ACKNOWLEDGEMENT

This senior seminar, titled "The Impact of Foreign Direct Investment on Human
Development Index and Implications for Vietnam" is my first independent
academic study. The seminar is the product of my own efforts, encouragement, and
support from my university instructors, friends, and family, all of whom I would
like to thank for supporting me with my seminar.

To begin with, I would like to express my gratitude to my lecturers at the School of

Economics and International Business, particularly those in the Advanced Program
of Economics, who have devoted their time to guiding and instructing me
throughout my university career, laying the groundwork for my seminar
accomplishment.

I would like to express my heartfelt gratitude to Dr. Cao Thi Hong Vinh – my
beloved senior seminar supervisor – for providing me with the chance to conduct
the seminar and for providing me with essential advice throughout. Her vitality,
enthusiasm, and genuineness have significantly influenced my decision to follow an
academic research career. It was an honor for me to do research under her clear and
compassionate leadership, and as such, I am thankful of what she has generously
gifted me.

I would like to express my gratitude to the Advanced Program of Economics Office

for providing me with important information on the seminar, which enabled me to
finish the seminar successfully.

Finally, I want to express my heartfelt appreciation to my family and friends,

particularly my classmates - Advanced Program of Economics cohort 57 students –
for their tremendous spiritual support and encouragement.

Many thanks!
 STATEMENT OF AUTHORSHIP

This seminar includes no material published elsewhere or taken in whole or in part

from any senior seminar or thesis by which I have qualified for or been granted
another degree or diploma, save when reference is made in the text of the senior
seminar.

In the seminar, no one else's work was utilized without proper attribution.

This seminar has not been submitted to any other higher institution for the granting
of a degree or certificate.

Hanoi, May 2022

Nguyen Minh Long

 Table of Contents
INTRODUCTION...................................................................................................1
1. Rationale of the research....................................................................................1
2. Literature review................................................................................................3
3. Research objectives and tasks............................................................................6
4. Research subjects & scope.................................................................................8
5. Research methodology.......................................................................................8
6. Research structure..............................................................................................8

CHAPTER 1. THEORETICAL FRAMEWORK...............................................10

1.1. Foreign Direct Investment............................................................................10
1.2. Human Development Index..........................................................................13
1.3. Theoretical effects of FDI on HDI................................................................14
1.3.1. Positive impacts.....................................................................................15
1.3.1.1. Positive impacts of FDI on income..................................................15
1.3.1.2. Positive impacts of FDI on health....................................................17
1.3.1.3. Positive impacts of FDI on education..............................................18
1.3.2. Negative impacts....................................................................................19
1.3.2.1. Negative impacts of FDI on income................................................19
1.3.2.2. Negative impacts of FDI on health..................................................19
1.3.2.3. Negative impacts of FDI on education............................................20

CHAPTER 2. QUANTITATIVE ANALYSIS OF THE IMPACT OF FDI ON

HDI IN DEVELOPING COUNTRIES................................................................22
2.1. Research model.............................................................................................22
2.2. Empirical methodology.................................................................................23
2.2.1. Correlation test.......................................................................................23
2.2.2. Panel cross-sectional dependence and unit root test...............................24
2.2.3. Panel long-run estimates........................................................................25
2.2.4. Panel Granger causality test...................................................................26
2.3. Data..............................................................................................................27
 2.4. Research results............................................................................................31
2.4.1. Summary statistics and correlation test results.......................................31
2.4.2. Cross-sectional dependence and unit root test results.............................33
2.4.3. Common correlated effects mean group estimator results......................34
2.4.4. Common correlated effects mean group estimator results by sub-groups
.........................................................................................................................35
2.4.5. Panel Granger causality test results........................................................36
2.5. Assessment of the impact of FDI on HDI in developing countries...............38

CHAPTER 3. IMPLICATIONS FOR VIETNAM.............................................41

3.1. Current situations of FDI and HDI in Vietnam.............................................41
3.1.1. Current situations of FDI........................................................................41
3.1.2. Current situations of HDI.......................................................................44
3.2. The impact of FDI on HDI in Vietnam.........................................................46
3.3. Orientation for promoting FDI and HDI in Vietnam....................................47
3.4. Policy recommendations for Vietnam...........................................................48
3.4.1. Changing FDI structures in Vietnam......................................................48
3.4.2. Encouraging inclusive growth on a large scale.......................................49
3.4.3. Fixing the distribution of the benefits gained from FDI growth to human
development dimensions..................................................................................50

CONCLUSION......................................................................................................52
Conclusion of research results.............................................................................52
Contribution of the research.................................................................................53
Limitations and Suggestions for Future Research................................................53

REFERENCES......................................................................................................54
 LIST OF ABBREVIATIONS

Abbreviation Meaning

ARDL Autoregressive distributed lag

ASEAN Association of Southeast Asia Nations

CADF Cross-sectionally Augmented Dickey-Fuller

CCEMG Common Correlated Effects Mean Group

CD Cross-sectional Dependence

CIPS Cross-sectionally augmented Im-Pesaran-Shin

EYS Expected years of schooling

FDI Foreign Direct Investment

FGLS Feasible Generalized Least Squares

GCF Gross Capital Formation

GDP Gross Domestic Product

GE Government Expenditure

GLS Generalized Least Squares

GNI Gross National Income

HDI Human Development Index

IHDI Inequality-adjusted Human Development Index

ILO International Labor Organization

LE Life expectancy at birth

LFPR Labor Force Participation Rate

MENA Middle East/North Africa

MG Mean Group

MYS Mean years of schoolinf

OECD Organization for Economic Cooperation and Development

OLS Ordinary Least Squares

SAARC South Asian Association for Regional Cooperation

SMA Simple Moving Average

TO Trade openness

UN United Nations

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Program

WHO World Health Organization

 LIST OF TABLES

Table 2.1. Sample of studied developing countries.................................................33

Table 2.2. Description of variables and data sources...............................................36

Table 2.3. Summary Statistics of Variables.............................................................37

Table 2.4. Correlations of Variables........................................................................38

Table 2.5. Pesaran CD and CIPS unit root test results.............................................39

Table 2.6. Coefficient results with CCEMG estimator............................................40

Table 2.7. Coefficient results with CCEMG estimator by country groups..............41

Table 2.8. Dumitrescu & Hurlin Granger non-causality test results........................43

LIST OF FIGURES

Figure 1.1. FDI inflows, global and by group of economies, 2007-2020 (Billions of
dollars and percent).................................................................................................18

Figure 1.2. Calculation of the Human Development Index.....................................19

Figure 1.3. FDI per capita vs. GDP per capita in Europe, 1987-2016.....................22

Figure 3.1. Vietnam Foreign Direct Investment 2021-2022....................................47

Figure 3.2. South-East Asian countries’ GDP growth rates in 2015-2021...............48

Figure 3.3. FDI attraction by Industry in Vietnam, as of December 2021...............49

Figure 3.4. Vietnam FDI attraction by Country, as of December 2021...................49

Figure 3.5. Vietnam’s HDI based on the indexes of the three sub-categories..........51
INTRODUCTION
1. Rationale of the research

Human Development Index (HDI) is developed by the United Nations as a

statistic to evaluate a country’s level of socioeconomic development (UNDP, 2022).
The statistic captures the summary measurement of a country’s human development
status. With HDI being a precise reflection of a country’s level of development, this
statistic also accurately reveals the life standards and living conditions of the people
of the country in survey. The HDI is used as a tool to draw focus towards more
human-centered approaches, and away from the usual economic spotlight (WHO,
2022). In other words, the HDI acts as a reminder and an emphasis that human
development should be the most fundamental outcome of a country’s development
(WHO, 2022). This aspect of the HDI ensures that the development of a country is
meticulously evaluated via multiple facets of human development, rather than just
merely economic growth. A higher level of HDI thus is testament to higher levels of
development and growth of a country. For the abovementioned reason, HDI has
become a decisive factor in the pursuit of sustainable development, and the ultimate
goal for the overall growth of a country.

Foreign Direct Investments (FDI) can be understood as an investment made

by investors or a country into another foreign country. Along with the rapidly
developing trend of globalization as well as cross-country co-operation in the last
few decades, FDI has also experienced substantial growth. FDI plays a vital role in
sustaining and fostering economic growth in the recipient party and the investing
side simultaneously, and are known to have improved economies and in general, led
to multiple advancements of a country’s economic status. The constantly growing
importance of FDI has led to multiple economic investigations being carried out, in
order to further examine this new form of foreign aid. An abundant amount of past
research has indicated positive effects of FDI on multiple aspects of an economy,
which is proof of the macroeconomic importance FDI possesses as well as its
potential to affect economic growth in both a direct and indirect manner
(Gökmenoğlu, Apinran and Taşpınar, 2018).      

Despite these apparent acknowledgements for the ability of FDI to enhance

economic growth in developing countries, FDI on its own has encountered multiple
research that argued against its positive effects, with the main focus being laid on
the inequality threat caused by this form of international capital flows (Cao et al.,
2017). The positive effects that FDI have on economic growth and productivity are
clearly studied and documented, but its effect on social inequity has not received
enough attention as well as consistency (Le et al., 2021). Therefore, the real effects
that FDI have on its recipient has not been researched with enough degree of depth
and coherence, and agreeably there is still a certain level of doubt and ambiguity
surrounding the precision of the past literature. Aside from the inconsistencies of
the past research in terms of validity, there still remains skepticism regarding the
overall effect of FDI on the growth of HDI in developed countries. These disbeliefs
stem from many causes, but mainly share the same root of fear dominance from
foreign corporations and enterprises, thus suffocating competition in the recipient
country. Due to the inconsistencies and incoherence of the past literature, alongside
growing distrust in FDI, the validity of the merits that FDI investments claim to
have is being questioned comprehensively.

With the HDI being a proxy for human development and the suspicion
surrounding the negative effects that FDI may have, the impact of FDI on HDI still
remains shrouded in questions. The impact of FDI on HDI also poses another
question about both the validity and consistency of the past ’s research. The scopes
of the past studies are often limited to a specific country, region, or one specific
continent. However, in the current perception, there have been no studies that dived
into the effects that FDI has on the HDI of developing countries as a whole. As
mentioned above, developing countries are particularly interested in the effects of
FDI as this is their precious escape from the middle-income trap, leading them
towards long-term sustainable growth. Vietnam is also classified as a country of this
group, and a timely research into this question can call for appropriate decisions
from policy-makers and economists, thus becoming extremely valuable implications
for Vietnam to follow. In other words, further and deeper research into the
relationship between FDI and HDI entails a much better insight into the best
economic strategy for both Vietnam and developing countries in general as well. It
is therefore of utmost importance that this topic receives its well-deserved amount
of research. Therefore, considering the increasing need for an in-depth explanation
regarding this issue, this seminar will attempt to examine and evaluate the impact
that FDI has on HDI in developing economies, and in Vietnam in specific. 

2. Literature review

The relationship between the inflows of foreign direct investment and human
development has long attracted attention from manifold groups of people including
academic economists, policymakers and even from ordinary people as human
development is an issue that influences them in a direct way. On the empirical front,
a multitude of comprehensive works have been conducted and published to test the
validity and rationality of the nexus between FDI and human development in
general and the HDI statistics in particular. However, little consensus has been
reached in previous studies about the impact of the flows of FDI. The results vary
from statistically significant positive effect to negative effect, or even no significant
effect or mixed results between different years and different regions, most of which
are torn between positive effect and no significant effect. These variations in
empirical research outcomes can be ascribed to the variations in terms of research
subjects and time span, the employment of econometric techniques and
methodologies and the types of data collected.

