Research Journal of Economics and

Journal of Economics and Development Vol. 20, No.1, April 201832

Journal of Economics and Development, Vol.20, No.1, April 2018, pp. 32-47 ISSN 1859 0020 | DOI: 10.33301/JED-P-2018-20-01-02

Impact of Globalization on Economic

Growth in Vietnam: An Empirical Analysis

Tran Tho Dat

National Economics University, Vietnam

Email: tranthodat@neu.edu.vn

Nguyen Thi Cam Van

National Economics University, Vietnam

Email: ncvantkt@neu.edu.vn

Abstract

This study aims at investigating the impact of globalization on economic growth in the case

of Vietnam. Empirical analysis is done by using time series data for the period from 1995 to

2014. The paper tested the stationary cointegration of time series data and utilized the error

correction modeling technique to determine the short run relationships among economic growth,

globalization, foreign direct investment, balance of trade and exchange rate variables. Then,

the long run relationship between economic growth and the variables representing economic

integration were estimated by ordinary least square. The results show that globalization, measured

by the KOF index, promotes economic growth and Vietnam has gained from integrating into

the global economy. The overall index of globalization had positively and significantly impacted

the economic growth in Vietnam. The results also indicated that economic globalization had a

significantly positive effect on economic growth in the period examined. The study further revealed

that foreign direct investment and the exchange rate affect economic growth positively whereas

balance of trade affects economic growth negatively.

Keywords: Globalization; economic growth; trade balance; foreign direct investment;

cointegration.

JEL code: F63, O47, C32.

Received: 13 October 2017 | Revised: 15 December 2017 | Accepted: 1 Febuary 2018

Journal of Economics and Development Vol. 20, No.1, April 201833

1. Introduction

Globalization reflects an ongoing process of

greater interdependence among countries and

their citizens (Fischer, 2003). There are four

main driving forces behind increased interde-

pendence: trade and investment liberalization,

technological innovation and the reduction of

communication costs, entrepreneurship, and

global social networks. Globalization is de-

scribed as the growing economic interdepen-

dencies of countries worldwide through the

increasing volume and variety of cross-border

transactions in goods and services and of inter-

national capital flows, as well as through the

rapid and widespread diffusion of technology

and information. As a multidimensional con-

cept, globalization expresses the extension pro-

cess of economic, political and social activities

across national borders.

Today, there are two main views on glo-

balization, one given by anti-globalists and

the other by supporters of globalization. The

anti-globalists view globalization as a con-

trolling and influencing force used by overseas

corporations to dominate international trade

(Konyeaso, 2016). Western organizations have

throughout the years increased their commit-

ments in developing countries due to this be-

ing more profitable for them. One reason is

due to the large quantity of resources found in

these parts of the world. Many highly global-

ized developing countries have not been able

to profit from globalization and are still facing

the same problems they have been facing for

many decades. According to the globalists, glo-

balization is viewed as a beneficial process. It

is presumed the only true way to beat poverty

(Konyeaso, 2016). They argue that one of the

main characteristics of globalization is greater

trade in goods and services both between na-

tions and within regions. Many of the industri-

alizing countries are winning a rising share of

world trade and their economies are growing

faster than in richer developed nations, espe-

cially after the global financial crisis. Anoth–

er important characteristic of globalization is

the increasing transfers of capital, including

the expansion of foreign direct investment, by

trans-national companies and the rising influ–

ence of sovereign wealth funds. Foreign direct

investment will help developing nations to in-

dustrialize, create jobs, bring business opportu-

nities, and acquire manufacturing skills (Kon-

yeaso, 2016).

Globalization could be either a success or

a failure depending on its management (Sti-

glitz, 2002). There is success when it is well

managed, for instance in the case of East Asian

countries. Their success is based on exports,

closing technological, capital and knowledge

gaps. However, there is failure when global-

ization is managed by international economic

institutions. Stiglitz argued that the problem is

not with globalization but with how it is man-

aged by international institutions who set the

rules of the game.

