In the long term, the results showthat public investment has a crowding-in effect on total private investment in all key economic regions.. More specifically, public investment creates a
OVERVIEW OF THE RESEARCH
The urgency of the subject
Public investment is crucial for economic development, particularly in enhancing socio-economic infrastructure and fostering a conducive environment for private sector competitiveness In Vietnam, the surge in public investment has significantly contributed to sustained economic growth and serves as a catalyst for attracting foreign direct investment (FDI), thereby bolstering national development resources Often referred to as "bait investment," public investment stimulates private investment, driving socio-economic progress across various regions As Vietnam deepens its integration into the global economy through trade agreements and tariff reductions, it is imperative for the government to further enhance public investment in both economic infrastructure—such as roads, bridges, and ports—and social infrastructure, including schools and hospitals This strategic focus on public investment is essential for improving the overall investment and business environment, highlighting its vital role in supporting private investment and economic advancement in Vietnam amidst international economic integration.
Vietnam is divided into four key economic regions: the Northern, Central, Southern, and Mekong Delta regions, encompassing 24 provinces and cities These regions are recognized by the Party and State as vital for driving national development and attracting both public and private investment, significantly contributing to the country's economic growth Despite the importance of public investment in establishing infrastructure to draw private investment, its role has been limited over the years Although there have been successes in stimulating private investment, particularly in economic zones and industrial parks, the overall effectiveness has been hampered by a lack of coordinated planning and regulation This disjointed infrastructure—comprising transport systems, seaports, and urban areas—fails to capitalize on regional advantages and attract private sector interest Furthermore, the substantial public investment required for regional projects places significant pressure on the state budget, affecting the loan market and negatively impacting private investment.
The impact of public investment on private investment in key economic regions remains a contentious issue, raising the question of how these areas can effectively utilize public funds to enhance complementary effects while minimizing the crowding-out of private investment This is particularly crucial for key economic regions and the nation as a whole, especially in light of the ongoing Russia-Ukraine conflict and the significant implications of the global minimum tax on the Vietnamese economy, which is further constraining monetary policy options.
The relationship between public investment and private investment remains a contentious topic among researchers, with many studies indicating that public investment can complement private investment by enhancing market access, lowering production costs, and ultimately stimulating private sector growth.
Government investment in human capital, including education and health, as well as research and development spending, plays a crucial role in enhancing labor productivity and fostering investment (Lail, 2007; Daniele, 2009; Flores-Chamba et al., 2019; Jena & Barua, 2020) However, some studies indicate that such public investment can lead to a crowding out effect on private investment, as the government's substantial demand for capital can drive up interest rates in the capital market, thereby limiting private sector access to funding (Friedman, 1978; Ganelli, 2003; Kustepeli, 2005; Cavallo & Daude).
2011) Additionally, raising taxes or borrowing to finance government spending also discourages the private sector
1 Overview and forecast of the world economic situation in the third quarter and the whole year
In 2022, the General Statistics Office highlighted the challenges faced by the economy in accessing limited financial resources (Pereira & Andraz, 2004; Drezgic, 2011; Rodriguez-Pose et al., 2012; Solihin et al., 2021) The relationship between public investment and private investment remains a contentious topic, particularly when examining both short-term and long-term effects, as well as the influence of specific components of public investment on private investment elements (Pereira et al., 2001; Castillo et al., 2005; Ngeendepi et al., 2021; Babu et al., 2022) Therefore, it is crucial to systematically and comprehensively investigate the impact of public investment on private investment to address this ongoing debate.
In Vietnam, while numerous studies have examined public investment and its effectiveness, there is a significant gap in research regarding the impact of public investment on private investment, particularly concerning the crowding out and complementary effects in both short and long terms Furthermore, existing studies have not sufficiently explored the influence of public investment on specific components of private investment or the role of infrastructure investment in this context Notably, there has been no comprehensive qualitative and quantitative research across the 24 provinces and cities within the key economic region, which is recognized as vital for the country's overall growth Thus, investigating the channels through which public investment affects private investment is essential for devising strategies to utilize public funds effectively, attract private investment, and ultimately foster economic growth in key regions and nationwide amidst global economic fluctuations.
