CAPITAL FLOWS AND ECONOMIC GROWTH. EVIDENCE FROM VIETNAM

Abstract

The study examines the impact of foreign capital flows on economic growth in Vietnam over the period 1989-2019 using autoregressive distributed lag (ARDL). The findings indicate that there exists a long-run relationship between economic growth and foreign capital flows. Foreign direct investment stimulates economic growth both directly and indirectly since the findings indicate that in both the short and long run, foreign direct investment has significantly positive effects on economic growth. Foreign direct investment can also indirectly affect growth through appreciation of human capital due to the existence of a bi-directional Granger causality relationship between human capital and foreign direct investment. Our findings suggest that foreign direct investment and human capital are complementary to improving economic growth and Vietnam should promote foreign direct investment with enhancing human capital accumulation. External debt, however, has an insignificant impact on growth and the impact of foreign aid is also negative. Vietnam, therefore should not rely on external debt in the long run and allocate the effectiveness of foreign aid to achieve the optimal target.