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MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM
BANKING UNIVERSITY – HOCHIMINH CITY
NGUYEN THI KIM LIEN
THE RELATIONSHIP BETWEEN THE EXCHANGE
RATE AND THE FOREIGN INVESTMENT CAPITAL:
EVIDENCE FROM VIETNAM
SUMMARY OF PHD THESIS
Major: Finance - Banking Code: 9.34.02.01
Supervisor: Associate Prof. Dr. Tram Thị Xuan Huong
Associate Prof. Dr. Nguyen Thi My Linh
HO CHI MINH CITY - 2020
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CHAPTER 1. INTRODUCTION
1.1.
Research context
According to Dornbusch (1998); Broto, Diaz-Cassou and ErceDominguez (2011), policymakers
often try to attract foreign investment to fill the gap in domestic savings in order to promote
economic growth and development. On the other hand, in an open economy, exchange rate is one
of the macroeconomic variables that plays an important role in a country's macro economy. Over
the past decades, there have been many studies examining the relationship between the exchange
rate and foreign investment capital. Existing studies provide evidence that there is a relationship
between exchange rates and FDI capital (Froot and Stein, 1991; Campa, 1993; Djulius, 2017).
Besides, some previous studies concluded that there exists a relationship between exchange rate
and FPI such as: Agarwal (1997); Bleaney and Greenaway (2001); Kodongo and Ojah (2012);
Grossmann, Paul and Simpson (2017). However, there are also some studies that have not found
statistical evidence on the relationship between the exchange rate and foreign investment capital
(Itagaki, 1981; Bouoiyour and Rey, 2005; Ersoy, 2013; Ifeakachukwu and Ditimi, 2014).
Vietnam is a developing country that is making reform efforts to promote international integration
and attract foreign investment, including FDI and FPI. In the period 2005 up to now, foreign
investment into Vietnam has increased significantly, of which FDI is more stable while FPI
capital has strong fluctuations. Therefore, the problem posed in the context of theory and practice
of Vietnam is to study the relationship of foreign investment flows and exchange rates in Vietnam
to have appropriate policies to promote capital flows. However, in Vietnam, researches on FDI,
FPI and exchange rate are limited in quantity and lack quantitative studies on the relationship
between exchange rate and foreign investment capital.
On the other hand, at present, in the world, there are very few authors who simultaneously analyze
the relationship of exchange rate to FDI and FPI in the same study (Kodongo and Ojah, 2013;
Opperman and Adjasi, 2017). This is an important gap that requires additional studies.
Furthermore, macro factors such as economic growth, trade openness, and the global financial
crisis have an impact on exchange rates and foreign investment. However, these factors have not
been considered simultaneously in the models of testing the relationship between the exchange
rate and foreign investment capital. Therefore, the author finds that it is very necessary to add
these control variables to the models to test the relationship between the exchange rate and foreign
investment capital.
Stemming from the above issues, the author chooses the topic: "The relationship between the
exchange rate and foreign investment capital: a case study of Vietnam" as the research topic of
the doctoral thesis. The thesis is meant to reinforce the theoretical basis and supplement empirical
evidence on the relationship of the exchange rate to foreign investment capital in Vietnam,
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contributing to additional empirical evidence on the relationship between exchange rate and
capital. Foreign investment is typical in a developing country. At the same time, the thesis also
examines the relationship between the exchange rate and foreign investment capital in Vietnam
in the conditions affected by other macro factors such as economic growth, trade openness and
the global financial crisis.
1.2. Research objectives and research questions
The general objective of the thesis is to analyze the relationship between the exchange rate and
foreign investment capital in Vietnam and propose implications of the exchange rate policy and
policies to attract foreign investment into Vietnam. To achieve the overall goal, the thesis
identifies the specific objectives as follows:
(1) Analyze the relationship between exchange rate and FDI in Vietnam
(2) Analyze the relationship between exchange rate and FPI capital in Vietnam
(3) Implies implications the exchange rate policy and the policy to attract foreign investment
capital in Vietnam
Research questions:
(1) What is the relationship between exchange rate and FDI in Vietnam? How do macro factors
and financial crisis affect the relationship between exchange rate and FDI capital?
(2) What is the relationship between exchange rate and FPI's capital in Vietnam? How do macro
factors and financial crisis affect the relationship between exchange rate and FPI capital?
(3) What are the implications of the exchange rate policy and the foreign investment attraction
policy applied in Vietnam?
1.3.
Object and scope of the study
1.3.1. Research subjects
The object of the thesis research is the relationship between the exchange rate and the foreign
investment capital in Vietnam as well as other factors that affect the relationship between the
exchange rate and the foreign investment capital.
1.3.2. Research scope
• About space: researching and testing the relationship between the exchange rate and the
foreign investment capital, the case of Vietnam.
