Some bing surveies show that there is a positive relationship between FDI influx and economic growing in the development states. An effort is made to analyze this relationship in Viet Nam with time-series informations from 1986 to 2010. The two equations theoretical account is used to place the issue. And the consequences from GMM method show that relationship between FDI influx and economic growing in Viet Nam are positive and bidirectional. The survey besides uses other controlled variables and all of their coefficients are statistically important. However, some such variables as investing and exports show negative relationship to FDI inflow that needs more discussing. Furthermore, the survey discusses some other points such as impact of corruptness, administrative processs on FDI attractive force and reassign monetary value activities of foreign invested endeavors in Viet Nam. Finally, the survey suggests some little policy deductions.


Viet Nam suffered to a great extent from war and used to be a hapless state with low economic growing rate and gross domestic merchandise ( GDP ) per capita. After independency, Viet Nam has strongly transformed from a centrally planned into a market-oriented economic system thanks to Reform policy started in 1986. From this clip on, the socio-economic public presentation has gained many singular accomplishments. Viet Nam has ever been a high growing rate state, particularly a roar from 1896 to 1997 with mean growing degree of 9 % per twelvemonth. After a lessening due to Asia fiscal crisis in 1997, this figure recovered at 2000 with 6.7 % and bit by bit went up in the undermentioned old ages to make 8.5 % in 2007. Unfortunately, one time once more, the impulse was stopped by another crisis in 2008, 2009 and Viet Nam economic system has merely recovered in 2010. Overall, in the period of 1990-2010, the mean growing rate is 7.3 % and GDP per capita increased 5 times. Apart from this, Viet Nam is recorded as one the best states in footings of hapless relief. At present, Viet Nam has officially shifted from a hapless economic system into a low in-between income state.

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These accomplishments are consequences of implementing many Reform policies which are appropriate to regional and planetary tendency. In fact, Viet Nam has carried out economic integrating early from the terminal of 1980s. The authorities ever focuses on pulling foreign investors and it started by publishing foreign investing jurisprudence in 1987. In add-on, Viet Nam has fostered international relationship with many spouses over the universe. More specifically, Viet Nam has been a member of Association of Southeast Asiatic Nations in 1995, Asian – Pacific Economic Cooperation in 19 and World Trade Organization in 2007. Apart from openness to merchandise, Viet Nam has significantly improved concern environment to pull more foreign investors. As effect, the above attempts have brought some positive results. Foreign direct investing ( FDI ) influx has risen well and contributed to economic growing of host state.

FDI could impact every facet of one state from society, civilization to economic system. However, in instance of developing states, the important outlook from FDI influx is to advance economic growing. In which, FDI influx is expected to carry through capital demand of developing states, to better national balance of payment and to lend to macroeconomic stableness. FDI motion besides is expected to convey new engineering, cognition and managerial accomplishments to receivers. It is argued that one state is a success in pulling FDI when FDI inflow would take to: ( I ) an addition in flow of capital into domestic market ( two ) efficient spillover effects and ( three ) a sustainable socio-economic development. In contrast, some writers believe that FDI does non ever convey good things to host states. FDI is seen as a permutation, non a complementation to domestic economy that exacerbates balance of payment. Furthermore, it is besides argued that FDI have a inclination to use less up-to-date and capital-intensive engineering into host states. In some instances, FDI investors come to work natural resources and leave the host states the large issue of environment. Overall, this survey will merely analyze impact of FDI influx on economic growing, non every facet, of Viet Nam.

However, at the other extreme, some economic experts argue that the causal relationship between FDI and economic growing does non merely run from FDI to economic growing. They indicate that assuring economic growing of host states would be an indispensable determiner of FDI. In other words, there should be a bidirectional relationship between FDI and economic growing. Thus, in chapter 1, the author will reexamine the development of FDI theories, empirical groundss and happen out the relationship between FDI and economic growing in Viet Nam. After that, chapter 2 will depict informations and present methodological analysis to mensurate this relationship after reexamining the planetary tendency of FDI and FDI inflow into Viet Nam. Finally, chapter 3 will demo the empirical consequence from theoretical account and discourse some modern-day issues of Viet Nam.

Chapter 1: THEORETICAL Model

Definition and Theories of Foreign Direct Investment

Definition of Foreign Direct Investment

Foreign direct investing is defined in several ways but in general, harmonizing to the Organization for Economic Co-operation and Development ( OECD ) :

“ Foreign direct investing reflects the aim of set uping a permanent involvement by a resident endeavor in one economic system ( direct investor ) in an endeavor ( direct investing endeavor ) that is resident in an economic system other than that of the direct investor. The permanent involvement implies the being of a long-run relationship between the direct investor and the direct investing endeavor and a important grade of influence on the direction of the endeavor ” ( OECD, 2008 p.48 ) .

In other words, FDI is considered as an internationalisation scheme in that the endeavors set up their concern abroad by possessing such productive assets as labour, capital, engineering and other equipment. ( Cavusik et al, 2008 p.148 )

FDI is a scheme in which investors will keep control and net income which differentiates FDI and portfolio investing. The latter implies purchasing and selling bond activities of foreign investor in order to do net income, but the investor does non affect in direction activities. The term “ control ” here could be understood as “ some grade of discretional determination devising by the investor in direction policies and scheme ” ( Moosa, 2002 p.2 ) . For illustration, control could come up through the right ballot or engagement in determination devising procedure. A foreign direct investor could be an person ; a group or related persons ; an integrated or unincorporated endeavors ; a populace or private endeavors ; a group of related endeavors ; a authorities organic structure ; an estate, trust or social organisation ; or any combination of above ( OECD, 2008 p.50 ) every bit long as an entity occupant get at least 10 % of voting rights of houses.

Development of FDI Theories

FDI motion was believed to get down from the 19th century by imparting activities of Britain to finance economic public presentation in other states. From this clip on, FDI has progressively become of import and significantly conduced to planetary economic growing. Thus, many writers try to explicate why investors, particularly transnational corporations ( MNCs ) , are interested in FDI ; which factors determine the determination of investors to take investing location and they besides try to calculate out what makes a state or part more successful in mobilising FDI? Arguably, some theories indicate that FDI would hold a positive consequence on economic growing, but some showed the negative impact of FDI in some certain instances.

