Trade Liberalization and Productivity Spillover from Different Foreign Direct Investment Sourcing Origins

By Pham, Ngoc Thi Bich | Journal of International Business Research, September 1, 2012 | Go to article overview

Trade Liberalization and Productivity Spillover from Different Foreign Direct Investment Sourcing Origins


Pham, Ngoc Thi Bich, Journal of International Business Research


ABSTRACT

The study investigates productivity spillovers of different Foreign Direct Investment sourcing origins into domestic firms in 23 Vietnamese manufacturing sectors through horizontal and vertical linkages in two periods: pre and post WTO accession (2004-6, 2007-9). The analysis uses an augmented production function and System GMM estimators to show that the foreign presence by sourcing origin appearing in the same or in downstream industries causes different productivity spillovers into domestic enterprises, and the trade liberalization strongly enforces the spillover process in two directions: (1) Horizontal spillovers are positively improved; (2) Vertical spillovers are strongly diversified. We prove that kind of technology transferred which is more suitable to the local economy' characteristics could drive the spillover absorption through vertical linkages, and domestic firms could actively absorb FDI spillovers through horizontal linkages.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Foreign Direct Investment (FDI) is always attracted by developing countries in hope for more capital for their economic development. While many researchers find evidences on positive FDI impact on one developing country's economic growth and its contribution on taxation, creating more jobs for young population, or supplying wider range of goods and services to the economy, others still argue for its spillover effects on domestic economy (Aitken, Harrison & Lipsey, 1996 and Lipsey & Sjöholm, 2005). On the one hand, it is believed to stimulate the technological progress in the host country. FDI may be used as a vehicle for increasing productivity growth (Bitzer & Görg, 2009). FDI can bring newer technology transfer to developing countries than licensing (Mansfield & Romeo, 1980). In addition, it possibly improves the knowledge and skills of managers or workers, and enhances efficiency and productivity in production and performance. On the other hand, possessing better production technology, managerial skills, export contacts, reputation and good will, FDI is able to force local enterprises to strive in a strong competitive environment and can draw the demand from domestic firms.

However, it is truly difficult to find an existing study on productivity spillovers from different sourcing origins except Javorcik & Saggi (2004). In view of the approach, this study uses firm-level data from the Vietnamese General Statistics Office (GSO) for 23 manufacturing sectors in Vietnamese economy covering the period 2004-2009 to investigate horizontal and vertical productivity spillovers of foreign enterprises sourcing from main traditional counterparts (China, Japan, South Korea, Taiwan, the United States) and associations (ASEAN, Europe). Vietnam has changed to a market oriented economy since 1986. It joined the Association of Southeast Asian Nations (ASEAN) in July 1995 and was fully engaged to the trade liberalization program under ASEAN Free Trade Area (AFTA) in January 1, 2006. After 16 years since applying to participate in the World Trade Organization (WTO) in 1991, Vietnam was accepted to be a full official WTO member in 2007.

Table 1 introduces inward FDI in general and FDI in manufacturing in particular, and FDI by main sourcing origins. In the Vietnamese economy, FDI plays an important role when contributing yearly 16-18% in GDP and foreign firm size is increasing in term of capital when Vietnam is involved more in the regional and the world economies. FDI inflows increased with an average rate from 46% in the period 2004-2005 to 76% in the period 2006-2007, but enormously bumped to 236% in 2008. The largest investors come from Asian countries such as Taiwan, South Korea, Japan, China, Malaysia and Singapore. The United States is a special case when it registered more capital to be the largest investor who occupied 43%» of the whole inward FDI in 2009. While many European countries invest in Vietnam at an average capital level, not much FDI from Africa appear in this developing economy. …

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