With regard to research papers indicating the positive effects of FDI on

human development, there exist divergent research subjects and time ranges,
including the particular effect on a country or the general impact on a specific
region. In terms of the effect in a country, Pakistan and Nigeria - two developing
countries have been selected in the studies conducted by Hussain et al. (2010) and
Gökmenoğlu, Apinran and Taşpınar (2018), respectively with a large time range,
which is 33 years for Pakistan (1975 to 2008) and 41 years for Nigeria (1972 to
2013) - the era of economic and financial liberalization under an open economy.
Both of these studies were able to confirm that FDI has a statistically significant
effect on the changes in HDI over the years.

When it comes to the effect on a regional scale, manifold research papers

have corroborated the positive effects of FDI on human development but depending
on the objective of the research, their dependent variables are different, which entail
not only HDI but also poverty rate, headcount poverty index or sub-indices of the
HDI statistics: life expectancy, education and per capita income. In spite of these
discrepancies in the selection of variables, these following studies all confirm the
presence of a positive correlation between FDI and human development in general.
For instance, countries in the Association of Southeast Asia Nations (ASEAN) and
South Asian Association for Regional Cooperation (SAARC) have been found to
prove the positive effects of FDI net inflows on HDI over the period commencing
1990 to 2014 (Ahmad et al., 2019) by utilizing both panel and pool model
specifications. Another study conducted by Assadzadeh and Pourqoly (2013) on the
Middle East/North Africa (MENA) region shows that by dint of foreign direct
investment and appropriate institutional quality, poverty reduction and welfare
improvements for which the HDI is the proxy can be detected statistically in these
MENA countries with a random effect panel econometric method. The same result
can also be acquired from the research paper of Gaston Gohou and Issouf Soumaré
(2011) in 52 countries in Africa but this study goes even further by investigating the
regional differences between different regions in this continent as the relationship is
positive and significant in Central and East Africa but not so in Northern and
Southern Africa and even dubious in West Africa. Hence, this research paper claims
that FDI has a greater influence on poverty reduction in poorer nations than in
wealthier ones. 

Along with the ample amount of research proving the positive effect of FDI
on human development and the HDI statistic, a number of studies have been
performed and seen no real relationship between these variables. In the case of a
specific country, South Africa is a nation in which it was econometrically proved
the non-existence of any significant relationship between FDI and HDI over the
period from 1990 to 2017, both in the short term and long term with the application
of the autoregressive distributed lag (ARDL) time series econometric method
(Kounou, 2020). On a regional level, despite having the same research subject with
Calvo and Hernandez (2006) - Latin America but more updated in terms of time
period: 2000 to 2014, the research by Quinonez, Saenz, and Solorzano (2018)
brought to the table the evidence that no significant association of FDI with poverty
alleviation using multiple regression methods: an entity fixed effects regression, a
random effects GLS regression, a cross-sectional time series FGLS regression and a
heteroscedasticity-panels corrected standard errors Prais-Winsten regression. Cao et
al. also proved that the movements of FDI did not statistically significantly
influence the changes in human development in Asian countries from 2013 to 2015
as inequality is controlled for and this outcome still holds true for different regions
in Asia categorized by very high, high and medium human development. This study
is unique in its use of the Inequality-adjusted Human Development Index (IHDI) to
account for unequal distribution across regions in a nation - a newly developed
concept by UNDP.

In contrast with the preceding works, some academic works found empirical
evidence related to the negative or even mixed effects of FDI flows on poverty
reduction and human development. Huang, Teng, and Tsai (2010) by using the
method of 3-year simple moving average (SMA), the fixed effects and the 2-stage-
least-square fixed-effect method, found that both outward and inward FDI adversely
affect the mean income of the poorest quintile of the population in both East and
Southeast Asia and Latin America. A study on the African country of Tanzania by
Magombeyi and Odhiambo (2017) even produced mixed results with the
employment of the ARDL bounds testing technique as FDI exerted a short-run
positive impact on poverty reduction when the proxy in use is infant mortality rate.
However, the outcome changed into no significant effect when the proxies are
infant mortality rate and life expectancy, thus giving way to the conclusion that the
validity relating to the impact of FDI on poverty reduction is subject to what proxies
and time periods are chosen for poverty reduction and welfare improvements.

Generally speaking, a review of previous literature on the impact of FDI on

HDI depicts the fact that this validity of this effect still remains to be seen as the
results are rather mixed, mostly between two results: positive effect and no
significant effect depending on the sample size and the research methodology
applied in the study. Hence, there need more comprehensive studies, especially
large-scale ones, into the effect of FDI on HDI to confirm whether FDI actually
influences human development in countries around the world and developing
countries in particular, which is one principle reason for this senior seminar to be
conducted.

3. Research objectives and tasks

The objectives of the senior seminar are that based on the econometric
results obtained from the research model of developing countries, this seminar will
highlight the implications for Vietnam in the issue related to the nexus between FDI
and HDI so that Vietnam can promote the positive effects and limit the negative
effects FDI leaves on human development, presenting a brighter prospect for human
development in Vietnam by taking advantage of the enormous flows of FDI.

To accomplish these objectives, this senior seminar will do the following

tasks:

(i) provide the current literature with a comprehensive system of theories

relevant to the effect of establishing FDIs on human development. This will provide
developing countries as well as FDI-dependent countries with valuable insight into
this form of financial investment, as these are the countries with serious needs of
financial support but also striving to maintain their HDI statistics (Cao et al., 2017).
Results and findings from past research will also be provided as reference points to
be considered.
 (ii) empirically quantify and examine the degree of impact that FDI has on
multiple facets of life of the citizens in developing countries. Not stopping on the
effect of FDI alone, this study is also an evaluation of the effects of numerous other
macroeconomics factors. Given the current status quo of economic growth in
developing countries, this topic has not received enough research, and the current
academic literature is seriously lacking certain extents of consistency and coherence
(Cao et al., 2017).

(iii) formulating an in-depth proposal for Vietnam, including suggestions,

and possible policies, that can be introduced, and future plans as well as appropriate
strategies worth considering. Throughout this study, this paper will document a
thorough set of practical implications and insights to be followed by the developing
countries in order to maximize their gain from FDI. The relevant stakeholders of
this issue, namely economists, government officers, and policy-makers, are the ones
in need of feasible strategic plans to accordingly use the effects of FDI to their
advantage, thus improving the current development status of HDI.

4. Research subjects & scope

The subject of the senior seminar is the impact of FDI on HDI. The scope of
the senior seminar concentrates on the effect of FDI on the HDI from 45 developing
nations. The time range of the data set spans from the year of 1990 to 2019, a total
of 30 years. From the results obtained, the implications for Vietnam will be made in
order to take full advantage of FDI for the sake of human development, aimed for
the period from 2022 to 2030.

5. Research methodology

The senior seminar will implement a multitude of research methods to

achieve its objectives and tasks successfully. For the qualitative methods, they will
range from the systematization method, the analysis method, the comparison and
synthesis method, the translation method. For the quantitative methods, a series of
tests will be conducted, which include the methods of descriptive and inferential
statistics with the assistance of the software STATA by running correlation test,
cross-sectional dependence and unit root test, common correlated effects mean
group estimations and panel Granger causality test. All of these methods serve to
illuminate the dynamics between FDI inflows and HDI.

6. Research structure

This senior seminar, except for the introduction and the conclusion, is organized
as follows: 

 Chapter 1: Theoretical Framework. This chapter provides an intensive

representation of the theoretical framework, covering the detailed definition
and characteristics of FDI, HDI, and the theoretical effects of these two
factors. 
 Chapter 2: Quantitative Analysis of The Impact of FDI on HDI in
Developing Countries. This chapter presents the model of research as well as
methodology, results, findings, and conclusions deduced from the studies, as
well as a critical analysis of the results. 
 Chapter 3: Recommendations for Vietnam. This chapter presents the relevant
and applicable implications for Vietnam extracted from the studies, including
an analysis of the current situations of FDI and HDI along with policy
orientation and recommendations to promote the effect of FDI on human
development for the country.
CHAPTER 1. THEORETICAL FRAMEWORK

1.1. Foreign Direct Investment

1.1.1. Concept

The concepts of foreign direct investment, albeit different in wording, all

focuses on the investment in a country made by a business or an entity based in
another country. According to the OECD (2022), foreign direct investment (FDI) is
marked as the act of purchasing and owning a significant share of a recipient in a
country by an enterprise residing in a foreign country. From the definition given by
UNCTAD (2007), foreign direct investment can be understood as an investment
having a long-term connection and showing a permanent interest and control by an
entity in one economy (foreign direct investor or parent company) in an enterprise
resident in another economy (FDI enterprise or affiliate enterprise or foreign
affiliate). FDI indicates that the investor exercises a substantial amount of control
over the management of the firm located in the other economy. This investment
includes both the original transaction between the two companies as well as any
future transactions between them and among their incorporated and unincorporated
overseas affiliates. The establishment of FDI also entails the implication that the
investor has made a strategic expansion towards the recipient’s area of operation.
FDI also carries the virtually complete dominance in terms of influence of the
investor country onto the recipients.

To further illustrate the concept “direct” and “control” in the definition of

foreign direct investment, The fifth edition of the IMF's Balance of Payment
Manual defines a direct investor as the owner of 10 percent or more of a company's
capital. This guideline is not an universal rule, since it recognizes that a lesser
proportion of shares may constitute a controlling stake in the firm (and, conversely,
that a share of more than 10 percent may not signify control). However, the IMF
suggests adopting this proportion as the fundamental dividing line between direct
investment and portfolio investment in the form of shareholdings. Therefore, when
a non-resident who previously had no stock in a resident firm acquires 10 percent or
more of that enterprise's shares from a resident, the price of the acquired equity
should be recorded as direct investment.

The concept of the above organizations is basically consistent with each

other in terms of relationships, roles and interests of investors and time in FDI
activities. The most widely accepted international definition of FDI today proposed
by the IMF and UNCTAD is based on the concept of the balance of payments. In
summary, FDI can be understood as a form of international investment in which the
investor of one country invests all or a large enough capital to invest in a project in
another country in order to gain control or participate in making profits and
controlling that project.

1.1.2. Characteristics

Regarding the characteristics of FDI, FDI is mainly private investment with

the primary purpose of seeking profit. According to the classification of foreign
investment by many documents and according to the provisions of many countries'
laws, FDI is a private investment. However, the laws of some countries (for
example, Vietnam) stipulate that, in special cases, FDI may involve state capital
contribution. Whether the subject is private or state, it is also necessary to confirm
that FDI has the first priority purpose of profit, which is worth the attention from
investment recipient countries, especially developing countries when conducting
FDI attraction to direct FDI to serve the goals of economic and social development
of their country.

Another characteristic of FDI is that foreign investors must contribute a

minimum percentage of capital in the legal capital or charter capital depending on
the provisions of the laws of each country in order to gain control or participate in
controlling the investment enterprise. Countries often have different regulations on
this issue. The law of the US stipulates that the ratio is 10% and in France and the
UK, the requirement is 20% while in Vietnam, the Law on Investment 2014 does
not distinguish between direct investment and indirect investment but collectively
refer to it as business investment. According to OECD regulations (1996), this ratio
is 10% of the common shares or voting rights of the enterprise - a recognized level
that allows foreign investors to truly participate in the management of the
enterprise. The capital contribution ratio of the investors will determine the rights
and obligations of each party, and profits and risks are also divided based on this
ratio.

Thirdly, investors in FDI projects make their own decisions on investment,

production and business decisions and are solely responsible for losses and profits.
This form is feasible and highly economic, without political constraints. The
investor's income depends on the business results of the business in which they
invest capital.

FDI also creates a streamlined connection for the technological transfer

between countries, thus further enhancing the link in this co-developing economic
relationship (OECD, 2022). The achievement of a technology transfer agreement
between economies is acquired through numerous processes, including agreements
on ownership licenses of the technology, or through trade deals, agreements or
straightforward purchase (Osano et al., 2016). These processes are considered as the
stimuli for the diffusion of technological advancements in the companies,
corporations, and enterprises of the recipient economies. The main cause of all of
these developments and enhancements in technology transfer, according to Osano et
al. (2016), is the involvement of FDI inflows with the transfer of not only the
technology, but the knowledge, understanding, production managing skills, and
organizational methods behind these technologies as well (Osano et al., 2016). 

