Research on the relationship between fdi and economic growth in Binh Đinh province

tudents and researchers in learning and research. 6. Thesis structure Thesis structure includes 5 chapters: 5 Chapter 1. Overview of the studieson the relationship between FDI and economic growth. Chapter 2. Literature review on the relationship between FDI and economic growth. Chapter 3. Research Methodology Chapter 4. Research results Chapter 5. Policy implications 6 CHAPTER 1. OVERVIEW OF THE STUDIES ON THE RELATIONSHIP BETWEEN FDI AND ECONOMIC GROWTH 1.1. Studies on the relationship between FDI and economic growth in term of investment capital aspect 1.1.1. Related studies 1.1.2. Comments 1.2. Studies on the relationship between FDI and economic growth in term of absorptive capacity aspect 1.2.1. Related studies 1.2.2. Comments 1.3. Research gaps and research directions 1.3.1. Research gaps - The literature review shows that a lot of studies has been conducted to research the relationship between FDI and economic growth in Vietnam but the studies examined this relationship at a specific locality are still limited. - Besides, most studies only stop at answering the question, whether or not the relationship between FDI and growth. These studies have not solved the question, how to promote the role of local factors to increase the benefits of FDI capital, thereby promoting economic growth. - At the same time, up to now, no author has thoroughly and deeply studied this issue in specific conditions of Binh Dinh province. Whereas, most related studies apply qualitative methods to analysis secondary data and assess the role of FDI in economic growth. For instance, the study of Ha Thanh Viet (2011) or Nguyen Duy Thuc (2007) is one of a few studies using both qualitative and quantitative methods to research the economic growth model in Binh Dinh province. The conclusion in this study also mentioned the content of attracting FDI. In order to achieve the economic growth goals, Binh Dinh province not only must maintain a high growth rate but also increase foreign investment attraction. However, this 7 proposal is only sentimental and there is no specific scientific basis. 1.3.2. Research directions Based on the research gaps, the study will clarify the relationship of FDI and economic growth as well as the role of some key local factors in this relationship in terms of investment capital and absorption capacity aspects by using both descriptive statistics method and regression method, specifically as follows: - From investment capital perspective, providing empirical evidence for the relationship between FDI and economic growth at the local level, Binh Dinh province. Besides, the previous research results are not really heterogeneous so this research results will contribute consolidating for the arguments about this relationship. At the same time, determining the threshold for FDI to promote the role of this capital in economic growth (based on threshold effect in the study of Nguyen Quynh Tho (2017); and Nguyena and Tob, (2017)). - From absorptive capacity perspective, in the research model for the relationship between FDI and economic growth, the author takes into the interaction variables with FDI. At the same time, through a questionnaire survey of FDI enterprises, experts and regulators in Binh Dinh to identify factors that play the role as absorptive factors in the locality. These factors are very important for the host countries in promoting the positive role of FDI in economic growth. This has been confirmed by Nguyen et al. (2009), they believed that in order to gain benefits from FDI, the host countries must create strong absorptive capacity. 8 Chapter 2. LITERATURE REVIEW ON THE RELATIONSHIP BETWEEN FDI AND ECONOMIC GROWTH 2.1. Theories for the relationship between FDI and economic growth 2.1.1. Several concepts 2.1.1.1. FDI 2.1.1.2. Economic growth 2.1.2. The relationship between FDI and economic growth Nowbutsing (2009) has developed a model about the relationship between FDI and economic growth through the direct effects, indirect effects (spillover) and feedback effects. This is not an one-way relationship, FDI and economic growth can interact with each other. Fig 2. 1 The relationship between FDI and economic growth Source: Nowbutsing (2009) Lately, Nguyen Minh Tien (2014) also outlined the nature of this relationship through three channels of impacts. In which, (1) The direct effects is considered through the investment capital perspective; (2) The indirect effect is determined depending on the absorptive capacity in the host countries through conditional factors; (3) and vice versa, the effects of economic growth on FDI capital (feedback effects). Based on the above approach, the research content is evaluated 9 as a causal relationship of FDI and economic growth in both aspects (investment capital and absorptive capacity) as follows: - From investment capital perspective: FDI directly affects economic growth, and vice versa economic growth also affects FDI. - From absorptive capacity perspective, FDI indirectly impacts on economic growth (spillover effects). 