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WTO accession and benefits from FDI: The case of Vietnam Jean Louis BRILLET (INSEE) TRAN Thi Anh-Dao (CARE, University of Rouen, and CEPN, University of Paris XIII) LINK spring meeting St Petersburg June 4-6, 2009 Outline of the presentation The importance of FDI Integrating FDI in a macroeconomic model ◦ Formalizing its determinants ◦ Assessing its impact Applied to the context of WTO accession ◦ The direct measures ◦ The structural changes, the policy decisions The determinants of FDI The level of skills and labor costs, the production costs -> profitability The infrastructures The access to finance The macroeconomic policy, the regulatory and legal framework, sound institutions The potential markets and the regional context FDI and development FDI should improve the process By increasing growth ◦ ◦ ◦ ◦ ◦ Capacity Factor productivity Technology transfers Exports Revenue But no statistical evidence The reason : no complete picture FDI in VietNam 40000 35000 30000 25000 20000 15000 10000 5000 0 1600 1400 1200 1000 800 600 400 200 0 90 9 91 9 92 9 93 9 94 9 95 9 96 9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04 0 05 0 06 0 07 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 inward FDI (Mill $) FDI Stock (Mill $) Number licensed projets FDI distribution Table 1: FDI distribution by form in Vietnam from 1988 to 2007 (in million USD) Number of Project Investment capital Registered capital Executed capital 100% foreign capital 6743 52 437, 099 250 21 476, 300 760 11 324, 296 112 Joint-Venture 1640 24 574, 544 436 9 292, 461 262 11 144, 796 904 BCC 226 4 578, 597 287 4 127, 650 407 5 661, 119 003 BOT, BT, BTO 8 1 710, 925 000 456, 185 000 727, 030 774 Joint Stock Company 66 1 657, 659 197 451, 054 442 362, 746 513 Forms of Investment Mother-Subsidiary company 1 98, 008 000 82, 958 000 Total 8684 85 056, 833 170 35 886, 609 871 Source: FIA - MPI BCC: Business Cooperative Contracts BOT: Build-Operate-Transfer ; BT: Build-Transfer ; BTO: Build-Transfer-Operate 14, 448 000 29 234, 437 306 FDI composition in 2007 Construction 5% Agriculture 6% Food processing Service 3% industry 5% Transport, Post 8% Hotel, Tourism 7% Heavy industry 26% Others services 18% Light industry 17% Oil and gas 7% The model A structural, econometric model of the Vietnamese economy Built with Vietnamese partners : GSO, NCSEIF Annual, single product Estimated on 1986-2006 Cobb-Douglas with explicit role of the relative cost Short term : Keynesian with a strong role of the output gap Long term : More neo-classical with profit maximizing Formalizing FDI determination Relative to total capital evolution, FDI depends on The output gap ◦ Sales prospects on the local and foreign markets The profits rate ◦ Compared implicitly with other countries’ ◦ Contains the output gap ◦ Sensitive also to the margins rate, the productivity of capital, and the ratio of production and demand deflators (sensitive to tariffs) ◦ PR = Marg / (pk K) = MR . pq / pk . UR . prodk Crowding out substitution : -0.3 (calibrated) The estimation Dependent Variable: D(KFDI/K(-1)) Sample (adjusted): 1990 2004 D(KFDI/K(-1))=C_KFDI(1)*LOG(UR)+C_KFDI(2)*0.5*(RPROB+RPROB) +C_KFDI(3)+C_KFDI(4)*(T-2004) Variable Coefficient Std. Error t-Statistic Prob. Log(UR) 0.5*(RPROB+RPROB(-1)) C T 0.533291 0.298370 -0.152926 -0.003641 0.096180 0.062402 0.032235 0.000536 5.544701 4.781386 -4.744174 -6.792465 0.0002 0.0006 0.0006 0.0000 R-squared S.E. of regression F-statistic 0.911320 0.008822 37.68063 Mean dependent var Akaike info criterion Durbin-Watson stat 0.022053 -6.399856 1.608704 The production function Estimation Method: Seemingly Unrelated Regression Sample: 1990 2004 Equation: LOG(K*k_corr/QA)=-b*T-c+alpha*LOG(RELC)+c_fdi*LOG(KFDI(-1)/K(-1)) S.E. of