1.1.3. Classifications

From the standpoint of market entry methods, according to Le (2022), FDI is

divided into (i) new investment: made by a company investment by a company to
build a new production, marketing or administrative facility, (ii) acquisitions: the
direct investment or purchase of an operating company or business establishment
and (iii) merge: a special type of acquisition in which two companies pool capital to
form a new and larger company.

From the perspective of business field selection, FDI comprises three

distinctly different forms: horizontal FDI, vertical FDI, and conglomerate FDI.
According to Boyce (2021), in a horizontal FDI investment, a corporation invests in
another corporation abroad that shares the same type of industry. Vertical FDI
investment, on the other hand, relates to the act of investment of a company into
another company that belongs to the same supply chain of a product that they share
in common, and does not necessarily share the same area of industry. The situation
when one company invests in another company with no features in common is
called conglomerate FDI.  

1.2. Human Development Index

Human Development Index (HDI) is a statistic developed by the United

Nations Development Program (UNDP) as a form of evaluation of a country’s level
of socioeconomic development (UNDP, 2022). The statistic is a thorough
examination and compilation of a country’s level of human development (UNDP,
2022). HDI reflects the overall quality of life of their citizens: how much life
expectancy are they enjoying (life expectancy), how much knowledge and
understanding do they acquire (knowledge), and how their standard of living is
(gross national income). 

According to the UNDP (2020), the HDI is an evaluation of achievement in

three dimensions of life: life expectancy, knowledge, and income, calculated from
the geometric mean of the slices of each of these dimensions (see Figure 1.1.).
Therefore, the HDI is measured and calculated based on the value of the three
indicators of an economy’s quality of life: life expectancy index, knowledge index,
and GNI index.

- Life expectancy index - the average number of years a person is predicted to

live depending on demographic characteristics such as birth year and current
 age, demonstrates a long and healthy life. As society usually associates good
health with the ability to live longer, life expectancy at birth is utilized as a
proxy for the overall public health of a country, the degree of attention and
investment in health and the effectiveness of its healthcare system.
- Knowledge index is measured by expected years and mean years of
schooling. The number of schooling years people in a country can go for has
an inextricable link with the amount of knowledge they obtain during their
learning process, thus reflecting the population’s dedication to education.
Therefore, the knowledge dimension in HDI demonstrates the development
in the education field of a country.
- The standard-of-living aspect is measured by GNI per capita, which
demonstrates the entire domestic and foreign output produced by the
country's residents. Therefore, this aspect in the HDI reflects the income
earned by the labor force in a country.

In essence, the HDI evaluates the average lifespan being enjoyed, the
average as well as expected years of academic education, and the average amount of
income per capita. With the combination of all these three factors, the HDI is an in-
depth statistic deduced from the very essence of one’s desirable qualities of living
standards. The HDI provides us with a better form of measurement with much
larger scope of evaluation. 

Figure 1.1. Calculation of the Human Development Index

Source: UNDP (2020)

 With HDI being a precise reflection of a country’s level of development, this
statistic also accurately reveals the life standards and living conditions of the people
of the country. Since the foundation for the establishment and development of the
HDI is to place more emphasis on the potential achievement of a person. In other
words, whereas the normal GDP only calculates and singles out how much, on
average, a person earns annually, and is affected by countless side factors, the HDI
is a comprehensive system of measuring what a person can potentially do, become,
and achieve in their life (UNDP, 2022). With the premise of improving the richness
of life, rather than just the richness of the economy, the HDI is the development of
an attempt to put the focus of policies and strategies away from the mere economic
gains, and more towards improving the life standards of the people (WHO, 2022).
The system is fixed upon creating fair choices and equal opportunities to fulfill their
potentials (UNDP, 2022). This aspect of the HDI ensures that the development of a
country is meticulously evaluated via multiple facets of human development, rather
than just merely economic growth. A higher level of HDI thus is testament to higher
levels of development and growth of a country.

1.3. Theoretical effects of FDI on HDI

The effects that FDI has on different economic variables will be measured
and evaluated via two main features (sometimes referred to as perspectives): capital
widening and capital deepening (Cao et al., 2017). Capital widening refers to the
increase or growth of an economy when the economy grows in terms of output,
which was prior achieved when the increase of the capital stock develops at the
same rate as the labor. Capital widening results in constant worker productivity, but
more output of the economy is produced. FDI can help an economy in terms of
capital widening by generating more capital stock to be available for accumulation.
Capital deepening is the result of technology transfer and advancements, in the
attempt to increase economic output by enhancing the workers’ productivity. FDI
also possesses the advantages of developing these aspects, with its ability to
promote international support and co-operation, the technological links between
countries will be further strengthened, allowing for more connection between
economies.

This senior seminar is an attempt to examine and evaluate the impacts of FDI
on HDI under the scope of both capital widening and capital deepening. As human
development as a whole is a broad and vague concept, the seminar will divide
human development into three aspects in accordance with the calculation method of
the HDI: income (the GNI index), health (the life expectancy index) and education
(the knowledge index).

1.3.1. Positive impacts

The positive effects of FDI on human development are wide-ranging and

reflected in all three aspects of the HDI statistic: income, health and education,
which will be clarified in more details below.

1.3.1.1. Positive impacts of FDI on income

From the analysis of the HDI in the previous section, income here is
interpreted as income earned by labor so the analysis of the effects on income will
be from the perspective of a worker in the FDI-receiving country.

The introduction of more job opportunities, both in terms of quantity and

quality, is undoubtedly one of the most apparent benefits of FDI (Cao et al., 2017).
On top of that, it is typical for developing economies to seek investors from a
variety of sectors. This trend will ultimately result in the offering and creation of
new occupations, as well as a significant decline in terms of unemployment rate. An
increase in employment rate entails the growth of income per capita, thus
strengthening the people’s buying power. This is a chain reaction that triggers a
more dynamic market with more consumers, thus strengthening the overall quality
of an economy. The skills and competence of local workers, through the process of
global understanding, collaborating and training, will be put to much higher, more
international standards (Cao et al., 2017). This can become an extremely significant
boost in terms of economic gain for local industries and workers as well. 
 The introduction of more career opportunities from the developed investing
countries to the developing recipient economies can help develop the human capital
of the workforce (Cao et al., 2017). Developing countries are those currently
lacking the cutting-edge technology, falling behind in terms of the digital race
among the developed ones. The knowledge and competence that come along in the
process of technology transfer between economies are valuable insights for
employees and workers of the developing countries to take advantage of. Via this
process of FDI support, the training gathered from these collaborations can become
useful insights and may as well be applicable to many other sectors and industries,
thus creating a dynamic and versatile workforce that can proactively adapt to
changing situations. These are the valuable features of an employee that the current
economic situations really desire, and the constant growth of FDI inflows will be a
beneficial support for this ongoing trend.

Another potential positive effect that FDI has on an economy is its ability to
generate higher earnings from exports, which could resultantly bring higher income
for labors in the recipient country. Most of the products generated with the support
of FDI come from international markets. It is apparent that the growth in FDI
inflows encompass a more active and dynamic flow of the global markets. This
trend has wide-ranging results, ranging from maintaining a constant flow of foreign
exchange, thus stabilizing the exchange rate of the host country, to breaking
domestic monopolies, forcing them to take strategies that involve more
collaboration between economies. This allows for a fairer and more competitive
economy to function through the process of providing more workers with more
opportunity to gain better income. 

1.3.1.2. Positive impacts of FDI on health

When considering the health aspect in human development, life expectancy

is the closest proxy because life expectancy at birth is directly used as one of three
important indices to calculate the final score for HDI. Nevertheless, looking at this
aspect from a broader perspective, better health and higher life expectancy stem
from better healthcare services and infrastructures in the country as citizens have
more money and time to care for their health so in this analysis, the impact on
health will be investigated under the scope of healthcare quality in the FDI-recipient
nation.

Burns et al. (2017) found a positive correlation between life expectancy and
FDI growth. Through the investigation of 85 countries in the 1974-2012 period, the
group of researchers of Burns et al. (2017) found out that FDI displayed a strong
positive impact on the health status of countries receiving FDI. This trend was
explained via the considerable increase in health-related supplies and products from
foreign countries, which boosted the overall public health system and supply
chain.  

The positive effects that FDI have on income can be instantaneously

transferred to become positive impacts of FDI on the public's health care and
lifespan. Apparently, increased average income allows the people to afford as well
as gain access to better healthcare services. With the development of the public
health sector, more and better public health services will be applied and fully
available to the people in need, considerably increasing their overall health and
ultimately their life expectancy. Aside from that, as the economy of the country
progresses, there will be more medical infrastructure being constructed, including
hospitals, medical centers, and public health clinics fully provided and equipped
with help, support, and even alliance with medical hospitals of the host countries,
thus providing a much better healthcare coverage for the citizens. 

In reverse, high-quality medical infrastructures can also serve as attractions

for FDI investments, thus developing economies in need of FDI support can invest
in these aspects in order to attract support and investments from FDI-providing
countries. These motivations can act as a catalyst for the establishment of high-
quality medical schools, providing their people with more opportunities to become a
medical practitioner. All of these trends are the decisive factors contributing to the
better well-being of the people in the developing countries, ranging from declining
mortality rate, better vaccine covered rates to more state-of-the-art medical
technologies that all contribute to better healthcare of the people. 

1.3.1.3. Positive impacts of FDI on education

The increase in the amount of FDI inflows can also act as a strong stimulus
for swift developments in education improvement (Cao et al., 2017). With the
introduction of FDI into the recipient economies, a new, dynamic, and revitalizing
source of labor is constantly required and renewed. The increasing need for quality
sources of labor is a strong motivation for people in the countries receiving FDI to
continually devote themselves to study, enhancing their academic knowledge and
skill sets required for the potential job opportunities from the investing economies.
This trend causes a higher motivation and better incentives for more students to
pursue a higher education, thus creating a much better-trained workforce with
enough academic skills and understanding. 

With more job opportunities being offered through the process of increasing
FDI inflows, students as well as workers are more frequently exposed to more
opportunities to more internship or work-study positions from numerous
corporations. This effect has the ability to promote and enhance career-related skills
suitable for the ever-increasing competitive human resource markets, diversifying
the choices employers can make, and all of these trends are triggered by the shared
cause of human intelligence index development. 

A greater push in the development of education through the process of FDI

investing can also incentivize the population, allowing for greater and more
widespread recognition of the importance of education. This is the development of
an additional motivation for the population, especially the younger generation, to
recognize the crucial and fundamental education plays in the growth of a
developing country. The ultimate result of these improvements is a diversification
in the knowledge and skill sets trained, allowing for a more versatile workforce,
allowing for more opportunities to join a foreign company and possibly
significantly improve their income. 
1.3.2. Negative impacts

Despite the abovementioned positive impacts, the negative side of FDI with
respect to human development is acutely present in countries at the receiving end of
FDI flows. Similar to the previous section, as HDI is measured in three aspects:
income, health and education, the negative impacts of FDI on HDI are also analyzed
in these three aspects.

1.3.2.1. Negative impacts of FDI on income

With the minimum amount of 10% investment into a foreign country, the
establishment of an FDI relationship in a foreign country translates to the complete
dominance of that country’s domestic sectors. This trend can freeze domestic
investment to some extent, minimizing the impact of domestic industries,
enterprises, and corporations. According to Cao et al. 2017, FDI can exacerbate the
already worsening trend of income inequality. In particular, Cao et al. stated in a
2017 report that workers with substandard payment and skill levels are extremely
susceptible to replacement, and thus may be unable to dive into the constant
changing flow of international economic development. 

