Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
Multinational Corporations’ (MNCs) Motivations to Invest in the
Vietnamese Services Industry
Thi Lan Anh Nguyen*, Ali Saleh** and Denis Vinen***
This study investigated the MNCs’ motivation to invest in the Vietnamese
services industry. Consistent with the focus on eclectic paradigm to marketseeking and efficiency seeking factor, this study also analyses the influence
of government policies, culture dimension and business networks on
foreign direct investment (FDI) location decision.
The data (from 288 MNCs operating in the services industry in Vietnam)
was predominantly analysed through descriptive statistics, confirmatory
factor analysis (CFA and structural equation modeling (SEM).
The analysis confirmed the market-seeking and government policies factor
had significant influences on the FDI location decision. In contrast,
efficiency-seeking, culture dimension and business networks had an
insignificant influence on the FDI location decision.
The results from this study make a significant contribution to the literature
given the lack of studies that examine the motivation of MNCs to invest in
the Vietnamese services industry at firm level.
JEL Codes: C12, D21, D78 and M10
1. Introduction
In 1986, the Republic of Vietnam launched the “Doi Moi” policy – a home-grown, political
and economic renewal campaign that restructured the economy from a planned economy,
to a socialist-oriented market economy. After the “Doi Moi” policy was implemented, FDI
into Vietnam increased rapidly both in terms of the number of projects and their capital
volume. Since that time FDI has made a major contribution to Vietnam‟s economic growth
and the living standards of all Vietnamese people. By 1990, Vietnam had licensed 211
projects with a registered capital of US$1.57 billion; however by December 2012, these
numbers had increased to 14,522 projects and a registered capital of US$211 billion (FIA,
2013).
In Vietnam‟s long term development strategy, the Vietnamese National Congress
highlighted that one of the key elements for success is the continued ability to attract and
utilise foreign inflow of capital including FDI and official development assistance (ODA).
FDI has been considered as an important source of economic growth of Vietnam,
therefore Vietnam has maintained a policy of encouraging FDI since the promulgation of
the first Law on Foreign Investment in 1987. Foreign investors quickly responded to this
* Thi Lan Anh Nguyen, Faculty of Business & Enterprise, Swinburne University of Technology, PO Box 218
Hawthorn, Victoria 3122, Australia. Email: thilananhnguyen@swin.edu.au
** Dr Ali Saleh. Email: asaleh@swin.edu.au
*** Associate Professor Denis Vinen. Email dvinen@swin.edu.au
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
open door policy which resulted in Vietnam receives a large amount of foreign investment
and also competing for more FDI. The major goal of Vietnam‟s FDI policy is to attract
capital, advanced technology, and manage skills in order to effectively develop the
country‟s potential, increase saving and improve people living standard.
Although FDI has been considered as an important source of economic growth of
Vietnam, there are very few empirical studies on the motivations of MNCs to invest in
Vietnam. Most studies have focused on the relationship between FDI inflows and
economic development by using secondary data, such as Dinh (2009) and Mirza and
Giroud (2004). This study, using primary data, examines empirically various determinants
and strategic motivations of FDI based on managerial perceptions. To our knowledge, the
authors believe this is the first comprehensive study to examine the motivations of MNCs
to invest in the Vietnamese services industry at the firm level.
The motivations of MNC‟s to invest abroad, especially in developing countries like Vietnam
have resulted in conflicting opinions between economists. Some have argued that
economic variables (such as market-seeking, asset-seeking, efficiency-seeking and
resource-seeking) together with government policies are the important factors affecting
inward FDI (Sethi et al., 2003, Mirza and Giroud, 2004). Other economists, such as
Blonigen and Piger (2011), Du et al. (2011) and Lei and Chen (2011) believed that not
only the traditional economic factors and government policies, but also cultural dimension
and business networks, are the main determinants of FDI.
Therefore, the primary aims of this paper are as follows.
 To empirically test the significance of the underlying constructs and hypotheses
derived from the conceptual framework and identify the importance of factors in the
MNCs‟ investment decision.
 To introduce new constructs (business networks and cultural dimension) and
validate them in the context of Vietnam with the aim of enhancing the current
literature with regards to MNCs‟ motivation to invest into Vietnam.
