Analytical models on the relation between foreign direct investment and economic growth in vietnam

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PREFACE
1. Urgency of the thesis topic
After 25 years of implementing reform (Doi moi), Vietnam has gained
convincing social and economic achievements. During the period 2001 – 2010, the
Vietnamese economy achieved fairly high growth with an average increase of 7,26%
in gross domestic product each year. During the last decade, Vietnam has always
been included in the group of countries with high growth rate and remarkable results
in poverty reduction, which is an important achievement.
This achievement is a positive sign of the transitional economic period thanks to
policies that Vietnam has been implementing in the wake of rapid changes in the
global economy, especially the trend of globalization. In particular, Vietnam took an
important step in becoming the 150th member of the World Trade Organization in
2007.
Efforts from the Vietnamese government has brought about encouraging results in
FDI attraction. As of the end of December 2012, Vietnam attracted 14.522 FDI projects
with the total registered capital of USD 210,5 billion (of which disbursed capital was USD
71,9 billion) from over 100 countries and territories into almost all important sectors such
as: manufacturing, processing, construction, information and communication, mining,
hospitality…
The FDI sector is the most dynamic sector with GDP growth rate higher than the
national GDP growth rate. The contribution of the FDI sector to the national GDP
gradually increased from 2% in 1992 to 12,7% in 2000, 16,98% in 2006 and 18,97%
in 2011. The important impact of the FDI sector is also felt in export with USD 3,7
billion in contribution to national budget (excluding crude oil), accounting for 11,9%
of the total national budget revenue.
In addition to economic contributions, the FDI sector has also contributed to
economic restructuring through the application of science and technology to
agricultural production and job creation for 2 millions people in direct labour and 3-4
millions people in indirect labour. The FDI sector is also considered an important

channel for technology transfer, contributing to improving the technological level of
the economy.
Despite certain results, Vietnam has yet ultilized opportunities for FDI attraction
or optimized the benefits of FDI. Vietnam has yet been chosen as the investment
destination of most multi-national companies with great potentials in technology that
are willing to share their technology and know-how. This situation, together with
increasing pressure of competition in FDI attraction from China and neighbouring

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countries, is creating great challenges for Vietnam.
Some countries attracted very large FDI inflows but the spillover effects barely
happened. In another scenario, FDI capital into a coutry can increase the investment
capital for the economy, but its contribution to growth is low. Both cases are
considered unsuccessful with FDI attraction policies or they failed to utilize this
resource from the perspective of economic growth. This reality has called for
increasing attention from economists about the impact of FDI to economic growth,
especially in developing countries including Vietnam.
In recognizing the importance of the quantitative approach coming from these
above arguments to evaluate the relation between FDI and economic growth in
Vietnam, the author chose the following thesis topic basing on the approach of
estimated models: “Analytical models on the relation between Foreign Direct
Investment and economic growth in Vietnam”.
2. The research objectives of the thesis
The overall objectives: analyzing the relation between FDI and economic
growth in Vietnam
Specific objectives:
- Studying the rationale of FDI, economic growth and the role of FDI in
economic growth.
- Analyzing the reality of economic growth and the process of FDI attraction in

Vietnam during the period 1990-2012.
- Building quantitative models for analyzing the relation between FDI and
economic growth in Vietnam, evaluating factors affecting the effectiveness of FDI
on economic growth, productivity and production efficiency of enterprises using
data during the 1990-2012 period.
- Proposing some recommendations for FDI attraction policies in Vietnam with
the aim of enhancing economic growth in the future..
3. The objects and scope of the thesis
3.1. The objects of the thesis
The objects of the thesis are models for analyzing the relation between Foreign
Direct Investment and economic growth in Vietnam :
- Model for measuring the relation of FDI and economic growth (the approach
basing on the vector autoregression (VAR) model)
- Model for evaluating the impact of FDI on local enterprises (the approach
basing on Levinsohn-Petrin method).
- Model for evaluating the impact of FDI on output of enterprises (the approach
basing on the panel data regression model).


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3.2. The scope of the thesis
Scope of content: the study focuses on analyzing the relation between FDI and
economic growth at both macroeconomic and microeconomic levels.
The scope of time and space:
- The thesis analyzes the relation between FDI and economic growth during the
period 1990 – 2012.
- The thesis evaluates the impact of FDI on local enterprises and on the input of

enterprises during the period 2000-2011.
4. Research methodologies
To achieve the research objectives, the thesis applies dialectical materialism and
historical materialism as the basic methods for analyzing the relation between FDI
and economic growth. In addition, the thesis also applies a number of other methods,
such as: statistics, mathematical modeling, logic synthesis, historical, systems analysis,
comparative methods.
5. Scientific contributions of the thesis
* Academic and theoretical contributions
On the basis of the theoretical and empirical researches, the thesis analyzes and
clarifies the reality of FDI attraction and economic growth in Vietnam during the period
1990-2012 as well as the impact of FDI on the Vietnamese economy during that period.
From that, quantitative economic models are chosen to analyze the relation between FDI
and economic growth in Vietnam at both macroeconomic and microeconomic levels
The thesis applies the VAR model to measure and analyze the relation between
FDI and economic growth during the 1990-2012 period. The thesis’s new approach lies in
the selection of variables in the models, which has not been mentioned in previous
research works.
The thesis uses the model for analyzing the impacts of FDI on local enterprises by
appying the Levinsohn and Petrin approach. Data used in the thesis are statistics of the
manufacturing sectors from the enterprise survey data of the General Statistics Office
during the 2000-2011 period which has 45.720 cases of observation over 12 years with
3.810 enterprises in operation each year. With a microeconomic approach, the model
allows recognition of the role of of enterprises and economic sectors in using FDI
effectively.
For better evaluation of FDI to the output of local enterprises, in addition to the
Levinsohn and Petrin approach, the thesis also applies the panel data model with collected
data. With General Method of Moments (GMM), the thesis overcomes the cases of error
variance and autocorrelation of the model.

