FDI AGGLOMERATION, GEOGRAPHY AND PROVINCIAL FACTORS: EVIDENCE FROM PROVINCIAL PRODUCTIVITY IN VIETNAM

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Independent variables

Firm size (SMEs): Traditionally, there are several criteria for carrying out this classification of companies. In this regard, Decree 39/2018/NĐ-CP classified business by size as small, medium, and large size. Decree 39/2018/NĐ-CP points out that companies with fewer than 200 workers and total assets below 100 billion VND can be categorized as small and medium enterprises (SMEs). Large businesses, meanwhile, are those that exceed these parameters. Firm size is included here as a factor that affects firm productivity.
State Ownership (STATE): In literature, SOEs’ performances are often compared with performances of private firms in previous studies. Many explanations are provided to explain the difference in productivity and innovation outcomes between SOEs and privately-owned firms. According to (Shepherd, 1972), because of protectionism, the government offers to favor policies and creates an unfair playing field for state-owned firms. SOEs often operate in less competitive industries or monopolies. Conversely, privately firms tend to operate in more competitive industries, which forces them to make more effective R&D investments to survive and grow. In addition, SOEs’ performance is evaluated by the government goal. Although SOEs cannot perform as well as private firms, the government does not shut them down but finance the funds from the government budget to help them stay in the industry. Whereas private firms cannot receive any government funds, they have to compete in many aspects to secure a market share or be crowded out of the industry.
Foreign Ownership (FDI): In-Law on Enterprises 2014 of Vietnam, this study divides all enterprises into 14 groups by type of ownership. Following the Law on Investment of Vietnam, FDI-related firms are classified into two groups explaining performance variations: 100% foreign-invested company and Joint Venture Company. According to the Vietnamese state law, a Joint Venture Company (“JVC”) can be incorporated as a joint-stock company or a limited liability company by at least one Vietnamese investor and one foreign investor (either individual or legal entity). Besides, foreign investors can establish their wholly-owned companies in Vietnam but not in all business sectors. A wholly foreign-invested company (“LLC”) can be formed with a single-member LLC (if there is only one investor), a multi-member LLC, or a joint-stock company (if there are two or more investors).

Benchmark regression

In this section, we systematically investigate the causal effect between FDI presence and the firm’s productivity. We carry out the DID estimation of Equation (1) with and (2) without the control variables. As shown in Table 2.5, we have evidence about the causal relationship between FDI presence and the firm’s productivity within a region. But this causal effect is contrary between long-lived firms and younger ones whether in the same area. In detail, FDI will generate positive effects on long-lived firms. When a new business plans to start up or operates, they have to survey the business environment and potential return of an industry or region. Typically, start-up owners also want to find out the area with a high development level (e.g., better transportations, telecommunications, complementary services) to benefit from available conditions and incentives of the local governance quality. This point is also true with foreign investors called “good land birds.” That can be explained about the positive impact of FDI contribution firms in the same region. By using the interaction term between dummy variables D_before and the contribution of FDI in the region, the coefficients are significant and positive. These findings also proved that the more FDI enters an area will enhance the productivity of long-lived firms. The result of Column (2) shows that after we added the control variables in our model, the coefficients of the interaction term (D_before × Contribution of FDI in a region) were still significantly positive. Although the values of the coefficients were changed, the result was robust. We have the evidence to reject H2a and support H2b hypotheses at a 1% level.

Brief overview of FDI in Vietnamese Provinces

WTO accession was an important milestone in Vietnam. It was the opportunity for Vietnam to record its positive developments in the trade policy and regulatory environment, and a milestone to review and assess the success after 30 years since Vietnam’s economic reforms. As a result, Vietnam has emerged as one of the most rapid economic growth in the world in recent years. Trade policy and economic reforms have brought out considerable transformation to the economy in all aspects. It highlights foreign direct investment as a key determinant leading to this outcome. Cost-saving considerations, great potential in the production of labor-intensive exports, and market opportunities represent appealing reasons for investors to set up production facilities and lead to significant growth in FDI inflows to Vietnam.
Foreign investment laws have been changed to encourage foreign investments since 1996. Vietnam decides to implement a decentralization policy to devolve central government powers and responsibilities to local government in all government administrative sectors. This policy has provided local governments with more policy space and flexibility in mobilizing and allocating their resources in achieving their development goals within the state hierarchy. Decentralization policy and economic reforms have brought considerable transformation to the economy in all aspects, especially FDI inflow into the industrial zones.

Literature Review

This study bases on traditional Dunning’s eclectic paradigm and theories of production location as the most appropriate theory, which explains FDI’s location choice for investment. Dunning’s eclectic paradigm and theories of production location explain why a specific host country or a specific region within a particular host country is more or less attractive for FDI by using policy, economy variables, and cost of productions.

