VIETNAM NATIONAL UNIVERSITY – HO CHI MINH CITY

INTERNATIONAL UNIVERSITY
SCHOOL OF BUSINESS

THE DETERMINANTS OF FOREIGN DIRECT

INVESTMENT INFLOWS INTO VIETNAM AND
DEVELOPING COUNTRIES

International Financial Management course

Lecturer: Assoc. Professor, Dr. Vu Thi Quy

Group members:
Student’s name Student’s ID
Nguyễn Diệu Thùy BABAIU18402
Nguyễn Hoàng Lê Trang BAFNIU18151
Nguyễn Minh Thông BAFNIU17070
Thái Thị Kim Hoàng BABAIU17068
Bùi Quỳnh Như BAFNIU15004

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 TABLE OF CONTENT

I. INTRODUCTION
1. Recent trend of Foreign Direct Investment (FDI) in Vietnam........................3
II. LITERATURE REVIEW...................................................................................3
1. Developing countries and emerging market....................................................3
a. Inflation...............................................................................................3
b. Exchange rate......................................................................................4
c. Gross Domestic Product......................................................................4
d. Gross Domestic Product per capita.....................................................5
e. Infrastruture.........................................................................................5
f. Trade openness....................................................................................5
g. Institutional determinant......................................................................6
2. Vietnam context..............................................................................................6
III. DISCUSSION......................................................................................................10
1. The similarity between the determinant of FDI inflows into Vietnam
and into developing and emerging market......................................................10
2. The difference between between the determinant of FDI inflows
into Vietnam and into developing and emerging market................................10
IV. CONCLUSION....................................................................................................12
V. REFERENCES....................................................................................................14

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I. Introduction:

According to OCED, Foreign direct investment is described as an investment with the

intention of securing a long-term interest, a long-term partnership between a foreign direct
investor and a direct investment company. With FDI, lots of countries gain several benefits:
entering new markets to attract more demands and gain superior profits; avoiding trade
restrictions, and diversifying internationally, and so on. Due to the advantages for revenue and
cost, FDI plays a critical role in the economic growth of a nation. Determinants which affect the
FDI inflows of countries vary from one another. There are several researches on the determinants
of inward FDI in various countries. With the best of our knowledge, we make a decision on
doing a desk research for the purpose of identifying the determinants of foreign direct investment
inflows from developing countries-emerging market and Vietnam perspective. Thereby, we
make a comparison between the factors affecting the inward FDI in Vietnam and developing
countries as well as emerging market and give some discussion related to our finding from the
above research papers. We decide to divide the report into four main sections: Introduction,
Literature Review, Comparison, and Conclusion. Introduction part consists of the definition of
FDI, the role of FDI in economic development, and the purpose of our report. In Literature
Review, we summarize the papers supporting our report from a global perspective and Vietnam’s
perspective. In the Comparison part, we make a comparison between the two contexts: global
context and Vietnam context and discuss the reason for the similarity and difference between the
two contexts. In Conclusion part, we define which variables have a significant effect on FDI
inflows in Vietnam and developing nations and address the question whether or not the findings
of the key determinants support FDI theories.