 To develop a comprehensive model that incorporates a number of variables
including market-seeking, efficiency seeking, government policies, cultural
dimension and business networks. The combination of these variables in analysing
the MNCs‟ motivation to invest in Vietnam has not been addressed in previous
studies.
To achieve the objective of this study, a numerical simulation of the theoretical
macroeconomic model was conducted in order to analyse the determinants of FDI in the
Vietnamese services industry.
2. Literature Review and Research Hypotheses
Vernon (1966) argued that when the economic ties in a host country fit more easily into
global production and trade patterns, the country would be more attractive to foreign
investors. Thus, it is argued that FDI and openness of the economy will be positively
related. Furthermore, the influence of market size and market potential on location
decision making is also a widely examined variable in empirical studies, for example Kang
& Lee (2007) and Sethi et al. (2003). These studies have identified a strong positive
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
relationship between the market size and market potential of the host country and FDI
inflows. Thus, it was hypothesised that:
Hypothesis1: Market-seeking would be positively related to FDI inflow in the Vietnamese
services industry.
Vernon (1966) also pointed out that foreign investment is related to the international
product life cycle, so MNCs tend to invest in the countries that can produce their products
at the lowest possible cost. Thus, factor cost considerations are a significant location
advantage. According to Vernon (1966), the availability of cheap inputs is the main
determinant to attract FDI. Moreover, empirical studies found a relationship between either
operating cost or labour quality and FDI inflow. For example, Parcon (2008) reported that
the relationship between labour costs and FDI inflows is negative at country level, but is
positive at the firm level. The major reason for this positive relationship is that the higher
level of labour cost implies a higher strength in labour skills and thus higher productivity.
Thus, it was hypothesised that:
Hypothesis 2: Efficiency-seeking would be positively related to FDI inflow in the
Vietnamese services industry.
Over the past two decades, most governments have been actively promoting their
countries as investment locations to attract scarce private capital and associated
technology and managerial skills in order to help achieve their development goals.
Examples of such measures include liberalising the laws and regulations for the admission
and establishment of foreign investment projects, providing guarantees for repatriation of
investment and profits and establishing mechanisms for the settlement of investment
disputes. Tax incentives are also part of these promotional efforts.
Most of the empirical studies have tended to emphasize the impact of government policies
(tax incentives) on FDI inflow, for example, Margalioth (2003) and Van Parys (2010).
However, the findings from the previous researchers had been inconsistent and
inconclusive as to whether the tax incentives are effective in influencing investment
decision. While some researchers [e.g. De Mooij and Ederveen (2003) and Margalioth
(2003)] supported the view that tax incentives effect foreign direct investment decisions,
the results of other researchers‟ studies [such as Van Parys (2010)] were concluded that
taxes and state incentive programs do not seem to have a major effect in attracting FDI
inflow. Furthermore, many empirical studies focused on the influence of other type of
government policies on FDI flows, such as trade agreement, infrastructure and policy
promotions (Dinh, 2009, Pham, 2012, Binh and Haughton, 2002). Based on the existing
theoretical and empirical work, it was hypothesised that:
Hypothesis 3: Government policies would be positively related to FDI inflow in the
Vietnamese services industry.
Recently, some researchers have also adopted a cultural dimension and business
networks approach to examine firm internationalisation. While some researchers, such as
Asiedu (2002) and Gast and Herrmann (2008), supported an opinion of cultural distance
effects to foreign direct investment decision, Sethi et al. (2002) pointed out cultural
distance do not seem to have major effects to new business location decision. With regard
to the business networks approach, a vast literature review found that MNCs' networks
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
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have an important impact on MNCs‟ investment location decisions (Lei and Chen, 2011).
Most business networks are measured based on internal or external relationships, for
example, based on firm‟s relationships with supplies, competitors and other associations
or government agencies (Welch et al., 1997) or based on firm‟s links with other firms,
outsiders, government, customers, suppliers, competitors and vertical links with MNCs
(Saleh and Harvie, 2010) or based on personal relation (Senik et al., 2011). Thus, it was
hypothesised that:
Hypothesis 4: There would be a relationship between FDI inflow and cultural and
business network factors.
H4a: There would be a negative relationship between FDI inflow and cultural factors.
H4b: There would be a positive relationship between FDI inflow and business network
factors.
