Foreign capital inflows and economic growthDoes foreign capital inflows promote the host country's economic growth? An empirical case study of Vietnam and the intuitive roles of Japan's capital inflows on Vietnam’s economic growth.

Presenter: Vu Van Chung,

Visiting Scholar, Policy Research Institutes, Ministry of Finance, Japan.

Tokyo, January 15 , 2015

1

1

Overview Economic in brief

Recent development of capital inflows in Vietnam

Theories, empirical evidence on capital inflows and economic growth

Empirical results: the case of Vietnam

Q&A

2

I. Economic in brief

Vietnam’s economy has witnessed a relatively stable growth trend in since 1990:

8-9 percent for the period 1990-2000 except for two years 1997, 1998; 7 percent from 2002-2007; about 5.5 percent for the period 2008-2013 because of the 2008 global financial crisis.

per capital income are triple in every 10 years.

Speed of growth is above the average growth of ASEAN countries.

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

1986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013

%

ASEAN Vietnam Indonesia Malaysia Philippines Singapore Thailand

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I. Economic in brief (cont.)Economic growth is mainly based on the capital and labor intensiveness via maintaining a sustained high level of the gross investment while it shifts towards more export-oriented with 3 drivers of economic growth:

The relatively strong institutional system,

The deeper global integration and trade expansion,

No. Structure of exports and imports 1991-1995

1996-2000

2001-2005

2006-2010

2011 2012 2013

I Structure of exports

1 Mining and heavy industrial products 31.7 30.6 34.3 33.9 35.8 42.1 44.3

2 Light industries and handcrafts 19.4 34.6 40.2 42.9 41.6 37.8 38.1

3 Primary products 48.9 34.8 25.5 22.8 22.5 20.1 17.6

II Structure of imports4 Machineries and equipment 24.4 29.8 29.2 28.5 29.6 35.1 36.7

5 Production Materials 60.5 61.1 62.7 60.8 59.0 55.8 55.36 Consumer products 15.0 9.1 7.7 8.4 9.5 9.1 8.0

7 Other imports 0.0 0.0 0.4 2.3 1.9 0.0

Source: GSO statistics yearbooks 1994-2013

4

I. Economic in brief (cont.)- and the large capital inflows.Capital inflows maintain a stable macroeconomic balance via offsetting the trade deficit and building foreign reserves besides the growth effect.

Items Unit 1995-00 2001-05 2006-10 2011 2012 2013

Capital inflows to GDP (%) 15.0 15.2 19.3 17.2 15.9 16.2

1. Current Account (2+3+4) ($US million) -701 -678 -4,940 233 9,267 9471

2.Trade balance ($US million) -2,083 -3,536 -11,048 -9,844 749 863

3. Investment income and current transfers ($US million) 548 980 616 1,476.9 -1,681.6 -2,592

4.Remittances ($US million) 834 1,877 5,492 8,600 10,200 11,200

5. Capital Account ($US million) 3,179 4,009 10,594 14,658 14,611 16,591

Net FDI inflows ($US million) 2,003 2,439 8,069 11,063 10,495 11,470

Net ODA inflows ($US million) 1,176 1,570 2,525 3,595 4,116 5121

6. Change in foreign Exchange reserves (1+5) ($US million) 2,478 3,331 5,654 14,891 23,878 26,062

Source: ADB 2014, IMF2013, and author calculation

5

I. Economic in brief (cont.)Major economic growth barriers were:

(i) adverse economic environment and investment climate which drew down the capital inflows of neighbor countries, e.g. Japan, Singapore, Taiwan, Korea, Hong Kong;

(ii) unequal distribution of capital resources between the state-owned sector and the private sector while the state-owned sector is not economically efficient;

(iii) the financial system is inadequate and fails to meet the demand of the economy for some times.

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II. Recent developments of capital inflows in Vietnam 1. FDI inflows

No. Items 1995-2000 2001-2005 2006-2010 2011-2013

1 FDI contribution to GDP 9.7% 14.6% 17.9% 18.6%2 FDI’s share in total government budgets 10.2% 13.25% 19.10% 19.70%

3 FDI’s share of the gross exports 35.60% 50.90% 54.50% 60.40%

4 FDI’s share of the manufacturing output 31.40% 36.10% 40.10% 47.20%

5 FDI share of gross investment 24.20% 16.30% 23.70% 21.90%

6 FDI’s share of gross employment 0.98% 1.78% 3.70% 5.20%7 FDI’s share of manufacturing labor 11.52% 16.42% 21.1% 24.2%

Sources: No.1,3,4,5,6,7 from the GSO-MPI; No.3 from MoF of Vietnam

0

50,000

100,000

150,000

200,000

250,000

300,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1988-94 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013

Number of projects Registered capital (accrued) Disbursed capital (accrued)

7

II. Recent developments of capital inflows in Vietnam 1. FDI inflows (cont.): Classified by local region

Economic regions

Number of industrial & export zones

(%)

Share of Registered

Projects (%)

Share of Registered Capital (%)

Share of Employment

(%)

Share of Exports

(%)

East Southern 33.8% 56.3% 42.5% 16.6% 64.4%

Red River Delta 20.7% 28.4% 24.8% 22.7% 21.3% Mekong River delta 29.4% 5.3% 4.8% 20.0% 8.5%

Central coastal 15.0% 6.1% 24.1% 21.9% 3.6% Central Highlands 1% 0.9% 0.3% 4.8% 2.2%