Following the globalization trend, Vietnam

has made considerable efforts for economic in–

tegration with the world since the late 1980s.

Vietnam joined ASEAN, APEC, and ASEM

in 1995, 1998, and 2001. The country contin-

ues to move toward greater international eco-

nomic integration, through more opening up

of trade with China, expanding bilateral links

with the US, accessing the WTO in 2007, and

signing the TPP in 2015. In addition to a more

Journal of Economics and Development Vol. 20, No.1, April 201834

open trade policy, Vietnam has improved the

investment environment to attract foreign di-

rect investment. In Vietnam, trade and foreign

investment are the two strongest linkages to

the global economy. In more than 20 years,

Vietnam has made a number of convincing

economic achievements. The average annu-

al economic growth rate was 6.5 percent over

the period 1995 – 2016. In 1995, Vietnam’s

GDP per capita of US$ 288 placed it among

the poorest countries in the world. In 2008, a

GDP per capita of US$ 1164 led to Vietnam’s

attainment of lower middle-income status by

the World Bank classification. In the year 2016,

GDP per capita reached US$ 2185. Economic

growth in Vietnam has been accompanied by

trade liberalization reforms that have led to an

explosion in international trade. Exports as a

share of GDP grew from 32.81 percent in 1995

to 93.62 percent in 2016, while imports grew

from 41.91 percent to 91.06 percent over that

same period. The key to the remarkable gains

of the Vietnamese economy is the liberalization

of domestic markets, foreign investment attrac-

tion, a trade openness policy and other macro-

economic policies.

Vietnam has experienced an increasing lev-

el of the overall globalization index (KOF),

from 29.29 in 1995 to 56.69 in 2014. Due to

the increasing trend of globalization, finding

the effect of globalization on economic growth

is most important. However, the relationship

between globalization and economic growth in

Vietnam has not been deeply evaluated by pre-

vious researchers (for example John Thoburn

(2004), Jenkins (2006), and Pham Lan Huong

(2013) etc.) and there is apparently a need to

fill this research gap. Therefore, the aim of this

study is to investigate the impact of globaliza-

tion on economic growth in Vietnam for the pe-

riod from 1995 to 2014.

This paper is organised as follows: after a

short literature review of relevant studies on the

impact of globalization on economic growth,

the methodology of the study is presented. The

next section exposes the main findings, and the

final section concludes the paper with several

policy recommendations.

2. Literature review

The relationship between globalization and

growth is a heated and highly debated topic in

the growth and development literature. Econo-

mists have long been interested in determining

how globalization affects economic growth.

Theoretical growth studies report a contradic-

tory discussion on the relationship between

globalization and growth. Some of the stud-

ies found a positive effect of globalization on

growth, others argued that globalization has

a harmful effect on growth. Despite the con–

flicting theoretical views, many studies have

empirically examined the impact of globaliza-

tion on economic growth in developed coun-

tries as well as in developing ones. Many of

them appeared after 2006 when Dreher intro-

duced a new comprehensive index of global-

ization – KOF (an acronym for the German

word “Konjunkturforschungsstelle”). The

overall globalization index (KOF) covers the

economic, social and political dimensions of

globalization. Economic globalization is char–

acterized as long-distance flows of goods, cap–

ital and services, information and perceptions

that accompany market exchanges. Political

globalization is characterized by a diffusion

of government policies. Social globalization is

Journal of Economics and Development Vol. 20, No.1, April 201835

expressed as the spread of ideas, information,

images and people (Fidelis, 2012).

There have been numerous studies on the

effects of globalization on economic growth.

Dreher (2006) examined the impact of global-

ization on the growth of 123 countries between

1970 and 2000. Ordinary Least Squares (OLS)

regression and Generalized Method of Moment

(GMM) techniques have been used for the anal-

ysis. The overall result showed that globaliza-

tion promotes economic growth. The economic

and social dimensions have a positive impact

on growth whereas the political dimension has

no effect on growth.

