The impact of free trade agreements on FDI inflows: the case of Vietnam

We examine the relationship between FTAs and inward FDI in Vietnam using panel data for Vietnam’s 17 main foreign investors over the period 1997–2016, and 23 partners for the sub-period 2005–2016. In contrast to past studies that focus on either multiple FTAs for a group of countries or case studies for a well-known FTA, we evaluate whether the overall involvement in FTAs of a developing country such as Vietnam increases FDI inflows. Results from gravity models strongly indicate that FTAs, overall, are associated with increased FDI inflows, with a much greater impact in the sub-period. We also find evidence of the prevalence of vertical FDI in Vietnam. Further examination of the later sub-period shows that FTAs also have a significant effect on inward FDI through interactions with the real exchange rate, human capital, and factor endowments. Interestingly, all of the three FDI determinants have more important roles following the FTAs.