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Foreign direct investment and export spillovers: Evidence from Vietnam

Sajid Anwar a,*, Lan Phi Nguyen b

a Faculty of Business, University of the Sunshine Coast, Maroochydore DC, QLD 4558, Australiab Department of Monetary Analysis and Forecasting, State Bank of Vietnam, 49 Ly Thai To Street, Hoan Kiem District, Hanoi, Viet Nam

1. Introduction

Foreign direct investment (FDI) affects the economic performance of host countries through direct as well as indirect

channels. The indirect effect (also known as the spillover effect) of FDI arises from a number of sources including the linkages

that are formed between domestic and foreign firms and increased competition in the domestic market that leads to better

allocation of resources. The linkages between domestic and foreign firms can also facilitate technology and knowledge

transfer. Recent studies (for example,Blomstrom & Kokko, 2003; Gorg & Greenaway, 2004; Greenaway and Kneller, 2004;

Kneller & Pisu, 2007; Wagner, 2007; Sun, 2009) have suggested that linkages between domestic and foreign firms can also

affect the export performance of domestic firms, which provides yet another explanation for increased competition for FDI

among host country governments.1

While a large number of existing studies (for exampleBlomstrom, 1986; Blomstrom & Kokko, 2001; Liu & Wang, 2003;

Gorg & Hijzen, 2004; Wei & Liu, 2006; Duanmu & Fai, 2007; Beugelsdijk,Smeets, & Zwinkles,2008; Grima,Gorg, & Pisu, 2008;Liu, 2008; Suyanto, Salim,& Bloch, 2009; Barbosa & Eiriz, 2009; and Blalock & Simon,2009) have considered theimpact of FDI

and FDI-linked spillovers on productivity and technology transfer, relatively few empirical studies have considered the

impact of FDI-related industrial linkages on the export performance of host countries. Furthermore, drawing on the early

theoretical work of Rodriguez-Clare (1996), it is clear that FDI can also affect the export activities of domestic firms

in upstream and downstream industries through vertical linkages, yet the studies that have considered the impact of FDI-

International Business Review 20 (2011) 177193

A R T I C L E I N F O

Article history:

Received 1 February 2009

Received in revised form 9 November 2010

Accepted 11 November 2010

Available online 15 December 2010

Keywords:

Foreign direct investment

Export spillovers

Emerging economies

A B S T R A C T

The existing IB literature suggests that the presence of foreign firms in a country canbenefit domestic firms through the formation of inter-firm linkages. These linkages can

take various forms. By making use of firm level data from Vietnams manufacturing sector,

this paper examines the impact of horizontaland vertical (backward and forward) linkages

between domestic and foreign firms on (i) the decision of domestic firms to export and (ii)

the export share of domestic firms. This paper considers only transactional linkages. The

empirical analysis is based on Heckmans two-step estimator in selection models. It is

shown that the presence of foreign firms in Vietnam, through horizontal and forward

linkages, significantly affects the decision of domestic firms to export as well as their

export share. This result continues to hold when we take into account factors such as the

(a) level of technology of domestic firms, (b) ownership structure of domestic firms, (c)

orientation of foreign firms and (d) geographical proximity to foreign firms.

2010 Elsevier Ltd. All rights reserved.

* Corresponding author.

E-mail addresses: [email protected],[email protected](S. Anwar),[email protected](L.P. Nguyen).1 According to UNCTAD, in 1995 (2002), 64 (70) countries introduced changes in their investment regimes, with the total number of regulatory changes

being 112(248).Among them, 106(235) were more favourable to FDI, accounting forapproximately 95 (95)% of the total.For an excellent discussion of the

determinants of FDI, seeBuckley et al. (2007).

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related industrial linkages on export performance (also known as export spillovers) have mainly focused on horizontal

linkages.2 Some empirical studies (for example Kokko, Zejan, & Tasini, 2001; Alvarez & Lopez, 2008) have found the impact of

horizontal linkages on export performance to be positive and statistically significant which suggests that the presence of

foreign firms promotes the export activities of domestic firms in the same sector. On the other hand, some studies (for

exampleAitken & Harrison, 1999; Djankov & Hoekman, 2000; Lutz, Talavera, & Park, 2003; Greenaway, Sousa, & Wakelin,

2004) have found the impact on export performance to be zero or negative. In other words, the empirical evidence is mixed,

which is not surprising since the impact of FDI related industrial linkages on export performance depends on the

characteristics of domestic firms, industries and indeed the host country. Some of these characteristics are categorised as theabsorptive capacity which includes variables such as the size of a countrys stock of human capital, the level of its financial

market development and the technology gap between domestic and foreign firms.

Based on the existing studies, it can be argued that the presence of foreign firms in a country does not always increase the

probability of exporting or the export performance of domestic firms (for example, see Wagner, 2007; Alvarez & Lopez, 2008

and the references therein).Alvarez and Lopez (2008)have argued that the presence of sunk-entry costs to export markets

tends to diminish the overall size of the export spillover effect. In other words, the net effect on export performance will be

positive only if the export spillover effects can more than compensate the sunk-entry cost. In a recent study Harris and Li

(2009)have argued that absorptive capacity can lower the barriers to export market entry. The presence of mixed evidence

warrants further research. Theimpact of FDI in any host country varies from industry to industry and hence results presented

for one country cannot be applied to another.

This paper focuses on Vietnam, a country that has attracted significant FDI since the late 1980s. At the end of the War in

Vietnam, the country had two economic systems, a centrally planned system in the north and a market based system in the

south. However, after national reunification, from 1975 to 1989, Vietnam remained a centrally planned economy. Theintroduction of the reform policy known as Doi Moi in 1986 marked the beginning of the opening up of the Vietnamese

economy which resulted in a significant inflow of foreign investment. FDI inflows have played an important role in the rapid

economic growth experienced by Vietnam. Vietnam is also an interesting case to consider because FDI in Vietnam is mainly

concentrated in designated key economic regions while remote regions are unable to attract significant FDI. This factor

influences the magnitude of horizontal as well as vertical linkages between domestic and foreign firms in different regions.

Vietnam promulgated the Law of Foreign Investment in 1987. This law, which has been subsequently amended, is aimed at

(a) increasing FDI inflows into Vietnam, (b) promoting technology transfer through FDI inflows and (c) enhancing export

activities of domestic firms. Investigations of the effect of FDI on the Vietnamese economy to date are scarce, mainly due to

data limitations. While some existing studies have considered the impact of FDI on productivity, economic growth and

exports, none of the available studies has considered the impact of FDI-related industrial linkages on export spillovers in

Vietnam.3 An analysis of the indirect effect of FDI on Vietnams export performance allows one to assess the effectiveness of

government policies.

This paper examines the impact of horizontal and vertical linkages between domestic and foreign firms on (i) the decisionof domestic firms to export and (b) the export share of domestic firms. The empirical analysis, which is conducted by means

of Heckmans two-step estimator in selection models, reveals that the presence of foreign firms in Vietnams manufacturing

sector has a strong positive effect on domestic manufacturing firms decision to export and their export share, mainly

through horizontal and forward linkages. We also consider the impact on the decision to export and export share after taking

into account factors such as the differences in technology level of domestic firms (i.e., low versus medium and high

technology firms), the ownership structure of domestic firms (i.e., private versus state ownership), whether or not foreign

firms are export-oriented and the geographical proximity of domestic firms to foreign firms.

