The relationship amongst financial development, economic growth, and foreign direct investment in vietnam Mối quan hệ giữa phát triển tài chính, tăng trưởng kinh tế và đầu tư trực tiếp nước ngoài tại Việt Nam
INTRODUCTION
Concerning rationale of the Study
Vietnam is recognized as one of Asia's most successful economies, transitioning from a centrally-planned system to a dynamic market-based economy since the economic reforms known as "Doi Moi" in 1986 This transformation led to a remarkable surge in foreign direct investment (FDI), increasing from USD 40 thousand in 1986 to USD 10.3 million in 1987 The country's effective management of the COVID-19 pandemic, including health policies and fiscal measures, resulted in net FDI inflows of USD 15.8 billion in 2020, nearly matching the USD 16.19 billion from 2019 Additionally, Vietnam's GDP per capita grew 2.7 times from 2002 to 2018, exceeding $2,700 in 2019, which has significantly reduced the poverty rate from over 70% to less than 6%, lifting more than 45 million people out of poverty.
Foreign Direct Investment (FDI) is a crucial driver of economic growth in Vietnam, contributing significantly to industrial production and export development While its initial impact on job growth may be modest, FDI inflows have been instrumental in enhancing investment capital Moreover, with the right government policies in place, FDI not only attracts additional capital but also promotes technology transfer, which is essential for improving human capital formation and further accelerating economic growth.
Foreign Direct Investment (FDI) can have negative effects, such as hindering domestic investment by disrupting local industries and attracting top talent, which can lead to income inequality This situation may cause local companies to lose interest in investing in their own products Additionally, political or economic instability can result in long-term capital outflows from the host country, as profits from foreign investments may flow back to the investor's home country.
Attracting foreign investment is crucial for both developed and developing countries with low internal capital accumulation, such as Vietnam, where a high demand for investment exists In 2019, foreign direct investment (FDI) contributed 20% to the GDP and represented over 70% of export turnover, highlighting its significance in the economy Furthermore, FDI participation across various sectors has positively transformed the lives of millions of workers nationwide.
It can be said that FDI has boosted the Vietnamese economy
Foreign Direct Investment (FDI) has become increasingly significant in Vietnam's economic landscape, attracting diverse opinions due to its dual capital sources In recent years, FDI inflows have surged, with new investments reaching $23 billion by December 2015, marking a 17.4% increase from 2014 Notably, foreign investment constituted 73% in the industrial and construction sectors and 27.5% in services, underscoring its vital role in the country's economic development.
Foreign Direct Investment (FDI) plays a crucial role in driving economic growth in Vietnam This article explores the current state of FDI attraction in the country and assesses its significant impact on Vietnam's economic development By analyzing the contributions of FDI, we aim to provide a comprehensive understanding of its effects on the overall economic landscape of Vietnam.
Research questions
To continue to contribute to the current theoretical basis of current foreign direct investment (FDI), the study focuses on the following two basic research questions:
(1) How does FDI activity in Vietnam in the period 1990-2019 affect the Vietnamese economy and society?
(2) How has FDI affected economic development factors in the short and long term?
Object and Scope of the Study
- The object of the study is to investigate the impacts of FDI inflows on financial development and economic growth
+ About space: Effects of FDI inflows on financial development and economic growth are presented for Vietnam
+ About time: The period from 1990 to 2019
- Research data: Data is collected from the World Bank, General Statistics Office of Vietnam, Statistical Yearbook.
Structure
The research is organized into chapters aimed at addressing the objectives related to attracting Foreign Direct Investment (FDI) It explores the rationale behind FDI, establishes a theoretical framework, and examines the relationship between FDI, financial development, and economic growth This study provides a comprehensive analysis of FDI's impact on Vietnam's economic development.
The main body of the thesis consists of five chapters:
Chapter 3: FDI attraction and implementation in Vietnam since Doi Moi
Chapter 4: Data analysis and research findings
LITERATURE REVIEW
What is foreign direct investment (FDI) and why is it important?
Foreign Direct Investment (FDI) is defined by the OECD as a cross-border investment where an investor from one economy gains substantial influence and long-term interest in a business located in another economy (OECD, 2017).
Foreign Direct Investment (FDI) occurs when an investor holds 10 percent or more of the voting power in a company across different economies, signifying a stable and enduring relationship between them FDI plays a crucial role in international economic integration by facilitating the transfer of innovation, enhancing global trade through access to foreign markets, and serving as a vital driver for economic development Key indicators related to FDI include restrictiveness levels and the inward and outward values of stocks, flows, and income by partner country and industry (OECD, 2017).
Foreign Direct Investment (FDI) signifies a long-term commitment by a resident entity, known as the direct investor, in a business located in a different economy, referred to as the direct investment enterprise (OECD, 2008) Essentially, FDI involves a corporation investing directly in a commercial venture abroad.
Foreign Direct Investment (FDI) is defined as an international investment where a resident entity in one economy seeks to establish a lasting interest in a business located in another economy This lasting interest signifies that the direct investor possesses substantial influence over the management of the company and fosters a long-term relationship with the enterprise.
Foreign Direct Investment (FDI) differs from portfolio investment primarily in the level of control exerted over the investment, as FDI requires the foreign investing company to hold at least 10 percent of the voting rights A key characteristic of FDI is that the new venture operates independently from the investor's home country's economy, setting it apart from other forms of foreign investment.
