Factors Affecting Foreign Direct Investment and Economic Performance in Developing Economies: Evidence from Vietnam

ABSTRACT

Since the economic and political reforms in 1986, Vietnam government has introduced a high extent of decentralization in fiscal and administrative aspects. This paper examines the impact of foreign direct investment (FDI) as a channel of fiscal and administrative decentralization on economic performance in Vietnam as the embodiment of emerging economies. The results point out that fiscal decentralization in terms of better tax revenue and spending on development investment have a positive and significant impact on the attraction of foreign investment. Strikingly, the level of “unofficial expenditure” has a negative influence on FDI, and controlling of corruption at local levels is critical to attract foreign investment. The results from instrumental-variable estimations show that FDI and total spending of local governments positively and significantly affect the performance of local economies.

KEYWORDS:

• Decentralization
• foreign direct investment
• economic performance
• Vietnam

Acknowledgments

The authors would like to thank GSO, CECODES, and UNDP (of the PAPI data), VCCI and USAID (of the PCI data) for their great effort to make the data available. MH Do would also like to thank the German Academic Exchange Service (DAAD) for financial assistance. We acknowledge the constructive comments and suggestions from the Editor and reviewers that are very helpful for us to improve the article.

Disclosure Statement

No potential conflict of interest was reported by the author(s).