* Recommendations from research results
The thesis results confirm the two-way interaction in a positive direction of FDI
and economic growth indicators. Increase in FDI affects the increase of socioeconomic indicators, except for the GDP, in the first year. The process of FDI
increase displays an inertia characteristics in itself and can maintain inertial
momentum for 2 years; the growth rate may decrease gradually over the following
years. A set of effective policies for FDI attraction will have positive impacts on
growth, capital accumulation, improvement of labor force quality and integration into
the global economy.
The thesis results show that the presence of FDI positively affect the growth of
productivity of all enterprises in the manufacturing sector, including local enterprises,
while state ownership does not. Therefore, the equitilization of state-owned companies in
Vietnam will improve the effectiveness in using resources of local enterprises, creating
fair competition between economic sectors and positively influence the productivity of
foreign-invested enterprises.
The presence of FDI has directly and indirectly enhanced the production
efficiency of enterprises and the existence of FDI enterprises has positively affected
production and increased efficiency of the whole sector.
From research results, the thesis states that for improving economic growth in
Vietnam, the government must have FDI attraction policies in the direction of:
investing in education and training, enhancing the labour force quality, stimulate
saving and investment, accelerating the process of global economic integration;
implementing FDI incentives
in the manufacturing sector,
promoting the
development of supporting industries for the foreign-invested sector, creating an
attractive environment for FDI, developing the money market, capital market to be on
par with other countries in the region..
6. Structure of the thesis
Thesis name: “Analytical models on relation between Foreign Direct
Investment and economic growth in Vietnam”

In addition to the preface, conclusion, list of reference materials and annexes, the
thesis has 4 chapters :
Chapter 1: Rationale of FDI and economic growth
Chapter 2: Overview of theoretical and empirical models of the relation between FDI
and economic growth.
Chapter 3: The reality of FDI and economic growth in Vietnam during the period
1990 – 2012.
Chapter 4: Empirical estimation results.


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CHAPTER 1
RATIONALE OF FDI AND ECONOMIC GROWTH
1.1. Rationale of economic growth
1.1.1. The concept of economic growth
Economic growth is considered one of the most critical issues in the study of
economic development. Most economists agree that economic growth is the increase
in income or yield calculated for the entire economy in a given time period (usually a
year).
1.1.2. Some views on economic growth
Classialc view on economic growth : Classic theories of economic growth were
put forward by classic economists with Adam Smith and David Ricardo as
representatives since they inherited and further developed the Malthus model.
According to Adam Smith, labour used for useful and effective works is the source of
creating social value and capital increase is considered the determining factor of
economic growth. It is stressed in David Ricardo’s theory for economic growth that:
Agriculture is the most important sector. Basic factors of economic growth are : land,
labor and capital ; depending on each sector and in accordance with a certain level of
technology, these factors combine together in a fixed ratio.

Karl Marx’s view on economic growth : According to Karl Marx, capitalists
need more capital for exploiting technology advance and improving labour
productivity ; therefore they have to divide surplus value into two parts :
consumption of the capitalists and accumulation for production development, which
is the accumulative source of capitalism.
Neo-classical view on economic growth : Neo-classical economist rejected the
classical view that the production in a specific situation requires certain percentage
of labor and capital. They claimed that capital and labor can be substituted for each
other, and that there are multiple combinations between inputs during the production
process. Their views focused on input factors of production. Neo-classical theories
are also called supply-side theories.
Keynes’s view on economic growth : According to John Maynard Keynes, the
aggregate supply curve AS – LR reflects the potential output and the short-run
aggregate demand curve AS-SR reflects the actual capabilities. The economy’s
equilibrium is not necessarily at the level of potential output; it is often below that level.
It is also stated in Keynes’s theory that investment plays a crucial role on the scale of
employment and the volume of investment depends on interest rate and the marginal

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productivity of capital.
Modern views on economic growth: Modern economists support building a
mixed economy in which the market directly determines the basic issues of
economic activities and the government participates in a certain degree to reduce the
market downsides.
1.1.3. Factors affecting economic growth
Economic factors
* Economic factors affecting growth in terms of aggregate supply
Normally, in talking about aggregate supply factors that influence economic growth,
4 key resources are mentioned: capital (K), labour (L), land (R), and technology (T). They

are usually combined in a production function as follows:
Y = F ( K , L, R, T )

* Economic factors affecting growth in terms of aggregate demand
According to macroeconomics, there are 4 direct factors that constitute the
aggregate demand, including: personal consumption expenditures, government
spending, investment spending, export activity spending.
Non-economic factors
Non-economic factors affecting economic growth include: cultural and social
characteristics, political institution - economic – social factors, ethnic composition,
religious institutions and community involvement.
1.1.4. Impact and quality measurement of economic growth
Indicators for measuring economic growth
Measure of economic growth is determined by the criteria in the system of
national accounts including the total value of production (GO), the total gross
domestic product (GDP), gross national income (GNI), national income (NI), using
national income (NDI), the per capita income.
Measure of economic growth is determined by the criteria in the system of
national accounts including the total value of production (GO), the total gross
domestic product (GDP), gross national income (GNI), national income (NI), national
disposable income (NDI), the per capita income.
Criteria for measuring quality of economic growth
Criteria for measuring quality of economic growth can be divided into three
groups: group of criteria reflecting economic restructuring, group of criteria reflecting
economic efficiency, and group of criteria reflecting the economy’s competitiveness.
1.2. Rationale of capital and FDI
1.2.1. Production capital
The concept of production capital comes from the concept of national assests

