THESIS THE IMPACT OF MACROECONOMIC FACTORS ON FDI IN VIET NAM Instructor : Nguyen Tien Chuong, MS Student : Le Thi Thu Ha Student ID : 20050082 Class : QH2020E TCNH CLC 3 Faculty : Finance & Banking Hà Nội - 2023 VIETNAM UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS THE IMPACT OF MACROECONOMIC FACTORS ON FDIIN VIET NAM Instructor : Nguyen Tien Chuong, MS Student : Le Thi Thu Ha Student ID : 20050082 Class : QH2020E TCNH CLC 3 Faculty : Finance & Banking Hà Nội - 2023 GUARANTEE GUARANTEE I hereby declare that this thesis “The impact of Macroeconomic Factors on FDI in Vietnam” is my own scientific research work. All references are properly sourced, correctly published and cited. The content of the thesis has been researched inan honest and scientific manner and has not published any research work. Signature of Instructor Signature of Student ACKNOWLEDGE I have been very fortunate to have received the support, advice, and encouragement of many people in order to carry out and complete this thesis research project.
First of all, I would like to express my sincere gratitude to Tien Chuong, the direct supervisor of the thesis, who always devoted a lot of time and effort to me throughout the research process and thesis topics. I would like to thank University of Economics and Business of Vietnam National University in Ha Noi for allowing me to participate in the thesis, thus allowing me to exchange and learn from information Despite many efforts, it is impossible to avoid the limitations ofthis thesis. I hope that teachers and experts will continue to provide assistance. Again, I sincerely thanks! Hanoi, Octorber, 2023 le The Mu He TABLE OF CONTENTS I9.
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Missions of the reSearch. Questions Ofthe reS@arch. Research objectives and Research SCOPES. ReSe arch SCOPES 1.
Research methoOÌÏOBV. Method ofdata colleCfiOT. Structure Of FESCALCH. The theoretical frameWOIK.
The theory of marginal profits affects FDI attraction. Overview ofdomestic oCUIMTIES. Overview of foreign OCUIm€TIES. The theory of macroeconomic factors which influence on FDI.
Research Hypothesis and research mo del. Determining the Research MethodoÌOgy. Data Collection and Data AnallySis. Data CoÌÏ€CtÏOT.-cs<-Scxx HH HH HH HH H111 11erkrrrrke 26 3.
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VAR lag length seleCtÏOT. VAR model estimation results. Dynamically stable t€SE. «ch HH HHrrrkrrrrksrrrkerrrkree 38 4.
Analysis Impulse ReSPOISG.cs HH HH HHHHHH1HHHrrHrkkiriirrirrsrrrenrie 45 M0) 99Ä0010. CONCLUSIONS AND POLICY RECOMMENDATTIONS. Scientific and practical significance of the study. 49 LIST OF ABBREVIATIONS Abbreviation Meaning ADF Augmented Dickey Fuller AIC Akaike information criterion AR Autoregressive model CPI Consumer Price Index E&E the electrical and electronic EX Exchange rate EXR Exchange rate FDI Foreign Direct Investment FPE Final prediction error FTA Free Trade Area GDP Gross domestic product GSO General Statistics Office HQ Hannan-Quinn information criterion IFS International Financial Statistics IMF International Monetary Fund INF Inflation LR Sequential modified LR test statistic Obs Observations OECD Organization for Economic Cooperation and Development OLI Ownership, Location, Internalization Prob.
Probability value SC Schwarz information criterion Std. Standard deviation UNCTAD United Nations Conference on Trade and Development USD United States Dollar VAR Vector Autoregression VECM Vector Error Correction Model VND Vietnam Dong REER Real exchange rates LIST OF IMAGES, FIGURES Name Page Figure 2.1 The FDI capitalinflow into Vietnamin the period 2011 - 2022 16 Figure 2.2 Top 5 largest foreign investors contributing capital in 17 Vietnam in 2022 Figure 2.3 The percentage of foreign investors contributing capital in 18 Vietnam in 2022 Figure 2.4 Model to study factors affecting Investment activity of FDI in 23 Vietnam Figure 3.1 Process of the research 25 Figure 4.1 Dynamically stable test 37 Figure 4.2 Impulse Response of D(D(FDI)) to D(D(FDI)) 40 Figure 4.3 Impulse Response of Exchange Rate to D(D(FDI)) 40 Figure 4.4 Impulse Response of Inflation to D(D(FDI)) 41 Figure 4.5 Impulse Response of GDP to D(D(FDI)) 41 Figure 4.6 Multiple graphs for responses of FDI, EXR, INF, and GDP 42 LISTS OF TABLES Name Page Table 3.1 Details of variables in the model 27 Table 4.1 Descriptive statistics 31 Table 4.2 Results of Augmented Dickey fuller and Phillips Perron unit 32 root test of the variables Table 4.3 Final result 33 Table 4.4 Lag Length Selection 34 Table 4.5 VAR model estimation results for the dependent variable FDI 35 Table 4.6 VAR Residual Serial Correlation LM Tests 37 Table 4.7 VAR Granger Causality with dependent variable FDI 38 Table 4.8 VAR Granger Causality with dependent variable EXR 38 Table 4.9 VAR Granger Causality with dependent variable INF 39 Table 4.10 | VAR Granger Causality with dependent variable GDP 39 Table 4.11 | Variance Decomposition 44 ABSTRACT TITLE: The impact of macroeconomics factors on FDI in Vietnam ABSTRACT: The thesis analyzes the influence of macroeconomics factors such as Exchange rate, Inflation and GDP on the foreign direct investment capital inflow into Vietnam during the period 2011 - 2022. The research uses the method Vector Autoregression (VAR) in order to examine and evaluate the impact level of these factors on FDI in Vietnam. The result indicates that Exchange rate have a negative effect on FDI, whereas, GDP affects positively on FDI.
