IMPACT OF PUBLIC INVESTMENT ON ECONOMIC GROWTH
IN VIETNAM

A DISSERTATION PAPER
Presented to
the Faculty of the Graduate Program
of the College of Arts and Sciences
Central Philippine University, Philippines
In Collaboration with
Thai Nguyen University, Vietnam

In Partial Fulfillment
Of the Requirements for the Degree
DOCTOR IN PUBLIC ADMINISTRATION

NGUYEN PHUC AI
NOVEMBER, 2020


i
ACKNOWLEDGEMENT
The author wishes to convey the gratitude to the following persons who
wholeheartedly devoted and helped make this piece of work a reality:
To the leadership of Central Philippine University and leadership of Thai Nguyen
University for their enthusiasm to support executive for the participants who completed the
study program;
To Assoc. Prof. Nguyen Khanh Doanh for his advices, guidance, supervision,
suggestions, and precious time in enthusiastically reading and checking the manuscript,
providing the author useful materials;
To Doctor Reynaldo Nene Dusaran, his incomparable contribution and support to the
development of Doctor of Public Administration program in Thai Nguyen University as well

as his invaluable thoughts, insightful suggestions, useful guidance throughout the thesis work.
To the leadership of International Cooperation Center for Training and Study Abroad
and their staff for their enthusiasm to support executive for the participants who completed
the study program;
To the faculties and researchers of Thai Nguyen University of Economics and
Business Administration for their active involvement and cooperation which made the
conduct of the study possible.
Finally, I specialy would like to give inmost thanks to my family and friends for their
love and support in one way or another, and to all who have contributed to making this study
a success.

Thai Nguyen, November 2020

Nguyen Phuc Ai


ii
LỜI CẢM ƠN
Tác giả xin gửi lời tri ân đến những người đã tận tình giúp đỡ để tác giả có thể hồn
thành luận án này:
Trân trọng cảm ơn Ban lãnh đạo trường Đại học Central Philippine và Ban lãnh đạo
Đại học Thái Nguyên đã nhiệt tình hỗ trợ điều hành cho các học viên đã hồn thành chương
trình học.
Trân trọng cảm ơn PGS. GS Nguyễn Khánh Doanh đã tận tình chỉ bảo, hướng dẫn,
giám sát, góp ý và dành thời gian quý báu trong việc nhiệt tình đọc và kiểm tra bản thảo, cung
cấp cho tác giả những tư liệu hữu ích;
Xin cảm ơn tiến sĩ Reynaldo Nene Dusaran vì những đóng góp, hỗ trợ khơng nhỏ của
ơng đối với việc xây dựng chương trình Tiến sĩ Quản lý hành chính cơng tại Đại học Thái
Ngun cũng như những suy nghĩ, những góp ý sâu sắc, những chỉ dẫn hữu ích của ơng trong
suốt q trình tơi thực hiện luận án;

Cảm ơn Ban lãnh đạo Trung tâm Hợp tác Quốc tế Đào tạo và Du học cùng các cán bộ
đã nhiệt tình hỗ trợ giúp các học viên hồn thành chương trình học.
Xin cảm ơn các khoa, các cán bộ nghiên cứu của Trường Đại học Kinh tế và Quản trị
Kinh doanh Thái Nguyên vì sự tham gia và hợp tác tích cực của họ đã giúp cho việc tiến hành
nghiên cứu trở nên khả thi.
Cuối cùng, xin cảm ơn gia đình và bạn bè của tơi đã dành tình cảm và sự ủng hộ cho
tơi bằng nhiều cách khác nhau, cảm ơn tất cả những người đã góp phần làm cho nghiên cứu
này thành công.

Thái Nguyên, tháng 11 năm 2020

Nguyễn Phúc Ái


iii
COMMITMENT

I assure you that the data and reseach findings in this disertation are honest and have
not been used for publication in any other reseach.
I would like to assure you that all helps for the implementation of the disertation has
been thanked and the information cited in the disertation is clearly indicated.

Thai Nguyen, November 2020
Author of disertation

Nguyen Phuc Ai


iv
LỜI CAM ĐOAN

Tôi xin cam đoan: Số liệu và kết quả nghiên cứu trong luận án này là trung thực và
chưa được sử dụng để công bố cho bất kỳ nghiên cứu nào khác.
Tôi cam đoan rằng tất cả những trợ giúp cho việc thực hiện luận án đã được cảm ơn
và thơng tin trích dẫn trong luận án đều được chỉ rõ nguồn gốc.
Thái Nguyên, tháng 11 năm 2020
Tác giả của luận án

