Introduction
Problem Statement
The Provincial Competitiveness Index (PCI) assesses the varying performance of regions in Vietnam regarding private sector dynamism, job creation, and economic growth, as well as their ability to attract foreign and local investment By utilizing survey data from businesses about their local environments alongside credible data from official sources, the PCI evaluates provinces on a 100-point scale Initially established in 2005 with nine sub-indices, the index was refined in 2006 to include additional sub-indices that reflect the efforts of Provincial Governments in improving the business climate.
Despite extensive research, there is a lack of empirical studies examining the independent variables of the Provincial Competitiveness Index (PCI) and their effects on provincial foreign direct investment (FDI) in Vietnam Understanding how these traditional variables influence provincial FDI remains an area that requires further investigation.
I also did not find any analysis related to the independent variables of PCI whether they have internal relation.
Research Objectives
This research aims to analyze the critical effects of various independent variables, including PCI and traditional factors, on provincial foreign direct investment (FDI) inflows The findings will assist policymakers in identifying key areas for enhancing the investment climate at both provincial and governmental levels, ultimately fostering improved economic conditions.
Previous studies have explored the factors that attract Foreign Direct Investment (FDI) to developing countries, revealing key elements that influence investment decisions across nations This thesis aims to identify and analyze these critical factors in greater detail.
The independent variables of the Provincial Competitiveness Index (PCI) and other traditional factors significantly influence Foreign Direct Investment (FDI) across provinces in Vietnam Additionally, the components of PCI are highly interrelated, indicating the need for a revision of the PCI framework.
(iii) PCI determinants out of the ten original factors should be included in a new, more significant subset base of PCI determinants
(iv) Interaction effects between PCI improvement and FDI growth.
Research questions
This thesis examines the factors influencing provincial foreign direct investment (FDI) in Vietnam, utilizing the Provincial Competitiveness Index (PCI) alongside traditional variables that may attract FDI to various provinces.
This article explores economic theory and empirical studies related to Foreign Direct Investment (FDI) in Vietnam, as detailed in Chapter 2 Chapter 3 provides a comprehensive description of the independent variables utilized in the Provincial Competitiveness Index (PCI) project We develop a research model and gather data from the PCI project website and the General Statistics Office of Vietnam to address key research questions, including which PCI and traditional independent variables significantly impact FDI across Vietnamese provinces.
(2)Factors ofPCI are highly correlated and we should revise PCI set?
(3)Which PCI determinant out of the ten original factors should be included in a new, more significant subset base of PCI determinants?
(4)Are interaction effects between PCI improvement and FDI growth?
Organization of the study
This thesis has five chapters, while the chapter one has presented as above explain the purpose chose the theme The rest of this thesis is organized as follows:
Chapter two outlines the theories of regional development and foreign direct investment (FDI), while also summarizing empirical research focused on strategies for attracting FDI, particularly in various provinces of the country.
Chapter three outlines the process of constructing the research model based on the previous chapter, emphasizing the selection of data It is crucial to define the dependent and independent variables utilized in the PCI project’s annual surveys, while also incorporating some traditional variables.
Chapter four is the econometric analysis and finding The last chapter will be conclusion and recommendation of the research.
Theoretical Consideration and Literature Review ll 2.1 The regional development and competitive regionalism theory
FDI theories and its applicability
Foreign Direct Investment (FDI) is influenced by various factors, leading to diverse approaches in understanding its determinants Capital theory emphasizes the importance of profit rates and risk assessments for firms In contrast, international trade theories examine the relationships between FDI and exports, highlighting their substitute or complementary effects Theories on industrial organization view FDI as a means to leverage firm-specific advantages The OLI paradigm offers a dynamic perspective on FDI determinants, while agglomeration economies explore the spatial distribution of FDI.
2.2.1.1 Differential Rate of Return Theory
Until the 1950s, international direct investment was entirely explained within the traditional theory of international capital movements Like other forms of international
II investment, FDI was seen as a response to differences in the rates of return on capital between countries
Investors aim to create an efficient investment portfolio to minimize risk When selecting between alternative assets, it's crucial to align the expected rates of return with their associated risks, ensuring a balanced and effective portfolio strategy.
Dunning (1973) argues that portfolio theory only partially accounts for direct foreign investment because it overlooks the fact that direct investment does not entail changes in ownership Instead, it involves the transfer of critical factors such as entrepreneurship, technology, and management expertise Additionally, the relative profitability of utilizing these resources in various countries, alongside monetary capital, significantly influences direct investment decisions.
