Absorptive capacity, foreign direct investment-linked spillovers and economic growth in Vietnam

Abstract

Before the introduction of the economic reform process in the late 1980s, the Vietnamese economy was operating under a centrally planned system. The reform process resulted in the integration of Vietnam into the world economy, which led to significant increase in foreign investment. By making use of panel data on 22 manufacturing industries over the period 1995–2005, this article examines the impact of foreign direct investment (FDI)-generated spillovers on manufacturing sector growth in Vietnam. Unlike most existing studies, which are limited to considering the effect of FDI on economic growth, this article focuses on the impact of FDI-linked spillovers that take place through both horizontal and vertical linkages between domestic and foreign firms. The empirical results presented here suggest that FDI-generated spillovers have made a significant contribution to manufacturing sector growth in Vietnam through vertical-backward linkages. The positive impact of vertical-backward linkages on manufacturing sector growth is strengthened by the stock of human capital. Specifically, manufacturing industries with a larger stock of human capital have experienced a higher level of technological advancement and hence stronger economic growth.