Digital transformation as a catalyst for foreign direct investment: evidence from an emerging economy

Abstract

This paper examines the impact of digital transformation on foreign direct investment (FDI) inflows into Vietnam using a panel dataset of 42 partner countries over the period 2007–2023. A digital transformation index is constructed, encompassing three components: electronic government, digital economy, and digital society. Using a modified gravity model, the study shows that digital transformation significantly increases FDI inflows by reducing transaction costs, improving transparency, and enhancing the business environment. The results reveal important heterogeneity: in developed countries, all three components have significant effects, while in developing countries, only electronic government shows a significant impact. The effect is especially strong among EU countries, likely due to institutional and regulatory alignment, while it is weaker in non-EU countries. Robustness checks using alternative proxies, such as mobile subscriptions and internet usage, confirm the central role of mobile connectivity in attracting FDI, particularly in emerging markets. These findings highlight the importance of tailored digital and institutional reforms, including enhancing e-government services, aligning digital policies with international standards, and expanding digital infrastructure. The study contributes to the literature on FDI and digitalization and offers practical implications for Vietnam and other developing countries in leveraging digital transformation to attract foreign investment.