8/12/2019 B NC INternational Investment
1/17
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).
Contents lists available at ScienceDirect
International Business Review
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / i b u s r e v
0969-5931/$ see front matter 2010 Elsevier Ltd. All rights reserved.doi:10.1016/j.ibusrev.2010.11.002
http://dx.doi.org/10.1016/j.ibusrev.2010.11.002mailto:[email protected]:[email protected]:[email protected]://www.sciencedirect.com/science/journal/09695931http://dx.doi.org/10.1016/j.ibusrev.2010.11.002http://dx.doi.org/10.1016/j.ibusrev.2010.11.002http://www.sciencedirect.com/science/journal/09695931mailto:[email protected]:[email protected]:[email protected]://dx.doi.org/10.1016/j.ibusrev.2010.11.0028/12/2019 B NC INternational Investment
2/17
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
8/12/2019 B NC INternational Investment
3/17
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.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193 179
8/12/2019 B NC INternational Investment
4/17
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
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193180
8/12/2019 B NC INternational Investment
5/17
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.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193 181
8/12/2019 B NC INternational Investment
6/17
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).
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193182
8/12/2019 B NC INternational Investment
7/17
8/12/2019 B NC INternational Investment
8/17
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.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193184
8/12/2019 B NC INternational Investment
9/17
8/12/2019 B NC INternational Investment
10/17
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%.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193186
8/12/2019 B NC INternational Investment
11/17
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)*
Industry dummies Yes Yes
Region dummies Yes Yes
Observations 1564 9146
Censored obs. 1071 7153
Uncensored obs. 493 1993
Wald-x2 337.35 3455.99
Sigma 0.9 0.4
Log likelihood 1245.29 2353.73
Notes: (i) Robust t-statistics in parentheses; (ii) *** significant at 10%, ** significant at 5%, and * significant at 1%.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193 187
8/12/2019 B NC INternational Investment
12/17
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
Notes: (i) Robust t-statistics in parentheses; (ii) *** significant at 10%, ** significant at 5%, and * significant at 1%.
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)*
Industry dummies Yes Yes
Region dummies Yes Yes
Observations 10710 10710
Censored obs. 8224 8224
Uncensored obs. 2486 2486
Wald-x2 4901.69 5905.83
Sigma 0.4 0.3
Log likelihood 2106.611 1431.905
Notes: (i) Robust t-statistics in parentheses; (ii) *** significant at 10%, ** significant at 5%, and * significant at 1%.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193188
8/12/2019 B NC INternational Investment
13/17
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
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193 189
8/12/2019 B NC INternational Investment
14/17
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
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193190
8/12/2019 B NC INternational Investment
15/17
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
References
Aitken, B. J., & Harrison,A. E. (1999). Do domesticfirms benefit fromdirect foreign investment? Evidencefrom Venezuela.American Economic Review, 89, 605618.Aitken, B. J., Gorg, H., & Strobl, E. (1997). Spillovers, foreign investment, and export behavior. Journal of International Economics, 43, 103132.Alessandria, G., & Choi, H. (2007). Do sunk costs of exporting matter for net export dynamics? Quarterly Journal of Economics, 122, 289334.Alvarez, R., & Lopez, R. A. (2008). Is exporting a source of productivity spillovers? Review of World Economics, 144, 723749.Amighini, A., Sanfilippo, M., & Rabellotti, R. (2009). The rise of multinationals from emerging countries: A review of the literature, WP SERIESN. 04/09. http://
www.docstoc.com/docs/DownloadDoc.aspx?doc_id=6339644Accessed 09.02.10.Anwar, S., & Nguyen, L. P. (2010). Foreign direct investment and economic growth in Vietnam. Asia Pacific Business Review, 16, 183202.Anwar, S., & Nguyen, L. P. (2011). Foreign direct investment and trade: The case of Vietnam. Research in International Business and Finance, 25 , 3952.Barba-Navaretti, G., & Venables, A. (2004). Multinational firms in the world economy. Princeton, NJ: Princeton University Press.
