Productivity growth and technology spillovers from foreign direct investment: Evidence from Vietnam

Attracting foreign direct investment (FDI) has become an integral part of development strategies among developing countries. Many offer special incentives to foreign investors, including tax holidays, tariff reductions or exemptions, and subsidies for infrastructure. While these policies rest on the premise that foreign investment facilitates technology spillovers from foreign to domestic firms, the empirical evidence is ambiguous. In this dissertation, we investigate whether the presence of foreign direct investment help raise the productivity of domestic firms in Vietnam. We estimate spillovers that occur within an industry and between different industries, whether technology gap between foreign and domestic firms is a limiting or facilitating factor for technology spillovers. We also assess the roles of foreign ownership structure (joint venture v. wholly foreign-owned firms), and human capital endowment among domestic firms in influencing technology spillovers. We differ significantly from much of the empirical literature in that we recognize that the adoption of better technology or managerial know-how is a costly learning process. The firm's productivity may suffer initially because some resources must be devoted to learning. However, once the firm successfully adopts the new technology its productivity will grow at a higher rate, which propels the firm to a steeper growth path and raises the productivity level in the long run. Our estimation results indicate that: (1) FDI has a negative effect on productivity levels but a positive effect on the rate of productivity growth of domestic firms; (2) While there is evidence for both within and between industry spillovers, the backward linkage, i.e., downstream foreign firms buy inputs from upstream domestic firms, is the dominant channel for positive spillovers; (3) The intensity of spillovers has an inverted-U relationship with technology gap; (4) Wholly foreign-owned firms (rather than joint ventures) are the main source of technology spillovers; (5) The spillover effect of FDI is positively associated with human capital endowment of domestic firms; (6) The geographic dimension matters for technology spillovers.