The impact of fdi spillovers on the productivity of domestically manufacturing firms and average wage in vietnam

INTRODUCTION

Problem statement

The growing presence of foreign direct investment (FDI) is anticipated to enhance productivity by providing local firms with opportunities to observe and adopt advanced technologies, particularly through horizontal spillovers related to worker mobility, competition, and demonstration effects Additionally, vertical integration fosters positive externalities via successful upstream and downstream linkages between domestic companies and foreign partners Furthermore, the entry of multinational corporations (MNCs) is likely to create employment and wage spillovers for domestic workers, contributing to a more effective restructuring of the overall economy.

To enhance its appeal to multinational corporations (MNCs) and facilitate internationalization, the government has implemented various incentive policies and legal amendments to attract foreign investment Previous research highlights the indirect benefits of these measures, emphasizing channels such as competition, demonstration effects, labor turnover, and vertical linkages These factors collectively foster capital formation, technology transfer, managerial skill enhancement, economies of scale, the development of a skilled workforce, and ultimately lead to improved productivity and market expansion (Blomstrom & Kokko, 1998).

Research by Gorodnichenko, Svejnar, and Terrell (2014) highlights that local firms in host countries experience significant positive spillovers primarily through their roles as suppliers for foreign partners This finding is supported by various empirical studies, including those by Behera (2017), Le and Pomfret (2011), and Liao et al.

2012) The others are optimistic that local enterprises can use high-tech outputs from those foreign subsidiaries as their intermediate inputs more easily (Ahmed, 2012; Kee, 2015)

Domestic firms are compelled to invest in advanced technology to maintain competitive advantages in their host markets, as noted by Hamida (2013) Multinational corporations (MNCs) with effective management practices can significantly boost the adaptive capacity of local firms by developing a skilled labor force (Parman, 2012) However, Halpern and Muraküzy (2007) suggest that increased competition can diminish the positive effects of imitation Additionally, Huang and Zhang (2017) highlight that wage disparities may hinder labor movement from foreign subsidiaries to local companies The situation is further complicated by the fact that employees trained by MNCs may eventually establish their own businesses, contributing to the development of future local labor Consequently, the overall impact of foreign direct investment (FDI) spillovers remains complex, context-dependent, and challenging to quantify accurately.

Foreign Direct Investment (FDI) can negatively impact local firms in the host country by intensifying competition, which may lead to the exit of domestic businesses from the market, a phenomenon known as the crowding-out effect (Perri et al., 2013) Additionally, weak vertical linkages and low absorptive capacity in both upstream and downstream sectors hinder local firms from reaping the benefits of FDI (Demena & Murshed, 2018; Fatima, 2016) Local firms with limited absorptive capabilities are particularly vulnerable in this global competitive landscape, as they struggle to adapt to market changes and lack the capacity to leverage positive spillovers from foreign investments.

The ability of local firms to capitalize on the positive spillovers from foreign direct investment (FDI) is significantly influenced by their internal capabilities and the host business environment, which includes factors such as financial markets, networks, policies, and regulations (Anwar & Phi, 2011; Jacobs, Zámborský, & Sbai, 2017; Perri & Peruffo, 2016).

Recent studies highlight that Vietnam remains a highly attractive destination for foreign direct investment (FDI) in Asia, despite receiving somewhat ambiguous externalities from FDI, as indicated by outdated data from previous years.

Between 2000 and 2010, particularly in 2007 and 2009, researchers such as Anwar & Nguyen (2014), Le & Pomfret (2011), Nguyen (2015), and Thang, Pham, & Barnes (2016) acknowledged that Vietnam's economic growth was largely driven by foreign capital inflows They highlighted the strong connection between foreign direct investment (FDI) and international trade, especially in exports Additionally, there are conflicting studies regarding the impact of trade openness on wage levels.

In Vietnam, reforms targeting investment and trade liberalization since the 2000s have facilitated the operation of foreign-invested firms and domestic private firms as well as export and import activities

In recent years, Vietnam's wage patterns have been significantly influenced by the increasing foreign presence and trade openness The origin of foreign investors plays a crucial role in shaping labor demand, skill intensity requirements, and wage premiums in the host country For instance, Chinese investors typically exhibit a high demand for blue-collar workers, which tends to depress equilibrium wages for both skilled and unskilled labor In contrast, domestic firms in Vietnam often focus on low-skilled intensive production, while FDI firms from more developed nations are recognized for their technology- and capital-intensive operations This dynamic fosters a competitive market for high-skilled and qualified workers, further highlighting the impact of foreign investment on Vietnam's labor landscape.

Foreign Direct Investment (FDI) can threaten unskilled employees, potentially leading to job losses due to domestic firm exits, acquisitions, or labor-saving technologies (Girma & Greenaway, 2013) These job losses may result in an oversupply of labor, which can lower average wages and increase wage inequality Additionally, the gender wage gap persists, as female workers often face lower pay and fewer job opportunities due to prevailing prejudices (Nguyen, 2015) Despite the complex impact of FDI on average salaries, there is a notable lack of research focused on this issue in Vietnam.

Vietnam has made progress in narrowing the productivity gap with ASEAN countries, yet its productivity remains below the regional average (Nguyen, 2015) From 2016 to 2018, productivity increased by an average of 5.77% annually, surpassing the 4.35% growth rate observed from 2011 to 2015 During the same period, domestic firms experienced an average productivity growth of 4.88% per year While labor productivity in Singapore, Malaysia, Thailand, and Indonesia was significantly higher than Vietnam's in 2011, the gaps have narrowed by 2018 However, the General Statistics Office (2019) still considers Vietnam's labor productivity to be low in comparison to its regional counterparts, highlighting the significant challenges the economy faces in catching up Despite government efforts to attract foreign direct investment (FDI), evidence of FDI spillovers, particularly in productivity, remains limited in Vietnam.

Limited research exists in Vietnam regarding the impact of foreign direct investment (FDI) on local workers' wages However, it is important to highlight that positive wage spillovers from foreign companies to domestic firms can arise from increased competition in the labor market and improvements in labor productivity.

Multinational corporations (MNCs) often offer competitive wages to attract and retain skilled workers, which can decrease the overall supply of skilled labor in the local market As a result, domestic companies may need to increase their wage offerings to compete for these top talents Additionally, the presence of foreign firms can lead to positive spillover effects, enhancing the overall labor productivity of local businesses and subsequently raising equilibrium wages in the host country.

The productivity levels of domestic firms in the presence of foreign direct investment (FDI) and its spillover effects on wages are challenging to predict due to various contextual factors in the host economy, such as the type of FDI, firm heterogeneities, and macroeconomic conditions (Willem, 2019) In emerging economies like Vietnam, local firms face increased vulnerability to market competition from foreign giants, often resulting in a "newbie" status within their industry (Newman et al., 2019; Nguyen & Sun, 2012) Consequently, it is essential to assess the impact of inward FDI on both firm productivity and labor welfare separately to uncover the complexities of Vietnam's relatively young economy, which has recently integrated into the global market (Demena & Bergeijk, 2017).

Recent studies by Rojec & Knell (2017) and others highlight the need for further research into the various transmission channels of Foreign Direct Investment (FDI) spillovers in developing countries, particularly as existing literature has largely concentrated on horizontal FDI externalities Given that each country possesses a unique input-output matrix for different industries, it is crucial to explore vertical spillovers, focusing on supplier and customer relationships, to effectively address contextual differences This approach is supported by findings from Lenaerts & Merlevede (2016), Behera (2017), and Anwar et al (2018).

Background to the study - FDI in Vietnam

Over the past 30 years of its open-door policy, Vietnam has established a comprehensive legal framework that fosters a conducive business environment for foreign investors As a result, the total registered foreign direct investment (FDI) has seen a remarkable rise from 735 million USD.

Between 1990 and 2010, foreign direct investment (FDI) in Vietnam surged from 19.9 billion USD to 24.4 billion USD by 2016, according to the General Statistics Office (GSO) The number of registered projects also experienced significant growth, increasing from 211 projects between 1988 and 1990 to 500 projects in 2000, and reaching 2,500 projects by 2017 As illustrated in Figure 1-1, FDI inflows remained stable from 2000 to 2003, followed by a notable rise from 2004 to 2007, peaking in 2008 However, following the global financial crisis in 2008, FDI inflows into Vietnam plummeted in 2009, fluctuating until 2016 before showing a slight recovery in 2017.

Figure 1-1: Number of FDI projects and inward FDI capital in Vietnam from 2000 to 2017

Source: GSO, translated by the author

Foreign Direct Investment (FDI) as a share of total investment rose from 16% between 2001 and 2005 to nearly 25% from 2006 to 2017 Notably, the manufacturing and production sectors attracted the largest portion, representing approximately 70% of total inward FDI equity.

Foreign Direct Investment (FDI) in Vietnam's manufacturing sector significantly surpasses that in services, real estate, retail, and construction, prompting this study to examine the spillover effects from foreign firms to domestic enterprises The integration with foreign subsidiaries fosters technology transfer, enhancing domestic production capabilities In response to increased competition, many Vietnamese companies have upgraded their technology and equipment, leading to the production of new products and a reduction in imports of manufactured goods, including construction materials and consumer electronics.

Figure 1-2: FDI share across economic sectors in Vietnam in 2017 Source: GSO, drawn by the author

Foreign Direct Investment (FDI) has significantly impacted Vietnam's GDP, with its contribution rising from $15 billion (approximately 15.7%) in 2011 to $35 billion (over 18%) in 2015 This trend underscores FDI's crucial role in enhancing the country's economic growth By 2017, FDI accounted for nearly 20% of GDP and represented 23.7% of total social investment, highlighting its importance as a vital source of capital for development in Vietnam.