Let ‘s get down with merchandise life rhythm theory of FDI of Vernon ( 1966 ) . He points out that in the 20th century the United State ( US ) was a prima state in footings of engineering, so a big proportion of new merchandises came from the US and evidently they were the biggest exporting state in the universe. From the experience of the US, Vernon discusses how goods were produced, developed and exported. He shows three periods. At first period, goods ab initio produced and their early demand could be negligible, but they have had great possible in future. During this period, goods features were labour intensive. At 2nd period, merchandises ‘ demand started turning domestically and internationally. The merchandises had become standardised and foreign markets would desire to bring forth by themselves at comparative lower production costs. The US houses accordingly had sought for better markets than the US and decided to set up their presence at other states to do usage of location advantages. Finally, at the last period, production techniques had become to the full standardized at local market and abroad markets. At this clip, developing states turned into advantageous parties thanks to their lower production costs and so lower monetary value of merchandises. Now they had a opportunity to export back to the US and became exporters. That is merchandise life rhythm of Vernon. Once the engineering becomes more common, production location tends to switch towards developing states.

Turning to the industrial organisation theory, Hymer ( 1960 ) was the first one used this theory which developed after that by some economic experts such as Kindleberger ( 1969 ) ( Desai et al, 1977 ) or Caves ( 1996 ) . Basically, theory shows that in procedure of puting up new subordinates aboard, houses would confront some troubles, for illustration differences in linguistic communication, civilization, legal systemaˆ¦ However, in the position of Kindleberger ( 1969 ) , “ the comparative advantages has to be firm-specific, it must be movable to foreign subordinates, and it should be big plenty to get the better of these disadvantages ” ( Moosa, 2002 p.30 ) . And firm-specific advantages have been the ground why foreign investors could be more successful in competition with local houses. Furthermore, Aharoni ( 1966 ) argues that three factors could find determination of house to take locations are uncertainness, information and committedness. He indicates that because of uncertainness, houses have desire to diversify hazard by puting abroad. Hence, they need to near to decent information to do certain whether the market is assuring or non. Finally, if it is assuring, they will hold commitment start concerns.

Following is the internalisation or dealing cost theory. The theory bases on premise that market is imperfect and implies that FDI comes up because houses, particularly MNCs, want to internalise market dealing costs in order to better their net income. By making so, houses could maintain uncertainnesss or clip slowdowns off and when this procedure is taken topographic point across national boundaries, it leads to FDI. Other motives for internalisation procedure could be explained by Tormenting ( 1977 ) that MNCs want to maintain their sole rights after utilizing innovated engineering in footings of R & A ; D procedure.

In order to further discuss, Dunning ( 1977, 1979, 1988 ) developed the Dunning ‘s eclectic theory by uniting industrial organisation theory, the dealing cost theory and location theory ( Moosa, 2002 p. 36 ) . Harmonizing to this theory, there are three factors impacting FDI: ownership advantages, internalisation advantages and location advantages. Ownership advantages are the capacity of houses to bring forth goods and services better than other houses domestically and internationally. Internalization advantages imply that houses could utilize their ownership advantages in the best manner to acquire benefit instead than to outsource them. Finally, these above advantages must work efficaciously when uniting with location advantages of host states. Three factors closely link to each other and houses have to see them carefully before make up one’s minding the signifier of FDI. For illustration, if a house has ownership advantages but no additions from internalisation and no favour from location feature, it should licence its ownership. But in contrast, if the house has ownership advantages, additions from internalisation and location factors are favour to enlargement abroad, FDI will come up.

Apart from these, it is possible to sort FDI theories into two opposite statements: the mainstream position and extremist position. In which, the former supports positive consequence of FDI, while the latter critics the function of FDI. FDI is considered as one factor of production map in the mainstream position which appreciates the function of FDI in development of host state. Pham ( 2004 ) reviews surveies of some writers and points out that in the theoretical account of Hecksher-Ohlin-Samuelson ; FDI motion is explained by differences of production resources in different states. The tendency is that FDI will flux from states with low fringy productiveness to states with higher fringy productiveness but deficiency of production resources. On one manus, FDI investors make better net income from differences in involvement rate among states. On the other manus, host states could expeditiously do usage of capital flow to bring forth goods and services. Therefore, FDI brings benefit to both investors and resource state. More specifically, in the Harrod-Domar theoretical accounts, FDI is believed to decide major job of “ salvaging spread ” of “ financing spread ” of developing states. Harmonizing to this position, economic growing depends on salvaging which generates investing. FDI flow could increase gross investing and lessening incremental capital end product ratio and so increase economic growing. Furthermore, FDI besides helps to reassign up-to-date engineering, direction accomplishments and contributes to poverty relief, income inequality decrease and industrialisation publicity ( Pham, 2004 pp. 7-8 ) .

In contrast to the mainstream position of FDI, the extremist position argues that FDI could be damaging to socio-economic development. They believe that FDI is merely a tool of rich states to put up new market or to take advantage of low production cost. Pham ( 2004 ) cites Dos Santos ( 1970 ) that “ FDI is the footing for a new type of technological industrial dependance to replace earlier signifiers of dependance ” ( Pham, 2004 p.8 ) . FDI is seen as a permutation non a complementation for domestic economy that exacerbates balance of payment. The extremist position besides concerns about capacity of FDI in relieving poorness. It is argued that FDI have a inclination to use less up-to-date and capital-intensive engineering into host states. In some instances, FDI investors come to work natural resources and leave the host states the large issue of contaminated environment.

Cavusik et Al ( 2008 ) explicate why investors want to put out of boundary by utilizing three motives: Market-seeking motive, Resource or asset-seeking motive and Efficiency-seeking motive.

Market-seeking motive: the investors want to research their portion market over the universe by puting in new market. In add-on, they have bigger opportunities to follow their key clients and serve them better. Importantly, they could vie with their cardinal competition at the comparator markets. The intent is to weaken the challenger by coercing them to utilize more resources to protect their place market i.e. usage less resources in foreign markets.

Resource or asset-seeking motive: Resource-seeking motive comes chiefly from endeavors in agribusiness and extractive industries when they want to entree natural stuffs in the host states. Furthermore, in such Fieldss as research and development, fabrication, selling, investors would wish to near to knowledge, technological and managerial know-how in a cardinal markets.

