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Contribution of foreign direct investment to poverty reduction : the case of Vietnam in the 1990s

Hemmer, Hans-Rimbert ; Phuong Hoa, Nguyen Thi


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Universität Justus-Liebig-Universität Gießen
Institut: Professur für Volkswirtschaftslehre und Entwicklungsländerforschung
Fachgebiet: Wirtschaftswissenschaften
DDC-Sachgruppe: Management (BWL)
Dokumentart: ResearchPaper (Forschungsbericht, Arbeitspapier)
Zeitschrift, Serie: Entwicklungsökonomische Diskussionsbeiträge (Erscheinen eingestellt) ; 30 / 2002
Sprache: Englisch
Erstellungsjahr: 2002
Publikationsdatum: 24.08.2005
Kurzfassung auf Englisch: In the current context of increasing globalisation, there exist many arguments against it in
that it does not benefit the poor. Globalisation through foreign direct investment (FDI)
might do nothing for the poor since foreign investors usually recruit skilled workers who
are likely to be non-poor. FDI may outcompete local small enterprises making local
workers become poor or the poor workers worse. Nevertheless, whether this presumption
is true in every developing country is still open to discussion.

The paper aims at analysing impacts of FDI on poverty reduction in Vietnam in the 1990s
because following the economic reform in the late 1980s Vietnam achieved high
economic growth, rapid poverty reduction, increasing FDI and trade. FDI is also
considered an integral component of the economy. Hence to what extent FDI contributes
to poverty reduction may be a relevant question to the country that was characterised by
widespread poverty in the 1980s.

The paper analyses FDI’s impact on poverty reduction in Vietnam through direct and
indirect impacts. The direct impact of FDI works through employment creation and it is
estimated to be negative but insignificant. The indirect impact of FDI works through
FDI’s effect on economic growth and through FDI’s contribution to the local budgets.
Regarding FDI’s contribution to growth, estimated coefficients are significantly positive
based on panel data covering 61 provinces of Vietnam and the 1990-2000 period.
Furthermore, FDI interacts positively with local human capital in affecting economic
growth. Economic growth is then estimated to exert significantly positive impacts on the
magnitude of poverty reduction results. Therefore, FDI has indirectly helped reduce
poverty in Vietnam. Regarding FDI’s contribution to the local budget, this effect remains
insignificant.

Globalisation through FDI thus benefits the poor. Policy implications then include
policies that help attract FDI continuously, policies that facilitate the implementation of
registered foreign investment projects and policies that upgrade the quality of the labour
workforce.