An empirical study of the real effective exchange rate and foreign direct investment in Vietnam
-
DOIhttp://dx.doi.org/10.21511/imfi.17(4).2020.01
-
Article InfoVolume 17 2020, Issue #4, pp. 1-13
- Cited by
- 1321 Views
-
632 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Foreign direct investment (FDI) inflows to Vietnam have increased significantly in recent years. Theoretically, capital inflows will put pressure on the overvaluation of local currencies in countries, despite different exchange rate mechanisms. So, the problem facing the Vietnamese government is the need to examine the relationship between the exchange rate and FDI in order to develop effective policies. This study examined the relationship between the exchange rate and FDI in Vietnam in the period of 2005–2019 using the VAR (vector autoregression) model based on quarterly frequency data. The new points of this study are: (i) using the real effective exchange rate (REER) of the Vietnamese currency with 143 major trading partners of Vietnam; and (ii) adding two control variables into the VAR model to examine the relationship between the exchange rate and FDI in Vietnam – a case study for developing countries. The findings show that, firstly, there is a positive causal relationship between FDI and Vietnam’s real effective exchange rate. Secondly, trade openness has a positive impact on FDI and REER in Vietnam. Thirdly, economic growth has an impact on REER, but no statistically significant impact on FDI was found. The findings can provide useful information to help policymakers plan and make decisions on future policies and support further research studies.
- Keywords
-
JEL Classification (Paper profile tab)E22, F21, F31
-
References40
-
Tables6
-
Figures3
-
- Figure 1. The response of factors to FDI
- Figure 2. The response of variables to the current REER
- Figure 3. The relationship between REER and FDI inflows in Vietnam
-
- Table 1. Variables used in the research model
- Table 2. Unit root test results
- Table 3. Determining the optimal lag
- Table 4. Johansen tests for cointegration
- Table 5. Granger causality Wald tests
- Table 6. Testing results of the relationship between REER and FDI
-
- Abdullah, H., Bakar, N. A. A., & Hassan, S. (2006). Analysis of FDI Inflows to China From Selected Asean Countries: A Panel Cointegration Approach. Journal of Economic Cooperation and Development, 35(3), 1-28.
- Ahmed, A. (2018). Modelling the Effect of Stock Market Volatility and Exchange Rate Volatility on Foreign Direct Investment in Nigeria: A New Framework Approach. Asian Economic and Financial Review, 8(12), 1482-1505.
- Aizenman, J., & Binici, M. (2016). Exchange market pressure in OECD and emerging economies: Domestic vs. external factors and capital flows in the old and new normal. Journal of International Money and Finance, 66, 65-87.
- Alba, J. D., Wang, P., & Park, D. (2010). The impact of exchange rate on FDI and the interdependence of FDI over time. The Singapore Economic Review, 55(4), 733-747.
- Asiedu, E. (2002). On the determinants of foreign direct investment to developing countries: is Africa different? World development, 30(1), 107-119.
- Barrell, R., & Pain, N. (1996). An econometric analysis of US foreign direct investment. The Review of Economics and Statistics, 200-207.
- Blonigen, Bruce A. (1997). Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment. American Economic Review, 87(3), 447-465.
- Boateng, A., Hua, X., Nisar, S., & Wu, J. (2015). Examining the determinants of inward FDI: Evidence from Norway. Economic Modelling, 47, 118-127.
- Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115-135.
- Buch, C. M., & Kleinert, J. (2008). Exchange rates and FDI: goods versus capital market frictions. World Economy, 31(9), 1185-1207.
- Burakov, D., Intse, M., & Freidin, M. (2018). Energy Consumption, Trade Openness and Exchange Rate Impact on Foreign Direct Investment in Union State of Russia and Belarus. International Journal of Energy Economics and Policy, 8(4), 77-82.
- Campa, J. M. (1993). Entry by foreign firms in the United States under exchange rate uncertainty. The Review of Economics and Statistics, 75(4), 614-622.
- Combes, J. L., Kinda, T., & Plane, P. (2012). Capital flows, exchange rate flexibility, and the real exchange rate. Journal of Macroeconomics, 34(4), 1034-1043.
