Does Foreign Direct Investment Accelerate Vietnamese Economic Growth? – A Simultaneous Equations Approach

Journal of Developing Areas, 2017, vol. 51, issue 4, 331-345

34 Pages Posted: 28 Nov 2016 Last revised: 30 Sep 2017

See all articles by Hiep Luu

Hiep Luu

University of St. Andrews

Dr Vu Quang Trinh (Rainy)

Newcastle University Business School

Nam Vu

University of Birmingham, Department of Economics, Students

Date Written: June 16, 2016

Abstract

The main purpose of this paper is to investigate the impact of foreign direct investment (FDI) on economic growth in Vietnam over the five-year post-crisis period of 2010-2014. In addition, it also provides a comparative analysis with the pre-crisis period to yield greater insight into how the FDI-growth nexus evolved over time and under different economic conditions. Our empirical work is based on a panel data set containing 63 provinces in Vietnam. We start our analytical section by examining the FDI-growth relationship using two simple ordinary-least-square (OLS) models, where FDI and economic growth are the dependent variables and are regressed on a number of other factors that seemingly influence FDI and growth. With an awareness of the possible endogeneity bias, we re-estimate our model using the simultaneous equation approach, employing the two-step system generalized method of moment (GMM) estimator. We complement our study by re-estimating the model on the pre-crisis sample during the period 1999-2006. Then, we re-run our regressions on the full-sample setting and take into account the possible effect of the 2007/2008 crisis by incorporating the crisis dummy variables (D2007 and D2008) to shed more light on the impact of the crisis on FDI and economic growth. Overall, we find some evidence of the simultaneous relationship: increased inward FDI promotes economic growth, while at the same time, greater growth could help the country to attract additional FDI capital. However, this bi-directional relationship only existed in the post-crisis period, and not in the pre-crisis time. During the pre-crisis period, growth does not exhibit a significant impact on FDI, while FDI is found to be an important driver of growth. In our full-sample setting, we find a robust positive significant influence of FDI on economic growth. However, economic growth, again, does not exhibit a significant positive impact on FDI. Some other factors, including domestic investment, market size, exports, level of trade openness and infrastructure development, either promote economic growth or inward investment. We also find some evidence suggesting that Vietnam should invest more in human capital to obtain a sufficient absorptive capability in order to benefit from advanced technologies and knowledge transfers that accompany inward FDI. In the end, our empirical findings suggest that the country should implement a more ‘open door’ policy to exploit further benefits from additional FDI inflows.

Keywords: Foreign Direct Investment, Economic Growth, Absorptive Capacity, Vietnam

JEL Classification: C36, P45, O47

Suggested Citation

Luu, Hiep and Trinh (Rainy), Dr Vu Quang and Vu, Nam Hoai, Does Foreign Direct Investment Accelerate Vietnamese Economic Growth? – A Simultaneous Equations Approach (June 16, 2016). Journal of Developing Areas, 2017, vol. 51, issue 4, 331-345, Available at SSRN: https://ssrn.com/abstract=2875826

Hiep Luu (Contact Author)

University of St. Andrews ( email )

The Gateway, North Haugh, St Andrews
St Andrews, Fife KY16 9SS
Great Britain

Dr Vu Quang Trinh (Rainy)

Newcastle University Business School ( email )

5 Barrack Road
NUBS
NEWCASTLE UPON TYNE, Tyne and Wear NE1 7RU
United Kingdom

Nam Hoai Vu

University of Birmingham, Department of Economics, Students ( email )

West Midlands
United Kingdom

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