Barbosa, N., & Eiriz, V. (2009). Linking corporate productivity to foreign direct investment: An empirical assessment. International Business Review, 18, 113.Barrios, S., Gorg, H., & Strobl, E. (2001). Explaining firms export behavior: The role of R&D and spillovers. University of Nottingham GEP Research Paper 01/27.
Appendix A (Continued)
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193 191
http://www.docstoc.com/docs/DownloadDoc.aspx%3Fdoc_id=6339644http://www.docstoc.com/docs/DownloadDoc.aspx%3Fdoc_id=6339644http://www.docstoc.com/docs/DownloadDoc.aspx%3Fdoc_id=6339644http://www.docstoc.com/docs/DownloadDoc.aspx%3Fdoc_id=63396448/12/2019 B NC INternational Investment
16/17
Barrow, M., & Hall, M. (1995). The impact of a large multinational organization on a small local Economy. Regional Studies, 29, 635653.Bernard, A. B., & Jensen, J. B. (2004). Why some firms export. Review of Economics and Statistics, 86, 561569.Beugelsdijk, S., Smeets, R., & Zwinkles, R. (2008). The impact of horizontal and vertical FDI on Hosts Country Economic Growth.International Business Review, 17,
452472.Blalock,G. B., & Simon, D. H. (2009). Do all firmsbenefit equally fromdownstream FDI?,The moderating effect of local suppliers capabilities on productivity gains.
Journal of International Business Studies, 40, 10951112.Blomstrom, M. (1986). Foreign investment and productive efficiency: The case of Mexico. Journal of Industrial Economics, 35, 97112.Blomstrom, M., & Kokko, A. (2001). Foreign direct investment and spillovers of technology. International Journal of Technology Management, 22, 435454.Blomstrom, M., & Kokko, A. (2003). The economics of foreign direct investment incentives,CEPR Discussion Paper No. 3775. Available at SSRN:http://ssrn.com/
abstract=390667.
Buckley, P. J. (2010). The theory of international business pre-Hymer. Journal of World Business doi:10.1016/j.jwb.2010.05.018.Buckley, P., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P. (2007). The determinants of Chinese outward foreign direct investment. Journal of International
Business Studies, 38, 473499.Buckley, P. J., & Ghauri, P. N. (2004). Globalisation, economic geography and the strategy of multinational enterprises.Journal of International Business Studies, 35,
8198.Casson, M. (1985). Entrepreneurship and the dynamics of foreign direct investment. In P. J. Buckley & M. Casson (Eds.), The economic theory of multinational
enterprise (pp. 172191). London: Macmillan.Das, S., Roberts, M. J., & Tybout, J. (2007). Market entry costs, producer heterogeneity, and export dynamics. Econometrica, 75, 837873.Djankov, S., & Hoekman, B. (2000). Foreign investment and productivity growth in Czech enterprises. World Bank Economic Review, 14, 4964.Duanmu, J.-L.,& Fai, F. M. (2007). A processual analysis of knowledgetransfer: From foreign MNEs to Chinese suppliers. International BusinessReview, 16, 449473.Dunning, J. H. (1977).Trade, location of economic activity andthe multinational enterprise: A searchfor an eclecticapproach. In B. Ohlin,P. O. Hesselborn, & P. M.
Wijkman (Eds.), The international allocation of economic activity (pp. 395418). London: Macmillan.Dunning, J. H. (1981). Explaining the international investment position of countries: Towards a dynamic or development approach. Weltwirtschaftliches Archiv,
117, 3064.Dunning, J. H. (1986). The investment development cycle revisited. Weltwirtschaftliches Archiv, 122, 667677.Dunning, J.H., & Narula, R. (1996). Theinvestment developmentpath revisited: Some emerging issues. In J. H. Dunning & R. Narula (Eds.), Foreign directinvestment
and governments: Catalysts for economic restructuring(pp. 141). London and New York: Routledge.