Foreign Direct Investment (FDI) is primarily driven by the acquisition of resources, sales expansion, and risk reduction Additionally, governments often encourage FDIs for various political motivations (Daniels et al., 2004).
Foreign Direct Investment (FDI) refers to an investment made by a foreign entity in a domestic company's equity, aiming to participate in its management Key characteristics of FDI include a focus on long-term commitment rather than quick capital gains, typically involving an acquisition of at least 10% of the target company's paid-up equity FDI often facilitates access to new markets and technology transfers, benefiting both the foreign investor and the domestic company by enhancing productivity and creating jobs, which ultimately fosters economic growth in the host country Additionally, these investments may involve the sale of shares by promoters or new capital issues, impacting the organization's financial records and typically classified as primary market operations.
2.1.3 The impact of FDI on the host country
Foreign Direct Investment (FDI) offers numerous advantages for both investors and recipient countries, impacting them at corporate and national levels This article explores the typical positive and negative effects of FDI inflows on host nations, highlighting its macroeconomic implications.
There are two approaches in economic theory which contribute to studying the effects of FDI on host countries
The standard theory of international trade, proposed by MacDougall in 1960, employs a partial equilibrium comparative-static approach to analyze the distribution of foreign investment increments (Blomström & Kokko, 1997) This model assumes that an increase in foreign investment leads to a rise in the marginal productivity of labor while simultaneously decreasing the marginal productivity of capital.
Hymer's (1960) theory of industrial organization explores why firms invest in foreign countries to produce goods similar to those made domestically Kindleberger (1969) emphasizes that successful direct investment relies on market imperfections for goods or factors, including technology, or government and firm interventions that create market separations Consequently, firms must possess valuable assets in their home countries that can benefit their foreign affiliates (Blomström & Kokko, 1997).
Therefore, it can be concluded that FDI has both positive and negative effects on the host economy
2.1.3.1 Positive effects of FDI on host economy
Foreign Direct Investment (FDI) significantly impacts host countries by boosting productivity and exports, thereby fostering economic development Research by Gửrg and Greenaway (2004) highlights that factors such as imitation, skill acquisition, competition, and increased exports play crucial roles in enhancing the productivity of host nations.
Multinational corporations (MNCs) and domestic companies facilitate the indirect transfer of technology to local businesses in host countries By adopting and imitating the advanced management and technology practices of these multinationals, local firms can enhance their competitiveness in export markets.
Domestic businesses learn more about international markets and become more familiar with them The administrators and other qualified workers of the homegrown firms
16 obtain prevalent administrative and specialized abilities, which expands their productivity
Multinational corporations enhance market competition and efficiency in host nations by investing in human and physical capital, which poses challenges for local businesses Their entry into markets with significant barriers to entry improves resource allocation and encourages local firms to elevate their performance and productivity Consequently, the presence of these foreign companies compels homegrown businesses to adapt and innovate to remain competitive.
To align with the stringent standards set by international companies, multinationals actively influence local suppliers of intermediate products, enhancing their efficiency in delivery speed, quality, and reliability.
Foreign Direct Investment (FDI) is widely recognized for its positive impact on the labor market When domestic firms adopt the production methods of multinationals, which emphasize increased labor efficiency, they are likely to boost their own productivity As a result, these domestic companies may be more willing to offer higher wages to their employees (Lipsey & Sjửholm, 2005).
In addition, multinationals raise the standard of the labour market in the host nation by training workers, preparing them to handle complex machinery, and increasing their productivity
The relationship between FDI and important variables
The literature on the effects of Foreign Direct Investment (FDI) on host economies presents mixed predictions, with scholars examining the relationship through four primary lenses: (i) identifying FDI as a key determinant of development; (ii) considering Gross Domestic Product (GDP) as a significant factor influencing FDI; (iii) exploring the mechanisms by which FDI drives economic growth; and (iv) analyzing the causal links between FDI and growth Notable studies addressing these areas include works by Balasubramanyam, Salisu, and David (1996, 1999), Borensztein, De Gregorio, and Lee (1998), De Mello (1997, 1999), Hansen and Rand (2006), and Al Nasser (2010).
Foreign Direct Investment (FDI) plays a crucial role in influencing economic growth, as explored in various research areas Numerous studies support the hypothesis that FDI significantly contributes to positive economic growth outcomes.
Foreign direct investment (FDI) significantly influences the economic growth and welfare of host nations by enhancing global exposure, restructuring domestic businesses, and fostering innovation and job creation Benefits include improved working conditions and the development of the industrial sector, leading to positive spillovers that can stimulate economic growth (De Mello, 1997; De Mello, 1999; Chowdhury and Mavrotas, 2006) However, some studies present conflicting evidence; for instance, Carkovic and Levine (2002) found no positive effect of FDI on growth in their analysis of 72 countries from 1960 to 1995, while Alfaro (2003) reported ambiguous effects from 1981 to 1999 Liu (2008) noted that the impact of FDI spillovers can vary, highlighting the complex relationship between FDI, economic growth, and financial development According to sources like the OECD (2002), UNCTAD (1999), and Forte and Moura (2013), the effects of FDI on economic growth can be both positive and negative.
