The impacts of foreign direct investment on economic growth in vietnam

Introduction The necessary of study After nearly 30 years of Doi Moi, Vietnam has achieved number of convincing economic and social achievements In the period 2001 – 2010, Vietnam’s economy achieved a relatively good growth rate, the average annual gross domestic product increased by 7.26%, in which, the Socioeconomic Development Plan years from 2001 to 2005 increased by 7.51% / year, the 5-year socio-economic development plan for 2006 - 2010 increased by 7.01% / year This achievement is a good sign of the economic transformation process and is the result of the policies that Vietnam has been implementing before the rapid changes of the world economy, especially the global trend chemical On the basis of innovations in economic thinking and management reform proposed in the 6th Congress of the Communist Party of Vietnam, in 1987, the 8th National Assembly adopted and promulgated the "Foreign Investment Law at Vietnam "with the goal of continuing to improve the legal environment for production and business activities in general and the legal environment for foreign investment activities in particular Vietnam has established diplomatic relations with more than 170 countries around the world, expanding trade relations and exporting goods to more than 230 markets of countries and territories In addition, Vietnam also participates in international economic and financial organizations such as the United Nations Development Program (UNDP), United Nations Food and Agriculture Organization (FAO), Public Development Organization the United Nations (UNIDO), the International Labor Organization (ILO), the United Nations Educational, Scientific, and Cultural Organization (UNESCO), the World Bank (WB), In particular, the process of international economic integration of Vietnam has taken an important step when it became the 150th member of the World Trade Organization (WTO) in 2007 after 11 years of negotiations Since 1988 when the investment law came into effect, along with the open-door exchange policy with international relations, many foreign investors have appeared in Vietnam The presence of foreign investors (the presence of FDI inflows) has brought our country a huge capital to supplement domestic capital (FDI in Vietnam from 2005 to 2014, an average of about 1,700 billion VND), providing new technology, solving jobs, training human resources and improving management skills Although certain results have been achieved, there are still many opinions that Vietnam still has not taken advantage of opportunities to attract FDI and has not yet maximized the benefits that foreign direct investment can bring The basis for the above remarks is the unusual movement of FDI inflows into Vietnam, the ratio of implemented FDI to the registered capital is still low, concentrating FDI in only a few sectors, regions and recruitment capacity modest labor, Vietnam has not been selected as an investment point for most multinational companies with great potential in technology and willing to transfer technology and knowledge This situation, together with increasingly fierce competition pressure on China and regional countries' FDI attraction, poses a huge challenge for Vietnam Recognizing the importance of a quantitative approach derived from the above arguments to assess the relationship between FDI and economic growth in Vietnam Therefore, the research topic in the direction of the models can be estimated, with the title: "The impacts of foreign direct investment on economic growth in vietnam” Study’s purpose: Evaluate the impact of FDI on Vietnam's economic growth, thereby offering some solutions to improve the efficiency of FDI utilization The results in the topic can be used as a reference for specialized teachers and students At the same time, these results also suggest for managers some macro solutions and policies to attract foreign direct investment to supplement domestic capital resources to promote economic growth Subjects and scope of study Research object: The impact relationship between FDI and economic growth Scope of research: The topic of measuring the relationship of FDI and economic growth in Vietnam in the period 1995 - 2017, through studying some indicators such as export and government spending (shown by GP) Study Methods To solve the problems mentioned, the study uses some of the following methods: General research; Descriptive statistics; Quantitative analysis The specific approach is: - Research documents, analyze the status of FDI, economic growth in Vietnam - Collect recent FDI data; using the OLS method to assess the impact of FDI on economic growth The study layout: The study layout includes chapters: Chapter 1: The theoretical basic for FDI and Economic growth Chapter 2: Foreign direct investment and Economic growth in Vietnam Chapter 3: Research methodology Chapter 4: Research results and recommendation Chapter 1: Theoretical basis for FDI and Economic growth 1.1 General theory of Economic growth 1.1.1 The concept of Economic growth Economic growth is considered one of the most important issues in economic development research Most economists agree that economic growth is an increase in income or output calculated for the entire economy over a certain period of time (usually a year) The increase shown in the growth scale reflects a more or less increase, while the growth rate is used with relative comparative significance and reflects a rapid or slow increase between periods The economy's income can manifest in kind or value The income is equal to the value reflected in the indicators of gross domestic product (GDP), gross national income (GNI) and calculated for the whole economy or per capita There are many different definitions about the quality of economic growth In a narrow sense, the quality of growth can be understood in terms of one aspect: the efficiency of investment, the evaluation of the ICOR index, or the similarity with the concept of productivity factor, TFP index In a broad sense, the quality of growth can advance to the point of sustainable development, focusing on all three elements: economic, social and environmental The relationship between development and growth is a reciprocal relationship, complementing each other, while maintaining the principle of economic growth is an important element of development Growth in quantity but not maintained stable and not accompanied by improvements in welfare lead to the development objectives are not achieved Thus, when studying the growth process, it is necessary to fully consider the two sides of economic growth phenomenon, the quantity and quality of growth 1.1.2 Some perspective on Economic growth 1.1.2.1 Classical perspective about Economic growth During the seventeenth century and earlier, Thomas Robert Malthus explained that as the supply of food and food increased, the population also increased, even at a faster rate But in the eighteenth century, when both economies of England and the Netherlands succeeded in raising their average income, under the pressure of population growth and the law of diminishing returns in agriculture, wealth was created faster than population growth rate Classical theory of economic growth by the classical economists stated that the representative of Adam Smith and David Ricardo that is considered to be the successor has developed Malthus model Adam Smith (1723-1790) is regarded as the founder of the economics department and was the first to study the theory of economic growth in a systematic way In " The Wealth of Nations", he did research on the nature and causes of economic growth and how to promote economic growth through the doctrine of the "value of labor", "The invisible hand" and the theory of income distribution From early work of Adam Smith, the labor that is used in productive and effective jobs is a source to create value for society and considers capital growth as a determinant of economic growth Adam Smith's conclusions were accepted by economists until the twentieth century, when the development of economic theory changed the traditional notions and brought economists to support cental planning and Gorverment control, considering it a better way to promote economic growth, especially in developing countries 1.1.2.2 Karl.Marx’s perspective about Economic growth According to Karl Marx, factors affecting the reproduction process are land, labor, capital and technical progress Karl Marx was particularly interested in the role of labor in creating surplus value The labor force for capitalists is a special commodity, the use value of labor goods is not the same as the use value of other goods, because it can create a greater value than its own value, that value is equal to the value of labor power plus the surplus value Karl Marx said that because capitalists needed more capital to exploit technological advances to improve workers' productivity, capitalists had to divide the surplus value into two parts: a part of consumption for capitalists, partly to accumulate production development and this is the accumulated source of capitalism Karl Marx rejected the idea of "supply creates its own demand", arguing that the economic crisis is a solution to restore a disordered balance and that the State's economic policies are important to promoting growth, especially the policy of encouraging an increase in existing demand 1.1.2.3 The neoclassical perspective about economic growth At the end of the nineteenth century was a period that marked the dramatic transformation of science and technology A series of scientific inventions were born, along with many precious resources put into exploitation, making the world economy have a strong development step This transformation had a strong influence on economists, forming a new school of economics that today is called the neo-classical school, headed by Alfred Marshall (1842 - 1924), his main work is the "Principles of Economics", published in 1890, marking the birth of the neo-classical school Neoclassical economists reject the classical view that production in a certain state requires certain proportions of labor and capital, they argue that capital and labor are interchangeable and the production process may have multiple combinations of inputs At the same time, they believe that scientific and technical progress is a fundamental element to promote economic development Therefore, attention should be paid to the inputs of production Neoclassical theory is also called supply-side economics theory 1.1.2.4 Modern perspective about economic growth Modern economists support the construction of a mixed economy, in which the market directly identifies the basics of economic activity, the Goverment participates in regulation to limit the downside of the market Essentially, a mixed economy is the combination of Keynesian economic theory and economic theory in economic regulation The basic ideas of this study are presented in P.Samuelson's book "Economics" published in 1948 Modern economics conceptualizes economic equilibrium according to Keynesian model, meaning that the balance of the economy is often below the potential, under normal operating conditions of the economy, there is still inflation and unemployment The Gorvement needs to determine the unemployment rate and the acceptable inflation rate This economic equilibrium is determined at the intersection of the aggregate supply and aggregate demand curve The theory of modern economic growth holds that the market is the fundamental factor regulating the operation of the economy The interaction between total supply and aggregate demand creates real income, jobs unemployment, price - inflation rate, which is the basis for solving three basic problems of economy: What to produce? For whom to produce? How to produce? On the other hand, the Government plays an important role in the expansion of the market economy that requires the intervention of the Government, not only the market has disabilities but also the society sets a target that even though the market is operating well, it cannot meet the target 1.1.3 Factors affecting economic growth According to modern studies on economic growth, factors affecting economic growth can be divided into two groups: the group of economic factors and the