The rest of this paper is organised as follows. Section2provides a theoretical perspective on FDI and FDI-generated

linkages between domestic and foreign firms and the impact of these linkages on economic growth in host countries. Section

3contains a review of some empirical studies that have considered the impact of transactional linkages between domestic

and foreign firms on the export performance of domestic firms in host countries. Sections 4 a n d 5, respectively, contain data

description and empirical analysis and Section6 contains concluding remarks.

2. MNC presence and economic growth in host economies

A number of existing international business and international economics studies have considered the impact of FDI and

FDI-linked spillovers on host country GDP and the output of domestic firms. These studies include both theoretical and

empirical studies. Empirical investigation can contribute to the development of new theories and/or refinement of the

existing theories.Buckley (2010), among others, has highlighted the importance of the strong interaction between theory

development and empirical investigation. Buckley also argues that international business can be viewed as the interaction of

2 Rodriguez-Clare (1996) is among the firsttheoreticalstudies to considerFDI-linked spillovers through both horizontal and vertical linkages.A review of

more recent theoretical studies, including the seminal work ofMelitz (2003), can be found in Barba-Navaretti and Venables (2004).3 A review of most availablestudies that consider the impact of FDIon productivityand employment in Vietnam canbe found in Nguyenet al.(2008). By

making use of a panel dataset that covers 61 provinces of Vietnam from 1996 to 2005, Anwar and Nguyen (2010)have examined the link between foreign

directinvestmentand economic growthin Vietnam. This study,which is based on a simultaneousequations model,revealsthatin overall terms a mutuallyreinforcing two-way linkage between FDI and economic growth exists in Vietnam.

S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193178


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industrial economics, international economics and the theory of the firm. The main purpose of this section is to provide a

theoretical perspective on the impact of FDI and FDI-generated spillovers on economic growth in host countries. While this

paper deals only with the impact of FDI-generated transactional linkages on the export performance of Vietnamese

manufacturing firms, an understanding of the different types of linkages along with the development of the idea of

investment development path (IDP) is likely to enhance the readers understanding of the broader issues.4

Globalisation has resulted in a significant increase in FDI around the globe. While the IB literature has only recently

started considering the welfare implications of FDI, the international economics literature on the other hand has already

considered this issue, but in a very general way.

5

Casson (1985)argues that the theory of FDI is based on three distincttheories: (i) the theory of international capital markets, (ii) the theory of international trade and (iii) the theory of the

international firm. In his seminal paper,Jones (1965)considered the impact of growth in labour and capital on prices and

output, which is a preconditionfor determining its effect on national welfare as measured by real GDP per capita. The growth

of capital in a country can be attributed to foreign direct investment. Jones has shown that in the case of a small open

economy, growth of capital has no effect on the price of capital and wages as long as all sectors within the economy are

perfectly competitive. This implies that, in the presence of perfect competition, inflow of FDI in a small open economy has no

effect on national welfare as long as the income earned by foreign capital is fully repatriated. However, all sectors in real

economies are not perfectly competitive and hence FDI can have a positive and in some cases negative effect on national

welfare.6

Vernon (1966), through his product cycle theory, has argued that comparative advantage is not fixed and, once a product

is standardised, it may be produced in a developing country to take advantage of, for example, cheaper labour. In other

words, once a new product is standardised, the overall cost of production can be reduced through FDI. In his subsequent

work, Vernon acknowledged that, due to an increase in the geographical reach of leading multinational corporations throughestablishment of overseas subsidiaries, new product development can also take place in relatively less advanced

industrialised countries (Vernon, 1979).

Dunning (1981)has argued that the decision of a firm to expand through FDI depends on ownership (O), location (L) and

internalisation (I) advantages. The OLI framework (also known as the eclectic paradigm) aims to explain the why, where

and how of FDI.7 The OLI paradigm is a general framework. Based on the OLI framework, it can be argued that, in order to

undertake cross border activities, a firm must possess some type of ownership advantage. Such advantages, also known as

the core competencies, can include intangible assets such as, for example, patents, production technologies, marketing

systems, etc. Ownership advantages allow a foreign firm to compete with domestic firms. Based on the extent of its

ownership advantages, a foreign firm will choose an entry mode to safeguard its interests. Dunning has further argued that

the extent of foreign activities in a host country also depends on the extent of location specific advantages that a host country

offers. Location advantages can take the form of availability of natural resources, cheaper labour or government incentives

that serve to lower the cost of production. Locations with good quality infrastructure are likely to be more attractive to

foreign firms. Unlike ownership advantages, location advantages are external to the firm but internal to the government ofthe host country. Location advantages can also be categorised as economic, political or socio-cultural. The third element of

the eclectic paradigm, internalisation advantages, addresses the entry mode of FDI. FDI due to market imperfections (i.e.,

situations where the market does not exist or functions poorly) can reduce the transactions costs of foreign firms. This

involves the creation of an internal market in goods and services; that is, transferring ownership advantages to subsidiaries

in foreign locations to generate revenue. Internalisation is thus a way of avoiding the dissipation of ownership advantages.

Through internalisation a foreign firm can substantially increase the return on its investment ( Dunning, 2000, 2001).

Using the OLI framework, Dunning developed the idea of investment development path (IDP). This idea was refined and

further developed byDunning (1986),Dunning and Narula (1996)andScott-Kennel and Enderwick (2004). The central idea

behind the IDPis that a countrys economy evolves over time and, as a result, a country that used to be a recipient of FDI then

becomes a net exporter of FDI (i.e., its Net Outward Investment position changes over time).8 Stages in the IDP have been

identified and, in stage 1, FDI plays an important role in the economic development of a country. Economic growth makes a

developing country, like China or Vietnam, more attractive for inward FDI. This occurs initially due to location advantages

that contribute to the development of ownership advantages through learning-by-doing. Learning-by-doing, which occursdue to interactions between domestic and foreign firms, gives rise to outward FDI (Amighini, Sanfilippo, & Rabellotti, 2009).

The presence of foreign firms not only increases the supply of capital in host countries, but it can also contribute to the

enhancement of the competitive advantage of domestic firms. In other words, the recent literature has highlighted the

important role played by (i) linkages between local and foreign firms and (ii) spillover effects arising from the presence of

foreign firms in host economies. The empirical work presented in Dunning and Narula (1996) suggests that the IDP is

4 A significant proportion of the material provided in this section is based on the suggestions received from an anonymous reviewer.5 In a very interesting paper,Buckley (2010)has argued that the theory of international business existed well before Stephen Hymer completed his PhD

thesis at MIT. An excellent discussion of early FDI theories can be found in this paper.6 In a veryinteresting paper, Oetzeland Doh(2009) have arguedthatthe welfare implications of FDIneedto be recognised ifMNEs aregoing to overcome

the liabilities of foreignness. They have suggested that MNEs should pursue collaborative relationships with NGOs that make a positive, collective

contribution to host country development.7

Also seeDunning (1977).8 The Net Outward Investment (NOI) is the gross outward investment stock minus the gross inward investment stock.

