BỘ GIÁO DỤC VÀ ĐÀO TẠO

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG

---------o0o---------

BÁO CÁO TỔNG KẾT

CÔNG TRÌNH THAM GIA XÉT
GIẢI THƯỞNG "SINH VIÊN NGHIÊN CỨU KHOA HỌC"
NĂM 2022

The effects of FDI on Labour Productivity in Processing

Industry in Vietnam

Thuộc nhóm ngành: Khoa học xã hội

Tháng 5 Năm 2022

 TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION .................................................................................................7
1.1 Rationale of the study .................................................................................................... 7
1.2 Literature Review ........................................................................................................ 11
1.2.1 The situation of research in the world ................................................................... 11
1.2.2 The situation of research in Vietnam ..................................................................... 14
1.3 Research objectives...................................................................................................... 18
1.4 Research subject and scope ........................................................................................ 18
1.5 Research method.......................................................................................................... 18
1.6 Research structure ....................................................................................................... 19
CHAPTER 2: THEORETICAL BACKGROUND OF THE RESEARCH ............................20
2.1. Definitions of variables ................................................................................................ 20
2.1.1. Foreign Direct Investment ..................................................................................... 20
2.1.2. Processing Industry................................................................................................ 21
2.1.3. Labor Productivity ................................................................................................. 24
2.1.4. Other variables affecting Labor Productivity ........................................................ 25
2.2. Production function ..................................................................................................... 26
2.2.1. Some significant forms of production functions ................................................... 26
2.2.2. Theoretical framework of effect of FDI on Labor productivity ............................ 28
CHAPTER 3: RESEARCH MODEL AND RESEARCH METHOD .....................................29
3.1. Research process .......................................................................................................... 29
3.2. Research model and research hypotheses ................................................................. 30
3.2.1. Research Model ..................................................................................................... 30
3.2.2. Research hypotheses .............................................................................................. 32
3.3. Research sample and data collection method ........................................................... 36
3.4. Data Analyzing Methods ............................................................................................. 37
3.4.1. Sample Descriptive Statistics ................................................................................ 37
3.4.2. Regression Analysis .............................................................................................. 37
3.4.3. Statistical Significance Tests ................................................................................. 37
3.4.4. Determination Coefficient Evaluation ................................................................... 37
3.4.5. Multicollinearity test.............................................................................................. 38
3.4.6. Heteroskedasticity test ........................................................................................... 38
CHAPTER 4: RESEARCH RESULTS AND DISCUSSION ...................................................39
4.1. Sample Descriptive Statistics Results ........................................................................ 39
4.2. Regression Results ....................................................................................................... 41
4.2.1. Overall effects of FDI on Labor Productivity ....................................................... 41

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 4.2.2. Effects of other exogenous variables on Labor Productivity ................................ 42
4.2.3. Effects of FDI on Labor Productivity by age groups ............................................ 43
4.2.4. Effects of FDI on Labor Productivity by regions .................................................. 44
4.2.5. Effects of FDI on Labor Productivity by sub industry groups .............................. 45
4.3. Determination Coefficient Evaluation Result ........................................................... 49
4.4. Statistical Significance Test Result ............................................................................ 49
4.4.1. Statistical Significance Hypothesis ....................................................................... 49
4.4.2. Results of Student-T test and P-values test ........................................................... 50
4.5. Multicollinearity Test Results..................................................................................... 51
4.5.1. Variance Inflation Factors evaluation.................................................................... 51
4.5.2. Correlation Matrix result ....................................................................................... 52
4.6. Heteroskedasticity Test Results .................................................................................. 54
4.6.1. Residual Graph ...................................................................................................... 54
4.6.2. White’s test result .................................................................................................. 55
4.6.3. Breusch – Pagan test result .................................................................................... 56
CHAPTER 5: CONCLUSIONS ON RESEARCH RESULTS AND
RECOMMENDATIONS ............................................................................................................ 57
5.1. Conclusions................................................................................................................... 57
5.2. Recommendations ........................................................................................................ 57
5.2.1. Policies to attract FDI into Vietnam ...................................................................... 57
5.2.2. Recommendations to enhance positive impacts of FDI on Labor productivity in
Vietnam for enterprises ......................................................................................................... 61
5.2.3. Recommendations to enhance positive impacts of FDI on Labor productivity in
Vietnam for policy makers .................................................................................................... 64
5.3. Contribution and meaning of the research ............................................................... 68
5.4. Limitations of the research ......................................................................................... 69
REFERENCES .............................................................................................................................70

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 LIST OF ABBREVIATIONS
Abbreviations Full name
ASEAN The Association of Southeast Asian
Nations
MNC Multinational corporations
GDP Gross domestic product
FDI Foreign direct investment
FIA Foreign Investment Agency
USD United States Dollar
ILO International Labor Organization
VCCI Vietnam Chamber of Commerce and
Industry
APO Asian Productivity Organization
SOEs State-owned enterprises
POLS Pooled Ordinary Least Square
REM Random effects model
FEM Fixed effects model
TFP Total factor productivity
ISIC The International Standard Industrial
Classification
SUR Seemingly unrelated regression
OLS Ordinary Least Square
ARDL Autoregressive Distributed Lag model
SSA Singular spectrum analysis
WTO World Trade Organization
VIF Variance Inflation Factors
VND Vietnam Dong
SMEs Small and medium-sized enterprises
FTA Free Trade Agreement

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IFRS The International Financial Reporting
Standards

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 LIST OF TABLES
Table 2.1. Sub Industries (2-digit codes) in the manufacturing and processing industry
group ............................................................................................................................................. 22
Table 4.1. Sample Descriptive Results ........................................................................................39
Table 4.3. FDI’s regression coefficients in different age groups ..............................................44
Table 4.4. FDI’s regression coefficients in different regions ....................................................45
Table 4.5. FDI effects on Labor Productivity by sub industries ..............................................46
Table 4.6. Hypothesis for statistical significance test ................................................................50
Table 4.7. Student-T test and P-values test results ....................................................................50
Table 4.8. Variance Inflation Factors Evaluation .....................................................................52
Table 4.9. Correlation Matrix between independent variables ................................................53
Table 4.10. Cameron & Trivedi's decomposition of IM-test results ........................................56

LIST OF FIGURES
Figure 4.1. Age Distribution of Vietnam’s Processing Enterprises .........................................41
Figure 4.2. Regression Results with Statistical Significance Test ............................................51
Figure 4.3. Residual Graph Result ..............................................................................................55

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 CHAPTER 1: INTRODUCTION

1.1 Rationale of the study

Vietnam, a country transitioning away from agriculture, has a low capital stock, a poor
level of production, and a low intellectual quality. Vietnam will continue to be a strong
candidate for ASEAN and international investment in the coming year. Given its investor-
friendly policies, relative economic and political steadiness, cost-effectiveness, and
consumer demand expectations, Vietnam is expected to benefit from Asian supply chain
restructuring while also drawing a new variety of investors in terms of location and
industries.
Vietnam faced an arduous year in 2021 due to stringent lockdowns and movement
restrictions for nearly half of the year. This precipitated a severe economic collapse,
resulting in job losses and business closures. It exacerbated supply chain bottlenecks,
harming multinational corporations (MNCs) as demand in western markets peaked because
of factory closures and rigorous quarantine procedures. Nonetheless, Vietnam achieved a
positive GDP growth rate of 2.58 percent and now appears to be on track to return to its
average annual growth rate of 6% in 2022 as the government gradually reopens the country.
Rather than continuing its zero-covid policy, Vietnam’s government decided to abandon
the previous method and go for “living with virus” strategy. This can be a chance to allow
enterprises and manufacturing plants to recover and restart their operations.
Foreign direct investment (FDI) is a significant development driver in an open and
successful international economic system. It is vital to the growth of both emerging and
developed economies. Foreign direct investments play an indispensable role in the open
international economic system, as they provide significant sources of external finances for
developing countries and funding sources for developed countries. In general, FDI is one
of the catalysts for economic growth by increasing capital inflow, creating employment,
increasing exports - imports and transferring technology. For developing countries, higher
FDI inflow leads to higher levels of economic growth (Cao Liang, Salman Ali Shah , Tian
Bifei, 2021).

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 According to data from the Foreign Investment Agency (FIA)., despite the impact of
COVID-19, Vietnam received 31.15 billion USD in foreign direct investment (FDI) as of
December, up 9.2 percent annually. the first seven months of 2021, an 11.1 percent
decrease from last year. The figure involved 15.2 billion USD invested in 1,738 new
projects, 9 billion USD in 985 ongoing projects, and 6.9 billion USD in share acquisitions
as of December 20th, according to data as of December 20th . The FIA stated that while total
FDI commitments increased, the number of projects declined significantly as a result of
Vietnam's selective approach, which excluded low-value-added projects. Processing sector
attracted the most foreign investors, receiving 18.1 billion USD, or 58.2 percent of total
capital pledges, followed by power generation, which received 5.7 billion USD.
Labor productivity is the number of products and services generated by an employee
over a specified time. In general, labor productivity is an important indicator to evaluate
the competitiveness of an economy, as well as enterprises. According to the National
Statistical Indicator System, labor productivity reflects workers’ performance, measured by
GDP per labor in the reference period.
Vietnam has not yet entered a genuine period of productivity development, which is
a necessary condition for an economy to achieve high-income status. According to the
General Statistics Office, in recent years, although Vietnam’s labor productivity has
increased stably at the highest growth rate in the ASEAN, with its great efforts to increase
labor productivity leading to significant developments, with regards to value as well as
speed; Vietnam’s labor productivity is still relatively lower than that of many countries in
Southeast Asia. Precisely, the total economy's labor productivity is estimated to be
VN171.3 million (US$7,398) per worker in 2021, up $538 from 2020. Productivity
increased by 4.71 percent because of increased worker qualifications; the proportion of
trained workers with degrees and certificates increased to 26.1 percent, up from 25.3
percent in 2020.
Vietnam's labor productivity has increased significantly in recent years, with the
growth of an average of 5.8 percent per year on average between 2016 and 2020, which wá
higher than the rate of growth between 2011 and 2015 (4.3 percent) and exceeding the
expected target (5 percent). According to the International Labor Organization (ILO),

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Vietnam's labor productivity growth rate between 2011 and 2020 was 5.11 percent, higher
than the ASEAN median (3.11 percent) and higher than most ASEAN countries, second
only to Cambodia, VCCI President Loc stated. Nevertheless, this rate was still lower than
China's (7%) and India's (7%) rates (6 percent).
Despite a high growth rate of labor productivity, Vietnam still witnessed a much lower
level of productivity than that of many countries in the area. Vietnam's labor productivity
increase has been insufficient to narrow the gap with other countries. Vietnam's labor
productivity was 26 times that of Singapore, seven times lower than that of Malaysia in
2020, four times that of China, three times that of Thailand, and two times that of the
Philippines, according to the ILO. Vietnam's worker productivity also lags behind Japan by
60 years, Malaysia by 40 years, and Thailand by ten years, according to the Asian
Productivity Organization's (APO) 2020 Report. It can be inferred from this fact that
Vietnam's productivity must be increased more efficiently.
There are reasons to explain the situation of Vietnam’s labor productivity. First,
reality shows that Vietnamese workers only undertake the final stages following available
models. Although Vietnam has a large labor force, their labor only guarantees outsourcing
tasks, which are not enough to create branded products for the market. In addition, Vietnam
still considers cheap labor as an advantage, which makes it challenging to increase labor
productivity. Besides, more than 90% of enterprises in Vietnam are small and medium with
low and medium production technology. Furthermore, Vietnam's large and branded
enterprises participating in the international market have increased but are still quite modest
in recent years. The main driving force for Vietnam's exports is still FDI enterprises and
Vietnamese enterprises doing business in exploiting raw materials for agricultural and
aquatic products. (Hung Manh Nguyen, 2019). On the other hand, Vietnamese enterprises
have not been deeply involved in the global supply chain, domestic enterprises have almost
not been able to connect to the global value chain of large transnational companies and
corporations, so they have not been able to take advantage of the pervasiveness of the global
supply chain. Knowledge, technology, and labor productivity from transnational companies
and corporations into domestic enterprises. Enterprises participating in export and import
have 35% higher labor productivity than enterprises without this activity. In addition, the

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process of equitization of SOEs has not been as expected, and the allocation of resources
to SOEs is still limited.
According to the situation it is vital to make effective solutions for the problem of
labor productivity in Vietnam. In which, policies to help enterprises access international
capitals, including Foreign Direct Investment (FDI), are increasingly necessary.
FDI has been taken into significant consideration by the Vietnamese government
since the role of FDI in enhancing labour productivity and providing competitive
advantages for companies, industry and the whole country has long been acknowledged by
the government. In order to achieve sustainable development, it has been noted that the
country’s economic growth cannot be based on unreliable sources such as natural resources,
obsolete technology, or cheap labor. Vietnam is still trapped in some of those scenarios.
Therefore, given the emergence of FDI in our country, workers' skills will fall short of
meeting the demands of modern technologies without sufficient training. As shown by the
data, signs of development remain ambiguous in our country, despite increasing investment
in technology. There has been a greater than ever need for enhancing labour productivity,
given Vietnam's tremendous advancements in science and technology
The impacts of FDI spillovers on labour productivity in Vietnam remain in doubt, as
positive (Nguyen Hoang Le,Luong Vinh Quoc Duy, Bui Hoang Ngoc . 2019), negative
(Tran Cam Linh.2013), or ambiguous (Hidekatsu Asada .2020). It can be inferred that the
real benefits of technology spillovers from FDI that Vietnam is currently deriving from FDI
are questionable. To narrow the gap, using cross-sectional data of 10134 companies in the
processing industry in the year 2018, we will analyze the effect of FDI on Labour
Productivity by addressing the main research questions: (1) To what extent does foreign
direct investment (FDI) affect the labour productivity in the processing industry in Vietnam.
To receive accurate results, we also try to deal with the causality effect between FDI and
Labour productivity. We believe it is essential that the paper is conducted so that feasible
and suitable recommendations can be suggested for Vietnam to enhance positive impacts
and restrict negative impacts of FDI on labour productivity given the trend of globalization
in the economy and advancements in science and technology while still concentrating on
sustainable development goals.

