MASTER OF BUSINESS ADMINISTRATION

BUSI 1546 FOUNDATIONS OF SCHOLARSHIP

Assignment one: Topic Review

THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN VIETNAM ANALYSIS IN CONSTRUCTION AND BANKINGFINANCIAL INDUSTRIES

Student name: Student ID: Lecturer: Date of submission:

Tran Long Dr. KOH, Yang Fatt 16th August 2012

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Contents
1. INTRODUCTION ................................................................................................................................... 2 2. THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN VIETNAM ..................................................... 3 2.1. Approach and Research Questions .............................................................................................. 3 2.2. FDI Foreign Direct Investment .................................................................................................. 3 2.3. Economic development ............................................................................................................... 3 2.4. The impact of FDI on economic development ............................................................................. 4 2.4.1. Positive effects ...................................................................................................................... 4 2.4.2. Negative impacts................................................................................................................... 4 2.5. FDI and economic development in Vietnam................................................................................ 5 2.5.1. An overview of FDI in Vietnam ............................................................................................. 5 2.5.2. Positive effects of FDI............................................................................................................ 6 2.5.3. Negative impacts of FDI ........................................................................................................ 8 2.6. Research framework .................................................................................................................... 9 2.7. FDI in construction and banking-financial industries in Vietnam ................................................ 9 2.7.1. FDI in Construction Industry ................................................................................................. 9 2.7.2. FDI in Banking-financial Industry ........................................................................................ 10 2.8. Summary .................................................................................................................................... 12 3. CONCLUSION ..................................................................................................................................... 13 REFERENCES .......................................................................................................................................... 14

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1. INTRODUCTION
In the dynamic context of global economy, national investment is not enough to develop a countrys economy and international business has gradually played a more important role in economic development as well as maintaining competitive advantages of nations. Among many forms of international business, Foreign Direct Investment (FDI) has been regarded as the most effective way for a country to integrate into the global economy (Dinh, 2009). Although FDI originally mostly concentrated on developed countries, there has been an increasing amount of FDI flowing to developing and less-developed ones in recent years (UNCTAD, 2008). Accordingly, many countries, those who have implemented economic openness such as Thailand, Indonesia, especially Vietnam after WTO participation, have received a number of FDI inflows to develop the national economies. However, beside the positive contributions of FDI, many countries has been aware of its supposedly negative effects and raised a question about whether FDI is really necessary for national economic development (Weigel et al. 1997). The aims of this research are reviewing existing knowledge about FDI, its impacts on economic development, and then examining the case of FDI in Vietnam with supplement analysis in construction and banking-financial industries. From that, the research will contribute a clearer overview of FDI in Vietnam and the role of FDI in Vietnams economic development.

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2. THE IMPACT OF FDI ON ECONOMIC DEVELOPMENT IN VIETNAM

2.1. Approach and Research Questions To achieve the research purposes, a deductive approach is used to start with literature review (Moore et al. 2010). From the theory of FDI, economic development and the relationship between them, the situations of FDI in Vietnam will be investigated to answers 3 following research questions. What are positive and negative impacts of FDI on economic development in Vietnam? How does FDI affect Vietnams economic development in construction and banking - financial industries? Is Foreign Direct Investment necessary for economic development in Vietnam? 2.2. FDI Foreign Direct Investment There are various ways to define FDI, but most economists have been using the definitions, concepts and recommendations of IMF (International Monetary Fund) and OECD (Organisation for Economic Co-operation and Development). Based on the definitions of IMF and OECD, FDI generally indicates the purpose of achieving a long-term interest by an enterprise of parent country (direct investor) in another enterprise of host country (Foreign Invested Enterprise - FIE). The long-term interest represented a substantial impact on FIE management (OECD, 2008). That relationship can require the ownership of 10% or more of shares or voting power in an enterprise by non-resident investors (IMF, 2006). Although there are still some arguments about the proportion of the ownership, the percentage of at least 10% is recommended to ensure statistical consistency across countries. 2.3. Economic development The term economic development is one of the most popular words used in business journals, forums as well as public media. However, it seems to be impossible to give the exact and clear definition of economic development. From the most reliable business organisations, in terms of scientific study and popularity, the concept of economic development generally refers to a process of development in qualitative and quantitative changes of multiple areas varied from agriculture, industry, services