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idiosyncratic and heavily influenced by a countrys macro organisational policy orientation. In other words, the IDP of a

country depends on whether the country in question is outward looking-export-oriented (OL-EO) or inward-looking-import

substituting (IL-IS) or some hybrid of the two. A hybrid regime includes features of both IL-IS and OL-EO (seeOzawa, 1992).

However, given that few real life economies at present can be categorised as IL-IS, it can be argued that OL-EO is more

effective in achieving faster growth and structural upgrading in developing countries. Obviously, the government policy

plays a central role in determining whether a country is going to be IL-IS or OL-EO. Like China and India, Vietnam used to be

IL-IS but a shift in government policy has resulted in most countries, including China, India and Vietnam, becoming OL-EO.

By making use of the key elements of the IDP and OLI paradigm,Scott-Kennel (2004) has examined whether or not inter-firm linkages between foreign affiliates and domestic firms have contributed to the development of the capability of

domestic firms in New Zealand. She examined the mechanism by which inbound investment could be linked to the

development of ownership specific advantages. By determining the OLI configuration of the affiliates within the host

economy, Scott-Kennel and Enderwick (2005) were able to assess the differences between foreign and domestic enterprises.

This allowed them to determine the degree to which the unique ownership specific advantages of foreign firms might be

transferred to domestic firms and also to identify the mediating effects of internalisation specific advantages. This has

resulted in a clearer picture of (a) why foreign investment might exert a different impact than investment by domestic firms,

(b) the mechanisms for such an impact, and (c) the impact of government policy and host country factors on the process of

upgrading.

Some earlier studies investigating the impact of FDI on domestic firms, mostly in developing countries, have shown that

ownership specific advantages were transferred to domestic firms through linkages formed between foreign and domestic

firms (UNCTAD, 2001; Giroud, 2003). However, these studies were limited to transactional linkages that involved domestic

firms acting as suppliers or subcontractors (backward linkages) or occasionally as marketing/distribution agents or customers(forward linkages) for the foreign affiliates. Most of these studies have tried to place a value on these transactional linkages by

asking the question what is the value of local sourcing by foreign owned firms versus local firms? or what is value of

intermediate goods supplied by local customers to foreign firms? A number of empirical studies haveused the sameapproach,

which essentiallydeals withquantitative linkagesbetween domestic andforeignfirms. Themain disadvantageof thisapproach

is that we do not see insidethe workings of such relationships;we only estimate thechangesto demand and supply. In addition

to evaluating the quantitative side of the linkages between domestic and foreign firms,Scott-Kennel and Enderwick (2004,

2005) have extended the analysis to incorporate the qualitative aspects (developmental potential) of a wide range of linkages.

These linkages include competitive pressures induced by the foreign firms on domestic competitors, which could force

domestic firms to improve the quality of their products and, in some cases, might force them to exit the industry. Competitive

pressures might also force domestic firms to attempt to imitate innovations introduced by foreign firms thereby improving

their own competencies. The presence of such an effect is also highlighted by, among others, Dunning (1986)andLall (2001).

The backwardand forward linkagesbetweendomestic and foreign firms that are the focus of the present study canalsoplay an

important role in upgrading the capabilities of domestic firms. For example, there may be potential for longer lastingrelationships wherebythe foreignfirm works closelywith domesticfirms,providing assistance andtraining to help improvethe

quality of their products or services. There is evidence of such on-going relationships in many case studies of foreign firms in

host economies, especially where the products or services supplied by the domestic firms were of a more specialised nature

(Wong, 1992; Barrow& Hall, 1995). In addition, foreignfirms mayalso helpdomesticfirms to improvetheir capabilities through

collaboration. This could include strategic alliances, technology sharing agreements, mutual development of innovative

products and practices, or cooperationon marketing anddistribution contracts (Scott-Kennel& Enderwick, 2004). Scott-Kennel

(2007) has further investigated FDI related industry spillovers and inter-firm linkages in New Zealand. This study highlighted

the importance of both the quality and the quantity of the linkages between foreign affiliates and domestic firms, arguing that

collaboration is more likely to result in positive spillover effects.

In summary, Dunnings work, discussed above, uses the idea of Net Outward Investment (a macroeconomic concept) to

explain a micro level phenomenon. Scott-Kennel and Enderwick extended Dunnings work by conducting a theoretical

investigation of theblack boxof the IDP.Their workfocuses on the mechanics throughwhich inward FDI induces domesticfirms

to enhance their ownership advantages. Scott-Kennel and Enderwick have highlighted the role of the intensity of inter-firmlinkages. They argue that the degree of linkage intensity at the firm level has a positive effect on the contributionof inward FDI

on a countrys economic development and linkages of different intensity are associated with different stages of the IDP. Unlike

most existing studies reviewed in this paper and Meyer and Sinani (2009), Scott-Kennels empirical work is based on a survey

that is used to find out from foreign firms in New Zealand the linkages that they had developed with local firms.

Drawing on insights from other disciplines,Giroud and Scott-Kennel (2009)have suggested a framework that could be

used for further research into FDI related linkages between domestic and foreign firms in host countries. They have argued

that the intensity of inter-firm linkages depends on three factors: the scope (i.e., types and breadth), quantity (i.e., number

and values) and quality (i.e., depth, duration, knowledge and resources transfer) of linkages. These three factors affect the

learning and development potential of domestic and foreign firms in host countries. The learning and development potential

of domestic and foreign firms affects the size of linkage-induced spillovers.

Some recent studies have also considered the effect of MNC strategies and internal structures on spillover effects

including technology transfer. Earlier studies have viewed FDI as an engine of economic growth. However, recent studies

have taken the effect of globalisation into account, which has altered the context within which the developmental effect of IBactivities has to be considered (Buckley & Ghauri, 2004). Recent IB studies have started looking at the effect of MNC strategies



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and their internal structures on spillovers including the question of technology transfer. 9 Globalisation has increased the

location options for MNCs. Other developments, including technological improvement and outsourcing, have altered the

spatial and organisational structure of MNC activities (Buckley & Ghauri, 2004). It has been suggested that the degree of such

structural transformation within an economy can affect the volume of inward as well as outward FDI.10 Giroud (2007)has

considered the impact of vertical linkages between domestic and foreign firms in Malaysia and Vietnam. His study considers

foreign firms in either the electronics or textile sectors and is based mainly on data collected from interviews. Giroud finds

that foreign firms do not share their skills/technologies with local suppliers. Barbosa and Eiriz (2009)have argued that FDIcan also facilitate access to distribution channels. By making use of firm level data from Portugal over the 19941999 period,

Barbosa and Eiriz have considered the impact of FDI on the productivity of manufacturing sector. They estimated a Cobb-

Douglas production function, augmented by measures of foreign presence and some control variables. The empirical model

is estimated by Generalised Methods of Moments. Following most existing studies, in order to reduce the severity of the

endogeneity problem, lagged values are used as instruments. Based on their empirical results, Barbosa and Eiriz concluded

that foreign presence in Portugals manufacturing sector has not resulted in a significant productivity spillover effect.

