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DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN VIETNAM

Thu Thi Hoang

Abstract
Since the Vietnamese economic reforms in 1986, Vietnams economy has been among the fastest
growing countries in ASEAN. Foreign direct investment (FDI) flows are an important factor helping economic
growth and development in Vietnam. This paper explores factors that determine foreign direct investment in
Vietnam from 1988 to 2005. The main results show that higher market size, GDP growth, openness to trade and
better infrastructure development are factors attracting FDI inflows into Vietnam. However, at this stage of
research, we have not found a strong relationship between FDI and human capital quality or the timing of joining
ASEAN. More study is needed to gain a better understanding on this aspect.
Key Words: foreign direct investment, determinants, Vietnam

Introduction
Fully independent in 1975, Vietnam has been in transition from a centrally planned to a market oriented
economy since December 1986. These economic renovation policies called doi moi were very successful at
generating economic growth and reducing poverty. Vietnam had seen remarkable economic achievements in
growing gross domestic product (GDP), GDP per capita, export and foreign investment and important trade and
economic agreements signed with major partners. Large amounts of foreign direct investment (FDI) have flown
into Vietnam. FDI not only brings additional capital to the Vietnamese economy, but can also bring modern
technology, managerial expertise and more industries, products and jobs. Therefore, FDI might promote better
utilization of domestic resources and accelerate economic structural transformation in the direction of
industrialization and modernization. Vietnams economy now is among the fastest growing country in the ASEAN.
The FDI in Vietnam has been expanded along with the countrys rapid economic growth increased
openness to the rest of the world. It is useful to know important factors determining FDI in Vietnam. However,
there are not many studies on determinants of FDI in Vietnam due to the lack of data and information on Vietnam.
The purpose of this study is to examine factors which are most important for increased FDI across Vietnam from
1988 to 2005. The paper first gives a brief background on FDI development in Vietnam. Then, it shortly reviews
empirical evidences of location determinants of FDI and discusses model specification and potential
determinants of FDI in Vietnam. In the final section, the study finds factors attracting FDI in Vietnam using the
quarterly time series data and makes conclusions.

Foreign direct investment in Vietnam: an overview


Right after Vietnams economic reforms in 1986, the first Law on Foreign Investment was introduced by
the National Assembly of Socialist Republic of Vietnam in December 1987. The law states that Vietnam welcomes
and encourages foreign organizations and nationals to invest capital and technology in Vietnam on the basis of
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respect for national independence and sovereignty, full observance of the Laws of Vietnam, equality and mutual
benefit. The State shall guarantee the ownership of the invested capital and other rights of the foreign investors,
and extend to the latter favorable conditions and easy formalities1. The law was revised to improve the
investment environment and further attract foreign capital in 1990, 1992, 1996, 2000, and 2003 and recently in
the new FDI law in 2005 by the amended tax, land, currency policies and environment.
From the first law on Foreign Investment in the late 1987 that granted legal status for FDI inflows,
Vietnam has been greatly attracted attention from foreign investors. FDI inflow into Vietnam increased rapidly
during the 1990s and in the first half of the 2000s. From 1988 up to December 2005, there were 7279 FDI
projects receiving investment licenses with total registered capital amounting to US $66244.4 million. In 2005
alone, there were 922 projects with registered capital of US$ 4268.4 million. Even though the number of contracts
in the five year 2001-2005 were more than double of that in the five year 1996-2000, the registered capital in
2001-2005 period were smaller than that in 1996-2000 period. The registered capital in 1996 was the highest
amount (US$10164.1 million) and accounted for 1/6 of total capital registered.
Table 1 shows the overall trend of FDI inflows in Vietnam. The opening of the Vietnamese economy to
FDI in 1987 and subsequent measures to liberalize the FDI regime, together with the fast growth of the 1990s, led
to a rapid increase in FDI inflows in the first half of 1990s, peaked in 1996 at 9735.3 million US dollars and
dropped sharply after that. Although showing a gradual increase again at beginning of period 2000-2005, the
registered capital in 2005 was only $4268.4 million, equal to 0.44% of that in 1996. The 1997-1998 East Asian
crises could be one of the interpretations of the downturn in FDI inflows as the volume of FDI in Viet Nam in the
early 1990s had two third come from these countries. Moreover, the lack of transparency in property and land
rights, dispute resolution mechanisms, preferential treatment of local firms and suppliers, corruption, and
infrastructure constraints in Vietnam are the other reasons of the decline in FDI flow(Schaumburg-Muller 2003,
p.48).
To attract FDI inflows into Vietnam, the crucial legal changes were made in Decree 852 of January 1996
and the amended Foreign Investment Law 2000. Decree 852 placed FDI coordination and planning under the
direct control of the provincial People's Committees Department of Planning and Investment (DPI). The Foreign
Investment Law allowed provinces to sign directly small FDI projects (below $10 million). Not coincidentally, the
average size of individual FDI projects has dropped considerably since 1996 despite the fact that the absolute
number of projects increased.
Up to the December 2005, there are 75 different countries and territories had invested in Vietnam with
most capital inflows from Asia. Table 2 shows that Taiwan is the biggest foreign investor in term of contractual
FDI value for the period 1988-1995 and with US$ 3134.1 million in early stage, accounted for 17% of total FDI
1

Vietnam Permanent Mission to the United Nations,


http://www.un.int/vietnam/dev_bus/Foreign%20direct%20investment%20in%20Vietnam.htm.

