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MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING NGUYEN THI VAN ANH APPLYING BAYESIAN ANALYSIS METHOD TO EVALUATE ENVIRONMENTAL, SOCIAL, AND GOVERNANCE TO FOREIGN DIRECT INVESTMENT IN THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT COUNTRIES: THE ENHANCING ROLE OF TRADE OPENNESS MASTER THESIS Major: Banking and Finance Major Code: 8 34 02 01 Ho Chi Minh City - 2025
MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING NGUYEN THI VAN ANH APPLYING BAYESIAN ANALYSIS METHOD TO EVALUATE ENVIRONMENTAL, SOCIAL, AND GOVERNANCE TO FOREIGN DIRECT INVESTMENT IN THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT COUNTRIES: THE ENHANCING ROLE OF TRADE OPENNESS MASTER THESIS Major: Banking and Finance Major Code: 8 34 02 01 LECTURER: 1: Dr. NGUYEN DUY LINH Ho Chi Minh City - 2025
i DECLARATION OF AUTHORSHIP I hereby declare that this thesis is the result of my independent research conducted under the guidance of my lecturer, Dr. Nguyen Duy Linh. I affirm that the content of this thesis is entirely original and does not include any material plagiarized or copied from the work of other authors without proper acknowledgment. All external sources of data, information, and scholarly opinions have been appropriately cited and referenced in accordance with academic integrity standards. I take full responsibility for the originality and ethical conduct of this research, and I acknowledge that Ho Chi Minh University of Banking bears no responsibility for any potential copyright issues arising from this work. Ho Chi Minh City, Date: Author Nguyen Thi Van Anh
ii ACKNOWLEDGMENT Throughout the past six months of conducting this thesis, I have received valuable support and encouragement that I would like to sincerely acknowledge. I am truly thankful to all lecturers at Ho Chi Minh University of Banking, whose dedication to teaching and student development has inspired and guided me throughout my studies. Their knowledge and enthusiasm have been a constant source of motivation during my academic journey. I would like to express special appreciation to Dr. Nguyen Duy Linh for his thoughtful guidance and consistent support during the entire research process. His feedback helped me think more critically, stay on the right path, and push through difficult stages of the thesis. Although I have done my best to complete this research within six months, I understand that some limitations are inevitable. I remain open to all comments and suggestions, as I believe they will help me continue learning and improving in this field.
iii TITLE: APPLYING BAYESIAN ANALYSIS METHOD TO EVALUATE ENVIRONMENTAL, SOCIAL, AND GOVERNANCE TO FOREIGN DIRECT INVESTMENT IN THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT COUNTRIES: THE ENHANCING ROLE OF TRADE OPENNESS ABSTRACT In the increasingly competitive landscape of attracting FDI, non-economic factors such as ESG standards have gained prominence in both research and policymaking. This thesis investigates the impact of Sovereign ESG on FDI inflows in 38 OECD countries and examines the moderating role of trade openness. Using data from the WDI for the period 2002-2023, the study applies PCA to construct a composite ESG index and employs Bayesian analysis to estimate the Sovereign ESG and FDI inflows relationship. The results indicate that Sovereign ESG has a negative effect on FDI inflows, while mineral rents also exert a negative influence, consistent with the “resource curse” hypothesis. In contrast, inflation, tariff, and biodiversity are positively associated with FDI inflows. Trade openness directly promotes investment flows, but the interaction between Sovereign ESG and trade openness shows a negative effect, suggesting that deeper integration into global trade may reduce the positive role of Sovereign ESG in attracting capital. These findings enrich the empirical literature on Sovereign ESG and FDI inflows while offering policy implications for OECD economies: Enhancing ESG standards, improving resource governance, and balancing trade strategies are all essential for fostering sustainable development alongside investment attractiveness. Keywords: Bayesian analysis, ESG, FDI, OECD, trade openness.
