The relationship between japan’s oda and fdi to vietnam in the new context

Nội dung text: The relationship between japan’s oda and fdi to vietnam in the new context

1. THE RELATIONSHIP BETWEEN JAPAN’S ODA AND FDI TO VIETNAM IN THE NEW CONTEXT MSc. Do Thi Hai1 Abstract: At present, Japan’s ODA plays a vital role in socio-economic development in Vietnam, especially in the new context with the trend of innovation associated with industrial revolution 4.0. Meanwhile, FDI is one factor accelerating this trend due to taking advantage of technology and management skills However, a question is posed: “Is there any relationship between ODA aid and FDI? And their impacts on socio-economic development in Vietnam?”. Recent studies on aid have concluded that a reduction in assistance and a radical revision of its terms and conditions would facilitate FDI development. This study will use Japanese FDI and ODA data to assess whether aid has a positive and complementary effect on FDI inflows in promoting economic development in Vietnam in the new context. This paper studies the impact of Japanese official development assistance (ODA) on Japanese foreign direct investment (FDI) flows into Vietnam between 1992 and 2018. The impact of Japanese ODA is examined using the two-stage least squares method. The regression results provide evidence of a positive impact of ODA on FDI inflows, not only by direct channels but also by indirect channels through improving the human capital base. However, at this time, the short-term impact of the current level of ODA disbursement is unclear. Key words: FDI, ODA, Japan, Vietnam. INTRODUCTION To achieve sustainable economic development, it is essential that developing countries need to gain adequate foreign finance to break out of the vicious circle of low savings and low economic growth. The low income per capita in developing countries has resulted in low domestic savings. According to Hayami and Godo (2006): “For developing countries, where the need for investment in development tends to exceed the capacity to save domestically, net capital imports from abroad represent the possibility of exiting the country. from the vicious circle of slow economic growth and low savings” (pp.45 - 46). The financial sector in developing countries is usually unable to provide sufficient resources for economic growth; therefore, foreign direct investment (FDI) and official development aid (ODA) provide not only major financial resources but also opportunities for human capital development and technology transfer. A number of international organizations, namely the OECD and UNCTAD, have called for the adoption of measures that would allow recipient countries to take advantage of the potential interactions between ODA and foreign direct investment (OECD, Several years and UNCTAD, 2008), which indicates some relationship between these two streams. Japan is one of the countries with the biggest source of ODA support in Vietnam since the normalization between the two countries in 1992. This capital contributes a lot to the 1 Viet Nam Institute of Economics; Email: Beansea11@gmail.com 648
2. INTERNATIONAL CONFERENCE PROCEEDINGS: GLOBAL FDI AND RESPONSES OF FDI ENTERPRISES IN VIETNAM IN THE NEW CONTEXT 649 socio-economic development in Vietnam, namely: infrastructure, poverty alleviation, etc. However, this funding is only aid which may change when Vietnam becomes a middle- income country. So, for socio-economic development, there must be a significant source of capital from outside - Japan’s FDI (foreign direct investment) capital plays a crucial role in ensuring growth. Therefore, the combination of ODA and FDI is vital. These two sources also guarantee a large amount of capital for socio-economic development. LITERATURE REVIEW The first analysis was done by Papanek in 1973 to find the relationship between saving, foreign capital inflows and economic growth. The author analyzed the correlation between aid and foreign private investment. Papanek’s results seem to indicate that there is no statistical relationship between official development aid and private flows. Most of the literature surveyed agree on the fact that ODA, and especially multilateral ODA, has no significant effect on FDI (Papanek, 1973; Rodrik, 1995; Tuman and Emmer, 1999, and Kosack) and Tobin: 2006) unless it flows for additional inputs to FDI (KAPFER, SR NIELSEN & D. NIELSON, (2007); Kimura, 2007 and Selaya and Sunesen, 2008) and recipients enjoy a certain degree of financial market development and good governance (Karakaplan et al., 2005). Partially challenging these results, Harms and Lutz (2006) argue that the impact of official aid on private foreign investment (FDI plus portfolio investment owner) is negligible unless the recipient bears a high legal burden. Furthermore, Asiedu and Villamil (2002) argue that foreign aid reduces default risk, thereby promoting foreign private capital. Although their analysis does not explicitly target FDI, it does show that ODA will have a positive effect on FDI in countries where enforcement is inadequate. Finally, Ali