Vietnam has experienced significant growth in Foreign Direct Investment (FDI) over the years, highlighting its crucial role in the country's economic development at both national and local levels Research by Anwar and Nguyen (2010) indicates that FDI positively influences economic growth, suggesting that Vietnam should expand its market and seek new partnerships to attract more investment Additionally, Freeman (2002) identifies weaknesses in Vietnam's FDI policy framework and outlines key factors influencing FDI The study concludes that ongoing economic reforms and liberalization efforts have improved the investment climate; however, enhancing coordination among stakeholders is essential for further promoting FDI in the country.
Research by Nguyễn (2004) indicates that foreign direct investment (FDI) positively influences local economic growth by fostering the development and accumulation of inherent assets, while also enhancing human capital However, the findings raise questions regarding the effectiveness of labor mobility as a sufficient condition for realizing FDI spillover effects More recent quantitative studies, such as those by THANH and THANH (2016), employing the AR model, suggest that FDI is influenced by its own historical margins and that its impact on provincial economic growth is relatively limited.
In 2011, a concurrent model was employed to examine the GMM method, revealing a bidirectional relationship between foreign direct investment (FDI) and economic growth Additional research has explored various aspects of FDI, including its influence on labor productivity (Vu & Le, 2017), economic structure (LONG, 2020), and the factors influencing FDI attraction (Anwar and Nguyen, 2011; HoA and Phương, 2014) However, these studies have not adequately addressed how the effects of FDI attraction vary in the short and long term, nor have they considered the endogeneity of economic growth factors.
Numerous studies have investigated the complex relationship between financial development and foreign direct investment (FDI) A notable positive effect on inward FDI occurs when host countries can secure external financing for financially vulnerable firms Kletzer and Bardhan (1987) highlight that nations with advanced financial systems benefit from easier access to external funding, giving them a competitive edge to specialize in sectors reliant on such financing Building on this, Beck (2002) demonstrated that both credit-intensive and less credit-dependent sectors can access external funding, revealing that industries with a higher reliance on foreign financing experience faster growth in countries with well-developed financial systems Specifically, the export of manufactured goods is positively correlated with a high level of financial development, while the food sector shows a lower correlation.
The majority of empirical studies examining the impact of financial development on international trade, found evidence of a connection between trade and finance: a strong
Numerous studies indicate that the financial system significantly impacts both the volume and structure of trade Research by Beck (2002, 2003), Svaleryd (2005), Hur, Raj, and Riyanto (2006), Kim et al (2010), Becker, Chen, and Greenberg (2013), Manova (2013), and Bilas, Bošnjak, and Novak highlights this relationship, emphasizing the crucial role of financial systems in facilitating trade dynamics.
Becker et al (2013) conducted a comprehensive analysis of bilateral trade flows among 170 countries from 1970 to 1998, highlighting the crucial role of financial development in relation to fixed costs and international trade Their findings indicate that companies face substantial fixed costs when entering new export markets, which require significant initial investments in product development, marketing, and distribution Furthermore, the study reveals a positive correlation between financial progress and increased exports, particularly in industries characterized by high upfront fixed expenses.
The global financial crisis of 2007-2008 significantly impacted international trade, as highlighted by studies from Iacovone and Zavacka (2009), Chor and Manova (2012), and Berman and Martin (2012) These studies reveal that external financial dependency negatively affects sector-specific export growth, particularly during banking crises Since trade transactions often rely on credit, insurance, or guarantees, a lack of financing due to supply-side constraints can further harm international trade (Auboin, 2009) Additionally, Manova (2013) demonstrates that financial development can enhance exports by positively influencing overall production Other research, including work by Bayar, Akyuz, and Erem (2017), as well as Menyah, Nazlioglu, and Wolde-Rufael (2014), suggests a feedback relationship between international trade and financial development, with the causal link varying by country (Wajda-Lichy et al., 2020).
FDI ATTRACTION AND IMPLEMENTATION IN VIETNAM
Characteristics of Vietnam's economic development
From 2000-2019, it was a horizontal economic growth model that took advantage of resources, cheap labour, and capital intensity Vietnam's economic growth model has the following characteristics:
Vietnam's economic growth model relies heavily on capital intensiveness, consistently achieving a high growth rate Social investment capital is crucial for the nation's development and economic progress Consequently, the Party and State prioritize the effective mobilization and utilization of both domestic and foreign investment resources.
Between 1991 and 2000, social investment capital experienced a consistent growth trend, with a notable exception in 1998 when it slightly declined due to the regional financial crisis By 2000, investment capital had surged to 414% of the levels recorded in 1990 Overall, the total societal investment capital during this decade exceeded 700 trillion VND, with over 300 trillion VND accumulated from 1991 to 1995 and 400 trillion VND from 1996 to 2000 During the latter period, social investment capital represented approximately 27.8% of the annual GDP, peaking at 30.9% in 1997.
1998 accounted for 27.0%; in 1999 accounted for 25.9%; in 2000 accounted for 27.2%
To achieve sustained growth, total investment capital for development has consistently exceeded 30%, despite a recent decline in the capital growth rate This trend, illustrated in Figure 3-1, indicates that the increase in societal capital is a fundamental aspect of the growth model observed from 2000 to 2019, which is primarily driven by capital investment.
