Impact Of Foreign Direct Investment And International Trade On Economic Growth In Vietnam

Economic development is always a global imperative.Globalization connects nations closer together,playing an important role in developing countries.Financial flows,information,skills,technology,goods and services among countries are growing rapidly.International trade plays an important role in improving skills through importing and cutting-edge technology.Exporters are motivated to apply technological advances to deal with fierce competition(Frankel and Romer,1999).Trade liberalization lowers the costs of international transactions and the need for foreign direct investment.The liberalization of capital flows has contributed to the expansion of foreign direct investment inflows.As the production process is fragmented and moving globally,the global value chain has become the center of the world economy(Cattaneo et al.2010).FDI is one of the most dynamic elements in the flow of international resources,it is a package of tangible and intangible assets and a catalyst for investment and domestic capabilities.FDI helps to supplement the development investment capital(Brems,H.,1970),human resource development and job creation(Gregorio,Jose,2003),market expansion and export promotion,economic restructuring.Therefore,FDI and trade have been recognized as important factors in the process of economic growth.There is a great deal of literature on the impact of FDI and trade on economic growth over several periods and in different methods.Specific national and cross country studies have ana lyzed the effects of FDI and trade on economic growth(Kohpaiboon,A.,2004,Lipsey,RE,2000,Pahlavani,M.,E.Wilson and AC Worthington,2005)largely concludes that both FDI and trade promote economic growth.In fact,FDI is attracted by countries that are expected to grow faster and follow open trade policies.However,the level of influence for each country is different(Balasubramanyam et al.,1996).The main obstacles to economic growth in developing countries are capital and economic integration,so developing countries try to attract foreign capital(foreign direct investment)and promote international trade so that the gap between savings and investment can be reduced.FDI and international trade play an important role in the country’s economic growth.FDI plays an important role by increasing the capital for domestic investment in the receiving country.This can be done through the production chain as foreign investors purchase inputs domestically and sell intermediate inputs to local businesses.Moreover,FDI can increase the host country’s export capacity to help developing countries increase their foreign exchange earnings.FDI can also encourage the creation of new jobs and the promotion of technology transfer and the promotion of overall econo mic growth in host countries.International trade plays a role in improving skills through importation and through advanced production technology and innovation.Exporters use the improvement and development of production technology by acting as subcontrac tors for foreign enterprises or through international market competition.Manufacturers of alternative imports face competition from foreign companies.They are driven by increased investment in productivity to cope with fierce competition in developing co untries where products are often expensive(Frankel and Romer,1999).The impact of trade openness on economic growth can be positive and significant mainly due to the accumulation of material capital and technology transfer.FDI can affect all economic,cultural and social fields.However,for developing countries,especially poor ones,the greatest expectation of attracting FDI is primarily for economic growth.According to Borensztein,there are three important channels in which foreign direct investment can affect economic growth: first,foreign capital helps to increase domestic savings through capital accumulation;Overflowing through the introduction of new technologies into the host country to exploit natural resources to increase productivity and efficiency,and third,FDI leads to increased foreign demand(exports)for domestic production due to open Broaden production capacity and increase the competitiveness of domestic enterprises.However,these impacts depend on the absorption capacity of natio ns through the commercial regime,the degree of openness and the development of local labor force related to human resources(Borensztein et al,1998).This impact is seen as the spillover effect of FDI,contributing to increased productivity of domestic f irms and ultimately to economic growth in general.Several countries have attracted large FDI inflows,but spillovers have hardly happened.In another situation,FDI inflow into a country may increase investment capital for the economy but its contribution to growth is low.Both cases are considered unsuccessful with the policy of attracting FDI or have not fully utilized and wasted this resource in terms of economic growth.This situation makes economists more and more concerned about the impact of FDI on economic growth,especially in developing countries,including Vietnam.Through the development of trade theories and economic growth,exports have been identified as the driving force for economic growth of nations by a number of fundamental reasons: First,export