THAI NGUYEN UNIVERSITY
Socialist Republic of Vietnam

SOUTHERN LUZON STATE UNIVERSITY
Republic of the Philippines LE HOANG BA HUYEN (JAMES)
CAUSES AND EFFECTS OF FOREIGN DIRECT INVESTMENT:
BASIS FOR POLICY RE-DIRECTION IN THANH HOA PROVINCE
IN VIETNAM
SUMMARY OF DOCTORAL THESIS IN BUSINESS ADMINISTRATION

Development, National Economics University, No. 182(II) of 2012, pp. 38-44.
6. Le Hoang Ba Huyen, Nguyen Thi Thanh Xuan, “Some solutions to attract foreign
direct investment (FDI) in Thanh Hoa province”, Science and Technology Journal of
Agriculture & Rural Development, Ministry of Agriculture and Rural Development,
Vietnam, No. 9/2012, pp. 160-165.
7. Le Hoang Ba Huyen, Nguyen Thi Thu Phuong, Nguyen Thu Huong, “Analyzing
the factors affecting the investment of FDI companies in Thanh Hoa province”,
Journal of Economic & Development, National Economics University, No. 188(II) of
2013, pp. 76-81.
8. Nguyen Thi Thu Phuong, Le Hoang Ba Huyen, Nguyen Thu Huong, “Enhancing
the role of internal auditing in preventing risks of foreign direct investment in Thanh
Hoa province”, Socio – Economic information and Forecast Journal, Ministry of
Planning and Investment, No.87 – March 2013. pp 33 – 37.
9. Le Hoang Ba Huyen, Tran Dai Nghia, “Identification of the main factors affecting
the attraction of foreign direct investment into Thanh Hoa province”, Journal of
Economic & Development, National Economics University, No. 190(II) of 2013, pp. 34-
39. 1

CHAPTER 1
INTRODUCTION
1.1 Problem Statement
According to the decentralization policy started in the FDI
law
amendment in 1996, each province was decentralized with more power and
autonomy in dealing
with
foreign investments such as in granting investment

investors. These mechanisms and policies of Thanh Hoa focus on improve and
simplify administrative procedures, issue the open and attractive mechanisms and
policies, call for investment, create innovative in building essential socio-economic
infrastructure, promote the advantages of human resources, improve the quality of
human resources in order to meet business’s demands. In addition, resolution No
02/NQ-TU dated 27/6/2011 regarding improvement for investment environment in
province in the stage 2011 – 2015 focused on implementing site clearance work in
order to meet investors’ requirements, support business development, transparency of
information for business, support business development, transparency of information
for business. With the above policy should take until 2012 in Thanh Hoa province has 2

41 investment projects involving foreign direct operation with a total registered
capital of USD 6,952 million.
These results are encouraging, but compared to the potential and advantages of
Thanh Hoa province are still limited. The number and sizes of investment projects in
Thanh Hoa are low. Thanh Hoa is not one of the top provinces classified based on
provincial competitiveness index. We have to describe the trends in FDI in Thanh
Hoa Province and identified of factors affecting the attraction of foreign investment in
Thanh Hoa. After that we can analysis of the impact of each factor to attract foreign
investment is essential for the government in offering policies to attract investment
capital and analyze the effects of FDI in the economic growth of Thanh Hoa Province.
Therefore, we can formulate policy implication to enhance economic growth of Thanh
Hoa Province in Vietnam.
This thesis focuses on determinant of “Causes and Effects of Foreign Direct
Investment: Basis for Policy Redirection in Thanh Hoa in Vietnam”.
1.2 Research Objectives
The main objective of this research is to determinants Foreign Direct