Figure 3-1 Total social investment capital for the period 2000-2019
Source: General Statistics Office of Vietnam (GOS, 2021)
Vietnam's economic growth model is characterized by its capital-intensive nature, largely due to its status as a resource-intensive developing country With nearly 80% of its labor force comprised of unskilled workers and limited training, the nation faces challenges in workforce development Furthermore, Vietnam's technology application level lags behind the regional average, with only 26 towers in comparison Consequently, the recent economic expansion has primarily stemmed from economies of scale, leading to increased investment capital for development.
Second, the growth model is unbalanced but has a positive development trend
Public investment capital constitutes 70% of the total investment expenditure, while investment in social fields and development remains significantly lower Despite its high share in social capital, public investment is notably inefficient, leading to an unsustainable growth model that negatively impacts the economy The budget deficit consistently exceeds the National Assembly's 5% limit, with public debt rising above 50% of GDP, nearing its ceiling However, the major economic balances from 2016 to 2019 have been maintained, reinforcing the macroeconomic foundation and generating resources for development It is projected that total budget revenue for the 2016-2020 period will reach VND 6,915 trillion, 1.6 times higher than the previous five years.
Total investment Radio of total investment/GDPGrowth rate of total investment
From 2016 to 2019, Vietnam experienced a decreasing ratio of state budget deficit to GDP, with both central and local budget balances being secured and the deficit kept under control The economy's openness surged, as evidenced by the total export and import turnover of goods and services rising from 184.7% of GDP in 2016 to an estimated 209.3% in 2020 This significant growth highlights Vietnam's enhanced integration into the global market and its effective utilization of domestic economic strengths (GOS, 2021).
The growth model in Vietnam is significantly shaped by political ideology, particularly in the context of establishing a socialist-oriented market economy since 2001 While numerous reforms have been introduced to foster market development, the persistent influence of "local socialist" principles has not been adequately addressed, leading to missed opportunities for advancement A notable instance of this is the policy aimed at diversifying ownership of production means during the Doi Moi reforms.
The 1990 Enterprise Law marked a significant shift in policy by officially recognizing the existence of private enterprises in Vietnam, 14 years after the 1986 reforms This legislation allowed individuals to engage in investment activities across all sectors, except those explicitly prohibited by law, paving the way for a more dynamic and diverse economic landscape.
3.1.1.2 Scale and structure of growth
Between 2000 and 2020, Vietnam experienced significant economic growth, maintaining an impressive average growth rate of approximately 6.3%, even amidst global financial crises, price fluctuations, and natural disasters This resilience highlights Vietnam's positive growth trajectory and positions it favorably compared to other regions worldwide, marking a notable achievement for its economy.
Figure 3-2 GDP growth rate of Vietnam and some regions in the world in the period 1990-2019
Vietnam's economic growth has experienced significant fluctuations over time, particularly during the Doi Moi period from 1990 to 2000, when the economy transitioned from a closed system to one that is open and integrated globally, achieving impressive growth rates of around 8-9% The Asian Financial Crisis in 1997-1998 had a limited impact on Vietnam's growth due to its relatively underdeveloped trade activities However, the global economic downturn in 2008-2009 caused a decline in Vietnam's growth rate from 7.13% to 5.39% The post-crisis recovery from 2009 to 2016 was slower for Vietnam compared to other regions, as the economy faced internal challenges and the lingering effects of the recession The COVID-19 pandemic in 2020 further exacerbated these issues, leading to a sharp drop in growth from 7.01% in 2019 to just 2.9% in 2020 Despite these setbacks, the IMF and World Bank projected that Vietnam would emerge as one of the fastest-growing economies in Southeast Asia, driven by increasing domestic demand and promising prospects in the export-oriented manufacturing sector.
The growth structure of the economy is positively shifting, aligning with the country's industrialization and modernization efforts Notably, the construction sector has emerged as a key driver of growth, while the agricultural sector's share has rapidly declined The service industry, on the other hand, has faced fluctuations and indications of a slowdown Despite significant growth in the industrial sector, it remains primarily an intermediate and auxiliary industry Overall, the economic restructuring process is progressing at a relatively slow pace.
Table 3-1 GDP growth and growth of economic sectors (%)
After 30 years of implementing Doi Moi, Vietnam has always achieved high and stable economic growth in the region and the world Based on a high growth model, it is a premise to help Vietnam realize many other socio-economic goals, such as expanding the size of the economy, reducing unemployment, improving material and spiritual life, and reducing the poverty rate Hunger decreased sharply Vietnam is gradually joining the group of low-middle income developing countries It can be seen that the growth rate of GDP per capita over the years has increased continuously and is quite stable In
1990, Vietnam's GDP per capita reached 96.7 USD By 2019 it is estimated to reach
3491 USD/person Especially in the last ten years, the growth rate is remarkable Those are encouraging achievements of Vietnam's economic growth
Figure 3-3 Vietnam's GDP per capita in the period 1990-2019
Vietnam's GDP per capita highlights the quantitative efficiency of its growth, but it is crucial to examine the underlying factors within provinces during this process Essential growth foundations, including macroeconomic stability, socio-economic institutions, basic education, and healthcare infrastructure, exhibit significant shortcomings These deficiencies lead to low investment efficiency and ineffective capital utilization, as evidenced by the low Incremental Capital-Output Ratio (ICOR) coefficient Furthermore, the diminishing contribution of Total Factor Productivity (TFP) to growth indicates a lack of sustainability in the economic growth structure.