1. Recent trend of Foreign Direct Investment in Vietnam

Vietnam also seen a steady rise in demand after the stabilization of the trade war between
the U.S. and China, drawing further foreign investment. And a lot of firms have shifted their
operations to Vietnam. The global economy has experienced the economic slowdown in the post-
Covid 19 period, which has impacted a large number of countries, including Vietnam. Vietnam's
recovery prospects, however, remain hopeful and are said to be the best of Asian nations.
Between January and October, there were 109 nations invested in Vietnam, especially Singapore,
the Republic of Korea and China. Furthermore, Vietnam is engaged in 16 Free Trade
Agreements, including the EU-Vietnam Free Trade Agreement (EVFTA) expecting to ratify by
the end of 2020. Vietnam also joins in the Regional Comprehensive Economic Partnership
(RCEP) negotiations.
II. Literature review
1. Developing nations and emerging market
a) Inflation
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 (Asiamah et al., 2019) expects the inflation impact negatively on the FDI and there is
two-way round relationship between FDI and inflation. The result consistent with the expectation
that inflation is a negative and important factor effecting on FDI both in the short and long term
in Ghana. However, it describes the unidirectional causality between inflation and FDI. This
mean that FDI is influenced by inflation, but no opposite direction. (Saleem et al., 2020) also
point that inflation affect negatively FDI inward in Pakistan. Similarly, (Sabir et al., 2019)
inflation hurts FDI in developing nations, but it is statistically negligible. (Jaiblai & Shenai,
2019) shows the result that the inflation variation coefficient in one model was negative and
positive in the other, but not significant, suggesting the need for market-wide macroeconomic
stabilization. In contrast, (Asongu et al., 2018) indicates that the inflation is projected to be
negative. However, the study indicated a positive and insignificant effect. The BRICS (Brazil,
Russia, India, China, and South Africa) and MINT (Mexico, Indonesia, Nigeria, and Turkey)
nations with higher inflation rates still receive more FDI because the BRICS and MINT macro-
economic stability play a smaller part in global corporate investment decisions.
b) Exchange rate
(Asiamah et al., 2019) expects a close interaction between FDI and exchange rate
changes in the short and long term and have a negative effect on FDI inflows. The findings show
that there is also a unidirectional causality between the FDI and the exchange rate log. Given the
analysis has demonstrated a negative and important causal effect of the exchange rate on FDI.
(Ergano & Rambabu, 2020) variability of the exchange rate project to adversely impact the flow
of FDI to Ethiopia. Official Exchange Rate (OER) at the 10 percent mark showing the
importance and positively affects the inflow of FDI. A rise of 1 unit in the official exchange rate
will result in a 13.4 percent increase in FDI flow. This suggests that if the domestic currency
were devalued, the cost of investment for international companies will decrease and the
competitiveness of exports of their goods would rise in the global markets. And (Jaiblai &
Shenai, 2019) in the long term, the coefficient of adjustment in the exchange rate was positive
but insignificant. In the short term, the exchange rate variation coefficient was negative but not
important in both models, pointing to the trend in the direction of the stabilization.

c) GDP

Most of the research shows the positive relationship between GDP and FDI inflow.
Specifically, (Asiamah et al., 2019) anticipate seeing a causal association between GDP and FDI.
And the findings suggest a two-way directional causality between the GDP and FDI. And the
finding is that the causality of FDI to GDP is greater than the causality of GDP to FDI. This is
consistent with long-term consequences. It also recognizes that the GDP is a crucial factor for
every economy to draw FDI, like Ghana. (Asongu et al., 2018) shows that the GDP coefficient
was positive as predicted and important, suggesting that GDP was an essential determinant of
BRICS and MINTS FDI inflows. (Ergano & Rambabu, 2020) argue that Ethiopia’s GDP
influence positively on FDI consistency with the expectation. Ethiopia's GDP rises, more FDI

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inflows will arise as GDP growth will generate more sales and market access for FDI project
outputs. The β value implies that an increase of 1% in Ethiopia's GDP would lead to an increase
of 1.56 percent in FDI inflows.

d) GDP per capita

Gross Domestic Product (GDP) per capita calculate by a country's GDP divided by its
total population. (Sabir et al., 2019) expect the GDP per capita is the major determinant of FDI in
host nation. LnGDP per capita in developing countries is positively and statistically substantially
correlated with FDI. Besides, (Ergano & Rambabu, 2020) shows that the partner country's GDP
per capita, India, also affects Ethiopia's FDI inflow in this case and finds it important at 10%.
The β value indicates that an increase of 1% in the Indian GDP per capita would increase the FDI
inflow to Ethiopia by 13.14 per cent. This aspect has been shown to have a favorable effect on
the inward of FDI to Ethiopia. On the other hand, (Jaiblai & Shenai, 2019) predict a stronger
appeal of FDI to lower-income markets. The findings also find out that in one model that points
to the region where investment was drawn most, the coefficient of income levels was negative
and significant. In the short term, the coefficient of change in income levels has again been
negative, but not significant, suggesting that investors see greater opportunities in lower-income
economies.

