Impacts of Foreign Direct Investment on Economic

growth in Vietnam

Nguyen, Le Thao Huong

Research Management Division, Banking Research Institute, Banking Academy

Chronicle Abstract
Article history This research determines the impact of foreign direct investment (FDI) on
the economic growth of Vietnam (economic) over the period 1990 to 2020
Received 16 Nov 2021
after the political and economic reforms (Doi Moi) in 1986. The study uses
Revised 25 Jul 2022
the VAR model through unit root test, Granger causality, impulse response,
Accepted 22 Aug 2022 and variance decompositions to achieve the goal of finding the impacts of
Keywords FDI on economic growth. The study finds that the impact of FDI on economic
Foreign Direct In- growth in the short-term and harms the growth for the long-term. Despite the
vestment (FDI), increase of FDI capital over the years and its potential, the effectiveness of
Economic growth, FDI is still limited. In this context, this study is written in parallel to provide a
VAR model systematic study on the determinants of FDI and its potential impacts on the
economy of Vietnam.
JEL classification

T
1. Introduction the country. In addition, FDI has contributed
he Doi Moi policy in 1986 transformed to shifting the agricultural structure, raising
the market economy, promoting the the value of the agricultural product for export,
development of all economic sectors, and creating several new production methods
especially the private sector, and the foreign- which have improved poor and outdated farm-
invested sectors. According to the Minister ing practices and infrastructures in some areas.
of the Ministry of Planning and Investment Accordingly, there have been several papers on
Portal, the promulgation of the Law Foreign the impacts of FDI on economic growth, pov-
Investment in Vietnam in 1987 created the mir- erty reduction, and industrial upgrading (Anwar
acle of FDI, an important contributing factor and Nguyen, 2010; Hoang, Wiboonchutikula
to Vietnam’s economic growth (WorldBank, and Tubtimtong, 2010; Do et al., 2021).
2021). The flow of FDI into Vietnam is widely However, a trade-off for the enormous amount
believed to benefit the economy in terms of in- of foreign funds and the growth opportunities
vestment capital, technology transfer, manage- in the economic- society issues such as envi-
ment skills, and job creation. FDI inflow leads ronmental pollution, unemployment, the domi-
to form some key industries of the economy, nation of foreign enterprises, the localization is
such as telecommunications, oil and gas, elec- low... The reason behind those consequences
tronics, and information technology, a founda- is the spillover effect is lower than expected
tion for long-term growth as well as accelerat- and Vietnamese enterprises are still limited in
ing the modernization and industrialization of participating in the global supply chain (Anwar

* Corresponding author.
E-mail address: [email protected] (Nguyen, L.T.H.)

© Banking Academy of Vietnam Journal of Economic and Banking Studies

ISSN 2734 - 9853 Volume 04 December 2022 pp.01-15
1
 Impacts of Foreign Direct Investment on Economic growth in Vietnam

and Nguyen, 2010). Besides, attracting FDI cal capital per worker, human capital, natural
has been the main occurred policy since the resources, and technological knowledge are fac-
first Law on Foreign Investment in Vietnam in tors that contributed to economic growth.
1987 was issued, thus, the application of the The first theory of economic growth is the
policy is ineffective. Many FDI projects are Neoclassical Growth Theory (or exogenous-
not suitable for developing planning, technol- growth theory) which first introduced by
ogy transfer, and management experience’s Robert Solow and Trevor Swan in 1956. The
results are not as expected. As a result, the theory states that economic growth is the result
contribution to the state budget is inadequate. of three factors labor, capital, and technology.
Moreover, the antiquated infrastructure leads A standard Solow model predicts that in the
to the number of investments from developed long run, economics converge to their steady-
countries still low and cannot reach its highest state equilibrium and permanent growth as
potential. the increase of labor productivity and output
In this context, this study is one among sev- capabilities of labor through the technological
eral papers written in parallel to provide a process. The accumulation of physical capital
systematic study on the determinants of FDI cannot account for either the vast growth over
and its potential impacts on the economy of time in output per person and the accumulation
Vietnam. The main purpose of this paper is to of capital that creates growth in the long run
investigate the impact of FDI inflows on the only to the extent that it embodies improved
economic growth of Vietnam after transform- technology (Solow, 1956).
ing into a market-oriented economy. The study Therefore, the production function of neoclas-
also investigated the performance of Vietnam’s sical growth theory is used to measure the
economic since the first issued Law on For- growth and equilibrium of an economy.
eign Investment and at the same time provided Y(t) = F (K(t), A(t)L(t))
some useful suggestions for policymakers to Where: Y output
make effective policies about FDI and eco- K capital
nomic growth. The objective will be achieved L labor 
by analysing the economic performance of A time or the rate of technological
Vietnam since Doi Moi through qualitative and progress which changes over time
quantitative, identifying whether FDI directly According to the exogenous growth model,
or indirectly contributes to the economic devel- FDI increases the capital in the host country
opment of Vietnam. and that would affect economic growth. Barro
and Sala-I-Martin (1995) find that the is a
2. Literature review relationship between capital accumulation and
output. Moreover, FDI might introduce the
2.1. Theories about economic growth new technology which enhances the labor’s
capability and capital labors, this would then
To measure the economic status of a country, lead further to more consistent returns on
the productivity of one country is a key deter- investment (De Jager, 2004). The FDI has
minant (Mankiw, 2011). So, economic growth been proved that stimulating economic growth
is an increase in productivity or the increased through augmenting domestic investment (Her-
quantity of goods and services, compared from zer, Klasen and Nowak-Lehmann D, 2008).
one period of time to another. Traditionally, ag- The second economic growth theories is the
gregate economic growth is measured in terms endogenous growth theory. Endogenous growth
of Gross Domestic Product (GDP) since it mea- theory holds that economic growth is primarily
sures total income earned by everyone and an the result of endogenous and not external forces,
item of total expenditure on the output of goods which is inadequate in explaining the determi-
and services in the economy. Moreover, physi- nants of long-term growth (Barro and Sala-i-