Objectives, tasks and research questions
The objective of this research is to examine how public investment influences private investment in Vietnam's key economic regions The study aims to propose effective solutions for leveraging public investment to enhance private investment in these vital areas.
To achieve the above basic research goals, the study will perform the following specific theoretical and experimental tasks:
First, the system of theoretical basis for public investment, private investment, channels of impact of public investment on private investment and theory of key economic regions.
This study examines the current effects of public investment on private investment in Vietnam's key economic regions It also employs quantitative analysis models to evaluate the relationship between public and private investment during the research period.
Third, propose solutions to implement public investment to promote private investment in key economic regions of Vietnam.
The research aims to answer the following main research questions:
Public investment significantly influences private investment and its components in Vietnam's key economic regions This impact raises questions about its potential changes when assessed over both the short and long term.
Second, how does public investment in infrastructure affect private investment in
Third, how should public investment policies in key economic regions be developed to promote private investment by 2030?
Research subject and scope of research
This paper studies the impact of public investment on private investment in key economic regions of Vietnam.
This paper examines the influence of public investment on private investment in Vietnam, specifically analyzing how total public investment impacts domestic private investment, including household and private sector investments, in key economic regions In the wake of the Covid-19 pandemic, as foreign direct investment (FDI) becomes increasingly competitive, the significance of domestic private investment for economic recovery has heightened Consequently, it is essential to develop policies that enhance public investment to effectively guide and establish a framework for attracting private investment in these crucial economic areas.
T Time: The research was conducted from 2010 to 2021 Because the Mekong
The Delta key economic region was established in April 2009, and data on the four key economic regions has been collected since 2010 to maintain consistency According to the General Statistics Office, data on public and private investment in Vietnam, particularly in key economic regions, has only been updated until 2021 Therefore, this article will analyze research data from 2010 to 2021.
A research paper examines the influence of public investment on private investment across four major economic regions in Vietnam, encompassing 24 provinces and cities These regions include the Northern key economic area, which features Hanoi City, Hung Yen, Hai Phong City, Quang Ninh, Hai Duong, Bac Ninh, and Vinh Phuc, as well as the Central key economic region represented by Thua Thien-Hue.
Da Nang City, along with the provinces of Quang Nam, Quang Ngai, and Binh Dinh, is part of the central key economic regions of Vietnam Meanwhile, the southern key economic regions include major areas such as Ho Chi Minh City, Binh Duong, Ba Ria-Vung Tau, Dong Nai, Tay Ninh, Binh Phuoc, Long An, and Tien Giang Additionally, the Mekong Delta key economic region is represented by Can Tho City.
An Giang, Kien Giang, Ca Mau).
Research Methods
The research utilizes secondary data sourced from the Statistical Yearbooks of various Statistics Departments, the General Statistics Office, and the State Budget Expenditure Finalization Report from the Department of Finance across 24 provinces and cities within four key economic regions Additionally, interest rate data necessary for the model was obtained from the World Bank by the postgraduate student.
The integrated analysis method involves a systematic synthesis of theoretical foundations and empirical research regarding the influence of public investment on private investment This approach enables the researcher to identify existing research gaps and establish a clear direction for the study.
The researcher utilizes descriptive statistical methods to compile and illustrate data through diagrams and charts, effectively showcasing the current landscape of public and private investment, as well as their interrelationship in Vietnam's key economic regions By integrating these findings with quantitative model research results, the researcher formulates informed policy recommendations.
Pooled Mean Group estimation method: Researcher uses Pooled Mean Group
(PMG) estimation method to evaluate the impact of public investment on private investment and components of private investment in key economic regions of Vietnam.
This method allows short-term parameters to vary between groups while constraining long-term parameters between panel units.
The researcher employed the non-causal analysis method introduced by Juodis et al (2021) for panel data to assess the influence of public investment in infrastructure on private investment across various regions This approach was chosen due to the insufficient observability of public investment data for application with the PMG model A key benefit of this method is its applicability to small sample sizes and its versatility in handling models with both homogeneous and heterogeneous regression coefficients.