Vietnam's economic growth is primarily capital-intensive, yet the efficiency of capital utilization remains low, as indicated by a high Incremental Capital-Output Ratio (ICOR) This ratio measures the investment required to generate an additional dollar of GDP, with a score of 3 signifying effective investment and sustainable development for developing nations Recent data shows that Vietnam's ICOR is notably high, particularly within the state economic sector, which ranks among the highest globally Although the ICOR decreased from 2016 to 2019, it remained elevated, highlighting low capital productivity and indicating poor capital utilization in 2019.
Figure 3-4 Incremental capital output radio (ICOR) at contrast in 2010
FDI in Vietnam in the period 1990-2019
3.2.1 Results of attracting and using FDI
Vietnam stands out as a top destination for foreign investors due to its open investment climate, stable political and macroeconomic environments, and a wealth of low-cost human resources These factors have significantly boosted foreign direct investment (FDI) inflows, particularly following the country's engagement in various bilateral and multilateral free trade agreements (FTAs).
Between 2000 and 2009, Vietnam experienced significant fluctuations in registered Foreign Direct Investment (FDI), peaking at USD 71.7 billion in 2008, which represented approximately 80% of the country's GDP that year Prior to joining the WTO in 2005, registered FDI was only USD 6 billion Following Vietnam's accession to the WTO, FDI surged, with a steady increase observed from 2010 to 2014, rising from USD 19.89 billion in 2010 to USD 21.92 billion in 2014 Since 2015, the trend has continued upward, with total registered FDI reaching USD 22.7 billion in 2015 and climbing to USD 38.95 billion by 2019.
The COVID-19 pandemic has significantly impacted the global economy, leading to a 25% decline in foreign investment capital registered in Vietnam, which totaled only 28.53 billion USD in 2020 compared to the previous year.
Figure 3-5 Total registered FDI capital into Vietnam in the period 1990-2019
Between 2015 and 2019, there was a significant rise in both registered capital and realized foreign direct investment (FDI), which grew from 14.5 billion USD to 20.38 billion USD Additionally, the number of newly registered investment projects surged from 1,843 in 2015 to 3,883 by 2019.
Table 3-2 Amount of capital and FDI projects into Vietnam in the period 1988-
Over the past decade, foreign investors have actively engaged in 19 of the 21 economic sectors, with the processing and manufacturing industries being particularly appealing The total newly registered and additional capital consistently ranges between USD 13-24 billion, representing a significant portion of the overall registered investment capital, which accounts for 40-70% Furthermore, sectors such as real estate, wholesale, retail, and electricity production and distribution have also emerged as notable recipients of foreign direct investment, according to MPI 2020.
By the end of 2019, the processing and manufacturing industry attracted significant investor attention, with total registered capital reaching $214.6 billion, representing 59% of the overall investment This sector also led in the number of projects, totaling 14,463, which accounts for 46.7% of all projects Real estate followed as the second-largest sector, with registered capital of $58.4 billion, making up 16% of the total Notably, investment in real estate has increased, driven by renowned multinational corporations like CapitaLand, Sunwal Group, Mapletree, and Kusto Home Additionally, the production and distribution of electricity, gas, hot water, steam, and air-conditioning comprised 6.5% of the total registered capital.
As of December 20, 2019, the country saw a significant increase in investment, with 3,883 new projects granted investment certificates, marking a 27.5% rise compared to the same period in 2018, according to MPI (2020) The total newly registered capital reached 16.75 billion USD, which is 93.2% of the amount registered during the previous year However, the average size of registered capital for new projects decreased from 5.9 million USD in 2018 to 4.3 million USD in 2019.
In 2019, while newly registered investment capital saw a decrease, the rate of decline slowed compared to previous months Excluding large projects over 1 billion USD from 2018, the total newly registered investment capital in 2019 actually rose by 32.5% compared to the same period Notably, the largest investment project in 2019 was valued at 420 million USD.
2018 there were Smart city project in Dong Anh district, Hanoi, with total investment
31 capital of 4.14 billion USD, Polypropylene manufacturing plant and liquefied petroleum gas warehouse project, with a total registered investment capital of 1.2 billion USD)
As of 2019, Japan was the leading foreign direct investment (FDI) partner in Vietnam, contributing over 20.1% of the total FDI, followed by South Korea at 18.3% and China at 14.1% Singapore accounted for 9.1%, while Taiwan, Thailand, and the US contributed 6.9%, 4.4%, and 3.8%, respectively, along with more than 20 other countries and territories These nations have significantly invested in Vietnam's manufacturing, real estate, and technology sectors, drawn by the country's expanding market, youthful workforce, and competitive labor costs.
Figure 3-6 Structure of major FDI partners in Vietnam by cumulative investment up to 2019
Japan leads with more than $59 billion in registered capital, followed closely by South Korea at over $67 billion, Singapore with over $49 billion, Taiwan at over $32 billion, and Hong Kong exceeding $20 billion Most of this investment is comprised of joint ventures with Vietnamese partners or wholly foreign-owned enterprises.
