Public investment, private investment, foreign direct investment and economic growth in vietnam further evidence at the provincial level

Public investment, private investment, foreign direct investment and economic growth in Vietnam: Further evidence at the provincial level PHAM DINH LONG HCMC Open University – long.ph

Public investment, private investment, foreign direct investment and economic

growth in Vietnam:

Further evidence at the provincial level

PHAM DINH LONG HCMC Open University – long.pham@ou.edu.vn

LE NGUYEN QUYNH PHUONG University of Economics and Finance

Abstract

This paper identifies the linkages between public investment, private investment, foreign direct investment and economic growth using Vietnam provincial data in the period 2007–2014 Applying the PVAR model in considering the relations between these variables, we provide more empirical evidence on the impacts of different types of investments on the local economic growth of 63 provinces in Vietnam

Keywords: PVAR model; public investment; private investment; FDI; economic growth; Vietnam provinces

1 Introduction

On the trend of modern economy, globalization is one of the main tendencies Opening up and integrating national and regional economies become a mandatory condition of development The issue of durable growth, high speed, and structural shift have become development management for all modern economies and Vietnam is not out of the trend There have been many previous studies focused on understanding the relationship between investment types and economic growth including domestic investment (including the public investment, private investment), foreign direct investment, and most of all in the countries Domestic investment (DI) has always been seen as a major contributor to the nation's economic growth especially in term of

creating jobs for the economy Foreign direct investment (FDI) plays a key role in boosting the economy, contributing significantly to the economic growth of countries in general

Developing countries in the world, as well as Vietnam, are facing issues of attraction, management, and use of investment sources that have not been effective in recent years Vietnam has access to state budget funds, encouraged in sector private investment as well as foreign direct investment from multinational companies, which is expected to make a positive change in promoting economic growth However, in the local context, it is not the exploitation of these resources that is the same, depending on the characteristics of each region, the policies and ways of using the sources of investment of managers are different All of these factors contribute to changing the impact of investment on local economic growth

Studies on the impact of overall investment on economic growth have been done mostly within the country, but empirical evidence suggests that this effect is still an unsatisfactorily answered question Such as there is very little research going into understanding the simultaneous causal relationship between different types of investment and economic growth, most research focuses on studying the relationship of two of the factors Studying the causal relationships between these factors for a specific analysis within the provinces of a country is very important for policy makers to design preferential investment policies

Therefore, the paper will analyze the current status and quantification of the causal relationship between public investment, private investment, foreign direct investment and economic growth in the provinces/cities Vietnam in the period 2007 - 2014 using the PVAR model From the results of the analysis, the study provides policy recommendations for each of these investments as well as a combination of these types

of investments in a way that can sustain and promote local economic growth in Vietnam

The outline of this paper is the following Section 2 summarizes the survey of the literature Section 3 contains an overview of the econometric methodology and a brief discussion of the data Section 4 discusses the empirical results Finally, Section 5 gives some conclusions and policy implications

2 Literature Review

In the history of developing countries and in general theories, any country must use the most internal resources to develop the economy By using the effective domestic capital to enhance its role and achieve the country's important goals Domestic capital is

a decisive source, and foreign capital is an important additional source of initial development This is reflected in the role of additional funds for investment as the internal accumulation of the economy is low The role of domestic capital in any country

is undeniable, but with globalization in the new era, foreign capital plays an important role in promoting economic development Of any country, especially underdeveloped, developing countries, of which FDI is the dominant (apart from official development assistance (ODA))

In the early 1980s, researches on the determinants of economic growth attracted new interest among economists In particular, the relationship between FDI and economic growth is a topic studied in developed economies, both theoretically and empirically The theory of endogenous growth (Romer (1986), Lucas (1988), Barro (1991), Mankiw, Romer and Weil (1992), Barro and Sala-i-Martin (2004) confirms that FDI promotes long-term economic growth by technological diffusion This theory forms the basis of later studies to identify the major factors explaining the differences in economic growth among nations