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invested in Vietnam, followed by Hong Kong (10.1%), Japan (9.8%), Singapore (8.5%) and Korea (7.8%).
However, in the period of 1996-2000, the share of investment in Vietnam from source countries changed quickly.
Singapore tops of the list by increasing its share from 8.5% in 1988-1995 up to 21.2% in 1996-2000 period. The
unusual increasing of the investment of Singapore can be explained by the large investment in industrial zone in
Binh Duong, a new province in central Vietnam in 1996. Based on the MPI in Vietnam, the Singapores
investment in Vietnam in 1996 is biggest one, counted about one third of total FDI commitment in 1996. After the
signing of US Vietnam Bilateral Trade Agreement in July 2000, investment from United States has been
increasing. The United States is the eleventh biggest countries invested in Vietnam with $1455 million, accounted
2.85% of total registered capital in period 1988-2005. Most of FDI projects in Vietnam have focused on industry
and construction (oil, gas, food production). Other projects were interested in agro-forestry, fisheries, tourism
and services.
According to the Ministry of Planning and Investment, all 64 provinces and cities in 8 regions of Vietnam
have attracted FDI, but foreign investors predominately concentrate their investments in key economic areas
where they can take advantage of more developed infrastructure. Table 3 shows that during 1996-2005, the Red
River Delta and the South East regions have accounted for average rate of 22.2% and 55.5%of total FDI
commitment, respectively. Other sixth regions received only 22.3% of total committed FDI inflows at the same
time. In 2005, South Vietnam has seen the largest influx of FDI totaling US $3.7 billion, which represents 67% of
the total projects and nearly 54.8% of committed capital in Vietnam. The key economic areas in North Vietnam
such as Red River Delta attracted nearly 20% of the total projects and 34.5% of committed capital. FDI only has
a small effect in the mountain provinces in the North, Central, and Central Highlands, which are Vietnams
poorest regions. Ho Chi Minh City and Hanoi accounted for 13.1 and 23.5 percent, respectively, of the total FDI
inflows in 2005. The other southeast provinces such as Dong Nai, Ba Ria-Vung tau, Tay Ninh and Long An
absorbed another 30.8 percent of total FDI, far more than the principal northern provinces of Hai Phong, Ha Tay
and Quang Ninh, which absorbed just 5.7 percent.
The factors caused this spatial concentration of investment is the infrastructure advantages such as
volumes of roads, airports, freight, postal services and telecommunications of Red River Delta region (including
Hanoi, Hai Phong, Ha Tay and Quang Ninh) and the South East region (including Ho Chi Minh, Dong Nai, Ba RiaVung tau, Tay Ninh and Binh Duong). Numbers of telephone lines of South East and Red River Delta regions
accounted for 22.3% and 20.7% of the total telephone lines in the country, respectively (GSO, 2004). Moreover,
about 80 Industrial and Export Processing zones allocated in the two regions, accounted for more than 70% of
total numbers of IZs and EPZs in Vietnam in 2004 (Runckel, 2004).
Table 3 also indicated that the distribution of FDI inflows into provinces over the years is changing to a
large extent to find new locations. FDI registered capital distributed in some major cities such as Ho Chi Minh
city, Hanoi, Hai Phong and Da Nang are reducing, while increasing in some other new provinces such as Ha
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Tay, Quang Ngai, Binh Duong, Vinh Phuc, Long An , Thanh Hoa and Hai Duong due to those provinces
increasing its competitiveness in attracting FDI. According to Vietnam provincial competitiveness index (PCI),
Binh Duong got highest competitive on the business environment in 2005, followed by Da Nang, Vinh Long, Vinh
Phuc, and Dong Nai and so on. The favor of business environment could lead to an increasing of new FDI
invested.
During the years, Vietnams economy was able to attract FDI in all sectors. The industry sector has
been increasing during the time, from 39.9% in 1988-90, when began having FDI invested in Vietnam, to 52.3%
in the 1990s and up to 74.2% in the first half of the 21 century (Table 4). In which, there are 70% of total FDI was
invested in manufacturing industrial in 1988-2005 (MPI, 2005). Even thought decreased its share in some first
year of the 21 century, the share of industry in total FDI in 2003, 2005 were still high at 72.3% and 60%,
respectively. Following industrial sector is the hotel, restaurants and tourism sector with average 12% of total FDI
capital. By contract, very little FDI went to agriculture and forestry sector.
Moreover, in 2003, FDI sector contributed 14.47% to the GDP, about 73.76% to manufacturing output,
50.4 % to export value and 34.9% to import value. In 2005, it accounted for 57.2 % of total export, 36.9% in total
import and more than 40% in industrial output (GSO, 2003-2005). Furthermore, FDI absorbed more than 667,000
workers directly and hundreds of thousands of workers indirectly in 2005, increased 24.4% compared to 2000.
As a result, FDI increased its contributions to overall employment from 0.6% in 2000 to 1.6% in 2005. With this
increasing rate, FDI can help Vietnamese in increasing the employment rate in the future, especially after
Vietnam joint WTO in 2006.
In short, even though unequally distributed of FDI inflows into different regions and provinces, and
different sectors, foreign direct investment inflows in Vietnam are showing the positive sign in Vietnamese
economy during the its transition. The development of FDI in Vietnam is the main concentrations of this paper.
What are the main determinant factors that attract FDI inflows in Vietnam? The answer of this question could be
appeared in some next parts.