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1.2 Literature Review
In the process of conducting the research, we have researched and given an overview
of the general observations on the impact of Foreign Direct Investment (FDI) on labor
productivity in the world and in Vietnam.
The majority of empirical studies which deal with the growth impact of FDI come to the
conclusion on the positive effects. However, certain studies prove the existence of neutral,
or even negative effects on economic growth
1.2.1 The situation of research in the world
There is an extensive empirical literature on the effects of FDI on local economies,
with much of it focused on technology transfers and spillovers. The study "FDI effects on
the labor market of host countries" (Hale, Galina, Mingzhi Xu. 2016) is summarizing the
results of studies that addresses the effects of FDI on a destination country’s labor markets,
primarily on wages and employment. The authors surveyed 30 papers published in
academic journals between 1995 and 2015 that empirically analyze the effects of FDI on
various aspects of labor markets. These papers vary in many aspects: FDI measures
employed, level of aggregation, outcome variables considered, econometric methodologies,
and time and country samples. The result showed that FDI has positive effects on host
countries’ labor markets. There is overwhelming evidence of the positive effect of FDI on
wages of target firms through all channels: increased productivity, a shift to more skilled
composition of labor in target firms, and increased demand for skilled labor and resulting
labor market pressure. Wages increase and so do productivity and the skill level of the labor
force. Even though some lower-skilled workers may experience adverse effects and some
domestic firms may suffer competition pressure in terms of the availability of skilled labor,
most of the literature suggests that labor conditions improve owing to FDI. The increase in
inequality that results from disproportionate growth of demand for skilled labor may induce
the labor force to seek education and training.
A study on the influence of FDI on the labor market analyzed the current situation in
ASEAN countries research by Ngoc Anh Pham and Thi Thu Hien Phan (2020) with title
"The Impact of FDI on the Labor Market: The Case of ASEAN”. The authors analyzed the
impact of FDI on labor costs, labor demand, labor productivity, and the labor environment.

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In this paper, the result also showed that FDI has positive effects on host countries’ labor
markets. Wages increase and so do productivity and the skill level of the labor force. In the
process of analyzing productivity, the author points out prominent countries such as
Vietnam, Thailand and Indonesia. The article demonstrated that FDI helps to raise the
productivity of ASEAN workers by pushing their competitiveness. In the long term, the
labor cost would rise in ASEAN.
Carmen Bogheana and Mihaela Statea (2015) study focus on analyzing the relation
between foreign direct investments (FDI) and labor productivity in the European Union
countries. Based on the data available retrieved from the Eurostat website, for the 2000 –
2012 time periods and used by the SPSS computer program through correlation methods,
it is highlighted that the existence of a strong connection between the volume of foreign
direct investments outflows and productivity zones. After calculating the Spearman
correlation coefficients, values that indicate direct and strong connections between the
foreign direct investments inflows and average labor productivity were obtained, for
countries such as: Bulgaria, Czech Republic, Germany, Estonia, Greece, Spain, Poland,
Portugal, Slovenia and Slovakia. For Romania, the obtained Spearman coefficient proves
that the connection is direct, substantial, and significant.
K. Riesta (2019) had conducted on the impact of FDI spillovers on domestic firms’
labor productivity in Indonesia through “The spillover effects from Foreign Direct
Investment (FDI) on labor productivity: Evidence from Indonesia manufacturing sector”.
In this article, micro-level panel data covering about 20,000 medium and large
manufacturing establishments in each year over the period 2010 and 2014 was employed.
This study suggests that, within the same industry, horizontal spillovers are associated with
domestic firms’ productivity: this relationship is negative in the short-term but positive
in the long-term. The author estimated equations with three types of panel regression
models: POLS, REM, and FEM. This study’s findings also demonstrate that, across
industries, there are adverse backward spillover effects on domestic firms’ productivity. In
addition, this study points out that FDI spillovers affect domestic firms’ productivity
effectively when they are capital-intensive. Therefore, the results imply the importance of
maintaining a long-term perspective toward foreign-invested firms in Indonesia and the

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government needs to stimulate policies that can enhance domestic firms’ capacity to supply
intermediate materials and capital to foreign firm in downstream market by truncating the
technology gap between foreign and domestic firms.
A study “Foreign direct investment in services and manufacturing productivity:
Evidence for Chile” researched by Ana M. Fernandes and Caroline Paunov (2012) also
analyzed manufacturing productivity. This paper examines the impact of substantial foreign
direct investment (FDI) inflows in producer service sectors on the total factor productivity
(TFP) of Chilean manufacturing firms. The dataset is an unbalanced panel capturing firm
entry and exit that includes an average of 4913 firms per year for the 1992–2004 period
classified into 4-digit ISIC revision 2 industries. To estimate the effects of service FDI on
manufacturing TFP, the authors consider a Cobb–Douglas production function in
logarithms. Interestingly, we also find that services FDI offers opportunities for lagging
firms to catch up with industry leaders. This contradicts the frequently held idea that only
the most advanced firms in emerging economies can benefit from increased relations with
foreign-owned firms via FDI or trade. Therefore, concerns about opening emerging
economies further to FDI and trade based on alleged negative effects on less advanced
firms do not appear to be therefore a valid general objection.
The study “Spillover effects of inward foreign direct investment on labour
productivity: An analysis on skill composition in manufacturing industry” using the current
2-digit levels of panel data set from 14 manufacturing industries
during the period of 2000–2018. This paper compares the influence of technology
effects with knowledge effects in labour productivity according to skill composition in the
Malaysian manufacturing industries. The econometrics results revealed that all the factors
that determine Malaysian labour productivity –investments in training, local R&D,
domestic investment from local investors, firm size and both FDI spillover effects from
“technology” and “knowledge” significantly contribute to the increase of Malaysian labour
productivity. Additionally, applying the seemingly unrelated regression (SUR)
estimator, the outcomes showed that the “technology effects” measured by the number of
FDI companies are greater as compared to MNCS‟ capital investments and “knowledge”
effects in increasing labour productivity.

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 Foreign direct investment (FDI) is not only a transfer of capital, but a complex bundle
of capital and firm-specific assets. In particular, the transfer of production know-how
improves overall productivity of FDI-receiving firms and to some extent also that of the
other firms due to spillovers. Egger, P. and M. Pfaffermayr (2001) with study “A Note on
Labour Productivity and Foreign Inward Direct Investment” used a small panel of Austrian
manufacturing sectors and investigated this hypothesis empirically. The authors analyzed
the productivity effects of inward FDI within industries using a CES-framework in a small
panel of Austrian manufacturing sectors from 1981 to 1994. The paper showed a
significant overall (neutral) impact of FDI on labour productivity. This effect arises in
addition to the labour productivity increase resulting from an expansion of the accurate
stock of capital. The nonlinear estimates furthermore lend some support to the hypothesis
that the labour-augmenting effect of inward FDI exceeds the capital-augmenting effect.
Together with the finding of elastic factor substitution this suggests that the potential for
job creation of inward FDI is likely to be smaller as commonly assumed.
Anagaw Derseh Mebratie (2010) focused on “Foreign Direct Investment and Labour
Productivity in South Africa”. This paper used firm level data from South African
manufacturing industries from 2003 to 2007 to examine the impact of foreign investment
on labour productivity of domestic firms. The author used the Cobb-Douglas production
function to obtain empirically testable results because of its realistic assumption of non-
linear relationship between inputs and output in the production process. The result showed
that while foreign firms improve the productivity of their own workers, there is no evidence
of either positive or negative spillover effect from FDI on productivity of labour in local
firms at either the national or regional level.
In fact, there are many other related studies in the same field, but the research focuses
more on the general study of the effect of FDI on labor productivity of the host country.
However, these studies have not analyzed specific industries.
1.2.2 The situation of research in Vietnam
Foreign direct investment has been considered an essential factor in the recent growth
of Vietnam’s economy and thus far has drawn a great deal of concern from economic
researchers in Vietnam. However, studies on the impacts of foreign direct investment on

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Vietnam’s economy, especially the productivity spillovers, are still very scarce compared
with other developing countries.
The study “Effects of Foreign Direct Investment and Human Capital on Labor
Productivity: Evidence from Vietnam'' was researched by Nguyen Hoang Le,Luong Vinh
Quoc Duy, Bui Hoang Ngoc (2019). The economic growth rate of the current year would
be affected by those of previous years; thus, lagged values of dependent variables became
explanatory variables for the current year. This problem in the model cannot be solved by
the Ordinary Least Square (OLS) technique. Hence, the authors used the Autoregressive
Distributed Lag model (ARDL) of Pesaran et al.,2001) and the Granger causality test with
the method of Toda and Yamamoto (1995) with the data of Vietnam from 1986 to 2014.
The paper affirms two main points: (i) FDI and human capital have positive effects on
improving labour productivity in the long term. (ii) There is uni-directional Granger
causality running from FDI and human capital index to labour productivity. Moreover, this
article has two policy implications: Firstly, Vietnam should promote tertiary education
socialization and vocational education. Secondly, there should be long-term strategies to
attract FDI, priority should be given to high-tech FDI projects that use fewer natural
resources.
Nguyen Van Vinh (2019) conducted research on “The impact of FDI and human
capital on labor productivity of Vietnam”. In this paper, the author used data analysis
techniques ARDL model with data collected from 1990 to 2017, research results showed
that FDI has a positive impact on labor productivity in the short term and long term. The
paper showed that FDI has a positive impact on Vietnam's economy in general and labor
productivity in the short term and long term. At the same time, the factor of human resource
through university education also indicates positive long-term effects on labor productivity
also indicates that the concentration of higher education does not clearly show a strong
impact on productivity dynamic.
The study “The impact of Foreign Direct Investment on the labor productivity in the
host countries: The case of Vietnam” was researched by Pham Xuan Kien (2008). This
paper will answer whether FDI increases overall labor productivity in Vietnam or not and
what the main determinants of the spillovers of FDI to host countries are and the spillovers

15
of FDI vary due to different forms of FDI as well as different locations in the case of
Vietnam. This author used the data of Enterprise Survey 2005 by the General Statistics
Office of Vietnam which focus on the data at the firm level in four sub-industries: food
processing, textile, garment and footwear, electronics and mechanics containing 441
enterprises including domestic and FDI firms located over the country. The result showed
that the spillovers of FDI to the overall labor productivity in Vietnam are unambiguous
and strongly positive. The spillovers of FDI in Vietnam depend on the skills, scale, and
capital intensity gaps between FDI and domestic firms. Moreover, the spillovers of FDI in
Vietnam were also found to be different across locations.
The study “Role of FDI sector in increasing labor productivity in Vietnam” was
conducted by Nguyen Tien Long, Nguyen Chi Dung (2018) to propose some solutions to
spread and link the FDI sector with the rest of the economy, thereby creating motivation to
increase labor productivity for the whole economy in Vietnam. The authors used data sets
on FDI and labor productivity by economic sectors in Vietnam in the period of 2008 - 2017
and analyzed them using the SSA method. Research results show that the increase in labor
productivity of the economy is mainly explained by the increase in labor productivity of
economic sectors, including the FDI sector with significant contributions. The FDI sector
always maintains the highest level of labor productivity but creates the lowest
employment rate for Vietnamese workers. In addition, this article also offers 7 solutions for
the FDI sector to increase labor productivity in Vietnam.
A study “Does Foreign Direct Investment Have an Impact on the Growth in Labor
Productivity of Vietnamese Domestic Firms?” was researched by Le Thanh Thuy (2007).
This study makes an attempt to determine the main channels and estimate the degree of
spillover effects in Vietnam using industry level data for the 1995-1999 and 2000-2002
periods. The data include 29 sectors from three industrial groups of mining and quarrying,
manufacturing and electricity, gas, and water supply. There are four industries in mining
and quarrying, 23 sectors in manufacturing and two in electricity, gas & water supply. The
author used the Cobb - Douglas function and log-linear regression. FDI has complemented
insufficient domestic investments for enlarging production, helped to reduce government
budget deficits, contributed to rising exports to international markets and increased

