Determinants of FDI into China and Vietnam: A comparative study

Since the inception of economic reforms, China in 1978 and Vietnam in 1986, both countries have become successful examples of transition to a market economy. Over their courses of reform, attracting substantial and rising amounts of inward FDI has been a key focus of their market-oriented policy reforms. Yet, the last two decades have experienced a widening gap in inward FDI between these two countries even though the context and characteristics of their economic reform are relatively similar. Therefore, this paper aims to address the question "What has caused the substantial gap in FDI inflows between China and Vietnam?" through a comparative study of the FDI determinants. In other words, this paper revisits the determinants of FDI into China and Vietnam by employing an augmented gravity model and using a panel dataset containing information on bilateral FDI and a large set of acroeconomic variables over the period 1994-2008. The main finding is that the widening gap in inward FDI flows between China and Vietnam can be explained by two broad sets of main factors: one related to institutions and another to domestic macroeconomic stability.