Foreign Direct Investment and Provincial Income Convergence in Vietnam: Evidence of Heterogeneous Growth Effects

This study examines the role of foreign direct investment (FDI) in provincial income growth and convergence in Vietnam within a dynamic panel framework. Using a balanced dataset of 59 provinces over the period 2002–2022, the analysis employs the two-step System Generalized Method of Moments (System GMM) estimator to account for income persistence, endogeneity, and unobserved heterogeneity. The empirical model incorporates interaction terms to explore whether the growth effects of FDI vary with provincial development conditions and labor-market characteristics. The results reveal a high degree of persistence in provincial income dynamics, indicating that regional disparities evolve gradually over time. In a homogeneous specification, FDI does not exhibit a statistically significant average impact on income growth. However, once regional heterogeneity is explicitly incorporated, foreign investment becomes significantly associated with income dynamics. The negative interaction between FDI and initial income suggests that the marginal growth effect of FDI is stronger in poorer provinces, implying that foreign investment is associated with faster convergence through reduced income persistence. At the same time, the interaction between FDI and educated labor supply highlights the importance of local absorptive capacity and labor-market conditions in shaping the spatial realization of FDI benefits. Overall, the findings suggest that FDI is associated with differences in the dynamics of income adjustment across provinces, with potential implications for the speed of convergence. Its developmental impact appears to depend less on the scale of inflows than on the structural conditions that allow foreign investment to generate locally embedded productivity gains.