Distributional Effects of Foreign Direct Investment on Poverty: The Case of Vietnam

Abstract

In this paper, we examine the impacts of foreign direct investment (FDI) on poverty reduction in Vietnam. The influences of FDI on the poor can be categorised into two types - growth-enhancing effects and distributional effects. This empirical study analyses the two effects through a sub-national data of 63 provinces and three regions of Vietnam from 2005 to 2015, using Driscoll-Kraay regression and the Sobel-Goodman mediation bootstrapping test. We measure the role of FDI as a synthetic contribution of FDI capital inflow, FDI productivity, and FDI labour creation. Results of this analysis suggest that FDI could reduce poverty throughout these regions of Vietnam since it stimulates productivity and job creation with foreign enterprises. Government bodies, therefore, need to prioritise the regulation of FDI enterprises over calling for FDI inflow at both the national and provincial levels. Additionally, differences in FDI distributions exist between Northern, Central, and Southern Vietnam.