The theory argued that the international diversification of portfolios 1s a way of reducing the firm's risk and hedging the risks
Capital theory shows that some determinants related cost factors in PCI set have potential effects to attracting FDI of provinces
2.2.2.1 Mundell and the Heckscher-Ohlin Model
Mundell (1975) expanded the foundational economic model to demonstrate that trade and capital movements can act as substitutes He posited that implementing trade tariffs would lead to an increase in foreign direct investment (FDI) directed towards protected countries This perspective aligns with the original Heckscher-Ohlin model, which suggests that trade restrictions can be offset by the international mobility of capital, particularly in the context of labor immobility.
Kojima (1973) categorizes the motives for foreign direct investment (FDI) into four key areas: seeking natural resources, capitalizing on low labor costs in the host country, circumventing tariff and non-tariff barriers, and leveraging oligopolistic power derived from technological and knowledge advantages.
The product cycle model, introduced by Vernon in 1966, addresses the rapid international investment by US firms, highlighting that each product undergoes three key phases: innovation, maturity, and standardization Domestic demand plays a crucial role in driving innovation, while similarities in international demand encourage exports This theory emphasizes that the US's abundance of highly skilled labor and research and development resources, combined with a sophisticated domestic market, significantly fosters innovation among American companies.
2.2.3 Market Failures and Industrial Organization
Foreign firms face inherent disadvantages compared to domestic companies, such as market knowledge and communication barriers, necessitating firm-specific advantages to succeed in international production Hymer (1960) posits that foreign direct investment (FDI) transcends mere capital transfer, involving the international exchange of proprietary rights and intangible assets, including technology, business methodologies, and skilled personnel He asserts that FDI arises from imperfections in international markets for these assets, prompting firms to "internalize or supersede" market failures through direct investment.
Certain transactions can be more economical when conducted within a firm rather than in the external market Internalization occurs when the advantages, including barriers to new entrants, surpass the costs associated with communication, coordination, and control Foreign Direct Investment (FDI) aims to leverage these benefits effectively.
2.2.4 The Eclectic Paradigm and International Investment Path
Dunning ( 1979) suggests that a firm engage in FDI if three conditions are satisfied:
It possesses net ownership (0-) advantage vis-a-vis firms from other countries;
It is beneficial to internalize (I- advantage) those advantages rather than to use the market to pass them to foreign firms;
There are some location (L-) advantages in using the firm's ownership advantages in a foreign location rather than at home
The IDP approach examines the relationship between a country's level of development and its international investment position, specifically through net outward investment per capita It posits that there is a significant interconnection between inward and outward investment flows and a nation's development trajectory As a country advances, the circumstances encountered by both domestic and foreign firms evolve, influencing investment dynamics.
In today's rapidly globalizing world, the location determinants of Foreign Direct Investment (FDI) in host countries have become increasingly crucial for multinational enterprises (MNEs) According to UNCTAD (2001), while traditional factors influencing FDI remain relevant, their significance is waning, especially in dynamic and high-tech industries Instead, the choice of FDI locations is increasingly reliant on host countries' ability to offer complementary skills, robust infrastructure, reliable suppliers, and supportive institutions.
Increasing returns in production activities are needed if we want to explain economic agglomerations without appealing to the attributes of physical geography
Externalities from agglomeration are known to encompass specialized labor markets and supplier networks as well as knowledge spillovers
The determinants of regional economic growth in developing countries are influenced by various factors, including geography, infrastructure, and the quality of institutions Key elements such as human capital, the capacity to connect to the global economy, and a transparent governance framework play a crucial role Additionally, a competitive tax regime, efficient public goods supply, and low corruption levels contribute to a favorable business environment Secure property rights and flexible labor markets further enhance regional competitiveness, fostering sustainable economic development.
The competitive advantage of a nation is significantly influenced by the quality of its skilled labor, robust infrastructure, and the presence of supporting industries Key factors in production include the availability of skilled labor, the nature of domestic demand, and the development of industries that support these elements Together, these components create a conducive environment for economic growth and competitiveness on a global scale.
Capital Theory Higher rate of return , leading to Factor cost: Entry higher attracting FD I Cost, Informal charges, Time Costs of Regulatory
Compliance Mundell and the Trade tariffs would induce a flow Legal Institutions ,
Heckscher-Ohlin ofFDI Proactively of
Kojima's Motiving of FDI into four Labor Training,
To optimize macroeconomic strategies, businesses should focus on securing natural access to land and adopting a legal approach to resources Leveraging institutions and the low labor costs in the host country, along with enhancing infrastructure, can significantly improve operational efficiency Additionally, navigating tariff and non-tariff barriers is crucial, as is capitalizing on oligopolistic power Domestic market size and labor training can drive innovation, while aligning with international demand can boost exports and support provincial industry growth.
