The Impact of Foreign Direct Investment on Economic Growth: Evidence from Vietnam

Abstract

The relationship between Foreign Direct Investment (FDI) and economic growth has long been a topic of great interest in the field of international development. Although this interest has provided rich insights into the impact of FDI on growth in developing countries, there are very few empirical analyses of the linkage in Vietnam compared to other developing countries. Therefore, this study investigates the impact of FDI inflows on economic growth in Vietnam over the period from 1990 to 2013 using time series analysis techniques that address the problem of nonstationarity. Specifically, the Unit root test and Cointegration approach are applied to ensure that the regressions are not spurious. The empirical results reveal that FDI inflows, domestic investment, trade openness and secondary education have positive impacts on economic growth whereas inflation rate is found to have negative effect on economic growth. In addition, the impact of government consumption on economic growth is negative and statistically insignificant. Ultimately, this paper suggests that Vietnamese government should improve regulations governing business activities by easing the process of business start-up, controlling price, enhancing public spending on education and training, and augmenting cooperation between training centers and Foreign-invested enterprises.

Keywords: Foreign Direct Investment, economic growth, time series, unit root test, cointegration, Vietnam.