Does Proximity to Foreign Invested Firms Stimulate Productivity Growth of Domestic Firms? Firm-level Evidence from Vietnam

Kyburz, Stephan Daniel; Nguyen, Huong Quynh (August 2016). Does Proximity to Foreign Invested Firms Stimulate Productivity Growth of Domestic Firms? Firm-level Evidence from Vietnam (SECO Working Paper Series 10/2016). Bern, Switzerland: SECO, World Trade Institute

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Much attention has been paid to foreign investment spillovers in the literature, since inward foreign direct investment is regarded as a key engine of industrial growth and technological progress. However, little clear evidence has been found with regard to the relevance of geographic proximity for spillover effects, owing to a lack of location specific information. We therefore study the spatial component of spillover effects from foreign direct investment on total factor productivity (TFP) of domestic manufacturing firms in Vietnam from 2005 to 2010. Firm level TFP is estimated by applying a semi-parametric method. We geo-reference firms by using the smallest administrative unit (ward) and compile a unique data set containing information of firms location to exploit the variation in the presence of foreign firms around each domestic firm over time. Benefiting from enhanced spatial accuracy over previous studies, our empirical results using a first differenced two-stage least squares estimator are threefold. First, they show positive local spillover effects of foreign investment on domestic firms in the same industry. The effects are strongest and highly significant within a radius of 2 km to 10 km, and they show a distinct decay pattern within 10-50 km. Second, small and unproductive firms benefit disproportionately from the presence of foreign firms in their neighborhoods. Third, manufacturing vertical spillovers are also localized while vertical spillovers from the service sector are less geographically restricted.

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