How Will the Origin of FDI Affect Domestic Firms’ TFP?—Evidence from Vietnam

Type Report
Title How Will the Origin of FDI Affect Domestic Firms’ TFP?—Evidence from Vietnam
Publication (Day/Month/Year) 2015
Technology spillover from foreign direct investment is thought to be a powerful vehicle for
economic growth. This study examines how the origin of foreign investors affects the degree of
horizontal and vertical technology spillovers, using firm-level panel data from Vietnam in 2002-2011.
First, we examine if the investment from different continents might have different impacts on domestic
firms’ productivity. Second, given the fact that the sourcing pattern of multinational firms is likely to
be affected by preferential trade arrangements or investment agreements, especially in transitional
economy like Vietnam, e.g. the tariff rates on imported goods into Vietnam are totally different
between ASEAN (Association of South-East Asian Nations) and non-ASEAN countries, we would like
to see how this factor impacts the spillover.
The empirical analysis produces evidence consistent with our hypothesis: preferential treaties in
general, promote spillover from multinational firms, while local procurement is the most important
channel to incur vertical spillover. The results show a positive association between the presence of
Asian firms in downstream sectors and the productivity of Vietnamese firms in the supplying industries,
and no significant relationship in the case of European and North American affiliates. Within Asian
area, we find foreign direct investment (FDI) from East Asian firms excluding Japan and South Korea
tend to have the most vertical spillover impact on increasing Vietnamese suppliers’ productivity. It
coincides with the fact that multinational firms whose origins are these two countries tend to not to
source locally. In the horizontal way, FDI from ASEAN, East Asian and European firms all shows
negative impact, indicating that FDI from these firms tends to drive Vietnamese counterparts away.
Also, we find that firm size and location also affect the extent of spillover

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