2 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

Martin, 2004). Endogenous growth theory holds entrepreneurial abilities which decrease poverty,
that investment in human capital, innovation, create new jobs and industrialize the developing
and knowledge are significant contributors to countries (Athukorala, 2003).
economic growth. The theory also focuses on Besides, according to modernization theories
positive externalities and spillover effects of a about the influence of FDI on developing
knowledge-based economy which will lead to countries, FDI is expected to have positive
economic development (Romer, 1994). effects on economic growth in host coun-
In open economies, according to Prior endog- tries needing capital investment. Since FDI
enous growth models, the long-run rate of is a source of capital, an extreme level of the
economic growth is impacted by three compre- capital gap in the host countries is provided to
hensive channels. The first channel is trading, maintain the economic growth which leads to
the innovation as well as R&D investment demand for more FDI (Zhao and Du, 2007). In
increase thanks to the increase in the size of the addition, FDI influences the growth based on
market. Secondly, economic openness leads to the quality of the economic and social envi-
information exchange and raises the productiv- ronment of host countries which are related
ity of researchers and the field of knowledge to technological growth, savings rates, and
spillovers. Finally, there is trade openness the degree of openness in the host countries
(Khder Aga, 2014). Hence, FDI is assumed (Akinlo, 2004). Hence, FDI is considered an
more effectively than domestic investment as important vehicle for technology transfer and
the shift of human capital, management, and contributes to economic growth more than do-
technology spillovers (Romer, 1994; Barro and mestic investment (Borensztein, De Gregorio
Sala-i-Martin, 2004; De Jager, 2004). As the and Lee, 1998).
result, foreign investment can increase the pro- However, FDI still harms growth. The en-
ductivity of the host economy, and then FDI try and presence of multinational enterprises
can be seen as a catalyst of domestic invest- (MNEs), shifting capital freely due to FDI
ment and technological spillover. activities, distributed the existing equilibrium
in the market (Blomstrom, Lipsey and Zejan,
2.2. Theoretical studies about the impact of 1994). The imbalance in investment, investing
FDI on economic growth in effective return sector instead of sectors that
the host country wants, can lead to inefficient
FDI theoretically promotes economic growth investment, overexploited natural resources
in various ways (Herzer, Klasen and Nowak- distorted economic structures, slow improve-
Lehmann D, 2008). Firstly, FDI can affect ment, and dangerous general instability of the
economic growth through capital accumulation socio-economic life of the country receiving
by introducing new goods and foreign technol- investment when sudden capital withdrawal
ogy which come from the exogenous growth (Moon and Roehl, 2001). The “transfer pric-
theory (De Mello, 1999). Secondly, based on ing” also happens which leads to reducing
endogenous growth theory, FDI can promote the effectiveness of state management in the
economic growth through research and devel- implementation of calling investment to devel-
opment in the host country. op the social economy (Barry, 2005). This is
According to Zhang (2001), FDI could enhance also the reason for the increasing trade deficit
the economic growth of host countries and both because the amount of foreign currency used to
of them are positively interdependent. The rapid import raw is always larger than the amount of
growth of FDI makes positive effective growth foreign currency exported (Fontagné, 1999).
through foreign countries’ extra facilities such Nonetheless, the existence of the foreign firms
as managerial skills and better technology. FDI would gradually become direct or potential
offers developing countries abundant required competitors with local businesses in the same
resources such as technology, capital, and investment field. In the long-term, domestic

