Determinants of economic growth in Vietnam

Hoàng Thị Thu

Tạp chí KHOA HỌC & CÔNG NGHỆ

124(10): 31 - 37

DETERMINANTS OF ECONOMIC GROWTH IN VIETNAM
Hoang Thi Thu*
College of Economics and Business Administration - TNU

SUMMARY
This study explores factors that determine the economic growth in Vietnam by using time-series
model in 1988-2013. The study shows that there are strong and positive effects of domestic
investment and foreign direct investment on Vietnamese economic growth as a channel of
increasing the stock of capital. Exchange rate and Asian financial crises also determine the
economic growth. However, human capital and trade in Vietnam are not yet the channels that
increase Vietnam’s economic growth.
Keywords: determinant, economic growth, FDI, domestic investment, Vietnam

INTRODUCTION*
Recognized as a premier target for the
economic development, economic growth and
its determinants have attracted increasing
attention in both theoretical and applied
research. Literature on economic growth
showed that there are a several partial theories
discussing the role of various factors in
determining economic growth. In neoclassical
growth model, such as Solow’s growth
model, investment and labor are emphasized
as important determinants of economic

growth. The endogenous growth theory of
Romer (1986, 1990) and Lucas (1988) added
human capital and innovation as the new
factors for explaining economic growth.
Besides, labor, human capital, domestic
investment, openness and some non economic
factors showed both insignificant and
significant effects on economic growth in
several empirical researches.
Since the launch of market-oriented economic
reforms in 1986, Vietnam move towards trade
liberalization. Market orientation, openeconomy and competition for foreign direct
investment with other regional and global
markets were important policies to
Vietnamese government restructuring the
economy. Economic growth increased
dramatically in Vietnam over time. In 2013,
the GDP value was nearly seven times that of
*

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1986. Nearly three decades since 1986, the
Vietnamese economy has grown at a rate of
7.5 percent annually. So what are the major
factors that determine high economic growth
in Vietnam since its economic reform in
1986? What useful policy implications can
the country apply to increase its economic
growth in the long run? This study intends to

address these specific questions.
The structure of the study is organized as
follows. Section 2 presents the model, data
and research methodology. Section 3 presents
the findings and interpresentation. The final
section deals with conclusions and policy
implications.
METHODOLOGY AND DATA
Model specification
The purpose of this research is to examine the
determinants of economic growth in Vietnam
over the 1988-2013 period. Based on the
theoretical models of the neoclassical and
endogenous growth and some empirical
analysis models such as Romer (1990) and
Markiw-Romer-Weil (1992), the research has
developed the model to identify the most
important determinants of economic growth
in Vietnam. The econometric model is
derived from a production function in which
economic growth is the dependent variable.
Foreign direct investment, domestic capital,
labor, human capital, trade, exchange rate and
some dummy variables are independent
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Hoàng Thị Thu

Tạp chí KHOA HỌC & CÔNG NGHỆ

variables. The augmented production function
will have the following form:
Y = A Lβ1 Fβ2 Iβ3 Hβ4Tβ5Eβ6

(1)

where Y represents output or gross domestic
production (GDP), L is labor. H denotes
human capital as a skilled labor. I is domestic
investment. F stands for foreign direct
investment (FDI). T presents the country’s
international trade. A is an overall efficiency
factor, capturing the control and policy
variables that are not accounting for increase
in factor inputs I, F, L, T, E and H and
frequently included as determinants of growth
in cross-host-area studies (see in Barro and
Sala-i-Martin, 1995, chapter 12).
Assuming the production function to be linear
in logarithms, the research takes the natural
logarithm, and then time derivatives of this
production function. Also, the use of 1st
differences in econometric studies facilitates
the results explanation, since the first
differences of logarithms of initial variables
represent the rate of change of these variables.
The determinants of economic growth in
Vietnam are presented as folows:
DLnGDPt =  0 + 1 DLnFDIt + 2 DLnDIt +

3 DLnHKt + β4 DLnTRADEt + β5 DlnLt + β6
DLnEXCHANGE +Rj + εt
(2)
The dependent variable GDP is the value of
GDP at current price in the year t. The
independent variables are constructed by a set
of annual factors capturing various aspects of
endowments relevant to the determinants of
economic growth. L is the population density
in the year t, present the labor factor in the
model. HK is the number of upper secondary
school pupils per 10000 inhabitants, proxy
human capital in the host country. TRADE is
the value of international trade (exports plus
imports) over each year. DI presents the value
of domestic investment at current price and
FDI is the total registered capital of FDI
inflow. Rj is dummy variable, taken into
account to present the national effects on the
economic growth. In the model, D that
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124(10): 31 - 37

presented in front of each variable denotes the
first differences of these variables. βi is the
individual effect which assumed to be
constant over time t while error εt is a
stochastic disturbance.
Hypotheses

