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The effects of foreign direct investment on domestic firms: The case of Vietnam

Thanks to the economic reform after the launch of “Doi moi” in 1986, Vietnam has made significant gains and has transformed from an economically poor country in the 1980-90s towards a middle-income country by the 2010s. A dynamic market deeply integrated into the global economy has helped pave the way for foreign investment inflows to Vietnam. While it is clear that foreign direct investment plays a crucial role in the economy as a whole, the debate continues on whether foreign direct investment has positive or negative effects on domestic firms. In developing countries, foreign investment can be supportive to local enterprises where the former provides technological advantages that are beneficial. However, there are examples of where foreign presence negatively impacts on the development of local firms if they do not have adequate resources to absorb spillovers. This thesis examines whether the presence of foreign direct investment contributes to the development of Vietnamese firms from different angles including productivity, export activity, R&D and innovation and investment during the 2010-15 period. The thesis comprises four papers. The first paper examines the impacts of foreign presence on domestic enterprise productivity within and between industries through horizontal and vertical channels. Panel data models are employed to investigate the linkage between foreign investment and local firm total factor productivity. The results indicate the presence of positive spillovers from foreign investment in downstream sectors to domestic firm productivity in upstream sectors through backward linkages, while a negative impact is found in the same sectors through horizontal linkages. In the second paper, Heckman selection estimation is employed to investigate whether foreign investment has any influence on the exporting activity of domestic firms. The results suggest that while foreign investment in downstream sectors is found to encourage the export decision of local firms in the same and upstream sectors through horizontal and backward linkages, the export intensity of local firms only benefits from backward linkages. The linkages between exporting activity of local firms and the presence of foreign investment appears to be different when comparing low- and high-tech firms. While it is argued that foreign investment in a host country can encourage domestic firms to invest in R&D and innovation, there are few studies that consider the case of Vietnam. The third paper of the thesis fills this gap. The results suggest that there is a weak positive association between foreign investment and local firms R&D activity and innovation through forward linkages, while there is no significant evidence to support the view that multinational enterprises help improve local firms R&D behaviour through horizontal and backward linkages. The final paper in this thesis investigates the possibility of crowding-effects from foreign investment to local investment. System General Method of Moments estimation is employed to a sector-level balanced panel dataset to account for dynamic effects. The results indicate that foreign investment significantly encourages domestic investment, and export-oriented sectors appear to be more sensitive to the impact from multinational investment.
Type of thesis
Ha, V. T. C. (2021). The effects of foreign direct investment on domestic firms: The case of Vietnam (Thesis, Doctor of Philosophy (PhD)). The University of Waikato, Hamilton, New Zealand. Retrieved from https://hdl.handle.net/10289/14062
The University of Waikato
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