Is foreign direct investment productive? A case study of the regions of Vietnam

a r t i c l e i n f o Keywords: Foreign direct investment Total factor productivity Technological progress Panel data analysis Vietnam By making use of a recently released dataset that covers a large number of manufacturing firms over the period 2000–2005, this paper examines the impact of foreign direct investment (FDI) and FDI generated spillovers on total factor productivity (TFP) in eight regions of Vietnam. Unlike most existing studies, this paper focuses on the impact of spillovers that take place through both horizontal and vertical linkages. The results presented in this paper suggest that the impact of FDI spillovers on TFP varies considerably across regions. FDI spillovers generate a strong positive impact on TFP through backward linkages only in Red River Delta, South Central Coast, South East and Mekong River Delta while in other regions the impact is negative and mostly insignificant. The paper also examines the impact of the absorptive capacity on TFP growth in each of the eight geographical regions. Economic reforms create international business opportunities. Due to the rising cost of doing business in China, Vietnam has become a popular destination for foreign investment. A number of existing studies have examined the impact of foreign direct investment (FDI) and FDI-related spillover effects on firm productivity and export behavior in developed as well as developing countries. This paper focuses on Vietnam, a country that due to the rising cost of doing business in China is now attracting significant FDI. However, due to lack of appropriate data, so far, relatively few studies have considered the case of Vietnam. In recent years, the government of Vietnam has started releasing firm level data, including data on FDI inflows that could be used to examine the impact of FDI-related spillover effects on firm performance. Most existing studies, for example Anwar and Nguyen (2010a) and Athukorala and Tien (2012), focus only on the direct effect of FDI on firm performance in Vietnam. In addition, the existing studies (such as Anwar and Nguyen, 2010b) are highly aggregated and hence do not present a clear picture of the impact of FDI on different regions of Vietnam. An important role of the government is to take steps to reduce regional economic disparity. A region by region analysis of the impact of FDI-related spillover effects (i.e., the indirect effect) on firm productivity can provide useful information to domestic policy makers. By making use of …