Nguyễn Phúc Ái


v
TABLE OF CONTENTS

ACKNOWLEDGEMENT ........................................................................................................... i
LỜI CẢM ƠN............................................................................................................................. ii
COMMITMENT ....................................................................................................................... iii
LỜI CAM ĐOAN ...................................................................................................................... iv
TABLE OF CONTENTS ........................................................................................................... v
LIST OF TABLES .................................................................................................................. viii
LIST OF FIGURES ................................................................................................................... ix
LIST OF ABBREVIATIONS .................................................................................................... x
ABSTRACT .............................................................................................................................. xi
CHAPTER 1: INTRODUCTION ........................................................................................... 1
1.1. Background and Rationale of the Study .............................................................................. 1
1.1.1. Background of the study ................................................................................................... 1
1.1.2. Statement of the Problem ................................................................................................. 3
1.2. Objectives of the Study ....................................................................................................... 4
1.2.1. General Objective ............................................................................................................. 4
1.3. The Theoretical Framework ................................................................................................ 4
1.4. Conceptual Framework........................................................................................................ 5

1.5. Operational Definition of Variables and other term ............................................................ 7
1.6. Significance of the Study..................................................................................................... 8
1.7. Scope and Limitations ......................................................................................................... 8
1.7.1. Scope of the Study ............................................................................................................ 8
1.7.2. Limitations of the Study ................................................................................................... 9
CHAPTER 2: REVIEW OF RELATED LITERATURE AND STUDIES ...................... 10
2.1. An Overview of economic growth theory and public investment ..................................... 10
2.1.1. Overview of economic growth theory ............................................................................ 10
2.1.2. Public investment theory ................................................................................................ 38
2.1.3. The role of public investment ......................................................................................... 40
2.2. Approaches to estimate relationships in macro economic variables ................................. 41
2.2.1. The Engle-Granger Two-Step Modeling Method (EGM) .............................................. 41
2.2.2. The Engle-Yoo Three-Step Modeling Method (EYM) .................................................. 42
2.2.3. The Saikkonen Method................................................................................................... 43
2.2.4. The Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR) Method ...... 43
2.2.5. The ARDL bound test method ....................................................................................... 45


vi
2.3. Review of related studies................................................................................................... 45
2.3.1. International studies on the relationship between economic growth and public
investment................................................................................................................................. 45
2.3.2. Study on the relationship between economic growth and public investment in
Vietnam .................................................................................................................................... 52
Chapter Summary ..................................................................................................................... 56
CHAPTER 3: RESEARCH METHODOLOGY ................................................................. 57
3.1. Research Design ................................................................................................................ 57
3.2. Population, Sample Size and Sampling Technique ........................................................... 58
3.3. Research Instruments......................................................................................................... 58
3.4. Ethical Considerations ....................................................................................................... 58

3.5. Data Gathering Procedure ................................................................................................. 58
Chapter Summary ..................................................................................................................... 65
CHAPTER 4: DATA PRESENTATION, ANALYSYS AND INTERPRETATION ....... 66
4.1. Economic overview and public investment trend ............................................................. 66
4.1.1. Vietnam economic overview in the period of 1986-2015 .............................................. 66
4.1.2. Import and Export of Vietnam ....................................................................................... 67
4.1.3. Investment and public investment trend ......................................................................... 69
4.1.4. Vietnamese public investment System and Issues ......................................................... 72
4.2. Empirical Results............................................................................................................... 76
4.2.1. Descriptive Statistics ...................................................................................................... 76
4.2.2. Unit root test ................................................................................................................... 77
4.2.3. Empirical results of the impact of Public Investment on Economic growth .................. 78
4.3. Discussions ........................................................................................................................ 84
Chapter Summary ..................................................................................................................... 87
CHAPTER 5: SUMMARY, CONCLUSIONS AND POLICY RECOMMENDATIONS ....... 88
5.1. Summary............................................................................................................................ 88
5.2. Conclusions ....................................................................................................................... 88
5.3. Policy recommendations ................................................................................................... 89
5.3.1. Economic restructuring................................................................................................... 89
5.3.2. Public investment restructuring ...................................................................................... 89
5.3.3. Reduce the proportion of public investment in society's total investment, improve
the efficiency of public investment .......................................................................................... 90
5.3.4. Changing the role of public investment in the economy ................................................ 91
5.3.5. Strict control of public investment ................................................................................. 92


vii
5.3.6. Improve the quality capital and effectively use capital for public investment
activities .................................................................................................................................... 94
5.3.7. Improve the efficiency of the implementation of the National Target Program