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to human capital, environmental sustainability, critical infrastructure and other initiatives. In other words, economic development is always involved in the expansion of human rights and their corresponding capabilities, literacy, education, and other socio-economic indicators (Todaro and Smith, 2002). 2.4. The impact of FDI on economic development
2.4.1. Positive effects

FDI has contributed positive effects as well as enhanced tangible and intangible resources of the host country. Firstly, FDI improves economic growth by increasing capital account surplus balancing payments and boosting domestic investment. FDI is a stable type of external financing flow compared to others (Sun, 2002). Secondly, due to the fact that the economic development of a country depends on its linkages with others in a global economy, linkages with FIEs will bring market access to increase export earnings and minimize the trade deficit (Kehal, 2004). Thirdly, FDI have generated employment in the host country through directly recruiting local workforce for FIEs or indirectly creating employment in their related institutions (Wei, 2010). Fourthly, FDI helps to transfer technology advances in R&D activities and also plays a vital part in human capital development through employee training as well as transferring organizational and managerial practices (Kehal, 2004).
2.4.2. Negative impacts

First of all, the adverse impact of FDI is balance of payment effect. If the repatriation of profits exceed inflows of capital, the capital account will be negatively affected (Wei, 2010). Next, FIEs can use transfer pricing to reduce declared profits which leads to loss of tax revenue (Weigel et al. 1997). Then, FIEs can gradually dominate their industry through direct competition in host country which will crowd out of local products, impair the development of domestic firms and sometimes abuse the market power (Sun, 2002). Many nations are aware of the loss of economic sovereignty through dependence on the actions of foreign investors.

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Last but not least, FDI projects may have negative impacts on environment (Kehal, 2004). FIEs can avoid building the pollution monitoring systems to save their capital which will pollute the surrounding environment; this issue is more serious especially when local authorities just focus on attracting FDI without considering the effects on environment of FDI projects. 2.5. FDI and economic development in Vietnam
2.5.1. An overview of FDI in Vietnam

Before the economic reforms in 1986, there are really little FDI flows to Vietnam (GSO, 2008). The law on foreign investment was firstly issues in 1987 to encourage foreign enterprises and organisations to invest in Vietnam (Yusuf, 2012). After that, Vietnam has become one of the most attractive destinations for FDI in ASEAN. Up to the end of 2010, there have been nearly 13,670 FDI projects that have been licensed in Vietnam with a total investment of US$198 billion (VOV, 2011). The distribution of FDI capital in different sectors of Vietnam is relatively rational which mainly focus on manufacturing, real estate, construction, accommodation and food service (Exhibit 1). FDI is overwhelmingly concentrated in industry and service sectors (Konishi, 2008). Among 23 subsectors, 11 are highly export-oriented industries which have accounted for 40% of total investment and 89% of total employees (Tran, 2006). The province receiving the largest amount of FDI are Hochiminh, Ba Ria Vung Tau, Hanoi, Dong Nai, Binh Duong which have total registered capital at from US$14 billion (Binh Duong) to more than US$30 million (Hochiminh city) so far (GSO, 2011). In terms of FDI parent countries, the main counterparts are Taiwan, Korea, Singapore, Japan, Malaysia, British Virgin Islands and the US who have registered FDI capital from US$13 billion (the US) to nearly US$23 billion (Taiwan) up to now (Exhibit 2). However, in the recent years, Singapore has become the top investor. FDI in Vietnam has increased significantly both in quantity and scale of projects, especially after the new stage when Vietnam became a WTO member on January 2007. The committed FDI peaked at US$71.7 billion in 2008 before going back to the similar amount as in 2007 due to economic crisis (figure 2.1).
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Figure 2.1: Commited FDI in billions of US$ (GSO, 2011)

Nevertheless, there has been a slow FDI implementation in Vietnam due to inadequacy in infrastructure, and human resources and the fact that many FDI projects have been registered to book a place (Vo and Nguyen, 2011).
2.5.2. Positive effects of FDI