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Investment capital
Investment capital is created through investment activities under two forms: direct
investment and indirect investment from domestic and international sources.
1.2.2. Foreign direct investment (FDI): there are many definitions of FDI but their
concepts are not much different
According to the Organisation for Economic Co-operation and Development
(OECD): direct investment reflects the objective of establishing a lasting interest
by a resident enterprise in one economy (direct investor) in an enterprise (direct
investment enterprise) that is resident in an economy other than that of the direct
investor.
According to the United Nations Conference on Trade and Development
(UNCTAD): FDI is an investment involving a long-term relationship and reflecting a
lasting interest and control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise resident in an economy other than
that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign
affiliate).
According to the International Monetary Fund: FDI reflects the aim of obtaining a
lasting interest by a resident entity of one economy (direct investor) in an enterprise that is
resident in another economy (the direct investment enterprise).
According to the World Bank (WB): Foreign direct investment are the net
inflows of investment to acquire a lasting management interest (10 percent or more of
ordinary shares) in an enterprise operating in an economy other than that of the
investor.
According to Article 2 of the Law on Foreign Investment in Vietnam dated
November 12, 1996: FDI means the transfer of capital in money or any asset into Vietnam
by foreign investors to carry out investment activities in accordance with the provisions of

this Law
1.2.4. Some economic theories of FDI
The theory of international trade: The classical trade theory was initiated by Adam
Smith (1776). He believed that nations could create more benefits through commercial
activities of commodities that they were unable to produce efficiently and instead focused
on commodities that they could produce efficiently. Ricardo (1913) proposed the concept
of comparative advantages with a model consisting of 2 countries and 2 types of
commodities to take into account the comparative production efficiency nations in
international trade
Neo-classical theories of capital movement: the movement of foreign capital
flows is considered a part of international factor movements. According to model of

Hecksher – Ohlin (H – O), the international movement of factors of production,
including foreign investment, are determined by different ratios of main production
inputs available in countries
Method of industrial organization: In the 1960s, economic theories (economics)
begun to explain FDI by applying the method of industrial organization in which FDI was
considered a part of international production. This method was mainly interested in the
characteristics of multi-national enterprises and market structure.
Positioning theory: it explains FDI activities related to economic conditions
about investment and invested countries and considered locations for better FDI
implementation. This method includes: input-oriented method and out-put oriented
method.
Product life-cycle theory: This theory was created by Vernon (1966) and used
to explain FDI activities. According to Vernon, there are 3 phases in the product
development life cycle: making, using and standardized phases . In response, there are
also three phases for FDI enterprises to introduce their products: using, growing and
standardized phases.
Catching–up product cycle theory: Basing on Japan’s experience, Akamatsu
(1962) initiated an approach called “flying geese paradigm” to explain the reason for

FDI in developing countries. He divided the product life cycle at developing countries
into 3 phases: import, domestic production and export.
Eclectic Theory: This view is developed by Dunning (1981), incorporating
industrial organization approaches and theories about location and localization to
clarify the concept of FDI and international production. This theory states that a
company participating in FDI activities needs to combine ownership advantages,
location advantages and internalization advantages.
Kojima’s theory: Kojima (1973) – a Japanese economist – expanded
Akamatsu’s paradigm and provided the macroeconomic theory of FDI in the
framework of relative factors of productions from Heckscher-Ohlin’s international
trade theory and based on post-war experiences of Japan. According to this theory,
FDI is divided to trade-biased FDI (Japanese-type FDI) and anti-trade FDI (Americantype FDI).
1.2.5. Characteristics of FDI
FDI has the following basic characteristics: FDI is the type of foreign capital
movement with the capital owner carrying out investment activity overseas; FDI is
the type of direct investment with the foreign investor having the rights to manage the
invested enterprise; income of the investor depends on the business results and profit
or loss is divided among investors according to the capital contribution ratio with little


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influence from the governments and especially little dependence on the political
relation between the investor’s country and the host country; FDI is the relative longterm and stable source of capital and is not a loan so it contributes to the domestic
investment of the host country with no worry of repayment; investors must abide to legal
regulations for foreign-invested enterprises at the host country; the aim of foreign investor
is profit so FDI mainly concentrates in highly profitable fields.
1.2.6. Forms of FDI
FDI activities can be classified in many ways: reciprocal trade, business cooperation contract, joint venture, 100% foreign invested enterprise, build-operatetransfer (BOT) contract, build-transfer-operate (BTO) contract, builD-transfer (BT)
contract.

1.3. The role of FDI in the economy
1.3.1. The benefits of FDI
For the investor’s country : FDI can help to bring about the following basic
benefits: improving efficient use of capital; expanding product market; ensuring material
source; improving economic restructuring towards international co-operation and
integration; diversifying investor’s risk; utilizing differences in tax regime in countries to
increase profit.
For the host country: generating large revenue; coming along with advance
technology and know-how transfer; generating jobs and training employees;
connecting enterprises in the host country with the international market via joint
co-oporation, production network and supply chain in the region and in the word;
shaping the structure of economic sector and industry;
1.3.2. Downsides of FDI
To the investor’s country : creating high risk due to uncertainties in the political
and economic environment of the host country; causing imbalance of payment;
reducing domestic investment source for economic development; causing human
capital flight, outflow of technology which can lead to a potential loss of technological
monopoly or leading role in sectors with foreign investment participation; creating
direct competitors of investor’s products for export or domestic consumption. FDI can
create negative impact on domestic production and cause loss of jobs.
To the host country: creating uneven development or serious imbalance for
sector, industry or products in the host country; creating fierce competitors for
domestic investors; causing a decline in production or bankruptcy in the host country
in case of no proper preparation; accidentally converting the host country into a
market for product consumption

