FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS

---------***--------

MIDTERM ASSIGNMENT
Major: International Economics

Economic growth of Vietnam in the period 1995 - 2020:

the role of foreign capital

Group: 14
Class: KTEE410
Supervisor: Prof. Pham Xuan Truong

Hanoi, March 2023

INTRODUCTION 1
CHAPTER 1: THEORETICAL BACKGROUND 3
1.1 Economic Growth 3
1.1.1 Definition 3
1.1.2 Measurement 4
1.1.3 Affecting factors 5
1.2 Foreign capital 6
1.2.1 Definition 6
1.2.2 Classification 6
1.2.3 Role for recipient countries 7
1.3 Economic growth model related to the role of foreign capital 8
1.3.1 FDI theories 9
1.3.2 Keynesian model 10
1.3.3 Neoclassical growth model 11
1.3.4 Cobb-Douglas production function 12
CHAPTER 2: LITERATURE REVIEW 14
2.1. Review on the role of ODA 14
2.1.1. Current situation in Vietnam 14
2.1.2. The role of ODA on Vietnam’s economic growth: 17
2.2. Review on the role of FDI 20
2.2.1. The current situation 20
2.2.2. The role of FDI on Vietnam’s economic growth: 22
CHAPTER 3: QUANTITATIVE ANALYSIS ON THE ROLE OF FOREIGN
CAPITAL ON VIETNAM’S ECONOMIC GROWTH 25
3.1 Model specification and hypothesis 25
3.1.1 Model specification 25
3.1.2 Proxy to measure 25
3.1.3 Research Hypothesis 27
3.2 Data description 28
3.2.1 Sources of data 28
Source: World Bank 28
3.2.2 Description of statistics and interpretation for each variable 28
3.3 Estimation process 29
3.3.1 Estimated model 29
3.3.2 Correlation analysis 30
3.3.3 Regression analysis 31
3.4 Results and Discussion 33
CHAPTER 4: POLICY IMPLICATION 35
4.1 Policy Implication 35
 4.2 Recommendation 36
4.2.1 Government’s side 36
4.2.2 Public and Private companies’ side 37
CONCLUSION 39
REFERENCES 40
ABBREVIATIONS

GDP: Gross Domestic Product

FDI: Foreign Direct Investment

ODA: Official Assistance Development

FC: Foreign Capital

GFCF: Gross fixed Capital formation

LFT: Labor force, Total

NT: Net trade in goods and services

LISTS OF TABLES

Chart 2.1 Total net ODA to Vietnam, 1990-2016

Chart 2.2 Net ODA received per capita in Vietnam

Chart 2.3 ODA commitment of international donors in 1993 - 2012

Chart 2.4 Total registered FDI inflows in Vietnam

Table 3.1 Model’s variables explanation

Table 3.2 The source of data for the variables

Table 3.3 Variables sum results

Table 3.4 Variables correlation results

Table 3.5 Variables regression results

Table 3.6 Overall model regression results

INTRODUCTION

i. Rationale of the research

Vietnam has experienced remarkable economic growth over the past two
decades, with its GDP increasing by an average of 6.7% per year between 1995 and
2020. This sustained growth has been attributed to a variety of factors, including
favorable government policies, improved infrastructure, and a growing labor force.
However, perhaps the most significant driver of Vietnam's economic growth during
this period has been the influx of foreign capital.

Foreign direct investment (FDI) has been a key driver of Vietnam's economic
growth, accounting for over 70% of its total exports, and contributing significantly
to its GDP growth (Nguyen, T., 2019). This influx of foreign capital has allowed
Vietnam to upgrade its industrial base, develop its infrastructure, and expand its
export markets, contributing to its sustained economic growth. Vietnam's rapid
economic growth in recent years has been driven largely by its integration into the
global economy, which has been facilitated by the inflow of foreign capital. By
attracting foreign investors, Vietnam has been able to access international markets,
transfer technology, and gain access to management skills that have helped it to
achieve rapid economic development. Thereby, allowing Vietnam to upgrade its
technology and production methods, develop new industries, and increase its
competitiveness in the global market.

Vietnam's success in attracting foreign capital and leveraging it to drive

economic growth has made it a model for other developing countries seeking to
follow a similar path (Le, B. et al., 2021). Given the significance of foreign capital
to Vietnam's economic development, it is crucial to look at the elements that have
helped the country succeed in luring and utilizing this capital as well as to evaluate
the effect that this capital has had on the country's economic growth over the past
20 years.

ii. Aims and Objectives of the research

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 The research paper mainly explores the impact of foreign capital - mainly FDI
and ODA on the gross domestic product (GDP) over the years from 1995 to 2020.
Thereby assessing the impact of these factors and making new recommendations
suitable for the long-term and sustainable development of this field compared to the
existing policies introduced by the government, government policymakers, and
existing business organizations.

iii. Scope of the research

The subject of the research is foreign capital into Vietnam (FDI and ODA),
economic growth (GDP) and their impact on the Vietnamese economy. The research
discusses the theoretical background of foreign capital and economic growth as well
as related policies in the period from 1995 to 2020 to have a clear look on how it
has affected GDP growth, export performance, job creation, technology transfer,
and infrastructure development.

iv. Research methods

The research provides an empirical model with a correlation and regression

analysis between economic growth (GDP) and several independent variables
(including foreign capital). The data is collected from 1995 to 2020 on the World
Bank (WB) website on a few factors that affect gross domestic product of Vietnam.
The research will use the traditional econometrics method OLS (ordinary least
squares) to analyze the data.

v. Structure of the research

Structure of the research report: The essay is made with four main chapters:

Chapter 1: Theoretical Background

Chapter 2: Literature Review

Chapter 3: Estimated model and statistical inferences

Chapter 4: Policy implication

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CHAPTER 1: THEORETICAL BACKGROUND

1.1 Economic Growth

1.1.1 Definition

Economic growth describes how the size of a nation's economy changes over
time, either growing or contracting. The production of commodities and services
within an economy is frequently used to measure growth and express it in terms of
scale and growth rate. Many nations, especially developing ones, place a high
priority on growth in the economy since it is considered to be related to rising living
standards and higher social welfare. Economic expansion has a number of important
characteristics.

First of all, it is usually distinguished by four separate phases: expansion,

peak, contraction, and recovery. Changes in capital, labor, interest rates,
governmental regulations, and economic cycles are a few examples of the variables
that frequently affect these periods.

Second, economic growth is generally considered to be an indicator of a

nation's overall economic health. This is due to the fact that it offers a thorough
overview of the nation's production and consumption of products and services. In
this regard, the GDP, which represents the entire value of all products and services
produced inside a nation's boundaries during a specific time period, is frequently
used to gauge economic growth.

Last but not least, economic growth is a worthwhile goal. One advantage is
that it may lead to more job opportunities and higher pay for employees. It can also
encourage technological advancements and innovation, which can support
economic growth. As a result, both corporations and legislators frequently prioritize
economic growth as a major goal for their respective organizations.