FDI flows have been playing an important factor in Vietnams economic development through enhancing and improving economic growth, market access, transfer of technology and management skills as well as effectively implementing the hunger eradication and poverty reduction (VOV, 2008). Economic growth FDI in Vietnam has brought a considerable contribution to the balance of internal capital in GDP growth (Hoang et al. 2010). After 20 years, FDI has contributed 19% to total GDP, 30% to total income of state budget, 19% to business capital, and 23% to fixed assets value of whole enterprises. According to Tran (2005), increasing 1% of FDI can boost the provincial GDP by 0.105%. By the same token, FDI has supported for domestic capital to meet the domestic investment demand (Nguyen et al. 2006). It has provided vital financial resources to finance the economic growth of Vietnam and contributed to inflation control, macro-economic stability (Leproux and Brooks, 2004). As a consequence, FDI has acted as a stabilizing factor for the economy during financial (UNCTAD,

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2008) and FIEs along with sectors receiving FDI have become the engines of Vietnams strong economic growth (Konishi, 2008). Furthermore, FDI also has both direct and indirect significant influence on the poverty reduction (Tran, 2005). The illustration for direct effect is FDI helps to raise living standard by offering higher salaries for FIEs employee than in domestic enterprises. Trade integration and diversification of exports The export value of FIEs has accounted for nearly 60% total export of Vietnam in which the most amount is from footwear, textile and garments, and electronics products (UNCTAD, 2008). FIEs have enabled Vietnams export to access international markets with production and distribution network of parent companies (Konishi, 2008). As a result, Vietnam's position has been improved in the international markets and export capacity is enhanced (Leproux and Brooks, 2004). Free Trade Agreements has also encouraged foreign investors to establish their production business in Vietnam. According to Vo and Nguyen (2011), implementing 1% FDI can increase 0.14% exports in the short-term and greater in the long-term. Job creation Up to now, over 1.5 million people have been employed at FIEs (GSO, 2008). The number of employees in FIEs has tripled between 2000 and 2006, about 200 thousand employees is recruited each year making up about 20% total annual employments (UNCTAD, 2008). In early stage of FDI in Vietnam, FIEs accounted for a small amount of total employment (Le, 2002). This was due to the higher productivity in FIEs and lowlabour requirements of sectors receiving FDI (Jenkins, 2006; Nguyen et al. 2006). Human resource development and technology transfer FDI has helped to develop and modernize human resource capabilities and skills (Leproux and Brooks, 2004). For example, Intel and Foxconn have sent Vietnamese employees to their facilities in other countries to prepare them for key positions. Nestl also sent experts to Vietnam to work with Vietnamese coffee organisations in improving coffee quality. Formal training courses by foreign

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investors are an important channel to build skills and transfer knowledge (UNCTAD, 2008). Thanks to FDI, Vietnam has got the technology, processes and know-how in heavy industry and mineral exploitation, manufacturing cars and motorcycles, electronics, information and communication, and even agriculture (Hoang et al. 1997). For above reasons, FDI have created spillover effect to enhance labour productivity in Vietnam (Nguyen and Nguyen, 2007).
2.5.3. Negative impacts of FDI

Beside the effective operation in Vietnam, some FIEs shifted taxable income to another location with lower tax to reduce the tax amount. Therefore, Vietnam has made provisions on transfer pricing to ensure income of FIEs generated is taxed fairly (UNCTAD, 2008). The biggest concern for FDI negative impacts is the loss of national control over strategic sectors which happened to chicken product industry. To resolve this, Vietnam encouraged export-oriented sectors at first and restricted FDI entry in a number of strategic sectors like manufacturing cars with the aim to limit the competition with national firms on the domestic market. However, these solutions could limit linkages between FIEs and national firms as well as reduce consumer benefits and productivity (UNCTAD, 2008). Moreover, the competition issue is increasingly serious after WTO participation. The commitments of opening market of Vietnam have gradually made the competition between domestic and foreign invested enterprises harsher which can lead to the failure or bankruptcy of some private and public enterprises (UNCTAD, 2008). Likewise, environment issues of FIEs have been among the hottest topic among Vietnamese publicity in recent years. Some FDI projects have polluted the environment which negatively impacted peoples life, health and money like in Thi Vais case (Nguyen, 2010). Even though environmental rules and regulations have been come into force, it is argued that the efforts of government and local authorities are not strong enough to control the issue.