Overall, FDI continues to play a significant role in Vietnam's economic development, driving export growth and creating jobs for locals while also bringing about technology
Japan Korea China Singapore Taiwan Others
In 2019, Vietnam attracted investment projects from 125 countries and territories, with Korea leading at 7.92 billion USD, representing 20.8% of total foreign investment Hong Kong followed closely with 7.87 billion USD, including a significant 3.85 billion USD investment in Vietnam Beverage Co., Ltd., which constituted 48.9% of its total investment Singapore ranked third with 4.5 billion USD, accounting for 11.8% of the total investment capital Notably, investments from China and Hong Kong surged during this period, influenced by the US-China Trade War, with Chinese investments increasing nearly 1.65 times and Hong Kong's investments rising 2.4 times compared to 2018.
3.2.2.1 The ability to create jobs
Foreign Direct Investment (FDI) in Vietnam has the potential to generate numerous job opportunities for local workers, as evidenced by the steady increase in employment within FDI enterprises However, when compared to other regions, the job creation rate from FDI in Vietnam averages only 4.36% over the entire period, indicating that the impact on employment is not aligned with the significant potential and scale of the capital influx.
Figure 3-7 Employment contribution rate of FDI sector
Labour at 15 years of age in FDI sector Percentage of total labour
Despite representing a small fraction of the overall workforce, the foreign-invested sector significantly boosts labor productivity growth, ranking just behind the FDI and non-state sectors in contributions.
The employment efficiency of the Foreign Direct Investment (FDI) sector does not match its potential, primarily due to the reliance on untrained or minimally trained labor Labour productivity growth in this sector is largely influenced by labor mobility, while the sector's overall capacity remains limited FDI enterprises often seek to capitalize on inexpensive labor, resulting in a workforce that lacks comprehensive training, with crucial skills rarely being transferred to Vietnamese workers.
3.2.2.2 Level of impact on the environment
Recent investigations have revealed significant environmental damage caused by foreign direct investment (FDI) enterprises, leading to severe socio-economic repercussions Notable incidents include Vedan Company discharging untreated wastewater into the Thi Vai River in 2008 and the Formosa Ha Tinh Company, which caused extensive marine pollution and mass fish deaths across four provinces—Ha Tinh, Quang Binh, Quang Tri, and Thua Thien—in April 2016.
- Hue is a typical example At the time of appraisal of the Formosa project in 2008, FDI projects were appraised according to Decree 108/2006/ND-CP dated September 22,
DATA ANALYSIS AND RESEARCH FINDINGS
Data and Variable
4.1.1 Sources of variables and data relationships
This paper employs the situation of the Vietnam dataset based on data ranging from
This study focuses on the period from 1990 to 2019, chosen due to the availability of relevant data While numerous studies have explored the impact of Foreign Direct Investment (FDI) on economic development in various countries, there is limited research specifically addressing Vietnam's context Consequently, this research aims to analyze the effects of FDI on Vietnam's economic development, determining whether these influences are positive or negative, and to identify potential government strategies to address any arising challenges.
This study examines the relationship between GDP and several independent variables, including FDI inflows, GDP per capita, trade openness, CO2 emissions, and renewable energy consumption, all sourced from the World Bank’s World Development Indicators, alongside financial development data from the International Monetary Fund (IMF) Given the significant impact of these independent variables on GDP, as highlighted in the literature review, the analysis focuses on their influence on FDI in Vietnam The empirical analysis utilizes a dataset spanning 30 years, from 1990 to 2019, with all variables expressed in natural logarithmic form.
Table 4-1 presents descriptive statistics for key variables, including maximum and minimum values, mean, standard deviation, skewness, and kurtosis The variables analyzed are GDP in constant local currency units (LCU), foreign direct investment (FDI) inflows measured in current US dollars, financial development (FD) expressed as an annual percentage, carbon emissions (CO2) in metric tons per capita, renewable energy consumption (RENEW) as a percentage of total energy consumption, trade openness (TO), and annual GDP per capita growth (GDPpc_growth).
Table 4-1 Descriptive statistics of the variables
GDP FDI FD GDPpc TO CO2 RENEW
Theoretical Framework
This study followed Naz et al (2019), Zaman and Abd-el Moemen (2017), Khan, Zaman, and Zhang (2016), Qureshi, Rasli, and Zaman (2016), (Azam, Khan, Zaman, & Ahmad,
A study conducted in 2015 examined the interplay between foreign direct investment (FDI) inflows, financial development, GDP per capita, trade openness, CO2 emissions, and renewable energy consumption in relation to GDP levels The findings were presented through a non-linear regression equation that highlights these complex relationships.
GDP = β0 + β1FDI+ β2FD+ β3GDPpc + β4TO+ β5CO2 + β6RENEW + ε (1)
The equation examines the effects of foreign direct investment (FDI inflows), financial development (FD), GDP per capita (GDPpc), trade openness (TO), carbon dioxide emissions (CO2), and renewable energy consumption (RENEW) on GDP The parameters β0, β1, , βk represent various influences in this analysis By applying natural logarithms (Ln) to both sides of the equation, we can derive further insights into these relationships.