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 1.1.2 Measurement

The measurement of economic growth is a crucial aspect of any economy, as it

is used to assess the performance of a country's economy over a given period. It is a
crucial indicator of its standard of living, level of productivity, and ability to meet
people's needs. The size of an economy is usually measured by real GDP - the GDP
that takes into account inflation.

Real GDP is calculated by adjusting nominal GDP for inflation using the GDP
deflator. Since real GDP takes into account inflation, it provides a more accurate
picture of economic growth than nominal GDP. The formula to calculate real GDP
is as follows:

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟
× 100

The economic growth of a nation can be understood as the annual increment of

the real GDP. The GDP growth rate is a measurement of the changes in real GDP
over a particular period. A positive GDP growth rate indicates that the economy is
growing, while a negative growth rate indicates a contraction in the economy.

It is calculated by taking the difference between the real GDP of two periods
and dividing it by the real GDP of the earlier year. The formula for calculating GDP
growth is:

𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑌𝑒𝑎𝑟 2 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑌𝑒𝑎𝑟 1

𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑌𝑒𝑎𝑟 1
× 100

Although GDP growth is a widely used measure of economic growth, it has

some limitations. First, it does not take into account the distribution of income or
wealth within an economy. Second, it does not account for the value of non-market
activities, such as household work, volunteer work, or the informal economy. Third,
it does not reflect the environmental or social costs of economic activity.

However, the GDP growth rate is not always representative of the economic
progress of a country. For example, it does not take into account the distribution of
income or wealth within an economy. Alternatively, a falling growth rate may be

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due to temporary factors and may not represent the long-term economic health of a
country. Moreover, the GDP growth rate is affected by different economic factors,
such as consumer spending, government spending, investment in physical capital,
entrepreneurship, and innovation.

Still, GDP continues to be a crucial tool for directing firms, investors, and
politicians, regardless of its limitations. For instance, it can help firms make
strategic decisions about investment and expansion; furthermore, it can assist
policymakers in understanding the size and growth rate of their economy. Also,
investors can use GDP to evaluate a nation's economic health and decide where to
direct their money.

1.1.3 Affecting factors

There are four primary factors affecting economic growth: land, labor, capital,
and entrepreneurship. According to the Federal Reserve Bank of St. Louis, these
factors are "resources that are the building blocks of the economy; they are what
people use to produce goods and services."

Land contains natural resources, commercial property, and renewable

resources like forests. It also includes agricultural land. Although the value of land
varies among businesses, it is typically seen as a key component of economic
growth.

The term "labor" refers to the people in charge of performing services and
producing goods. This is a crucial component of any economy and encompasses
everyone from managers to industrial workers.

Capital encompasses assets used for business purposes and the production of
goods and services. These can include money, factories, equipment, tools, and other
supplies. Capital is essential for growth and expansion in many sectors.

The last component of economic growth is entrepreneurship, which is

regarded as being of extreme significance. Any technical advancement in the

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economic system is driven by entrepreneurs and visionaries, who are also crucial in
the development of new products, industries, and jobs.

Ultimately, these four production components form the foundation of any

economy, and promoting economic development requires an understanding of how
they interact.

1.2 Foreign capital

1.2.1 Definition

Foreign capital is a type of investment or financing that originates from

foreign sources. Foreign capital can come in various forms, including equity, debt,
or grants, and can be used to finance various projects, including infrastructure
development, business expansion, or research and development. It can also be
referred to as "paid-up capital" obtained from foreign sources, which includes the
reinvested profits and dividends of a foreign investor and is registered by a pertinent
government body.

1.2.2 Classification

Foreign investments can take several forms. It is often used interchangeably

with terms like foreign investment or FDI and ODA.

FDI is a significant form of foreign capital, where an investor, company, or

government from another country acquires an ownership stake in a foreign
company or project. There are two types of FDI: horizontal FDI and vertical FDI.

● Horizontal FDI occurs when a company establishes the same type of

business operation in a foreign country as it operates in its home country.

● Vertical FDI occurs when a business acquires a complementary business that

is unrelated to its core business.

ODA refers to the financial assistance provided by governments, multilateral

organizations, or private organizations to support the economic development and

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welfare of developing countries. ODA can take many forms, such as grants, loans,
or technical assistance.

1.2.3 Role for recipient countries

FDI and ODA can bring various benefits to the recipient country, such as
improved economic growth; increased job opportunities; improved infrastructure,
health care, and education; better access to capital and technology; political
stability; and the facilitation of the transfer of knowledge and skills.

Therefore, recipient countries have to take the initiative in encouraging foreign

capital from international investors, and making the most of the investment and aid
that they are given.

● One of the key roles that recipient countries must undertake is creating an
environment that is welcoming to international investment. This requires a
range of measures, such as improving infrastructure, providing attractive
investment policies, and establishing legal frameworks that protect investors'
rights.

● Another important role that recipient countries need to play is developing a

workforce whose skills are adequate to take part in the global economy.
Investing in education and training programs can give the skills necessary for
workers to take advantage of the opportunities brought on by foreign capital
inflows.

● Promoting technological spillovers is also something that recipient countries

must pay attention to. Through actions like requiring technology transfer
agreements, funding R&D, and fostering innovation and entrepreneurship, it
is possible to encourage overseas companies to transfer technology and
expertise to the local economy. This can help the receiving countries improve
their technological capacity and output.

● Last but not least, recipient nations must make sure that the advantages of
foreign capital inflows are shared fairly among the population. This can

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 entail putting policies in place to deal with income disparity, encouraging
inclusive growth, and creating social safety nets.

However, there are also potential risks associated with foreign capital,
including inflation, currency risks, the possibility of capital flight in times of
economic instability, the potential for foreign investors to exert influence over
domestic policy decisions, dependency on aid, debt burdens, and the potential for
corruption and misuse of funds.

Overall, the role of recipient countries in promoting and utilizing foreign

capital inflows is still essential for the growth of their economies. By actively
fostering an environment that is favorable for business, training a skilled workforce,
managing risk, encouraging technological spillovers, and ensuring an equitable
distribution of benefits, they can draw in and profit from foreign capital inflows,
supporting economic growth and development.

1.3 Economic growth model related to the role of foreign capital

The use of foreign capital plays a significant role when it comes to the
economic growth model. As it refers to the inflow of capital into a receiving
country, originating from a different country, company, or individual, it can be
stated that the inflow of investments will lead to an increase in economic growth.
More capital in the receiving country can lead to new job opportunities,
improvements in infrastructure, and technical advancements.

Moreover, investments are part of the composition of the GDP, meaning that
the real income of the population is partly dependent on it. This is especially the
case for developing countries, which depend on overseas capital to escape the
vicious cycle of poverty and increase their GDP in a sustainable way. The
Keynesian Model, the Cobb-Douglas Production Function, the Neoclassical Growth
Model, as well as FDI theories suggest a connection between economic growth and
foreign investments.

