Straight Ahead on Red: How Foreign Direct Investment Empowers Subnational Leaders

Abstract

This paper tests the hypothesis that increasing stocks of foreign direct investment (FDI) can lead to de facto decentralization in the form of autonomous reform experiments by subnational leaders. Because these reform experiments may attract FDI in subsequent years, there is a possibility of endogeneity. As a result, the methodology is a simultaneous equation model of 61 Vietnamese provinces between 1990 and 2000. Stocks of FDI as a percentage of GDP are regressed on a measure of autonomy derived from a content analysis of Vietnamese stateowned newspapers. Every time a province is cited in the papers for violating central laws on economic policy by engaging in reform experimentation, it is coded as a case of autonomy. The central question of the analysis is: how much FDI is needed for a province to believe it has the bargaining power to challenge central authority for the first time in a given year? Using this approach, I find strong evidence for the influence of FDI on local autonomous economic reform experiments.

Who Drives Economic Reform in Vietnam's Provinces?

“…This precisely is the focus of Edmund Malesky's (2004aMalesky's ( , 2008 research on the politics of economic reform in Vietnam. He demonstrates how a coalition of foreign investors and provincial officials induced far-reaching economic reforms.…”

“…The outcome was that some provinces were disciplined but others were allowed to get away with it because their attraction of foreign investment showed results on the ground: increases in economic growth and jobs. More than that, some of the provincial policy reforms -worked out in conjunction with foreign enterpriseswere eventually adopted into national-level legislation (Malesky 2004a(Malesky , 2008.…”

“…This makes them politically more powerful since they are funders of central government rather than supplicants. Malesky (2008) has shown that this provided such provinces with considerable autonomy for policy reform. This autonomy may enable such provinces to push forward faster with reforms than other, more dependent, provinces.…”

Rent(s) Asunder: Sectoral Rent Extraction Possibilities and Bribery by Multinational Corporations

“…Although While provinces could register any FDI investment up to a specified amount locally, Group A projects still required central approval and a Prime Ministerial signature (Malesky 2008). Even in the lead up to the USBTA in 2000, over 30 different economic sectors were protected by restrictive conditions on foreign investment.…”

Accelerating Sustainability: Why Political Economy Matters

“…Both China and Vietnam used temporary institutions and transitional arrangements (Qian 2003;Heilmann 2008). Experimentation was also a key feature in Vietnam, sometimes organised purposefully from above; sometimes pushed on the agenda from below -called 'fence breaking' (Malesky 2008). The key feature of China's development strategy, and that of other East Asian countries, is that they did not follow models from elsewhere.…”