Figure 1-3: Total output accounted by the FDI sector from 2011 to 2015 Source: GSO, drawn by the author

The Foreign Direct Investment (FDI) sector has significantly boosted Vietnam's export growth, as illustrated in figures 1-4 Between 1998 and 2015, Vietnam experienced a remarkable increase in exports, with FDI representing a substantial share of the country's total export volume, starting from a modest 20 percent.

Since 1998, foreign direct investment (FDI) has significantly influenced export dynamics, with its share of total exports peaking at over 40% in 2000, approximately 57% in 2006, and reaching nearly 70% by 2016 Furthermore, the presence of FDI has substantially enhanced the export volume of domestic firms over time.

Figure 1-4: FDI share of total export in Vietnam from 1998 to 2016 Source: VCCI, translated by the author

Foreign-invested enterprises have significantly impacted the labor market, increasing employment from around 500,000 workers in 2000 to approximately 2.8 million by 2017 While FDI accounts for less than 5% of total labor usage, it generates millions of indirect jobs through supporting industries and local partnerships Workers in FDI companies tend to be more qualified and productive due to standardized training and discipline, leading to higher incomes and job stability Additionally, the competition for skilled labor between FDI and domestic sectors enhances worker compensation and bargaining power.

Figure 1-5: Number and labor share of the FDI sector in the total country's labor from 2000 to

2017 Source: VCCI, translated by the author

The World Economic Forum has ranked key indicators for understanding Foreign Direct Investment (FDI) spillovers in transition economies, focusing on Vietnam, China, and Thailand during two periods: 2014-2015 and 2017-2018 These indicators include the Provincial Competitiveness Index (PCI), availability of new technology, firms' absorptive capacity, FDI and technology transfer, and the quality and number of local suppliers The analysis reveals that Vietnam lags behind China and Thailand in these areas, with its performance showing significant improvement in 2017-2018, except for the quality of local suppliers However, Vietnam still struggles with the availability of new technology, absorptive capacity, and value chain width, ranking around 120th in these critical areas.

17 position) Overall, figure 1-6 indicates that Vietnam has not well prepared for absorbing FDI spillovers

Figure 1-6: Ranking in some indicators of FDI spillover (Note: the lower the column is, the better the performance is) Source: World Economic Forum WEF (2014, 2017), translated by the author

Vietnam's economic growth is notable, particularly with the dynamic presence of foreign direct investment (FDI) While FDI is recognized for its potential benefits, such as providing investment capital, promoting exports, transferring technology, developing human resources, and creating jobs, it also brings complex challenges These include negative impacts and unintended indirect effects, known as spillovers, that can influence the economy in unpredictable ways Economists and scholars acknowledge that the nature of these spillover effects varies significantly across firms, sectors, regions, and countries.

In recent years, the influx of Foreign Direct Investment (FDI) in Vietnam has led to several unforeseen consequences One significant issue is the limited efficiency in technology and knowledge transfer, as many investors tend to introduce outdated or non-essential technologies, primarily to take advantage of the country's low labor costs.

Significance of study

Foreign technology transfer in Vietnam is governed by state-approved contracts, but accurately assessing the value of technology, particularly in high-tech sectors, poses challenges for investment recipients While technology and knowledge spillovers from Foreign Direct Investment (FDI) could offer a cost-effective alternative, multinational corporations (MNCs) often safeguard their intellectual property, limiting knowledge diffusion Many domestic enterprises are ill-prepared to leverage the benefits of foreign investment, and some FDI firms prioritize profit over environmental concerns, leading to adverse effects Additionally, issues such as industry structure imbalance, low investment disbursement rates, price transfer problems, tax avoidance, and low localization rates raise questions about the true impact and spillover effects of FDI in Vietnam Consequently, examining the spillover effects of FDI has become increasingly critical in the current investment landscape.

This dissertation presents a conceptual framework that outlines the direct and indirect effects of inward foreign direct investment (FDI) on firm productivity and wages, integrating relevant theoretical concepts and their interrelationships, culminating in a detailed research model.

Recent meta-analyses on foreign direct investment (FDI) spillovers highlight the necessity of distinguishing spillover effects across various transmission channels Researchers Demena and Bergeijk (2017, 2019) along with Rojec and Knell (2017) stress the importance of differentiating between horizontal and vertical spillovers, particularly focusing on backward and forward spillovers in future studies.

This study establishes vertical linkages between local firms and foreign affiliates, addressing a gap in previous research that predominantly focused on horizontal spillovers, which are less common The primary objective is to investigate FDI spillovers through various mechanisms, including horizontal, vertically backward, and vertically forward spillovers To enhance the analysis, the research employs a multi-dimensional approach by measuring three distinct spillover indicators, allowing for a more comprehensive assessment of FDI effects Additionally, the use of Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Method of Moments (GMM) approaches strengthens the robustness of the findings.

Recent studies by Behera (2017) and Anwar et al (2018) highlight a significant lack of substantive evidence regarding firm heterogeneity, which leads to biased perceptions of spillover effects, often underestimating or overlooking negative spillovers This bias may stem from multinational corporations (MNCs) actively protecting their technological secrets and intangible assets from competitors (Demena & Bergeijk, 2017) Notably, not all MNCs are inclined to share their knowledge, and many local enterprises may not be prepared to leverage foreign presence effectively Key factors contributing to biased spillover estimations include the failure to differentiate between horizontal and vertical spillovers and insufficient consideration of host firms' absorptive capacity and heterogeneity (Demena & Bergeijk, 2017; Rojec & Knell, 2017) To address these issues, Rojec & Knell (2017) and Jacobs et al (2017) advocate for further research into firm heterogeneity to better understand the variability in spillover outcomes, influenced by factors such as geographical distance and the absorptive capacity of domestic firms Consequently, the dissertation's research objectives 2, 3, and 4 focus on examining moderating variables, including absorptive capacities related to human capital, technology gaps, and financial development.

20 regional and provincial proximity that interact with FDI spillover proxies to recognize the primary facilitators or barriers of the positive spillover effects

Foreign investment in emerging countries not only provides capital but also enhances employment opportunities, skills development, and labor productivity among local workers, ultimately influencing wages and bargaining power (Javorcik, 2015; Nguyen & Ramstetter, 2017) Research by Nguyen (2015) highlights a significant wage disparity between the foreign direct investment (FDI) sector and the local sector in Vietnam's manufacturing industry from 2000 to 2009 Additionally, wages offered by multinational corporations (MNCs), joint ventures, and state-owned enterprises (SOEs) are notably higher than those from domestic private firms, even after accounting for factors such as size, capital intensity, education, and gender ratios (Nguyen & Ramstetter).

Research in Vietnam has highlighted wage discrimination between foreign and domestic sectors; however, there is a lack of studies examining whether foreign presence positively impacts local workers' wages and how these wage externalities differ by ownership type This research aims to address these questions, revealing that productivity and wage diffusion significantly vary across firms and regions with distinct characteristics Utilizing the latest panel data from 2007 to 2015, the findings offer valuable empirical insights into FDI spillover effects in Vietnam, benefiting managers, policymakers, and researchers focused on inward FDI impacts Notably, the exploration of wage spillovers represents a critical gap in the existing literature on FDI spillovers in emerging markets.

Based on the above justifications and significance, the dissertation attempts to fulfill the following research objectives by employing a large panel of Vietnamese manufacturing enterprises from 2007 to 2015:

1 First, investigating the effects of FDI spillovers through both vertical and horizontal channels on domestic firms’ productivity

2 Second, exploring the moderating effects of absorptive capabilities in terms of human capital, technology gap and financial development on productivity spillovers from FDI firms to Vietnamese manufacturing firms

3 Third, examining whether productivity spillovers through vertical and horizontal channels are associated with regional effects

4 Fourth, examining whether local firms in provinces located within 100 square kilometers (sq km.) of eight cities/ provinces with the highest FDI concentration receive greater FDI spillovers than those located outside 100 sq km of these areas

5 Finally, investigating the effect of horizontal (intra-industry) FDI spillover on the average wage of domestic employees and whether ownership types influence wage spillovers from FDI

Based on the above research objectives, the dissertation aims at answering the following research questions for further hypotheses testing:

1 Is there a positive/negative relationship between the productivity of Vietnamese domestic companies and horizontal/ vertically backward/ vertically forward technology spillovers from FDI firms?

2 Whether the relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of human capital?

3 Whether the relationship between FDI spillovers and productivity of domestic firms is lower at the top 25 th and bottom 25 th percentile of the technology gap and is enhanced at the middle 25 th -75 th percentile of the technology gap?

4 Whether the relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of financial development?

5 Whether FDI spillover effect on domestic firm productivity vary significantly across geographical/ economic regions and higher in more FDI-intensive regions?

6 Is there a positive relationship between horizontal FDI spillovers and the average wage of local firms? And whether this relationship varies across ownership types?

The findings of this thesis aim to assist policymakers in reviewing national investment policies and institutional factors in Vietnam's open economy, particularly in the context of rapidly evolving international trade and global investment By highlighting effective practices and timely policies at both the authorized and managerial levels, the research seeks to enhance FDI spillovers and benefit local stakeholders The empirical evidence regarding spillover effects from FDI provides crucial insights for policymakers and forecasters, enabling them to better understand FDI outcomes, mechanisms, and influential factors The presence and intensity of FDI can significantly impact local productivity and economic growth in both the short and long term Therefore, timely interventions and incentives at the policy-making level are essential for fostering positive changes in domestic production factors and strengthening local firms' capabilities to adapt to ongoing economic shifts driven by FDI Recognizing both the advantages and limitations of FDI is crucial for effective policy formulation.

