EFFECT OF ODA ININFRASTRUCTURE IN ATTRACTING
FDI INFLOWS IN VIETNAM
Presenter: Pham Thu Hien

Structure
I. Objectives
II. Review
1.
2.
3.

Definition
ODA in infrastructure and FDI
Previous Studies

III. Current situation in Vietnam
IV. Methodology
V. Regression result
VI. Policy implication and conclusion

I. Objective-

The role of foreign capital for developing countries ODA and FDI-Infrastructure and FDI attraction-ODA in infrastructure investment-

The empirical studies-The real situation in Vietnam-The expected outcome of the paper

II. Overview1. Definition-Foreign Direct Investment (FDI): A longlong-term investment by a foreign direct
investor in an enterprise resident in an economy other than where
where the foreign direct
investor is based
FDI location is determined by ownership advantage, location advantage
advantage and transaction
costs-Infrastructure: Infrastructure is the basic physical systems of a country's orcommunity's population, including roads, utilities, water, sewage,sewage, etc
Infrastructure is characterized by (1) Capital intensive and exhibits
exhibits economies of scale;(2) Lumpy rather than incremental; (3) Long lasting with space andand use specific; (4)Complicated-

Official Development Assistance (ODA): The flow of official financing
administered with the promotion of economic development and welfare
welfare of developing
countries as the main objective, and which are concession in charactercharacter with a grantelement of at least 25 percent (using a fixed 10 percent rate of discount)2. ODA in infrastructure and FDI- Better access to necessities

like electricity, water- Better transportation thus
better access to markets

IncomeIncrease

INFRASTRUCTURE(Mainly from ODA)

Consumption
and market
size increase- Health capital (e.gSchools, hospitals,
roads for better accessto education andhealth service

mothers’ health)- Credit constraints(credit markets,scholarships)- Parents’ income

Human capital
Accumulation

Investment
environment
improvement

FDI3. Previous studies
1. FDI determinants studies
2. The effects of infrastructure on investment
and economic growth
3. The effects of foreign aid on investment
and aggregate growth

FDI determinants

Effects of infrastructure
on investment andgrowth

Effects of ODA oninvestment and growth

Determinants include laborcosts, market size, humancapital, FDI policy andinfrastructure

102 studies conducted overthe last 15 years

Until 2005, there are 43
papersMost studies find positiveeffects of the level ofdevelopment, market size andeconomic growth on FDI

The majority find positiveimpacts. In the case ofdeveloping countries, allstudies find positive impacts

ODA first has an impact on
savings and investment andthen savings and investment
will have impacts on growth
accumulation+ Harms and Lutz (2006) findthat the effect of aid on FDI isgenerally insignificant but
significantly positive forcountries in which private
agents face heavy regulatoryburdens.
+ Karakaplan et al. (2005)
also find an insignificant effectof aid on FDI, but in contrast
to the finding of Harms andLutz (2006), their results
suggest that good governanceand developed financial
markets lead to a positiveeffect of aid

III. Current situation in Vietnam
The Amount of Registered Foreign Direct Investment in Vietnam,
1991 – 2004
10000

900

9000

800

8000

700
600

6000
500
5000
400
4000
300

3000

200

2000

100

1000
001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Registered

Number of Projects

Projects

US$ Millions

7000

Registered Foreign Direct Investment and Committed OfficialDevelopment Assistance in Provinces of Vietnam, sum in 19882004
12000

10000

8000

6000

4000

2000

Registered FDI

ODA disbursement

c
hphu
Vin

on
gidu
Hang
an
Lo

dong
Lam

iph

ong

VT
Ha

hdBin

Bari a-

uong

igna
Donoi
Han

HC
M

cit

y0

Hypothesis-

Ho : ODA in infrastructure has no positive impact on FDI
H1 : ODA in infrastructure has positive impact on FDI-Ho : ODA in infrastructure of one donor has no positive andstrong impact on FDI from that particular country.
H1 : ODA in infrastructure of one donor has positive andstronger impact on FDI from that particular country

IV. Methodology
1. Data:--++Period: 2002 – 2004 (Number of observations = 192)
Source:ODA disbursement data and FDI from Ministry ofPlanning and Investment of Vietnam (MPI) at provinciallevel
Other data from Ministry of Labor and Social Affair andNational Statistical Office2. Model
2.1. General---

Simple linear regression is appliedVariables are transferred into logarithm form tominimize the excessive variations in the value ofODA and FDI
A small value of 0.001 is added to eachobservation when they are being transformed
into logarithm form to escape from losing obs
problem (some obs has 0 value)2.2. Model forms:- Two stage least square to correct:+ Two-way relationship between ODA variable and endogenous
variable (FDI)+ Possible correlation between the error term and explanatory
variables+ The Model pass all necessary tests- Fixed effects/Random effects Model to correct:+ Omitted variables problem+ Arbitrary correlation between the unobserved constant effects andthe explanatory variable+ Fixed effects/Random effects Model will be chosen based on theresult of Hausman test

2SLS model
1.