16
employment, and with advanced technologies and know-how embodied in the capital, FDI
has been discussed as having a long-term effect of contributing significantly to the growth
of productivity in Vietnam’s industries. There is a tendency for the enlargement of FDI to
go along with the development of domestic sectors, suggesting a positive spillover from
FDI. The empirical study shows that spillovers were significantly positive during 1995-
1999 and insignificantly positive in 2000-2002. The results also indicate that technology
restricted spillover effects in the earlier period but had no effect in the later years.
Hidekatsu Asada (2020) researched Effects of Foreign Direct Investment and Trade
on Labor Productivity Growth in Vietnam. The author used the autoregressive distributed
lag (ARDL) model of analyzing data from 1990 to 2017. The study examined the effects of
FDI and trade on labor productivity growth in Vietnam in the long run and short run while
avoiding the risk of the “middle-income trap”. This article also showed that FDI, capital
goods imports and exports unanimously contributed to labor productivity growth in the
long run, while the impact in the short run remained ambiguous. The results confirm the
theoretical framework augmenting the positive relationship that exists between FDI and
trade, and labor productivity growth.
Tran Cam Linh (2013) researched about “The impact of FDI on labor productivity of
manufacturing enterprises in the textile and garment industry in Vietnam” by using 1,237
enterprises data in 2010, in which, FDI enterprises accounted for 27.7% of total enterprises,
state-owned enterprises accounted for 3.7% and non-state enterprises accounted for 68.6%.
The author used the Cobb - Douglas function and Translog function to analyze and the labor
productivity variable is explained by variables such as: fixed investment capital per
employee, enterprise cost per worker, average labor in the enterprise, number of years of
operation of the enterprise, the location of the business and the form of business ownership.
Research results confirm that there is an impact of FDI on labor productivity of enterprises
operating in the textile industry and this impact is negative. Besides, the study also
confirmed that there is no evidence of the impact of FDI on labor productivity of textile
and garment enterprises operating in different regions of the country.
It can be clear that in Vietnam, research on the effects of FDI on labor productivity is
diverse. Most of the new studies have the level of theoretical analysis, the general situation

17
and propose policies and long-term vision in the future. However, there are hardly many
studies on the effects of FDI on each economic sector, especially those with a large
proportion of foreign direct investment.
● New points about the research team's topic
In this research, the authors would build models to analyze how FDI affects labor
productivity of Vietnam’s manufacturing and processing enterprises. This analysis would
be conducted in different levels such as by regions, by ages or by sub industries so that FDI
effects on labor productivity could be clearly indicated. Furthermore, collecting the sample
from manufacturing and processing enterprises is also a new approach, which could suggest
further research.
1.3 Research objectives
The paper includes the following objectives:
• Summarize Vietnam’s experience in FDI promotion in the processing industry in
2019
• Examine the effect of foreign direct investment (FDI) on the labor productivity in
the processing industry in Vietnam.
• Investigate whether the effects of foreign direct investment (FDI) on the labor
productivity are contingent on geographic factors.
• Provide several lessons from Vietnam’s experience to other developing countries.
1.4 Research subject and scope
• Research subject: The effect of FDI on Labor Productivity in the Processing Industry
• Research scope: Using the data from the General Statistics Office in the Enterprise
Census, the research examined 10,134 processing enterprises from the North to the
South regions in Vietnam
• Research time period: The databases used in the research was collected from survey
results conducted from March to May 2019 by the General Statistics Office in the
Enterprise Census
1.5 Research method

18
 First of all, the research group applies desk research method, data research and collects
previous studies related to FDI, Labour Productivity, Investment and Economy to review,
draw lessons and build a linear structural model.
After collecting data, the research group conducted data analysis. With regards to
qualitative research, the research group collected, organized, and described meaning of the
data so that they could be suitable for the research model. Concerning quantitative data, the
research group used Excel and STATA to carry out correlation analysis, regression
analysis, hypothesis testing on reliability, etc.
1.6 Research structure
The study is divided into five chapters as follows
Chapter 1: Introduction
Chapter 2: Theoretical background of the research
Chapter 3: Research model and research method
Chapter 4: Research result and discussion
Chapter 5: Conclusions on research results and recommendations

19
 CHAPTER 2: THEORETICAL BACKGROUND OF THE RESEARCH

2.1. Definitions of variables

2.1.1. Foreign Direct Investment
Nowadays the issue of foreign direct investments is getting more attention, both at
national and international levels. Economists believe that FDI is an essential element of
economic development in all countries, especially in the developing countries. Foreign
direct investment (FDI) has become a popular form of investment for decades and has been
defined by scholars, international economic organizations as well as national laws of most
countries.
Foreign Direct Investment (FDI) is defined as investment from one country into
another (typically by companies rather than governments) that involves establishing
operations or acquiring tangible assets, including stakes in other businesses (Vintila
Denisia, 2010). FDI is not just a transfer of ownership as it usually involves the transfer of
factors complementary to capital, including management, technology and organizational
skills.
FDI is a long-term investment by individuals or firms from one nation (delivering
country) into another country (receiving country) for the purpose of setting up production
and business (Boddewyn, 1985; Moosa, 2002). In other words, FDI is the transfer of cash,
property, technology, or any other asset from a home nation to a host country in order to
start or control a profit-making firm. Foreign individuals or enterprises will gain ownership
of assets and control of all commercial and manufacturing operations of their establishment
in the host nation due to their investment. In this approach, the key to distinguishing FDI
from other financial instruments is the management component of control (Li & Rugman,
2007).
To further clarify the FDI definition, Brewer (1992) discussed the specific
characteristics of FDI enterprises: (1) establishing investors' rights and obligations to where
(the firm in the host country) they are invested, (2) establishing their ownership with the
ability to control the invested capital, (3) FDI can be seen as a the market expansion of

20
multinational enterprises and organizations, and (4) demonstrating investors' rights to
transfer technology and technology transfer.
2.1.2. Processing Industry
In this research, the authors used the Decision No. 27/2018/QD-TTg by the Prime
Minister of the Socialist Republic of Vietnam (2018) to define the industry of
manufacturing and processing. Accordingly, processing and manufacturing include
activities that alter the physical and chemical aspects of materials or change the composition
of the materials, to create new products. Materials or modified ingredients are raw materials
from agricultural, forestry, aquatic products, mining or ores as well as other processing
products. Goods changes or restoration are also considered processing activities. Units in
this industry include plants or factories that use machines and craft equipment. Units that
process products by hand at home to sell to the market, such as apparel and baking products,
are also included in this industry. Processing units also include material handling operations
or contracting with other material processors. Both types of these units are also processing
operations.
Also, in the Decision No. 27/2018/QD-TTg, the industry of manufacturing and
processing has sub industries at 04 levels: C2 (2-digit codes), C3 (3-digit codes), C4 (4-
digit codes) and C5 (5-digit codes). C4 is the subset of C3; C3 is the subset of C2; and C2
is the subset of C (the largest set that covers all industries in the processing group). In this
research, the authors chose to analyze processing enterprises divided in accordance with
C2, which includes 24 sub industries.

21
 Table 2.1. Sub Industries (2-digit codes) in the manufacturing and processing
industry group

Code Sub Industry

10 Food production and processing

11 Beverage production

12 Tobacco production

13 Weaving

14 Costumes Production

15 Manufacture of leather and related products

16 Wood processing and production of products from wood, bamboo and cork

17 Manufacture of paper and paper products

18 Print and copy record types

19 Production of coke and refined petroleum products

20 Manufacture of chemicals and chemical products

22
21 Manufacture of drugs, pharmaceutical chemicals and medicinal herbs

22 Manufacture of products from rubber and plastic

23 Manufacture of other non-metallic mineral products

24 Metal production

25 Manufacture of prefabricated metal products; except machinery and equipment

26 Manufacture of electronic products, computers and optical products

27 Manufacture of electrical equipment

28 Manufacture of unclassified machinery and equipment

29 Manufacture of automobiles and other motor vehicles

30 Manufacture of other transportations

31 Manufacture of beds, cabinets, tables and chairs

32 Other processing and manufacturing industries

23
 33 Repair, maintenance and installation of machinery and equipment

Source: 27/2018/QD-TTg
2.1.3. Labor Productivity
Labor productivity, understood as the value of output produced per unit of labor input,
is a crucial long-run determinant of workers’ real wages. Ultimately, workers cannot
sustainably earn more value than they create. Neoclassical economic theory formalizes this
notion in its assertion that a worker’s wage is equivalent to the marginal product of her
labor, that is, her productivity (Cahuc et al., 2014).
Labor productivity shows the technical relationships that exist in production among
workers, material inputs and outputs (Mahmood, 2006). It's considered to be a reliable
indication of technological efficiency that reflects changing factor usage patterns. In the
industrialized world, labor productivity increase is one of the most important drivers of
rising national revenue.
Most developing-country sectors are seen to be uncompetitive in terms of quality and
pricing in international markets. As a result, unlike in industrialized nations, their
contribution to the national economy is far smaller than that of the agricultural industry.
One of the reasons for such weak performance is supposed to be low productivity of factors
of production (Gorg and Strobl, 2001). Many studies have emphasized the importance of
labor productivity growth to increase real output and improve living standards (Steindel
and Stiroh, 2001; Mahmood, 2008). However, increasing the productivity of industrial
employees may be costly since it necessitates investments in education, training, expertise,
and research & development.
Foreign companies may be able to contribute to the development of human capital in
general and labor productivity in particular. When multinational companies decide to invest
in developing countries, it is expected that they will bring capital and other intangible assets
(Aitken and Harrison, 1999). Moreover, the productivity of workers of the host country is
expected to increase when they receive training or accumulate experience while working
for multinationals. When these workers move to domestic firms, they bring some of the

24
knowledge acquired from multinational enterprises (Cuyvers et al, 2008). Another
theoretical thesis, which is also supported by empirical evidence, is that inbound FDI has a
greater labor-augmenting effect than it does a capital-augmenting effect. For Austrian
industrial industries, Egger and Pfaffermayr (2001) affirmed this. One of the main factors
why most developing countries give significant opportunities to promote foreign
investment is because of spillover through labor productivity, and it is crucial to empirically
explore if this was the case or not. As a result, the influence of foreign presence on local
enterprises is examined using labor productivity as a key variable in this study.
2.1.4. Other variables affecting Labor Productivity
Capital Intensity: Capital intensity is measured by the ratio of total capital to the
number of workers in the firm. The greater the projected marginal productivity of labor, the
more machinery employees utilize (Buckley, 2007). Foreign investment in a company's
shares boosts its capital structure and boosts its production capability. As a result, capital
stock must be controlled in order to separate the productivity benefit connected with the
firm's asset from other spillover effects of foreign presence (Anagaw Derseh Mebratie,
2010).
Cost per Labor: Cost per Labor is measured by the ratio of an enterprise’s total
expenses to the number of workers in that enterprise in a given time period (Tran Cam Linh,
2014). Xiaming Liu et al (2001) stated that in the model analyzing FDI effects on labor
productivity, there was a vector of other possible independent variables including cost per
labor. Pham Thi Bich Ngoc & Nguyen Huu Van Phuoc (2017) developed the model by
taking logarithm of cost per labor.
Wage: Wage is variable to measure total labor-related costs. According to
neoclassical labor economics, a worker’s wage equates to that worker’s marginal product
of labor in equilibrium. Worker's wage is one of crucial long-run determinants of labor
productivity (Katovich & Maia, 2018). In Vietnam, wage or labor expenses includes:
Salary, bonus and other allowances of salary-like nature, including: salary, wages,
allowances and bonuses in salary; Allowances and other incomes of employees are
accounted into costs and product costs; Social insurance paid instead of salary; and other

25
incomes not included in production and business expenses (Vietnam National Assembly,
2019).
Age: It is the number of years that an enterprise has been in operation, starting from
the year of establishment until investigation time. Firm age is managed in order to assess
the businesses' production and commercial experience. Controlling for the age of the
factory is necessary since the productivity of the firm might be changed due to accumulation
of marketing and production experience overtime (Javorcik, 2004).
Firm Size: This is defined as the total number of laborers of a firm in a given time
period (Oku Ai, Inoue Shun & Masui Tsubasa, 2020). However, to avoid insignificant
results, some research calculated firm size by taking logarithm of a firm’s assets (Acemoglu
et al, 2007; Vujanović et al, 2021).
2.2. Production function
According to Britannica dictionary (2014), the production function, in economics, is
an equation that expresses the relationship between the quantities of productive factors
(such as labor and capital) used and the amount of product obtained. It states the amount of
product that can be obtained from every combination of factors, assuming that the most
efficient available methods of production are used. In other words, we can say that the
production function is an indicator of the physical relationship between the inputs and
output of a firm. The general form of production function is:
Y = f (K, L, Mi)
Whereas:
Y is maximum output
K and L are inputs to production (say, capital and labor)
Mi is other relevant inputs
It is noted that only a single maximum level of output can be produced from a given
combination of inputs, while the opposite may not be true. To produce the same output,
different combinations of inputs can be used. If a certain input is used more, another type
of input must be used less.
2.2.1. Some significant forms of production functions
● Cobb - Douglas production function

