FDI and the Effectiveness of Tax Contribution: A Study of a Formal Economic Sector in Vietnam

The purpose of this study is to assess the impact of foreign direct investment (FDI) on the effectiveness of tax contribution in the formal economic sector in Vietnam. The empirical study is conducted at the local level with all 63 cities/provinces nationwide in the period from 2006 to 2015. Applying the generalized method of moments (GMM) estimation for a dynamic panel data model, the finding reveals that FDI intensity has a positive effect on the tax contribution rate which implies that relatively more FDI presence increases the effectiveness of tax contribution in the sector. The magnitude of FDI effect varies among sector by different geographical and key economic regions. FDI enterprises are found to be more effective in generating tax revenue than domestic enterprises. Besides, there is a positive spillovers effect on tax contribution that the FDI sector creates on the domestic sector, though the size of the effect remains small.