The impact of provincial‑level institutional quality on attracting foreign direct investment in the red river delta provinces

Abstract

This study empirically investigates provincial-level institutional quality's impact on foreign direct investment (FDI) inflows within Vietnam's Red River Delta region (2009–2023), addressing a literature gap concerning how subnational governance affects FDI distribution in a rapidly transitioning economy. Inspired by the Worldwide Governance Indicators (WGI) framework, an Ordinary Least Squares (OLS) panel regression model analyzed data from 11 provinces over 15 years. Key Provincial Competitiveness Index (PCI) sub-indices – specifically time costs, informal charges, leadership dynamism, and legal institutions – served as proxies for institutional quality, with controls for market size, labor quality, and infrastructure. Results reveal that market size (population) and labor quality (share of trained labor) are strong positive FDI determinants; proactive and dynamic provincial leadership also significantly attracts investment. Conversely, higher informal charges and burdensome administrative time costs act as significant deterrents. Surprisingly, infrastructure capacity exhibited a negative correlation with FDI in this regional context, while the rule of law did not show a statistically significant effect at the provincial level. The study concludes that subnational institutional quality is a critical determinant of FDI patterns in Vietnam, playing a decisive role beyond uniform national policies. Investors appear to prioritize informal institutional aspects like administrative efficiency and local governance responsiveness, particularly where formal legal structures are relatively consistent. These findings call for policymakers to strengthen provincial-level governance by targeting specific local bottlenecks such as reducing administrative delays and informal charges, and fostering dynamic leadership as essential complements to broader national initiatives to attract and sustain high-quality FDI.