group of non-economic factors Within the scope of the study, author only research on economic factors Economic factors are the resources that have a direct impact on the input and output variables of the economy Represent that relationship by constructing the general function as follows: Y = F (Xi) In which: Y is the output value Xi (i = 1,2, , n) are variables that represent the value of economic factors that directly generate output value In a market economy, the output value of the economy depends not only on the purchasing power and solvency of the economy but also on the input variables directly related to production * Economic factors affecting growth from the supply side Normally, referring to the aggregate supply factors affecting economic growth, it refers to the four major resources: capital (K), labor (L), land resources (R), and technology The technique (T) is often combined according to a production function of the form: Y=F(K,L,R,T) In which: Capital (K): is an important input factor that has directly impact on economic growth The production capital stands on the macroscopic scale, which is considered physical capital rather than in the form of money (value) It is the total accumulated material of the economy and includes: factories, equipment, machinery,etc In developing countries, the growth is usually in width, the contribution of production capital often occupies the highest proportion in economic growth Labor (L): In the past, the concept of labor was the input material factor as the capital factor and determined by the number of people, the labor force of each country could be calculated working hours However, recent modern economic growth models have emphasized both the non-material aspects of labor called human capital, which are skills, initiatives and methods of workers Considering the labor factor according to these two contents, it is particularly important in analyzing the advantages and the role of labor in economic growth Currently, the economic growth of developing countries in terms of labor factor is contributed by the size and quantity of labor rather than the contribution of labor quality Resources (R): an important element in agricultural production and an indispensable element in the implementation of economic establishments in industries and services Natural resources from the ground, air, forest and sea are divided into two categories: renewable resources and non-renewable resources Resources are an important factor but not the most important factor in economic growth A resource-poor economy (Japan) but effectively used, economic growth is still better than resource-rich countries (Vietnam) 10 According to the ion of random elements Ui equal ie E(Ui / Xi ) = This assumption means that elements that are not in the model U i, represent them and not systematically affect the mean value of ̂ It can be said that assumptions of Xi and Ui, the estimates obtained using OLS method is linear, unbiased and minimum variance Hypothesis 1: The independent variables Xi are random, ie the values for them are predetermined This assumption is natural, since the regression analysis is mentioned as conditional regression analysis, depending on the given Xi values Hypothesis 2: The expectat 57 the values of Ui positive cancel with negative Ui values so that their average affects ̂ equal Hypothesis 3: Var( This assumption means that the conditional distribution of Y with the given value of X has the same variance, the individual values of Y revolve around the mean with the same difference Hypothesis 4: There is no correlation between Ui COV( This assumption means Ui that is random This observed error does not affect other observational errors Hypothesis 5: Ui and Xi are not correlated COV( Hypothesis 5is necessary because if U and X are correlated, then we cannot separate their separate influence on Y, while U represents the elements not present in the model Hypothesis will satisfy if X is non-random Gaus-Markov theorem: With the assumptions from of the OLS method, the estimates of the least squares method will be linear, unbiased and smallest variances in the class of conventions Linear quantity is not biased ̂ For the two regression functions, according to the above theorem, and ̂ are respectively linear, non-biased and have the smallest variance of ̂ ̂ 58 and 3.2.2 The accuracy of the least squares estimates ̂ ̂ According to the OLS method, and are determined by the formula These estimates are random quantities, with different samples having different estimates Since the variance or standard deviation characterizes the dispersion of random quantities, we use them to measure the quality of the estimates With the assumptions of the OLS method, the variance and standard deviation of the estimates are determined by the following formula: Var( ̂) = se( ̂) = √̂ 59 Summary of Chapter Chapter discussed how to sample, retrieve data, research models and techniques used to analyze data Firstly, based on previous studies, the variables used in the regression model are selected and describe in detail the method of obtaining data In particular, the dependent variable is the economic growth variable measured by the growth rate of GDP, the independent variable is the FDI that uses the net inflow of FDI data of the World Bank The following independent variables include: Government spending and Exportation Secondly, based on the situation of FDI attraction, study to decide on sample selection in the period of 1995 - 2017 Finally, in terms of data analysis techniques, because of the econometric problems arising in the estimation equation, the study found that the OLS model is most suitable for this paper 60 Chapter 4: Research content and results 4.1 Describe variables and correlations between variables Table 4.1: Descriptive Statistics Table 4.2: Pearson correlations: 61 Use the Pearson correlation test in SPSS to verify the correlation between independent variables with dependent variables and the correlation between independent variables because conditions for regression are first to correlate In addition, one of the necessary conditions for regression analysis is that the