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2.6. Research framework From the overview of FDIs impacts on Vietnams economic development, it can be clearly seen that FDI have strongly affected economic growth of Vietnam with both positive contributions and negative impacts while the effects on job creation is quite insignificant. The influence of FDI in export and HR development technology transfer is also noteworthy. However, to research in service sectors like construction and banking-financial industries, the impact of FDI through export enhancing is omitted. For this reason, the research framework will focus on the impacts of FDI on Vietnams economic development through economic growth aspects and human resource development - technology transfer (Figure 2.2).

Figure 2.2: Research Framework in construction and banking-financial industries

2.7. FDI in construction and banking-financial industries in Vietnam

2.7.1. FDI in Construction Industry

Overview Up to 2010, construction industry constituted 707 projects (6% total projects) with more than US$11.5 billion registered capital (6% total capital) (Exhibit 1). In 2010, there were 174 projects (14% total projects) registered with value more than US$1.8 billion (9% total capital) (GSO, 2011). This increase is due to the priority of Vietnam for infrastructure construction, hotel and tourism which has created high demand for construction services (Le, 2004). In 2010, the commitment with WTO enabled construction FIEs to establish branches in Vietnam.

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Most domestic construction works are undertaken by local workforce, with technical assistance from foreign partners in some essential phases. In the past years, Vietnam local workforce was not well trained, working tools were poor and of only basic design and standards (To, 1999). Economic growth First of all, the capabilities and capacity of local Vietnamese firms will increase when cooperating with foreign-owned construction firms and helps to implement a higher amount of FDI capital registered as well as attract more FDI (Smith et al. 2009). Next, supplier construction firms can get necessary investments from FDI to acquire modern technologies and world-class processes to enhance quality and reduce cost which improve competitive capabilities of domestic construction enterprises (Smith et al. 2009). Consumers would have benefits to be able to buy a good quality house at a reasonable price. Therefore, this can indirectly enhance the economic growth. HR development and technology transfer Importantly, FIEs have organized training courses in the newest methods and processes to improve professional skills and capabilities for local employees, especially construction designers and planners (Smith et al. 2009). Moreover, FIEs have also helped Vietnamese construction firms to adopt advanced and modern construction technologies and have the opportunity to operate in overseas markets as well as build more international cooperation which is good for their operation and development (Smith et al. 2009)..
2.7.2. FDI in Banking-financial Industry

Overview Up to 2010, banking-financial industry constituted 75 projects (0.6% total projects) with more than US$1.3 billion registered capital (0.7% total capital) (Exhibit 1). In 2010, there were only 3 projects (14% total projects) registered with value more than US$59 million (0.3% total capital) (GSO, 2011). In fact, Vietnam have just gradually opened banking-financial market in recent years with three 100% foreign-owned banks including HSBC, Standard Chartered,

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ANZ and 11 largest Joint Stock Commercial Banks have foreign strategic investors in 2008. In 2007, FIEs accounted for 9% of total deposits and loan. Economic growth At first, the appearance of foreign banks in the form of branches operating in Vietnam played an important role in the mobilization of foreign loans to Vietnam (ICTC, 1999). FIEs have brought benefits for customers by offering them various choices of financial products and services. As a consequence, this has made Vietnamese banking-financial market operate more efficiently. Besides, with only a simple personnel organization, these branches have had a trading turnover bigger than that of domestic joint stock commercial banks (ICTC, 1999). In the macroeconomic intermediation tasks, FIEs have good capabilities to reduce transaction cost, improve financial resource access and enable higher investment. As a result, they have increased transactions and contributed to economic growth. By 2015, removal of the remaining restrictions according to commitments with WTO will estimated raise 0.3 % of Vietnams GDP per annum. (Smith et al. 2009). Moreover, with lower instability of lending as well as stronger loan growth rates, FIEs have supported to Small and Medium Enterprises (SMEs) by enhancing intermediation and innovating financial services (Barr et al. 2006). However, domestic financial institutions can have difficulties in competing with FIEs due to the weakness in the organizational structure which can lower the execution of monetary policies as well as make them be damaged more easily when crisis happens. HR development and technology transfer Thanks to FIEs, local financial institutions can gain advanced management techniques. For example, first foreign banks in Vietnam including Credit Lyonnais, ANZ and Chinfon have provided diversifying banking services (ICTC, 1999). Moreover, FIEs have also created standard criteria for modernizing the banking technology for domestic banks. For instance, foreign banks have experiences and professional capabilities with payment services, credit services, money transmission, and money brokering as well as individual services like mortgage credit (Barr et al.