Another potential economic drawback of FDI, as briefly mentioned before, is

its possibility to gradually widen the inequality gap in income between different
groups of population (Cao et al., 2017). FDI is developed as a result of globalization
and its role is to further promote the effects of globalization. This is a constant cycle
that is constantly setting high-skilled workers from the low-quality ones, thus
gradually widening the income gap between these groups of workers. By putting a
higher demand on quality and skills of workers, FDI is causing a continually
growing gap in the wage inequality of the host economies. 

1.3.2.2. Negative impacts of FDI on health

Past research has not recorded or documented results consistent enough for a
coherent conclusion about the negative effects of FDI on public health. The main
cause for the negative impacts of FDI is the constant pressure suffered by workers
and employees in economies receiving FDI. These are the pressures generated from
the constant atmosphere of utmost competition in virtually every workplace. The
consequences of suffering from these pressures include stress, anxiety,
cardiovascular diseases, and in some cases, even depression (Herzer et al., 2012).
Herzer et al. also stated that the public health suffers as a side effect of FDI due to
exacerbation in income inequality. This leads to the situation where higher-skilled
workforce struggle to survive and remain in the realms of the developed and suffer
from constant stress and mental insecurities, while workers with lower level of
competence are left out of the workforce market and struggle to achieve a level of
income sufficient for their lives. 

Another potential harm for the public health caused by increased FDI
investment is the alarming and worsening trend of environmental pollution. The
dramatically increasing rate of constant international trades and businesses between
nations exacerbated the aggravating conditions of pollution (Cao et al., 2017). The
gradual decline in environmental quality is a major threat to public health. With the
increasing need for people to travel across different regions of the world for
business trips, there are threatening risks of suffering from transmitting diseases.
The COVID-19 pandemic is an archetype of the case when the constant traveling of
people for businesses worsened and even intensified the impacts of diseases. The
disease also completely froze the entire flow of business and commerce between
countries, thus posing another risk of the vulnerabilities of FDI-invested projects to
sudden changes and risks caused in the public health. 

1.3.2.3. Negative impacts of FDI on education

The increase in FDI investments also hinders the improvement of education

to some extent. The FDI investment steers the focus of policy-makers away from
developing public necessities. In other words, the increase in FDI causes many
economies to forcefully cut down spending and budgets for many other public
projects, and save those resources for other economic-centered focuses (Cao et al.,
2017). These trends are clearly not the optimal environment for educational
opportunities in developing countries. The population in developing countries
seeking academic education opportunities may face certain difficulties, mainly due
to the current economy having not but their focus on the well-being and life
standards of the public, but more on gaining economic advantage through
promoting other non-public projects (Cao et al., 2017). In general, since the welfare
of the public is often deemed negligible by FDI investors, public sectors including
education are not likely to be benefited from FDI, and may also face risks of being
degraded due to the decline in the amount of their allocated budget (Cao et al.,
2017). 

Another negative impact that FDI has on education is that FDI investments
tend to lay more focus on training the workforce with the relevant skills and
knowledge, and that the overall quality of the public sectors is often undervalued
and therefore overlooked. This is an extremely detrimental influence on education
as this depreciates the value and potential of education, thus limiting the educational
quality and experience of the population. 

Drawing from the conclusions of these theoretical frameworks, it is apparent

the impact of FDI on the three dimensions of human development measured by the
HDI index is not consistent, and that the results could vary greatly between
economies. An in-depth and comprehensive study of the impact of FDI on HDI is
therefore necessary to provide the current literature with relevant information on the
issue, as well as to elicit valuable insights and implications for the case of
developing economies, including Vietnam.
CHAPTER 2. QUANTITATIVE ANALYSIS OF THE IMPACT
OF FDI ON HDI IN DEVELOPING COUNTRIES

2.1. Research model

Upon reviewing previous literature and theoretical effects of FDI on HDI, in

order to investigate the dynamics between FDI and HDI in a quantitative way, the
senior seminar will include both factors in a linear regression model in which HDI
is set as the dependent variable and net inflows of FDI as an independent variable so
that the effect of FDI of HDI can be detected, which is similar to many previous
works mentioned in the literature review: Hussain et al. (2010); Gökmenoğlu,
Apinran and Taşpınar (2018), Ahmad et al. (2019), Kounou (2020). In an attempt to
further testify the relative relationship between HDI and FDI, this seminar employs
three other independent variables to avoid the problem of omitted variable bias. The
four variables are all macroeconomic factors that are highly tangible in the process
of a country’s economic development, which will be illuminated below.

- Trade openness: the sum of international trade as a share of GDP. It is

assumed that the open a country is to trade, the higher economic growth it
will witness and thus, a higher level of human development. Jawaid and
Waheed (2017) confirmed the positive relationship between international
trade and human development. Additionally, Hussain et al. (2010) and
Ahmad et al. (2019) incorporated international trade in the regression model
as a control variable when studying the relationship between FDI and HDI.
- Labor force participation rate: It is presumed that greater participation rate
will correlate with more production and income for the population – a
possible sign of higher human development. Emprically speaking, Wijaya,
Kasuma, Tasenţe and Caisar Darma (2021) also found that labor force
participation can improve the development of a country in different aspects
including human development.
 - Gross capital formation: It is assumed here that as the gross capital formation
is larger, investments in public infrastructure are also larger so human
development will receive more attention and see noticeable improvements.
Ahmad et al. (2019) did corroborate the positive impact of gross capital
formation on human development in South and Southeast Asian countries,
from an empirical standpoint.

With the above foundation, the research model specification will be formed
as follows:

HDI i ,t =α i+ β1 FDI i ,t + β 2 ¿i ,t + β3 LFPRi , t + β 4 GCF i ,t + ε i ,t (1)

In equation (1), i denotes country i while t denotes year t and α iis a unit-specific
fixed effect. The list of variables is as follows:

- HDI: Human Development Index

- FDI: Foreign Direct Investment, net inflows 
- TO: trade openness
- LFPR: labor force participation rate
- GCF: gross capital formation

β 1 , β 2 , β 3 , β 4 are the coefficients for our 5 independent variables yet in this

case, the coefficient of the most interest is β 1, which measures the impact of FDI on
HDI. If FDI does actually assist developing countries to ameliorate their human
development, the coefficient β 1will be positive and vice versa.

With a view to examining the impact of FDI and other control variables on
different dimensions of human development, the senior seminar will replace the
dependent variable HDI in equation (1) with the sub-indices in the calculation of the
HDI score, which are expected years of schooling, mean years of schooling, life
expectancy at birth and GNI per capita. The equations for estimating the effect of
FDI on the sub-indices of the HDI are clarified below:

EYS i ,t =α i + β 1 FDI i ,t + β2 ¿i , t + β 3 LFPR i ,t + β 4 GCF i ,t +ε i , t (2)

 MYS i ,t =α i+ β 1 FDI i , t + β 2 ¿ i ,t + β 3 LFPRi , t + β 4 GCF i ,t + ε i ,t (3)

¿i , t=α i + β 1 FDI i ,t + β 2 ¿i , t + β 3 LFPR i ,t + β 4 GCF i , t +ε i, t (4)

GNI i ,t =α i+ β1 FDI i ,t + β 2 ¿i ,t + β3 LFPR i ,t + β 4 GCF i ,t + ε i ,t (5)

with the list of dependent variables being as follows:

- EYS: expected years of schooling

- MYS: mean years of schooling
- LE: life expectancy at birth
- GNI: GNI per capita

These econometric models will be applied first to the entire sample of

developing nations to study the general impact of FDI on HDI as a whole for this
country classification. Then, in order to document the impact in specific sub-groups
of developing countries, this seminar thesis will divide the sample into 3 sub-groups
in accordance with the continental area these nations belong to: (1) Asia and
Oceania, (2) Africa and Europe and (3) Latin America. It is noteworthy that in the
sub-group (2), there are only two countries from Europe: Albania and Romania, so
for convenience purposes, the author decides to include these two nations in the
sub-group of Africa.

2.2. Empirical methodology

2.2.1. Correlation test

The research paper will firstly conduct the correlation test among the
dependent variable and five independent variables by using Pearson correlation
coefficient. Its value range is from -1 to 1 in which zero denotes no linear
relationship and -1 or 1 shows a perfectly negative or positive correlation
respectively. The two variables must show a correlation relationship to be included
in the model and have an actually meaningful coefficient interpretation. If the value
is zero, there is perfectly no correlation between the two variables but if the two
variables are too highly correlated, they also cannot be included due to perfect
collinearity. Both cases make it almost impossible to acquire any useful structural
inferences from the econometric model.

2.2.2. Panel cross-sectional dependence and unit root test

Afterwards, the research paper will conduct the panel unit root tests for all
variables to check the stationarity of the studied panel data set because a stationary
panel will make it possible to estimate historical patterns and make future
predictions whereas the reverse will lead to spurious regression and wrongful
forecasts. However, before leaping to the unit root test, there is the possibility of
cross-sectional dependence, which is viewed as a critical matter in panel data
analysis because leaving this issue out of the context can induce inconsistent
estimates and misleading information (Grossman and Krueger, 1995; Pesaran, 2004;
Bilgili and Ulucak, 2018). In the panel, the cross-sectional dependence (CD) test
developed by Pesaran (2004) will be applied first with the equation as follows:

( T −k ) ^ρ2ij −E [ ( T −k ) ^ρ2ij ]
√
N −1 N
2T
CD= ∑ ∑ (6)
N (N−1) i=1 var [ ( T −k ) ^ρij ]
2
j=i+ 1

In equation (2), N is the sample size and T refers to the time period whereas
^ρ2ij indicates the coefficient of pair-wise correlation acquired from OLS estimation

for each cross-section dimension i.

Then the research paper uses the second-generation panel unit root test called
the cross-sectionally augmented Im-Pesaran-Shin (CIPS) developed by Pesaran
(2007) because the CIPS unit root test relaxes the assumption of cross-sectional
dependence. The statistics for the CIPS unit root test are obtained from calculating
the cross-sectionally augmented Dickey-Fuller (CADF) from Pesaran (2007):

∆ y i , t=α i + β i y i , t−1 +γ i y t −1+ δ i ∆ y i , t +ε i , t (7)

Where y t −1 and ∆ y i , t are the cross-sectional averages of lagged levels and

first differences of individual series, respectively.
 N
1
y t −1= ∑ y i ,t −1 (8)
N i=1

N
1
∆ y i , t= ∑ ∆ y i ,t (9)
N i =1

The CIPS statistic can be computed by averaging the CADF i as follows:

N
1
CIPS= ∑ CADFi (10)
N i=1

where CADF iis the t-statistics in the CADF regression defined by equation (3).

This stationarity test is conducted among variables both at level and in first
difference and the optimal lag length is chosen based on the Bayes information
criterion. The null hypothesis of the Pesaran CD test is the presence of cross-
sectional independence while that of the CIPS test is that there is unit root or non-
stationarity in the panel dataset.