2.2. Theories 2.2.1. Economic growth and FDI theory 2.2.1.1. The classical theory of economic growth 2.2.1.2. Exogenous growth theory 2.2.1.3. Endogenous growth theory 2.2.1.4. The eclectic paradigm 2.2.2. Absorptive capacity theory 2.2.2.1. FDI absorptive capacity Farkas (2012), Khordagui and Saleh (2013) show that absorptive capacity is the ability that an economy can obtain the benefits of FDI through spillover effects. The factors include human capital, trade openness, quality of infrastructure and institutional quality. These are intermediate factors to help enhancing the absorptive capacity in the host country. According to Nguyen Khac Quoc Bao (2014), there are some factors that not only impact on economic growth and attracting FDI capital but also play the role as essential factors to help the economy absorb the benefits of FDI. Therefore, the relationship between FDI and economic growth is called the conditional relationship. The above views show that factors represent FDI absorptive capacity in the relationship with economic growth at local level is understood as factors that impact on both economic growth and attracting FDI. At the same time, these are essential factors that help localities to increase benefits of this capital. 2.2.2.2. FDI absorptive capacity theory 10 Fig 2. 2 FDI absorptive process Source: Nguyen, Duysters, Patterson, & Sander, 2009 Nguyen et al. (2009) showed that the benefits that FDI brings to the host countries depend on the absorptive capacity. In which, the absorptive capacity is considered on two level: Firstly, the absorptive capacity of domestic enterprises is related to technology and labor skills (this has also been confirmed by Cohen & Levinthal, 1990). Secondly, the absorptive capacity of localities related to human capital, institutional quality, financial system, infrastructure and technology. Fig 2. 3 Photosynthesis model and FDI absorptive capacity Source: Nguyen et al. (2009) Basically, photosynthesis model and absorptive capacity 11 theory explain the conditional relationship between FDI and economic growth. In other words, the interaction between FDI and absorptive factors create growth results for localities that receive investment. In addition, Findlay (1978) showed that FDI impacts on economic growth depends on the conditions of the host country including macroeconomic stability, investment policy, trade openness and human capital. 2.3. Factors affect the relationship between of FDI and economic growth 2.3.1. Human capital 2.3.2. Infrastructure 2.3.3. Institutional quality 2.3.4. Macroeconomic stability 2.3.5. Trade openness 2.3.6. The absorptive capacity of domestic firms 12 CHAPTER 3. RESEARCH METHODOLOGY 3.1. Research process 3.2. Analytical framework Based on the synthesis of theories and relevant empirical studies, and especially the model of Nowbutsing (2009), the author built an analytical framework for the relationship of FDI and economic growth as follows: Figure 3.1. Analytical framework for the relationship between FDI and economic growth In which: + Evaluating the effects of FDI on economic growth, besides foreign direct investment variable (FDI), three variable groups are considered including absorptive capacity factors (A), interaction variables (FDIxA), and control variables (B). + At the same time, determining the impact of economic growth on FDI, the author uses the Granger - causality test. In addition, analytical framework for absorptive capacity is also proposed based on the theory and the studies of Findlay (1978); Nguyen et al (2009); Tran Kim Cuong (2016). It is illustrated as follows: 13 Figure 3.1. Analytical framework for FDI absorption capacity Source: summarization of the author 3.3. Research model 3.3.1. Research model Regression model for assessing the impact of FDI on economic growth is specifically written as follows: Gt = β0 + β1FDIt + β2DIt + β3GIt + β4Lt + β5Ht + β6 FRt + +β7FDIxHt+β8FDIxFRt +ut (3.2) In which: G: Local economic growth FDI: Foreign direct investment in locality DI: Private domestic investment in locality GI: Public investment in locality L: Labor H: Human capital FR: Infrastructure FDIxH: FDI absorptive capacity depends on human capital FDIxFR: FDI absorptive capacity depends on infrastructure t: Subscript β1, β2, β3, , β8: Regression coefficients ut: Error model 14 3.3.2. Measurement variables 3.3.3. Research hypothesis 3.4. Data collection methods 3.4.1. Secondary data Secondary data was collected between 1997 and 2019 from the Statistical Yearbook, Statistical Office of Binh Dinh Province. Therefore, data achieves the high reliability. After collecting data, the study uses Eviews 9.0 software to estimate the regression model. 