The impact of free trade agreements on foreign direct investment in Vietnam

Abstract

Foreign direct investment (FDI) has increasingly played a crucial role in Vietnam’s economic development and growth. However, amid intensifying competition to attract FDI, these capital inflows are influenced by multiple factors. This study aims to provide a comprehensive assessment of the impacts of seven free trade agreements (FTAs), along with other macroeconomic and institutional factors, on FDI inflows into Vietnam over the period 2000–2023. Using a gravity model estimated by Feasible Generalized Least Squares (FGLS) on panel data for 21 partner countries and measuring FTA effects by the depth of their commitments, the empirical results indicate that the FTAs considered exert significantly heterogeneous effects on FDI inflows into Vietnam during the study period, depending on the degree of legal binding and the scope of regulation embedded in each agreement. In addition, economic size (GDP), GDP per capita differentials, inflation, and institutional quality in Vietnam are found to have positive effects on the dependent variable, whereas geographical distance exerts a negative impact. Moreover, real interest rates and Vietnam’s economic size also positively affect FDI inflows when one-year lagged data are considered, reflecting investors’ tendency to rely on past economic information when making investment decisions.