VIETNAM NATIONAL UNIVERSITY, HANOI

INTERNATIONAL SCHOOL

STUDENT RESEARCH REPORT

ARE DETERMINANTS OF FDI INFLOWS SUBJECT TO POLITICAL AND

PANDEMIC ISSUES_ EMPIRICAL EVIDENCE FROM VIETNAM

KT.NC.SV.23_16
Supervisor: Ph.D Nghiem Xuan Hoa

Team Leader: Tran Ngoc Anh – 21070317 – IB2021D

Team Members: Nguyen Lan Anh – 21070420 – IB2021B

Nguyen Yen Nhi – 21070492 – IB2021D

Nguyen Duy Tung – 22071042 – AC2022A

Hanoi, April 15th, 2024

 TEAM LEADER INFORMATION
I. Student profile
- Full name: Tran Ngoc Anh
Picture 4x6
- Date of birth: 28/06/2003
- Place of birth: Thai Binh
- Class: IB2021D1
- Program: International Business
- Address: 24/180 Dinh Thon, My Dinh 1, Nam Tu Liem, Ha Noi
- Phone no. /Email : 0327358358/ 21070317@vnu.edu.vn
II. Academic Results (from the first year to now)
Academic year Overall score Academic rating
1 3.53/4.00 Very Good
2 3.57/4.00 Very Good

III. Other achievements:

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...............................................................................................................................................
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Hanoi, April 10th 2024
Advisor Team Leader
(Sign and write fullname) (Sign and write fullname)
 [TABLE OF CONTENTS]

I. INTRODUCTION ........................................................................................................... 9
1. Overview ....................................................................................................................... 9
2. Research’s background ............................................................................................... 13
FDI research in Vietnam ............................................................................................. 13
3. Research objective & scope ....................................................................................... 16
4. Research methodology ................................................................................................ 17
5. New contribution of the thesis & significance of research ......................................... 17
6. Thesis structure ........................................................................................................... 18
II. LITERATURE REVIEW ........................................................................................... 20
1. Introduction ................................................................................................................. 20
1.1. FDI ........................................................................................................................ 20
1.1.1. Definition & concept of FDI .......................................................................... 20
1.1.2. Dunning’s classification of FDI ..................................................................... 21
1.1.3. Theories of FDI .............................................................................................. 25
1.1.4. The impact of FDI .......................................................................................... 28
1.1.4.1. Benefit to home country. .......................................................................... 28
1.1.4.2. Benefit to host country. ............................................................................ 29
1.1.4.3. FDI and Economic Growth Relationship ................................................ 30
2. FDI in VietNam ........................................................................................................... 32
2.1. FDI development in Vietnam ................................................................................ 32
2.2. Current Status of linkage of FDI enterprises and Domestic enterprises ............. 36
2.3. VietNam legal framework ..................................................................................... 39
2.3.1. Foreign Investment Law 1987 ........................................................................ 40
2.3.2. Foreign Investment Law in period 1990-2000 ............................................... 40
2.3.3. Investment Law after 2001 ............................................................................. 42
2.4. Determinants of FDI ............................................................................................. 43
2.4.1. FDI studies in the world ................................................................................ 43
2.4.2. FDI studies in Vietnam ................................................................................... 48
3. Conclusion................................................................................................................... 51
III. METHOD ................................................................................................................... 52
1. Proposed research model ........................................................................................ 52
2. Data, Model specification ........................................................................................ 53
2.1. Source of data ....................................................................................................... 53
2.2. Model specification ............................................................................................... 54
2.3. Estimation method ................................................................................................ 58
3. Results and Discussion ............................................................................................ 61
3.1 Estimation results .................................................................................................. 61
3.2 Discussion .............................................................................................................. 63
IV. IMPLICATIONS AND RECOMMENDATIONS .................................................. 67
V. CONCLUSION ............................................................................................................ 73
1. Concluding remarks ................................................................................................ 73
2. Limitations and recommendations for future studies ............................................ 75
VI. APPENDIX ................................................................................................................. 76
VII. ABBREVIATION ..................................................................................................... 79
VIII. REFERENCES ........................................................................................................ 80
 [LIST OF TABLES]

Table 1.1 & 1.2: Main customers of Vietnamese private enterprises at home and abroad
(2018).................................................................................................................................. 38
Table 2: Suppliers to FDI enterprises (with a certain percentage share of revenue from at
least one customer group) ................................................................................................... 39
Table 3: Summarizes the characteristics of the variables in the research model; and
expectations about the impact of the independent variable and control variables on the
dependent variable .............................................................................................................. 61
Table 4: Unit root tests ....................................................................................................... 61
Table 5: Correlation of Variables in the study ................................................................... 62
Table 6: The regression results by Robust method ............................................................ 62
 [LIST OF FIGURES]

Figure 1: Relationship between GDP growth and realized FDI capital growth rate (%)
1996-2021 ........................................................................................................................... 14
Figure 2: FDI in Viet Nam from 1988 to 2005 ................................................................. 33
Figure 3: FDI licensed in 2022 divided by investment partner .......................................... 34
Figure 4: Foreign direct investment (FDI) in Viet Nam 2006-2021 ................................ 35
 7

INTRODUCTION

ARE DETERMINANTS OF FDI INFLOWS SUBJECT TO POLITICAL AND

PANDEMIC ISSUES_ EMPIRICAL EVIDENCE FROM VIETNAM

1. Project Code
KT.NC.SV.23_16
2. Member List:

Full Name Class ID

Trần Ngọc Ánh IB2021D 21070317
Nguyễn Yến Nhi IB2021D 21070492
Nguyễn Lan Anh IB2021B 21070420
Nguyễn Duy Tùng AC2022A 22071042
3. Advisor(s):
Ph.D Nghiem Xuan Hoa
4. Abstract (300 words or less):

Foreign direct investment plays an important role in economic growth and social
innovation in developing countries, which are always thirsty for investment capital. Its role
is expressed through promoting transformation, restructuring the economy, developing
human resources, providing new production technology and improving quality of life.
Therefore, FDI is always considered a top concern of governments of developing countries.
The impact of FDI capital flows is unstable and changes depending on influencing factors
such as macroeconomic factors, socio-political factors,... Previously, studies based on this
relationship were mostly implemented in developed economies and were considered quite
little in developing countries like Vietnam. On the other hand, research results among
authors are inconsistent. Our research aims to analyze the determinants of FDI flows into
Vietnam in the period 1996-2021, focusing on political stability and the covid-19 epidemic,
thereby drawing out applicable policies in the current post-Covid economic recovery
context.
 8

Finding - Research results show that market size, trade openness, inflation, political
stability, corruption have a positive correlation with FDI capital into Vietnam, while
infrastructure and Covid - 19 have a negative impact, no binding relationship has been
found between natural resources and foreign investors' willingness to provide capital.
Practical implications – This study is significant in promoting Vietnam's economy
through policy recommendations that if implemented can ensure attracting more capital
flows into the economy.
Social implications - This research has proposed effective ways to attract FDI,
thereby taking advantage of the benefits it brings, improving social security and enhancing
quality of life.
Originality/value – Although some scholars have studied this correlation in
Vietnam, they seem to forget factors such as political stability, corruption, natural resources
and Covid 19. Therefore, a study will explore these and other macroeconomic variables to
provide a clear picture of their relationship and recommendations based on the findings and
the current Vietnamese context to attract more FDI is what this study aims to do.

5. Keywords (3 – 5 words)

FDI, determinants, political stability, Covid-19 pandemic, RLS

 9

SUMMARY REPORT IN STUDENT RESEARCH,

2023-2024 ACADEMIC YEAR

I. INTRODUCTION

1. Overview

According to the World Trade Organization (WTO, 1996), Foreign direct investment
(FDI) happens when an investor based in one nation (the home country) purchases an asset
in another country (the host country) intending to achieve long-term benefits and control
over this business institution. In other words, it is a form of investment by individuals or
organizations of one country in others by building business and production facilities while
the investor is the one who holds the right to manage and operate the model business and
production to make a profit. FDI plays an indispensable role in the context of trade
liberalization and global economic integration through export activities (OECD, 2008). It
brings about substantial benefits to both sides. According to the United Nations Conference
on Trade and Development (UNCTAD, 2020), the host country can be helped to create
momentum to promote economic development, create jobs, provide investment capital, and
transfer technology and knowledge. Regarding foreign investors, FDI can help expand
commerce, bring profits from business activities in the target country, and enlarge global
presence. With the above benefits, FDI makes a positive contribution to the generation of
budget revenue, ensuring balance of payments, supplementing important capital sources for
development investment, creating a strong impact on import and export, contributing to
labor productivity growth, as well as providing opportunities for extensive integration into
the global economy.

Vietnam's current standing in terms of enhancing the caliber of FDI attractiveness is

demonstrated by the quantitative impact of its infrastructure, policies, and resources to
boost FDI in the years to come (Ngo et al., 2017). Drawing successful FDI can bring a
range of benefits and is recognized as one of the "pillars" of economic growth. The specific
advantages will depend on the circumstances of each case. Amirahmadi and Wu (1994)
find that for developing countries, FDI assists develop human resources, creates
 10

employment opportunities, and invests in infrastructure to improve living standards.

Emerging economies benefit from FDI by accessing advanced technology and enhancing
production capacity, business management, and administration skills by approaching the
opportunity to learn from foreign investors which can develop markets to heighten
competitiveness in the world market and participate in global value chains. Developed
economies can use FDI to equal out the balance of trade and expand international trade.
According to Calimanu (2021), countries often have their import tariffs, which makes
trading quite difficult. Many economic sectors often require the presence of international
manufacturers to ensure sales and goals are achieved. FDI makes all these aspects of
international trade a lot easier. It may offer excellent jobs and other chances as foreign
investors build new local factories and establish new companies. With more jobs and higher
wages, national income typically increases. This also leads to increasing GDP per capita
and purchasing power for local people, thereby bringing about an overall boost to economic
goals. FDI enables the transfer of resources and the exchange of knowledge, technology,
and skills between advanced economies (Chaudhuri et al., 2014). In addition, the top goal
of foreign investors is profit, they invest in production and business establishments that
bring the highest efficiency to production activities. Domestic enterprises that want to
survive and develop in today's fiercely competitive market must change, learn, work on
management skills, and invest in technical equipment, technology, and capital... to improve
the efficiency of manufacturing (Baci et al., 2022). Besides positive effects, the process of
tempting and operating the FDI sector also has negative effects on the economy of the
country attracting FDI. Among them, we can mention some potential adverse impacts of
FDI include environmental pollution; tax evasion; transfer pricing. Therefore, countries
need to have clear policies and regulations to manage FDI effectively and protect the
interests of the country (OECD, 2002).

As FDI constitutes an integral part of economic growth and development in many

countries, especially developing ones, its determinants may be of great and practical
importance to policymakers, businesses, and ordinary people etc. In addition, fluctuations
in the global economy significantly affect FDI flows in countries. From 1996 to 2021, the
 11

world economy has experienced many variations that can be predicted in advance or come
unexpectedly. These fluctuations affected both developed and developing countries.
Developing countries have weaker economies and are more susceptible to economic
fluctuations. These fluctuations can be caused by various factors such as commodity and
service prices, changes in consumer demand, currency exchange rates, changes in trade
policies, and most importantly, fluctuations in FDI flows (UNCTAD, 2023). Countries need
to monitor and manage these oscillations to ensure economic stability and growth. For
example, during the 2008 financial crisis, many countries faced an economic recession and
reduced consumer demand, leading to a decrease in the amount of FDI invested in countries.
Many investment projects have been postponed or canceled, and investors have become
more cautious about investing in new markets. According to a report by the OECD (2011),
the amount of global FDI decreased by 21% in 2009 after the 2008 financial crisis occurred.
Developed countries were hit particularly harder, witnessing a 29% decrease in FDI inflows
compared to the previous year. Similarly, the COVID-19 pandemic has also caused major
fluctuations in FDI globally. As the epidemic spreads worldwide, many countries have
imposed travel restrictions and social distancing measures, leading to business disruptions
and reduced consumer demand. This limits FDI into countries or hinders entrepreneurs'
investment intentions. Developing countries saw a 14% decrease. According to a United
Nations (UN) report, the amount of global FDI decreased by 42% in the first half of 2020
compared to the same period last year. Developed countries have been hit harder, with a
69% drop compared to the first half of 2019. Meanwhile, developing countries have seen a
16% drop. FDI can also help countries cope with the influence of the global economy.
However, for these countries, FDI can have positive or negative impacts depending on how
the government and domestic businesses manage and use FDI.

The political environment and social security are also important factors affecting the
movement of FDI in a country. In the world, conflicts between countries can cause crises
in many areas, pushing commodity prices up and leading to inflation and an increasingly
serious debt spiral. When territorial disputes and struggle between large and small countries
continue to be tense, some large countries will take advantage of the instability caused by
 12

this conflict to carry out their beneficial intentions. This may increase the risks facing
businesses and investors, thus undermining business and investment confidence, and
significantly affecting the global FDI development trend. The quality of government is
closely related to its interference with the private sector, impacting on the performance of
the private sector (Haksoon, 2010). When the political and social situation is unstable, the
state is not capable of controlling all activities of foreign investors, so investment activities
will not follow the strategic direction of economic and social development of the host
country, affecting the effectiveness of FDI utilization. In an uneven socio-political context,
foreign patrons will likely not be attracted to the locality because the risk for them is very
high at this time. Although they are adventurers, they appear to be more concerned about
the level of social security and safety when choosing their investment destination. (Ozturk
et al., 2014). Furthermore, it is not surprising to learn that expat investors are more likely
to select locations that are politically and/or socially steady, given that FDI is a long-term
investment. Because of that, investors will choose localities with constancy, which must be
a safe place for investment movement, and a place with higher profitability than other
places, ensuring the effectiveness and stability of FDI flows. Safety here is the steadfast
macro environment and is evaluated through criteria for preventing political and social
crises. Therefore, to have certain advantages, and create opportunities to attract quality FDI
with increasing scale, whether in developing or developed countries, the stability and
solidity of the country's political and social situation is a necessary factor.

Based on the above factors, the authors decided to choose the topic "Are
determinants of FDI inflows subject to political and pandemic issues? Evidence from
Vietnam" as the research topic. The authors found that through many stages, most studies
focus on the impact of FDI on different socio-economic aspects while overlooking the
determinants of FDI into Vietnam. Therefore, our research aims to provide an
understanding of the factors which affect FDI inflows in Vietnam. Finally, through the time
series analysis research with clear research purposes, questions, the authors expect to
identify and determine the determinants of FDI inflows in Vietnam. It is aimed at providing
practical policy implications and recommendations that can be implemented to support
 13

Vietnam's efforts to attract foreign capital investment and enhance its capacity to recover
and grow economically following the severe effects of the pandemic.