To effectively manage the growing influx of foreign direct investment (FDI), Vietnam must prioritize understanding and implementing policies that foster knowledge spillovers This strategic approach is essential for sustaining local firms and bolstering the economy, as highlighted by Barnes et al (2016) and Willem (2019) By focusing on long-term industry, regional, and national planning, Vietnam can better prepare for the challenges and opportunities presented by increased FDI.

Research highlights the significance of firm heterogeneity in influencing productivity and wage spillovers, emphasizing the need for domestic manufacturing firms to adopt effective strategies and set clear priorities Positive foreign direct investment (FDI) spillovers do not occur automatically; they are closely linked to local firms' absorptive capacities and their ongoing efforts to enhance competitiveness and foster vertical linkages with foreign partners, particularly for emerging global players from developing countries Therefore, top management in local enterprises must grasp the channels and mechanisms of spillover transmission to maximize positive impacts by leveraging their strengths and implementing relevant strategies and policies.

The thesis is executed following Vietnam's signing of significant free trade agreements with key partners, including the Russia-Belarus-Kazakhstan Customs Union in December 2014 and South Korea in May 2015 The research utilizes recent panel data from 2007 to 2015 to deliver current empirical insights into the FDI spillover effects in Vietnam These findings are valuable for managers, policymakers, and future researchers in international business, providing a foundation for recommendations aimed at enhancing positive productivity and wage spillovers from FDI firms to Vietnamese businesses and local workers.

Methodology and Data

This thesis employs the Cobb-Douglas production function model to evaluate the effects of foreign direct investment (FDI) spillovers from foreign subsidiaries on the total factor productivity of domestic firms By focusing on total factor productivity, the study analyzes technology spillover effects from FDI through non-traditional factors The research identifies FDI spillovers using three indicators: horizontal spillovers, vertically backward spillovers, and vertically forward spillovers, to explore both productivity and wage spillovers Econometrically, the spillover effects are estimated using large panel data with fixed effect models (FEM) and random effect models (REM), with model selection guided by the Hausman test Furthermore, dynamic panel data methods (GMM) and various statistical tests are applied to ensure the robustness of the findings.

This thesis analyzes secondary panel data at the enterprise level from 2007 to 2015, utilizing information gathered from the Enterprise Survey by the General Statistics Office After thorough screening, the final dataset comprises 385,976 observations (2011-2015) to estimate productivity spillovers from foreign direct investment (FDI) and 693,720 observations (2007-2015) to assess the impact of horizontal FDI spillovers on average wages Additionally, the research incorporates input-output matrices from 2012 to enhance the analysis.

2015 to estimate vertical FDI spillovers between FDI firms and their locally upstream suppliers or downstream consumers.

Thesis organization

The organization of the thesis is divided into five chapters Firstly, chapter 1 briefly provides an introduction to the thesis Secondly, chapter 2 aims at reviewing relevant

This article explores the theoretical and empirical literature on foreign direct investment (FDI) and its spillover effects, leading to the development of a conceptual framework, research model, and hypotheses Chapter 3 focuses on identifying and justifying the research methodology employed In Chapter 4, the analysis and discussion of the research results are presented Finally, Chapter 5 concludes with insights and implications regarding the spillover effects of FDI in Vietnam.

LITERATURE REVIEW

FDI definition

Foreign direct investment (FDI) has gained popularity over the decades as a significant investment avenue, defined by scholars and international organizations It involves long-term investments made by individuals or companies from a delivering country into a receiving country, primarily through the establishment of production and business operations Essentially, FDI entails the transfer of capital, property, technology, or other assets from the home country to the host country to create or manage enterprises aimed at generating profits.

Foreign individuals or companies gain ownership of assets and control over business and manufacturing operations in the host country through their investments, highlighting that effective management is a crucial factor in defining Foreign Direct Investment (FDI).

Investors managing properties or assets abroad, typically business establishments, are often referred to as "parent companies," while these assets are known as "subsidiaries" or "branch companies." This global expansion of subsidiaries into host economies contributes to the formation of Multinational Companies (MNCs), a concept that will be further elaborated on later.

Vietnam's Investment Law of 2014 defines Foreign Direct Investment (FDI) as the capital or assets brought by foreign investors into Vietnam for investment purposes FDI is characterized by direct involvement of investors in management activities within the host economy, distinguishing it from foreign indirect investment For an investment to qualify as FDI, the investor must hold at least 10 percent of the company's shares or voting rights, as determined by the United Nations Unlike official development assistance (ODA), FDI is conducted through private channels The law also outlines FDI enterprises, which include those established by foreign investors for investment activities in Vietnam, as well as Vietnamese companies that have been acquired, merged, or bought by foreign investors.

Foreign Direct Investment (FDI) involves specific characteristics that define the relationship between investors and their investments in host countries According to Brewer (1992), FDI enterprises establish clear rights and obligations for investors, outlining their responsibilities and benefits within the host country's firm.

Foreign Direct Investment (FDI) involves ownership and management rights over invested capital, serving as a means for multinational enterprises to expand their markets It allows investors to transfer technology and techniques to local firms in the host country, fostering economic growth Additionally, FDI engages various financial markets and enhances international trade, which will be further explored in relation to its impact on the host economy.

Multinational corporations (MNCs) definition

Multinational corporations (MNCs), as defined by Moosa (2002) in his influential book on foreign direct investment (FDI) theories and practices, are companies that operate in at least two countries These corporations typically establish their parent company in their home country and then make direct investments in foreign markets to create various types of affiliates, including subsidiaries (with over 50% ownership and significant voting rights), associates (with at least 10% ownership and limited voting rights), and branches (unincorporated entities tied to the host country's assets, which can be wholly-owned or joint ventures).

The terms 'international,' 'multinational,' and 'transnational' are often used interchangeably to describe a company's business activities across various countries, particularly in light of recent developments in international operations (Moosa, 2002; Blomstrom & Kokko, 1998; Byun & Wang, 1995) These developments encompass the establishment of production facilities in multiple nations, global cross-border trade, and innovative transnational transactions, including payment and transportation methods (Chittoor, 2009) In this thesis, the terms "multinational corporations (MNCs)" and "FDI firms" will be used interchangeably to denote foreign companies engaging in foreign direct investment within a host economy.

Multinational corporations (MNCs) aim to maximize shareholder wealth by increasing stock value and dividends while managing risks To achieve this, they prioritize international expansion and product diversification strategies The interconnected nature of MNCs allows for the transfer of technology, knowledge, resources, and management expertise between the parent company and its affiliates, enhancing their competitive advantage.

Multinational companies (MNCs) can be categorized into three main types based on their production orientation, strategy, and degree of integration in host countries Horizontal MNCs, such as McDonald's, operate through horizontal foreign direct investment (FDI) to produce similar products across various nations In contrast, vertical MNCs, like Adidas, focus on establishing subsidiaries in different countries to enhance both upstream and downstream sectors related to their core products Lastly, multi-dimensional MNCs, exemplified by Microsoft, maintain production facilities in multiple countries that work together both horizontally and vertically.

Temiz & Gokmen (2014) highlighted the significant role of multinational corporations (MNCs) in the global economy, illustrating their extensive reach worldwide Their research reveals that the 500 largest MNCs account for over two-thirds of global trade, primarily involving transactions between these corporations and their subsidiaries or affiliates.

30 is uneven, with the majority of more than 63,000 MNCs in the world having headquarters in the US, Europe, and Japan.

FDI classifications and its natures

Foreign Direct Investment (FDI) can be classified into various types based on the motivations and objectives of investors, as highlighted by Dunning (2000) Different classification methods exist, influenced by factors such as investment motivations, the perspectives of investors and host countries, and ownership structures, according to Moosa (2002) and Denisia (2010).

2.3.1 Classified by foreign investment motivations

Based on investment motivations, FDI can be categorized by four different types including resource-seeking FDI, market-seeking FDI, efficiency-seeking FDI, and strategic- asset-seeking FDI

Resource-seeking foreign direct investment (FDI) targets the exploitation of inexpensive and plentiful natural and human resources in host countries, particularly in emerging markets like Southeast Asia and the Middle East Multinational corporations (MNCs) find abundant labor, even if low-skilled, highly attractive due to its cost-effectiveness This type of investment also aims to leverage local assets, including popular tourist destinations and intellectual properties Additionally, foreign investors are motivated by the competition for strategic resources, highlighting the strategic nature of resource-seeking FDI.

(2) Market-seeking FDI: the investment capital is aimed at penetrating new markets or maintaining existing markets (Contractor, Kumar, & Kundu, 2007; Welch & Welch,

1996) In addition, the purpose of the investment is to take advantage of economic cooperation agreements and trade preferential agreements between host countries and other

31 countries and regions, using the receiving country as a springboard to penetrate regional and global markets (Ni et al., 2017)

Efficiency-seeking foreign direct investment (FDI) aims to enhance a firm's operational efficiency by leveraging economies of scale and scope, as well as accessing cost-effective resources in the host country This includes utilizing affordable raw materials, labor, and production inputs such as electricity, water, communication, transportation, and favorable legal conditions.

(4) and Strategic-Asset-Seeking FDI: the purpose of the investment is to prevent the loss of resources to competitors and sustains the competitiveness of MNCs (Singla & George,

In 2013, it was highlighted that oil production and mining companies, despite not currently needing their oil reserves, must implement strategies to safeguard these assets from competitors.

Figure 2-1: Classification of FDI by foreign investors’ motivations/ purposes Source: author

2.3.2 Classified by host country’ orientation

According to Moosa (2002) and Li & Rugman (2007), there are three main types of Foreign Direct Investment (FDI) based on the perspective of the host country and government orientation: (1) FDI aimed at substituting imports, (2) FDI focused on enhancing exports, and (3) FDI directed towards other governmental objectives.

