“Impact of money supply and macroeconomic indicators on foreign portfolio investment: Evidence from Vietnam”

This study examines the relationship between money supply, macroeconomic indicators, and foreign portfolio investment in Vietnam. Using the Autoregressive Distributed Lag Model and Stata 17 software to analyze quarterly data from Q1/2007 to Q4/2022, the analysis reveals strong and enduring correlations. An increase in money supply and economic growth positively influences foreign portfolio investment, with the money supply from the previous quarters significantly impacting foreign portfolio investment (P-value < 0.01). However, foreign exchange rates and foreign direct investment negatively affect foreign portfolio investment. Three macroeconomic indicators show significance at 1% and 5%, where gross domestic product positively affects foreign portfolio investment, while foreign exchange rates and foreign direct investment have detrimental impacts. The findings indicate that a 1% increase in gross domestic product leads to a USD 50.426 million increase in foreign portfolio investment, while a USD 1 million increase in foreign direct investment results in a USD 0.025 million decrease. Foreign exchange rates significantly affect foreign portfolio investment, with the potential for reduction through VND devaluation or an increase in the VND/USD exchange rate due to government adjustments. Definitive conclusions about external debt, interest rates, and inflation require additional data and research. The study’s R-squared value is 0.2738, with an adjusted R-squared of 0.1813, explaining 27.38% of future changes in Vietnam’s foreign portfolio investment. These findings have important implications for policymakers, suggesting that expanding the money supply and implementing suitable interest rate policies could enhance foreign portfolio investment attractiveness in the nearest term.


INTRODUCTION
Since 2008, wealthier nations like the UK, US, some countries in EU area, and Japan have used quantitative easing measures, leading to significant capital inflows into developing economies, including Vietnam.However, investors withdrew capital when these countries raised interest rates to control growth and inflation.In response, emerging economies like Vietnam also raised interest rates to protect their currencies and control inflation.Global economic conditions and macroeconomic indicators in emerging nations influence this capital flow volatility.Vietnam's current and future economic growth heavily depends on foreign investment capital, and foreign portfolio investment (FPI) is one of those foreign sources.Evaluating how factors like money supply, interest rates, external debt, and macroeconomic indicators might affect Vietnam's capital flows is crucial.FPI has significantly grown in Vietnam, particularly since it entered the World Trade Organization in 2007.Like other emerging nations, foreign investment capital is crucial for Vietnam's economic progress.FPI played a vital role in boosting investment capital, driving socio-economic development, and improving the financial market.Therefore, studying the factors influencing FPI is essential to attracting FPI and diversifying investment opportunities for domestic and foreign investors.

LITERATURE REVIEW
Foreign portfolio investment, the movement of financial assets across borders, has long interested academics.After the 2008 financial crisis, there was a substantial shift in FPI inflows from developed to emerging markets.This shift helped stabilize the capital and stock markets of host countries.However, various economic factors significantly influence FPI, and findings can vary across different periods and regions.Numerous studies by Agarwal (1997), Portes and Rey (1999), Darby et al. (1999), Carrieri et al. (2004), Lee and Yoon (2007), Thompson (2008), Kodongo and Ojah (2012), Ahmad et al. (2015), and Koepke (2018) consistently highlight the positive impact of financial indicators on FPI.These indicators include interest rates, external debt, exchange rates, and other economic variables.For example, Agarwal (1997) found a positive correlation between exchange rates and FPI inflows.Darby et al. (1999) revealed that increasing exchange rates and foreign direct investment boost FPI inflows.
Investors turn to FPI to gain capital while avoiding direct control over its use, seeking high returns and risk diversification.The depreciation of the host country's currency attracts foreign investors looking for higher profit margins.Other studies by Bleaney and Greenaway (2001), Bekaert and Harvey (2002), and Gordon and Gupta (2003) have also identified substantial correlations between interest rates, currency values, exchange rates, and various financial indicators with FPI inflows in different nations.FPI is critical to a country's economic development and expansion of the global stock market.It is a capital source for developed and developing nations, allowing diversification and ownership in multinational corporations.When assessing investment opportunities, portfolio investors consider exchange rates, money supply, interest rates, and foreign debt levels.
Countries with low interest rates, high inflation, and limited economic growth may struggle to attract FPI investors, while those with higher deposit rates are seen as offering more profit potential.
The relationship between FPI and economic factors such as currency value, foreign exchange rates, and foreign direct investment is well-established (Lee & Yoon, 2007).Various elements impact foreign investment flows, including market trends, international financial integration, profit margins, deposit rates, and production facilities.As cross-border investments and global trade expand, so do investors' profit expectations from FPI. Economic variables are critical in shaping an economy's development by attracting foreign investment and FPI capital.An appropriate increase in the money supply can spur economic growth and make a nation more attractive to foreign investors.However, excessive money supply growth can lead to inflation.Therefore, countries must consider other financial indicators like inflation, exchange rates, and GDP growth rates when targeting FPI.In specific cases, the money supply can negatively affect FPI.Changes in exchange rates, inflation, and foreign sources also influence FPI capital flows within a country.Researchers like  2022) studied factors influencing FPI, including market efficiency, capital size, external debt, foreign exchange rates, and economic growth rates.Higher profit expectations significantly contribute to FPI inflows.Stable macroeconomic conditions are vital to attracting reliable capital flows.In the Chinese market, external debt appears as the primary driv-er of FPI inflows, with economic growth and exchange rates also exerting significant influence.Ezirim et al. (2022) examined the relationship between financial indicators (external debt, money supply, inflation, economic growth, and interest rates) and FPI volatility in India, China, Pakistan, and Sri Lanka.They discovered an inverse link between inflation and FPI in Pakistan, India, and China.Furthermore, exchange rate variables positively impacted FPI in the Chinese market, while economic growth negatively correlated with FPI volatility.Interest rates also influenced FPI volatility, as foreign investors sought higher actual yields in other countries due to unfavorable interest rate comparisons with host countries.
The research examines macroeconomic indicators' impact on foreign investment capital in Vietnam, specifically the money supply, interest rates, and external debt.There is a need for a comprehensive study of these factors' effects on foreign portfolio investment in emerging countries like Vietnam.As a result, this study addresses these gaps.It analyzes how the money supply, interest rates, external debt, and financial indices such as economic growth, inflation, foreign exchange rate, and foreign direct investment influence foreign portfolio investment flows in Vietnam.The research utilizes data from Q1/2007 to Q4/2021, a period of significant economic development in Vietnam after joining the World Trade Organization.These findings can be an example for other developing or emerging countries during their market opening processes.