26
 The Cobb-Douglas production function expresses the relationship between an input
quantity and an output quantity. In economics, this production function is widely used in
the analysis of growth and productivity. It was proposed by Knut Wicksell (1851 - 1926)
and tested against statistical evidence by Charles Cobb and Paul Douglas in 1928.
The form of Cobb – Douglas function is:
Y=AlαKβ
Whereas:
● Y = total production calculated by the real value of all goods produced in a year
● L = labor input calculated by person-hours worked in a year
● K = Capital input as a measure of all machinery, equipment, and buildings; the value
of capital input divided by the price of capital
● A = total factor productivity
● α and β are the output elasticities of capital and labor, respectively. These values are
constants determined by available technology. (0 < α < 1; 0 < β < 1)
● Translog production function
The first form of the Translog production function was proposed in 1967 by J.
Kmenta.
Not based on rigid assumptions such as there are perfect or easy substitutions between
factors of production, it is the most flexible form of function, advantageous over the Cobb-
Douglas production function. Besides, the Translog production function allows converting
from a linear relationship between output and factors of production to a nonlinear
relationship. The form is:
lnY = lnA + α1*lnL + α2*lnK + α3*lnM + β1*lnL*lnK + β2*lnL*lnM + β3*lnK*lnM
+ γ1*ln2L + γ2*ln2K + γ3*ln2M (2.7)
Where as:
● Y = total production calculated by the real value of all goods produced in a year
● L = labor input calculated by person-hours worked in a year
● K = Capital input as a measure of all machinery, equipment, and buildings; the value
of capital input divided by the price of capital
● A = total factor productivity

27
 ● M = materials and supplies
● α, β, γ is coefficients of the equation.
2.2.2. Theoretical framework of effect of FDI on Labor productivity
Pham, X.K. (2008), determining the impact of FDI on the labor productivity in
Vietnam as a whole, used the model:
Labprodi = F (capinti, scalei, skilli, Fsharei, Dloca2, Dloca3, Dloca4, Fshare1i,
Fshare2i,Fshare3i)
Where i denotes firm i, labprod: measures the labor productivity of the firms in terms
of value added per labor. capint measures the capital intensity per labor. Scale: average of
input cost per labor is used to measure the scale of the firm with an assumption that firms
which use larger amount of inputs would have larger scale. Skill reflects the quality of labor
in the firms. However, because of a lack of data, wage rate is used as a proxy with the
assumption that a worker paid a higher wage rate would have better performance or better
skills. Fshare is used to test the spillovers of FDI to the labor productivity in general. This
variable is equal to the proportion of the average revenue the firm accounts for in the total
revenues of the four sub-industries.
Meanwhile, the study of Hidekatsu, A. (2020), with the aim to examine the effects of
FDI and trade on the labor productivity growth in Vietnam in the long run and short run,
uses the ARDL bounds testing approach developed by Perasan, Shin and Smith:
lnLPt = ln = c0 + c1lnFDIt + c2lnCIMt+ c3lnEXt+ c2WTODUM+ et
ln is the natural log of each variable. LP is labor productivity per worker derived by
GDP per number of workers, N. FDI is the gross FDI inflows. CIM is the import of capital
goods. EX is the export. WTODUM is the WTO dummy. e is the random error term.
The study uses the ARDL approach to estimate the long-run and short-run effects. For this
purpose, the study aims to estimate the cointegration relationship between FDI and trade
and labor productivity growth. If co-integration among the variables is confirmed, the
model can be specified as a conditional error-model format. This would distinguish between
the long-run and the short-run effects of independent variables on labor productivity.

28
 CHAPTER 3: RESEARCH MODEL AND RESEARCH METHOD
3.1. Research process
Step 1: Determining research issues
Firstly, in order to set up complete research, the research topic must be selected. The
topic of this research is Labour productivity in Processing industry and the effects of FDI
on Labour productivity in Processing industry in Vietnam. The analysis of the effects of
FDI is to make some recommendations for Vietnam businesses and the government to
improve positive impacts and restrict negative impacts of FDI on Labour productivity in
Processing industry in Vietnam in the context of the increasing significance of labour
satisfaction and overall efficiency of the performance of the business. After determining
research issues, the research group determines the specific aims of the research.
Step 2: Referring to previous research
The research group conducted studies on previous research about definitions, theories,
as well as findings and evaluations about factors determining the outcome of labour
productivity, specifically labour productivity in the processing industry in Vietnam. Then,
the research group builds up hypotheses about relationships among the determinants and
carries out hypothesis tests in the specified research environment.
Step 3: Developing research hypothesis
After determining research issues and collecting relevant theories and analytical
results, the research group shall develop hypotheses and a research model. The research
model and hypotheses must be practical, clearly proposed and demonstrated so that the
testing process and results of the analysis make sense.
Step 4: Designing research
After defining the research model and hypotheses, the research group will conduct
research to solve the research issues proposed. Via interviewing experts in the field and
relevant companies from other research to modify the contents, define the sample size
necessary to collect data, and methods to collect data.
Step 5: Collecting data
The research group collects data as a random sample by using survey results by the
General Statistics Office in the Enterprise Census 2019 to analyze the research issues

29
proposed. Means of inquiring and collecting data depends mostly on research topic and
ability to access and inquire.
Step 6: Analyzing data
Data collected will be cleaned and analyzed by the software of STATA 15. To
overview the sample collected, the research group had sample descriptions through tables
and figures. Regression models with OLS estimators were used to evaluate effects of FDI
and other exogenous variables on labor productivity. Furthermore, to test significance of
models and variables, testing methods were conducted such as t-test, p-value test,
collinearity test, variance test…
Step 7: Conclusion and Report
Based on results after analyzing the data, the research group will draw conclusions
and write a report to solve the research issues and propose necessary solutions and
recommendations. In addition, the research group also defines meaning, contribution and
limitations of research, along with putting forward following directions for further research
into this field.
3.2. Research model and research hypotheses
3.2.1. Research Model
Based on previous studies and literature review, the research group suggested the
following variables (including FDI) that could affect Vietnamese enterprises’ labor
productivity in the industry of processing.
Capital Intensity. This intensity is calculated by dividing an enterprise’s total amount
capital by the total laborers working in that enterprise (Heshmati & Rashidghalam, 2018;
Ayelign & Singh, 2019; Zheng et al, 2017).
Cost per Labor. This index is calculated by dividing the total expense of an enterprise
by total labor number working in that enterprise (Tran Cam Linh, 2014; Pham Thi Bich
Ngoc & Nguyen Huu Van Phuoc, 2017; Xiaming Liu et al, 2001).
FDI status. In this research, the authors used the dummy variable to define FDI status
of an enterprise. If an enterprise is FDI related, the dummy variable would be “1”; while it
would be “0” if an enterprise does not engage in FDI (Kimura & Kiyota, 2006; Zhou et al,
2002; Lutz & Talavera, 2004).

30
 Wage. This includes: Salary, bonus and other allowances of salary-like nature,
including: salary, wages, allowances and bonuses in salary; Allowances and other incomes
of employees are accounted into costs and product costs; Social insurance paid instead of
salary; and other incomes not included in production and business expenses (Vietnam
National Assembly, 2019).
Age. It is the number of years that an enterprise has been in operation, starting from
the year of establishment until investigation time. Firm age is managed in order to assess
the businesses' production and commercial experience. Controlling for the age of the
factory is necessary since the productivity of the firm might be changed due to accumulation
of marketing and production experience overtime (Javorcik, 2004).
Firm Size. This is defined as the total number of laborers of a firm in a given time
period (Oku Ai, Inoue Shun & Masui Tsubasa, 2020). However, to avoid insignificant
results, some international research calculated firm size by taking logarithm of a firm’s
assets (Acemoglu et al, 2007; Vujanović et al, 2021). Therefore, the research chose to
calculate firm size by taking logarithm of a firm’s assets.
Labor Productivity. This is the dependent variable in the research model. It is
calculated by dividing the total output of an enterprise by the total number of laborers
working in that enterprise (Mahmood, 2006; Cahuc et al., 2014).
After reviewing the suggested variables, the research group had the following regression
function:
𝒍𝒂𝒃𝒐𝒓_𝒑𝒓𝒐𝒅 = 𝜷𝟎 + 𝜷𝟏 𝒄𝒂𝒑𝒊𝒕𝒂𝒍_𝒊𝒏𝒕 + 𝜷𝟐 𝒄𝒐𝒔𝒕𝒑𝒆𝒓𝒍𝒂𝒃 + 𝜷𝟑 𝒅𝑭𝑫𝑰 + 𝜷𝟒 𝒘𝒂𝒈𝒆
+ 𝜷𝟓 𝒂𝒈𝒆 + 𝜷𝟔 𝒔𝒊𝒛𝒆 + 𝜺𝒊
Where;
𝑙𝑎𝑏𝑜𝑟_𝑝𝑟𝑜𝑑: Labor Productivity
𝑐𝑎𝑝𝑖𝑡𝑎𝑙_𝑖𝑛𝑡: Capital Intensity
𝑐𝑜𝑠𝑡𝑝𝑒𝑟𝑙𝑎𝑏: Cost per Labor
𝑑𝐹𝐷𝐼: FDI status
𝑤𝑎𝑔𝑒: Firm Wage & other labor-related expenses
𝑎𝑔𝑒: Firm Age
𝑠𝑖𝑧𝑒: Firm Size

31
 𝛽0 ; 𝛽1 ; 𝛽2 ; 𝛽3 ; 𝛽4 ; 𝛽5 ; 𝛽6 : Regression Coefficients
𝜀𝑖 : Residuals
3.2.2. Research hypotheses
● Capital Intensity
Capital intensity is a key factor in business performance and has therefore attracted
the attention of researchers. Many studies establish a link between capital intensity and
employee productivity.
Heshmati and Rashidghalam (2018) investigated the level of productivity and its
determinants on Kenyan manufacturing and service sectors and found that wage per worker
and capital per worker (capital intensity) are significant factors that improve labor
productivity. Similarly, when examining the labor productivity growth and determining
factors of large and medium manufacturing establishments in Ethiopia, Yismaw Ayelign
and Lakhwinder Singh (2019) made a conclusion that beside wage per worker, firm age
and size, capital intensity has significant influence on the growth of labor productivity
According to Sen and Farzin (2000), a capital-intensive firm is one that requires
substantial financial resources to produce products or services. Given that capital-intensive
firms operate on a large scale, they can take full advantage of economies of scale. Thus,
they tend to focus on capitalizing on their investments which leads to more concern about
costs and efficiency, whereby the likelihood to increase labor productivity is higher. (Datta
et al., 2005). When the capital intensity (the capital to labor ratio) increases by increasing
new capital investment, the productivity increases because new capital is expected to
embody new technical innovation which enhances productivity (Zheng et al., 2017).
Therefore, the research group proposed the hypothesis:
H1: Capital Intensity has positive impacts on Labor Productivity.
● Cost per Labor
Tran Cam Linh (2014) concluded that a textile enterprise’s cost per labor positively
affected its total labor productivity, with the coefficient of cost per labor in the log-log
model at 0.512 and statistical significance at 1% level. Research by Pham Thi Bich Ngoc
& Nguyen Huu Van Phuoc (2017) also found positive impacts of cost per labor on labor
productivity with the coefficient at about 0.6 and 5% level significance. Xiaming Liu et al

32
(2001) used different regression functions, which showed that coefficients of cost per labor
on Chinese firms’ labor productivity ranged from 6.45 to 8.15.
Therefore, the research group proposed the hypothesis:
H2: Cost per Labor has positive impacts on Labor Productivity.
● FDI dummy variable
Besides calculating FDI as arithmetic values, many studies chose dummy variables to
define FDI status of enterprises. For instance, the dummy variable would be 0 if a firm does
not engage in FDI and would be 1 if that firm engages in FDI.
Kimura & Kiyota (2006) used models with dummy variables to analyze Japanese
firms’ status of exports and FDI. Two major findings were found in this research. Firstly,
the authors found that if Japanese enterprises engage in export activities and FDI, they will
have higher productivity. Results showed that the coefficients for FDI dummy variables
fluctuate from 3.54% to 3.95% with statistical significance. Secondly, there was a
systematic relationship among exports, FDI, and productivity. The most productive firms
engage in both exports and FDI, the second highest productive firms engage only in FDI,
while the third group engages only in exports. The coefficients for these three groups were
8.00, 5.96 and 4.16 respectively. These results also proved that FDI had a positive impact
on Japanese firms’ productivity.
Zhou et al (2002) also used the FDI dummy variable as one of the independent
variables in their model. This dummy variable identifies whether a Chinese firm is FDI-
related or not: “FDI=1 if it is an FDI-related firm and FDI=0 if it is a domestic firm”. Their
results showed that FDI-related firms have higher productivity than domestic firms. The
coefficient of the FDI dummy variable was estimated at 0.344 with 0.1% significance level,
which implied that FDI-related firms have higher productivity than domestic firms in
Chinese by 3.44%.
Lutz & Talavera (2004) used the FDI dummy variable to define FDI status of
Ukrainian firms. In their model, FDI, is a dummy variable taking the value 1 if the firm has
ever received foreign direct investments, and 0 otherwise. A firm is considered to receive
FDI if that firm is under foreign ownership or witnessed a change in the level of FDI
received during last periods. Regression results showed that the coefficients of FDI on labor

