A provincial analysis of formal economic institutions and private investment in Vietnam

Abstract

Formal economic institutions are incentive-motivated mechanisms under the control of the government and are widely accepted as an important factor shaping investment behavior. However, the relative significance of aspects of formal economic institutions has remained ambiguous, especially in a developing economy like Vietnam. This paper aims to fill this gap through the investigation of the influence of formal economic institutions such as market entry, property right protection, anti-corruption mechanisms, and informal charges on private investment across provinces in Vietnam. The empirical results suggest that the deregulation of market entry is essential for private investment. By contrast, both property right protection and anti-corruption mechanisms have unexpected outcomes as their improvements are detrimental to private investment. The effect of informal charges is consistent with the prediction of the rent-seeking hypothesis.