Volume 04- December 2022 - Journal of Economic and Banking Studies 3

 Impacts of Foreign Direct Investment on Economic growth in Vietnam

firms would be faced with a narrow market or in Cambodia from 2006-2016 (Khun, 2018).
be acquired because of advanced technology, Besides the positive relationship between FDI
capital, and brand (Zhou, Li and Tse, 2002). and economic growth, there are some studies’
Many studies show the concentration of FDI results that show the insignificance between
projects in urban areas inhibits the develop- the two variables. Charkraborty and Basu
ment of domestic enterprises (Azam, 2009). (2002) show that FDI plays no significant in
However, the quality of technology transfer the short-run adjustment process of GDP, yet
within FDI might be outdated, especially in reverse causality the strong evidence of GDP
developing countries (Glass and Saggi, 1998). causing flow for India during the period 1990-
The investors take advantage of the weakness 2000. There is also no causality between FDI
in technology inspection and management of and growth in Ghana over the period 1970-to
the host country to bring to these countries out- 2002 (Frimpong and Oteng-Abayie, 2006).
dated, depreciated equipment and machinery In the case of Vietnam, Nguyen (2017), using
and technology prices, instead of transferring annual times series data for the period 1986-
advanced technology as expected by receiving 2015, found that FDI has a significant positive
countries, yet still recognized at high prices impact on economic growth in Vietnam in
(Clapp, 2007). Besides, MNEs have an incen- the long run yet no impact in the short run. A
tive to prevent the spillover of technology to positive impact was also found while analyz-
other companies through trademarks (Dunning ing during the period 2000-2018 through the
and Rugman, 1985). OLS method (Nguyen, 2020). Other studies
In short, the impact of FDI on economic also find the same result. The positive impact
growth attracts much attention from research- can be via investment channels and have both
ers and the results are still being debated. FDI direct and indirect impacts on the growth (Le,
can promote the economic growth of a coun- 2007). Using the VAR model for the 1995-
try through introducing new technology and 2019 period, Le (2021) found FDI inflow has
foreign countries’ extra facilities as well as a negative impact on growth immediately then
providing more capital for the host countries. FDI inflows have a relatively small impact
Despite its positive impacts on the growth, FDI and have the strongest positive impact in the
can have negative impacts such as inefficient medium-term and then weaker in the long run.
investment, overexploited natural resources, The impact of the long-term effectiveness of
transfer pricing, trade deficit, narrowing the foreign investment in Vietnam also raises the
domestic market size, and importing the out- concern in Hoang and Duong’s paper (2018).
dated technology. These empirical studies have show that there
exits a link between FDI and economic growth.
2.3. Emprical studies on FDI and Economic Depend on the types of model, variables, time
growth period, scope and location of research, dif-
ferent studies may indicate varying degree of
Empirical country-specific studies also show linkage between FDI and growth. In Vietnam,
mixed results on the impacts of FDI on eco- data used in quantitative researches either up to
nomic growth. Time series regression is used 2015 or in the specific periord, thus, this study
by numerous studies to provide and explain may likely to be the first to explore the rela-
the impact of FDI on economic growth. For tionship between FDI and economic growth in
instance, the relationship between FDI and Vietnam with the full data from 1990 to 2020.
economic growth in Greece over the period
1960-2002 suggested that there is a long-run 3. The actual impacts of FDI on the growth
equilibrium relationship (Dritsaki, Dritsaki of Vietnam
and Adamopoulos, 2004). The positive impact
of FDI on economic growth was also found 3.1. Overview of Vietnam’s economy

4 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

Source: World Bank (2021)

