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Determinants of FDI in Vietnam: An application of the gravity model

By Hoang Ngoc Dat (VNP 24)

Supervisor: Dr. Nguyen Quynh Huy

Abstract:

For developing countries, Foreign Direct Investment (FDI) has been identified as an important source of capital, contributing remarkably to economic growth, technological transfer, and poverty reduction. Consequently, the subject is of intense interests to both economists and policy makers. Many studies have been conducted to analyse the determinants of FDI and its impacts on different aspects of the economy and solutions to increase desirable FDI projects. This research aims to expand the literature by applying an augmented gravity model to investigate factors pulling FDI towards Vietnam over the period from 2008 to 2019, focusing on the top 10 foreign investors in Vietnam, understanding the extent of the impacts of FDI and proposing policies that make Vietnam more appealing to foreign investors. The research finds out that the gravity variables as proxies by GDP per capita and distance from source countries to Vietnam have expected impacts as indicated in existing literature and are statistically important in the prediction of FDI inflows. Additionally, other important factors worth mentioning include institutions and ease of doing business, trade openness, infrastructure, inflation rate and exchange rate. Based on the findings, policies are suggested to help attract more FDI projects to Vietnam in the future.

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