3.4.2. Primary data 3.4.2.1. Primary data collection process 3.4.2.2. Designing measurement scales and questionnaires 3.4.2.3. Data collection Primary data was collected by interview method and sending questionnaires directly and indirectly via email for the survey subjects including: (i) FDI enterprises are operating in Binh Dinh province (it is taken from the list of FDI enterprises in database of the Investment Promotion Center of Binh Dinh Province); (ii) Experts/Regulators who are doing research/management about issues related to the research topic of this thesis so they are knowledge able about these issue. (Research Institute for Socio- Economic Development, Education and training institutions, department of science and technology/Investment Promotion Center, Department of Planning and Investment, Management Board of Economic Zones, Binh Dinh province People's Committee). 3.4.2.4. Research sample 3.5. Data analysis methods 3.5.1. Secondary data analysis In order to estimate regression model, this study use ARDL model - autoregressive distributed lag (Pesaran, Shin and Smith, 2001) to analysis the multivariate time series. From Equation (3.2), the auto regressive distributed lag model - ARDL with lag (p0, p1, p2, p3, p4 ... p8) for the empirical study (the 15 variables are converted to natural logarithms) as follows: LGt = α + ∑ 𝛽௜଴ ௣଴ ௜ୀଵ L𝐺௧ି௜ + ∑ 𝛽௝ଵ ௣ଵ ௝ୀ଴ L𝐹𝐷𝐼௧ି௝ + ∑ 𝛽௞ଶ ௣ଶ ௞ୀ଴ L𝐷𝐼௧ି௞ + ∑ 𝛽௟ଷ ௣ଷ ௟ୀ଴ L𝐺𝐼௧ି௟ + ∑ 𝛽௠ସ ௣ସ ௠ୀ଴ L𝐿௧ି௠+ ∑ 𝛽௡ହ ௣ହ ௡ୀ଴ L𝐻௧ି௡+ ∑ 𝛽௢଺ ௣଺ ௢ୀ଴ L𝐹𝑅௧଺ି௢ + ∑ 𝛽௤଻ ௣଻ ௤ୀ଴ L𝐹𝐷𝐼𝑥𝐻௧ି௤ + ∑ 𝛽௥଼ ௣଼ ௥ୀ଴ L𝐹𝐷𝐼𝑥𝐹𝑅௧ି௥ +ut (3.3) In which: L𝐺௧ି௜, L𝐹𝐷𝐼௧ି௝ , L𝐷𝐼௧ି௞,L𝐺𝐼௧ି௟ , L𝐿௧ି௠,..., L𝐹𝐷𝐼𝑥𝐹𝑅௧ି௪: are the stationary variable at the different lag. 3.5.2. Primary data analysis Descriptive Statistics method is applied like statistics the frequency and calculating the average values of the scale in order to reflect the assessment of FDI enterprises, experts and regulators according to different perspectives about the important role of local factors on the relationship of FDI and economic growth, as well as the situation of FDI absorptive capacity in locality. In which, 5-point Likert Scales is used to assess criteria as follow: 1- Strongly disagree; 2- Disagree; 3- Neither Agree nor disagree; 4- Agree; 5- Strongly agree). The author uses the SPSS 22 software to analysis data. 16 Chapter 4. RESEARCH RESULTS 4.1. The situation of FDI and economic growth in Binh Dinh province 4.1.1. General introduction about potential and advantages of Binh Dinh province 4.1.2. The situation of FDI in Binh Dinh province 4.1.2.1. FDI scale At the end of 2019, Binh Dinh province has attracted 80 projects with the registered capital of 756,9 million USD, the average capital per project is 9,45 million USD. This is much lower than Quang Nam (28,1 million USD) and Quang Ngai (30,24 million USD). From 1997 to 2019, Binh Dinh province has attracted the registered capital of 736,2 million USD. In which, implemented capital reached 227,48 million USD, equal 30,9% of the registered capital. This shows that the amount of FDI in Binh Dinh province is very low in terms of capital size and average capital per project. Besides, the ratio of implemented capital to registered capital is too low. 4.1.2.2. Form of FDI 4.1.2.3. Capital structure of FDI 4.1.2.4. The contribution of FDI into the local economy 4.1.2.5. General assessment about FDI attraction activities in Binh Dinh province 4.1.3. The situation of economic growth in Binh Dinh province 4.1.3.1. The scale and economic growth rate 4.1.3.2. The structure of economic growth according to the production factors 4.1.3.3. General assessment of economic growth situation - In terms of GRDP scale, recently the economic growth of Binh Dinh province has an upward trend. However, GRDP growth rate is slowing down, especially in recent years. Besides, the stability of growth is low. 17 - In addition, in recent years, the economic growth of Binh Dinh province has mainly been on the breadth, with low aggregate productivity factor. - Social labor productivity of Binh Dinh province has improved but it is still low compared to the level of national average productivity. 4.1.4. FDI and economic growth in Binh Dinh province The linear trendline describes the correlation between FDI and economic growth in the period 1997-2019. Figure 4.8 shows that both lines have the same uptrend. Fig 4.8 The linear trendline of the relationship between FDI and GRDP Source: Binh Dinh Statistical Yearbook However, in fact, the relationship between FDI and economic growth are also influenced by many different factors. This trend is only considered from a qualitative perspective. Hence, it is necessary to carry out quantitative analysis by regression model to have an accurate conclusion about this relationship. 