Does rising import competition harm local firm productivity in less advanced economies? Evidence from the Vietnam's manufacturing sector

Abstract

This paper examines whether rising import penetration has an effect on the productivity of domestic firms. The study uses data on a 10-year unbalanced panel of firms in the manufacturing sector in Vietnam from 2000 to 2009. Panel and instrumental variable methods are used to control firm heterogeneity and endogeneity of import penetration. We find statistically significant and negative effects of import competition on local firms’ productivity, but the effect in terms of magnitude is economically small. Further investigation shows no clear evidence of variations in the effects by firm size and technological level. However, we find that rising import penetration is associated with the likelihood of firm death.

Keywords:

• productivity
• competition
• developing countries
• manufacturing sector
• trade liberalization

Acknowledgements

We thank, without implicating, two anonymous reviewers for their helpful comments and suggestions to improve the paper. Any remaining errors in the paper are those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. http://gso.gov.vn

2. The concording program is available upon request.

3. In Vietnam, it is not unusual to run a business before having a tax code.

4. But longer time differencing, e.g. three-year or four-year differencing also comes at the cost of losing more observations of short-lived firms;therefore, two-year differenced specification is the main model specification for our time-differencing approach.

5. The Agreement on Trade in Goods of the China–ASEAN FTA entered into force in July 2005, and the Agreement on Trade in Services came into effect in July 2007.

6. Bloom, Draca, and Van Reenen (2011, p.28) indicate that China is a good experiment of low-wage country trade shock in the recent decades.

7. For this reason, we do not estimate for one-year difference specification.

8. Clustering may be still problematic if the number of clusters (industry-years) is small relative to the number of units per cluster. Cameron, Gelbach, and Miller (2008) suggest cluster bootstrapping techniques for inference. We tried both clustered and clustered bootstrapping for our main estimates and found similar estimated standard errors. We report clustered standard errors in the paper.

9. Firm survival cannot be accurately identified by a firm's absence from our analysis data alone. A firm is classified as continuing if, in the following year, there is output or intermediate input recorded in the VES data-set, if the firm has positive employment or if any sales or purchases are observed.

10. If including exited firms in the sample, the estimated effect would be more negative, but obviously not positive as exited firms should be the least productive ones. Our estimated effect thus would be underestimated.