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2006). Local banks can learn from those skills and experiences to improve their capabilities. Besides, FIEs have also played a useful role in developing banking and financial human resource. Many employees after working for HSBC or ANZ have enhanced their knowledge and skills and some of them are in key position when moving to local banks. 2.8. Summary On the whole, FDI have been playing an extremely important part in economic development of Vietnam with its contribution to economic growth, exports, job creation, human resource development and technology transfer. Although it has created some negative impacts, Vietnam has avoided significantly suffering from them thanks to its cautious and gradual policy to open to FDI (UNCTAD, 2008). Thus, FDI has contributed huge benefits for Vietnams economy compared to its partial negative impacts to be really necessary for economic development. More specifically, FDI in construction industry has considerably contributed to economic development by improving Vietnamese human resource capabilities, transferring new process as well as indirectly enhancing economic growth through utilizing construction cost. Although FDI in banking-financial industry just accounted for a small proportion in total projects and capital registered, it has shown a beneficial potential in transferring modern techniques. Besides, an open and active bankingfinancial industry can improve financial intermediation and help capital markets operate more effectively to considerably contribute to Vietnams economic development. In two analysed industries and other sectors receiving FDI in Vietnam, the market openness committed with WTO has generally raised the challenges with many problems, especially competitions issues. In fact, this openness is necessary to bring about huge benefits of FDI for economic development which matches with marketoriented economy in Vietnam. To achieve economic development goals, Vietnam should have strong innovation of awareness and state management for FDI as well as sustained efforts to increase national competitiveness by attracting FDI and use the benefits of the integration between regional and international (Konishi, 2008).

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3. CONCLUSION
This topic review enhances understanding of FDIs impacts on economic development in Vietnam with examining both positive contributions and negative effects. Based on the literature and findings about FDI in Vietnam, the review built an appropriate framework to analyse the impacts of FDI on Vietnams economic development in relation to construction and banking-financial industries. Then, the findings will be synthesized to conclude about the role of FDI in Vietnams economic development and how it is necessary for economic development in Vietnam. After answering all the questions to reach research purposes, this topic review synthesized the existing knowledge about FDI and its impacts on economic development. Moreover, it also emphasized the theory by testing its validity in particular situation of Vietnam and contributed the case of FDI in Vietnam with updated information. Additionally, the review analyzed the impacts of FDI on economic development in Vietnams construction and banking-financial industries which have not examined in depth by many researchers before. Hence, the topic review will serve as a base for more empirical researches or future studies in enhancing the impacts of FDI on Vietnams economic development in construction and banking-financial industries. Finally, some limitations and weaknesses of this review need to be considered. The first is about the data source. There are little published case studies and researches on FDI in Vietnam, especially the English materials. Moreover, some data are unavailable or have outdated statistical information (for example, the statistics of indirect employment created by FDI in Vietnam). The second is about the time and length to conduct this review which did not enable to investigate deeper into the situation of FDI in Vietnam as well as two above industries. Another limit is the different theory on the definitions of economic growth and economic development. This topic review based on the point of view that economic growth is an aspect and indicator of economic development. In this topic review, many factors in economic growth and spillover effects were not examined in depth.

