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Investment Environment and Its Components


parts and usually outdated technology, causing pollution... with prices higher than the international level.

+ Among foreign investors, there are cases of intentional intelligence activities that disrupt security and politics... [21, p.16]

1.2 Investment environment

1.2.1 Investment environment and constituent elements

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1.2.1.1 Concept of investment environment

There are many ways to define the investment environment:

Investment Environment and Its Components

According to Vu Chi Loc - Textbook "Foreign Investment" - Education Publishing House: "Foreign investment environment is the sum of political, economic and social factors related to investment activities and ensuring the profitability of foreign investment capital".

According to Professor Ngo Xuan Dan - "International Economic Relations (Theory and Practice)": "The investment environment is a set of natural, economic, political, social, legal, and psychological factors of the investment receiving country to protect the safety and maximum profitability of foreign investment capital."

According to WB – “Vietnam Development Report 2006”: “The investment environment is a set of local specific factors that shape the opportunities and motivations for businesses to invest effectively, create jobs and expand production.” [14, p.23]

According to Nguyen Thi Lien Hoa - "Solutions to attract and improve the efficiency of FDI capital use in Vietnam", the FDI attraction environment and the FDI attraction market are factors affecting FDI attraction.


Figure 1.2: Factors affecting attraction

Factors affecting FDI attraction

FDI attraction environment

FDI



Market attracting FDI capital

Potential market

Labor market

Policy

economy

Legal system

law

Political stability

Cultural practices

- society


From the above viewpoints, the investment environment can be understood in the most general sense as the sum of external factors related to investment activities. There are many ways to classify the investment environment, but according to many economists, the investment environment can be divided into:

(1) – Hard environment is related to factors of transport infrastructure (roads, ports, etc.), communication systems, energy supply, industrial park and cluster systems, etc.

(2) – Soft environment: administrative service system, legal service related to investment activities (especially issues related to treatment regime and settlement of disputes and complaints), financial service system – banking, accounting, insurance... Soft environment also includes factors of political and social stability, economic development,...


1.2.1.2 Constituent elements

All investment activities are ultimately for profit and other benefits if any. Therefore, an attractive investment environment must be an investment environment with high investment efficiency and low risk. This is influenced by many factors such as:

- Investment incentive policies and mechanisms of the host country.

- Development conditions of economic infrastructure.

- Level of perfection in administrative and legal institutions.

- Political and social stability and macroeconomics.

- Openness of the economy.

- The development of the market system.

… The above factors have a mutual impact relationship. Therefore, to improve the quality and efficiency of the investment environment, it is necessary to synchronously handle the above factors.

Below is an analysis of some of the elements that make up the investment environment.

* First, the socio-political environment and macroeconomic stability

When considering the socio-political environment, investors are often interested in two basic factors: socio-political stability and the political attitude of the receiving locality towards attracting foreign investment.

- Political and social stability is the most important factor influencing the investment decisions of foreign investors. This is an extremely important factor, because an unstable political situation, especially an unstable political regime (and the accompanying changes in laws and policies) ... will cause serious economic and social consequences that foreign investors will also have to bear in part.

The criteria of political stability that investors are interested in are the sustainability of the government, the level of power struggle between political factions.


politics, the activities of political parties and religions, ethnicities. If other conditions of the investment environment remain unchanged, the more stable the politics and the higher the reliability, the more attractive private investment is [16, p.41]

The goal of business is to make profit and minimize risks, which is the desire of any investor who wants to do business for a long time. Without a stable political and social environment, no matter how favorable other conditions are or how generous the preferential policies are, they cannot "hold" or attract foreign investors. For example, in the case of Thailand. Compared to other countries in the ASEAN region, Thailand is a country with advantages in terms of geographical location and human resources. Thailand has long paid much attention to improving the investment environment to attract more and more investment projects, including foreign direct investment. However, since the end of 2008, Thailand has always been in a state of prolonged political instability. Foreign businessmen doing business in Thailand are concerned that political instability in Thailand will flare up again and possibly last longer, affecting their business plans. FDI projects in this country have decreased significantly in recent years.

This shows that a country or locality has political stability.

- society, no conflicts, no religious or ethnic problems, no or very limited social evils and problems,

- The political attitude of the locality receiving investment towards attracting investment is

wish to receive investment projects or investment capital of that locality

This is reflected in policies and viewpoints on attracting investment. In addition, it is also reflected in the sincere and goodwill cooperation of the Government, local authorities, and people with investors. This is of particular importance: on the one hand, it is the driving force for that locality to improve the investment environment, on the other hand, it creates trust and peace of mind for investors when investing in that locality.


In Vietnam, local government is understood as provincial and municipal government directly under the Central Government. Vietnam currently has 64 provinces and municipalities directly under the Central Government. While the central government plays a decisive role in creating a transparent investment environment nationwide, increasing the country's competitiveness in attracting FDI, the results of implementing FDI attraction policies depend mainly on the role of local governments.

