Th.D: Investment decision under uncertainty - The case of carbon taxation in developing countries

In Vietnam, there are quite a few researches on the factors affecting FDI inflows in general. The typical researches should be referred to Nguyen Thi Lien Hoa & Bui Bich Phuong (2014); Le Van Thang & Nguyen Luu Bao Doan (2017). Both studies used the quantitative approach to estimate the relationship of factors affecting FDI inflows into Vietnam such as GDP, foreign exchange reserves, degree of infrastructure development, labor costs, national trade openness, labor quality, level of urbanization, and concentration of domestic enterprises. These researches are quite useful for designing of macro policies that attract FDI.

As the survey of Vietnam’s related academic researches, there are no researches on investment decisions of foreign firms in irreversible projects under uncertainty related to carbon taxation. In the academic world, researches about the effects of carbon taxation related uncertainties have been developed in the form of single case study only such as coal fired power plant projects. Therefore, the generalization capability of these research results for policy making is not so high. We could see that the study of foreign investment decisions on irreversible FDI projects in Vietnam under uncertainty is necessary and it would bring many benefits as listed below.

Based on reviewing results of theoretical and empirical researches, the research gaps will be identified for the thesis’s research concentration. The important part of thesis is to build the research model in mathematical form to fill the identified research gaps. The thesis will focus on the effects of carbon taxation related uncertainties on the investment decision behavior of investors from developed countries (carbon taxed countries), investing in irreversible projects in developing countries (non-carbon taxed countries) which are similar to Vietnam. Through the development of mathematical models and calculations, investment decision and the selection of capital/technology and labor levels in irreversible FDI projects in Vietnam will be examined under the carbon tax related uncertainties.

The main objective of the thesis is the firm’s investment decision in the irreversible project under the uncertainties associated with the carbon taxation. This type of taxes is commonly imposed in some developed countries aiming at greener and sustainable development which would be applied in Vietnam in the near future. The impacts of these carbon tax related uncertainties on the investment decision behavior of foreign firms will be examined, especially the optimum level of capital / technology and labor choices that the foreign investors can decide to choose in their investment projects in Vietnam.

The scope of the research is large fixed assets of foreign companies in Vietnam that cause carbon emissions and therefore there are potential uncertainty/carbon tax risks in these projects. This type of project is referred in academic community as irreversible investment projects by (McDonald & Siegel, 1986). In practice, these projects are very large value ones producing/supplying basic commodities of the economy or infrastructure projects in transportation, telecommunications, energy, oil and gas exploitation, power plants, oil refinery, iron and steel plants, chemicals production, real estates. Investors of these projects are often large industrial companies from developed countries (MNEs / MNCs). Since the phenomenon of carbon tax avoidance mainly from developed countries where the carbon taxation is already applied or about to apply, to non-carbon taxation developing countries, therefore, this study in Vietnam context can be generalized to other developing countries.

The thesis has applied quantitative approach by mathematical modeling and simulation techniques using reasonable assumption data and collected data in practices if available. The choice of research method is considered on the nature of the research nature, the relevant studies and the availability of actual data as follows.

The thesis is expected to contribute to academic knowledge, research methods and practical application in project appraisal. In terms of academic knowledge, the thesis will provide a theoretical framework and empirical evidences of uncertainties and investment decision into irreversible project in Chapter 2 in which uncertainties of carbon taxation will be given priority. In addition, the results of the model development using mathematical techniques in the thesis are expected to provide new theoretical discoveries: carbon taxation is likely to limit low-tech investors. Consequently, if the carbon tax is used as an adjustment tool, the government may develop carbon tax related policies to increase the quality level of FDI projects. This theoretical discovery is a clearly novelty of the thesis.

Research setting and motivations

Research targets and research questions

Research objectives and scope of research

Methodology

Expected outcomes of the thesis

Structure of the thesis

The firm and investment operation

Foreign direct investment and its impact factors

Irreversible project

Investment decision under uncertainties

Investment decisions under carbon taxation uncertainties

Research gaps

Selection of research methods

Research model

Model development based risk response of investors

Optimization techniques by maths

Simulation of research results

Simulated data

The Basic model

Modeling the cases of carbon and non-carbon taxation

The ratio of capital/labor in case of carbon and non-carbon taxation

Modeling the case of uncertain timing in application of carbon taxation

Modeling the case of investors with different technology level

Numerical results of simulation from the case of carbon and non-carbon taxation

General conclusions

Policy and managerial implications

Research limitations and recommendation for further research directions

Under different modeling cases involving uncertainties of carbon taxation affecting investor profitability, the results of algorithmic modeling and calculations show the interesting implication as follows.

Firstly, when comparing two cases with and without carbon taxation, it is clear that the application of carbon taxation will reduce the investor's optimal capital stock and labor level (Theory 1). However, the optimal capital/labor ratio in the case of carbon tax is higher than that of the case without carbon tax, suggesting that carbon taxation is effective to increase technology level in their project (Theory 2).

Secondly, when investors consider investing in a non-carbon taxed country, they will concern the uncertainties of carbon taxation such as: when will the government apply carbon tax? For the investor who is not risk taker, they will determine the worst case: the government will apply carbon taxation as soon as on the first year of their project life cycle.Therefore, they will choose low optimal capital/ technology and labor levels which are equal to case of carbon tax applied (Theory 3).

Thirdly, when the government has applied carbon taxation that will tends to lead investors with lower emission rate investing at the higher ratio of capital/labor in comparison with that ratio of higher emission investor. (Theory 4).

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