BUSI 1546 FOUNDATIONS OF SCHOLARSHIP ASSIGNMNET ONE TOPIC REVIEW - THE IMPACT OF FDI ON ECONOMIC...
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MASTER OF
BUSINESS ADMINISTRATION
BUSI 1546
FOUNDATIONS OF SCHOLARSHIP
Assignment one: Topic Review
THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN
VIETNAM ANALYSIS IN CONSTRUCTION AND BANKING-
FINANCIAL INDUSTRIES
Student name: Tran Long
Student ID:
Lecturer: Dr. KOH, Yang Fatt
Date of submission: 16th August 2012
http://www.gre.ac.uk/http://www.gre.ac.uk/http://www.gre.ac.uk/http://www.gre.ac.uk/ -
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Contents1. INTRODUCTION ................................................................................................................................... 2
2. THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN VIETNAM ..................................................... 3
2.1. Approach and Research Questions .............................................................................................. 3
2.2. FDI Foreign Direct Investment .................................................................................................. 3
2.3. Economic development ............................................................................................................... 3
2.4. The impact of FDI on economic development ............................................................................. 4
2.4.1. Positive effects ...................................................................................................................... 4
2.4.2. Negative impacts................................................................................................................... 4
2.5. FDI and economic development in Vietnam ................................................................................ 5
2.5.1. An overview of FDI in Vietnam ............................................................................................. 5
2.5.2. Positive effects of FDI ............................................................................................................ 6
2.5.3. Negative impacts of FDI ........................................................................................................ 8
2.6. Research framework .................................................................................................................... 9
2.7. FDI in construction and banking-financial industries in Vietnam ................................................ 9
2.7.1. FDI in Construction Industry ................................................................................................. 9
2.7.2. FDI in Banking-financial Industry ........................................................................................ 10
2.8. Summary .................................................................................................................................... 12
3. CONCLUSION ..................................................................................................................................... 13
REFERENCES .......................................................................................................................................... 14
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1. INTRODUCTION
In the dynamic context of global economy, national investment is not enough
to develop a countrys economy and international business has gradually played a
more important role in economic development as well as maintaining competitiveadvantages of nations. Among many forms of international business, Foreign Direct
Investment (FDI) has been regarded as the most effective way for a country to
integrate into the global economy (Dinh, 2009).
Although FDI originally mostly concentrated on developed countries, there has
been an increasing amount of FDI flowing to developing and less-developed ones in
recent years (UNCTAD, 2008). Accordingly, many countries, those who have
implemented economic openness such as Thailand, Indonesia, especially Vietnam
after WTO participation, have received a number of FDI inflows to develop the
national economies.
However, beside the positive contributions of FDI, many countries has been
aware of its supposedly negative effects and raised a question about whether FDI is
really necessary for national economic development (Weigel et al. 1997).
The aims of this research are reviewing existing knowledge about FDI, its
impacts on economic development, and then examining the case of FDI in Vietnam
with supplement analysis in construction and banking-financial industries. From that,
the research will contribute a clearer overview of FDI in Vietnam and the role of FDI
in Vietnams economic development.
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2. THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN VIETNAM
2.1. Approach and Research Questions
To achieve the research purposes, a deductive approach is used to start with
literature review (Moore et al. 2010). From the theory of FDI, economic development
and the relationship between them, the situations of FDI in Vietnam will be
investigated to answers 3 following research questions.
What are positive and negative impacts of FDI on economic development inVietnam?
How does FDI affect Vietnams economic development in construction andbanking - financial industries?
Is Foreign Direct Investment necessary for economic development in Vietnam?2.2. FDI Foreign Direct Investment
There are various ways to define FDI, but most economists have been using the
definitions, concepts and recommendations of IMF (International Monetary Fund) and
OECD (Organisation for Economic Co-operation and Development).
Based on the definitions of IMF and OECD, FDI generally indicates the
purpose of achieving a long-term interest by an enterprise of parent country (direct
investor) in another enterprise of host country (Foreign Invested Enterprise - FIE).
The long-term interest represented a substantial impact on FIE management (OECD,
2008). That relationship can require the ownership of 10% or more of shares or voting
power in an enterprise by non-resident investors (IMF, 2006). Although there are still
some arguments about the proportion of the ownership, the percentage of at least 10%
is recommended to ensure statistical consistency across countries.