Dunning, J. H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9, 163190.Dunning, J. H. (2001). The eclectic paradigm of international production: Past, present and future. International Journal of the Economics of Business, 8, 173190.Duran, J. J., & Ubeda, F. (2005). The investment development path of newly developed countries. International Journal of the Economics of Business, 12, 123137.Estrin, S., Meyer, K. E., Wright, M., & Foliano, F. (2008). Export propensity and intensity of subsidiaries in emerging economies. International Business Review, 17,
574586.Ghauri, P. N., & Yamin, M. (2009). Revisiting the impact of multinational enterprises on economic development. Journal of World Business, 44, 105107.Giroud, A. (2003). Transnational corporations, technology and economic development: Backward linkages and knowledge transfer in South-East Asia. Cheltenham:
United Kingdom Edward Elgar.Giroud, A. (2007). MNE vertical linkages: The experience of Vietnam after Malaysia. International Business Review, 16, 159176.Giroud, A., & Scott-Kennel, J. (2009). MNE linkages in international business: A framework for analysis. International Business Review, 18, 555566.Gorg, H., & Greenaway, D. (2004). Much Ado About Nothing? Do domestic firms really benefit from foreign direct investment?.The World Bank Research Observer,
19, 171197.Gorg, H., Henry, M., & Strobl, E. (2008). Grant support and exporting activity. Review of Economics and Statistics, 90, 168174.Gorg, H., & Hijzen, A. (2004). Multinationals and productivity spillovers. GEP Research Paper04/41, University of Nottingham.Greenaway, D., & Kneller, R. (2004). Exporting productivity in the United Kingdom. Oxford Review of Economic Policy, 20, 358371.Greenaway, D., & Kneller, R. (2007). Industry differences in the effect of export entry: Learning by exporting? Review of World Economics, 143(3), 416432.Greenaway, D., & Kneller, R. (2008). Exporting, productivity and agglomeration. European Economic Review, 52 , 919939.
Greenaway, D., Sousa, N., & Wakelin, K. (2004). Do domestic firms learn to export from multinationals? European Journal of Political Economy, 20, 10271043.Greene, H. (2008). Econometric analysis (3rd ed.). New York: Pearson Education.Grima, S., Gorg, H., & Pisu, K. (2008). Exporting, linkages and productivity spillovers from foreign direct investment. Canadian Journal of Economics, 41 , 320340.GSO. (2008). General statistical office. Vietnam: Hanoi.Harris, R., & Li, Q. C. (2009). Exporting, R&D, and absorptive capacity in UK establishments. Oxford Economic Papers, 61, 74103.Heckman, J. (1979). Sample selection bias as a specification error. Econometrica, 47, 153161.
Jindra, B., Giroud, A., & Scott-Kennel, J. (2009). Subsidiary roles, vertical linkages and economic development: Lessons from transition economies.Journal of WorldBusiness, 44, 167179.
Jones, R. W. (1965). The structure of simple general equilibrium models. Journal of Political Economy, 73, 557572.Karpaty, P., & Kneller, R. (2005). Demonstration or congestion?, Export spillovers in Sweden. University of Nottingham Research Paper No. 2005/44 . Available at
SSRN:http://ssrn.com/abstract=870237.Kokko, A., Zejan, M., & Tansini, R. (2001). Trade regimes and spillover effects of FDI: Evidence from Uruguay. Review of World Economics, 137, 124149.Kneller, R., & Pisu, M. (2007). Industrial linkages and export spillovers from FDI. The World Economy, 30, 105134.Kraay, A. (2002). Exports and economicperformance: Evidence froma panelof Chinese enterprises. In M. F. Renard (Ed.), China andits regions. Economic growthand
reform in Chinese provinces (pp. 278299). Cheltenham: Edward Elgar.Lall, S. (2001). Competitiveness, technology and skills. Cheltenham, United Kingdom: Edward Elgar.Liu, X., & Wang, C. (2003). Does foreign direct investment facilitate technological progress? Evidence from Chinese industries. Research Policy, 32, 945953.
