The impact of government policies on FDI decision of multinational corporations: an application to the Vietnamese service industry

Abstract

There has been an upsurge in competition amongst Asian countries to attract foreign direct investment (FDI) resulting in higher government incentives given by the host countries. Whereas most of the empirical studies emphasise the positive effects of government policies on FDI inflows, a few studies argue that there is no strong association between these policies and FDI. Studies focusing on the effects of government policies on FDI decisions in Vietnam have been scarce as well, especially studies on the extent to which government policies affects this decision. This article addresses a critical research question about the key determinants of government policies that impact FDI decisions in Vietnam. Hence, this study uses a comprehensive primary dataset of 288 multinational corporations operating in all service sectors in Vietnam. The structural equation modelling results reveal that the key determinants of government policies affecting an FDI surge in the Vietnamese service industry are FDI policies, trade agreements, tax incentives and infrastructure. The findings are plausible and are in line with the recent economic reforms occurring in Vietnam along with the increased FDI inflows into the country in the last 25 years.