The empirical growth literature has identified
a number of variables that are typically
correlated with economic growth. Like many
existing studies, this research expects the
effect of each determinant on economic
growth of Vietnam as follows:
Through capital accumulation, domestic
investment (DI) and foreign direct investment
(FDI) bring financial resources to host
countries. Output growth can additionally
result from a wider range of goods in FDI and
domestic investment related production.
Moreover, FDI is considered an important
source of technological change and human
capital augmentation. Therefore, FDI and DI
are expected to have positive effects on
economic growth in the nation.
Human capital (HK) is an important element
of economic growth. The greater the level of
human capital development leading to
expansion of its physical capital to match a
high endowment of human capital, the faster a
country grows. Moreover, as a production
input, a change in HK is correlated with the
change in economic growth. Well developed
labor force, in terms of better education and
health, is likely to be able to produce more
production from a given resource base than
less-skilled workers. In this research, I
hypothesize a positive relationship between

economic growth and human capital in
Vietnam.
Labor force is one of the important factors of
economic growth. Increasing labor force
could gain in total factor productivity and
economic growth. However, if the labor force
is growing, then a share of the economy’s
investment is used to provide capital for new
workers, rather than to raise capital per
worker. The research assumes that labor helps
increasing economic growth in Vietnam.


Hoàng Thị Thu

Tạp chí KHOA HỌC & CÔNG NGHỆ

How does international trade affect economic
growth? The literature shows that trade leads
to higher specialization and, thus to gains in
total factor productivity and economic growth
by allowing countries to exploit their areas of
comparative advantage. Moreover, it expands
potential markets, which allows domestic
firms to take advantage of economies of scale,
exposure to competition and the diffusion of
technological innovations and improved
managerial practices through stronger
interactions with foreign firms and markets.
These could result in both higher overall

efficiency and possibly a higher level of
investment. Based on the discussions, the
study expects that international trade is the
factor promoting economic growth.
The exchange rate does not traditionally
occupy a central role in growth regressions
because it only recently entered theoretical
models of economic growth. However, there
has been a gradual recognition of the real
exchange rate’s role in the growth process. In
fact, the disastrous effects of overvaluation on
economic growth are widely documented in
the undervaluation reduces growth. In contrast,
Rodrik (2008) states that the growth-driven
channel are the tradable sector, which
contributes to innovations and productivity
increases. For Vietnam, maintaining an
undervalued currency could serve to subsidize
its manufacturing industries, the driving force
behind that country’s growth.
There are some national dummy variables
(Rj) to describe how the effects of different
designations on economic growth. Rj takes
the value of 1 if the observation belongs to a
particular timeline and 0 if it does not belong
to that catalog. It is expected that Vietnam
that has more economics relationship with
other nations or international economic
groups in the world, it will see greater effect
on economic growth than the other nonopenness nation.

Data
The empirical analysis was presented by time
series model. Annual data on all variables for

124(10): 31 - 37

the period from 1986 to 2013 were collected
and calculated from various issues of the
Statistical Yearbook of Vietnam, Vietnam
General Statistics Office. Since the data of
FDI and international trade are in US dollars,
they are converted into Vietnam Dong (VNDVietnamese currency) using yearly average
USD/VND exchange rate obtained from the
socio-economic data indicators in the Vietnam
– 20 years of renovation and development,
General Statistics Office, Vietnam.
EMPIRICAL FINDINGS
Stylized fact on Vietnamese economic
growth since its economic reform
Vietnam has been in transition from a
centrally planned to a market oriented
economy since December 1986. From that
time up to the present, Vietnam had seen
amazing economic achievements in growth of
gross domestic product (GDP), GDP per
capita, foreign direct investment, and
important trade and economic agreements
signed with major partners.
The economic growth rate of Vietnam
dramatically increased since 1986 (table 1).