Import-substituting foreign direct investment (FDI) typically occurs in developing countries, facilitating a shift from importing goods to domestic production to satisfy local demand This transition results in reduced imports for the host country and decreased exports from the investing country Key factors influencing this type of FDI include domestic market capacity, availability of raw materials and production inputs, trade barriers, and transaction costs.

Despite having significant reserves of natural oil and gas in the East Sea, Vietnam frequently relies on imports to satisfy production needs due to insufficient exploitation techniques and equipment In response to this challenge, the Russian oil and gas corporation has partnered with Petrolimex to invest in oil and gas extraction in the East Sea, aiming to reduce Vietnam's dependency on petroleum imports.

Export-enhancing foreign direct investment (FDI) occurs when a host country leverages its comparative advantages in providing raw materials and intermediate inputs to boost exports to various nations, including the home countries of multinational corporations (MNCs) and their affiliates (Li & Rugman, 2007; Moosa, 2002) This strategy aims to improve the balance of payments and is influenced by factors such as input costs, the removal of export restrictions, regional free trade agreements (FTAs), and other production incentives A notable example of this is the joint ventures established in the Vietnam-Singapore Industrial Park.

33 in Di An, Binh Duong are oriented to produce products that meet the demand of the Vietnamese market and export to regional countries (Saisho, 2018)

Government-initiated foreign direct investment (FDI) aims to attract firms to develop underperforming manufacturing industries and challenging economic sectors, ultimately enhancing the host country's balance of payments (Li & Rugman, 2007; Moosa, 2002) A notable example is the Vietnamese government's recent incentives for foreign investors in green energy projects, such as solar and biomass power plants These environmentally friendly initiatives not only promote sustainable energy supply in Vietnam but also align with global sustainability goals (Wte, 2018).

Figure 2-2: Classification of FDI by the host country's orientation Source: author

Foreign direct investors have the flexibility to determine their desired level of control in new ventures, as highlighted by Denisia (2010) and Moosa (2002) This control can be established through either full or partial ownership, which directly influences key business decisions such as product development, expansion strategies, and profit distribution (Riahi).

Companies have the option to establish a wholly-owned enterprise or enter into a joint venture, which significantly influences their control and financial commitment in foreign markets (Belkaoui, 1996; Li & Rugman, 2007) This decision ultimately affects the equity share that a company invests in international ventures.

Wholly owned direct investment allows foreign investors to own 100 percent of their assets in an enterprise abroad, granting the parent company full control over the subsidiary's operations.

A joint venture is a collaborative partnership where two or more firms create a new entity through shared investment or resources Ownership stakes can vary, with partners holding majority, equal (50-50), or minimal shares While ownership typically indicates control, the actual power dynamics are better represented by the structure of the management board and the distribution of voting rights among partners.

2.3.4 Classified by foreign investors’ orientation and FDI integration level

Based on investors’ orientation and the degree of FDI integration, FDI can be classified into three types of horizontal FDI, vertical FDI and conglomerate FDI (Caves, 1974; Moosa, 2002)

Vertical Foreign Direct Investment (FDI) refers to a company's expansion efforts aimed at enhancing both the upstream and downstream sectors of its value chain This type of FDI is categorized into forward vertical integration, which involves investing in downstream activities like marketing and sales to improve the company's ability to sell its outputs, and backward vertical integration, which focuses on enhancing the upstream processes.

In 2017, it was noted that forward integration is less common compared to backward vertical integration, where a company invests in the upstream sector of its value chain This strategy involves supplying inputs to its own domestic or foreign subsidiaries through investments in factories or assembly plants.

Effect of FDI on the host economy

In the era of globalization and trade liberalization, multinational corporations (MNCs) are increasingly engaging in foreign direct investment (FDI) to capitalize on efficient production locations beyond their home countries By investing abroad, these companies aim to leverage the comparative advantages of host nations and benefit from favorable policies, ultimately reducing their production costs.

Subsidiaries in the same industry Horizontal FDI

Multinational corporations (MNCs) play a crucial role in the global economy by driving growth and competitiveness (Amber, 2014) Their expansion reflects significant shifts in the political and economic landscape MNCs are recognized as leaders in research and development, contributing to technological advancements and serving as vital agents for poverty alleviation in developing countries (Herrera-Echeverri, Haar, & Estévez-Bretón, 2014) As liberal global trade continues to rise, MNCs have become key players in trade activities, wielding considerable influence in shaping international trade regulations.

Multinational corporations (MNCs) play a crucial role in fostering economic growth in recipient countries, particularly in emerging markets They enhance the productivity of domestic firms by providing essential capital, transferring advanced technology, and imparting valuable managerial skills Additionally, MNCs generate positive externalities that further benefit local economies.

Multinational corporations (MNCs) play a crucial role in enhancing the economic landscape of host countries by creating jobs, boosting gross domestic income, and improving living standards (Herrera-Echeverri et al., 2014) Through their direct investments and business operations, MNCs contribute to transforming economic structures, expanding import and export activities, and facilitating deeper integration into the global economy (Beugelsdijk et al., 2008; Silajdzic & Mehic, 2016).

Some scholars criticize foreign direct investment (FDI) enterprises for exploiting natural resources, utilizing cheap labor, and contributing to significant pollution in host countries, while most profits are often repatriated When FDI constitutes a large portion of total investment capital in a host country, it can render the economy vulnerable, externally dependent, and unstable over time Additionally, the financial and technological advantages of FDI enterprises create intense competitive pressure on domestic firms, potentially leading to their exit from the market or crowding-out effects.

Inward foreign direct investment (FDI) significantly impacts various facets of a host country's economy, presenting both benefits and challenges According to Moosa (2002), the presence of FDI influences economic growth, employment rates, wage levels, trade flows, productivity, technology transfer, and the development of linkage relationships in recipient countries.

2.4.1 The effects of FDI on economic growth

Investment plays a crucial role in driving economic growth, with capital mobilized from both domestic and foreign sources Domestic capital arises from savings and investments, while foreign capital is generated through commercial loans, indirect investments, and foreign direct investment (FDI) In transition economies, FDI is particularly vital for economic development, especially in contexts where domestic credit markets are inefficient.

& Nguyen, 2010; Silajdzic & Mehic, 2016) FDI, by its nature, has created an effective measure is to raise capital for investment, mobilize resources to develop the host country ’s economy

Inward foreign direct investment (FDI) in a host economy can catalyze additional capital inflows from multinational corporations (MNCs) and boost domestic savings, thereby enhancing investments and improving the balance of payments Unlike other forms of capital inflows such as official development assistance (ODA) or commercial loans, these financial resources are marked by long-term commitment and stability The presence of MNCs not only provides capital but also facilitates the transfer of advanced technology, machinery, and intangible assets, including management expertise and innovative processes This synergy of increased capital and efficient resource utilization fosters improved labor productivity and output, ultimately driving economic growth in the host country.

2.4.2 The effect of FDI on employment and wage

Inward foreign direct investment (FDI) fosters the creation of new businesses and the expansion of existing firms in the host economy, resulting in job creation and positively impacting the labor market in developing countries with abundant labor resources As FDI enterprises emerge and grow, local workers gain valuable knowledge and skills, enhancing their technical abilities, work organization, and bargaining power Additionally, management-level employees benefit from acquiring extensive cross-cultural and regional expertise, including international market access, negotiation skills, trade promotion, and human resource management.

In her 2015 study, Javorcik conducted a thorough review of existing research on the impact of Foreign Direct Investment (FDI) on wages, examining both worker and host-country perspectives The central question addressed was whether FDI creates quality jobs in host countries From the worker's viewpoint, the study explored how foreign presence affects local wages, training opportunities, and job stability Conversely, the host-country perspective focused on knowledge transfer, productivity benefits, and externalities associated with FDI To achieve these research goals, Javorcik analyzed various FDI-related indicators, including total factor productivity (TFP), value-added per worker, employment rates, and average wages The findings revealed that FDI is linked to higher compensation, improved job quality in terms of training, and an overall increase in aggregate productivity from both perspectives.

40 intra-industry spillover on productivity which is supported by many previous studies (Damijan, Rojec, Majcen, & Knell, 2013a; Du, Harrison, & Jefferson, 2012)

Foreign Direct Investment (FDI) inflows significantly enhance workers' income, as FDI enterprises typically offer higher wages than domestic companies (Nguyen, 2015; Nguyen & Ramstetter, 2017) Additionally, these firms often provide training programs for local workers, which helps develop a skilled workforce and builds human capital in the host country (Gửrg, Strobl, & Walsh, 2007) The competition between FDI and domestic enterprises in the labor market encourages workers to improve their qualifications, leading to increased wages and greater bargaining power.

Foreign Direct Investment (FDI) projects often result in the loss of traditional jobs due to land acquisition, as these enterprises typically rely on cheap, low-skilled labor and may frequently replace workers through probationary mechanisms Additionally, host countries experience a "brain drain" effect, as FDI projects attract talent with high compensation and appealing work environments To combat the turnover of skilled workers to domestic firms, FDI enterprises implement various strategies aimed at retaining their talent.

2.4.3 The effects of FDI on trade flows

The relationship between foreign direct investment (FDI) and trade can vary as substitutes or complements, influenced by the unique characteristics of host countries and specific industries (Moosa, 2002) By analyzing the differences and similarities in factor endowments among host nations, foreign investors can determine whether to pursue vertical or horizontal FDI strategies to effectively implement their substitution or complementarity approaches (Trigeorgis & Reuer, 2017).

