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IMPACT OF SECTOR ON ATTRACTING FDI IN VIETNAM

Abstract
The purpose of this paper is to analyze the linkage of Foreign Direct Investment (FDI) and
economic sectors in Viet Nam, the relationship of which has been intensively discussed for a long
time. Numerous of studies have showed the result that FDI has various effects across sectors but
little of them were actually researched in Viet Nam. In this essay, we use the method of
regression analysis and dummy variables with the data of the General Statistics Office of
Vietnam. We hope our study will be beneficial in helping the government to create favorable
conditions to attract FDI into our country which would turn Vietnam into an industrialized and
modernized country.
Keyword: FDI, Regression, Dummy variables, Viet Nam, Sector
1.

Introduction

FDI, emerged in Vietnam since 1986, plays a huge role as it provides investment capital which is
not only essential for economic growth in many sectors but also helps in restructuring the
economy, transferring new technologies, generating job opportunities, making it more easier for
the economy to be integrated with other countries.
Although FDI inflows into Vietnam have been increased rapidly and reach 4 billion USD in
2005, it needs to be studied carefully and thoroughly since FDI inflow cannot be controlled or
predicted easily. In contrast, it is quite complex as there are many factors that affect the FDI
inflows. It is undeniable that attracting FDI is of great importance for one nation; however, there
are still many problems in attracting FDI especially in the relationship between sectors and how
they affect FDI inflows. In this essay, we use the analysis method of dummy variable regression
to point out the relationship mentioned above along with the proposals about which sectors
should be focus on more for the best result in attracting FDI and in what way we can apply those
suggestions effectively.
2.

Theory and research methodology

2.1. Foreign direct investment (FDI)


FDI is commonly known as cross-border investment by an enterprise or entity in one economy in
order to achieve a lasting interest in a company in another economy. Specifically, the
International Monetary Fund defines FDI as when one individual or business owns at least 10%
of a foreign enterprise's capital. Every financial transaction afterwards is considered as an

additional direct investment. However, if an investor owns less than 10%, it is considered as an
addition to his or her stock portfolio.
Literature review
There are many different factors that can affect the volume and distribution of FDI, especially in
developing countries. In Vietnam, this has received much attention from quite a lot of
researchers. Indeed, there have been some studies about the factors affecting FDI inflows to
Vietnam, which includes Research about factors affecting FDI into a locality in Vietnam
(Nguyen Manh Toan, 2010), or Impact of investment environment (Hoang Khac Lich &
Nguyen Quoc Viet, 2013).
Regarding some experimental research about FDI, in 2003, Hein Herrmann and Robert Lipsey
applied the method analysis of dummy variable regression to analyze Foreign Direct Investment
in the real and financial sector of industrial countries. Ashoka Mody also used the same method
in the book Foreign Direct Investment and the World economy in 2007.
Beyond some factors such as the market size, infrastructure quality or political stability, another
key element contributing to attracting foreign direct investment is the openness of sectors to
foreign equity ownership. In Starting a Foreign Investment Across Sectors, a product of the
FDI regulations database, Christian De La Medina Soto and Tania Ghossein also showed that the
average openness to foreign equity investment across sectors is positively correlated with inflows
of FDI, according to which three sectors attracting highest FDI inflows in Asia are
Manufacturing, Tourism and Services, while Media is the most restricted sector. In order to
study further about this in Vietnam, the Impact of sector on attracting FDI to Vietnam looks
specifically at how some sectors account for more percent of FDI inflows than others.
An overview of the recent FDIs situation in Viet Nam.
Source: The General Statistics Office

