The relationship between innovation and FDI inflows in Vietnam: does institutional quality matter?

This paper is the first to examine how local innovation and institutional quality affect foreign direct investment in Vietnam. The sample is an unbalanced panel with 621 annual observations of provinces and major cities from 2014 to 2024. This study applies the two-step system Generalised Method of Moments with instrumental variables to mitigate heteroskedasticity and endogeneity issues. Our results demonstrate that local innovation reduces foreign direct investment inflows and that institutional quality also has a negative impact. This study also identifies institutional quality as a moderating factor in the relationship between innovation and FDI. Our results are robust across subsamples and an alternative innovation proxy, aligning with Institutional Theory, Knowledge-Based Theory, and Complementarity Theory. Finally, the findings support that governments can encourage local innovation by offering incentives for research and development, protecting intellectual property rights, and enhancing competitiveness through collaboration and knowledge transfer.