The impact of FDI, trade and interest rates on fixed asset investment in Vietnam

Abstract

This study analyzes the impacts of Foreign Direct Investment (FDI), trade openness, and real interest rates on Gross Fixed Capital Formation (GFCF) in Vietnam during 1996 - 2023, employing a Vector Error Correction Model (VECM). The results confirm a stable long-run relationship among the variables: a 1% increase in trade openness (as a share of GDP) raises GFCF by 0.04%; a 1% increase in FDI raises GFCF by 0.76%; whereas a 1% rise in the real interest rate reduces GFCF by 0.88%. In the short run, higher real interest rates exert a negative effect on investment after a certain lag, while FDI has an initially positive but diminishing impact. Trade openness and FDI serve as the main adjustment mechanisms, guiding the system back to the long-run equilibrium. The contribution of this research lies in clarifying both the short-run and long-run dynamics between FDI, real interest rates, and trade openness within the unified VECM framework - an approach not yet applied in the Vietnamese context. Policy implications include promoting economic integration, attracting FDI, and managing interest rates prudently to enhance capital accumulation efficiency in Vietnam.