Abstract
Foreign direct investment (FDI) is an important sector of many developing economies in general and of Vietnam in particular. In Vietnam, the FDI sector contributed up to 27.7% of the average economic growth rate of 6.0% per year from 2010 to 2018. Besides this contribution, operations of FDI in Vietnam reveal many limitations, the most noticeable of which is the weak linkage between FDI and Vietnamese firms. This article examines determinants of FDI-domestic firms linkage in Vietnam. This research looks at all three types of linkage, including horizontal linkage, vertical linkage, and supply-backward linkage. Factors that have a positive impact on linkages are provincial economic growth, firms’ technology level, regional factors, being located in industrial zones, and operating in the manufacturing sector. Macroeconomic instability has a negative impact on linkage. The quality of economic governance, as measured by the Provincial Competitiveness Index, is important for attracting FDI, but does not affect linkages.
Highlights
Vietnam first began opening its economy in 1986, starting a period of economic reform known as “DoiMoi”
Since industry j’s products are sold to other sectors as inputs, this γjkt excludes products sold for final consumption and adds to imported intermediate products. This calculation does not measure the inputs provided by the intrasector (i.e. k≠j) because this effect is expressed in variable Horjt.Forward linkage is expressed by the proportion of input products produced by Foreign direct investment (FDI) firms by calculating the total share of the FDI sector's output in industries l that supply inputs to industry j at time t according to the method of Javorcik (2004)
The results of the econometric model show that there are many factors affecting the linkage of FDI and domestic firms in Vietnam
Summary
Vietnam first began opening its economy in 1986, starting a period of economic reform known as “Doi. Moi”. Vietnam stands as an interesting case study of FDI. From a mostly centralized economy with mostly state-owned firms, the economy of Vietnam has been becoming increasingly diverse, with FDI accounting for 23.6% of total capital formation during 2016-2018. FDI contributes significantly to export, accounting for 70.04% of 243.5 billion USD export volume in 2018 (MPI, 2019). Similar to many developing countries, the linkage between FDI and domestic firms in Vietnam is weak. The domestic content of electronic telecommunication products, the key export product of Vietnam, is only 15%. This article, using data from Vietnam, provides empirical evidence for factors affecting linkage determinants for FDI-domestic firms. The article looks at all three types of linkages, including horizontal linkage, vertical linkage, and supply-backward linkage
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