On the other hand, the Eclectic theory of FDI, developed by Dunning (1988), provides another way of analyzing the relationship between FDI and economic growth Based on the analysis of competitive advantage, this theory shows that the attraction of FDI depends very much on the factors and characteristics of the host country Although in the short term the relationship between investment and economic growth tends to be low, but in the long run, investment rates are found to be closely linked to economic growth One country, if domestic savings are not enough for domestic financial investment, will depend on foreign capital

In short, domestic capital has always been a major source of economic growth However, it can not be denied that the role of foreign capital, especially FDI, is also a potential source of economic growth for any country, its role in economic growth It

should be explored in depth through empirical studies In addition, the relationship between these two sources of capital is also affirmed as complementary and complementary relationships, in each period in which they interact at different levels, This effect is also not the same for each country with its own economic characteristics

Sumei Tang, E.A Selvanathan and S Selvanathan (2008) used the VAR and ECM regression model for quarterly time series data from the first quarter of 1988 to the third quarter of 2003 to examine short- and long-term relationships between FDI and

DI, and economic growth in China In the course of the experiment, he focused on the Granger causal relationship between the variables and the function of the impulse response function The results show that instead of overriding DI, FDI has an additional relationship for DI FDI not only helps in overcoming the shortage of capital, it also stimulates economic growth through the addition of DI capital in China China's DI capital and economic growth are positively correlated; Large economic growth encourages large domestic investment and vice versa China's DI and economic growth have not had a significant impact on FDI inflows over the long term The causal relationship between economic growth and DI is two-way, but there is only one causal dimension from FDI to DI and FDI to economic growth China's DI has a greater impact

on economic growth than the impact of FDI on stimulating economic growth and promoting domestic savings should be prioritized over FDI attraction in the design and implementation of the war Investment strategy and investment policies in China Samuel Adams (2009) used panel data for 42 sub-Saharan African countries between

1990 and 2003 to analyze the impact of FDI, DI on economic growth By the OLS regression method, the study shows that FDI in the latter period has a positive impact

on economic growth, but the current FDI does not have a positive impact on economic growth This result is explained by the low level of development in sub-Saharan Africa, less developed economies that favor FDI, but through OLS and FEM regression, the study has also been shown that DI has a positive and significant correlation for economic growth In addition, the study results also show a trend that FDI is inversely proportional to DI

Hoi Hoi Lean and Bee Wah Tan (2011) with annual time series from 1970 to 2009 study the relationship between FDI, DI and economic growth in Malaysia You use the

VAR and VECM models to study the relationship of economic variables in the short and long run First, they used the VAR model, verified the co-alignment relationship, and then continued using the VECM model to study the relationship of economic variables in the long run The empirical results of this study indicate that FDI, DI and long-term economic growth have a long-term relationship FDI has a positive impact on economic growth, whereas DI has a negative impact on economic growth In the long term In particular, the results of the study also show a causal relationship between DI and FDI, between economic growth and FDI in the short term In addition, the increase of FDI will have a positive impact on DI, resulting in additional effects from FDI on DI High economic growth will attract FDI flows in Malaysia DI is also an important factor in attracting foreign investment in the short term Expanding FDI inflows may be linked to

an astonishing increase in DI, and both FDI and DI businesses can work together to further the growth of Malaysia

Rehmat Ullah Awan, Khalid Javed and Falak Sher (2012) study the relationship between FDI, economic growth, exports, imports, DI in turn in South Asia including Bangladesh, India, Pakistan and Sri Lanka, Using the annual time series data from 1973

to 2010 The paper uses the VAR model and focuses primarily on causal relationships between FDI variables, economic growth, exports, imports DI, represented by fixed capital formation and additional commercial openness (with trade openings = (exports + imports) / GDP) The results of the study show that FDI has an impact on economic growth but this effect is weaker than the impact of exports on economic growth The paper also shows that other results such as economic growth affect imports in different periods but there is no reverse relationship of imports to economic growth Similarly, economic growth affects trade openness but there is no reversal of trade openness to economic growth There is also a two-way relationship between FDI and trade openness