and Isse (2006), when analyzing the determinants of foreign aid, found that FDI has a negative and significant relationship with ODA. Using a dataset of donor-recipient pairs, Kimura and Todo (2007) identify three effects of ODA on FDI inflows that include positive infrastructure effect, negative rent-seeking impact, and positive effect. In this case, the positive effect refers to the FDI flowing from a particular donor to a specific recipient caused by the flow of aid from the donor to the recipient (i.e., the host country). Regarding bilateral aid, Yasin (2005) found that, for 11 African countries, bilateral ODA has a positive effect on attracting FDI inflows. At the same time, Blaise (2005) finds that Japan’s ODA to China attracts FDI inflows. Under Dunning’s OLI framework, Blaise asserts that bilateral ODA influences site choice. Moreover, there have been studies providing some models to analyze the relationship between FDI and ODA. Kang, S. J., Lee, H., & Park, B. (2011), Kang, S. J., Lee, H., & Park, B. (2011) examines whether Korea can be a pioneer by using both micro and macro analysis in their paper. The authors review ODA and FDI using bilateral datasets. Their report uses data obtained from 7 donor countries along with the FDI gravity model and GMM estimation to identify the increasing impact of ODA on FDI based on the ODA types offered by donor countries. The report points out that only Korean and Japanese ODA could lead to increases in FDI flows to
3. 650 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI recipient countries whereas ODA from other donors acts as a substitute for FDI. Selaya and Sunesen (2012) formalized a simple theoretical model to show that the impacts of ODA on FDI depend on which sector the ODA is invested in. Their study covered 99 countries over a 5-year period from 1970 to 2001, which concluded that ODA invested in additional inputs would increase the marginal capital productivity and promote FDI inflows. However, direct ODA in the form of physical capital will crowd out private investment. In contrast, other studies indicate a negative relationship between ODA and FDI. Karakaplan, Neyapti, and Sayek (2005) set a hypothesis about such a relationship using a large data panel of 97 countries over a long time series (from 1960 to 2004). By performing GMM estimation, the authors’ study provides strong evidence of a significant negative impact of foreign ODA on (lagging) FDI inflows due to poor government policies and lack of workable financial market. In conclusion, the literature review seems to indicate that there are three distinctly possible impacts of ODA on FDI. Firstly, bilateral ODA offers a much more significant positive impact on capital allocation to infrastructure development, which could possibly be intentional (also called the pioneering effect as suggested by Kimura and Todo (2007). Secondly, a negative substitution effect is produced by heavy private investment, especially by bound aid flows. Finally, a neutral effect suggests that ODA flows do not have any strategic impact or influence on private foreign investment. There have been a myriad of studies on FDI and ODA models in many countries, which mainly focuses on the GMM model and gravity model. Nonetheless, very few of such studies focus on the increasing impacts of FDI and ODA within a specific country, especially whether Japanese ODA affects FDI flowing to Vietnam. 1. OVERVIEW OF JAPANESE FDI AND ODA IN VIETNAM 1.1. Overview of Japanese FDI in Vietnam According to the Foreign Investment Agency (FIA), in 1992 was the year that witnessed the largest FDI inflows from Japan into Vietnam, with 10 projects and a total registered capital of nearly 106 million USD. However, these figures dropped sharply the following year, accounting for only 75% of those in the previous year. Nevertheless, Japanese FDI into Vietnam recorded significantly large amounts between 1994 and 1997. According to the FIA, Japanese FDI into Vietnam saw dramatic growth with 35 investment projects and 347 million USD of total registered capital in 1994, an increase of more than three times compared to the figures for 1992, marking the peak of Japanese FDI inflow to Vietnam in the previous period. In 1995, Japanese FDI into Vietnam continued to skyrocket, reaching over $1.2 billion of registered capital, the highest from the first period until the end of 10 years later, with 65 licensed investment projects. In the last two years of the period, although Japanese FDI into Vietnam decreased, yet the FDI inflow in these 2 years achieved remarkable numbers. In 1996, the total registered capital reached 788.9 million USD with 72 licensed projects, the corresponding figures in 1997 were 606 million USD and 54 licensed projects. During the entire period from 1989 to 1997, Vietnam attracted nearly 3 billion USD of registered FDI from Japan and licensed 226 projects. During just 4 years of the boom period, the total registered capital increased 15 times compared to the 5 years of the previous period, and the number of projects increased by 5 times.