Empirical reviews of determinants of FDI


Table 5 indicates the main veins of determinants of FDI in empirical works that economists have
explored. There are two main group factors of FDIs determinant. The economic factors, such that host market
size, growth, labor, technology, government policies, and infrastructure, are the main sources of several
empirical studies in relationship with FDI. In contract, the non economic factors such that political stability,
international relationship, corruption, transparency and culture distance, and FDI relationship only accounts a
small number.
Some main determinants of FDI such as GDP, economic growth, and per capita GDP, human capital,
labor cost, export, taxes, political stability and openness are most supported in the empirical literature. A country
with large market size and high income that has market oriented policies and stable government is the most likely
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to attract foreign investment. It is not clear how many scientists, engineers and other skill labors is needed or if
low relative wages are necessary. Taxes have been shown to negatively effect firms location decisions when
taxes are transfers and to positively affect firms decisions when they are used to supply infrastructure and
institutions that ultimately reduce firm costs. A trade deficit may be a signal that there is fiscal laxity or there poor
macroeconomic policies are in operation but net importing market may be an ideal location for foreign
investment.

Identifying main determinants of FDI in Vietnam


There are many factors that could be attracting FDI inflows in a host country as presented in empirical
literatures part. However, what factors determining FDI in a host country is depending on the final goal of
investment: capturing new markets or cheap production to export to the home country. Market-seeking investors
will be attracted to a country with a large and fast growing local market. Efficiency-seeking investors will weigh
more of geographical proximity to the home country to minimize transportation costs and optimize for locations
with lower labor costs. Resource-seeking investors will look for a country with abundant natural resources.
Unfortunately, data of FDI inflows in a host country are normally aggregated at the country level and therefore do
not allow subdividing FDI inflows according to the motives of investors. Moreover, factors that increase the
productivity of capital are also relevant for all types.
Build on many previous findings, together with Vietnam economys situation; I identify some main
potentially important determinants of FDI distribution across Vietnam as follows:
Market size
Market-seeking investors will be attracted to a country with a large and fast growing local market. Even
though Vietnam is a small and developing country in Asia, its GDP were dramatically increasing rapidly since the
transition in 1986 In 2005, the GDP value was more than 3.5 times of that in 1986. Moreover, Vietnam is a market
with the population of about 84 million in 2005 and a vast potential for consumption. The country is expected to
boom in the near future.
Market size has positive impact on the FDI inflows as it directly affects the expected revenue of the
investment. Larger host market provides more opportunities for sales and also profits to foreign firms and
therefore attracts FDI inflows. To proxy for market potential, both expected market size in terms of country
population and income will matter. It is not interesting to invest in a country with a very high GDP per capita but
with a limited amount of population. Vice versa, the same holds for a country with a large number of inhabitants,
but low GDP per capita. Taking into account both GDP per capita and population actually brings us to GDP itself
as a determinant of FDI. I follow the literature and use nominal GDP to proxy for market size. Holding other
factors constant, GDP is expected to be a positive significant relationship with FDI flows. It means that the larger
GDP of Vietnam is, the greater FDI inflows would attract.
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Market growth
Vietnam has been showing a dramatically increase of GDP growth rates since its economic reform in
1986. The average GDP growth rates were about 7% in the 1900s and 7.5% in the first five years of 21 century.
The rate is expected to 7.5 8% in the next five years, 2006-2010 (MPI, 2005). FDI is at least to some extent
forward looking, expectations may lead the investors to invest to serve the domestic market. Along with market
size, the prospect of growth, generally measured by growth rates, also has a positive influence on FDI inflows.
Countries that have high and sustained growth rates receive more FDI flows than volatile economies. For this
aspect, I believe that GDP growth rate could also be another positive factor determining FDI inflow in Vietnam.
Human capital
Vietnam is a country having large population. The country has paid great attention to the education of its
people such as twelve-year universal compulsory education. However, skilled managers, engineers and
technicians are still in shortly supply.
Since a more educated labor force is likely to adopt new technologies faster and at a lower training cost,
an indicator of the general level of education can be included among the explanatory variables to capture this
effect. The study uses number of secondary school students per population in Vietnam representing the level of
human capital, as workers who completed secondary school will more easily understand new technology and be
able to better participate in industrial production. It has been expected that FDI flows is positively significant with
the higher quality of labor force.
Infrastructure development
Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication
systems to institutional development (e.g. accounting, legal services, etc.). Good infrastructure allows faster
transport and communication, increasing the productivity of investment and therefore stimulates FDI inflows. In
this paper, we use the number of telephones per 10000 residents (TEL) to measure infrastructure development.
Openness of the host country
Openness of one location is one of the traditional variables for explaining FDI movements. It is defined
as the ratio of total trade (import plus export) to GDP. Multinational firms engaged in export oriented investment
may prefer to locate in a more open economy since increased imperfections that accompany trade protection
generally imply higher transaction costs associated with exporting. Since 1986, even though still having trade
deficit, the share of export on GDP increases every period. In 1996-2000 period, the share of export in GDP was
two times of it in 1986-90. In 2001-2005, it was counted for more than 40% of Vietnams GDP (GSC, 2005). For
this variable, the expected effect the degree of openness on FDI is mixed as the openness is not only attracting
the foreign capital to the host area, but also taking the competition between the foreign and domestic firms on it.
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Exchange rate
Nominal exchange rate, given as VND/US dollar, is measures of competitive. We will also include this
factor in the regressions with hypothesis that a depreciation of Vietnam Dong (VND) favoring price
competitiveness of Vietnams exports and attracting foreign investors using Vietnam as the export base.