2.3. Economic development
The term economic development is one of the most popular words used in
business journals, forums as well as public media. However, it seems to be impossible
to give the exact and clear definition of economic development. From the most
reliable business organisations, in terms of scientific study and popularity, the concept
of economic development generally refers to a process of development in qualitative
and quantitative changes of multiple areas varied from agriculture, industry, services
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to human capital, environmental sustainability, critical infrastructure and other
initiatives. In other words, economic development is always involved in the expansion
of human rights and their corresponding capabilities, literacy, education, and other
socio-economic indicators (Todaro and Smith, 2002).
2.4. The impact of FDI on economic development
2.4.1. Positive effects
FDI has contributed positive effects as well as enhanced tangible and intangible
resources of the host country.
Firstly, FDI improves economic growth by increasing capital account surplus
balancing payments and boosting domestic investment. FDI is a stable type of external
financing flow compared to others (Sun, 2002).
Secondly, due to the fact that the economic development of a country depends
on its linkages with others in a global economy, linkages with FIEs will bring market
access to increase export earnings and minimize the trade deficit (Kehal, 2004).
Thirdly, FDI have generated employment in the host country through directly
recruiting local workforce for FIEs or indirectly creating employment in their related
institutions (Wei, 2010).
Fourthly, FDI helps to transfer technology advances in R&D activities and also
plays a vital part in human capital development through employee training as well as
transferring organizational and managerial practices (Kehal, 2004).
2.4.2. Negative impacts
First of all, the adverse impact of FDI is balance of payment effect. If the
repatriation of profits exceed inflows of capital, the capital account will be negatively
affected (Wei, 2010). Next, FIEs can use transfer pricing to reduce declared profits
which leads to loss of tax revenue (Weigel et al. 1997).
Then, FIEs can gradually dominate their industry through direct competition in
host country which will crowd out of local products, impair the development of
domestic firms and sometimes abuse the market power (Sun, 2002). Many nations are
aware of the loss of economic sovereignty through dependence on the actions of
foreign investors.
http://en.wikipedia.org/wiki/Literacyhttp://en.wikipedia.org/wiki/Educationhttp://en.wikipedia.org/wiki/Socioeconomicshttp://en.wikipedia.org/wiki/Socioeconomicshttp://en.wikipedia.org/wiki/Educationhttp://en.wikipedia.org/wiki/Literacy -
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Last but not least, FDI projects may have negative impacts on environment
(Kehal, 2004). FIEs can avoid building the pollution monitoring systems to save their
capital which will pollute the surrounding environment; this issue is more serious
especially when local authorities just focus on attracting FDI without considering the
effects on environment of FDI projects.
2.5. FDI and economic development in Vietnam
2.5.1. An overview of FDI in Vietnam
Before the economic reforms in 1986, there are really little FDI flows to
Vietnam (GSO, 2008). The law on foreign investment was firstly issues in 1987 to
encourage foreign enterprises and organisations to invest in Vietnam (Yusuf, 2012).
After that, Vietnam has become one of the most attractive destinations for FDI in
ASEAN. Up to the end of 2010, there have been nearly 13,670 FDI projectsthat have
been licensed in Vietnam with a total investment ofUS$198 bill ion(VOV, 2011).
The distribution of FDI capital in different sectors of Vietnam is relatively
rational which mainly focus on manufacturing, real estate, construction,
accommodation and f ood service(Exhibit 1). FDI is overwhelmingly concentrated in
industry and service sectors (Konishi, 2008). Among 23 subsectors, 11 are highly
export-oriented industries which have accounted for 40% of total investment and 89%
of total employees (Tran, 2006).
The province receiving the largest amount of FDI are Hochiminh, Ba Ria
Vung Tau, Hanoi, Dong Nai, Binh Duongwhich have total registered capital at from
US$14 billion (Binh Duong) to more than US$30 million (Hochiminh city) so far
(GSO, 2011). In terms of FDI parent countries, the main counterparts are Taiwan,
Korea, Singapore, Japan, Malaysia, Br iti sh Vir gin I slandsand the USwho have
registered FDI capital from US$13 billion (the US) to nearly US$23 billion (Taiwan)
up to now (Exhibit 2). However, in the recent years, Singapore has become the top
investor.
FDI in Vietnam has increased significantly both in quantity and scale of
projects, especially after the new stage when Vietnam became a WTO member on
January 2007. The committed FDI peaked at US$71.7 billion in 2008 before goingback to the similar amount as in 2007 due to economic crisis (figure 2.1).