Horizontal FDI results in a reduction of imports in host countries due to the implementation of 41 products, while vertical FDI enhances imports of intermediate inputs and boosts exports of finished goods, indicating a complementary relationship in production.

Inward foreign direct investment (FDI) is primarily driven by the desire for market and export expansion, allowing host countries to leverage their comparative advantages in production inputs within the global division of labor Developing nations often struggle to compete in international markets due to cost challenges (Wang & Blomström, 2002) Multinational corporations (MNCs) significantly contribute to export growth, thanks to their established position and reputation in the global arena Consequently, fostering export-oriented FDI is a key focus of FDI attraction policies in these countries By facilitating FDI, domestic firms gain access to international markets, thereby improving their competitiveness and gaining valuable internationalization experience over time.

2.4.4 The effect of FDI on productivity

The theories of FDI

In his 2002 work, Moosa systematically synthesizes Foreign Direct Investment (FDI) theories, highlighting their key assumptions, limitations, and supporting empirical evidence He categorizes these theories into three groups: those based on perfect market conditions, those that consider imperfect markets, and alternative theories that offer diverse perspectives on the motivations behind firms' investments in foreign countries.

Theories of perfect markets posit that neither producers nor consumers can influence market prices, ensuring a level playing field (Denisia, 2010) This ideal of perfect competition is believed to foster high economic efficiency (Li & Rugman, 2007) and serves as the foundation for supply and demand theory Key assumptions underpinning a perfectly competitive market model include the absence of market control by individual participants.

All exchanged goods must maintain uniformity in quality and quantity, ensuring that they are identical in specifications, qualities, and designs Buyers can purchase these goods without concern for the seller, as the products are standardized and interchangeable.

 All sellers and buyers have a full understanding of the information related to trading and exchanging

 There is nothing to prevent a buyer or seller from entering or exiting from the market

To sustain competitive advantages, firms in a perfect market must explore diverse strategies to lower costs related to foreign direct investment (FDI) or to differentiate their products from competitors However, since these ideal conditions seldom exist in reality, the concept of a perfect market remains merely a theoretical model The table below outlines various FDI theories grounded in the assumptions of a perfect market.

Table 2-2: FDI theories assuming perfect market

- Perfect substitute: the intentional movement of capital from low rate of return (RR) country to high RR country to equate marginal return on investment and marginal cost

-The importance of human capital as a facilitating factor for a higher rate of return in both rich and poor countries

To mitigate non-neutral risks with high probabilities, FDI firms should consider diversifying their investments across various industries and countries, as this strategy can help secure favorable rates of return.

- FDI is more attractive for MNCs than portfolio diversification in terms of the degree of control which determines the ability to reduce risk

-The host country's market size is an important determinant of inward FDI volume in that country as it reflects the MNCs' revenues there

-The larger the market size is, the more the capacities are provided to foreign firms to optimize production factors and minimize costs

The theory of imperfect markets posits that inefficiencies arise from various imperfect factors, impacting business performance (Li & Rugman, 2007) Consequently, foreign direct investment (FDI) entry modes are anticipated to help multinational corporations (MNCs) navigate these market imperfections and enhance their overall performance (Denisia, 2010; Gửrg & Greenaway, 2004) Two primary types of market imperfections include trade barriers and specialized knowledge.

 Trade barriers: A form of market imperfection is trade barriers such as import duties or quotas

 Special knowledge: This kind of knowledge includes the expertise of techniques, technology, marketing, managerial skills, etc It can undeniably create the extraordinary competitiveness of a company against its competitors

The following table summarizes FDI theories based on the assumptions of imperfect market

Table 2-3: FDI theories assuming imperfect market

-A firm expanding globally suffers from liability of foreignness (language, culture, legal regulations, etc…) and find difficult to compete with local firms

Foreign firms possess significant comparative advantages due to factors such as strong brand recognition, advanced technology, superior managerial skills, and substantial capital Additionally, their effective marketing strategies, access to raw materials, economies of scale, and enhanced bargaining and political power further contribute to their competitive edge in the market.

When a company embarks on international expansion, it faces challenges such as high transaction costs, extended timelines, and market failures, including shortages of intermediate inputs, skilled labor, and specialized knowledge in its domestic market.

- There are many alternatives for FDI such as

No Hypothesis Contents export, licensing, franchising, subcontracting Choosing FDI as the mode of entry may be a result of thoughtful consideration and preparations

-The internationalization efforts contribute to reducing uncertainties, including both export and import choice

Multinational corporations (MNCs) are driven to invest abroad due to the immobility of production factors By targeting preferential areas rich in low-cost labor and natural resources, they can establish significant locational advantages that enhance their operational efficiency and profitability.

-Labor productivity, skill and labor disputes may affect the cost of production (wage) and FDI decisions

-The combination of industrial organization, internationalization, and location hypothesis to some extent to clarify the following ideas

(1) whether demand for a specific product in a country could be met by local supply and importing of that product

(2) There are many different channels for production expansions instead of FDI

+ The existence of comparative advantage (firm-specific advantages)

+ The choice between using advantages or selling/leasing them must be driven by benefits

+ The existence of preferential production factors in the host economy

-Explain the changes in the development trend of internationalization over time The theory of the product life cycle is built based on successive product innovation and promotion

-The product life cycle is divided into 4 stages:

(1) Stage 1: Launch of new products  the

The initial consumption country is typically the same as the manufacturing country due to the strong link between innovation and demand Manufacturers, often based in advanced industrial nations, begin by exporting their innovative products to other high-income countries.

(2) Stage 2: The production process begins to take place in other leading industrial countries and gradually replaced the exports of launched products to these markets

In Stage 3, the demand for new products from other countries grows significantly, enabling producers to benefit from large-scale outsourced production As a result, these producers become net exporters, with their export volume surpassing import volume, effectively replacing exports from the original innovative country to nations that lack the capacity to produce these new products.

In Stage 4, as technology and products become standardized for untrained, low-skill workers, low-cost developing countries begin to export these goods, gradually displacing exports from the original countries where the products were first created and launched Consequently, the originating country of the initial products shifts its focus to developing new products, preparing to initiate a new product cycle.

The theory suggests that when a firm engages in foreign direct investment (FDI) to expand its market presence, competitors within the industry may respond by undertaking similar actions to protect their market shares.

- In this way, there is an increase in intra- industry competition level and entry concentration; however, a decrease in product diversity

The other theories of FDI reflect the different perspectives of MNCs such as internal financing, entry mode decision, and host country's characteristics and fiscal and legal regulations

Table 2-4: Other FDI theories from different perspectives

Multinational corporations (MNCs) leverage profits from their foreign affiliates to reinvest in foreign direct investment (FDI) and expand their business operations in the host country over the long term.

- It is more appropriate to interpret FDI in emerging countries due to barriers to funds transfer as well as inefficient institutions and financial markets in the host economies

-FDI decisions depend on the currency strength of the origin country

-Taking the exchange rate into account, firms in country with a powerful currency are motivated in investing their capital abroad and vice versa

3 Diversification with barriers to international capital flows

-The theory emphasizes two conditions of FDI implementation:

(1) FDI is a more attractive channel with lower barriers and costs in comparison with portfolio investment

Investors are increasingly recognizing the exceptional diversification opportunities offered by multinational corporations (MNCs) The global presence of these MNCs significantly influences their stock prices, with those boasting a robust and well-established subsidiary network often enjoying favorable market valuations.

-FDI as a source of factor endowments in kind of capital, technology, and skills transfer from home countries to host countries

-Two kinds of FDI is mentioned:

(1) Trade-orientated FDI: enhancing trade, welfare and industrial restructuring in both countries

(2) Anti-trade-orientated FDI: adverse effects

5 Political Risk and Country Risk

Definition of FDI spillover effect

Blomstrom, Kokko, Sjoholm, Wang, Aitken, Harrison, and Caves are recognized as pioneers in the study of foreign direct investment (FDI) spillover effects, providing foundational theories and empirical evidence through various research efforts Their work highlights both the direct and indirect impacts of FDI on host economies, emphasizing the significance of spillover effects They explore how advanced technology, best practices, and management expertise are transferred from multinational corporations (MNCs) and foreign subsidiaries to domestic firms in the host country, thereby enhancing local industry capabilities.

Foreign Direct Investment (FDI) enterprises significantly influence domestic firms by intensifying competition, which compels local companies to enhance their operational efficiency This foreign presence fosters knowledge diffusion and technology transfer within the host country, thereby bolstering the technological capabilities and competitiveness of local enterprises Additionally, spillover effects may arise when FDI firms struggle to safeguard their intellectual assets, leading to knowledge leaks through employee training and turnover Moreover, FDI enterprises can proactively share information and transfer technology and managerial skills to domestic firms within their supply chain, further contributing to local economic development.

Spillover effects are defined as foreign influences derived from intentional or unintentional interactions between economic entities over time (David & Rosenbloom, 1990)

The FDI spillover effect is a significant concept in international economics that refers to the influence of multinational corporations (MNCs) on the performance of domestic firms in host countries, even when their operations are not directly linked This effect encompasses both intentional and unintentional externalities resulting from foreign investments, which can enhance local businesses by expanding markets, accessing new resources, adopting advanced technologies, and improving product value However, the presence of MNCs can also lead to the decline of less efficient domestic firms unable to compete effectively within the same industry.

Foreign Direct Investment (FDI) generates two primary types of spillovers: productivity spillover and market access spillover (Blomstrom & Kokko, 1998) Productivity spillover is particularly significant, as it allows domestic firms in the host country to observe, imitate, and enhance their technology while adopting advanced business practices, ultimately leading to improved productivity at reduced costs (Aitken & Harrison, 1999; Aitken et al., 1997).