(NTP) and others ...................................................................................................................... 96
5.3.8. Prioritize public investment for infrastructure projects .................................................. 97
5.3.9. Strengthen public investment in agriculture and rural development .............................. 98
5.3.10. Promote reformation of SOE sector ............................................................................. 99
Chapter summary.................................................................................................................... 100
REFERENCES ..................................................................................................................... 101
APPENDICES....................................................................................................................... 107


viii
LIST OF TABLES

Table 4.1. Statistics of Variables .............................................................................................. 77
Table 4.2. Unit root test ............................................................................................................ 78
Table 4.3. Bound test results .................................................................................................... 79
Table 4.4. Estimation of ARDL model..................................................................................... 79
Table 4.5. Estimation of long -run variables ............................................................................ 80
Table 4.6. Estimation of ECM variables .................................................................................. 81
Table 4.7. Serial correlation test ............................................................................................... 82


ix
LIST OF FIGURES

Figure 1.1. Conceptual Framework ............................................................................................ 6
Figure 2.1. The classical theory of growth ............................................................................... 10
Figure 2.2. Fix proportion Production function ........................................................................ 17
Figure 2.3. Equilibrium output change with investment .......................................................... 17
Figure 2.4. Production function with some factor substitution ................................................ 19
Figure 2.5. Production function ................................................................................................ 22

Figure 2.6. Output, consumption and investment..................................................................... 24
Figure 2.7. Depreciation ........................................................................................................... 24
Figure 2.8. Investment, depreciation and steady state .............................................................. 25
Figure 2.9. Steady state consumption ....................................................................................... 27
Figure 2.10. The saving rate and the golden rule ..................................................................... 28
Figure 2.11. The saving rate is reduced .................................................................................... 29
Figure 2.12. The saving rate is increased ................................................................................. 29
Figure 2.13. Effects of depreciation and population growth .................................................... 31
Figure 2.14. Effect of population growth ................................................................................. 32
Figure 2.15. Steady - state with technical progress .................................................................. 33
Figure 4.1. GDP growth rate .................................................................................................... 67
Figure 4.2. Total import and export.......................................................................................... 68
Figure 4.3. Trade deficit ........................................................................................................... 69
Figure 4.4. Capital/GDP ratio ................................................................................................... 69
Figure 4.5. Investment at constant 2010 prices by types of ownership .................................... 70
Figure 4.6. Structure of Investment by types of ownership (%)............................................... 71
Figure 4.7. Change of GDP and Investment ............................................................................. 75
Figure 4.8. Description of variables ......................................................................................... 77
Figure 4.8. Cusum test .............................................................................................................. 83
Figure 4.9. Cusum of square test .............................................................................................. 83
Figure 4.10. TFP growth rate for 2006-2015 period ................................................................ 85


x
LIST OF ABBREVIATIONS

GSO

General Statistic Office


WB

World Bank

ARDL

Auto Regressive Distributed Lag

ADF

Augmented Dickey Fuller

GDP

Gross Domestic Product

EYM

Engle-Yoo Three-Step Modeling Method


xi
ABSTRACT
Public investment is considered as the consumption of goods that reduces the saving
and capital investment of an economy. For low-income countries, public investment is a
problem because they spend their scarce resources on the purchase of raw material rather than
on infrastructure, and other economic factors. Public investment also causes inequality
behavior in an economy. The de-unionization cause inequality when public investment
increase and employment reduce which create the phenomenon of wage inequality. Therefore,
the mechanism by which economic growth and inequality related is simply straightforward.

This study uses both qualitative and quantitative methods to assess the impact of
public investment on economic growth in Vietnam based on data from GSO and the World
Bank over 30 years (1986-2015) by applying the autoregressive distributed lag (ARDL)
method. The method was applied to study the effects of public investment on Vietnam‟s
economic growth in both short and long terms. The findings indicate that public investment in
Vietnam in the past period does affect economic growth in the long - run, with positive
effects, while there is no empirical evidence of the impact of public investment on economic
growth in the short - run. This result implies that when the economy needs an investment
environment to attract private investment, public investment does not play an important role.
Meanwhile, in the long term, the role of public investment is significant due to the coefficient
of positive impact. This can be explained by the low efficiency and inadequate management
in public investment together with improperly spread investment portfolio lead to the
situations of capital shortage, prolonged projects, and increases in costs. Therefore, the critical
issue in improving the efficiency of public investment is to assure appropriateness in project
evaluation and selection. To make the right choice, preventing imperfections throughout the
process of the project proposal, project approval in central government and local authority by
checking and developing a well-tailored procedure of project proposal, project selection, and
public investment capital distribution, avoiding overlapping situations, is highly required. It
also may be to continue to privatize public investment projects where appropriate. In addition,
it is necessary to reduce government intervention in the production business sector, to
promote equalization for increasing investment in infrastructure to reduce public debt, to
create an investment environment that attracts domestic private investment and FDI capital,
ultimately boosting economic growth.
Keyword: Public Investment, Private Investment, Economic Growth, ARDL
bound test