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Le, Hang Minh (2004), Foreign direct investment and economic growth: evidence from Asean countries. Available from: http://etheses.dur.ac.uk/1742/ [Accessed 28 June 2012]. Leproux, Vittorio and Brooks, Douglas H. (2004), Vietnam: Foreign Direct Investment and Postcrisis Regional Integration. ERD working paper series No.56, ADB. Moore, S., Neville, C., Murphy, M. and Connolly, C. (2010), Chapter 5: Research Skills and Orientations: First steps to good research. In The Ultimate study skills handbook. Maidenhead: Open University Press. Pp. 53-94. Nguyen, Mai (2010), Clean FDI for development. Vietnam investment review, 22nd Sep. Available from: http://www.vir.com.vn/news/special-edition/greendevelopment/clean-fdi-for-development.html [Accessed 20 July 2012] Nguyen, Thi Tue Anh, Vu, Xuan Nguyet Hong, Tran, Toan Thang, Nguyen, Manh Hai (2006), The impacts of Foreign Direct Investment on the economic growth in Vietnam. Hanoi: CIEM and Sida. Nguyen, Ngoc Anh and Nguyen, Thang (2007), Foreign direct investment in Vietnam: An overview and analysis the determinants of spatial distribution across provinces . [Online] Available from http://mpra.ub.uni-muenchen.de/1921/[Accessed 20 July 2012] OECDs (2008). Benchmark Definition of Foreign Direct Investment (4th Edition). [Online] Available from: http://www.oecd.org/daf/internationalinvestment/investmentstatisticsandanalysis/ oecdbenchmarkdefinitionofforeigndirectinvestment-4thedition.htm [Accessed 28 June 2012]. Sun, Xiaolun (2002), Foreign Direct Investment and Economic Development What Do the States Need To Do? Marocco: United Nations. Todaro, Michael P. and Smith, Stephen C. (2002). Economic Development. Boston, Mass.: Addison Wesley. To, Ngoc Thanh (1999) Vietnams Construction Industry: Prospects for Foreign Investors. In Tran, Van Hoa (1999), Sectoral analysis of trade, investment and business in Vietnam. London: Macmillan Press Ltd. Pp 15-24. Tran, Trong Hung (2005), Impacts of Foreign Direct Investment on Poverty Reduction in Vietnam, Tokyo: National Graduate lnstitute for Policy Studies.

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Tran, Van Tho (2006), FDI and Economic Development: The Case of Vietnam. In Multinationals and economic growth in East Asia : foreign direct investment, corporate strategies and national economic development / edited by Shujiro Urata, Chia Siow Yue and Fukunari Kimura. New York: Routledge. Pp. 393-422. UNCTAD (2008), Vietnam: Investment policy review. New York and Geneva: United Nations Publication. Vo, Tri Thanh and Nguyen, Anh Duong (2011), Revisiting Exports and Foreign Direct Investment in Vietnam. Asian Economic Policy Review, (June) pp 112-131. VOV (2008), Foreign investment makes a great contribution to Vietnams economy [Online] Available from: http://english.vov.vn/Home/Foreign-investment-makes-a-greatcontribution-to-Vietnams-economy/20081/19689.vov [Accessed 28 July 2012] VOV (2011), FDI into Vietnam nears US$200 billion. [Online] Available from: http://english.vov.vn/Home/FDI-into-Vietnam-nears-US200billion/201112/133757.vov [Accessed 28 July 2012]. Wei, Hongxu (2010), Foreign Direct Investment and Economic development in China and East Asia. GBR: The University of Birmingham. Weigel, Dare R., Gregory, Neil F., Wagle, Dileep M. (1997), Foreign Direct Investment. Washington: International Finance Corporation and Foreign Investment Advisory Service. Yusuf, Mohammed (2012), Foreign Direct Investment FDI in Developing countries: An overview of Syria, Egypt, Malaysia, Vietnam. Syria: Damascus University.

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TOPIC REVIEW TRAN LONG Exhibit 1. FDI projects licensed in Vietnam by kinds of economic activity (Accumulation of projects having effect as of 31/12/2010) (GSO, 2011)

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TOPIC REVIEW TRAN LONG Exhibit 2. FDI projects licensed in Vietnam by main counterparts (Accumulation of projects having effect as of 31/12/2010) (GSO, 2011)

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