2.2.3. Panel long-run estimates

In the presence of cross-sectional dependence, bias and inconsistency can be

detected in traditional panel regression methods (Pesaran and Smith, 1995; Phillips
and Sul, 2003; Sarafidis and Robertson, 2009; Paramati et al., 2017). Pesaran and
Smith (1995) introduced the mean group (MG) technique that allows all slope
coefficients and error variances to vary across the panel, employing the ordinary
least square (OLS) method in each panel or country to acquire panel-specific slope
coefficients and then averages the panel-specific coefficients. However, the MG
estimator does not entail any information about possible common factors that may
occur in the panel data. In response to this, Pesaran (2006) and Chudik and Pesaran
(2015) proposed the CCEMG estimator by approximating the common factors with
cross sectional averages, which is robust to cross-sectional dependence. The
estimated equation is specified as follows:

ρΤ
y i ,t =α i + λi y i ,t −1+ β 0 , i x i ,t + β1 , i x i ,t −1 + ∑ δ ' i ,l z t−l + ε i ,t (11)
l=0
where α i is a unit-specific fixed effect, ε i ,t is the error term and z t =( y t −1 , x t ) are the
cross sectional averages of the dependent and independent variables. What is
noteworthy is that for the cross-sectional averages, only the base of the variables are
added, but not further lags with a view to averting multicollinearity problems (Jan
Ditzen, 2019). The mean group coefficient can then be computed as the unweighted
average of the cross sectional individual coefficient:

N
1
^π MG =( ^λ MG , ^β 0 , MG , ^β1 , MG ) = ∑ ^π (12)
N i=1 i

Choosing the appropriate econometric model to study the correlation

between variables can be considered as a rather difficult task for panel data analysis
because there exists a multitude of panel regression models that cater for different
date sets with different characteristics. In the panel data set of this senior seminar,
the range of the panel and time period is large as there are 45 countries and 30 years
in total, thus giving rise to the possibility of bias and cross sectional dependence
when applying simple panel data models for analysis. In order to account for the
large size of the data set and cross-sectional dependence among its units, this
research paper decides to employ the common correlated effects mean group
(CCEMG) estimator Pesaran (2006) and Chudik and Pesaran (2015).

2.2.4. Panel Granger causality test

Once the long-run estimates are acquired, the next step after the CCEMG
estimation is to test the Granger causal relationships among the variables of interest
and to further corroborate the correlation between HDI and FDI, as well as other
control variables. A variable X i t is said to Granger-cause a variable Y i t if X i t and its
lagged terms contain information that provides better predictions of the future
values of Y i t than when the past values of Y i t are used alone (Granger, 1969), which
means that the validity of the theoretical framework has even future implications.
Hence, the Dumitrescu & Hurlin Granger non-causality test will be performed
because this advanced version of Granger causality analysis takes into account the
size and time dimension of cross-sections (Dumitrescu and Hurlin, 2012). The
underlying regression for the Dumitrescu & Hurlin Granger non-causality test is:

K K
y i ,t =α i +∑ γ i ,k y i ,t −k + ¿ ∑ βik xi , t−k +¿ ε i ,t (13) ¿ ¿
k=1 k=1

where x i ,t and y i ,t are the observations of two stationary variables for individual i in
period t. Coefficients are able to differ across individuals and assumed to be time
invariant. The lag order K is assumed to be identical for all individuals. After
running the regression based on equation (9), the next step is to perform F tests of
the K linear hypotheses β i 1=…=βiK =0 to retrieve the individual Wald statistic W i
and then calculate the average Wald statistic W :

N
1
W= ∑ W (14)
N i=1 i

Under the assumption that the Wald statistic W i are independently and
identically distributed across individuals, it can be inferred that the standardized
statistic Z with large N and T panel datasets, can be ‘reasonably considered’
(Luciano et al., 2017) as the statistic follows a standard normal distribution:

√
→
N
Z= × (W −K ) T , N → ∞ N ( 0,1 ) (15)
2K

To account for cross-sectional dependence in this Granger causality test,

Dumitrescu & Hurlin (2012) proposed a block bootstrap procedures to produce
bootstrapped critical values for Z . The lags chosen are based on Bayes information
criterion and the bootstrap procedures, including 1000 bootstrap replications, are
used to address the presence of cross-sectional dependence in the studied panel
dataset. After computing, the Z statistic and its corresponding p-value is taken with
the null hypothesis being no Granger causality between two tested variables.

2.3. Data
 The time period of the panel data set ranges from 1990 to 2019 - a total of
30 years. The list of the studied developing countries, classified by the United
Nations (2014), arranged into 3 sub-groups of continental areas, is clarified below:

Table 2.1. Sample of studied developing countries

Asia and Oceania Africa and Europe Latin America

Bangladesh, Bahrain Albania, Algeria Bolivia, Brazil, Barbados

Brunei Darussalam Botswana, Cameroon Chile, Colombia

China, Fiji, Indonesia Congo, Rep. Costa Rica

India, Iran, Islamic Rep. Egypt, Arab Rep. Dominican Republic

Sri Lanka, Malaysia Ghana, Kenya, Morocco Ecuador, Guatemala

Pakistan, Philippines Namibia, Romania Honduras, Jamaica

Saudi Arabia, Thailand Tunisia, Tanzania Mexico, Panama

Vietnam South Africa, Zimbabwe Peru, Paraguay

The data selected to construct the research model in equation (1) is illustrated
as follows:

Dependent variable

Human development index (HDI): the geometric mean of normalized

indices in 3 essential aspects of human development: a long and healthy life, being
knowledgeable and a decent standard of living. It is presumed that the countries
with high scores in HDI would provide a better living standard and working
environment for foreign workers to move to. The data are taken from the human
development reports in the United Nations Development Program (UNDP).

Expected years of schooling: A computation of the predicted number of

years a youngster will spend in school or college, including years spent on
repetition. It is the total of the age-specific enrollment ratios for primary, secondary,
post-secondary non-tertiary, and tertiary education and is computed based on the
assumption that the predominant patterns of age-specific enrolment rates would
remain constant throughout the child's life. Maximum expected years of education
are 18 years.

Mean years of schooling: A computation of the average number of years of

education obtained by individuals aged 25 and older throughout the course of their
lifetime, based on the education attainment levels of the population translated to
years of schooling based on the theoretical length of each level of education
attended. The expected maximum for this indicator for 2025 is 15.

Life expectancy at birth: the average number of years a baby may expect to
live if present mortality rates do not change.

GNI per capita: the total of the value contributed by all resident producers
plus any product taxes (less subsidies) not included in the output valuation plus the
net receipts of primary income (wages and rents) from outside divided by the
population.

Independent variable

Foreign direct investment: this is the net inflows of foreign direct

investment in a country in a year, measured in current US dollars. The data is
gathered from the online database of World Development Indicator on the website
of World Bank.

Control variables

In an attempt to testify the relative relationship between HDI and FDI, this
research paper employs three other independent variables to avoid the problem of
omitted variable bias. The variables are all macroeconomic factors that are highly
tangible in the process of a country’s economic development, which will be
illuminated below.
 Trade openness: this figure is the sum of exports and imports of goods and
services measured as a share of gross domestic product (GDP) and is also collected
from the database of World Bank’s online website.

Labor force participation rate: this is related to the proportion of the

population aged 15-64 that is economically active: all the people who provide labor
for the production of goods and services during a specific period. It is presumed that
greater participation rate will correlate with more production and income for the
population – a possible sign of higher human development.

Gross capital formation: this, according to World Bank, comprises "outlays

on addition to fixed assets of the economy plus net changes in the level of
inventories. Fixed assets include land improvements (fences, ditches, drains, and so
on); plant, machinery, and equipment purchases; and the construction of roads,
railways, and the like, including schools, offices, hospitals, private residential
dwellings, and commercial and industrial buildings. Inventories are stocks of goods
held by firms to meet temporary or unexpected fluctuations in production or sales,
and ‘work in progress’.” This figure is measured as a share of GDP and, similarly,
compiled from the database on the website of World Bank.

The list of data, as well as its unit specification, is summarized in Table 2.2.

Table 2.2. Description of variables and data sources

Variables Description Source Expected signs

HDI Human Development Index UNDP

EYS Expected years of schooling UNDP

MYS Mean years of schooling UNDP

LE Life expectancy at birth UNDP

GNI GNI per capita (thousand USD) UNDP

 FDI Foreign direct investment, net World Bank +
inflows (billion USD)

TO Trade openness, as % of GDP World Bank +

LFPR Labor force participation rate World Bank +

GCF Gross capital formation, as % of World Bank +

GDP

Table 2.3. and 2.4. presents the summary statistics and Pearson correlation
test results of the studied variables.

Table 2.3. Summary Statistics of Variables

Standard Minimum Maximum

Variable Observation Mean
Deviation Value Value

HDI 1,350 0.649 0.108 0.366 0.859

EYS 1,350 11.681 2.307 4.6 17.1

MYS 1,350 7.012 1.969 2.2 11.1

LE 1,350 68.768 7.627 43.1 80.3

GNI 1,350 11.612 12.504 1.097 72.947

FDI 1,350 64.188 238.406 -45.504 2909.284

TO 1,350 0.736 0.363 0.152 2.204

LFPR 1,350 0.662 0.099 0.436 0.897

GCF 1,350 0.245 0.081 0.015 0.794

 Source: Authors' calculation

Table 2.4. Correlations of Variables

HDI MYS EYS LE GNI FDI TO LFPR GCF

HDI 1

MYS 0.888 1

EYS 0.804 0.779 1

LE 0.814 0.596 0.467 1

GNI 0.645 0.471 0.409 0.391 1

FDI 0.136 0.146 0.059 0.163 0.018 1

TO 0.302 0.244 0.287 0.179 0.312 -0.137 1

LFPR -0.134 -0.081 0.074 -0.161 -0.081 0.114 0.113 1

GCF 0.128 0.065 0.039 0.226 0.045 0.266 0.175 -0.117 1

Source: Authors' calculation

All correlation coefficients in Table 2.4. exhibit appropriate values, whose

absolute values are neither zero or close to 1 (too high correlation is assumed to
have an absolute value between 0.9 and 1). Therefore, all variables can be included
in the econometric model without encountering the issue of zero or perfect
multicollinearity.
2.4. Research results

2.4.1. CCEMG estimator results for the impact of FDI on HDI in developing
countries

As aforementioned, before the CCEMG estimator can be deduced, the two

next tests to be conducted are the Pesaran CD test and the CIPS unit root test, whose
results are presented in Table 2.5.

Table 2.5. Pesaran CD and CIPS unit root test results

Variable CD-test CIPS value

value Level First difference

No trend With trend No trend With trend

HDI 158.777*** -1.531 -2.349 -4.267*** -4.592***

EYS 136.652*** -1.694 -1.775 -4.221*** -4.410***

MYS 161.13*** -1.931 -1.888 -4.746*** -5.069***

LE 141.89*** -1.863 -1.853 -3.392*** -4.431***

GNI 123.947*** -1.778 -2.069 -3.798*** -4.099***

FDI 96.184 *** -3.111*** -3.304*** -5.534*** -5.444***

TO 28.143*** -1.783 -2.378 -4.681*** -4.722***

LFPR 3.813*** -1.200 -2.073 -4.020*** -4.111***

GCF 17.019*** -2.519*** -2.691*** -4.998*** -5.013***

Note: *, ** and *** indicate significance at the 10%, 5% and 1% level

Source: Authors' calculation

Table 2.5. shows that all variables in the panel data set demonstrate strong
cross-sectional dependence across different countries, which is common because the
studied countries are developing countries and exert certain effects on each other in
each variable. This also makes it suitable to use the CIPS test to account for cross-
sectional dependence, unlike other types of panel unit root tests. The CIPS test
statistics prove that only FDI and GCF are stationary at level whereas all the other
variables HDI, TO and LFPR are only stationary in first difference. Therefore, FDI
and GCF are integrated at order zero or I(0) and HDI, EYS, MYS, LE, GNI, TO and
LFPR are integrated at order one or I(1).

Table 2.6. summarizes the results of the CCEMG estimator for all
independent variables.

Table 2.6. Coefficient results with CCEMG estimator

HDI Coefficient Standard error p-value

FDI 0.0000522 0.0000572 0.361

TO -0.0032916 0.0053562 0.263

LFPR* -0.0328086 0.0000975 0.095

GCF*** 0.0250879 0.0081493 0.002

Observations 1,305

R-squared 0.79

Note: *, ** and *** indicate significance at the 10%, 5% and 1% level

Source: Authors' calculation

Table 2.6. indicates that FDI, albeit having a positive coefficient in

accordance with the expected sign, is not a statistically significant variable in the
regression with the CCEMG estimator due to a high p-value above 0.1. Similarly,
trade openness is not proved to have a significant impact on the changes in HDI
with a high p-value of 0.263. Labor force participant rate, however, shows a
significant relationship with HDI yet only at a weak level of 10% significance. The
variable that records the highest confidence level is gross capital formation as it
shows strong evidence of a statistically significant effect on HDI. Its coefficient is
positive, at 0.0250879, which can be interpreted that when gross capital formation
increases by 1%, this can lead to an improvement in the HDI score of developing
countries by approximately 0.00025. This scale of increase is marginal so the
impact of GCF on HDI is statistically significant but not numerically significant.
Therefore, among the selected variables, gross capital formation would be the one
factor that has the most impressive impact on HDI. The R-squared is 0.79, which is
a relatively high figure and proves that this specification is a good fit for the
relationship among the investigated variables.