Structure of the research paper
In addition to the introduction and conclusion, the research paper includes 5 chapters:
Chapter 1: Overview of the research
Chapter 2: Overview of the theory and experimental research
Chapter 4: Current status of public investment and private investment in Vietnam's key economic regions and Discussion of research results
Chapter 5: Conclusions and Solutions for implementing public investment to promote private investment in key economic regions of Vietnam
OVERVIEW OF THE THEORY AND EXPERIMENTAL RESEARCH
Basic issues about public investment and private investment
2.1.1 Impact of public investment on private investment
Public investment is theorized to influence private investment through two primary perspectives, one of which suggests that public investment can lead to a crowding-out effect on private investment (Blejer and Khan, 1984; Beck).
1993; Voss, 2002; Ganelli, 2003; Kustepeli, 2005; Lutfi Erden, 2005; Ang, 2009; Cavallo & Daude, 2011), The view supporting public investment creates a crowding in effect on private investment (Aschauer, 1989a; Greene and Villanueva, 1990;
2.1.1.1 Impact channel of public investment on private investment a Crowding-out effect
The first perspective highlights the crowding-out effect, suggesting that increased government investment demand leads to a decline in private sector investment (Blejer and Khan, 1984; Beck, 1993; Voss, 2002; Ganelli, 2003) This crowding-out effect can occur through two primary channels: debt financing and the production of goods and services that compete with the private sector.
Government investment financed through borrowing or bond issuance requires the market to allocate capital for the government, which reduces available credit for the private sector and raises market interest rates This combination results in a decline in private investment Friedman (1978) differentiates between "true crowding out," which occurs at full employment, and "financial crowding out," which can happen even without full employment The financial crowding out effect operates through "transaction crowding," where increased government investment raises money demand, putting upward pressure on interest rates and further decreasing private investment.
Specifically, in the IS - LM model, when government investment is expanded, the
The IS curve shifts right to IS1, resulting in an increase in income from Y0 to Y1 This rise in income leads to a higher demand for money in the money market, which, under a fixed money supply, drives interest rates up from r0 to r1 Higher interest rates raise the cost of borrowing, causing a decrease in investment This phenomenon, known as the crowding out effect, occurs when increased government spending negatively impacts private sector investment, leading to a reduction in private investment According to Carlson and Spencer (1975), complete crowding out happens when each increase in public spending corresponds to a decrease in private investment capital, while partial crowding out occurs when the reduction in private capital is less than the increase in government expenditure To finance debt, the government may borrow from the financial system, issue bonds, or increase taxes.
Increased taxation can lead to higher rates of tax evasion and diminish profit expectations from investment projects, ultimately resulting in a decline in private investment (Boopen and Khadaroo, 2006) Additionally, Ahmed and Miller (1999) contend that government spending relies on these financial dynamics.
Taxes tend to crowd out private investment to a greater degree than debt financing.
Public investment can negatively impact private investment by producing competing goods and services, particularly when the government engages in commercial projects where the private sector excels in efficiency and productivity This competition can hinder the growth of private investment by altering market dynamics (Khan and Kumar, 1997) In developing countries, the presence of heavily subsidized and inefficient state-owned enterprises can significantly crowd out private investment opportunities (Liitfi Erden, 2005).
In contrast to this substitution effect, the crowding-in effect is seen when there is an increase in private investment due to increased public investment.
Public investment in physical infrastructure—such as roads, highways, ports, and railways—creates a favorable business environment that enhances private investment productivity By reducing initial investment costs and attracting private capital, these improvements foster long-term growth in potential output, making investors more optimistic about development prospects For instance, a rail network can lower transportation costs for heavy equipment needed to establish new factories, while also reducing production costs for private companies When public and private asset accumulation complement each other, public investment boosts the marginal productivity of private assets, leading to higher investment returns and stimulating increased private investment.
The government's increased demand for goods and services stimulates the private sector's need for products, prompting businesses to invest more in anticipation of higher revenues and profits (Ramirez, 1994; Greene and Villanueva, 1990).
Public investment can lead to an increase in national income, which subsequently attracts private investment This rise in national income stimulates economic growth, encouraging the private sector to invest more in order to take advantage of profitable opportunities (Reungsri, 2010).