Jindra, Giroud, and Scott-Kennel (2009) suggest that knowledge spillovers arising from vertical supply chain linkages

between foreign subsidiaries and domestic firms can contribute to the economic development of host countries. Meyer and

Sinani (2009)reconsidered the link between FDI spillovers and economic growth. They argue that FDI generated spillovers

affect economic growth in a curvilinear way, taking a U-shaped form. Meyer and Sinani further argue that spillovers

experienced by domestic firms in developing countries arise mainly from demonstration effects. It can hence be argued that

there is also a need for government support and/or sponsorship to promote linkages between highly productive foreign and

relatively less productive domestic firms.An interesting survey of a large number of studies that deal with the impact of FDI generated spillovers on firm

productivity can be found inMeyer and Sinani (2009); seeTable 1on pages 108283. The present study focuses exclusively

on FDI linked export spillovers. Such spillovers also contribute to overall economic development of host countries. The next

section contains a review of some studies that have focused on the impact of FDI on the export performance of domestic

firms.

3. MNC presence and export performance

The presence of MNCs in developing countries can facilitate technology transfer from developed to the developing

countries. Up until the late 1980s it was implicitly assumed that all developed countries have identical technologies and

hence no attention was paid to the examination of productivity spillovers from MNCs located in developed countries.

Recently, studies such asKneller and Pisu (2007)and Grima et al. (2008) have examined the possibility of productivity

spillovers to domestic firms from MNCs located in the UK.This section provides a review of studies involving developing as well as developed countries. Aitken, Gorg, and Strobl

(1997) were among the first to consider the impact of FDI linked spillovers on export spillovers. Aitken et al. investigated the

role of geographic and multinational spillovers on the export decision of local firms in Mexico for the period 19861990.

Aitken, Gorg and Strobl controlled for the overall industry concentration in order to focus on spillover effects specific to

exports. They argued that proximity to multinational activity reduces the cost of access to foreign markets, which has a

positive effect on the probability that domestic firms in the same sector and region will engage in export activity. Kokko,

Zejan, and Tansini (2001)found that entry of foreign firms in Uruguay after 1973 enhanced the probability that domestic

firms will be involved in export activities. By making use of data on Ukrainian manufacturing firms over the period 1996

2000, Lutz, Talavera, and Park (2003) tested for the presence of FDI linked export spillover effects. However, they did not find

any evidence of export spillovers from FDI.

Table 1

The expected direction of relationship between dependent and independent variables.

Independent variables Dependent variable

Export_intensityij/Exportij

Capital_Intensity +

Human_Capital +

Scale +

Concentration

Technology_Gap

Financial_Development +

Horizontal_FDI +/

Backward_FDI +/

Forward_FDI +/

9

SeeGhauri and Yamin (2009)for an interesting introduction.10 SeeDuran and Ubeda (2005)and the references therein.



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Using firm level data for the period 19881992,Kraay (2002)found that both labour and total factor productivity were

significantly higher in exporters as compared to non-exporters in China. However, for new exporters the learning effects

were insignificant and negative in some cases. Using a Chinese dataset that contains firm level data for the period 1993

2000, Ma (2006) examined whether exports by foreign firms increase the probability of exporting by domestic Chinese firms.

Ma found that foreign firms from OECD countries positively influence the export decision of local firms but overseas Chinese

firms do not increase the probability of exporting by local firms.

By making use of firm level data from Chile over for the period 19901999,Alvarez and Lopez (2008)found evidence of

significant horizontal productivity spillover effects that can be attributed to both the presence of export-oriented foreignfirms and the export activity of domestic firms. They further argue that export promotion is a particularly useful strategy if it

also contributes to productivity spillovers. However, the net effect on productivity will be positive only if the sunk-entry cost

to export markets is significantly smaller than the positive spillover effect.

Studies involving developed countries includeBarrios, Gorg, and Strobl (2001). They used firm level data from Spanish

manufacturing firms for the period 19901997. The main aim of their research was to investigate export spillovers from

foreign to domestic firms. They found no evidence to suggest that domestic firms will export following the export activity of

multinationals in a sector.

Greenaway et al. (2004)extended the model utilised by Aitken et al. (1997)to examine the impact of FDI on the export

performance of domestic firms in the UK. Greenaway et al.s work is based on firm level data for the period 19921996. By

estimating a two-step Heckmantypeselectionmodel, they investigate factors which affect thelocalfirmsexportdecisions.They

found that externalities pertaining to information on the international market have an impact on a domestic firms decision to

export or not but have no bearing on export share.Ruane and Sutherland (2004) focus on the effect of FDI linked spillovers on

Irelands exports. Specifically, they examined the effect on the export decision and intensity of domestic firms in third countryexport platforms. Their analysis, which is based on panel data from 1991 to 1998, suggests that the presence of foreign firms in

the Irish manufacturing sector is associated with a higher probability of Irish domestic firms becoming exporters and exporting

more intensively. In addition, they found that most of these spillovers can be attributed to the concentration of the US firms in

Ireland. They further argue that the strong presence of US firms in Ireland since the 1990s has had a positive impact on the

competitive nature of domestic firms which indirectly improvedthe export propensity of domestic firms. In other words, Ruane

and Sutherland found strong evidence to suggest that FDI has resulted in positive spillovers in Ireland.11

Kneller andPisu (2007) examined theimpactof FDI-relatedhorizontal and vertical linkages on export spilloversin the UK for

the period 19921999. They utilised Heckmans selection model which involves two decisions: (i) whetherto export or not and

(ii) howmuch to export. They found that a domesticfirmsdecision to export is positively associated with the presence of foreign

firms in thesame industry.Furthermore, export-oriented foreignfirms seem to be themain sourceof export spillover effects. The

decision concerning how much to export (i.e., the export share) is influenced positively by foreign firms in downstream

industriesand by those in the sameindustry that do not export.In summary, unlike the existing studies, Kneller and Pisu (2007)

attempted to examine the impact of FDI linked spillovers through three channels (horizontal, vertical-backward and vertical-forward) on export spillovers in theUK. Grimaet al. (2008) used the same dataset to examineboth horizontal and verticalexport

spillover effects for export-oriented and domestic market-oriented firms separately. Theyalso considered the role of absorptive

capacity. They conclude that spillover benefits vary considerably across domestic exporters and non-exporters. Harris and Li

(2009) have shown that absorptive capacity plays a crucial role in overcoming export market entry barriers. This study is based

on a merged 2000 and 2001 firm level dataset for the UK. By making use of panel data from 1988 to 1996, Blalock and Simon

(2009) have found that Indonesian manufacturing firms with greater absorptive capacity gain more from downstream FDI. By

making use of firm level data, Sun (2009)has shown that significant export spillovers exist in China.

Roberts and Tybout (1997) found that sunk cost plays an important role in determining the export performance of

manufacturing firms in Colombia. In a more recent study,Das, Roberts, and Tybout (2007)used plant-level panel data on

Colombian chemical producers. They found that, while the export market entry cost was typically large, it greatly varied

across producers. Their work also highlights the role of prior export experience. It is interesting to note that in a recent

empirical study, Alessandria and Choi (2007), by making use of an equilibrium business cycle model of the US economy, have

argued that the sunk cost associated with exporting does not have significant consequences for net export dynamics.However, theoretical studies have suggested that the presence of sunk cost can lead to a delayed effect on export

performance (seeBernard & Jensen, 2004and references therein).Wagner (2007), while summarising the existing research,

has argued that productive firms perform better in the export market since these firms are able to keep production as well as

non-production costs (for example transportation, distribution, marketing and foreign networks) down. Non-production

costs can be viewed as export market-entry barriers or sunk cost, which discourage less productive firms from exporting.