Other regions < 1% 2.8% 3.4% 13.9% 3.4%

Sources: GSO-MPI and author's calculations

 

8

II. Recent developments of capital inflows in Vietnam 1. FDI inflows (cont.): classified by country of origin

Country/ territoryNumber of registered projects

Share of Registered Projects (%)

Share of RegisteredCapital (%)

Share of Exports (%)

Annual change of export (%)

Japan 2186 13.7 15.0 10.3 4.3Singapore 1243 7.8 12.8 2.0 12.2Korea Republic 3611 22.7 12.7 5.0 18.6Taiwan, PR 2290 14.4 12.0 1.7 6.5British Virgin Islands 523 3.3 7.3 0.1 -Hong Kong, PR 772 4.8 5.3 3.1 10.9United States 682 4.3 4.6 18.1 21.2Malaysia 453 2.8 4.4 3.7 9.3China, PR 992 6.2 3.2 10.0 3.1Thailand 339 2.1 2.7 2.4 9.6Total 13,091 82.2 80.1 56.4 10.82Sources: GSO-MPI, and author's calculations, those data are accumulated to 2013

No. FDI classified by Economic sector RegisteredProjects (%)

Registered capital (%)

Size of project on average ($million)

1 Manufacturing 54.8 53.8 142 Real estate activities 2.6 20.9 1203 Accommodation and Food services 2.1 4.6 314 Construction 6.6 4.4 10

5Electricity, gas, steam and air conditioning supply

0.6 4.1 104

6 Information and communication 5.9 1.7 47 Arts, entertainment and recreation 0.9 1.6 26

8Wholesale and retail trade; repair of motor vehicles and motorcycles

7.1 1.5 3

9 Transportation and storage 2.4 1.5 910 Agriculture, Forestry and Fishing 3.1 1.4 7

Sources: GSO statistics yearbook 2013

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II. Recent developments of capital inflows in Vietnam 1. FDI inflows (cont.)

Classification of Investments 2009 2010 2011 2012 2013

All Forms of FDI Investments 100% 100% 100% 100% 100%100% foreign owned firms 77.1% 82.6% 82.6% 83.4% 83.8%Joint-venture and others 22.9% 17.4% 17.4% 16.6% 16.2%Employment 100% 100% 100% 100% 100%100% foreign capital 84.3% 88.1% 88.2% 89.7% 91.0%Joint-venture and others 15.7% 11.9% 11.8% 10.3% 9.0%Annual Operation Capital 100% 100% 100% 100% 100%100% foreign capital 58.1% 69.4% 62.2% 73.6% 75.0%Joint-venture and others 41.9% 30.6% 37.8% 26.4% 25.0%Sources: GSO-MPI and author's calculations, those data are accumulated to 2013

-60.0

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40.0

90.0

140.0

190.0

240.0

290.0

340.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ASEAN

Thailand

Malaysia

Indonesia

Singapore

Philippines

Viet Nam

Others

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II. Recent developments of capital inflows in Vietnam 1. FDI inflows (cont.)

FDI contribution (continued):

ASEAN Comparativeness

Advantages- The stable socioeconomic and political environment over time- Vietnam’s legal systems have been relatively accomplished and complied with international practices- Business competitiveness

improved- Operational cost effectiveness

Disadvantages- Business setup procedures - Tax and tariff systems remain less attractive - Laws restrictions and

applications- Undeveloped infrastructures- Lack of local supportive

industries

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II. Recent developments of capital inflows in Vietnam 2. ODA inflows inflows have been significantly large and grown over time, 3 percent of GDP or equivalence

of US $3.0 - 4.0 billion; about 10 percent on average contributes to the gross capital formation.

Table 12. Vietnam ODA types 2008-2010

ODA structure 2008 2009 2010

Budget support 21.1% 41.8% 25.0%Projects,

programs 44.3% 36.2% 43.3%

On-lending 34.6% 22.0% 31.8%Total ODA, US$

million 2,100 3,447 3,602

ODA to GDP (%)

2.1% 3.2% 3.2%Source: PEFA 2013; GSO statistics

Education, 4.2%

Healthcare, 4.4%

Institutional reforms, business

environment, administrative

and social supports, 14.0%

Environmental protection and

urban development,

15.0%

Agriculture, 15.2%

Transport and telecommunicati

on,38.2%

Economic infrastructure,

73.2%

Economic infrastructure

63.2%

18.873.24

2.281.67

1.111.11.03

13.545.33

1.951.1

0 5 10 15 20

JapanFrance

GermanyKorea

USDenmark

UKIDA

ADBUNEU

US$ billion

Figure 13: Top ODA donors in Vietnam1995-2012 (accrued, committed)

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II. Recent developments of capital inflows in Vietnam 2. ODA inflows (cont.)

18.81% 24.21% 23.62% 26.50%4.561%

13.638% 15.931% 14.619%7.07%

26.754% 18.382%25.05%

65.56%

28.65%17.37%

14.44%

3.991% 5.599%18.190% 13.471%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

On-lending Total external borrowing Population (2010) Expenditures (2011)

Figure 14: ODA classified by local economic region in 2012

Mekong River Delta

South East

Central Highlands

North and CentralCoast

Northern midlands

Red River Delta

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II. Recent developments of capital inflows in Vietnam 2. ODA inflows (cont.): Japan’s ODA roles in Vietnam Large and grown over time; about % 30 of total all donor ODA. large loans with low interest rates and long term repayment; Major sectors in infrastructure: transportation, energy, telecommunication;

Transport 43%

Energy, 24%

Social services, 15.1%

Tele-communication, 3%

Others, 14.9%

Figure 19: JapanODA by

sectoritle

Year TA (US$mil.)