The Hymer-FDI model emphasizes that foreign direct investment (FDI) extends beyond labor training and capital transfer; it also involves the crucial role of institutions and the international transfer of proprietary rights and intangible assets This highlights the importance of proactive provincial leadership in facilitating successful FDI.
Internalization Approach teclmology, business techniques, Business Supp011 and skill personnel's Service
Certain transactions can be more cost-effective when conducted within a firm rather than through the market Internalization occurs when the benefits, such as overcoming barriers for new entrants, exceed the costs associated with communication, coordination, and control Foreign Direct Investment (FDI) often takes place to leverage these advantages.
Empirical studies on the determinants ofFDI
Conventional empirical studies on the determinants of Foreign Direct Investment (FDI) typically focus on ten key variables identified by Dunning and Narula (1996): natural and created assets, capital intensity, market size and growth, infrastructural development, labor cost and productivity, degree of openness, government policies, political stability, profitability, and geographical proximity.
Nonnemberg and Mendonya (2004) analyzed the factors influencing foreign direct investment (FDI) in developing countries by employing an econometric model that utilized panel data from 38 developing economies between 1975 and 2000.
Research indicates that education is a key determinant of Foreign Direct Investment (FDI), particularly in developing countries where investments are increasingly focused on knowledge-intensive activities Additionally, the openness of an economy plays a significant role in attracting FDI A causality test revealed that Gross Domestic Product (GDP) influences FDI, rather than the other way around Furthermore, a study by Ali and Guo (2005) highlights that market size, labor costs, and global integration are critical factors affecting FDI attraction.
In a study by Sahoo (2006) focusing on India, Pakistan, Bangladesh, Sri Lanka, and Nepal, it was found that foreign direct investment (FDI) and its determinants have a long-term equilibrium relationship in the South Asian region Key factors influencing FDI include market size, labor force growth, infrastructure quality, and trade openness The study emphasizes that South Asian countries must sustain economic growth, develop policies to leverage their labor force, enhance infrastructure, and adopt more open trade strategies to attract increased FDI.
Kozlova and Smajlovic (2008) identified FDI inflows as the dependent variable in their model, with GDP per capita, investment freedom, trade openness, and infrastructure serving as explanatory variables Additionally, the model incorporates a dummy variable to differentiate between oil-exporting and non-oil-exporting countries.
FDii = ai + ~1 (GDPperCap)i + ~2 (lnvestmentFreedom)i + ~3 (Infrastructure)i + ~4
The general conclusion from the results demonstrates that the infrastructure and trade openness are significantly related to FDI in the MENA (the Middle East and North African) region
According to Vijayakumar et al (2010), while Economic Stability and Growth prospects—indicated by the inflation rate and industrial production—play a role, Trade openness, defined as the ratio of total trade to GDP, emerges as a key determinant of FDI inflows in BRICS countries.
Most of FDI researches focused to FDI of a country or some countries but they should be reviewed to compare these potential explanation variables with independent variables of provincial FDI.
Geographical literature on Vietnam, China and ASEAN countries l9
Xu et al (2009) reported that agglomeration economies, labor cost, infrastructures greatly influence the spatial distribution ofFDI in China
According to Dang (2008), several key factors drive foreign direct investment (FDI) in China Firstly, many investors are attracted to the potential of the Chinese domestic market Secondly, the availability of low-cost labor in China presents an opportunity for investors to reduce production expenses Additionally, the quality of infrastructure in the country significantly enhances FDI inflows, as it enables firms to improve their technology and achieve economies of scale and scope Lastly, the political environment plays a crucial role in attracting FDI, with China's political leadership providing a clear vision for the nation's growth and development trajectory.
Luo et al (2007) emphasize the importance of investigating how natural resource endowments can drive local economic growth and attract foreign direct investment (FDI) in under-developed regions Additionally, the study reveals that multinational enterprises (MNEs) prefer locations that facilitate high-value activities over those that merely offer low labor costs.
Havrylchyk and Poncet (2006) found that the positive impact of agglomeration, high labor productivity and low labor costs, market size, infrastructure density, and market reforms on FDI
Na and Lightfoot (2006) identified three key variables that significantly influence Foreign Direct Investment (FDI) across 30 regions in China Firstly, the market demand and size, measured by GDP, positively impacted FDI attraction in 2002 Secondly, regions with higher labor quality were more appealing to FDI Lastly, the degree of openness and the level of reform within each region also played a crucial role in attracting foreign investments.