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CHAPTER 2
OVERVIEW OF THEORETICAL AND EMPIRICAL MODELS ON THE

RELATION BETWEEN FDI AND ECONOMIC GROWTH
2.1. Overview of theoretical models on the relation between FDI and economic
growth
2.1.1. VAR model.
2.1.2. Semiparametric method by Levinsohn-Petrin
2.1.3. Panel data regression model
2.1.4. Multiple-equation model
2.1.5. General Method of Moments (GMM).
2.2. Overview of empirical researches
2.2.1. Empirical researches in the world: Most researches show that the impact of
FDI on economic growth and the role of FDI in each country are different. They can
be positive, negative or negligible depending on economic, institutional or
technological conditions in the host country. Even when the cope of research is
within a country only, a clear conclusion is still controversial.
2.2.2. Empirical researches in Vietnam: There are not many in-depth analysis about
FDI using the model approach available. These studies main apply the multivariate
regression models, panel data regression model and VAR model. There is a lack of
linked assessment at both macro and micro levels during the research progress. Most
empirical researches on FDI in Vietnam do not go through the testing process for the
models’shortcomings.

CHAPTER 3
REALITY OF FDI AND ECONOMIC GROWTH IN VIETNAM DURING
THE PERIOD 1990 - 2012
3.1. FDI in Vietnam during the period 1990 – 2012
According to statistics from the Foreign Investment Agency (under the Ministry
of Foreign Investment), as of December 2012, Vietnam attracted 14.522 FDI projects
with the total registered capital of USD 210,5 billion (of which disbursed capital was USD
71,9 billion) from over 100 countries and territories into almost all important sectors such
as: manufacturing, processing, construction, information and communication, mining,

hospitality…FDI in Vietnam was mostly in the form of 100% foreign capital. After 25
years of calling for FDI, all province in Vietnam succeeded in attracting FDI but
investment capital mainly focused on key areas with advantages, helping the economic
restructuring in these areas, turning them into dynamic areas and, promoting social-


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economic development in neighbouring areas.
3.2 . Economic growth in Vietnam during the period 1990 – 2012
During the period 1990-2012, unexpected economic events occurred in Vietnam,
the region and the world, namely the two economic crises in 1997-1998 and 20082009. As a small economy opening its door for regional and global integration,
Vietnam was also affected by these crises
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%

1991
1992
1993
1994
1995
1996
1997
1998

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

0.0%

Graph : Vietnam's GDP growth during the period 1990-2012
Changes in population during this period contributed to an on-going increase in
GDP per capital over the years. The rate of poor households gradually decreased (at
approximately 2%/year)

Graph: Changes in GDP per capital in Vietnam during the period 1990-2012
The economy gradually switched towards a market economy with sustainable
economic restructuring. The ratio of industry and service sectors accounted for over 80%
in the whole country’s GDP. Investment for the economy showed an on-going increase
during the period 1996-2012, even though the increase rate was not stable due to crisis
impacts. The number of employments also increased from 30 millions in 1990 to 52
millions in 2012. This was one of the achievements that Vietnam gained thanks to its
socio-economic strategies. Before the reform process, even during the years from 1986 to

1990, production did not the demand, trade deficit occurred and the amount of debt was
huge. From 1991, domestic production met most of the growing demand for
consumption. It could also be said that export was on the rise. However, export growth
rate was also affected by the crises in 1997-1998 and 2008-2009. FDI has been
contributed actively to the national income at an increasing ratio. In addition, FDI also has
positive influence in promoting economic growth.

Graph: Proportion of economic sectors in GDP during thE period 1995-2012
3.3. Impacts of FDI on the Vietnamese economy
3.3.1. Positive impacts
Economic impacts: FDI contributes to improving economic growth in Vietnam,
increasing efficiency in utilizing domestic investment resources; assisting the
economic restructuring process towards industrialization and modernization;
enhancing industrial production capacity. FDI plays an outstanding role in technology
innovation and transfer in Vietnam. It also helps to enhance economic and enterprise
management capability and creates more pressure for improvement in the business
environment.
Social impacts: FDI creates jobs, improve the quality of the human resource and
changes the labour structure. It also plays a role in expanding foreign relations and
promoting proactive economic integration with the region and the world.
3.3.2. Shortcomings
In addition to the above positive outcomes, unexpected shortcomings regarding
FDI in Vietnam appeared: imbalance occurred in sectors and regions; the overall effect
of foreign investment was not high; the result of attracting high-tech and technology
resources ans technology transfer was not satisfactory; the number of jobs created did
not match the potential, the living standard of the labor force was not high, disputes
and strikes tended to be on the rise; the spillover effects of the FDI sector to other
sectors in the economy were limited; there were evidences of crowding out effect,
transfer pricing and tax evasion; negative impacts on the ecological environment was
present .