2 J 1.2 Factors affecting the impact channel of public investment on private investment
Impact channel of public investment on private investment (crowding-out effect and crowding-in effect) will be influenced by the following basic factors: a International economic integration
Foreign direct investment (FDI) is a crucial indicator of a nation's international economic integration and significantly influences how public investment impacts private investment It serves as a regulatory factor that can determine the extent of both the crowding-out and crowding-in effects on private investment.
First of all, FDI inflows into an economy can increase supply in the loan market, thereby reducing pressure on the private sector to access loans (Harrison, A., et al.,
Increased Foreign Direct Investment (FDI) inflows can alleviate pressure on rising interest rates caused by government borrowing for public investment, thereby mitigating the crowding-out effect Additionally, foreign investor participation encourages host governments to enhance their investment environments, particularly in infrastructure, which can lead to a crowding-in effect for domestic private sectors However, FDI can also exacerbate the crowding-out effect if foreign firms compete for loans with local businesses, as multinational companies often have superior access to financing.
Research indicates a significant debate regarding the impact of public investment on private investment in both the short and long term The timing of public investment plays a crucial role in its effectiveness to stimulate private investment, influencing the extent of crowding-out and crowding-in effects (Berg et al., 2019) The quality of public investment is contingent upon various factors, including institutional frameworks and legal structures, which can be undermined by issues such as corruption and government inefficiencies in project planning and execution Studies by Abiad, Furceri et al (2016) and Myamoto et al (2020) reveal that countries with superior public investment management experience a more pronounced crowding-in effect Consequently, while public investment may yield immediate benefits, its crowding-in impact tends to be more significant over the long term.
The relationship between private investment and interest rates plays a crucial role in the crowding-out effect, primarily through the interest rate channel When private investment is highly sensitive to interest rate fluctuations, an increase in rates leads to a more significant decline in private investment, resulting in a larger crowding-out effect As noted by Keith Carlson et al (1975), this sensitivity is influenced by the private sector's expectations.
Increased government investment can raise concerns in the private sector about potential future borrowing or tax increases, negatively impacting private sector investment sentiment As government investment rises, the IS curve shifts from IS1 to IS2, resulting in heightened "liquidity preference" among private sector entities, which leads to reduced investment and increased cash holdings Consequently, this shift causes the LM curve to move leftward, further pushing the IS curve to the left.
IS curves, output remains unchanged (Carlson, Spencer, 1975).
In scenarios where households hold reasonable expectations, they anticipate that government investment will fully substitute their future investment and consumption Consequently, when government investment prompts a rightward shift of the IS curve from IS1 to IS2, households respond by actively decreasing their own investment or consumption, leading the IS curve to revert to its original position (LSI) Notably, household responses are independent of the government's debt financing methods, whether through borrowing in the loan market or taxation (Carlson, Spencer, 1975).
Public investment and private investment in key economic regions
2.2.1 Basic issues about key economic regions
2.2 l.I Key economic regions and related concepts
A region is defined as a hierarchical system comprising various cities, with a few prominent urban centers and numerous smaller towns (Harmaakorpi & Pekkarinen, 2002) It can also be viewed through the lens of geographical boundaries, natural resources, or ecosystems (Dunford, 2015).
According to 2009, a region must possess three essential characteristics: it should represent a domain or area with an indeterminate scale on the Earth's surface, be integrated into a broader system of regions that encompass the planet, and belong to a specific part of the Earth, such as a unique climatic zone or an economic zone.
In Vietnam, the 2017 Planning Law defines a region as a national division comprising several neighboring provinces and centrally governed cities, linked by common river basins or similar socio-economic, historical, population, and infrastructure conditions These interconnected factors contribute to the sustainability of the region.
Thus, in Vietnam, a region is considered a geographical area associated with population characteristics and socio-economic development goals (Nguyen Van Khanh et al., 2015).
• Concept of key economic region
Ron Martin and Peter Sunley (2008) argue that for a nation to achieve prosperity, certain regions must outpace others in development This perspective highlights the importance of fostering economic regions that drive rapid growth and accumulate resources essential for the country's overall economic advancement.