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 1.3.1 FDI theories

FDI theory refers to a set of economic theories that attempt to explain why the
home country decides to invest and FDI’s impact on the host country’s economy.
There are several different FDI theories that have been proposed by economists
over the years.

One of the earliest and most influential FDI theories is the market
imperfections theory, which suggests that FDI occurs when a company seeks to
exploit market imperfections, such as differences in labor costs, resource
availability, or regulations, between countries. In other words, a business will invest
abroad if doing so will give it a competitive edge.

Product Life-Cycle Theory is a theory that describes how a nation decides to

trade based on where a product is in its life cycle. It implies that when the product
begins to be exported, the comparative will gradually shift from an advanced
country to a nation with lower costs. With this, companies can take advantage of
opportunities in foreign markets, as well as mitigate the risks associated with
changing market conditions.

Another FDI theory is the internalization theory, which suggests that

companies will invest in abroad countries in order to internalize production
processes that they would otherwise have to contract out to third-party suppliers.
Companies can lower their transaction costs and increase efficiency by owning and
managing these manufacturing processes.

A third FDI theory is the eclectic paradigm, which argues that when a
company has ownership-specific advantages, location-specific advantages, and
internalization advantages, it will invest in foreign countries.

Overall, FDI theory helps to explain why companies choose to invest in host
countries and what impact that investment has on the host country's economy.
Understanding these theories can be beneficial when developing models that
appropriately analyze how foreign capital interacts with economic growth.

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 1.3.2 Keynesian model

The four-sector Keynesian model includes the macroeconomic factors:

household, business, government, and foreign. Oftentimes, the model is reduced to
three factors, all but the factor sector. However, connected to abroad capital, the
fourth sector represents the impact of international powers on the economy. The
foreign sector is responsible for all economic activity beyond the boundaries of an
economy. This suggests that in the four-sector model, one can not refer to a closed
economy. The foreign sector includes households, businesses, and governments that
reside in different countries.

In the Keynesian Model, the three sectors are labeled as follows:

𝐴𝐸 = 𝐶 + 𝐼 + 𝐺

When the foreign sector is added, it gets adjusted to:

𝐴𝐸 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀

X (Export) can be referred to as the goods produced by the domestic economy

that are purchased by the foreign sector. M (Import) can be referred to as goods
produced by the foreign sector and purchased by the domestic economy.

The equilibrium of the model is identified by the intersection between AE =

C+I+G+(X-M) and the 45-degree line. An equilibrium must take place on this line,
since the 45-degree line contains every potential equilibrium value of the
four-sector Keynesian model.

In relation to the importance of international investment, this suggests that the

foreign sector is crucial when looking at an open economy. Due to the fact that
exports are goods purchased by foreign countries, it indicates that overseas capital
must increase. If a developing country purchases a lot of goods from its domestic
economy, it could be an incentive for foreign investors to fund said domestic
economy.

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 1.3.3 Neoclassical growth model

The neoclassical growth model is a theoretical framework used in economics

to analyze long-term economic growth. It is based on the assumption that an
economy's output is determined by its factor inputs, such as labor and capital, and
that these factors are subject to diminishing returns over time. Therefore, economic
growth, according to this model, is driven by technological progress and
investments in physical and human capital rather than the factor inputs itself. In the
neoclassical growth model, foreign capital plays an important role in economic
development.

The model also assumes that individuals and firms behave rationally in an
attempt to maximize their own utility or profits in a perfectly competitive market,
and that externalities like pollution or traffic congestion have no impact on
economic progress.

According to the neoclassical growth model, long-term economic growth is

driven by increases in the economy's stock of capital, which can be accumulated
over time through savings and investment or via international sources. The model
predicts that countries with higher rates of savings and investment, such as foreign
capital, will experience faster rates of economic growth via a number of ways.

● Investment growth: Foreign capital inflows can increase a nation's

investment levels, resulting in higher levels of productivity and economic
expansion.

● A rise in savings: This is another effect of overseas capital inflows on

domestic savings rates. When foreign investors contribute to domestic
investment projects or businesses, the economy has access to new sources of
savings.

● Access to international markets: By making investments in or forming

partnerships with domestic businesses, foreign investors can expand the
markets available for domestic goods and services, boosting exports and
stimulating the economy.

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 ● Development of local infrastructure: Building new roads, bridges, and
airports can improve a nation's ability to produce and move goods and
services as foreign funding can also help with infrastructure development.

However, the neoclassical growth model suggests that foreign capital cannot,
by itself, stimulate sustained economic growth in a developing economy. The
benefits of foreign capital are not automatic and depend on the conditions in the
host country. For example, if the host country has weak institutions, corruption, or
inadequate infrastructure, the benefits of overseas investment may be limited or
even negative.

If foreign capital leads to an increase in the economy's stock of capital, this

can boost productivity and output, leading to higher rates of economic growth. On
the other hand, if it leads to a decline in the domestic savings rate, this can reduce
the economy's long-term growth potential.

1.3.4 Cobb-Douglas production function

The Cobb-Douglas production function is also affected by foreign capital and

models the relationship between production output and input. The function is used
to represent the technological relationship between the amounts of inputs and the
amounts of outputs that can be produced by those.

The Cobb-Douglas production function of a single good with two factors is

described as:

β α
𝑌 = 𝐴𝐿 𝐾

The total production (Y) is determined by the total factor productivity (A),
which is dependent on each country. Further, there are two input factors. One of
them is labor (L), which measures the hours a person works in a year, and the other
is capital (K). α and β are the output elasticities of capital and labor. They are
constants determined by the technology available. They are used to consider the
relative importance of the two input factors. In addition, the elasticity of the output
measures the responsiveness of the output to a change in labor and capital inputs.

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 One part of capital comes from foreign sources, which plays an important role
in the determination of total production, as Charles Cobb and Paul Douglas describe
in the production function. Yet foreign capital can have the potential to influence
other factors within the production function as well through a number of ways.

● Increased capital input: Foreign capital inflows can boost an economy's

capital supply, which could boost economic output.

● Increase in total factor productivity: This can be attained by the introduction

of new technology, managerial techniques, and marketing tactics that boost
the effectiveness and productivity of domestic businesses.

● Gain in labor productivity: Through enhancing working conditions, training

programs, and access to improved technology, foreign investment inflows
may also result in an improvement in labor productivity.

● Good trade effects: By improving a country's access to overseas markets,

foreign capital inflows can also raise a country's ability to compete
internationally, which can boost exports and economic growth.

Nevertheless, the function implies diminishing marginal returns which means

simply increasing capital inputs through foreign investment do still increase the
outputs, though at a diminishing rate.

