Foreign direct investment and the labour market in Vietnam's services sector

Abstract

The overall aim of this thesis is to investigate, theoretically and empirically, the impacts of foreign direct investment (FDI) on the host labour market. Specific objectives focus on exploring the role of FDI firms in determining wages and the employment of female workers (hereafter referred to as female employment) by domestic firms, using the empirical case of the services sector in Vietnam. While the literature suggests that foreign firms, especially large multinationals, tend to pay higher and employ women more intensively than local firms, there is scant evidence on whether and how FDI firms can influence domestic firms' wages and gendered employment, notably in the context of service industries. This thesis contributes to filling these knowledge gaps from both theoretical and empirical grounds. To realise the research objectives, I constructed two theoretical models to illustrate how the presence of FDI firms can be a determinant of local firms' pay and employment decisions. The first model shows that foreign presence can influence the expected average wage of domestic firms (causing so-called 'wage spillovers') through two contrasting channels, namely productivity spillovers and cut-off capability. The second model shows that FDI firms can affect domestic firms' female employment (measured by female-to-male labour ratio), directly via augmented female productivity spillovers and indirectly via the cut-off effect. The ultimate impact of foreign presence on wage and female employment depend on the relative strength of the two channels. Guided by the theoretical frameworks, I then specified two econometric models to empirically test and estimate the impacts of FDI firms on average wage and female employment of domestic counterparts. The empirical analyses utilise rich panel datasets of firms in Vietnam's services sector over the five-year period 2009-2013, which were extracted from the enterprise survey database of the General Statistics Office (GSO). In the specified models, foreign presence is the variable of interest and measured by the employment share of FDI firms in an industry, region and year. To address the potential endogeneity problem, I utilised the Generalised Method of Moments with Instrumental Variable (IV-GMM) estimation technique. Of this method, I adopted a novel approach to constructing IVs, which capitalises on the geographical and industry segmentation of the local labour market. In the estimation procedure, I conducted a number of diagnostic checking, including the endogeneity test, underidentification and overidentification tests (for the relevance and validity of selected instruments), and accounted for multicollinearity, autocorrelation, and heteroskedasticy problems. The estimation results indicate that FDI firms exert positive and statistically significant impacts on the pay level and female employment of domestic firms in Vietnam's services sector. Specifically, a one per cent increase in foreign presence induces local firms to raise their real wage and female-to-male labour ratio by 1.15 per cent and 2.18 per cent on average, respectively. The findings also suggest that higher paying firms tend to be larger, state owned, more capital intensive, and well established. Additionally, smaller, privately owned, less labour-intensive firms are more likely to hire women at a higher rate. To provide deeper insights into the heterogeneity of FDI-linked impacts, I extended the analysis by examining different layers of disaggregation. Notably, at the two-digit Vietnam SIC level, the scatterplots of the data and the estimation results reveal divergent effects of foreign presence on domestic firms' wages (positive in the high-wage group and negative in the low-wage group), and female employment (positive in the male-intensive group and insignificant in the female-intensive group). Likewise, additional investigations at the three-digit level show heterogeneous FDI impacts, depending on specific characteristics of domestic and foreign firms. While the existence of positive FDI impacts at the overall sector level may imply services FDI attraction as a viable strategy to improve local wages and promote female employment opportunities, the findings of heterogeneous effects warrant a more cautious and selective approach to be adopted by local firms, workers and governments in policy and decision formulation.