Using the simple regression model to investigate the relationship between the interest rate and private investment in vietnam

VIETNAM GENERAL CONFEDERATION OF LABOUR TON DUC THANG UNIVERSITY FACULTY OF FINANCE AND BANKING DAI HOC TON BUC THANG FINAL REPORT METHODS OF ECONOMIC ANALYSIS Using the simple regressi

VIETNAM GENERAL CONFEDERATION OF LABOUR

TON DUC THANG UNIVERSITY FACULTY OF FINANCE AND BANKING

DAI HOC TON BUC THANG

FINAL REPORT METHODS OF ECONOMIC ANALYSIS Using the simple regression model to investigate the relationship between the

interest rate and private investment in Vietnam

Lecturer: Bui Duy Ting Team members:

1 Nguyén Bao Chau B20H0465

2 Va Huynh Yén Nhi B20H0566

3 Nguyễn Ngoc Tuyét Nhi — B20H0565

TABLE CONTENT

ABSTRACT

12 — Private Investment

SIGNIFICANCE OF THE STUDY

AN OVERVIEW OF THEORY AND EXPERIMENTAL RESEARCH

COMMENTARY ON PREVIOUS STUDIES

RESEARCH METHODOLOGY

SUMMARY, CONCLUSION, AND RECOMMENDATIONS

REFERENCES

ABSTRACT

This research paper analyzes the relationship between interest rates and investment in economic growth potential in Vietnam from 1996 to 2020 The current economic policy includes the following basic projects to increase private investment By regression method, the equations are used to find out the relationship between the variables in the model The research results prove that there is a relationship between economic growth and several related factors, including interest rates The results of the experiments reveal that interest rate changes are tightly linked and associated with economic development in general and investment in particular The level of investment of the enterprise mostly depends on the interest rate, for the profit received to be greater than the cost spent; the investment project of the enterprise must be profitable An increase in interest rates causes investment projects to decline, so the investment is inversely proportional to interest rates

1 INTRODUCTION

In the economy, the interest rate is a percentage parameter that has a very large influence and determines many other factors The change in interest rates is regularly updated on press platforms or social networks because it directly affects and plays a decisive role in people's lives Changes in interest rates represent the health of a country's markets and economy

Interest rates in the economy are considered a useful tool to coordinate economic resources most efficiently and reasonably Money is saved or loaned to finance the economy and interest is the desired source of income Interest rates greatly affect the level and circulation of money in the economy to expand or contract, capital is

encouraged or prevented

Theory and practice show that interest rates are very important in the macroeconomics of

a country In the developed capitalist countries, it takes nearly a hundred years to accumulate a capital from production and consumption Capital is extremely crucial in Vietnam, which is a small country on its road to becoming a modernized industrialized country by 2022 Therefore, interest rate policy is very important for mobilizing idle capital to invest in production and development

Investment also contributes to improving the country's science and technology levels Investment activities from abroad, especially from countries with developed economies, will help countries accessing investment have the opportunity to access modern

technologies, and advanced production lines, and promote scientific research activities Therefore, underdeveloped or developing countries often have policies to attract foreign investment activities from developed countries to take advantage of scientific and technological advantages Scientific and technological achievements from developed countries will help the economies of these countries grow The process of

industrialization and modernization of these countries depends heavily on investment in science and technology

In a country’s economy, private investment is an important factor accounting for a large proportion of aggregate demand According to statistics from the World Bank,

investment usually accounts for 24% to 28% of the total demand structure of all countries In the short run, when aggregate demand is fixed, the size of investment capital increases - an increase in investment demand will cause aggregate demand AD to increase (provided other factors are constant)

AD=C+1+G+Nx

In there:

C: Consumption

I: Investment

G: Government spending

NX: Net exports

The real interest rate reflects the overall real cost of borrowed money, so the investment under consideration depends on the real interest rate, not the nominal interest rate The binding relationship between the real interest rate (r) and investment (I) can be

generalized by the following equation: I = I (r) This equation assumes that investment depends on interest rates