According to Giang (2008), four key local factors hinder development in Vietnam: the remote location from the country's commercial center, underdeveloped infrastructure, weak foreign direct investment (FDI) policies, and an unfavorable FDI environment compared to other regions.
The foreign direct investment (FDI) environment in Vietnam's mountainous provinces (NMPs) is generally unfavorable, as highlighted by annual surveys conducted by the Vietnam Chamber of Commerce and Industry (VCCI) and the Vietnam National Competitiveness Index (VNCI) Most NMPs, with the exception of Uto Cai, exhibit low transparency levels, with six of these provinces ranking among the least transparent in the country.
According to Anh and Thang (2007), key factors influencing foreign direct investment (FDI) location decisions in Vietnam include market potential, labor availability, and infrastructure However, their research did not reveal any significant evidence regarding the influence of local government policies on FDI.
In their 2007 study, Anh et al conducted an empirical evaluation of the effectiveness of incentives in attracting Foreign Direct Investment (FDI) They employed a two-step DD estimation approach, beginning with the estimation of a regression model using Ordinary Least Squares (OLS) methodology.
Yst = bO + bl.Xst + b2.Breaks + gst (1)
The level of per capita Foreign Direct Investment (FDI) attracted to provinces in year t is represented by Yst, while Xst encompasses the relevant determinants influencing FDI attraction in province s during the same year Additionally, Breaks is a dummy variable, where 0 indicates non-breakers and 1 signifies breakers The subsequent step involves estimating the impact of various incentives on FDI attraction.
OLS regression in this two period panel The regression has a very simple form as follow: gsi = b3 + b4.Timesi + usi (2)
The analysis reveals that the impact of labor costs on foreign direct investment (FDI) differs before and after investment occurs In regression (1), the wage coefficient is negative and statistically insignificant, suggesting that investors prioritize locations with lower labor costs prior to investment Conversely, in regression (2), the wage coefficient is positive and statistically significant, indicating that once investment is implemented, the presence of FDI projects leads to increased labor scarcity and higher productivity, ultimately resulting in higher wages This shift highlights the changing priorities of investors regarding labor costs before and after committing to FDI.
Thu (2007) studied the determinants of the FDI in Vietnam, the specific empirical model of the time-series determinants ofFDI inflows in Vietnam is:
LnFDit = po + 81 lnGDPt + 82 lnGDPGt+ 83 lnTELt + 84 lnHKt + 85 lnOPENt + 86 lnEXCHANGEt + 87 Dl998+ 88ASEAN + ut The results reveal that higher market size and higher GDP growth are encouraging FDI inflows into Vietnam
Ali and Ahmad (2008) reported that important factors in determining the location relationship of FDI in Malaysia are the community, availability of raw materials and fuel
Spatial Determinants of Inward agglomeration economies, FDI in China: Evidence from labor cost, infrastructures Provinces
FDI in China Economic Growth and Policy
Market size and growth, Government incentive policies; Cheap labor cost; High investment return
Na and Determinants of foreign direct market size (GDP),quality labor degree of openness Lightfoot investment at the regional
Foreign Direct Investment in Market stze, labor force South Asia: Policy, Trends, growth, infrastructure index Impact and Determinants and trade openness
Determinants of the FDI and market size, economic growth: a summary of recent growth, macroeconomic literature stability, Infrastructure , regulation, economic barrier
6 Anh and Foreign direct investment m the marker potential, the
Vietnam: An overview and labour factors, analysis the determinants of infrastructure spatial distribution across provmces and
7 Thu Determinants of the FDI m market size; GDP growth
8 Agiomirgi The determinants of foreign the marker size, the trained anakis et direct investment: a panel data labour , and infrastructure al (2006) study for the oecd countries
Most research on Foreign Direct Investment (FDI) has concentrated on individual countries or groups of countries, while some studies from China have explored regional FDI My thesis specifically examines provincial FDI in Vietnam, utilizing independent variables derived from the Provincial Competitiveness Index (PCI) alongside other traditional factors.
Base on Vietnam PCI project proposed general framework for determinants of provincial competition index as follows:
The equation PCiit = f(EC it, ALit, TAl it, TCRC it, IC it, PPL it, BSS it, LT it, Liit, INF it, uit) illustrates the various factors influencing the performance of a business in a specific region Key components include entry costs (EC), access to land (AL), transparency and access to information (TAl), and the time costs associated with regulatory compliance (TCRC) Additionally, informal charges (IC), the proactivity of provincial leadership (PPL), business support services (BSS), labor training (LT), legal institutions (LI), and infrastructure (INF) play critical roles in shaping the business environment.