CHAPTER 4
RESULTS OF EMPIRICAL ESTIMATION
4.1. Model for measuring the relation between FDI and economic growth
* Data: to measure the relation between FDI and economic growth in Vietnam,
the thesis applies the VAR model with secondary data source from 1990-2012
including 23 cases of observation. Variables in the model are built as follows : GDP
(gross domestic products); EM (average employment per year) HK (number of high


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school graduates); OPEN (openness of the economy); KAP (domestic capital each
year); FDI (value of direct investment capital in Vietnam used each year); LIB: a
dummy variable built to evaluate the impact of world financial crisis on the
Vietnamese economy. This variable takes on value 1 in 2008-2009 and 0 in other
years.
* Empirical model:
Yt = C + Φ1Yt −1 + Φ 2 Yt − 2 + ε t
(t =1,…,23)
(4.1.1)

- Similarily, the increase of high school graduates can go hand in hand with FDI
increase after one year but show opposite impact afterwards. Thus, it is possible that
the decrease of high school graduates in recent years stimulates an increase of about
0,087% in FDI (3% decrease in the number of high school graduates x 0,029).
Estimation results from the VAR model show that in the short term, the increase of
high school graduates stimulates growth rate of FDI at first, which then tends to

decline. Foreign investors do not have long-term expectation about the potentially
high-quality human resource in Vietnam.
- The openness of the economy has corresponding impact on FDI but the result
is not very clear.
Impacts of FDI shock on indicators of economic growth:
An impact of FDI growth rate affects the growth rate of socio-economic
indicators right in the first year, except for GDP. An FDI shock will :
- Affect the GDP growth rate in the second year and prolong the impact for 4
years. However, an increase of 1% in FDI does not have remarkable impacts on GDP
growth rate (in positive but small ratio). It matches with Vietnam’s objective in FDI
attraction, which is to promote growth. But actual data show that while FDI does have
positive impact on GDP growth, its role as the stepping stone for GDP growth does
not meet expectation.
- FDI shock stimulates domestic capital accumulation from the first year to the
third year but also slows it down in the following years. It indicates that the increase in
FDI creates competition with domestic capital accumulation and thus, domestic capital
accumulation also increases as counter-balance to the FDI sector, at least in the first
three years of higher FDI growth rate. Domestic capital accumulation in the fourth
and fifth year reflects an opposite tendency to FDI increase rate.
- FDI increase results in job creation in the first year but has opposite impact in
the second and third year. By the fourth and fifth year, the impact is not longer felt. An
increase of 1% in FDI volume in Vietnam results in an increase of 0,174% in
employment of the economy in the first year due to demand for labour force of
enterprises when joining the market. Due to competition of the FDI sector with the
domestic sector, however, negative impact is felt in production and employment of the
domestic sector in the second and third years.
- For the human resource (HK), FDI has a positive impact on education and
creates potential resources for the labour market. However, the impact is not
remarkable and tends to decline over time. Thus, the increase in high school
graduates does not have a positive impact on FDI attraction. But FDI results in the

increase in high school graduates due to the actual demand for quality of the labour

In which: Y=( DLNFDI DLNGDP DLNEM DLNHK DLNKAP DLNOPEN); C
= (c1, c2,…, c6)
* Unit Root Test
Results of unit root test show that the hypotheses of variables are not rejected.
However, first differences are found to be stationary – all variables are integrated of
order 1. Thus, upon inspection, data series in the model are at first difference level. .
* Determining lag length
With AIC, PPE, SC, HQ as selected criteria, there are two lag valueS suitable
with the model
* Analyzing the impact from reaction functions
Reaction of FDI regarding the shocks of growth targets
It is observed that FDI immediately and solely reacts to GDP shock (positive
reaction in the first year) while late reactions occur open impacts of other variables on
FDI. Specifically:
- The rate of national income increases in correlations with FDI rate from 1 to 3
years, then growth rate gradually declines. Especially, an increase of 1% in GDP can
bring about an increase of 0, 101% in FDI right in the first year and an increase of
0,04% to 0,06% in the next 2 years; then the sign of increase dies down in following
years (the absolute value is too small). This indicates that FDI capital resources tend to
favor short-term effect.
- The increase in domestic capital accumulation stimulates the growth rate of
FDI in the second year but a contradictory effect is show in following years. It
indicates that the increase in domestic capital accumulation shows signs of
competition in the investment market. In the long run, domestic capital accumulation
seems to decrease the growth rate of FDI
- Job creation has corresponding impacts on the growth rate of FDI after one
year but opposite impacts in the following years. Is it because the economy is still
under impact of sectors with low productivity? Thus, job creation is not an obvious

sign of FDI attraction in the long in. This result may need to be examined further in
other analyses.


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force in the FDI sector.
- Stimulating the openness of the economy right in the first year. Negative impact
is felt in the second year. The following years experiences positive but declining
impacts. This reflects the reality about the objectives of foreign investors: in the short
run, they want to take over and compete with local enterprises and in the medium and
long terms, they want to utilize advantages in natural resources and cheap labour in
the host country to produce their products and sell to international markets. Therefore,
the openness of the economy after an FDI shock experiences a positive impact from
the third year.
* Variance decomposition
- Unstable GDP growth rate is caused by its external volatility. Volatilities of
other variables such as FDI, KAP, EM, HK and OPEN have very little impact on the
instability of GDP growth rate . So the instability of GDP mainly depends on the
volatility of this variable itself.
- Change in FDI growth is influenced from 39% to 51% by this variable. Other
factors contribute 39% -61% in influence, with 45%-49% from economic growth and
little impact from the remaining factors.
- Change in domestic capital is mainly caused by its external volatility (about
70%) and GDP (about 29%). Other factors, including FDI, have very little impact (less
than 2%). Employment contributes considerably to domestic capital contribution.
- Change of employment growth rate (DLNEM) is mainly caused by changes in
GDP (59- 67%) and FDI (18 -28%). Other variables have little impacts on
employment in the economy.
- Change in the number of high school graduates is mainly caused by such factors

as FDI, KAP, FDI and HK. Other factors such as GDP and OPEN show little impact.
- Change in the openness of the economy is mainly influenced by GDP (about
32- 36%), its external volatility (24- 30%) and KAP (about 20%). Impact from FDI
accounts for only 5 to 7%. HK and EM barely make an impact. So production is
aiming towards export and the economy targets integration under the positive
influence of capital resources and GDP growth.
4.2. Model for evaluating the impact of FDI on local enterprises – Levinsohn Petrin semiparametric approach
Data: to assess the impact of FDI on local enterprises, the thesis applies data for
the manufacturing sector from the enterprise survey data of the General Statistics Office
during the 2000-2011 period which has 45.720 cases of observation over 12 years with
3.810 enterprises in operation each year .
Model structure: the semiparametric method based on the approach of