Channels of FDI spillovers

To assess the externalities of foreign direct investment (FDI) enterprises on domestic companies, spillover effects can be categorized based on various transmission channels and their integration within production supply chains, as highlighted by Blomstrom & Kokko (1998), Blomström & Sjöholm (1999), and Damijan et al (2013b).

2.7.1 Transmission mechanisms of FDI spillovers

FDI may spill over through four primary channels including imitation/ demonstration, labor turnover, competition and inter-linkage relationships with foreign subsidiaries

Imitation and demonstration are key channels for technology spillover, as countries adopting new technologies without prior experience face significant costs and risks (Damijan et al., 2013a) Successful implementation of technology by multinational corporations (MNCs) enables local companies to access and utilize these advancements more effectively (Hamida & Gugler, 2009) Foreign Direct Investment (FDI) facilitates this process, as MNCs introduce cutting-edge technology by establishing subsidiaries or branches in the host country Furthermore, the presence of FDI firms motivates domestic companies to innovate, either through joint ventures with foreign partners or by acquiring technology from these MNCs (Blomström &).

Sjửholm, 1999; Iršovỏ & Havrỏnek, 2013) However, the level of efficient use of technology also depends on the absorption capacity of domestic firms (Sourafel Girma, 2005; Jacobs et al., 2017; Marin & Sasidharan, 2010)

The second spillover channel arises when domestic firms employ workers who previously worked at multinational corporations (MNCs), as these individuals bring valuable technological knowledge that can enhance domestic enterprises (Blomstrom & Kokko, 1998; Fosfuri, Motta, & Rứnde, 2001) The spillover effect is particularly pronounced when these skilled workers leverage their experience from MNCs in their own businesses or startups (Damijan et al., 2013a) However, measuring the impact of these workers on domestic productivity poses challenges, especially when they lack the necessary conditions to fully utilize their skills According to FDI theory as outlined by Moosa (2002), various firm and industry-specific factors—such as market size, capital intensity, financial development, and industry concentration—can influence labor productivity Consequently, the relationship between labor mobility and firm productivity remains a topic of ongoing debate (Bellak, 2004; Gorodnichenko et al., 2014a; Peri & Urban, 2006).

The third spillover channel arises from competitive pressure exerted by foreign firms within the same industry To thrive in this highly competitive environment, domestic companies must enhance their efficiency by optimizing resource use, adopting new technologies, and boosting productivity (Blomström & Sjöholm, 1999; Malik, Rehman, Ashraf, & Abbas, 2011) However, this competitive landscape can also negatively affect domestic enterprises, as foreign direct investment (FDI) firms introduce advanced technologies and innovative products that can displace existing domestic offerings.

The introduction of 56 products by domestic enterprises could significantly impact their viability, influenced by the extent to which these new offerings can substitute existing products Additionally, the market share acquisition by foreign direct investment (FDI) enterprises may lead to a decline in the production efficiency of domestic companies (Hamida & Gugler, 2009; Hamida, 2013).

Salim & Bloch (2009) analyzed firm-level panel data from 568 Indonesian chemical and pharmaceutical firms between 1988 and 2000 to investigate the relationship between productivity growth and spillovers, utilizing Fixed Effects Model (FEM) and Random Effects Model (REM) methodologies Their findings revealed horizontal spillovers and highlighted that competition and R&D are significant factors influencing these productivity spillovers Building on this, Fatima (2016) aimed to deepen the understanding of how local firms' productivity growth relates to FDI spillovers across various productivity growth quantiles, employing quantile regression on panel data from Turkish manufacturing enterprises.

Between 2003 and 2010, a study analyzed 37 industries, distributing Total Factor Productivity (TFP) growth into five quantiles: 10th, 25th, 50th, 75th, and 90th The research incorporated absorptive capacity, defined as the distance between a firm's productivity and the industry's best practice, as a moderating factor The findings reveal that local firms across different quantiles experience varying impacts from horizontal and forward spillovers Specifically, firms in higher quantiles are less adversely affected by competition from multinational corporations (MNCs) and benefit more from forward spillovers.

2.7.1.4 Inter-linkage relationships with foreign subsidiaries

The Foreign Direct Investment (FDI) theory on the product life cycle highlights the gradual transition of production from the home country to more advantageous locations globally (Vernon, 1960; Moosa, 2002) In the third and final stages of this cycle, multinational corporations (MNCs) leverage the unique advantages of host countries to enhance their production capabilities.

Multinational corporations (MNCs) aim to scale and expand the export of their innovative products to various countries by establishing local production facilities, distribution networks, and transportation infrastructure, while also adapting to local tastes (Kokko, 1994; Wang, 2010) Their extensive operational experience and significant international presence enable MNCs to better identify factors that enhance export opportunities and maximize profits compared to local businesses.

The collaboration between foreign direct investment (FDI) enterprises and local businesses within the supply chain can create significant spillover effects for host country firms One key channel for these spillovers is the connection between domestic companies and foreign subsidiaries, which occurs in both upstream and downstream sectors Downstream linkages involve local enterprises purchasing production inputs from FDI firms, while upstream linkages occur when domestic companies supply intermediate inputs to foreign subsidiaries These backward linkages enable local firms to scale up production and enhance product quality to meet the stringent standards set by foreign entities.

Multinational corporations (MNCs) provide supplementary services alongside their products, creating opportunities for innovative processes and best practices to be shared with domestic firms (Mariotti et al., 2015) However, improvements in the quality of intermediate inputs can lead to increased production costs Therefore, domestic companies must focus on internal capacity building to effectively absorb technology and knowledge spillovers from foreign direct investment (FDI) firms (Jacobs et al., 2017; Mariotti et al., 2015).

In a pioneering study on the indirect effects of Foreign Direct Investment (FDI) in Vietnam, Giroud (2007) conducted semi-structured interviews with managers from multinational corporations (MNCs) in Vietnam and Malaysia during 1996 and 2002 Utilizing statistical methods for frequency and percentage estimation, the research focused on Vietnamese firms in the electronics and textiles sectors The questionnaire, designed on a five-point scale, assessed 19 transfer practices related to MNCs' supply of intermediate inputs and training activities that could lead to spillovers The findings revealed that while backward linkage spillovers to local firms in Vietnam exist, they are somewhat limited Notably, Malaysia outperforms Vietnam in absorbing MNCs' management expertise and advanced technology The study also highlighted the weak and poorly oriented vertical linkages in Vietnam, leading Giroud to propose recommendations for enhancing linkages and building capacity in the host country.

Figure 2-4: Mechanisms of FDI spillovers Source: author

2.7.2 Horizontal and vertical channel of FDI spillovers

Integration in the production supply chain can lead to spillover effects through two primary channels: first, horizontal interactions between foreign direct investment (FDI) enterprises and domestic firms within the same industry; and second, vertical interactions among upstream and downstream companies in the supply chain.

Horizontal spillovers refer to the intra-industry externalities created by the presence and activities of multinational corporations (MNCs) in a domestic market These externalities arise within the same industry where foreign direct investment (FDI) is present It is recognized that FDI enterprises can generate horizontal spillover effects through the imitation of foreign technology and the movement of labor from foreign firms to domestic companies.

Inter-linkage relationships in the supply chain

Domestic firms’ productivity (TFP, labor productivity) Labor wages

Local firms sell inputs to FDI firms

Local firms buy inputs from FDI firms

Foreign Direct Investment (FDI) can significantly influence competition within the same industry, often enhancing the competitiveness of domestic firms or prompting weaker players to exit the market However, distinguishing the specific effects of FDI on competition remains challenging, as various factors intertwine in this complex dynamic (Blomstrom & Kokko, 1998; Carluccio & Fally, 2013; Damijan et al., 2013a; Khachoo & Sharma, 2016).

Theoretical framework

The impact of Foreign Direct Investment (FDI) extends beyond direct contributions, as evidenced by extensive discussions on its effects and associated theories This article presents a theoretical framework designed to address existing research gaps by elucidating both direct and indirect spillover effects of FDI on domestic firms within the host country Focusing on firm-level analysis, the framework highlights key theories and mechanisms through which these spillovers can transfer from foreign enterprises to local businesses.

Neoclassical growth theory, as developed by Solow and Swan (1956) and later expanded by Solow (1957), suggests that high labor costs and a lack of production factors in wealthy nations drive them to relocate production to poorer, labor-intensive countries This shift can lead to a positive impact on economic growth through foreign direct investment (FDI), which provides capital and technological advancements Numerous studies and empirical evidence highlight the direct relationship between FDI and economic growth, particularly in transition economies (Balasubramanyam, Salisu, & Sapsford, 2006; Forte & Moura, 2013; Murthy, 2015; Silajdzic & Mehic, 2016; Temiz & Gokmen, 2014) and specifically in Vietnam (Anwar & Nguyen, 2010).

At the firm level, relevant FDI theories highlight the significant spillover effects from foreign firms to domestic companies Blomstrom & Kokko (1998) elucidate how these foreign externalities disseminate within domestic markets The strategic and long-term factor theory outlines that a sustained foreign presence can lead to intra- and inter-industry spillovers, enhancing opportunities for imitation and the transfer of strategic production inputs The eclectic theory integrates industrial organization, internationalization, and location theories, identifying three key motivations for FDI: comparative advantages, suitable entry modes, and favorable production factors in the host economy Furthermore, industrial organization theory underscores how multinational corporations (MNCs) can mitigate the liability of foreignness by partnering with local firms, facilitating the transfer of unique foreign resources, which contributes to spillover effects through established linkages Finally, product life cycle theory also plays a role in understanding these dynamics.