Grants (US$mil.)

Loans (US$mil.)

Total (US$mil.)

Peer ranking

1995-99 254.36 364.44 973.32 1592.12 6-132000 91.49 41.52 790.67 923.68 22001 86.71 51.58 321.24 459.53 42002 79.81 53.51 241.42 374.74 42003 83.63 53.18 347.43 484.24 42004 83.89 39.81 491.63 615.33 32005 71.72 50.58 480.36 602.66 42006 60.82 40.97 461.12 562.91 42007 73.85 18.48 547.71 640.04 32008 74.59 26.29 518.16 619.04 22009 86.21 22.82 1082.33 1191.36 12010 106.81 51.84 649.16 807.81 22011 125.07 26.74 861.24 1013.05 12012 148.27 20.38 1478.06 1646.71 12013 118.72 17.48 1031.29 1167.49 1

[1] The 2013 amount is estimated. 

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Japan’s ODA roles in Vietnam (cont.)- Regional comparativeness

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II. Recent developments of capital inflows in Vietnam 3. Remittance inflows Large and grown over time; approximate 7 percent of GDP

Vietnamese inward remittances have originated from two sources, overseas workers and expatriated citizens and the latter has overwhelmed the former source;

0.0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

80,000.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US$

mill

ion

Figure 23: Remittances Developing world comparativeness

India

China

Philippines

Mexico

Nigeria

Egypt

Bangladesh

Pakistan

Viet Nam

Indonesia

Poland

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II. Recent developments of capital inflows in Vietnam 3. Remittance inflows (cont.)

YearRemittances as a share (%) of

GDP FDI ODA Gross capital Inflows Exports1995 1.4 14.3 34.1 9.2 6.1

1996-00 3.3 50.4 70.6 21.4 12.82001-05 5.0 80.5 124.7 32.5 17.42006-10 6.7 71.2 231.3 34.8 36.1

2011 6.3 77.7 235.1 36.9 43.52012 6.5 97.2 247.0 41.1 48.42013 6.5 97.6 218.7 40.3 48.3

Table 17: Vietnam Inward

Remittances by country 2002 2004

United States 41.10

%57.70

%Australia 7.30% 8.60%Canada 6.20% 6.10%

France 2.80% 4.00%Eastern Europe 9.30% 3.90%

Russia 3.40% 3.20%Hong Kong 0.00% 1.10%

Taiwan n/a 0.80%Thailand 0.30% 0.40%

China 0.20% 0.20%

Others 19.40

% 6.50%Source: MOFA (2012), Vietnam Review of Vietnamese migration.

1,257.7

1,521.61,433.0

2,323.6

1,465.8

2,411.3

2,722.2

0

500

1,000

1,500

2,000

2,500

3,000

1998 2002 2004 2006 2008 2010 2012

US$

Figure 25: Kinship household Overseas remittances by region Red River Delta

NorthMountainousand Midland

North Centraland Coastal

CentralHighlands

South East

Mekong RiverDelta

Countryaverage

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III. Theories, empirical evidence on capital inflows and economic growth

Classical theories have focused on the roles of capital investment and growth:

Capital inflows not only exert the direct effects on the economic growth through capital stock accumulation, but also FDI and ODA and remittances expose the indirect spillovers on the economic growth via technological transfusion, human capacity enhancement, infrastructure improvement, demand hike

FDI not only fills the gap of financial resources for investment, it also carries new technologies and managerial know-hows to the recipient economies;

ODA contributes to capital investment in both physical and human capital, particular infrastructure development and poverty reduction;

Remittances: consumption, domestic demand hike, and poverty reduction;

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IV. Vietnam case study 1.Growth contribution by capital element

YearShare of FDI in GDP

by GSO statistics(%)

Economic growth of Capital stock (K) contribution decomposition (%)

Total K contribution

DI Capital inflows FDI (calculated) ODA Remittances

1995 6.3 33.0 18.60 14.42 10.05 4.21 0.16

1996 7.4 54.5 41.40 13.08 8.89 4.03 0.16

1997 9.1 63.0 49.48 13.49 9.59 3.74 0.16

1998 10.0 71.4 59.16 12.25 7.21 4.63 0.41

1999 12.2 83.3 71.95 11.39 5.80 5.09 0.49

2000 13.3 54.3 41.67 12.63 6.33 5.55 0.76

2001 10.3 55.7 45.19 10.54 6.00 4.24 0.30

2002 13.8 55.7 46.21 9.52 5.89 3.31 0.32

2003 13.8 56.8 47.47 9.30 5.23 3.73 0.34

2004 14.5 51.8 43.44 8.36 4.74 3.34 0.28

2005 15.1 45.0 36.64 8.33 5.05 2.99 0.30

2006 16.0 53.6 45.31 8.24 5.51 2.48 0.25

2007 14.8 60.5 49.85 10.62 7.85 2.45 0.33

2008 17.0 66.4 54.74 11.69 9.41 2.02 0.26

2009 18.0 58.8 46.93 11.84 8.46 3.04 0.34

2010 18.4 52.1 41.93 10.21 7.90 2.06 0.25

2011 18.3 43.3 33.17 10.12 7.38 2.44 0.30

2012 17.7 40.6 30.32 10.28 7.08 2.79 0.41

2013 18.0 35.7 24.72 11.02 7.27 3.24 0.51

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2. Economic growth contribution by K, L, TFP Equation: gY= TFP + α*gK + (1-α)*gL