16

Levinshon-Petrin is as follows:
j
LnYitj = α + β1LnK itj + β 2 LnLit + β3 FSitj + β 4 Horizontal jt

+ β 5 Backward jt + β 6 Forw jt + β 7 Herf jt + β8Gownship jt
+ β 9Vonngoai jt + α r region + ε it

in which:
j
Yitj , K itj , Lit , FSitj are: actual output, capital, good quality labour, share of capital

from the foreign investor in enterprise i , sector j , year t , respectively.

Horizonal jt variable shows the level of foreign participation in the sector
Backward jt variable indicates the level of foreign participation in the sector in

sectors where their input sectors include enterprises in the research. In will reflect the
level of co-operation between the domestic supplier with customers as multinational
enterprises.
Forw variable (forward) is defined as Forw jt =

∑

δ jlt Horizontallt , in which the

l khi l ≠ j

ratio δ jlt of the input sector of the sector j buys from sector l at the point of time t .
Herf variable (Herfindahl index).
Von ngoai (external capital) is measured by 1 subtracting the coefficient of
equity.
Dummy variable region (V1: the Red River Delta; V2: the Northeast; V4: North
Central; V5: South Central region; V6: the Highlands; V7: the South East; V8: the
South West region)
Estimation results
- The value of of variable FS is positive and the statistical significance is at the
1% level for all samples, indicating that the presence of foreign direct investment has
positive impacts on productivity growth of all enterprises in the manufacturing sector,
including local enterprises. This can be explained that the wave of new technology
from foreign enterprises can create spillover effects for local enterprises.
- Horizontal spillovers occur when the presence of FDI improves productivity of
local enterprises in the same industry. According to estimation results, the coefficient
of Horizontal variable (showing the impact of horizontal spillovers) is negative and
the statistical significance is at the 1% level for all samples and separate samples of
local enterprises. It means the impacts of horizontal spillovers reduce the efficiency and
productivity of enterprises in general. This can be explained that by growing

competition for Vietnamese enterprises, weak management, outdated technology,
crowding out effect, participation of FDI enterprises resulting in increase of labour cost


17

18

in the market
Eatimation results according to Levinsohn – Petrin method
Independent
variable

All samples

Non-FDI enterprise (FS=0)

0.304***
(0.040)
-0.185***
(0.052)
0.526***
(0.028)
-0.341***
(0.110)

-0.300***
(0.057)
0.525***
(0.038)

-0.166*
(0.140)

Herf

0.469***
(0.149)

0.176*
(0.202)

Gownship

-0.019***
(0.034)

-0.016*
(0.035)

Von ngoai
(External
capital)

0.079***
(0.027)

0.087**
(0.036)

0.557***

(0.190)
0.568***
(0.190)
0.393**
(0.195)
0.723***
(0.184)
0.310
(0.213)
0.819***
(0.182)
1.057***
(0.182)
0.483***
(0.014)
0.428***
(0.010)

0.546**
(0.221)
0.590***
(0.210)
0.401*
(0.215)
0.743***
(0.221)
0.354
(0.233)
0.866***
(0.214)

1.102***
(0.209)
0.497***
(0.016)
0.433***
(0.015)

FS
Horizontal
Backward
Forw

V1
V2
V4
V5
V6
V7
V8
LnL
LnK

Nguồn: ước lượng từ số liệu
Note: The symbols *** / **/* indicate that statistical significance of estimated parameters is
is at 1%, 5% and 10%, respectively. Standard errors are put in parentheses below variables

- Positive Backward variable with statistical significance at 1% for all samples
and separate samples for local enterprises indicates that the spillovers occur due to the
co-operation between FDI enterprises and local suppliers in Vietnam. These impacts
can be done through direct knowledge transfer from foreign customers to domestic

supplier, higher requirements about product quality and timely supply…, thus
motivating local suppliers to upgrade technology for better management and
production.
- Coefficient of variable Forw is negative with statistical significance for all

samples and separate samples of local enterprises. By definition, variable Forw indicates
the presence of foreign factors in upstream industries, in which industry j purchases
intermediate products as inputs. Thus, there is better availability of inputs because
foreign investment increase usage of these inputs and may help to improve productivity
of local enterprises. However, inputs produced at localities by foreign enterprises are
more expensive and less suitable for requirements of enterprises in Vietnam.
- Variable Herf is positive with statistical significance for all samples and separate
samples of local enterprises.
- Variable Gownship is negative with statistical significance for all samples and
separate samples of local enterprises, which indicates that state ownership causes
setback for the industry’s productivity growth. This results from weak management,
heavy and ineffective apparatus of state-owned enterprises. The equitization of stateowned enterprises in Vietnam, therefore, does not only improve the efficiency in using
resources of local enterprises but also has positive impacts on the productivity of FDI
enterprises. The equitization process creates a fairer competitive environment for local
and foreign enterprises, stimulates innovation and improve productivity of local
enterprises. Foreign enterprises do not suffer from unfair treatment as compared to
local enterprises, thus increasing their productivity also.
- Coefficient Von ngoai (external capital) is positive with statistical significance
for all samples and separate samples of local enterprises. It indicates that increasing the
ratio of external capital can improve the production value and income of enterprises in
the manufacturing sector.
- Coefficient V 6 is positive but without statistical significance for all samples and
separate samples of local enterprises. This shows ineffective impact of FDI in the
Highland regions.
4.3. Model for evaluating impacts of FDI on output of enterprises - the panel data

regression approach
In addition to the semiparametric-based approach of Levinshon-Petrin, the thesis
also applies the panel data regression approach with the same collected data. The
structure of the panel data regression model is presented through the following
production function:
j
LnYitj = α + β1LnK itj + β 2 LnLit + β3 FSitj + β 4 Horizontal jt

+ β 5 Backward jt + β 6 Forw jt + β 7 Herf jt + β8Gownship jt
+ β 9Vonngoai jt + ε it
Estimation results is done according to the mix-data method with Fixed Effect
Model (FEM) and Random Effects Model (REM ) . This method is applied for both
group of samples: one group of all enterprises and one group of non-FDI enterprises.