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CHAPTER 2: LITERATURE REVIEW

2.1. Review on the role of ODA

2.1.1. Current situation in Vietnam

ODA has been one of the most critical sources of external funding for
Vietnam's economic development over the past few decades. Vietnam's relationship
with ODA began in the 1990s when the country began to transition to a
market-oriented economy. Although ODA capital accounts for only about 4% of
GDP, it accounts for a significant proportion of the total investment capital from the
state budget (about 15-17 percent on average).

This is very meaningful since the state budget for our development investment
is still limited, while the need for socio-economic infrastructure development is
very large. The primary objective of ODA was to support the country's
infrastructure development and a broad range of social welfare programs such as
education, healthcare, and poverty reduction. For instance, the World
Bank-supported Higher Education Reform Agenda Program has helped upgrade
universities across the country, providing Vietnamese students with access to
higher-quality education and job opportunities. In particular, the program produced
knowledge and skills-building training for students, facilitated research and
innovative practices, and linked to job opportunities, which contributed to long-term
sustainability.

ODA inflows have contributed significantly to Vietnam's economic growth.

According to the Asian Development Bank (ADB), Vietnam received
approximately USD 16.81 billion in ODA disbursements from 1993-2019, and
increasingly it has relied on a larger share of concessional loans rather than
grant-based assistance. These funds were distributed among various sectors of the
economy, with infrastructure projects receiving the most significant share of funds.

As of 2021, the current situation on ODA in Vietnam is that it remains an

important source of financing for the country's development. According to the

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Ministry of Planning and Investment of Vietnam, ODA disbursement in 2020 was
estimated at USD 3.56 billion, accounting for 20.6% of total investment capital for
social development.

Chart 2.1 Total net ODA to Vietnam, 1990-2016

Source: Bernhard Gunter (2019)

Chart 2.2 Net ODA received per capita in Vietnam

Billion US$ (Current US$)

Source: Trading Economics

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 Ever since 1992, Japan has always been the leading country in ODA for
Vietnam with a total committed capital of 509.804 billion yen, equivalent to over
USD 5 billion. That first of all shows the desire to strengthen cooperation in the
economic field with Vietnam. Japan's ODA for Vietnam has increased year after
year larger than the previous year.

Japan's ODA is considered as one of the basic sources of external capital that
can be used to accelerate the socio-economic development of Vietnam. For
example, for many years, especially in 1998, when the Vietnamese economy faced
many difficulties due to the impact of the financial storm in Asia, the Government
had to use ODA as an additional source of finance for the economy. 3% for budget
support, 17% for education and training, 35% for capital construction, 45% for
on-lending projects.

Chart 2.3 ODA commitment of international donors in 1993 - 2012

Billion US$ (Current US$)

Source: The Foreign Economic Relations Department

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 2.1.2. The role of ODA on Vietnam’s economic growth:

ODA or more commonly referred in general as foreign aid is required for

underdeveloped nations with limited initial capital accumulation to escape the
vicious cycle of poverty and become developing nations with middle-income
levels. It can take on many forms such as humanitarian aid, non-refundable ODA,
refundable ODA with low-interest rates, or non-interest rates. Foreign assistance is
an extra source of cash for any nation's development initiatives, and its influence on
economic growth can be favorable or bad depending on how well or significantly it
is utilized.

The research results from Nguyen et al. (2020) indicate that ODA has a strong
positive impact on the Vietnam economy growth in the long run. He suggested that
Vietnam being able to maintain its reception of foreign help for decades was due to
its incredible utilization of aid, which in turn inspired confidence in donor countries.
Hadjimichael et al. (1995) investigated the impact of foreign aid on economic
development in Sub-Saharan countries over the period 1986-1992. The result
showed a positive sign on economic growth. Several studies have highlighted the
evidence of a positive effect of public development aid on economic growth such as
Karras (2006). He studied the link between foreign assistance and GDP growth rate
using annual data for the period 1960–1997 and a sample of 71 development
assistance recipients from developing countries. The author concluded that foreign
aid has a positive effect on economic growth. Accordingly, the effect of various
forms of foreign capital inflows, notably FDI, and ODA, on the economic growth of
26 African countries was examined by Mowlaei (2018). The findings indicated that
ODA has a positive and significant effect on economic growth in both the long and
short run. Ekanayake and Chatrnas (2010) also gave evidence indicating that
international assistance has contributed significantly to economic growth in SSA
nations by subsidizing public investment. Qayyum and Haider (2012) studied the
effects of external help, foreign debt, and governance on the growth of the Pakistani
economy, confirming a favorable correlation between aid and economic growth.

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 Other published research shares the same perspective on the relationship
between ODA and economic development, but its significance will be diminished if
it is not utilized. Hansen and Tarp (2001) and Dalgaard et al. (2004) claim that
although foreign aid does not have an absolute correlation with growth, it is
nonetheless demonstrated that the more the aid flows, the more rapidly they
stimulate the economic growth of recipient nations. According to a study on the
relationship between ODA and economic growth in Vietnam (Nguyen, 2016), aid
had pretty beneficial effects on the Vietnamese economy between 1993 and 2006.
Yet, since 2008, the relationship between these two components has not followed
any particular pattern, not even an inverse proportion. Their examination of
Pearson's correlation coefficients between ODA and GDP growth indicates a
negative association between foreign aid and economic growth in Vietnam.
According to Morrissey (2001), foreign aid may indirectly contribute to economic
growth by raising investments in physical and human capital as well as the country's
capacity to purchase capital goods and technologies. There are four alternative
perspectives on the effectiveness of foreign aid, according to McGillivray et al.
(2006):

● First, aid generates diminishing returns

● Second, aid's effectiveness is affected by external and climatic conditions

● Third, aid's effectiveness is influenced by political conditions

● Last, aid's effectiveness depends on the quality of institutions in the host

country.

Burnside and Dollar conducted a study on the relationship between foreign

aid, policies, and economic growth in 56 developing nations, including 16
middle-income and 40 low-income nations (2000). Using a two-stage least squares
(2SLS) method, the findings indicated that foreign aid was positively and
significantly associated with economic growth when it entered the growth
regression as an interactive term with policy; however, foreign aid had no effect on
economic growth in the countries studied without this term. Hansen and Tarp

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(2001) gave out the exact same opinion that ODA relied on a suitable policy regime
to be able to have a positive impact on economic growth.

A few research papers show a complete opposite result to that within the
above studies, this could be due to foreign aid not being made use of properly and
appropriately. The effect of foreign aid on Cambodia's economic growth over the
period 1980–2014 was analyzed by Sothan (2018). He came to the conclusion that
foreign aid has a substantial disadvantageous effect on economic growth over the
long term. A number of previous studies (Rajan and Subramanian, 2008; Ali and
Isse, 2005), among others, came to the conclusion that overseas aid had a
disadvantageous impact on economic growth. The findings of an empirical study
conducted by Rehman and Ahmad (2016), who investigated the impact of foreign
capital inflows on the economic growth of 21 developing countries over the course
of the period 1990-2013, indicate that net ODA has a highly detrimental effect on
the economic growth of developing countries. In the same manner, a study was
conducted in Zambia on the factors that contribute to economic growth, and the
impact of these factors on economic growth was calculated in both the short run and
the long run. The study found that only foreign aid had a negative impact on
economic growth in the long run (Chirwa & Odhiambo, 2016).