growth it will lead to aggregate growth of a country.Demand growth may not be sustained in a small,low-income economy,but the export market is seemingly endless and therefore openness to trade will not limit aggregate demand growth.Therefore,exports can be a catalyst for income growth.Second,export expansion can enhance the specialization of export production,thus improving productivity and leading to productivity growth.Third,increased exports may ease the tension on foreign exchange.This helps increase the import of inputs for production,machinery and equipment for investment and thereby boosting output growth.In addition,opening up trade helps accelerate technological progress,create more jobs,and factors of production move f rom less effective to more productive regions,thereby boosting economic growth.After more than 30 years of implementing the “Doi Moi” policy,Viet Nam has achieved relatively convincing economic and social achievements.In the period of 1990-2015,the annual growth of Vietnam’s economy is relatively good,with an average annual increase of 6.79%(World Bank,2016).This achievement is a good sign of the economic transition and is the result of the policies that Vietnam has been implementing before the rapid changes of the world economy,especially the global trend.One of the main contents of the renew policy changes is attracting foreign investment and export promotion strategies.The efforts of the Government of Vietnam have brought encouraging results i n attracting FDI into Vietnam.The foreign invested sector is the most dynamically developing sector with GDP growth always higher than the national growth rate.The impact of the FDI sector has also contributed significantly to exports.The export sector that develops in comparative advantage has achieved many achievements along with economic growth in Vietnam.In recent years,both economic growth,foreign investment attraction and export growth have been the targets of macroeconomic regulation in Vietnam.Although the results have been achieved,there are still opinions that Vietnam has not taken advantage of opportunities to attract FDI and not maximize the benefits that foreign direct investment can bring.The basis for the above observations is the abnormal flow of FDI inflows into Vietnam,the ratio of realized FDI to registered capital is low,focusing FDI only in some sectors,regions,recruitment capacity,labor are modest...Vietnam has not been chosen as an investment destination for most large multinational corporations with great technological potential and is willing to transfer technology and knowledge.This situation together with the increasingly intense competition pressure on FDI attraction among countries in the region poses great challenges to Vietnam.Vietnam has meaningfully improved the functioning of its market economy,in the other hand decisive steps towards macroeconomic stability and structural reforms are also enhancing the attractiveness of foreign investments.This study recogn izes the growing confirmations from cross-country and country specific studies that the association between foreign direct investment,international trade and economic growth has generated.Successful and sustainable economic growth requires continued im provement in investment and productivity,and therefore a study of the impact of FDI and international trade on economic growth and development is important not only to researchers interested in economic development but also to people responsible for formulating development policy.This study examines the impact of foreign direct investments on economic growth in Vietnam(1990-2015).The estimation approach employed is Cointegration,Vector Error Correction Model and Auto Regressive Distributed Lags(ARDL)bound testing,using time series data.The statistical properties of the series were tested for unit root for Stationarity and Johansen Cointegration of long run relationship.While Granger Causality test was used to determine the direction of Causality.T he results indicate that all the series were integrated of order one(first difference)that is I(1)by using Augmented Dickey Fuller(ADF)and Phillips Perron(PP)meaning that the data are stationary at I(0).The Johansen Cointegration results show that the variables are cointegrated meaning that there are long run relationship among the variables meaning that they have long run association ship.The trace statistic shows that there are two Cointegration equations while maximum Eigenvalue statistic shows one Cointegration equation at(5%)level of significance.The estimated model under(VECM)system shows that foreign direct investment;gross fixed capital formation and exports are positive and statistically significant determinants of economic growth wi th the test at(5%)and(1%)level of significance in the long run.Also this study found that the two lagged variables of FDI are jointly significant to explain the RGDP in the short run,and the speed of adjustment toward the long run equilibrium level w as approximately(39.7%).The Granger Causality test suggests two directional Causalities running from FDI to GDP and from international trade to GDP.Foreign direct investment and international trade can be seen from this findings as an integral part of an open and effective international economic system which constitutes a major catalyst to development.