Inward FDI and Vietnam’s labor productivity – Implication for FDI inflows

from the EU

Le Van Hung

Vietnam Institute of Economics

Email: hunglevan78@gmail.com

Hanoi, 25.10.2017

Contents

1. Overview of FDI and labor productivity (LP) in Vietnam

2. The role of FDI sector in improving LP

3. Measuring of the contribution of FDI to labor productivity growth

4. Contribution of FDI sector on Vietnam’LP

5. Conclusion and implication for FDI inflows from the EU

1. Overview of FDI and labor productivity (LP) in Vietnam

Annual FDI disbursement in Vietnam (million USD)

0

20000

40000

60000

80000

100000

120000

140000

1988

-19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Sơ

bộ 2

015

1988

-20

15

428.5 2398.7

11000.314500

138692.9

FDI registered by industry (accumulated to 31/12/2015)

0

20000

40000

60000

80000

100000

120000

140000

160000

180000162772.7

50896.4

Growth rate of Vietnam’s LP

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006 2007 2008 2009 2011 2012 2013 2014 2015 2016

4.04.2

2.82.6

4.1 4.03.7

4.7

6.6

5.3

Labor productivity gap between FDI sector and domestic sector

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2006 2011 2016

1.7 1.6 1.4

9.69.0

8.0

FDI/State ownership

FDI/Non-stateOwnership

2. The role of FDI sector in improving LP

• FDI to help labor move from low productivity sectors (agricultural and informal sector) to higher productivity sectors (manufacturing and service sector) ((Kuznets, 1966; Harberger, 1998), Timer và Vries (2008), Crafts (1984)).

• FDI sector with the advantage of technology, market, knowledge, will help to increase labor productivity higher and more stable (Vahter, 2004)

• FDI sector will create a spillover effect on technology and management skills for the local sector through linkages (Trần Văn Thọ (2005), Porter (1990) , Blomstrom và Kokko (1998) , Blomström và Persson (1983), Ramirez (2006),…

Contribution of FDI to labor productivity growth

FDI

Direct Effect

Labor shift Within effect

Indirect Effect

Spillover effect (skill, technology)

Competition effect

3. Measure the contribution of FDI to labor productivity growth

• Direct contributionThe method measures the labor productivity in the economy using the below formula:

(1)In which:Pe: LP of economy, Pi: LP level in sector i , Ye: gross output of economy (value added); Le: total labor in

economy, i= i-n (numbers of sectors in economy); Li: total labor in sector i; Si proportion of labor to sector i (Si=Li/Le)

Using formula (1), we can calculate the change in productivity levels between two points in time:

(2)

We can use the below formula to calculate the growth rate of labor productivity in economy (gPe) between two periods and compare year T to base year (0):

(3)

the first component in the right-hand side of the equation measures the productivity growth within sector (intra-sectoral effect); the second component is the effect of structural change on labor productivity in economy (shift effect).

• Direct contribution: The backward linkage, forward linkage and horizontal effect are calculated by method of Javorciket.al, 2004)

o Demonstration effect (or competition effect)

Where yjt is output or labour of FDI firm in the Vietnamese industry j; Yjt is total labour of all firms in the same industry

o Backward linkages

Where ajk is the proportion of output in industry j consumed by sector k to produce output of sector k. These coefficients are taken from Input Output (I-O) Table 2010.

o Forward linkages

Where bjk is proportion of output of sector k to be used as input of the industry j and they are picked up from I-O Table 2010

4. Contribution of FDI sector to Vietnam’LP growth

0.0

20.0

40.0

60.0

80.0

100.0

2006 2007 2008 2009 2011 2012 2013 2014 2015 2016

28.716.1

25.8

29.2

70.342.8

42.1

13.6

31.4

FDI Non-state State

Share of investment capital, employment, and their contribution to LP growth

24%

10%

39%

47%

86%

38%

29%

4%

23%

0% 20% 40% 60% 80% 100%

Share of LP growth

share of employment

Share of investment capital

State Non-state FDI

Components of labor productivity growth (Percentage points)

State sector Non-state sector FDI

VietnamWithin

effect Shift effect

Within

effect

Shift

effect

Within

effect

Shift

effect

2006 2.5 -1.3 1.2 0.0 -0.7 2.4 4.0

2007 1.5 -0.5 1.7 -0.2 -0.8 2.4 4.2

2008 1.0 -0.5 1.4 0.0 -0.1 1.0 2.8

2009 1.5 -1.1 1.4 0.4 2.5 -2.2 2.6

2011 0.6 0.0 2.5 0.1 1.6 -0.7 4.1

2012 1.2 -0.1 1.8 0.0 1.2 -0.3 4.0

2013 1.7 -0.6 1.5 0.1 0.5 0.6 3.7

2014 0.4 0.5 2.7 -0.4 -1.2 2.5 4.7

2015 3.4 -1.7 2.9 0.2 0.7 1.3 6.6

2016 1.3 0.0 2.4 -0.1 0.7 0.9 5.3

Linkage between FDI and domestic companies in the manufacturing industry

VSIC 2 digit

Sector

Vietnam

(2009-2013)

