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

Pham Dinh Long & Le Nguyen Quynh Phuong | 445

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

LE NGUYEN QUYNH PHUONG
University of Economics and Finance

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

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

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creating jobs for the economy. Foreign direct investment (FDI) plays a key role in
boosting the economy, contributing significantly to the economic growth of countries in
general.
Developing countries in the world, as well as Vietnam, are facing issues of attraction,
management, and use of investment sources that have not been effective in recent
years. Vietnam has access to state budget funds, encouraged in sector private
investment as well as foreign direct investment from multinational companies, which is
expected to make a positive change in promoting economic growth. However, in the
local context, it is not the exploitation of these resources that is the same, depending on
the characteristics of each region, the policies and ways of using the sources of
investment of managers are different. All of these factors contribute to changing the
impact of investment on local economic growth.
Studies on the impact of overall investment on economic growth have been done
mostly within the country, but empirical evidence suggests that this effect is still an
unsatisfactorily answered question. Such as there is very little research going into
understanding the simultaneous causal relationship between different types of
investment and economic growth, most research focuses on studying the relationship of
two of the factors. Studying the causal relationships between these factors for a specific
analysis within the provinces of a country is very important for policy makers to design
preferential investment policies.
Therefore, the paper will analyze the current status and quantification of the causal
relationship between public investment, private investment, foreign direct investment
and economic growth in the provinces/cities. Vietnam in the period 2007 - 2014 using
the PVAR model. From the results of the analysis, the study provides policy
recommendations for each of these investments as well as a combination of these types
of investments in a way that can sustain and promote local economic growth in

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


Pham Dinh Long & Le Nguyen Quynh Phuong | 447

2. Literature Review
2.1.

Theoretical Studies

In the history of developing countries and in general theories, any country must use
the most internal resources to develop the economy. By using the effective domestic
capital to enhance its role and achieve the country's important goals. Domestic capital is
a decisive source, and foreign capital is an important additional source of initial
development. This is reflected in the role of additional funds for investment as the
internal accumulation of the economy is low. The role of domestic capital in any country
is undeniable, but with globalization in the new era, foreign capital plays an important
role in promoting economic development. Of any country, especially underdeveloped,
developing countries, of which FDI is the dominant (apart from official development
assistance (ODA)).
In the early 1980s, researches on the determinants of economic growth attracted
new interest among economists. In particular, the relationship between FDI and
economic growth is a topic studied in developed economies, both theoretically and
empirically. The theory of endogenous growth (Romer (1986), Lucas (1988), Barro
(1991), Mankiw, Romer and Weil (1992), Barro and Sala-i-Martin (2004) confirms that
FDI promotes long-term economic growth by technological diffusion. This theory forms

the basis of later studies to identify the major factors explaining the differences in
economic growth among nations.
On the other hand, the Eclectic theory of FDI, developed by Dunning (1988), provides
another way of analyzing the relationship between FDI and economic growth. Based on
the analysis of competitive advantage, this theory shows that the attraction of FDI
depends very much on the factors and characteristics of the host country. Although in
the short term the relationship between investment and economic growth tends to be
low, but in the long run, investment rates are found to be closely linked to economic
growth. One country, if domestic savings are not enough for domestic financial
investment, will depend on foreign capital.
In short, domestic capital has always been a major source of economic growth.
However, it can not be denied that the role of foreign capital, especially FDI, is also a
potential source of economic growth for any country, its role in economic growth. It


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should be explored in depth through empirical studies. In addition, the relationship
between these two sources of capital is also affirmed as complementary and
complementary relationships, in each period in which they interact at different levels,
This effect is also not the same for each country with its own economic characteristics.
2.2.