In summary, there are gaps in the empirical studies which examine MNCs‟ motivations to
invest abroad. Firstly, although there is a growing interest in researching the factors
influencing FDI, most studies in this field have used a cross-sectional procedure. Few
studies have considered the primary data in examining MNCs‟ motivation to invest abroad
[e.g. Chandprapalert (2000), Sandhu (2007), among others]. Secondly, there is little
research on the growth and internationalisation of services firms. More specifically, studies
focusing on the motivational factors behind MNC‟s willingness to invest in the Vietnamese
services industry have been scarce. Thirdly, although most studies confirm the importance
of the cultural dimension and business networks variables, there are few empirical studies
that consider the cultural and network variables in examining the MNCs‟ motivations to
invest in the services industry (Guiso et al., 2009, Siegel et al., 2011). Therefore, in order
to better explain the determinants, which affect the inflow of FDI in Vietnam, the
conceptual framework should include economic, government policies, cultural dimension
and business networks factors. This study uses a combination of variables likely to attract
FDI into the Vietnamese services industry, including market-seeking, efficiency-seeking,
government policies, cultural dimension and business networks variables. The hypotheses
and research model used in this research in order to fill the gap in the literature will be
developed below.
3. The Methodology and Model
3.1 The Survey Instrument
In this study, the constructs measured multi-items by using a five-point Likert scale. The
knowledge scales were adopted from the empirical studies, such as Chandprapalert
(2001), Lei and Chen (2011), Tatoglu and Glaister (1998) and Tuomi (2009).
3.2 Data and Sample Characteristics
This study is based on a survey instrument delivered to 2,500 randomly selected MNCs in
Vietnam. The selection of the sample MNCs was not limited to firms carrying out any
particular business type. However, due to resource constraints, the sample was limited
primarily to MNCs operating in Ho Chi Minh City, which has the biggest number of MNCs
establishments in Vietnam (FIA, 2013). Details of MNCs were obtained from the Vietnam
Statistical Yearbook 2010 published by the General Statistics Office. This directory was
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
chosen as it contains official information of MNC‟s operating in Vietnam. However, this
directory also includes MNC‟s that have not commenced operations and MNC‟s that have
ceased operations.
In order to provide the most accurate data about MNC‟s operating in Vietnam, other
sources [such as Vietnam industry bodies (e.g. Vietnam Chamber of Commerce &
Industry (HCMC); the Association of International Businesses in Vietnam (such as
AmCham Vietnam, AusCham Vietnam, German Business Association and Singapore
Business
Association);
and
the
Vietnam
Economic
Times
website
(http://gda.com.vn/doanhnghiepfdi)] were used to update information. The questionnaire
was sent to the senior management staff in each firm, such as the Chief Executive Officer
(CEO), President or Managing Director. This approach was adopted as they were
considered to be the senior management within an MNC responsible for the key
investment and employment decision making.
Five hundred and forty three (21.72%) of questionnaires were not delivered. According to
post-office documentation on the returned questionnaires, the main reasons were
company had moved or no such address or business had ceased. Just 62.36 percent of
total questionnaire recipients declined to respond. Of the 1957 potential participants, three
hundred and ninety eight (398) firms responded to the survey, representing a response
rate of 20.34%. The response rate is comparable to other studies that use similar
methodology, which typically report response rates that range from 14 to 27% [e.g. Zulkiffli
(2011)]. Given the study‟s requirement for senior management involvement, sensitive
information, firm diversity and industry range variety, 20.34% of response rate in this study
is an acceptable sample size for further analysis. Table 7.1 shows the response and nonresponse rates of the distributed questionnaire.
Since the focus of this study is to examine factors that motivate MNCs to invest in the
Vietnamese services industry, the study used data from 288 services firms for analysis.
Table 1: Respondents’ Response Rate
Questionnaire Distribution
Frequency (N=2500)
First-period
n
Questionn
aire
Answered
Questionn
aire Not
Answered
Usable
%
After
Follow-up
Phone Calls
n
%
Second-period
(Reminder
letter)
n
%
Total
n
%
186
9.50
88
4.50
110
5.62
384
19.62
7
0.36
2
0.10
5
0.26
14
0.72
Total
193
9.86
90
4.60
115
5.88
398
20.34
Undeliverable
428
17.12
0
0
0
0
428
17.12
Business Ceased
115
4.60
0
0
0
0
115
4.60
Not Responded
1764
70.56
0
0
0
0
1559
62.36
Total
2307
92.28
0
0
0
0
2102
Unusable
3.3 Analytical Procedures
This study used descriptive statistics, confirmatory factor analysis (CFA), and structural
equation modelling (SEM) analysis. The data was analysed by using the computer
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
package AMOS (version 20) for SEM; and SPSS (version 20) for CFA and descriptive
statistics. Results of the data analysis are presented in the following section.