1
CHAPTER 1
INTRODUCTION

1.1. Background and Rationale of the Study
1.1.1. Background of the study
Public investment can be defined as an investment that is procured based on the
sovereignty of the state or taxpayer‟s money and a huge amount of public investment has been
made on improving economic infrastructures such as roads, railways, etc. and social
infrastructure such as welfare, education, etc. across the world. Economic infrastructure plays
a crucial role in the improvement of national industrial competitiveness and economic
development since investment in infrastructure provides long-term economic benefits through
increases in output, income, employment, and productivity, or reductions in costs of
production. So many countries around the world have consistently made a huge amount of
investment to improve the level of public economic infrastructure. In recent years, there has
been also a growing need for investment in social infrastructure according to population
growth, aging, and growing gaps in income. However, government financial resources are
limited and many countries across the world have paid a lot of attention to improving the
efficiency of public investment. Public investment has a great impact on the national economy
and requires substantial costs. And, it is very difficult to suspend in the middle of the project
once its implementation is confirmed. Therefore, it is crucial to prepare detailed plans and
appraise the feasibility of the public investment projects accurately. It is also important to
manage and evaluate the investment projects in an intermediate phase whether they are being
implemented as originally planned and whether they are still feasible in new contexts if the
plan has been modified. It is also important to evaluate the investment projects or programs in
an ex-post phase to check if they are effective. In this way, it is very important to establish an
integrated evaluation system (ex-ante, intermediate, and ex-post) over the project life cycles
to improve the efficiency of the overall public investment management.
Public investment is considered as the consumption of goods that reduce the saving
and capital investment of an economy. For low-income countries, public investment is a
problem because they spend their scarce resources on the purchase of raw material rather
than on infrastructure, and other economic factors. Public investment also causes
inequality behavior in an economy. The de-unionization causes inequality when public
investment increase and employment reduce which create the phenomenon of wage

inequality. Therefore, the mechanism by which economic growth and inequality related is
simply straightforward.


2
Vietnam has been making much progress in different fields including economic
growth rate during 30 years since “Doi Moi” from 1990 to 2016 ranging around an average of
6.66 percent, inflation rate controlled at an acceptable level, and growing exports. One of the
key factors in this success is policy renovation in public finance. According to the new public
investment policy (Vietnam Public Investment Law, 2014), public investment consists of the
following

fields:

(i)

investment

in

programs/projects

developing social-economic

infrastructure; (ii) investment in serving activities of governmental organizations, political and
social-political organizations, both domestically and abroad; (iii) investment in supporting
supplies of public services and goods; (iv) and investment from public investment capital
under shares of government in public-private partnership projects.
Vietnam's economy is now integrating into the global economy, improving fiscal
policy (Budget revenue and expenditure suits the economy scale, and overspending rate is in

allowed restriction) which creates trust for international investors and sponsor organizations.
Since 2007, Vietnam became an official member of World Trade Organization (WTO); and
since early 2019, Vietnam has been a member of the Comprehensive and Progressive
Agreement for Trans Pacific Partnership - CPTPP. As a result, Vietnam has been gradually
cutting tariffs as an integrated commitment. Tax reduction means that a part of budget income
through the tax will decrease, and a sharp drop in crude oil price also leads to decreased
budget income. However, Vietnam Government needs to maintain public expenses for social
economics, and infrastructure development, which is far too weak. In the context of high
budget pressures, the need to save government expenses is set. However, to achieve economic
growth and improve the competitiveness of the economy to attract private domestic
investment and foreign direct investment (FDI), it is necessary to improve the investment and
business environment. To improve the investment and business environment, the role of the
Government is to provide public goods and services through investment in technical
infrastructure (e.g., roads, bridges, ports, industrial parks, and so on) and social infrastructure
(e.g., hospital, school, and so on). It is, therefore, necessary to increase public investment by
the government, and public investment must ensure efficiency by attracting private
investment and economic growth.
There are two opposite trends in public investment research. As for the first trend, the
research of Khan and Kumar (1997), Ramirez and Nazmi (2003), Bukhari et al.
(2007) and Haque (2013) showed positive impacts of public investment on economic growth.
On the contrary, some other studies proved that public investment has no or negative effects
on economic growth and creates the situation in which public investment crowds out private
investment (Vedder and Gallaway, 1998; Ghani and Din, 2006; Swaby, 2007; Hatano, 2010).


3
However, not many studies were conducted for the Vietnamese case so far mainly due to the
inconsistent or reliability of the data, and there is no study employing ARDL method to assess
the impact of public investment on economic growth.
Within the scope of this research, the author would like to consider whether public