independent variable must be correlated with the dependent variable, so if in the correlation analysis step this independent variable does not correlate with the dependent variable, then we exclude that independent variables out of regression analysis * Pearson Correlation coefficient, the degree of correlation between the variables is described in the model The greater the correlation coefficient, the higher the correlation level, which may lead to multicollinearity when testing the regression model * Sig coefficient: Shows the appropriateness of the correlation coefficients between variables under F test with a given reliability Table 4.1 shows the descriptive statistics of variables used in the regression model in the period 1995 - 2017 Table 4.2 shows the correlation between variables Accordingly, it can be seen that the correlation coefficients are smaller than Correlation coefficients between GDP and E are highest, close to Correlation between other variables is also quite strong, namely correlation between GDP and G and the correlation between E and G, 0.991 and 0.980 respectively Considering the correlation between variables with economic growth, most of them show correlation in accordance with expectations, notably FDI and E Pearson correlation analysis results also show some variables independence is correlated with each other Considering the significant coefficient of Pearson test: According to Hypothesis H0: the correlation coefficient is Therefore if Sig is less than 62 5% can be concluded that the two variables are correlated The higher the correlation coefficient, the stronger the correlation.Iif Sig is greater than 5%, the two variables are not correlated Therefore, the variables in the paper are strongly correlated with the dependent variable 4.2 Research results Table 4.3: Model Summary Table 4.3 is used to assess the suitability of multivariate regression models, Adjustment R Square is 0.998 This means that 99.8% of the variation of GDP dependent variable is explained by three independent factors This shows that this linear regression model is consistent with the sample data set at 99.8%, ie the independent variables explain 99.8% of the variation of the GDP dependent variable Table 4.3: ANOVA test 63 Table 4.3 show hypothesis testing of the model's overall fit, value F = 2726.646 with sig = 0.000 , which is less than 0.05, and indicates that, overall, the regression model statistically significantly predicts the outcome variable That means that the linear construction regression model is suitable for the model Table 4.4: Coefficients * Estimated results (at 5% significance level) show: For the coefficient β1 = 0.091, when the total value of FDI changes by unit ($ / year), how will Vietnam's gross domestic product change? The positive sign of the estimated value of the relationship between the total value of FDI and Vietnam's gross domestic product is the same The value of β1 = 0.091 indicates that when the total value of FDI increases (decreases) by $ and other factors remain constant, it will increase (decrease) the value of Vietnam's gross domestic product 0.091 ($ / year) According to economic theory, when foreign direct investment increases, it will increase the gross domestic product and vice versa (in the context of other factors constant) With β1 = 0.091 >0 shows that this result is consistent with economic theory 64 For the coefficient β2 = 0.519, the positive coefficient with the high significance of the export variable suggests that when exports rise, it not only stimulates economic growth but also expands the potential benefits of FDI The value of β2 = 0.519 indicates that when the total value of increases (decreases) by $ and other factors remain constant, Vietnam's gross domestic product will increase 0.091 ($ / year) For the coefficient β3 = 0.519, the positive coefficient with a high level of significance defines the positive relationship between goverment spending and economic growth This result corroborates the importance of Goverment speding for growth, which is consistent with some previous studies Research by Nguyen Quang Trung and Tran Pham Khanh Toan found that government spending has a positive impact on economic growth by increasing the purchasing power of aggregate demand * Durbin – Watson test with significant at 5%: Table 4.5: Durbin – Watson test 4.2.1 Regression Standardized Residual test 65 Table 4.6: Regression Standardized Residual test 4.3 Conclusions: Through the use of the OLS regression model for empirical testing, the paper identifies the impact of foreign direct investment on Vietnam's economic growth from 1995 to 2017 Despite the validation tests The reason for the variable of the instrument variables has a low level of significance, however, the research has partly achieved the basic objectives The research results show that there is a strong correlation between foreign direct investment and economic growth, factors such as Export and Government spending also have a strong impact on economic growth 66 The study has focused on the theoretical basis of the relationship of FDI and economic growth Based on the analysis of the status of economic growth and the process of attracting FDI in Vietnam in the period 1995 - 2017 and the estimated results from the models: measuring the relationship of FDI and economic growth (approach OLS method), since then, the topic has given some recommendations to boost FDI attraction in Vietnam in the coming years Besides, the study has clarified the views on economic growth To systematize measures, indicators of economic growth, on the basis of which formulate a comprehensive assessment of economic growth The study also clarified the basic arguments on FDI, Export, Government spending and the role of FDI in the development of the economy, systematically reviewed the empirical studies on the relationship of FDI, Export, Government spending for economic growth Based on an overview of theory and empirical research, the thesis has drawn the main characteristics of FDI attraction and economic growth in Vietnam in the period of 1995-2017 Proposing a model of quantitative research on the