Attracting FDI is a rather complex activity that requires local authorities to demonstrate their role clearly, responsibly and creatively. Local authorities, through their basic functions of building and guiding the legal framework, mobilizing and allocating resources within the locality, providing necessary support services, stabilizing the socio-economic order to create a good image of the locality in the eyes of investors.

The role of local authorities is primarily to guide the implementation of laws and regulations of the central government within the locality, to ensure the stability of the political and legal system within local government agencies, and to have solutions to stabilize the local socio-economy to create confidence for investors. More specifically and proactively, local authorities can carefully study and evaluate the advantages of areas with growth potential to develop investment plans, investment calling projects, and carry out local investment promotion activities as well as coordinate with national investment promotion agencies to carry out local image marketing. Based on the assessment of potential and investment attraction planning, local authorities must demonstrate their role in mobilizing resources to ensure a suitable infrastructure system and a service system that meets the needs of investors.


In addition to the role of local government agencies, institutional systems, mass organizations, and local people's behavioral culture are also factors that have a certain impact on the attractiveness of the local investment environment. Although government agencies may not have a decisive influence on these factors, authorities at all levels have the ability to guide and encourage social organizations and local people to behave appropriately in order to create a cultural environment that is capable of accepting and harmonizing foreign cultural elements.

Performing the role of local government, developing the image of the locality on a national and international scale is a big challenge for local government. Therefore, local government must be equipped with the necessary means and capacity. Attracting talents, selecting and developing cadres are extremely necessary to create an effective local government system, meeting the requirements of economic growth in general and promoting and nurturing investment in particular.

Thus, local authorities must redefine their role to be able to organize policy implementation to achieve expected results.

- Macroeconomic stability : is an important factor in attracting FDI and is the first factor in assessing national competitiveness. Reality shows that if the economy and all aspects of a country's life are not stable, the country cannot develop. There cannot be good growth quality (which foreign investors are very interested in) without macroeconomic stability.

Macroeconomic stability is reflected in: ensuring economic growth (GDP) at a reasonable and stable rate, controlling and reducing inflation, and reducing budget deficit.

* Second, the openness of the economy and national competitiveness

- Openness of the economy


Commonly used measures of economic openness include: the ratio of exports to GDP (EXP) and imports to GDP (IMP), the ratio of FDI to total investment (FI) and the ratio of the foreign sector to GDP (FS). These measures are often unstable, so there is a phenomenon of measurement error. EXP and IMP are the most basic measures commonly used for the openness of the economy.

The openness of the economy can contribute to improving the technological level by promoting the import of advanced technology and foreign economic management experience into the domestic economy through attracting FDI. The greater the openness of the economy, the more FDI will flow in. For example, in 2007, the country's GDP was equivalent to 71.3 billion USD, export turnover reached 48.387 billion USD, import turnover was 60.783 billion USD. Therefore, EXP was 67%, IMP was over 83%. FDI attracted was 20.3 billion USD, an increase of 69.1% compared to 2006 [22, pp.31,34,43]. However, it is also necessary to realize that the greater the openness of the economy, the more dependent Vietnam is on international trade.

- National competitiveness

The World Economic Forum (WEP) has proposed a way to measure national competitiveness by using comprehensive competitiveness indices (institutions, infrastructure, macroeconomics, health and primary education, training and higher education, market efficiency, technical readiness, business sophistication, innovation and creativity) and the Growth Competitiveness Index (GCI) which includes three basic components: macroeconomic environment ranking index, public institution index, and technology ranking index. Improving national competitiveness is extremely important, affecting FDI attraction, because in reality, investors often rely on the results of national competitiveness rankings as a basis for making decisions about which country to invest in.


* Third, resources for development and FDI attraction

- Natural resources

Natural resources include: geographical location and natural resources (mainly minerals)

Every investor is always interested in the geographical location of the place where he intends to invest. A favorable geographical location (convenient in transportation, close to raw material markets, close to large consumer markets) is the advantage of that locality in attracting investment because it creates conditions for investors to reduce production costs, thereby increasing profits. A study on factors attracting foreign investment in developing countries during the period 1980-2005 determined that geographical location advantages help to significantly save transportation costs, easily expand to surrounding markets, effectively exploit human resources and promote centralized enterprises [23, p.13]

Natural resources, especially minerals, are also a point of interest for investors. Not all investors, nor at any time and place, when making their investment decisions, consider the mineral potential of the locality they intend to invest in. However, if a country has high economic and political stability and clear financial policies, then abundant natural resources, good quality and reserves will be more attractive to investors.

The abundance of cheap raw materials is also a positive factor in attracting foreign investment. In the case of Malaysia, the country's natural resources have the strongest attraction for FDI. Foreign investors flock to this country to target its abundant resources of oil, gas, rubber, wood, etc. Especially in Southeast Asian countries (ASEAN), exploiting natural resources has been an important goal of many MNEs in recent decades. In fact, before the emergence of

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