Foreign invested firms’ responses to policy changes: an empirical analysis in Vietnam

Abstract

Previous studies on responses of Foreign Direct Investment (FDI) firms to policy changes mainly focus on the impact of government policies on foreign investment flows in a country or in a province. So far, there has been no research on how Foreign Direct Investment enterprises, which are investing in Vietnam, react to unexpected changes in policies. We focus on studying some main factors affecting the behavior of FDI firms in Vietnam when the policy changes adversely. Using the data set of the annual Vietnam Provincial Competitiveness Index (PCI) survey with the foreign invested firms (FIFs) in Vietnam for 4 years from 2013 to 2016, the study shows that enterprises’ behaviors strongly depend on the capacity to predict changes in government policies. The policy changes directly affect business activities, so policymakers need to make a long-term stability plan to attract the FIFs. In addition, the FIFs tend to choose moving production to another country or coordinating with other businesses if local leaders are highly transparent. The opposite is true for the proactivity. In the case that local leaders are proactive, it helps FIFs feel secure to invest with enthusiastic support so the desire to move location or coordinate with other businesses is reduced. On the other hand, the FIFs are more likely to employ both formal and informal diplomacy if there is an increase in the number of employees, time spent interacting with government officers and prediction about policy change. Moreover, it is more likely to employ formal diplomacy than informal diplomacy in the case of FIFs’ size expanding. Similar to that case, it is true when increasing the capability of predicting harmful policy changes. We also find that the tendency of choosing formal diplomacy of foreign leaders is higher than that of Vietnamese leaders.