4. INTERNATIONAL CONFERENCE PROCEEDINGS: GLOBAL FDI AND RESPONSES OF FDI ENTERPRISES IN VIETNAM IN THE NEW CONTEXT 651 As of 2018, Japan was the leading investor among 112 countries and territories investing in Vietnam, with $8.59 billion, accounting for 24.2% of the total investment. Unit: billion yen Figure 1: Attracting Japanese ODA in the period 1992 - 2016 Source: JICA Office in Vietnam Through graph 1, it is clear that Japanese ODA into Vietnam quickly grew from 59.9 billion yen in 1993 to 155.615 billion yen in 1999, which marks the highest growth in Japanese ODA during the 10 years from 1993 to 2000. The rapid increase in Japanese ODA to Vietnam during this period happened due to the negative impact of the economic crisis in East Asia. As a result, Japan was forced to readjust its foreign policy on ODA by gradually reducing the size of ODA provided to countries in the region to avoid risks and any possible instability. However, among many countries that received Japan’s ODA, Vietnam had the slightest reduction. Between 1997 and 1999, the amount of ODA that Vietnam received increased compared to the figure for the previous period. These developments proved that Vietnam occupied an important position and role in Japan’s ODA policy. In 2000, Japan’s ODA for Vietnam suddenly dropped sharply due to Japan’s implementation of a 10% reduction in general ODA given to other countries. However, since then, Japan’s ODA for Vietnam has tended to increase again. From 2014 to 2016, Japanese ODA into Vietnam remained high and reached the highest record of about 187.1 billion yen in 2016. The distribution of Japanese ODA among Vietnamese provinces is not biased towards the poor regions of the country. Regions with low poverty rates, such as the Red River Delta and the Southeast, received more aid than other poor regions. This development could be explained by the higher efficiency of development spending, mainly through encouraging FDI into relatively more developed regions in generating economic growth. As a result, a more immense amount of ODA has been allocated to relatively prosperous urban centers than to rural and mountainous areas where poverty is still high. From 1992 to 2016, the attraction of Japanese ODA focused mainly on investment projects synchronous with relatively large-scale and infrastructure development, especially in the fields of transport, energy and industry, communication, urban infrastructure development (urban transport and water supply and drainage). In addition, the application of the program-by-sector approach through national target programs or sector programs
5. 652 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI implemented in many localities, including the bridge constructed on National Highway 1; North-South railway line; Hai Van road tunnel in the Central region, or Can Tho bridge in the Mekong River region - traffic connecting the two North and South regions of Vietnam, My Thuan bridge, Bai Chay bridge, ports of Saigon, Cai Lan, Tien Sa, Hai Phong, Terminal T2 of Tan Son Nhat International Airport, etc., have been put into operation with the volume of goods and passengers. In 2018, JICA continued to support Vietnam to achieve sustainable growth in line with the national goal of “becoming a modern industrialized country” based on the 5-year Socio- Economic Development Plan (2016 - 2020) and the Socio-Economic Development Strategy (2011 - 2020) of Vietnam. The Japanese government’s growth assistance strategy for Vietnam is implemented according to the following three pillars: The Pillar 1: Promoting economic growth and strengthening international competition Fast and sustainable economic growth along with global economic growth is one of the most important policies of Vietnam. JICA recognizes that Vietnam needs to solve a number of urgent challenges, including (i) macroeconomic stability and economic restructurings such as reforming the state-owned enterprise sector, (ii) enhancing industrial competitiveness, and (iii) developing human resources and the infrastructure. For policy innovation, JICA has recently supported Vietnam to improve the investment environment through dialogue and policy advice. In addition, JICA also helped Vietnam prepare long-term industrialization strategies for six key regions, renovate state-owned enterprises, and restructure the banking sector. In terms of business development activities, JICA has offered support to develop small and medium enterprises (SMEs) and supporting industries through improving business management, production techniques, and access to finance. JICA also strives to help Vietnam in human resource development by upgrading universities as well as technical and vocational schools. Regarding infrastructure development, JICA pays special attention to