Efficiency-seeking motive: houses seek to better their operational efficiency via puting in assuring markets with location advantages such as low production cost or policy inducements from governmentsaˆ¦ Besides, they could avoid some duty barriers and non-tariff barriers by set uping their presence at host states. For illustration, European Union encourages Chinese houses by handling them as member province states ; i.e. Chinese houses might get the better of the EU trade barriers and take all location advantages. Or Nipponese automobile houses want to avoid trade barriers in the US in the 1980s by making many mills in the host state.

To sum up, the impact of FDI has been a contention. However, it is general accepted truth to state that FDI plays a important function in planetary economic system and its impact on peculiar state varies.

Types of FDI:

There are some ways to sort FDI, but this survey will establish on entry manners to split FDI into 3 classs: signifier of FDI ( green-field versus amalgamations and acquisitions ) , nature of ownership ( entirely owned versus joint venture ) and degree of integrating ( horizontal versus vertical ) ( Cavusik et al, 2007 ) .

By signifier of FDI:

Greenfield: the investors come to host state purchasing new land and get down their concern from constructing new fabrication, selling to buying their goods and services. This type is perfectly opposite to acquisitions.

Acquisition: as opposed to green-field type, investors want to buy bing company or installation in host states. Merge is a particular instance of acquisition with combination of two or more similar size companies into a larger company. It could make many benefits such as resource and cognition sharing, increased economic of graduated table, production cost reductionaˆ¦

In fact MNCs might prefer amalgamation and acquisition ( M & A ; A ) to green-field. First, green-field requires a comparative high initial cost of buying land and edifice new industry. Second, by taking M & A ; A manner, investors could take advantage of bing experient staff, equipment, providers and clients. In add-on, acquisition could convey net income to MNCs faster than green-field. On the other manus, the host state wants MNCs to take the signifier of green-field because it is better than M & A ; A in footings of occupation creative activity, production capacity, engineering diffusion and linkages to worldwide. Therefore, some host state authoritiess provide inducements to promote green-field signifier that could get the better of the benefits of M & A ; A signifier.

By the ownership of FDI:

Harmonizing to ownership of FDI, there are 3 types of FDI. They are equity engagement, entirely owned direct investing and equity joint venture ( Cavusik et al, 2008 ) . Equity engagement refers to activity of investor to buy a portion of ownership of an bing house. Wholly owned direct investing assumes that investor will keep 100 % ownership of the house. As opposed to this type is equity joint venture which means two or more houses cooperate and create one new house. The ownership could be shared every bit or unevenly depending on committedness of co-owners.

By construction of FDI:

It is classified into perpendicular and horizontal FDI. In footings of perpendicular FDI, investor has a desire to have non merely one phase in value concatenation but “ multiple phases of them for bring forthing, merchandising, and presenting a merchandise and service ” ( Cavusik et al, 2008 p. 432 ) . Vertical FDI includes frontward and rearward perpendicular integrating. While in forward perpendicular integrating type, investor frequently focuses on downstream value concatenation activities such as selling and merchandising operation, in backward perpendicular integrating, investor wages more attending on upstream activities. In some instances, houses could keep both frontward and rearward perpendicular integrating. In footings of horizontal FDI, the proprietors merely own individual phase of value concatenation.

Relationship between FDI and economic growing.

First, economic growing is understood as an addition of merchandises which are made by one economic system over clip. Economic growing traditionally measured by per centum alteration in existent GDP. It is a well-documented fact that the higher economic growing implies the better public presentation of one economic system. Turing to the relationship between FDI and economic growing, there are some rearward statements about it. Some believe that FDI could be the chief factor that promotes economic growing, some argue that economic public presentation would be a major factor to pull FDI and some point out that there is a bidirectional relationship between FDI and economic growing.

Harmonizing to first statement, they consider that one of the most important functions of FDI is its impact on economic growing. In the authoritative theory of economic growing, the public presentation of an economic system depends major on capital accretion and evidently FDI, by impacting capital accretion, could play a critical function. FDI besides has an of import influence on engineering diffusion. The growing theories such as Solow – Swan theoretical account or endogenous theoretical account besides appreciate the function of engineering even it is endogenous or exogenic. They consider engineering as a taking factor that could lend to degree of growing and explicate the differences among states. More specifically, Solow – Swan theoretical account predicts convergence that developing states could maintain gait with developed states when they are at the same steady province. In other words, every bit long as the less developed states ( LDCs ) catch up with engineering degree of developed states, they could turn at the same degree. However, there are many statements predict divergency. They consider engineering as an endogenous factor and it develops by itself. Level of engineering in large states is perfectly higher than others and the growing degree of engineering in these states is besides higher. Therefore the spread among rich and hapless states would ne’er vanish.

As opposed to these statements, some economic systems find it no relationship between FDI and economic public presentation and even FDI could impede economic growing. They claim that benefits from activities of MNCs tend to return to investors instead than host states. In fact, Bacha ( 1974 ) finds negative impact of FDI on economic growing in his survey of the US companies. De Mello ( 1999 ) takes sample of 32 industrial and developing states, utilizing cross and panel informations and finds that causal relationship between FDI and economic growing is weak. Similarly, some writers such as Carkovic and Levine ( 2002 ) or Frimpong and Oteng-Abaiye ( 2006 ) besides claim bad consequence of FDI on host states.

At the other extreme, some empirical groundss show that FDI would be a impulsive force to hike economic growing. Blomstrom et Al ( 1992 ) collect one-year informations from 1960 to 1985 at 78 LDCs to gauge the relationship between FDI and economic growing. They find that FDI positively affects economic public presentation. This consequence is relevant to analyze of Borensteinz et Al ( 1998 ) . The writers base on endogenous theoretical account to analyze impact of engineering transportation of FDI on economic growing in 69 developing states in 2 periods of clip, 1970 – 1979 and 1980 – 1989. They emphasize that FDI bring positive affect in footings of engineering transportation to receivers. Vadlamannati et Al ( 2009 ) collect informations from 80 developing states between 1989 and 2006 to gauge consequence of FDI influx, policy and institutional factors on end product. They use GMM appraisal happening that all three factors have positive influences on end product and they are complementary to each others. Kotrajarat et Al ( 2012 ) examine consequence of FDI on economic growing in the East Asiatic states during 1990 – 2009. They divided 15 states into three groups: high-income, middle-income and low-income states. They use panel cointegration analysis and demo the chief findings as follow. First, the impact of FDI on economic growing is important in the high and in-between income states where have comparative high degree of fiscal factors, instruction and good governmental outgo. Second, high income states will have the most benefits from FDI which is followed by in-between income 1s and low income states gain less benefits from this activities. In general, staying conditions of host states play a important function in back uping FDI to advance growing. This is consistent with statement of Kose et Al ( 2006 ) .

