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How Foreign Direct Investment Impacts Domestic Productivity: The Case of Vietnam
by Minh Phuong Nguyen Hoang
Abstract
Foreign direct investment (FDI) has long been known as a vital driver of economic growth in many developing countries by providing capital boosts, generating employment, and introducing advanced technology. This paper focuses on a more long-term economic impact of FDI — the productivity spillover effect — in the specific case of Vietnam. Using firm-level data from the Vietnam’s Enterprise Survey from 2013 to 2022, I conduct a regional analysis to investigate 1) how foreign presence affects the productivity of firms in the region, and 2) how engagement in international activity further boosts firms’ productivity. Findings indicate that both domestic and foreign firms experience a statistically significant productivity boost as the level of foreign presence in the province increases, with domestic firms seeing a more substantial positive impact. Overall, my study aims to present a comprehensive picture of the dynamic between FDI and domestic productivity, thereby offering insights into how foreign investment can shape Vietnam’s economic landscape. This research can help inform Vietnam’s strategic FDI policies to foster technological advancement and strengthen its global economic integration, which has become a critical priority as the country navigates an unprecedented influx of high-tech foreign investment spurred by the ongoing US-China trade war.
Professor Michelle Connolly, Faculty Advisor
Professor Edmund Malesky, Faculty Advisor
JEL Codes: F21; F43; O30; O33
Keywords: FDI, Productivity, Knowledge Spillover, Vietnam, Economic Development
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Do Political Connections Help Firms Gain Access to Bank Credit in Vietnam?
By David Brunnell
One of the major contributing factors to Vietnam’s macroeconomic instability has been the massive growth of credit inflows and its often inefficient allocations. Vietnam is in a state of economic transition from state-planned to open market based. The private sector has grown very rapidly but private firms’ demand for credit is still largely crowded out by the state sector. This paper specifically focuses on the use and impact of political connections by private firms to gain access to bank loans. More generally, this is one issue resulting from, and contributing to, the inequality of credit distribution across the Vietnam’s economy. Using individual company level data from 2007 to 2009 inclusive, this paper finds that exercising political connections increases a private firm’s probability of accessing a loan by 4.7%. In testing the effect of political connections on loan terms, this analysis found that firms with political connections also paid a price in the form of higher interest rates. Indeed private firms trying to access bank credit apparently pay a premium to their Vietnamese bankers in return for their privileged relationship. This suggests that the benefit of political connections translates into an extra financial advantage to both the lender and borrower.
Advisor: Michelle Connolly | JEL Codes: N45