developing lifeline traffic (roads, seaports, airports, and railways), power plants and power transmission networks through the application of advanced Japanese engineering and technology. Terminal T2, Noi Bai International Airport, Nhat Tan Bridge, and the road connecting Nhat Tan and Noi Bai are some typical projects funded by JICA. This cluster of works has dramatically reduced the travel time from the airport to the center of Hanoi. In addition, 11 thermal and hydroelectric power plants built under JICA’s projects also contribute to providing 14% of Vietnam’s total electricity generation capacity. The Pillar 2: Strengthening response ability Despite gaining high economic growth, Vietnam is facing social and environmental problems, including poverty, economic disparities between population groups, lack of health services, disaster prevention, environmental pollution, climate change, etc. JICA supports Vietnam to respond to these challenges through the following activities: (i) Building infrastructure to meet basic human needs, such as domestic water, waste water infrastructure, bridges/agricultural roads village, etc.; (ii) Agricultural and rural development, including
6. INTERNATIONAL CONFERENCE PROCEEDINGS: GLOBAL FDI AND RESPONSES OF FDI ENTERPRISES IN VIETNAM IN THE NEW CONTEXT 653 building irrigation systems, developing agro-food value chains, upgrading production techniques, etc.; (iii) Improve health services through upgrading major hospitals (Bach Mai, Cho Ray, and Hue Central), producing vaccines, preventing infectious diseases, promoting the use of maternal and child handbooks, capacity building for local hospitals and health workers, etc.; (iv) Natural disaster prevention through several activities, such as weather forecasting, early flood warning system, community-based disaster prevention system, etc.; (v) Environmental management and conservation of the natural environment, such as biodiversity conservation and improved forest management; (vi) Reducing damage and enhancing resilience to climate change through policy development, and preventing saltwater intrusion in the Mekong Delta; and (vii) Set up a hotline to prevent human trafficking. The Pillar 3: Strengthening governance Good governance is one of the foundations for sustainable socio-economic development. JICA believes that governance related challenges that Vietnam needs to address include reforming the law and judicial apparatus, strengthening capacity and administrative functions, and strengthening the operational processes of the National Assembly while increasing citizen participation. In terms of legal reform and judicial apparatus, JICA has implemented many technical cooperation projects since 1996. These projects have helped Vietnam develop and amend its civil law and legal procedures, and strengthen law enforcement as well as the capacity of judiciary bodies and human resources. In terms of administrative activities, JICA provided support for state officials and employees’ capacity building through cooperation with Ho Chi Minh National Academy, renovation of public services and administrative reform, and strengthening the capacity of the Government Office to promote policy development and implementation. JICA carried out a large-scale technical cooperation project on human resource training for leadership and administrative reform in 2018. Regarding the National Assembly, JICA supports strengthening the capacity of the Office of the National Assembly to enhance the functions of the National Assembly in terms of legislation and monitoring the Government’s activities. Japan is one of Vietnam’s leading strategic partners, the largest ODA donor, the number one investor, and the most important trading partner of Vietnam. In 2013, Vietnam’s economy grew by 5.42%, partly thanks to the high growth of Vietnam’s exports, up to over 15.4%, reaching US$132 billion, of which a massive contribution from Japanese FDI in total exports. The source of Japan’s development aid to Vietnam is enormous. Currently, Japan’s ODA loan for Vietnam is about 200 billion yen per year, focusing on the following main areas: Promoting economic growth and improving international competitiveness; Improving social and living standards and reducing disparities; Environmental Protection; Improve administrative management capacity. The wave of Japanese investment continued to increase in both the number of businesses and investment capital until 2018. Specifically, in 2018, Japan led the countries investing in Vietnam with 8.59 billion USD, accounting for 24.2 total investment capital among 112 countries and territories having investment projects in Vietnam. This shows that Japan has always been a significant investment partner of Vietnam after 47 years of establishing diplomatic relations.