19

20

Random effect (REM)
Independent
variable

All samples

Horizontal

0.263***
(0.034)

0.255***
(0.039)

Backward

0.249***
(0.017)

0.229***
(0.019)

Forw

Estimation results according to the mix data method

0.588***
(0.064)

0.536***
(0.075)

Herf

-0.520***
(0.077)

-0.674***
(0.089)

-0.236***

(0.030)
0.018
(0.015)
0.363***
(0.008)

-0.210***
(0.032)
-0.000
(0.017)
0.350***
(0.009)

0.210***
(0.005)

0.233***
(0.006)

Fixef effect (FEM)

Non-FDI enterprise

All samples

0.357***
(0.027)
-0.0010
(0.030)
0.339***

(0.015)
-0.065
(0.061)

-0.066
(0.034)
0.314***
(0.016)
-0.106
(0.069)

0.113**
(0.035)
0.024
(0.031)
0.285***
(0.015)
0.146*
(0.063)

-0.027
(0.036)
0.257***
(0.016)
0.035
(0.072)

Herf

-0.446***

(0.075)

-0.522***
(0.086)

-0.634***
(0.075)

-0.672***
(0.088)

LnL

Gownship

-0.127***
(0.020)

-0.102***
(0.020)

-0.218***
(0.022)

-0.216***
(0.023)

LnK

Von ngoai

(external
capital)

0.069***
(0.012)

0.061***
(0.013)

0.075***
(0.012)

0.063***
(0.013)

LnL

0.624***
(0.006)

0.599***
(0.006)

0.601***
(0.006)

0.572***
(0.007)

LnK

0.389***
(0.004)

0.414***
(0.004)

0.294***
(0.004)

0.320***
(0.005)

FS
Horizontal
Backward
Forw

Non-FDI enterprise

In deciding between FEM and REM models, Hausman test is carred out with the
result of p-value = 0.000< 0.005. Therefore, REM model is not suitable and FEM
model is chosen.
Test is carried out for error variance and serial correlation in the newlyconstructed FEM model as follows:
+ Results of testing error variance in FEM model shows that p-value = 0.000<
0.005. It is concluded that the FEM model has error variance
+ Results of testing serial correlation in the FEM model shows that p-value =
0.000< 0.005. It is concluded that the FEM model has serial correlation.
The set of data for regression is only collected from 2000 to 2011 (T=12) but
there are too many enterprises (n= 3.810); therefore the general method of moments is

applied in the thesis
Correction results according to the GMM method
Ảnh hưởng cố định (FEM) đã hiệu chỉnh
Independent variable

All samples
***

FS

0.352
(0.032)

Non-FDI enterprises

Gownship
Von ngoai
(External capital)

Upon testing the endogenous phenomenon in the FEM model, results show that
the GMM model is acceptable. With the correction result of regression according to
the GMM method for FEM model, it is observed that:
- The coefficient of variable FS is positive 0,352 with statistical significance at
1% for all samples, which indicates that the presence of foreign capital directly and
indirectly improve production efficiency of enterprises.
- The coefficient of the horizontal variable Horizontal is 0,263 for all samples
and 0,255 for samples of non-FDI enterprises, which indicates that foreign investment
stimulates technology innovation and effective internal organization in the same
sector via direct and indirect impacts.
- The coefficient of the backward variable Backward is 0,249 for all samples and

0,229 for samples of non-FDI enterprises, which indicates that foreign investment has
positive impacts on related industries (enterprises providing material input, those in
the supporting industries…)
- The coefficient of variable Forw has statistical significance and positive value
( 0,588 for all samples and 0,536 for samples of non-FDI enterprises), showing that
the presence of FDI enterprises has positive impacts on production and efficiency of
the whole sector.
- Herf coefficient has negative value of - 0,52 for all samples and - 0,764 for local
enterprises, which indicates fiercer competition in the wake of foreign investment,
causing a decline in the market strength of enterprises.
- Similar to estimation results before, the coefficient of variable Gownship is
negative for all samples and samples of non-FDI enterprises, which indicates that the
state sector has negative impacts on the output of all enterprises.


21

22

- The coefficient of External capital (loan) is positive for all samples and negative
for samples of local enterprises without statistical significance. This shows that the
impacts of external capital on local enterprises are unclear (the coefficient value is
positive in the previous model). The coefficient value for FDI enterprises is positive;
however, this result needs to be further verified because enterprises always expect to
get loans with the aim of reaching a certain level of efficiency in business and
production .
- The coefficient of labor efficiency has positive value of 0,363 for all samples
0,350 for samples of non-FDI enterprises, which indicates that FDI enterprises display
higher labor efficiency as compared to non-FDI enterprises.
- The coefficient of efficient use of capital is 0,210 for all samples and 0,233 for

samples of non-FDI enterprises. However, just like the case with estimation results, it
is unclear that FDI enterprises have better efficient use of capital.
4.4. Policy recommendations from estimation results
Basing on analysis results of models, the thesis proposes some policy
recommendations regarding improving FDI attraction in Vietnam for rapid and
substainable economic growth in following years as follows:
Promoting economic growth
Investing in education and training, improving the quality of human resource
Encouraging savings and investment
Stepping up the global integration process
Implementing incentives for FDI in the manufacturing sector
Developing supporting industries for the FDI sector
Using the FDI capital at enterprises efficiently
Carrying out administrative reform to attract and implement FDI projects
Promoting the equitilization process of state-own companies, enabling fair
competition among economic sectors
Developing the capital and money markets to be on par with other countries in
the region .
Creating an attractive FDI environment for economic development of provinces in the
Central Highlands.