Empirical Studies

Sumei Tang, E.A. Selvanathan and S. Selvanathan (2008) used the VAR and ECM
regression model for quarterly time series data from the first quarter of 1988 to the
third quarter of 2003 to examine short- and long-term relationships between FDI and
DI, and economic growth in China. In the course of the experiment, he focused on the
Granger causal relationship between the variables and the function of the impulse

response function. The results show that instead of overriding DI, FDI has an additional
relationship for DI. FDI not only helps in overcoming the shortage of capital, it also
stimulates economic growth through the addition of DI capital in China. China's DI
capital and economic growth are positively correlated; Large economic growth
encourages large domestic investment and vice versa. China's DI and economic growth
have not had a significant impact on FDI inflows over the long term. The causal
relationship between economic growth and DI is two-way, but there is only one causal
dimension from FDI to DI and FDI to economic growth. China's DI has a greater impact
on economic growth than the impact of FDI on stimulating economic growth and
promoting domestic savings should be prioritized over FDI attraction in the design and
implementation of the war. Investment strategy and investment policies in China.
Samuel Adams (2009) used panel data for 42 sub-Saharan African countries between
1990 and 2003 to analyze the impact of FDI, DI on economic growth. By the OLS
regression method, the study shows that FDI in the latter period has a positive impact
on economic growth, but the current FDI does not have a positive impact on economic
growth. This result is explained by the low level of development in sub-Saharan Africa,
less developed economies that favor FDI, but through OLS and FEM regression, the
study has also been shown that DI has a positive and significant correlation for
economic growth. In addition, the study results also show a trend that FDI is inversely
proportional to DI.
Hoi Hoi Lean and Bee Wah Tan (2011) with annual time series from 1970 to 2009
study the relationship between FDI, DI and economic growth in Malaysia. You use the


Pham Dinh Long & Le Nguyen Quynh Phuong | 449

VAR and VECM models to study the relationship of economic variables in the short and
long run. First, they used the VAR model, verified the co-alignment relationship, and
then continued using the VECM model to study the relationship of economic variables in
the long run. The empirical results of this study indicate that FDI, DI and long-term

economic growth have a long-term relationship. FDI has a positive impact on economic
growth, whereas DI has a negative impact on economic growth. In the long term. In
particular, the results of the study also show a causal relationship between DI and FDI,
between economic growth and FDI in the short term. In addition, the increase of FDI
will have a positive impact on DI, resulting in additional effects from FDI on DI. High
economic growth will attract FDI flows in Malaysia. DI is also an important factor in
attracting foreign investment in the short term. Expanding FDI inflows may be linked to
an astonishing increase in DI, and both FDI and DI businesses can work together to
further the growth of Malaysia.
Rehmat Ullah Awan, Khalid Javed and Falak Sher (2012) study the relationship
between FDI, economic growth, exports, imports, DI in turn in South Asia including
Bangladesh, India, Pakistan and Sri Lanka, Using the annual time series data from 1973
to 2010. The paper uses the VAR model and focuses primarily on causal relationships
between FDI variables, economic growth, exports, imports. DI, represented by fixed
capital formation and additional commercial openness (with trade openings = (exports
+ imports) / GDP). The results of the study show that FDI has an impact on economic
growth but this effect is weaker than the impact of exports on economic growth. The
paper also shows that other results such as economic growth affect imports in different
periods but there is no reverse relationship of imports to economic growth. Similarly,
economic growth affects trade openness but there is no reversal of trade openness to
economic growth. There is also a two-way relationship between FDI and trade
openness.
Tran Nguyen Ngoc Anh Thu (2014) focused on the impact of public investment on
economic growth in Vietnam using the ARDL technique for 1988-2012. The results of
the study show that there is no evidence of this effect in the short term but public
investment has the effect of promoting long-term growth, although this is the lowest
compared to private and capital investment. Private direct foreign In addition, the study
by Nguyen Hong Ha (2015) on the impact of FDI on economic growth in Tra Vinh
province for data for the period 1999 to 2013 using VAR techniques and relationship

