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The relationship between Foreign Direct Investment, trade openness, exchange rate, and Gross Domestic Product per capita in Vietnam

Author

Listed:
  • Nguyen Anh Tru

    (Faculty of Accounting and Business Management, Vietnam National University of Agriculture, Trau Quy, Gia Lam, Ha Noi, Vietnam)

  • Poczta-Wajda Agnieszka

    (Department of Macroeconomics and Agricultural Economics, Poznań University of Economics and Business, Poznań, Poland)

Abstract

Aim/purpose This study explores the nexus between Foreign Direct Investment (FDI), trade openness, exchange rate, and Gross Domestic Product (GDP) per capita in Vietnam between 1986 and 2020. Design/methodology/approach The Vector Error Correction Model (VECM) was used to evaluate the nexus between FDI, trade openness, exchange rate, and GDP per capita in Vietnam between 1986 and 2020. Moreover, the Johansen co-integration test examined the long-run relationship among these variables. Findings Results address that GDP per capita, FDI, and trade openness may generate an appreciation of the Vietnamese currency in the short run. In the long run, we found that FDI inflows and trade openness support GDP per capita, but the depreciation of Vietnam Dong harms the economic growth of this country in the long run. The Johansen co-integration test confirmed a long-run association among GDP per capita, FDI inflows, trade openness, and exchange rate. Results also indicated a unidirectional causality running from GDP per capita and trade openness to FDI and exchange rate. In addition, a bidirectional causality ran from FDI to the exchange rate. Research implications/limitations Policies were recommended to facilitate macroeconomic stability for Vietnam. First, fiscal and monetary policies should be carried out to achieve targets in macroeconomic stability, economic development, employment creation, and inflation control. Second, FDI inflows should continue to be encouraged since they accelerate economic growth. Still, FDI projects should concentrate on improving labor skills and technological progress and promoting sustainable development in crucial sectors such as agriculture, energy, and the environment. Third, fostering innovation in exports by shifting focus from raw materials and inputs exports towards processed and high-value-added commodities while also promoting exports from domestic enterprises to reduce reliance on exports from FDI enterprises. Lastly, improving flexible and active exchange rate regimes consistent with real conditions in both domestic and international markets is necessary to stabilize the exchange rate and foreign currency market in Vietnam. Originality/value/contribution This paper contributes to the field by providing specific policy recommendations for Vietnam. These recommendations aim to stabilize the economy, attract FDI, renovate exports, and implement flexible and active exchange rate regimes.

Suggested Citation

  • Nguyen Anh Tru & Poczta-Wajda Agnieszka, 2024. "The relationship between Foreign Direct Investment, trade openness, exchange rate, and Gross Domestic Product per capita in Vietnam," Journal of Economics and Management, Sciendo, vol. 46(1), pages 189-212.
    • Handle: RePEc:vrs:jecman:v:46:y:2024:i:1:p:189-212:n:1008
    DOI: 10.22367/jem.2024.46.08
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    References listed on IDEAS

    as
    1. Klein, Michael W. & Shambaugh, Jay C., 2012. "Exchange Rate Regimes in the Modern Era," MIT Press Books, The MIT Press, edition 1, volume 1, number 026251799x, December.
    2. Jen-Yao Lee & Ya-Chuan Hsiao & Ngochien Bui & Tien-Thinh Nguyen, 2021. "Inward Foreign Direct Investment and Trade Openness in Vietnam: A Nonlinear Autoregressive Distributed Lag Approach," Economies, MDPI, vol. 9(3), pages 1-18, August.
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    More about this item

    Keywords

    Foreign Direct Investment (FDI); trade openness; exchange rate; Gross Domestic Product (GDP) per capita;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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