The model of FDI determinants in Vietnam


To analysis the location determinants of FDI in Vietnam, for the best result, I build a model based on the
theoretical and empirical researches to examine the important characteristics of the FDI inflows in the host
country as Vietnam. The specific empirical model of the time-series determinants of FDI inflows in Vietnam is:
LnFDIt = 0 + 1 lnGDPt + 2 lnGDPGt+ 3 lnTELt + 4 lnHKt + 5 lnOPENt + 6 lnEXCHANGEt + 7 D1998+ 8
(1)
ASEAN + ut
where subscript t refers to quarters from 1988 to 2005 and s are the regression parameters to be
estimated. The dependent variable FDI is the ratio of net FDI inflows to GDP. GDPG is gross domestic product
growth rate. GDP is gross domestic, proxy for market size of Vietnam. Presented for infrastructure is TEL which is
number of telephone sets per 10000 inhabitants. HK is number of secondary school students per 10000
inhabitants, proxy for human capital. OPEN represented trade openness of the host country and measured by
the ratio total trade to GDP. EXCHANGE is nominal exchange rate of Vietnam as a VND/USD. INFLATION is
inflation rate. There are two dummy variables, D1998 and ASEAN. The year dummy variable (D1998) takes the
value of one if the Vietnam is in the year of 1998 that has effected of Asian financial crises and zero for other
years. ASEAN is a dummy variable to determine the impact of ASEAN on FDI inflows to Vietnam. It takes the
value of one if observation in year of 1995 to 2005 and zero for other years.

Data and empirical results


The empirical analysis was presented by time series model. The time period of analysis is quarter time
series data from 1988 to 2005 in Vietnam. Most of the data on variables used in the test are taken and calculated
from Vietnams Statistical Yearbook of General Statistics Office, Vietnam. Since GDP is denominated in Vietnam
Dong (VND- Vietnamese currency) and the FDI, import and export are in US dollars, the FDI, import and export
data are converted into Dong using yearly average VND/US dollar exchange rate obtained from the socioeconomic data indicators in Vietnam 20 years of renovation and development, General Statistics Office,
Vietnam.
To analysis the determinants of FDI in Vietnam in 1988-2005, I used the ordinary least square (OLS) for
all the estimations. All variables, except dummies, are in natural logarithm form and on the first differences. The
results are reported in Table 6.