33
productivity in different regional and industrial groups of firms ranged from 0.73 to 0.80 at
significant levels of 1% or 5%. These proved that FDI has a positive and significant impact
on the labor productivity of the receiving firm.
Therefore, the research proposed the hypothesis:
H3: If an enterprise engages in FDI, it is likely to have higher Labor Productivity than
those not engaging in FDI.
• Wage
Future wage growth will almost certainly be contingent on beneficial interactions
between market-driven productivity improvements and institutional reforms (Katovich &
Maia, 2018). According to Mieczysaw Dobija (2011), the level and fairness of legal
minimum wages are influenced by worker productivity as measured by the ratio Q, which
is a key factor determining the minimum pay level. This ratio should be at least 3.00 in
order for the minimum wage to cause spontaneous random spread of human capital among
employees. When workers receive higher wages, it encourages them to work harder and
contributes to higher productivity. Workers with higher education and training skills tend
to receive higher wages, and they contribute more to career development and further to the
accumulation of human capital (Blundell et al. 1999) , thereby contributing to increased
labor productivity.
Although there is a significant positive relationship between salaries and worker
productivity in manufacturing firms, this relationship sometimes becomes shaky and
erratic. For larger businesses with a higher capital intensity, wages would be more
associated with labor productivity, but the gap between the two would be wider. Wages and
labor productivity would be more connected in firms with a greater amount of state capital,
foreign capital, but the gap between labor productivity and wages would be lower in these
enterprises ( Zhang Jun & Liu Xiaofeng, 2013).
The research group proposed the hypothesis:
H4: Wage has positive impacts on Labor Productivity.
• Firm’s Age
There are arguments for and against firm age to have a positive effect on productivity.
Calvo (2006) also found that old firms tend to grow less than young ones, which could be

34
mainly explained by innovation factors. Regression results by Vujanovic et al (2021)
showed that coefficients of Croatia firms' age on labor productivity ranged from -0.02 to -
0.06. This means that the older a firm is, the lower productivity that firm has.
However, some studies found that age has positive effects on labor productivity.
Srithanpong (2016) found that age coefficients on Thailand firms’ labor productivity ranged
from 0.01 to 0.04. Similarly, Supan et al (2021) found that service enterprises’ ages from
30 years and above have positive coefficients on labor productivity. These results were
statistically significant at 1% or 5% level.
The research group proposed the hypothesis:
H5: Firm’s Age has positive impacts on Labor Productivity.
• Firm’s Size
Oku Ai, Inoue Shun & Tsubasa (2020) found that firm size and labor productivity
have positive correlation. Wagner (2002) also found that firm size had positive impacts on
American labor productivity. This higher productivity could not be attributable to the
substitution of bought inputs for labor because the largest enterprises process a higher value
of raw materials (including energy) per worker. Van Biesebroeck (2005) also explored that
firms employing 100 or more workers are shown to be more productive and more likely to
survive, which is in line with results for more developed countries, while large firms also
grow more rapidly and improve productivity faster, conditional on other covariates or on
previous performance. In this paper, the author used the principal measure of firm size used
in the analysis is employment, defined as all workers, including part-time and seasonals.
The research group proposed the hypothesis:
H6: Firm’s Size has positive impacts on Labor Productivity.

35
 Figure 3.1. Research framework with hypothesis
(Source: The research group)
3.3. Research sample and data collection method
The subjects of the investigation were identified as Vietnamese enterprises in the
processing industry group. Because it was impossible to collect and investigate the
population of all enterprises, the research group chose to collect data as a random sample.
The data was collected from survey results by the General Statistics Office in the Enterprise
Census 2019.

36
 The investigation by the General Statistics Office lasted from March to May 2019.
After investigation, more than 550,000 answers were collected. Among these, there were
some enterprises with missing data or/and false values. To process missing data and errors,
the research group used STATA and its data cleaning feature. After this step, there were
10,134 valid feedbacks from 10,134 processing enterprises.
3.4. Data Analyzing Methods
3.4.1. Sample Descriptive Statistics
Variables: Labor Productivity, Capital Intensity, Cost per Labor, FDI, Wage, Age and
Size were described by their frequencies and percentages. These descriptive statistics aimed
at providing an overview of the sample collected. The sample descriptive statistics were
shown by quantities, graphs, tables and figures.
3.4.2. Regression Analysis
To evaluate how FDI and other exogenous variables affect the endogenous variable -
Labor Productivity, the research group used the method of multivariable regression analysis
with the OLS estimators. The sample was analyzed through STATA 15 software to estimate
the effects of FDI and other exogenous variables on Labor Productivity.
Evaluate how FDI affects Labor Productivity in different levels, the research group
conducted regression analysis dividing the sample into age groups, regions and sub
industries. The regression results were based on FDI coefficients on labor productivity as
well as t-value and p-value to test statistical significance. The significance level was taken
at 0.01 or 0.05.
3.4.3. Statistical Significance Tests
To test the statistical significance of regression coefficients, the research group used
the t-values and p-values. If the t-value is greater than the critical value on the t-table, the
null hypothesis that the sample mean and population mean are statistically different at the
0.01 or 0.05 significance level can be rejected. If the p-value is smaller than 0.01 or 0.05,
it can be concluded that a variable is statistically significant (Wooldridge, 2015).
3.4.4. Determination Coefficient Evaluation
To evaluate the coefficient of determination, the research group used R-squared (R2)
, which would indicate how much variation of the exogenous variable could be explained

37
by the endogenous variables in the regression models. A good R-squared is normally 0.5 or
above (Wooldridge, 2015).
3.4.5. Multicollinearity test
The multicollinearity test was used to define whether independent variables in the
model be highly correlated. If the correlation between variables is high enough, this could
be explained by the phenomenon of multicollinearity. To test this phenomenon, the research
group used Variance Inflation Factors (VIF) and Correlation Matrix. If the VIF is lower
than 10, it could be concluded that there would be no multicollinearity. If correlations
between independent variables were greater than 0.8, there would be multicollinearity.
Moreover, if R-squared was high while t-values were close to 0, there could be
multicollinearity phenomenon.
3.4.6. Heteroskedasticity test
To test whether the model had the phenomenon of heteroskedasticity, the research
group used White test, Breusch-Pagan test and residuals graph. In the White test and
Breusch-Pagan test, if the probability that the observed Chi-squared be greater than the
critical Chi-squared is less than 5%, there would be heteroskedasticity. If the residuals
graph has evident patterns, there will be heteroskedasticity.

38
 CHAPTER 4: RESEARCH RESULTS AND DISCUSSION

4.1. Sample Descriptive Statistics Results

The model’s variables were described by their frequencies and percentages. The
overview of descriptive statistics was given in the Table 4.1
Table 4.1. Sample Descriptive Results

Variable Observations Mean Std. Dev. Min Max

labor_prod 10,134 1424.19 5933.038 0.0534066 335254.9

capital_int 10,134 304.0513 1397.051 -59.95 90211.3

costperlab 10,134 1425.244 6051.093 1.072872 351177.8

dFDI 10,134 0.2553779 0.436095 0 1

wage 10,134 25582.28 132494.6 0.2 8427008

age 10,134 10.05072 7.324997 0 73

size 10,134 2.302422 16.40354 0.0001057 955.4832

(Source: The research group’s analysis)

About processing enterprises’ labor productivity, the mean value was 1424.19 million
VND and the standard deviation was 5933.038. The lowest productivity value was
0.0534066 million VND, while the highest productivity value was about 335255 million

39
VND. This meant that the range of labor productivity among processing enterprises was
greatly large with a high standard deviation.
About the FDI status, the investigation showed that there were about 75% of
processing enterprises engaging in FDI, while the other 25% were not FDI related at the
time of investigation. This ratio is consistent with the actual situation, when it is reported
that the processing industry in Vietnam attracted more than 18 billion USD in 2021, which
accounted for 58% of FDI structure by industry (Foreign Investment Agency, 2021).
About regions distribution, after cleaning data, the sample was divided into 2 main groups:
Northern Vietnam, and Central & Southern Vietnam. There are 2714 observations in the
North region, which accounts for 26.8% of the sample. Meanwhile, the other 73.2% is for
those in the Central and South regions, which makes 7420 observations.
The research group also summarized the age distribution of Vietnam’s processing
enterprises. As can be seen in the Figure 4.1 the sample is divided into 03 groups of ages.
The largest percentage is 56.7% for the group of enterprises 10 years or below, which means
that 5745 enterprises are in this group. The second highest percentage is for the group from
11 to 20 years (37.8%) with 3834 enterprises. 5.5% of the sample is the group with more
than 20 years old, which includes 555 enterprises.

40
 Figure 4.1. Age Distribution of Vietnam’s Processing Enterprises
(Source: The research group’s analysis)
4.2. Regression Results
4.2.1. Overall effects of FDI on Labor Productivity
The regression analysis results are summarized in the Table 4.2 Overall, it can be seen
that all p-values of independent variables are smaller than 0.01, which proves that all
regression coefficients are statistically significant at 1% level. The regression results show
that 04 hypotheses are accepted: H2, H3, H5 and H6. Although H1 and H4 are rejected, the
regression results are still statistically significant.

41
 Table 4.2. Regression Analysis Results

labor_prod Coefficient Std. Err. t P>t 95% Confidence Intervals

capital_int -0.253993 0.0043283 -58.68 0.000 -0.2624774 -0.2455086

costperlab 0.9923494 0.0010101 982.42 0.000 0.9903694 0.9943294

dFDI 38.80143 13.15941 2.95 0.003 13.00637 64.59649

wage -0.0002543 0.0000519 -4.9 0.000 -0.000356 -0.0001525

age 3.791625 0.7848193 4.83 0.000 2.253223 5.330026

size 6.091246 0.4178115 14.58 0.000 5.272253 6.91024

_cons 31.53942 10.36439 3.04 0.002 11.22316 51.85567

Source: The research group’s analysis

The result showed that the regression coefficients of the FDI dummy variable on
Labor Productivity was 38.80143. This means that FDI has a positive and direct impact on
labor productivity of a processing enterprise in Vietnam. In detail, as FDI was evaluated by
the dummy variable, a FDI - related processing enterprise would probably have higher labor
productivity value by about 38.8 million VND than an enterprise that did not engage in
FDI.
The coefficient of FDI has the standard error at about 13.159 with the 95% confidence
interval from 13.00637 to 64.59649. This interval includes the mean coefficient of FDI on
Labor Productivity, which proves that the regression result is significant at the level of 95%
confidence. Therefore, the regression result of FDI effects on Labor Productivity is
accepted.
4.2.2. Effects of other exogenous variables on Labor Productivity
Capital Intensity has a negative effect on Labor Productivity with the regression
coefficient at -0.253993 and the standard error at about 0.004. This variable has the 95%
confidence interval from -0.2624774 to -0.2455086, which again proved that Capital

42
Intensity negatively affects Labor Productivity. The variable of Wage also had the same
negative impacts on Labor Productivity with the regression coefficient and standard error
at -0.0002543 and 0.0000519 respectively. The 95% confidence interval of Wage is from -
0.000356 to -0.0001525.
Meanwhile, other variables: Cost per Labor; Age and Size have direct and positive
impacts on Labor Productivity of processing enterprises in Vietnam, with regression
coefficients at 0.9923494; 3.791625 and 6.091246 respectively. All these three variables
have the 95% confidence intervals that include the above regression coefficients. Therefore,
these regression results are acceptable.
In addition, the residuals have the regression coefficient at 31.53942, which means
that other variables which are not included in the model, on average, have positive impacts
on Labor Productivity. The 95% confidence interval of residuals is from 11.22316 to
51.85567.
4.2.3. Effects of FDI on Labor Productivity by age groups
To analyze how FDI affects Labor Productivity in different groups of age, the research
group divided the sample into 03 main groups: 0-10 years; 11-20 years; and Above 20.
Overall, the regression result showed that in all age groups, FDI still had positive impacts
on labor productivity of Vietnam’s processing enterprises.