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Figur e 2.1: Commited FDI in bil li ons of US$ (GSO, 2011)
Nevertheless, there has been a slow FDI implementation in Vietnam due to
inadequacy in infrastructure, and human resources and the fact that many FDI projects
have been registered to book a place (Vo and Nguyen, 2011).
2.5.2. Positive effects of FDI
FDI flows have been playing an important factor in Vietnams economic
development through enhancing and improving economic growth, market access,
transfer of technology and management skills as well as effectively implementing the
hunger eradication and poverty reduction (VOV, 2008).
Economic growthFDI in Vietnam has brought a considerable contribution to the balance of
internal capital in GDP growth (Hoang et al. 2010). After 20 years, FDI has
contributed 19% to total GDP, 30% to total income of state budget, 19% to business
capital, and 23% to fixed assets value of whole enterprises. According to Tran (2005),
increasing 1% of FDI can boost the provincial GDP by 0.105%.
By the same token, FDI has supported for domestic capital to meet the
domestic investment demand (Nguyen et al. 2006). It has provided vital financial
resources to finance the economic growth of Vietnam and contributed to inflation
control, macro-economic stability (Leproux and Brooks, 2004). As a consequence,
FDI has acted as a stabilizing factor for the economy during financial (UNCTAD,
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2008) and FIEs along with sectors receiving FDI have become the engines of
Vietnams strong economic growth (Konishi, 2008).
Furthermore, FDI also has both direct and indirect significant influence on the
poverty reduction (Tran, 2005). The illustration for direct effect is FDI helps to raise
living standard by offering higher salaries for FIEs employee than in domestic
enterprises.
Trade integration and diversif ication of exportsThe export value of FIEs has accounted for nearly 60% total export of Vietnam
in which the most amount is from footwear, textile and garments, and electronics
products (UNCTAD, 2008).
FIEs have enabled Vietnams export to access international markets with
production and distribution network of parent companies (Konishi, 2008). As a result,
Vietnam's position has been improved in the international markets and export capacity
is enhanced (Leproux and Brooks, 2004).
Free Trade Agreements has also encouraged foreign investors to establish their
production business in Vietnam. According to Vo and Nguyen (2011), implementing
1% FDI can increase 0.14% exports in the short-term and greater in the long-term. Job creation
Up to now, over 1.5 million people have been employed at FIEs (GSO, 2008).
The number of employees in FIEs has tripled between 2000 and 2006, about 200
thousand employees is recruited each year making up about 20% total annual
employments (UNCTAD, 2008).
In early stage of FDI in Vietnam, FIEs accounted for a small amount of total
employment (Le, 2002). This was due to the higher productivity in FIEs and low-
labour requirements of sectors receiving FDI (Jenkins, 2006; Nguyen et al. 2006).
Human resource development and technology transferFDI has helped to develop and modernize human resource capabilities and
skills (Leproux and Brooks, 2004). For example, Intel and Foxconn have sent
Vietnamese employees to their facilities in other countries to prepare them for key
positions. Nestl also sent experts to Vietnam to work with Vietnamese coffee
organisations in improving coffee quality. Formal training courses by foreign
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investors are an important channel to build skills and transfer knowledge (UNCTAD,
2008).
Thanks to FDI, Vietnam has got the technology, processes and know-how in
heavy industry and mineral exploitation, manufacturing cars and motorcycles,
electronics, information and communication, and even agriculture (Hoang et al. 1997).
For above reasons, FDI have created spillover effect to enhance labour productivity in
Vietnam (Nguyen and Nguyen, 2007).
2.5.3. Negative impacts of FDI
Beside the effective operation in Vietnam, some FIEs shifted taxable income to
another location with lower tax to reduce the tax amount. Therefore, Vietnam has
made provisions on transfer pricing to ensure income of FIEs generated is taxed fairly
(UNCTAD, 2008).
The biggest concern for FDI negative impacts is the loss of national control
over strategic sectors which happened to chicken product industry. To resolve this,
Vietnam encouraged export-oriented sectors at first and restricted FDI entry in a
number of strategic sectors like manufacturing cars with the aim to limit the
competition with national firms on the domestic market. However, these solutionscould limit linkages between FIEs and national firms as well as reduce consumer
benefits and productivity (UNCTAD, 2008).
Moreover, the competition issue is increasingly serious after WTO
participation. The commitments of opening market of Vietnam have gradually made
the competition between domestic and foreign invested enterprises harsher which can
lead to the failure or bankruptcy of some private and public enterprises (UNCTAD,
2008).
