Problemstatement
ThecentralassumptionoftheSolow’s(1956)growthmodelisa positivenexusbetweensavingrateandeconomicgrowthinwhichsavingrateplaysaroleofc onditionalfactortopushgrowth.Thismodelimpliessomepolicyimplicationsforac o u n t r y t o concentrateo n increasingsaving,thuseconomicg r o w t h willi n c r e a s e inrespons e.However,inverselyifthereisapossibilityofnegativeimpact,acountryshallf o c u s onremo vingbarrierstogrowthinsteadofaccumulatingsaving.
Therearesomerobustempiricalfindingsaboutthepositiveassociationbetweensavingandgro wth.Nevertheless,this correlationdoesnotimplyacausaldirectionamongstthem,andthe nthis controversyisstillunsolved.Moreover,thedebateconcerningwitht h e priorityofpolicyimp licationfortheseindicatorsisanimportantissueraisedatthecurrentmacroeconomics,asstate dbySchmidt-Hebbeletal(1996).Hence,determiningt h e causaldirectionofsaving- growthlinkageiscrucial,andhasmanyimplicationsforp o l i c y makersindevelopingcountri es.
Atthenotionofgrowthtosaving,ithasbeensupportedbysomeempiricalevidenceso f sever alrecentstudiesanalyzingindevelopingcountries.Forinstance,intheresearchbyRamesh(2 006),hefindsthatinthegroupoflow- middleincomecountriesthereismostlythecausaldirectionfromgrowthtosaving.Furthe rmore,thestudybyPradeep,Pravakar,andRanjan( 2 0 0 8 ) alsoshowst h e empiricalevide ncesf r o m 5 countries–Bangladesh,India,Pakistan,SrilankaandNepal–thereisacausal directionf r o m growtht o saving,however,o n l y Bangladeshwithb i - d i r e c t i o n a l causality.
In an open economy, domestic investment is influenced by both domestic and foreign savings, with foreign savings typically represented by international capital inflows These inflows are expected to supplement domestic savings, thereby enhancing investment and promoting economic growth This theory is particularly relevant for foreign direct investment (FDI), which is considered more stable and predictable than other forms of foreign savings Research by Maite, Ana, and Vicente (2004) highlights that FDI positively impacts both GDP and gross domestic savings (GDS) in Mexico, reinforcing the connection between economic growth and domestic savings However, a contrasting study by Ahmad, Marwan, and Salim (2002) on Malaysia, Thailand, and the Philippines reveals that foreign savings negatively affect domestic savings in both the short and long term Furthermore, their findings indicate that the causal relationship runs from foreign to domestic savings in the long run, with no reverse effect observed.
In 1994, a crisis erupted in Latin America when Mexico's peso was devalued, leading to significant capital outflows and turmoil across the region In contrast, East Asian economies remained largely unscathed by this crisis Economists suggest that Latin American countries are more sensitive to shifts in investor sentiment and fluctuations in international capital flows compared to their Asian counterparts This vulnerability is linked to domestic saving rates, as higher savings can mitigate the impact of capital outflows during crises During this period, East Asian nations experienced a surge in foreign investment, while Latin American countries saw a substantial decline in their domestic saving rates.
In mid-1997, the Asian crisis originated in Thailand and quickly spread to several other countries, casting doubt on previously held economic notions following the Latin American crisis The sharp devaluation of Asian currencies led to a significant outflow of foreign capital by the end of 1997, mirroring the experiences of Latin America This retreat of foreign investment highlights the critical need for increased domestic financing to counterbalance the decline in capital Given the volatility of foreign capital, which can be withdrawn as easily as it enters, analyzing the relationship between domestic and foreign savings is essential to safeguard domestic economies from potential crises.
Inrecentyears,Vietnam’seconomyhassucceededinthenewstageofdevelopmentafter openingtheeconomyin1988.Especially,VietnamhasbeenamemberofA S E A N since1 995,andWTOsince2007.Then,itseconomicgrowthhasincreasedr a p i d l y intheperio d1989–
2012.TariffsandtradebarriershavebeenreducedstepbystepamongstmembersinASEANan dWTO,therefore,Vietnam’stradebalancehasb e e n improvedaswell.Fromapoor countrywithpercapitaincomeonlyequalsto290
U.Sdollarsayearin1989,Vietnamhasreachedtonearly1000U.Sdollarsayearin2 0 1 2 Moreover,domesticsavingrateandforeigndirectinvestmentinVietnamhavealsoinc reasedannuallythrought h i s period.I n detail,i t s grossd o m e s t i c savinghaschangedfrom 0.837to26.9billionU.Sdollars,andFDIhasalsomovedfrom0.01to
4.7billionU.Sdollars,respectivelyin1989and2012(WorldBankIndicators,2012).