These publications provide additional evidence supporting the notion that

official development assistance (ODA) may and will, provided that it is utilized
effectively, contribute to the expansion of the economy. Using country-specific time
series growth models, Most and Vann de Berg (1996) conducted research on the
factors that determine economic growth in eleven nations located in sub-Saharan
Africa. The findings of the investigation showed contradictory findings. It was
discovered that foreign aid had a significant and negative association with economic
growth in Togo, Ivory Coast, Nigeria, Zambia, Rwanda, and Botswana. On the
other hand, it had a significant and positive association with economic growth in
Niger, Senegal, and Mauritius. Chang and Mendy (2012) conducted research into
the empirical relationship between openness and economic growth in 36 African
countries from 1980 to 2009. Their findings were published in 2012. The findings

19
of the study indicated that factors such as foreign aid, exports, imports, labor
employed, and trade openness were significantly and positively associated with
economic growth. When the data were broken down by region, the study indicated
that international assistance had a mixed bag of effects. Foreign assistance was
shown to have a positive and substantial association with economic growth in the
Middle and North Africa regions of Africa; while, on the contrary hand, in the West
and East Africa regions, foreign assistance was found to have a negative and
significant association with economic growth. Anyanwu (2014) conducted research
using an empirical growth model to investigate the factors that influence economic
growth in China and Africa. The findings of the study indicated that for African
countries, net official aid was positively and significantly associated with economic
growth. These findings were reached by applying panel data for African countries
covering the period 1996-2010 in conjunction with time series data for China
covering the period 1984-2010. The findings of the analysis indicated that ODA
was significantly correlated with a negative impact on economic expansion in
China.

2.2. Review on the role of FDI

2.2.1. The current situation

Vietnam is considered an attractive destination for foreign direct investment

(FDI). In 1991, the registered FDI capital into Vietnam was USD 2.07 billion, of
which the realized FDI capital was USD 428.5 million, reaching over 20% of the
registered capital. The amount of FDI into Vietnam increased gradually after that.
Notably, the fact that Vietnam joined the World Trade Organization in 2007 has
strongly increased the registered FDI in Vietnam from USD 21.35 billion in 2007 to
71.73 billion in 2008 alone. However, the US financial crisis in 2008, then spread
globally, seriously affected FDI inflows into Vietnam.

In 2010, realized investment capital reached USD 11 billion, by 2015 it

reached USD 14.5 billion, and by 2016 it reached USD 15.8 billion. By the end of
2017, Vietnam has attracted over 25,000 foreign direct investment projects with a

20
total registered investment of more than USD 333 billion. Up to now, 129
countries/territories have invested in Vietnam.

FDI projects have been present in 63/63 localities, FDI capital has also been
invested in 19/21 production and business lines of Vietnam (Ministry of Finance,
2018). According to data from the Foreign Investment Agency - Ministry of
Planning and Investment, in 2019 FDI capital into Vietnam reached USD 38.95
billion, up 7.2% compared to 2018. In which, the number of projects registered to
contribute newly granted investment registration certificates are 3883 projects with
a value of USD 16.75 billion, making Vietnam one of the most attractive countries
for foreign investors.

The period from 2010 to 2014 registered FDI capital fluctuated continuously
and increased slightly from USD 19.89 billion in 2010 to USD 21.92 billion in
2014. With a strong and continuous increase, the total investment capital in Vietnam
in 2015 was USD 22.7 billion, by 2019 this figure increased to USD 38.95 billion.

In 2020, due to the impact of the Covid-19 pandemic, the global economy was
severely affected, so foreign investment capital registered in Vietnam had a
decrease, reaching only USD 28.53 billion, down 25% compared to with 2019. The
production and business activities of enterprises will be affected, so FDI projects in
Vietnam will have a decrease in both registered capital, and investment capital.
newly registered projects, but implemented capital only decreased slightly, reaching
98% compared to 2019.

21
 Chart 2.4 Total registered FDI inflows in Vietnam

Billion US$ (Current US$)

Source: Foreign Investment Agencies

2.2.2. The role of FDI on Vietnam’s economic growth:

Research on the relationship between FDI and economic growth is done by

many scholars with diversity in scope, data, and research methods. The presence of
FDI enterprises have helped promote export activities of enterprises along with
domestic industry and then create a positive spillover effect for the economy
through horizontal link. Hsiao (2006) establishes a panel data model in the case of
China, Korea, Taiwan, Hong Kong, Singapore, Malaysia, Philippines and Thailand.
Research results show that FDI has a one-way effect directly on GDP and indirectly
through exports. In addition, FDI promotes economic development by affecting
labor productivity through various channels. According to Blomstrom and Kokko
(1998), the impact of FDI on labor productivity through three channels: knowledge
change with skilled labor, technology transfer and efficient resource allocation due
to competition. Nguyen Thi Tue Anh et al. (2006) said that besides direct impact on
economic growth, FDI also has an indirect impact on labor productivity in
localities. FDI puts competitive pressure on domestic enterprises to improve their
business performance. FDI helps to supplement capital for development investment
(Brems. H., 1970), develop human resources and create jobs (Gregorio, Jose, 2003),

22
expand markets and promote exports, accelerating the process of economic
restructuring.

However, there are also many studies that do not detect the relationship
between FDI and economic growth. Karikari (1999) examines the causal
relationship between FDI and economic growth in Ghana from 1961 to l988, the
results show that FDI has no effect on economic growth, while economic growth
does reduce it. light FDI inflows. According to Karikati, this result may be due to
the insignificant volume of FDI over time data, the FDI effect increasing trade
freedom rather than boosting the country's economic growth. Similarly, when
studying 72 developed and developing countries with OLS and GMM methods,
Carkovic & Levine (2002) did not find a strong relationship between FDI and
growth.

In general, there are many research papers on the effects of FDI and trade on
economic growth through many stages and by different methods. Studies between
countries and specific countries have analyzed the effects of FDI and international
trade on economic growth (Kohpaiboon, A., 2006; Pahlavani, M., E. Wilson & AC
Worthington, 2005) largely conclude that both FDI and international trade promote
economic growth, the fact that FDI is attracted by countries that are expected to
grow faster and are subject to commercial opening. However, the degree of impact
on each country is different (Balasubramanyam, 1996). In addition, from the point
of view of cost theory transactions, with a large scale of operations and visibility
transnational, investment activities of FDI enterprises are associated with the
transfer of science and technology to minimize transaction costs. So, FDI creates
opportunities for localities to receive further capital, acquire modern techniques and
technology, and experience advanced business management of foreign partners
(Ridzuan et al., 2017).