Likewise, environment issues of FIEs have been among the hottest topic among
Vietnamese publicity in recent years. Some FDI projects have polluted the
environment which negatively impacted peoples life, health and money like in Thi
Vais case (Nguyen, 2010). Even though environmental rules and regulations have
been come into force, it is argued that the efforts of government and local authorities
are not strong enough to control the issue.
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2.6. Research framework
From the overview of FDIs impacts on Vietnams economic development, it
can be clearly seen that FDI have strongly affected economic growth of Vietnam with
both positive contributions and negative impacts while the effects on job creation isquite insignificant. The influence of FDI in export and HR development technology
transfer is also noteworthy. However, to research in service sectors like construction
and banking-financial industries, the impact of FDI through export enhancing is
omitted. For this reason, the research framework will focus on the impacts of FDI on
Vietnams economic development through economic growth aspects and human
resource development - technology transfer (Figure 2.2).
F igur e 2.2: Research F ramework in construction and banking-financial industri es
2.7. FDI in construction and banking-financial industries in Vietnam
2.7.1. FDI in Construction Industry
OverviewUp to 2010, construction industry constituted 707 projects (6% total projects)
with more than US$11.5 billion registered capital (6% total capital) (Exhibit 1). In
2010, there were 174 projects (14% total projects) registered with value more than
US$1.8 billion (9% total capital) (GSO, 2011). This increase is due to the priority of
Vietnam for infrastructure construction, hotel and tourism which has created high
demand for construction services (Le, 2004). In 2010, the commitment with WTO
enabled construction FIEs to establish branches in Vietnam.
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Most domestic construction works are undertaken by local workforce, with
technical assistance from foreign partners in some essential phases. In the past years,
Vietnam local workforce was not well trained, working tools were poor and of only
basic design and standards (To, 1999).
Economic growthFirst of all, the capabilities and capacity of local Vietnamese firms will increase
when cooperating with foreign-owned construction firms and helps to implement a
higher amount of FDI capital registered as well as attract more FDI (Smith et al. 2009).
Next, supplier construction firms can get necessary investments from FDI to
acquire modern technologies and world-class processes to enhance quality and reduce
cost which improve competitive capabilities of domestic construction enterprises
(Smith et al. 2009). Consumers would have benefits to be able to buy a good quality
house at a reasonable price. Therefore, this can indirectly enhance the economic
growth.
HR development and technology transferImportantly, FIEs have organized training courses in the newest methods and
processes to improve professional skills and capabilities for local employees,especially construction designers and planners (Smith et al. 2009).
Moreover, FIEs have also helped Vietnamese construction firms to adopt
advanced and modern construction technologies and have the opportunity to operate
in overseas markets as well as build more international cooperation which is good for
their operation and development (Smith et al. 2009)..
2.7.2. FDI in Banking-financial Industry
OverviewUp to 2010, banking-financial industry constituted 75 projects (0.6% total
projects) with more than US$1.3 billion registered capital (0.7% total capital) (Exhibit
1). In 2010, there were only 3 projects (14% total projects) registered with value more
than US$59 million (0.3% total capital) (GSO, 2011).
In fact, Vietnam have just gradually opened banking-financial market in recent
years with three 100% foreign-owned banks including HSBC, Standard Chartered,
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ANZ and 11 largest Joint Stock Commercial Banks have foreign strategic investors in
2008. In 2007, FIEs accounted for 9% of total deposits and loan.
Economic growthAt first, the appearance of foreign banks in the form of branches operating in
Vietnam played an important role in the mobilization of foreign loans to Vietnam
(ICTC, 1999). FIEs have brought benefits for customers by offering them various
choices of financial products and services. As a consequence, this has made
Vietnamese banking-financial market operate more efficiently.
Besides, with only a simple personnel organization, these branches have had a
trading turnover bigger than that of domestic joint stock commercial banks (ICTC,
1999). In the macroeconomic intermediation tasks, FIEs have good capabilities to
reduce transaction cost, improve financial resource access and enable higher
investment. As a result, they have increased transactions and contributed to economic
growth. By 2015, removal of the remaining restrictions according to commitments
with WTO will estimated raise 0.3 % of Vietnams GDP per annum. (Smith et al.
2009).