Year

GDP (billions

VND)K stock

(billions VND) gK (%) gL (%)gGDP

(%)

GDP shares of %Growth factor decomposition

αgK(1- α)

gL TFP K L TFP

1995 195,567 327,099 9.5 2.1 9.5 3.2 1.4 5.0 33.0 15.0 52.01996 213,833 377,031 15.3 2.2 9.3 5.1 1.5 2.8 54.5 15.8 29.71997 231,264 435,076 15.4 2.2 8.2 5.1 1.4 1.6 63.0 17.8 19.31998 244,596 488,763 12.3 2.1 5.8 4.1 1.4 0.2 71.4 24.8 3.81999 256,272 547,052 11.9 2.1 4.8 4.0 1.4 -0.6 83.3 29.5 -12.82000 273,666 607,566 11.1 4.5 6.8 3.7 3.0 0.1 54.3 44.6 1.1

2001 292,535 677,559 11.5 2.5 6.9 3.8 1.7 1.4 55.7 24.5 19.72002 313,247 757,762 11.8 2.5 7.1 3.9 1.6 1.5 55.7 23.1 21.22003 336,242 852,480 12.5 2.7 7.3 4.2 1.8 1.4 56.8 24.5 18.72004 362,435 955,686 12.1 2.5 7.8 4.0 1.7 2.1 51.8 21.4 26.82005 393,031 1,064,513 11.4 2.9 8.4 3.8 1.9 2.7 45.0 22.6 32.42006 466,385 1,183,882 11.2 2.8 7.0 3.7 1.9 1.4 53.6 26.9 19.52007 486,459 1,337,032 12.9 2.8 7.1 4.3 1.9 1.0 60.5 26.1 13.4

2008 525,890 1,487,851 11.3 2.8 5.7 3.8 1.8 0.1 66.4 32.6 0.92009 552,797 1,629,502 9.5 2.8 5.4 3.2 1.8 0.4 58.8 34.1 7.12010 589,748 1,793,148 10.0 2.7 6.4 3.3 1.8 1.3 52.1 28.4 19.52011 643,318 1,938,458 8.1 2.7 6.2 2.7 1.8 1.8 43.3 28.4 28.32012 703,233 2,062,408 6.4 2.7 5.3 2.1 1.8 1.3 40.6 34.0 25.4

2013 732,417 2,182,277 5.8 2.2 5.4 1.9 1.5 2.0 35.7 27.4 36.9

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3. Model estimation: Hypotheses and equationsHypotheses Model equations

Direct hypotheses1. Do the aggregate capital inflows have a positive and significant impact on economic growth?

(1) GDP=f(fid, oda, rem, inflows, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, tra, gdp*fdi, gdp*oda, gdp*rem)

--Does FDI inflow have positively significant effects on economic growth at the national level?

(2) GDP =f(fdi, educ, fid, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, tra, gdp*fdi);(3) FDI =f(gdp, educ, fid, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, tra, gdp*fdi);

--Does FDI inflow have positively significant effects on economic growth at provincial level?

(4) GDP=f(fdi, oda, demand, educ, health, gl, lacost, mpv, tel, reer, gdp*ex, gdp*govex, gdp*fdi, gdp*oda, gdp*tel, region);(5) FDI =f(gdp, ex, demand, educ, health, gl, lacost, mpv, tel, reer, gdp*fdi, region)

--Does ODA inflow have positively significant effects on economic growth at the national level?

(6) GDP= f(oda, oda(-1), educ, ex, gov, health, imac, infra, lap, prod, reer, tot, tra, pov, gdp*fdi, gdp*oda, gdp*rem);(7) ODA= f(oda(-1), gdp, educ, ex, gov, health, imac, infra, lap, prod, reer, tot, tra, pov, oda*gdp);

--Does ODA inflow have positively significant effects on economic growth at provincial level?

(8) GDP= f(oda, oda(-1), educ, ex, gov, health, imac, infra, lap, prod, reer, tot, tra, pov, region, oda*gdp, fdi*gdp);(9) ODA= f(oda(-1), gdp, educ, ex, gov, health, imac, infra, lap, prod, reer, tot, tra, pov, region, oda*gdp);

--Does remittance inflow have positively significant effects on economic growth at the national level?

(10) GDP =f(rem, educ, health, infra, reer, rem, pov, demand, gdp*rem, gdp*fdi, gdp*oda); (11) REM =f(gdp, educ, health, infra, reer, rem, pov, demand, rem*gdp);

2. Does the business cycle increase or decrease partly capital inflows, then economic growth?

(12) GDP=f(fid, oda, rem, inflows, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, tra,(region), dummy)

3. Does the national competitiveness increase or decrease partly capital inflows, then economic growth?

(13) GDP=f(fid, oda, rem, inflows, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, (region), tra,bci)

Indirect hypotheses4. What are major determinants of FDI inflows? (14) FDI =f(gdp, educ, fid, educ, ex, fid, govex, health, imac, infra(tel), lap, prod, reer, tot, tra, gdp*fdi)

--Does a region with better economic infrastructure attract more FDI than others?

