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[Research Contribution] Impacts of Provincial Competitiveness Index on Foreign Direct Investment Attraction: A Case Study of the Mekong Delta

10 May, 2025

Keywords: Provincial Competitiveness Index, FDI, Mekong Delta, Investment attraction, Business environment

The Provincial Competitiveness Index (PCI) is not only a tool to evaluate the economic management efficiency of localities but also a decisive factor in attracting foreign direct investment (FDI) flows. In the context of global capital flows shifting and increasing demands for the quality of the investment environment, PCI is increasingly asserting its strategic role in local economic development. The study by the author group from UEH Mekong, University of Economics Ho Chi Minh City (UEH) provides insights into the impact of PCI on FDI in the Mekong Delta and suggests strategic solutions to improve the business environment and promote sustainable development of the region.

The Mekong Delta and the problem of improving competitiveness to attract sustainable FDI

The Mekong Delta (MD) is located in the southern key economic region, playing a particularly strategic role in the socio-economic development of the whole country. This land is not only famous for its agriculture sector but is also one of the areas with strong potential to attract foreign investment. However, in the period 2013-2023, data from FiinPro shows a clear differentiation in FDI capital flows between localities: some provinces (Long An, Ben Tre, Tien Giang, and Tra Vinh) recorded large amounts of investment capital while many other provinces had difficulty accessing international capital flows. In particular, in the period 2020-2021, the impact of the COVID-19 pandemic has made FDI attraction unstable, revealing limitations in the sustainability of the regional investment environment.

In that context, the need to optimize the business environment and to enhance provincial competitiveness has become a key factor. The Provincial Competitiveness Index (PCI), as an indicator of economic governance quality and ease of doing business, is increasingly becoming a strategic tool for localities to reposition themselves, to attract FDI more effectively, and to contribute to promoting sustainable regional development.

Research method: Quantitative approach with panel data and modern econometric models

The study uses secondary data in the form of panel data collected during the period 2013–2023. Data sources include the Provincial Competitiveness Index published by the Vietnam Federation of Commerce and Industry (VCCI), data on foreign direct investment from the FiinPro platform, and population data from the General Statistics Office of Vietnam.

PCI is a composite index reflecting the quality of economic governance and business environment of localities, consisting of 10 component indices: market entry, land access, transparency, time costs, informal costs, fair competition, government dynamism, business support services, labor training, and legal institutions – information security. Each index is standardized on a 10-point scale, with adjustments in the calculation method in 2013 and 2017. The study uses a panel data regression method to analyze the impact of PCI factors on foreign direct investment. Specifically, the study applies pooled regression models (Pooled OLS), fixed effects (FEM) and random effects (REM) to test this relationship. The selection of appropriate models is completed using the Hausman test. To ensure the accuracy and reliability of the results, the authors checked for common technical problems in panel data models with multicollinearity (through VIF test), heteroscedasticity (Wald and Breusch–Pagan test), and autocorrelation.

In addition, to reflect the lag in the impact of the business environment on investment decisions, the study included independent variables with lags of 1 to 3 periods in the model. This helps us assess the impact of past policies to improve the business environment on current investment decisions.

Research results and practical implications

The research results link a close relationship between the component indicators in the Provincial Competitiveness Index and the ability to attract foreign direct investment in the Mekong Delta in the period 2013–2023. Specifically, factors of market entry, land access, transaction costs, business support services, human resource quality, and the legal environment are identified to have a positive and significant impact on FDI inflows. These indicators not only directly impact investment decisions but also contribute to the formation of a stable, transparent, and favorable business environment, strengthening investors’ confidence in the long-term development potential of the region.

Among them, the market entry index stands out as a key factor. Simplifying administrative procedures, shortening the time to establish a business, and making regulations transparent have increased the attractiveness of the locality to international investors. In addition, access to land, with stability in usage rights and clarity in planning, is considered a prerequisite for businesses to boldly implement long-term investment projects. The flexibility and the operational capacity of local governments, demonstrated through the ability to reform in the field of reducing time costs and enhancing business support services, improving transparency and developing human resources, had positive impacts on FDI inflows into the region. However, the study illustrates that the lack of stability in the legal system and administrative procedures remains a significant barrier affecting the sustainability of investment attraction. This unveils the importance of maintaining and continuously improving local governance capacity, not just through technical reforms but also requiring a strategic vision to establish a stable, predictable, and long-term oriented investment environment.

Policy implications

Drawing on the research results, the authors proposed a number of important policy implications to improve the investment environment and enhance provincial competitiveness in the Mekong Delta region:

First, promoting administrative procedure reform: Provinces need to continue to reform and simplify administrative procedures to shorten the time and reduce market entry costs for businesses, and reduce cumbersome processes to facilitate FDI enterprises to easily access and operate more effectively.

Second, reducing informal costs and improving transparency in state management: Provincial authorities need to make efforts to reduce informal costs that businesses have to pay during their operations. This will help create a fair, competitive environment that increases the attractiveness of the region to foreign investors and transparency in management and information on investment policies for investors to easily access and make more accurate investment decisions.

Third, increasing investment in human resource development: Building training programs that are suitable for practical needs and those of FDI enterprises. Labor training policies need to be promoted to improve the quality of human resources, meeting the needs of production and technological innovation.

Finally, developing an ecosystem to support businesses: The government needs to increase the provision of business support services, including trade promotion, legal support, and industrial infrastructure development, to facilitate businesses to operate and develop.

In general, improving the factors in the PCI index not only enhances the competitiveness of provinces and cities in the Mekong Delta region but also contributes to attracting stable and sustainable FDI capital flows. Simultaneously, this is also the basis for promoting regional economic growth, creating jobs, and improving people’s lives. Solutions from this study can help policymakers in the Mekong Delta build appropriate development strategies, contributing to increasing the effectiveness of investment attraction and creating a sustainable business environment for the region.

The full-text research article on Impacts of Provincial Competitiveness Index on Foreign Direct Investment Attraction: A Case Study of the Mekong Delta can be accessed HERE.

Author group: Tran Thi Thuy Dung, Duong Nguyen Thanh Phuong – University of Economics Ho Chi Minh City

This article is part of the series spreading research and applied knowledge with the message “For a More Sustainable Mekong”, under the program “Research Contribution For All – Research for the Community” implemented by UEH. UEH cordially invites readers to the next UEH Research Insights newsletter.

News, photos: The authors, UEH Mekong Department of Admissions and Communications, UEH Department of Communications and Partnerships