First stage:(1)

lnODA = f(lnlagODA, lnODA*lnSCHOOL , lnINDUS, lnSCHOOL, lnGDPPC, lnPOP,lnTAX, Y03, Y04, lnPATIENTBED, MOUNTAINOUS)-lnODA:lnODA: ODA in infrastructure, the disbursement of ODA in infrastructure system includingtransportation, telecommunication, electricity.
lnlagODA：
lnlagODA：longlong-term impact of ODA in infrastructure on the FDI inflows.
lnODA*lnSchool: captures indirect impacts of ODA in infrastructure
infrastructure and FDI inflows
Induszone: the area of industrial zones or exportexport-processing zones
LnSchool: The secondary school enrollment is uses as a proxy for human capital
capitalformulation
lnGDPPC:
lnGDPPC: Nominal GDP per capita of each province divided by inflation rate
rate at nationallevel. This is the proxy of level of wage rate in Vietnam
LnPOP: Represents potential market size of these provinces
LnT
LnTAX:
AX: The Proxy for favorable policy of provinces to attract FDI in VietnamVietnam
Taxratio = Tax revenue/Total turnover of the projectproject
Y03, Y04: Year dummies
LnPATIENTBED: The number of patient beds in hospitals of provinces of Vietnam
MOUNTAINOUS: The dummy for mountainous province (=1 if it is moutainous province
province
and =0 if otherwise.

----2SLS model
Second StagelnFDI = f(lnODAhat, lnlagODA, lnODAhat*lnSCHOOL, lnINDUS,lnSCHOOL, lnGDPPC, lnPOP, lnTAX, Y03,Y04 )--lnFDI:lnFDI: Foreign direct investment, FDI commitment according to provinces ofVietnam in the period 2002 – 2004
LnODAhat: predicted value of ODA from the first stage

Fixed effects/Random effects Model(3)

lnFDI = f(lnODAhat, lnlagODA, lnODA*lnSCHOOL,lnSCHOOL, lnGDPPC, lnPOP, lnTAX,a)- a: capture all time-invariant factors

V. Regression Results
Variables

Name of the variables

Coefficients(2SLS)ODA in infrastructure

lnODA

Coef.

t-valueLag of ODA in infrastructurelnlagODA

0.68

3.75**ODA*School

ODA*SCHOOL

0.45

4.01**

Area of industry zones

lnInduszone

0.02

1.69

Secondary school enrollment

LnSchool

-0.81

-1.02

Income per capita

lnGDPPC

-1.14

-0.02

Population

lnPopulation

2.15

0.89

Tax ratiolnTaxation

0.69

0.78

Year Dummy for 2003

Y03

23.01

1.01

Year dummy for 2004

Y04

21.67

1.23

Number of patient beds per person in hospital ofthe province

PATIENTBED-2.26-1.97**

Dummy for Mountainous province

MOUTAINOUS

0.08

1.96*

Constant termCons-14.52-1.68Variables

Name of thevariables

Coefficients(2SLS)

Foreign Direct Investment
inflows

lnFDI

Predicted ODA

lnODAhat

1.36

1.43

2.04

1.79*

Lag of ODA ininfrastructurelnlagODA.85

1.97*

1.50

2.12**

lnSchool*lnODAhat

ODAhat*SCHOOL

.14

1.99*

.135

0.81

Area of industry zones

lnInduszone.32

1.69*

Secondary school
enrollment

Lnschool

2.03

2.42**

3.36

2.33**

Income per capita

lnGDPPC

1.87

1.96*

1.26

1.98*

Population

lnPopulation-1.98-2.24**

-1.86

-1.29

Tax ratiolnTaxation-1.51

3.0**.87

0.02

Year Dummy for 2002

2.91

0.93

Year dummy for 2003

1.29

0.19

-19.20-0.54-19.48-0.59

Constant term

Cons

Coef.