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testing Cause and effect, the study results show that the attraction of foreign direct
investment has an impact on economic growth in Tra Vinh province and vice versa.
Tran Pham Khanh Toan (2014) captured on the impact of public expenditure on
economic growth in Southeast Asian countries and lessons learned for Vietnam. The
study used the panel data for 1995-2012 and used the regression analysis technique. The
results of the study show the impact of public expenditure on the economic growth of
Southeast Asian countries, reflected in the impact of the total public expenditure
variable, public expenditure on health, expenditure Public security and defense have a
positive impact on economic growth, and the public spending on education is negative.
In addition, variables such as labor force, private investment, FDI have a positive impact
on economic growth, meanwhile, the openness of the economy, inflation is the opposite.
Based on the findings of the study, the author also provided some lessons for Vietnam to
improve the impact of public expenditure on economic growth.
In addition to the theoretical observations surrounding the relationship between
sources of investment capital for economic growth, there has been quite a number of
empirical studies in the past regarding this relationship with other economic factors.
Studies use a variety of data types (time data, table data) with a variety of estimation
methods and thus produce different results for each country, group, or region. The
results show that the relationship between investment capital and economic growth
remains unclear. On the basis of inheriting previous research, as well as extensive
research, the implementation of a research project on the same subject in a Vietnamese
locale has an important role to play. To help policy makers have a pragmatic and
general view of their local situation in order to make recommendations and implement
effectively the competitiveness, sustainable economic development of the locality, close
contribution and overall development of the whole economy in the country.
3. Method and Data
This method used in this research is Panel Vector Autoregression (PVAR). By this

way, the Panel VAR (PVAR) technique combines the traditional VAR approach treating
all variables of the system as endogenous with estimation techniques for panel data,
which allows for unobserved heterogeneity while the use of VAR models in time series


Pham Dinh Long & Le Nguyen Quynh Phuong | 451

analysis is a common standard. PVAR is one of appropriate estimation techniques in the
context of dynamic panel data models.
This analysis focuses on test for Granger-causal relationships, the resulting ImpulseResponse Functions (IRFs), which estimates the response of particular variables in the
system to innovations in another variable in the system, while holding all other shocks
at zero. To analyse the IRF, this method needs an estimate of their confidence intervals;
since the matrix of IRF is constructed from the estimated VAR coefficients, their
standard errors need to be taken into account. Then, this method also presents the
Forecast Error Variance Decompositions (FEVDs), which shows the percent of the
variation in one variable that is explained by the shock to another variable, accumulated
over time. The variance decompositions show the magnitude of the total effect.
The equation for PVAR in this research is follow:
LnGDPit = βo + β1LnGIit + β2LnPIit + β3LFDIit + β4LnLABORit +β5TOit + vit (1)
Where is:
+ i: 63 provinces of Vietnam;
+ t: years from 2007 to 2014.
Data used in this research are provincial data.
Dependent variable
+ GDP: real value of per captita GDP
Independent variables (Explanatory variables)
+ GI: Public Investment
+ DI: Private Investment
+ FDI: Foreign Direct Investment
Control variables

+ LABOR: Labor

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


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Table 3.1
The calculation and the expected signs of the variables in the model
Dependent variable
GDP growth rate per capita
Real GDP represented for
economic growth

GDP
Independent variables (Explanatory variables)
GI

PI

Investment from government
sector

+

Investment from private sector

+

Public Investment

Public Investment rate in
GDP
Private Investment
Investment rate of nonstate sector in GDP

FDI

Foreign Direct Investment

+

Proportion of investment
capital from foreign direct
investment sector to GDP

Employees aged 15 years and
above in the Workforce

+

Annual rates of labor force
growth

Control variables
LABOR

Labor Force
TO

Total value of export and

import of goods in the area

+

Volume of exports and
imports of goods and
services
Total Import-Export
turnover to GDP

This paper uses secondary data from 63 provinces and cities in Vietnam for the
period of 08 years from 2007 to 2014, so there will be a total of 504 observations.
Data from the following sources:
- Gross domestic product (GDP) of provinces and cities in the period 2007-2014 is
taken according to the actual value, measured in VND billion at the fixed price in 2010
taken from the Vietnam economic - the social statistical yearbook of 63 provinces and
cities, provided by the General Statistics Office of Vietnam.