(15) FDI =f(gdp, educ, fid, educ, ex, fid, govex, health, imac, infra, lap, prod, reer, tot, tra, fdi*infra(tel), dummy)

--Does a region with better provincial competitiveness attract more FDI? (16) FDI = f(gdp, educ, health, gl, lacost, mpv, infra(tel), bci(cpi), (region), (dummy))5. What are major determinants of ODA inflows? (17) ODA= f(ggdp, gfdi, gedu, ghealth, gmpv, gdemand, reer, gtrade, pov, infra(tel), bci, (pci), (region),

(dummy)) 6. What are major determinants of remittance inflows? (18) REM = f(gdp, literacy, demand, prod, reer, imac, pov, dummy)7. Do FDI inflows impact on the export of the economy? At national and provincial level?

(19) FDI=f(gdp, educ, fid, gov, health, imac, infra(tel), lap, rem, tra, tot, lacost, reer, ex, ex*fdi); (20) EX=f(fdi, gdp, educ, fid, gov, health, imac, infra(tel), lap, rem, tra, tot, lacost, reer, fdi*ex)

8. Do ODA inflows impact on the infrastructure development? At national and provincial level?

(21) ODA= f(oda(-1), gdp, educ, ex, gov, health, imac, infra(tel), lap, prod, reer, tot, tra, pov, oda*infra(tel));(22) Infra= f(oda, gdp, educ, ex, gov, health, imac, infra(tel), lap, prod, reer, tot, tra, pov, oda*infra(tel))

21

4. Estimation Results and discussionTable 22. Estimation growth effects of capital inflows at national level

Independent variables Growth effects FDI, ODA, REM Growth effects of FDI Growth effects of ODA Growth effects

remittances

Foreign Direct Investment (FDI) 0.164189 (*) 0.021028 (*)Official Development Assistance(ODA) 0.111177(****) 0.115637 (**)Overseas Vietnamese remittances (REM) 0.037784 (*) 0.022899 (*)Aggregate inflows (INFLOWS)Education (EDUC) 1.157058 (*) 0.606306 (*) 0.354364 (*) 0.34765(*)Exports (EX) 0.186557 (***) 0.130376 (*) -0.134361 (****) 0.051777Financial market development (FID) -0.010888(*) -0.006613 (*) -0.010073 (*) -0.006446(*)General government spending (GOVEX) 0.474033(**) 0.190397 (*) 0.182812(*)

Healthcare (HEALTH) -0.05827 -0.838921 (**) 0.843638 (*) -0.011234

Technological progress (IMAC) 0.077702 0.073436 (*) -0.123763 (*) 0.023573Economic infrastructure (INFRA) -0.067758 (*) -0.029013 (*) 0.058846 (*) 0.00421Labor participation ratio (LAP) 1.028516(*) 1.456134 (*) 1.225574 (*) 1.282873(*)National labor productivity (PROD) 0.335009(*) 0.412801 (*) 0.245843(*)Real effective exchange rate (REER) -0.149756 (**) -0.031275 (*) -0.017418Terms of trade (TOT) -0.327007 (*) -0.217996 (*) -0.40453 (*) -0.212047(*)Trade volume (TRA) -0.474206 (**) -0.251123 (*) -0.115287 (*) -0.107992(**)Interactions between FDI and GDP 0.001036 (*)Interactions between ODA and GDP 0.005732 (*)Interactions between REM and GDP 0.001069(*)Interactions between GDP and BCI 0.009956

Booming business cycle (dummy =0) 0.000361 0.00033(****) 0.000282 0.001077

Downturn business cycle (dummy =1) -0.000361 -0.00033 (****) -0.000282 -0.004933

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4. Estimation Results and discussion (cont.)At national level: Capital inflows have a positive and significant relationship with economic

growth; aggregate effect is stronger than the individual effect of each factor FDI,

ODA, REM; FDI inflows show a stronger effect than the rest of capital inflows, ODA and

REM; Supporting factors: labor growth, productivity of the economy, education,

exports, technological progress, and government expenditures, have been actively supported to the economic growth;

Unsupporting factors: infrastructure and financial markets in Vietnam remains undeveloped; terms of trade (low value of the primary products); relative appreciation of VND compared; human resource quality (healthcare);

FDI, ODA are affected by business cycles, but remittances are countercyclical inflows.

Country’s competitiveness also affects capital inflows and the economic growth.

23

4. Estimation Results and discussion (cont.)At provincial level: Relationship b/w capital inflows (FDI and ODA) and GDP is positive and

significant;

In case of FDI, regions with better economic infrastructure, better social development, and better governance associated with larger capital inflows disbursed (the Red River Delta and the South East region versus the rest);

In case of ODA, infrastructure, human capital, exports, and local government expenditures are growth-supported;

Regions with better socioeconomic conditions are receiving more ODA. However, ODA inflows are decreasing in its marginal effects on economic growth in the developed regions relative to the rest of the region;

Healthcare, financial market development and infrastructure , real effective exchange rate, terms of trades also have negative effects on the provincial economic growth;

FDI, ODA are affected by business cycles;

Provincial competitiveness also affects the economic growth.