investment in Vietnam has a positive effect, i.e. public investment has an impact on attracting
private investment and economic growth or not. The questions to be answered in this study
are: What is the role of public investment in Vietnam today? What is the impact of public
investment on economic growth?
Therefore, the author chooses the title: “Impact of public investment on the
economic growth of Vietnam” for the topic of the Ph.D. thesis majoring in Public
Administration. This research is to assess both short - term and long - term influences of
public investment on economic growth. The approach utilized in this study is quantitative for
the empirical studies and qualitative to analyze the impact of public investment on economic
growth in Vietnam for the period of 1986-2015. Moreover, studying the impact of inputs in
general and public investment in particular on economic growth in combination with the
analysis of public investment efficiency to propose some solutions to enhance public
investment efficiency on economic growth is of necessity and importance both in a practical
and theoretical way.
1.1.2. Statement of the Problem
The relationship between public investment and economic growth has attracted a lot of
attention of researchers in the last twenty years but their results also many contradictions.
There have been many buildings in the world to drill test the relationship between public
investment and economic growth. The first direction of research studies focusing on the
relationship between public investment and economic growth, one of the research projects
that are of Barth and Bradley (1987), Easterly & Rebelo (1993), Devarajan et al. (1996),
Aschauer (1998, 2000)... Their conclusion is not the same as giving two opposite argument:
this relationship is positive or negative.
Currently, the causal connection between public investment and economic growth in
Vietnam has not yet been fully explored. The previous studies are limited to the assessment of
the effectiveness of government spending to the economic sector or the phenomenon of
crowding out public investment or individual studies the impact of infrastructure investment
on economic growth. So this study is carried out to address the following research questions:
- Does Public investment impact positive or negative or have no impact on economic
growth in Vietnam?

- What are the weaknesses in public investment in Vietnam in the last 30 years?


4
- What are some recommendations for improving the effectiveness of public
investment as well as promoting the economic growth?
Therefore, the author through qualitative and quantitative research will seek plausible
answers to these questions above and fill the gap of knowledge as well as the method
employing.
1.2. Objectives of the Study
1.2.1. General Objective
The aim of this research is to identify the impact of public investment on economic
growth in Vietnam for the period of 1986-2015. Then, it proposes some solutions to enhance the
effectiveness of public investment in order to encourage sustainable growth in public investment,
contributing to the economic development of Vietnam in the context of globalization.
Specific Objectives:
This study aims to assess the long-term impact of public investment on economic
growth in Vietnam (period of 1986-2015) and the public investment and economic growth of
Vietnam for the last ten-year period from 2006 to 2015. Specifically, this study aims to find
the answers to the following objectives:
- To assess the impact of public investment for economic growth in Vietnam to find
out whether the impact is positive or negative for the period 1986-2015;
- To propose a recommendation to enhance public investment efficiency in order to
encourage sustainable growth in public investment and economy of Vietnam.
Hypothesis
- H1: Public investment have positive impact on economic growth in long - run
- H2: Public investment have positive impact on economic growth in short - run
1.3. The Theoretical Framework
The simplest and famous growth model applied is Harrod - Domar which was
introduced in the 1940s, named after its originators, Roy Harrod - British and Evsey American. The model focuses on the ICOR ratio or capital-outcome ratio, showing the

relationship between investment and growth in the gross product. While the low ICOR ratio
infers the lack of investment, the high one infers the situation of capital wasting. The theory
that explains the relationship between inputs and growth in a national product is called the
production function. The production function is one of the key concepts of mainstream
neoclassical theories, used to define marginal product and to distinguish allocated efficiency,
the defining focus of economics. Cobb-Douglas production function (1928) represent the
technological relationship between the amounts of two or more inputs, particularly physical
capital (K) and labor (L), and the amount of output (Y) that can be produced by those inputs.


5
Growth models are fundamental of two folds: the neoclassical growth model, also
known as the exogenous growth model developed primarily by Solow (1956), and the new
growth theory, also known as the endogenous growth model, pioneered by Romer (1986),
Lucas (1988), Barro (1990), and Rebelo (1991). Economic growth has been emphasized as a
significant factor in many countries for decades. As a discipline, core economic growth theory
was born in the late 1960s. After two decades, growth theory became popular again in the
mid-1980s with the emphasis on long-run growth, which is now called endogenous growth
theory. It is understood that long-run economic growth is at least as important as short-run
fluctuations of growth and in fact, it is even more important than that. For instance, it might
be important to know why the GDP of a country raised three or four percent in the last couple
of months. However, it might be even more important to know why African countries have
quite low GDP rates than their European counterparts. Or why a country‟s GDP fell during
the last century. The new growth theory or the endogenous growth theory underlines the
importance of the latter questions, related to the long-run growth performances, rather than
the former. The name of endogenous growth models is given to these theories since according
to these theories determination of long-run growth rates are explained within the models,
rather than by some exogenous variables. The development of endogenous growth theory has
followed the neoclassic growth theory. Romer (1990, 1997) introduced the incorporation of
resource and development and imperfect competition into the growth framework. Other

researchers, especially, Aghion and Howitt (1992), and Grossman and Helpman (1991) also
considered research and development (R & D) in the growth model.
Robest Solow (1956) tried to explain the origin of growth by a different kind of
production function that allows analysis of the different causes or origins of growth called the
Solow model. The main assumptions of the Solow model relate to the characteristics of the
production function and the evolution of the three inputs of the product (capital, labor, and
knowledge) over time. Public investment which affects strongly the economic growth is also
reflected by aggregate supply and demand. Public investment directly impacts aggregate
demand as government expenditure and aggregate supply as a production function (capital
factor). Public investment has a spillover effect and indirectly impacts aggregate demand by
stimulating private investment and aggregating supply through attracting private investment.
1.4. Conceptual Framework
The neoclassical growth model framework of Solow (1957) should be the basis for
this study. The framework of the growth model takes as its starting point an aggregate
production function of Cobb-Douglas function which related to output to factors inputs and
variable referred to as total factor productivity.


