2010 Summer Research Proposal: Decentralization and its Impact on Provincial FDI Policies in Vietnam

I. Background and motivation

1. The significant role of FDI in Vietnam’s economic renovation and development

As part of its economic reform in late 1980s, Vietnam opened up its economy for FDI with the 1986 Law on Investment, leading to an explosion of FDI inflows, dampened only by the 1997 Asian crisis, and has picked up a strong pace again in 2003. As in other developing countries, FDI has played an instrumental role in Vietnam’s economy, providing the needed capital, technology, and management skills. The contribution of FDI can be convincingly proven by the observation that the foreign-invested sector has accounted for almost one fifth of the annual real output growth of Vietnam in 1996-2005.

Moving beyond purely economic rationale, FDI has also secured a political momentum that ensures its continuing legitimacy within an otherwise divisive leadership. This legitimacy is of great significance, especially when considered against the context of a still plan-influenced, directive economy that may easily change course due to an ideological surge or a political concern. It allows us to safely assert that FDI has had and will have long-lasting impact upon the economic and political landscape of Vietnam.

2. Consistent administrative decentralization regarding FDI policies

In 1995, the Eight Plenum of the Central Committee endorsed decentralization, which includes the devolution of planning/management and of financial responsibilities to the local governments. Coupled with the fact that Vietnam, as a relatively small country, has 63 provinces, each with its own administrative, legislative, and judicial units, this decentralizing trend allows and encourages provincial autonomy, and hence, provincial variation and competition. In areas specifically relevant to FDI, laws passed in the first half of 2000s give the Chairman of provincial People’s Councils the vast authority to grant or recover land use rights, grant investment certificate, approve development plan, approve land price, assess environmental impact, etc.

Besides opportunities, there are also great incentives for provinces to compete as well. Fiscal decentralization allows local governments to wholly collect land rent, and partially collect profit tax and income tax from high-income earners. Equally important is the political influence gained with the ability to attract FDI, thanks to budgetary autonomy and favorable reputation.

Are there empirical evidences of increasing provincial competition? Officials’ remarks and recent studies suggest a positive answer. Vũ Hồng Phúc, Minister of Planning and Investment, publicly advocates provincial competition in attracting FDI. Data also shows that since the promulgation of decentralization laws, FDI registered boomed, both in absolute terms and in percentage growth, while the percentage of FDI implemented, interestingly, declined markedly. This suggests that provinces may be engaging in a race to attract FDI that involves immature and permissive approvals.

To conclude, it can be said that decentralization succeeds in turning locals into corporatist actors, who are self-reliant, self-aware, and self-interested. Yet along with efficiency and local dynamism, the new entrepreneurial nature of local governments naturally induces competition as well. Therefore, this research intends to measure the impact of decentralization upon provincial competition, and the factors that cause this impact to vary across provinces.

II. The Theory

My research posits that the impact of decentralization upon provinces’ policies to attract FDI varies substantially in accordance with provincial capacity. “Capacity” means the capability of provinces to coordinate, and to deliver public goods and services that are instrumental to investment. To confirm this theory, it is necessary to perform two steps: 1) determine the ways with which provinces can attract FDI, then 2) examine how variations in capacity affects the policy choice of provinces among these instruments.

I divide the possible means for provinces to attract FDI into two categories: 1) concessionary, including low land price, tax holidays, and lax regulation; and 2) developmental, including administrative reform and provision of public goods. Even though the central government has been emphasizing the role of decentralization in fostering local governments’ developmental policies, in an intensely competitive atmosphere, there are real risks that locals will engage in highly concessionary policies, which do not require the strenuous process of capacity-building.

This leads to my main hypothesis that local governments with low capacity will have to rely more heavily upon concessionary policies. The differentiation between locals with high and low capacity should be most apparent in land price and tax holidays, which directly affect provincial budgets. Since labor and environmental regulations are of a lesser concern, locals’ capacity may not be vigorously channeled into this area, leaving a less sharp distinction.