RESEARCH METHODOLOGY AND DATA
This study investigates the impact of money supply and macroeconomic indicators on foreign portfolio investment in Vietnam.The research ensures data stability using the Augmented Dickey-Fuller Test (ADF) by Dickey and Fuller (1979) a rise in the local currency's value raises the confidence of potential foreign portfolio investors in the economy.
Foreign Direct Investment: Hailu (2010) and Tran and Dinh (2013) asserted that direct foreign investment inflows impact international portfolio investments.According to the same study by Nguyen (2022), foreign direct investment can stabilize the macroeconomic system and reduce the volatility of foreign portfolio investments.

RESEARCH RESULTS AND DISCUSSION
Descriptive statistics provides basic descriptions for the chosen variables.It has minimum and maximum as well as mean and standard deviation.
The mean represents the data set.The standard deviation also illustrates how each variable deviates from its mean.The link between the chosen independent financial indices was evaluated using correlation analysis.The best method for deciding the strength of a linear relationship is to use Pearson Correlation because all the chosen independent variables are continuous.Also, deciding the degree of linear connection and statistical significance of the independent variables is crucial.Note: * indicates lag order selected by the criterion.
According to Table 5, MS has the second lag.This result indicates that the money supply has a maximum lag of 2 for the model.The test procedure was then used to eliminate the mismatch latency and deliver the best latency.Therefore, MS with lag at second is the endogenous variable or independent variable.The second lag is still suggested by the findings from the LR (Sequential modified LR test statistic), AIC (Akaike information criterion), HQIC (Hannan-Quinn information criterion), and SBIC (Schwarz information criterion) (significant at the 5% level).This result indicates that the model's maximum latency for MS is two.As a result, all the independent variables may be utilized to analyze the model because they are all trustworthy and steady.After checking the lag length of variables in the model, the autoregressive distributed lag study proves a long-run relationship between Vietnamese foreign portfolio investment and selected independent variables.Additionally, the study made it possible to predict future times by comparing the effects of financial indices like economic growth, inflation, foreign exchange rate, and foreign direct investment to the effects of money supply, interest rate, and external debt on foreign portfolio investment.2021), who also found that FPI tends to increase with a higher money supply.However, the government must balance this approach since excessive monetary expansion can lead to currency devaluation and long-term macroeconomic instability.The debate between prioritizing growth or stability in monetary policy still needs to be solved, especially in emerging and developing nations.These findings are significant for Vietnam's development, as it relies on foreign capital.The Vietnamese government, notably the Vietnam State Bank, should consider these results when formulating monetary policies.Regarding interest rates and external debt, the data suggests their insignificance, but they might still indirectly impact specific macroeconomic issues and FPI in Vietnam, needing further investigation.Three out of four financial indices are significant, with GDP positively affecting FPI, while foreign exchange (FX) and foreign direct investment (FDI) have negative impacts.This finding is supported by Amjed and Shah (2021).Specifically, a 1% increase in GDP results in a 50.426 million USD FPI increase, while a 1 million USD FDI increase leads to a 0.025 million USD FPI decrease.FX has a high impact on FPI, implying that VND devaluation or an increased VND-USD exchange rate reduces FPI.These findings echo those of Ahmad et al.Moreover, the depreciation of the local currency will cause investors to worry about declining returns, thus reducing their FPI investment in that country (Ahmad et al., 2015;Anggitawati & Ekaputra, 2018).In this case, the devaluation of the VND will reduce the incentive for foreign investors to invest in FPI in Vietnam in the future.These findings are essential for the Vietnamese government to issue suitable foreign exchange rate policies.However, the inflation variable was not statistically significant in assessing the impact of inflation on FPI flows into Vietnam.However, inflation directly affects the attraction of foreign investment flows to countries in general and Vietnam in particular.Therefore, more than the study is needed to conclude the relationship between inflation and FPI in Vietnam during the study period and predictions for the following periods.Besides, the value of R2 is 0.2738, and the adjusted R2 is 0.1813.It means that all independent variables in the model can impact about 27.38% and 18.13% of the change in Vietnam's foreign portfolio investment in the future.
To test the accuracy of the results of the regression model as well as the significance of the selected model, the study conducted two kinds of tests, the Durbin-Watson test and the Breusch-Godfrey test, to consider the impact of money supply and three financial indices like GDP, FX, and FDI on Vietnam's foreign portfolio investment in the period from Q1/2007 -Q4/2022.The test result of Durbin-Watson is d-statistic (8,64) = 2.020688.
It indicated that if the value of the d-statistic is more significant than 1 and smaller than 3, or if 1 < d-statistic < 3, then conclude that the model has no self-correlation-alternatively, the selected model is suitable to explain the problem.The Breusch-Godfrey Test in Table 7 yields the same conclusion as the Durbin-Watson test; the model is not subject to self-correlation.Additionally, the chi-squared is 0.517, and the P-value is more significant than 0.05, indicating no serial correlation in the model.This outcome also fits the study's needs and ensures the correctness of the model used.The study shows that money supply and selected financial indices impact Vietnam's foreign portfolio investment.However, there needs to be more evidence and data to prove the impact of interest rates, external debt, and inflation on Vietnam's foreign portfolio investment in the following quarters.The study's results demonstrate the suitability and dependability of the ARDL model for assessing the impact of the money supply, economic growth rate, foreign exchange rate, and foreign direct investment on Vietnam's foreign portfolio investment.

