Abstract
By making use of a recently released panel dataset that covers 61 provinces of Vietnam from 1996–2005, this study examines the link between foreign direct investment and economic growth. Our analysis, which is based on a simultaneous equations model, reveals that in overall terms a mutually reinforcing two-way linkage between FDI and economic growth exists in Vietnam. However, this is not the case for each and every region of Vietnam. The results presented in this study suggest that the impact of foreign direct investment on economic growth in Vietnam will be larger if more resources are invested in education and training, financial market development and in reducing the technology gap between the foreign and local firms.
Highlights
Together with the increasing pace of globalization, the debate about the benefits of international capital flows is becoming intensifying
While most studies generally agree on the potential benefits of foreign direct investment (FDI) and the dangers of short-term capital flows (e.g., Stiglitz, 1999, 2000, 2004), they often look at the effects of the various types of international capital flows in isolated cases
Its interaction with trade or financial development of the host country is positively related to economic growth in some of the models we considered in this paper
Summary
Together with the increasing pace of globalization, the debate about the benefits of international capital flows is becoming intensifying. The process of financial liberalization is most intensifying in these markets and the contrasting effects of long-term versus short-term capital flows, if any, would be most transparent in these countries. We reinvestigate the effect of FDI on economic growth in emerging markets using improved model specifications and regression techniques in contrast to previous studies. As the financial liberalization intensity indicator measures the effects of short-term capital flows, its presence together with foreign direct investment, a type of long-term capital, help reflect the overall impact of foreign investment on growth as well as identify which force, short-term or long-term capital, is stronger. We employ one of their liberalization variables to control for the variation in economic growth that is due to the financial liberalization process in the host countries.
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