Regarding the effect of FDI on the sub-indices of human development, Table

2.7. exhibits the CCEMG estimators for the full sample of 45 developing countries.

Table 2.7. Coefficient results with CCEMG estimator by sub-indices of HDI

EYS MYS LE GNI

FDI 0.0008088 0.0017788 -0.0008842 0.0027201

(0.0035908) (0.0012461) (0.0024748) (0.0030255)

TO -0.0678687 0.0308466 -0.0896077 -0.137599

(0.1811852) (0.1680831) (0.1411616) (0.2998541)

LFPR -2.579741 -1.120509 0.8818918 -3.215449

(1.334012) (0.9406442) (1.923069) (4.058561)

GCF -0.1788406 0.320943 0.4897195 2.751467***

(0.4418771) (0.2726817) (0.4779998) (0.8710568)

Observations 1,305 1,305 1,305 1,305

R-squared 0.81 0.82 0.62 0.76

Note: *, ** and *** indicate significance at the 10%, 5% and 1% level

Source: Authors' calculation

 From Table 2.7., it can be seen that even when divided into specific sub-
indices, FDI does not have any statistically significant effect on any aspect of
human development: income, health and education. Trade openness, labor force
participation rate and gross capital formation also follow the same pattern with the
exception of the impact of the variable GCF on GNI. Gross capital formation does
have a strong positive relationship with GNI per capita as it is statistically
significant even at the 1% level. Its coefficient is 2.751467, which can be
interpreted that an increase of 1% in gross capital formation can lead to 27.51467
USD in GNI per capita in developing countries, which is once again a marginal
growth compared to the scale of GNI per capita. Hence, gross capital formation
does only have a positive impact on HDI to a small degree because it has a positive
impact on GNI per capita yet just to a small degree. All four models with four sub-
indices of the HDI have R-squared statistics going for at least above 0.6, which
proves the good fit of the model.

2.4.2. CCEMG estimator results for the impact of FDI on HDI in sub-groups of
countries

As mentioned above, to study the dynamics among variables in a more

comprehensive way, this research paper will divide the sample into 3 sub-groups in
accordance with the continental area these nations belong to: (1) Asia and Oceania,
(2) Africa and Europe and (3) Latin America, which have already been clarified in
Table 2.1. Table 2.8. presents the CCEMG results for each sub-group of developing
countries.

Table 2.8. Coefficient results with CCEMG estimator by sub-groups of

countries

HDI Sub-group 1 Sub-group 2 Sub-group 3

FDI 0.000027 0.0000875 0.000183*

(0.0000402) (0.0000734) (0.0001081)

TO 0.0003774 -0.0015759 -0.0067279

 (0.0041189) (0.0049841) (0.0064898)

LFPR -0.0359045 -0.0428143 -0.0158375

(0.0456815) (0.492955) (0.0208155)

GCF 0.0240663* 0.0221188 0.028582***

(0.0142836) (0.0182978) (0.0092672)

Number of countries 15 15 15

Observations 435 435 435

R-squared 0.79 0.71 0.85

Note: *, ** and *** indicate significance at the 10%, 5% and 1% level

Source: Authors' calculation

Table 2.8. demonstrates that for Asia and Oceania, only GCF is significant
and still at a weak level of 10% significance. The results for Africa and Europe in
the sub-group 2 go even further as no independent variables show any statistically
significant relationship with HDI. The situation for the sub-group 3 of the Latin
America is that this is the only region which sees the positive impact of FDI on HDI
but only at a 10% significance level – rather weak evidence for this relationship.
Latin America also witnesses strong evidence of gross capital formation on HDI as
it is significant at even the 1% level and the coefficient is positive, indicating a
positive nexus between GCF and HDI in this sub-group.

2.4.3. Panel Granger causality test results

Once the long-run relationship is identified, panel Granger causality tests are
conducted to examine the causal direction between the variables of interest.
Following the procedures proposed by Dumitrescu & Hurlin (2012), the detailed
results are presented in Table 2.9. with the optimal lag chosen by Bayes information
criterion, which is one (1) for all causality tests in this senior seminar.
 Table 2.9. Dumitrescu & Hurlin Granger non-causality test results

Causal direction Z -stat Causal direction Z -stat

FDI → HDI*** 9.454 HDI → FDI*** 25.695

TO → HDI*** 15.867 HDI → TO 8.711

LFPR → HDI*** 27.728 HDI → LFPR*** 14.152

GCF → HDI*** 7.551 HDI → GCF 3.803

FDI → EYS** 7.209 EYS → FDI*** 23.786

FDI → MYS* 4.594 MYS → FDI*** 18.021

FDI → LE 11.282 LE → FDI*** 20.721

FDI → GNI*** 7.6627 GNI → FDI*** 22.977

Note: *, ** and *** indicate significance at the 10%, 5% and 1% level.

Source: Authors' calculation

From Table 2.9., it can be deduced that all of the studied independent
variables did Granger-cause the dependent variable – HDI as all of their Z -stat show
significance at the level of 1%. This implies that the data all of the independent
variables: FDI, TO, LFPR and GCF can be used to predict the future score for HDI
in developing countries in the world rather than just relying on past data of the
dependent variable alone. In the reverse direction, nevertheless, HDI did only
Granger-cause FDI and LFPR or only FDI and LFPR show bidirectional causality
with HDI. In this way, the values of HDI cannot be utilized to anticipate the future
data of TO and GCF.

When it comes to the Granger causality between FDI and the sub-indices of
HDI, FDI demonstrates bidirectional causality with the variables EYS, MYS and
GNI, confirming that the values of FDI can be used to predict the future values of
expected and mean years of schooling, as well as GNI per capita and the opposite
interpretation for this causality also holds true for this case. However, mean years of
schooling does only Granger-cause FDI to a weak degree as the level of
significance of that direction is only at 10% In contrast with these variables, for life
expectancy at birth, only the values of LE can be employed to anticipate future FDI
levels but not the other way round.

2.5. Assessment of the impact of FDI on HDI in developing countries

Based on the test results presented in the previous section, this paper’s
research model has illustrated that despite having a positive coefficient, FDI annual
net inflows do not have a significant impact on the changes in HDI in developing
countries as a whole and in three dimensions of HDI: income, health and education
over the period from 1990 to 2019, which is a rather long and updated time period
compared to previous literature. For the sub-group analysis, FDI also demonstrates
no significant relationship with human development in developing countries of Asia
and Africa, matching with the results obtained from Cao et al. (2017). Even when
divided into four sub-indices of the HDI, human development does not record any
statistically significant impact from FDI. Nevertheless, FDI did have a positive
effect on HDI in Latin America but at a weak level as the p-value only indicates
significance at the level of 10%, which can be flatly denied if more robustness in
econometric estimation results is required. Overall, the impact of FDI on HDI, from
the sample of 45 developing countries around the world, is insignificant for the
most part.

These results can be explained in this way. All the coefficients for FDI in the
full sample, in the three sub-groups of countries and in the four sub-indices of the
HDI, are positive, proving that FDI does have a positive effect on HDI but with a
high p-value of above 0.1, that kind of positive effect is not sufficient to exert an
actual effect on changing the HDI statistic. Based on the theoretical analysis from
Section 1.3.1. in this seminar senior, from the perspective of income, greater FDI
net inflows can bring about greater income for the citizens of recipient countries but
the introduction of more job opportunities, worker training, technology transfer and
international trade in these investigated developing countries still fails to bring the
actual desired outcomes for the salaries and wages of workers, thus unable to uplift
the income levels in a noticeable and significant manner. This may stem from the
fact the flows of FDI in a country is not distributed fairly for all workers, only
benefiting a certain group of high-skilled employees and employer that can meet
with the requirements of the foreign investors. Another potential factor may have to
do with sticky low wage for low-skilled workers. Many FDI projects come to
developing countries due to relatively low wages of workers in the recipient
countries (Braconier, Norback and Urban, 2005) so when moving to these nations,
FDI projects will strive to be as cost-effective as possible by offering low-skilled
workers low wages or just slightly higher wages than average. All these factors,
when combined together, widens the inequality in income distribution and only
improves the overall income levels to a marginal extent, thus making FDI’s
theoretical positive effects on HDI pale into insignificance. In reality, based on the
author’s calculation from the data collected from World Bank for FDI and UNDP
for GNI per capita (2022), while FDI in developing countries increased by 24.5
times from 1990 to 2019, the growth rate of GNI per capita is only 2.6 times – a
huge gap with that of FDI, which helps to explain the failure to use the benefits
from FDI for the sake of increasing income for the entire population in developing
countries.

From the perspective of knowledge and health of the citizens, the

insignificance in the coefficient estimates of FDI can also be ascribed to FDI’s lack
of focus on health and education. Since foreign investment heads for developing
countries mostly for economic benefits, FDI projects potentially concentrate on
making the most economic wealth out of the recipient nations without paying
adequate attention to the amelioration of working conditions, work-life balance,
education and training for workers of FDI projects in particular and the citizens
there in general, thus limiting the extent of the spillover effects for developing
countries. According to UNDP data (2022), expected years of schooling increased
by 1.4 times to 12.2 and mean years of schooling increased by 1.8 times to 7.5,
which is a decent increase but compared to the cap of 18 for EYS and 15 for MYS
and to the pace of growth of FDI calculated above, the increase rate of EYS and
MYS in 30 years still appears modest and far from achieving the cap. Overall, FDI
net inflows of a developing country may, to a little extent, uplift the situation for the
population there, in terms of income, health and education – three dimensions of the
HDI statistic, that kind of uplift is marginal compared to the genuine benefits FDI
can potentially offer to the recipient nation. In this way, the coefficient of FDI
obtained from the CCEMG estimator in this senior seminar is still positive but fails
to exert any significant impact on the changes in the HDI over the period from 1990
to 2019.

Nevertheless, it would be rather a hasty generalization to only confine the

assessment of FDI’s impact on HDI to just this principle independent variable
alone. In fact, the insignificant effect of FDI on HDI can be owing to the relatively
significant effect of other variables on the HDI statistic. Even though FDI may
produce positive impacts on HDI in certain ways as mentioned above, these impacts
become statistically insignificant should the impacts of other variables be
overwhelmingly stronger to actually dominate the influence of FDI. From the
specified research model in this study, it can be seen that gross capital formation has
a statistically significant positive impact on HDI at the significance level of even
1%, proving the strength of the nexus between GCF and HDI. In reality, there can
exist multiple other variables that can have a genuine impact on HDI, which is of
the same or even stronger strength compared to the significance of GCF in the
econometric model of this research study. This, in turn, raises a critical issue for
both the world of academic economists and the governments of developing
countries to identify the true factors that can fuel an escalation in human
development other than just the annual net inflows of foreign direct investment.

Albeit its insignificance, FDI has been proved to Granger-cause HDI from
the panel Granger causality test and there is even bidirectional causality between
FDI and HDI. Thus, the past values of FDI can be utilized to predict the future
values of HDI and the opposite direction also holds true for the prediction of these
two variables. Bidirectional causality can also be witnessed between FDI and EYS,
MYS and GNI per capita so FDI flows can be a proxy for the prediction of even the
sub-indices of the HDI with the exception of life expectancy at birth. This result can
be assessed in this way: the values of FDI net inflows are considered as a testimony
to the potential for socio-economic growth in the future as investors have to
investigate the recipient country to lay their trust for business growth. The higher
the FDI values, the better the future of development for that country and the level of
human development, along with the sub-indices of HDI, can follow an upward trend
correspondingly. In reverse, the level of human development measured by the HDI
statistic can be taken into account when an FDI investor is pondering their decision
of their foreign business locations so in this case, HDI acts as one incentive for FDI
to flow to a certain country.

