The impact of free trade agreements on foreign direct investment inflows: Evidence from next-generation agreements in Vietnam

Free Trade Agreements (FTAs) are widely recognized as instruments for enhancing economic integration and attracting Foreign Direct Investment (FDI). This study examines the impact of FTAs, particularly next-generation agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam Free Trade Agreement (EVFTA), on FDI inflows to Vietnam. Using a Gravity Model and a panel dataset of 48 trading partners covering the period 2007–2023, this study quantifies the extent to which FTAs influence FDI attraction. The empirical results reveal that FTAs significantly contribute to increased FDI inflows. The overall effect of FTA participation is estimated at 5.64% (coefficient = 0.0549, p < 0.05), reinforcing the positive relationship between trade liberalization and investment attraction. However, the impact varies across agreements. The CPTPP has a stronger effect, increasing FDI inflows by approximately 9.47% (coefficient = 0.0905, p < 0.05), while the EVFTA does not exhibit a statistically significant impact. These findings highlight the effectiveness of next-generation FTAs in attracting investment, particularly when agreements include deeper commitments beyond tariff reductions. For Vietnam and other emerging economies, maximizing the benefits of FTAs requires complementary structural reforms, including institutional improvements, regulatory enhancements, and investment-friendly policies to sustain FDI inflows and strengthen global economic integration. AcknowledgmentThe authors gratefully acknowledge the financial support from the Banking Academy of Vietnam.