Does foreign investment benefit the exporting activities of Vietnamese firms?

• Date: 01 June 2020
• DOI: http://doi.org/10.1111/twec.12912
• Published date: 01 June 2020
• Author: Mark J. Holmes,Van Ha,Gazi Hassan

World Econ. 2020;43:1619–1646. wileyonlinelibrary.com/journal/twec

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1619

© 2019 John Wiley & Sons Ltd

Received: 6 September 2018

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Revised: 4 November 2019

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Accepted: 19 December 2019

DOI: 10.1111/twec.12912

ORIGINAL ARTICLE

Does foreign investment benefit the exporting

activities of Vietnamese firms?

VanHa1,2

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Mark J.Holmes1

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GaziHassan1

1School of Accounting, Finance and Economics, University of Waikato, Hamilton, New Zealand

2Thuongmai University, Hanoi, Vietnam

KEYWORDS

backward linkage, domestic firms, export, foreign investment, forward linkage, horizontal linkage, spillovers

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INTRODUCTION

In recent years, many less-developed countries have experienced a significant increase in foreign in-

vestment. Given that the effect of foreign investment can manifest itself in many ways throughout the

economy, it is important to gauge what the effect has been. The indirect effect of foreign investment

on domestic enterprises through horizontal or vertical linkages has been confirmed in many studies

(Aitken, Hanson, & Harrison, 1997; Aitken & Harrison, 1999; Greenaway, Sousa, & Wakelin, 2004;

Kneller & Pisu, 2007; Sun, 2009). While most of the existing research into foreign investment spill-

overs in developing countries focuses on productivity spillovers, fewer studies have examined the

effects of foreign firms on the exporting activities of local enterprises. Although there is considerable

evidence in support of the view that foreign firms have positive export spillover effects on domestic

firms in developing countries (Aitken et al., 1997; Greenaway & Kneller, 2008; Greenaway et al.,

2004; Lutz, Talavera, & Park, 2008; Nguyen & Sun, 2012; Sun & Anwar, 2016), other studies find no

or even negative effects (Barrios, Görg, & Strobl, 2003; Chakraborty, Mukherjee, Lee, & Ki-Dong,

2017; Estrin, Meyer, Wright, & Foliano, 2008; Meyer & Sinani, 2009). Using a large Vietnamese

firm-level data set, we address a number of questions about the relationship between foreign invest-

ment and the exporting activities of domestic firms. In particular, does the presence of foreign firms

affect the export decisions of local firms and if so, how and to what extent? What are the channels of

influence and how do they make themselves felt? Is domestic manufacturing and service firms' export

behaviour influenced differently by the presence of foreign investment? Do high-tech manufacturing

firms receive more advantages over low-tech firms from export spillovers?

In the case of Vietnam, little research has investigated these issues. Anwar and Nguyen (2011)

focus on the influence of foreign-invested firms on the export activity of domestic enterprises on both

export decisions and export performance using cross-sectional data for 2002. In contrast to Anwar

and Nguyen (2011), we analyse a richer updated panel data set comprising 200,000 firms from the

Vietnamese manufacturing sector and more than 500,000 firms in some selected service sectors over

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HA et Al.

a 6-year period. While Anwar and Nguyen (2011) find positive horizontal and backward export spill-

overs from foreign investment to local firms on both the export decision and export share, our results

reveal that foreign investment impacts on domestic firms' exporting activity have changed in recent

years. Going beyond Anwar's study through the employment of the Heckman selection model with an

exclusion restriction and controlling for year and industry effects on an updated panel data set, we find

evidence of significant spillovers on both the export decision and performance from multinationals to

domestic firms. Although increased competition is introduced through an increase in foreign presence

in the same industry, domestic firms are found to be more likely to start serving the international mar-

ket. With respect to vertical linkages, we find evidence that foreign firms exert a significant positive

effect on domestic firms' export activities in upstream sectors and a strongly significant negative effect

on the export behaviour of domestic firms in downstream sectors. We also find evidence suggesting

that low-tech firms export behaviour is more likely to be influenced by the presence of multinationals

than for high-tech manufacturing firms.

Export spillovers from multinationals to local firms are the focus of this study. We analyse the

channels through which such spillovers may occur. While the results from this research are broadly

consistent with previous studies, our analysis makes a number of key contributions to the existing

literature. First, compared with existing studies on Vietnam, which are based on cross-sectional data,

we use a richer panel data set that enables us to incorporate time variation when assessing the effect

of key drivers in domestic firms' exporting activities. Our estimation strategy has advantages over

the employment of the Heckman selection model based on cross-sectional data. This is not only by

employing Heckman selection corrections for panel data which have been done less often in the liter-

ature, but also by using an exclusion restriction at the first stage (Heckman, 1977; Wooldridge, 1995).

Second, our work is among the first studies, which take into account export spillovers in service sec-

tors to draw a bigger picture of the impacts from foreign investment on local firms in Vietnam. Third,

we add to a limited number of studies focusing on export spillovers in developing countries. Using

Vietnam as a case study, our analysis is among the first to examine the impact of foreign firms on the

exporting behaviour of domestic firms. The fourth innovation of our work is bringing research up to

date with recent developments when covers the recent period of 2010–15.

The paper is structured as follows. The following section discusses the relevant background liter-

ature on linkages with foreign firms. The third section sets out the Heckman-based methodological

approach and Vietnamese data employed in this study. The discussion of results in the fourth section

expands on our finding that foreign investment exerts a negative influence on the exporting activities

of some domestic firms. The fifth section provides the conclusion and offers some pointers on policy.

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LITERATURE REVIEW

2.1

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Theoretical base

Spillovers can occur either through horizontal linkages within an industry, or through vertical linkages

across industries. Since information about export opportunities may spread across markets and in-

dustries, increasing business-to-business linkages between firms, the horizontal spillovers in exports

may be stronger for those industries in which foreign firms are more concentrated (Anwar & Nguyen,

2011). Vertical spillovers are generated across industries through backward or forward linkages. The

linkage between foreign and domestic firms is called a backward linkage if the former buys inputs

from the latter, and a forward linkage occurs if the former supplies inputs to the latter. If the foreign

firms are exporters, then upstream or downstream activity may also spur domestic firms to engage in