The 18th WORKSHOP
19 November 2005 (Sat), GRIPS campus in Tokyo 14:00-17:00
“Impacts of Foreign Direct Investment on Poverty Reduction
In the workshop, Mr. Hung presented his analysis on the impacts of foreign direct investment (FDI) on poverty reduction in Vietnam. This was topic of his research paper at the International Development Studies (IDS) program of GRIPS.
Reviewing various studies on the link between FDI, economic growth, and poverty reduction in developing world, Mr. Hung showed that there were close and dynamic links between these factors. According to the author, FDI had both direct and indirect impacts on poverty reduction. On the one hand, FDI had indirect impacts on poverty reduction through economic growth, which resulted in the improvement of living standards, technological progress, and productivity growth. On the other hand, FDI also had direct impacts on poverty reduction, which were mostly derived from the increase in employment, and the improvements in workforce and safety nets. From these points of view, Mr. Hung proposed three hypotheses which reflected these impacts:
-- (H1) Inflows of FDI in each province have a positive impact on the economic growth of the province. The higher the inflows of FDI in each province, the higher the gross domestic product in that province;
-- (H2) The number of poor people who live below the poverty line in the province is negatively correlated with the economic growth, and
-- (H3) FDI inflows have positive impacts on the reduction of poverty in the provinces. The higher the FDI inflows in the provinces, the lower the number of people living below the poverty line.
Based on these hypotheses, Mr. Hung continued with a brief description of FDI and poverty incidence in Vietnam during the period 1993-2002 with panel data from 12 cities and provinces. Then, he presented two econometric models to evaluate the impacts of FDI on poverty rate during the mentioned period, in which Model 1 indicated the relation between economic growth and growth of FDI inflows to provinces in the sample, and Model 2 showed poverty rate as a function of such important factors as economic growth, changes in FDI as percentage of GDP, changes in government spending, and employment growth. The estimated results indicated that above hypotheses were consistent in the case of Vietnam, and FDI had significant direct and indirect impacts on poverty rate (see his paper for the detailed analysis). From these estimates, the author proposed some policy implications for the government to encourage more FDI inflows to promote economic growth and to accomplish the Millennium Development Goals of Vietnam.
The discussion section started with some comments and questions from Mr. Thanh (VDF & GRIPS). Most of his comments focused on the models used in the paper. According to Mr. Thanh, the choice of 12 cities and provinces, which was not random, might lead to biases in estimates and policy recommendations. In addition, he was also concerned about the possible multicollinearity in those models due the choices of variables. Mr. Thanh also emphasizes that FDI might also lead to price increases, which were derived from income improvements, and this might have negative effects on the poor people who could not benefit anything from FDI. These ideas were agreed by Mr. Khai (VDF & Yokohama National University), and Mr. Phuong (Hitotsubashi University).
Also with the choices of models, Mr. Hoang (VDF & Yokohama National University) suggested that the author distinguish poverty incidence at provincial and national levels since geographic poverty was quite different between provinces and cities. He was also concerned about choosing provinces in the sample, in which some “star” FDI-attracting provinces such as Binh Duong were not taken into account. Moreover, Mr. Hoang mentioned about the possibility of time-lag impacts of FDI on poverty incidence in particular provinces as some FDI projects took time to have realized influences.
From VDF Hanoi, Mr. Cuong also sent email to comment on the research. He suggested that the author review more literatures on the topic in Vietnam. The same as Mr. Hoang’s ideas, Mr. Cuong also recommended that the author should compare the impacts of FDI on poverty in large and centre cities like Hanoi and HCMC with their surrounding provinces and cities so that we could have more policy implications for different economic regions.
In his turn, Mr. Long (VDF & GRIPS) also provided comments on both models and result analysis. In addition to variables that were commented by others, Mr. Long, with information from Vietnam Development Report 2004 and Public Expenditure Report 2004, suggested that Mr. Hung consider the difference between government’s total spending and its spending only on poverty reduction programs, and decompose poverty incidence by provinces in the sample because these factors are very different from this province to the other. Moreover, he also said that, according to the available data, FDI created more indirect employment than direct one so that, if possible, employment should also be decomposed in analysis.
Prof. Ohno, after listening to others, also provided comments and suggestions on the research. According to him, Vietnam had experienced substantial changes in economic growth, FDI inflows, and poverty incidence during the studied period with different characteristics, and thus it would be better to see the impacts of FDI by sub-periods. In particular, when we considered indirect and direct impacts of FDI, this way would provide more information. In addition, by pointing out different channels for poverty reduction in developing world, in which FDI had played a crucial role, he showed that the models in the paper might not consider some important factors. Therefore, he thought that the topic would be more concrete and meaningful if the analysis was focused on certain factors or provinces, e.g. we could conduct a research about the impacts of FDI on income and poverty incidence in Vinh Phuc, which is Hanoi’s neighbor, and currently one of the most FDI-attracting provinces in Vietnam.
Taking all the comments and suggestions with acknowledgements, Mr. Hung admitted that there were limitations of the research, in which shortage of data was one of the most important factors. He said that he would conduct a more comprehensive analysis on the topic in the coming time.
(by Giang Thanh Long)
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