7. 654 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI Due to the economy being underpinned by sizable Japanese ODA inflows, it is essential to expect to find a close correlation between FDI and Japanese ODA flows to Vietnam. In the coming time, when Vietnam enters the process of deeper integration with many new trends gradually developing, typically the 4.0 technology revolution is having a great influence on Japan, especially the Japanese enterprises. According to a survey, up to 52.3% of Japanese businesses realize that the Internet of things (IoT) will change their products and services in about 3 years’ time. However, only 8% of 515 enterprises have formed an IoT support department, which could be either a department, team, or special unit; however, this rate is much lower than the result of the worldwide survey (about 20%). This dramatically affects the attraction of Japanese FDI; along with the growing innovation process, the preferential capital sources are tending to decrease, especially Japanese ODA. On that basis, along with the change of Vietnam’s economy in the coming period, the following hypotheses are proposed: Ho: Japanese ODA has no positive impact on Japanese FDI H1: Japanese ODA has a positive impact on Japanese FDI Bổ sung số liệu về FDI Nhật Bản vào Việt Nam 3. ECONOMETRIC MODEL To investigate the relationship between FDI and ODA, the study uses a two-stage least square (2SLS) regression model. The reason for using 2SLS is due to the fact that 2SLS reduces the problem of multicollinearity, i.e., the occurrence of high intercorrelations among two or more independent variables in a multiple regression model. In the first stage of 2SLS, ODA is regressed on a set of exogenous variables, including 2 instrumental variables affecting ODA, but not affecting FDI. In the second stage, the predicted values ​​of ODA are considered one of the regression values ​​of FDI. Firstly, the established source of ODA can be a necessary prerequisite to promote FDI attraction. ODA is also considered an endogenous variable in the FDI regression, and instrumental variables are needed to adjust the endogeneity using a two-stage estimation process. Furthermore, the term “error” in the FDI regression contains unobserved province- specific effects so that the term “error” may be correlated with variations in some of the regressors. For example, shocks in Gross Domestic Product per Capita (GDPPC) can be highly correlated with shocks affecting FDI. Uniformity tests, over-identification tests, and tool durability tests are conducted to ensure the certainty of the coefficients, in which the results are all in favor of 2SLS. Secondly, all variables are converted to logarithmic form to minimize excessive variations in the value of ODA and FDI in both periods. In addition, some provinces record zero values, and such observations are excluded when they are converted to logarithmic form, thereby reducing the number of observations for the regression analysis. To avoid this problem, a small value of 0.001 is added to each observation as they are converted to logarithmic form (Pham Hoang Mai, 2005).
8. INTERNATIONAL CONFERENCE PROCEEDINGS: GLOBAL FDI AND RESPONSES OF FDI ENTERPRISES IN VIETNAM IN THE NEW CONTEXT 655 As a result, the first equation in 2SLS is: lnODA = f(lnlagODA, lnGDPPC, ln ODAQuarter, DODACapital). In which, the endogenous ODA variable is measured by the current disbursement value of ODA. This represents a direct, short-term impact of ODA on attracting FDI. ODA is measured in real local currency, deflated by the CPI using 2010 as the base year, and converted to US dollars (US$) at the official exchange rate recorded in the respective year. In this article, the Japanese ODA values ​​are taken from the data of Foreign Investment Agency of the Ministry of Planning and Investment. The level of ODA disbursement depends on the disbursement level of the previous year which is measured by the lagged change in ODA (lnlagODA) and income per capita (lnGDPPC). Both are measured in real terms after being deflated by the national consumer price index and converted to US dollars. Two instrumental variables are included to adjust the endogeneity of ODA. The first instrumental variable is Japanese ODA disbursed quarterly (lnaODAQuater). The data of this variable comes from the Foreign Investment Agency of the ​​Ministry of Planning and Investment. The second instrumental variable is the dummy variable for ODA disbursement in cities (D ODA Capital), taking the uniform values of 1 and 0 in case of large city and small city respectively. The data are taken from 63 provinces and cities in Vietnam. The equation in stage 2 is: LnFDI = ln(lnODAshort, lnlagODA, ln GDPPC, lnSCHOOL, lnPOP, lnTAX) Since there is no valid reason to assume any form of function other than a linear relationship, a simple linear regression analysis is applied. The structural regression equation follows the model used by Kimura and Todo (2007). The dependent variable is measured by the value of FDI registration in provinces. It is commitment value rather than disbursement value that is more appropriate to apply in this case. The lnODAshort variable represents the short-term impact of ODA on FDI, while the lnlagODA variable represents the long-term impact. One driving force of foreign investors in developing countries is the availability of a cheap and well-educated labor force. The variable “lnSCHOOL” is used to measure the quality of the local workforce, representing potential productivity in each province. The income per capita of each province (in terms of GDPPC) is used as a proxy for wages in Vietnam, representing labor costs in Vietnam. The influence of market size at provincial level is represented by the province’s population (lnPOP). Population is considered a proxy for market size, and many studies have demonstrated a statistically significant positive effect of population on FDI inflows at both the national and regional levels, for both developed and developing countries (Lecraw 1991; Wheeler and Mody 1992). To examine the impact of host countries’ policies on FDI inflows, the paper introduces the tax variable (lnTAX), which represents favorable government policies for mountainous provinces. This variable is the average tax rate, based on the ratio between sales tax and capital gains tax on the total revenues of FDI projects.