43
 Table 4.3. FDI’s regression coefficients in different age groups

Age FDI Std. Err. t- p- 95% Confidence

Group coefficient value value Intervals

0 – 10 18.86139 18.86139 1.48 0.139 -9.079372 64.8715

11 – 20 66.06923 19.88276 3.32 0.001 27.08741 105.051

Above 20 149.0812 44.93497 3.32 0.001 60.81533 237.347

Source: The research group’s analysis

For the group of enterprises with 10 years old or lower, the coefficient of FDI on labor
productivity is 18.86139, which is the lowest coefficient among age groups. This means
that, for processing enterprises with 10 years or below, FDI engagement would probably
increase labor productivity by about 18.86 million USD. However, the p-value of this
coefficient is 0.139 (higher than 0.05), which proves that this effect is not significant at 0.05
level.
Meanwhile, two groups “11-20 years” and “Above 20” have positive coefficients of
FDI with statistical significance. In the group “11-20 years”, the FDI coefficient on labor
productivity is 66.06923. In the group “Above 20”, the FDI coefficient on labor
productivity is 149.0812, which is the highest among all age groups. These two age groups
share the same p-value at 0.001, which states that the regression results are statistically
significant at 1% level.
4.2.4. Effects of FDI on Labor Productivity by regions
Region groups were divided into 02 main groups: Northern Vietnam and Central &
Southern Vietnam. Overall, in all regions, FDI still has positive effects on labor
productivity of processing enterprises.

44
 Table 4.4. FDI’s regression coefficients in different regions

Region FDI Std. Err. t- p- 95% Confidence

coefficient value value Intervals

North 93.72681 29.18457 3.21 0.001 36.50053 150.9531

Central & 30.04962 15.15604 1.98 0.047 0.3394749 59.75976

South

Source: The research group’s analysis

In the North region, the coefficient of FDI on labor productivity is 93.72681. This
means that processing enterprises in this region will probably increase labor productivity
by about 93.7 million VND if they engage in FDI. This coefficient has the t-value and p-
value at 3.21 and 0.001 respectively, which means that the result in Northern Vietnam has
statistical significance at 1% level.
In the Central & South region, FDI coefficient on labor productivity is 30.04962,
which is equal to nearly one-third of that in the North region. This means that a FDI-
engaged processing enterprise in this area is likely to have higher labor productivity than
those not FDI-related by about 30 million VND. This coefficient has the t-value and p-
value at 1.98 and 0.047 respectively, which means that the result in Central and Southern
Vietnam has statistical significance at 5% level.
4.2.5. Effects of FDI on Labor Productivity by sub industry groups
To compare FDI effects on Labor Productivity in different sub industries of the
processing industry, the research divided these sub industries into 24 groups subject to
Decision No. 27/2018/QD-TTg by the Prime Minister of the Socialist Republic of Vietnam.
The Decision is enclosed with the system of economic sectors in Vietnam including lists
and contents. In this system, the manufacturing and processing industry includes 24 sub
industries, which are coded from 10 to 33.
Overall, regression analysis showed that many sub industries witnessed positive
impacts of FDI on labor productivity with statistical significance. However, the research

45
group also received some groups with negative coefficients or/and statistical
insignificance.
Table 4.5. FDI effects on Labor Productivity by sub industries

Code Sub Industry FDI Std. Err. t- p-value

coefficient value

10 Food production and processing 75.44781 57.98102 1.30 0.194

(ns)

11 Beverage production 88.77918 180.8204 0.49 0.624

(ns)

12 Tobacco production 491.0634 440.6513 1.11 0.466

(ns)

13 Weaving -47.49326 18.642 -2.55 0.011**

14 Costumes Production -14.54841 4.907329 -2.96 0.003*

15 Manufacture of leather and related -29.00198 27.52583 -1.05 0.293

products (ns)

16 Wood processing and production -1.204746 20.77753 -0.06 0.954

of products from wood, bamboo (ns)
and cork

17 Manufacture of paper and paper 54.80914 24.59748 2.23 0.026**

products

18 Print and copy record types 13.67429 18.02272 0.76 0.448

(ns)

19 Production of coke and refined -39.13199 91.88897 -0.43 0.683

petroleum products (ns)

46
20 Manufacture of chemicals and 141.7425 59.51198 2.38 0.018**
chemical products

21 Manufacture of drugs, 535.4191 196.7246 2.72 0.008*

pharmaceutical chemicals and
medicinal herbs

22 Manufacture of products from 24.88947 13.54927 1.84 0.067***

rubber and plastic

23 Manufacture of other non-metallic 209.1891 194.6066 1.07 0.283

mineral products (ns)

24 Metal production 185.6439 116.9919 1.59 0.114

(ns)

25 Manufacture of prefabricated 18.24781 15.6306 1.17 0.243

metal products; except machinery (ns)
and equipment

26 Manufacture of electronic 57.59151 58.5071 0.98 0.326

products, computers and optical (ns)
products

27 Manufacture of electrical -1.198716 28.24508 -0.04 0.966

equipment (ns)

28 Manufacture of unclassified 24.01242 16.78422 1.43 0.153

machinery and equipment (ns)

29 Manufacture of automobiles and 54.24129 73.53398 0.74 0.462

other motor vehicles (ns)

47
 30 Manufacture of other 45.13336 36.97626 1.22 0.225
transportations (ns)

31 Manufacture of beds, cabinets, 4.89186 13.16911 0.37 0.710

tables and chairs (ns)

32 Other processing and -37.83689 21.50321 -1.76 0.080***

manufacturing industries

33 Repair, maintenance and 21.89183 47.69526 0.46 0.647

installation of machinery and (ns)
equipment

Source: The research group’s analysis

(Note: ns is not significant, *, ** and *** are statistically significant at 1%, 5% and 10%
levels respectively)
For instance, enterprises in manufacturing paper and paper products have the
coefficient of FDI on Labor Productivity at 54.80914, which means that an FDI-related
enterprise is likely to have higher labor productivity than those that do not by more than 54
million VND. This group has t-value and p-value at 2.23 and 0.026 respectively, which
proves that the coefficient is statistically significant at 5% level. Similarly, enterprises in
manufacturing chemicals and chemical products have FDI coefficient at 141.7425 and the
t-value and p-value at 2.38 and 0.018 respectively. Therefore, this group also has statistical
significance at 5% level. Enterprises in manufacturing drugs, pharmaceutical chemicals and
medicinal herbs have the coefficient of FDI at 535.4191, which is the highest coefficient
among 24 groups. This group’s coefficient is also statistically significant at 1% level, with
t - value and p - value at 2.72 and 0.008 respectively. Meanwhile, the coefficient of FDI in
the group of manufacturing rubber and plastic is 24.88947, but the p-value at 0.067 shows
that this result is significant at 10% level.
However, some sub industries have positive coefficients of FDI on Labor Productivity
but do not have statistical significance: Beverage production (p = 0.624); Tobacco
production (p = 0.466); Print and copy record types (p = 0.448); Manufacturing electronic

48
products, computers and optical products (p = 0.326); Manufacturing automobiles and other
motor vehicles (p = 0.462) ... In addition, some sub industries witnessed negative FDI
coefficients with statistically insignificance: Weaving (-47.49326); Manufacturing leather
and related products (-29.00198); Wood processing and production of products from wood,
bamboo and cork (-1.204746); Producing coke and refined petroleum products (-39.13199)
... These errors and insignificances can be explained by the sample distribution. When
groups of sub industries are unequally distributed or/and some groups do not have enough
observations, the regression results can be biased (Wooldrigde, 2015).
4.3. Determination Coefficient Evaluation Result
The regression model gave the R-squared at the value of 0.9907, which meant that
99.07% of the observed variation could be explained by the model inputs. Specifically,
more than 99% variation of Labor Productivity could be explained by the model’s
explanatory variables, including: Capital Intensity, Cost per Labor, FDI status, Labor
Expenses, Age, Size. The R-squared also proved that the model had a good determination
and prediction ability. In addition, a high R-squared could imply that the chosen model was
suitable with the dataset used for regression analysis.
4.4. Statistical Significance Test Result
As mentioned above, the regression model could be written as the following function:
𝑙𝑎𝑏𝑜𝑟_𝑝𝑟𝑜𝑑 = 𝛽0 + 𝛽1 𝑐𝑎𝑝𝑖𝑡𝑎𝑙_𝑖𝑛𝑡 + 𝛽2 𝑐𝑜𝑠𝑡𝑝𝑒𝑟𝑙𝑎𝑏 + 𝛽3 𝑑𝐹𝐷𝐼 + 𝛽4 𝑤𝑎𝑔𝑒
+ 𝛽5 𝑎𝑔𝑒 + 𝛽6 𝑠𝑖𝑧𝑒 + 𝜀𝑖
4.4.1. Statistical Significance Hypothesis
Before testing statistical significance of regression coefficients, the research group
built up hypotheses for each coefficient. The null hypothesis would assume that the
coefficient be equal to zero, which means that the coefficient from the regression result
would not have any statistical significance. Meanwhile, the alternative hypothesis would
reject the null hypothesis, which means that the independent variable has actual effects on
the dependent variable with statistical significance. The significance levels would be taken
at alpha values: α=0.01 or α=0.05.

49
 Table 4.6. Hypothesis for statistical significance test
Independent Variable Null Hypothesis Alternative Hypothesis
Capital Intensity 𝛽1 = 0 𝛽1 < 0
Cost per Labor 𝛽2 = 0 𝛽2 > 0
FDI 𝛽3 = 0 𝛽3 > 0
Wage 𝛽4 = 0 𝛽4 < 0
Age 𝛽5 = 0 𝛽5 > 0
Size 𝛽6 = 0 𝛽6 > 0
Source: The research group
4.4.2. Results of Student-T test and P-values test
Overall, t-values and p-values of independent variables provide enough evidence that
the regression coefficients have statistical significance. As the significance level was taken
at 0.05, the critical t-value would be 1.645 (right – tailed) and -1.645 (left – tailed).
Table 4.7. Student-T test and P-values test results
Independent t-value p- Null Alternative
Variable value Hypothesis Hypothesis
Capital Intensity -58.68 0.000 Rejected Accepted
Cost per Labor 982.42 0.000 Rejected Accepted
FDI 2.95 0.003 Rejected Accepted
Wage -4.9 0.000 Rejected Accepted
Age 4.83 0.000 Rejected Accepted
Size 14.58 0.000 Rejected Accepted
Source: The research group
The FDI variable has the t-value equal to 2.95, which is higher than the critical value
(1.645). Therefore, the null hypothesis was rejected, which meant that the regression
coefficient of FDI has statistical significance at 1% level. Furthermore, the p-value of the
FDI variable is 0.003, which is lower than 0.1. Therefore, the p-value also rejected the null
hypothesis, which again proved that FDI’s regression coefficient is statistically significant.
Other independent variables’ coefficients also have statistical significance. Capital
Intensity and Wage are the two variables that have negative observed t-values at -58.68 and

50
-4.9 respectively. Meanwhile, the other variables have positive t-values: Cost per Labor
(982.42); FDI (2.95); Age (4.83) and Size (14.58). Therefore, those with right-tailed
hypothesis would have t-values higher than 1.645 and those with left-tailed hypothesis
would have t-values lower than -1.645. These values are consistent with the previous
regression results, which stated that only Capital Intensity and Wage had negative impacts
on Labor Productivity. In addition, all the observed p-values of these variables are smaller
than 0.01, which proves that the regression coefficients are statistically significant at 1%
level.

Figure 4.2. Regression Results with Statistical Significance Test

Source: The research group’s analysis
Note: * is significant at 1% level.
4.5. Multicollinearity Test Results
4.5.1. Variance Inflation Factors evaluation
The result of Variance Inflation Factors (VIF) is given in the Table 4.8 VIF indicators
of all independent variables range from 1.02 to 1.47 with the mean VIF of 1.21. Therefore,
all variance inflation factors are lower than 10. This means that the model did not have the

51
multicollinearity phenomenon. In other words, independent variables in the model did not
have too high linear dependence on each other.
Table 4.8. Variance Inflation Factors Evaluation

Variable VIF 1/VIF

wage 1.47 0.679832

size 1.46 0.684608

costperlab 1.16 0.860753

capital_int 1.14 0.879452

age 1.03 0.973024

dFDI 1.02 0.976433

Mean VIF 1.21 0.842350

Source: The research group’s analysis

4.5.2. Correlation Matrix result
The correlation matrix indicated correlations between independent variables in the
model. Overall, as can be seen in the Table 4.9, all correlations between any two different
independent variables are smaller than 0.8, which range from -0.0161 to 0.5438. Therefore,
it could be concluded that the model had no multicollinearity.

