Investment behavior by foreign firms in transition economies: the case of Vietnam

The structure of this dissertation is as follows. The first chapter presents a literature review on FDI with the aim to explore the motivations driving a firm to expand investments abroad, the reasons why FDI is preferred to other investment forms, and the main factors affecting location choices of foreign investors. Since our thesis focuses on location decisions of foreign firms in Vietnam, we spend more room on the discussion of the location theories such as the theory of comparative advantages, localization theory, institutional based view and information cost approach. Subsequently, we present a theoretical review on FDI determinants in transition economies and in Vietnam. We state that market size, labor costs and the riskiness of investment environments are key factors affecting FDI inflows to these countries. The final section provides the description of data source that is used for the empirical studies in Vietnam. The second chapter studies the effect of institutional practices by local authorities on the entry rates of foreign firms in Vietnam over the period 2000-2005. The Vietnamese provincial competitiveness index in 2006 (PCI 2006) and its two sub-indices reflecting attitudes of local government toward state-owned enterprises and the capability of private enterprises to access to necessary information for their business are used as proxies for institutional implementations by provincial authorities. The empirical findings show that provinces with better institutional performance attract more foreign firms. The results support our argument that just as institutions at the national level affecting the overall volume of FDI inflows, informal institutions at the sub-national level influence FDI spatial distributions among provinces within the country. Formal legal changes initiated at the centre have varied impacts across provinces because the implementation of laws and regulations at local level depends on the informal institutions determined by attitudes (norms and cognitions) of local authorities. The third chapter examines the effects of agglomeration economies on the location choices by foreign firms in Vietnam. By using a large dataset that provides detailed information about individual firms, we examine the location choices by 568 newly created foreign firms in 2005 in about 150 different 4-digit industries. The estimates of the negative binomial regression model and the conditional logit model strongly support our hypotheses that agglomeration benefits motivate foreign firms in the same industries and from the same countries of origin to locate near each other. Moreover, the empirical results show that provinces in Vietnam compete with each other to attract FDI, and the locations of Vietnamese firms have no effects on the location decisions by foreign firms in the same industry. The last chapter investigates the survival probability of foreign entrants in Vietnam by looking at the life span of 187 foreign firms created in 2000 over the period 2000-2005. By applying the Cox proportional hazard model, we find that foreign firms with larger start-up size and growing current size are more likely to stay longer in the market. We also reveal that foreign firms entering the market with wholly-owned subsidiaries rather than making joint ventures with local partners can live longer. In addition, locating in industrial zones or export processing zones increases the survival probability of foreign firms due to tax priority and other incentives. However, by contrast to our prediction, agglomeration economies have no significant effect on firm survival. As expected, cultural distance is found to have a strong impact on the survival of foreign firms. Proximities in culture make it easier for foreign firms in cooperating with local partners, therefore increasing their success in foreign markets.