6
(1)

Y= A f(L,K)

Where: Y is real aggregate output;
A is factor productivity;
L is labor force;
K is capital
From production function of Cobb-Douglas function, if ignored factor productivity
(A), the general production function is as simple rewrite as follows: Y= f(L,K)
Now separate the capital: K= Kg + Kpd + Kpdf

Where: Kg is Public capital (State sector);
Kpd is Domestic Private Capital (Non-State sector);
Kpdf is Foreign Direct Capital (Foreign invested sector).
Then (1) can be rewritten as follows:
(2) Y= f(L, Kg, Kpd, Kdf)
To examine the relationship between public investment and economic growth, we
need to put it in interaction with other control variables (Private Investment, FDI, Labor
force) as shown in Figure 1.1.
Economic
Growth

Public investment

Domestic private
investment

Foreign direct
investment
Labour force

Figure 1.1. Conceptual Framework
Dependent Variables: Economic growth;
Independent Variables: Public Investment;
Control Variables: Private Investment, Foreign direct investment, Labor force
Economic growth is influenced by many factors. However, investment and labor
should be the most important factors for economic growth. Furthermore, investment consists


7
of several components such as foreign direct investment, private investment, public

investment and they might have a positive or negative impact on economic growth (in some
cases, there is no empirical evidence of the relationship between those variables).
1.5. Operational Definition of Variables and other term
- Economic growth:
In the conceptual framework of the study, Economic growth is represented by the
Gross domestic product index. Gross domestic product (GDP) is a general indicator reflecting
the final results of production and business activities of the whole economy in a given period.
GDP is calculated at current and constant prices. In the conceptual framework of the study,
GDP is calculated at constant prices (Real Gross domestic product).
The GDP growth rate measures how fast the economy is growing. It does this by
comparing one year of the country's gross domestic product to the previous year. The GDP
growth rate is the most important indicator of economic health. It changes during the four
phases of the business cycle: peak, contraction, trough, and expansion. When the economy is
expanding, the GDP growth rate is positive. If the GDP growth rate turns negative, then the
country's economy is in a recession.
- Public investment:
Public investment is the investment of the State in the programs and projects to build
economic - social infrastructure and activities investment programs and projects for economic
- social development (Public Investment Law No. 49, the National Assembly of Vietnam
issued in 2014, article 4, paragraph 14, page 3). Public investment in this study is understood
that public sector capital investment for development.
- Private Investment:
In the conceptual framework of study, Private Investment is understood that Domestic
Private sector capital investment for development.
- Foreign direct investment:
In the conceptual framework of study, Foreign direct investment is understood that the
Foreign invested sector capital investment for development.
- Labor force:
Labor force is the number of individuals in an economy who either are employed or
are seeking employment. In the conceptual framework of study, Labor force is the number of

individuals in the economy who are employed.
Economic growth is dependent variable; while Public Investment are independent
variables. Private Investment, Foreign direct investment, Labor force are Control Variables.


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1.6. Significance of the Study
This research is going to be significant in the following aspects:
As regards the policy makers:
Public investment is one of the economic development policy - a very important social
of any state, especially significant for countries in transition and developed market economy
as Vietnam.
Firstly, the results of this study indicate the relationship between public investment
and economic growth in both the short term and long term, help policymakers develop
policies accordingly.
Secondly, the results of this study point out the weaknesses of public investment in
today's Vietnam and propose solutions to improve the efficiency of public investment. So it
provides a platform to help policymakers develop a plan of public investment with high
efficiency, thereby promoting economic growth.
As regards administrators: This study provides managers of public investment picture
in Vietnam today. Research results indicate the strengths and the weaknesses of Vietnam's
public investment, thereby promoting the management strengths and overcome weaknesses,
and enhancing the efficiency of public investment.
As regards the researcher:
- This study constitutes an important contribution to the empirical literature
investigating the relationship between public investment and economic growth.
- The author of this research can gain more in-depth knowledge about public
investment. The author can also improve their ability to carry out a study qualitatively and can
implement new researches at a higher level in the future.
As regards future learners:

- This can be a useful reference with a relatively abundant amount of information and
data about the field of public investment and economic growth in Vietnam.
- Through this dissertation, future learners can form their research targets.
1.7. Scope and Limitations
1.7.1. Scope of the Study
The authors collected data through the statistical yearbook of the Vietnam General
Statistics Office and the World Bank for the period of 2006 - 2015. Even there are many
factors that may affect economic growth, the main focus of the research is to examine the
relationship (or impact) between public investment and economic growth in Vietnam. The
study relies on secondary data collected.


