1. Vietnamese service industries, and then finally

1. Introduction

            Foreign
Direct Investment (FDI) has always been an indispensable factor for
socio-economic development in developing countries like Vietnam. Besides the
basic industries, effective development of the service sector is one of the
ways for the Vietnamese economy to catch up with the development of the world
and encourage sustainable development through effective participation in the
global value chain. The trend of focusing on investment in services after basic
development of agriculture, forestry, fisheries and industry in developing
countries like Vietnam is indispensable. With a stable economic growth rate in
addition to the advantages of a large, young, and dynamic population, Vietnam
is a potential consumer market attracting the attention of many foreign
investors.

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            In the
context of Vietnam, when the internal capital resources are limited, in order
to develop equally in all sectors, especially the service industry, the foreign
capital inflows in general and Japanese FDI inflows in particular is especially
necessary. Additionally, in recent years, Japan has consistently ranked among
the top three countries in terms of total FDI inflows into Vietnam, with
consistent and steady growth in registered capital, and also the implemented
capital (MPI-FIA, 2017c and Vietnam Embassy in Japan, 2017). With the current
strategic partnership between Vietnam and Japan, we must be fully aware of the
importance of taking advantage of Japanese FDI to boost the development of the
service sector. Indeed, this is a remarkable source of additional funding, and
also a good opportunity for Vietnam to learn and access the science and
technology, and the advanced management level of foreign countries in general,
and Japan in particular, and Vietnam can integrate more deeply into the global
economy. From
the demand of service industry development in the new era, the orientation of
Japanese FDI inflows into this sector has become an important task for Vietnamese
government.

            The thesis
aims to study the case of Vietnam in attracting Japanese FDI into service
industries. The methodologies are literature review, data analysis, and score
method. In the second part, we will come to the theoretical framework with the
basic definitions of FDI and service industry, and experiences of some Asian
countries in attracting FDI. Then, the paper will study the Vietnam-Japan
economic relationship, briefly
describes recent developments of Japan’s capital inflows and discovers the
features and determinants of Japanese FDI into Vietnamese service industries,
and then finally we come to the assessment to understand the reasons that make
the insignificant investment volume in studied country. Finally, there will have some policy suggestions to
improve the quantity and quality of Japanese FDI into Vietnamese service
industries.

2. Theoretical Framework

2.1.
Service Industry

2.1.1. Definition

            The
term service is very broad, covering a wide range of activities and invisible products.
The service sector (or service industry) is an industry that provides consumers
with the final products are services, but it is not involved to the goods’
production (Oxford Dictionary of English, 2010).

2.2.2. Classification

            The
World Trade Organization (WTO) (2017) lists the sectors included in the service
sector and classifies them into 12 group:

Group 1: Business services

Group 2: Communication services

Group 3: Construction and civil engineering
services

Group 4: Distribution services

Group 5: Educational services

Group 6: Environmental services

Group 7: Financial services

Group 8: Social and health-related services

Group 9: Travel and tourism services

Group 10: Cultural and recreational services

Group 11: Transportation services

Group 12: Other Services

2.2.
Foreign Direct Investment

2.2.1. Definition and Classification

            According to the
International Monetary Fund (IMF) (Duce, 2003), FDI is an investment out of the
national boundary, in which a direct investor gains part or all long-term ownership
of a direct investment enterprise in another country. The characteristics that
transcend national boundaries and long term ownership are considered as the
focus of the definition. Thus, FDI will form a long-term relationship between a
parent company (direct investor) and a dependent company (FDI enterprise)
located in a country other than that of the parent company (IMF, 1993). The
parent company does not necessarily control the entire operation of the
dependent company (in case the parent company does not hold a majority of the
shares of the dependent company) and the FDI is just counted in the sphere of
ownership of the parent company to the dependent company (IMF, 1993). The
Organization for Economic Co-operation and Development (OECD) (2008) introduced
the concept of FDI enterprises – a legal or non-legal entity in which the
direct investor owns at least 10% ordinary shares or voting power. Accordingly,
the outstanding characteristics of FDI is the intention of taking control rights
over the company. The 2005 Investment Law of Vietnam mentions concepts such as
investment, direct investment, offshore investment… but there is no concept
of FDI. Hence, it is possible to understand FDI as a form of investment by
foreign investors investing in and participating in the management of
investment activities in Vietnam or Vietnamese investors investing in and
participating in the management of investment activities overseas in accordance
with the provisions of this law and other relevant provisions of law (The Law
on Foreign Investment in Vietnam and the Guiding Documents, 2005).

            From
the above concepts, it is generally possible to understand FDI as an investment
that requires a long-term interest and reflects the long-term interests of the
management of a business (hereinafter referred as foreign direct investor) in
an enterprise residing in another economy (referred as FDI enterprise). Thus,
FDI is always a form of economic relations with foreign factor with two basic
characteristics: international capital movements and direct investors (legal
entities) participate directly in capital use and management of investment’s
objects.

             Based on the different criteria, there
are many ways to classify FDI, such as classifying bases on investment types,
investment motivations, intrusion methods, etc. The multinationals divide FDI into vertical FDI (or export-oriented FDI) and horizontal FDI
(domestic-market oriented FDI). In the vertical FDI model, the finished
products are exported, and the motivation for the FDI inflows is the cheap
labor availability which reduces production costs. This kind of FDI is more
attractive and popular. On the other hand, the horizontal FDI produces
and sells goods in the host market (Demirhan and Masca, 2008).

            However, in service industry, FDI is often
categorized by intrusion methods which contains two main types: Greenfield
Investment and Mergers and Acquisitions (Harms and Meon, 2012). In Greenfield
Investment method, FDI is used to build new enterprises or to develop the
existing enterprises in the host country. This is the most preferable way for
FDI recipients to create more jobs for the locals, increase productivity,
transfer high technology and create exchanged relationship with the world
market (Calderón, Loayza, and Servén, 2004).
On the negative notes, this method can threaten the existence of the domestic
industry because of higher technology and economic competitiveness from foreign
enterprises and the rapid exhaustion of the domestic resources. Additionally, a
significant portion of profits will flow back to the investor (Calderón, Loayza, and Servén, 2004).

            According
to OECD (2008), Mergers and Acquisitions is the form in which the assets of a
domestic enterprise are transferred to a foreign enterprise. The form of transfer
can be a merge between a domestic company and a foreign company to form a
business with a new legal status. This new business started to have
multinational characteristic. In the case of mergers with foreign companies,
the FDI portion is calculated as the part of the contribution received by the
domestic company from the foreign company. Another form of transfer could be
selling the domestic companies definitively to foreign companies. In this case,
FDI is calculated as investments from the parent company to the domestic
subsidiary. This type of intrusion is primarily preferred by service industry
investors because of its rapid market penetration and high probability of
success (Harms and Meon, 2012).

            In
addition, the 2005 Investment Law of Vietnam also provides forms of FDI allowed
in Vietnam as follows:

– Establishment of an economic organization with
100% capital of foreign investors.

– Establishment of a joint venture between
domestic and foreign investors

– Investment in the form of BCC, BOT, BTO and BT
contracts.

– Investment in business development.

– Participating in the management of investment
activities by purchasing shares or contributing capital.

– Investing in mergers and acquisitions.

– Other forms of direct investment.

            Accordingly,
FDI has been classified by listing activities considered as foreign direct
investment, without any specific criteria for classification. This
classification is not sufficient scientific comparing to the above
international classification, only gives the direction to foreign investors in
choosing how to invest in Vietnam.

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