As can be seen from the bar chart, FDI inflows to Vietnam were relatively low in the first 14
years, from 1991 to 2005. Vietnam has just been considered as a new good place for foreign
investment since 2006. In 2008 FDI into Vietnam reached its peak with 71.7 billion USD, as
triple as that in 2007. However, this figure considerably decreased to 23.1 billion USD due to the
impact of global recession. After dropping continuously for the next 3 years, FDI inflows started
to recover slightly in 2013.
Moreover, out of 50 countries and territories investing in Viet Nam, much of the FDI inflows into
Vietnam come from developed Asian countries. South Korea was Vietnam's biggest investor with
over US$ 3.75 billion (accounting for 26.3% of total FDI registered capital). Singapore ranked
second with US$ 3.01 billion (21.1%). Followed by China US$ 2.27 billion (16%); Japan US$
1.29 billion (9.1%); Russia US$ 1.02 billion; Hong Kong US$ 604 million (4.2%); Taiwan US$
400 million (2.8%).
1Regression analysis with dummy variables
Regression analysis was once coined by Francis Galton is a statistic tool that helps researchers
study about the relationship between many variables in order to identify the impact of one
variable on the others. This analysis tool has been long used in the economics also to define the
effect of one economics factor on other factors of the economy. Dummy variables are used in
regression model to quantify the qualitative variables. Qualitative variable denotes whether or not
one particular character, or different levels of one of these attributes.
In order to analyze the impact of sector on attracting FDI in Viet Nam we use the model:
Yi= 1 + 2D1i + 3D2i + 4D3i + 5D4i
With:

1, 2, 3, 4, 5 are the regression parameters


Yi is the dependent variable FDI (million USD)
D1i; D2i; D3i; D4i are the values of the independent variables to the observation
i, or can be said the values of the sectors observed (dummy)
D1i =1 if the cause attracting FDI is from sector Hotels and Restaurants
D1i =0 if the cause attracting FDI is from other sectors
D2i=1 if the cause attracting FDI is from factor Manufacturing
D2i=0 if the cause attracting FDI is from other sectors
D3i=1 if the cause attracting FDI is from factor Mining and Quarrying
D3i=0 if the cause attracting FDI is from other sectors
D4i=1 if the cause attracting FDI is from factor Real estate, Renting
business activities
D4i=0 if the cause attracting FDI is from other sectors
Hence, we consider Construction a basic category.
E (Yi| D1i = 0, D2i = 0, D3i = 0, D4i = 0) = 1 (1)
(1) Represents the average FDI flows into sector Construction
Similarly, we have, the average FDI flows into sector Hotels and Restaurants:
E (Yi| D1i = 1, D2i = 0, D3i = 0, D4i = 0) = 1 + 2
The average FDI flows into sector Manufacturing:
E (Yi|D1i = 0, D2i = 1, D3i = 0, D4i = 0) = 1 + 3
The average FDI flows into sector Mining and Quarrying:
E (Yi| D1i = 0, D2i = 0, D3i = 1, D4i = 0) = 1 + 4
The average FDI flows into sector Real estate and Renting business activities:
E (Yi| D1i = 0, D2i = 0, D3i = 0, D4i = 1) = 1 + 5
2Research data and model estimation techniques
In this research, the data which was mainly collected from the Vietnamese General Statistics
Office (GSO) is secondary data type. We also got the information from other sources such as
articles, scientific researches, and internet as well. Methods of analysis, synthesis, statistics and
hypothesis are also applied in this research.
3.

Results and discussion

3General results
1 Overview
Figure 1. Foreign direct investment licensed in 2005-2012 by sectors (million USD)

Con-

Hotels and

Manu-

Mining and Real estate, renting

struction

restaurants

facturing

quarrying

business activities

56.00
144.30
262.3
6840.8
397.0
202.3
98.4
167.5

460.80
1818.80
6114.8
23702.8
7808.4
6842.7
869.9
1979.9

2005
171.10
61.80
4818.40
2006
641.40
498.40
8270.90
2007
993.3
1968.1
10882.5
2008
492.1
1350.2
28902.4
2009
652.0
9156.8
3942.8
2010
1734.6
5437.9
5081.2
2011
1296.4
476.8
7788.8
2012
346.0
108.2
11701.9
Source: General statistics office of Vietnam.

Total
6839.80
12003.80
21347.80
64011.00
23107.3
18600.00
15598.1
16348.00

From the data shown in the table above, we have a line graph illustrating the general trends of the
amount of FDI invested in 5 sectors
35000.00
30000.00
25000.00
Construction
20000.00

Hotels and restaurants

Manufacturing

milion USD 15000.00


10000.00
Mining and quarrying
5000.00
0.00
2005

Real estate, renting business activities

2006

2007

2008

2009

2010

2011

2012

Figure 2. Foreign direct investment licensed in 2005-2012 by sectors


As can be seen from the table and the chart, a huge amount of FDI in Vietnam were invested in
Manufacturing and Real estate, renting business activities while other sectors just contributed to
negligible amount. Especially, in 2008, both of them reached their peak with 28902.4 million
USD for Manufacturing and 23702.8 million USD for Real estate, renting business activities.
However, from 2009, the FDI of Manufacturing suddenly dipped at 5081.2 in 2010 and then
slowly recovered. Real estate and renting business activities also considerably dropped until
2012. FDI flown to Hotel and restaurant remained stable since 2005 and then markedly climbed
to its highest point 9156,8 million dollar in 2009 and slipped back afterward. The sector Mining
and quarrying got the same trend with the highest point was 6840.8 in 2008.