From 4.4 per cent of average GDP growth
rate in 1986-1990, it went up to 8.18 per cent
in 1991-1995, decreased its annual economic
growth rate to 6.95 per cent in 2006-2010 and
5.64 per cent in the 2011-2013 period due to
the global economic crises since 2008.
Although the country decreased its annual
growth rates in some recent years, the average
annual growth rate of GDP in Vietnam still
presents at high growth rate (about 6.61 per
cent). This helped the country increase its
national income per capita over time. In 2013,
the GDP per capita of Vietnam was US$1908,
three times of that in 2005 and more than
twenty times that of 1986 (GSO, 2013).
This
achievement
and
the
stable
development of the society showed that the
chosen reforms of Vietnamese leaders were
going in the right way, and the contents and
implemented measures at the macro level
were ensuring growth.
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Tạp chí KHOA HỌC & CÔNG NGHỆ

124(10): 31 - 37

Table 1: Average annual growth rates of GDP in Vietnam
Period
1986-1990
1991-1995
1996-2000
2001-2005
2006-2010
2011-2013
1986-2013

Annual GDP growth
rate (%)
4.44
8.18
6.98
7.48
6.95
5.64
6.61

Of which
Agriculture, forestry
Industry
Services
and fishery
2.72

4.82
5.84
4.12
12.02
8.60
4.40
10.64
5.72
3.84
10.24
7.04
3.45
7.85
7.67
3.11
5.95
6.43
3.61
8.59
6.88
Source: Vietnam statistical Yearbook, various issues

The reason behind the achievements was the
fast development of all economic sectors,
especially the industrial sector. At the end of
1988, the regulation 217/HDBT gave the
state-owned enterprises (SOEs) autonomy to
do business and stated that the government
would no longer subsidies them. The SOEs
stopped receiving capital from the

government budget for their activities and are
now required to obtain bank loans and pay
interest. During the adaptation period, the
industrial and construction sector grew at an
average rate of 4.8 per cent during the period
1986-1990. However, after adaptation, the
industrial sector expanded quickly, about
12.02 per cent in 1991-1995 and about 8.59
per cent during the 1986-2013 period.
Eventually it became the main source of
economic growth (Table 1). The development
was the result of increasing inflows of foreign
capital in heavy industries of gas, electricity,
cement, steel, paper and agriculture
processing. Some key products of Vietnam’s
industries are crude oil, gas, aquaculture
processing, paper, garment, coal, textiles,
chemical, fertilizers, cement, iron and steel.
The service sector has been continuously
increasing since 1988 and had a high growth
rate (about 8.6 per cent) during the first half
of the 1990s. This was due to open economic
policies of the government. The rise was
mainly
from
the
improvement
in
administration, banking reform, trade
liberalization and tourism.

Besides the increase in GDP growth rates,
Vietnamese economic structure has also
shifted in the direction of industrialization and
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modernization.
Vietnam's
economy
transformed itself from being a primary sector
dependent economy to a more industry and
services sector oriented one (Table 2). During
1986-1990, agriculture, forestry and fishing
factor accounted for 41 per cent of total GDP
output, and it decreased to 22.29 per cent in
2001-2005. Industry and services sectors have
higher shares of GDP - 39.44 per cent and
38.27 per cent respectively in the first five
years of the 21 century. Even though the
share of the services sector decreased during
2001-2005, several sub-sectors such as
banking and finance, communication, import
trade, insurance and tourism grew faster than
previously. The change in the economic
structure was in the right direction and
suitable with the industrialization and
modernization policy announced by the
government.
With an objective to develop a socialistoriented market economy under the State’s
management, the Vietnamese government
kept the central leading role of the state sector

while facilitating the development of other
economic sectors. As a result, the number of
state owned enterprise declined, while the
GDP’s shares of the state sector did not
change much overtime. The number of the
foreign owned and non-state enterprises is
growing. However, the GDP’s share of the
foreign investment sector increased, from
1.14 per cent in 1986-1990 period to 18.56
per cent in 2011-2013 and the proportion of
the non-state sector in GDP decreased from
63.6 per cent in 1986-1990 to 48.95 per cent
in 2011-2013.


Hoàng Thị Thu

Tạp chí KHOA HỌC & CÔNG NGHỆ

124(10): 31 - 37

Table 2: Structure of GDP in Vietnam (%)
Period
Tota
l

Share of GDP by sector
Agricultur
e forestry
and

Industry Services
fishery
41.15
25.36
33.49

Share of GDP by ownership
Tota
l
100

35.26

NonState
63.60

40.70

100

33.78

57.54

5.68

33.10

41.05

100

39.54

49.82

10.40

22.29

39.44

38.27

100

38.68

46.54

14.60

100

20.55

40.27

39.18

100

35.48

46.64

17.89

2011-2013

100

19.38

38.28

42.34

100

32.48

48.95

18.56

1986-2013

100

26.83

33.99

39.17

100

35.87

52.18

11.38

1986-1990

100

1991-1995

100

31.78

27.52

1996-2000

100

25.85

2001-2005

100

2006 -2010

State

Foreign
investment
1.14

Source: calculated from Vietnam statistical year book 2006
Table 3: Empirical results on economic growth Effect of FDI in Vietnam
Dependent variable: Economic growth (GDP)
Variable
Intercept
Foreign direct investment (FDI)
Domestic investment (DI)
Human capital (HK)
Labor force (L)
International Trade (TRADE)
Exchange rate (USD_VND)