4. The Findings
4.1 Descriptive Statistics
The majority of responding firms were represented from a variety of sectors within the
services industry including information & communications, hotel and restaurant, real
estate, wholesale and retail (Figure 2). In terms of ownership structure, the wholly foreign
owned firms accounted for 60.1 per cent of the total in comparison with 27.4 per cent of
firms which had a joint-venture structure and 10.4 per cent of firms which had a
partnership structure. Most of firms were from parent companies which have been
involved in international business operations for more than 20 years (31%). Approximately
54% of the firms indicated operations in two foreign countries and 23% of firms were
operating in more than four countries.
Furthermore, most of the MNCs were established in Vietnam during the 2006-2010 period
(37.8 per cent), 2001-2005 period (22.2 per cent) and 1991-1995 period (21.2 per cent),
with only 18.8 per cent established during the 1980-1990, 1996-2000 and 2011-2012 time
periods. In terms of total investment capital in Vietnam, the majority of MNCs invested
capital of less than USD15 million (60.1 per cent), followed by 26.4 per cent of MNCs
which invested over 35 million, only 13.5 per cent of MNCs which invested from USD16
million to USD35 million.
Figure 2: Survey Respondents, by Sub-Industry, in Percent
4.2 Measurement Model Assessment
In order to measure the model and ensure that a scale: (1) conforms to its conceptual
definition; (2) is unidimensional; and (3) meets the necessary levels of reliability, scale
validity must be assessed (Hair et al., 2010). This study evaluated four forms of validity,
including content (face) validity, convergent validity, discriminant validity and nomological
validity.
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
Firstly, content (face) validity was examined. In this study, the determination of content
validity for research instruments is based on established scales that have been already
subjected to test of content validity (Lei and Chen, 2011, Tuomi, 2009, Tatoglu and
Glaister, 1998). To ensure the relevance of each instrument in the context of MNCs
operating in Vietnam, the questionnaires were comprehensively screened by 9
respondents during the pilot-study stage: four academics and five CEOs of MNCs located
in Ho Chi Minh city of Vietnam.
Secondly, convergent validity was tested. The result in this study, showed confirmatory
factor loadings of each measured item above 0.5 and Cronbach‟s alpha reliability scores
of each construct above 0.7, is considered acceptable (Hair et al., 2010). Thus,
convergent validity was confirmed successfully.
Thirdly, discriminant validity was established following Fornell and Larcker problems
(1981). All correlations among five independent variables (market-seeking, efficiencyseeking, government policies, culture dimension and business networks) were significant
and there was the highest correlations between efficient-seeking construct and business
networks construct (r2=0.583). Furthermore, the squared root of AVE scores was higher
than the correlations between the constructs. Thus, the assessment of discriminant
validity did not reveal any problems.
Lastly, the entire measurement model is nomological valid since the χ2 is 416.045, with
412 degrees of freedom, at a probability of 0.435. In addition, the measurement also
supported validity since the Goodness-Of-Fit index (GFI) is 0.92, the Root-Mean Square
Error of Approximation (RMSEA) is 0.006 and the Comparative Fit Index (CFI) is 0.999.
4.3 Structural Equation Model (SEM) Results
In order to investigate the relationship between five factors (market-seeking. efficiencyseeking, government policies, culture dimension and business networks) and FDI location,
CFA was utilised to assess SEM model fit. SEM is used to investigate all variables in the
proposed framework and to confirm the hypotheses.
Table 2 summaries the results of the hypotheses test, standard errors (SE), the critical
ratio (CR) and the probability (p). The „p‟ value indicates statistical significance at levels of
0.001 and 0.05 respectively. The direction and importance of the relationships is
determined by the magnitude of β weights.
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Table 2: Summary of Hypotheses Tests (H1-H4)
Hypothe
sis No.