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Research publications released by the General Statistics Office of Vietnam and can be
accessed via the electronic portal of the General Statistics Office. Furthermore, the author also
directly contacts the General Department of Statistics and the Ministry of Finance or through
the website to get the report to additional information required.
The author made the data collection from February 2016 to September 2016.
1.7.2. Limitations of the Study
The main data are taken from the Vietnam General Statistics Office and some from the
World Bank, which may cause the inconstancy of the data. Data that is not separated for a
long time should not apply time series methods, for example, public investment data for
specific areas are available only from 2005 to now.
On the other hand, the gross figures of public investment and domestic private
investment, economic growth and are only available from 1986 to the present. If data are
available for a longer period, it will have higher reliability.
Data from the General Statistics Office of Vietnam are also inconsistencies together.
Besides, the statistical criteria of the phase difference have the effect of restricting the study.
On the other hand, the concept of public investment in Vietnam has much different from those
in other countries, for example, investment activities of state-owned enterprises are not

separate but overall investment in the state. Enterprises data that this study carried out for
purely business purposes does not serve public purposes. This makes evaluating the
effectiveness of public investment difficult and imprecise.


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CHAPTER 2
REVIEW OF RELATED LITERATURE AND STUDIES
This chapter is to present the review of literature and studies that have significant
effect on the conduct of the study.
2.1. An Overview of economic growth theory and public investment
2.1.1. Overview of economic growth theory
2.1.1.1. Introduction
The Classical Theory of Growth (Lanza, 2012) can be explained in a simple way given a certain amount of labor (assuming labor theory of value), at a certain level of
production, wages will be paid to each worker according to the level of subsistence and any
surplus (TP - TC = Total Surplus) accumulated by the capitalist. Such accumulation will
increase the demand for labor and, with a given population, wages will tend to rise.
As the wage exceeds temporarily the level of subsistence, the population will increase
according to the Malthusian Theory of Population. With a growth of population, the supply of
labor will increase and wages will again fall back to the subsistence level.
The dynamics of growth ends as the law of diminishing returns sets in and wages eat up
the whole production - leaving no surplus for accumulation, expansion, and growth of population.
The „magnificent dynamics‟ ends not with a bang but a whimper as Fig. 2.1 shows.
TP (Total Product)

W

TP‟
E2


E

TP

E1
P
W2
Labor

W1
0

N1

N2

L
The Classical Theory of Growth
Figure 2.1. The classical theory of growth
Source: Lanza (2012)


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The vertical axis measures TP and the horizontal axis measures L = Labor and OW
line is a subsistence wage line. With ON1 population, production is OP, wage per unit is
N1W1 and surplus or profit is N1E1, when TP = Wages + Profits.
The emergence of a surplus engenders accumulation which leads to an increase in the
demand for labor. Wages rise to E1N1 since the demand for L rises with accumulation but
population, and, thus L supply remains constant at ON1. But once the wages are above the
level of subsistence, i.e. N1E1 > N1W1, growth of population is stimulated to ON2

Once the population is ON2, a surplus emerges again, i.e. W2E2, as wages are driven
back to the level of subsistence and the whole process is repeated until the economy reaches a
point E where the stationary state is reached. As W = TP, there is no surplus and the day of
doom is reached. If technical progress is introduced (a shift of TP to TP‟), then the day of
doom is postponed, but not eliminated.
Limitations of the Model:
(1) The role of technical progress has been underestimated in the model. The
experience has shown that the role of DR, as the pointer to the day of doom, has certainly
diminished.
(2) The iron law of wages, which suggests that wages cannot be above the subsistence
level because the Malthusian Law of Population has been discredited as the sole-explanation
of wage determination. The iron law of wages is based only on supply, whereas wages are
determined both by demand and supply. It does not take into account the role of trade union
on wage determination.
(3) The Malthusian Theory of Population Growth has been found to be misleading in
the light of the experience of economic-development of the economically advanced European
countries. The Malthusian argument that, whenever wages are above the subsistence level,
people like to have more babies rather than other things seems to be unacceptable, both
logically and empirically.
(4) The classical model seems to be too simplistic to account for the complex factors
which influence the growth (Lanza, 2012)
2.1.1.2. Keynesian Theory and the Classical Theory
It is significant to observe that, in classical theory, money is a „veil‟ and has nothing to
do with the determination of real factors like output and employment; money plays no role in
the equilibrium analysis of value and distribution in the classical system, whereas in the
Keynesian model money tends to influence the equilibrium values of output and employment.
Later, Patinkin (1954) tried to integrate value and monetary theory by introducing the real
balance effect.