Wagner also highlights the role of learning by exporting which refers to the flow of knowledge from international buyers and

competitors. Therefore, firms that are engaged in exporting are exposed to increased competition which can result in

increased efficiency. Learning effects have been investigated byGreenaway and Kneller (2007)for UK manufacturing firms

11 Prior to the global financial crisis, the Irish economy experienced impressive growth which can be attributed to FDI, low tax, government support and

investment in educationfunded fromEU Structural Funds. However, the global financialcrisis significantly affected the Irish economy along witha number

of economies around the globe. It has been suggested that the Irish model of development was not sustainable due to various factors including corruptionand unregulated financial markets (See OToole, 2010).



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An increase in capital intensity is expected to increase the possibility of exporting as well as the export share. The implicit

assumption is that an increase in capital intensity increases the productivity of labour since more capital per worker is

available. The same applies to the role of human capital. An increase in human capital increases the productivity level which

is likely to have a positive effect on export activities. An increase in capital intensity or an increase in human capital increases

the scale of production and increases the likelihood that domestic firms will enter the export market and that the firms that

are already exporting will export more. An increase in the technology gap means that domestic firms have become relatively

less productive and hence their export share is likely to decrease. Financial development is likely to have a positive effect on

export activities of domestic firms. Human capital, the technology gap and the level of financial development are well-known measures of absorptive capacity. An increase in absorptive capacity allows domestic firms to reap greater benefits

from the presence of foreign firms which positively affects export activities of domestic firms (seeGrima et al., 2008).

4.2. Industry variables

Concentrationjtis measured by means of the Herfindahl index for domestic firms. The level of concentration in industryj

is defined as follows, where xijtis the sales of the firm i in industry j at time tand Xjtis the total sales of industry j.

HERFjtXni1

xi jtXjt

2i 1; 2;. . . ; n (3)

An increase in this index indicates a higher degree of industry concentration which reflects less competition. Decline in

competition reduces incentives for exporting and hence the estimated coefficient is expected to be negative. It could also be

argued that greater concentration means greater economies of scale, which promotes exporting.

4.3. FDI spillover variables (FDISpilloversijt)

FDI spillovers can occur through both horizontal and vertical linkages between domestic and foreign firms. Vertical

linkages can be divided into forward or backward categories. Based on the existing literature (for example see Liu, 2008;

Grima et al., 2008), several FDI linked spillover variables are constructed and used in this paper. The degree of horizontal

spillovers in industry j at time t, Horizontal_FDIjt, is measured as follows:

Horizontal FDIjtY fjtYjt

(4)

An increase in Horizontal _ FDIjtindicates that the output of foreign firms in Vietnam is expanding faster than the output

of domestic firms in the same industry which gives rise to an increased horizontal spillover effect (see Liu, Wang, & Wei,2009; Grima et al., 2008). In order to take into account the regional dimension, the horizontal regional FDI in region rat time

t, Horizontal_Regionrt, index is computed as the proportion of output accounted for by foreign firms in the same region. In

order to assess the effect of the presence of export-oriented and domestic market oriented foreign firms in the same industry,

two horizontal indices (Horizontal_Exportjtand Horizontal_Domesticjt) are calculated. Horizontal_Exportjtis the proportion

of the output of foreign firms that is exported and Horizontal_Domesticjt is the proportion of the output of foreign firms that

is sold in the domestic market.

The vertical spillover effect can divided into two categories: vertical backward and vertical forward. The degree of

backward spillovers in industryj at time tis computed as follows, where Ykj is the output of industry k supplied to industryj.

Backward FDIjtX8 k6 j

ak jtHorizontal FDIkt (5)

ak j Yk j

Yk(6)

In other words, the greater the proportion of output provided to an industry with foreign presence and the greater the

activities of the foreign firms receiving the intermediate inputs from industry k, the greater the value of the spillover effect

(see Girma et al., 2008). This measure captures the extent of backward linkages between local firms in upstream sectors and

foreign firms in downstream sectors. The output of some foreign firms in Vietnam is used as input by some domestic firms.

An increase in FDI leads to an increase in the output of foreign firms which leads to an increase in the supply of inputs to

domestic firms.

The vertical forward spillover effect in industry j at time t is calculated as follows:

Forward FDIjtX8h6 j

bh jtHorizontal FDIht (7)

bh j Yh jYj

(8)

wherebhj represents the proportion of sector h s output supplied to industry j.



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5.1. Technology level and export spillovers

In order to examine the role of the level of technology, the data was divided into two subsamples: (1) low technology

industries and (2) medium and high technology industries (see Appendix 2). Linear versions of Eqs.(1) and (2)were re-

estimated by making use of each of the two subsamples. Based on the sample size, it is clear that a larger proportion of

Vietnams manufacturing firms can be categorized as low technology firms. The estimated results are summarised in Table 3.

The estimated coefficients presented in Table 3indicate that the impact of FDI linked export spillovers arising from

horizontal and vertical linkages on a firms decision to export and its export share vary considerably with the level of its

technology. The impact of horizontal linkages between foreign anddomestic firms on the decision to export and export share

is positive and significant for both technology groups. This suggests that, irrespective of the level of technology, the presence

of foreign firms encourages domestic firms in the same sector to (a) enter the export markets and (b) increase their export

volume.

As far as the impact of forward linkages is concerned, the estimated coefficients are positive and significant only for the

low technology group. This suggests that only low technology industries gain significant benefits from forward linkages. Theresults presented inTable 3 suggest that Vietnamese firms gain no benefit from the presence of foreign firms through

backward linkages; the estimated coefficients are negative and statistically significant. This can be attributed to the presence

of high sunk costs that discourage export activity.

These findings are consistent with the general conclusions that can be drawn from the existing literature. Based on results

presented inTable 3, it can be argued that the impact of export spillovers on the decision to export and on the export share

Table 3

Technology level of domestic firms and export spillover effect.

Independent variables Low technology Medium and high technology

Export decision (1) Export intensity (2) Export decision (3) Export intensity (4)

Capital_Intensity 0.0000038 (1.90)*** 0.0000049 (3.06)* 0.0000022 (0.20) 0.0000014 (0.10)

Scale 2.2734810 (3.46)* 14.33778 (7.12)* 2.413318 (3.16)* 5.239148 (4.39)*Concentration 0.5536146 (1.19)* 0.7836603 (0.78) 2.514365 (3.16)* 4.363257 (5.46)*

Human_Capital 0.0017494 (2.28)** 0.0068176 (3.97)* 0.0107931 (4.87)* 0.0285431 (10.59)*

Technology_Gap 0.0014056 (4.99)* 0.0037722 (5.84)* 0.0013518 (2.61)* 0.0023352 (3.16)*

Financial_Development 0.213323 (6.88)* 0.6472288 (8.91)* 0.0187376 (0.26) 0.0158928 (0.16)

Horizontal_FDI 0.343195 (3.11)* 1.329048 (6.40)* 0.7898903 (3.20)* 1.252257 (3.15)*

Backward_FDI 0.0024247 (3.50)* 0.009430 (5.79)* 0.0010981 (1.14) 0.0036114 (2.79)*

Forward_FDI 0.008117 (5.10)* 0.024579 (7.07)* 0.0122217 (2.44)* 0.0258886 (4.17)*

Industry dummies Yes Yes

Region dummies Yes Yes

Observations 6755 3763

Censored obs. 5286 2938

Uncensored obs. 1469 825

Wald-x2 2634.26 859.81

Sigma 0.4 0.7

Log likelihood 1351.555 2677.310

Notes: (i) Robust t-statistics in parentheses; (ii) *** significant at 10%, ** significant at 5%, and * significant at 1%.