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- Private investment (PI), foreign direct investment (FDI) sector in provinces and
cities in the period 2007-2014 are taken at current prices in VND billion from the
statistical yearbook, provided by the General Statistics Office of Vietnam.
- The labor force over 15 years old in the economy (in thousands of units) of
provinces and cities, provided by the General Statistics Office of Vietnam.
- The export and import value of goods in the area (unit: the US $ thousand) taken
from the statistical yearbook of the General Statistics Office. Then, trade openness data
is calculated from this source.
The research data of the topic is taken from the reliable sources available in the

provincial statistical yearbook and the General Statistics Office of Vietnam. But for
provincial GDP figures, some estimates tend to be higher than GDP figures for the
whole country. This is a restriction on the GDP figures of provinces and cities in this
topic. However, this topic does not take into account the overall GDP of the whole
country but only to assess the impact of public investment on the GDP of provinces and
cities. Therefore, it is temporarily acceptable according to the GDP data available from
the provincial statistical yearbook for analysis.
Whereas, the time series databases are often not only very large values but also
different ones, most variables used in this model are got Logarithm from their values
except trade openness. Moreover, the getting logarithm also helps to eliminate the linear
trend for data.
4. Result
4.1.

Unit root Test

First, like the VAR model, when estimating the PVAR model, it is necessary to ensure
stationarity of all time series variables. A commonly used test valid in large samples is
the augmented Dickey–Fuller Test (ADF Test) through The Levin, Lin and Chu - LLC
(2002), the test result shows that all LnGDP, LnGI, LnPI, LnFDI , LnLabor and Openness
are I(0), so these time series are stationary.
4.2.

Optimal Lag

An important aspect of empirical researches based on the PVAR model is the choice
of lag order. To find out optimal lag for this estimation, we base on J statistic and


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

CD

J

p-value

MBIC

MAIC

MQIC

1

1

114.2077

.3228587

-451.9009

-101.7923

-243.6297

2

1

63.95394

.739278

-313.4518

-80.04606

-174.6044

3

1

23.64065

.9436641

-165.0622

-48.35935

-95.6385

4.3.

PVAR model with GMM estimation

Table 4.2.
Main result of a 6-variable VAR model
Response to (95% confidence interval)
Response of

LnGDP(t-1)

LnGI (t-1)

LnPI (t-1)

LnFDI (t-1)

LnLabor (t-1)

TO (t-1)

LnGDP (t)

-.1668642
(0.205)

.1042577

(0.150)

.1364178
(0.003)

-.0716075
(0.090)

3.338253
(0.000)

.0603157
(0.028)

LnGI (t)

.4616195
(0.065)

.094512
(0.512)

.9706284
(0.000)

-.3197219
(0.003)

-5.440385
(0.000)

.0014753
(0.982)

LnPI (t)

-.8522748
(0.002)

-.0606252
(0.661)

1.194189
(0.000)

-.1774328
(0.026)

2.188309
(0.055)

-.052237
(0.363)

LnFDI (t)

-.0623101
(0.808)

.1877488

(0.160)

.3540222
(0.000)

.5093528
(0.000)

-1.228988
(0.190)

.1153056
(0.020)

LnLabor (t)

.052977
(0.001)

-.0213812
(0.015)

.0459218
(0.000)

-.0167932
(0.000)

.4737137
(0.000)

-.0103271
(0.003)

TO (t)

.4541414
(0.252)

.4023829
(0.036)

-.2428815
(0.003)

-.0808577
(0.397)

.4471119
(0.759)

.8904815
(0.000)


Pham Dinh Long & Le Nguyen Quynh Phuong | 455

The results of the PVAR regression indicate that the big values of R2, Log Likelihood,
small values of FPE and AICI Criterion, HQIC (Hannah Quinn Criterion), Small SBIC
(Schwarz Criterion) are accordant in the model.