To evaluate the effectiveness of FDI, countries use some basic indicators such
as contribution of the FDI sector to GDP; net sales and profits of FDI enterprises
(Pao and Tsai, 2011). There, the FDI sector's contribution to GDP is calculated
according to both value and share of GDP. According to Pazienza (2015), the value

23
and proportion of the contribution of FDI in GDP of host countries is quite high
compared to other types of enterprises operating in the economy, this promotes
growth in GDP of that country and business activities in the country, helping the
national economy not be in surplus surplus, and the balance of payments is not in
deficit.

24
CHAPTER 3: QUANTITATIVE ANALYSIS ON THE ROLE
OF FOREIGN CAPITAL ON VIETNAM’S ECONOMIC
GROWTH

3.1 Model specification and hypothesis

3.1.1 Model specification

We aim to study the effect of ODA as well as FDI on economic growth in

Vietnam by using time-series data methodology. Based on the theoretical basis as
well as previous studies, our group has built a model to assess the econometric
relevance of the explanatory variables.

Economic growth = f(Foreign capital, Gross fixed Capital formation,

Labor force total, Net trade in goods and services)

From the above function, it can be deduced in general terms that changes in
any of the determinants can directly affect the dependent variable, which is
economic growth. However, we will focus mainly on the effect of foreign capital.

3.1.2 Proxy to measure

In this analysis, we will use the following dependent variable:

● GDP - The annual value added created through the production of goods and
services in Vietnam ranging from 1995 to 2020 (at current US$).

And within the model, the following explanatory variables will be taken into
account:

● FC - the inflow of capital into the home country through international

nations, in this model, foreign capital will be the sum of FDI and ODA (at
current US$).

25
 ● GFCF - the acquisition of produced assets (including purchases of
second-hand assets), including the production of such assets by producers for
their own use, minus disposals (at current US$).

● LFT - the pool of workers either in employment or in unemployment within

a specific geographical area.

● NT - the difference in value between a country's exports of goods and

services and its imports (at current US$)

It is evident that there is a linear relationship between these variables. In order

to examine the correlation between them, we will construct a multiple linear
regression model in this research paper.

Here is our linear progression model:

𝐺𝐷𝑃𝑖 = β0 + β1𝐹𝐶𝑖 + β2𝐺𝐹𝐶𝐹𝑖 + β3𝐿𝐹𝑇𝑖 + β4𝑁𝑇𝑖

Table 3.1 Model’s variables explanation

Name Variables Expectation Note

GDP Gross Domestic

Product

FC Foreign Capital + An increase in FC would motivate

economic growth

GFCF Gross fixed capital + GFCF increases then economic

formation growth accelerate

LFT Labor force total + An increase in LFT will promote

economic growth

NT Net trade on goods + Net trade increase would motivate

and services economic growth

26
 However, economic growth also depends on many other socioeconomic
factors. Hence, in order to construct a more precise model, we will set out 𝑢𝑖 to

represent those factors.

The population regression function in stochastic form:

𝐺𝐷𝑃𝑖 = β0 + β1𝐹𝐷𝐼𝑖 + β2𝑂𝐷𝐴𝑖 + β3𝐺𝐹𝐶𝐹𝑖 + β4𝑁𝑇𝑖 + 𝑢𝑖

3.1.3 Research Hypothesis

Based on existing theories and research, we developed the hypothesis that:

foreign direct investment, official development assistance, gross fixed capital
formation, and net trade all have an impact on economic growth. In detail:

● FC: According to FDI theories and the neoclassical growth model, foreign
capital can lead to an increase in the stock of capital which helps increase the
level of output of an economy. For this, we come up with the hypothesis that:
The relationship between foreign investment and economic growth is
positive.

● GFCF: Federal Reserve Bank of St.Louis have conducted and published a

research paper on how gross fixed capital formation affects the growth rate
of an economy. Based on their findings, we decide on a hypothesis that: The
relationship between gross fixed capital formation and economic growth is
positive.

● LFT: Within the Cobb-Doughlas production function, labor is one of the

inputs that directly affects the output, which is the economy’s output. Based
on these findings, we assumed that the total labor force has a positive effect
on economic growth.

● NT: The impact of trade on economic development has been analyzed and
proven for many years. If the net trade is positive then it promotes economic
growth and vice versa. Vietnam, throughout the period, mostly experienced

27
 trade surplus. Therefore, we hypothesized: The GDP growth has a positive
effect on inflation.

3.2 Data description

3.2.1 Sources of data

Table 3.2 The source of data for the variables

Variable Definition Source

World Development
GDP Gross domestic product (current US$)
Indicators

Foreign capital (current US$) (sum of FDI and World Development

FC
ODA) Indicators

World Development
GFCF Gross fixed capital formation (current US$)
Indicators

World Development
LFT Labor force, total
Indicators

Net trade in goods and services (BoP, current World Development

NT
US$) Indicators

Source: World Bank

3.2.2 Description of statistics and interpretation for each variable

We use the “sum” command to determine descriptive statistics, the number of

observations, the mean value, the standard deviation, and the min and max of the
variables. The below table is a conclusion for the descriptive statistics of our sample
data:

28
 Table 3.3 Variables sum results

Variable Obs Mean Std. dev. Min Max

GDP 26 1.33e+11 1.11e+11 2.07e+10 3.47e+11

FC 26 8.72e+09 5.76e+09 2.46e+09 1.72e+10

GFCF 26 4.03e+10 3.34e+10 5.27e+09 1.05e+11

LFT 26 4.68e+07 6968378 3.60e+07 5.59e+07

NT 26 8.26e+08 8.34e+09 -1.37e+10 2.04e+10

We chose to collect 26 observations in our research. These data are from 1995
to 2020.