e) Infrastructure

(Jaiblai & Shenai, 2019) forecast that infrastructure are important for higher FDI inflows.
The result indicates that in both models, the infrastructure coefficient was positive and important,
indicating infrastructure is the key determinant of FDI inflow in Sub-Saharan countries. (Paul &
Jadhav, 2019) in the emerging economy, the efficiency of infrastructure in the host nations is
favorably correlated with FDI inflow for the primary and secondary industries in emerging
market, which is confirmed by the first research hypothesis that infrastructure efficiency changes
have an impact on FDI inflows in all industries.

f) Trade openness

(Asongu et al., 2018) in MINT, the trade coefficient was positive and important as
predicted, suggesting that countries more open to trade are drawing larger amounts of FDI.
(Ergano & Rambabu, 2020) the coefficient of trade openness shows a positive connection
between international trade and FDI in the context of bilateral relations between Ethiopia and
India. In its direction of impact, trade openness is considered significant and positive. Similarly,
Ethiopia's trade coefficient is relevant at a 1% stage and has a favorable effect on FDI inflows
from China. The beta value indicates that a 1% rise in Ethiopia's trade with China would result in
an increase of 1.175 per cent in FDI flows and that the trade impact trend is as favorable as
anticipated. (Jaiblai & Shenai, 2019) eexpect a two-way relationship of causation between
openness and FDI and its effects is positive. In the long run, the openness coefficient was found

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to be positive but not important in both models, pointing to the pattern in Sub-Saharan
economics of more open to trade. (Saleem et al., 2020) Openness to trade, pursuing theoretical
views, plays an essential role in FDI inflows in Pakistan. Trade openness is a key factor to
achieving a positive and important impact on FDI. (Sabir et al., 2019) the findings indicate that
trade openness in developing countries has a strong and important effect on FDI inflows. In
particular, the 1-percent rise in trade opennes leads to a 3.7 per cent increase in FDI inflows in
low-income nation and a 2.1 per cent increase in low-middle-income nations, while keeping all
other variables stable.

g) Institutional determinant

(Saleem et al., 2020) institutional quality is an important determinant that has a favorable
effect on FDI in Pakistan and a long-term relationship between institutional efficiency and FDI
has been developed to provide evidence of FDI-led growth assumptions in Pakistan as
expectations. The implication of the study indicates that policies related to FDI would have a
positive impact on growth factors and boosting the economy, with rising patterns leading to
higher growth prospects in Pakistan. Furthermore, the positive effect of FDI inflows on
institutional efficiency offers policymakers an incentive to boost local institutional quality by
drawing more FDIs. (Paul & Jadhav, 2019) the iinstitutional quality is an important
determinant of FDI in emerging markets and assesses by successful rule of law, political
stability, regulatory consistency and corruption controls. It predicts that in the host economy, a
higher level of corruption leads to a lower level of FDI in all sectors. However, the finding is that
higher levels of corruption positively impact on FDI inflow, especially primary industrues which
indicates that while the level of corruption in emerging markets is high, FDI still flow to the
primary sector, as FDI decisions in the primary sector are mostly dictated by other factors such
as position of resources with the easy transportation of machinery. The hypothesis expects that
more FDI for all industries is earned by countries that have a stronger business-friendly climate
and improvement in governance efficiency. Nonetheless, two variables are not statistically
relevant. FDI inflows are negatively associated with governance and the business environment,
indicating that FDI often flows into these economies dominated by other variables, such as
infrastructure and trading costs, if the level of governance and business are not assisted in
emerging market. The extent of corruption in the case of the secondary sector is not statistically
important. Well governance in the tertiary sector is found to be able to draw further inflows of
FDI into emerging markets. (Sabir et al., 2019) predict that FDI is adversely correlated with poor
institutions. And the author finds out that, the effect of the institutional efficiency index on the
FDI inflow is statistically and positive. Institutional quality interventions, such as avoidance of
corruption, government efficiency and political stability, have a strong and substantial effect on
FDI inflows in developing countries, but other institutional quality indicators in these countries
have a favorable but slightly impact on FDI inflows..