regression 0.146 Sum squared resid 0.216 Equation: LOG(LE/QA)=-b*T-c+(alpha-1)*LOG(RELC)+c_fdi*LOG(KFDI(-1)/K(-1)) S.E. of regression 0.118 Sum squared resid 0.155 Capital correction Time trend Constant Alpha KFDI elasticity Coefficient 0.144 -3.67E-05 1.776 0.655 -0.228112 Std. Error 0.008057 0.00425 8.520 0.1825 0.05066 t-Statistic 17.90685 -0.008613 0.208508 3.590637 -4.502119 Prob. 0.0000 0.993 0.836 0.0014 0.0001 Exports Dependent Variable: DLOG(X) Sample: 1990 2004 Included observations: 15 DLOG(X)=0.6*DLOG(WD)+C_X(2)*DLOG(COMPX)+C_X(3)*(LOG(X(-1) /WD(-1))-C_X(4)*LOG(COMPX(-1))-C_X(5)*(T-1)-C_X(6))+C_X(7) *LOG(KFDI(-1)/K(-1)) Variable Coefficient Std. Error t-Statistic Prob. C_X(2) C_X(3) C_X(4) C_X(5) C_X(6) C_X(7) -0,4312 -1.1563 -0.3828 0.04037 -73.43 0.3433 0.1590 0.2647 0.1135 0.007923 15.897 0.1030 -2.711 -4.367 -3.370 5.095 -4.618 3.331 0.0239 0.0018 0.0082 0.0006 0.0013 0.0088 R-squared S.E. of regression Durbin-Watson stat 0.7416 0.0370 1.933 Mean dependent var Akaike info criterion 0.1493 -3.466 World demand graph GDP Exports Rate of use Global factor Product Capacit y Labor Capital Wage rate Prices FDI in the model Final demand Imports FDI share in capital Foreign Direct Invest Investm ent Factor cost Profitab ility Case A : Shock on f oreign quotas 1.6 1.2 1.4 G1 : The supply-demand 1.0 equilibrium 1.2 .6 .4 1.0 .2 0.8 0.8 0.6 .0 0.6 0.4 0.4 -.2 0.2 0.2 08 10 12 14 16 18 20 22 24 98 08 00 1.0 0.8 G2 : Production Value added Capacity Capital Employment Rate of use -.4 0.0 0.0 10 12 14 16 18 20 22 24 98 00 1.4 .7 1.2 .6 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 .5 1.0 0.6 08 .4 0.8 .3 0.6 0.4 .2 0.4 0.2 .1 0.2 0.0 .0 0.0 -.1 -.2 -0.2 -0.2 08 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 in percentage, shock : +1% of ex ante exports in percentage, shock : +1% of ex ante exports 1.4 Final demand GDP Exports Imports Value added deflator Impact of FDI with FDI impact no FDI impact Case A : Shock on f oreign quotas no FDI impact with FDI impact 1.0 .5 .6 G3 : The ratios Relative cost Capital-Labour ratio Rate of use Profits rate in points Unempl. rate in points .6 0.8 .4 .5 0.6 .4 .3 .2 .3 0.4 .1 .2 0.2 .0 .1 -.1 0.0 .0 -.2 -.1 -0.2 08 10 12 14 16 18 20 22 24 98 00 .4 10 12 14 16 18 20 22 24 98 00 .6 .3 Impact of FDI 08 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 .4 .3 .4 G4 : The export - import .2 ratios .2 .2 .1 At constant prices Terms of trade At constant prices -.3 08 .1 .0 .0 .0 -.1 -.2 -.1 -.2 -.4 -.3 -.4 -.2 -.6 08 10 12 14 16 18 20 22 24 98 00 -.3 08 10 12 14 16 18 20 22 24 98 00 in percentage, shock : +1% of ex ante exports in percentage, shock : +1% of ex ante exports .7 Impact of FDI Case A : Shock on foreign quotas Foreign Direct Investment - with FDI impact .3 .2 in percentage .0 3 -.1 2 1 0 -1 08 10 12 14 16 18 20 22 Foreign direct investment in points of IP Productive investment FDI capital Capital Rate of use / right scale Profits rate in points / right scale 24 98 00 shock : +1% of ex ante exports .1 Comments on Shock A : neutral FDI Quite usual results, with a high openness to world trade (GDP # Exports, Final demand # Imports) Imports increase more than exports This comes from tensions and competitiveness Lower unemployment causes substitution With inflation, the current trade balance improves Comments on Shock A : specific FDI More investment, even more FDI (UR), more factor productivity : more capacities More factor productivity, more capacities : lower prices More demand (investment, exports) but lower UR. Capital more than employment : direct effect, substitution favors capital More cyclic : the higher speed of adaptation generates overshooting Long run : return to normal (no incentive). FDI speeds up the process : this can be