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The results reported in column 1 of Table 6 indicate that a large share of the variation in FDI rate can be
explained by a small number of factors, namely, GDP, GDP growth, infrastructure development and openness to
trade. As a group, these factors account for about 64% of variability in FDI/GDP. The results show that FDI
increases with the degree of GDP, GDP growth rate and openness to trade in Vietnam. A 1% increase of GDP
growth rate and openness to trade leads to 0.5% and 0.7% increase in the share of FDI/GDP, respectively. The
positive relationship between FDI and GDP, GDP growth and openness found in the model is consistent with
most of previous studies supporting that the market size and its growth of the host country and the policies of
openness to world trade can have positive effects on attracting FDI inflows into a host country.
In all estimations, GDP growth and GDP present a positive impact on FDI inflows. This result could be
surprised many research due to multinational that invest in a host developing country are more interesting by low
labor costs and natural resources. However, the signs show that FDI inflows in Vietnam could be also market
seeking FDI. Vietnam is an emergent and undiscovered market with crowded population, about 84 million in
2005 (GSO, 2006) and a vast potential for consumption.
As expected, openness to trade (OPEN) is statistically significant and positive effects in all estimations.
An increase of FDI is equivalent to increase of total trade in Vietnam. Vietnams abundance of cheap labor has it
internationally competitive in many low-cost, labors-intensive manufactures. As a result, manufactured products
constitute an increasingly larger share of Vietnams trade. Fuel and raw materials accounted for more than 60%
share of import commodities each year used for production and investment. The traditional products of Vietnam
exports such as textile and clothing, foot-wear, marine products, coffee, rice, crude oil are still keeping the
important role in exports as they are still remaining high growth rates.
The level of human capital (HK) captured by a number of secondary school students per 10000
populations, shows a negative and statistically insignificant related to FDI. This is consistent with the findings in
several developing countries by Root and Ahmed (1979), Schneider and Frey (1985), Hanson (1996) and Narula
(1996), which saying human capital is not necessarily an important input for inward FDI2. One reason to explain
for the result is that FDI in a developing country as Vietnam was concentrated on market and resource seeking
that cheap labor and abundant natural resources were more important. Thus, demand for higher-educated labor
appears to be less crucial during this period.
The factors of infrastructure (TEL) in column (2)-(6) are shown a positive and statistically significant sign.
It means that infrastructure development promotes FDI inflow to the country. FDI investors are normally looking
2

Among the 58 developing countries, Root and Ahmed (1979) shows that none of their proxies for human capital: literacy, school
enrolment, and the availability of technical and professional workers, are statistically significant determinants of inward FDI.
Schneider and Frey ( 1985) , using data for 54 developing countries, find the share of an age group with secondary education to be
a less significant determinant as compared with other economic and political influences. Narula(1996) demonstrates that the
number of tertiary education per population was not a statistically significant explanatory variable for FDI inflows among the 22
developing countries.

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for a location that is available and convenient in infrastructure such as road, telecommunication and
transportation. If the location is well developed, investors can reduce their expenditure and then increase their
profit. This could explain why most of FDI inflow into Vietnam located in the most developed regions and
provinces of Vietnam such as Red Rivel Delta and South East regions, Hanoi, HoChi Minh city, Danang, B.inh
Duong, Hai Phong and Quang Ninh.
The positive signs of the nominal exchange rates represent a depreciation of the Vietnam Dong against
the US dollar. It makes lower the price of the local asset and production cost, and therefore leads to higher in FDI
inflows due to lower international competitiveness. It seem to be consistent with many papers of Goldberg and
Klein (1997), Wang and Swain (1997), Blonigen (1997) and Cushman (1985). Goldberg and Klein (1997)
investigated the relationship of FDI and the real exchange rate in ASEAN4 (Malaysia, Philippines, Indonesia and
Thailand) and concluded that a depreciation of ASEAN 4 currencies against the yen was shown to increase FDI
inflows from Japan to ASEAN.
Finally, I include some dummy variables such as ASEAN and D1998 in the regression. The year dummy
variable (D1998) takes the value of one if the Vietnam is in the years since 1998 that have effected of Asian
financial crises and zero for other years. Vietnam jointed Association of South East Asian Nations in July 1995,
so ASEAN is a dummy variable determining the impact of ASEAN on FDI inflows to Vietnam. It takes the value of
one if observation in year of 1995 to 2005 and zero for other years. Based on my estimation results, ASEAN
shows positive sign but not statistically significant related to FDI. It means that even though not clearly support
by evidence, the joining in ASEAN also may not yet help increasing FDI invested in Vietnam during the time of
analysis (1988-2005). As a member of ASEAN, Vietnam signed the Protocol for the Accession to AFTA, a regional
trade arrangement among the ASEAN member states. Under the terms and conditions of its accession to AFTA,
Vietnam is committed to reduce its tariff rates to 0-5 % of several goods and remove non-tariff barriers; however,
the ending period of preparing the lists of goods and reduce effectively is on 1 January 2006. So the benefit of
lower tariff rates when investing in Vietnam was not much effect to foreign investors in Vietnam in 1988-2005,
then not yet attracting FDI inflows.
In all estimations, the dummy variable D1998 turns out with low statistically significant and positive sign.
It means that in the year of 1998, some factors affect positively on FDI inflows. As is well known, the Asian
financial crisis, which spread from Thailand to other countries in the region during the second half of 1997-1998,
plunged the countries affected into deep recessions that brought rising unemployment, poverty and social
dislocation. The countries most strongly affected by Asian crisis were Korea, Indonesia, Hong Kong, Singapore,
Taiwan, Malaysia and Thailand. Investors who were invested in above Asian countries moved their investment to
other countries that have no effect or small effect of the crisis to invest. Vietnam is one of the best choices to
invest in Asia because it has high and much stable economic growths in the region. Moreover, high political and
social stability and less problems related religions, languages or ethnic disputes are guaranteed for the safety of
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foreign direct investments. According to Vietnam statistical yearbook 1998, some biggest countries increasing its
FDI invested into Vietnam in 1998 and later are Russian, Singapore, United Kingdom, Hong Kong, Channel
Islands, Japan, United States, France and Canada who could be some big FDI invested partners in above
countries.

