Regional integration in a former centrally planned economy: the role of FDI in the formation of market institutions in Vietnam

Among the most important factors necessitating economic reform in the 1980s was Vietnam's high level of dependence on Soviet aid. As Soviet aid was progressively reduced in real terms (up to 1991 when it was finally terminated), the expansion of compensatory market relations brought about a process of integration with the market economies of the Pacific Rim, notably East Asia In the 1990s trade and investment relations with the region expanded rapidly such that Japan and the East Asian NICs came to account for 60-70 percent of both trade and foreign direct investment (FDI). Focusing on FDI, the paper shows how regional integration affected the formation of market institutions and changes in the structure of the economy in a former centrally planned economy. Since the level of FDI in Vietnam was strongly affected by the bubble economy which developed in the region during the mid-1990s, its impacts on these structures was large. Therefore, the bursting of the bubble in 1997-98 has major implications for future economic development.