2. Research’s background

FDI research in Vietnam

Since the first Foreign Investment Law was promulgated in 1987, Vietnam has
received hundreds of billions of dollars in foreign direct investment, creating a great
impetus to promote development. From 2 million USD, Vietnam has attracted 524 billion
USD of registered FDI capital after 35 years. By the end of 2022, more than 36,000 projects
are operating with a total capital of 441 billion USD, 57% disbursed. (General Statistics
Office of Vietnam-GSO, 2022). Many studies suggest that there exists a long-term
equilibrium relationship between GDP growth and FDI in Vietnam (Ha,2021).
Accordingly, increased FDI inflows will advance economic augmentation, and vice versa,
economic growth is one of the elements that causes foreign investors to transfer capital to
Vietnam in the form of FDI or most of the rising in economic growth (GDP) all upsurge
the value of FDI disbursed into our country. Below, the authors will calculate and illustrate
data from the General Statistics Office on the relationship between GDP growth rate and
realized FDI capital growth rate in Vietnam in the period 1996-2021 using a timeline
diagram.
 14

Figure 1: Relationship between GDP growth and realized FDI capital growth rate
(%) 1996-2021

(Data source: Vietnam-GSO and World Bank’s World Development Indicators)

Vietnam carries out economic reforms from a low starting point. Considering the
importance of FDI to Vietnam's economic and political strategy, previous studies have
found that FDI plays an important role and has great significance for Vietnam's growth and
identifies the determinants or driving factors of this important resource for the country.

Delaunay and Torrisi (2012) used a regression model using time series data with
annual FDI from 1991 to 2008 as the dependent variable. The explanatory variables include
GDP, GDP growth, exchange rate, wage level, tax rate, trade volume and a dummy variable
separating the pre-1998 period from the post-1998 period when Asia's economic crisis
occurred. The authors conclude that Vietnam's domestic market size as measured by GDP
has significantly increased Vietnam's attractiveness to foreign investors. On the other hand,
the 1998 financial crisis and rising wages are negatively correlated with FDI inflows. The
creators believe that the exchange rate between the Vietnamese dong and the US dollar also
 15

negatively impacts FDI attraction. In an emerging economy, a weakening currency can

indicate economic volatility, causing concern among investors and thus discouraging them
from making investment decisions, which coincides with Vo's research (2018).

Besides, using regression analysis of data, also studying market size and GDP
growth, Hoang (2007) points out two other factors that affect FDI flows: trade openness
and infrastructure development. The researcher believes that infrastructure plays an
important role in attracting new foreign investment, trade openness expressed through the
import value of the country of origin to Vietnam has a strong and positive significance with
dependent variables on FDI capital flows (Hoang, 2020).

The size of the source country's economy is measured by GDP per capita, and the
bilateral trade relationship between Vietnam and the source country has a positive
correlation with FDI investment in Vietnam (Vo, 2018). This means that as the GDP per
capita of home countries increases, investors from those countries are more likely to invest
abroad to expand their markets and gain higher returns. This result is quite consistent with
previous research by Tampakoudis et.al (2017). On the other hand, distance and inflation
rate have a negative correlation with FDI inflows into Vietnam (Vo, 2018). The negative
sign of macroeconomic stability variables, specifically the inflation rate, suggests that
major economies in Asia including Vietnam cannot manage their monetary policy and
financial stability well, affecting FDI flows into countries (Aziz and Mishra,2015). The
negative sign of the distance variable is regular with the theoretical view that the farther the
distance between the host country and the source country, the greater the cost of capital
management and regulation, leading to a decrease in FDI (Frankel et al., 1995; Hoang,
2020). In addition, the vulnerability of the stock market (Vo; 2018) and favorable financial
market conditions (Hoang, 2020) are also factors affecting FDI flows in Vietnam.

Overview of research articles shows that previous studies mostly used cross-
sectional and panel data sets because finding consistent time series data for all factors has
proven to be a big challenge. (Delaunay and Torrisi, 2012). Recent studies show the
connection between FDI flows and independent variables related to the host country,
 16

specifically the positive correlation with factors such as trade openness, market size,...They
are also commonly used factors for research along with taxes, exchange rates,
infrastructure, inflation rates. However, the natural resources factor and the association
between attracting FDI in Vietnam and it have not yet been established. The authors found
that this factor appears quite rarely in research around the world and has hardly been studied
as a factor affecting FDI flows in Vietnam. In addition, Delaunay and Torrisi (2012) used
dummy variables for the period before 1998 and the period after 1998 when the Asian
economic crisis occurred in the data regression model to study the differences in FDI flows
in these two separate periods. Realizing that in the period 1990-2020, there were many
variations in the world, typically the impact of the covid 19 epidemic on the world economy
in general and countries in particular, the authors believe that the covid epidemic is suitable
to be a dummy variable in the research model. Previous researchers also focused on
studying policies rather than political factors in studying the reasons for attracting FDI in
Vietnam. There are many conflicts about the impact of this factor in previous studies.
Research by Simanjuntak (2018) suggests that political risk has no effect on FDI flows, but
the findings of Busse and Hefeker (2005) show that political risks have a significant impact
on FDI flows. In the current study, the authors try to explain the relationship between
factors believed to affect FDI attraction and fluctuations in FDI capital flows in Vietnam
using time series analysis, focusing on political factors and the covid epidemic with the
desire to resolve shortcomings and contradictions in previous studies, and at the same time
propose reasonable policies to contribute to promoting FDI in Vietnam.

3. Research objective & scope

The study's goal is to identify factors affecting FDI aimed at providing practical
policy implications and recommendations that can be implemented to support Vietnam's
efforts to attract foreign investment capital and to evaluate to what extent they influence
FDI in Vietnam. Add to that the identification of political issues and how the pandemic
affects them. In particular, theoretical frameworks on FDI determinants and their driving
factors will be closely studied. Based on the scope of research stretched over a 26–year
period from 1996 to 2021 via pulling data in Vietnam, we will estimate the determinants of
 17

FDI inflows into Vietnam using econometric methods. Then we will propose policy
implications and recommendations for relevant authorities to boost FDI attraction in
Vietnam.

To attain these goals, the following research questions are addressed below.

· What are the main determinants of FDI inflows into Vietnam?

· Do political and pandemic issues have a significant effect on FDI inflows?

4. Research methodology

To achieve the above objectives, a time series analysis methodology will be

employed. Time series analysis is a statistical technique used to analyze data collected at
regular intervals over time. Collect time series data on FDI inflows, political stability
indicators, pandemic-related variables, and other potential determinants of FDI inflows in
Vietnam. Gather relevant data for the period from 1996 to 2021. Ensure the data is reliable,
consistent, and covers the required time frame. Data can be obtained from official sources
such as the World Bank, International Monetary Fund (IMF), central banks, and national
statistical agencies.

By applying this methodology, the research will assess the impact of political and
pandemic on FDI determinants over a specific time period in Vietnam. The following steps
can be undertaken:

1. Data Preprocessing
2. Unit root testing
3. Time series analysis

5. New contribution of the thesis & significance of research

Currently, FDI has become the subject of research by many scholars and research
groups because of its strong influence on the economy and society. Previous research
articles mainly focused on how FDI will affect the economy, the social, and political of
Vietnam, etc but have not focused too much on the factors that will govern FDI. On the
 18

other hand, the results of experimental research are also inconsistent. In addition, some
studies on factors affecting FDI flows in Vietnam only focus on macroeconomic factors
and ignore factors related to politics and natural resources. This is very difficult to explain
because Vietnam is a country with relatively stable politics and relatively abundant
resources. We believe that these are favorable conditions for attracting foreign investment.
Moreover, the COVID-19 pandemic that took place around the 2020s brought negative
effects on the Vietnamese economy in general and was detrimental to foreign capital flows
into our country in particular. However, not many researchers have mentioned COVID-19
as a factor affecting FDI flows in Vietnam. This is the gap in the research and the direction
in which the research team can continue to research deeper. Therefore, the authors hope to
be able to provide a perspective on how the epidemic and politics impact factors that
directly affect FDI.
Usually, with other research projects, the use of cross-sectional data or panel data,
or both is popular, but for this project, the research team chose the other approach is using
time series data to provide an alternative approach to capture the relationship between FDI
inflows and its determinants through each period, thereby drawing the most objective
conclusions.
For Vietnam, this research article aims to contribute more empirical research results
on factors affecting FDI flows, in addition to providing recommendations and outlining
feasible measures based on research results. This is the basis to help the government build
and develop appropriate policies to encourage and promote increased foreign direct
investment in Vietnam in the current economic context.

Regarding the research field, the research team wants to fill in the gaps in the
relationship between the factors and FDI flow. At the same time, the authors hope to
contribute more reference materials for future research articles on the same topic, clearly
stating the problems that the research has effectively solved, problems that have not been
solved or have just arisen, limitations of the topic and suggestions for further research
directions for the topic in the future will be presented by the authors in this chapter.

6. Thesis structure
 19

The remainder of this thesis is structured into 5 main chapters

Chapter 1: Introduction

Provides an overview of study history, objective and scope, methods and structure
of research topic. Research questions, technology used in order to achieve these objectives
are also described in this chapter.

Chapter 2: Literature Review

In chapter 2, the authors delve deeper into the research landscape by first establishing
the theoretical underpinnings. The authors will present an overview of concepts related to
FDI flow, FDI determinants, political and pandemic issues, and the theoretical framework
used to explain the model. In addition, the authors also summarize domestic and foreign
experimental studies related to theory and research topics, analyze the context and results
of previous experimental research. From there, the author proceeds to build a model and
propose research hypotheses.

Chapter 3: Data, model specification and estimation methods

In chapter 3, the authors will in turn present the research design, research process,
data sampling method and Time series analysis method that will be used to analyze data in
this research article. Using this approach, our research will analyze the impact of FDI
factors and the influence of political variables and the COVID-19 pandemic on FDI in
Vietnam from 1996 to 2021. Steps like Data Preprocessing; Descriptive analysis; Unit root
testing; Time series analysis can be performed.

Chapter 4: Discussions of results

In chapter 4, presents the key to the research results after conducting descriptive
statistics on the research sample, presenting and analyzing the research results according to
the established questions and hypotheses. It does not just report the findings but also
provide a critical evaluation, assessing whether the results are consistent with research
 20

hypotheses and expectations, clarifying the underlying bases and reasons for the observed
results.

Chapter 5: Conclusion & Recommendation

This part provides a brief summary of the study and its results. In addition, it also
proposes recommendations and outlines possible measures based on research results to
encourage and promote an increase in foreign direct investment in Vietnam in the current
economic context. It clearly states the problems that the research has effectively solved, the
problems that have not yet been resolved or have just arisen, the limitations of the topic and
proposes further research directions for the topic in the future will be presented by the
authors in this chapter.

II. LITERATURE REVIEW

1. Introduction

1.1. FDI

1.1.1. Definition & concept of FDI

After World War II (WWII), Foreign Direct Investment gained a vital role in the
global economy. The trend towards market internalization has prompted companies to
develop various strategies for internalizing their business operations, leading to a wide
range of activities including foreign direct investment.
UNCTAD (2007) provides a general definition of FDI based on Detailed Benchmark
Definition of Foreign Direct Investment, third edition (OECD, 1996), and International
Monetary Fund, Balance of Payments Manual, fifth edition (IMF, 1993). Foreign direct
investment reflects the objective of establishing a lasting interest by a resident enterprise in
one economy over an enterprise located in an economy other than the economy of the initial
foreign investor. The lasting interest implies the existence of a long-term relationship
between the direct investor and the direct investment enterprise and a significant degree of
influence on the management of the enterprise. The investment involves the initial
transaction between the two entities and the subsequent transactions between them and their
 21

foreign affiliates, both incorporated and unincorporated. Foreign investment can be made
by individuals as well as business organizations and enterprises.
Explanations about the reasons for the existence of FDI and the occurrence of
transferring capital flows from a country to another have been given. It is the reason that
there are differences in productive capacity due to increases in marginal productivity, the
quantity of harvest a producer can achieve by using one supplemental unit of element of
production capital across countries. Some countries can be both investors and recipients of
foreign capital. Capital moves from countries with a low marginal productivity of capital
to the country with a higher productivity (Rauscher, 2001). A country with a "capital
surplus" in a specific sector frequently has a lower marginal productivity when deploying
it in another country, indicating a "tipping point" (Lanchman, 1938). An "undercapitalized"
country usually has higher marginal productivity because it has more untapped potential.
This situation will result in the motion of capital from places of surplus to places of relative
scarcity, with the purpose of maximizing profits because the production expenses of
"capital surplus" countries are higher than the production costs of "capital deficit" or
“capital shortage" countries and desire to receive capital.

1.1.2. Dunning’s classification of FDI

Market seeking FDI: Market seeking investments involve enhancing international

markets, facilitating commercial channels, establishing unprecedented markets while using
available resources of raw materials. The market-seeking motive forms the fundamental
characteristic at the initial phase of the internalization process, and among TNCs from
developing countries, it is the most popular motive.
- Market seeking factors
• Market size: The size of the host market, measured by GDP or population, is
considered one of the most robust determinants of FDI inflows. A larger market size
indicates greater demand and revenue potential for firms. Market size can be categorized
as unattractive (FDI per capita less than $1), moderately attractive ($1 to $4.1 FDI per
capita) and highly attractive (above $4.1 FDI per capita). The larger the market size, the
 22

more FDI inflows it is likely to receive, especially market-seeking FDI which aims to serve
the domestic market.
• Purchasing Power of Consumers: While the absolute market size matters, the
purchasing power of consumers in that market drives the quality of demand. Higher income
levels indicate greater ability and willingness to purchase goods and services. FDI flows
towards markets with stronger purchasing power to maximize revenue potential.
• Trade Openness: Trade openness, as indicated by the ratio of trade volume to
GDP, is another key determinant. It determines market-seeking FDI which aims to avoid
trade barriers by providing access to larger markets, promoting competition and innovation,
and facilitating access to inputs and resources.
• Gross Domestic Product: The faster an economy grows, the more market-
oriented FDI it attracts. The GDP of the host country has been used as an indicator of
absolute market size by Grcic and Babic (2003). Agarwal (1980) noticed that outside
investors are mostly motivated to invest in the host country by its market size, especially
when they took FDI flows to developing countries into consideration. The same measure
has been applied by many other authors to proxy market-seeking FDI such as using GDP
in host nations as a conventional motive of FDI. A positive connection between FDI and
GDP has been observed.
• Exports: Dunning (1980) considered exports as a market seeking factor. He
believes the relationship between FDI and trade varies depending on the motivation of the
FDI being discussed. On the condition that FDI is market seeking, then it can shift exports
from the home to the host country whereas if the FDI is either efficiency seeking or resource
seeking, it can raise trade volume.
Resources seeking FDI: The main aim of this FDI motive is to boost longstanding
supply of natural resources for TNCs. These firms mainly do business either in primary
industries or in those that employ a great deal of natural resources. As it plays such an
important role in securing resource supply. Natural resource seeking is the main motivation
for a significant part of TNCs from developing countries, especially from those that lack
natural resources.
- Resource seeking factors
 23