The investment function shows that the quantity of investment demanded decreases when interest rates tend to rise, and investment is discouraged when interest rates rise because

of the high opportunity cost

1 With a higher interest rate, the cost of borrowing from a bank will be higher

2 Money deposited in a bank has a higher rate of return As a result, the savings are used

to invest with a lower return

On the other hand, Marxist economics when analyzing available capital and showing that: the average interest rate and rate of return in society If this relationship is not appropriate and imbalanced, resulting in the interests of producers not being satisfactorily

resolved in the long run, it will significantly reduce the desirability to invest in

production, the speed of development, and production The size of the economy is not scalable Besides, people who hold savings will tend to prefer to deposit money in the bank for profit

2 SIGNIFICANCE OF THE STUDY

This study aims to help people see the binding relationship of lending rates with the size

of investment capital and show the importance of capital for investment If the

government wants to promote Vietnam's economy, it must have a stable financial system and reasonable mechanism to help Vietnamese businesses expand their investment scale

as well as attract a large amount of foreign investment

Developing countries face enormous challenges to achieve real and sustainable development due to limited and scarce economic resources These countries seek to improve available resources in addition to increasing investment as a significant contributor to economic growth Developing countries differ in how effectively they use interest rates to motivate investment That is why this article seeks to determine the degree to which interest rates induce investment Within the scope of this topic, it is possible to present an overview with knowledge of finance mixed with economics to highlight the relationship between the two components above."

3 AN OVERVIEW OF THEORY AND EXPERIMENTAL RESEARCH The nexus between interest rate and investment has been discussed by much research work These studies were empirical and drew various inferences regarding the association between the rate of interest and investment The results of the studies on the relationship between the interest rate and investment vary in several directions, namely:

Studies confirm that there is an inverse relationship between two variables of interest rate and investment, (Lugo, 2008) - the existence of an opposing relationship between interest rates and investment with low-interest rates, (Greene & Villanueva, 1991) published Research Papers of the International Monetary Fund with the content of identifying essential factors affecting investment in more than 20 developing countries in the world Period of more than 10 years from 1975 to 1987 and conclude that variables in the macro economy such as foreign debt, and rising inflation harm the private investment rate of countries Growing, meanwhile, the level of per capita income and the general investment rate are quite large and have a positive impact on private investment Another study by (Bader & Malawi 1010) over 15 years from 1990 to 2005 by evaluating through study the integration of economic variables including real interest rate, and average income The results of this study reflect the negative effect of high-interest rates on private investment when interest rates tend to increase by approximately 1%, the level of private investment decreases About 44%, reflecting a positive relationship between investment rate and

income level, but the interest rate is the variable that affects investment level higher than income level

Several studies with the conclusion that interest rates have no effect on private

investment or have a negligible effect on private investment, one of which is Osundina & Osundina's last year, is applied to Nigeria - a West African country for 30 years from

1980 to 2010, analyzes the relationship between interest rates and investment by considering economic variables such as government spending, exchange rates, public debt and gross domestic product at the cost of the nation's factors of production The results show that no relationship exists between private investment and interest rates Meanwhile, a 2015 study by Share & Suarez, studied creating a survey questionnaire for more than 550 financial managers in several US companies at the end of 2012 However, this survey excluded non-profit companies, some financial companies, and government institutions, the study examined the degree of investment desirability for interest rates, and the results showed that in most companies, when interest rates fall, the company's investment plan decreases, the level of investment is greater when interest rates tend to increase, this result is more evident for companies that do not have a loan plan Capital in the short term or not focusing on financial barriers is confirmed by Dimson at the end of

2018, a survey examining the investment level of 8 out of 12 industries and 12 financial assets of more than 20 countries over 100 years since 1900, the results show that even when interest rates are higher, all assets are more active Another study in 2011 by Mehrara & Karsalari with 101 developing countries in the period from 1970 to 2007 demonstrated that there is a non-strong relationship between the rate of private investment and the return on investment real interest rates, however with interest rates between 5% and 6%, this relationship is positive for the economy Above this level, the relationship between investment and real interest rates tends to be the opposite, and this confirms the severity of high-interest rates