Coefficients(Fixed effects)

t-valueCoef.

t-valueName of thevariables

JapanEU

Coefficients(2SLS)

Coefficients(Random effects)

Coefficients(2SLS)

Coefficients(Fixed effects)

lnFDI

Coef

t-valueCoef.

t-valueCoef.

t-valueCoef.

t-valuelnODAhat

1.03

1.89*

1.47

2.52**

1.3

2.78**

1.64

0.24

lnlagODA

2.00

3.55**

2.03

2.03**.611.60.21

0.96

ODAhat*SCHOOL

2.35

1.97*

3.31

2.34**.20

2.92**.06

2.92**

Lnschool

1.63

0.56

2.73

3.67**

2.35

2.47**

2.47

3.38**

lnGDPPC

3.15

2.30**

3.45

2.31**

0.18

0.39

0.39

0.16

lnPopulation

0.063

0.42

0.024

0.77

-1.28

-0.2

0.20

0.91

lnTaxation

-4.32

1.99*

-4.24

-0.75

-1.48

-3.51**

-3.51

-0.58

lnInduszone

0.69

1.96*

0.15

1.13

3.27

0.92.92

2.22**

Year 02

1.55

0.76

Year03.35

0.11

-8.94

-1.04

Cons

1.39

0.07-89.11

-1.66

25.13

0.83

1.91

0.09

Interpretation
1.

--First stage of 2SLS model
The positive correlation with the number of patient beds
in provincial hospitals implies that aid allocation is also
influenced by the level of development of public service inthat province
The dummy variable (Moutainous) does have minor
significant impact on the level of ODA in infrastructure.
Moreover, GDPPC variable does not have significant
impact on ODA level. Thus, ODA in infrastructure inVietnam does not necessarily flows to poor provinces, butrather to enhance basic infrastructure needed for FDI
inflows

Interpretation
2. The second stage:--------The effect of aid in infrastructure is statistically significant and positively affects theFDI inflows in fixed effects model
In both the two models, the positive coefficients of lag of ODA in infrastructure arestatistically significant proving the longlong-term impact of ODA in infrastructure and FDI
inflows
Interaction term implies that ODA in infrastructure enhances FDI
FDI inflow throughindirect channel by improving the human capital in that province but the indirect
effects of ODA in infrastructure on FDI inflows are not large compared
compared to otherfactors
Income per capita to is positive correlated with FDI inflows. TheThe potential market
size of the province has the positive impact on the FDI inflows.
Number of secondary school pupils also has a positive correlation
correlation with FDI. The
quality of labor force of each province has played a decisive rolerole in attracting FDI
flows
Population has opposite sign with the expectation. This prevails that population does
not appropriately represent the purchasing power or the market sizesize of provinces.
The government tax incentives have not provided any significant effects on attracting
FDI flows in mountainous or remote province
The area of industrial zones also has significant impact on FDI inflows but themagnitude of the coefficient is small implying that the effects of industrial zones to
FDI inflows is not large

Interpretation
3. ODA from Japan and EU--The effects of Japanese aid on own FDI in both direct andindirect channel are significant and substantial in size andthe long-term effects of ODA on the FDI inflows are evenlarger
The effects of ODA in infrastructure from EU countries on
FDI inflows are minor and ambiguous
The effects of ODA in infrastructure of each country on FDI
inflows of that country vary, depending largely on the policy
and targets of aid allocation that respective countryVI. Conclusion and policy implication
1. Conclusion
FDI flows in Vietnam have been allocated unevenly between provinces
and regions, which is attributed to (1) the infrastructure, (2) quality of
the labour force and (3) the local market of each province.
ODA in infrastructure has contributed to the attraction of FDI in provincesof Vietnam not only by direct channel but also by indirect channel
Japanese ODA, rather than ODA from other bilateral donors have positiveand significant impact on the allocation of FDI of Japanese private
investors

2. Policy implication---

Adjust government priority policy in ODA mobilization
towards attracting more aid in infrastructure.
Further enhancement of ownership in ODA mobilization anddisbursement will improve the impact of ODA to FDI
attraction and economic development of Vietnam
Government policies also should focus on development ofhuman capital through universal secondary school graduate
programs as well as vocational training programs, rather
than provide tax-incentive policy to promote FDI tomountainous areas

THANK YOU