• Availability of Natural Resources: The availability of natural resources like

oil, gas, minerals, and metals in a host country is a key driver of resource-seeking FDI.
Multinational corporations invest abroad to secure direct access and control over critical
raw materials for their global production networks. Empirical evidence shows that countries
with abundant natural resources tend to attract more resource-seeking FDI. The size and
quality of mineral reserves signify long-term revenue potential for foreign investors.
• Infrastructure to Transport Resources: Apart from resource availability, the
infrastructure to transport resources like pipelines, roads, rail, and ports is vital. Without
adequate logistics infrastructure, the costs of resource extraction and transportation remain
high regardless of resource abundance. For example, landlocked countries in Africa with
rich mineral deposits have struggled to attract FDI due to lack of transport infrastructure to
seaborne export routes. The quality and connectivity of infrastructure drives the
profitability of resource investments.
• Imports: Dunning (1998) argued that the motivation of FDI forms the basis
of the relationship between FDI and trade, thus, theoretically, there is a relationship
between imports and FDI. A substitute relationship between FDI and imports is established
if the host nation earlier used to import from the investing nation but then instead of
importing those goods, the host nation now meets its domestic demand through local
production. In this context, there is a negative relationship between FDI and imports. The
opposite is accurate as well. FDI and imports can be in a complementary relationship if FDI
is resource seeking. Provided an investing nation needs some types of specific inputs or
elements that are unavailable in the host nation and are imported, an increase in production
will subsequently make imports of inputs rise. In this case, positivity is found in the
connection between imports and FDI (Alguacil and Orts, 2002).
Efficiency seeking FDI: Normally, TNCs from comparatively more developed
countries, which focus on some specific industries, conduct efficiency seeking investments.
The value chain of a TNC is broadened through FDI in developing nations where lower
production costs can be found.
- Efficiency seeking factors
 24

• Low Labor and Material Costs: Efficiency-seeking FDI aims to decrease

production costs by transferring operations to locations with lower input costs like labor
and raw materials. Many multinational corporations establish manufacturing bases in
developing countries to leverage the abundant low-cost labor pool. Similarly, proximity to
cheap raw material sources allows firms to reduce material procurement expenses.
Therefore, countries with lower wage rates and input costs tend to be more successful in
attracting efficiency-seeking FDI projects in labor-intensive manufacturing industries.
• Investment and Tax Incentives: Governments use financial incentives like tax
holidays, reduced tax rates, capital subsidies, and regulatory exemptions to lower the
operational costs for foreign investors. These policies compensate for the lack of natural
cost advantages and boost FDI inflows. Empirical evidence shows that efficiency-seeking
FDI, which is motivated by cost reduction, tends to be most responsive to tax incentives
that lower production expenses. In contrast, market- and resource-seeking FDI focused on
revenue potential reacts less to such incentives.
• Inflation: The efficiency-seeking FDI has been explained based on the
differences in costs involved in business transactions in the home and host markets.
According to Botric and Skuflic (2005), inflation is an efficiency-seeking engine. High
inflation represents macroeconomic instability, increasing the value of materials and
production costs in the host country and posing risks for companies operating in the host
economy. When inflation increases, that nominal income does not change, causing the real
income of the business to decrease. Inflation not only reduces the real value of unprofitable
assets, but it also erodes the value of profitable assets, which means reducing real income
from interest
• Strategic asset seeking FDI: The aim of strategic asset seeking investments
includes fostering current competitive advantages, obtaining others and especially
searching for human capital resources. Strategic asset FDI is hardly a significant motive for
TNCs from developing countries because most of this FDI aims to boost a TNC’s
absorption.
 25

Strategic asset seeking FDI: Advancing an enterprise’s global or regional strategy

into international systems of created assets such as organizational abilities and markets,
technology, etc. is the aim of strategic asset seeking FDI.
- Strategic asset seeking factors:
• Technology, Know-How or Brands: Strategic asset seeking FDI aims to
acquire advanced technologies, management expertise, human capital, and internationally
recognized brands overseas to strengthen a firm's competitive advantages. Such
knowledge-based assets are embedded in clusters of leading firms, suppliers, and
institutions.
• Agglomeration Effects: Industrial agglomerations exhibit positive
externalities like knowledge spillovers between co-located firms that boost innovation. By
investing in these clusters, multinational corporations can tap into new sources of
competitiveness. For example, manufacturing FDI in Chinese industrial parks aims to
absorb advanced production processes and technical expertise from peer firms. The
resulting productivity and technology gains then allow them to compete globally.

1.1.3. Theories of FDI

The 1970s saw a boom in the literature on foreign direct investment and the
incentives that attract businesses to operate overseas. The two ideas that were most
frequently addressed are internalization theory and neoclassical trade theory. The former,
which was first presented in the 1960s, was developed using the Heckscher-Ohlin (HO)
trade model's central claim to explain the intentions of investors who run overseas
production chains but sell goods back to their own nation. The rationale behind FDI is also
examined by internalization theory, the second dominant hypothesis that was first
presented by Buckley and Casson in 1976 (Li, 2023). This argument highlights that,
because of lower transaction costs, internalizing these activities is probably a less
expensive option for MNEs to gain a competitive advantage in a foreign market than
outsourcing different elements of the production process. Dunning synthesized these two
theories in 1993 to create the groundbreaking ownership-location-internalization (OLI)
paradigm, which has served as the basis for numerous empirical studies looking at the
 26

factors influencing foreign direct investment. According to internalization theory, many

ideas on multinational corporations (MNCs) that were put forward before the 1970s are
overly broad and universal in their explanation of MNC activities, and Dunning (1977,
1988, 1993), a representative author of the "Reading school," has stated as much. As a
result, he presents the renowned eclectic or OLI paradigm, combining the best elements of
several economic and foreign direct investment theories. This paradigm offers a cohesive
framework for studying MNCs and elucidating their actions.
According to Dunning's (1977, 1988, 1993) OLI paradigm, an organization needs
to have the following benefits in order to internationalize: (i) ownership-specific benefits
(O-advantages), (ii) location-specific benefits (L-advantages), and (iii) internalization
incentive benefits (I-advantages). The O, L and I in the model refer to three groups of
conditions that determine whether a company, industry or firm will be a source or recipient
of FDI (Asiamah et al, 2018). After the research, many studies have been conducted in
various countries, analyzing factors of FDI related to ownership, location, and
internalization advantages.
O-advantages include the Hymer-proposed idea of FSAs, which are the distinctive
advantages of an organization, including those derived from asset and transactional
ownership. Benefits from asset ownership refer to tangible assets (production equipment,
production plants, funds, energy, and raw materials) and intangible assets (patents,
proprietary technologies, trademarks, goodwill, capabilities at technological development
and innovation, management, and marketing techniques). Advantages from transactional
ownership are obtained when a firm operates transnationally on a global scale, deploys
various resources rationally, and avoids multiple risks, comprehensively reducing its
transactional costs.
According to Dunning (1981), a business must possess the O-advantages listed
above in order to engage in FDIs. However, these benefits do not always result in FDIs.
Stated differently, O-advantages are a prerequisite, but not a sufficient one, for an
enterprise's FDI practices. If a business has O-advantages but no I- or L-advantages, it can
nevertheless make use of export sales, licensing, or domestic production to realize its
advantages.
 27

I-advantages—which refer to an enterprise's capacity to preserve particular

ownership advantages inside, preventing the imperfect external market from influencing
its interests—integrate Buckley and Casson (1976) concept of internalization. Cost
reductions are more important for internal than for external market transactions,
particularly for information and technology items whose worth are hard to pin down. As a
result, every unique benefit of the company can be completely utilized. I-advantages, like
O-advantages, are necessary but not sufficient for carrying out FDIs. The essential element
in the eclectic theory of FDI is that all the three types of conditions must be met before
there will be FDI (Asiamah et al, 2018).
Dunning bases his proposal for L-advantages on the industrial location hypothesis.
In terms of its market environment, this idea refers to how favorable a certain overseas
market is to the production and operation of an enterprise when contrasted to its own
country. Stated differently, the host country may benefit from aspects related to its
investment environment, such as labor force (Chen, 1997), costs, market size (Cheng and
Kwan's, 2000), infrastructure (Loree and Guisinger, 1995), economic development level,
infrastructure endowment (Belkhodja et al, 2017), and foreign investment rules. The
company wants a foreign market with such a favorable climate for its international
operations. In detail, location advantage considers issues such as the level of infrastructure
development for production, economic development potential, transportation costs, tariff
barriers to imports, and convenience when entering a new market, tax policy between the
investing country and the host country, political stability of the host country. In addition,
L advantage also considers natural resources with the purpose of increasing trade when
FDI exploiting resources enters the host country. Specifically, an enterprise with only O-
advantages will choose technology authorization. If a firm exhibits both O- and I-
advantages, it will choose export; only when it exhibits all three advantages will the firm
choose FDIs. Thus, L-advantages play a crucial role in whether enterprises conduct FDIs.
(Yin et al. 2014)
Apart from the aforementioned models, FDI can also be viewed as a competition
between two or more host countries for FDI, or as a game in which the host government
and MNEs are the only players. MNEs and host nations haggle over a wide range of topics,
 28

such as taxes, subsidies, financing plans, the hiring of foreign nationals, training, local
employment, local input, export requirements, and capital repatriation-that is, concerns
pertaining to areas where governments may intervene in foreign direct investment. Many
studies, including those by Asiedu and Villamil (2000); Wei (2000); Asiedu (2006); Ting
& Tang (2010); found that policy variables such corporate tax rates, tax concessions,
tariffs, and other fiscal and financial investment incentives have a significant effect on FDI,
and as such, ought to be regarded as possibly significant FDI factors. Generally speaking,
FDI was not significantly impacted by tax policy when compared to other criteria (such as
market size and growth, basic infrastructure, political stability, cost and availability of
sources of production).

1.1.4. The impact of FDI

1.1.4.1. Benefit to home country.

Since foreign direct investment is seen as a key tool for home nations to preserve or
improve their relative standing in international markets, the following are possible
advantages of FDI flows.
• Growth of outward FDI: There are several opposing views on the positive
effects of outward FDI on economic Policy legal changes. These policy changes can slowly
shift workplace cultures and the growth of home countries. One is that the growth of
outward FDI is mainly due to a more liberalized capital account, which attracts capital
inflows and promotes economic growth, especially in high income countries.
• Impact on home country export: According to some of the earliest studies,
such as Stobaugh et al. (1972) for the US and Jordan, and Vahlne (1981) for Sweden, the
establishment of foreign affiliates usually resulted in significant increases in foreign market
shares and exports of intermediate products to affiliates, supporting the idea that foreign
direct investment had a positive impact on home country exports and employment (Kokko.
A, 2006).
• Assure production facilities at low cost: By investing in countries with
abundant low-cost labor and inexpensive raw materials, enterprises can reduce their
production expenses and increase competitiveness. FDI brings employment opportunities,
 29

industrial development, technology transfer, and the development of supplier networks.

However, it's important for home countries to also focus on diversification, innovation, and
value-added activities for long-term economic growth (Agarwal, 1997).
• Ensure domestic market: By investing in the production and domestic selling
of products and services, FDI can guarantee the domestic market for home countries. This
makes it possible for international investors to directly meet local demand and take
advantage of the sizable consumer base. It offers market stability, customisation options,
and market access.
• Benefit from the impact of knowledge flows through MNCs: Outward FDI
creates the spread of knowledge back to the home country through awareness exchange in
business associations, personal relationships, labor mobility, and other similar channels.

1.1.4.2. Benefit to host country.

FDI has emerged as a significant source of finance, technology, know-how, and

other valuable resources that would not otherwise be accessible in less developed nations.
As a result, FDI promotes social and economic growth in developing countries (UNCTAD,
1999). Potential advantages of FDI flows to host nations include the following:
• Creating job: Bring technology: The foreign investor will provide fresh
skills, technology, and knowledge to the host country. Because companies in home
countries have new technologies, advanced production processes, experience, and higher
thinking, we can learn and develop our creativity and technology from there.
• Enrich competitiveness: By bringing in new management techniques, quality
standards, and marketing tactics, FDI increases the competitiveness of the industries in the
host country. Local businesses could benefit from these strategies, creating a more
competitive business climate.
• Advantages in terms of export market: Foreign businesses are frequently able
to create goods and services on a global scale, efficiently, and at competitive costs because
they have significant financial resources and enormous production scales. As a result, these
businesses are capable of expanding into and successfully entering export markets. In the
global economy, foreign businesses frequently already have established marketing and
 30

distribution networks. They possess extensive understanding of many marketplaces,

including client demands and specifications, trade laws and guidelines, and efficient
methods of distribution (Phung, 2016).
• The foreign exchange deficit in the host country can be closed with the help
of foreign investment: Typically, investment calls for imported materials. These savings
might not be sufficient to guarantee growth if there are obstacles to converting domestic
savings to foreign currency to purchase imports, or if domestic savings are insufficient.
Inflows of capital contribute to the availability of foreign exchange for the purchase of
imports for investment purposes (Brooks et al., 2003)

1.1.4.3. FDI and Economic Growth Relationship

As has already been mentioned in the literature, multinational firms bring with them
money, technology, managerial and marketing expertise, and their extensive worldwide
network when they invest in a nation. Official figures indicate that FDI has a considerable
and growing economic impact in Vietnam. The FDI sector's share of the GDP in 2000 was
roughly 13.2 percent. In 2005, this percentage rose to 15.9 percent. When it comes to
growth rates, the foreign direct investment segment has consistently had the highest, rising
from 11.4 percent in 2000 to 13.20 percent in 2005. This is a considerable increase from
the State sector and non-state domestic sector's respective growth rates of 7.7 percent and
5.0 percent in 2000 and 7.3 and 8.1 percent in 2005 (UNCTAD, 2010).
Numerous academics have been interested in investigating the relationship between
FDI and economic growth in the recipient nations. Attracting foreign investments is a key
objective for policymakers in developing nations, because capital deficits are one of the
primary obstacles to economic growth. Abdul Bahri et al. (2019) made the assumption that
physical capital inflows and technological spillovers would result in FDI having a
beneficial impact on economic growth. Using data from 90 nations, panel and cross-section
research, he discovered that while FDI inflows boost economic growth in emerging
economies, they do not in established economies. Olofsodotter (1998) used cross-section
data for 50 industrialized and developing nations between 1980 and 1990 and the usual
OLS approach and discovered that because of technological spillovers, the FDI stock
 31

positively affects the rate of economic growth. Furthermore, the effect is more noticeable
in host countries with stronger institutional capacities, as evidenced by the level of property
rights protection and the efficiency of the bureaucracy in the host country. FDI can help
reduce unemployment problems in the country. High and continued unemployment is a
sign of inefficiencies of resource allocation which threatens economic growth in a country
(Almfraji et al., 2014). In contrast to the more closed economies where enduring causality
from GDP growth to FDI is unidirectional, they discovered two-way causality between
FDI and GDP growth in open economies. The relationship between FDI and human capital
has drawn a lot of interest. Borensztein et al. (1998) discovered that inward FDI has
favorable effects on growth through its interaction with human capital in a cross-country
regression framework for 69 less-developed countries in the years 1970–89. FDI not only
increased domestic investment but also made a larger contribution to growth than domestic
investment. Economic growth equations are very responsive to human capital proxies.
According to Bengoa and Sanchez-Robles (2003), according to a data collection
framework for an example of eighteen Latin American countries for the period from 1970
to 1999, a country needs sufficient levels of economic stability, liberalized capital markets,
and human capital for FDI to have a beneficial effect. Li and Liu (2005) based on the results
of a panel data analysis conducted for 84 countries between 1970 and 1999, FDI had a
direct and indirect impact on development due to how it works with human resources.
The relationship between FDI and economic growth is unstable and varies over
time, according to a recent paper by the World Bank. Since the 1990s, global value chains
- which are defined as the disjointed processes by which multinational corporations
conduct their business - have emerged as one of the main pillars of globalization (Almfraji,
2014). The study states that "early empirical literature on FDI and economic growth was
founded on economic theory, which holds that more financial capital (i.e., FDI) and
improvements to human capital generate growth." The rise of global value chains (GVCs),
however, arguably breaks the link between FDI, absorptive capacities, and growth because,
in contrast to what was once believed to be growth barriers—weak human capital and low
financial development - provide an environment that is conducive to multinational
corporations shifting their operations and their investments (Har et al, 2008).
 32

