Foreign investment, economic growth, and environmental degradation since the 1986 “Economic Renovation” in Vietnam

Abstract

Vietnam has achieved impressive economic growth principally supported by foreign direct investment (FDI) in the last three decades. However, environmental deterioration is observed. No studies have ever been conducted to examine the link between economic growth and environmental degradation, focusing on the important role of the FDI, in Vietnam in both short run and long run. Using the ARDL and the threshold regression techniques for 35 years from 1986, Vietnam’s “Doi Moi” (economic renovation), the U-shaped relationship between economic growth and the environmental quality is found in the long run and at the upper threshold of economic growth. FDI in the long run and at the upper threshold of economic growth also leads to further deterioration of the environmental quality. Also, consumption of fossil fuel energy deteriorates the environment in the long run, and at any level of economic growth. These findings simply mean that Vietnam has to adopt a new growth model with the focus on the quality FDI projects and clean energy sources to achieve the dual objectives: (i) sustained economic growth and (ii) improved environmental quality.