Abstract
Foreign direct investment (FDI) inflows to Vietnam have increased significantly in recent years. Theoretically, capital inflows will put pressure on the overvaluation of local currencies in countries, despite different exchange rate mechanisms. So, the problem facing the Vietnamese government is the need to examine the relationship between the exchange rate and FDI in order to develop effective policies. This study examined the relationship between the exchange rate and FDI in Vietnam in the period of 2005–2019 using the VAR (vector autoregression) model based on quarterly frequency data. The new points of this study are: (i) using the real effective exchange rate (REER) of the Vietnamese currency with 143 major trading partners of Vietnam; and (ii) adding two control variables into the VAR model to examine the relationship between the exchange rate and FDI in Vietnam – a case study for developing countries. The findings show that, firstly, there is a positive causal relationship between FDI and Vietnam’s real effective exchange rate. Secondly, trade openness has a positive impact on FDI and REER in Vietnam. Thirdly, economic growth has an impact on REER, but no statistically significant impact on FDI was found. The findings can provide useful information to help policymakers plan and make decisions on future policies and support further research studies.
Highlights
According to Barrell and Pain (1997), Borensztein et al (1998), Foreign direct investment (FDI) is a capital source that plays an important role in promoting productivity growth in both developed and developing countries
Trade openness has a positive impact on FDI and real effective exchange rate (REER) in Vietnam
Economic growth has an impact on REER, but no statistically significant impact on FDI was found
Summary
According to Barrell and Pain (1997), Borensztein et al (1998), FDI is a capital source that plays an important role in promoting productivity growth in both developed and developing countries. If cost-driven FDI argued that investment decisions of companies mainly uses the input resources of the host country that want to own income-generating assets abroad to produce and sell products to the home coun- tend to be influenced by financial and exchange try or export to a third country, the depreciation of rate variables. Theories that analyze the effects of exchange rates The research by Pham and Nguyen (2013) on the on imperfect markets have a great influence on the relationship between the level of the real exchange theoretical approach to the relationship between rate and FDI in Vietnam in the period 1990–2007 the exchange rate and FDI later: Froot and Stein shows that the depreciation of the VND has (1991) and Blonigen (1997).
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