According to Nguyen Ha Phuong and Nguyen Tien Huy (2009), a key economic region is characterized by optimal development conditions that foster competitive advantages and serve as a catalyst for rapid economic growth This region not only contributes significantly to its own development but also plays a crucial role in the national economy, acting as a driving force due to its substantial economic potential and favorable factors.
- the locomotive to attract the common development of the whole country (Institute of Development Strategy, 2004) According to Nguyen Van Nam and Ngo Thang Loi
The key economic region, defined as an area with optimal development conditions that fosters competitive advantages, serves as a crucial growth engine for accelerating the development of surrounding regions and enhancing the national economy This concept is historically dynamic, with the number and boundaries of key economic regions evolving in response to the country's socio-economic development strategy In Vietnam, the definition of these regions increasingly emphasizes quantity, alongside planning and management objectives (Development Strategy Institute, 2004).
2.2.1.2 Basis for forming key economic regions
According to the author's research, the basis for building key economic regions is based on theories of regional development, mainly based on Growth Pole theory
Central Places theory and Core - Periphery theory.
The growth pole theory, proposed by French economist Francois Perroux in the 1950s, suggests that economic development is not evenly distributed across a region but rather concentrated around specific poles or clusters, typically centered around a core industry This core industry, which can include sectors such as automobiles, aviation, electronics, steel, and petrochemicals, generates both direct and indirect economic impacts Direct effects occur when the core industry engages with backward-linked suppliers or forward-linked customers, while indirect effects arise from increased demand for goods and services by employees within these core industries The expansion of the core industry leads to greater output, job creation, increased investment, and the emergence of new industries, thereby fostering overall economic growth.
The growth pole theory highlights three key issues, starting with the identification of industry as the primary catalyst for economic growth, where core industries can stimulate the development of surrounding sectors Additionally, the theory emphasizes the concept of economic space, which refers to locations where production factors can be centralized to enhance growth based on a leading industry Ultimately, a growth pole can emerge in any area where resources, land, labor, and businesses converge to achieve optimal economic outcomes.
The Growth Pole Theory has a notable limitation in its lack of consideration for geographical space, prompting the development of the Central Region Theory Proposed by economist Boudeville in 1966 and later expanded by Friedman in 1973 and 1980, this theory classifies regions into three types: homogeneous, polarized, and planned A homogeneous region is characterized by localities that are geographically close and share similar socio-economic characteristics.
A polarized area is understood as an area in which localities are interdependent on factors and a planning area is an area established according to the Government's plan
In Boudcvillc's perspective, a "Pole" refers to a concentration of industries located in urban areas that can stimulate the growth of surrounding localities Boudeville (1966) emphasized the growth pole theory, highlighting the industrial sector as the primary engine for economic development (Misra et al., 1974).
Friedman (1966) expanded on Boudeville's core-periphery theory by asserting that economic growth primarily occurs in the "core" region, which is characterized by advanced science and technology In contrast, the "periphery" regions experience lower levels of economic development and are dependent on the core's progress Friedman’s model highlights the relationship between the core and periphery, suggesting that advancements in the core will ultimately foster development in peripheral areas, thereby refining the understanding of regional economic growth dynamics (Ha Huu Nga, 2008).
The three regional development theories highlight various challenges in regional growth, yet collectively stress the importance of a development pole to generate positive spillover effects for surrounding areas This concept serves as the theoretical foundation for the emergence of key economic regions.
Studies on the crowding out effect of public investment on private investment
First, studies analyze the crowding out effect of public investment on private in vestment within a specific country, or a group of countries.
Research by Pradhan, Ratha, and Sarma (1990) indicates that public investment in India from 1990 to 2000 crowds out private investment, with the extent of this effect influenced by the government's financing methods, particularly when borrowing from the loan capital market Similarly, Bilgili (2003) found that in Turkey, a 1% increase in public investment results in a 0.68% decrease in private investment from 1988 to 2003 Extending this analysis, Bahai et al (2015) examined the period from 1950 to 2012 in India using the VECM model, revealing that public investment has consistently overshadowed private investment, particularly in light of significant structural changes in the economy over the last three decades.
