THE FACTORS AFFECTING THE INFUSION OF FOREIGN DIRECT INVESTMENT CAPITAL INTO A

LOCALITY IN VIETNAM

Group 5: Đỗ Thùy Dung

Lê Kim HằngTrần Thị Ly Ly

Content1 INTRODUCTION2 THEORETICAL BASIS3 DATA COLLECTION4 EMPIRICAL MODEL AND HYPOTHESIS TESTS5 CONCLUSION

1. Introduction

With purpose to determine the decisive factors that influence the selection of investment locations in Vietnam, our group chooses the topic:

“THE FACTORS AFFECTING THE INFUSION OF FOREIGN DIRECT INVESTMENT CAPITAL INTO A LOCALITY IN VIETNAM”.

Doi moi (renovation) economic reforms in 1986

Foreign direct investment (FDI) has played a crucial role

2. THEORETICAL BASIS

The specific advantages of each country in general and each locality of it in particular can be divided into 3 categories:

1. The infrastructure benefits consist of export processing zones ( EPZs ) as well as industrial zones.

2. Political advantages: common and specific government policies that affect FDI flows.

3. Resources advantages includes geography, number of labors

1 Industrial zone

+ this belongs to technical infrastructure and seems to be one of the most important factors to attract FDI to any area in Viet Nam.

2 School + This kind of social infrastructure is one criterion that encourages foreign companies investing in a locality. More schools will reflect higher level of labor force

3 Policy + Policy (measured based on level): open and flexible policies of the local authority will motivate foreign firms to establish their new business or invest money in this locality. There are 3 increasing levels of good policy :

0: normal1: good2: very good

4 Density (people/km2)

+ Foreign companies when decide to invest in one area also want to exploit a great number of young labor forces with low salary

5 Region + Different kinds of topography may create advantages or disadvantages for economy development in each locality and this affect the amount of FDI as well. This Dummy variable includes:

0: mountain area and midland1: coast2: Delta

3. DATA COLLECTION

3.1 Source of survey:

The data is collected from some websites of General Statistic Office as well as Industrial Zones in Vietnam

3.2 Scope of survey:

The data from 45 provinces in Vietnam randomly, classified into 5 categories:

1. Population density2. The number of industrial zones

3. School4. Policy

5. Region

Number Province FDI (million $) Region Populaiton density

School Industrial zone

Policy

1 An Giang 82.5 0 608 252 0 0

2 Bà Rịa - Vũng Tàu 26289.3 2 1569 652 18 2

3 Bắc Giang 468.4 1 408 347 2 0

4 Bắc Kạn 17.9 0 61 222 1 0

5 Bạc Liêu 46.1 0 347 241 0 0

6 Bắc Ninh 2361.2 1 457 319 4 1

7 Bến Tre 148.3 1 532 357 1 0

8 Bình Định 591.4 1 247 438 2 1

9 Bình Dương 14130.4 2 801 319 15 2

10 Bình Phước 466.7 1 130 292 2 0

11 Bình Thuận 1371.2 2 151 431 1 1

12 Cà Mau 780.4 1 227 402 1 0

13 Cần Thơ 709.5 1 854 264 3 0

14 Đà Nẵng 2970.5 1 722 174 4 1

15 Đắk Lắk 101.7 0 134 682 0 0

16 Đồng Nai 16794.1 2 835 527 16 2

17 Hà Nam 207.6 1 914 285 1 0

18 Hà Nội 20534.6 2 1962 1471 6 2

19 Hà Tĩnh 8371.4 2 604 540 1 1

20 Hải Dương 2671.1 2 538 604 5 1

21 Hải Phòng 5143.2 2 1221 478 3 1

22 Hậu Giang 639.5 1 474 244 1 0

23 Hoà Bình 127.1 0 173 486 1 0

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Number Province FDI (million $) Region Populaiton density