III. Methodology

1. Measuring the independent variable

To measure capacity, I rely mainly on the annual Provincial Competitive Index, jointly produced by the USAID and the VNCI. The index ranks provinces based on their cumulative scores on 9 sub-indices: entry cost, land access and security of tenure, transparency and access to information, time costs of regulatory compliance, informal charges, proactivity of provincial leadership, business support services, labor and training, and legal institutions. I will further dissect the sub-indices in order to select measurements that specifically and accurately reflect coordination capacity. (For example, land access, measuring how easy it is to access land, may be affected by laxness in approval rather than bureaucratic coordination, and hence, will be left out.)

2. Measuring the dependent variable

First of all, to assure that any variations in the dependent variable is attributable to the independent variable, I control all others variables that may prompt locals to engage in concessionary policies, e.g. geography, size, GDP, and infrastructure. This ascertains that these provinces seek the same kind of FDI (hence, facing the same amount of pressure to concede).

Quantifying land price and tax concessions should be quite easy and concrete. I will seek data from the General Statistics Office and local government to discern any variation in current absolute values as well as historical relative trend.

Measuring lax regulation is a more complicated matter. Firstly, since locals are only responsible for implementing national laws, and not for setting the standards per se, laxness is much less concretely measurable. Secondly, data on the resolution of labor and environment violations are not readily available due to political sensitivity. Thirdly, the rigor with which locals punish infringement may be confounded by factors other than capacity, e.g. corruption.

Due to these constraints, I intend to substitute with the number of labor complaints and environment violations. Even though this measurement admittedly does not point to regulatory laxness, it does reflect a willingness of locals to approve potentially damaging projects. By tightly controlling other variables that may affect number of complaints and violation, I will make this measurement a better reflection of the variation in permissiveness.

IV. Research plan

1st and 2nd week – Review most recent literature; request data from governments.
3rd week
– Devise a more accurate measurement of capacity, based on the PCI.
4th week
– Design pairs of provinces for comparison.
5th and 6th week
– Gather and analyze data on land price and tax concessions (dependent variable).
7th and 8th week
– Gather and analyze data on labor complaints and environmental violations (dependent variable).
9th and 10th week
– Finalizing data analysis and writing a report

V. Concluding remarks

This research, first and foremost an academic work, will supplement the “race to the bottom” analysis by recognizing the impact of varying capacity in shaping the decentralization experience in FDI policies. Viet Nam is an apt test site for this effect, due to its heavy reliance on FDI, its consistent decentralization (albeit not without tension within the ruling party), and its fragmented sub-national administration. The findings should be relevant to other developing countries as well, most of which need FDI and consider decentralization.

At the same time, this research cannot escape its implicit role of a policy assessment. More than five years have passed since the first signs of vigorous decentralization; now is the prime time for the impact to be felt and the debate to be raised. Even though the state has been highlighting developmental policies as the product of decentralization, concessionary policies are the concomitant risk. High cost of excessive concessions, if found, would suggest that the government should preclude or discourage these concessions, in order to channel the pressure of competition into improving locals’ developmental capability.


There, my baby research.

A full version of my research proposal, including proper footnotes, tables, and bibliography can be downloaded here. Due to the five-page limit of the submitted proposal, there may be some minor differences. The version posted in this entry is the most extensive version that I was able to salvage from my old files. A 5-page proposal clearly does not possess much persuasive power; there is only so much room for claims and not enough for evidences. I was, therefore, compelled to make difficult choices in editing. I am fully aware of, and (somewhat) (haha) apologetic for this shortcoming.

This proposal is also much less ambitious than my initial intentions. I believe that the development of FDI unfolding in Vietnam is much richer, and much more interesting than the issues superficially addressed here. I will probably elaborate more on the some other intriguing puzzles, and on what forces me to resign with  (haiz I should probably say resolve on) this particular topic.

Not that my wondrous, erudite, charming, patriotic professor (a classically trained violinist too!) would ever run across this entry, I am deeply grateful for her help, insights and encouragements. Any mistakes (oh, there are quite a few) are entirely my own.


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