Ln (GDP) = β0 + β1Ln (FDI) + β2Ln (FD) + β3Ln(GDPpc) + β4Ln (TO) + β5Ln (CO2)
Gross Domestic Product (GDP) serves as a crucial indicator of a country's economic growth and development, reflecting the total annual output Foreign Direct Investment (FDI) inflows are essential for assessing investment trends, while renewable energy consumption (RENEW) as a percentage of total energy highlights a nation's commitment to sustainable practices GDP per capita (GDPpc) provides insights into individual prosperity, and Trade Openness (TO) measures a country's engagement in global trade The Financial Development Index (FD) indicates the maturity of financial markets, and carbon dioxide emissions per capita (CO2) offer a perspective on environmental impact Additionally, the natural logarithm (Ln) is often utilized in economic analyses to simplify complex relationships.
The use of log linear specification for estimating variable coefficients is driven by several factors Primarily, it addresses the non-linear relationships among variables Additionally, the log model allows for a more meaningful interpretation of coefficient values.
In Vietnam, a 48% elasticity indicates that foreign direct investment (FDI) inflows, financial development, GDP per capita, trade openness, and CO2 emissions positively impact economic growth Conversely, renewable energy is anticipated to have a negative relationship with economic growth Additionally, research by Vo and Ho (2021) and Tang and Tan highlights that FDI significantly influences CO2 emissions.
(2015) FDI and trade openness would facilitate to specify the industry intensive pollution growth In fact, increasing emissions may be led by growing trade openness
In analyzing time series data, the initial step involves using the unit root test to assess the stationarity of the variables (Johnston & Ramirez, 2015) After confirming the stationarity of each series, the next phase tests for cointegration among the integrated series, which indicates a long-term equilibrium relationship among the variables This study employs the Robust Least Square methodology to perform the cointegrating test effectively.
Method Research
In the RLS model, it is essential for all variables to be stationary at their first difference (I(1)) to avoid spurious regression and undesirable characteristics of the variable of interest, as highlighted by Granger and Newbold (2001) Prior to model estimation, it is crucial to check for unit roots using the Augmented Dickey-Fuller (ADF) test and the Phillips Perron (PP) unit root test The ADF test is capable of handling more complex models than the traditional Dickey-Fuller test; however, it should be applied cautiously due to the potential for a high type 1 error rate Therefore, the Phillips-Perron test is often used in conjunction with the ADF test to mitigate this risk.
4.3.1.1 Augmented Dickey-Fuller (ADF) test a The Dickey-Fuller (Dickey and Fuller (1979); Fuller (1976)) test
Brooks (2019) lists 3 versions of the Dickey-Fuller test for unit root
A time series 𝑦𝑡 is classified as having a unit root if the null hypothesis of the coefficient 𝛼 = 0 cannot be rejected, indicating that the series is integrated of order 1, or I(1) Conversely, if the null hypothesis is rejected, the series is considered stationary The Augmented Dickey-Fuller (ADF) test is commonly used to assess these conditions.
If the error term \( u_t \) exhibits autocorrelation, the dependent variable will also show similar patterns To address this issue, the Dickey-Fuller test is enhanced by incorporating lags of the changes in the dependent variable.
In both types of tests, the null and alternative hypotheses are:
𝐻0: 𝛼 = 0 (the series has a unit root)
At this point, a problem that arises is the determination of the number of lags This study uses Schwarz information criterion (SIC) for the selection of lags
The Phillips-Perron (1988) unit root test is a widely used method in macroeconomic and financial time series analysis, particularly when the Dickey-Fuller test may be invalid This non-parametric approach addresses potential autocorrelation and heteroskedasticity in residuals, testing the null hypothesis that a time series is integrated of order 1 Unlike the ADF test, which corrects for autocorrelation by incorporating lags of the dependent variable, the PP test adjusts the test statistics \( t_{\delta=0} \) and \( T_{\delta} \), where \( \delta \) represents the coefficient of \( y_{t-1} \) in the test equation.
∆𝑦𝑡 = 𝛾 + 𝛿𝑦𝑡-1 + 𝑢𝑡 Where the disturbance term 𝑢𝑡 is stationary and may have heteroskedasticity
Phillips and Perron (1988) highlight that their method is beneficial for a wide range of data exhibiting general forms of heteroskedasticity and autocorrelation Nonetheless, Davidson and MacKinnon (2004) emphasize that there are important considerations to keep in mind regarding its application.
PP test is based on asymptotic theory, the PP test has poor small sample property
This study aims to evaluate the impact of Foreign Direct Investment (FDI) inflows, economic growth, trade openness, and renewable energy usage on environmental quality in Vietnam using the Robust Least Square (RLS) method, specifically the M-estimator Traditional estimation methods, including Two-stage Least Square (2SLS), Generalized Method of Moments (GMM), and Ordinary Least Square (OLS) regression, often face challenges when regression assumptions are violated, leading to poor performance of OLS While GMM is used to address endogeneity issues, and 2SLS is commonly employed to tackle endogeneity among regressors, the RLS approach presents a solution to the limitations of these traditional methodologies by effectively handling outliers and ensuring more robust results.
