Abstract
Foreign direct investment (FDI) is expected to generate external effects—usually termed FDI spillovers—for a host country, and these spillovers are thought to have consequences on the productivity of domestic firms. Despite this strong expectation, the empirical findings on FDI spillover are still indecisive. This study examines firm-level panel data to determine the effects of FDI spillover on firms’ productivity in Bangladesh in comparison to Vietnam. We consider both the horizontal and vertical (backward and forward) spillover effects of FDI. We find evidence that Bangladeshi firms gain productivity improvement through intra-industry or horizontal linkages, whereas Vietnamese firms gain through backward linkages. Our findings suggest that increases in foreign presence in the same industry for Bangladesh and in downstream industries for Vietnam are related with increase in output of domestic firms.
Highlights
The general belief regarding multinational corporations (MNCs) is that they possess superior production technologies and organizational techniques and tend to be more productive compared to domestic firms (Hymer 1976)
6 Conclusion This study assesses the relationship of Foreign direct investment (FDI) spillover on firm productivity for two emerging economies in Asia, Bangladesh and Vietnam
The empirical findings imply that Bangladeshi firms gain productivity improvement through intra-industry or horizontal linkages, and Vietnamese firms gain productivity through inter-industry spillover, through backward linkages
Summary
The general belief regarding multinational corporations (MNCs) is that they possess superior production technologies and organizational techniques and tend to be more productive compared to domestic firms (Hymer 1976). This study examines the influence of FDI spillover effects on firm productivity in Bangladesh in comparison to Vietnam. Both countries are emerging economies in Asia. Compare to the current escalation of FDI flows and the potentiality of further inflow, the previous research works on FDI spillover effects in Bangladesh are inadequate. They are mostly time-series analyses and confined to FDI’s macro-impact on economic growth. To the best of our knowledge, there exists no comparative study that examines firm-level spillover effects for Bangladesh and Vietnam to date. The presence of foreign firms leads domestic firms in the same industry to experience productivity gain (horizontal spillover) through different channels, such as demonstration, competition, labor mobility, etc
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