Figure 1: GDP per capita and GDP growth of Vietnam from 1985 to 2020

In 1986, Vietnam launched a political and eco- Vietnam had an average GDP growth of 6.9%
nomic renewal campaign “Doi moi” that intro- a year from 2000 to 2005. The growth was
duced reforms to facilitate the transition from 7.5% in 2005, the third-largest in Asia, trailing
a centralized economy to a socialist-oriented only China’s (14.2%) and India’s (7.9%). The
market economy. Doi moi combined govern- average GDP growth in the two next periods
ment planning with free-market incentives and 2006-2010 and 2011-2015 declined to 6.32%
encouraged the establishment of private busi- and 5.91%, respectively. The Financial crisis
ness and foreign investment, including foreign- of 2007-2008 led to a decrease in GDP growth
owned enterprises. During the transition from in 2008 (5.6%) and slow growth during the
a backward, subsidized economy to a modern post-financial crisis (2011- 2013). The GDP
socialist-oriented market economy, Vietnam growth of Vietnam in 2010 was 6.42% then de-
has risen to become a growth bright spot in the creased to 6.24% in 2011 and 5.25% in 2012.
region and the world with notiable achieve- The average GDP in the period 2016- 2019
ments. The economy has not only grown in reached 6.8%, reaching the target of aver-
size, but the quality of growth has also been age growth of 6.5% to 7% of the 5-year plan
improved, and the people’s material and 2016- 2020. Although in 2020, the economy
spiritual life has been significantly improved was heavily affected. Despite the Covid-19
(WorldBank, 2021). epidemic, the economy still grew by nearly
Economic growth reached a high rate. After 3%, being one of the rare countries with posi-
the first period of renovation (1986-1990), the tive growth in the region and the world (World
average annual GDP growth rate was only 4.4% Bank, 2021).
and reached 8.2% in the next five years (1990- In conclusion, the scale of the economy was
1995). Although the GDP in the late 1990s was significantly expanded, and the material and
lower than the previous 5-year period, following spiritual life of people has been significantly
the 1997 Asian Financial Crisis, the success of improved and helping Vietnam to escape from
the business and agricultural reforms ushered being a poor and undeveloped country and
in under Doi Moi was evident. In the period belonging to middle-income countries in the
1996- 2000, the GDP growth rate reached 7% world since 2008. GDP reached about 262
and poverty was nearly halved compared to the billion USD in 2019, an increase of 18 times
previous period (World Bank, 2021). compared to the first year of renovation is

Volume 04- December 2022 - Journal of Economic and Banking Studies 5

 Impacts of Foreign Direct Investment on Economic growth in Vietnam

about 2,800 USD/person (World Bank, 2021). sector with an ever-expanding capital scale in
Vietnam. Expect the unusual fluctuations in the
3.2. Overview of FDI period 2008-2009, FDI inflow has skyrocketed
and the size of FDI capital tends to increase
3.2.1. FDI inflow and used over the years. In 2020, despite the crisis
Since its appearance in Vietnam, the FDI caused by COVID-19 having a strong impact
enterprise sector has gradually asserted itself on the global supply chain, the total registered
as the most dynamic economic development capital by foreign investors in Vietnam still

Source: General Statistics Office (2021)

Figure 2: Foreign direct investment projects licensed in the period 1988-
2020 by Year

Source: General Statistics Office (2021)

Figure 3: Scale of FDI project registered and implementation and
disbursement rate during 1988-2020

6 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

reached 31 billion USD. FDI capital continues ect significantly increased. The average scale
to maintain positive results in 2020, showing of FDI in this period was 19.79 billion USD
that the section of foreign investors for Viet- per project. The reason for this phenomenon
nam is an attractive and safe destination. is the lifting of the embargo on Vietnam from
Beginning in 1991, a massive wave of foreign the United States in 1994 did not prevent other
investment poured into Vietnam. For the whole countries from lending money to Vietnam.
period of 1991-2000, 3,133 projects were at- Besides, the scale average of FDI in 1999-
tracted with a total registered capital of 43.9 2005 was 5.76 billion USD per project. This
billion USD. Although the number of projects might be the consequence of the Asian Financial
and total registered capital reduced during crisis and Vietnam’s shift in industrial policy
1996-2000 as the result of the 1997 Asian to encourage export. The peak of the scale of
financial crisis, the results of attracting FDI in registered capital of the project in 2008 (reached
these early years laid the foundation for later a record of 61.25 billion USD per project) yet
policy changes, creating the great achievement the scale of the implemented project is still quite
that FDI brought to the Vietnamese economy. modest, only 5.65 billion USD, corresponding
The policy adjustment (usually right before and to the disbursement rate of only approximately
right after international integration events) and 25%. The scale through period shows the
Vietnam’s economic integration process sig- reaction of foreign investors to the change in
nificantly influenced the registered FDI capital. policies, investment, and business environment
With the validity of the Law on Investment in Vietnam and international conditions. The
2005 and the event of Vietnam’s accession to stable and continuous raise of scale since 2009
the WTO, the period 2005-2008 was the boom reflected the balance of the investment environ-
period of registered FDI. The total registered ment as well as the expansion of trade bilateral
FDI capital increased by more than 1.5 times and multilateral commitments.
compared to the previous years. Especially, in In the last 10 years, the average disbursement
2008 alone, the registered and additional FDI rate was 57.7% which can cause either regis-
capital exploded, reaching 71.76 billion USD, tering for incentives or financial shortcomings
equal to 71.97% of the total registered capital of FDI enterprises. There are long-term issues
of the previous 20 years combined. in Vietnam that only focus on the scale rather
Along with joining several new trade agree- than the investment structure as well as the
ments and reformed Foreign Investment Law investment performance of foreign investors.
and Investment Law 2014, reduce the restric- It can understand that FDI enterprises heavily
tion on business and investors and the third depend on loans or link with other enterprises
wave of foreign investment took place. In the to implement projects. In addition, some firms
2011-2019 period, the implementation capital are taking advantage of low-interest rates and
reached about 143 USD billion, equaling 6.93 borrowing money from Vietnamese banks to
times in the 1991-2000 period and 2,45 times quickly implement project expansion rather
the previous 10 years (2001-2010), the aver- than depend on external capital (Vietnam
age value of attracting 14,3 billion USD per News Agency, 2018). Thus, the proportion of
year. In 2019, the total projects reach a peak at FDI in these projects is pretty small and the
4028 projects and the implementation FDI is goal of attracting FDI to the economy has not
estimated at 20 billion USD, the highest since been implemented properly. The low disburse-
the Doi Moi policy in 1986. However, this year ment rate also reflects the ability to absorptive
also witnessed a decrease in the scale of FDI capacity is limited.
project capital from 11.55 million USD per
project in 2018 to 9.67 million USD per project 3.2.2. The impacts of FDI in Vietnam
in 2019. Before the reform, the ability to accumulate
From 1995 to 1999, the scale of the FDI proj- capital within the economy was still limited