relationship of FDI and Vietnam's economic growth, simultaneously analyzing the relationships of economic growth and FDI indicators Analyzing the estimation results from the relationship measurement model of FDI and economic growth for some specific results: GDP growth is the main factor (in selected factors) positively impacting on attract foreign direct investment This is a strong factor affecting FDI, B1 coefficient of FDI by GDP reaches approximately Other factors such as export, Government spending in general have positive impacts on attracting FDI over time as certain effects on both FDI and GDP The research results confirm the twoway interaction in the positive direction of FDI and economic growth targets 67 A good system of policies to attract and use FDI will positively impact growth, capital accumulation, improving the quality of human resources, regional and world economic integration 4.4 Recomendations:  Recommendations from quantitative results Based on the analysis results of the model, we propose some implications of policies to improve the efficiency of FDI attraction in Vietnam to implement the strategy of rapid and sustainable economic growth in the coming years as follows: Promote economic growth The volatility (increase) of FDI is heavily dependent and mainly on GDP growth, so creating shocks to GDP will have a positive impact on FDI attraction In the current context with low economic growth, low inflation, the Government's implementation of macroeconomic policy easing including monetary policy and fiscal policy not only helps increase chief economist but also a way to attract FDI inflows into Vietnam Accelerate the process of international economic integration Opening up and liberalizing trade are considered as a channel to promote technology transfer, both opportunities and challenges for Vietnam The estimated results from the OLS model show that the economy's exports have a positive effect on GDP Therefore, in the future, Vietnam needs to continue to accelerate bilateral and multilateral negotiations on trade  Recommendations from qualitative results: Effectively use FDI in enterprises 68 Economic efficiency measured by profit is the most important indicator of capital types for businesses It can be seen that although FDI brings a lot of differences to the production and business efficiency of enterprises, the efficiency of capital use of foreign-invested enterprises is higher than the general efficiency, in there are FDI enterprises Promote equitization of state-owned enterprises, create fair competition among economic sectors Streamlining the number of state-owned enterprises, reducing the size of state-owned enterprises and equitizing state-owned enterprises Promote economic restructuring towards efficiency, increase the efficiency of production focus Determining a reasonable capital structure by ownership so that state-owned enterprises can operate more efficiently and have a larger role in implementing the economic development strategy Equitization of state-owned enterprises is one of the important solutions of the policy to adjust and restructure state-owned enterprises, the fastest way to reduce the market power of monopolies and move to competitive markets of state-owned enterprises Business linkages need to be strengthened, forming value chains associated with global value chains Vietnam has many models of successful integration, it needs to continue to improve and replicate such as the value chain business model - tourism industry, Logistics industry (Warehouse transport service), processing and manufacturing industry, Vietnam Leather and Footwear Association, links between FDI enterprises and Vietnamese enterprises - the automotive industry, etc Reform and perfect administrative institutions to create attractiveness in the environment to attract and implement FDI projects 69 In response to the requirements of international integration, of practical requirements in Vietnam, to improve the business, investment environment, create new momentum and new vitality for development, administrative reform and procedures Administration is always the top recommendation of domestic and foreign enterprises Need to innovate from thinking and awareness of the role of local authorities in attracting FDI into local economic development in the context of promoting openness and international integration In order to meet this demand, the Government needs to pay more attention to the good performance of two functions: (i) Provision of "Public Services", including :physical infrastructure such as transport infrastructure, ports, warehouses, electricity and water works, etc and "soft" services (customs services, tax services, insurance, business registration and licensing services, paper investment license, ) (ii) Function of monitoring and supervising activities in society in general, production and business activities in particular in the direction of reducing the level, scope, areas of intervention and brand improvement force and efficiency of management and regulation of state agencies 70 Summary of Chapter Chapter 4, the topic has selected the OLS model to assess the impact of FDI on Vietnam's economic growth Analyze the simultaneous response of variables through the OLS model The research results confirm the two-way interaction in the positive direction of FDI and economic growth targets A good system of policies to attract FDI will have a positive impact on growth, domestic investment, promote sustainable growth, and expand Vietnam's integration into the global economy 71 ... impact of the size of government spending on economic growth If the increase in the size of 32 government spending constitutes an increase in the rate of economic growth, then the composition of. .. respectively 38 2.1.2 Foreign direct investment into Vietnam in the form of investment In the early years of attracting foreign direct investment, all the above mentioned forms of investment appeared,... the international circulation of production factors, including foreign investment, is determined by the other ratios of the main production inputs available in countries The international flow of