Second, studies also separate public investment into investment categories and study the impact of those categories on private investment
Pereira (2000) conducted a VAR analysis to assess the influence of public investment on private investment in the United States from 1956 to 1997 The study examined the effects of five types of public investment on total private investment and various categories of private investment Findings revealed that, in approximately one-third of the cases analyzed, public investment significantly outperformed private investment.
Rahman et al (2015) categorized public investment while examining its impact on private investment in Pakistan from 1974 to 2010, identifying areas such as health, transportation, community services, and national defense Their findings revealed that public investment in community services and defense negatively affects private investment Similarly, Dada (2013) found that in Nigeria, public investment in administration, construction, agriculture, and information also leads to a crowding-out effect on private investment Omitogun et al (2018) further explored this issue in Nigeria from 1981 to 2015 using the ARDL model, categorizing public investment into administration, transfer, economic services, and social services, and confirmed that public investment in economic and social services adversely impacts private investment.
In Vietnam, studies primarily analyze the significant influence of public investment on private investment, rather than categorizing public investment into infrastructure and other sectors Research by Nguyen Thi Canh et al (2020) utilized the FOLS model to examine the impact of state budget capital on private investment across 16 industries from 1990 to 2016, revealing that public investment significantly overshadows private investment in these sectors Similarly, Nguyen Thi Thuy Lien (2022) confirmed this trend for the period 2000-2020, while earlier studies by Ngo Doan Vinh (2010), Ngo Thuy Quynh (2019), and Bui Minh Chuyen and Nguyen Ngo Viet Hoang also reported comparable findings.
In Vietnam, public investment primarily relies on the State Budget, yet its effectiveness has been disappointing, often described as relatively low (Ngo Doan Vinh et al., 2021).
Third, research also focuses on the overwhelming impact of public investment on private investment in different industries and sectors of the economy.
Saeed et al (2006) employed the SVAR model to assess the influence of public investment on private investment across Pakistan's agricultural, industrial, and service sectors from 1974 to 2006, revealing that public investment significantly outpaced private investment in the industrial sector Similarly, Fujii et al (2013) utilized the FA VAR model to examine the effects of public investment on private investment in various industries within the Japanese economy during the second quarter.
Research spanning from 1983 to the first quarter of 2008 indicates that public investment generally leads to a crowding-out effect on private investment across most sectors, with exceptions in agriculture and utilities A study by Annala et al (2008) focusing on the Japanese economy from 1970 to 1998 using the VAR/ECM model similarly found that public investment adversely affects private investment in all sectors except agriculture, utilities, trade, services, finance, insurance, and real estate In the context of the US economy, Pereira and Andraz (2003) employed a VAR model to analyze data from 12 industries between 1956 and 1997, concluding that public investment negatively impacts private investment, particularly in mining, media, and wholesale sectors This crowding-out effect of public investment on private sectors has also been corroborated by studies conducted by Pereira (2000), Hamaaki (2008), Forni & Gambetti (2010), and Muthu (2017).
Fourth, studies show that the crowding out effect of public investment on private investment is still controversial when analyzed in the short and long term.
Studies on the complementary effects of public investment on private investment
First, studies analyze the crowding-in effect of public investment on private investment within a country or a group of countries.
Hatano (2010) analyzed the impact of public investment on private investment in Japan from 1953 to 2004 using the Cobb-Douglas production function and ECM model, revealing that public investment positively influences private investment after the first year The study employed Granger causality testing to confirm the crowding-in effect of public investment on private investment Similarly, Girish Bahai et al (2015) examined the relationship in India between Q2 1996 and Q1 2015 utilizing the SVECM model, finding that public investment also induced a crowding-in effect on private investment during this period.
Between 1980 and 2012, the Indian economy underwent significant reforms, leading to a notable crowding-in effect observed in a study analyzing quarterly data from Q2 1960 to Q1 2015 The findings revealed that a 1 rupee increase in public investment correlates with subsequent increases in private investment of 0.3, 1.24, and 1.07 rupees after 4, 8, and 12 quarters, respectively These results align with previous research conducted by K Krishnamurty (1985), Blejer & Khan (1984), D Ramirez (1994), Naqvi (2003), Erden & Holcome (2005), and Mitra.