Conclusion
This paper analyzes the determinants of foreign direct investment in Vietnam during 1988-2005. By
descriptive analysis, the paper shows that FDI inflows into Vietnam increased rapidly during the 1990s and in the
first five years of the 21st century. FDI flowed into different sectors and provinces disproportionately. Next, the
paper constructs a model to find out important factors attracting the FDI inflows. The results reveal that higher
market size and higher GDP growth are encouraging FDI inflows into Vietnam. This is consistent with the widely
accepted belief that growing market size creates an incentive for foreign investors to gain market access.
The results also strongly support the hypothesis that well developed infrastructure is an important factor
attracting FDI. Good infrastructure increases the productivity of investment and therefore stimulates FDI inflows.
The result also help explain why most of FDI inflows into Vietnam are located in the most developed regions and
provinces such as Red River Delta and South East regions, Hanoi, Ho Chi Minh City, Danang, Binh Duong, Hai
Phong and Quang Ninh.
In addition, multinational firms engaging in export oriented investments in Vietnam prefer to locate in a
more open economy. This is consistent with the results of most other empirical papers. Moreover, depreciation of
the exchange rate leads to increase FDI inflows into Vietnam due to greater international competitiveness.
Based on our findings, high quality of labor is not an attracting factor of FDI inflows in Vietnam probably
because the industrial sector still consists of industries producing labor intensive goods which have not yet
required a large amount of skilled labor.
Finally, Vietnam has not yet attracted much FDI inflows from ASEAN countries probably because Vietnam had
just jointed ASEAN not long ago. However, as the effect of Asian financial crisis in 1997-1998, foreign investors
moved their capital from the countries having large effects of the crisis to some other less risky countries as
Vietnam to invest because Vietnam has high and much stable economic growths in the region. Moreover, high
political and social stability and less problems related to religions, languages or ethnic disputes are guaranteed
for the safety of FDI inflows in Vietnam.

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paper No. 99-06

969

Table 1: Development of FDI 1988-2005

Year

Number of
projects

Registered capital
(million USD)

Implemented capital
(million USD)

Total
1988 - 1990
1991 - 1995
1991
1992
1993
1994
1995
1996 - 2000
1996
1997
1998
1999
2000
2001 - 2005
2001
2002
2003
2004
2005

7279
211
1409
152
196
274
372
415
1724
372
349
285
327
391
3935
555
808
791
811
970

66244.4
1602.2
17663
1291.5
2208.5
3037.4
4188.4
6937.2
26259
10164.1
5590.7
5099.9
2565.4
2838.9
20720.2
3142.8
2998.8
3191.2
4547.6
6839.8

33315.4
6517.8
328.8
574.9
1017.5
2040.6
2556
12944.8
2714
3115
2367.4
2334.9
2413.5
13852.8
2450.5
2591
2650
2852.5
3308.8

Source: General Statistics Office (GSO) and Ministry of Planning and Investment (MPI) 2005 and revised in
April 2006

970

Table 2: Top 10 countries classified by FDI commitment, 1988-2005

(Registered capital at current prices)


Source country
1988-1995
1996-2000
Mill. USD
%
Mill. USD
Total
18438
100
20437.9
Taiwan
3134.1
17.0
1744.6
Japan
1808.9
9.8
1550.3
Korea
1435.1
7.8
1790.3
Hong Kong
1858.4
10.1
1776.1
Singapore
1558.7
8.5
4324.7
United States
756.1
4.1
581.2
Malaysia
685.3
3.7
446.1
France
877.6
4.8
1197.6
Thailand
505.8
2.7
586.3
United Kingdom
518.4
2.8
1255.1

%
100
8.5
7.6
8.8
8.7
21.2
2.8
2.2
5.9
2.9
6.1

2001-2005
Mill. USD
14442.6
2580.4
1762.9
1623.7
1034.9
919
576
556.8
464.7
196.4
64

2002

2004

%
100
17.9
12.2
11.2
7.2
6.4
4.0
3.9
3.2
1.4
0.4

Source: Vietnam GSO 1995-2004 and MPI 2005


Table 3: Structure of FDI inflows in Vietnam by allocation (%)