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 Impacts of Foreign Direct Investment on Economic growth in Vietnam

while the need for investment capital for ranked 45th out of 216 countries in terms of
development was still large. In that situation, FDI attraction. Vietnam’s ranking declined in
foreign investment is the solution and brings the period 2001 to the time of WTO accession
the country out of the lack of capital and plays in 2006, then quickly regained its form and in-
a decisive role in the success of the economic creased from 2007. Since then, Vietnam’s rank-
growth goals. ing in FDI attraction has continuously improved
FDI inflows into Vietnam have achieved many over the years. In 2020, Vietnam ranked 19th
remarkable results. According to UNCTAD’s out of 216 in FDI attraction.
Global Investment Report (2021), Vietnam’s Since the Financial Crisis 2007-2008, the pro-
ranking in FDI attraction has improved marked- portion of FDI capital in total social investment
ly. From nearly zero in 1987, in 2000, Vietnam has increased and maintained at 21.4% in 2020

Source: General Statistics Office (2021)

Figure 4: The proportion of foreign investment from 1995 to 2020

Source: General Statistics Office (2021)

Figure 5:The contribution to GDP at current prices by types of ownership

8 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

Source: General Statistics Office (2021)

Figure 6: State budget revenues from foreign-invested enterprise

despite the pandemic. The average in the last However, the contribution of FDI to state
10 years was 22.8%. FDI is increasingly show- budget revenues is still low compared to the
ing its role as an important source of additional proportion of FDI to total social investment. It
capital for the economy. This is reflected in the can be explained by the Government’s incen-
proportion of this type of capital in total social tive policy through income tax in the first year
investment capital and its contribution to Viet- of operation and during the difficult period,
nam’s economic growth which has increased hardly have profit and loss. Hence, the FDI
over the years. enterprises take advantage of those benefits for
According to APO Productivity Databook evading taxes through transfer pricing. 55%
2020, nearly 60% of Vietnam’s economic of FDI enterprises report continuous losses for
growth is the quantity of investment capital. many years despite investing and expanding
While Vietnam’s domestic capital is still lim- production and business as well as the increase
ited, it can be seen that the country’s economic in their revenues. (Cam Tu, 2021). For exam-
growth depends largely on the contribution ple, Coca-Cola Vietnam continuously declares
of the quantity of foreign investment capital, losses by reporting the high cost of raw materi-
including FDI. Since 2005, the FDI sector has als directly imported from the parent company
always contributed to GDP above 15% which at a very high price. Coca-Cola Vietnam is not
shows the significance of FDI inflows to Viet- the first company to use transfer pricing tricks.
nam’s economic growth. Previously, a series of FDI enterprises such
Besides, the state budget revenues from as Metro, Pepsi Vietnam, Adidas, Keangnam
foreign-invested enterprises have witnessed Vina... were also detected and arrears by the
upward trends since 2000. The state budget Vietnamese tax authorities.
revenues in 2020 are estimated at 206.088
billion VND, 43.52 times higher than in 2000 4. Methodology and data
(4,735 billion VND. During the 2016-2020 pe-
riod, the total revenues from FDI sectors were 4.1. Research Design
approximately 941 billion VND which was
even higher than the total revenue from 2000 The author uses the model based on the Solow-
to 2015 (808 billion VND). Swan growth model or neoclassical growth