4.2. The results of descriptive statistics 0 10000 20000 30000 40000 50000 60000 0 500 1000 implemented FDI (million dong) G R D P( m ill io n do ng ) -100 0 100 200 300 400 500 600 700 800 900 0 20000 40000 60000 GRDP (million dong) im pl em en te d FD I ( m ill io n do ng ) 18 4.2.1. Descriptive statistics for sample survey 4.2.2. Results of statistical analysis of absorptive capacity factors 4.2.2.1. Factors play the important role in FDI absorptive capacity to promote local economic growth. 4.2.2.2. The importance of absorptive capacity factors The research results show that there are four factors which is assessed be important including: - Human capital: The average statistical value is 4.57 on a 5- point scale (the 5-point is the most selected). It shows that experts and regulators assess human capital as a very important factor in the FDI absorptive capacity of locality. Similarly, the average statistical value of this factor is also assessed by FDI enterprises at 4.37 (the 4- point is the most selected). - Institution quality: The average importance level of this factor are assessed by experts and regulators at 4.48; FDI enterprises assess the average level of 4.58 on a scale of 5 (the 4-point and 5- point is the most selected). This shows that institutional quality of locality has the important role in the FDI absorption. - Infrastructure: Experts, regulators and FDI enterprises appreciate the importance of local infrastructure (average level is 4.0 and 4.63 respectively; the 4-point and 5-point is the most selected). This shows that they appreciate the role of this factor in improving the FDI absorptive capacity of locality. - The absorptive capacity of domestic firms: The average statistical value is 4,18 and 4,0 respectively (the 4-point is the most selected). It shows that experts, regulators and FDI enterprises consider the absorptive capacity of domestic firms that is important factors to promote the FDI absorptive capacity of locality. 4.3. The regressions results 4.3.1. Unit root tests 4.3.2. The regressions result of the relationship between FDI and economic growth in term of investment capital aspect 4.3.2.1. The estimation results of ARDL model 19 Table 4.18 The estimation results of ARDL model ARDL (1,0,0,1,1) (Dependent variable LGRDP) ARDL (1,0,0,1,0) (Dependent variable Lg) Variable Coefficient Variable Coefficient LGRDP(-1) 1.004486*** Lg(-1) 0.028989 LFDI -0.003369 LFDI -0.148103 LDI 0.022381*** LDI 0.100557** LGI 0.033142 LGI 0.117903 LGI(-1) 0.047022* LGI(-1) 0.313547** LL -0.187512 LL -2.629938 LL(-1) -0.560477 C 1.988017** C 7.792510* Note: *, **, *** significance at 10%, 5%, 1% Source: Results from Eviews 9.0 The estimation results show that the coefficient of the LFDI variable is not statistically significant in both cases. This means that there is no empirical evidence for the impact of FDI on local economic growth. In other words, this capital still has not shown a really positive role for economic growth. This result is similar to some previous studies (Belloumi, 2014; Umeora, 2013; Ho Thi Thanh Mai and Pham Thi Thanh Thuy, 2015). The reason is that the impact of FDI on economic growth depends on many factors (Nguyen Phuc Canh and Pham Gia Quyen, 2016). Especially, in the case of Binh Dinh, the amount of implemented capital is too low. 4.3.2.2. Estimating short and long-run relationships 4.3.2.3. The test of the suitability model The research conduct to test the suitability and reliability of 20 model through Breusch - Godfrey Serial Correlation LM (testing for autocorrelation), heteroskedasticity, Cusum (the stability of residuals), and Ramsey RESET (function testing). The results show that the research model is suitable and reliable. 4.3.2.4. Granger causality test The results of Granger causality test show that economic growth has a positive effect on FDI in Binh Dinh province. This result contributes to streng then the theory and some previous research perspective (Umeora, 2013; Nguyen Phu Tu & Huynh Cong Minh, 2010; Nguyen Hong Ha, 2015). At the same time, the results of Granger causality test confirm that no empirical evidence was found for the impact of FDI on economic growth in Binh Dinh province in the research period. 