2. FDI in VietNam

2.1. FDI development in Vietnam

In the late 1980s, Vietnam initiated economic reforms known as "Doi Moi"
(Renovation). These reforms aimed to implement a path of innovation, transforming from
a centrally planned, subsidized economy to a multi-sector commodity economy, operating
according to market mechanisms, with State management and socialist orientation (GSO,
2020), involved liberalizing markets, encouraging private enterprise, and attracting foreign
investment. Vietnam's economy in the period 1976-1985 is a manifestation of a centrally
planned and subsidized economy which was an enclave of economic activity kept alive by
subsidized trade and aid relations. During this period, the State managed the economy
mainly by administrative orders based on a system of ordinance targets imposed from top
to bottom. Enterprises operate based on decisions of competent state agencies and assigned
ordinance targets (GSO, 2020). The transition was also relatively painless in Vietnam
because it had a labor force willing and able to join the international ladder of specialization
at the bottom. The dominance of market-substitutable agricultural goods in the Vietnamese
economy also smoothened the transition (McCarty and Burke, 2005). Over 30 years of
integration, Vietnam has signed numerous bilateral and multilateral agreements with other
countries and has participated in international and regional organizations. One significant
milestone was Vietnam's accession to the Association of Southeast Asian Nations
(ASEAN) in 1995. This event marked Vietnam's formal entry into the regional bloc, which
has played a crucial role in promoting economic cooperation, trade facilitation, and political
dialogue among member countries (Nguyen, 2007).
 33

Figure 2: FDI in Viet Nam from 1988 to 2005

Source: GSO (1988-2005)

From the graph, it can be observed that immediately after joining ASEAN in 1995,
Vietnam attracted a significant increase in FDI into the country. The ASEAN member
countries have consistently been important partners and one of the top priorities for
Vietnam, contributing to maintaining a high growth rate even during challenging periods
and crises. In 2022, Singapore invested $6551.0 million, accounting for 22.4% of total
FDI; Korea invested $5086.6 million, accounting for 17.4%; Japan invested $5017.3
million, accounting for 17.1%; China invested $2616.6 million, accounting for 8.9%; and
the Hong Kong Special Administrative Region (China) invested $1429.6, accounting for
7.9% (GSO,2022).
 34

Figure 3: FDI licensed in 2022 divided by investment partner

Source: GSO 2022

The year 2007 witnessed a significant milestone in Vietnam's efforts to attract FDI
with its accession to the World Trade Organization (WTO). This event served as a
breakthrough moment, opening new avenues for FDI inflows into the country. After ten
years of WTO accession, FDI has played an important role for economic growth, job
creation and trade balance improvement (Phung, 2018).
 35

Figure 4: Foreign direct investment (FDI) in Viet Nam 2006-2021

Source: GSO (2006-2021)

It can be said that within one year of joining the WTO, Vietnam experienced a surge
in FDI inflows. Additionally, the commencement of the Vietnam-EU Free Trade
Agreement (EVFTA) on August 1, 2020, served as a momentous milestone in the 30-year
history of cooperation and development between Vietnam and the European Union (EU).
This agreement opened up a new promising phase for a comprehensive, substantial, and
effective partnership between the two parties (A.N, 2021).

FDI has become a major economic force that drives the economic reform of
Vietnam (World Bank, 1997). FDI capital flows help create new economic dynamism,
creating conditions for the private economy to continue to grow, while divesting capital
from the state-owned enterprise (SOE) sector through the formation of hundreds of joint
ventures with SOEs (Vuong, 2004). The industry has shifted towards industrialization and
modernization, with foreign investment capital focusing on the industry-construction
sector with a technological level higher than the country's average, contributing to the
formation of several key industries such as telecommunications, oil and gas exploitation
and processing, electronics, information technology, steel, cement. That contributed to the
 36

transformation of agricultural structure, product diversification, improving the value of

exported agricultural products and absorbing several advanced technologies, especially
investment projects in developing raw material sources, contributing to improving farming
practices and poor infrastructure conditions. The foreign investment sector has also created
a new face in the field of high quality services. These services also contributed to creating
new methods of distributing goods, consuming; stimulating domestic trade activities and
increasing export turnover of goods (Chu, 2021).

The economic sector structure has shifted towards rearrangement and innovation.
State-owned enterprises switched to holding only key areas of the national economy such
as oil and gas, energy, construction materials, chemicals, mechanics...After 1995 when the
process of equitization of state-owned enterprises was widely deployed, the proportion of
the state economy has tended to decrease significantly. Internally, the non-state economy
has changed in a positive direction, which is increasing the proportion of the private
economy, gradually decreasing the proportion of the individual economy and the collective
economy. The foreign investment sector always has the fastest growth rate and is able to
recover from the effects of economic recession faster than other economic sectors (Ninh,
2013).

In terms of labor structure, in the period 2015-2020 there is a large difference

between economic sectors. Specifically, during this period there was a clear shift in the
labor structure between regions: a decrease in the proportion in Zone 1 and an increase in
the proportion in Zones 2 and 3. (Nguyen, 2021). The labor structure has shifted positively,
consistent with the shift in industry structure, components and economic regions (Chu,
2021).

Although Vietnam's transition to a market economy still has limitations, it has

created a large and dynamic consumer market. MNEs are attracted to Vietnam's growing
middle class and increasing purchasing power, offering opportunities for business
expansion.

2.2. Current Status of linkage of FDI enterprises and Domestic enterprises

 37

Foreign direct investment enterprises are always considered an important resource

to promote Vietnam's economic development, create more jobs, increase industrial
production value and boost exports. However, the expectation of a strong connection,
supporting domestic businesses to develop together, participate in the global supply chain
and increase the value of Vietnamese goods has not yet been achieved.
Vietnam mainly forms links with a number of FDI enterprises in the form of vertical
links, including backward and forward links. But both backward and forward links between
FDI enterprises and Vietnamese enterprises are weak. The links between them are quite
weak and only focus on a few industries such as pharmaceuticals, paper products, rubber
and plastic products. The three industry groups with the strongest links are:
pharmaceuticals, pharmaceutical chemistry and plant products; other non-metallic mineral
products; motor vehicles, trailers and semi-trailers. The spillover effects from the FDI
sector to domestic enterprises in terms of technology and skills are still limited. According
to the 2018 PCI report, the majority of these businesses sell goods and provide services to
Vietnamese individuals, domestic private companies, and other state-owned enterprises.
But this number is too different from the number of Vietnamese businesses currently doing
business with foreign partners, who are most likely to integrate into global supply chains.
The proportion of Vietnamese private enterprises selling goods and services to foreign
enterprises in Vietnam, in addition to exporting products directly and exporting indirectly
through sales to purchasing enterprises, accounts for quite a low rate.
 38

SOE State agencies Individual Private

enterprise

Domestic 23.8% 27.8% 65.7% 63.8%

Individual Foreign-owned Direct Indirect

enterprise Export Export

Abroad 7.7% 14.6% 8.4% 7.4%

Table 1.1 & 1.2: Main customers of Vietnamese private enterprises at home and
abroad (2018)

Source: PCI 2018

Vietnam has not been able to participate in the ecosystem and value chain of chain-
leading enterprises and foreign enterprises. In particular, compared to FDI enterprises
operating in the low-tech sector, FDI enterprises operating in the high-tech manufacturing
sector often prefer to import goods originating from their own country instead of taking
advantage of private Vietnamese suppliers.
 39

Table 2: Suppliers to FDI enterprises (with a certain percentage share of revenue

from at least one customer group)

Source: Dieu tra PCI-FDI (2022)

As for the reason, first, FDI enterprises operating in Vietnam are not satisfied with
the ability to fulfill the desiderata of domestic suppliers. They do not meet the localization
rate requirements and miss out on trade incentives due to problems with the quality and
capacity of domestic enterprises. Enterprises can only complete small orders, but large
orders are difficult to meet on time due to lack of quality processing steps, appropriate
management standards, distribution channels, and limited trade as well as deficiency of
information about trends, technology, markets, products, competitors or suppliers... This is
reflected in the fact that domestic supporting industry products have a low localization rate
and face many limitations, especially in the field of technology. Support industry products
are still simple, with medium and low technology content, have small value in the product
value structure. Moreover, supporting industry enterprises are facing a lack of resources to
innovate and do not have enough capacity to provide components, spare parts with high
technology content and complex techniques to participate in the global production chain
(VEPR,2023). The annual volume of components imported to Vietnam for assembly,
manufacturing, and production for export reaches tens of billions of dollars. Due to an
underdeveloped supporting industry, Vietnam's processing and manufacturing industries
rely heavily on the supply of imported raw materials and components - especially key
industries such as electronics; textile; automobile fabrication and erection... (MOIT,2021)
Typically, in the industry of supplying electrical and electronic constituents to assembly
companies in Vietnam, up to 47% of components still have to be imported , 40% are
provided by FDI enterprises in Vietnam, only 1% are provided by Vietnamese enterprises
(VEPR,2023). Second, policy mechanisms from the central to local levels with many
incentives for FDI enterprises such as tax exemptions or land support have created
conditions for FDI enterprises to bring suppliers along with their businesses when investing
in Vietnam (Nguyen,2018)

2.3. VietNam legal framework

 40

After the Law on Foreign Investment in Vietnam was established in 1987, marking
a historical milestone in its formation, the Law on Foreign Investment in Vietnam went
through amendments marked milestones in the development and completion of the Foreign
Investment Law in Vietnam because of the need to make the country more attractive and
suitable for foreign investment.

2.3.1. Foreign Investment Law 1987

Foreign Investment Law 1987 passed by the National Assembly in December 1987
has 42 articles, 6 chapters, regulating the following issues:
- Foreign investors can only cooperate with state-owned enterprises
- Foreign investors can invest in Vietnam through 3 forms: business cooperation
contract; joint venture companies, 100% foreign-owned companies
- The 1987 Law on Foreign Investment in Vietnam only allows joint ventures
between two parties, including the Foreign Party and the Vietnamese Party (Foreign
Investment Law, 1987, Clause 1, Article 2 and Article 6)
- The Vietnamese Government commits not to nationalize the assets of foreign
investors (Article 21). The 1987 Foreign Investment Law stipulates ensuring fair and
satisfactory treatment for investors (Article 20); Allow foreign investors to repatriate
capital, profits and all other funds under their legal ownership (Article 22); Allows foreign
employees working in joint venture enterprises, enterprises with 100% foreign capital or
to carry out business cooperation contracts to remit their legal income back to their country,
after paying enough income tax (Article 23).
- Foreign enterprises are exempted from import tax on machinery, equipment, and
raw materials for production and business

2.3.2. Foreign Investment Law in period 1990-2000

• The issue of private participation in cooperation with foreign countries: By

1992, the Foreign Investment Law allowed the Vietnamese party, which includes one or
more enterprises of all economic sectors, to cooperate independently with foreign
 41

countries. however, did not remove restrictions on them in certain sectors that should have
been reserved for the state economy.
• Tax incentives: Exemption from import tax on machinery, equipment,
specialized means of transport, raw materials... to serve production and business of FDI
enterprises and projects in priority sectors and areas for a period of 5 years from operation
(Foreign Investment Law,1996)
• 100% foreign capital Enterprises enjoy tax incentives like joint venture
enterprises: Exemption from profit tax for the first 2 years and 50% reduction of profit tax
in the following year; In special cases, enjoy the lowest income tax bracket of 10 - 15%
(NAV, 1992)
• Adding additional criteria is that goods replace essential imported goods that
cannot be produced domestically or are not produced enough to be considered for tax
incentives.
• Foreign investors, or Vietnamese residing abroad, enjoy tax incentives when
transferring profits abroad (Foreign Investment Law 2000)
• Investment procedures: New regulations on investment license registration
according to simple procedures; shorten the investment license deadline; Clearly define the
objectives and scope of inspection, limit arbitrary inspection that causes difficulties for the
operations of foreign-invested enterprises (Foreign Investment Law 2000)
• Regulations on land use rights: FDI enterprises are allowed to mortgage
assets attached to land and the value of land use rights to secure loans at credit institutions
in Vietnam. In case of capital contribution equal to the value of land use rights, the
Vietnamese party is responsible for compensation, site clearance and procedures for
receiving land use rights; In case the State of Vietnam leases land, the People's Committee
of the province where the investment project is located will organize compensation, site
clearance and complete land lease procedures.
• Joint venture issue: Foreign Investment Law before 1996 stipulated that
joint venture enterprises could cooperate with foreign organizations and individuals to
establish new joint venture enterprises in Vietnam. Foreign Investment Law 1996 allowed
 42

existing joint venture enterprises to continue joint ventures with one or more Vietnamese
economic organizations to establish new joint venture enterprises.

