Foeign direct investment (FDI) and its implication

Vietnam attracted $36.7 billion of announced greenfield foreign direct investment (FDI); according to the Financial Times data service, Vietnam was the third place of attracting FDI across the world, only after the US and the UK. FDI is an important index to measure the world expectation about the economy’s future growth. Usually when an economy is believed to have a high economic growth rate, foreign investors will see the opportunity and invest in this economy to seek returns from the possible high economic growth in the economy. However, sometimes it is not necessary to be a perfect measurement of the market confidence and the expected growth of one economy.

FDI is determined by several factors. Firstly, the world expectation of future performance of an economy is one and probably the most important factor determine the FDI level. Investment is more likely to have higher return rates in an economy with high economic growth than it in an economy with low economic growth. Secondly, uncertainty is another important determinant. When an economy has a very risky future, this implies that investors in this economy need to face many uncertainties and if their expected returns are not high enough to compensate the high risks, they will drop their investment plans. Uncertainties come from economics as well as politics. Economic uncertainties could be caused by complicated structural changes and sharp increase in the numbers of players in the economy; political uncertainties could be caused by highly frequent political shifts, corruption, radical political ideologies and etc. This is why the US and the UK have higher FDI than other countries, the US and the UK are considered to be the economies with the least uncertainties and their 10 year government bond yields are considered as the risk-free market return rate. Thirdly, FDI could be influenced by the local governments and central government’s attitudes towards foreign investors and regulations. This could influence the costs of investment. When the regulators and governments welcome foreign investment, foreign investors could have very low costs and even sometimes they can have immediate returns. However, when governments are afraid that foreign investment could let foreign influence too powerful domestically, they are likely to limit the activities of foreign investors. Fourthly, the domestic investors can influence FDI as well. The financial market has its constraint of opportunities, this means the demand for investment is not infinite. When domestic investors have powerful influence domestically, they have more competitiveness than foreign investors. When domestic investors are growing stronger,  foreign investors do not enough competitiveness, they may not invest as much as previously.

Overall, when the two economies have similar economic and political characteristics, the levels of FDI can be a signal to show which one is expected to have a higher economic growth rate in the future. However, when the economies are at different phases of economic growth and development, the levels of FDI may not be a good index to measure the world confidence of the economy’s future performance. Therefore, Vietnam overtakes China, I still think that the potential of the Chinese economy is much greater than Vietnam, as I think that the differences in the levels of FDI are caused by the regulators’ attitudes, and more importantly two economies having different development phases and two countries’ domestic investors’ strengthen.