2 Regression with dummy variables in means of FDI attracted by sectors of economy


Using the data given, we obtain the following results:
Y = 790.8625 + 1591.4125*D1 + 9382.75*D2 + 230.2125*D3 + 5408.9*D4
se =(1869.820) (2644.325) (2644.325)

(2644.325)

(2644.325)

t =(0.422962) (0.601822) (3.548259) (0.087059) (2.045475)


p =(0.6749)

(0.5512)

(0.0011)

(0.9311)

(0.0484)

R2 = 0.345785
df = 35
F(4,35) = 4.624814
p = 0.004201
As these regression results show, the mean FDI of sector Construction is about 790.8625 million
USD, that of sector Hotels and Restaurants are about 1591.413 million USD, Manufacturing is
about 9382.75 million USD, Mining and quarrying are about 230.2125 million USD, Real estate
and renting business activities are about 5408.9 million USD.
Although R2 of this model is just 0.345785 which is quite low, the probability of
F(4,35)=0.004201 is very small, so this model can be said to be reasonable accepted.
As can be seen from this regression, the estimated slope coefficient for Construction, Hotels and
Restaurants, Mining and quarrying are not statistically significant as its p value are 0.6749,
0.5512, 0.9311 (greater than 5 percent) respectively. Hence, the sector does not have influence on
the amount of FDI attracted in Construction, Hotels and Restaurants, Mining and quarrying while
in Manufacturing and Real estate and renting business activities it does have influence.
Therefore, the overall conclusion is that statistically the mean FDI in 5 mentioned sectors are
significant different.
We did Whites General Heteroscedasticity Test and had results n.R2 =4.698695, Prob.=
0.3196>5%. Thus, there is no heteroscedasticity.
Moreover, the absolute value of the coefficient of correlation between D 1 and D2, between D1 and
D3, between D1 and D4, between D2 and D3, between D2 and D4, between D3 and D4 are equal 0.25
(less than 0.8) , which means there is the model has low multicollinearity so this model can be
accepted.
We also did Breusch-Godfrey Serial Correlation LM Test as well and had results Prob. ChiSquare=0.7535 (greater than 5%), hence, there is no autocorrelation.

4Factors affecting FDI of sectors


1 Geographical location and natural conditions:
The geographical location and natural conditions of Vietnam are always highly appreciated by
foreign investors. Our natural conditions such as sea, forest, resources, land, water, etc is an
advantage for most sectors such as heavy industries, energy industries and manufacturing.
Moreover, Vietnam is located in a strategic area of Southeast Asia which is a convenient
geographical location for transportation. This is the reason why Vietnam is considered to be a
springboard to investors purpose.
2 The economic - political social environment
Political is one of the first elements to be considered when investing into a country as it is the
requisite to develop economic. Political environment in Vietnam was assessed to be stable.
However we are still in the process of innovation and integration into the world economy, not all
foreign investors understand and believe in the policy of encouraging FDI in Vietnam.
3 Law and policy
Vietnamese government more and more focuses on attracting investors. Foreign Investment Law
and legislation on foreign investment have been issued. The provisions of the law of Vietnam in
the field of investment incentives, forms of foreign investment and measures to ensure the
investment are considered to be liberal and attractive in comparison with other countries. For
example, in car industries, Vietnam has made a multi-dimensional advocacy policy for the
component manufacturing company in Japan to encourage them to move from Japan to Vietnam.
However, the guidelines and enforcement decrees issued too slow and lacked of detail
deployment processed, which makes it difficult for the activities of investors. The legal system of
foreign investment in Vietnam is a newly formed so is not really fully synchronized.
4 Infrastructure
In recent years, the infrastructure of Vietnam has developed rapidly. The modern international
airport, railway systems, traffic networks and communications systems are nationwide coverage.
However, the issue of infrastructure development in Vietnam is so far still facing some financial
problems so if the foreigners want to invest, they need a huge amount of capital, especially in the
national transport network investment.
5 Human resources

