Does foreign investment improve domestic firm productivity? Evidence from a developing country

Abstract

This study examines the linkages between foreign investment and the total factor productivity of local enterprises within manufacturing industry in Vietnam. The Wooldridge GMM estimation approach is applied to panel data to estimate production function, which allows us to obtain total factor productivity of local firms. We then investigate how foreign investment influences local enterprise productivity through different spillover channels using two-step system GMM, FE and RE estimations. Our consistent findings show that foreign investment has a negative impact on the total factor productivity of domestic enterprises through the competition channel within an industry. There are strong positive spillovers associated with backward rather than forward linkages. Further insights relate to firm ownership, location, and the state of technology in which the different spillovers occur.

Keywords:

• Foreign investment
• productivity
• horizontal
• backward
• forward linkages

JEL classification:

• D22
• F21
• F23
• O12

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The use of intermediate goods/materials or investment and its lags can be used as an IV to control for unobservables, but the former is not available for the whole sample throughout the period so we use lag of investment as an IV instead.

2 We take the first difference of the tfp as the dependent variable and the first difference of all other independent variables.

3 We provide Hausman test in the Table A1 where the results favor FE estimation.

4 We also estimate our baseline model in Equation (11) using lag-model and first difference estimation technique and results are presented in Tables A2 and A3.

5 There is another survey that looks deeper into this conducted by the World Bank, but for only small and medium selected firms which is about a thousand firms a year. In employing the VES data that features a much larger number of firms, we are not able to obtain more.

6 The results from FE and RE estimations are also reported in Table A4.

7 The results from GMM estimations are also reported in Table A5.