Effect of foreign direct investment inflows on urbanization in Vietnam: Does environmental regulation matter?

Abstract

This study uses provincial-level panel data containing 63 provinces over the period 2014–2021 in Vietnam to explore the role of foreign direct investment in urbanization in Vietnam, emphasizing the roles of environmental regulations as both a mediator and a moderator. To address the issue of endogeneity, the System Generalized Method of Moments (SGMM) estimators are employed in empirical estimations. The initial results show that lagged foreign direct investment (FDI) directly has a detrimental effect on the progress of urbanization. However, the indirect effects offer a more detailed perspective. Through its contributions to economic growth, FDI indirectly facilitates urbanization, showing that economic development stimulated by foreign investment can drive urban expansion. Environmental regulations, meanwhile, serve a dual purpose: as a mediator, they enable FDI to promote stricter environmental standards, which subsequently encourage urbanization; as a moderator, they enhance the positive influence of FDI on urbanization. The study suggests that in addition to FDI and environmental regulations, urbanization in Vietnam is promoted by higher economic development and human capital accumulation.