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

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.