9. 656 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI Table 1: Variables used in the two-stage least squares regression model Variables Data source Measurement Studies Dependent variables FDI – Foreign Direct Foreign Investment Agency Natural Logarithm of FDI – ln Chowdhury, A. and Mavrotas, G. (2006); Investment ODA Herzer, D., Klasen, S. and Nowak-Lehmann, F. (2007) ODA – Official Foreign Investment Agency Natural Logarithm of ODA – Doucouliagos, H. and Paldam, M. (2005); Development Aid lnODA Svensson, J. (1999); Explanatory variables GDPPC – Gross Domestic General Statistics Office Natural Logarithm of GDPPC – ln Giuliano, P. and Ruiz-Arranz, M. (2009) Product per Capita GDPPC Lag ODA – Lag of ODA General Statistics Office Natural Logarithm of lagODA – Doucouliagos, H. and Paldam, M. (2005) ln (lagODA) D ODAcapital – ODA General Statistics Office Natural Logarithm of lagODA – Doucouliagos, H. and Paldam, M. (2005); disbursed in cities (63 provinces and cities in ln (DODAcapital) Hansen, H. and Tarp, F. (2001) Vietnam) ODAquarter-ODA General Statistics Office Natural Logarithm of Harms, P. and Lutz, M. (2006); Harms disbursed quarterly ODAquarter – ln (ODAquarter ) Philipp. and Lutz Matthias (2006) ODAshort – short-term General Statistics Office Natural Logarithm of ODAshort Blaise, S. (2005); Doucouliagos H. and impact of ODA on FDI – ln (ODAshort) Paldam M. (2005) Tax ratio - TAX General Statistics Office Natural Logarithm of TAX –ln Burnside, C. and Dollar, D. (2004) (TAX) Doucouliagos H. and Paldam M. (2005) Population - POP General Statistics Office Natural Logarithm of POP – ln Burnside, C. and Dollar, D. (2004) (POP) College enrollment General Statistics Office Natural Logarithm of college Pham Hoang Mai (2005) (SCHOOL) enrollment – ln (SCHOOL) Source: developed by the author The data of the above variables in the time from 1992 - 2018. The time was chosen because in 1992, the relationship of Viet Nam and Japan was normalized and Japanese ODA, FDI into Viet Nam step by steps increased. 4. RESULTS OF ANALYSIS OF THE RELATIONSHIP BETWEEN FDI AND JAPANESE ODA IN VIETNAM The results of the first stage regression are summarized in Table 2. It is predicted that Japanese ODA disbursement will be positively affected by the level of disbursement in the previous year. More specifically, an increase of 1% in the previous year’s disbursement could result in an increase of about 1% in the current disbursement, statistically significant at 1%. However, the dummy ODA for provinces and cities does not have a significant positive coefficient, implying that there is no bias in aid allocation to cities. In addition, GDPPC also has no significant impact on the level of Japanese ODA, which implies that ODA does not necessarily flow to poor provinces.