- Cushman, D. O. (1985). Real exchange rate risk, expectations, and the level of direct investment. The Review of Economics and Statistics, 67(2), 297-308.
- Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427-431.
- Djulius, H. (2017). Energy use, trade openness, and exchange rate impact on foreign direct investment in Indonesia. International Journal of Energy Economics and Policy, 7(5), 166-170.
- Dunning, J. H. (1988). The theory of international production. The International Trade Journal, 3(1), 21-66.
- Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: Journal of the Econometric Society, 55(2), 251-276.
- Ersoy, I. (2013). The role of private capital inflows and the exchange market pressure on real exchange rate appreciation: The case of Turkey. South African Journal of Economics, 81(1), 35-51.
- Froot, K. A., & Stein, J. C. (1991). Exchange rates and foreign direct investment: an imperfect capital markets approach. The Quarterly Journal of Economics, 106(4), 1191-1217.
- General Statistics Office of Vietnam (2018). The 2017 economic census – Result of Foreign Invested Enterprises in the period 2011–2016.
- Ibarra, C. A. (2011). Capital flows and real exchange rate appreciation in Mexico. World Development, 39(12), 2080-2090.
- Ibrahim, Y., & Raji, J. O. (2018). Cross-border merger and acquisition activities in Asia: the role of macroeconomic factors. Studies in Economics and Finance, 35(2), 307-329.
- Ifeakachukwu, N. P., & Ditimi, A. (2014). Capital inflows and exchange rate in Nigeria. Mediterranean Journal of Social Sciences, 5(7), 263.
- Itagaki, T. (1981). The theory of the multinational firm under exchange rate uncertainty. Canadian Journal of Economics, 14(2), 276-297.
- Jongwanich, J., & Kohpaiboon, A. (2013). Capital flows and real exchange rates in emerging Asian countries. Journal of Asian Economics, 24, 138-146.
- Kodongo, O., & Ojah, K. (2013). Real exchange rates, trade balance and capital flows in Africa. Journal of Economics and Business, 66, 22-46.
- Komuves, Z., & Ramirez, M. D. (2014). FDI, Exchange Rate, and Economic Growth in Hungary, 1995-2012: Causality and Cointegration Analysis. Applied Econometrics and International Development, 14(1), 45-58.
- Kosteletou, N., & Liargovas, P. (2000). Foreign direct investment and real exchange rate interlinkages. Open Economies Review, 11(2), 135-148.
- Lartey, E. K. (2011). Financial openness and the Dutch disease. Review of Development Economics, 15(3), 556-568.
- Lee, J. W. (2015). Dynamic Relationships between exchange rates and foreign direct investment: Empirical evidence from Korea. Asian Economic Journal, 29(1), 73-90.
- Linh, N., & Lien, N. (2020). The impact of real effective exchange rate volatility on trade balance in Vietnam. Accounting, 6(6), 1167-1172.
- Morande, F. G. (1988). Domestic currency appreciation and foreign capital inflows: What comes first? (Chile, 1977–1982). Journal of International Money and Finance, 7, 447-466.
- Pham, T. H. H., & Nguyen, T. D. (2013). Foreign direct investment, exports and real exchange rate linkages in Vietnam: evidence from a co-integration approach. Journal of Southeast Asian Economies, 250-262.
- Polat, B., & Payaslıoğlu, C. (2016). Exchange rate uncertainty and FDI inflows: the case of Turkey. Asia-Pacific Journal of Accounting & Economics, 23(1), 112-129.
- Shrikhande, M. M. (2002). A general equilibrium analysis of foreign direct investment and the real exchange rate. International Journal of Finance & Economics, 7(4), 309-325.
- Takagi, S., & Shi, Z. (2011). Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008. Japan and the World Economy, 23(4), 265-272.
- Tsaurai, K. (2015). FDI location and exchange rates, is there really a relationship between the two? Corporate Ownership and Control, 13(1), 644-653.
- Vita, G. D., & Abbott, A. (2007). Do exchange rates have any impact upon UK inward foreign direct investment? Applied Economics, 39(20), 2553-2564.
- Yang, J. Y. Y., Groenewold, N., & Tcha, M. (2000). The determinants of foreign direct investment in Australia. Economic Record, 76(232), 45-54.