On the other manus, the 2nd statement is that economic public presentation of host states will pull foreign investors. In other words, the causal relationship runs from end product or GDP of receivers to FDI influx. Empirically, Jackson and Markowski ( 1995 ) in their survey of Asiatic states find positive impact of economic growing on FDI influx. Zhang ( 2000 ) points out that economic public presentation causes addition of FDI influx. The writer explains that higher economic degree of host states leads to higher demand for investing including FDI. Hermes and Lensink ( 2003 ) appreciate the function of fiscal factors of host states in order to take advantage of FDI influx.

Finally, there are some surveies examine the bidirectional relationship between FDI and economic growing. Tsai ( 1994 ) collect informations for more than 60 states during 1975-1978 and 51 states during 1983-1986 to prove bipartisan linkages of FDI and economic growing. His determination supports the position that bipartisan linkages exists that is relevant to ensue of Bende-Nabende et Al. ( 2001 ) in his survey of relationship between FDI and economic growing in Asiatic five states from 1970 to 2006. All of them use coincident equation in procedure of analysis. Similarly, Caves ( 1996 ) and Chowdhry and Mavrotas ( 2006 ) find bidirectional. Srinivasan ( 2010 ) investigates impact of FDI influx on five Asiatic states by utilizing vector mistake rectification theoretical account and Granger trial and finds that in Vietnam and Malaysia, FDI and economic growing shows the bidirectional relationship in long term.

In drumhead, the relationship between FDI and economic growing is a uninterrupted argument and in fact there are many empirical groundss which against each others. Therefore, it is possible to claim that this relationship varies depending on different staying conditions of receivers. However, it is true to province that FDI has played an of import function in the universe development.

In Viet Nam, there are some surveies about FDI in general, but a few deeply researches about a bidirectional relationship between FDI influx and economic growing, particularly in footings of quantitative method. Nguyen ( 2003 ) examines the relationship between FDI and economic growing in Viet Nam by roll uping informations from 1988 to 2005. He finds that FDI has a positive impact on national growing degree. He besides indicates that Viet Nam should open more the economic system and cooperate with new spouses. Freeman ( 2003 ) has an overview research about FDI in Viet Nam until 2002 and points out some drawbacks in policy model of Viet Nam. The writer concludes that policy reforms and trade liberalisation have promoted concern environment for investors. And therefore, Freeman ( 2002 ) suggests that Viet Nam has to finish these policies to pull more FDI influxs. Nguyen ( 2004 ) trials relationship among FDI, economic growing and productiveness. She shows that FDI stimulates capital accretion and human capital. Furthermore, the writer claims that spillovers consequence merely occurs at national degree in agribusiness – forestry industry by labour transportation consequence. Doan ( 2004 ) analyses modern-day issues and chance of FDI in Viet Nam during 1988-2003. Viet Nam economic growing depends extremely on FDI sector. FDI contributes unusually to increase in industry value-added, occupation creative activity, goods production fosterage and improves Viet Nam fight. In 2006, Nguyen et Al ( 2006 ) examine impact of FDI on Viet Nam economic growing and point out some critical points as follow. First, although Viet Nam has been a promising market for FDI, registered undertakings ( bulk of them is little and average undertakings ) into Viet Nam fluctuate over twelvemonth which shackles economic growing. Second, FDI in Viet Nam has focused on protected industries and spillovers consequence via labour transportation has been negligible. Third, FDI has been complement, non permutation to domestic investing and authorities outgo has positive impact on economic in short-run but in long tally, it could be different. Overall, many surveies have reconfirmed an of import function of FDI in advancing economic growing and suggest that Viet Nam should happen the manner to pull more FDI influx and take full advantage of it. However, the bidirectional relationship between FDI and economic growing is still an issue that needs more attending. Therefore, the following chapters will seek to analyze this relationship in instance of Viet Nam.


The tendency of FDI

The planetary tendency of FDI

The planetary tendency of FDI influx is described clearly by graph of United Nations Conference on Trade and Development ( UNCTAD ) as follow:

Figure 2. FDI inflows, planetary and by group of economic systems

( Billions of dollar )

Beginning: UNCTAD, 2011

As we know, FDI has a long history. The initial thought about foreign investing occurred by David Ricardo with his theory of comparative advantages. And until 1990s, the universe witnessed a important motion of FDI flow. Harmonizing to informations of UNCTAD, the planetary FDI influx during 1990-1997 increased mean 13 % per twelvemonth thanks to planetary economic integrating and commercial liberalisation. After that, within the impact of M & A ; A activity, FDI influx went up to average 50 % per twelvemonth in the period of 1998-2000 and reached its extremum at approximately 1,400 billion USD in 2000. It decreased to 800 USD in following twelvemonth because of decrease in cross-border M & A ; A activity among industrial states. At this clip, developed states were the chief investors and finishs at the same time. FDI activities chiefly came up among them with 94 % of FDI investor and 70 % of FDI finish. At the same clip, FDI influx was 23 % addition per twelvemonth between 1990 and 2000 in developing states. In 2001, there was a lessening in FDI influx into developing states which reflected the downswing of Hong Kong, Argentina and Brazil. It is interesting that in the period of 1998-2001, Asiatic states constituted a bulk of FDI influx into LDCs ( 407 billion USD out of 900 billion USD ) in which two chief finishs were China with 165 billion USD and Hong Kong with 124 billion USD. At this clip, chief FDI investors were developed states such as the US, England, France or Germany and their promising finish was China with low cost and skilled labour force.

In the period 2000-2007, there was a recovery in planetary FDI influx. After making its extremum in 2000, there was a large lessening in following old ages. Until 2004, FDI influx started to retrieve and from this clip on, it increased approximately 20 % per twelvemonth and reached a new extremum in 2007 with more than 2,000 billion USD. In add-on, there was a alteration in the tendency of FDI influx. The chief investors paid more attending on emerging markets and hence, FDI inflow into those states rose 57 % in 2004, 23 % in 2005 with 400 billion USD. It was estimated that this tendency would go on its impulse in the hereafter.

