Luận văn thạc sĩ UEH location specific determinants of japanese foreign direct investment in

University of Economics International Institution of Social Studies

Ho Chi Minh City, Vietnam Eramus University of Rotterdam,

The Netherlands

VIETNAM – THE NETHERLANDS PROGRAMME

FOR MASTER OF ART IN DEVELOPMENT ECONOMICS

LOCATION SPECIFIC DETERMINANTS OF

JAPANESE FOREIGN DIRECT INVESTMENT

IN SELECTED ASIAN COUNTRIES

BY HUYNH THAO THUY VI

A thesis submitted in partial fulfillment of the requirements for the degree of

Master of Arts in Development Economics

Under the supervision of Dr. Le Cong Tru

HO CHI MINH CITY, 2014

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DECLARATION

This is to certify that the thesis entitled “Location-specific determinants of Japanese foreign

direct investment in selected Asian countries”, is submitted by me in fulfillment of the

requirement for the degree of Master of Art in Development Economics to Vietnam –

Netherlands Programme. This thesis comprises only my original work and due supervision and

acknowledgement have been made in the text to all other material used.

Huynh Thao Thuy Vi

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ACKNOWLEDGEMENT

I would not be possible to finish this thesis without the support of people surrounding me.

Firstly, I am really grateful to my supervisor, Dr. Le Cong Tru, for his guidance, comments and

supervisions.

Secondly, I would like to express my gratitude to Dr. Truong Dang Thuy for his econometric

guidance.

Thirdly, I want to acknowledge all lecturers of Vietnam-Netherlands Programme for the wide

knowledge they provided me during the time I studied here.

Next, I would like to express my gratitude to my parents for all of their sacrifice, encouragement

and support for me.

Last but not least, I would like to thank my friends and people, who supported for my thesis but

were not above-mentioned.

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ABBREVIATIONS

FE Fixed Effect

FDI Foreign Direct Investment

GDP Gross Domestic Product

JBIC Japan Bank for International Cooperation

JFDI Japanese Foreign Direct Investment

JETRO Japan External Trade Organization

MNE Multinational Enterprises

RE Random Effect

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ABSTRACT

This thesis contributes to examine the location-specific determinants influencing on

Japanese foreign direct investment. This research uses fixed effect method and panel data of ten

selected Asian countries in the period from 1995 to 2012. The determinants are classified into

three groups: policy factor, business facilitation and economic factor. In this study, except for the

variables which belong to policy factor and business facilitation, the others of economic factor

are categorized in accordance with three main motives for Japanese enterprises investing abroad.

Those motives are market-seeking, resource-seeking and efficiency-seeking. The study finds that

market size, natural resource, inflation rate, exchange rate volatility, political risk and

infrastructure development are the significant factors.

Moreover, among ten selected Asian countries, there are the differences between

intercept coefficients of Vietnam and other countries who are Thailand, Indonesia, Vietnam–

Philippines and China. In other words, except for the determinants in the regression model, there

would be other factors making those countries to be more dominant than Vietnam. Finally,

recognizing the need of Japanese foreign direct investment, the policy makers in host countries

should apply the relevant policies to improve the business environment for becoming promising

destinations and attract more Japanese foreign direct investment.

Key words: Japanese foreign direct investment, panel data, location-specific, Asian countries,

fixed effect.

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TABLE OF CONTENT

DECLARATION .......................................................................................................................... 1

ACKNOWLEDGEMENT ............................................................................................................ 2

ABBREVIATIONS ....................................................................................................................... 3

ABSTRACT ................................................................................................................................... 4

TABLE OF CONTENT ................................................................................................................ 5

LIST OF FIGURES ...................................................................................................................... 7

LIST OF TABLES ........................................................................................................................ 8

CHAPTER 1 INTRODUCTION .............................................................................................. 9

1.1 PROBLEM STATEMENT ........................................................................................................... 9

1.2 RESEARCH OBJECTIVES ....................................................................................................... 10

1.3 RESEARCH QUESTION ........................................................................................................... 10

1.4 THESIS STRUCTURE ............................................................................................................... 11

CHAPTER 2 LITERATURE REVIEW ................................................................................ 12

2.1 THEORETICAL LITERATURE ............................................................................................... 12

2.1.1 Early concepts & studies of determinants of FDI ............................................................... 12

2.1.2 Neoclassical Trade Theory (Heckscher-Ohlin model & MacDougall-Kemp model) ......... 13

2.1.3 Hymer – Kindleberger Paradigm ........................................................................................ 13

2.1.4 Internalization theory .......................................................................................................... 14

2.1.5 The OLI paradigm - Eclectic theory ................................................................................... 15

2.2 EMPIRICAL STUDIES .............................................................................................................. 17

2.3 CONCEPTUAL FRAMEWORK ............................................................................................... 22

CHAPTER 3 RESEARCH METHODOLOGY .................................................................... 25

3.1 VARIABLE DEFINITION AND TESTING HYPOTHESES ................................................... 25

3.1.1 Market size .......................................................................................................................... 25

3.1.2 Natural resource .................................................................................................................. 25

3.1.3 Inflation rate ........................................................................................................................ 25

3.1.4 Exchange rate volatility ...................................................................................................... 26

3.1.5 Trade openness .................................................................................................................... 26

3.1.6 Political risk ........................................................................................................................ 27

3.1.7 Infrastructure development ................................................................................................. 27

3.1.8 Labor cost ............................................................................................................................ 28

3.2 DATA AND MODEL SPECIFICATION .................................................................................. 28

3.3 RESEARCH METHODOLOGY ................................................................................................ 31

3.3.1 Descriptive Analysis ........................................................................................................... 31

3.3.2 Regression Analysis ............................................................................................................ 32

CHAPTER 4 DATA ANALYSIS ........................................................................................... 37

4.1 THE OVERVIEW OF JAPANESE FDI IN ASIAN COUNTRIES ........................................... 37

4.1.1 Before the crisis in 1997 ..................................................................................................... 37

4.1.2 After the crisis in 1997 ........................................................................................................ 43

4.1.3 Several remarkable characteristics of recent Japanese FDI in Asia .................................... 45

4.2 EMPIRICAL RESULTS ............................................................................................................. 47

4.2.1 Descriptive analysis and some general tests ....................................................................... 47

4.2.2 Econometric results ............................................................................................................. 52

CHAPTER 5 CONCLUSION AND POLICY IMPLICATION .......................................... 57

5.1 CONCLUSION ........................................................................................................................... 57

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