The effect of interest rates on investment is not the same in different periods depending

on the following other policies This statement was studied by Baillie and McMahon in

1981 using the Granger test as well as the Box Jenkins model to examine the effects of three GDP and interest rate shocks on the Federal Republic of Germany from 1960 to

2005 1978 Research results indicate that investment is inelastic concerning short-term nominal interest rates and for the case of real interest rates, similar results are found However, this result also shows that long-term nominal interest rates affect investment Even after the government changed its policy to regulate the money supply instead of controlling interest rates, the results remained the same

In 1983, research by Lanyi and Saracoglu concluded that there is a positive relationship between private investment and interest rates This study is conducted through the statistical collection of data from more than 20 developing countries for the period 1971

to 1980, besides; financial assets and real interest rates are also examined After this study, they made a statement about a positive correlation between real interest rates and

the growth of financial assets However, in 1992, the study by Ingersoll and Ross used random interest rates instead of discount rates to assert that interest rates negatively affect investment uncertainty

In the least developed countries, Joshua and Delano conducted the consequential factors

of private investment in about 23 countries between 1975 and 1985 The results show that real interest rates have an inverse relationship with investment

The relationship between investment and interest rates in Jiangsu province, China - the province with the largest level of investment through Wayans study in 2015, the study was carried out by testing the Johansen Integration used for a long-term relationship Simultaneously, VECM - vector error correction model is applied in the short term, from

2003 to 2012 Empirical results show that investment and interest rates have a long-term relationship However, this relationship is positive in the short term Some other factors that have an impact on investment are found to include the investment environment, the level of economic development, and the preferential policies of the government Different conclusions about the relationship between interest rates and investment have been reached by many scholars based on the synthesis of a large number of empirical studies The 2004 study by Qing and Chong demonstrated that investment does indeed have an impact on interest rates when investment is viewed as an endogenous variable in the money utility function model If the analysis is based on stochastic interest rates rather than discount rates, the results suggest that it is not certain that interest rates have a significant effect on investment, a conclusion supported by Ingersoll and Ross's study in

1992

According to research in 2010 by Luis H.R Alvarez, the uncertainty of the exchange rate limits the size of investment through the spillover model of short-term interest rates Some conclusions from scholars differ from the traditional theory that there is a positive correlation between interest rates and investment Based on the analysis of real financial assets of developing countries (21 countries) for the period from 1971 to 1980 Similarly, the study of Lanyi and Saracoglu in 1983 also demonstrated that interest rate fluctuations and fixed financial assets are positively correlated This conclusion is further

demonstrated by the study of Andrea Beccarini in 2007 when the discount coefficient is used to represent the investment variable and the GMM estimation method is used to analyze the relationship between investment and investment and interest rates in an uncertain environment, the results show a positive correlation between them

The VAR model is used by some scholars to test the conclusion that exchange rates do not affect investment and the causal relationship between interest rates and investment, the study by Mohammed Dore, 2013 with the found that investment depends on the level

of demand in the macro economy, rather than on interest rates Besides, the effect of interest rates on investment varies due to different policies This conclusion was reached

by R T Baillie and P C McMahon, in 1981 through the analysis of three interest rate hikes from 1960 to 1978 in West Germany

Iorember and Akighir (2015) employed the quarterly data of interest rate for the Kalman Filtering Technique and Space Modeling between 1999 and 2013 The forecasts of interest rates from out-of-sample showed that the interest rate in Nigeria would hover around the average rate of 18 percent This trend would be observed from the first quarter

of 2014 to the fourth quarter of 2020 The study concluded that such a level of interest rate is not suitable for the investment condition in the economy, and hence, an efficient policy measure must be introduced The authors also stressed that the persistent increase

in interest rate would adversely affect the Small and Medium Enterprises (SMEs) of the economy