In general, the results of the model estimation show that in the short run, the
relationships between these variables are unclear. Hence, using the Granger causality
test to better analyze the relationship between variables to find out what variables affect
another.
4.4.

PVAR Stability

Graph 4.1. PVAR stability

According to the result, all the eigenvalues line inside the unit circle. PVAR satisfies
stability condition.


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4.5.

PVAR Granger

Table 4.3.
PVAR Granger Causality/Block Exogeneity Wald Tests
Dependent variable: LnGDP

Conclusion

Excluded

Chi-sq

df

Prob.

LnGI

2.071

1

0.150

LnPI

8.769

1

0.003 ***

PI Ž GDP

LnFDI

2.875

1

0.090 *

FDI Ž GDP

Dependent variable: LnGI
Excluded

Chi-sq

df

Prob.

LnGDP

3.409

1

0.065 *

LnPI

70.137

1

0.000 ***

PI Ž GI

LnFDI

8.980

1

0.003 ***

FDI Ž GI

PI Ž GI
FDI Ž GDP
FDI 1 PI

GDP Ž PI

FDI Ž GI

Dependent variable: LnPI
Excluded

Chi-sq

df

Prob.

LnGDP

9.784

1

0.002 ***

LnGI

0.192

1

0.661

LnFDI

4.942

1

0.026 **

PI 1 GDP

FDI Ž PI

Dependent variable: LnFDI
Excluded

Chi-sq

df

Prob.

LnGDP

0.059

1

0.808

LnGI

1.973

1

0.160

LnPI

14.034

1

0.000 ***

PI Ž FDI

Notes: Robust Standard Errors in parentheses. ***p<0.01, **p<0.05, *p<0.10.

Results in Table 4.3 show that:
+ PI affects GDP (p = 0.003***), GDP affects PI (p = 0.002***)
+ FDI affects GDP (p = 0.090*)
+ PI affects FDI (p = 0.000), FDI affects PI (p = 0.026**)
+ FDI affects GI (p = 0.003***)
+ PI affects GI (p = 0.000***)
From the results, in the short term, FDI, PI have the positive impact on economic
growth in Vietnam. On the contrary, economic growth also affects PI. Besides, FDI and


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PI have reaction and both of them affect GI. These different results of the causal
verification mentioned, may be due to the characteristics of the economy as well as the
incentive policy, legal environment and favorable conditions for the effective use of
resources in Vietnam provinces/cities.
4.6.

Impulse Response Function (IRF)

The IRF function indicates the effect when a shock occurs in one variable to itself and
other variables in the PVAR model. Impulse response functions show dynamic causal
relationships between FDI, PI and GDP.
lnpi : lngdp
.4

IRF

.3

.2

.1

0
0

5

10

step
impulse : response

impulse (lnpi) response (lngdp)
lngdp : lnpi

IRF

0

-.5

-1

0

5

step
impulse : response

impulse (lngdp) response (lnpi)

10


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lnpi : lngi

IRF

1

.5

0

0

5

10

step
impulse : response

impulse (lnpi) response (lngi)

lnfdi : lngdp
.1

IRF

0

-.1

-.2
0

5

step
impulse : response

impulse (lnfdi) response (lngdp)

10


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lnfdi : lnpi
.4

IRF

.2

0

-.2

0

5

10

step
impulse : response

impulse (lnfdi) response (lnpi)
lnpi : lnfdi

IRF

1

.5

0
0

5

step

impulse : response

impulse (lnpi) response (lnfdi)

10


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lnfdi : lngi
.2

IRF

0

-.2

-.4
0

5

10

step
impulse : response

impulse (lnfdi) response (lngi)

4.7.