Table 2

Horizontal and vertical linkages and export spillover effect.

Independent variables Export decision (1) Export intensity (2)

Capital_Intensity 0.0000009 (0.54) 0.0000046 (4.83)*

Scale 1.8494013 (4.54)* 6.623209 (6.41)*

Concentration 1.298461 (5.28)* 2.819040 (5.86)*

Human_Capital 0.0041308 (5.79)* 0.0123169 (8.79)*

Technology_Gap 0.0015185 (6.01)* 0.0034078 (6.98)*

Financial_Development 0.1568261 (5.29)* 0.4316906 (7.51)*Horizontal_FDI 0.1533816 (1.82)*** 0.2720660 (1.91)**

Backward_FDI 0.002132 (6.02)* 0.0063872 (9.69)*

Forward_FDI 0.0043637 (3.03)* 0.0120513 (4.38)*

Industry dummies Yes

Region dummies Yes

Observations 10710

8224 Censored Obs.

Uncensored obs. 2486

Wald-x2 3364.81

Sigma 0.5

Log likelihood 2970.509

Notes: (1) Robust t-statistics in parentheses; (2) *** significant at 10%, ** significant at 5%, and * significant at 1%.



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varies with the level of technology. Our findings are consistent with the fact that a significant proportion of Vietnamese firms

export mainly low technology products such as textile garments, shoes, food and furniture. In other words, the technology

gap between foreign and domestic firms is high. Government policy, such as increased spending on advanced education,

could help to improve the level of technology.

5.2. Export spillovers and firm ownership

The purpose of this section is to examine whether the impact of export spillovers varies with ownership of firmsin Vietnam. This issue was empirically examined by subdividing the sample into two groups (1) private and (2) state-

owned firms. The empirical model was re-estimated for each of the two subsamples. The estimated results are summarised

inTable 4.

Table 4 shows that the impact of horizontal linkages on the decision to export and export share is positive for both private

and state-owned firms but the effect is highly significant only for state-owned firms. Vietnam is regarded as an economy in

transition so this result is not surprising. State-owned firms are better organized and hence these firms have better access to

information on export markets. These firms are also better equipped to imitate the products of foreign firms in the same

sector. However, the state-owned firms do not gain any benefits from vertical linkages with foreign firms (see the estimated

coefficients andt-values in columns 1 and 2 ofTable 4). On the other hand, private firms are relatively more innovative and

hence these firms do gain significant benefits from the presence of foreign firms through vertical linkages (see the estimated

coefficients andt-values in columns 3 and 4 ofTable 4). This suggests that private firms have better access to good quality

intermediate inputs, which helps to reduce production costs. As a result, private firms are able to increase their export share.

5.3. Export spillovers: Export-oriented versus domestic market oriented foreign firms

Existing studies such as Aitken et al. (1997), Karpaty and Kneller (2005), Kneller and Pisu(2007) and Grimaet al. (2008)have

emphasized that FDI-linked export spillover effects can also be attributed to information or competition effects. In order to

capture this effect, following the existing literature, foreign firms included in the sample were divided into two groups: firms

thatare export-oriented and firmsthat are producing primarily for the domesticmarket.The Heckmanselection model utilized

in this paper was re-estimated by splitting the horizontal spillover effect into two variablesHorizontal-ExportandHorizontal-

Domestic. The former captures the spillover effect arising from the presence of export-oriented foreign firms in Vietnams

manufacturing sector and the latter captures the spillover effect arising from the presence of foreign firms that are primarily

producing for the domestic market. The empirical results are summarized in Table 5.

Table 5 shows that horizontal spillover effect arising from the presence of export-oriented foreign firms in Vietnams

manufacturing sector has a positive and significant effect on domestic firms decision to export and their export share. In

other words, the presence of export-oriented foreign firms not only significantly increases the probability that domesticfirms in the same industry will become involved in exporting but it also leads to a significant increase in their export

intensity. The presence of domestic market oriented foreign firms in Vietnam has the opposite effect. These results suggest

the presence of significant imitation and knowledge spillovers effects among Vietnams manufacturing firms. In addition,

one can argue that (a) the presence of export-oriented foreign firms in Vietnam helps domestic firms to reduce substantially

Table 4

Firm ownership and export spillover effect.

Independent variables SOEs Private enterprises

Export decision (1) Export intensity (2) Export decision (3) Export intensity (4)

Capital_Intensity 0.0000023 (0.80) 0.0000027 (1.27) 0.0000024 (0.15) 0.0000061 (4.92)

Scale 6.987369 (3.06)* 14.56053 (6.13)* 1.5620800 (3.78)* 4.786338 (3.86)*Concentration 3.675066 (3.01)* 5.792057 (5.31)* 1.12775 (4.49)* 2.21122 (3.98)*

Human_Capital 0.0153369 (2.30)** 0.0268919 (4.08)* 0.0009708 (2.77)* 0.0136376 (9.33)*

Technology_Gap 0.0123865 (2.76)* 0.0175449 (4.20)* 0.0013069 (5.76)* 0.0030646 (6.29)*

Financial_Development 0.122673 (0.78) 0.1722184 (1.02) 0.1217213 (4.20)* 0.3869783 (6.28)*

Horizontal_FDI 1.630444 (4.26)* 2.559526 (9.30)* 0.1773258 (1.90)*** 0.0683166 (0.38)

Backward_FDI 0.0063897 (3.90)* 0.0095481 (6.42)* 0.002187 (5.86)* 0.0084265 (11.16)*

Forward_FDI 0.012042 (1.78)*** 0.0197829 (3.26)* 0.0065807 (4.26)* 0.0220281 (7.02)*






Wald-x2 337.35 3455.99

Sigma 0.9 0.4





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the sunk-cost associated with export activities and (b) horizontal export spillovers mainly arise from the presence of

export-oriented foreign firms.

5.4. Geographical proximity and export spillovers

The existing literature suggests that the scope for FDI-linked export spillovers is greater when geographical distance

between foreign and domestic firms is small. It can be argued that, in some cases, domestic firms learn from foreign firms by

observing and imitating and that knowledge concerning export practices spillovers from foreign to domestic firms through

labor turnover. However, such spillovers are limited by a spatial dimension, such as within the confines of a local labor

market. Thus, we assess the importance of geography by making use of an index of horizontal linkages that takes into

account both the regional and export orientation of foreign firms. Specifically, we re-estimate Eqs. (1) and (2) by making use

of an alternative variable Horizontal_Regionrt, which consists of the proportion of output accounted for by foreign firms in

the same region. The estimated results are summarized in columns (1) and (2) ofTable 6.The estimated coefficients of the variable Horizontal_Region are positive and highly significant, which suggests that an

increase in geographical concentration of foreign firms operating in a region increases the probability that domestic firms

located in the same region will be involved in exporting. Based on the results presented in column (3) ofTable 6, it is also

possible to conclude that an increase in geographical concentration of foreign firms in a region leads to an increase in the

export share of domestic firms located in the same region. In order to further investigate this effect, the Horizontal_Region

Table 5

Export-oriented versus domestic market oriented foreign firms and export spillover effect.