Liu, X., Wang, C., & Wei, Y. (2009). Do local manufacturing firms benefit from transactional linkages with multinational enterprises in China? Journal ofInternational Business Studies, 40 , 11131130.
Liu, Z. (2008). Foreign direct investment and technology spillovers: Theory and evidence. Journal of Development Economics, 85, 176193.Love, J. H., & Mansury, M. A. (2009). Exporting and productivity in business services: Evidence from the United States.International Business Review, 18, 630642.Lutz, S., Talavera, O., & Park, S. M. (2003). The effects of regional and industry-wide FDI spillovers on export of Ukrainian firms. Centre for European Economic
Research Discussion Paper No. 03-54.Ma, A. C. (2006). Export spillovers to Chinese firms: Evidence from provincial data. Journal of Chinese Economic and Business Studies, 4, 127149.Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 16951725.Meyer, K. E., & Sinani, E. (2009). When and where does foreign direct investment generate positive spillovers? Journal of International Business Studies, 40, 1075
1094.Nguyen, A. N., Nguyen, T. L., Dang, T. P., Quang, N., Nguyen, D. C., & Nguyen, D. N. (2008). Foreign direct investment in Vietnam: Is there any evidence of
technological spillover effects? Development and Policies Research Center Working Paper, Hanoi, Vietnam.Oetzel, J., & Doh, J. P. (2009). MNEs and development: A review and reconceptualization. Journal of World Business, 44, 108120.OToole, F. (2010). Ship of fools: How stupidity and corruption sank the celtic tiger. London: Faber & Faber.Ozawa, T. (1992). Foreign direct investment and economic development. Transnational Corporations, 1, 2754.Roberts, M., & Tybout, J. (1997). The decision to export in Colombia: An empirical model of entry with sunk costs. American Economic Review, 87, 545564.Rodriguez-Clare, A. (1996). Multinationals, linkages and economic development. American Economic Review, 84, 852873.
Romer, P. (1986). Increasing return and long-run growth. Journal of Political Economy, 94 , 10021037.
S. Anwar, L.P. Nguyen/ International Business Review 20 (2011) 177193192
http://ssrn.com/abstract=390667http://ssrn.com/abstract=390667http://dx.doi.org/10.1016/j.jwb.2010.05.018http://ssrn.com/abstract=870237http://ssrn.com/abstract=870237http://dx.doi.org/10.1016/j.jwb.2010.05.018http://ssrn.com/abstract=390667http://ssrn.com/abstract=3906678/12/2019 B NC INternational Investment
17/17
Ruane, F., & Sutherland, J. (2004). Ownership and export characteristics of Irish manufacturing performance. International Institute of Integration Studies (IIIS)Discussion Paper No. 32. Trinity College, Dublin.
Scott-Kennel, J. (2004). Foreign direct investment: A catalyst for local firm development? European Journal of Development Research, 16, 425445.Scott-Kennel, J. (2007). Foreign direct investment and local linkages: An empirical investigation. Management International Review, 47, 5177.Scott-Kennel, J., & Enderwick, P. (2004). Inter-firm alliance and network relationships and the eclectic paradigm of international production: An exploratory
analysis of quasi-internalisation at the subsidiary level. International Business Review, 13, 425445.Scott-Kennel, J., & Enderwick, P. (2005). Foreign direct investment and inter-firm linkages: exploring the black box of the investment development path.
Transnational Corporations, 14, 105137.Sjoholm, F. (2006). State-owned enterprises and equitization in Vietnam . New York: United Nations Development Program, New York.Sun, S. (2009). How does FDI affect domestic firms exports? Industrial evidence. The World Economy, 32, 12031222.
Suyanto, S., Salim, R. A., & Bloch, H. (2009). Does foreign direct investment leadto productivity spillovers? Firm level evidence fromIndonesia. World Development,37, 1611876.
UNCTAD (2001). World investment report: Promoting linkages. New York and Geneva: United Nations.Vernon, R. (1966). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80, 190207.Vernon, R. (1979). The product cycle hypothesis in a new international environment. Oxford Bulletin of Economics and Statistics, 41, 2552