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One of the main sources of conflict between the Keynesian and classical theories lying
in the way the difference between the demand for and supply of money should be corrected.
In the classical theory, an increase in money supply will raise unwanted cash holding and,
since a rational individual does not hold money for its own sake, excess money would be
spent on goods and services, pushing the price upwards, with a given level of output.
The mechanism is explained with the help of the quantity theory: MV = PT, where M
= quantity of money, V = Velocity, P = Price Level and T = total transaction. It is assumed
that V and T are unlikely to change substantially in the short-run. In such a situation, an
expansion of M will have a direct and positive impact on prices. The critics, however, have
argued that, if either V or T or both change with the change in M, then the direct relationship
between M and P is unlikely to hold (Ghatak, 2003).
To this „new monetarists‟ point out that, as long as the demand for money remains
stable, an expansion of M will always lead to a rise in prices, though the effect may not be
seen instantaneously. At a higher price, the expansion of money supply would be consistent
with ordinary transaction demand (k) which is assumed to be a fixed proportion of income (Y)
or M = kY.
In the Keynesian theory, an expansion of money supply will raise bond prices and
reduce the interest rate, increase the level of investment, output, and employment and perhaps
lead to a secondary effect on prices. Should there be excess capacity, the effect on prices of a
rise in money supply will be even less. If we are concerned with an underemployment
situation, prices should not be affected so long as the supply of output with respect to the
money supply is elastic. Thus, the effect could well be on income, output, and employment
(Ghatak, 2003).
2.1.1.3. Marxist Theory of Economic Growth
Marx rejected some principal features of the Classical theory of economic growth and
offered his own theory within a socio-historical framework in which economic forces play a
major role. In Marxist theory, the law of diminishing returns has been discarded because
Marx believed that the Classical theory of the Stationary State was actually a creation of
human actions rather than the end product of natural, immutable law. For a similar reason,

Marx also castigated the Malthusian theory of Population (Ghatak, 2003).
Marx looked at economic development from a social and historical stand-point. Each
stage of economic growth was regarded as the product of Hegelian dialectics of a game of
contradictions where a thesis created its anti-thesis and the conflict between the two produced
a synthesis. Marx emphasized that, with capitalism, social relations of production were much
more important than exchange relations between goods.


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The social character of labor has been stressed in particular. Marx argued that labor
productivity „is a gift, not of nature, but of history embracing thousands of centuries‟.
However, the Marxist concept of relations of production is rather vague. It has been
interpreted as an „organic whole‟ characterized by labor organization and skill, the standing of
labor in society, technological and scientific knowledge, and its use in a certain environment.
In the Marxist analysis, these „relations of production‟ determine the socio-cultural setup of society. Marx believed that capitalism would not end up in a quiet classical „stationary‟
state; rather, it would break up with a „bang‟ „when the expropriators are expropriated‟. Here we
shall only analyze the economic views in the Marxist theory (Ghatak, 2003).
The Marxist model of economic growth depends on some major dynamic „laws‟:
(1) The law of capital accumulation, which says that the prime desire of the capitalists
is to accumulate more and more capital.
(2) The law of falling tendency of the rate of profit which plays a crucial role in the
breakdown of the capitalist system.
(3) The law of increasing centralization and concentration of capital, which tells us
that, with the growth of capitalism, cut-throat competition among capitalists will lead to the
annihilation of the smaller firms by bigger ones, which will lead to the growth of monopoly
and concentration of economic power.
(4) The law of increasing „pauperization‟ which implies the growth of the misery of
the working class with the advancement of capitalism, reflected in wages being tied to the
subsistence level coupled with a rise in the proportion of unemployed people - or, what Marx
called the „industrial reserved army of labor‟- made possible by the substitution of capital for

labour in the process of technical change.
The simultaneous working of these laws would generate contradictory forces, which
would eventually sharpen the class conflict between capitalists and workers or between „haves‟
and „have-not‟s‟. Capitalism would face a violent death in the final confrontation when the
expropriators would be expropriated. Hence, Marx gave the clarion call: „workers of the world
unite‟, as they have nothing to lose except their „chain‟ and „the whole world to conquer‟.
The Marxist notion of the falling tendency of the rate of profit plays a crucial role in
the whole process of change and can now be illustrated. According to Marx, the value of a
commodity (W) is given by the sum of „constant capital‟ (c) + the „variable capital‟ (q) + the
„surplus value‟ (s).
If the working day consists of 8 hours and only 4 hours are required to produce a
commodity for subsistence then for the remaining 4 hours, the worker is producing a surplus
value, which is expropriated by the capitalists. More formally, W = c + q + s and X = s/q
where x is the rate of surplus value or the rate of „exploitation‟. Thus, in the above example,