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 Impacts of Foreign Direct Investment on Economic growth in Vietnam

Table 1. List of variables

Variable Abbreviations Methodology Measurement
Gross Regional GDP Growth (annual
GDP (GDPt - GDPt-1)/GDPt
Domestic Product %)
Foreign Direct
FDI Total FDI implementation capital % of GDP
Investment
State Investment GINV State capital/GDP % of GDP
Non-state investment PINV Non-state capital/GDP % of GDP
Percentage of employed workers % of total populations
Labor focus LABO
at 15 years of age and above ages above 15
Source: Collected by the author from General Statistics Office of Vietnam

model, which has been discussed above. The search method measures the linear relationship
essence of the model is a neoclassical aggre- between the variables in the model. The author
gate production function, usually in the form uses Eview 11 to obtain lag optimal-order
of a Cobb-Douglas model, allowing the model selection statistics for Vector Auto-regression
to be linked to microeconomics. This model is (VARs). Granger causality test is also used.
proposed to explain long-run economic growth Then, the researcher uses Impulse Response to
by studying the process of capital accumula- analyse the impact of the shock of each variable
tion, labor or population growth. Besides, on the remaining variables and variance decom-
the human capital variable is also included as position to analyse the importance of each vari-
several include it as a determinant for spillover able in explaining the change of variable.
of the FDI. Variables in the model are included
in the following Tables 1. 4.3. Data collection

4.2. Methodology Data used in this study are annual figures that
cover the period between 1990- 2020 which
This research accesses qualitative research is time-series data using a single linear regres-
methods: by using a combination of methods sion model to examine the impact of FDI on
such as statistics, synthesis, interpretation, economic growth. The data is from 1995 since
comparison, and inductive. The quantitative re- the Law on Foreign Investment in Vietnam

Following Solow-Swan model and the above variables the model analysis, Granger’s Reoperation
Theorem is be adopted as the following form:

where: growtht is measured by the percentage of GDP growth for a country at time t;
FDIit represents the scale of FDI inflows into the economy at the time t;
GINVt represents the total capital of the state at time t, compared to current prices
PINVt represents the total capital of non-state at time t, compared to current prices
LABOt represents the percentage of labor focus at time t
εt the observation error

10 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

Table 2. Variables Descriptive Statistic

GDP FDI GINV PINV LABO
 Mean  0.064200  0.058251  0.154842  0.842579  0.767736
 Median  0.064232  0.058300  0.157678  0.933432  0.766600
 Maximum  0.093400  0.097131  0.214159  1.480751  0.779500
 Minimum  0.029058  0.033904  0.105433  0.377669  0.756300
 Std. Dev.  0.012254  0.018277  0.035450  0.319204  0.006595
Source: Result obtained from Eview 11

had been performed and in the first five years, 5. Empirical result and discussion
FDI did not have a significant impact on the
growth. Besides, not until 1996, did some 5.1. Granger Causality Test
data was collected such as state and non-state
investments. The data used is secondary data One approach to examining the relationship
which is taken from the General Statistics Of- between interacting variables is to look at
fice of Vietnam. the causality among these variables. Granger
(1969) designed a statistical test, called the
4.4. Descriptive Statistics “Granger causality test,” to determine whether
one-time series is useful in predicting another
Table 2 shows the descriptive statistics of each time series. The null hypothesis of “no Granger
variance. In the first column, we see that the causality” is tested with a version of the F test.
highest GDP of Vietnam during the observed Table 3 presents the significant result for the
period was 9.34%, and the lowest value, at causality test.
2.9%. Those values show the possibility of The researcher considers the p-value < 0.05
economic growth in each period of Vietnam is (significant level 5%), and the null hypothesis
different and tends to be fluctuated. Besides, of “no Granger causality” is rejected highly
the labor focus rate is always about 75% of the significantly for
total population from 1990 to 2020. (i) There is no causality between growth and
FDI (p = 0.022 and p = 0.019)