proposed for this study:
1. What are the existing conditions of industry facilities of Thanh Hoa Province
2. What are the existing policies with regards to (Ownership sharing; Stocks
distribution & allocation; Permits and Registration; Taxation; Supply of raw
materials; Capitalization & other resource; Man power)
3. To what extent that foreign direct investment is affected as course the low
FDI.
4. Is there a significant difference on the perceptions of respondents in terms of
factors affecting the process of FDI investment in the Thanh Hoa province?
5. What policies investors & incentives can be redirected to encourage and
improve performance of FDI?
1.5 Significance of the Study
(1). The thesis indicated the general picture of foreign direct investment in Thanh Hoa
province in the period from 2001 to 2012. At the same time, it also pointed out the
trend of foreign direct investment in Thanh Hoa province during this period through
the number of projects, the registered capital and the field of investment projects.
(2). The thesis is one of the first studies implemented in the province of Thanh Hoa
about the factors affecting attraction of FDI in the province. This thesis has built
models of group factors affecting attraction of FDI in Thanh Hoa Province. Based on
surveys of foreign investors and the use of statistical analysis software, author
assessed the importance of each factor and group factors in attraction of foreign direct
investment into this province.
(3). The thesis also assessed and summarized the impact of foreign direct investment
for each field as raising capital for development investment, job creation, and
contribution to exports in particular and to the growth and economic transformation in
general. 4


+ Joint – venture
+ Business co-operation under forms of BCC, BOT, BTO, BT, PPP
2.1.4 Effects of FDI 5

FDI affects the economy under following aspects:
- FDI provides capital to increase budget
- Effects of FDI on economic growth
- FDI and technology
2.1.5 Summary of some theories of attraction of FDI
2.1.5.1. Theory of marginal benefits
2.1.5.2. Theory of market power
2.1.5.3 Theory of Ownership advantages – Location advantages –
Internalizations advantages
2.1.5.4. Theory of steps for investment development
2.2 FDI and Motivation
2.3 Factors Influencing Location of FDI
2.3.1 Political stability and policy mechanisms factors
- Stability of politics
- Policy mechanisms
2.3.2 Socio-cultural environment factors
2.3.3 Financial factors
2.3.4 Economy and market factors
- Market factor
- Profit factor
- Cost Factor
2.3.5 Resource factors
- Human resources

health care, culture, sports, environment (defined in Decision 4294/2011/QD -2011);
- Policy supports investments in Nghi Son economic zone and industrial parks
(currently under construction);

CHAPTER 3
RESEARCH METHODOLOGY
3.1.
Theoretical framework
and hypothesis development
This study will be conducted based on the theoretical frame work drawn from
eclectic paradigm or the “OLI” paradigm develop by “Dunning” as explain under the
literature review and studies and according to factors which are influencing to choice
of a host market of Gilomre, O’s Donnel, Carson and Cummins (2003). The following
factors are considered as maininfluences for attracting FDI to Thanh Hoa province.
(1) Political, government and legal factors such as political stability,
government tax incentives, province image and the institutional performance by
provincial
authorities.

(2) Social and cultural factors such as level of education, attitudes,
b e l i e f s and values, religion, manners and customs, language and communication.
(3) Economic and market factors, such as
economic growth, domestic
investment affect; diversified industrial base, infrastructure; the size of the
local
market;
and
market growth.
3.2. Sample size and Population determination
3.2.1 Population determination
- Business managers of foreign direct investments and the main shareholders
of the businesses: There are forty one (41) FDI entrepreneursoperatingin Thanh Hoa
province during period from 2001 to 2012.
- Government officials: The population of this study is 100 officers who are in
Province people’s committees, Department of Planning and Investment, Department of
Finance, Department of Industry, Tax Authority, Land Authority, Department of
Political, Government
and

Legal

Factors

Social and Cultural
Factors

Economic and Market
Factors

Financial Factors

Availability of resources
factors
Perceived
increase of
Foreign

Infrastructure Factors

sample size for this study is:

n =
41/ {1 + 41 (0.05)
2
}

n = 37

Hence the sample size is 37, to collect the required data 37 questionnaires
were send to the FDI companies located in Thanh Hoa through the ways of both e -
mailing and personally. There is thirty seven (37) respondents were received.
- Government officials: With the population of this study are 100 officers (N =
100), e = 5% (at least 95% confidence level),
Therefore the sample size for this study
is:

n =
100/ {1 + 100 (0.05)
2
}

n = 80
Hence the sample size is 80, to collect the required data 80 questionnaires
were send to the Government officials in Thanh Hoa Province through the ways of
both e – mailing, telephone and personally. There are eighty (80) respondents were
received.
3.2.3 Sampling Method
DATA ANALYSIS AND RESULTS