Base on empirical studies related to FDI, especially regional FDI, economic theory and base on PCI survey as equation ( 1 ), the research question is
(i) Which independent variables of PCI and other traditional variables are significant impacts to FDI of Provinces in Vietnam?,
The first regression model for this study is suggested as follow:
FDI it= a o +a 1 EC it+ a 2 ALit+ a 3 TAl it+ a 4 TCRC it+ as IC it+ a 6 PPL it+ a
1 BSS it +as LTit +a 9 LI it+ o.w IP u +an INF it+ o.n MS it + o.13 KEA it + u it
Where: IP-Industrial Product of province, MS-Market Size, KEA: northern and southern key economic area KEA = 1, other provinces KEA =0
The OLS technique applies for the first regression model to answer for the first research question
Based on economic theory and principal component analysis, we anticipate identifying multicollinearity or significant interaction effects among several variables Consequently, some independent variables may be categorized into two groups: Cost Factors and Province Policy.
The Cost Factor (CF), which encompasses Economic Conditions (EC), Total Revenue Cost (TCRC), and Investment Cost (IC), along with Province Policies (PP) that include Agricultural Land (AL), Taxation and Land Policies (TAl PPL), Business Support Services (BSS), Land Tenure (LT), and Land Investment (LI), should be thoroughly reviewed to incorporate additional significant variables This approach is utilized to address research questions No 2 and No 3.
The initial regression model in this study focuses on the determinants of total Foreign Direct Investment (FDI) in provinces To highlight the growth rate of FDI, we utilize the logarithm of the annual FDI for each province as the dependent variable.
Ln (FDI) it = fJJ + f32Ln (PC!) it+ uit (3)
Where, i and t denote sample provinces, and time (year) respectively !.! denotes residuals
To answer for research question No.4, The OLS technique also applies
There are two types of panel data: Balanced versus non-balanced data
Two limit cases are a "pure" cross section data with only one time period or a "pure" Time-series data with only one individual
I gathered panel data, including both dependent and independent variables, from the PCI project (www.pcivietnam.org) and the statistical yearbook of Vietnam provided by the General Statistics Office (www.gso.gov.vn) This data encompasses all provinces in Vietnam from 2006 to 2009, totaling 252 observations (4 years x 63 provinces) I calculated cross-sectional data by averaging the values over the four years, resulting in 63 observations Additionally, we obtained registered FDI data for the provinces in Vietnam and applied a weight of 0.33 for the three years from 2007 onward.
2009) of the implementation value of provincial FDI as following:
Table 3.1: the implementation value of provincial FDI
Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):
Table 3.2: FDI capital of top ten provinces
Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai
Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74 FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81 USD
By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)
Above result will be compared with actual survey data (benchmarking) to choose the best output
3.3.1 The Provincial Competitiveness Index-PCI (total point= 100)
Research Model, Data Collection and Variable Description
Data Collection
There are two types of panel data: Balanced versus non-balanced data
Two limit cases are a "pure" cross section data with only one time period or a "pure" Time-series data with only one individual
I gathered panel data, including both dependent and independent variables, from the PCI project (www.pcivietnam.org) and the statistical yearbook of Vietnam from the General Statistics Office (www.gso.gov.vn) for all provinces in Vietnam covering the years 2006 to 2009 This dataset comprises 252 observations, representing four years across 63 provinces To create cross-sectional data, I calculated the average values over the four years, resulting in 63 observations Additionally, I obtained registered Foreign Direct Investment (FDI) data for the provinces in Vietnam, applying a weight of 0.33 for the three years from 2007 onward.
2009) of the implementation value of provincial FDI as following:
Table 3.1: the implementation value of provincial FDI
Source: GSO 2007-2009 This is the average data of ten provinces which they had FDI capital in high level (2006-2009):
Table 3.2: FDI capital of top ten provinces
Provinces BRVT HCMC Dong Ha Binh Quang Da Long Bac Hai
Nai Noi Duong Nam Nang An Ninh Duong PCI point 62.02 62.89 62.43 54.75 74.80 60.10 74.12 59.41 59.75 54.74 FDI-Mill 1582.97 1236.93 659.58 611.05 606.31 369.46 184.35 175.95 145.65 140.81 USD
By using OLS method for estimating the equations (2), and (3) to answer for four research questions (i,ii,iii,iv)
Above result will be compared with actual survey data (benchmarking) to choose the best output.