24

4. Estimation Results and discussion (cont.)Results at provincial level

Table 23. Estimation growth effects of capital inflows at provincial level

Independent variables Across Region Red River DeltaNorthern

Mountain and Midland

North Central Coast

Central Highlands Southeast Mekong River

Delta

Provincial FDI (FDI) 0.022903 (*) 0.033736 (*) 0.035831 (*) 0.031792 (*) 0.033158 (*) 0.032718(*) 0.031899 (*)

Provincial (ODA) 0.099075 (*) 0.098339 (*) 0.103769 (*) 0.101519 (*) 0.107359 (*) 0.098554(*) 0.099506(*)

Provincial (DEMAND) 0.083063 (*) 0.124211 (*) 0.12508 (*) 0.132785 (*) 0.113005(*) 0.126819(*) 0.132745(*)

Education (EDUC) 0.600994 (*) 0.907082 (*) 0.912578 (*) 0.89382 (*) 0.861471(*) 0.895928(*) 0.89569(*)

Healthcare (HEALTH) -0.005071 -0.007465 -0.007054 -0.010654 -0.010962 -0.009046 -0.009174

Labor growth (gL) -0.499676 (*) -0.396261 (**) -0.477602 (*) -0.450342 (*) -0.462562(**) -0.437034(*) -0.456651 (*)

Labor cost (LACOST) 0.024317 (****) -0.004634 -0.001118 -0.004807 0.002155 -0.002811 -0.005791

Learning by doing (MPV) -0.03889 -0.083822 -0.071766 -0.083632 (****) -0.062884 -0.083537 -0.088099(****)

Infrastructure (TEL) -0.017072 0.034957 (*) 0.038546 (*) 0.035013 (*) 0.034533(*) 0.03332(*) 0.034893(*)

Real eff.exchange rate (REER) -6.106985 (*) -1.253146 (*) -1.068257 (***) -1.012052 (****) -0.91595 (****) -0.921443 (****) -0.973016(****)

Interaction GDP& GOVEX 0.053098 (*) 0.058418(*) 0.052496(*) 0.055707(*) 0.05376(*) 0.056969(*) 0.056257(*)

Interaction GDP& EX 0.012142 (*) 0.006553 (*) 0.006768(*) 0.006569(*) 0.006758(*) 0.006903(*) 0.006724(*)

Interaction GDP & FDI 0.00462 (*) 0.005633 (*) 0.005447(*) 0.005143 (*) 0.005155(*) 0.005163(*) 0.005133(*)

Interaction GDP &ODA 0.009665 (*) 0.01686 (*) 0.016691 (*) 0.016387(*) 0.016164(*) 0.016766(*) 0.016232(*)

Interaction GDP& TEL 0.009665 (*) 0.009724 (*) 0.009965(*) 0.009347(*) 0.009444(*) 0.006506(*) 0.006434(*)

Booming business cycle 1.109661(****) 5.504409(**) 4.540704(**) 5.458802(**) 5.557723(**) 1.107271 (*) 1.177022(****)

Downturn business cycle -0.422905 -1.899446(****) -1.457347 (****) -1.768077(****) -1.875325(****) -0.422017(*) -0.449806

25

4. Estimation Results and discussion (cont.)Capital inflows’ determinants and policy changes

FDI’s determinants: Economic growth, infrastructure,

Supporters: Trade activities, the level of financial market developments, given technology progress, labor ratio, however, not statistically significant;

Unsupporters: Labor cost’s productivity in decreasing its marginal effects on firms’ production effectiveness; country’s real effective exchange rate is appreciated, reduce the country’s competitiveness; labor force’s quality (healthcare and education) are inadequate;

Country’s/ province’s competitiveness also positively affects FDI inflows, insignificant at country level, but statistically significant at provincial level;

Business cycles affect the FDI inflows;

26

4. Estimation Results and discussion (cont.)FDI’s determinants and policy changes

Table 24. Estimation FDI determinants at national level

Independent variables FDI interacts with exports

FDI estimates with BCI

FDI interacts with labor cost

FDI Interacts with economic

infrastructure

FDI interacts with technological infrastructure

In booming business cycle

In downturn business cycle

National GDP (GDP) 0.750287 3.754964(****) 0.130974 2.475882(*) 0.571301 (*) 1.570162 -7.006593 (*)

Education (EDUC) -1.534297(*) -6.503552(**) 0.52745(****) -2.211929(*) -1.124529 (*)-3.17062

3.019459 (**)(****)

Government spending (GOV) 0.319728(*) 0.34157 -0.164403(****) -0.201025 0.033754 2.645362 (*) 0.46554

Exports (EX) 0.16683 -0.329787(****) -1.610416(**) -0.093916 1.12016 -1.936775 (*)

Financial development (FID) 0.022643(*) 0.027527 0.015314(*) 0.017041(*) 0.009086 (*)-0.035574

-0.094809 (*)(****)

Healthcare (HEALTH) 4.777689(*) -0.432912 5.03882 (*) -3.576643(*) 2.214926 (*) -14.89236(*) -11.35666 (*)Learning by doing (IMAC) 0.143167 (****) 1.069628 -0.586633(*) 0.154071 -2.325133 (*) 2.572706(*) 1.396842 (*)Infratructure (INFRA) -0.121204(*) 0.466184(*) -0.171327(*) -0.045187 -0.036651 0.390333 (*)Trade (TRA) -1.122714 (*) -0.606413 0.617682(*) 0.880599 0.062138 -3.510944(**) 0.755508Real eff. Exchange rate (REER) 0.098188(****) 0.19398 0.00715 -0.2229(****) -0.064113 (***) -0.72224(*) -1.437983 (*)Labor participant(LAP) -1.87042 (****) -5.77657 0.960323 17.64683 (*)Labor cost (LACOST) 0.158867(*) -3.861941(*) 0.01772 -0.020391 -0.556855 (*)Interaction GDP&EXInteraction FDI&EX 0.056525(*)Interaction FDI&BCI 0.004209Interaction FDI&LACOST 0.22934 (*)Interaction FDI&INFRA -0.019882 (*)Interaction FDI&TEL 0.13031 (*)Booming business cycle 0.012548(*)Downturn business cycle -0.005926 (*)

