Exploring the effects of foreign direct investment and local governance on multidimensional poverty: Evidence from Vietnam

This study examines the combined impacts of foreign direct investment (FDI) and local governance on multidimensional poverty in Vietnam, addressing a gap in the literature that predominantly focuses on monetary poverty. Utilizing provincial-level data from 2016 to 2020, sourced from the General Statistics Office of Vietnam and the United Nations Development Programme, this study employs the generalized method of moments (GMM) to explore the causal relationship between FDI, local governance, and multidimensional poverty in Vietnam. The results indicate that local governance primarily affects multidimensional poverty through two critical dimensions: administrative procedures and local-level participation. Specifically, a one-point improvement in administrative procedures leads to a 1.495% reduction in multidimensional poverty, while a one-point increase in local-level participation results in a 0.620% reduction. Additionally, the analysis suggests that local governance, as measured by the Provincial Governance and Public Administration Performance Index (PAPI), positively contributes to the reduction of multidimensional poverty. A one-point improvement in the PAPI corresponds to a 0.130% reduction in multidimensional poverty. By contrast, the analysis does not find evidence of a direct causal relationship between FDI and multidimensional poverty. However, the findings reveal that the poverty effects of FDI are conditional on local governance quality, suggesting that governance moderates how foreign investment translates into welfare outcomes across provinces. This study contributes to the literature by integrating FDI and disaggregated governance measures into the analysis of multidimensional poverty and highlights the importance of strengthening local governance to ensure that economic integration and foreign investment lead to inclusive poverty reduction.