Relationship
Marketseeking
Efficiency<--H2
FDI
seeking
Government
<--H3
FDI
policies
Culture
<--H4a
FDI
dimension
Business
<--H4b
FDI
networks
Note: *** p<0.001; * p<0.05
H1
FDI
<---
Estimate
SE
CR
P
Accepted/
Rejected
.385
.103
3.744
***
Accepted
.027
.114
.242
.809
Rejected
.313
.134
2.339
*
Accepted
-.131
.076
-1.719
.086
Rejected
.171
.121
1.409
.159
Rejected
β
.367
.025
.271
-.138
.146
The output would answer the research hypotheses by considering the result for the causal
model. As predicted in Hypothesis 1, market-seeking motivation positively influences on
FDI location (β=0.367, CR=3.744, p<0.001). In contrast to Hypothesis 2, no support was
found. Efficiency-seeking is no significantly related to FDI location in the Vietnamese
services industry (β=0.025, CR=0.242, p>0.05).
In accord with Hypothesis 3, government policies factor has a significant impact on FDI
inflows to the Vietnamese services industry (β=0.271, CR=2.339, p<0.05). Contrary to
market-seeking (Hypothesis 1) and government policies (Hypothesis 3), culture dimension
(Hypothesis 4a) and business networks (Hypothesis 4b) are not a significant factor in
determining FDI location (β=-0.138, CR=-1.719, p>0.05 and β=0.146, CR=1.409, p>0.05,
respectively).
Overall, given the number of potential factors that could affect FDI location in Vietnamese
services industry, the model explains a considerable amount of the observed variance in
FDI location (37.2%).
5. Summary and Conclusions
This study investigated the MNCs‟ motivations to invest in the Vietnamese services
industry. Based on the earlier empirical and theoretical literature, the authors developed
new hypotheses and constructs for a questionnaire survey, aimed at studying the
motivation of MNCs to invest in Vietnam. Results from this study offer new knowledge and
insights into factors that motivate MNC‟s to invest into the services industry in Vietnam
and findings can be summarised as follows:
Firstly, as expected, the result confirmed the Eclectic paradigm that market-seeking factor
is the major determinant of investments. The market-seeking factor was supported in this
study. This result is in line with many previous studies, such as Asiedu (2006) and
Vijayakumar, Sridharan and Rao (2010). This study indicated that MNCs have been
making increasing investments into the Vietnamese services industry to exploit marketseeking (to secure entry into new markets).
Secondly, although efficiency-seeking factor has been frequently cited by many scholars
as one of the major determinants of FDI, results do not support the hypothesis in this
study. This is in line with the Nunnenkamp and Spatz‟s (2002) study in which they found
that non-traditional determinants, such as efficiency-seeking factor, are not important to
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Proceedings of 3rd Global Accounting, Finance and Economics Conference
5 - 7 May, 2013, Rydges Melbourne, Australia, ISBN: 978-1-922069-23-8
proceeding globalisation. They also emphasised traditional determinants (for example,
market seeking) which are seen as dominant factors shaping the distribution of FDI.
Thirdly, the study‟s findings coincide with previous studies, such as De Mooij & Ederveen
(2003) and Margalioth (2003), which found that government policy plays an important role
in the business decisions of investors. Therefore, it could be argued that the Vietnamese
government should implement new policies and „tweak‟ existing policies to encourage and
protect foreign investors, maintain the nation‟s political stability and enhance labourers‟
skill levels.
Furthermore, the findings of this study rejected the significant influence of constructs
(culture dimension and business network) on FDI location. Many studies have suggested
that the culture dimension factor is negatively or positively related to FDI location (Asiedu,
2002, Gast and Herrmann, 2008, Li and Guisinger, 1992, Hong and Chen, 2001).
However, in the case of the Vietnamese services industry, the relationship was not
statistically significant. In the Vietnamese context, this result discrepancy can probably be
explained because of the fact that MNCs have been investing in the Vietnamese services
industry for different reasons. For example, firms which make investments mainly to take
advantage of market potential or investment incentives, do not highly consider countries
culturally close to Vietnam as viable alternatives for investments.
In conclusion, the findings of this study make a significant contribution to the literature
which lacks detailed studies that examine the motivation of MNCs to invest in the
Vietnamese services industry at the firm level.
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