4.1 The trends of FDI inflows in Thanh Hoa Province in the period from 2001 to
2012
The FDI inflows in Thanh Hoa increased rapidly in the period from 2001 -
2012, the invested capital, on average, was US $ 15, 09 million a year. During the 10

period from 2006 to 2011, although suffering from the world and the regional
economic crisis; high inflation rate and increasing prices of input materials in
domestic markets. The FDI in Thanh Hoa province has achieved good results.
Table 4.1: Foreign direct investment project licensed in period 2001 to 2011
Registered capital (Mill.USD)
Year

Number of
projects
Total
Of which:
Legal capital

2001 1 0,67 0,67
2002 1 0,18 0,18
2003 1 0,90 0,30
2004 3 1,97 0,52
2005 7 30,50 30,50
2006 5 6,35 6,35
2007 7 34,73 6,46

Political stability 559 0.1806 502
The legal requirements for clear and
transparent
604 0.4075 328
Expropriation risk 655 0.0020*** 455
Protection of property 592 0.8610 399
Protection of intellectual property rights 555 0.0820* 381
Security and order 585 0.08620* 408

* Statistically significant at the level of 10%
** Statistically significant at the level of 5%
*** Statistically significant at the level of 1%
The table 4.2 presents there are four factors affecting FDI inflow to Thanh
Hoa province significantly, i.e., tax or land incentives factor (with P - Value of
0.0403**), expropriation risk factor (with P - Value of 0.0020***), protection of
intellectual property rights factor (with P - Value of 0.0820*) and security and order
factor (with P - Value of 0.08620*). All variables mentioned above are rated as high
importance, specifically expropriation risk factor was ranked with highest score of
655 (rank sum of 655).
On the other hand, convenient procedures lease/land, political stability, the
legal requirements for clear and transparent, protection of property factors have
positive impacts on decision making of foreign investors in general, however, in
particular at Thanh Hoa, it shown that these factors have not statistically affected
investment decisions of foreign investors.
4.2.1.2. Social and cultural factors (F2)
In Thanh Hoa, these factors are presented in the following table: 12



* Statistically significant at the level of 10%
** Statistically significant at the level of 5%
*** Statistically significant at the level of 1%
As it is shown by the table 4.4, fluctuation of exchange rate factor and access
to capital factor is the most important factors in group factors. On the other hand, the
reasonable and stable interest rate and high inflation factors are not statistically
affected by these factors when making their investment decision Thanh Hoa.

13

4.2.1.4. Economic and marketing factors (F4)
Table 4.5 The importance level of economic and marketing factors
Attributes Rank sum

P Value
Adj.
Variance
Size of domestic market 611 0.259 380
Costs of intermediate goods and service 618 0.121 351
Wealth of Vietnamese consumers 600 0.487 274
Proximity to export markets 647 0.0056*** 445
Other investors in my industry were already 612 0.155 273
The main competitors 609 0.286 351

* Statistically significant at the level of 10%
** Statistically significant at the level of 5%

Quality of labor force factor is considered as the most important factor in the group.
In fact, this is a very consistent result because Thanh Hoa province has been ranked as
the third largest workforce in Vietnam.
4.2.1.6. Infrastructure factors (F6)
Table 4.7 The importance level infrastructure factors