interpreted as an additional way to enter the world economy. ◦ But substitution to imports? Case B : Shock on local quotas no FDI impact with FDI impact 0.8 .4 0.4 G1 : The supply-demand0.0 equilibrium Final demand GDP Exports Imports Value added deflator .6 .2 0.0 -0.4 .0 -0.4 -.2 -0.8 -0.8 -.4 -1.2 -1.2 -1.6 -1.6 08 10 12 14 16 18 20 22 24 98 00 0.2 0.0 G2 : Production Value added Capacity Capital Employment Rate of use -.6 -.8 08 10 12 14 16 18 20 22 24 98 00 0.4 0.2 0.0 0.0 -0.4 -0.2 -0.8 -0.4 -1.2 -0.6 -1.6 -0.8 08 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -2.0 08 10 12 14 16 18 20 22 24 98 00 -1.0 08 10 12 14 16 18 20 22 24 98 00 in percentage, shock : +1% of ex ante imports in percentage, shock : +1% of ex ante imports 0.4 Impact of FDI Case B : Shock on local quotas no FDI impact with FDI impact 0.2 0.0 0.0 G3 : The ratios Relative cost Capital-Labour ratio Rate of use Profits rate in points Unempl. rate in points .4 .2 -0.2 -0.2 .0 -0.4 -0.4 -0.6 -.2 -0.8 -0.6 -.4 -1.0 -0.8 -.6 -1.2 -1.0 -1.4 08 10 12 14 16 18 20 22 24 98 00 .6 -.8 08 10 12 14 16 18 20 22 24 98 00 1.0 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 .4 0.6 ratios At constant prices Terms of trade At constant prices 10 .6 0.8 G4 : The export - import .4 Impact of FDI 08 .2 0.4 .2 0.2 .0 .0 0.0 -.2 -0.2 -.2 -.4 -0.4 -.4 -0.6 08 10 12 14 16 18 20 22 24 98 00 -.6 08 10 12 14 16 18 20 22 24 98 00 in percentage, shock : +1% of ex ante imports in percentage, shock : +1% of ex ante imports 0.2 Impact of FDI Case B : Shock on local quotas Foreign Direct Investment - with FDI impact .2 .1 in percentage -.1 -.2 1 -.3 0 -.4 -1 -2 -3 -4 08 10 12 14 16 18 20 22 Foreign direct investment in points of IP Productive investment FDI capital Capital Rate of use / right scale Profits rate in points / right scale 24 98 00 shock : +1% of ex ante imports .0 Comments on Shock B Ex ante increase of imports, ex post negative demand shock This closes the explanation Also for FDI (only ex post effect) Case C : Shock on local tarif f s no FDI impact with FDI impact 1.2 .3 0.8 G1 : The supply-demand0.4 equilibrium Final demand GDP Exports Imports Value added deflator .4 in percentage, shock : -1 point of the rate 0.8 Impact of FDI .2 0.4 0.0 .1 0.0 .0 -0.4 -0.4 -.1 -0.8 -0.8 -1.2 -.2 -1.2 08 10 12 14 16 18 20 22 24 98 00 10 12 14 16 18 20 22 24 98 00 1.0 .7 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 .4 0.8 G2 : Production 08 .5 in percentage, shock : -1 point of the rate .8 -.3 08 .6 .3 Value added Capacity Capital Employment Rate of use .5 0.6 .2 .4 0.4 .3 .1 .2 0.2 .0 .1 0.0 -.1 .0 -.1 -0.2 08 10 12 14 16 18 20 22 24 98 00 -.2 08 10 12 14 16 18 20 22 24 98 00 Case C : Shock on local tarif f s no FDI impact with FDI impact .8 .5 .7 .5 G3 : The ratios .4 .6 .4 Relative cost Capital-Labour ratio Rate of use Profits rate in points Unempl. rate in points in percentage, shock : -1 point of the rate .6 Impact of FDI .3 .5 .3 .4 .2 .2 .3 .1 .2 .1 .0 .1 .0 -.1 -.1 08 10 12 14 16 18 20 22 24 98 00 -.1 G4 : The export - import -.2 ratios -.3 -.4 -.5 -.2 08 10 12 14 16 18 20 22 24 98 00 0.2 .3 0.0 .2 -0.2 .1 -0.4 .0 -0.6 -.1 -0.8 -.2 Impact of FDI 08 10 12 14 16 18 20 22 24 98 00 08 10 12 14 16 18 20 22 24 98 00 in percentage, shock : -1 point of the rate .0 At constant prices Terms of trade At constant prices -.1 .0 -.6 -.7 -.8 -1.0 08 10 12 14 16 18 20 22 24 98 00 -.3 08 10 12 14 16 18 20 22 24 98 00 Case C : Shock on local tariffs Foreign Direct Investment - with FDI impact .20 .15 .10 in percentage 2.5 .00 2.0 -.05 1.5 -.10 1.0 0.5 0.0 -0.5 08 10 12 14 16 18 20 22 Foreign direct investment in points of IP Productive investment FDI capital Capital Rate of use / right scale Profits rate in points / right scale 24 98 00 shock : -1 point of the rate .05 