Abundant cheap labor in Vietnam is one of our advantages. According to VEF (Vietnam
Economic Forum), with 0.39USD / hour, Vietnam ranks 5th in the list of countries with cheap
labor market in the world. However, the quality of labor in Vietnam is not high. Therefore, FDI
into Vietnam only focuses on the most labor-intensive industries such as footwear, apparel or
textile and does not require high skill.
5Some assessment of the position of the sectors in attracting FDI
1 Real estate and renting business activities
In general, capital invested into this sector is starting to grow in recent years. In 2014, real estate
sector ranked second in attracting FDI in the first quarter of the year. Furthermore, experts have
predicted that there will be a bigger-scale of FDI flowing into the market this year, as the price of
real estate in Vietnam is relatively lower than that of others countries along with some certain
advantages in the region, for instance, the demand for housing is still high, young population, the
economic growth is stable and urbanization is still low.
However, it is predicted that the pressure would soar as the market will be frozen which will in
turn lead to bankruptcy and bad debt. Moreover, there are some problems such as high tension
and conflict between the residents and the investors leading to a failure in many projects.
2 Construction
Foreign investors have already realized the important of construction sector in Vietnams
industry; therefore, it leads to ever increasing projects in this field. To be specific, Vietnam has
enhanced its business partnership with Japan who is the sponsorship for many constructions in
Vietnam including railway, marine, road land...
However, there are still problems especially when carrying out the constructions, which include
the lack of consideration about the economic situation, and collaborate with other well-known
construction companies.
3 Hotels and restaurants
Investors bring into Vietnam new management technologies and attractive services along with
new impressive projects on hotels and restaurant which helps develop the tourism in Vietnam.
But after the period of 2008-2010, there was a decrease in total capital invested into the field of
real estate in 2013. This was caused mainly by projects being delayed due to financial problems.
It is suggested that the government should instead monitor the financial capacity of foreign
investors rather than just give them license and then revoke the license if there is any problem.

4 Manufacturing
Manufacturing is the sector that attracts most FDI in 2014 according to the Ministry of Planning
and Investments Foreign Investment Agency, which accounted for 76.5 percent of total capital
invested in January and February.
5 Mining and quarrying
It is considered that mining and quarrying in Vietnam is one of the sectors that attract much of
FDI and has the potential to develop, as it is one of the fastest-growing and stable markets
compared to other nations in Asia. Vietnam also considers focusing on producing high quality
coal for reservation purpose aiming to push the industry of heavy mining, technology, and related
service, etc. But mining industry may face problems if sustainable development and socioeconomic effectiveness cannot be achieved.
2

Conclusion and policy implication


1Conclusion

Through this essay, the impact of sector on attracting FDI in Viet Nam has been pointed out that
there is a significant difference between the amounts of FDI invested into 5 sectors analyzed.
Among mentioned sectors, just only Manufacturing and Real estate and Renting business
activities showed that their sectors have effect on the FDI, they also account for the majority of
the FDI invested into Viet Nam while the other remained sectors illustrated a negligible impact of
the factor sector in attracting FDI. Furthermore, we expand our research by analyzing some
factors can affect the FDI received such as cheap labor force, developing infrastructure, natural
resources endowments, and the favorable policy which encourage foreign investors to pour
money into Viet Nam. To sum up, we suggest that the government should mainly focus on
Manufacturing and Real estate and Renting business activities.
2Policy implication
To attract FDI, besides improving the procedures and omitting redundant ones, we could be more
active in the way enticing investors. Government should prioritize 5 main sections, which are
Construction, Hotel and restaurant, Manufacturing, Mining and quarrying, Real estate and
Renting business activities. Moreover, sector-monopoly must be eliminated; especially
electricity, water and seaport services. Enterprises obtaining the monopoly advantages could
increase the marginal revenue and decrease marginal cost, which would lead to an imbalance
situation in the harsh competition among sectors and enterprises. Last but not least, the

government also needs to restrict unnecessary sectors through restrictive measures. We cannot
just open the door of the economy with so many trading activities and accept all the investing
suggestions since even only a small amount of FDI invested wrongly might considerably worsen
the economy.
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