51 from dependent variables (through the M-estimator) (Huber, 1973) Also, this method aims to lessen the effect of outlying cases to provide greater coherence with the overwhelming bulk of data
M-estimation is the most flexible approach of robust regression and is intended to provide researchers with robust statistical inference (Du, Zhang, & Xie, 2018) The symbol "M" denotes that M estimate is a maximum likelihood estimation The basic form of the M-estimator (adapted from Fox and Weisberg (2018)) is as follows
In statistical modeling, the response variable for the i-th observation, denoted as 𝛾𝑖, is expressed through a linear equation: 𝛾𝑖 = 𝛽0 + 𝛽1𝑥𝑖1 + 𝛽2𝑥𝑖2 + ⋯ + 𝛽𝑘𝑥𝑖𝑘, which can also be represented as 𝑥𝑖′𝛽 + 𝜖𝑖 Here, 𝛽0, 𝛽1, …, 𝛽𝑘 are the parameters of the model, while 𝑥𝑖 represents the values of the independent variables for the i-th observation Additionally, 𝜖𝑖 is a normally distributed random variable that accounts for the error term in the model, applicable across n independent cases.
Empirical results
This study employs time series analysis, which is essential for examining economic data collected over time Time series datasets often require the assumption of stationarity in their underlying processes Conducting unit root tests is crucial to ascertain whether the series is stationary or shows a trend, as this has significant implications for the reliability and accuracy of time series models and their outcomes.
After analyzing the descriptive statistics, it is crucial to assess the stationarity of the variables Table 4-2 presents the results of multiple unit root tests, specifically the ADF and PP tests, indicating that all first difference series are stationary, except for GDP per capita (GDPpc), which remains non-stationary The findings demonstrate significant variability in the variables over time, leading us to utilize the first difference approach At the level, FDI inflows (FDI), financial development (FD), CO2 emissions (CO2), renewable energy consumption (RENEW), and trade openness (TO) are stationary Consequently, we differentiate the non-stationary series from the stationary series, confirming that all research variables are integrated of order one.
Table 4-2 PP and ADF-unit root test estimates
Foreign Direct Investment (FDI) inflows, measured in net inflows (BoP, current US$), play a significant role in economic growth Trade openness (TO) and GDP per capita (GDPpc) are critical indicators of a country's economic health Additionally, renewable energy consumption (RENEW) as a percentage of total energy consumption highlights the shift towards sustainable practices The financial development index (FD) reflects the robustness of financial systems, while carbon emissions (CO2) measured in metric tons per capita underscore the environmental impact of economic activities Each of these factors is interconnected, influencing overall economic performance and sustainability efforts.
After analyzing the unit root estimates, the study proceeds to estimate the relationship among the variables using RLS method, which is presented in Table 4-3
The analysis indicates that Foreign Direct Investment (FDI) significantly impacts GDP, as evidenced by a p-value below 0.05 Additionally, a positive coefficient for GDP per capita (GDPpc) suggests that economic growth correlates with higher GDP emissions However, the study also highlights a concerning trend: increased trade in energy-related carbon emissions threatens environmental sustainability, aligning with Nguyen's (2020) earlier research findings.
As Vietnam continues to open its economy, Foreign Direct Investment (FDI) plays a crucial role in its rapid economic development, evidenced by a significant p-value of 0.003, which highlights FDI's strong influence However, this influx of investment also poses environmental challenges, as multinational corporations contribute to increased pollution through the establishment of manufacturing facilities and outsourcing to local businesses.
Trade openness has a positive impact on Vietnam's GDP, with an estimated influence of 2.639111% The findings indicate that reducing trade restrictions can foster economic growth, as supported by research from Hadeel Yaseen (2014) and Adhikary (2015), which highlights a strong correlation between economic expansion and trade openness Vietnam's trade policies aim to protect domestic industries while promoting export growth However, the positive influence of CO2 emissions on GDP suggests that increased foreign direct investment (FDI) in Vietnam may negatively affect environmental quality This aligns with the findings of Managi, Hibiki, and Tsurumi (2009), which indicate that trade openness significantly contributes to rising CO2 emissions, despite the low technique effect observed due to Vietnam's limited implementation of state-of-the-art environmental practices.
The technology transfer from the Foreign Direct Investment (FDI) sector to the domestic economy has been insufficient in both quantity and quality, particularly when compared to other countries in the region As a result, the adoption of advanced production techniques remains limited, highlighting the need for improved integration of innovative practices within the local industry.
Renewable energy consumption is negatively correlated with GDP, indicating a significant decrease in GDP by a value of -5.50754 Additionally, renewable energy exhibits a two-way causal relationship with carbon emissions and fossil fuels, effectively reducing greenhouse gas emissions by decreasing fossil fuel usage This transition not only lessens dependence on imported fuels but also fosters economic development and job creation in manufacturing and installation sectors.
Foreign Direct Investment (FDI) inflows significantly contribute to economic development in Vietnam, enhancing GDP per capita, financial development, and trade openness However, the data indicates that the increase in GDP per capita and FDI, along with greater trade openness, negatively impacts air quality, supporting the "pollution-haven hypothesis" as noted by researchers such as Eskeland and Harrison (2003), Zhang (2011), and Jiang (2015) These findings can inform government and economic policies aimed at promoting trade and attracting FDI to stimulate economic growth while providing a crucial foundation for environmentalists and policymakers to implement sustainable measures for improving the country's environmental agenda.
Table 4-3 Robust least square regression estimates
Variable Coefficient Std Error z-Statistic Prob