Variance Decomposition of GDP

Table 4.4
Variance Decomposition of GDP
Period

LnGDP

LnGI

LnPI

LnFDI

LnLabor

TO

0

0

0

0

0

0

0

1

1

0

0

0

0

0

2

0.5413873

0.1533593

0.070449

0.0476705

0.1754293

0.0117045

3

0.4613772

0.0996154

0.1769657

0.1398475

0.11496

0.0072343

4

0.3453978

0.0898764

0.2498483

0.1824491

0.124909

0.0075194

5

0.2903546

0.0716859

0.3019847

0.2041284

0.1112117

0.0206346

6

0.2480055

0.0612572

0.3309023

0.2019585

0.1149515

0.0429249

7

0.2202262

0.0569789

0.3432809

0.189697

0.1122504

0.0775667

8

0.2035096

0.0553518

0.339355

0.1728468

0.1121299

0.116807

9

0.1922726

0.058043

0.3250538

0.1587701

0.1083174

0.1575429

10

0.187311

0.0611938

0.3041253

0.1510868

0.1035841

0.1926991


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Variance Decomposition of LnGDP
1.2
1

0.8
0.6
0.4
0.2
0
0

1

2
LnGDP

3
LnGI

4
LnPI

5

6
LnFDI

7

8

9

LnLabor

TO

10

One of the important applications of the PVAR model is the variance decomposition
function that analyzes the impact level of each variable shake in explaining the dynamics
of a variable in the model.
Fluctuations in economic growth over a long period of time are always explained
primarily by the shock of the previous period, but the volatility gradually decreases in
the following periods. In addition, PI and FDI shocks also contribute to the creation of
economic growth. Moreover, compared with PI, the level of FDI impact is negligible.
5. Conclusion and Policy Implications
From the study of the relationship between public investment, private investment,
FDI and economic growth in the provinces of Vietnam, the results show a strong causal
relationship between private investment and growth. The economy, FDI and economic
growth meanwhile do not realize the long-term relationship between public investment
and economic growth. In addition, the results of the study show that the causal
relationship of private and FDI investment, through the addition of private capital, to
FDI has partially overcome the shortage of capital, stimulating growth. The economy, in
addition to economic growth, also reacted and stimulated DI, FDI. The findings of this


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study have several important implications for policy makers in Vietnam, where FDI and
private sector investment need to be particularly encouraged in the provinces of
Vietnam. FDI inflows play an additional role in promoting private sector investment.
Vietnam should encourage FDI inflows, along with improved legal and investment
environment, as well as policies for managing resource use. This capital is efficient and

rationalized in the structure of FDI in sectors such as agriculture and services, and
encourages FDI into limited investment areas. Preferential policies calling for
investment should be oriented and have a specific purpose in encouraging investment in
hi-tech industries; Consumes less energy, and ensures the environment; Productive and
competitive; Ensuring national and local interests, as the city's economy is largely
dynamically developing thanks to private and FDI resources. For public investment, the
government should have strategies such as reforming the state-owned enterprise sector,
restructure public investment, and consider increasing the quality of investment so that
efficiency is more focused on Infrastructure, health and education ... because besides
private capital and FDI, economic growth has not yet had an impact on public
investment. To utilize and effectively utilize this resource to contribute to sustainable
growth and development.
With large FDI capital, Vietnam has achieved remarkable achievements in economic
growth and social development in 25 years. It can be seen that the source of human
capital is mainly foreign capital is important, but between the two sources of capital
varies depending on the economic conditions of each period that adjust the capital
structure of the first Reasonable. In addition to encouraging FDI as a global trend, the
Vietnamese government needs to recognize and take steps to overcome the constraints
it causes, encourage and promote domestic savings. Priority is given to attracting FDI in
the formulation of investment strategies and investment policies in Vietnam.

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Adams, S. (2009). Foreign direct investment, domestic investment, and economic growth in Sub-Saharan
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