School Industrial zone

Policy

24 Hưng Yên 1148.8 2 1226 375 3 1

25 Khánh Hoà 808.2 1 224 325 2 1

26 Kiên Giang 2790.8 2 268 517 1 1

27 Lai Châu 4.0 0 42 267 0 0

28 Lâm Đồng 523.8 1 123 471 1 0

29 Lạng Sơn 206.0 1 88 497 0 0

30 Long An 3499.6 2 322 419 6 1

31 Nam Định 182.5 1 1107 591 2 0

32 Nghệ An 1494.6 2 177 1056 2 1

33 Ninh Bình 602.2 1 648 322 1 0

34 Ninh Thuận 10145.1 2 1170 424 9 2

35 Phú Yên 8133.9 2 572 298 3 2

36 Quảng Nam 4903.4 2 437 531 1 1

37 Quảng Ngãi 3789.9 2 336 441 2 1

38 Quảng Ninh 3784.2 2 490 416 3 1

39 Tây Ninh 919.2 1 266 421 2 0

40 Thái Bình 231.7 1 1140 603 2 0

41 Thái Nguyên 113.3 0 221 439 1 0

42 Thanh Hoá 7054.6 2 306 1482 1 2

43 Thừa Thiên Huế 1883.9 2 215 393 1 1

44 Tiền Giang 462.3 1 675 385 2 0

45 TP.Hồ Chí Minh 30011.2 2 3530 981 20 2

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1) Model 1

4. EMPIRICAL MODEL AND HYPOTHESIS TESTS

R-squared = 91.18 % of the total variation of FDI amount in an area in Viet Nam. Types of topography may not have influence on the amount of FDI infusion into this region.

T-test Null hypothesis : H0 : = 0

Alternative hypothesis : H1 : 0

=> we reject H0, which means variable INDUSTRIAL ZONE has significant explanation to the model We do the same with variables: SCHOOL, POLICY, DENSITY => all of these independent variables are significantly explaining the amount of FDI to Vietnamese locality at 5% level. Similarity, with variable REGION:we do not have enough evidence to reject H0: = 0, we can remove variable REGION.

Similarity, with variable REGION:we do not have enough evidence to reject H0: = 0, we can remove variable REGION.

When the foreign organizations intend to invest their capital in one locality, they initially carried out surveys on some important aspects of this area and they may be deeply impressed by local infrastructure, the labor force and natural resources. If they find out one locality providing them with all of these things, they will almost invest money in this area without caring much about what kind of topography this is. They believe that whether the land is coast, midland or delta, they can cope with it and take advantages of it. => in this model, independent variable REGION is statistically insignificant in explaining the variation of FDI.

FDI = -3669.4 + 785.685 INDUSTRIAL ZONE + 4.49338 SCHOOL + 2043.06 POLICY + 2.53454 DENSITY

The 4 independent variables all have positive signs as expected

F-Test

2.1- Multicollinearity testing:

no collinearity between variables because pair correlation coefficient between independent variables is quite low ( smaller than 10.0)

2.2- Normality of residual testing

This indicates that disturbance term is homoscedastic and the model 2 is right with the assumptions of the Ordinary Least Squares estimator

2.3- Heteroscedasticity testing

2.4- Autocorrelation testing

5. Conclusion

5.1. The optimal modelFDI = -3669.4 + 785.685 INDUSTRIAL ZONE + 4.49338 SCHOOL+ 2043.06 POLICY + 2.53454DENSITY

5.2. Practical significance: The large external capital inflow mostly in the form of foreign direct investment (FDI).Foreign – invested operations now contribute to nearly 10% of Vietnam’s GDP,more than 30% of gross capital formation.perception of factors which influence FDI infusion in Vietnam is getting more and more important

5.3. Model application:

- Vietnam must complete infrastructures by building more factories, industrial zones, improving transportation in order to make distribution faster and more convenient.- Vietnam government also needs to encourage foreign investor factors, issuing the

open – policies, tries to create an equal business environment. - We should concern more about quantity as well as quality of work force. To make sure the good work source, whole society must focus and spend money on building

schools, universities, replacing old facilities by modern ones, advance teacher’s capacity…

Thank you !!!