Download A simple method to switch endogenous and exogenous

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.