Table 3. Granger Causality Test

 Null Hypothesis: Obs F-Statistic Prob. 
 D(FDI,2) does not Granger Cause D(GDP)  22  6.14935 0.0227
 D(GDP) does not Granger Cause D(FDI,2)  6.56921 0.0190
 D(GINV) does not Granger Cause D(GDP)  23  0.94213 0.3433
 D(GDP) does not Granger Cause D(GINV)  1.17404 0.2915
 D(PINV) does not Granger Cause D(GDP)  23  5.32746 0.0318
 D(GDP) does not Granger Cause D(PINV)  2.33531 0.1421
 LABO does not Granger Cause D(GDP)  23  0.39513 0.5367
 D(GDP) does not Granger Cause LABO  0.51081 0.4830
 D(GINV) does not Granger Cause D(FDI,2)  22  5.19647 0.0344
 D(FDI,2) does not Granger Cause D(GINV)  8.57508 0.0086
Source: Results obtained from Eview 11

Volume 04- December 2022 - Journal of Economic and Banking Studies 11

 Impacts of Foreign Direct Investment on Economic growth in Vietnam

(ii) Non-state capital does not have an impact have a positive impact on the growth, same
on growth (p = 0031) evident in China (Tang, Selvanathan and Sel-
(iii) There is no causality between the state vanathan, 2008).
capital and FDI (p = 0.034 and p =0.008)
From the result, it is shown that in the short 5.2. Variance Decomposition Using Colessky
term, FDI has a positive impact on economic Factors
growth in Vietnam. After more than 30 years,
FDI capital has become an important part of The variance decomposition techniques can
Vietnam’s economy and has made many con- be utilized to examine the relationship among
tributions to the development of the country, variables (Kim and Seo, 2003). The forecast
economic restructuring, improving industrial error variance allows us to make inferences
production capacity, making a significant to over the proportion of movement in a time se-
budget revenue and job creation, making an ries due to its shocks versus shocks to another
important contribution to Vietnam’s export variable in the system.
turnover and participating in the expansion Within a ten-year forecasting horizon, the
of international markets. Besides, state and variance decomposition reported some main
non-state capital (or domestic investment) results:
is always an important internal force to pro- (i) In the first year, the innovations in GDP are
mote economic growth in Vietnam and stabi- explained by non-state capital (19%) and then
lize macro-regulation. The efficiency of the FDI (11%). However, since the second year,
domestic capital has been increased over time FDI explains the second largest innovations
hence, Vietnam’s investment Law is necessary (28%) besides its past (52%). In the second
to have a priority on promoting domestic sav- year, the state capital also increased from 0.6%
ings over capital FDI because of the long-term to 1.76%.
role of domestic investment in the Vietnamese (ii) GDP also shows great influence on FDI, at
economy. Furthermore, FDI has an impact on 12% in the second year and 16% in the third
the state capital and has to overcome the capi- year, comparing other variables, less than 5%.
tal shortage and stimulate economic growth (iii) The influence of both GDP and FDI are
through the addition of domestic capital and also witnessed on the state capital and the

Table 4. Variance decomposition

Variance Decomposition of D(GDP):
 Period S.E. D(GDP) D(FDI,2) D(GINV) D(PINV) LABO
 1  0.035985  100.0000  0.000000  0.000000  0.000000  0.000000
 2  0.050560  66.06632  11.28120  0.607544  19.82450  2.220427
 3  0.056754  52.44788  28.12117  1.762073  15.90310  1.765775
 4  0.057463  53.25067  27.43470  1.796322  15.69312  1.825190
 5  0.057866  53.12038  27.43216  1.813630  15.83230  1.801526
 6  0.058157  52.59722  28.01697  1.844639  15.71715  1.824018
 7  0.058235  52.57549  27.95869  1.839710  15.76137  1.864730
 8  0.058259  52.56085  27.98171  1.838216  15.74861  1.870614
 9  0.058277  52.53093  27.98453  1.837113  15.76598  1.881446
 10  0.058289  52.51494  27.98237  1.837805  15.77744  1.887438

12 Journal of Economic and Banking Studies- Volume 04- December 2022

 Nguyen, Le Thao Huong

Variance Decomposition of D(FDI,2):