Independent variables Export decision (1) Export intensity (2)

Capital_Intensity 0.0000032 (0.85) 0.0000047 (5.00)*

Scale 1.760814 (4.31)* 6.098204 (5.82)*

Concentration 1.297493 (5.44)* 2.600951 (5.74)*

Human_Capital 0.0010284 (2.70)* 0.0137745 (9.71)*

Technology_Gap 0.0014121 (5.75)* 0.0030654 (6.35)*

Financial_Development 0.1351666 (4.58)* 0.3352363 (5.80)*Horizontal_Export 0.4592585 (5.44)* 1.123808 (7.62)*

Horizontal_Domestic 0.9560449 (7.15)* 3.061645 (12.87)*

Backward_FDI 0.0014185 (3.96)* 0.0052418 (7.83)*

Forward_FDI 0.0060968 (4.23)* 0.0174519 (6.45)*

Industry dummies Yes

Region dummies Yes

Observations 10,710

Censored obs. 8224

Uncensored obs. 2486

Wald-x2 4065.80

Sigma 0.5

Log likelihood 2833.038


Table 6

Geographical proximity to foreign firms and export spillover effect.

I ndependent variables Export decision (1) Export intensity (2) Export decision (3) Export intensity (4)

Capital_Intensity 0.0000095 (0.07) 0.0000047 (4.94)* 0.0000042 (0.04) 0.0000046 (4.90)*

Scale 1.53397 (5.01)* 6.396632 (6.19)* 1.341503 (4.71)* 6.473427 (6.25)*

Concentration 1.011194 (5.66)* 2.893500 (6.10)* 0.905554 (5.54)* 2.867600 (6.05)*

Human_Capital 0.000766 (2.73)* 0.0119050 (8.47)* 0.006642 (2.62)* 0.0119036 (8.47)*Technology_Gap 0.0011882 (6.37)* 0.0035120 (7.25)* 0.0010331 (5.78)* 0.0035113 (7.25)*

Financial_Development 0.0960326 (4.39)* 0.3519516 (6.18)* 0.0831739 (4.17)* 0.3506576 (6.16)*

Horizontal_Region 1.438696 (11.31)* 1.329048 (6.40)*

Horizontal_Reg_Exp 2.353917 (5.66)* 0.5704931 (0.39)

Horizontal_Reg_Dom 0.024175 (0.04) 6.787053 (4.78)*

Backward_FDI 0.0021234 (8.42)* 0.0089175 (14.57)* 0.018392 (7.02)* 0.0089525 (14.62)*

Forward_FDI 0.0064101 (9.72)* 0.0216143 (11.67)* 0.0055857 (8.04)* 0.0217489 (11.74)*






Wald-x2 4901.69 5905.83

Sigma 0.4 0.3





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variable wassplit into twoparts, oneto take into account the export-oriented foreign firms and theother to take into account

the domestic market oriented firms in the same region. The estimated results are reported in columns (3) and (4) ofTable 6.

The estimated results suggest that the presence of export-oriented foreign firms significantly increases the probability that

domestic firms in the same region will enter the export market. However the effect on export share is insignificant.

Surprisingly, it appears that the presence of domestic market oriented foreign firms in the same region contributes to a

significant increase in export intensity of domestic firms.

In summary, based on the empirical analysis presented in this paper it can be argued that horizontal and forward linkages

between foreign and domestic firms are the main channels of export spillovers from FDI in Vietnam. The negative andstatistically insignificant spillover effects can be attributed to the high sunk costs of exporting.

6. Conclusion and policy implications

This paper contributes to the existing literature that deals with the impact of spillovers that arise from FDI-generated

linkages between domestic and foreign firms on productivity and exports. FDI is regarded as a vehicle for the development of

new technologies and technology transfer. Technology transfer can boost productivity and hence contribute to a larger

increase in production. It has been suggested that the presence of foreign firms can also affect the decision of domestic firms

to export as well as their export share. Most existing empirical studies have focused only on the impact of horizontal linkages

between domestic and foreign firms on the export performance of domestic firms. Recent studies, such as Kneller and Pisu

(2007), have suggested that the export performance of domestic firms can also be affected by vertical (forward and

backward) linkages between domestic and foreign firms. This paper focuses on Vietnam, a country that has attracted

significant FDI since the late 1980s, yet none of the existing studies has considered theimpact of the presence of foreign firmson export performance of the Vietnamese firms. An analysis of export spillovers in Vietnam is also useful in that the lessons

learned from Vietnams experience can be of considerable value to other regional and transitional economies.

In order to examine the impact of the horizontal and vertical linkages between domestic and foreign firms on export

performance of domestic firms in Vietnam, this paper makes use of a Heckman type selection model. The model is estimated

by means of Heckmans two-step estimator in selection models. The empirical analysis, which is based on firm level data

from the Vietnamese manufacturing sector, reveals that the presence of foreign firms in Vietnam has a positive and

significant effect on (i) the decision of domestic firms to export and (ii) the export share of domestic firms only through

horizontal and forward linkages. In other words, export spillovers experienced by Vietnams manufacturing firms can be

mainly attributed to FDI-related horizontal and forward linkages. Our empirical analysis suggests that backward linkages

have contributed to a significant reduction in exports of domestic firms. The existing theoretical literature suggests that the

entry of foreign firms can increase domestic firms sunk-entry cost of export activities. Based on the empirical evidence

provided in this paper, it can therefore be argued that the presence of foreign firms in Vietnam has contributed to an increase

in the sunk-entry costs for a significant number of domestic firms and hence the overall effect on export activity throughbackward linkages with foreign firms is negative

Further empirical analysis shows that horizontal linkages have resulted in a positive and significant export spillover effect

to both low and medium/high technology domestic firms. However, forward linkages have resulted in a positive and

significant export spillover effect only to low technology domestic firms. We also consider the export spillovers by splitting

the sample into state-owned and private sector firms. The empirical analysis suggests that horizontal linkages with foreign

firms lead to a significant positive export spillover effects to state-owned firms, whereas forward linkages with foreign firms

lead to a significant positive spillover effect to private firms. In an attempt to improve the competitiveness of the state-

owned enterprises (SOEs) and to attract additional FDI, Vietnam has undertaken a program to semi-privatise some SOEs that

are not involved in the provision of public goods and services. However, so far only a very small number of small and

medium-sized SOEs have been semi- privatised and these SOEs remain under government control. By 2005, more than 3000

SOEs were partially privatised (SeeSjoholm, 2006).