Comments on Shock C : neutral FDI Again, ex ante increase of imports, ex post negative demand shock With an additional positive supply shock The cost of wages and equipment goes down Creating competitiveness, exports, but also a need for equipment and consumption goods Again, imports increase more than exports But GDP and local demand improve Limiting disinflation in the long run But both real trade balance and terms of trade worsen And of course the State budget Comments on Shock C : specific FDI Actually similar to shock A But the increase comes mostly from profitability And less (but some) from the rate of use Profitability lasts longer So GDP is never negatively affected Global impact is stronger Conclusions on shock A (and A’) The access to world markets through quotas and tariffs produces gains which attract FDI, directly, and indirectly through local demand. FDI increases capacities, limits inflation and helps to satisfy foreign demand. Both types of shock have the same consequences, at a variable level. But to really gain from the situation, the conditions of local profitability must be met. Demand is only part of the game. Inflation and costs limit the gains in the medium term. Conclusions on shock B Increasing local quotas depresses the economy. FDI worsens the situation, as firms prefer exporting to investing in a depressed market. Lower FDI reduces capacities and productivity, limits disinflation and substitution by exports. These results are trivial, as opposite to the above shocks Conclusions on shock C Decreasing local tariffs will also increase imports, but create profitability and gradually growth. Foreign firms invest in the country, primarily to export, but local conditions improve too (due to FDI...). Losses in competitiveness are limited. Conclusions on all shocks (1) An initial increase in FDI can be short (medium) lived. More investment and improved factor productivity make capacities adapt faster to demand. The need for additional capacities disappears if profitability does too. The improvement of exports can sustain the effect, the reduction of costs causes deflation and gains in profitability. The inertia on FDI, investment and capacities can actually create overshooting, and sometimes negative medium run consequences. But the actualized gain on GDP is almost always positive. Conclusions on all shocks (2) FDI has a positive impact on local (non FDI led) activity, including local firms (except when it comes from the reduction of local subsidies). On the trade balance, the impact of FDI is generally positive, but it can increase the import of equipment goods in the short run. But when capacities build up, they will be more productive, more profitable, and create more export potential. Also, a higher disinflation has a cost on the terms of trade. Conclusions on all shocks (3) Increasing FDI will have a reduced effect on employment, as it increases the role of capital, and the gains in global productivity will limit job creation, However, employment will generally grow. That all these mechanisms interact with each other, with generally expanding properties. For instance, FDI increases factor productivity which creates profitability and FDI. Or FDI creates exports and the need for additional capacities and FDI, which increases productivity and helps satisfy export potential…. Final conclusion (did we need a model???) For a pure demand shock, FDI increases the speed of adaptation and makes it smoother ◦ By generating capacities through size and efficiency But the impact disappears in the medium run However, the global impact is positive To sustain the gains, we need ex ante profitability (like local tariffs). But even then, more growth and employment will make profitability disappear in the long run.