Indonesia

(2000-2008)

H B F B F

10 Food products 14.6 1.1 4.0 33.6 19.7

11 Production of beverages 16.6 4.8 15.0 n.a n.a

12 Tobaco 0.0 0.1 9.5 21.8 22.8

13 Textiles 39.3 34.6 10.0 33.4 26.4

14 Wearing apparel 54.4 18.7 36.7 36.4 37.5

15 Leather products and footwear 72.5 5.2 13.5 22.4 31.3

16 Wood, bamboo,.. products 13.8 35.0 7.7 28.7 32.1

17 Paper 24.4 13.1 9.4 11.7 27.0

18 Publishing 14.8 17.8 24.9 38.4 31.3

19 Mining/Petroleum products 7.4 11.4 1.5 30.5 41.2

20 Chemicals 27.9 26.4 6.3 37.0 32.0

21 Pharmaceutical chemistry and medicine 12.5 3.1 6.0

22 Rubber and plastics products 43.7 44.0 16.5 42.9 45.3

23 Non-metallic mineral products 7.4 10.8 8.1 32.5 35.0

24 Basic metals 14.8 23.4 1.2 45.9 33.1

25 Fabricated metals 37.9 33.3 11.0 40.5 35.0

26 Production of electronic products, computers and optical products 94.2 11.4 18.5 78.3 68.3

27 Electrical machinery 66.5 15.1 24.3 70.9 58.7

28 General machinery 39.0 31.2 27.0 62.4 31.4

29 Manufacture motor vehicles, trailers 59.8 7.2 20.2 82.3 45.4

30 Other transport equipment 32.4 1.7 28.6 65.9 43.2

31 Furniture and miscellaneous 46.4 15.8 19.7 40.1 33.0

32 Other manufacturing and processing industries 79.6 0.9 20.4 n.a n.a

33 Repair, maintenance and installation of machinery and equipment 2.7 32.8 23.3 n.a n.a

Manufacturing industry 34.3 16.6 15.1 42.8 36.5

5. Conclusion and implication for FDI inflows from the EU

Conclusion

• In the last decade, the FDI sector plays an important role in directly contributing to the Vietnam’s labor productivity growth. However, the contribution of the FDI sector to labor productivity growth is largely due to the shift of labor (64%).

• The level of linkage between the FDI sector and the domestic sector is almost low in manufacturing industry , especially in the high technology and technology sectors. It implies that the indirect effect on labor productivity of the FDI sector through the spillover effect on technology and labor skills is small and weak.

Some suggestions to improve the contribution of FDI to labor productivity

– Improve the level and skills of domestic labor

o To upgrade the quality of universities and vocational training schools in Vietnam according to international standards;

o Ranking and evaluation of universities and vocational training for post-graduates students (employment, income, stability)

– FDI attraction policy

o Vietnam needs to attract quality FDI instead of quantity

o Experimenting to build several eco-industrial parks specializing in processing agricultural products (Ex: coffee in Highland region , aquatic products / fruits in the Mekong Delta region)

Implication for FDI inflows from EU

FDI from the EU to Vietnam is still small compared to the potential (currently accounts for 7% of total FDI registered capital in Vietnam )

Registered FDI capital of over $ 1 billion by country

50553.5

42433.9

38255.4

31885.5

20482.1

17003.1

11966.5

10527.6

10141.7

7799.7

7604.5

6485

5323.3

5128.3

3754.7

3390.4

2933

2300.5

1830.7

1372.5

1366.4

1211.7

1056.6

0 10000 20000 30000 40000 50000 60000

Hàn Quốc

Nhật Bản

Xin-ga-po

Đài Loan

Quần đảo Virgin thuộc Anh

Đặc khu hành chính Hồng Công (TQ)

Ma-lai-xi-a

CHND Trung Hoa

Hoa Kỳ

Thái Lan

Hà Lan

Xa-moa

Quần đảo Cay men

Ca-na-đa

Vương quốc Anh

Pháp

Thụy Sỹ

Lúc-xăm-bua

Ôx-trây-li-a

Bru-nây

CHLB Đức

Tây Ấn thuộc Anh

Liên bang Nga

The expectation on FDI inflow from EU

• EU companies have strengths in food processing, agro-fishery, nutritious food, renewable resources, pharmaceuticals, manufacturing machinery and equipment.

• Vietnam has great potential to link with EU companies in the supply of raw materials and vice versa, EU’s enterprises will support the transfer of technology and production methods to the Vietnamese side.

=> VEFTA will promote FDI flows from the EU into Vietnam =>Expect more spillover effects from FDI in the EU.

The policy on attraction of FDI inflows from EU

• Promote and introduce the investment environment of Vietnam to EU companies.

• The governments of Vietnam and the EU countries hold annual enterprise meetings to them look for investment opportunities

• Increase cooperation /joint venture between Vietnam and EU(Ex: Vincom and Posch, Siemen)

Thank you for your attention!