2.3.3. Investment Law after 2001

Since 2005, the National Assembly of Vietnam has promulgated the Investment
Law to replace the Foreign Investment Law and the Domestic Investment Promotion Law
to improve the business investment environment, legal environment, and create unity in
the legal system on investment, promulgating the following articles on foreign investment:
- Strengthen and improve the investment security mechanism: Ensure investors'
property ownership rights and commit to adequate compensation in case of confiscation or
nationalization of assets (Ministry of Justice, 2014, 2020 ); Improve State regulations to
ensure non-discriminatory treatment among investors; (NAV, 2005, 2014, 2020)
- Allowed to apply investment laws, international treaties, foreign laws and
international investment practices in cases where Vietnamese law does not have
regulations and such application does not contravene the basic principles of Vietnamese
law (NAV, 2005)
- Registration procedures: Eliminate fees related to registration (NAV, 2005).
Simplify and shorten procedures for granting investment registration certificates (NAV,
2014). Expanding investors' autonomy during project implementation such as the right to
divide, split, merge, merge, and transfer projects - Exchange rate and foreign currency
policy: Transfers abroad are made in freely convertible currencies at the exchange rate at
the commercial bank chosen by the investor; Bought foreign currency of commercial banks
to meet transaction needs; Reduce fees for transferring profits abroad. (NAV, 2005, 2014,
2020)
- Tax policy: Remove the regulation that FDI enterprises must set aside a certain
portion of profits into a reserve fund (Bui, 2011); Income tax exemption from technology
transfer activities for preferential projects.
- Dispute resolution regarding: Disputes in which one party is a foreign investor,
foreign-invested enterprise or disputes between foreign investors are resolved through
Arbitration or Vietnamese Courts, unless otherwise agreed in a contract signed between a
 43

representative of a competent state agency and a foreign investor or in an international

treaty to which the Socialist Republic of Vietnam is a member. (NAV, 2005)
- In addition, the Law has supplemented and completed a number of regulations to
improve the quality and efficiency of investment projects such as: Regulations on ensuring
the obligation to implement investment projects in the form of deposits; Regulations on
quality inspection of imported machinery, equipment and technology; Regulations on
transfer of investment projects, extension of investment progress, suspension of investment
activities, ... (MOJ, 2014)

2.4. Determinants of FDI

2.4.1. FDI studies in the world

With the available variables, the research team will continue to analyze the
relationship of each factor on FDI. First, the research team wants to emphasize that market
size is a factor that significantly affects FDI. To draw in international monopolies, Haufler
and Wootton's (1999) research employed a two-state framework in which no established
local businesses with asymmetry market sizes engaged in competition with one another.
This study reveals that, despite higher taxes, international monopolies favored being
located in a nation with a sizable market. Using ARDL approach to cointegration and an
error correction model based on ARDL to estimate relationships among FDI and variables
in Pakistan period 1984 - 2008, Mugal and Akram (2011) finds that market size as the most
dominating positive impact factor to attract FDI inflows in long run and thereby confirming
other studies that market size tends to enhance FDI inflows into any country, whereas no
influence of market size on FDI inflows in short run can be found. A large market with
strong development potential will provide foreign businesses with the opportunity to
expand their markets and grow sales, thereby increasing profits. Another study
by Ho (2013) found that market size is significant in affecting FDI flows in China and
Russia and confirmed that larger market size would attract foreign
investors seeking0new0markets and the host country has attracted a substantial amo
 44

unt of FDI in recent years. This conceded with results found by Asiedu (2006) and
Asiedu and Nasir (2016).
Inflation is also considered an important determinant. In general, the inflation rate
can reflect the rate of consumption in the economy. Rising spending can lead to significant
levels of inflation since it increases productivity and lowers manufacturing costs through
economies of scale. Sayek (2009) showed that inflation might frequently have a positive
correlation with foreign direct investment inflows because it both lowers costs and has a
favorable impact on past consumption patterns. High rates of inflation, nevertheless, may
be a sign of economic insecurity in the receiving nation and act as a deterrent to foreign
investment (Yartey and Adjasi, 2007). During periods of high inflation, MNEs face
uncertainty about product and input prices, which may cause them to reduce or avoid
investments in those countries. Inflation has a negative effect across Europe, Central Asia,
the Middle East, and North Africa, in accordance with Addison and Heshmati's 2003 study,
which looked at the factors that impact foreign direct investment flows into a sample of
emerging economies. They contend that uncertain macroeconomic policies have a
tendency to raise inflation rates, which could have a detrimental effect on FDI inflows.
Likewise utilizing data, Valli and Masih (2014) discovered a causal link between moderate
inflation and expanding FDI inflows towards South Africa from 1970 - 2012.
Trade openness is also a factor affecting FDI. Countries that are open to
international trade are frequently the target of foreign capital, particularly efficiency-
seeking FDI (Ramasamy and Yeung 2010).Openness to trade which indicates increasing
export and import activities enable foreign investors to distribute their goods not only in
the domestic economy but also to neighboring markets which may not be attractive for
location (Ho,2013). Prior studies indicate that trade openness helps the country access a
broader market, creating resources for import and export, causing investors to expect much
revenue in the host country. Therefore, trade openness greatly influences foreign direct
investment (Djulius, 2017). Therefore, to attract FDI into the economy, policymakers
should consider any impeding barriers that may hinder the smooth flow of FDI (Yol and
Teng 2009). With the pace of trade expansion, domestic businesses will have many suitable
options for FDI flows, and investors will also have a clearer view of investment
 45

opportunities in the market. The relevance of FDI and trade openness was shown clearly
in the research of Asiedu (2002), despite legislative changes, he demonstrated how poorly
sub-Saharan Africa (SSA) performed in luring foreign direct investment. He concludes that
while trade openness encourages FDI, greater return on investment and improved
infrastructure have no appreciable effect on FDI to SSA. Moreover, Wyk and Lal (2010)
discovered that trade openness and other macroeconomic variables have a big impact on
FDI.
Researching determinants of foreign direct investment in BRICS economies, Jadhav
mentioned that Natural Resource availability had a negative effect on total inward FDI and
explained that in BRICS economies FDI is not resource-seeking FDI, exactly largely
market-oriented. Phung et al. (2016) mentioned that countries with more abundant natural
resources are more attractive to investors. For a longer period of time, her results
highlighted that natural resources and labor force were more predominant factors for
attracting FDI. Asongu et al. (2018) looked at the variables influencing FDI flow to BRICS
and MINT and observed that the existence of natural resources and its attraction to foreign
investors are not very significant. They suggested that FDI inflow was likely to increase in
BRICS and MINT countries that were less reliant on natural resources. This finding also
implies that FDI flows into MINT and BRICS were not resource-oriented but market-
oriented. This is in contrast to the research of Kasimov et al (2022) when exploring the
determinants of FDI in Central Asian developing countries during 2000-2020 and used
total natural resources rents/GDP to represent natural resources. With Prais-Winsten
regression, they confirmed a positive correlation between foreign investment and natural
resource endowment. The availability and abundance of natural resources and raw
materials was important inputs for many manufacturing industries, so they played an
important role in attracting FDI. Asiedu (2006) researched factors affecting FDI over the
period 1984–2000 in 22 countries in SSA, also affirmed that natural resource endowments
promote FDI inflow. Contrary to them, when identifying the determinants of FDI in
Tunisia through a gravity model, according to Yakubu and Mikhail (2019), there is no
meaningful correlation between FDI influx and natural resource availability in Tunisia,
 46

despite the country's abundance of natural resources., they are not decisive in the decision
of foreign investors.
In addition, there is another factor that the research team found also has a significant
impact on FDI, which is political factors, especially political stability and corruption. In
the opinion of Moosa (2009), political risk levels can foster a climate in the receiving
country that encourages FDI inflows. The former, no investor is interested in investing in
a country with war, or constant civil war, because it is too risky when businesses in that
country can go bankrupt anytime. For that reason, countries with stable politics will attract
more investment, typically countries in a state of peace, becoming the world's largest FDI
attraction. The latter, the control of corruption will also have a significant impact, as it
helps foreign investors feel more secure about their investments. There were many studies
in the world about how political affect to FDI, such as: Kurecic and Kokotovic (2017)
argue that political stability does not significantly affect FDI because investors take
political risks for granted. Sabir et al. (2019) indicate that political stability positively
affects foreign direct investment. Another factor worth mentioning is corruption.
Corruption in Egypt is found to be positively associated with total FDI and non-oil FDI
inflows in both the short and long run (Moustafa, 2021). However, many authors
mentioned that Corruption is a threat to foreign investment for several reasons. Corruption
distorts the economic and financial environment, reduces the efficiency of government and
business by enabling people to assume positions of power through patronage rather than
ability. However, According to Barassi and Zhou (2012), the effect of corruption on foreign
direct investment (FDI) is not uniform and is contingent upon the quantity distribution of
FDI in the investment destination. The degree of corruption harms foreign direct
investment (FDI) in countries with low FDI distribution. The association among FDI and
corruption, however, is not essential in nations with high FDI distribution rates because
increased corruption will not deter investment in a country that has been selected as a
destination for it. Plus, corruption forces the political system to become inherently unstable
(Mina, 2009; Asiedu and Lien, 2004).
The research team will point out another factor preventing FDI in the world, which
is epidemics, especially COVID-19. During the epidemic, the global economy was also
 47

affected by a severe recession, leading to negative impacts on FDI. Investors were hindered
by the quarantine order, which caused many companies to stop operating, and freight
transport units were delayed, leaving many businesses on the brink of bankruptcy. Not
only that, investors also have to withdraw capital, according to The United Nations
Conference on Trade and Development (UNCTAD), in 2020, FDI decreases by 5 -10%,
and this affects the costs for healthcare, economy, infrastructure, to restore the country after
the pandemic. So it can be seen that the epidemic in general and Covid -19 in particular
will be a major barrier to global FDI. Besides, the pandemic's devastating consequences on
the direction of FDI flows differ for poor and industrialized countries. Chaudhary et al.
(2020) demonstrated that the COVID-19 pandemic had reduced FDI funds in Nepal. It is
expected that FDI flows to developing countries would drop even more than the developed
countries since the primary and manufacturing sectors are severely affected by the crisis,
which accounts for a major share of FDI inflows in the developing countries (OECD,
2020). FDI inflows have been adversely affected by COVID-19, especially when it comes
to investments in global value chains (GVCs) and tourism in emerging and transitional
countries. On the other hand, since 2018, new FDI inflows have gone down. This drop was
sped up by the epidemic, particularly in countries where doping was prevalent. With a 65%
decline in new FDI flows, Africa has been the most seriously impacted region. Asia follows
in third with a 51% decline, followed by Latin America and the Caribbean in second place.
The worldwide pandemic of COVID-19 has had an analogous effect on foreign direct
investment flows. It was anticipated that emerging nations would be hurt greatly as a
consequence of the health crisis.
Finally, it's about infrastructure. This is the thing that most clearly reflects the
development of a country. When investors come to survey the market, buildings and roads
will be the first things that affect their perception of the market. Besides, the condition of
roads and bridges will also be a factor worth considering, because it directly affects the
ability of businesses to move and transport goods. In addition, the reasonable planning of
industrial parks and specialized farm areas compared to residential areas will also make
management easier, thereby attracting more FDI. Analyzing the data in 6 Asean countries
in 2007-2016 by multiple linear regression, in the word of Sasana and Fathoni (2019), the
 48

six members of ASEAN will be more alluring to FDI as investment targets based on the
caliber of the infrastructure provided by the nation that is being invested in. Alam and Shah
(2013) used Granger causality, cointegration, and VCEM approaches to estimate the
determining factors of FDI in OECD member-states during 1985-2009. Their estimations
indicated that infrastructure is significant and positively associated with FDI.
Another study by Yakubu and Mikhail (2019) found that the infrastructure
accurately reflects their theoretical expectations and confirmed that if the
infrastructure is of good quality, the transaction costs will go down, which encourages
foreign investors to locate in the host country.

2.4.2. FDI studies in Vietnam

Currently, there have been a number of studies conducted in Vietnam on factors

affecting FDI. First, market size is a factor that Hoang (2007); Bui (2012); Hoang(2020)
assessed as a determining factor in FDI flows in host countries. Market size represents
market demand in the host country. In fact, discovering new markets is the main motivation
of FDI, and market-seeking FDI aims at broadening the host nation's market.
Consequently, assuming all other variables stay the same, a country's market size will
influence how much FDI it draws in. (Aziz and Mishra,2015). The projected income of the
investment is directly impacted by the size of the market (Hoang, 2007). International
businesses will have access to greater product, revenue, and profit opportunities in the
broader host market. Consequently, additional FDI inflows will be pulled to a broader
market (Bui, 2012). Hoang (2007) used nominal GDP to measure market size. Host
countries with higher GDP per capita will provide increasingly higher opportunities for
industries that promote their advantages and will therefore attract more market-seeking
foreign investment flows (Chong et al (2019)). With the estimation of a cross-sectional
regression model for local factors determining FDI up to 2000 among provinces in
Vietnam, Nguyen at el (2002) also argues that market size calculated by provincial GDP is
closely related to the flow of FDI.
Trade openness is a second economic variable that has been studied. It reflects the
level of restrictions on commercial activities taking place in the host country. Many
 49

previous studies on FDI suggest that the trade "openness" of the host economy can have a
significant relationship with FDI inflows (Hoang, 2007); (Hoang, 2020). Delaunay and
Torrisi ( 2012) mentioned that openness to trade was not shown to be significant in their
empirical analysis. Additionally, trade openness can be a proxy for successful economic
liberalization and favorable trade policies (Delaunay and Torrisi, 2012). Hoang(2020), by
applying the gravity model, found that trade openness expressed through the import value
of the source country into Vietnam is highly significant and positive with the FDI flow
dependent variables. This coincides with previous research by Hoang (2007). She finds
that trade openness (OPEN) is statistically significant and has a positive impact in all
estimates.
The inflation rate is an economic variable that is studied quite a lot in studies on
FDI in Vietnam. It shows the stability of the macroeconomy. Or, specifically, low inflation
is considered a sign of economic stability in the host country. High inflation reflects the
government's inability to balance the budget and the central bank's failure to implement
appropriate monetary policy. After starting their economic transition with floating prices,
the majority of developing countries experienced significant rates of inflation. Using the
monthly statistical Consumer Price Index (logarithm form) to represent Inflation when
researching factors affecting FDI flows in the period from January 2020 to October 2021,
Nguyen at el (2022) commented rising inflation promotes FDI flows into Vietnam. This
coincides with the research of Nguyen (2020) when studying Vietnam’s FDI attraction
during the period 1995-2018, affirmed that annual inflation rate has a positive sign and is
significant on FDI net inflows at a 5% significance level. Tran et al (2021) analyzed the
factors affecting FDI in the Northwest region of Vietnam in the context of global economic
integration in the period of 2000 - 2019 and reckoned that inflation did not affect FDI
capital in Vietnam. Du (2011) also reported similar results.
Another factor believed to impact FDI flows is infrastructure. Infrastructure
development is the top physical condition for foreign investors to invest. The reality of
attracting FDI in localities shows that this capital flow only flows to places with developed
infrastructure, capable of serving the production and economic activities of investor's
businesses. Nguyen and Nguyen (2007) examined factors that influence FDI inflows in
 50