* Statistically significant at the level of 10%
** Statistically significant at the level of 5%
*** Statistically significant at the level of 1%
In the table 4.7, it can also be seen that foreign investors are interested in
infrastructure quality factor; Low transport and logistics factor (with P value 0.004***
and rank sum of 651) have been ranked as the most important, while availability of
industrial zones factor (with P Value of 0.52 and rank sum of 601) has been rated less
important in comparison to two factors above.
4.2.2 Results of the Analysis
Table 4.8: Descriptive Statistics
Attributes Rank sum P Value Adj.
Variance
Political/governmental/legal factors 623 0.147 550
Social and cultural factors 610 0.35 537
Financial factors 617 0.23 546
Economic and marketing factors 641 0.013** 439
Availability of resources factors 617 0.201 514
Infrastructure factors 631 0.067* 527
Attributes Rank sum P Value Adj.
Variance
Availability of industrial zones 601 0.52 354
Infrastructure quality 622 0.09* 359
Low transport and logistics 651 0.004*** 474


16

Figures 4.7: Contribution of FDI in gross domestic product (in Bill.VND)
0 20000 40000 60000 80000
Total
FDI sector
2011
2010
2009
2008
2007
2006
2005

Source:
Thanh Hoa
Statistics
Office 2012
4.3.2 Contributions in mobilizing invested capital for development
The gross invested capital for development of the region within 5 years
(2006-2010) reached 85,395 billion VND, increased 55% in comparison to the
planned objective; the rate of budgetary capital has a decreasing tendency;
invested credit capital and FDI capital have increased continuously. For the two
years 2011 and 2012, the total capital investment has developed rapidly, in which
foreign investment has also contributed a significant density.

Figures 4.2: Investment at current prices
0
10000
20000

Total province labor force
Employees in FDI set

Source: Calculated from Thanh Hoa yearbook 2012
4.3.4 Contribution of FDI sector in province revenue
Total tax revenue of the province collected from FDI companies in the period
2006 - 2010 reached 981 billion VND, with annual growth rate of 6%; it was 220
billion in 2011, an increase of 2.17 times as comparison to that of 2006. In 2012, the
estimated total government budget revenue was 6,128 billion VND, 13.3% higher
than budgeted figures, an increase of 20.4% over the same period.
Figures 4.4: State budget revenue from FDI sector
0
2000
4000
6000
8000
2006 2007 2008 2009 2010 2011 2012
Year
Bill.dongs
From FDI
Province Revenue

Source: Calculated from Thanh Hoa yearbook 2012
Figures 4.9: Employment in FDI sector of
Thanh Hoa province
Figures 4.10: State budget revenue from FDI sector 18


2 Evaluating basis design time, planning and
construction permits
66 34
3 Clearance compensation, land tax or land 34 66
4 Intervention of government in operation of
enterprises
62 38
5 Recruiting employees 59 41
6 Dynamics of provincial leaders 79 21
7 Assess policy maker’s ability to deal with
companies’s problems.
63 37
Figures 4.11: Export turnover of FDI sector 19

8 Corruption controls 45 55
9 Environmental factors 52 48
10 Access to information of investment and investment
policies.
66 34
Source: Results of the research group's surveys.
The result of the survey for managers in Thanh Hoa shows that there are two
factors above with advantage; however, 75% of managers in the public sector said the
most favorable factor is the dynamics of leaders of Thanh Hoa province, followed by
the investment licensing time and labor recruitment.
The group of these elements is evaluated at fair level (over 60% of enterprises
rated them as good). The elements include the evaluating the basic design time,
planning and construction permits; government's intervention in operation of

