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How Does Foreign Direct Investment Drive Employment Growth in Vietnam’s Formal Economy?

Author

Listed:
  • Thi Bich Thuy Dao

    (Faculty of Development Economics, VNU University of Economics and Business, Vietnam National University, Hanoi 100000, Vietnam)

  • Van Quy Khuc

    (Faculty of Development Economics, VNU University of Economics and Business, Vietnam National University, Hanoi 100000, Vietnam)

  • Manh Cuong Dong

    (School of Business, British University Vietnam, Hung Yen 160000, Vietnam)

  • Thuy Linh Cao

    (Faculty of Business, FPT University, Hanoi 100000, Vietnam)

Abstract

Over the last three decades, Vietnam has undergone economic reforms and achieved rapid economic growth. However, the country is still facing numerous challenges linked to a relatively high share of employment in an informal economic sector, which could prevent Vietnam from escaping from the middle-income trap and becoming a high-income country. This research explores the effect of foreign direct investment (FDI) on job creation in the formal economic sector of Vietnam. A subnational dataset of 63 cities/provinces from 2006 to 2020 was analyzed using an instrumental variable two-stage least-squares fixed-effect model. The results show that FDI is an employment growth-enhancing factor in the formal economic sector. Specifically, FDI enterprises are found to be more capable than domestic enterprises in creating employment, and there is a positive employment spillover from the foreign to the domestic sector, although the magnitude of the effect remains small. Apart from FDI, firm agglomeration, capital resource productivity, and government support for sector development spur employment growth. Labor quality, profitability and foreign industrial agglomeration are identified to be determinants of FDI. Furthermore, the impact mechanism of FDI on the formal sector’s employment is further discussed using mindspongeconomics, the SM3D knowledge management system, and the culture tower.

Suggested Citation

  • Thi Bich Thuy Dao & Van Quy Khuc & Manh Cuong Dong & Thuy Linh Cao, 2023. "How Does Foreign Direct Investment Drive Employment Growth in Vietnam’s Formal Economy?," Economies, MDPI, vol. 11(11), pages 1-15, October.
    • Handle: RePEc:gam:jecomi:v:11:y:2023:i:11:p:266-:d:1267581
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    References listed on IDEAS

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