2. Vietnam context

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 (Minh, 2019) conduct the research indicating the effect of institutional quality on FDI in
Vietnam.. This paper presents the dependent variables as the annual FDI inflow and dependent
variables are market size, trade openness, labor, education, and institutional determinants. In
specific, the GDP and the population of each province as a measure of the market size acquired
by the General Statistic Office of Vietnam, openness to trade calculate by the export ratio plus
import to GDP of each province, labor is determined by the proportion of labor in the population
aged 15 to 64 years, the percentage of high school graduates as a measure for the standard of
education and institutional determinants measure by Vietnam Provincial Competitiveness Index
(PCI), institutional index of nine sub-indicators: entry cost; Land access and security of Tenure;
transparency and access to information; time cost; proactivity; informal charge; business support
services; labor training; legal institutions.
The hypothesis before conducting the research is that institutional quality serves as a
catalyst for inflows of FDI and there is also a reverse effect. Indeed, the inflow of FDI is likely to
encourage the efficiency of the institutions. The most significant and statistically significant
measure is market size. The labor force is known to be a key determinant of FDI inflow and for
international investors, provinces with a stronger education system are more appealing.
Result:

Source: institutional quality and foreign direct investment inflows: the case of Vietnam

As we can see, there has been a clear positive relationship between FDI inflows to the
provinces of Vietnam and institutional efficiency, GDP, labor force and trade openness. Other
model variables are in a negative relationship to the FDI inflow. All the factors significant
impacts on FDI inflow in Vietnam. The main element of institutional efficiency in Vietnam is
the variety of governance policies and regulations across regions and provinces that influence
foreign investor location decisions. An increase of 1 point in Pricipal competitiveness index
could promote the value of the inward FDI by 62.3 corresponding units, indicating that foreign
investors have established provincial governance as a key determinant of the location decision.
Local authorities in the provinces of Vietnam should improve both administrative productivity
and the business environment in order to enable foreign investors to invest more. GDP has an
important and optimistic effect on the volume of FDI inflows. An increase in GDP of 1% may
lead to an increase in inward FDI of about 615 units. In Vietnam, this outcome correlates with
the fact that major provinces, cities with a high rate of economic growth are now at the top of the
Foreign direct investment list, while others have been left behind for years with a low capacity to

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attract FDI. Labor has also been positively correlated to GDP. Almost all of Vietnam's FDI
projects focus on labour-intensive industries with high demand for labour, especially low-cost
labour force. As a result, the province with a high labour ratio is beneficial in drawing FDI. The
paper also supported the results of other studies that international trade has a favorable impact on
FDI.
(Vo, 2018) examines determinants of FDI flows into Vietnam, an important emerging
market. This researches concentrate on the features of the foreign countries and other bilateral
relationships between the foreign countries and Vietnam as the main factors of FDI inflow into
Vietnam. The data contains the majority of foreign nations that have Direct Foreign investment
inward in Vietnam from the World Bank, IMF, and Vietnam's GSO in Vietnam for the period
2005-2014. FDI is the dependent variables and other independent variables such as market size,
inflation, trade openness, volatility in returns on the stock exchange, volatility of exchange rate,
and distance.
Result:

Source: Determinants of Capital Flows to Emerging Economies – Evidence from Vietnam

Market size is determined by GDP log of source countries. It shows that the
GDP coefficients are positive and significant in all regressions, and this finding shows that the
GDP of the source country is also relevant in determining Vietnam's FDI. In most regressions,
the inflation coefficients of the source countries are negative and important. This finding
indicates that investors in high inflationary economies, in the context of FDI, appear to search for
investment opportunities abroad. This simply means that if governments make good efforts to
stabilize inflation, Vietnam could become a desirable destination for foreign investors.
Mentionig about the effect of trade on FDI in the regression model, we find that Vietnam draws
more FDI from trading partners as the bilateral trade coefficients are favorable and important in
the explanation of FDI inflow into It is also shown that increased FDI is a significant reason for
entering into a free trade agreement in a region. Stock market volatility coefficients determined
by the standard deviation of the regular stock return of the source nation index are positive and
substantial in most regressions. This indicates that foreign investors choose long-run FDI

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investment in emerging markets as an option to escape short-run investment uncertainty in their
homeland. Finally, the distance factors are determined by the log distance of thousands of
kilometers between the capital city of foreign countries and Vietnam's capital city, Hanoi. It finds
that in explaining FDI, the distance factors are negative and important. This result is consistent
with preceding researches that shows that location is an essential indicator in increasing FDI.

