A Var Analysis of the Connection between FDI and Economic Growth: A Case Study from Vietnam after 30 Years Reforms

Abstract

According to many studies, Foreign Direct Investment (FDI) has had a positive effect on economic growth. Thomas et al. (2008) discussed that multinational companies are more successful in developing new products and technologies than local companies, thus exerting competitive pressure on firms in some countries to compete and innovate. This has prompted developing countries to look for ways to attract FDI. The most developed economy faces the issue of investment- savings and FDI promotes growth by offsetting this gap by increasing productivity, technology transfer and increased competition (Kobrin, 2005). Given the practical benefits and expected benefits of FDI, many researches have been conducted to study the impact of FDI on economic growth. However, the results have been found mixed regarding the impact of FDI on economic growth in developed countries. In the theory of economic growth, the factor is always mentioned. When an economy wants to grow faster, it needs more capital. If domestic capital is not enough, this economy will want to have capital outside the country, including FDI. One of the purposes of FDI is to exploit conditions to achieve low production costs, foreign-invested enterprises will employ many local workers. The income of an improved part of the population will contribute positively to local economic growth. During the hiring process, vocational skills training, which in many cases is new and progressive in developing countries that attract FDI, will be provided by enterprises. This creates a skilled workforce for FDI-attracting countries. Not only regular workers but also local professionals have the opportunity to work and professional training in foreign-invested enterprises. At the same time, FDI stimulates the domestic economy to join the global production network. When attracting FDI from multinational companies, not only the multinational company’s investment capital, but also other domestic enterprises that have business relationships with that enterprise will participate too, which is regional division of labor. Therefore, the host country will have the opportunity to join the entire production network which is conducive to boosting exports. FDI provides much-needed resources for developing countries such as capital, technology, management skills, entrepreneurship, branding and market access. These are essential for the industrialization and modernization of the country, to develop and create more jobs, and to contribute to poverty reduction and improve the economic situation in developing countries, such as in Vietnam. As a result, most developing countries recognize the potential value of FDI and liberalize their investment regimes. Like other developing countries, Vietnam also opens the door to FDI into the country with the expectation of great benefits. After 30 years of renovation and opening up integration, despite many difficulties, Vietnam has achieved many advancements in the process of economic growth, increasingly bringing Vietnam out to the international arena. Var Analysis