52
 Table 4.9. Correlation Matrix between independent variables

capital_int costperlab dFDI wage age size

capital_int 1.0000

costperlab 0.3465 1.0000

dFDI 0.0188 0.0011 1.0000

wage -0.0032 0.0025 0.1470 1.0000

age -0.0048 0.0032 -0.0161 0.1526 1.0000

size 0.0519 0.1358 0.0744 0.5438 0.1217 1.0000

Source: The research group’s analysis

The Capital Intensity variable has positive correlations with Cost per Labor, FDI
dummy and Size with correlation coefficients at 0.3465, 0.0018 and 0.0519 respectively.
On the contrary, it has negative correlations with Wage and Age, with correlation
coefficients at -0.0032 and -0.0048 respectively. Therefore, the Capital Intensity variable
has no multicollinearity with other explanatory variables.
On the other hand, Cost per Labor has positive correlations with all other independent
variables. In detail, this variable has correlation coefficients with Capital Intensity, FDI
dummy, Wage, Age and Size at values of 0.3465, 0.0011, 0.0025, 0.0032 and 0.1358
respectively. Therefore, it can be concluded that Cost per Labor has no multicollinearity
with other explanatory variables.
FDI has positive correlations with Capital Intensity (0.0018), Cost per Labor (0.0011),
Wage (0.1470) and Size (0.0074). However, this variable has a negative correlation with
Age (-0.0161). All these statistics prove that the dummy variable of FDI does not have
multicollinearity with other exogenous variables.
About the variable of Wage, it only has a negative correlation with Capital Intensity
(-0.0032). Meanwhile, all other independent variables have positive correlations with
Wage: Cost per Labor (0.0025); FDI dummy (0.1470); Age (0.1526) and Size (0.5438). As

53
all correlation coefficients are smaller than 0.8, it is clear that Wage has no multicollinearity
with other explanatory variables.
Age of enterprises has positive correlations with Cost per Labor (0.0032), Wage
(0.1526) and Size (0.1217). However, it has negative correlations with Capital Intensity (-
0.0048) and FDI dummy (-0.0161). In conclusion, this variable also has no multicollinearity
with other explanatory variables.
Meanwhile, Firm’s Size has positive correlations with all other independent variables.
Specifically, its correlation coefficients with Capital Intensity, Cost per Labor, FDI Status,
Wage and Age are 0.0519, 0.1358, 0.0744, 0.5438 and 0.1217 respectively. Therefore, all
correlation coefficients are smaller than 0.8, which means that Firm’s Size has no
multicollinearity with other explanatory variables.
4.6. Heteroskedasticity Test Results
4.6.1. Residual Graph
Figure 4.3 shows the residual graph of the regression model. As can be seen from the
graph, although most of the patterns are on or near the zero-residual line, some residual
patterns are relatively distant from the zero-residual line. Furthermore, these patterns do not
make a symmetrical texture, which can lead to the fact that there is the phenomenon of
heteroskedasticity.

54
 Figure 4.3. Residual Graph Result
Source: The research group’s analysis
4.6.2. White’s test result
The White’s test has the null hypothesis assuming that there is no heteroskedasticity,
while the alternative hypothesis considers the possibility of heteroskedasticity. The
significance level is taken at 0.05. These hypotheses are written as follows:
White's test for Ho: homoskedasticity
against Ha: unrestricted heteroskedasticity
The result shows that the chi-squared value is equal to 4813.06 and the p-value is very
small (close to 0). With the degree of freedom at 26, it can be concluded that the null
hypothesis is rejected, or there is unrestricted heteroskedasticity phenomenon.

55
 Table 4.10. Cameron & Trivedi's decomposition of IM-test results
Source chi2 df p

Heteroskedasticity 4813.06 26 0.000

Skewness 1547.52 6 0.000

Kurtosis 3.68 1 0.055
Total 6364.25 33 0.000
Source: The research group’s analysis
4.6.3. Breusch – Pagan test result
The Breusch – Pagan test has the null hypothesis assuming that there is no
heteroskedasticity, while the alternative hypothesis considers the possibility of
heteroskedasticity. The significance level is taken at 0.05. These hypotheses are written as
follows:
Ho: Constant variance
Variables: fitted values of labor_prod
The result shows that the chi-squared value is equal to 353521.13 and the probability
that the observed chi-squared be greater than the critical is close to 0 (or smaller than 0.05).
Therefore, the null hypothesis is rejected, which means that there is heteroskedasticity.

56
 CHAPTER 5: CONCLUSIONS ON RESEARCH RESULTS AND
RECOMMENDATIONS

5.1. Conclusions
The research continued to prove positive effects of FDI on Labor Productivity, which
showed that a FDI-related processing enterprise tends to have higher productivity than
those not engaging in FDI. Furthermore, the research found that the older a processing
enterprise is, the higher its FDI coefficient on Labor Productivity is. Regression analysis
by regions showed that the FDI coefficient in Northern Vietnam is stronger than that in
Central and South regions.
The research also examined how FDI affects Labor Productivity in different sub
industries in the processing group. Results show that some sub industries witness positive
effects of FDI with strong correlations such as Manufacture of paper products; Manufacture
of chemicals and chemical products; Manufacture of drugs, pharmaceutical chemicals and
medicinal herbs. Some industries such as Manufacture of electronic products, computers
and optical products; Food production and processing; Tobacco production still have
positive coefficients of FDI on Labor Productivity, but these coefficients are not statistically
significant. Some industries are found to witness negative impacts of FDI such as: Weaving
and Costume Production; Wood processing, which can be explained by the sample
distribution.
Besides FDI effects, the research also built up the regression model of determinants
of Labor Productivity. Results show that in the manufacturing and processing industry,
Capital Intensity and Wage have negative impacts on Labor Productivity, which are
contrary to many previous studies. However, the research group continued to prove positive
impacts of FDI, Cost per Labor, Firm Age and Firm Size on Labor Productivity. All these
regression results are statistically significant
5.2. Recommendations
5.2.1. Policies to attract FDI into Vietnam
There should be long-term strategies to attract FDI. Priority should be given to high-
tech FDI projects that use fewer natural resources. Also, incentives should be directed to

57
FDI projects that carry out transfer of technology, management techniques, or market-
expanding support to domestic enterprises.
● Promoting to green growth, green economy
When it comes to recruiting FDI firms in the future, Mr. Nguyen Hai Minh, Vice
President of the European Business Association in Vietnam (Eurocham), said that investors
still consider Vietnam as a bright spot with a lot of promise, capabilities and prospects. In
the near future, new investment initiatives, expansion, or further investment will be
discussed.
Currently, European businesses are particularly interested in green investment and
green growth in the Vietnamese market. Green growth is an essential component of
sustainable development in Vietnam, and it is a development process that combines
socioeconomic development and environmental conservation in a close, reasonable, and
harmonious manner. Climate change, natural catastrophes, diseases, and a variety of other
external forces have all had a significant impact on Vietnam. Vietnam is altering growth
models in terms of depth, quality, and efficiency through innovation.
Green growth was enshrined in the National Strategy on Green Growth for the period
2011-2020, with a vision to 2050, as early as 2012. Reducing greenhouse gas emissions,
greening production, and greening the environment are all issues that need to be addressed.
The implementation of 17 sets of solutions establishes a sustainable lifestyle and
consumption. In which communication, awareness-raising, and resource mobilization are
prioritized in order to implement the Strategy; training and development of human
resources; research and implementation of science and technology; increased efficiency and
energy use efficiency; reduced energy consumption in manufacturing activities, and
practice sustainable consumption, however, the transition of Vietnam's economy to green
growth is fraught with obstacles and challenges. As a consequence, the government must
raise awareness and renew the growth model by developing and implementing
communication and propaganda projects to raise awareness of green growth
implementation among the political system, businesses, and the general public, thereby
contributing to the country's long-term development.

58
 The government should prioritize spending in green economic areas, implement
public procurement of green technologies to contribute to promoting the market for green
goods and services. Green public procurement should focus on products aimed at the
benefit of the community, such as efficient use of energy, reduction of waste and emissions
into the environment, response to climate change... In addition to considering the criteria
of price and efficiency when purchasing, state agencies that are investors and bid solicitors
need to consider environmental issues when considering bids, giving priority to contractors.
green development orientation.
Encouraging green economic development and supporting businesses to provide
environmentally friendly products and services helps state agencies save public spending
on environmental pollution treatment. On the side of businesses, green production helps
them save costs of troubleshooting pollution, or reduce costs of waste and hazardous
substance management, protect the health of employees and the community; save costs
through saving energy, water, fuel and other resources and more importantly, improve the
image and brand of the business.
● Encourage enterprises to enhance research & development process
Research and Development is an important part of every business. This is a process
of continuous improvement that can be applied to products, services or focus on developing
new ones to keep businesses updated and competitive.
Sustainable development is a criterion for investors to pay attention to. Green
technology has appeared in developed countries around the world, in recent decades,
originating from the socio-ecological movement in Western industrial countries in the 60s
- 70s of the last century. Green technology has received a lot of attention from the
governments of many countries as well as the private sector and the scientific community;
it is considered as one of the leading solutions in the fight against climate change and a
promising field in the future. Therefore, countries that develop green technology not only
for environmental purposes but also want to create new vitality for the economy.
The Vietnamese government has been focusing on raising awareness for businesses
about green technology to create conditions for sustainable, stable and long-term growth.
However, the use of green technology to replace the technology that businesses are using

59
requires a change in the mindset of business leaders, especially the investment costs of
technological innovation. Therefore, in order to encourage enterprises to apply green
technology to production and business activities, the Governments of different countries
have developed and implemented many investment policies, investment support,
competition policies, etc. especially financial policies.
Investing in R&D activities is very important and brings practical results. The State
can directly invest the budget for research institutes and universities to conduct research
and development of green technology. At the same time, the State can also order research
and application of green technology for research centers or enterprises with external
research services.
Over the years, the Government has spent more than 200 billion VND/year from the
state budget for basic and additional scientific research activities depending on the
disbursement progress of the National Fund for Science and Technology Development.
family. However, the investment still has many shortcomings, has not been able to attract
good Vietnamese scientists abroad to work and contribute to the development of science
and technology in the country. On the other hand, the disbursement for scientific research
is still based on the target but not on the effectiveness of the research. Therefore, in the
coming time, the investment and ordering of scientific and technological research should
be done on the principle of "ineffectiveness, no investment". Thus, scientific research,
especially those related to green technology, will be practical, highly applicable and
contribute to the sustainable development of the national economy.
● Strictly control investment projects and adjust reasonable structure
According to Minister of Planning and Investment Nguyen Chi Dung, in the context
of limited capital supply, countries are taking advantage of attracting external resources to
maintain and recover the economy, competing to attract FDI among investors. In
developing countries, similarities in market, development level, technology and labor are
becoming increasingly acute. Therefore, in order to continue to maintain and enhance the
attractiveness of attracting FDI enterprises, our country needs to implement a number of
key solutions.

60
 The Government needs to review and promptly adjust foreign investment policies to
suit and keep up with the fluctuations of the global economy and changes in the strategies
of attracting FDI enterprises of countries around the world. Besides, create a competitive
and open business investment environment, remove difficulties and obstacles in policy to
create the most favorable conditions for the operation of enterprises and investors.
On the other hand, the government needs to review plans to use FDI to make a more
rational structure such as prioritizing strategic investors, creating a global production chain,
prioritizing high-tech enterprises and technology transfer for Vietnamese businesses.
Currently, there are a number of investment projects that are not suitable for Vietnam's
development needs, so the government needs to take measures to strictly control those
projects and provide access to projects where domestic enterprises are capable of
technology and human resources.
5.2.2. Recommendations to enhance positive impacts of FDI on Labor productivity in
Vietnam for enterprises
● Improving skills and knowledge of the labour force
According to economist Nguyen Thuy Quynh - The National Institute for Finance
(Ministry of Finance), human resources have always been a factor in the success of any
organization or country. The enterprise's primary concern is the implementation of high-
quality workforce development, as this is a significant factor in determining productivity,
product quality, and cost. Without adequate human resources, an enterprise's development
will be unsustainable. Vietnam benefits from a large labor force and a young labor structure.
However, human resources remain deficient in terms of quality; there is a shortage of
skilled workers who are unable to meet labor market and integration needs; the gap between
vocational education and labor market needs continues to widen; labor lacks dynamism and
creativity, as well as professional style…
As a result, enterprises must also have training policies to boost their human resource
levels. Intensive training classes, skill development programs, social and collective
activities... all these are effective ways to accomplish this goal.
Science and technology have a direct impact on human resource quality by altering
organizational processes, professional qualifications and motivating employees to

61
constantly learn, train themselves, and increase their self-knowledge. As a result,
companies must educate, foster, and attract talented individuals in order to build a team of
highly capable experts and scientists to advance their industrial revolution.
The digital and knowledge economy requires a high-quality human resource capable
of adapting to rapid changes in the development of science and technology. The human
resource development policy of companies must be based on two critical foundations: both
general and fundamental education. Workers must be able to apply theoretical knowledge
in practice, apply lessons learned to the production processes of businesses, and utilize
practice to develop advanced professional skills...
Additionally, in the context of new normal skills development is necessary. In
particular, the 4th Industrial revolution requires workers to adopt a mindset centered on the
application of information technology, the use of technology systems, and the application
of artificial intelligence. Furthermore, workers must work to improve their foreign language
skills, position themselves as global human resources, and contribute to the country's
globalization process. Regarding all the concerns, enterprises should have suitable
programs to train and provide sufficient knowledge to their employees.
● Improving competitiveness of enterprises
According to Porter, the competitiveness of enterprises is the ability to maintain and
expand market share and achieve high profits. In order to be able to compete successfully,
businesses must have a competitive advantage, have lower production costs or be able to
differentiate products to achieve higher-than-average prices.
On the other hand, in view of Mehra (1998), Ramasamy (1995), Buckley (1991),
Schealbach (1989), Central Institute for Economic Management, National Committee for
International Economic Cooperation of Vietnam, competitiveness is the ability to consume
goods and services compared to competitors and the ability to "make profits" of enterprises.
Nguyen Minh Tuan (2010) said that the competitiveness of enterprises is the ability to
maintain and enhance competitive advantages in product consumption, expansion of
consumption networks, attraction and effective use of products, production factors in order
to achieve high economic benefits and ensure sustainable economic development.