Bagci and Erguven (2016) performed a Causality and Correlation Analysis to determine the trend direction between the variables of the model The authors employed the Augmented Dickey-Fuller test, Granger causality tests, and Pearson and Kendall Tau's correlation tests between 2002 and 2015 The result of the study was in contradiction with the well-known fact that the interest rate determines the investment and growth patterns of the economy Moreover, there was an illusory correlation between the interest rate and growth, and the study found no evidence of an association between these variables as proposed by the economic theory

Appienti, Ofori, Damptey, and Kusi (2016) incorporated investment, income, interest rate, and inflation employing the data from 1990 through 2014 The study used Co- integration analysis and Stationarity and Causality tests to analyze the association between the variables in the economy of Ghana The 11 findings of Granger causality confirmed a significant, positive, and bidirectional relationship between investment and income Moreover, the results revealed a significant unidirectional association between income and inflation; and income and interest rate

The results confirmed the economic theory that investment has a negative relationship with the real rate of interest in Pakistan Jamil and Muhammad (2015) investigated the impact of the rate of interest on private investment as well as the economic growth of Pakistan They used a time-series data span from 1980 to 2010 They as well used a structural equation model to discover the associations among the said variables in the model The outcomes showed that the labor force, government expenditures, and private investment have a positive and significant impact on GDP; however, FDI has a statistically significant and negative association with GDP They found a distinctive long- term association between the growth of the economy and its factors, including the rate of interest The outcomes suggest that the behavior of the rate of interest is significant for the growth of the economy And that's due to the ass As for previous empirical studies, because of the significant number of these studies, five of them were chosen The first study was conducted by Greene and Villanueva (1990) They explored the determinants

of private investment in less developing countries for 23 countries over the 1975-1987

8

period They found that the real deposit interest rate harms private investment The second study by Hyder and Ahmad (2003) was about the slowdown in private investment

in Pakistan They found that higher real interest rates reduce private investment Larsen (2004), in the third study about the United States, has found that low mortgage interest rates make direct real estate investments attractive to suppliers of the real estate units Aysan and others (2005), in the fourth study, analyzed the determinants of unsatisfying private investment growth in the Middle East and North Africa (MENA) throughout the 1980s and 1990s Their findings have shown that the real interest rate appears to exert a negative effect on firm investment projects And in the last study, Wang and Yu (2007) examined the role of interest rate in investment decisions for firms in Taiwan Their results reveal that the interest rate plays a vital role in investment associations between the rate of interest and investment and the growth of the economy

4 COMMENTARY ON PREVIOUS STUDIES

The majority of the studies in the literature covered by this study focus on proving the relationship between the interest rate and investment, as well as the existence of a non- linear relationship between the interest rate and investment and the change from positive

to negative according to interest rate rates at both the micro and macro level of analysis, such as (Lugo, 2008), Alvareand and Koskef (2003), Whuyan et al (2015), Greene and Villanueva (1990), Larsen (2004), Hyde Furthermore, most earlier studies used an integrated approach to evaluate the presence of a long-run link between interest rate and investment, which indicates association but not causality between variables

5 RESEARCH METHODOLOGY

This study is guided by this hypothesis;

Ho: There is no significant relationship between real interest rate, prime lending rate, and Domestic Private Investment in Viet Nam

To examine the effect of interest rate on Domestic Private Investment, a model is specified that states that Domestic Private Investment (PDI) depends on Real Interest Rate (RIR) and Prime Lending Rate (PLR)

The functional relationship is expressed thus:

PDI = f (RIR, PLR) This is transformed into a mathematical relationship as follows;

DPI =a+ bIRIR + error;

3.2

DPI = a + b2PLR + grror;

Where DPI = Domestic Private Investment

RIR = Real Interest Rates

PLR = Prime Lending Rates

error; = stochastic or error term

b1, b2 = parameters to be estimated

Apriority theoretical expectation

bl <0,b2<0

Data

Data was collected from The World Bank and FX Empire on various issues

Unit: %

10