(1)
0.0787
(2.3043)**
0.0811

(2.3913)**
0.3757
(6.0968)***
0.0454
(0.3271)
0.3707
(0.1853)
-0.0468
(-0.2466)
0.3588
(2.1694)**

(2)
0.1441
(3.5623)***
0.0847
(2.4762)**
0.3246
(3.8275)***
-0.0127
(-0.0784)
-0.8968
(-0.5018)
-0.0778
(-0.4061)
0.3581
(2.0551)**
-0.0407
(-1.5052)

(3)
0.1696
(2.5497)**
0.0836
(2.3415)**
0.3052
(3.1197)***
-0.0198
(-0.1179)
-1.1931
(-0.6172)
-0.0817
(-0.4194)
0.3449
(1.8270)*
-0.0381
(-1.4142)
-0.0206
(-0.4666)

0.8621
0.8162
1.8990
25

0.8663
0.8113
2.0180
25

0.8673
0.8009
2.0413
25

Asian financial crises (D1998)
ASEAN
US
R-square
Adj. R-square
DW statistics
No. of Obs.

(4)
0.1229
(1.3574)
0.0693
(1.8156)*
0.3539
(2.9745)***
0.1777
(0.7393)
-2.2068
(-1.0911)
0.0004
(0.0022)
0.4526
(2.4682)**
-0.0821
(-2.1945)**

-0.0166
(-0.3304)
0.0807
(1.4431)
0.8826
0.8122
2.2775
25

Note: (1) The coefficient of the variable is shown first, followed by the t statistic is in parentheses
(2) *, **, and *** indicate significance levels of 10, 5 and 1 percent, respectively
(3) All variables are in first differences of natural log form except dummy variables
(4)Method of regression: Ordinary Least Squares with White heteroskedasticity-consistent standard errors
& covariance

35


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Tạp chí KHOA HỌC & CÔNG NGHỆ

In short, after nearly thirty years of Doi Moi
in 1986, Vietnam has recorded relatively high
growth rates, which have increased from year
to year. The annual average GDP growth rate
in the 2001-2006 period of about 7.5 per cent
satisfied the planned targets. The economic
structure has gradually shifted along the lines
of industrialization and modernization,

closely tied to the market for better efficiency.
Although the economic growth is increasing
in volume in Vietnam, the main determinant
factors of economic growth is still in
question. This will be addressed in the
following parts of the research.
Empirical results
Table 3 presents the estimation results of the
main determinants of economic growth in
Vietnam. The results from the column (1)
present effects of original determinant factors
on economic growth. It shows that foreign
direct investment, domestic investment and
exchange rate are positive and have
significant relations with the country’s
economic growth. As a result, if the growth
rate of domestic investment, foreign direct
investment inflow and exchange rate goes up
by 1 per cent, on average, the economic
growth rate increases by about 0.37 per cent,
0.08 per cent and 0.36 per cent, respectively.
This means that although both depend on the
foreign financial development and the
exchange rate, the economic growth rate of
Vietnam is much more dependent on its
domestic financial development.
The
significant and positive coefficient of FDI
suggests that FDI has a positive effect on
Vietnamese economic growth. This result is

consistent with the proponent of the FDI-led
growth hypothesis such as Romer (1990) and
Markiw-Romer-Weil (1992) and Zhang
(2001).
From Table 3, the exchange rate presents the
positive and significant effect on economic
growth of Vietnam. This means that the
depreciation of Vietnamese currency have
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124(10): 31 - 37

expansionary effects on economic growth.
The result could be explained that the
devaluation of Vietnamese currency causes
local goods to be cheaper abroad and this will
enhance the cost competitiveness of
Vietnamese exports which are a component
gross domestic product, leading to an increase
in exports and improve the country’s
economic growth.
In order to assess whether human capital and
labor force are major determinant factors of
economic growth in Vietnam, the human
capital variable (presented skilled labors) and
labor force variable (presented less-skilled
labor factor) are included in the model. I
assume that human capital and labor force
have a positive relationship with economic
growth in Vietnam. However, the results