The product life cycle consists of four stages, emphasizing the importance of continuous product innovation and promotion This evolution leads to increased standardization of technology and products, making them accessible to low-skill workers in developing countries, thereby replacing exports from developed nations Additionally, oligopolistic reactions theory suggests that a firm's foreign direct investment (FDI) aimed at market expansion may provoke responses from competitors, influencing intra-industry competition and potentially creating both positive and negative spillover effects for domestic firms Furthermore, Kojima's theory highlights FDI as a means of transferring capital, technology, and skills from home to host countries, which can enhance trade and labor welfare or have adverse effects.

The six foundational theories highlight the potential mechanisms through which foreign spillover effects influence domestic firms' productivity, trade flows, and employee compensation, particularly wages These mechanisms include vertical channels, such as forward and backward linkages, and horizontal channels, which encompass imitation, demonstration, competition, and worker mobility A comprehensive analysis of these spillover motivations and mechanisms is provided in critical reviews of foreign direct investment (FDI) theories, as discussed by notable researchers including Blomstrom & Kokko (1998), Blomström & Sjöholm (1999), Calvet (2014), Caves (1974), Denisia (2010), Forte & Moura (2013), Schaumburg-Müller (2003), and Wang.

Previous literature and empirical evidence highlight the significance of absorptive capacity, influenced by firm and industry-specific characteristics, in shaping the direction and extent of Foreign Direct Investment (FDI) spillovers Key studies by Aitken & Harrison (1999), Aitken et al (1997), Blomstrom & Kokko (1998), and others underscore this relationship, demonstrating that a firm's ability to absorb and utilize external knowledge is crucial for maximizing the benefits of FDI.

Figure 2-5: A theoretical framework of relevant theories illustrating the presence of FDI spillovers Source: author

Productivity spillovers from FDI

Productivity spillover refers to the impact of foreign direct investment (FDI) on the productivity levels of local firms in the host country This phenomenon can manifest in both positive and negative effects, as local businesses may be influenced by the operations and presence of foreign equity entrants.

Productivity spillover can benefit local firms through various mechanisms, particularly when foreign companies share their existing technologies or provide employee training This transfer of knowledge and skills enhances the capabilities of local businesses, ultimately contributing to their growth and competitiveness.

Direct effects on economic growth through the capital provision and technological advances

Strategic and long-term factors theory

A set of strategic factors, long-term effects through spillover channels

Advantages of location and production inputs

Standardized technology and products for low-skill workers in developing countries to replace home exports

An increase in intra-industry competition level and entry concentration

A source of human, capital, technology transfer Enhancing trade and labor welfare or vice versa

Relevant theories on absorptive capacity

Collaboration to relieve foreignness liability Transfer of foreign firms’ specific factors

Local firms in Vietnam can enhance their competitiveness by imitating practices of multinational corporations (MNCs) or by offering higher salaries to attract skilled workers trained by these MNCs Additionally, joint ventures with foreign partners provide local firms with valuable opportunities for learning and upgrading, ultimately improving productivity The competitive pressure from foreign entities motivates domestic companies to invest in technology and strengthen their workforce Furthermore, productivity gains can occur through vertical business linkages, where local firms act as suppliers or customers for MNCs, facilitating knowledge transfer and operational improvements.

Blomstrom & Kokko (1998) significantly advanced the theoretical framework surrounding foreign direct investment (FDI) externalities in both home and host countries, laying a foundation for subsequent research Their work has inspired recent studies that utilize their estimation models to explore the complexities of FDI Through case study methodology and limited empirical evidence on multinational corporations (MNCs) and their spillover effects on local firms, the authors developed a conceptual framework that differentiates between productivity spillovers and market access spillovers.

2.9.1 Channels of productivity spillovers from FDI

Recent studies have explored the productivity spillovers from foreign direct investment (FDI) through two primary channels: horizontal FDI spillover and vertical FDI spillover (Damijan et al., 2013a; Fatima, 2016; Iršová & Havránek, 2013; Le & Pomfret, 2011).

Horizontally productivity spillovers occur when local competitors experience changes in productivity levels due to the presence of wholly foreign-owned firms or joint venture subsidiaries within the same industry These changes can arise from positive externalities of foreign direct investment (FDI), such as technology diffusion, enhanced management practices, and employee turnover, or from negative externalities like increased competition and intellectual property challenges Consequently, a higher level of foreign equity in a sector may lead to improved productivity among local firms, as they gain access to advanced technologies that become more affordable and accessible.

Domestic players can gain from the transfer of skilled labor from the FDI sector, as these workers bring formal training and efficient processes that can enhance local firms' technology transfer and absorptive capabilities However, the presence of foreign firms also increases the risk of local firms failing due to intense competition and the crowding-out effect Additionally, foreign companies often protect their technologies, making it challenging for local firms to adopt these innovations without significant effort and costs Consequently, local firms lacking resources, technology, and management expertise may struggle to compete and adapt to market changes, potentially falling victim to foreign market entries.

Local firms in the host country face significant challenges in leveraging horizontal FDI spillovers It is widely recognized that domestic companies lacking competitiveness and absorptive capacity struggle to benefit from the positive externalities generated by foreign direct investment.

In a competitive landscape, companies must enhance their productivity and performance to avoid becoming victims of foreign entrants (Jordaan, 2013) Notably, foreign competitors within the same industry excel at retaining and satisfying their top talent, highlighting the importance of employee engagement and satisfaction (Caves).

Attracting high-skilled labor in a competitive industry is challenging and resource-intensive, often leading to fierce competition within the host market Consequently, the potential positive horizontal spillovers from this labor may be overshadowed by the intense rivalry present in the sector.

Vertical spillover occurs through backward and forward linkages created by domestic firms collaborating with multinational corporations (MNCs), allowing local businesses to become integral stakeholders in the supply and distribution chains of foreign firms (Halpern & Murakőzy, 2007) These linkages enhance the capabilities of domestic firms and boost long-term productivity (Iršová & Havránek, 2013) Backward linkages arise when local firms supply inputs to foreign companies, generating positive externalities such as improved quality control and innovation to meet foreign sector demands Conversely, forward linkages involve local firms utilizing foreign inputs in their production processes This dynamic is particularly relevant in emerging economies, where businesses strive for cost minimization while seizing opportunities to maintain competitive advantages and expand their markets (Merlevede & Purice, 2016) However, the benefits of these linkages are primarily realized by firms with high absorptive capacities, who also face challenges including stringent quality standards, increased operational costs, and intense competition.

This dissertation comprehensively explores the channels through which foreign direct investment (FDI) spillovers occur from foreign firms to domestic firms in the host country Focusing on horizontal spillovers, Carluccio & Fally (2013) identify three primary mechanisms for technology transfer Firstly, demonstration and imitation effects enhance the institutional, managerial, and technological capabilities of domestic firms Secondly, the competition effect arises as the presence of FDI firms boosts market competitiveness, prompting domestic firms to upgrade their skills and productivity (Blomstrom & Kokko, 1998; Blomström & Sjöholm, 1999) Lastly, productivity spillovers can occur through the movement of employees from technologically advanced FDI firms to domestic firms, as well as through the integration of complementary workers (Fosfuri et al.).

Research indicates that vertically backward spillover happens in the upstream sector, involving interactions between local suppliers of intermediate goods and foreign subsidiaries Conversely, vertically forward spillover occurs in the downstream sector through activities connecting foreign subsidiaries with local customers (Iršová & Havránek).

Backward spillover refers to the impact of foreign firms on local suppliers, prompting them to adapt proactively to meet higher standards of product quality and delivery reliability (Javorcik & Spatareanu, 2011) This adaptation is essential for local providers to secure consistent orders from multinational corporations (MNCs) Additionally, MNCs are motivated to share knowledge with local suppliers within their supply chain to enhance production control (Hamida, 2013) Consequently, the practices of local suppliers, as key stakeholders, can significantly affect the overall performance of foreign firms.

68 subsidiaries Therefore, in most cases, backward spillover has been considered as the most positively dominant channel of FDI spillover

Forward linkage refers to the external benefits that occur when the products of foreign subsidiaries are supplied to downstream customers in the host country The presence of foreign entities significantly enhances the accessibility and affordability of technologically advanced inputs for local producers.

Wages spillovers from FDI

2.10.1 The effect of FDI horizontal spillovers on wages:

Foreign Direct Investment (FDI) horizontal spillover is a well-established phenomenon in developing countries, where foreign equity from advanced nations enhances local industries This spillover occurs when foreign firms, through inward capital, technology, and skilled executives, operate alongside domestic companies, thereby boosting the overall industry output Theoretical and empirical studies indicate that these horizontal spillovers generate positive externalities, enabling local firms to access advanced technologies and managerial expertise via demonstration, imitation, and workforce mobility.

The presence of foreign firms can lead to positive spillovers; however, this may be offset by intense competition within the same industry (Hamida, 2013) In low-tech sectors with unskilled labor, such as Vietnam, local firms and employees face significant risks from foreign investment (Le & Pomfret, 2011) The impact of horizontal foreign direct investment (FDI) on local workers' wages is complex, but Javorcik (2015) highlights that foreign affiliates can enhance domestic workers' compensation and contribute to the economy by creating quality jobs.

Research has identified two key ways in which foreign presence influences local wages through horizontal spillovers: first, by creating competition in the labor market between foreign affiliates and domestic firms; and second, by enhancing overall productivity This dual impact highlights the complex relationship between foreign investment and local economic dynamics (Aitken & Harrison, 1999; Driffield, 2004; Pittiglio, Reganati, & Sica, 2015).

According to labor competition theory, foreign-based firms must offer higher wages than local companies to attract and retain highly skilled and experienced workers in the host market Multinational enterprises (MNEs) prioritize the recruitment of qualified employees to ensure efficient operations, leading them to pay above-average wages to reduce labor turnover Additionally, foreign companies aim to safeguard their intangible assets, and offering competitive salaries serves as a strategy to mitigate trade losses and employee turnover challenges.