Zhuang and Koo (2007) used a panel data-

set covering 56 countries in the period from

1991 to 2004 to investigate the effects of glo–

balization on economic growth. The variables

include GDP growth rate, labor, capital, foreign

direct investment, portfolio capital flow, trade,

consumer price indices, per capita GDP, hu-

man capital, indicators of technology, and real

exchange rates. By using the generalized least

squares estimation, results strongly suggest

that economic globalization has a significant–

ly positive effect on economic growth for all

countries.

Rao and Vadlamannati (2009) examined the

impact of globalization on the growth rate of

21 poor African countries during 1970 – 2005.

The variables used in the study include log(out-

put per worker), log(capital per worker), index

of globalization, index of institutional reforms,

the rate of inflation and the ratio of current gov–

ernment expenditure to GDP. They employed a

systems GMM method of estimation and found

a small but significant positive association be–

tween globalization and economic growth in 21

low-income African countries.

Kakar (2011) determined the long run effect

of globalization on economic growth in Paki-

stan from the year 1980 to 2009 by employing

the time series data, co-integration and error

correction technique. The variables include

GDP growth rate, foreign direct investment

inflow, population growth rate, real effective

exchange rate, government expenditure on

education and health as a percentage of GDP

and trade as a percentage of GDP. The results

show that globalization can be a useful tool for

economic growth for a developing country like

Pakistan.

Plegrinova et al. (2012) studied the rela-

tionship between globalization and important

macroeconomic indicators in twelve developed

countries on the European and North American

continents from 1995 to 2009. They considered

the effect of rising FDI, balance of payments

and GDP per capita on the KOF globalization

index. By using nonparametric regression mod-

el (panel data regression), the results indicate

that there is a statistically significant relation–

ship between the KOF index of globalization

and foreign direct investments as well as GDP

per capita. They could not accept the hypothe-

sis of a statistically significant relationship be–

tween the KOF index of globalization and the

balance of payments of selected countries.

Umaru (2013) analyzed the effects of glo–

balization on Nigeria’s economic performance

between the years 1962 and 2009 by using

the Annual Average Growth Rate technique.

He found that globalization affects the petrol,

manufacturing industry and solid mineral sec-

tors in negative ways, but it effects the agricul–

ture, transportation and communication sectors

in positive ways. Konyeaso (2016) also stud-

ied the impact of globalization on the Nigerian

economy between 1986 and 2013. By using the

multiple regression technique, the results show

that there is a positive relation between glo-

balization and economic growth. The Nigerian

economy is gaining from globalization main-

ly due to foreign direct investment and trade

openness.

Chelly and Deluna (2014) examined the re-

lationship among economic growth, financial

and trade globalization in the Philippines from

1980 to 2011. The variables considered in the

study include real GDP growth rate, financial

openness (the sum of FDI inflow and external

debts divided by GDP) and trade openness (the

trade to GDP ratio). The study used the Vector

Autoregressive VAR(1) model and the Grang-

er Causality test. It was found that the current

value of GDP is positively affected by the pre–

vious value of itself and trade openness. The

dex of globalization (KOF) had a positive and

significant impact on economic growth in the

region. Economic and political globalization

positively impacted the economic growth but

social globalization did not affect growth. In–

flation, infrastructure, quality of education,

technological preparedness, and government

spending also had positive impacts on econom-

ic growth.

Olimpia Neagu (2017) studied the impact of

globalization on economic growth in Romania

for a time span of 24 years between 1990 and

2013. In order to highlight the impact of glo-

balization, expressed by the KOF globalization

index and its components, on the economic

growth rate, the author estimated an econo-

metrical model and found a statistically strong

and positive link between the GDP per capita

dynamics and the overall globalization index

as well as between the GDP growth rate and

economic and political globalization. Howev-