1996
Whole country
Red River Delta
North East
North West
North Central Coast
South Central Coast
Central Highlands
South East
Mekong River Delta
Hanoi
Hai Phong
Ha Tay

1998

2000

2005

100.0
40.1
5.3
0.0
1.0
4.0
0.2
48.2
1.2

100.0
15.0
2.0
0.3
0.5
35.1
19.1
26.6
1.5

100.0
5.2
2.2
0.1
1.9
5.0
0.2
84.7
0.7

100.0
19.6
4.8
0.4
0.3
9.0
0.3
57.8
7.8

100.0
19.1
8.7
0.5
6.6
2.5
0.5
59.0
2.8

100.0
34.5
2.3
0.1
1.2
4.2
0.5
54.8
2.2

30.8
1.7
2.8

14.1
0.3
0.3

4.0
0.3
0.0

9.3
2.4
0.6

7.3
6.6
0.0

23.5
4.2
0.1

971

Table 3: (Cont.)

1996
Quang Ninh
TT Hue
Da Nang
Khanh Hoa
Dong Nai
Baria Vungtau
Ho Chi Minh city

4.3
0.1
2.3
1.7
6.3
10.9
25.1

1998
1.6
0.1
0.9
0.5
3.0
0.5
17.7

2000
0.7
0.6
0.2
3.6
13.4
4.3
23.5

2002
2.6
0.3
4.4
0.7
18.1
1.7
16.6

2004
2.3
0.1
1.1
0.2
20.8
1.4
16.4

2005
1.4
0.7
2.4
0.2
16.9
10.8
13.1

Source: statistical yearbook, 1997-2005


Table 4: FDI registered capital by economic sectors, 1988-2005 (%)
Sectors

1988-90

1991-95

1996-2000

2001-05

Agriculture and forestry 20.8


2.9
2.4
1.9
Fishery
1.4
1.0
0.3
0.7
Industry
39.9
49.7
54.8
74.2
Construction
0.0
7.7
9.1
2.6
Hotel, restaurants and
Tourism
16.6
19.3
7.9
4.5
Transport, storage and
15.3
2.5
8.7
5.7
communications
Finance and Banking
0.0
1.4
0.7
3.3
Culture, Health and
Education
0.0
0.4
1.9
2.9
Other services
5.9
15.2
14.1
4.2
Total
100.0
100.0
100.0
100.0
Source: IMF paper 135(1996), GSO 1995, 2000, 2003 and MPI 2005

972

1995

2000

2003

2005

4.16
0.44
36.46
9.54

2.52
0.40
89.26
1.19

1.12
1.27
72.36
1.27

0.6
0.2
71.5
2.5

13.51

1.13

7.05

0.9

5.89
0.22

0.40
0.49

0.77
9.28

10.0
2.1

1.90
27.88
100.0

3.77
0.84
100.0

1.68
5.20
100.0

3.7
8.5
100.0

Table 5: Determinants of FDI Empirical evidence


FDI
determinant
factors

Proxy

Empirical
finding

A. Economic factors
1. Host market GDP, GDP +
sizes
growth

Per
GDP

capita +

GNP;
per +
capita GNP
2. Labor sector

Wages

+
Insig

Human capital +

Mixed
3. International Trade volume
trade
- Import
-Export

+
+

-Trade
volume/GDP
Degree
of +
economic
openness
-

Authors

Agarwal (1980), Tsai (1994), Wheeler and Mody (1992), Grosse and
Trevino (1996), Wang and Swain (1997), Wei (1997, 2000), Billington
(1999), Globerman and Shapiro (1999), Taylor (2000), Fung et al(2000),
Farrell et al (2000), Bevan and Estrin (2000), Chakrabarti (2001), Ito and
Rose (2002), Smarzynska and Wei (2002), Campos and Kinoshita (2003)
Coughlin et al (1991), Lorce and Guisinger (1995), Chakrabarti (2001),
Habib and Zurawicki (2002), Smarzynska and Wei (2002), Nunnenkamp
and Spatz (2002), Wezel (2003)
Bandera and White (1968), Schmitz and Bieri (1972), Lunn (1980),
Woodward and Rolfe (1993), Wei (1995), Barell and Pain (1996), Beer and
Cory (1996)
Smith and Florida (1994), ), Noorbakhsk et al (2001), Strobl and Thornton
(2001), Te Velde and Morrissey (2001, 2002), Matsuoka (2002)
Urata and Hawai (1999), Blonigen and Slaughter (2001)
Looree and Guisinger (1994), Wang and swain (1997), Billington (1999),
Globerman and Shapiro (1999), Noorbakhsk et al (2001)
Woodward (1993), Broadman and Spatz (1997), Bende-Nabende et al
(2000),
Nachum (2000), Fung et al (2000), Nooebakhsk (2001), UNCTAD (2002)
Root and Ahmed (1979), Schneider and Frey (1985), Hanson (1996),
Narula (1996),
Buckley et al (2002)
Grosse and Trevino (1996), Wang and Swain (1997),
Billington (1999), Farel et al (2000)
Lipsey and Weiss (1981, 1984), Grosse and Trevino (1996), Goldberg
and Klein (1999), Bajo-Rubio and Montero-Munoz (1999), Mankovska
(2000), Blonigen (2001),
Teo and Wang (2001)
Noorbakhsk (2001), Habib and Zurawicki (2002)
Woodward and Rolfe (1993), Taylor (2000), Asiedu (2002), Chakrabarti
(2001), Kyrkilis et al (2003)
Billington (1999), Deabek and Payne (2001), Smarzynska and Wei (2002)