Variables description
3.3.1 The Provincial Competitiveness Index-PCI (total point= 100)
The Provincial Competitiveness Index (PCI) aims to understand the disparities in economic performance across different regions, focusing on factors such as private sector dynamism, job creation, and overall economic growth By utilizing recent survey data gathered from businesses about their perceptions of local business environments, the PCI provides valuable insights into the conditions that foster or hinder economic development.
Comparable data from official and other sources regarding local conditions Following table is PCI result in 2009
Province EC AL TAl TCRC IC PPL BSS LT LI PCI
Source: PCI 2009 3.3.2 Provincial Foreign Direct Investment-pFDI (mill USD)
Is investment which provinces in Viet Nam receive from investors who come from other countries
3.3.3 Entry Costs-EC (point=lO)
A measure of the time and difficulty it takes firms to register, acquire land, and receive all the necessary licenses to start business
This sub-index aims to evaluate the variations in entry costs for new businesses across different provinces Despite the Enterprise Law and its implementing documents intending to standardize these procedures nationwide, research indicates that discrepancies still exist among provinces.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group Cost Factor
3.3.4 Access to Land-AL (point=lO)
The ease of land access for firms is a crucial measure, which was enhanced in 2006 to include an important dimension: the security of tenure after land acquisition This includes evaluating whether businesses hold official land use rights certificates, if they have sufficient land for expansion, and whether they are renting from state-owned enterprises (SOEs).
The second dimension of conversion efforts focuses on the perception of tenure security risks, which encompass concerns about expropriation, inadequate compensation values, alterations in lease agreements, and the overall duration of tenure.
Private firms often face challenges due to significant variations in land policies across provinces, which can be categorized into two main dimensions The first dimension, Access to Land, highlights the difficulties firms encounter in locating and acquiring productive land, hindering their investment opportunities and limiting access to capital, as they cannot use Land Use Rights Certificates (LURCs) as collateral for loans Additionally, firms that cannot secure land must rent from state-owned enterprises (SOEs) or provincial agencies, which restricts their growth potential and incurs extra transaction costs The second dimension, Security of Tenure, pertains to the certainty of land rights over time; greater security encourages firms to invest in the long-term productivity of their land Conversely, the threat of expropriation or changes in lease agreements prompts firms to adopt a short-term perspective, negatively impacting overall provincial welfare by limiting income and employment generation.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.5 Transparency and Access to Information-TAl (point=lO)
Access to essential planning and legal documents is vital for businesses to operate effectively It is important that these documents are fairly available and that any new policies and laws are clearly communicated and consistently implemented Additionally, the functionality of provincial web pages plays a significant role in supporting business operations Analysts and development practitioners emphasize that transparency is a key factor in creating an environment that fosters private sector growth.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.6 Time Costs of Regulatory Compliance-TCRC (point=lO)
The article assesses the time firms expend on bureaucratic compliance and the frequency and duration of operational shutdowns for inspections by local regulatory agencies It evaluates two key dimensions of time costs—Bureaucratic Procedures and Time Lost to Inspections—assigning equal weight to both factors.
The examination of transaction costs over time plays a crucial role in the economic transition literature, especially in Vietnamese provinces where the adage "time is money" holds significant weight Firm managers frequently find themselves diverted from core business activities to address routine bureaucratic issues, resulting in a loss of valuable time that could otherwise be utilized for more productive management of their operations.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group -Cost Factor
3.3.7 Informal Charges-IC (point=lO)
A measure of how much firms pay in informal charges and how much of an obstacle those extra fees pose for their business operations
This section examines the informal fees, fines, and extraordinary payments that businesses incur as part of their operations It evaluates the prevalence, types, and amounts of these additional payments through five key indicators The significance of this analysis has increased following the enactment of the Revised Anti-Corruption Law by the National Assembly in August 2007.
This is negative independent variable of FDI which above empirical research have done It may have internal relation with variables group- Cost Factor
3.3.8 Proactivity of Provincial Leadership-PPL (point=lO)
Provinces demonstrate their creativity and ingenuity by effectively implementing central policies, developing their own initiatives to foster private sector growth, and navigating ambiguous national regulatory frameworks to support and advocate for local businesses.