• About time: Examining the relationship of exchange rate and foreign investment capital from
quarter 4/2005 to quarter 4/2019.
1.4.
Research methodology and research data
1.4.1. Research methodology
In order to achieve the general research objectives, the thesis combines qualitative research
methods and quantitative research. As follows:
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• To achieve specific objectives 1 and 2 "Analyzing the relationship between the exchange rate
and FDI (FPI) capital in Vietnam", the thesis uses qualitative research, archeology of previous
studies to build a research model. Research and use quantitative research to test the research
model of the relationship between exchange rate and FDI (FPI) capital in Vietnam.
• To achieve the specific target 3, which is "Recommendations implying exchange rate policy
and policies to attract foreign investment capital in Vietnam", the thesis uses qualitative
research to discuss the results of quantity research in Vietnamese conditions. From there,
proposing the implications of exchange rate policy and policy to attract renewable energy
capital into Vietnam.
1.4.2. Research data
The thesis uses secondary data, quarterly frequency, collected from the following sources:
International Monetary Fund (IMF); BRUEGEL Organization (Europe); and General Statistics
Office of Vietnam. Some variables are calculated by the author on the database collected from
the above sources, including: quarterly real effective exchange rate fluctuations measured by the
standard deviation method (Std_reer), exchange rate fluctuations quarterly real estate (V_reer)
measured by GARCH method (1.1), trade openness (OPEN).
1.5.
Researh results and new contributions of the thesis
1.5.1. Researh results
i. There exists a two-way causal relationship between FDI and the effective real exchange rate
of Vietnam. Macro factors such as trade openness and economic growth are found to affect
the relationship between the effective real exchange rate and FDI capital. The financial crisis
has an impact on the relationship between the FDI capital and the effective real exchange
rate. In addition, there exists a two-way causal relationship between FDI capital and effective
real exchange rate fluctuations (measured by the standard deviation method).
ii. There exists a one-way causal relationship from the level of effective real exchange rates to
FPI in Vietnam. The study found no statistical evidence of the effect of FPI capital on real
effective rates. The factors of trade openness, economic growth, and the financial crisis are
found to affect the relationship between exchange rates and FPI capital. In addition, the study
shows that there exists a two-way causal relationship between FDI capital and effective real
exchange rate fluctuations (in both measurement methods)
1.5.2. New contributions of the thesis
The thesis has new theoretical and empirical contributions in studying the relationship between
exchange rates and foreign investment capital, as follows:
• Theoretical contributions:
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The thesis has presented completely and systematically the previous studies related to the
relationship between exchange rate and foreign investment capital. The thesis found the research
gaps, then identified and implemented the study to supplement the research gaps.
• Empirical contributions:
The thesis has contributed a new empirical evidence on the relationship between exchange rate
and foreign investment capital in Vietnam with the main features as follows:
- Analyzing the relationship between the exchange rate and the foreign investment capital
combining both FDI and FPI in the same study. Previous studies focus on analyzing only the
relationship between exchange rate and FDI capital or the relationship between exchange rate
and FPI capital. The new point of the thesis is to compare and draw similarities and
differences in the nature of the relationship between the exchange rate and each capital flow.
This is an important new contribution to the study of the relationship between exchange rates
and foreign investment capital.
- Use real effective rates with a large number of trading partners to more accurately reflect
exchange rates. Instead of using a nominal rate (NER); bilateral real exchange rate (RER);
Effective real exchange rate (REER) with a small number of trading partners, this thesis uses
the multilateral real exchange rate of VND with 143 trading partners.
- Using two methods of measuring exchange rate fluctuations simultaneously. Previous studies
often used one of two measures of exchange rate volatility, the standard deviation measure and
the GARCH model (1.1). This thesis uses both measures of exchange rate fluctuations, thereby
comparing the differences in the relationship between exchange rate fluctuations (according to
two different measurement methods) with FDI and FPI.
- Analyze the impact of macro factors such as trade openness and economic growth on the
relationship between the exchange rate and foreign investment capital in Vietnam.
- Analyze the impact of the financial crisis on the relationship between the exchange rate and
foreign investment capital.
- Research results: there exists a causal relationship between the real effective exchange rate and
foreign investment capital in Vietnam, the case of a developing country. On the other hand,
macro factors such as trade openness, economic growth, and financial crisis are found to affect
the relationship between exchange rate and foreign investment in Vietnam.
Proposed policy implications: On the basis of empirical research results, the thesis proposes the
implications of exchange rate policy and policies to attract FDI and FPI into Vietnam according
to the specific characteristics of each capital flow in relationship with exchange rate.
1.6.
The structure of the thesis
The thesis is structured into 5 chapters. As follows:
