On the Linkage between FDI and Trade: Evidence from Vietnam

The purpose of this paper is to examine the linkage between FDI and trade in the case of Vietnam. To investigate this issue, firstly, we attempt to find out the causality relationship between FDI and trade of Vietnam, including exports and imports. Secondly, we try to find out the determinants of Vietnam’s bilateral trade by individually applying gravity models for trade, exports and imports. Our main results indicate that there is one way causality linkage between trade and FDI. Concerning the linkage between FDI and import, there is 2 ways causality linkage between these variables: import causes FDI and vice-versa in Granger’s sense. The empirical result of gravity models shows that Vietnam’s bilateral trade flows were positively associated with economic size while the impact of geographical distance appeared to be rather modest. Interestingly, our empirical results show that the effective contribution of Foreign Direct Investment (FDI) inflows may be overestimated. Also, the real exchange rate did not play an important role in promoting Vietnam’s exports, while the positive sign associated with its coefficient on the import side is counter-intuitive. More importantly, our empirical results show that Vietnam was constrained by the external balance as its exports and imports reacted differently to the process of trade liberalization within the region. The value of coefficients on the partners’ Gross Domestic Output (GDP) suggests that Vietnam was more influenced by external demand shocks than supply shocks: hence, any global crisis will affect more demand for Vietnam’s exports than supply of imported commodities. Finally, the intra-regional factor played a significant role in Vietnam’s trade expansion. The deepening of sub-regional integration in East Asia contributed substantially to drive Vietnam’s export growth, at the expense of third markets like European Union (EU).