CONCLUSION
The ARDL Model assesses the impact of Money Supply, Interest Rate, External Debt, Economic Growth Rate, Inflation Rate, Foreign Exchange Rate, and foreign direct investment on Vietnam's foreign portfolio investment.The findings indicate a positive correlation between Money Supply, Economic Growth Rate, and Foreign Portfolio Investment.Foreign currency rates and foreign direct investment abroad negatively affect foreign portfolio investment overseas.However, more data is needed for specific conclusions on inflation's impact.These findings have implications for attracting foreign capital in developing and emerging countries, particularly the post-2008 global financial crisis.Many countries increased their Money Supply through quantitative easing after the crisis, attracting foreign investment, but later had to use interest rates to combat inflation.Factors like Money Supply, Interest Rates, External Debt, and financial indicators in developing and emerging countries significantly influence international money transfers.Recognizing the interplay between internal and external factors affecting capital flows is crucial for Vietnam's economic growth.These findings reflect common trends in emerging and developing markets.
The study uses quarterly data from Q1/2007 to Q4/2022 to analyze the FPI impact in Vietnam with financial indices like money supply, interest rate, external debt, economic growth rate, inflation rate, foreign exchange rate, and foreign direct investment inflow.Other indices, such as the stock index, fi-nancial development index, and trade openness, may be explored in other studies or emerging countries.Further research could gain deeper insights by incorporating high-frequency data (monthly, weekly, daily).Additionally, competent authorities must monitor and predict abnormal fluctuations in the financial system, especially with changes in economic policies in developed nations.This paper is a resource for international investors and governments considering investments in Vietnam or similar emerging markets.Money supply and economic growth significantly influence FPI, and foreign exchange rates and foreign direct investment should be considered.Researchers can also include additional variables to explain the remaining FPI impact, as the current model explains only 27.38 percent.This work advances understanding and serves as a resource for academics.

Table 1 .
Stata 17 software is utilized for data analysis.The study applies the ARDL model to assess the effects of selected factors on foreign portfolio investment in Vietnam as follows: Variable and hypothesis . Autoregressive Distributed Lag (ARDL) accounts for non-stationarity at different levels.The ARDL model combines the least squares regression (OLS) and vector autoregression (VAR) models, making it a productive, adaptable, and simple multivariate time series analysis tool.It has the appropriate functional form, no autocorrelation, variable var-iance, and stationary time series variables.The analysis used quarter data in Vietnam from Q1/2007 to Q4/2022.The study gathered data on foreign portfolio investment (FPI), money supply (MS), deposit interest rate (IR), external debt (EDGDP), economic growth rate (GDP), inflation rate (INF), foreign exchange rate (FX), and foreign direct investment (FDI) from Vietnam State Bank, Vietnam Stock Market, the World Bank, the IMF, and the Vietnam Gross Statistic Organization.http://dx.doi.org/10.21511/bbs.18(4).2023.09

Table 2 .
Descriptive statistics of macro-economic variables

Table 3 .
Correlation between independent variables

Table 5 .
Lag length selection of MS

Table 6 .
Regression coefficients of Autoregressive Distributed Lag Model