An empirical study of the real effective exchange rate and foreign direct investment in Vietnam

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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.

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    • 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
    • Conceptualization
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Data curation
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Formal Analysis
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Funding acquisition
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Methodology
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Investigation
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Resources
      Tram Thi Xuan Huong, My-Linh Thi Nguyen, Nguyen Thi Kim Lien
    • Supervision
      Tram Thi Xuan Huong, My-Linh Thi Nguyen
    • Validation
      Tram Thi Xuan Huong, My-Linh Thi Nguyen
    • Writing – review & editing
      Tram Thi Xuan Huong, My-Linh Thi Nguyen
    • Project administration
      Nguyen Thi Kim Lien
    • Software
      Nguyen Thi Kim Lien
    • Writing – original draft
      Nguyen Thi Kim Lien
    • Visualization
      Nguyen Thi Kim Lien