correlation
with X6 at significance level of 0.01 (0.4556) indicating that t h e
e valuating basis design time, planning and construction permits factors will lead to
improvement in the dynamics of provincial leaders factor, and vice versa.
Furthermore, X3 has positive correlation with X4 at significance level of 0.01
(.0.4862). This tells us that the clearance compensation, land tax or land factor,
the
Intervention of government in operation of enterprises
factor
will also improve which
is consistent with expected result. Similarly, X6 has a significant correlation with X7
and the correlation is at significance level of 0.01 of (0.5242). Especially, the
assess policy makers ability to deal with company’s problems factor(X7) have the
most significant correlation with (X8). When the correlation is positive pointing out
that improvement in X7 will enhance X8 and vice versa.
As can also be seen from the table 4.12 that X1, X2 have negative correlation
(-0.2652, -0.2173) with X5 indicating that the improvement of the time investment
licensing factor and time of evaluation the basis design, planning and construction
licensing factor will lead reduce the recruiting employees and vice versa.
Likewise, it can be seen that some interpretation was given for the correlations
which are not significant. X5 has not significant correlation with all other factors. It
means that there are no relationships between X5 with all other variables. Moreover,
X1, X2 have not significant correlation with X3 indicating that granting investment
licenses time, evaluating basis design time, planning and construction permits factor do
not influence on clearance compensation, land tax or land.

CHAPTER 5
CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusion
Firstly, about the trends in FDI in Thanh Hoa Province, FDI in Thanh Hoa

attitudes, belief and values.
(3) The Group of financial factors: the results shows that the exchange rate
change and ability of mobilization fund factors affect significantly to the decision of
foreign investors, other factors like stable and reasonable interest rate, high inflation
have no significant impacts on the decision of investors in Thanh Hoa.
(4) Group of economy and market factors including 6 factors and the results
show that the distance to the export market is the most important factor. On the other
hand, the other factors have very little or no impact to the decision of foreign
investors. 22

(5) The group of resources factors: the result from previous chapters shows that
the quality of labors and cost of labor are considered importantly than the availability
of materials, intermediary service in term of making decision for investors.
(6) The group of infrastructure factors: These are the factors which have largest
impact to the decision of foreign investors. In details, the factors like quality of
infrastructure (roads, airports, ports, communication ) and the low cost of
transportation and logistics have large impact to the decision of foreign investors.
Otherwise, the availability of infrastructure of industry zone is considered less
important in comparison to 2 above factors.
Thirdly, analyze the effects of FDI in the economic growth of Thanh Hoa
Province. FDI has a positive impact on the industrialization and modernization in
Thanh Hoa province in recent years. Especially, it has added investment capital for
development, contributing to maintain the pace of economic growth, boosting exports,
contributing to local budgets and whole country over the years. Through foreign
direct investment, labor force gradually has been improved skills, attracted to working
with high income than other sectors. Manage staff have improved knowledge and
management experience. However, the current state of foreign direct investment in


(1) To build an overall strategic to develop industries, as well as FDI investment in
the sector, economic regions; so investors can identify plans of long-term
development and reasonable decisions. In addition, we need to offer to preferential
policies for investors who are interested in the sector and priorities such as duty-free
import of technology, free value added tax, state credit incentives, using land tax and
other investment supports.
(2) Most foreign investors highly appreciate about infrastructure and communication
network facilities for any investment take place. Therefore, it is must to improve the
capacity of potential investment sites to attract investment by developing
infrastructure such as industrial estates, export processing zones, roads, dry and sea
ports, communication and generation of electricity are as an important factors
and the Thanh Hoa government.
(3) That the bureaucracy and red taps (land acquisition, land allocation and corruption
control) are some how hindering factors for discriminating foreign i n v e s t m e nt s
i n t o T h a nh Hoa province. Therefore, the Thanh Hoa Government and as well as
the center government should focus strategy with a core committee at the highest
level through the line departments to minimize bureaucracy and red taps to attract
and promote FDI into the province.
(4) To make mechanisms and policies focus on removing the difficulties of the
enterprises in stages of clearance compensation, land lease and land. For example, we
need to improve the land valuation process, so that the approved price is close to the
market price, to organize inventory process well, inventory of assets on land.
(5) To promote administrative reform, elimination of unnecessary licenses and
procedures for investment. A synchronized administrative reform program includes:
reducing the administrative apparatus, training staff, eliminating troublesome
procedures and salary reform.
(6) To reform education and training systems to develop human resources, to increase
high qualified resources to meet the requirements of integration and development the
country as well as province;