2012 and estimation results from models, the thesis proposes some policy
recommendations to improve FDI attraction in Vietnam in following years.
Obtained results
The thesis clarifies viewpoints about economic growth. It systematizes measures
and indicators of economic growth ; from that it develops the method for
comprehensive assessment of economic growth. It also clarifies basic theories of FDI
and the role of FDI in the economy’s development and provides a systematic overview
of empirical researches on the relation between FDI and economic growth.
The thesis presents a detailed statistical analysis of the reality of economic

growth and the FDI attraction process in Vietnam during the period 1990 – 2012. It
points out the impact of the 2008–2009 global financial crisis on the Vietnamese
economy and applies this in the models on the relation between FDI and economic
growth.
On the basis of theoretical overview and empirical research, the thesis concludes
main characteristics of FDI attraction and economic growth in Vietnam during the period
1990-2012. It proposes the quantitative research framework at both macro and micro
level about the relation between FDI and economic growth Vietnam with a system of
models suitable to data and distinctive characteristics of the Vietnamese economy. It also
analyzes the dynamic relations of economic growth indicators and FDI.
Upon analyzing the estimation result of the modes on the relation between FDI and
economic growth, it is concluded that: GDP growth is the main factors (among chosen
factors) with positive impacts on FDI attraction. It strongly affects FDI, the elasticity
coefficient between FDI and GDP is approximately 1. Other factors such as domestic
investment, education or employment .. in general have positive impacts on FDI
attraction over time and certain influence on FDI and GDP. Research results confirm the
positive two-way interaction between FDI and economic growth indicators. The process
of FDI increase displays an inertia characteristics in itself and can maintain inertial
momentum for 2 years; the growth rate may decrease gradually over the following
years. A set of effective policies for FDI attraction will have positive impacts on
growth, capital accumulation, improvement of labor force quality and integration into
the global economy. Estimation results also show that the recent economic crisis slows
down the increase of FDI into Vietnam.
According to estimation results of the model for assessing the impact of FDI on
local enterprises, the presence of FDI has positive impacts on productivity growth of
all enterprises in the manufacturing sector, including local enterprises while state
ownership does not. The equitization of state-owned enterprises in Vietnam,
therefore, improves the efficiency in using resources of local enterprises, creates a

CONCLUSION

Titled “Analytical models on the relation between Foreign Direct Investment
and economic growth in Vietnam”, the thesis focuses on studying the rationale for
the relation between FDI and economic growth. Based on analysis of the reality of
economic growth and FDI attraction process in Vietnam during the period 1990 –


23

24

fairer competitive environment among economic sectors, and has positive impacts on
the productivity of FDI enterprises.
Upon analyzing the estimation result from the model for assessing the impact of
FDI on local enterprises, the presence of FDI has directly and indirectly enhanced the
production efficiency of enterprises and the existence of FDI enterprises has positively
affected production and increased efficiency of the whole sector.
In combining analysis results of three models and applying necessary technical
corrections, the thesis analyzes the relation between FDI and economic growth at both
maaro and micro levels. Research results indicates t achievements and shortcomings
calling for attention from the government and the community. As weaknesses in
business activities (represented by enterprises) are also pointed, corporations and
enterprises need to find the way to overcome them. Production efficiency (generating
GDP), employment, domestic capital accumulation and form of ownership are the
main issues in attracting and creating spillover effects of FDI in Vietnam .
On the basis of theoretical overview, reality analysis and estimation results of
models on the relation between FDI and economic growth in Vietnam, the thesis
proposes some policy recommendations for improving economic growth. It is
suggested that the government issues FDI attraction policies in the following
directions : investing in education and training, improving the quality of human
resource ; stimulating savings and investment ; stepping up the global integration

process ; implementing FDI incentives in the manufacturing sector ; creating an
attractive environment for FDI, developing the money and capital markets to be on
par with countries in the region and creating an attractive FDI environment for
economic development of provinces in the Central Highlands.
Limitations of the data : the source of data for empirical researches of
economic model is not only lacking but also not synchronized as well.
Regarding statistical data for the models on the relation between FDI and
economic growth, the author does not have reliable information about the import value
of machinery and transport vehicles; therefore these variables can not be applied for
estimation and model analysis.
For many enterprises, no information is available even for critical indicators in
annual survey. This also happens with enterprises in the manufacturing sector which is
considered most informative. The level of data synchronization is not high, the
connectivity of information over time is limited. The thesis can only use data in 12
years of 3.810 enterprises in the manufacturing sector. Further research in other
sectors is not very likely
Further research direction : Due to the limitations of research condition, assess

of data source and level of data update, the thesis still has some basic shortcomings
for further research.
According to the author, an approach from the macro level to the micro level can
be applied by using a set of (possibly more complete) models for a more
comprehensive analysis of economic relations in the process of economic growth.
Hopefully, with this method of approach and further data synchronization, useful
research results can be obtained for better support of the government’s economic
planning and investment.