(Ngo et al., 2020) analyzing the determinants of foreign direct investment inflow into
Vietnam. The papers expected result before testing is that market size, Labor force, Skilled labor,
Macroeconomic policy, Infrastructure, Trade openness macroeconomic stability are positive
relations with FDI.
Result

Source: Determinants of Foreign Direct Investment: Evidence from Vietnam

Source: Determinants of Foreign Direct Investment: Evidence from Vietnam

In explaining the inflows of FDI, market size is one of the most powerful determinants.
The results indicate that the size of the market has a favorable effect on attracting FDI. The
results confirm the positive influence of market size on FDI inflows at a 5% relevant level by
GMM difference method. And using the PMG regression, at the significance stage of 1%, the
market size component impacts the FDI in the same direction. This outcome shows the
importance of the market size for the FDI attraction that should be concentrated in future in
offering a stimulus for attracting FDI to Vietnam. The PMG regression's analytical findings
verify that labor force has a positive effect on generating FDI flows with a significance of 1%. It
demonstrates the essential role of the labor force in drawing FDI flows to Vietnam. However, the

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influence of the labor force on obtaining FDI inflows is not defined by the difference between
the GMM method and the PMG regression, which is statistically neligible. This outcome reveals
that the influence of the labor force on drawing FDI inflows into Vietnam is unsustainable. Well-
trained labor and knowledgeable workers have a positive effect on FDI inflows. The findings
suggest that qualified labor affects drawing inflows of FDI into Vietnam.Likewise, the impact of
the professional labor factor is not determined by the short-term use of both the GMM
differential and the PMG approaches, indicating that the function of this factor is not solid. The
trade openness variable shows a short-term negative influence on FDI and has no long-term
influence. This conclusion is remarkable, obviously pointing to the imperfect short-term function
of trade openness. The beneficial effect of trade openness on attracting FDI has been seen by
most previous research. Few studies have shown that foreign trade has a negative impact on
foreign direct invetsment inward. Instead of FDI ventures, the low cost of the transportation of
goods and the eliminated barriers would allow international trade unless the developing countries
provide any unique incentives that persuade foreign investors to come in. In addition, the
findings of the Vietnam analysis indicate that Economic unsustainability have a detrimental
effect on the attractiveness of FDI, which means that in all regression models, a rise in CPI
would have an unfavorable influence on attracting FDI. The paper reveals that statistically
important variables are market size, labor force, macroeconomic policy, macroeconomic
stability, qualified labor and trade openness which is largely consistent with other prior research,
between market size and FDI inflows.
III. Discussion
1. Similarity:
Consider inflation, GDP, GDP per capita, trade openness, institutional quality is the factors
that appear both in other developing countries and in Vietnam. In particular, for inflation most of
papers show the negative and important impact of inflation on foreign direct invetsment inflows
into developing countries and Vietnam, interpreting that the stability of inflation rate plays an
essential part in the attrecting of FDI inward. For GDP most of papers from developing countries
and Vietnam shows that the GDP coefficient and FDI move in the same direction and its effect is
significant which means the country having the higher level of GDP growth attract more FDI
because the high growth rate of GDP provides increased revenue and market accessibility for
FDI project. In term of GDP per capita, most of papers’ results illustrate that it has a positive and
important impact on FDI inward in developingg nations as well as Vietnam. This implies that
higher level of income attracts more FDI. In addition, openness to trade has a favorable and
significant influence on FDI inflows into developing nations and Vietnam. The more open the
economy is, the more FDI inflows is. And some developing countries like Vietnam tend to join
in free trade agreements to draw more FDI inflows into the countries. Lastly, Institutional
determinants, most of papers we have read demonstrate that institutional determinants are the
key determinants which the foreign direct invesment inflow of host countries both in developing