 Period S.E. D(GDP) D(FDI,2) D(GINV) D(PINV) LABO
 1  0.016487  3.455289  96.54471  0.000000  0.000000  0.000000
 2  0.018208  12.37576  86.83011  0.289515  0.470725  0.033893
 3  0.019438  16.98739  78.18111  0.270540  4.020878  0.540078
 4  0.019987  16.26797  78.96584  0.368610  3.883916  0.513672
 5  0.020060  16.50158  78.74879  0.367813  3.869576  0.512236
 6  0.020115  16.72198  78.36534  0.370085  4.015460  0.527128
 7  0.020146  16.68976  78.39278  0.376215  4.013812  0.527439
 8  0.020151  16.69850  78.38366  0.376135  4.013636  0.528070
 9  0.020153  16.71059  78.36716  0.376266  4.017855  0.528129
 10  0.020155  16.70954  78.36619  0.376424  4.019235  0.528611
Source: Result obtained from Eview 11
Response to Cholesky One S.D. (d.f. ad
Response of D(GDP) to Innovations
impact of GDP is significantly higher in the
.04 .020
first year and reduces in the second year, both
variances explain at around one-third. .03 .015
The result variance decomposition shows that .02
.010
domestic capital also plays an important role .01
in Vietnam’s economic growth as its influence .005
.00
is less than FDI. The relationship between eco- .000
nomic growth and FDI is bidirectional, but the -.01

role of economic growth on FDI is weaker than -.02 -.005

vice versa. FDI has an impact on state capital -.03 -.010

but not as much as economic growth. The re- 1 2 3 4 5 6 7 8 9 10 1

sult also shows that the present and past values D(GDP) D(FDI,2) D(GINV)
of these economic indicators have a strong D(PINV) LABO
influence on their future values and trends in Source: Result obtained from Eview 11
each period. Based on this method of assessing Figure 7. Impulse
Response responses
of D(GINV) to shock
to Innovations in
those relationships, the Vietnam government .008 GDP .08
can have flexible policies in attracting invest-
.06
ment in the short term. have
.004 a negative impact in the medium-term

when the impact will be the strongest. In the .04

5.3. Impulse responses long

.000
term, the impact of FDI is hardly to be .02

witnessed.
-.004
Meanwhile, the investment capi- .00
The impulse response function is used to reveal tal of the private sectors has an immediate -.02
the dynamic causality relationship between and strong impact on economic growth, then
-.008
-.04
variables. The impact of shock on GDP itself is impacts gradually in the medium term, while
strong. GDP has reverted to its mean level after public investment has a stable impact in the
-.012 -.06
1 2 3 4 5 6 7 8 9 10 1
an immediate sharp decline. This confirms that short and medium-term.
the GDP level of Vietnam depends greatly on D(GDP) D(FDI,2) D(GINV)
its past values. The effect of FDI on GDP is 6. Conclusion
D(PINV) LABO

stronger after 1.5 years then falls sharply to

Response of LABO to Innovations
.004

.003
Volume 04- December 2022 - Journal of Economic and Banking Studies 13
.002

.001
 Impacts of Foreign Direct Investment on Economic growth in Vietnam

GDP and FDI have a bi-directional causality will slow down Vietnam’s economic growth .
relationship yet FDI only maintains growth in Therefore, encouraging and promoting domes-
the first stages but after that, it can negatively tic saving should take precedence over attract-
impact growth. The reason for that is that most ing FDI in designing and executing invest-
of the investment capital flows into industries ment strategies and investment policies since
that cause bad effects on the environment such domestic investment has a greater contribution
as heavy industry, chemicals, and industries to growth than FDI (Tang, Selvanathan and
that depend on foreign investors do not trans- Selvanathan, 2008). On the basis of the result,
fer technology. The development of these the study suggests the following recommenda-
industries inadvertently affects the investment tions: effectively exploiting domestic capital
environments. The negative impact of FDI in sources to promote economic growth. Accord-
the long-term has been found in much research ing to the analysis, the domestic investment
in Vietnam in different periods (Hoang and has a greater contribution to growth than FDI.
Duong, 2018; Le, 2021) Hence, encouraging and promoting domestic
Domestic investment has a greater impact on savings should take precedence over attract-
growth than FDI. The impact of FDI on the ing FDI in designing and executing investment
efficiency of economic growth is still modest strategies and investment policies in Vietnam.
compared to domestic investment which is the The study cannot avoid limitations. The data
same result as Le (2020) and Tang, Selvana- are provided by a secondary official source
than, and Selvanathan (2008). Besides, the from the General Statistics Office of Vietnam,
empirical analysis also finds the bi-directional which the quality of data is unable to control.
causality link between GDP and domestic Besides, with the scope of the paper, the re-
investment. Hence, Vietnam may face a capital search has not been comparing the FDI policies
shortage in new industries where FDI was a systems in Vietnam in each period as well as
complement to domestic investment and do- with other countries in areas. The researcher
mestic investment was limited and export de- expects to fulfill those limitations in further
mand may decrease. Vietnam’s domestic firms research. ■
have been dominated by foreign firms which

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