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Subject:
"The Impact of Foreign Direct Investment on the Labor Productivity
in the Host Countries: The Case of Vietnam"
by
Mr. PHAM Xuan Kien
Master of International Development
Studies, FASID/GRIPS, Tokyo, Japan On-leave Expert, Ministry of Planning
and Investment (MPI), Vietnam
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Summary
Since its
adoption of the Doi Moi line in 1986, Vietnam has been in a dual process
of transitioning from a central planned economy to a socialism oriented
market economy and integrating into a rapidly changing world. Together
with the promulgation of the Law on Foreign Investment in 1987, FDI
flows into Vietnam have been remarkably increasing. This source of
capital has significantly contributed to the economic growth of the
country. In this monthly workshop of October, we invited Mr. Pham Xuan
Kien - Master of International Development Studies from FASID and GRIPS.
The main purpose of Mr. Kien’s research is to study the spillover effect
of FDI on labor productivity in Vietnam and propose policy suggestions
for the country in dealing with this issue.
Mr. Kien began his presentation by presenting some existing research on
FDI in which in terms of theoretical studies, the impact of FDI on
productivity in host countries is positive, while results of empirical
research have remained mixed. Focusing on the case of Vietnam, Mr. Kien
firstly provided an overview of the Vietnamese economy and data showing
the registered amount, sector structure of FDI flows and employment
generalized by this type of investment in the country. He pointed out
that the number of FDI employment has more than tripled in the period of
2000-2006 and 70 percent of the FDI projects are operated in the
construction and industry sector as for the year 2006.
Turning to the main part of the presentation, Mr. Kien presented his
three research hypotheses in which the first one is to test whether the
impact of FDI on labor productivity is positive and depends on the gap
between FDI and domestic firms in terms of industry’s capital intensity
(capital per labor index), labor quality (wage rates index) and firm
scale (input costs index). The second and third hypotheses are to
investigate the impact of different locations and forms of FDI on labor
productivity, respectively. In order to answer these hypotheses, Mr.
Kien ran regression analysis using Stata and data from the Enterprise
Survey 2005 conducted by the General Statistic Office of Vietnam (GSO)
in which he chose 441 companies for the observations. Estimation results
concluded that in the case of Vietnam, the spillover effect of FDI on
labor productivity is clear and strongly positive. This effect depends
on three determinants showing the gap between FDI and domestic firms
which are labor skills, capital intensity and size of firms. The
spillovers also vary across different locations and among various types
of FDI.
Prof. Ohno started the discussion section by saying that this research
actually focused on the impact of FDI on labor productivity in FDI
companies themselves rather than the spillover effect of FDI as stated
by the presentation’s purpose which should concern with the impacts of
FDI on domestic firms or on the whole socio-economy in general. Prof.
Ohno also commented that some of Mr. Kien’s policy recommendations were
not related to or withdrawn from his research results and should be
thoroughly reconsidered. For example, Prof Ohno expressed his skepticism
on Mr. Kien’s recommendation to encourage investments in relatively less
developed regions through tax policies and investment incentives. He
said that if the research showed significantly positive impacts of FDI
on labor productivity in big cities like Hanoi and Ho Chi Minh City then
more investments should be attracted to these places so as to take
advantage of them and therefore, scattering investments in the whole
country may not be effective. Following Prof. Ohno’s idea, Mr. Pham Thai
Son from Hitotsubashi University added that there had been some articles
on the ineffectiveness of financial incentives used by local governments
to attract FDI in mountainous and remote regions.
Regarding the question of Ms Thuy Anh (Waseda University) as to which
sectors were considered to be appropriate to attract more FDI, Mr. Kien
responded that in the short-run, they should be labor-intensive
industries such as garment, textile, and footwear, in order make use of
the cheap and abundant labor of the economy, whereas in the long-run,
Vietnam should concentrate on technology-intensive sectors. The country
should also avoid the risk of becoming a “technology dump” as well.
However, Prof. Ohno pointed out that this was not necessarily true and
Vietnam should shift to high value added sectors right from the short
run in order to raise the economy’s competitiveness and sustainable
development.
The discussion was continued with questions and comments from Ms Kikuko
Sakai from JICA, Mr. Tsujiura Yukihiro (Keio University) and again from
Ms Thuy Anh, regarding the number of companies, other case studies of
ASEAN countries and the relevance in using wage rate index to measure
skill levels of labors. Ms Huong Giang from Meiji University also shared
some experiences of Japanese local governments in attracting and
creating favorable conditions for investors to come in which were also
useful for Vietnam to take into consideration. Mr. Kien responded and
further explained to all the questions and comments from the floor one
by one. He finally thanked all the participants for their constructive
comments and suggestions which would be of great significance for his
future research on the spillover effect of FDI across sectors and among
different types of enterprises.
After the presentation section, as usual, we had an hour meeting in
which new participants introduced themselves and their research
interests. We also discussed socio-economic topics related to each
participant’s research field. Finally, we announced forthcoming research
activities of VDF Tokyo and welcomed anyone to actively take part in
these events.
Slides
(PDF943KB)
(By Nguyen Thuy Anh & Pham Thai Son)
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