27

4. Estimation Results and discussion (cont.)FDI’s determinants and policy changes

Table 26. Estimation FDI determinants at provincial level with Provincial Competitiveness index

Independent variable, Across Region Red River Delta

Northern Mountain and

Midland

North Central Coast

Central Highlands Southeast Mekong

River Delta

Provincial GDP (GDP) 3.251106 (****) 7.544102 (*) 6.576472 (*) 7.103524 (*) 7.413218 (*) 7.349324 (*) 7.011901 (*)

Education (EDU) -0.92059 (****) -0.814992 (*) -1.008407 (*) -0.809594 (*) -0.748903 (*) -0.769218 (*) -0.826659 (*)

Healthcare (HEALTH) 0.391674 0.139401 0.17058 (****) 0.204417 0.22777 (***) 0.30273 (***) 0.161564

Labor (L) 4.393148 (*) 4.571527 (*) 5.053435 (*) 4.808595 (*) 5.241985 (*) 4.701783 (*) 4.743105 (*)

Labor cost (LACOST) -2.131642 (**) -0.516068 (**) -0.59272 (*) -0.56306 (**) -0.553003 (**) -0.532342 (**) -0.526576 (*)

Learning by doing (MPV) -0.48052 0.15496 0.307104 0.04334 -0.166145 -0.016598 0.080925

Infrastructure (TEL) 0.65031 (***) 0.272053 (***) 0.275227 (*) 0.293779 (**) 0.316377 (*) 0.26915 (***) 0.28084 (***)

Provincial competitiveness (PCI) 0.505482 0.546105 (*) 0.444615 (*) 0.542828 (*) 0.498413 (*) 0.524184 (*) 0.497487 (*)

Interaction FDI& Ex 0.018533(**) 0.037405 (*) 0.039062 (*) 0.036357(*) 0.036831(*) 0.03619(*) 0.038302(*)

Interaction FDI&TEL 0.011985 (*) 0.011997(*) 0.011716(*) 0.012019(*) 0.012019(*) 0.01083(*) 0.01159(*)

Interaction FDI&FDP 0.086374 (*) 0.086336(*) 0.086063(*) 0.086947(*) 0.083543(*) 0.078271(*) 0.085804(*)

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4. Estimation Results and discussion (cont.)ODA’s determinants and policy changes

Economic growth and infrastructure are positive and significant;

Supporters are trade, historical ODA disbursed, and macroeconomic stability (REER), poverty, and learning by doing;

Unsupporters: labor growth, education, low given technology progress/ lowered labor skills (learning by doing), labor productivity, and labor cost;

Country competitiveness/ provincial competiveness affect the ODA inflows and ODA allocation;

Business cycles affect the ODA inflows;

Provinces with better infrastructure and economic conditions are allocated more ODA;

29

4. Estimation Results and discussion (cont.)ODA’s determinants and policy changes Table 27. Estimation ODA determinants at national level

Independent variables General estimates

ODA interacts with poverty

Poverty interacts with

ODA

Economic infrastructure interacts with

ODA

ODA estimates with downturn business cycle

dummy

Estimates with booming

business cycle dummy

National GDP (GDP) 1.293404 (*) 1.382398 (*) 0.428428(*) -0.512292 (****) -3.246699(*)exNational ODA (ODA (- 1)) 0.173738 (*) 0.63597 (*) -0.4074 (**) -0.4074 (**)

Education (EDUC) -1.625366(*) 0.450365 (**) -2.764586 (*) -1.567831(*) 1.906921 (*) 4.052423 (*)

Export (EX) 0.023395 -0.09431 0.531261 (*) 0.784433(*) 1.273792 (*) 0.76152 (*)Government spending (GOV) -0.101287 -0.572356 (*) 0.800005 (*) 0.383657(*) -0.152195 -0.355955 (*)

Healthcare (HEALTH) 1.197243(*) 1.355059 (*) -2.754643 (*) -0.680605(**) -3.945665 (**) -6.158891(*)

Manufacturing value (IMAC) -0.048006(****) -0.016787 0.352877 (*) 0.089113(*) 0.611973 (*) 0.397332 (*)

Infrastructure (INFRA) 0.131915(*) -1.756384 (*) -2.052411 (*) 3.81456 (*) 11.06517 (*)

Labor participation (LAP) -0.772306(*) 0.347215 (*) -0.197294 (*) -0.969448(*) 0.111886 (****) -0.025794

Productivity (PROD) -0.291564(*) 0.015863 0.053676 -0.559624(*) -0.195936 (***) -0.577161 (*)Real eff.exchange rate(REER) 0.237059(*) 0.128044 (*) -0.089307 0.248492(*) 0.123374 0.296775 (****)Trade (TRA) 0.246962(**) -0.14614 (*) 0.125336 (*) -0.760597(*) -0.311859 (*) -0.45339 (*)Poverty (POV) 0.113823(*) 0.138318(*) 0.098374 (*) -0.193545 (*)Interaction GDP and ODA 0.053225(*)Interaction ODA and POV 0.002347 (*)Interaction POV and ODA 0.062773 (*)Interaction ODA and INFRAInteraction INFRA and ODA 0.076241(*)Booming business cycle (dummy =0) -0.005158 (*)Downturn business cycle (dummy =1) 0.009096 (*)