Legal ambiguity in Vietnam arises from unclear wording in legal documents, delays in implementing laws, and contradictions between various legal sources This ambiguity can significantly affect business projects, as provincial government decisions play a crucial role in determining their success Delays caused by unclear regulations can lead to increased costs and time for businesses, and some provinces may exploit these uncertainties to hinder competition Conversely, provinces that creatively navigate central laws and proactively address the challenges faced by private firms can greatly enhance private sector development.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group -Province Policy
3.3.9 Business Support Service-BSS (point=lO)
This article evaluates provincial policies aimed at promoting private sector trade and facilitating business partner matchmaking It assesses the effectiveness of provincial officials in addressing challenges faced by firms in these areas.
The eighth sub-index builds on the Pro-activity Sub-Index by examining how provincial initiatives foster private sector growth Surveys conducted among Vietnamese firms reveal key challenges they face, including: i) limited access to information about both domestic and international markets; ii) difficulties in comprehending new regulatory changes; and iii) challenges in sourcing a sufficient number of skilled employees for their operations.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
3.3.10 Labor Training-LT (point=lO)
A measure of the efforts by provincial authorities to promote vocational training and skills development for local industries and to assist in the placement of local labor
Vietnam faces a significant challenge in creating employment for 1.4 million new job seekers annually, while businesses consistently report a shortage of skilled and semi-skilled workers This highlights a critical gap: the private sector seeks qualified employees who can contribute value, rather than merely filling positions Consequently, provincial initiatives aimed at enhancing local workforce skills are essential for fostering a conducive business environment While some firms invest in employee training, they often lose trained workers to competitors offering better pay, leading to a collective action problem To address this issue, provinces could implement general labor training programs to ensure a more skilled labor pool that benefits all businesses.
This is positive independent variable of FDI which above empirical research have done It may have internal relation with variables group - Province Policy
The confidence of the private sector in provincial legal institutions is assessed by determining whether firms view these institutions as effective mechanisms for dispute resolution or merely as channels for appealing against corrupt practices by officials.
Correlation among explanatory variables
Correlation analysis is used for finding associations between explanatory variable In
Table 4.1 illustrates the correlation matrix some of the explanatory variables included in model
Table 4.1 Matrix of Correlation among explanatory variables
AL BSS EC IC INF IP LI LT PPL TAl TCRC MS
See more detail in table 7- Appendices
The analysis reveals significant correlations among key variables impacting industrial products and market dynamics A strong correlation of +0.89 between Industrial Product (IP) and Market Size (MS) indicates that initial market size stocks significantly influence industrial product factors, suggesting that one of these variables may be excluded during hypothesis testing Additionally, a correlation of +0.75 between Transparency and Access to Information (TAl) and Business Support Services (BSS) highlights that effective business support services facilitate easier access to information for investors Furthermore, Labor Training (LT) shows the highest positive correlation with BSS, emphasizing its critical role in attracting foreign direct investment (FDI) and underscoring the importance of LT in the regression model's significance regarding business support services.
Empirical estimation and result
This section aims to report and discuss the econometric results of my analysis, utilizing both the provincial competition index and traditional variables to assess provincial FDI, as shown in Table 4.2 The regression results are derived from an empirical framework based on the specified equation and explanatory variables Employing the OLS technique across a sample of 63 provinces in Vietnam, the analysis incorporates twelve explanatory variables (detailed in Table 4.2) while adhering to the assumptions of the OLS method to ensure that the estimators are BLUE Additionally, we assume the accuracy of the collected dataset.
To limit the FDI value coming later than provincial competition index I have counted to cross section data by getting the average value in four years (63 observations)
The regression analysis was conducted across six different specifications to address the uncertainty surrounding the statistical significance of the general equation's effects on most explanatory variables By systematically evaluating each scenario, I refined the model by eliminating less significant independent variables, transitioning from a general to a simpler equation methodology This approach allowed me to identify the optimal model, necessitating the application of the Wald test for validation.
Test to check reduced variables such as AL, EC, TAl, TCRC, IC, PPL, LT, KEA, refer to the result of testing (table 5 of appendices)
); simple model specification is the best model
Heteroskedasticity was assessed using the results presented in Table 4 of the appendices, confirming that the error variance remains constant and the residuals adhere to a normal distribution The testing results indicate that the data does not exhibit Heteroskedasticity.