Eclectic paradigm

Dunning’s eclectic paradigm (Dunning & McQueen, 1981; Dunning, 1988) refers to firm-specific advantages such as ownership, internalization, and location advantages to explain the presence and development of multinational corporations (MNCs). The ownership-location-internalization (OLI) model states that all three conditions must be satisfied for potential investing firms to find FDI. Before entering a foreign country, FDI-related firms possess specific advantages. According to (Dunning, 1973, 1980, 1988), there are several advantages:
(i) Ownership Advantages including three kinds of specific advantages: (i) monopoly advantages as privileged market access through natural resources, copyrights, trademarks; (ii) technology and knowledge; (iii) Scale of economy, learning, scope, better access to financial capital.
(ii) Location Advantages include the cost of transport, telecommunications, market size, political advantages, and social advantages.
(iii) Internalization advantages: when the first two conditions are met, companies can use these advantages in coordination with at least some factors outside their original country.
The central core of Dunning’s eclectic paradigm is that one of these advantages may be necessary but not sufficient to attract FDI. It is essential to take into consideration all three conditions together. This model helps us to answer why firms engage in FDI, where and when to participate. But when foreign investors identify a particular country to invest in, they are faced with where to set up their manufacturing plant. The economic geography literature provides an answer to this issue, offering different interpretations of FDI location decisions. The review of these theories is to examine different approaches to the question of optimal position. It will help provide a better understanding of why there is an obvious regional disparity in the FDI allocation in the same country.

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Theories of production location

We start with the neoclassical theory, which bases on the assumption of profit maximization of economic agents. Neoclassical location theory is developed based on Weber’s classical theory to determine the least-cost location, and then it has been expanded well beyond the classical approach to combine with demand considerations. Next, the behavioral approach is followed to answer the question of location. This approach is regarded as a response to the failure of neoclassical theories. This theory considered the macro-context of the whole economic system that affects the firm’s location decision.
Weber’s least-cost location theory: One of its (Weber & Friedrich, 1929) core assumptions is that firms will choose a location because of minimizing their total costs. Namely, without external influences, the area takes place in an isolated region composed of one market, and there are no variations in transport costs except a simple function of the distance between spaces and that markets are located in a particular number of centers. The perfect competition assumption of this model implies that a high number of firms and customers prevent the impact of monopolies and oligopolies and perfect knowledge of market conditions, both for the buyers and suppliers. Several natural resources are available in every area, while many production inputs such as labor, fuel, and minerals are available in a particular region. In summary, three main factors affect an optimal industrial location, including labor costs, transport costs, and agglomeration economies. The generalized variable cost model: According to critics of this theory, Weber & Friedrich (1929) has unrealistic assumptions of industrial location. Weber has taken only two elements for determining the transportation cost, namely weight and distance. He has not given due to the type of transport, quality of goods to be transported, topography, the character of the region. One of the arguments against this theory mentioned is (Smith, 1981), who developed a model that deals with total costs rather than just the transportation cost, with ‘the cost of all inputs treated as continuous spatial variables. He stated that the Weberian triangle could be expanded to an n-corner figure to incorporate more material resources, markets, and realistic situations. For example, the cheap labor, capital, land, other input sources can be treated as a corner of the figure. In this case, each corner will exert its plant location proportional to the quantity of input required and the transportation cost. The relative strength of all these determinants will determine the optimal location.

Table of contents :

CHAPTER 1: GENERAL INTRODUCTION
1.1 Motivation
1.2 Thesis structure and Contributions
Appendix
CHAPTER 2: DOES FOREIGN DIRECT INVESTMENT BOOST THE PRODUCTIVITY OF DOMESTIC FIRMS? EVIDENCE FROM VIETNAM MANUFACTURING FIRMS . .
2.1 Introduction
2.2 Related literature and our research hypotheses
2.2.1 Related literature
2.2.2 Empirical studies
2.2.2.1 The productivity of FDI related firms vs. the productivity of domestic firms
2.2.2.2 The impact of FDI on the productivity of the domestic firm
2.2.2.3 The impact of FDI on the productivity of domestic firms in the same region
2.3 Data and variables
2.3.1 Data
2.3.2 Variables
2.3.2.1 Dependent variable
2.3.2.2 Independent variables
2.4 Methodology
2.5 Results
2.5.1 Benchmark regression
2.5.2 Region-Based Discussion
2.6 Conclusion
Appendix
CHAPTER 3: FDI AGGLOMERATION, GEOGRAPHY AND PROVINCIAL FACTORS: EVIDENCE FROM PROVINCIAL PRODUCTIVITY IN VIETNAM
3.1 Introduction
3.2 Brief overview of FDI in Vietnamese Provinces
3.3 Literature Review
3.3.1 Eclectic paradigm
3.3.2 Theories of production location
3.4 Methodology and Data
3.4.1 Data
3.4.2 Variables
3.4.2.1 Dependent variable
3.4.2.2 Independent variables
3.4.3 Methodology
3.5 Empirical Results
3.6 Conclusions
Appendix
CHAPTER 4: TOWARD AN ALTERNATIVE EXPLANATION FOR THE NATURAL RESOURCE CURSE: BRIBE AND FISCAL POLICY
4.1 Introduction
4.2 Literature review
4.2.1 Natural resource and FDI
4.2.2 Taxes and subsidies on FDI
4.2.3 FDI and corruption
4.3 The model
4.3.1 The benchmark model: FDI in the non-resource sector
4.3.2 In the full model: FDI in the non-natural resource and the natural resource sectors
4.4 Choice by the target state of the optimal system to incentivize the FDI agency
4.4.1 Endogenous choice of the power of incentives, * s
4.4.2 The case where the FDI agency and the government are a unique agent
4.4.3 Effects of an anti-bribery policy
4.5 Conclusion
Appendices
CHAPTER 5: CONCLUDING CHAPTER
5.1 Main findings
5.2 Contributions
5.3 Policy implications
5.4 Limitations and further research
References

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