However, the universe faced fiscal crisis in 2008 and 2009 which caused a important decrease in planetary FDI flow. In 2009, planetary FDI influx decreased 41 % due to a serious recession in developed states, particularly in the US – one of the biggest FDI investors and finishs in the universe. Investors were improbable to foretell a bright hereafter and became loath to pass their money. Similarly, FDI inflows into developing states and emerging states besides went down 35 % and 36 % in 2009 severally. This figure, nevertheless, was still smaller than this in developed states with 45 % lessening to 488 billion USD. It is noticeable that the land of emerging states in planetary FDI flow increased compares to this of industrial states. It was explained that M & A ; A activities in developed states stuck, investors wanted to avoid fiscal hazard and they lost their religion on large states. Therefore, some economic experts considered 2008-2009 fiscal crises as an chance for emerging states to catch up with strong states.

In 2010, there were positive marks of recovery for planetary FDI flow, nevertheless, planetary economic environment still has many such obstructions as double-dipped crisis, rising prices, or overheat warning in some economiesaˆ¦ which may halter FDI flow. Interestingly, emerging states turned out into new FDI human dynamos and MNCs shifted their activities towards emerging and passage economic systems. Hence, in 2010, they accounted for half of planetary FDI influx. World Investment Report 2011 indicates that in top 20 FDI receivers, there were half 1s from the emerging and passage states. More than that, FDI escape of them besides strongly increased ( 21 % ) . In which, there were four strongly raising states where received many attendings of economic experts over the universe: Brazil, Russia, India and China. They are called BRICs by Jim O’Neill and have rapidly become popular presents. Four states are classified into one group because they have many common things such as immense country, big host market, rich of natural resourcesaˆ¦In fact, in instance of autonomous debt crisis in European about, they are considered as lone states could deliver the EU based on their capital handiness.

Global FDI flow has changed late when investors find hazardous investment on large states such as the US or particularly the EU member provinces. Therefore, FDI flow has shifted to emerging states and Asiatic states that have many location advantages and they are comparatively safe in footings of finance status and macroeconomic stableness. Therefore, many specializers consider current planetary state of affairs as a aureate chance of the developing states includes Viet Nam.

Overview of FDI in Viet Nam

Vietnam started developing after Reform policy in 1986 and there have been many statements that FDI has a considerable impact on economic-socio public presentation. Until December, 2010, harmonizing to Viet Nam Government Statistic Official ( GSO ) , there are 12,463 FDI licensed undertakings in Viet Nam ( GSO, 2012 ) . FDI was believed to get down coming to Viet Nam from 1988. From this clip on, FDI flow has increased unusually.

After initial period from 1988 to 1990 with merely 128 accredited undertakings, FDI inward rose well in period of 1991-1996 with 1,300 accredited undertakings ( entire registered capital was 16.2 billion USD ) . It was considered as “ a first moving ridge of FDI ” in Viet Nam. However, Viet Nam had suffered from an Asiatic fiscal crisis and so, the accredited undertakings of FDI influx decreased to 961 in 3 old ages from 1997 to 1999 with entire registered capital of 13 billion USD and bulk of them were little and average undertakings. In the undermentioned old ages, there was non large alteration in FDI influx. Even some accredited undertakings were suspended because the investors were unable to finance their undertakings. Until 2000, Viet Nam faced “ a 2nd moving ridge of FDI ” at the same clip with commercial committedness between Viet Nam and the US. It was argued that after this committedness, Viet Nam became more promising in the eyes of investors and hence from 2001 to 2005, entire registered capital reached 20.8 billion USD – a 73 % addition compared the initial mark of the authorities, while execution capital reached about 14 billion USD, a 30 % addition to initial mark. In general, in 5 old ages of 2001 – 2005, the FDI influx into Viet Nam went up bit by bit. In 2006 and particularly in 2007 – when Viet Nam officially has become a member of WTO – the FDI influx has increased significantly with many large undertakings in heavy industry and service industry. And in 2008, this flow reached the extremum of approximately 70 billion USD. Nevertheless, one time once more, fiscal crisis and planetary recession in the undermentioned twelvemonth damaged investing into Viet Nam and so FDI decreased to 21 billion USD in 2009. It has merely started retrieving about. The alterations in registered capital, execution capital and figure of undertakings are illustrated more clearly by a graph as follow:

Figure 2. FDI influx into Viet Nam

Beginning: GSO, 2012

Structure of FDI into Viet Nam until 2010

FDI into Viet Nam by sector

Accumulated to 31/12/2010, processing and fabrication is the taking sector with more than 95 billion USD and about 7,000 undertakings. This is followed by Real Estate sector with entire capital of 48 billion USD, although there are merely 354 undertakings. Construction and Accommodation and Food service base at following places. FDI into Viet Nam by sector is illustrated at figure 2.3.

Figure 2. FDI into Viet Nam by sector

( Accrued undertakings until 31/12/2010 )



No of undertakings

Entire registered capital ( Billion, USD )


Processing and Manufacturing




Real Estate








Adjustment and Food service




Electricity, Gas, Stream and air Conditioner supply




Information and communicating




Art and Entertainment




Transportation system and Storage




Agribusiness, Forestry and Fishery




Mining and Quarrying




Wholesale, Retail and Repair




Finance, Banking and Insurance




Healthcare and Social work




Professional, Scientist and proficient activities




Other services




Education and Training




Administrative and Support service




Water supply, sewage, waste direction and redress







Beginning: GSO, 2012

FDI into Viet Nam by type of investing

By the terminal of 2010, 100 % FDI type dominates with more than 9,000 undertakings which account for 78 % of entire undertakings. Collaborative is 2nd 1 with 2,179 undertakings. Other types such as BOT, BT, BTO contracts constitute little proportions. Entire capital is tantamount with figure of undertaking. Entire capital of 100 % FDI type histories for 60 % of entire FDI influx into Viet Nam. Collaborative type follows with 30 % of entire FDI influx.

FDI into Viet Nam by spouses

There are 93 states invested in Viet Nam. The prima spouse is Taiwan with registered capital of 22 billion USD and 2,139 undertakings. Interestingly, Korea has higher figure of undertakings than Taiwan ( 2,621 compared to 2,139 ) but its registered capital is smaller. The followerss are Japan, Malaysia and Singapore. It is noticeable that FDI from the US has become higher and higher over clip, standing at 6th place with more than 500 undertakings. Viet Nam attracts many investors over the universe, nevertheless, apart from the US and Japan, the other spouses are non high engineering degree states. Therefore, even Viet Nam could derive from engineering diffusion ; the degree of engineering is still dawdling behind to the universe.

