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Foreign direct investment, economic growth, governance quality and the informal economy: Empirical insights from an emerging economy

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  • Huynh, Cong Minh
  • Tran, Nam Hoai

Abstract

This paper empirically investigates how foreign direct investment (FDI) inflows affect the informal economy by using a panel data set of 63 provinces in Vietnam from 2006 to 2021. The results show that: i) FDI inflows reduce the informal economy through the channels of boosting economic growth and improving local governance quality; ii) the formal economy and the informal economy are substitutes; iii) local governance quality reduces informal activities. Additionally, poverty and unemployment emerge as the primary forces driving Vietnam's informal economic activities, while strategic fiscal policy and urbanization can effectively shrink the informal sector.

Suggested Citation

  • Huynh, Cong Minh & Tran, Nam Hoai, 2025. "Foreign direct investment, economic growth, governance quality and the informal economy: Empirical insights from an emerging economy," International Economics, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:inteco:v:183:y:2025:i:c:s2110701725000423
    DOI: 10.1016/j.inteco.2025.100619
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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