It has been suggested that export spillovers are stronger if foreign firms located in host countries are export-oriented (see

Grima et al., 2008). Our empirical investigation suggests that horizontal linkages with export-oriented foreign firms do leadto significant positive export spillovers to Vietnamese firms. Finally, we consider the impact of the geographical location of

foreign firms on export spillovers to Vietnamese manufacturing firms. The empirical analysis shows that an increase in the

geographical concentration of foreign firms operating in a region increases (a) the probability that domestic firms located in

the same region will be involved in exporting and (b) the export share of domestic firms located in the same region. We also

found that the presence of export-oriented foreign firms in Vietnam significantly increases the probability that domestic

firms in the same region will start exporting. The empirical results presented in this paper are consistent with the theory that

linkages with foreign firms can have a significant impact on export activities of domestic firms. However, given the structure

of the Vietnamese economy, its stock of human capital and government policies, not all linkages have a positive effect on the

export activities of domestic firms. In other words, the empirical results presented in this paper are dependentupon the state

of the economy and government policies.

The empirical results presented in this paper suggest that, among other things, there is a need for improved export

promotion programs in Vietnam. Firms that enter an industry face competition from existing firms. The level of competition

is higher when foreign firms are present. New firms notonly face stiff competition but they have to also incur significant sunkcosts which can discourage export activities. For example, the cost of product promotion, the cost of establishing contacts



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with potential clients and, of course, the cost of product development. The presence of negative and statistically insignificant

spillover effects appears to suggest that the sunk cost of exporting is too high and the quality of linkages with foreign firms is

relatively poor. A decrease in sunk costs could make Vietnamese firms more competitive at theinternational level. By making

use of Irish manufacturing sector data,Gorg, Henry, and Strobl (2008)have shown that government support in the form of

capital grants, training grants, R&D grants, rent subsidies, technology acquisition grantsand loan guarantees can improve the

performance of exporters. It can therefore be argued that there is a need for government support in Vietnam. Such support

can serve to indirectly reduce the sunk cost associated with exporting. Government support may be lowered over time since

new firms can learn from the experiences of the pioneering firms. In other words, government action can help to create,among other things, information externalities which can help to reduce the cost of finding a new market and/or to reduce the

cost of export growth in existing markets. FDI has contributed to significant GDP growth in Vietnam but this is mainly due to

increased employment and wages growth. An increase in net exports can also make significant contribution to the overall

GDP growth. While FDI has contributed to export growth in Vietnam,Anwar and Nguyen (2011)have shown that FDI has

also led to a significant increase in imports since a number of foreign firms located in Vietnam utilise imported inputs. Hence

the positive effect of export growth is significantly offset by the negative effect of import growth. Government steps to

reduce the sunk cost of exporting can help increase Vietnams net exports and this is likely to enhance the overall rate of

economic growth.

Based on the results presented in this paper, it can also be argued that there is a need for increased spending on advanced

educationand training in Vietnam. A recent World Bank report indicates that theshare of GDP spent on educationin Vietnam

increased from 3.5% in 1997 to 4.6% in 2004 and that the education sector is now given a higher priority. Spending on

education as a percentage of total public spending has increased from 14% in 1997 to 18.6% in 2005. Despite an increase in

spending on education, Vietnams higher education sector still faces mismatches in fulfilling the needs for industrialisation(World Bank, 2008). A further increase in spending on education along with education sector reform is likely to increase the

stock of human capital that will help not only to decrease the technology gap between domestic and foreign firms but also

help Vietnamese firms increase their competitive advantage in the production of high technology products over time. An

increase in the stock of human capital can also contribute to a decrease in reliance on imported inputs.

From a business management point of view, Vietnamese firms need to budget for sunk cost associated with exporting

since the long-term benefits will more than offset the short-term cost. Domestic firms need to be proactive in establishing

and exploiting their contacts with MNCs. Such contacts can improve the quality of technological spillovers. In addition,

government can also facilitate collaboration between domestic and foreign firms, thereby enhancing the quality of both

forward and backward linkages. This is particularly important for private sector firms. An important implication for

Vietnamese firms that are contemplating entry into the manufacturing sector is that they should consider their location

decision very carefully; location in a region where foreign firms are concentrated can result in significant spillover effects. In

addition, being export-oriented from the start can be very helpful.

Due to the unavailability of data, this study is based only on cross sectional data. The limitations of studies based on crosssectional data are well known. It will be useful to repeat this exercise when panel data becomes available. This research can

be further extended in several directions. For example, it may also be useful to examine the impact of FDI-generated

spillovers on capital structure of domestic firms empirically. Entry of new foreign firms in a country can affect the R&D

spending of domestic firms as well as the spending of existing foreign firms. The level of R&D spending affects among other

things new product development and hence it will be interesting to examine the impact of spillovers on R&D spending

empirically.

Acknowledgements

This paper has greatly benefitted from extremely useful and detailed comments and suggestions received from two

anonymous reviewers. The authors are also thankful to Dr Robert Alexander and Professor Pervez Ghauri for helpful

suggestions. However, the authors are responsible for all remaining errors and imperfections. The views expressed in this

paper do not necessarily reflect the views of the State Bank of Vietnam.

Appendix A

List of industries considered.

Group 1: Mining and quarrying

C10: Mining of coal and lignite; extraction of peat

C11: Extraction of crude petroleum and natural gas

C12: Mining of metal ores

C13: Other mining and quarrying

Group 2: Manufacturing

D15: Food and beverages

D16: Cigarettes and tobaccoD17: Textile products



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D18: Wearing apparel, dressing and dying of fur

D19: Leather and products of leather; leather substitutes; footwear.

D20: Wood and wood products, excluding furniture

D21: Paper and paper products

D22: Printing, publishing, and reproduction of recorded media

D23: Coke and refined petroleum products and nuclear fuel

D24: Chemicals and chemical products

D25: Ruber and plastic productsD26: Other non-metallic mineral products

D27: Iron, steel and non-ferrous metal basic industries

D28: Fabricated metal products, except machinery and equipment

D29: Machinery and equipment

D30: Computer and office equipment

D31: Electrical machinery apparatus, appliances and supplies

D32: Radios, television and telecommunication devices

D33: Medical equipment, optical instruments

D34: Motor vehicles and trailers

D35: Other transport equipment

D36: Furniture and other products not classified elsewhere

D37: Recycles products

Group 3: Electricity, gas and water supply

E40: Electricity, gas, steam and hot water supply

E41: Collection, purification and distribution of water

Appendix B

List of the industries in terms of the level of technology.

Group 1: Low technology

D15: Food and beverages

D16: Cigarettes and tobacco

D17: Textile products

D18: Wearing apparel, dressing and dying of fur

D19: Leather and products of leather; leather substitutes; footwear.

D20: Wood and wood products, excluding furnitureD21: Paper and paper products

D22: Printing, publishing, and reproduction of recorded media

D23: Coke and refined petroleum products and nuclear fuel

D36: Furniture and other products not classified elsewhere

D37: Recycles products

Group 2: Medium technology

D24: Chemicals and chemical products

D25: Rubber and plastic products

D26: Other non-metallic mineral products

D27: Iron, steel and non-ferrous metal basic industries

D28: Fabricated metal products, except machinery and equipment

Group 3: High technology

D29: Machinery and equipment

D30: Computer and office equipment

D31: Electrical machinery apparatus, appliances and supplies

D32: Radios, television and telecommunication devicesD33: Medical equipment, optical instruments

D34: Motor vehicles and trailers

D35: Other transport equipment

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