Overall, FDI flow into Viet Nam significantly increased after 1986. The following portion will analyze the relationship between FDI influx and Viet Nam economic growing by utilizing econometric theoretical account.

Variable specification

The intent of this survey is to analyze the relationship between FDI and economic growing. Many economic experts believe that FDI has a positive consequence on economic growing and, in bend, economic growing besides promotes degree of FDI. In this instance, economic growing will be expressed by degree of GDP and FDI is measured by net influx in Viet Nam from foreign investor. Apart from that, there are many determiners of economic growing and FDI.

Determinants of economic growing

Human capital

Many theoretical theoretical accounts of economic growing emphasize the function of human capital, from classical theoretical accounts like Solow-Swan ‘s and Ramsey ‘s to advanced theoretical accounts such as endogenous growing ( Barro and Sala-i-Martin, 2004 ) . They argue that, apart from physical capital and engineering, human capital is a important factor in economic growing and could explicate the differences among states over the universe. Therefore, the relationship between human capital and economic growing is expected to be positive. In the instance of Viet Nam, I will utilize a placeholder for human capital defined as the gross registration ratio in third instruction, which is the ratio of entire registration, irrespective of age, to the population of the age group ( people ages 15 or older who meets the International Labor Organization ) that officially corresponds to third instruction.

Government outgo

Government outgo could better the substructure and/or the educational degree of an economic system and hence facilitate economic growing. Lucas ( 1988 ) finds that authorities outgo increases the degree of human capital via investing in instruction, Barro ( 1990 ) focuses on the impact of authorities outgo on substructure, and Romer ( 1990 ) examines the relationship between authorities outgo and research and development ( R & A ; D ) . They all find that authorities outgo plays an of import function in hiking economic growing. On the other manus, inefficient public outgo could be damaging to the public presentation of an economic system. Take Greece as an illustration: the unreasonable authorities outgo is a root of its autonomous debt crisis and is conveying the whole euro country into pandemonium. Furthermore, Durham ( 2004 ) argues that if authorities outgo is financed by enforcing more revenue enhancements on persons and houses, input costs will be raised and this will damage economic growing. In this survey, authorities outgo is all outgo by the authorities and includes purchases of goods and services, national defence and security, but excludes military disbursals. It is calculated as a per centum of GDP.

Labor force growing

Labor force is considered as an of import determiner of economic growing and there are some surveies examine this issue. Pissarides et Al ( 2005 ) uses labour force to show human capital and indicated that states with a big figure of skilled workers could hold more opportunities to develop. Krichel and Levine ( 2002 ) conclude that labour mobility has significantly contributed to economic growing which is consistent with statement of Stadler ( 2003 ) . However, Sadler focuses on quality of labour force instead than measure of them. The writer indicates that capacity betterment of labour force, non an addition in the figure of workers, plays an of import function in advancing an economic system. Paudel and Perera ( 2009 ) survey Sri Lanka from 1950 to 2006 to analyze relationship between foreign debt, trade openness, labour force and economic growing. They use Johansen maximal likeliness and happen that three factors positive affect economic growing. Therefore, in this survey, one-year labour force growing will besides be used and evidently, it is expected to hold positive impact on economic growing. This variable is measured as a per centum.

Learning by making

Learning by making refers to the capacity of employees to better their productiveness by detecting and retroflexing activities. This is really of import in footings of engineering scattering to host states and, to some extent ; it represents the skill degree of workers in recipient states. Anwar and Nguyen ( 2010 ) usage this variable after sum uping some statements by Grossman and Helpman ( 1991 ) and Bende-Nabende et Al ( 2001 ) . While Grossman and Helpman ( 1991 ) point out the positive relationship between larning by making and economic growing, Bende-Nabende et Al ( 2001 ) show grounds for this statement in their survey of the ASEAN-5 economic systems in the period 1970-1996 ( Anwar and Nguyen, 2010 p. 187 ) . Anwar and Nguyen ( 2010 ) besides find that there is a positive relationship between larning by making and economic public presentation in the instance of Viet Nam from 1996 to 2005. Learning by making is measured by the placeholder “ one-year fabrication value added as a per centum of GDP ” ( Anwar and Nguyen, 2010, p. 187 ) .

Other determiners

Barro et Al. ( 2004 ) use the rising prices rate to qualify macroeconomic stableness, while Anwar and Nguyen ( 2010 ) usage another variable, the exchange rate, when discoursing this point. They argue that frequent fluctuations of exchange rate imply hapless macroeconomic policies and impede economic growing. Sachs ( 2003 ) besides believes that geographics affairs by mentioning to the “ disease load ” . He states that states with a higher hazard of infective diseases, for illustration malaria in tropical countries, need to use resources to turn to this job. That leads to less investing in human and physical capital and shackles economic growing. However, geographics is chiefly relevant in cross-country survey and therefore, it is non sensible to utilize geographics variable in survey covering merely with one state.

Determinants of FDI

Labor market conditions

Cavusik et Al ( 2008 ) point out that cost, handiness and productiveness of skilled labour are important factors for an investor in make up one’s minding an investing location. They argue that FDI investors ever seek efficiency and net income, so they will take states which have low labour and production costs to maximise their net income. The best variable to mensurate labour cost would be the mean pay of employees. However, because of deficiency of available informations, I will utilize the placeholder of gross national income ( GNI ) per capita, which is relevant to analyze of Du ( 2011 ) about determiners of FDI to Viet Nam ( 2011 ) . In this instance, GNI is based on buying power para and measured in current international dollars. It is believed that investors prefer lower cost of labour and, therefore, they tend to put more in states with lower GNI per capita, i.e. , the expected relationship between GNI per capita and FDI is negative.


Cavusik et Al ( 2008 ) claim that states where have a developed substructure could hold a better opportunity to pull more foreign investors. Many placeholders have been used in order to analyze the impact of substructure. For case, outgo on route conveyance is used by Hill and Monday ( 1992 ) , railway conveyance by Bengoa and Sanchez-Robles ( 2003 ) , telephones per 1000 of people by Asiedu ( 2002 ) . In this survey, goods transported by railroad will stand for the substructure factor, which is “ the volume of goods transported by railroad, measured in metric dozenss times kilometres traveled ” ( World Bank, 2012 ) . Obviously, there should be a positive relationship between the variable for substructure and FDI.