Vietnam through determining the average number of telephones and the number of
industrial parks in each province between 1988 and 2005.The findings corroborate the
preceding claim concerning the importance of infrastructure by revealing a positive and
statistically significant influence of the number of industrial parks. Improved and improved
infrastructure will attract FDI to the area in the form of capital expenditures as well as
project numbers. Nonetheless, it is negligible to use the average number of phones to
indicate the state of infrastructural development. This contradicts the results reported by
Nguyen (2002) and Bui (2012). They all believe that infrastructure and FDI flows are
deeply correlated (telephone numbers per 1,000 people (TEL) are used to measure
Vietnam's infrastructure index.) Their results are consistent with Dunning's theory. This
means that adequate infrastructure will lead to higher FDI inflows into the locality. Foreign
investors look for areas with favorable infrastructure conditions such as electricity,
telecommunications, transportation, and seaports to reduce costs. (Bui, 2012). Hoang
(2006) and Hoang (2020) studied factors affecting FDI in Vietnam at two different times
and also confirmed that infrastructure is closely related to FDI flows.
It is easy to see that countries rich in resources will have favorable conditions for
economic development. In the period from the 19th century to before World War II, natural
resources owned 60% of the world's FDI capital (Mirza and Giroud, 2004). With abundant
natural resources, businesses can exploit and serve their business activities without
worrying about a lack of raw materials for production. Even if surplus production can be
exported at high prices. Furthermore, countries with rich resources will receive strong
cooperation and investment from multinational companies, especially for rare raw
materials.Vietnam is regarded as one of the countries with a wide range of natural
resources. Since 1986, the year economic reform began, until now, Vietnam's abundant
mineral resources have been one of the main factors attracting such large FDI inflows
(Mirza and Giroud, 2004). Nguyen (2020) affirmed that abundant natural resources are one
of the main driving forces for Vietnam's economic development, and at the same time, he
also affirmed that FDI and economic development have a deep relationship. From here, the
authors questioned the existence of the relationship between the natural resources Vietnam
owns and attracting FDI in Vietnam. However, unfortunately, we have not found any
 51

research related to the above issue. Du (2011) also hypothesized the correlation between
FDI flows and natural resources. However, because the data on natural resources was
incomplete, with more than half of the missing values, he had to remove it from the
analysis.
The factors of political stability, covid epidemic and corruption have hardly been
studied in previous studies on FDI flows in Vietnam. Originating from the Covid-19
epidemic may hurt attracting FDI flows to Vietnam, especially in the context that the
Vietnamese Government must implement social distancing measures and economic
blockade to prevent the Covid epidemic to protect people's lives and health, Nguyen et al
(2022) conducted research and empirically evaluated the impact of the Covid-19 epidemic
on FDI flows to Vietnam in the period from January 2020 to October 2020 using estimation
methods such as instrumental variable regression and OLS regression. The article uses the
number of Covid-19 cases as a proxy for the Covid-19 epidemic for empirical evaluation,
and the results show that the Covid-19 epidemic reduced FDI inflows into Vietnam during
the research period. In line with Mirza and Giroud's (2004) examination of transnational
corporation (TNC) subsidiaries in ASEAN, Vietnam has certain distinct advantages when
it comes to bringing in international investment. Based on the findings of the survey,
Vietnam was chosen as an investment destination because of its advantages including
political stability. The parameters making Vietnam an attractive investment destination are
low political risk, decreasing level of corruption

3. Conclusion

Thus, in the literature review, the research team reviewed existing documents on
FDI in general and factors affecting FDI in particular, and then came up with practical
perspectives on FDI. First, the research team provides basic knowledge such as the
definition and concept of FDI, so that readers have a more general view of FDI. Second,
the research team provides arguments to explain the necessity and important position of
FDI in economic development. In addition, characteristics of FDI such as infrastructure,
technology diffusion, trade facilitation, knowledge management, and technology transfer
and economic growth are discussed, and valid arguments are provided. Besides, the
 52

research team also pointed out the effects of FDI on host countries and home countries,
along with the correlation between FDI and economic development. Next, our team
summarizes the situation of FDI during the period 1990 - 2020, illustrating Vietnam's
change when moving from a centrally planned economy to a socialist-oriented market
economy with the emergence of MNEs. In this section, additional information is also
provided about the contributions that FDI brings to the economic development process in
Vietnam. In the next section, the Law on FDI in the period 1990 - 2021 is studied very
carefully, the author analyzed and described the positive changes in foreign investment
promotion laws because it is the basis for the research team's later comments. Finally, we
provide perspectives on the situation and factors affecting FDI in Vietnam and
internationally. This chapter once again confirms what was proposed in the introduction of
the research article, which is that there exist gaps in previous data and research, such as
many studies in Vietnam on influencing factors FDI is ignored or data for research is
lacking. Our research attempted to overcome this by accessing reliable data sources to find
missing data. Many neglected factors will be investigated and researched to draw
conclusions, thereby bringing contributions to fill the void of FDI research literature in
Vietnam and making recommendations for policymakers with the desire to solve
shortcoming problems, promote FDI flows into Vietnam to create momentum for economic
development.

III. METHOD

1. Proposed research model

 53

2. Data, Model specification

2.1. Source of data

To serve the research model, the authors use secondary data, specifically time series
data from two different sources. The first source is the World Development Indicators
(WDI: World Development Indicators) Data System of the World Bank. The World
Development Index reflects the development progress of economies through economic,
social, financial, natural resources, and environmental indicators. The second source is the
General Statistics Office of Vietnam. For the purpose of our study, we used time series data
monitored annually from 1996 to 2021 in Vietnam. For consistency, all currency-related
data is expressed in US dollars. However, due to limited data updates in Vietnam, some
indicators (variables in the model) are not available for certain specific years. In such cases,
we employed the Eviews X10 software to estimate and adjust the data. To address missing
 54

data, we adopted a method of filling in the gaps with average values obtained from the
nearest available survey year. For instance, if the data for the Political Stability Index is
absent for the years 1997, 1999, and 2001, we would use the average value from the nearest
available years to fill in those gaps. Similarly, we would apply a similar approach for other
indicators such as Control of Corruption and Access to Electricity. While filling in average
values may not be completely accurate compared to the actual data for the missing years, it
helps us maintain consistency and continue analyzing the data in our research model. We
have acknowledged the use of this data and the limitations associated with it when drawing
conclusions and conducting analysis in our study.

2.2. Model specification

• Dependent variable
FDI (Y)
FDI capital flows into Vietnam in the period 1996-2021. FDI is defined as capital
flows of foreign investors investing in the host country. According to the World Bank, FDI
includes total equity capital, reinvestment of profits, other long-term capital sources and
short-term capital as in the balance of payments. In the study, FDI is measured by total
implemented capital of licensed Foreign Direct Investment (current US$)
• Independent variable:
Political stability (X1)
Political stability is a particularly important 'weapon' for international investors to
place great trust in Vietnam's link in the global supply chain. It is an important variable in
the macroeconomic balance and favorable business environment in a country. Instability of
it is extremely worrying because of its negative impact on the country's economic
development and growth process by having an unhealthy impact on resources, both material
and human. Foreign investors will hesitate to carry out any project when investing in a
country with internal conflicts, power struggles, and frequent riots. According to a French
economic doctor, Philippe Delalande, political stability is one of the indispensable factors
that helps Vietnam persevere in its economic development policy. Stable politics gives
Vietnam peace and prosperity. In the research paper, the authors will use PS & Absence of
 55

Violence/Terrorism data to represent political stability and expect a positive relationship

with foreign investment flows.
H1: Political stability has a positive and significant impact on FDI inflow
• Control variables:
Trade Openness (X2)
In addition, trade openness has a significant role in drawing in international
investment. This is valid for multinational companies who frequently broaden their markets
to include nearby markets. One of the conventional variables used to explain FDI
movements is a location's openness, as a nation's foreign economic relations are both a
result of its capital mobilization strategy and a means of attracting investors. Dunning
(2002) asserts that FDI can seek more successfully in an environment where commerce is
more open. Due to the higher defects associated with trade protection, multinational
corporations that invest with an eye on exporting typically have their headquarters in more
open economies. This is because lower costs are generally involved. Exports are related to
higher transaction fees. Since 1986, Vietnam's import-to-GDP ratio has grown with time,
despite the country's ongoing trade deficit. In comparison to the 1986–1990 era, the share
of exports in GDP doubled between 1996 and 2000. It was estimated to have contributed
more than 40% of Vietnam's GDP between 2001 and 2005 (GSC, 2005). It is anticipated
that this variable will have the dual effects of lessening competitiveness between domestic
and international corporate nations and luring foreign capital to the host region. The study's
authors used the ratio of export plus import over GDP to represent Trade Openness and
anticipated that trade openness and FDI will be positively correlated.
H2: Trade Openness has a positive and significant impact on FDI inflows
Market size (X3)
Market-seeking is the main motivation of investors when making foreign
investments. Because FDI is always an investment with a long-term commitment, a country
with a promising business environment, specifically GDP per capita representing a high,
stable market size, will motivate MNCs to invest. This fits perfectly with the L-advantage
in Dunning's eclectic theory. Since market size directly impacts predicted investment
revenue, it beneficially impacts FDI inflows (Hoang, (2007)). Vietnam is a country in the
 56

region with the fastest-growing economy in ASEAN. According to data from the United
Nations and the Census, Vietnam's population in 2021 is 98.3 million people, ranking 15th
in the world and third in Southeast Asia. This proves that Vietnam is a potential market,
moreover, Vietnam's GDP per capita in 2021 is 3,694.02 USD/person according to the latest
data from the World Bank, GDP growth rate over the years is impressive. Therefore, GDP
per capita is used in the paper to represent market size and is expected to have a positive
relationship with FDI inflows.
H3: Market size has a positive and significant impact on FDI inflows
Inflation (X4)
Theoretically and practically, the economy cannot guarantee high and stable growth
if the inflation index surpasses the real development requirements. This can lead to internal
economic crises like the financial crisis of 2008, high inflation, and economic recession.
This will have an impact on FDI capital flows' attractiveness. The impact mechanism results
in a slowdown in FDI capital flows. Foreign investors will need to find alternative
opportunities or relocate to other markets if the inflation index remains high and persists.
Vietnam's economy has seen double-digit inflation for a number of years. For example, it
was roughly 23.12% in 2008 and 13.46% in 2011. Nevertheless, the average is only roughly
6% by 2021 (GSO, 2021). Vietnam's economy is thought to be reasonably safe for foreign
investors if one merely takes into account the correlation between the inflation index and
FDI. The average rate of inflation is comparatively steady, and total implemented capital
as well as total registered capital show increases in foreign direct investment capital flows
into Vietnam. Based on our analysis, we anticipate that there will be a positive correlation
between FDI and the inflation (consumer prices (annual %))
H4: Inflation has a negative and significant impact on FDI inflow
Infrastructure (X5)
Electricity, roads, ports, airports, railroads, and telecommunications systems—such
as phone lines and the internet—as well as institutional development—such as accounting
and legal services—are just a few of the numerous elements that make up infrastructure.
An effective infrastructure plays a key role in lowering indirect production and business
costs for foreign investors and enabling them to implement investment activities that, in
 57

particular, promote commerce with certain regions easier and prevent the production
process from pausing, which boosts investment efficiency and encourages capital inflows
from foreign direct investment. Companies typically gravitate toward nations with greater
investment in infrastructure. This implies that higher levels of FDI are anticipated in nations
with more established infrastructure. In the context of today's information explosion, when
data regarding all market swings worldwide is regularly transmitted, the communication
infrastructure is crucial. Communication breakdowns result in lost chances to draw in
funding. The article measures Vietnam's infrastructure metrics using electricity Access to
electricity (% of population) data. In this analysis, the authors anticipated that FDI and
infrastructure will have a positive relationship.
H5: Infrastructure has a positive and significant impact on FDI inflow
Natural Resources (X6)
Natural resources are primary sources of material wealth, formed and existing in
nature that humans can use to meet life's needs. Natural resources are an important element
of the production process, especially in the development of processing industries,
exploitation and supply of raw materials, fuel for other economic sectors. Vietnam's natural
resources are rich and have much potential to exploit and use such as climate resources,
land resources, mineral resources, water resources, forest resources, marine resources and
biodiversity... Vietnam also has the potential to develop available renewable energy
sources including small-scale hydropower, wind energy, biomass energy, biogas energy,
biofuel, energy from household waste sources, solar energy, and geothermal energy. The
current situation of natural resources in Vietnam is going in a negative direction, and is
currently shrinking in both quantity and quality. With these advantages, the authors use
natural resource rent/GDP data to estimate the correlation between FDI flows in Vietnam
and available natural resources. We expect this relationship to exist.
H6: Natural Resources has a significant impact on FDI inflows
Corruption (X7)
Corruption is an investment "tax" for foreign investors. Higher corruption means
that part of the profits from foreign investors' investments may be enjoyed by officials of
the host country, which reflects the risk of their investment projects. Furthermore, a country
 58

with a high level of corruption demonstrates the weakness of the country's legal system
and government intervention in economic activities through regulations and policies
imposed on the investment, directly limiting the right to choose the optimal business plan.
Corruption diverts investment capital sources, making foreign donors more hesitant when
wanting to pour capital, reducing the flow of foreign investment capital into the host
country. In the CPI ranking of 180 countries according to Transparency International,
Vietnam ranks 77th (2022). This proves that corruption in Vietnam is still a major problem,
and the impact of corruption on the ability to attract foreign investment is a negative impact
that needs to be eliminated. The authors use data control of corruption to represent the
variable corruption and expectations about social relations inversely with FDI flows.
H7: Corruption has a negative and significant impact on FDI inflow
• Dummy variables (X8)
Covid 19
COVID-19 is an infectious acute respiratory disease caused by the coronavirus
SARS-CoV-2 and its variants. On March 11, 2020, the World Health Organization (WHO)
confirmed that Covid-19 infection in the world had become a global pandemic. The
COVID-19 pandemic has had a significant impact on the production and business activities
of many businesses in Vietnam, especially businesses in the southern region. Policies to
control the Covid-19 epidemic had made it difficult for foreign investors to travel to
Vietnam to explore investment opportunities as well as carry out procedures for registering
new investment projects, which affected the number of newly granted investment projects.
The authors decided to use Covid 19 as a dummy variable and expected a negative
correlation with FDI
H8: Covid 19 have a negative and significant impact on FDI inflows

2.3. Estimation method

To look into what influences FDI into Vietnam, the authors build a real-world model
based on early studies mentioned in the literature review and the Robust Least Squares
(RLS framework. The regression model is:
 59

Where
: log of total implemented capital of licensed Foreign Direct Investment (current
US$)
: the intercept coefficient of the model (the value of FDI when all both other variable
values are 0)
: Political Stability and Absence of Violence/Terrorism: Estimate
: The ratio of export plus import over GDP
: Log of GDP per ca pita (current US$)
: Inflation, consumer prices (annual %)
: Access to electricity (% of population)
: Total natural resources rents (% of GDP)
: Control of Corruption: Estimate
COVID: Dummy variable representing the COVID-19 pandemic event (COVID = 1: after
COVID-19;
COVID = 0: before COVID-19).
Random Error Term
The empirical analysis is presented using an econometric model. To research the
data, the authors used regression for all estimates. Table 1 contains a list of the pertinent
variables' descriptions and data sources.

Definition/Interpretation
Classification Variable Source
with expectations

Logarithm of total
Foreign Direct
Dependent implemented capital
Investment GSO
variable of licensed Foreign Direct
(FDI)
Investment
Independent Political Stability A measure of the
World Bank
variable (PS) level of political stability
 60

and the absence of violence

or terrorism within a
specific country or region
(+)
The estimate
provides a score indicating
Control Corruption the level of control over
World Bank
variable (CC) corruption, ranging from
approximately -2.5 to 2.5.
(+)
Logarithm of gross
Market size
domestic product divided by World Bank
(MS)
midyear population (+)
The annual
Inflation
percentage change in World Bank
(INF)
consumer prices (-)
Trade Openness The ratio of exports
World Bank
(TO) plus imports over GDP (+)
National resource
Total natural
rents World Bank
resources rents over GDP
(RES)
The percentage of
Infrastructure
population with access to World Bank
(ELEC)
electricity (+)
COVID pandemic
Dummy Pandemic
event (no COVID=0; Calculation
variable (COVID)
COVID=1) (-)
 61

Table 3: Summarizes the characteristics of the variables in the research model;

and expectations about the impact of the independent variable and control variables on
the dependent variable

The results of the experimental analysis were presented in the next section. We
performed analysis and discussed the results achieved. Then, the paper provided empirical
research results. This result was not only linked to the improvement of Eclectic Theory
mentioned in the case of Vietnam but also showed whether this result is equivalent or not
equivalent to the decision of other researchers in the previous section.