Recently,almostempiricalstudiesfordeveloping countriesshowtheresultsthattheca usaldirectionrunsfromeconomicgrowthtodomesticsaving,however,theroleofFDIt o t h e r e l a t i o n s h i p i s s t i l l ambiguous.A d d i t i o n a l l y , therei s a l a c k o f empiricalevide ncesf o r t h e specificc a s e o f Vietnam,t h u s wec h o o s e t h i s researcht o p i c t o ans werwhatkindofrelationshipstandsbehindtheupwardmovementamongsttheseindicato rsintheperiod,1989–2012.
Researchobjectives
Ass o m e issuesmentionedo n t h e p r o b l e m statementabove,t h e y castanempiricalresea rchobjectivetoanalyzewhetherornotthehypothesisofsaving– growthnexuscomposedbyS o l o w ( 1 9 5 6 ) h o l d s f o r t h e caseo f Vietnam.M o r e o v e r , i n anopene c o n o m y foreigncapitalinflowsplayanimportantroletoincreaseincom e.Therefore,wewanttomeasuretheeffectofdomesticsavingtoeconomicgrowthwithanaddit iono f foreigndirectinvestmentseenasacomponentofforeignsaving.Ontheotherhand,i t m eanst h a t t h e study willanalyzew h e t h e r or n o t domesticandforeignsa v i n g aresourcest oaffectincomep o s i t i v e l y asS o l o w ( 1 9 5 6 ) ’ s h y p o t h e s i s m e n t i o n s Finallyba sedonthisestimatedresult,thestudywillsuggestsomepolicyimplicationsforthes p e c i f i c caseofVietnamthatrelatetothesavingandgrowthrelationship.
Researchquestions
Ast h e researchobjectivem e n t i o n e d above,t h e s t u d y willdealwitht h e researchq u e s t i o n i n which:Couldanincreaseofeconomic growthinVietnamforyears1989to2 0 1 2 beexplainedbythehighersavingrateandFDI?,ont heotherhand,itmeansthel o n g runcausaldirectionrunningfromdomesticsavingandFDItoeconomicgrowththatexistsornot.
Methodology
2012(discussedindetailatChapter4),thusARDLcointegrationboundtestisemployedtodete ctalong- termcointegrationamongstGDS,GDPandFDI.Basedontheresultsoftheboundtest,wewille m p l o y V E C M t o estimates h o r t terma n d l o n g t e r m n e x u s betweent h e s e variable s.Finally,tomakethefindingsmorerobust,wemustcombinetheestimatedresultswithth estatisticalmeasurementofsomerelevantindicatorsinthediscussion.
Researchscope
2 0 1 2 T h e analysisconcentratesondealingwiththeresearchquestionsraisedabove. Furthermore, becauset h e timeseriesspanofVietnamdataislimited,thenitisimportanttonotethatso mem o r e relevantvariablescouldnotbeaddedintotheestimationto analyzetheinteract ionbetweeneconomicgrowthanddomesticsaving,butonlyFDI(Modigliani,1 9 7 0 ; McKinnonandShaw,1973).
Structureof thestudy
The study is structured into five chapters The first chapter outlines the problem statement, research objectives, and research questions, while also defining the study's scope The second chapter reviews relevant theoretical and empirical literature, establishing the conceptual framework In the third chapter, the research methodology is detailed, highlighting the econometric techniques suitable for addressing the research questions and specifying the dataset used The fourth chapter presents and discusses the estimated results Finally, the fifth chapter summarizes the empirical findings and suggests directions for further research based on the study's limitations.
Inthischapter,thestudysummarizestherelevanttheoreticalandempiricalstudiesthatsupportf ortheresearchobjectivesraisedabove.Theempiricalliteraturesarepresentedb e l o w thatc o n c e n t r a t e o n analyzingt h e r e l a t i o n s h i p amongstt h e t h r e e indicators– d o m e s t i c saving,economicg r o w t h andforeigndirecti n v e s t m e n t – i n developingcountriestogivesomeempiricalevidencesthatareexpectedtocontributeforth ecaseo f Vietnam.
Theoreticalliterature
Therearetworelationsthatlinkbetweeneconomicgrowthandsaving:thefirstrelationi s repre sentedbyaggregateproductionfunctioninwhichahighercapitalstockleadstoani n c r e a s e o f o u t p u t T h e secondr e l a t i o n i s basedo n a c o n d i t i o n o f savingandinvestme ntequilibrium,therebyahighersavingratewilldefinitelyincreaseinvestmento r capitalaccum ulation,thenoutputlevelwillbehigher.
Atthefirstrelation,theSolowgrowthmodelhasalinearlyhomogeneousproduction functiono f t h e f o r m𝑌= (�( �(,�(),whereY i so u t p u t ,K i scapitalandL i slabor.Mor eover,t h e p r o d u c t i o n functioni n f o r m o f labori n t e n s i v e thati s writtenas𝑦 𝑓(𝑘)i nwhichkisthecapital-laborratioandequalsto𝑘 =�(/�(.Thereisan assumptionwhichmarginalp r o d u c t o f capitali s p o s i t i v e b u t decreasing,writtenas
𝑓 ′ (𝑘)>0,𝑓 ′′ (𝑘)