973

Table 5: (Cont.)
Bilateral
exchange rate

+
Insig

4. Government Taxes policies


policies

Investment
policy
Inflation rate

+
Insig
Insig
Insig

B. Non economic factos


5. Geographic Distance of distance
capital city
Insig
6.
Political Political
+
stability
stability
Insig
Mixed
7. Corruption

Corruption

8. Others

Mixed
Other qualities +
of institution
-

Goldberg and Klein (1997), Wang and Swain (1997), Blonigen (1997),
Cushman (1985)
Campa (1993), Froot and Stein (1991), Blonigen (1995), Blonigen and
Feenstra (1996), Gastanaga (2000),
Dewenter (1995), Kishinota (1998), Globerman and Shapiro (1999),
Drabek and Payne (2001)
Loree and Guisinger (1994), Hartman (1981, 1984), Frisch and Hartman
(1983), Cummins and Hubbard (1995), Ondrich and Wasylenko (1993)
Slemrod (1990), Wei (1997), Billington (1999), Hines (1996)
Coughlin et al (1991)
Woodward and Rolfe (1993), Loree and Guisinger (1994)
Globerman and Shapiro (1999)
Woodward and Rolfe (1993), Taylor (2000), Chakrabarti (2001),
Asiedu (2001), Drabek and Payne (2001)
Smith and Florida (1994), Grosse and Trevino (1996), Wei (1997), Ito and
Rose (2002), Smarzynska and wei (2002)
Habib and Zurawicki (2002)
Lucas (1990), Schneider and Frey (1985), Looree and Guisinger (1996),
Bevan and Estrin (2000), Habib and Zurawicki (2002), Singh and Jun
(1995)
Bennett and Green (1972), Asiedu (2001), Morisset (2000), Grosse and
Trevino (1996),
Levis (1979), Nigh (1985),
Hines (1995), Wei (1997, 2000, 2000a, 2000b), Habib and Zurawicki
(2002), Smarzynska and Wei (2000)
Wheeler and Mody (1992), Henisz (2000), Akcay (2001), Teksz (2003)
Globerman and Shapiro (2002), Levchenko (2004),
Aizenman and Spiegel (2002)

974

Table 6: OLS estimation results-quarterly data


Dependent variable: FDI

Variable
Intercept
GDP
GDPG
OPEN
TEL

(1)
-0.1396
(-3.3862)***
1.7138
(5.0480)***
0.5105
(2.0541)**
0.7235
(7.8132)***
0.6419
(1.3862)

HK

(2)
-0.1365
(-3.2693)***
1.5016
(4.0499)***
0.4861
(1.9590)*
0.6775
(6.8043)***
0.8035
(1.6737)*
-1.0979
(-1.2598)

EXCHANGE

(3)
-0.1286
(-3.3966)***
1.1565
(3.2685)***
0.5423
(2.3941)**
0.3843
(3.2174)***
0.9441
(2.1526)**
-1.1630
(-1.4623)
0.3365
(3.7604)***

ASEAN

(4)
-0.2096
(-2.8182)***
1.5240
(3.2442)***
0.6454
(2.6704)***
0.3872
(3.2504)***
1.1699
(2.4574)**
-1.0427
(-1.3050)
0.3378
(3.7835)***
0.0526
(1.2103)

D1998

(5)
-0.2733
(-3.9933)***
1.8175
(4.1667)***
0.6742
(2.9977)***
0.4393
(3.7476)***
1.4605
(3.0877)***
-0.1501
(-0.1721)
0.3201
(3.6998)***

0.0976
(2.4413)**

(6)
-0.2918
(-3.5554)***
1.9095
(3.8828)***
0.7028
(2.9695)***
0.4364
(3.6922)***
1.5081
(3.0790)***
-0.1692
(-0.1924)
0.3218
(3.6905)***
0.0187
(0.4153)
0.0913
(2.1225)**

Adjusted R2 0.6385

0.6417

0.7026

0.7045

0.7241

0.7204

DW star

1.4769

1.4903

1.4288

1.4442

1.5354

1.5408

No. of Obs.

70

70

70

70

70

70

t statistics are in parentheses

*, **, *** Significance at the 0.10, 0.05 level and 0.01 level

975

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