Research has explored the crowding-in effect of public investment on private investment, both from the perspective of individual countries and in studies involving multiple countries (Abiad et al., 2016).
Altin Gjini and Agim Kukeli (2012) investigated the investment behavior of the private sector in Eastern European transition economies, focusing on the influence of public investment on private investment Analyzing data from 11 countries over 19 years (1991-2009) using the POLS method, they found that public investment significantly crowds in private investment, particularly in less developed nations Similarly, Mahmoudzadeh et al (2013) studied 23 developed and 15 developing countries from 2000 to 2009 with the PVAR model, revealing that increased public investment serves as a complement to private investment in developing nations Additionally, Phetsavong and Ichihashi (2012) applied the economic growth model of Le & Suruga to further explore these dynamics.
(2005) and the fixed effects model through analyzing data from 15 developing countries in Asia between 1984- 2009.
Research on the relationship between public and private investment not only focuses on the overall crowding-in effect of public investment but also examines specific components of public investment by sector and their individual impacts on private investment.
Pereira (2000) examined the influence of public investment on private investment in the United States from 1956 to 1997 using the VAR (Vector Autoregression) model The study found that total public investment positively affects private investment overall, with significant impacts observed specifically in industrial and transportation equipment sectors Similarly, Xu and Yan (2014) explored the relationship between government investment and private investment in China from 1980 to 2011 through the SVAR model, categorizing government spending into two distinct types.
Government investment in public goods and infrastructure plays a crucial role in complementing private industry and commerce Research by Daradag et al (2003), Cavallo et al (2011), Saidjada et al (2016), Makuyana (2016), and Ouedraogo et al (2019) highlights the significant positive impact of public investment on infrastructure, demonstrating its importance for overall economic development.
Third, some studies also analyze the crowding-in effect of public investment on private in vestment from the perspective of industries.
Saseed et al (2006) utilized the SVAR model to investigate the effects of public investment on private investment in Pakistan's industrial and agricultural sectors from 1974 to 2006, revealing a crowding-in effect of public investment on private investment in agriculture, largely due to enhancements in agricultural infrastructure Similarly, Fujii et al (2013) employed the FA VAR model to assess the impact of public investment on private investment across various industries in Japan from the second quarter of 1983 to the first quarter of 2008, finding a crowding-in effect in most sectors, excluding agriculture and utilities Additionally, research by Annala et al (2008) further explored this dynamic within the Japanese economy during the 1970s.
RESEARCH METHODS
Analytical framework and research hypotheses
This study introduces an analytical framework to assess the influence of public investment on private investment across key economic regions in Vietnam It distinguishes between corporate sector investment and household sector investment, evaluating the impact of public investment on both in the short and long term The findings indicate that the effect of public investment on private investment varies over time Furthermore, the research highlights the significant role of public infrastructure investment in enhancing private investment, particularly in vital economic areas By employing a regression model, the study analyzes the current landscape of public and private investment, relevant policies, and the broader domestic and international contexts Ultimately, it proposes strategies to leverage public investment to stimulate private investment in these key regions.
Based on the analytical framework and a comprehensive review of the research landscape regarding the influence of public investment on private investment, the following research hypotheses are proposed for empirical testing.
Hypothesis Hl: Public investment has a complementary effect (in the same direction) on total private investment in the long run
Public investment significantly influences private investment over the long term, particularly through the enhancement of physical infrastructure such as roads, ports, and airports When the government boosts public investment, it not only increases demand for goods and services but also stimulates economic growth, leading to higher national income This growth creates attractive opportunities for the private sector, encouraging further investment to capitalize on emerging profitable prospects.
Hypothesis H2: Public investment has a complementary' effect (in the same direction) on private investment in the corporate sector in the long run
Public investment in infrastructure—such as roads, highways, water systems, sanitation, ports, airports, and railways—can significantly benefit both the business and household sectors in the long run Specifically, for businesses, key infrastructure projects reduce logistics costs and facilitate easier access to customers Consequently, this public investment fosters a complementary effect on private investment within the business sector, enhancing overall economic growth.