Openness degree

It is clear that FDI investors go to states which are unfastened to them and hold incentive policies in favour of FDI, in order to avoid dearly-won barriers ( Chakrabarti, 2001 ) . The degree of openness is sometimes measured by the ratio of imports plus exports to GDP ( Hall and Jones, 1999 ) . Alternatively, some writers, such as Chakrabarti ( 2001 ) and Buckley et Al. ( 2007 ) , use the export degree to stand for the openness of a state. All of them show a positive relationship between export and FDI influx. This paper uses the ratio of exports to GDP as a placeholder for the openness of Viet Nam.

Entire investing

There are many empirical surveies that show a positive relationship between entire investing ( more exactly, domestic investing ) and FDI influx. For illustration, Hecht et Al ( 2004 ) found a important affect of domestic investing on FDI in six-four states from 1976 to 1997. Ndikumana and Verick ( 2008 ) indicated that there is a bidirectional relationship between FDI and domestic investing, particularly private investing in instance of Sub-Saharan Africa. However, they found that impact of domestic investing on FDI is stronger than consequence of FDI on domestic investing. In add-on, Shah et Al ( 2012 ) in their survey of Pakistan utilizing Hetch – Razin – Shinar theoretical account besides found that domestic investing is a factor to pull more FDI influx. Ideally, informations on domestic investing should be used, but because of inaccessibility, entire investing as a per centum of GDP will be used alternatively. In any instance, entire investing and FDI still have an interaction and I expect a positive relationship in the instance of Viet Nam.

In add-on, there are some more determiners of FDI such as, endowment factors and policy factors ( Du, 2011 ) . In instance of policy factors, because of inaccessibility of informations, this survey will non see them. Furthermore, natural resource gift factors are merely valid in the context of cross-country he-man which is similar to geography variable above. Hence, it is non used in instance of one state.

Model, informations and methodological analysis


The intent of this survey is to analyze bidirectional relationship between FDI and economic growing. In other words, this causal relationship is examined at the same time. Therefore, two equations theoretical account is used, this is relevant to surveies of Ruxanda and Muraru ( 2010 ) and Anwar and Nguyen ( 2010 ) . Simply, two equations theoretical account could be illustrated as follow:

Notice that Y and appear in both right-handed and left-handed side in this system. They are called endogenous variables and their values are determined within the system. Besides, variable merely appears in right-handed side. It is called exogenic variable and it is truly independent variable. The inquiry is that why to utilize two equations model? Suppose that merely consequence of Y on is examined i.e. the first equation is omitted and Original Least Square ( OLS ) will be applied to equation 2. However, it will disregard the instance that many variables could non be truly exogenic and that leads to bias. Note that two equations theoretical account besides based on premise about mistake footings as follow:

( (

In instance of Viet Nam, the FDI influx and degrees of GDP are chosen to be the dependent variables in two equations. In fact, there are many writers use FDI influx and degree of GDP when they test the relationship between FDI and economic growing ( Karimi and Yusop, 2009, Ruxanda and Muraru, 2010, Du, 2011 and Pradeep, 2011 ) . Both of variables are expressed in the logarithms. First, this is one manner to avoid heteroskedaticity ( Verbeek, 2008 ) . Second, by making so, coefficients of two variables are transformed into snap. It merely indicates that one per centum alteration in independent variable could take to a certain fluctuation in per centum of dependent variable. So the simplified theoretical account is as follow:

lnGDP = degree Fahrenheit ( lnFDIaˆ¦ )

lnFDI =f ( lnGDPaˆ¦ )

Apart from two cardinal variables, some other control variables are used to increase the significance of theoretical account. Based on the handiness of informations and the bing literature, the bipartisan relationship between FDI and economic growing will be tested within two equations system as follow:

( 1 )

( 2 )

Consistent with above specifications, determiners of GDP are FDI, authorities outgo, third, larning by making, labour growing and exchange rate. Determinants of FDI are GDP, railroad, export, entire investing and GNI per capita. Basically, this theoretical account based on the theoretical account of Ruxanda and Mumaru ( 2010 ) . However, some new controlled variables are used to explicate better the relationship between FDI and economic growing. In equation ( 1 ) , they are labour force growing ( Sahoo, 2006 and Paudel and Perera, 2009 ) , authorities outgo and exchange rate ( Omankhanlen, 2011 ) . Furthermore, larning by making and third variables besides used to stand for capacity of Vietnamese workers. In equation ( 2 ) , they are exports, GNI, substructure ( Railway ) which is consistent with Du ( 2011 ) and domestic investing ( expressed by entire investing ) which is relevant to Anwar and Nguyen ( 2010 ) .

Definitions of all the variables looking in the theoretical account are provided in Figure 2.4.

Figure 2. Definition of Variables




Logarithm of GDP degree


Logarithm of FDI inflow degree


Ratio of authorities outgo to GDP ( % )


Gross registration ratio in third instruction: ratio of entire registration, irrespective of age, to the population of the age group that officially corresponds to third instruction ( % )


Ratio of exports to GDP ( % )


Ratio of entire investing to GDP ( % )


Labor force growing rate ( % )


Goods transported by railroad: volume of goods transported by railroad, measured in metric dozenss times kilometres traveled


Gross state income per capita ( current international dollars )


Real exchange rate ( units of local currency per USD )


Learning by making: fabrication value added as a per centum of GDP ( % )

The expected marks of the relationships between explanatory and dependent variables in the theoretical account are presented in Figure 2.5.

Figure 2. Anterior Expectations
























As mentioned above, it is argued that FDI flux into Viet Nam started after 1986 with the Reform policy. Hence, I use one-year informations between 1986 and 2010 to gauge the theoretical account. Datas are collected from the World Bank and International Monetary Fund ( IMF ) . More specifically, informations of authorities outgo, third, exports, larning by making, railroad, GNI and exchange rate are collected from World Bank web site. Data of FDI and GDP besides are collected from World Bank but they are transformed into logarithms. Labor force is collected from World Bank and be transformed into labour force growing within equation: LGt = ( LFt – LFt-1 ) / LFt-1 * 100. In which LG is labour force growing and LF is labour force. And eventually, informations of entire investing is collected from IMF web site. The tabular array of descriptive statistics will be shown as follow:

Figure 2. Table of descriptive statistics


Ob river


Std. Dev.






































































As we can see, the theoretical account is a system of two equations. Suitable appraisal methods include, hence, two-stage least squares ( 2SLS ) , three-stage least squares ( 3SLS ) and the generalised method of minutes ( GMM ) . In order to increase the dependability of the theoretical account, the Hausman trial is used to measure possible endogeneity. After that, the Breusch-Pagan trial is used to detected heteroskedasticity.