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countries and Vietnam. And they give recommendation that improving the quality of institution
helps a country attract more FDI
2. Difference between the determinants of FDI inflows into developing countries-emerging
market and into Vietnam:
Firstly is GDP, (Vo, 2018) consider the impact of the GDP of foreign countries while most
of papers from developing countries only consider the impact of the GDP of home countries. It
indicates that GDP of the countries that invest in host countries has a positive and important
effect on FDI inflows. Furthermore, (Asiamah et al., 2019) also find out the bi-directional
causality of FDI inflows into Ghana and GDP. It interprets that FDI create more income to
higher the level of GDP, booming the economy. Secondly, with regard to inflation, (Vo, 2018)
consider the impact of inflation from the source country’s perspective while most of papers from
other developing countries only consider the impact of inflation in home countries. In the former
paper, the inflation coefficient of the source countries is negative and important, interpreting that
source country with higher inflation rate has a tendency to seek more investment opportunities
abroad. Vietnam is also considered as an attractive location to invest directly if the government
attempts to stabilize the inflation rate. The third difference is GDP per capita, most of developing
nations as well as Vietnam only cover the GDP per capita factor from the home country’s
perspective as a determinant of FDI, while a paper related to the determinants of FDI (Ergano &
Rambabu, 2020) considers the GDP per capita factor from the partner country’s perspective. The
latter show the result that the coefficient of GDP per capita of the partner country is positive and
significant. This implies that the increase in the income level of foreigner leads to the increase in
FDI inflow into host countries because the enterprises have more capacity of investing abroad. In
addition, Only the paper (Jaiblai & Shenai, 2019) related to sub-Saharan economy show the
negative and insignificant result, implying that some lower income zones like sub-Saharan
countries attract more FDI due to the fact that the foreign investors see the potential in these
economies. The next difference is for trade openness, only one paper (Ngo et al., 2020) shows
that openness to trade and FDI inflow move in the opposite direction and it impact is significance
in the short run and there is no effect in the long run while most of papers from developing
countries state the benefit of trade openness on FDI inflows. The explanation for this is that
international trade is more encouraged by the low costs of transportation of goods and the
elimination of obstacles than FDI projects in Vietnam. In aspect of institutional determinants,
some papers from developing countries use the same indicators of institutional determinants such
as control of corruption, voice and accountability, government effectiveness, political stability,
rule and law, and regulatory quality (Sabir et al., 2019); (Paul & Jadhav, 2019). These papers
figure out the indicators through previous cross-country literatures. However, the Vietnamese
study (Minh, 2019) using the unique measurement of Vietnam’s institutional determinants,
Provincial Competitiveness Index (PCI) including Entry cost; Land access and security of
Tenure; Transparency and access to information; Time cost; Proactivity; Informal charge;
Business support services; Labor Training; Legal institutions. Furthermore, for infrastructure and

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exchange rate, Vietnamese papers we have read do not mention the impact of the two factors on
FDI inflows into Vietnam while the papers from developing countries consider these two factors.
The latter show the positive and significant effect of infrastructure on FDI inflows into
developing countries. For the exchange rate, the research conducted in another developing
countries has shown the unit-directional causality of FDI inflows and exchange rate. In contrary,
few Vietnamese papers consider to test the unidirectional and bidirectional causality of FDI
inflows into Vietnam and various independent variables mentioned above. For labor force,
skilled labor and knowledgeable workers, the paper from Vietnam do mention about these
factors while most of papers from developing doesn’t consider these factors. The reason for the
labor force only mentioning in Vietnamese papers rather than the paper from other developing
countries such as Sub-Saharan, Pakistan, Ethiopia, and so is that Vietnam is a labor-extensive
industry which have the low cost of labor, attracting foreign direct investors. Hence, it is certain
that Vietnamese papers tend to consider the labor force as a factors influencing FDI inflows into
Vietnam. The paper whose author is Minh shows that the coefficient of labor force is positive
and important, implying that the province having a high ratio of labor attract more FDI because
the focus of all the FDI projects in Vietnam is labor-extensive industry, especially low-cost labor
force. However, the labor force factor is considered as unsustainable factor. Similarly, the role of
skilled labor and knowledgeable workers is not sustainable and positive so the paper (Ngo et al.,
2020) give a recommendation that the government should concentrate on this phenomenon and
create and improve some policies related to skilled labor and knowledgeable labor. Beside, in
Vietnam there are also some factors are discussed such as stock market volatility and distance
which was not mentioned in the other research papers we had read in foreign countries. From
stock market volatility of the source country’s perspective, (Vo, 2018) it has a positive and
significant impact on FDI inflows into Vietnam. This indicates that foreign investors prefer to
invest directly in Vietnam in the long run, with the intention of preventing uncertainty
movements of short-term investment in their countries. From the distance’s perspective, it is a
negative and significant influence on FDI inflows into Vietnam, which is the same as the results
of previous literatures that the longer the distance is, the less FDI inflows the home country has
and it plays an important role in determining FDI inflows into the home country.
IV. Conclusion