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4. Estimation Results and discussion (cont.)ODA’s determinants and policy changes

Table 28. Estimation ODA determinants at provincial level

Independent variables Across Region Red River DeltaNorthern

Moutain and Midland

North Central Coast

Central Highlands Southeast Mekong

River Delta

Provincial GDP growth (gdp) 1.067613(*) 1.114461(**) 1.053175(****) 1.067588 (**) 1.051605 (**) 1.176234 (**) 1.076633(**)

Human capital (educ) -8.435585(****) -8.293289(***) -8.568069(***) -8.683999 (***) -8.384479 (***) -9.276985 (***) -8.712821(****)

Human quality (health) 0.107677 0.169821 0.031608 0.015726 0.096859 0.141764 0.194202

Labor growth (gl) 0.147338 0.120092 0.184846 0.202294 0.150227 0.153322 0.123713

Tech infrastructure (tel) -0.788735 -0.941835 -0.672473 -0.635008 -0.778408 -1.064096 -1.077099

Macroeconomic stability (reer) 0.054228 0.05501 0.054941 0.059315 0.051857 0.061347 0.054314

Poverty (pov) 14.48767 11.89155 17.6023 19.03339 14.33757 18.08133 12.31557

Interact b/t ODA & infrastructure 0.037939 (*) 0.038215 (*) 0.037551(*) 0.038093(*) 0.037094(*) 0.038365(*) 0.0378731(*)

Provincial Competitiveness (PCI) 0.010012(***) 0.01164(***) 0.009521(***) 0.010823(**) 0.009941(***) 0.01134(**) 0.01084(**)

Interaction ODA and provincial competitiveness index 1.13173 (**) 1.177858(**) 1.079845(**) 1.056454(***) 1.13174(**) 1.129268(**) 1.240177(**)

Interaction ODA and Poverty -0.014471 (**) -0.01616(***) -0.012763(****) -0.011912(****) -0.014706(****) -0.012202 -0.016486(****)

Downturn business cycle (dummy =1) 1.949754(**) 2.086868(**) 1.570812(****) 1.95523 (**) 1.838008 (****) 1.98317(**) 1.978373 (**)

Booming business cycle (dummy =0) -2.20028(**) -2.337204(**) -2.017022(****) -2.202189 (**) -2.528359 (***) -2.237783(**) -2.192109 (**)

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4. Estimation Results and discussion (cont.)Remittances’ determinants and policy changes

Table 29. Estimation Remittances determinants at national level

Independent variables General estimation

Interact between REM and

GDP

Interact between REM

and poverty

Interact between REM

and TEL

Interact between REM and DEMAND

Interact between REM

and IMAC

Boming business cycle

Downturn business

cycle

National GDP(GDP) 8.248163(****) 0.792723 2.183013 (**) 0.678238 (****) -1.238419 8.297831 (****) 8.298026 (****)

Literacy (LITERACY) -6.191566 (*) 0.053089(*) -0.558962 (*) -0.38725 -0.482072 (****) 1.963958 (*) -6.245703 -6.2476

Domestic demand (DEMAND) -5.390506 (**) 0.249547(*) -0.31989 -0.117495 0.700168 (**) -5.389993(****) -5.388936

Productivity (PROD) 3.307656 (*) -0.423745(*) 0.526502 (****) -1.870154 (*) -0.790667 (*) -0.13199 3.322438 (*) 3.322089 (*)

Real eff.exchange rate (REER) -0.82695 0.039018 0.047708 -0.083194 0.374883 (*) -0.345927 (***) -0.843866 -0.844023

Learning by doing (IMAC) 0.864147 0.083474 -0.268377 (***) 0.598905(****) -0.248675 (**) 0.849604 0.849599

Poverty (POV) 2.370289 (****) -0.010821 -1.176899 (*) 0.416988 (*) -1.480331 (**) 2.391582 2.391881

Interaction REM&GDP 0.118769(*)

Interaction REM&POV 0.079834(*)

Interaction REM&TEL -0.166522 (*)

Interaction REM&DEMAND 0.168778 (*)

Interaction REM&IMAC 0.130703 (*)

Downturn business cycle-0.01045

(dummy =1)

Booming business cycle0.01054

(dummy =0)

32

4. Estimation Results and discussion (cont.)Policy changes to attract more capital inflows, FDI and ODA

The future governmental policies should focus to improve the underdeveloped conditions of infrastructure, quality of human resources (healthcare and education), while their incentives are spurious to the economic growth:

Firstly, the government should review and amend those laws and incentive policies that promote foreign investment to take off. Earlier, the Law on investment, the Law on Enterprises, and other laws on land management, construction, and intellectual property rights must have been amended to meet the demand for current socioeconomic developments and the new global integration period;

Secondly, the government should focus on up-grading socioeconomic infrastructure by increasing more public spending and socialized resources. Particularly, electric power supplies, seaports, roads and bridges are the top priorities. In line with the improving of the backbone infrastructure, reforming public administration and enhanced institutional capacity are needed;

Thirdly, human resource development via training and education should be another government priority. The quality of Vietnam's labor forces must be enhanced in different ways, such as vocational training, foreign languages, healthcare, and industrial disciplines.

33

Thank you very much for your attention and your valued comments.

Q&A

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