62
 It can be concluded that the competitiveness of enterprises is the ability to maintain,
deploy and coordinate resources to help enterprises achieve their goals, create competitive
advantages, higher productivity and quality. competitors, occupy a large market share,
generate high income and develop sustainably.
Enhancing competitiveness is an essential thing to boost the productivity of
enterprises. However, at present, the machinery and equipment being used in Vietnamese
enterprises are only 10% modern, 38% average and 52% outdated and very outdated; the
rate of using new high technology is only 2%; Vietnamese enterprises invest in
technological innovation very low, only about 0.2%-0.3% of total revenue... The level of
technological equipment in non-state SMEs is only 3% of equipment level. This poses
many great challenges to the competitiveness of Vietnamese enterprises (Ministry of
Planning and Investment (2020), Vietnam Enterprise White Paper 2020)
In the context of international integration, especially when Vietnam participates in
Free Trade Agreements (FTAs), improving the competitiveness of enterprises plays an
important role in the process of attracting foreign investors. international investment.
The issue of determining the outcome in a competition remains in the hands of each
business. Businesses need to actively seek out opportunities and make the most of the
support of the State to strengthen their competitiveness in an environment of integration
and development. Enterprises increase labor capacity by upgrading new information and
skills on a regular basis to remain competitive in the market and get access to the knowledge
economy. Improve management capacity, productivity, quality, and competitiveness of
products and services by actively renewing business thinking; standardize production and
business to meet the standards and criteria of worldwide markets. At the same time,
businesses should spend in the research phase to understand changing market demand
patterns, the product design phase to add more value, and the use of relevant technologies
to ensure the creation of high-quality, low-cost goods that fulfill market demands.
On the other hand, businesses need to upskill and innovate in technology. In reality,
70% of Vietnamese workshops' equipment, machinery, and infrastructure are obsolete,
impeding productivity. Enterprises need to choose technology suitable to production
conditions, product characteristics, and skill level of employees in the enterprise to optimize

63
the combination of resources to achieve high efficiency. This is an important measure for
enterprises to have a competitive advantage over other enterprises in the process of
attracting FDI. Enterprises need to encourage and have adequate regimes to stimulate
employees to promote their initiatives, improve techniques, rationalize production
processes, improve technology to improve product quality and reduce costs. .
5.2.3. Recommendations to enhance positive impacts of FDI on Labor productivity in
Vietnam for policy makers
● Enhancing the quality of human resources
Numerous factors such as intellectual capacity, physical strength, and population are
used to determine the quality of human resources. Intelligence development is contingent
upon the advancement of education and training levels. Fitness improvement is dependent
on the condition of health and medicine. Meanwhile, the population's size, structure, and
quality all directly affect the quantity and quality of the labor force in each country.
Population and medical care are inextricably linked - when people's health improves,
population-related indicators such as population growth rate - an indirect reflection of birth
and death rates; and average life expectancy of people... improve as well.
To be more specific, Vietnam's low labor productivity is primarily due to the
workforce's relatively low quality. The findings indicate that human capital has a positive
effect on labor productivity, showing that additional investments in education and training
should be made. To begin, national leaders must concentrate on the pre-employment
training phase, preparing human resources from afar, effectively deploying the stream of
student groups enrolled in vocational education, and enhancing the quality of vocational
education. Being aware of future trends to prioritize investments in vocational education
development that are ahead of the development can contribute, so they should conduct
research and assessment of future human resource requirements. Additionally, it is
necessary to improve educator quality, to standardize courses according to international
standards, to strengthen training to meet the qualifications and standards required by the
practical situation and to provide opportunities for employees to access science and
technology. Most importantly, regarding existing human resources, the government should

64
implement policies that encourage the retention of high-quality workers, the domestic labor
market, and the prevention of brain drain.
Socialization and diversification of resources for vocational education development:
joint training with foreign partners; and attracting foreign investors to vocational
education… are also necessary. Simultaneously, authorities should encourage creative and
innovative activities to establish a position in the value-added chain by supporting
Vietnamese workers with job positions in high-value-added sectors; prioritizing human
resource development policies; prioritizing start-ups…
● Enhancing the effectiveness of business institutions, policies, and legal systems
The manufacturing industry with low added value, which accounts for a sizable
portion of FDI, has been and continues to be a springboard for economic growth. Vietnam
requires a new growth model to avoid falling into the low middle-income trap and to
advance toward modernization, industrialization, and sustainable growth. This also
necessitates the modernization of the labor market.
In recent years, Vietnam has made significant efforts to reform and improve its
economic institutions, thereby boosting the economy's momentum. However, institutional
"bottlenecks" remain in the transition to a market economy, impeding the process of
restructuring the economy and renewing the growth model.
Therefore, the government should implement policies and improve legal systems so
that transparent and fair business can be promoted to enhance the business environment and
provide companies with the maximum convenience possible when doing business in both
domestic and international markets. It is also recommended that the authorities establish
synchronous and long-term stable policies for the business sector's operation. Furthermore,
it is important to assist small and medium-sized enterprises by resolving legal issues and
registering businesses, to expand consulting activities for businesses or to establish a
specialized agency to aid in the development of small and medium-sized enterprises in
Vietnam. Last but not least, developing a diverse range of financial and stock markets to
assist businesses in raising capital on the stock market and borrowing money on the
corporate bond market should be considered.

65
 It is advisable for the government to continue to implement mechanisms and policies
aimed at reforming tariff levels, streamlining business registration procedures, and reducing
"informal costs." There should be a mechanism to reduce corporate income tax in order to
assist small and medium-sized businesses in addressing the issue of job creation for society,
with specific regulations governing the use of that portion of corporate income tax
incentives for reinvestment resulting in the creation of employment. In addition, assisting
and creating favorable conditions for small and medium-sized businesses to access
resources such as land, finance, labor, science, and technology, etc. are also necessary.
● Promoting national digital transformation
In the context of the fourth industrial revolution, accelerating the process of digital
transformation in businesses is expected to be one of the leverage points for increasing
labor productivity. According to a study conducted by the National Economics University,
between 2020 and 2030, if the digital transformation process proceeds as planned, the
digital economy alone could contribute between 7% and 16.5 percent of the overall labor
productivity growth rate of 100%. Thus, it can be seen that the digital economy makes a
significant contribution to the economy's effective development by improving and rapidly
increasing labor productivity.
To accomplish this, Vietnam's national digital transformation strategy must accelerate
the implementation of breakthrough technologies through appropriate and targeted
approaches. It is necessary to invest properly in digital transformation, to foster public-
private collaboration on digital transformation under the direction of the government, and
to align with the market's dynamism and efficiency.
Digital transformation is predicated on a close connection between technology and
administrative reform, effectively resolving the state-market-society relationship... To have
timely promotion solutions, it is necessary to conduct accurate and timely evaluations of
the level and effectiveness of digital transformation at the national, ministerial, sectoral,
and enterprise levels. Ministries, branches, and local governments must allocate adequate
and effective resources to digital transformation…
The Ministry of Information and Communications is advised to accelerate the
establishment and development of e-Government; urgently urge the completion of national

66
databases that must be prioritized for deployment and promote national digital
transformation in order to boost labor productivity and socio-economic development. This
includes promoting comprehensive digital transformation of businesses, key industries,
state agencies, and individuals, as well as developing foundations to facilitate national
digital transformation.
New technologies applied to manufacturing and business processes would be
necessary to boost labour productivity, which can be done by the government’s connecting
ICT firms with processing firms; directing information and propaganda to raise awareness
and instill a sense of responsibility in all classes of people regarding labor productivity
improvement.
● Providing financial support to enterprises
The Ministry of Finance has speeded up the completion of the framework for financial
institutions - the state budget so as to capitalize on Vietnam's ASEAN market position and
the revenue opportunities created by free trade agreements (FTAs) so as to attract foreign
direct investment effectively, improve labor productivity, and actively restructure the
economy as well as the financial markets.
Although the Law on Support for Small and Medium-Sized Enterprises 2017 took
effect on January 1, 2018, regulations on capital access remain quite limited and lack a
foundation for practical implementation. Credit institutions must improve their
effectiveness in implementing government executive documents such as Resolution No.
35-NQ/CP on supporting and developing businesses until 2020; Decree No. 34/ND-CP on
the establishment, organization, and operation of the Credit Guarantee Fund for small and
medium-sized enterprises; Decree No. 39/ND-CP on the organization and operation of the
Small and Medium-Sized Enterprise Development Fund...; The authorities are
recommended to diversify capital access channels for small and medium-sized enterprises.
Indeed, small and medium-sized enterprises obtain capital from a variety of sources, but
the primary and most important source of capital for small and medium-sized enterprises
remains financial and credit institutions. As a result, the government should establish an
incentive mechanism to encourage credit institutions to provide effective credit support to
small and medium-sized businesses.

67
 The State Bank of Vietnam must continue to review and evaluate the implementation
of solutions to direct capital inflows toward production and business sectors, particularly
priority sectors in accordance with the Government's policy, directing capital into sectors
with high labour productivity, thereby facilitating the access of businesses and individuals
to credit capital.
● Enhancing the competitiveness of Vietnamese enterprises
Vietnam is an open economy country, all agreements have provisions to encourage
free trade and investment flows, especially from the private sector. One of the important
things to improve the competitiveness of enterprises is the standardization of financial
statements according to international standards (IFRS). IFRS is an important financial tool
to assist investors in accessing more accurate financial information, and for businesses to
attract financial resources of a global nature. On March 16, 2020, the Ministry of Finance
formally published Decision No. 345/QD-BTC authorizing the Scheme on the application
of financial reporting standards in Vietnam to encourage the use of IFRS in Vietnamese
businesses. South with the roadmap: optional application in phase 1 (from 2022 to 2025);
compulsory application in phase 2 (after 2025). However, because Vietnamese enterprises
lack expertise executing transactions and accounting for corresponding economic elements,
IFRS is still difficult to obtain.
Furthermore, the government must strengthen the legal environment, methods, and
regulations for businesses. Therefore, continuing to promote the reduction of business costs
for enterprises, particularly unreasonable costs arising from state management; preventing
and repelling acts that generate unofficial costs for enterprises; and reducing and
simplifying regulations on investment, land, construction, tax payment, and social
insurance to raise Vietnam's Doing Business Index to an average score of ASEAN.
Simultaneously, continue to change the business climate and boost national
competitiveness.
5.3. Contribution and meaning of the research
The study makes academic and practical contributions. In terms of academic aspect,
authors established and evaluated the suitability of the research model through experimental
research data. Third, through the analysis of empirical data, the study has evaluated the

68
effect of FDI and other factors on labor productivity. While FDI, Cost per Labor, Firm Age
and Firm Size align to other research with a positive impact on Labor Productivity, Capital
Intensity and Wage have negative impacts on Labor Productivity which inverts to many
previous studies. Finally, this study could be used as a reference for future researchers to
establish models to evaluate the impact of FDI on labor productivity in the processing
industry in particular or other industries in general.
In terms of practical aspect, the research provides suggestions for both enterprises and
policymakers to enhance the positive impact of FDI on Labor Productivity. For enterprises,
it is vital to improve skills and knowledge of the labor force as well as improve
competitiveness of enterprises. For policymakers, it is recommended that the quality of
human resources and the effectiveness of business institutions, policies, and legal systems
should be enhanced. Furthermore, the government should establish an incentive mechanism
to encourage credit institutions to provide effective credit support to small and medium-
sized businesses. It is also suggested that Vietnam's national digital transformation strategy
must accelerate the implementation of breakthrough technologies through appropriate and
targeted approaches.
5.4. Limitations of the research
Though the research achieved its aim to prove the positive impact of FDI on labor
productivity in the processing industry, the authors acknowledge that it is not without
limitations, some of which are related to the sample used. Firstly, the study aims to cover
databases from all regions of Vietnam; however, the data from the firms in Central regions
is limited compared to North and South regions.
Secondly, although the firms in the examined sub industries are relevant for measuring
the impact of FDI on labor productivity, as they present objective and reliable data
accordingly, it would be necessary to add databases and different information sources of
firms from other sub industries to assess the robustness and scope for the generalization of
the results recorded here.
These limitations may lead to some errors in the results, which should also be seen as
opportunities and challenges for future investigations.

69
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