Generally speaking, the impact of FDI on HDI is insignificant in developing

countries, even when divided into sub-groups. This marginal effect can be linked to
several possible factors such as the failure of FDI to focus its benefits on improving
the income, health and education of the recipient country’s citizens and the
dominance of other variables that actually leave a greater impact on HDI than FDI.
Nevertheless, rather than affecting HDI in a direct way, the values of FDI can be
taken advantage of as a criterion to predict the future levels of human development
in developing countries, which is even valid in the reverse direction of prediction.
CHAPTER 3. RECOMMENDATIONS FOR VIETNAM 
3.1. Current situations of FDI and HDI in Vietnam 

3.1.1. Current situations of FDI 

The lockdowns and movement restrictions caused by COVID-19 pandemic

triggered countless job losses, disrupted the entire Vietnamese economy, and have
left behind serious consequences that would take a prolonged period of amelioration
to compensate. Regardless of all of these trends, the amount of FDI investment
Vietnam received recorded incessant increases over the year of 2021 (see Figure
3.1.) As of December 2021, the Vietnam economy recorded a total US$ 19.74
billion of foreign investments, which was 1.2% lower than that of the same month
in 2020.

Figure 3.1. Vietnam Foreign Direct Investment 2021-2022 (billion USD)

Source: Ministry of Planning and Investment, Vietnam (2022)

Although there are losses, these are the setbacks caused by the pandemic,
and the damage that Vietnam was inflicted on by the pandemic was significantly
less severe compared to other South-East Asian countries (see Figure 3.2.). In the
2015-2019, Vietnam’s GDP growth rate was constantly at the top of South-East
Asia. The end of 2019 marked a significant decline in all five countries surveyed,
but Vietnam still retained its dominant position as the leading economy in terms of
GDP growth. The projections for 2021 expected even more promising results for
Vietnam, quickly recovering and perhaps even surpassing the previous levels of the
previous years. 

Figure 3.2. South-East Asian countries’ GDP growth rates in 2015-2021

Source: National General Statistics Office of Vietnam (2022)

According to the Ministry of Planning and Investment (2022), from the

amount of FDI inflows in 2021, a total of 1,738 new projects received investment
registration certificates, an increase of approximately 31.1% compared to 2020. A
total capital investment of 15.2 billion USD has been pooled to these projects for
investments. Aside from the newly found projects, there also have been 985 projects
that registered for an adjustment of FDI investments, with the total registered capital
investment of more than 9 billion USD. There were also 3,797 available for share
purchase by the investing countries, with the accumulating registered capital of 6.9
billion USD.

Similar to past years’ statistics, manufacturing and processing hold the lead
in terms of FDI attraction, with a total registered investment capital of more than
18,000 million USD. It is also noteworthy that although 23 new electricity
production and distribution projects were registered in 2021, this industry ranked
second in terms of investment capital registration (see Figure 3.3.). 

Figure 3.3. FDI attraction by Industry in Vietnam, as of December 2021

(million USD)

Source: Ministry of Industry and Trade (2022)

According to investing countries of FDI, Vietnam had 106 FDI investors in

the year of 2021. Following the previous years’ pattern, the majority of these FDI
investors were Asian economies. Singapore held the lead in terms of the total
amount of capital investment, followed by South Korea (see Figure 3.4.). In 2020, it
was China that held the third place in terms of FDI investment to Vietnam, but this
spot was replaced by Japan in 2021. 
 Figure 3.4. Vietnam FDI attraction by investing countries and by recipient
locations, as of December 2021

Source: Ministry of Industry and Trade (2022)

Figure 3.4. also shows the cities/provinces with the highest amount of

invested FDI. Hai Phong topped the list with a total of 5.26 million USD,
surpassing last year’s first ranker Long An to become the most FDI-invested city in
Vietnam. Long An is thus came second in the list, followed by Ho Chi Minh City,
Binh Duong, Bac Ninh, and Hanoi in the sixth place. A look at these graphs and
statistics reveals a wide range of very competitive sources of FDI for Vietnam as
well as sources of FDI destinations in terms of Vietnam industries as well. 

Two key takeaways from these graphs include: (1) The amount of FDI
investment each sector and industry received varies greatly, revealing the imbalance
in terms of the attractiveness in the essence of each industry. The diverse range of
industries that receive FDI investments in Vietnam indicates the wide and diverse
sources that Vietnam possesses. The absolute dominance of the manufacturing and
processing industry reflects the competitive edge of Vietnam in this sector, creating
a potential for Vietnam to further increase the efficiency of products in this field;
and (2) the majority of foreign investors lay their focus on big industrial cities in
Vietnam with good systems of infrastructure. 

3.1.2. Current situations of HDI 

According to data reported from the UNDP Development Report published

in 2019, Vietnam’s HDI during the 1990-2018 period was among the fastest
growing HDI in the world (Nguyen, 2019), with an annual increase of roughly
1.36% (see Figure 3.5.). Vietnam HDI value in the year 2019 was 0.704, making it
eligible for Vietnam to be listed as an economy with high levels of HDI. In the
thirty-year period, Vietnam’s HDI increased by more than 45 percent, with life
expectancy since birth increased by almost 5 years, expected year of schooling
increased by 4.9 years, and GNI per capita to almost increase fivefold. These
achievements are an all-out effort of many different sectors in Vietnam. To be able
to acquire such an impressive feat, the public sectors and industries in Vietnam have
embarked on a journey where the development of people-centered issues are put at
the very first priority. 

The 2019 UNDP Development Report also commended Vietnam on its

capability to constantly and gradually increase its HDI status while keeping the
control of issues that may give rise to potential inequalities. This made the human
development program in Vietnam to be set in a very sustainable development
scheme, and thus ensure the impressive HDI growth rate. 

Regarding the sustainability of Vietnam’s HDI growth, the Human

Development Report emphasizes the amount of forest percentage in Vietnam
belongs to the top three countries with the highest forest coverage globally. Vietnam
was extremely successful in carrying out an HDI development roadmap that keeps
the threats of social inequalities and environmental deterioration controlled, risks
that many countries may fall into while attempting to develop their economy.
 Figure 3.5. Vietnam’s HDI based on the indexes of the three sub-indices

Source: 2019 UNDP Development Report

In the 2020 UNDP Development Report, Vietnam’s HDI grew to 0.706 in

2020, a slight increase compared to 0.704 in 2019. Although an increase of 0.2% is
a very trivial growth, the 2019-2020 period was the time when the pandemic struck
the whole world and froze economies globally. To be able to keep an upward
development in terms of HDI, without compromising the social equality as well as
environmental conditions is a highly commendable achievement of the Vietnam
economy in the past few years.

3.2. The impact of FDI on HDI in Vietnam

 From the theoretical and empirical analysis clarified in previous chapters of

this research paper, combined with the current situations of FDI and HDI in
Vietnam, it can be inferred that the impact of FDI on HDI in Vietnam is relatively
small when comparing the scale of the increase in both FDI inflows and HDI. From
the empirical results, both developing countries as a whole and Asia in particular
exhibit no significant effect of FDI on the HDI statistic so Vietnam, as part of the
developing countries and Asia continent, shows weak evidence of FDI’s actual
effect on the level of human development. From a qualitative perspective, the
impact of FDI on HDI also demonstrates little significance due to FDI benefits’ lack
of comprehensive focus on dimensions of human development, which has been
discussed in Section 2.5. in the analysis for developing countries as a whole.

Regarding the impact on income, the FDI sector contributes significantly to

job creation for workers. According to the General Statistics Office (2019), the
results of the Labor-Employment Survey in the first quarter of 2019, the FDI
enterprise sector has been creating jobs for 3.8 million workers, accounting for over
7% of the total number of employees. total labor force (over 54 million employees),
accounting for more than 15% of the total wage employment (25.3 million people)
in Vietnam. Besides creating jobs directly, the FDI sector also indirectly creates
jobs for a multitude of workers in supporting industries or other businesses in the
supply chain of goods for FDI enterprises. The average salary of employees
working in FDI enterprises is higher than in the state or non-state sectors.
Specifically, the average salary of workers in the FDI sector is 8.2 million
VND/month, of which it is 9.2 million VND/month for male workers and 7.6
million VND/month for female employees. Meanwhile, workers in the state sector
have an average salary of 7.7 million VND/month and in the non-state sector it is
6.4 million VND/month (GSO, 2019).

Nevertheless, acknowledging the fact that FDI increased by nearly 88 times

and GNI per capita increased by roughly 5 times over the 1990-2019 period (the
author’s calculation based on the data from World Bank and UNDP, 2022), the
massive gap in the growth rate shows that the fast-paced development of FDI
inflows in Vietnam does not necessarily lead to the corresponding uplift in the
income of the citizens. The average GNI per capita of Vietnam is also lower than
the average level of developing countries, at 7,433 and 10,583 USD respectively in
2019 (UNDP, 2022). According to Ngo (2021), this is due to the fact that the cash
outflows or remittances from FDI enterprises in Vietnam to their home countries is
increase as evidenced from the report of General Statistics Office (2021), especially
in the 2011-2020 period, an increase of more than 2 times compared the 2001-2010
period. This has caused a plummeting in the resources and money retained for the
domestic economy or Vietnam in this case. Therefore, the benefits gained from FDI
growth for the sake of income amelioration of the locals will be constrained to a
great extent, thus adversely affecting human development in general.

In addition to high wages, from the perspective of education, the FDI sector
makes a vital contribution to improving the quality of Vietnam's human resources
through the internal training system within the enterprise or association with
training institutions outside the enterprise (Do, 2021). Survey data of the Ministry
of Labor, Invalids and Social Affairs in 2017 shows that over 57% of FDI
enterprises implement training programs for employees. In which, self-training
accounts for 40%, association with training institutions accounts for 17%. This
contributes to improving the quality of human resources and labor productivity in
FDI enterprises, promoting the improvement of the quality of human resources in
general in Vietnam through the movement of labor from the FDI sector to others. It
is also undeniable that the FDI sector has contributed to improving the level of
technology, which is an important channel to help Vietnam integrate more and more
deeply in both socio-economic terms with other countries in the region and in the
world by dint of workers’ increased expertise and skills in their jobs. world. FDI is
expected to be an important channel for absorbing advanced technologies in the
world, especially in a number of industries such as electronics, software industry,
and biotechnology.

However, on the flip side, the education aspect of Vietnam also does not
receive sufficient benefits it deserves compared to the large amount of FDI in the
country as the spillover effects of FDI in science and technology improvement is
still very limited. According to data from the Vietnam Chamber of Commerce and
Industry, by the beginning of 2020, only about 6% of FDI enterprises will use
advanced technologies from Europe and the United States. In contrast, up to 30% to
about 45% of FDI enterprises are using Chinese technologies. The age of the
technology used is mainly that of technology from 2000 to 2005 and the majority of
these technologies are medium or medium advanced technologies of the region.
Most of these technologies have not been updated, because FDI enterprises have not
focused many resources on research and development (R&D) activities.