Correlogram Q-Statistics is also done to make sure the Autocorrelation (AR) does not exist in this model (table 6 of appendices)
Generally speaking, regression results are reported in table 4.2 including six regressions shows that four independent variable including IP,LI,INF and BSS are statistically significant at the level 1% , 5% and 10%
See more detail in table R3.1-R3.6- Appendices Note: Sign of *, ** and *** indicate significance at 1%, 5%, and 10% levels, respectively
Regression results of research model (3) shows that PCI distribute the growth rate of provincial FDI (see table 8 of appendices)
Following content, I want to discuss more detail related to each explanatory variable:
The literature indicates that industrial products significantly influence provincial foreign direct investment (FDI) in Vietnam, which aligns with our estimation results Our analysis focuses on the top five industrial products from 2006 to 2009, highlighting their correlation with the leading sectors attracting FDI in the country.
Table 4.3: Top five rank of attracting FDI in VietNam
Binh Province/City BRVT HCMC DongNai HaNoi
The data from GSO and PCI indicates a positive correlation between higher industrial product totals and increased foreign direct investment (FDI) attraction However, despite Vietnam's efforts to implement free trade agreements, the country is experiencing a decline in foreign capital inflow, primarily due to its underdeveloped supporting industries, which serve as a significant deterrent for investors.
The influence of infrastructure (INF) remains the most crucial factor affecting provincial foreign direct investment (FDI), consistent with previous empirical studies A comparison of the infrastructure rankings from the Provincial Competitiveness Index (PCI) survey and the top five provinces for FDI from 2006 to 2009 highlights this relationship.
Table 4.4: the rank of infrastructure in 2009
Province/City BRVT HCMC DongNai HaNoi
Source: GSO 2006-2009, PCI 2009 This shows that INF has the important role to attracting FDI
The PCI project defines Legal Institutions (LI) as a key indicator of private sector confidence in provincial legal frameworks, assessing whether businesses view these institutions as effective for dispute resolution or as a means to address corrupt practices Scholars and practitioners have highlighted that legal development and formal dispute resolution mechanisms represent a critical weakness in Vietnam's economic transformation Therefore, it is essential for provinces and cities to enhance their administrative capabilities and strengthen corruption prevention measures to foster a more supportive business environment.
Investors face several challenges, including the need to find skilled employees for effective labor training, difficulties in accessing information about both domestic and overseas markets, and obstacles in understanding new regulatory changes, which highlight the importance of transparency and information accessibility.
So, the BSS variable is significant to provincial FDI at levellO% is normal case
Land is a crucial resource that investors consider when making decisions about investments, particularly in the manufacturing sector This thesis suggests that the land availability (AL) variable is less significant to provincial foreign direct investment (FDI) due to the uniformity of land policies across provinces in Vietnam.
Despite hopes for a competitive advantage in Vietnam's labor force due to low wages, recent estimates indicate otherwise The low level of labor training across provinces is a significant factor, with only Binh Duong, Da Nang, and Vinh Phuc implementing effective regulations and incentives to enhance human resources A report reveals that 64% of the labor force is untrained, and 78% of youth aged 20-24 lack qualifications for the job market This presents a paradox, as Vietnam has a strong working-age population of 48 million, yet 50% of domestic and foreign enterprises report a critical shortage of skilled labor.
4.2 7 Transparency and Access to Information
Over the past decade, significant progress has been made in the implementation of grassroots democracy in Vietnam, as highlighted in various evaluation reports To further enhance democratic practices at the grassroots level, the National Assembly has proposed a law aimed at improving public access to information This legislation is designed to uphold the rights of individuals and organizations to obtain information while promoting greater transparency and accountability within government agencies The National Assembly anticipates that this law will be approved by mid-2012.
With insignificant result, this is the same floor of all provinces, and transparency and access to information is still weak point
Although there are two explanatory variables had significance to provincial FDI but still PPL and TAl less significant, these are explained at point 2.5 of this chapter 4.2.9 Informal Charges
The variable in question has been found to be insignificant in attracting provincial foreign direct investment (FDI) in Vietnam This conclusion is supported by a survey conducted in Binh Dinh, which aimed to facilitate a dialogue program focused on corruption prevention, revealing that this issue ranked eighth in importance in Hanoi.
The 8th International Donors Dialogue for Vietnam revealed that 43% of businesses reported having to pay bribes and unofficial fees to obtain land use right certificates.
4.2.10 Time Costs of Regulatory Compliance
Administrative procedures in Vietnam have seen improvements, yet challenges persist across all provinces To enhance efficiency, it is essential to further advance administrative reforms based on the outcomes of hypothesis testing.
4.2.11 other variable group related to cost factors such as Entry Cost
Estimation results indicate that two key explanatory variables are linked to provincial policy, while cost factors play a less significant role This suggests that the cost factor remains consistent across provinces, highlighting a uniformity in financial considerations.