Vietnam's economic growth: The roles of labour productivity, structural change, and foreign direct investment

Abstract

Since the economic reform "Doi Moi" in 1986, Vietnam has successfully transformed from a poor, centrally planned economy into one of the most dynamic developing economies in Asia. The country has sustained an average economic growth of 6.7% per year, associated with rapid labour productivity growth and progressive economic restructuring. The success of Vietnam is underpinned by a number of policies, particularly the orientation toward integration into international economic activities, including attracting Foreign Direct Investment (FDI). However, despite the remarkable achievements of Vietnam's economy, there are evident weaknesses that have emerged in recent years. Unfortunately, research on the relationships between labour productivity, structural change and FDI, and their roles in contributing to economic growth, is limited. In this context, the core objective of the thesis is to examine empirically the nexus between structural change and labour productivity and the nexus between structural change and FDI. Furthermore, the thesis evaluates the technical efficiency of localities in promoting and disbursing FDI, and investigates the factors determining FDI in Vietnam. Following the introductory first chapter, Chapter 2 presents an overview of Vietnam's economic growth since 1986 to 2019. This chapter also reviews the trends and characteristics of labour productivity growth, the economic structural transformation, and the attraction of FDI in Vietnam. Chapter 3 employs a modified shift-share decomposition method to assess the contribution of sectoral productivity growth and structural change to Vietnam's aggregate labour productivity growth, drawing on comparisons with selected ASEAN and East Asian economies. The main finding indicates that Vietnam has experienced a growth-enhancing structural change which provides a relatively substantial contribution share of the aggregate labour productivity growth compared to most countries. The sectoral analysis reveals that agriculture remains essential, as its productivity improvement contributed the most to Vietnam's aggregate labour productivity growth in the recent decades. Meanwhile, agriculture still employs a substantial portion of the labour force, signifying the potential for further progressive structural change. The sub-national analysis demonstrates the heterogeneity of labour productivity growth and structural change patterns across the country's regions, emphasising the need for targeted and region-specific policy interventions. Chapter 4 examines the role of FDI, a cornerstone in Vietnam's economic development strategy, in fostering structural change across 63 provinces in Vietnam from 2010-2019. The results indicate that FDI, particularly in the industrial sector, correlates positively with structural change. The results also reveal that the benefits of FDI are not monolithic and are contingent on other factors, such as the initial structural gap, skilled labour, and the nation-wide institutional changes. These findings emphasise the importance of ongoing efforts to attract high-quality FDI, while concurrently improving the quality of the enabling environment to maximise the benefits of this external source of investment. Chapter 5 employs stochastic frontier analysis to investigate the determinants of FDI and measure the efficiency of promoting and disbursing FDI in Vietnam, using a province-time panel data from 2007-2018. The estimation results reveal that natural resources endowment, infrastructure, human capital, labour cost and industrial parks are crucial determinants of FDI. The estimation of efficiency scores reveals that provinces in Vietnam have not fully utilised their capacity for attracting and disbursing FDI. The findings suggest that enhancing local institutions, developing industrial parks, and improving human capital and infrastructure are critical for promoting FDI. Chapter 6 concludes the thesis with policy implications. Show more