Through the literature review and comparison parts, we propose that five main
determinants of FDI inflows into Vietnam and developing countries include Inflation, GDP,
GDP per capita, Trade Openness, and Institutional Determinants. With the best of our
knowledge, most of the papers we have read do mention about five above determinants and those
studies show the same results. Inflationary variable is negatively correlated to FDI inflows and it
is statistically significant. In contrast, GDP, GDP per capita, Openness to Trade, and Institutional
Determinants have a positive impact on FDI inflows and they are statistically significant.
Moreover, due to the fact that five main determinants mentioned are macroeconomic factors, it
probably affects the whole economy so it may affect FDI inflows.

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  To answer the question whether the results of five main determinants of FDI inflows into
Vietnam and developing countries support theories of FDI or not, we make a comparison
between the five determinants and theories of FDI. There are four theories of FDI including the
neoclassical trade theory, the imperfection of market theory, the product cycle theory, and the
eclectic paradigm theory. The neoclassical theory states that the relative availability of factors of
production including land, labor, entrepreneur, capital affect the opportunities of trade and
capital flows. Higher return and lower production cost attract more foreign investors to invest in
the home country. With the imperfect market theory, due to the imperfection of the market,
MNCs want to capitalize the resources and funds of the foreign country. The imperfection of the
market encourages MNC to seek more foreign investment opportunities.  For the product cycle
theory, the theory states that a firm is likely to establish themselves in the home market due to
the availability of market information. To seek more demand for its product, exporting is the
initial way which the firm chooses to conduct so as to reduce transportation cost. After that, the
company understands that it should   maintain this dominance over its international market
competition. by producing its product in foreign markets. However, the foreign competitors
become more familiar with the firm’s products so the firm approaches a strategy that
differentiate its product in order to prevent its competitors duplicating its product easily. For
inflation, it has a negative and significant impact on FDI inflows, supporting one theory: the
neoclassical trade theory. To explain this, (Vo, 2018) states that the country having a high level
inflation rate is likely to seek more foreign investment opportunities and Vietnam is one of the
most attractive locations for FDI if the government tries to stabilize the inflation rate. For GDP
and GDP per capita in both the home country and the source country, they have positive and
significant impacts on FDI inflows into the home country, supporting the product cycle theory.
The reason for it is that higher income level grows the demand for foreign direct investment
firms’ products in both home and foreign markets and, thereby, higher income levels draw more
FDI inflows to the host country. Probably the most detailed analytical method for optimizing
decisions of global corporations to participate in FDI is the eclectic paradigm developed by
Dunning (1988, 1993, 2000). The eclectic model structure maintains that the multi-national
corporations' scale, geography, and industrial components of FDI are affected by three groups of
variables: strategic ownership benefit, locational specificity, and internalization (OLI). In
particular, Ownership benefit is that the capacity to capitalize on their government's political
assistance, the ease at which the business can move production between two countries,
technologies and operational expertise, access or ownership over raw materials, etc. Locational
factors include such as shipping costs for finished goods and raw materials, low wages, import
limitations, the business can easily work in another region, home countries ‘s political stability,
etc. And lastly is internationalization advantage such as Joint company, simple licensing, etc.
This theory is consistent with the finding that institutional quality, labor forces, trade openness
are the main determinant and influence positively on FDI inflow into host countries, especially
developing nations which were examined by the empirical researches.

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Asongu, S., Akpan, U. S., & Isihak, S. R. (2018). Determinants of foreign direct investment
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Ergano, D., & Rambabu, K. (2020). Ethiopia’s FDI inflow from India and China: analysis
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