4.3.2.5. The results of FDI threshold estimation As mentioned in the previous section, there is not enough evidence to conclude that FDI affects economic growth in Binh Dinh province when the implemented capital is still too low (FDI accounts for only 0,61% of GRDP). To test this problem, the author applies the optimal threshold level made by the research of Nguyen Quynh Tho (2017) to check evidence in real conditions of Binh Dinh. The results show that the optimal threshold value of FDI is 8.96% of GRDP. This confirms that FDI will have a positive impact on economic growth when the capital scale is large enough, this finding encourages local regulators to combine the FDI attraction and accelerating FDI disbursement in order to promote economic growth. 4.3.3. The regressions result for the relationship between FDI and economic growth in term of the absorptive capacity aspect The research results for the relationship between FDI and economic growth in terms of absorptive capacity in two cases of dependent variables are GRDP and g as follows: - The interaction variables between FDI and FR, FDI and H are statistically significant in both long-term and short-term cases. This finding shows that human capital and quality infrastructure are important 21 factors which locality should be achieved in order to gain benefits of FDI, in which: + The interaction variable between FDI and FR has positive and statistically significant in both cases. This shows that infrastructure is really an important factor that promotes the spread of FDI in the localities. + The coefficient of interaction variable between FDI and H has negative and statistically significant in both cases. This shows that high-quality of labor is an advantage for attracting FDI. However, in this case, the labor quality in Binh Dinh province is low. This is a barrier that limits the contribution of FDI to economic growth. From the above conclusions, the study gives general conclusion that locality need to have suitable policies to improve the quality of human capital and infrastructure in attracting FDI. Thereby, it creates real motivation for economic growth. CHAPTER 5. POLICY IMPLICATIONS 5.1. Local orientation in attracting FDI and economic growth 5.1.1. Attracting FDI 5.1.2. Economic growth 5.2. Policy implications 5.2.1. Increasing FDI attraction and promoting FDI disbursement - Improving the quality of enterprise support services, especially supporting enterprises were granted investment licenses; - Improving the state management for FDI; - Announcing and improving the quality of planning activities; - Innovating and improving the effectiveness of investment promotion activities; 5.2.2. Improving absorptive capacity to increase the benefits of FDI - Completing the construction of synchronous infrastructure; - Improving the quality of human resources; - Improving institutional quality of the locality; 22 - Supporting capacity development of enterprises. 5.2.3. Innovating economic growth model and enhancing competitiveness in attracting FDI - Enhancing the quality of labor productivity; - The economic growth of Binh Dinh province needs to focus on the quality and development of supporting industries; - Binh Dinh Province should give incentives to attract FDI in spearhead economic sectors that have advantages to create a breakthrough in economic growth. 5.2.4. FDI attraction attaches with environmental protection goals - Implementing the selection of investors and improving the effectiveness of environmental management; - Strengthening inspection, examination, and supervision. 5.2.5. FDI attraction attaches with the goal of connectivity with the domestic economic sectors - Enhancing the capacity of domestic enterprises in management and technology. - Binh Dinh province should be specific policies to strengthen linkages of FDI enterprises to promote the spillover effect with domestic enterprises. 5.3. Some recommendations CONCLUSIONS 1. Achieved results The relationship between FDI and economic growth has been a topic of great interest to researchers and regulators to solve the question how to enhance effectiveness in FDI attraction activities to promote economic growth. Especially, for the first time, the Politburo issued Resolution No. 50 on the orientation of perfecting institutions and policies, improving the quality and efficiency of foreign investment cooperation by 2030. This resolution plays a very important role in the process of innovating the economic growth 23 model of Vietnam in general and Binh Dinh in particular. However, in-depth studies on the relationship between FDI and economic growth in Binh Dinh province are limited. Therefore, the study was conducted to analyze and provide empirical evidence of this relationship in the specific conditions of Binh Dinh province. It is the basis for proposing policies to increase the FDI benefits in order to promote economic growth. The result has achieved are as follows: - Firstly, the thesis has systematized some important theoretical issue