3. Results and Discussion

3.1 Estimation results

A. Level Form

FDI CC ELEC MS TO PS INF RES

PP test -21,366 -19,966 -31,403 -11,958 -16,316 -44,677 -28,955 -17,026

Prob. (0.5019) (0.5749) (0.1191) (0.8895) (0.7508) ( 0.0082) (0.1804) (0.7198)

ADF test -24,328 -21,633 -27,995 -0.4661 -16,316 -57,575 -29,449 -18,305

Prob. (0.3536) (0.4881) (0.2102) (0.9784) (0.7508) (0.0005) (0.1664) (0.6594)

B. First-difference Form

FDI CC ELEC MS TO PS INF RES

PP test -36,470 -68,869 -58,813 -33,050 -35,323 -78,220 -161,631 -72,429

Prob. (0.0467) (0.0000) (0.0004) (0.0894) (0.0584) (0.0000) (0.0000) (0.0000)

ADF test -36,296 -68,869 -51,945 -33,064 -35,955 -50,492 -60,822 -56,563

Prob. (0.0483) (0.0000) (0.0023) (0.0892) (0.0516) (0.0034) (0.0003) (0.0006)

Table 4: Unit root tests

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Variable FDI2 CC CS ELEC MS PS TO RES

FDI 1.0000 0.3327 0.1223 0.7970 0.9698 -0.7422 0.7857 -0.4962
CC 0.3327 1.0000 - 0.4916 0.0435 0.3001 -0.4512 0.1346 -0.8017
INF 0.1223 -0.4916 1.0000 0.1135 0.0683 0.0276 0.0173 0.5652
ELEC 0.7970 0.0435 0.1135 1.0000 0.8930 -0.6749 0.7725 -0.2319
MS 0.9698 0.3001 0.0683 0.8930 1.0000 -0.7607 0.7937 -0.4778
PS -0.7422 -0.4512 0.0276 -0.6749 -0.7607 1.0000 -0.7386 0.4733
TO 0.7857 0.1346 0.0173 0.7725 0.7937 -0.7386 1.0000 -0.2588
RES -0.4962 -0.8017 0.5652 -0.2319 -0.4778 0.4733 -0.2588 1.0000
Table 5: Correlation of Variables in the study

Dependent Variable: FDI2

Method: Robust Least Squares
Date: 03/31/24 Time: 14:44
Sample 1996 2021
Included observations: 26 after
adjustments
Method: M- estimation

Coefficien
Variable Std. Error z-Statistic Prob.
t
C 6254151 2342889 2669418 0.0076

CC 0.485561 0.241497 2010628 0.0444

FDI2(-1) 0.405463 0.179767 2255487 0.0241

 63

ELEC -3299746 1335031 -2471663 0.0134

MS 4241426 1408293 3011750 0.0026

TO 0.004978 0.001083 4597822 0.0000

PS 0.280308 0.136487 2053740 0.0400

CS 0.006946 0.003888 1786569 0.0740

COVID -0.150136 0.065665 -2286405 0.0222

RES 0.002196 0.008885 0.247176 0.8048

Adjusted R-
R-squared 0.751612 0.602579
squared
Adjust Rw-
Rw-squared 0.991929 0.991929
squared
Akaike info criterion 5613253 Schwarz criterion 6649313
Deviance 0.032585 Scale 0.030820
Prob(Rn-
Rn-squared statistic 9342948 squared 0.000000
stat.)
Table 6: The regression results by Robust method

3.2 Discussion

As shown in Table 6, the coefficient of Control of Corruption is positive and

statistically significant at 4.44%. In other words, as the level of corruption in Vietnam
increases, it tends to discourage FDI inflows. This result is consistent with the findings of
Dut and Nga's (2015) study using the Hausman test. A higher degree of corruption control
implies a reduced prevalence of corrupt practices within the business environment,
consequently enhancing the potential for attracting FDI. This finding aligns with the
conceptual notion of "sand the wheel", which metaphorically signifies the removal of
corruption-related obstacles, thereby facilitating the smooth and efficient functioning of the
economic machinery. By conceptualizing "sand the wheel" as the eradication of corruption
 64

barriers and the establishment of a transparent business environment, a critical determinant

for FDI attraction emerges. The amelioration of the business climate through anti-
corruption measures engenders a competitive advantage and fosters the confidence of
foreign investors, thereby stimulating economic progress and fostering FDI inflows into
Vietnam.

Similarly, FDI also has a positive relationship with past FDI inflows. The coefficient
of Access to electricity produces a result contrary to expectations. Although it is statistically
significant at 1%, it has a negative sign. An explanation for the negative coefficient between
Access to electricity and FDI attraction in Vietnam may be related to Vietnam's
predominantly non-renewable energy sources for electricity, while the global trend is
shifting towards renewable energy. In practice, foreign investors are increasingly interested
in investing in clean and sustainable industries, where renewable energy plays a crucial
role. The use of electricity from non-renewable energy sources in production and business
can cause environmental issues and generate a large carbon footprint. This may lead foreign
investors to perceive that Vietnam does not meet international environmental standards and
requirements for renewable and sustainable energy use. Prior to 2005, electricity production
from renewable sources was almost 0%, and by 2015, it reached 12% (% total) according
to the World Bank (2015). Therefore, the heavy reliance on electricity from non-renewable
energy sources may impose limitations and hinder the attraction of FDI to Vietnam. Foreign
investors may seek other countries with more favorable policies and business environments
in terms of renewable energy use and participation in sustainable projects.

In the study, it can be observed that market size has a positive and significant impact
on FDI with a coefficient of 0.2%, in contrast with the finding reported by Nguyen (2007).
This reflects the importance of a large market for effectively utilizing resources and
exploiting the scale of the economy, thereby positively influencing FDI inflows. This is in
complete agreement with the L-advantage theory in Dunning's OLI framework. This result
is because foreign investors, especially those in industries relying on economies of scale,
such as manufacturing and retail, tend to choose countries with large market sizes to access
a large customer base. With a large population and increasing GDP per capita over the
 65

years, Vietnam is considered a potential consumer market in the expansion and

development strategies of multinational corporations. The market tends to expand rapidly
in scale, people's living standards are increasingly improving, leading to an increase in
demand for new goods and services, creating favorable conditions for conducting selling
new products in the Vietnamese market, increasing profits for foreign investors.

Furthermore, the empirical results also show that the degree of trade openness has a
positive and statistically significant impact on attracting FDI at an approximate level of 0%.
This study once again confirms that economic openness contributes to a positive force in
attracting FDI to a country. Using the Johansen cointegration test, Granger causality test,
Le (2014) also yielded the same result: "The relationship between FDI and trade openness
in Vietnam is positive (proportional) in both the short and long run". Large trade openness
would be a better option to attract more FDI inflows of efficiency-seeking multinational
corporations through reduced taxes and import duties, directly allowing foreign investors
to take advantage of low production costs, thereby enabling them to offer competitive prices
in both domestic and international markets. Furthermore, Vietnam is aiming to find
efficiency in promoting trade openness. Trade openness is combined with government
policy actions aimed at implementing investment-friendly policies, reducing transaction
costs and eliminating quantitative restrictions on imports. This creates favorable conditions
and encourages foreign MNCs to invest in Vietnam.

The regression results show that the impact of inflation on FDI flows is positive and
statistically significant at 7%. This is contrary to the study of Vo (2018) but has the same
results as Nguyen (2020) and Nguyen et al. (2022). To explain this, we believe that FDI
invested in Southeast Asia is a type of profit-seeking FDI. These differences in results may
occur because the impact of inflation on FDI varies depending on the nature of the host
economy and the current level of inflation. High inflation will go along with high economic
growth and high rates of return. When there is inflation, many debts may be
reduced/devalued, even lower than the original loan value. Not to mention in nominal
terms, if inflation increases, the nominal budget will also increase. A rise in inflation can
increase savings and investment, part of this capital can be borrowed by FDI enterprises to
 66

serve the process of expanding investment and production, so in this study found that an
increase in inflation promotes the attraction of FDI inflows. Nguyen (2020) believes that
inflation has a good or bad effect depending on the rate it represents. Moderate inflation
can benefit foreign investors by helping to boost domestic growth, resulting in lower debt
to suppliers and increased export competition. Inflation rate exceeding the economy's
optimal threshold will reduce FDI capital flowing into any country. Thus, the level of
inflation in the period 1996-2021 is still suitable for a developed country like Vietnam.
Contrary to expectations, research results show that natural resources in Vietnam do
not correlate with attracting FDI investment. This agrees with the study of Asongu et al.
(2018) but is contrary to Dunning's (1977, 1988, 1993) view on the type of resource-seeking
FDI. We believe that most FDI flows into Vietnam are market-seeking FDI. Furthermore,
natural resources in Vietnam are at an alarming level due to the ineffective and
unsustainable use of resources for economic development in the previous period. Because
natural resources have been overexploited and overused, causing some types of resources
to be seriously depleted, the Vietnamese government has had policies to redirect foreign
investment into more developed and potential industries, so FDI investment attracting in
our country does not depend on the abundance of resources, but instead depends on current
policies and market orientation.
Consistent with initial expectations, COVID-19 variable has a negative and
significant impact on the amount of FDI participating in Vietnam, agreeing with the
research results of Nguyen et al. (2020). During the 2020-2021 period, the epidemic
situation was tense with unpredictable and dangerous developments globally, and the
Vietnamese government took actions to close the economy. To ensure health, the entire
population must practice social distancing and the economy is almost blocked. Public health
solutions require the closure of non-essential businesses and durable goods manufacturing.
Covid also dealt a strong blow to businesses that depend on imports and exports as
blockades and economic stagnation reduced domestic and foreign demand, disrupted input
supplies, and reduced liquidity. Reduced credit availability affects access to finance,
funding opportunities are narrowed, moreover, Covid 19 causes uncertainty that reduces
investment. Besides the supply chain, the movement of investors is almost completely
 67

restricted, capital is affected globally, which has a negative impact, preventing the intention
to carry out a new project or expand a business of foreign investors.
The results show that the coefficient of the Political stability variable has a positive
sign and is statistically significant at 4%, indicating that political stability has a positive
correlation with FDI flows. This supports the OLI theory of Dunning (1993), who believes
that political stability is a factor determining investment location. Compared to neighboring
countries and countries in the ASEAN organization, Vietnam's politics is considered
relatively stable. After more than 40 years of peace and development, Vietnam has become
one of the trusted investment destinations of many countries due to its political stability and
consistency. With political stability, Vietnam's position and power is increasing in the
international arena, there are opportunities to attract high-quality investment. Furthermore,
political stability is very important for the expansion of the country's domestic and foreign
investments in its future direction (Shahzad and Al-Swidi, 2013). Investment in general and
FDI in particular is a forward-looking action based on the expectation of achieving enduring
profits. Investing in a country with unstable politics also means that investors have to face
risks stemming from this thing. Civil war, political conflicts with other countries will reduce
profits in operations in the host country because sales or exports decline, production is at
risk of interruption, and facilities are damaged or destroyed. Another risk from political
instability stems from the fact that it adversely affects the domestic currency, reducing the
value of investment assets as well as the profits generated (Brada et al.,2006). Therefore, a
country with a fairly stable political system like Vietnam will have a positive impact on the
investment willingness of foreign investors.

IV. IMPLICATIONS AND RECOMMENDATIONS

Based on the results of analyzing the effects of the above factors on attracting foreign
investment, the authors propose a number of recommendations for policymakers to
consider and combine with the real economic situation of Vietnam today in order to build
appropriate and effective strategies for attracting foreign investment capital in the current
context when Vietnam has just overcome the COVID-19 pandemic and has gradually
stabilized since then contributing to economic and developing the country in the future.
 68

First, because the legal system and enforcement process in Vietnam are not very
strict, it causes hidden corners in the investment process of foreign investors, which is
largely detrimental to our country,so what needs to be done is to complete and supplement
the policy and legal system. Since Doi Moi, Vietnam has gone through many times
promulgating and amending the Investment Law (previously including the Law on
Domestic Investment Promotion and the Law on Foreign Investment). On June 17, 2020,
at the 9th session of the XIV National Assembly, the Investment Law 2020 took effect from
January 1, 2021, and replaced the Investment Law 2014. As analyzed in the literature
review, the latest investment laws and theories have been improved, completed, and issued
many incentives to attract foreign investment capital, but certain legal shortcomings still
exist, we should continue to modify them to minimize inadequacies.
- Build a strict legal system, tighten the prevention of corruption, bribery to avoid
taking advantage of investment incentives to ensure that FDI enterprises do not have
"stains" in their business operations, and have no problems with tax evasion, transfer
pricing, or trade fraud.
- The current investment law is not consistent with a number of other related laws
such as the Land Law, Housing Law,... this is an important point that needs to be improved
for stability, consistency and synchronization by the authorities. Legal regulations need to
be consistent to avoid misunderstandings that affect business plans and general trust of
businesses.
Second, it is necessary to maintain political stability at home and abroad. Faced with
the current volatile world situation, Vietnam needs to choose appropriate plans and
implement "unchangeable adaptability" so as not to be dominated in international relations
and promote relations with many stakeholders, especially with major countries, on issues
of strategic interest. The year 2024 will be in a state of instability with escalating
geopolitical tensions, causing upheaval globally, typically the trade tensions between the
world's two largest economies, the US and China, which will have a significant impact on
Vietnam. Even in the optimistic case that this tension subsides, an immediate end is
completely impossible. In the short term, Vietnam can benefit from the investment shift of
the US and China, the opportunity for Vietnamese goods to enter the US market is huge. In
 69

the opposite direction, due to a very large amount of goods which unable to be exported
due to barriers imposed by the US, China will have to find a way to release this inventory
to countries where it has a competitive advantage to consume goods. Therefore, it will cause
devaluation and market distortion, greatly affecting foreign investment. Therefore, the
urgent issue is that we must have appropriate policies to protect domestic political stability
and security and avoid negative impacts from the external situation affecting the country in
general and attracting foreign investment capital in particular.
Thirdly, the results of the study indicate existing limitations regarding access to
electricity in Vietnam. Developing the renewable energy sector is crucial, not only to attract
investment from businesses pursuing sustainable development but also to have positive
environmental impacts. Based on this, the authors propose several policies:
- The government should promptly improve comprehensive policies on the
construction and upgrading of electricity infrastructure, including transmission and
distribution grids.
- To effectively mobilize resources for the development of renewable energy
sources, the proposed Renewable Energy Law should be quickly enacted. This law can
provide guidance and support for renewable energy activities in Vietnam, creating
favorable conditions for businesses and attracting FDI to this sector.
- The government should incentivize businesses to invest in renewable energy
development, such as wind power, solar energy, LNG, and biomass. These energy sources
have the potential to reduce greenhouse gas emissions. Incentives can be provided through
measures like loan support and tax reductions.
The research indicates that inflation has a negative impact on FDI, with the post-
COVID-19 period leading to an increase in inflation rates. We are concerned that if this
trend continues and inflation exceeds the threshold, it could have negative consequences.
Based on this finding, the study proposes some policy implications related to reducing
inflation in Vietnam post-pandemic:
- Central banks can maintain flexible monetary policies and reasonably adjust
interest rates to control inflation and stabilize prices. This helps maintain stability in the
financial system and support economic activities.
 70