Furthermore, according to UNDP (2020), FDI growth has not had much
positive impact on the education sector, so Vietnam's education, including general
education and higher education, contains a multitude of limitations compared to
education. education of countries. In spite of the fact that Vietnam's budget
expenditure on education has increased in recent years, constituting about 20% of
budget expenditure and about 5% of GDP, as stated by General Statistics Office of
Vietnam, the expenditure structure is not reasonable. In the budget account for
education, only 20% of the recurrent expenditure, only 20% is for research and
development; spending on early childhood education accounts for 30%, while
spending on higher education is only about 6% and this is much lower than other
countries in the region. Therefore, Vietnam's expected average years of schooling
(calculated by UNDP) in 2019 is only 12.7 years, which is quite negligible
compared to other countries in Asia such as South Korea (16.4 years), Thailand
(14.7 years) and even lower than the figures for China (14.0 years), Malaysia (13.7
years), Indonesia (13.6 years) or the Philippines (13.1 years). Because the growth of
FDI inflows has not had a positive impact on the education sector, the education
index in the HDI is low compared to other countries, along with the low level of per
capita income, leading to the slow improvement of Vietnam's HDI compared to the
country’s potential capability.

When it comes to the health aspect of human development, the FDI sector
has actively participated in the process of transferring green technology, fulfilling
social responsibilities, building and raising awareness about the green economy for
workers and consumers. The advantages of FDI for the development of
environmental protection in Vietnam can be mentioned such as the project of
medical wastewater treatment system at Cho Ray Hospital, Phu My 3 Power
Company with the installation of an automatic leak detection system and planting
4,000 trees around the company (Do, 2021).
 In addition to the positive impacts, many environmental incidents caused by
the discharge of FDI enterprises in the past years are concrete evidence of the
negative impacts of FDI attraction on the environment in Vietnam and the health
status of Vietnamese people. Many empirical studies have also demonstrated that
pollution has the ability to "migrate" from developed countries to developing
countries through FDI channels such as the studies done by Grossman and Krueger
(1995). For Vietnam in particular, Vu and Le (2020) found that northern provinces
in Vietnam still suffered acutely from serious environmental repercussions caused
by FDI projects. In reality, Dr. Nguyen Thi Phuong Mai, Institute of Environmental
Science from General Department of Environment (Luu, 2020), said that in order to
reduce costs and increase profits, many FDI enterprises do have waste treatment
systems, but always intentionally flout the environmental regulations imposed by
Vietnam, use sophisticated tricks to stealthily discharge waste into the environment
by building a secret and complicated exhaust system, disguised by a standard
system, which is difficult to detect, such as the case of Vedan Vietnam Company,
Miwon Limited Liability Company, to name but a few. The most famous case in
recent times can be the discharge of toxic waste into the sea by Formosa Ha Tinh
Steel Corporation, causing massive death of seafood creatures in four provinces of
the Central region of Vietnam. Also, many companies or corporations are
considering social responsibility for the environment and labor as a "burden" or just
a way of doing marketing and creating an image to benefit the most businesses. All
of these environmental ramifications leave severe impacts on health

Nonetheless, as the past values of FDI can be used to predict the future
values of HDI and the sub-indices of HDI, in the case of Vietnam, the steady
growth rate of FDI can be used as a reliable baseline to anticipate future ascension
of human development. In the period prior to the pandemic, as FDI net inflows into
Vietnam constantly increased, the score for HDI also demonstrated the same
pattern. In the face of lockdowns and disruptions to economic activities caused by
the COVID-19 pandemic, the amount of FDI inflows still grows incessantly in the
year 2021 thanks to Vietnamese government’s strenuous endeavor to achieve the
dual goals of development: keeping the COVID-19 pandemic under control and
fostering economic activities at the same time, thus building a positive image as an
enticing destination for foreign business operations among foreign investors. With
this reputation, it is reasonable to predict that the values of HDI in Vietnam in the
following years will maintain the upward trend when per capita income, health and
education prospects for Vietnam are brighter. However, a word of caution here is
that this is only for prediction purposes and the significance level of the effect still
remains to be seen.

3.3. Orientation and policy recommendations for promoting FDI and HDI in
Vietnam

Documents of the 13th National Party Congress has determined that by the
middle of the twenty-first century, Vietnam will become a socialist-oriented
developed country; by 2030, it will become a modern industrial developing country
with an upper middle income. To do this, Vietnam needs to effectively deal with the
relationships, in which the relationship between economic growth and cultural
development, progress implementation and social justice, is considered the center.
At the same time, the implementation of rapid and sustainable growth associated
with comprehensive human development is a task that needs to be placed high on
the agenda.

In order to achieve the above goal, the overall orientation is that there needs
consensus between the FDI flows and the change in the way Vietnam use FDI gains
for different human development criteria, ensuring that the results of FDI growth
have an impact on promoting the level of human development. Currently, the
degree of spillover of economic growth to human development has reached level 2,
with the orientation for the period 2021-2030 to reach level 1, that is, when growth
increases to 1%, the level of improvement HDI increases at a rate equal to or greater
than economic growth (Ngo, 2021). This orientation, if implemented, will
contribute positively to improving indicators of social progress for Vietnamese
people.
 In order to accomplish the orientation for a harmony between FDI and HDI,
the research paper has suggested three main policy directions that are going to be
clarified below.

3.3.1. Changing FDI structures in Vietnam

When Vietnam reaches higher levels of development, the orientation of FDI

must now shift from quantity to quality. Therefore, FDI attraction for Vietnam is to
proactively welcome the wave of high-quality investment capital flows from
countries such as the US, Europe, Japan, and South Korea, to name a few and
gradually reduce low-quality capital flows directed at non-priority industries, which
do not ensure the sustainable development goals and development orientation of the
Vietnamese economy according Documents of the 13th National Party Congress.
FDI projects need to focus on industries capable of enhancing added values and
provincial competitiveness, which is the immediate priority. For the short-term
priority, concentrating FDI resources on industries with strong competitiveness
whereas in the long term, the ultimate goal of FDI attraction must be for the sake of
market integration and skills development. The restructuring of the market and
investment partners should also pay special attention to the impact of the industrial
revolution 4.0 (Industry 4.0), the introduction of new-generation investment and
international trade agreements, the changing economic circumstances in the world
and Vietnam's current socio-economic development situations. Furthermore, it is
imperative that Vietnam diversify the forms of FDI flows into Vietnam like
focusing on 100% foreign-invested companies, expanding the methods for
equalizations of FDI firms and mergers and acquisitions. These deeds must go along
with stricter requirements related to assistance provision in upgrading the core
competencies of domestic firms to avoid losses for domestic industries and
maximize the spillover effects.

3.3.2. Encouraging inclusive growth on a large scale

Inclusive growth, indicating a quick and sustainable growth that leaves no

one behind is the most important way to achieve advances in human development in
countries with a low level of development (UNDP, 2015). There are three areas,
according to UNDP, that make up pillars of inclusive growth: (i) decent work
productivity; (ii) social services (especially education and medical); and (iii) social
security. When implementing inclusive growth, Vietnam can relish comprehensive
development both in economic and social aspects, thus allowing the large amount of
FDI net inflows to exert a genuine impact on HDI.

The inclusive growth can first be implemented by expanding productive

employment, defined as “employment yielding sufficient returns to labor to permit
the worker and her/his dependents a level of consumption above the poverty line”
(ILO, 2012). This goal is ensured by control inflation and maintain macroeconomic
balances at a reasonable level by dint of prudent monetary and fiscal policies,
flexible exchange rate policies, and at the same time ensuring the inclusiveness of
growth by making fiscal policy more progressive. Improving the efficiency of the
economy by accelerating domestic reforms in parallel with efforts to strengthen
international integration also plays an integral part, as well as enhancing
connectivity and technology absorption capacity for better innovation and closers
links between domestic economic sector and the FDI sector.

Inclusive growth also entails improving education and health systems to

meet the needs of the new stage of development, specifically:

 maintaining achievements in basic services at the primary and lower

secondary education levels; increasing focus on quality and accessibility at
the preschool, vocational and tertiary levels to enhance people's ability to
seize job opportunities that require higher-level skills and qualifications;
 undertaking a comprehensive assessment of the methods in which resources
are mobilized and managed prior to the expansion of socialization;
 have a new mindset on the State regulation of these public services to ensure
fairness and efficiency.

Vietnam even needs to renovate the social security system to ensure greater
coverage and greater efficiency, thus allowing people and the economy to be more
resilient to shocks and increase the ability to invest for the future and seize more
productive employment opportunities.

3.3.3. Fixing the distribution of the benefits gained from FDI growth to human
development dimensions

FDI attraction and growth policies need to be associated with creating

conditions for everyone to have equal opportunities for development, as well as to
participate in the economic development process. When economic gains from
foreign investment are achieved, they should be used to improve aspects related to
human development. Accordingly, Vietnamese government should pay more
attention to investment in education, health care, physical training and sports,
culture and art with the aim of comprehensive human development.

The gains from FDI projects need to be closely correlated with the
amelioration of living standards for all people through income redistribution and
redistribution policies. Therefore, the growth model for people needs to require
effective use of two income distribution methods including: (i) Functional income
distribution, i.e. income of each person is determined on the basis of their
contribution in terms of quantity and quality of resources that they contribute in
generating income for the economy in general and the specific FDI project in
particular; (ii) Redistribution of income in the form of direct (taxes, subsidies) and
indirect (through pricing policy to access public services) for FDI corporations to
contribute to the regulation of income between classes in society and towards
increasing access to health and education services for all classes of the population.
CONCLUSION

Conclusion of research results

The research paper has empirically examined the impact of Foreign Direct
Investment (FDI) on Human Development Index (HDI) over the period of 30 years
from 1990 to 2019 in 45 developing countries around the world. With the adoption
of Pesaran CD test, CIPS unit root test, CCEMG estimator and panel Granger
causality test, the research paper has come to the conclusion that FDI did not have a
statistically significant impact on the changes in HDI over the given period in
developing countries, which still holds true when the sample is divided into sub-
groups based on continents. This empirical result can be explained by the failure to
harness the gains from FDI for the sake of better human development and the
overwhelming effects. Nevertheless, FDI can be employed as a basis for predictions
of future HDI values and vice versa but that does not take away the main message
that is FDI does not produce a significant effect on HDI, matching with the results
obtained from previous literature of Cesar et al. (2006), Cao et al. (2017), Pablo et
al. (2018) and Marius (2020).

With regard to the implications for Vietnam, the research paper has assessed
that the impact of FDI on HDI in the country, similar to other developing countries,
exhibits little validity in reality because the unequal distributions of the benefits
gained from FDI, especially for the education sector. With a view to addressing the
roots of the issue in the dynamics between FDI and HDI, a consent must be
achieved between FDI attraction policies and the use of FDI gains for better human
development. Multiple policies, as proposed by this paper, will need to be put into
practice, ranging from changing FDI structures to encouraging large-scale inclusive
growth and reforming the distribution of FDI gains for human development
dimensions.
Contribution of the research

This research paper has provided an up-to-date system of literature on the

theoretical and empirical effects of FDI on HDI from multiple perspectives: a
country, a region or a group of selected countries. In addition, the research has
contributed to the world of academic research into the dynamics between FDI and
HDI by conducting a study of the largest scale compared to past studies: 45
developing countries over a period of 30 years stretching to the latest year compared
to other studies. By doing so, this research paper has confirmed the results of no
significant impact of FDI on HDI in developing countries and pointed out the
rationales behind these empirical results for these nations to contemplate and think
of the appropriate course of actions to enhance their situations of FDI and HDI. The
research paper goes even further by discussing the implications for Vietnam in great
details to act as a reference for Vietnamese government and policymakers to base
on and take proper measures for a better harmony between FDI and human
development.

Limitations and Suggestions for Future Research

Although the research is successful in attaining its set objectives, it still has
drawbacks as the sample size does not include all developing countries due to the
lack of data of certain years in certain countries. The robustness of the CCEMG
estimator also needs to be strengthened with the application of two or more other
dynamic panel estimators to guarantee reliable coefficient estimations, which
cannot be realized due to the time and paper length constraints. Moreover, possibly
most importantly, the specified model for future research can attempt to try with
other more variables so as to determine more variables that actually have a
significant impact on the HDI statistic so as for the governments of developing
countries can deploy corresponding policies to consolidate their level of human
development.
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