3.3 Estimation process

3.3.1 Estimated model

With the population regression function defined above, we can infer our
sample regression function as follows:

^ ^ ^ ^ ^ ^
𝐺𝐷𝑃𝑖 = β0 + β1𝐹𝑇𝑖 + β2𝐺𝐹𝐶𝐹𝑖 + β3𝐿𝐹𝑇𝑖 + β4𝑁𝑇𝑖

in which:

^ ^
β0 𝑖𝑠 𝑡ℎ𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝑜𝑓 β0 β2 𝑖𝑠 𝑡ℎ𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝑜𝑓 β2

^ ^
β1 𝑖𝑠 𝑡ℎ𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝑜𝑓 β1 β3 𝑖𝑠 𝑡ℎ𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝑜𝑓 β3

^
β4 𝑖𝑠 𝑡ℎ𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝑜𝑓 β4

The stochastic form of the sample regression function:

^ ^ ^ ^ ^ ^
𝐺𝐷𝑃𝑖 = β0 + β1𝐹𝑇𝑖 + β2𝐺𝐹𝐶𝐹𝑖 + β3𝐿𝐹𝑇𝑖 + β4𝑁𝑇𝑖 + 𝑢𝑖

^
𝑤𝑖𝑡ℎ 𝑢𝑖 𝑎𝑠 𝑡ℎ𝑒 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑡𝑒𝑟𝑚

29
 3.3.2 Correlation analysis

We calculate correlation coefficients among variables by using the “corr"

command. The table as following is the correlation matrix between the variables
that we use in the model:

Table 3.4 Variables correlation results

GDP FC GFCF LFT NT

GDP 1.0000

FC 0.9571 1.0000

GFCF 0.9975 0.9627 1.0000

LFT 0.9384 0.9612 0.9458 1.0000

NT 0.7639 0.5679 0.7341 0.5426 1.0000

From the result of the table, we can conclude that the independent variables
correlate with the dependent variable, and there is also some correlation among
independent variables. The positive correlation means that when the independent
variable increases, the dependent variable also increases and vice versa. When there
is a negative correlation, which in this case, there isn’t any, an increase in the
independent variables will lead to decrease in the dependent variable and vice versa.
We find out that there is a strong linear relationship between the independent
variables and the dependent variable. This can be an indication that the independent
variables have a strong influence on the dependent variable and may be good
predictors of the outcome

Nevertheless, the correlation among the independent variables is also high.

This could imply that there is multicollinearity within this model. But this could be
partially explained by our small sample size, the data is limited within a country and
a specific time - from 1995 to 2020. The fact that the pool of data isn’t diluted
enough might have caused this high correlation.

30
 3.3.3 Regression analysis

Using the command “reg” on STATA, we receive a regression model:

Table 3.5 Variables regression results

Coefficien 90% Confidence

GDP Standard error t P-value
t Interval
FC 3.661975 0.81811 4.48 0.000 [1.960622; 5.363328]
GFCF 2.084058 0.1999452 10.42 0.000 [1.668249; 2.499866]

LFT 1278.498 508.2514 2.52 0.020 [221.5318; 2335.465]

NT 2.026125 0.2531784 8.00 0.000 [1.499611; 2.552638]

CONST -4.47e+10 1.88e+10 -2.37 0.027 [-8.38e+10; -5.52e+09]

● Explain the meaning of regression coefficient:

^
β0 = -4.47e+10 is the intercept of the regression line, which represents GDP

when the explanatory variables - FC, GFCF, LFT, and NT are equal to 0.

^
β1 = 3.661975, when FC increases by 1 unit with the condition that other

independent variables remain unchanged, the estimated value of GDP will increase
by 3.661975.

^
β2 = 2.084058, when GFCF increases by 1 unit with the condition that other

independent variables remain unchanged, the estimated value of GDP will increase
by 2.084058.

^
β3 = 1278.498, when LFT increases by 1 unit with the condition that other

independent variables remain unchanged, the estimated value of GDP will increase
by 1278.498.

31
 ^
β4 = 2.026125, when NT increases by 1 unit with the condition that other

independent variables remain unchanged, the estimated value of GDP will increase
by 2.026125.

This result indicates that for this sample, UER has a negative relationship with
INF, while the other 3 variables have a positive effect on the value of INF, with INR
having the largest impact at 0.3651388.

From the table, we can infer a sample regression model:

𝐺𝐷𝑃𝑖 =− 4. 47𝑒 + 10 + 3. 661975𝐹𝐶𝑖 + 2. 084058𝐺𝐹𝐶𝐹𝑖

+ 1278. 498𝐿𝐹𝑇𝑖 − 2. 026125𝑁𝑇𝑖

Table 3.6 Overall model regression results

Source SS Df MS

Model 3.0737e+23 4 7.6842e+22

Residual 3.6118e+20 21 1.7199e+19

Total 3.0773e+23 25 1.2309e+22

Number of obs 26

F(4, 21) 4467.82

Prob > F 0.0000

R-squared 0.9988

Adj R-squared 0.9986

Root MSE 4.1e+09

The table above, which is taken from STATA output, shows results as follows:

Total sum of squared (TSS): 3.0773e+23 with degree of freedom: (n – 1) = 25

32
Explained sum of squared (ESS): 3.0737e+23 degree of freedom: k = 4

Residual sum of squared (RSS): 3.6118e+20 degree of freedom: (n – k – 1)= 21

Coefficient of determination (R-squared): 𝑅2 = 0.9988

3.4 Results and Discussion

From the regression results inferred from the table, with 𝑅2= 0.9988, around
99.85% of the variation in total output is explained by this model through
independent variables. Moreover, the overall model is concluded to be consistent
and statistically significance of 1% (Prob > F = 0.0000 < 0.01 = α)

The independent variable - FOREIGN CAPITAL, within the model has a

p-value of 0.000, which means it is statistically significant towards ECONOMIC
^
GROWTH. Moreover, having a coefficient of β1 = 3.661975 shows that the effect

of foreign capital on economic growth has a positive sign and is significant at a 1%

level of significance. The result is consistent with our hypothesis.

As analyzed above, along with empirical evidence previously studied in

Vietnam and in other countries, it suggests that the relationship between foreign
capital and economic growth is a positive sign. This means that attracting
international investment inflows will give the country access to an important part of
its total capital. As mentioned above, FDI and ODA are the two most common
forms of foreign investment, and their flows from the home country to host
countries like Vietnam have provided them with the capital necessary for economic
expansion. Such an increase in capital results in an increase in employment and
income and motivates the host country to export goods and services.

In addition, they also lead to an increase in labor productivity via technology

transfer, as well as management experience and skills sharing, and stimulate
economic growth. Within Vietnam, enterprises that are backed by foreign capital are
elevating the developing area that they are in with a GDP growth rate that is
consistently higher than the national growth rate. According to statistical data, in

33
1995, FDI enterprises contributed around 3% of Vietnam's GDP. Nevertheless, by
2019, FDI enterprises accounted for approximately 22% of Vietnam's GDP.

The relationship between foreign capital and economic growth reminds

countries that the competitive pressures to attract overseas investment inflows are
increasing. Despite that, Vietnam has had a history of using foreign investment with
high efficiency, this will bring confidence to donor countries. Furthermore, this is
also an indicator and motivation for Vietnam’s government to change its strategies
to attract FDI and ODA in the next period.

34
CHAPTER 4: POLICY IMPLICATION

4.1 Policy Implication

One of the objectives of the Vietnamese economic reform was a move towards
openness. Until now, FDI projects have needed to get approved by several
authorities. The licensing process was intricate and specified into different steps:
planned investment capital, business activity and location,…. While this process has
been increasingly improved by reducing the number of authorities and simplifying
procedures, the bureaucracy is still considered as a hindrance and cause for failure
of projects.