Tran Nguyen Ngoc Anh Thu (2014) focused on the impact of public investment on economic growth in Vietnam using the ARDL technique for 1988-2012 The results of the study show that there is no evidence of this effect in the short term but public investment has the effect of promoting long-term growth, although this is the lowest compared to private and capital investment Private direct foreign In addition, the study

by Nguyen Hong Ha (2015) on the impact of FDI on economic growth in Tra Vinh province for data for the period 1999 to 2013 using VAR techniques and relationship

testing Cause and effect, the study results show that the attraction of foreign direct investment has an impact on economic growth in Tra Vinh province and vice versa Tran Pham Khanh Toan (2014) captured on the impact of public expenditure on economic growth in Southeast Asian countries and lessons learned for Vietnam The study used the panel data for 1995-2012 and used the regression analysis technique The results of the study show the impact of public expenditure on the economic growth of Southeast Asian countries, reflected in the impact of the total public expenditure variable, public expenditure on health, expenditure Public security and defense have a positive impact on economic growth, and the public spending on education is negative

In addition, variables such as labor force, private investment, FDI have a positive impact

on economic growth, meanwhile, the openness of the economy, inflation is the opposite Based on the findings of the study, the author also provided some lessons for Vietnam to improve the impact of public expenditure on economic growth

In addition to the theoretical observations surrounding the relationship between sources of investment capital for economic growth, there has been quite a number of empirical studies in the past regarding this relationship with other economic factors Studies use a variety of data types (time data, table data) with a variety of estimation methods and thus produce different results for each country, group, or region The results show that the relationship between investment capital and economic growth remains unclear On the basis of inheriting previous research, as well as extensive research, the implementation of a research project on the same subject in a Vietnamese locale has an important role to play To help policy makers have a pragmatic and general view of their local situation in order to make recommendations and implement effectively the competitiveness, sustainable economic development of the locality, close

contribution and overall development of the whole economy in the country

3 Method and Data

This method used in this research is Panel Vector Autoregression (PVAR) By this way, the Panel VAR (PVAR) technique combines the traditional VAR approach treating all variables of the system as endogenous with estimation techniques for panel data, which allows for unobserved heterogeneity while the use of VAR models in time series

analysis is a common standard PVAR is one of appropriate estimation techniques in the context of dynamic panel data models

This analysis focuses on test for Granger-causal relationships, the resulting Impulse-Response Functions (IRFs), which estimates the response of particular variables in the system to innovations in another variable in the system, while holding all other shocks

at zero To analyse the IRF, this method needs an estimate of their confidence intervals; since the matrix of IRF is constructed from the estimated VAR coefficients, their standard errors need to be taken into account Then, this method also presents the Forecast Error Variance Decompositions (FEVDs), which shows the percent of the variation in one variable that is explained by the shock to another variable, accumulated over time The variance decompositions show the magnitude of the total effect

The equation for PVAR in this research is follow:

LnGDP it = βo + β 1 LnGI it + β 2 LnPI it + β 3 LFDI it + β 4 LnLABOR it +β 5 TO it + v it (1)

Where is:

+ i: 63 provinces of Vietnam;

+ t: years from 2007 to 2014

Data used in this research are provincial data

Dependent variable

+ GDP: real value of per captita GDP

Independent variables (Explanatory variables)

+ GI: Public Investment

+ DI: Private Investment

+ FDI: Foreign Direct Investment

Control variables

+ LABOR: Labor

+ TO: Trade Openness (counted by: (Export +Import)/GDP)

Table 3.1

The calculation and the expected signs of the variables in the model

Dependent variable

GDP

GDP growth rate per capita Real GDP represented for economic growth Independent variables (Explanatory variables)

sector

+ Public Investment

Public Investment rate in GDP

Investment rate of non-state sector in GDP

capital from foreign direct investment sector to GDP Control variables

LABOR Employees aged 15 years and

above in the Workforce

+ Annual rates of labor force

growth Labor Force

import of goods in the area

+ Volume of exports and

imports of goods and services

Total Import-Export turnover to GDP

This paper uses secondary data from 63 provinces and cities in Vietnam for the period of 08 years from 2007 to 2014, so there will be a total of 504 observations Data from the following sources:

- Gross domestic product (GDP) of provinces and cities in the period 2007-2014 is taken according to the actual value, measured in VND billion at the fixed price in 2010 taken from the Vietnam economic - the social statistical yearbook of 63 provinces and cities, provided by the General Statistics Office of Vietnam

- Private investment (PI), foreign direct investment (FDI) sector in provinces and cities in the period 2007-2014 are taken at current prices in VND billion from the statistical yearbook, provided by the General Statistics Office of Vietnam

- The labor force over 15 years old in the economy (in thousands of units) of provinces and cities, provided by the General Statistics Office of Vietnam

- The export and import value of goods in the area (unit: the US $ thousand) taken from the statistical yearbook of the General Statistics Office Then, trade openness data

is calculated from this source

The research data of the topic is taken from the reliable sources available in the provincial statistical yearbook and the General Statistics Office of Vietnam But for provincial GDP figures, some estimates tend to be higher than GDP figures for the whole country This is a restriction on the GDP figures of provinces and cities in this topic However, this topic does not take into account the overall GDP of the whole country but only to assess the impact of public investment on the GDP of provinces and cities Therefore, it is temporarily acceptable according to the GDP data available from the provincial statistical yearbook for analysis

Whereas, the time series databases are often not only very large values but also different ones, most variables used in this model are got Logarithm from their values except trade openness Moreover, the getting logarithm also helps to eliminate the linear trend for data

4 Result

First, like the VAR model, when estimating the PVAR model, it is necessary to ensure stationarity of all time series variables A commonly used test valid in large samples is the augmented Dickey–Fuller Test (ADF Test) through The Levin, Lin and Chu - LLC (2002), the test result shows that all LnGDP, LnGI, LnPI, LnFDI , LnLabor and Openness are I(0), so these time series are stationary

An important aspect of empirical researches based on the PVAR model is the choice

of lag order To find out optimal lag for this estimation, we base on J statistic and

corresponding p-value, and moment model selection criteria (MMSC) developed by Andrews and Lu (2001) (MBIC, MAIC, MQIC criterion) These criteria are based on a high log-likelihood value, the smaller the value of an information criterion the better the result Since optimal lag length is chosen according to these criteria, the first is chosen Table 4.1

PVAR Lag Order Selection

Table 4.2

Main result of a 6-variable VAR model

Response of

Response to (95% confidence interval)

LnGDP(t-1) LnGI (t-1) LnPI (t-1) LnFDI (t-1) LnLabor (t-1) TO (t-1)

LnGDP (t) -.1668642

(0.205)

.1042577 (0.150)

.1364178 (0.003)

-.0716075 (0.090)

3.338253 (0.000)

.0603157 (0.028)

LnGI (t) .4616195

(0.065)

.094512 (0.512)

.9706284 (0.000)

-.3197219 (0.003)

-5.440385 (0.000)

.0014753 (0.982)

LnPI (t) -.8522748

(0.002)

-.0606252 (0.661)

1.194189 (0.000)

-.1774328 (0.026)

2.188309 (0.055)

-.052237 (0.363)

LnFDI (t) -.0623101

(0.808)

.1877488 (0.160)

.3540222 (0.000)

.5093528 (0.000)

-1.228988 (0.190)

.1153056 (0.020)

LnLabor (t) .052977

(0.001)

-.0213812 (0.015)

.0459218 (0.000)

-.0167932 (0.000)

.4737137 (0.000)

-.0103271 (0.003)

TO (t) .4541414

(0.252)

.4023829 (0.036)

-.2428815 (0.003)

-.0808577 (0.397)

.4471119 (0.759)

.8904815 (0.000)