Regional Economic Development and Foreign Direct Investment Flows in Vietnam, 1988-98

Abstract

Over the 1988-98 period, large amounts of foreign direct investment (FDI) have flowed to several regions and provinces in Vietnam. These have contributed to regional economic development by increasing the industrial capital stock and output. However, as FDI flows have been allocated unequally between provinces and between regions, such contributions may widen the gap between rich and poor provinces. An analysis of factors that influence the pattern of regional allocation of FDI flows finds that the infrastructure, the quality of the labour force and the size of the local market are the most important factors deciding the regional allocation of FDI flows. Government tax incentives, on the other hand, have not made any significant impact on attracting FDI flows to poor and remote provinces. Thus the government should shift its concentration of public expenditure toward poorer provinces to improve these provinces' physical and social infrastructure. Such improvement of infrastructure will speed up the diffusion process of FDI flows toward poorer provinces located around big cities and more developed provinces. The rapid diffusion of FDI flows will then contribute more significantly to reduce the gap between rich and poor regions and provinces in Vietnam.