10. INTERNATIONAL CONFERENCE PROCEEDINGS: GLOBAL FDI AND RESPONSES OF FDI ENTERPRISES IN VIETNAM IN THE NEW CONTEXT 657 Table 2: Factors affecting Japanese ODA - The first stage in the two-stage squared model Variables Name of the variables Coefficients(2SLS) Coef. t-value Lag of ODA lnlagODA 0.57 11.65 Income per capita lnGDPPC -1.14 -0.11 ODA in quarter ln ODAQuarter -2.23 1.75 Dummy for ODA capital DODACapital -1.35* -1.64 Constant term Cons -14.52* -1.58 Adjusted R 2 0.26 Number of observation 203 * = statistically significant at 5% level. = statistically significant at 1%level. Source: Author’s calculations from STATA 14 The results of the second stage regression are summarized in Table 3. The effect of total Japanese ODA on Japanese FDI inflows is positive but not significant in the 2SLS model. This suggests that the total direct short-term impact of foreign aid on FDI is negligible. However, after controlling fixed effects, the current aid has a positive effect on FDI inflows in the FE model. In particular, Japan’s ODA increased by 1%, leading to an increase of more than 3% (3.04%) in Japanese FDI inflows. ODA is expected to enhance FDI attraction. These results show that there is evidence of a direct, short-term impact of ODA on FDI inflows. The positive coefficient of lnlagODA is statistically significant both in the 2SLS model and the FE model. This proves that the direct and long-term effects of ODA on FDI inflows are positive. In the 2SLS model, the interaction coefficient between short-term ODA and college enrollment rate (ln ODAshort*ln SCHOOL) is significant, which means that ODA, through increasing the university graduation rate, has contributed positively to attracting FDI. This suggests that ODA enhances FDI inflows through indirect channels by improving human capital. However, the coefficient of the “interaction” term in the FE model is not significant, indicating that the indirect effect of ODA on FDI attraction is not strong. Industrial zones also have a significant impact on FDI inflows as this coefficient is statistically significant in the 2SLS model. The lnSCHOOL coefficient is positive and significant both in the two-stage least squares model and the FE model. The amplitude of the coefficients in both models is relatively large, implying that the quality of labor resources of each province plays a decisive role in attracting FDI inflows. The only variable with the opposite sign (negative instead of positive) is the population. For the 2SLS model, this coefficient is statistically significant at the 1% level, but it is not significant in the FE model. This suggests that the impact of population on FDI inflows is not clear. Apart from Hanoi and Ho Chi Minh City, where high population density is associated with higher income and expenditure levels, other provinces with large population size mainly have larger geographical areas, but their spending on consumption goods remains relatively
11. 658 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI limited. As a result, population does not adequately represent the purchasing power or potential market size of the provinces. The tax rate has a statistically significant correlation with FDI inflows in the 2SLS model, but there is no statistically significant impact on FDI inflows in the FE model. This result may show that the government’s tax incentives are not effective in attracting FDI inflows in mountainous and remote areas. Table 3 Factors affecting Japanese FDI - Structural equation in two-stage squared model Variables Name of the variables Two-stage Least Squares Fixed Effects Coef. t-value Coef. t-value ODAshort lnODAshort 1.35 1.37 3.04* 1.89 Lag of ODA lnlagODA 0.86 1.95 1.50 2.32 lnODAshort*lnSCHOOL lnODAshort*lnSCHOOL 0.164* 1.93 0.135 0.71 Area of industry zones lnINDUS 0.43* 1.68 College school LnSCHOOL 2.14 1.83 3.36 2.45 Enrollment Income per capita lnGDPPC 1.787 1.86 1.26* 1.76 Population lnPOP -1.95 -2.14 -1.86 -1.38 Tax ratio lnTAX -1.54 3.00 0.87 0.05 Constant term Cons -19.20 -0.54 -19.48 -0.68 Adjusted R 2 0.47 Number of observations 203 * = statistically significant at 5% level. = statistically significant at 1%level. Source: Author’s calculations from STATA 14 5. CONCLUSIONS AND POLICY IMPLICATIONS The above study results show that the attraction of Japanese ODA has contributed to Japanese FDI attraction to provinces of Vietnam, not only by direct channels through current ODA disbursement, but also by other indirect channels through the improvement of the human capital base of the respective provinces. The impact of ODA on FDI inflows is not clear because of the differences between ODA and FDI, and their long duration and locality. This means that Japan’s ODA has an impact on Japan’s FDI inflows (accepting H1 and eliminating Ho). The results also show that the distribution of FDI among provinces is uneven, possibly due to differences in infrastructure development, labor quality and local market size. Provinces with higher levels of infrastructure development, higher quality of labor and larger domestic markets tend to attract larger amounts of FDI. This study has three policy implications. Firstly, the Vietnamese government should adjust its priority policy in mobilizing Japanese ODA, especially from the Japanese government. Secondly, to increase the relevance and effectiveness of ODA projects, the government needs to establish a specific socio-economic strategic development plan to promote socio-economic development. Finally, the government should focus on strengthening university training
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