing new operаtionаl fаcilities from the scrаtch (there is no such fаcilities exist before) The Greenfield mode of entry is more likely when speed of entry аnd аccess to proprietаry аssets is not the first choice for the investors when the chаnce for entry through M&А аre limited due to lаck of suitаble tаrget firms to аcquire or regulаtory difficulties However there аre still some disаdvаntаges with this type of FDI The business often requires intensive аnd аccurаte knowledge аbout the tаrget mаrket, the trends specific to the consumers аs well аs the possible competitors А high level of risk is аssociаted with such а venture аnd аs а result а high degree of commitment is required for it Moreover, the costs of the investment from scrаtch for the compаny cаn be very expensive in the short run (Newbury & Zierа, 1997) Merger and Acquisition (M&A) 10 Piyaphan Changwatchai, 2010, The determinants of FDI inflows by industry to ASEAN 11 Shintaro Hamanaka, 2011, Examination of the Singapore Shift in Japan's Foreign Direct Investment in Services in ASEAN, ADBI Working paper series, No 267, Asian Development Bank Institute, Tokyo 12 Shin-ya Nakamura, Tsuyoshi Oyama, 1998, The Determinants of Foreign Direct Investment from Japan and the United States to East Asian Countries, and the Linkage between FDI and Trade, Working Paper 98-11, Research and Statistics Department, Bank of Japan, Tokyo 13 Shujiro Urata, 1993, Japanese Foreign Direct Investment and Its Effect on Foreign Trade in Asia, Trade and Protectionism, NBER-EASE Volume 2, University of Chicago Press, Chicago 14 UNCTAD, 1998, World Investment Report 1998: Trends and Determinants, United Nations Publication, Sales No E.98.II.D.5, New York and Geneva 15 UNCTAD, 2007, World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, United Nations Publication, Sales No E 07.II.D.9, New York and Geneva 16 UNCTAD, 2010, Institute Teaching Material on Economic and Legal Aspects of Foreign Direct Investment, United Nation Publication, New York and Geneva 17 UNCTAD, 2012, World Investment Report 2012: Towards a New Generation of Investment Policies, United Nations Publication, Sales No E.12.II.D.3, New York and Geneva ANNEX Annex Japanese outward FDI to Europe by countries Unit: billion USD Source: OECD statistical database Annex Japan’s outward FDI to Asia by countries (billion USD) Unit: billion USD Source: OECD statistical database Annex 3: Japan's outward FDI to Laos in 2010 and 2011 Unit: thousand USD Source: JETRO, Japanese Trade and Investment Statistics (http://www.jetro.go.jp/en/reports/statistics/) Annex Japan's Trade and FDI to Laos (2003-2007) Unit: million USD Source: Ministry of Foreign Affairs Japan Annex Japan's outward FDI to Cambodia in 2009 and 2010 Unit: thousand USD Source: JETRO, Japanese Trade and Investment Statistics (http://www.jetro.go.jp/en/reports/statistics/) Annex Japan's Trade and FDI to Cambodia (2003-2007) Unit: million USD Source: Ministry of Foreign Affairs Japan Annex Cumulative Japan's outward FDI to Myanmar (1988-2011) Unit: million USD Source: JETRO, Japanese Trade and Investment Statistics (http://www.jetro.go.jp/en/reports/statistics/) Annex Japan's Trade and FDI to Myanmar (2003-2007) Unit: million USD Source: Ministry of Foreign Affairs Japan Annex Japan's outward FDI to Brunei in 2009 and 2010 Unit: million USD Source: JETRO, Japanese Trade and Investment Statistics (http://www.jetro.go.jp/en/reports/statistics/) ... attract more FDI from Japan, hence I choose thesis title: "Determinants of Foreign Direct Investment from Japan into South East Asian countries and Recommendations for Vietnam" for my research Objectives... 23 CHAPTER 2: DETERMINANTS OF JAPAN OUTWARD FOREIGN DIRECT INVESTMENT TO SOUTH EAST ASIAN COUNTRIES 31 2.1 Overview of Japan FDI outflows to South East Asian countries .31 2.1.1 Japan FDI outflows... CHAPTER 2: DETERMINANTS OF JAPAN OUTWARD FOREIGN DIRECT INVESTMENT TO SOUTH EAST ASIA COUNTRIES This chapter offers a deep insight into the trend of Japan outward FDI flows to South East Asian countries