Attracting and benefiting from foreign direct investment under absorptive capacity constraints : a case for Vietnam

Most developing countries have made concerted efforts to advance their national development. One way to increase gains in terms of capital and advanced technology is to attract investments from foreign countries with external investment reserves. However, the challenge host countries face is by definition their limitation of financial resources, when concurrently, they need to satisfy both their FDI partner’s profits and maintain their national economic growth. Weighing the balance of such decisions is a complex task for policy makers as well as decision takers. How to optimize the externality and utilize the internality, in combining them to create an aggregated synergy, ergo national development, is both an interesting and pragmatic research topic. The research in this thesis is conducted from the perspective of a host country and addressed the issues of attracting and benefitting from foreign direct investment (FDI). The whole process of FDI flow is examined in order to (1) understand factors that initiate FDI; (2) identify factors trigger FDI inflows into a particular developing country, (3) discover and isolate factors that capture absorptive capacities of host country. This research approach is a mixture of analytical methods applied to a selected case study – Vietnam. Quantitative data of forty-two FDI inflows into Vietnam in the period 1990-2006 were applied to determine specific factors influencing FDI initiation and establishment. The qualitative literary analysis, including an in-depth review of current FDI sources, and in-depth interviews, conducted with policy makers, professional experts, and domestic and international investors, are combined to explore factors that a host country requires to position itself for the absorption of FDI benefits. In summary, this research finds that both external or home investor and host countries’ characteristics impact FDI initiation and establishment. Also, it will be demonstrated that a host country demands prerequisites for a certain initial level of economic development, in terms of human capital, absorptive capacity of local firms, physical infrastructure, stable financial system, sufficient technology, and reliable institutions to absorb the benefits of potential FDI. To the best of my knowledge, this may be the first study on the entire process of FDI life from FDI birth, to growing up, and finally to maturation. This dissertation provides guidelines for future research on FDI’s Gravity approach forces, further FDI comparative advantages, and especially FDI’s absorptive capacities. This dissertation should provide a significant contribution to literature about FDI in Vietnam in particular.