Factors Affecting Foreign Direct Investment and Economic Performance in Developing Economies: Evidence from Vietnam

Abstract

ABSTRACT Since the economic and political reforms in 1986, Vietnam government has introduced a high extent of decentralization in fiscal and administrative aspects. This paper examines the impact of foreign direct investment (FDI) as a channel of fiscal and administrative decentralization on economic performance in Vietnam as the embodiment of emerging economies. The results point out that fiscal decentralization in terms of better tax revenue and spending on development investment have a positive and significant impact on the attraction of foreign investment. Strikingly, the level of “unofficial expenditure” has a negative influence on FDI, and controlling of corruption at local levels is critical to attract foreign investment. The results from instrumental-variable estimations show that FDI and total spending of local governments positively and significantly affect the performance of local economies.