Inflationimpact negatively on FDI inthe short run but positively in the long run. Besides, FDI also affects significantly on itself. Based on the research results, policy recommendations and solutions are given to improve the efficiency of FDI, thereby contributing to promoting Vietnam’s economic growth. KEYWORDS: FDI, Macroeconomic factors, Exchange rate, Inflation, GDP, VAR CHAPTER 1.
Background to the research The direct investment category refers to a relationship in which a resident entity in one economy acquires a lasting interestin an enterprise in another economy. The term foreign direct investment refers to foreign economic organizations and individuals bringing money or assets into a country to conduct foreign investment activities there. Since reforming from a centrally planned economy to a market economy model, socialist- oriented, with State management and regulation, Vietnam has become a potential destination of foreign investors. The increase in capital flows has brought positive signals to the economy.
In 2022, the total registered foreign direct investment capitalin Vietnam will reach nearly 27.72 billion USD, the level of realized foreign direct investment capital will reach a record of 22.4 billion USD, an increase of 13.5% over the same period 2021 term. The growth of Vietnam's economy in recent years relies more and more heavily on foreign direct investment (FDI). Like emerging economies, Vietnam has seena significant increase, in FD] due to economic globalization. This influx of investment plays a role in driving Vietnam's economic growth by creating jobs, enhancing human resource, transferring technology and developing infrastructure.
Moreover, this capital flow is also one of the important sources of capital to help countries supplement their limited capital resources to overcome capital shortages without causing debt to the recipient country. For the economy to grow, attracting FDI capitalis extremely necessary. However, foreign investors do not always trust capital contributions to the recipient country because the instability of macroeconomic factors can affect foreign investors’ investment decisions. There have been many studies showing that FDI capitalis affected by macro factors such as GDP growth, inflation, exchange rate fluctuations, politics, etc.
Changes in these factors also have different impacts on the FDI. The study of Dhakal, D. (2010) concluded that exchange rate volatility has a favorable effect on foreign direct investment. P-Enu, EDK-Havi, P-Attah-Obeng (2013) also had the same result when concluding that the first past year of foreign direct investment, the last two years of exchange rate and trade openness were statistically significant.
Meanwhile, Catherine S F Ho* and Ahmad Husni Mohd Rashid (2011) found that two important macroeconomic factors, economic growthrate and openness level, significantly affect FDI 10 inflows in most countries. Inflation rates play an important role in FDI inflows into Thailand. FDI into Malaysia is driven by the exchange rate while FDI into the Philippines is driven by manufacturing output. On the other hand, Komla Agudze, Oyakhilome Ibhagui (2020) investigated that the link between inflation and FDI is nonlinear, with evidence of threshold effects in both industrialized and developing economies.
Meanwhile, Inflation tends to reduce FDI in industrialized economies after exceeding its threshold whereas in developing economies, its impact on FDI is negative even before exceeding its threshold. (2023) found that Logistics Performance Index, Global Competitiveness Index, and Interest Rates are three major macroeconomic factors affecting FDI inflows. It was found that Logistics Performance Index positively impacted FDI in Gambia, Lesotho, and Rwanda, but negatively impacted FDI in Mauritius. FDI in Algeria and Lesotho is positively influenced by the Global Competitiveness Index, whereas it is negatively impacted in Rwanda, Mauritius, and Namibia.
Moreover, Interest Rates has a negative impact on FDI in Algeria, Rwanda and Mauritius with a positive impactin Lesotho. Studies have produced different research results on the impact of macroeconomic factors on FDI as well as differences in research variables. Therefore, this topic is researched to further strengthen the empirical evidence of the impact of macroeconomic factors on FDI. This research is necessary so that the Government can improve the macroeconomic environment to attract FDI more effectively.
Missions of the research e Identify macro factors which affect FDI investment activities in Vietnam e Assess the beneficial effects or risks of the factors for FDI investment activities in Vietnam as well as for the Vietnamese economy in general e Provide a number of recommendations to regulators and financial institutions to promotea stable and inclusive financial system in the evolving fintech landscape 1. Questions of the research se Howdoes macroeconomic factors affect FDI investment activities? e Assess whether those impacts are beneficial or negative for FD] investment activities? e What recommendations do you suggest for policymakers to minimize risks for investment activities of FDI enterprises in Vietnam? II 1. Research objectives and Research scopes 1. Research objective Research the impacts of macroeconomic factors on FDI investment activities 1.
Research scopes e Spatial range: the impacts of macroeconomic factors on FDI investment activities in Viet Nam e Time range: Research in the period from 2011 Q1 to 2022Q4 1. Research models The research model used in the studyis VAR (Vector Autoregression). Method of data collection The data is taken from the Trading view, Vietstock and the International Monetary Fund (IMF )and the data is used for model analysis 1. Structure of research In addition to the table of contents, the acronyms list, the tables list, the figures list, and the reference list, the study is also divided into five chapters, the first chapter being the introduction and the main content of remaining four chapters, specially: Chapter 1: Introduction Chapter 1 supplies the summary of the thesis’s core research topic, such as research missions, research questions, research objective and scopes, research methodology and research structure.
Chapter 2: Literature Review and Theories In Chapter 2, the researcher provides the theoretical foundation for understanding the FDI and the theory of the macro factors including Exchange Rates, Inflation and GDP. In addition, the thesis examines prior empirical studies that have examined the impact of macroeconomics factors on FDI as well. On the basis of the theoretical overview and the findings of past studies, the author draws out the research gaps at the end of the chapter. From there, as a foundation for selecting research methodologies based on data about FDI, Exchange rate USD/VND, Inflation rate and GDP from some reputable sources such as IMF data, Trading view, .