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The 46th WORKSHOP
4 October2008 (Sat), GRIPS Campus in Tokyo, 14:00-17:00

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   

Summary
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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fs 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fs 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fs 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fs 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fs 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fs 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 gtechnology dumph 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fs 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fs research field. Finally, we announced forthcoming research activities of VDF Tokyo and welcomed anyone to actively take part in these events.
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Slides (PDF943KB)

 (By Nguyen Thuy Anh & Pham Thai Son)

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