- It is necessary to regularly monitor and manage the prices of input materials for
production while strengthening supply chain management. In production, due to
dependence on imported input sources, it is encouraged to reduce reliance on imports and
be more proactive in securing input materials to mitigate inflation risks.
- The government should enhance fiscal management, ensure national financial
security, and control inflation. Additionally, efforts should be made to restructure and
enhance internal capacity, self-reliance, and resilience of the economy
Research has also shown a significant and positive relationship between market size,
trade openness, and FDI attractiveness. In addition to implementing policies supporting
tariff and trade facilitation, globalization has led to increasingly interconnected and open
markets, creating new opportunities for countries and businesses. Therefore, we propose
several policies that Vietnam should implement:
- Enhance economic institutions: Continue building and improving the legal and
policy framework to fully implement and align with international economic integration
obligations and commitments, especially with new-generation FTAs according to the
outlined roadmap.
- Comprehensive integration in cultural, social, scientific, and defense fields:
Proactively participate in the construction and shaping of regional and global economic-
trade structures, particularly in emerging areas of cooperation such as digital
transformation, green growth, inclusive and sustainable development. Coordinate closely
with ASEAN, ASEM, APEC members on policy cooperation, initiatives, and collaboration
directions in the post-COVID-19 period. Actively engage in these forums to ensure
continuous and effective cooperation.
- Strengthen forecasting, analysis, evaluation, and timely understanding of the
situation to formulate swift, decisive, and appropriate policies and actions. Harmonize
international integration with domestic innovation; maximize and combine domestic and
foreign resources effectively.
Moreover, in general, most FDI projects in Vietnam focus on areas that are less
environmentally friendly, have high levels of emissions, low added value, and lack
fundamental industries. Therefore, attracting green FDI capital is an important solution,
 71

helping Vietnam maintain competitiveness and sustainable development, contributing to

the transition from a brown economy to a green economy. Here are some important
measures:
- Invest in sustainable green infrastructure such as green buildings, green public
transportation, and biological waste treatment systems, to create favorable conditions for
the development of green FDI.
- Encourage and support R&D activities in the fields of green technology, clean
energy and production methods that have little impact on the environment through
preferential policies and financial support.
- Develop programs to support SMEs in a green and sustainable direction by
providing consulting, training and finance, helping them improve their competitiveness and
international cooperation in the green field.
- Build localities, industrial parks, and economic zones that are prepared in terms of
infrastructure, human resources, energy,... preparing input factors to meet the requirements
of foreign investors in green FDI projects
In addition, reality shows that FDI in Vietnam is unevenly distributed across each
region and each industry, concentrated only in socio-economically developed regions and
in certain industries, which gives rise to the state of uneven development between regions,
over time, has consequences for the country's development process. To improve this,
- Complete and supplement the previously issued legal framework to encourage FDI
to create more favorable conditions for investment in many new industries and areas,
including mountainous and undeveloped areas.
- Expand tax incentives and financial support for investment projects in less-
interested areas, including corporate income tax reduction, land rent exemption or
reduction, and capital support loan at preferential interest rates.
- Increase investment in transport infrastructure, communications and support
services in target areas. Developing infrastructure will reduce logistics costs for businesses
and increase the attractiveness of these areas for FDI.
- Focus on exploiting the strengths of each region, then invest in developing
resources depending on those strengths to attract foreign investors' willingness to invest.
 72

Vietnam currently does not meet the requirements of infrastructure, technological

resources and production techniques for foreign development projects. Compared to other
countries in the region, Vietnam still has low level and dilapidated infrastructure. Therefore,
our country needs to invest in infrastructure to attract investors and have reasonable
policies, regulations, and reciprocal negotiations. Here are some measures to fix this:
- The Government needs to continue to promote investment in transport, electricity,
water and telecommunications infrastructure, improve the quality of existing infrastructure,
and ensure safety in effective use.
- Strengthening public-private partnership (PPP): The new PPP Law was issued to
attract private investment and reduce the burden on the public budget and to promote the
policy of socializing investment in PPP projects. Support and regulate private investment
to increase the scale of infrastructure upgrades. The move is aimed at attracting more
private investment to reduce the burden on the country's public debt and fiscal policy.
- The medium and large development of supporting industries will help Vietnam's
industry develop sustainably, while also contributing to attracting high-quality FDI in the
industrial sector. Vietnam should review, amend, supplement and complete legal
documents on supporting industry development, build a policy framework strong enough
to promote the development of supporting industries, and create a basic foundation for
industry. towards modernity and sustainability.
Furthermore, when welcoming investment, technology transfer plays an important
role in improving a country's production capacity and technological innovation. However,
it is necessary to be cautious and choose carefully to avoid receiving outdated technology
or not suitable for the country's needs. So, Vietnam needs to pay attention to the risks
associated with becoming a transfer point for outdated technologies from investors. China
is a country that accounts for a large proportion of FDI into Vietnam. In 2025, they will
implement the MIC Strategy, which will inevitably require technological replacement and
innovation, creating pressure to push out faulty technologies. When it comes to less
developed countries, especially neighboring countries like Vietnam, then our country will
be at risk of becoming a "technology landfill". Vietnam needs to focus on dealing with these
challenges: Legal reform is the key factor to help Vietnam avoid becoming an "industrial
 73

landfill" for investors. Extreme caution is needed with technology transfer from FDI
enterprises into Vietnam; Increase authority for agencies managing foreign technology
flows to invest in Vietnam right from the input stage (except for investment projects
approved by the Prime Minister) to contribute to limiting import and use outdated
technology and equipment.
Finally, strengthening the connection between foreign and domestic investment,
along with connecting private enterprises to the supply chain of state-owned enterprises,
promoting integration and trade to have more investment options, expanding cooperation
plays an important role in creating opportunities for sustainable development of the
economy. To achieve and maintain the criteria for this measure, we can take the following
actions:
- Build a database of FDI enterprises, suppliers, connection services, and investment
promotion programs to attract foreign investors with priority policies and support
businesses domestically. In particular, we must create conditions and encourage businesses
and corporations to establish centers and expand research and development (R&D)
activities with the participation of domestic engineers.
- The Government and local authorities designing separate industrial zones for FDI
investment also need to consider the connection with industrial clusters for small and
medium enterprises.
- Motivate domestic enterprises to make efforts to improve their capacity in all
aspects, from technology to capacity, so that they can have enough strength to link closely
with FDI enterprises, and at the same time become an important link in the global value
chain
- Develop and implement appropriate priority policies to strengthen connections
between FDI enterprises and domestic supporting enterprises, orient supporting industries
closely to regional and global production networks and value chains.

V. CONCLUSION

1. Concluding remarks
 74

There have been many researchers and many studies confirming that FDI brings
countless attractive profits to the economy and society in developed countries like Vietnam
by filling the gap in capital and high technology supply, job creation,... However, others
believe that this is just the tip of the iceberg. Because developing countries shortage
resources and conditions for development, they give great preferential policies to foreign
investors. If these policies are not correct and misguided in market orientation, the host
country will become dependent and underdeveloped. Moreover, investors will take
advantage of the lack of rigor in the legal system to carry out tax evasion and transfer
pricing to maximize profits. Bui et al (2019) when researching FDI in the Vietnamese
economy, identified that the areas most in need of state investment, the state sector has the
highest spillover impact on income and the lowest on at-risk imports. opportunities were
forgotten and made way for the FDI sector. Consequently, this creates a fragmented
economy that does not take full advantage of its productive potential. When analyzing FDI
in the Vietnamese economy, Bui et al (2019) found that the national sector with the most
income spillover influence and the smallest effect on imports is the one that most requires
state investment., has the risk of being forgotten and giving way to the FDI sector.
Consequently, this creates a fragmented economy that does not take full advantage of its
productive potential.
In the research article, the authors focus on the benefits that FDI brought to Vietnam
in the period 1996-2021 such as Creating jobs, Generating revenue, technology transfer,
Enhanced competitiveness,... We provide information about FDI in general and Vietnam’s
FDI in particular. The authors focus on the process of FDI penetrating Vietnam, its impacts
on the progress of economic development and transition, and the policies Vietnam has
introduced to attract FDI. The study uses an econometric model to build a model to test the
factors affecting FDI attraction into Vietnam, including market size, trade openness, natural
resources, corruption, and political stability, infrastructure, Covid-19, inflation. The role of
the research is to complement the Eclectic Theory of John Dunning, focusing on the L
advantage in the OLI model. The research results show what aspects investors care about
when deciding to invest in Vietnam. We also use the types of FDI that Dunning proposed,
along with the results obtained, to explain the correlations between selected variables and
 75

current FDI flows. From there, we propose policies that the authors consider reasonable
and practical for the current Vietnamese context. Research on factors that promote FDI
needs to be conducted regularly because it still plays an important role in the economic
development of developing countries like Vietnam. Furthermore, the degree of influence
of factors changes over time and a proper understanding of their impact is closely related
to the planning of appropriate policies.

2. Limitations and recommendations for future studies

Although the research results have proven the hypotheses set out and contributed
theoretically and practically to the topic, there are still certain limitations in the process of
implementation, analysis, and evaluation of research results. Therefore, the authors propose
some further directions so that other studies can continue to deepen and expand the research
scope of this topic in the future.
First, the authors collected data over a period of time from 1996 to 2021 and Vietnam
still does not have complete data on the selected variables during this period, leading to the
conclusion of the relationship between the variables and FDI are still not really objective.
In order to have more certain results, future research should seek solutions if variables are
still selected in the study so that this relationship can be accurately assessed.
Second, the study has not been able to build all the determinants that are believed to
affect FDI in the model, so it cannot be affirmed that the test correctly and fully explains
FDI capital flows. In fact, there are many factors that affect it, especially factors related to
human resources such as labor's educational level, vocationally trained labor, high quality
labor, and labor costs, unemployment. Due to limited data during the study period, we were
unable to study the above factors. In addition, taxes, weak legal systems, government
spending, R&D intensity, R&D Expense, etc. are also reasons that dominate FDI flows.
Therefore, future research can consider analyzing these factors in the model to add more
depth to the study.
Third, in our research, we have not shown a correlation between natural resources
and FDI flows into Vietnam. This is in contrast to some previous studies around the world.
We have not found a study in Vietnam testing the correlation between these two aspects.
 76

This can also be a new research direction for the next groups when participating in
researching the factors that govern FDI.
Furthermore, this study collects results regardless of region while the amount of FDI
is distributed differently with different levels by region in Vietnam. Therefore, future
studies can conduct tests in different geographical areas in Vietnam to have a more
comprehensive perspective on the impact of factors in Vietnam on investment decisions of
investors or businesses.
Finally, we would like to conclude the paper with a final recommendation. Factors
affect FDI to different degrees and it would be interesting to test the reciprocal, not
unidirectional, correlation between them and FDI flows. The authors believe that
understanding this can help policymakers plan more appropriate and accurate policies in
the future.

VI. APPENDIX

Laws, Decrees Related subjects Direct regulations on FDI

• Establishing economic
Enterprise Law Enterprise; Agencies,
organizations with foreign investment.
2020 Enterprise organizations and
• Management organization and
Law No. individuals involved in the
operations of enterprises, including all
59/2020/QH14 establishment,
types of foreign-invested enterprises.
management,
• Scope of operations of foreign-
reorganization, dissolution
invested enterprises
and related activities of
enterprises
 77

• Rights and obligations of

Commercial Law Traders with commercial
representative offices, branches, and
2005 activities, other
foreign-invested commercial
organizations and
enterprises.
individuals with
• Adding two forms of foreign-
commercial-related
invested commercial enterprises
activities, including
including joint venture enterprises and
foreign traders in Vietnam
enterprises with 100% foreign capital.

Decree – Decree The Government Regulations on business investment

No. 31/2021/ND- conditions; industries, occupations,
CP and market access conditions for
foreign investors; ensuring business
investment; investment incentives and
support; Investment procedures;
investment activities abroad;
investment Promotion; State
management of business investment
activities in Vietnam and investment
abroad.

Decree No. Industrial parks and Specifically regulations on planning,

82/2018/ND-CP economic zones establishment, operations, policies and
management of housing water for
industrial parks and economic zones.
 78

Decree The order and procedures For appraisal of important national

29/2021/ND-CP projects and investment supervision
and assessment.

Land Law Land Land subjects Specifically on use rights land use of
Law No. foreign-invested economic
45/2013/QH13 organizations in the use of land in
industrial parks, industrial clusters,
high-tech zones, land use due to
transfer of real estate projects,
regulations on Land with Specialized
water surface and river land, streams,
canals, streams, etc

Housing Law Ownership (i) Economic organizations

2023 No. with foreign investment capital can
27/2023/QH15 own housing in the housing
construction investment project of that
enterprise in Vietnam, with The
condition is that the organization must
be the investor of the housing
construction project.

·(ii) Economic organizations

with foreign investment capital,
branches, and representative offices of
foreign enterprises can own housing
through purchasing or leasing
 79

commercial housing from investment

project investors housing construction,
if there is a valid investment certificate
at the time of signing the housing
transaction;

·(iii) Economic organizations

with foreign investment capital,
branches, and representative offices of
foreign enterprises can own housing
through purchasing or leasing housing
from foreign organizations and
individuals that have purchased
housing own affordable housing.

VII. ABBREVIATION

ARDL: Autoregressive Distributed Lag

ASEAN: Association of Southeast Asian Nations
BRICS: Brazil, Russia, India, China, and South Africa
CPI: Consumer Price Index
EU: The European Union
EVFTA: EU-Vietnam Free Trade Agreement
FDI: Foreign Direct Investment
FSA: Financial Services Agency
GDP: Gross domestic product
GSO: General Statistics Office of Vietnam
GVC: Global Value Chain
I-advantages: Internalization incentive benefits
 80

IMF: International Monetary Fund

L-advantages: Location-specific benefits
LNG: Liquefied Natural Gas
MIC Strategy: Made in China Strategy
MINT: Mexico, Indonesia, Nigeria, Turkey
MNC: Multinational corporation
MNEs: Multinational enterprises
MOIT: Ministry of Industry and Trade
MOJ: Ministry of Justice
NAV: National Assembly of Vietnam
O-advantages: Ownership-specific benefits
OECD: The Organization for Economic Cooperation and Development
OLI: Ownership location internalization
OLS: Ordinary Least Squares
PCI: Provincial Competitiveness Index
PPP: Public-Private Partnership
R&D: Research and Development
SOE: State-Owned Enterprise
SSA: Vector Error Correction Models
TNCs: Transnational corporations
UNCTAD: The United Nations Conference on Trade and Development
VCEM: Vector Error Correction Models
VEPR: Vietnam Institute for Economic and Policy Research
WTO: World Trade Organization

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