In reacting to these criticisms Vietnam has established a "one-stop agency"

which means a single agency acting as intermediary between investors and
authorities. The key point of this is that Vietnam is open for FDI in all economic
sectors. At present, there are no restrictions on minimal capital investment
requirements and no restrictions on the share of ownership for foreigners. There are
also no restrictions on repatriation of profits or dividends and the Vietnamese
government guarantees not to nationalize foreign assets or place restrictions on the
control and management of enterprises.

Also, various investment incentives are granted. Vietnam has offered tax
holidays for two years which can be followed by another two years, which is only
half of the regular tax rate. In priority sectors, the corporate income tax is lowered
to 10-15% for FDI. In order to encourage reinvestment of profits, enterprises are
refunded the profit taxes for reinvested funds. Likewise, companies with foreign
capital do not have to pay import duties on raw materials and other inputs
(machinery and equipment) or components used for the manufacturing. License
requirements for FDI projects were eased, which is a considerable advantage
because of the long delays often caused by the rather restrictive policies on imports.

Recruitment of labor must be made through local government labor offices or

labor supply companies. The investors have to pay comparatively high fees for the
intermediaries. There is also some pressure to use domestic labor if the necessary

35
skills are available. Additionally, there are minimum wages which were about $30
per month in 1996, and from May 2012, the figure reached $50 per month.

Land rights have been restricted for foreign investors. While getting the right
to use land, it is not possible for foreigners to buy the land. Only state-owned
companies are allowed to use land rights as part of their capital contribution to
foreign joint ventures. This explains the high number of joint ventures formed
between foreign firms and state-owned enterprises. Usually the state-owned
enterprises have brought in land or other rights subject to bureaucratic restrictions
while the foreigners participated with capital and management.

Recently, there has been a shift in the preferences of multinationals to relocate

operations from China to Vietnam, because of Vietnam’s low labor cost advantage
which it has not only over China, but also other regional players including Thailand
and the Philippines and somewhat less complex regulatory apparatus. Vietnam’s
increasingly favorable tax and financial incentives have made it a hot spot for
low-cost manufacturing. However, its cheap labor advantage has diminishing
returns for an economy that is past the early stages of development and needs to
restructure to high-value added sectors.

4.2 Recommendation

4.2.1 Government’s side

Firstly, to have a new motivation in attracting FDI inflows and continue to be

able to compete with other countries in the region, Vietnam needs to quickly shift
from FDI projects using cheap labor and natural resources to high-tech projects
through tax and land incentives, infrastructure development, administrative
procedure reform, the complete elimination of informal fees, provision of high
quality human resources, modern health care system, others. In this regard, Vietnam
trails far behind China, Singapore, Malaysia and Thailand. Reports indicate that
there is a huge gap in acute skills of the technical, professional and managerial
spheres between Vietnamese workers and international ones. A framework for skills

36
development and training workers aligned to the economy’s long-term vision will
be essential to luring FDI into high-tech industries

Secondly, in order to achieve the goals of socio-economic development

strategy in each period, Vietnam has always been seeking positive solutions to
mobilize all sources of domestic and foreign capital, including state budget, private
capital, and especially external investment capital. As Vietnam becomes a
developing country with low middle income, the relationship between Vietnam and
foreign donors will continue to fundamentally change, transiting from development
aid relations to partnership. Although Vietnam continues to receive the active
support of the international community, foreign donors are adjusting development
cooperation policies with Vietnam towards gradual shift from providing ODA to
loans with less favorable terms such as commercial loans, investment cooperation,
and gradually terminating development assistance programs for Vietnam. Vietnam
should consider selecting sectors for the use of loan capital on the basis of its
financial conditions. For projects that directly promote economic growth associated
with sustainable development, priority should be given to using ODA loans and
foreign concessional loans, such as projects of transport infrastructure, smart cities,
clean energy, smart agricultural development, or projects with spillover effects such
as climate change adaptation, environmental quality improvement, education,
health, technology, and skills. However, the selection of projects should be in the
overall balance of medium-term public investment and medium term public debt,
focusing on repayment duration to ensure credibility and responsibility for foreign
donors.

4.2.2 Public and Private companies’ side

To promote Foreign Direct Investment into Vietnam, apart from enormous

efforts from the government, Vietnamese local companies also play a vital role in
attracting FDI. However, the linkage between Vietnamese local companies and FDI
companies has long been inadequate, which hinders the investment of foreign
companies into Vietnamese potential market. Although FDI into Vietnam creates
many advantages to the host country such as: rapid growth in the number of

37
workers, increasing laborers' income, enlarging local business size,…. FDI inflow
in Vietnam has not yet fulfilled the government’ s expectation of technology
transferring and bridging the gap between Vietnamese companies and global
manufacturing network.

To overcome this dissatisfactory reality, domestic companies need a better and

more effective implementation of policies issued by the government to promote
linkages between domestic enterprises and FDI enterprises. It is essential to
improve the quality of domestic products by technology transfer. Furthermore, it is
advisable for private enterprises to improve technology innovation capacity to
actively participate in association with the FDI business sector. Host country
companies also should take the initiative in taking advantage to upgrade the quality
of services and products; at the same time encourage foreign enterprises to step in
the manufacturing process.

38
CONCLUSION

The effect of foreign capital on economic growth has been a subject of interest
and study for a very long time, with several quantitative and qualitative studies
conducted on the topic. The introduction of outside capital has a positive effect on
economic growth because it provides a source of funding for investment and
stimulates economic activity, such as the creation of new jobs, the improvement of
infrastructure, and the promotion of technological innovation. Vietnam's strategic
location, low labor costs, and political stability have made it a desirable place for
global investment. Therefore, FDI is considered a crucial source of capital for the
country's economic development, with sectors such as manufacturing, services, and
infrastructure attracting significant foreign investment. In 2022, Vietnam attracted
over $24 billion in FDI, despite the pandemic's impact. Despite this, challenges
persist as Vietnam's economy has become increasingly dependent on foreign
investment, particularly from China, Japan, and South Korea. This dependence
exposes the nation to foreign economic shocks and changes in global money flows,
which can contribute to economic instability.

This article is to analyze the impact of foreign capital - FDI and ODA - on
economic growth in Vietnam from 1995 to 2020. With a positive influence and a
strong significance level of 1%, this research emphasizes the significance of foreign
capital in supplying the host country with sufficient money to foster economic
growth and development. Also, the current state of international investment in
Vietnam is analyzed. Utilizing its findings, it makes recommendations that are
essential for sustaining economic growth over the long term. Some of these
initiatives include high-tech projects with tax and land incentives, infrastructure
development, administrative procedure reform, elimination of informal fees,
provision of high-quality human resources, and contemporary healthcare. In
addition, to maximize the benefits of foreign capital, the government must provide
transparency, accountability, and efficient management of foreign investment.

39
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