Moreover, with lower instability of lending as well as stronger loan growthrates, FIEs have supported to Small and Medium Enterprises (SMEs) by enhancing
intermediation and innovating financial services (Barr et al. 2006).
However, domestic financial institutions can have difficulties in competing
with FIEs due to the weakness in the organizational structure which can lower the
execution of monetary policies as well as make them be damaged more easily when
crisis happens.
HR development and technology transferThanks to FIEs, local financial institutions can gain advanced management
techniques. For example, first foreign banks in Vietnam including Credit Lyonnais,
ANZ and Chinfon have provided diversifying banking services (ICTC, 1999).
Moreover, FIEs have also created standard criteria for modernizing the banking
technology for domestic banks. For instance, foreign banks have experiences and
professional capabilities with payment services, credit services, money transmission,
and money brokering as well as individual services like mortgage credit (Barr et al.
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2006). Local banks can learn from those skills and experiences to improve their
capabilities.
Besides, FIEs have also played a useful role in developing banking and
financial human resource. Many employees after working for HSBC or ANZ have
enhanced their knowledge and skills and some of them are in key position when
moving to local banks.
2.8. Summary
On the whole, FDI have been playing an extremely important part in economic
development of Vietnam with its contribution to economic growth, exports, job
creation, human resource development and technology transfer. Although it has
created some negative impacts, Vietnam has avoided significantly suffering from
them thanks to its cautious and gradual policy to open to FDI (UNCTAD, 2008). Thus,
FDI has contributed huge benefits for Vietnams economy compared to its partial
negative impacts to be really necessary for economic development.
More specifically, FDI in construction industry has considerably contributed to
economic development by improving Vietnamese human resource capabilities,
transferring new process as well as indirectly enhancing economic growth throughutilizing construction cost. Although FDI in banking-financial industry just accounted
for a small proportion in total projects and capital registered, it has shown a beneficial
potential in transferring modern techniques. Besides, an open and active banking-
financial industry can improve financial intermediation and help capital markets
operate more effectively to considerably contribute to Vietnams economic
development.
In two analysed industries and other sectors receiving FDI in Vietnam, the
market openness committed with WTO has generally raised the challenges with many
problems, especially competitions issues. In fact, this openness is necessary to bring
about huge benefits of FDI for economic development which matches with market-
oriented economy in Vietnam. To achieve economic development goals, Vietnam
should have strong innovation of awareness and state management for FDI as well as
sustained efforts to increase national competitiveness by attracting FDI and use the
benefits of the integration between regional and international (Konishi, 2008).
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3. CONCLUSION
This topic review enhances understanding of FDIs impacts on economic
development in Vietnam with examining both positive contributions and negative
effects. Based on the literature and findings about FDI in Vietnam, the review built anappropriate framework to analyse the impacts of FDI on Vietnams economic
development in relation to construction and banking-financial industries. Then, the
findings will be synthesized to conclude about the role of FDI in Vietnams economic
development and how it is necessary for economic development in Vietnam.
After answering all the questions to reach research purposes, this topic review
synthesized the existing knowledge about FDI and its impacts on economic
development. Moreover, it also emphasized the theory by testing its validity in
particular situation of Vietnam and contributed the case of FDI in Vietnam with
updated information. Additionally, the review analyzed the impacts of FDI on
economic development in Vietnams construction and banking-financial industries
which have not examined in depth by many researchers before. Hence, the topic
review will serve as a base for more empirical researches or future studies in
enhancing the impacts of FDI on Vietnams economic development in construction
and banking-financial industries.
Finally, some limitations and weaknesses of this review need to be considered.
The first is about the data source. There are little published case studies and researches
on FDI in Vietnam, especially the English materials. Moreover, some data are
unavailable or have outdated statistical information (for example, the statistics of
indirect employment created by FDI in Vietnam). The second is about the time and
length to conduct this review which did not enable to investigate deeper into thesituation of FDI in Vietnam as well as two above industries. Another limit is the
different theory on the definitions of economic growth and economic development.
This topic review based on the point of view that economic growth is an aspect and
indicator of economic development. In this topic review, many factors in economic
growth and spillover effects were not examined in depth.
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Exh ibi t 1. FDI projects li censed in Vietnam by kinds of economic activi ty (Accumulation of
proj ects having effect as of 31/12/2010) (GSO, 2011)
-
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Exh ibi t 2. FDI projects li censed in Vietnam by main counterparts (Accumulation of projects
having eff ect as of 31/12/2010) (GSO, 2011)