Hypothesis H3: Public investment has a complementary effect (in the same direction) on private investment in the household sector in the long run
Public investment in infrastructure, including roads, highways, and ports, can significantly benefit the household sector over the long term, similar to its effects on the business sector However, the positive impact of public investment on private household investment may be less pronounced due to the fragmented and small-scale nature of household businesses in developing countries like Vietnam Nevertheless, in the long run, public investment is expected to complement private investment within the household sector.
Hypothesis H4: Public investment has a dominant (inverse) impact on total private investment in the short term
Public investment can significantly influence private investment, potentially leading to a crowding out effect, as highlighted by various studies (Blejer and Khan, 1984; Beck, 1993; Voss, 2002; Ganelli, 2003) This effect arises primarily through two channels: debt financing and the production of goods and services that compete with the private sector Particularly in developing countries, this crowding out effect is most pronounced in the short term (Ang, 2009; Cavallo and Daude, 2011), indicating that public investment tends to dominate total private investment during this period.
Hypothesis H5: Public investment has a complementary effect (in the same direction) on private investment in the household sector in the short term
In the short term, public investment boosts national income, benefiting the household sector, particularly business households that depend on final consumer demand Increased public investment leads to higher demand for goods and services, positively influencing private investment from households Additionally, households face challenges in accessing loans due to limited collateral, reducing their exposure to crowding out effects in the loan market compared to businesses Consequently, public investment plays a complementary role in enhancing private investment within the household sector.
Hypothesis H6: Public investment creates a crowding out (inverse) impact on private investment in the business sector in the short term
In Vietnam and other developing countries, infrastructure projects often face prolonged construction timelines due to limited investment capital, ineffective management mechanisms, and economic fluctuations Consequently, these projects may not yield immediate benefits for the business sector in the short term.
In 2023, increased public investment boosts domestic demand for goods and services, complicating its influence on private business investment compared to household investment, as products from businesses undergo multiple processes before reaching consumers (Do Thi Thanh Son, 2020) Consequently, public investment can crowd out private investment in the business sector in the short term Additionally, businesses typically have better access to loans than households, making them more susceptible to the crowding-out effect in the loan market Thus, public investment significantly impacts private business investment in the short term.
Thus, the research hypotheses and expected signs of the hypotheses can be summarized as presented in Table 3.1.
Table 3.1: Research hypotheses and expectations
Hypothesis symbol Hypothesis content Expectation mark
Public investment (positively) impacting total private investment in the long term +
Aschauer, 1989a; Hatano 2010; Reungsri 2010; Nguyen Thi Canh,
Public investment (positively) impacting private investment in the enterprise sector in the long term
Aschauer, 1989a; Hatano, 2010; Mitra, 2014; Abiad et al., 2016; Tran Dinh Khoi Nguyen et al.,
Public investment (positively) impacting private investment in the household sector in the long term
Hatano, 2010; Hashmat Khan et al., 2020
Public investment crowding out (negatively) total private investment in the short term
Blejer and Khan. 1984; Beck, 1993; Voss, 2002;
Ganelli, 2003; Ang, 2009; Cavallo and Daude, 2011
Public investment (positively) impacting private investment in the household sector in the short term
Public investment crowding out (negatively) private investment in the enterprise sector in the short term
Mitra, 2006; Mose et al., 2020; Tran Dinh Khoi Nguyen el al., 2021; Vu Phuong
This study's model is founded on the neoclassical investment theory introduced by Jorgenson in the 1960s and 1970s Recent research utilizing panel data, including works by Omitogun (2018), Omojolaibi et al (2016), Gérard Tchouass et al (2014), and AltinGjini et al (2012), has further explored this model These studies establish that the optimal capital amount (K*) can be determined through specific methodologies.
In which, K* is the optimal capital amount, a is the capital elasticity coefficient to output, p is the price of output, and c is the cost of capital utilization.
Omojolaibi et al (2016) transformed model (1) into a panel data model as follows:
Omojolaibi et al (2016) enhanced Malik's model (2013) by incorporating fiscal policy variables such as government investment, government recurrent expenditure, taxes, and foreign debt, resulting in a transformed model that emphasizes the impact of these fiscal elements on economic analysis.
_ ht =