Does FDI enhance provincial productivity? A panel data analysis in Vietnam

Abstract

In the present study, we examine foreign direct investment (FDI)-induced productivity spillovers across 60 Vietnamese provinces from 2000 to 2016. Using a generalized method of moments technique, we find that foreign presence has a positive direct effect on total factor productivity (TFP). Furthermore, we discern a positive association between industrial linkages and productivity spillovers. All these findings remain robust to alternative model specifications. After accounting for the roles of human capital in the FDI–TFP nexus, we find absorptive capacity, as measured by human capital, to be a key factor influencing the nature of the foreign presence–productivity spillover nexus in the host province. Specifically, we observe that better human capital enables provinces to better internalize productivity spillovers from foreign presence. This result lends support to the view that human capital must surpass a critical threshold before the host can realize any productivity spillovers engendered by foreign presence.

Keywords:

• Foreign direct investment
• total factor productivity
• human capital
• industrial linkage

JEL CODE:

• C23
• D24
• F21
• F23
• F62

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 We would like to thank Professor Saroja Selvanathan (Editor-in-Chief) and anonymous referees for their helpful comments on previous versions of the paper.

2 We provide details of the GMM approach in Section 3.2. The GMM approach provides consistent estimates for the short-and-wide panel structure adopted in this study. This has been confirmed in other studies using aggregate data in Vietnam (Hoang, Huynh, and Chen 2019; Huynh and Hoang 2019).

3 We also consider alternative measures of market access, including provincial population size (POP), and use this proxy to check the robustness of our results. Some studies suggested measuring market size by using population density per square kilometer of land. However, population density might involve the negative effect of congestion that prevented the agglomeration of firms (Bartik 1985; Guimaraes, Figueiredo, and Woodward 2000). Given this potential interpretation of population density, we decide to use only the level of population in our regression.

4 The IV/GMM estimator is performed by applying ivreg2 in Stata12. Baum, Schaffer, and Stillman (2003) and Baum, Schaffer, and Stillman (2007) provide details of ivreg2 and routines for estimation.

5 Unpublished data includes provincial GDP and provincial CPI.

6 We perform the Levin-Lin-Chu test proposed by Levin et al. (2002).

7 We also develop a dynamic model from Equation (4) to account for the underlying dynamics in TFP (Li and Tanna 2019). Overall, the coefficients’ signs are robust to the baseline model; however, independent variables, such as foreign presence, market size, infrastructure, and industrial linkages, become insignificant. Hence, we do not report them here to save space.

Additional information

Funding

This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.01-2019.318

Notes on contributors

Linh Thi Dieu Huynh

Linh Thi Dieu Huynh is a researcher-lecturer and Chair of International Business Division at University of Economics, The University of Danang, Vietnam. She received her Master of Business (Advanced) degree at the University of Queensland, Australia and her Ph.D in Economics at the University of New England, Australia. Her research interests include international trade and investment, exchange rate volatility, gender studies, public private partnership, new economic geography, applied econometrics, and Vietnamese economy. She has received and participated many research grant projects from different organizations. Her papers have been presented in many international conferences as well as published in various journals including International Economic Journal, Economy of Region, and Montenegrin Journal of Economics.

Hien Thanh Hoang

Hien Thanh Hoang holds a PhD in Economics by the University of New England, Australia and is researcher-lecturer for the Institute of Socio-Economic Research, Duy Tan University, Vietnam. His main areas of interest include agglomeration economies, international trade, foreign direct investment, new economic geography, applied econometrics, gender studies, and Vietnamese economy. His PhD on foreign direct investment determinants and its effects on local economy was the first in Vietnam based on the new economic geography theoretical framework. His recent publications have appeared in International Economic Journal, Economy of Region, and Montenegrin Journal of Economics.

Hung Ngoc Tran

Hung Ngoc Tran is a senior lecturer at Faculty of Accounting and Auditing, Industrial University of Ho Chi Minh city, Vietnam. He obtained his PhD degree from University of Economics Ho Chi Minh city, Vietnam. His research interests are in the area of microeconomics, environmental economics, development economics and Vietnamese economy. His recent publications have appeared in Journal of Science and Technology and international conferences.