Assessing the Impact of Foreign Direct Investment and Labor Force on Vietnam’s Economic Growth: A Vector Error Correction Model Approach

Abstract

This study investigates the impact of foreign direct investment (FDI) and the labor force on Vietnam’s economic growth using the Vector Error Correction Model (VECM) with data spanning 2000 to 2023. The findings reveal that, in the long run, gross fixed capital formation (GFCF) and the labor force significantly and positively influence GDP per worker, while FDI shows no notable impact, and trade exhibits a negative relationship. In the short term, shocks from trade, FDI, and GFCF strongly affect economic growth, though these effects diminish over time, underscoring the sustained role of GFCF and labor. The study highlights the limited long-term contribution of FDI, indicating its effectiveness hinges on the economy’s capacity to absorb foreign capital. Policy implications include prioritizing infrastructure development, reforming trade policies, attracting high-tech FDI, and enhancing labor skills to ensure sustainable economic growth in Vietnam amidst globalization.