show that the coefficients of HK and L do not
enter significantly and are negative;
representing that those factors are not yet
major determinant factors of economic
growth in Vietnam.
The model also includes some dummy
variables in the model. I believed that Asian
financial crises in 1997-1998 effects
negatively on economic growth of Vietnam
and the economic relationship of Vietnam
with ASEAN and American since their signed
trade agreements could help the economic
growth in Vietnam. The econometric results
present that the coefficients of ASEAN and
US are insignificant; representing that those
factors are not greater effect on economic
growth of Vietnam at the time of research.
The Asian financial crises factor has negative
effect on economic growth in Vietnam. This
could explain the situation that due to the
Asian financial crises in 1997-1998, the GDP
growth rates of Vietnam declined to 5.8 per
cent in 1998 and went down further to 4.8 per
cent in 1999.
CONCLUSIONS AND POLICY IMPLICATIONS
Vietnam’s economic growth has increased
dramatically since its renovation. The study
aims to examine the determinant factors of

Hoàng Thị Thu

Tạp chí KHOA HỌC & CÔNG NGHỆ

economic growth in Vietnam by using time
series model over the 1986-2013 period. This
study concludes that the foreign direct
investment inflow, domestic investment and
exchange rate are major and positive
determinants of economic growth in Vietnam.
The financial crisis such as Asian financial
crises is a dummy variable that effects
negatively on economic growth in Vietnam.
This find that even though Vietnam is a
crowded population and human capital and
openness to trade, many factors such as labor,
human capital and international trade, do not
exert independent determinants on Vietnamese
economic growth.
From the conclusions of the study, for Vietnam
to increase economic growth, the policy of
depreciation to increase exports and
employment in the economy might be the best
policy for Vietnam. Moreover, the policies that
attract more foreign direct investment inflow
into Vietnam and promote the domestic
investment in the country are still need to apply

124(10): 31 - 37

to enhance its economic growth. Policies that
encourage both foreign direct and domestic
investments in physical capital as well as human
capital, labor training and flexible international
trade development would boost both short and
long term growth of Vietnamese economy.
REFERENCES
1. Barro, R. J. and Sala-i-Martin, X., 1995.
Economic growth. McGraw-Hill, Cambridge, MA.
2. General Statistical Office (GSO), 1995-2013.
Vietnamese Statistical Yearbook. Statistical
Publishing House, Hanoi.
3. GSO (2005). Vietnam – 20 years of renovation
and development. Statistical Publishing House,
Hanoi.
4. Makiw, N.G., Romer, D. and Weil, D.N.
(1992). A contribution to the empirics of
economic growth. The quarterly journal of
economics 107, 407-37
5. Romer, D. (1990). Endogenous technological
change. Journal of Political Economy 98, S71-102
6. Zhang, K. H. (2001). How does foreign direct
investment affect economic growth in China?
Economics of Transition / European Bank for
Reconstruction and Development 9, 3, 679-693.

TÓM TẮT
NHỮNG YẾU TỐ QUYẾT ĐỊNH ĐẾN TĂNG TRƯỞNG KINH TẾ
CỦA VIỆT NAM
Hoàng Thị Thu*

Trường Đại học Kinh tế và Quản trị kinh doanh – ĐH Thái Nguyên

Bài báo nghiên cứu các nhân tố quyết định đến tăng trưởng kinh tế của Việt Nam bằng việc sử
dụng mô hình chuỗi thời gian trong giai đoạn 1988-2013. Nghiên cứu chỉ ra rằng đầu tư trong
nước và đầu tư trực tiếp nước ngoài là những nhân tố có tác động tích cực và mạnh mẽ đến tăng
trưởng kinh tế của Việt Nam. Ngài ra, tỷ giá hối đoái và khủng hoảng tài chính châu Á năm 1997
cũng là các nhân tố tác động đến tăng trưởng kinh tế của Việt Nam. Tuy nhiên, nghiên cứu chỉ ra
rằng, nguồn nhân lực và ngoại thương chưa phải là kênh giúp cho Việt Nam tăng trưởng kinh tế
trong giai đoạn nghiên cứu.
Từ khóa: nhân tố quyết định, tăng trưởng kinh tế, FDI, đầu tư trong nước, Việt Nam

Ngày nhận bài:15/8/2014; Ngày phản biện:29/8/2014; Ngày duyệt đăng: 15/9/2014
Phản biện khoa học: TS. Trần Nhuận Kiên – Trường Đại học Kinh tế & Quản trị kinh doanh - ĐHTN
*

Tel: 0989 910591

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