More item, 2SLS is used foremost. However, the theoretical account is possible endogenous because FDI and GDP seem to be determined within the system. Hence, Hausman trial is used and the consequences are as follow:

Figure 2. Hausman trial consequences

Trial: Holmium: difference in coefficients non systematic

chi2 ( 1 ) = ( b-B ) ‘ [ ( V_b-V_B ) ^ ( -1 ) ] ( b-B )


Prob & gt ; chi2


With these consequences, the void hypothesis is rejected. Note that the void hypothesis is that calculator is consistent. Consequently, the consequence of Hausman trial implies that endogeneity exists in this instance.

After that, Breusch – Pagan trial will be used to prove heteroskedasticity in instance of 2SLS calculator. Verbeek ( 2008 ) indicated that the Breusch – Pagan is a Lagrange multiplier trial which do non inquire for the option when estimation the theoretical account ( Verbeek, 2008 p.99 ) . The void hypothesis in this instance is that theoretical account is homoskedascity or heteroskedasticity does non happen. Stata shows the consequences as follow:

Figure 2. Breusch – Heathen trial consequences

Holmium: Perturbation is homoskedastic

Pagan-Hall general trial statistic


Chi-sq ( 9 )

Pagan-Hall trial w/assumed normalcy


Chi-sq ( 9 )

White/Koenker nR2 trial statistic


Chi-sq ( 9 )



Chi-sq ( 9 )

We can see from the tabular array that void hypothesis can non be rejected i.e. heteroskedasticity in this instance does non count. However, 2SLS theoretical account can estimates merely coefficients of one equation in the system. In other words, 2SLS merely take one equation and suppose reduced-relationship among endogenous and exogenic variables in the theoretical account. Therefore, the bidirectional relationship ( if applicable ) can non be shown clearly. Interestingly, this drawback is addressed by utilizing GMM method. More specifically, the GMM method will be used here is a two-step calculator.

The GMM calculator was introduced by Hansen ( 1982 ) and has quickly become popular because of its features. It is by and large true that OLS and IV are particular instances of GMM. The GMM calculator is consistent, asymptotically normal and efficient. Another interesting characteristic of GMM is that, in some instances, GMM is still valid in the presence of heteroskedasticity or/and autocorrelation. Furthermore, GMM “ estimates the theoretical account parametric quantities straight from the minute conditions that are imposed by the theoretical account ” ( Verbeek, 2008, p.157 ) and does non necessitate all information about the informations distribution. This could besides be a defect for this method, in that GMM does non take full advantage of the information in the sample. In general, GMM method has some outstanding advantages such as: ( 1 ) no need distributional premises ( for illustration normarlity ) , ( 2 ) it accepts heteroskedasticity of unknown signifier and ( 3 ) it is still valid even if the first-order is non solved analytically ( Verbeek, 2008 p.161 ) .

Finally, an overidentifying limitations trial, Hansen ‘s J trial, is applied, where the void hypothesis is that the theoretical account is valid and the alternate hypothesis is that the theoretical account is invalid. More specifically, Baum et Al. ( 2003 ) explain the J trial as follows: “ J is the most common diagnostic utilized in GMM appraisal to measure the suitableness of the theoretical account. A rejection of the void hypothesis implies that the instruments are non fulfilling the perpendicularity conditions required for their employment. This may be either because they are non genuinely exogenic or because they are being falsely excluded from the arrested development ” ( Baum et al, 2003 p.16 ) .


Empirical consequences

The consequences of the GMM calculator for the two-equation system are shown in Figure 3.1.

Figure 3. GMM Estimates



Robust Std. Err.
























































Overall, the consequences from GMM appraisal are extremely important, with p-values for most of the coefficients smaller than 0.01, i.e. , they are statistically important at the 1 % degree. Merely the coefficient of the labour force growing variable is important at the 5 % degree.

In order to prove the suitableness of the theoretical account, Hansen ‘s J trial is performed and the consequence is:

Figure 3. Hansen ‘s J trial consequences

Trial of overidentifying limitation

Hansen ‘s J chi2 ( 7 ) = 7.89878

( P = 0.3416 )

The void hypothesis is that the theoretical account is valid and the above consequence can non reject the void hypothesis. The instruments, hence, are fulfilling the perpendicularity conditions and it is possible to state that the GMM calculator in this instance is dependable.

We can see from figure 3.1 that the coefficients of the two cardinal variables in this theoretical account, FDI and GDP, are statistically important and so it seems that a bidirectional relationship between the variables exists in the instance of Viet Nam. More specifically, in equation ( 1 ) , a one per centum addition in FDI leads to a 0.338 % addition in GDP, which is consistent with the anterior size outlook. Besides, this figure is consistent with consequences of Anwar and Nguyen ( 2010 ) . They find that negative consequence of FDI is negligible compared to positive consequence. In equation ( 2 ) , a one per centum addition in GDP additions FDI by approximately 8 % . It supports my first position in footings of size of coefficient. In fact, it is consistent with survey of Anwar and Nguyen ( 2010 ) . They besides indicate positive relationship between FDI and economic growing. More item, 1 % addition in economic growing leads to an addition of about 990 thousand VND in FDI. Similarly, Du ( 2011 ) finds that economic growing has a good impact on FDI influx in Viet Nam. In general, the chief characteristic of the theoretical account is to corroborate a positive relationship between FDI and economic growing and that the relationship is bidirectional which is relevant to analyze of Srinivasan et Al ( 2010 ) .

The theoretical account besides uses other control variables in both equations and all their coefficients are important statistically at the 1 % or 5 % degree. However, there are some points that need discoursing.

Equation ( 1 ) , apart from FDI, includes authorities outgo, larning by making, labour force growing, registration in third instruction and exchange rate. All the coefficients are statistically important and the marks of the coefficients of acquisition by making, labour force growing, registrat