iv LIST OF ACRONYMS ACRONYM MEANING ESG Environmental, Social, and Governance FDI Foreign Direct Investment GRI Global Reporting Initiative MCMC Markov Chain Monte Carlo MNEs Multinational Enterprises OECD Organization for Economic Cooperation and Development PCA Principal Component Analysis UNCTAD United Nations Conference on Trade and Development WDI World Development Indicators WTO World Trade Organization
v TABLE OF CONTENTS LIST OF TABLES.................................................................................................ix LIST OF FIGURES.................................................................................................x CHAPTER 1. INTRODUCTION...............................................................................1 1.1. Background......................................................................................................1 1.2. Rationale of the study ......................................................................................3 1.3. Aims of the study.............................................................................................5 1.3.1. General aim................................................................................................5 1.3.2. Specific aims..............................................................................................5 1.4. Research questions...........................................................................................5 1.5. Research subject and scope..............................................................................6 1.5.1. Research subject.........................................................................................6 1.5.2. Research scope...........................................................................................6 1.6. Research method..............................................................................................9 1.7. Research contents.............................................................................................9 1.8. Contributions to the study................................................................................9 1.8.1. Scientific contributions..............................................................................9 1.8.2. Practical contributions .............................................................................10 1.9. Study structure ...............................................................................................10 SUMMARY OF CHAPTER 1..............................................................................11 CHAPTER 2. THEORITICAL AND EMPIRICAL ANALYSES..........................12 2.1. Theories of foreign direct investment............................................................12 2.1.1. Definition.................................................................................................12 2.1.2. Origin and nature .....................................................................................13 2.1.3. Features....................................................................................................14
vi 2.1.4. Forms .......................................................................................................14 2.1.5. Roles ........................................................................................................18 2.2. Foundational theories.....................................................................................19 2.2.1. International trade theory.........................................................................19 2.2.2. Neoclassical economic growth theory.....................................................20 2.2.3. Absolute advantage theory.......................................................................21 2.2.4. Comparative advantage theory ................................................................22 2.2.5. International product life cycle theory.....................................................23 2.2.6. Eclectic theory .........................................................................................24 2.2.7. Investment development path theory.......................................................24 2.3. Drivers of FDI................................................................................................26 2.3.1. Sovereign Environmental, Social, and Governance................................26 2.3.2. Mineral rents............................................................................................26 2.3.3. Tariff........................................................................................................27 2.3.4. Biodiversity..............................................................................................28 2.3.5. Inflation....................................................................................................28 2.3.6. Trade Openness........................................................................................29 2.4. Review of previous empirical analyses..........................................................29 2.5. Research gap ..................................................................................................33 SUMMARY OF CHAPTER 2..............................................................................35 CHAPTER 3. RESEARCH METHODOLOGY......................................................36 3.1. Research Process............................................................................................36 3.2. Research models and hypotheses...................................................................41 3.2.1. Research models ......................................................................................41 3.2.2. Research hypotheses................................................................................44
vii 3.3. Research data .................................................................................................46 SUMMARY OF CHAPTER 3..............................................................................50 CHAPTER 4. RESEARCH RESULTS AND DISCUSSION.................................51 4.1. Descriptive statistics of research data............................................................51 4.2. Check for autocorrelation...............................................................................52 4.3. Priori regression models.................................................................................54 4.3.1. Bayesian information criterion ................................................................54 4.3.2. Testing the Bayesian model.....................................................................56 4.3.3. Markov Chain Monte Carlo Parameter Estimation.................................58 4.3.4. Effective sample size ...............................................................................63 4.4. Technical discussion ......................................................................................65 4.5. Economic discussion......................................................................................70 SUMMARY OF CHAPTER 4..............................................................................72 CHAPTER 5. CONCLUSIONS AND POLICY IMPLICATIONS........................73 5.1. Conclusions....................................................................................................73 5.2. Policy implications.........................................................................................74 5.2.1. For developed countries...........................................................................74 5.2.2. For developing countries .........................................................................75 5.3. Limitations and Future Research ...................................................................76 5.3.1. Limitations...............................................................................................76 5.3.2. Future Research .......................................................................................77 SUMMARY OF CHAPTER 5..............................................................................79 REFERENCES.........................................................................................................i RESOURCES FROM OVERSEAS.........................................................................i RESOURCES IN VIETNAM................................................................................xi
viii WEBSITES.......................................................................................................... xii LIST OF ANNEXES........................................................................................... xiii
ix LIST OF TABLES Table 2.1. Review of previous empirical analyses...................................................30 Table 3.1. Explain Variables....................................................................................43 Table 3.2. Prior Information Simulation..................................................................48 Table 4.1. Descriptive statistics of research data .....................................................51 Table 4.2. Check for autocorrelation........................................................................53 Table 4.3. Bayesian information criterion................................................................55 Table 4.4. Testing the Bayesian model ....................................................................57 Table 4.5. Priori regression models..........................................................................59 Table 4.6. Effective sample size...............................................................................63 Table 4.7. Bayestest Interval....................................................................................65 Table 4.8. The estimation results of Model 1 and Model 2 after remediation.........66
x LIST OF FIGURES Figure 1.1. World foreign direct investment inflows.................................................1 Figure 1.2. FDI value and growth rates categorized by income groups and regions.. ....................................................................................................................................2 Figure 1.3. Greenfield projects, International project finance, Cross-border M&As and FDI.......................................................................................................................3 Figure 1.4. FDI inflows for selected areas, Q1 2018-Q2 2023 (USD billion)...........7 Figure 3.1. Research Process....................................................................................37 Figure 3.2. Research hypotheses..............................................................................46 Figure 4.1. Bayesgraph (Model 1) - After remediation ...........................................61 Figure 4.2. Bayesgraph (Model 2) - After remediation ...........................................62
1 CHAPTER 1. INTRODUCTION 1.1. Background In today’s globally integrated economy, countries aiming for development not only depend on their own resources but also need to engage with the global market. This integration allows them to maximize the combination of external and internal resources to foster economic growth. Attracting FDI has become a common strategy among countries in the context of international integration. The benefits that FDI brings to a country’s socio-economic development, particular for developing nations, are significant, and the efforts to attract such investment have yielded positive outcomes. However, as the economy undergoes substantial changes, the growing demand for investment capital can lead to several negative consequences (Latsamy, 2024). World foreign direct investment inflows 3,50 3,00 2,50 2,00 1,50 1,00 Percentage of GDP 0,50 0,00 Year World Figure 1.1. World foreign direct investment inflows (Source: UNCTAD) According to the UNCTAD report from 2024, FDI flows in 2023 totaled $1.33 trillion, a decrease of 2 percent compared to 2022. This overall figure was influenced by significant fluctuations in a few European conduit economies. When excluding these conduits, global inflows actually declined by more than 10 percent.
2 Figure 1.2. FDI value and growth rates categorized by income groups and regions (Source: UNCTAD) FDI inflows to developing economies, which had shown resilience in recent years, dropped by 7 percent in 2023. In contrast, flows to developed economies (The member countries of the OECD – other than Chile, Colombia, Costa Rica, Mexico and Türkiye), excluding conduits, fell by 15 percent. This downturn was primarily attributed to corporate financial restructuring, partly driven by initiatives to implement a global minimum tax targeting large MNEs, alongside a notable decline in the value of cross-border mergers and acquisitions (M&As). M&As, which particularly impact FDI in developed countries, ended 2023 at just over half the value recorded in 2022. International project finance also struggled, with both the member and value of deals decreasing by about a quarter. The main factors behind these declines included tighter financing conditions, investor certainty, volatility in financial markets, and increased regulatory scrutiny of M&As. On a positive note, greenfield project announcements saw a slight increase in both numbers and value. This uptick was primarily driven by increased announcements in manufacturing industries, breaking a decade-long trend of gradual decline in this sector. In developing countries, the number of new projects announced rose by 15 percent; however, in developed countries, new project announcements decreased by 6 percent. The contrasting trends in greenfield projects and international project finance deals highlight the different motivations behind
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