Entering a developing market often presents foreign affiliates with challenges, including a shortage of skilled workers and difficulties in recruitment and retention (Fukase, 2014) Successfully recruiting and integrating skilled employees is crucial for maintaining and enhancing productivity over time, which is vital for the efficient operation of multinational corporations (Chew).

& Teo, 2002) Besides, high payments can function as a marketing strategy highlighting the company's capital, revenue and high adaptability to the new environment

Local workers in developing countries are well-acquainted with the business practices and wage policies of domestic firms However, as highly qualified individuals become aware of better-paying opportunities at foreign companies, their bargaining power for desired salaries increases This competition for talent compels local firms to raise their wages to attract and retain skilled workers.

To attract qualified workers, multinational corporations (MNCs) often implement generous wage policies, which can lead to an increase in wage equilibrium (Fukase, 2014; Onaran & Stockhammer, 2008) However, the impact of foreign direct investment (FDI) on salaries is also influenced by various factors in the host country, including labor demand, capital intensity, firm size, skill intensity requirements, and the levels of minimum wages and wage premiums (Nelson, 2010; Ni et al., 2017).

Foreign Direct Investment (FDI) firms offer significant advantages to host countries, including advanced technology, management expertise, and productive capital Local businesses can enhance their labor productivity and reduce marginal costs by absorbing knowledge spillovers from foreign firms through observation and imitation (Hamida & Gugler, 2009; Blomstrom & Kokko, 1998; Caves, 1974) The ability of domestic firms to absorb this knowledge is crucial for benefiting from FDI (Huynh et al., 2019) Typically, labor productivity is higher in foreign companies, leading to increased wages compared to local firms This dynamic fosters a favorable environment that enhances local firms' productivity and raises wage levels for domestic workers (Aitken et al., 1997) Additionally, the positive impact of horizontal spillovers on domestic workers' wages is linked to skill development and knowledge expansion (Blomstrüm & Persson, 1983; Blomstrüm & Sjöholm, 1999; Globerman, 1979; Liu, 2002).

Foreign Direct Investment (FDI) can exacerbate wage inequality in developing countries by introducing management skills, market information, and advanced technology These factors accelerate technological change, which is a skill-driven process that often leads to increased income disparities The significance of spillover effects from FDI is crucial in understanding this dynamic.

Foreign Direct Investment (FDI) significantly impacts developing countries by promoting economic growth through capital accumulation and productivity enhancements Multinational Enterprises (MNEs) require higher-skilled labor, which drives the need for improved production skills in these regions Additionally, the competitive pressure from MNEs compels domestic firms to adopt innovative technologies and invest in research and development However, these technological advancements can lead to a disparity in skill levels, resulting in increased relative wages for skilled workers and contributing to income inequality.

Onaran and Stockhammer (2008) examine the influence of foreign presence and trade openness on average wages in five European countries, utilizing manufacturing panel data from 2000 to 2004 Their wage bargaining model highlights real wages as the dependent variable, incorporating factors like labor productivity, unemployment rates, foreign equity intensity, and export-import ratios They identify a short-term positive effect of foreign direct investment (FDI) on wages, contrasted by a negative impact in the medium term, influenced by skill and capital intensity While international trade does not affect wages in the short term, a positive correlation between exports and wages emerges in the medium term, alongside a negative correlation with imports Javorcik (2015) further supports these findings, noting that foreign presence generally enhances national productivity and employee salaries through job creation and training opportunities.

2.10.2 The relationship between trade openness and wages

Traditional trade theories suggest that trade openness enhances a country's welfare by leveraging its comparative advantages and abundant resources However, in developing countries, skilled workers may face reduced wage premiums if the focus shifts to unskilled labor-intensive production Despite this, trade openness often fosters knowledge spillovers, technological advancements, and increased capital inflow, which can elevate the demand for skilled workers The effects of trade liberalization differ significantly for developing countries compared to industrialized nations, as international trade influences wage disparities within and between industries, driven by factors like rising demand for skilled labor in export sectors and labor demand shocks in import sectors.

Recent studies indicate that firm-level trade openness significantly impacts wages in the formal employment sector of host countries Initially, trade openness tends to lower real wages for both skilled and unskilled workers; however, it can create well-paying jobs for unskilled labor while reducing wages for skilled labor in developing nations (Onaran & Stockhammer, 2008) Economists suggest that the relationship between trade and wages is complex and varies by country and firm characteristics, with long-term effects being more closely associated with cost efficiency and productivity improvements rather than short-term labor demand fluctuations (Arbache et al., 2004; Monte, 2011) Additionally, it is essential to analyze the impacts of exports and imports on wages separately (Onaran & Stockhammer, 2008).

Importing high-quality intermediate goods can enhance firm efficiency and productivity while benefiting workers through higher wages (Martins & Opromolla, 2009) However, an influx of new machinery and technology may initially disrupt real output due to the imperfect allocation of skilled labor, leading to job losses among unqualified workers (Arbache et al., 2004) This shift often results in a temporary increase in wages for skilled workers Nevertheless, as unskilled workers adapt and learn new technologies, the initial wage decline may be mitigated Ultimately, increased imports can intensify competitive pressure on domestic firms, potentially leading to wage declines and greater wage inequality across industries and ownership sectors (Onaran & Stockhammer, 2008).

Exporters in developing countries typically operate in high-capital-intensity industries that depend on skilled labor, giving workers significant bargaining power to negotiate their wages As firms seek to expand globally and meet international standards, they often provide higher compensation to motivate employees in their pursuit of shared objectives.

Research model and hypotheses

2.11.1 Firm productivity spillover under FDI presence

Based on the work of Blomstrom & Kokko (1998) and empirical findings by (Anwar

Productivity spillover occurs when local firms experience improvements in productivity and efficiency due to the presence of foreign companies This can result from the transfer of advanced technology and knowledge from multinational corporations (MNCs) to developing host countries, as well as increased market competition that pressures local firms to adapt However, evidence supporting the impact of foreign direct investment (FDI) spillover effects on host countries remains limited, with insufficient empirical analysis in both inter and intra-industry contexts Ultimately, the authors highlight that foreign presence contributes to enhanced "allocative efficiency."

"technical efficiency" in the host country, thereby enhancing the productivity of domestic host firms More important, spillovers are positively related to the host country's internal capacity and competitiveness

Inward foreign direct investment (FDI) by multinational corporations (MNCs) can lead to significant changes in local industries, including the potential removal of monopolistic practices due to increased competition MNCs facilitate the transfer of management expertise through training and employee turnover, fostering essential relationships with local suppliers and customers This includes the sharing of techniques related to inventory management, quality control, and industry standards Local firms also adapt their management and marketing strategies in response to the more competitive environment created by MNCs Productivity spillovers from FDI can be measured through three key channels: horizontal spillover, vertically backward spillover, and vertically forward spillover.

Hypothesis H1: The productivity of Vietnamese domestic companies is negatively associated with the horizontal technology spillovers from FDI firms

Hypothesis H2a: The productivity of Vietnamese domestic companies is positively associated with the vertical backward spillover from FDI firms

Hypothesis H2b: The productivity of Vietnamese domestic companies is positively associated with the vertical forward spillover from FDI firms

2.11.2 The importance of absorptive capabilities

The presence of foreign firms in host markets can significantly enhance local firms' ability to benefit from positive spillovers associated with foreign direct investment (FDI), particularly when supported by a well-trained labor force with high absorptive capacity (Ahmed, 2012) Conversely, inadequate human capital development can hinder domestic firms, causing them to miss out on valuable externalities Therefore, acquiring human capital and ensuring access to skilled labor are crucial for local firms to unlock the potential of FDI spillovers and improve productivity (Anwar & Nguyen, 2014) Notably, labor turnover from foreign subsidiaries to local firms has emerged as a vital channel for FDI spillovers in various countries (Demena, 2015; Havranek & Irsova, 2011).

Hypothesis H3: The relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of human capital

Research indicates that the technological gap between foreign and local firms can either facilitate or hinder technology transfer and productivity spillovers Studies by Carluccio & Fally (2013), Sourafel Girma & Wakelin (2007), Jacobs et al (2017), and Tsekouras et al (2015) highlight the significant impact of this gap on economic dynamics.

Research indicates that the technology gap is inversely related to the effectiveness of technology transfer, with technology upgrades being crucial for productivity growth Girma & Wakelin (2007) categorize the technology gap into three groups: the top 20th percentile, the middle 20th-80th percentile, and the bottom 20th percentile A minimal gap reduces local firms' motivation to innovate, while a significant gap poses challenges for low-tech firms to catch up Kounetas (2015) suggests that the middle range of the technology gap is optimal for facilitating technology transfer and the adoption by local firms.

Hypothesis H4a: The relationship between FDI spillovers and productivity of domestic firms is lower at the top 25 th and bottom 25 th percentile of the technology gap

Hypothesis H4b: The relationship between FDI spillovers and productivity of domestic firms is enhanced at the middle 25 th -75 th percentile of the technology gap

Financial development, often overlooked in prior empirical studies, serves as a crucial indicator of a firm's financial health An abundance of financial resources, represented by organizational slacks, empowers firms to embark on new ventures, navigate uncertainties, and adapt to rapid changes This financial flexibility is vital for maintaining competitiveness, enhancing technology, and investing in human capital development.

Local firms with strong financial development are better equipped to absorb knowledge diffusion and technology spillovers from foreign direct investment (FDI), as supported by Liu (2012) and Zhang et al (2018) This leads to the following hypothesis:

Hypothesis H5: The relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of financial development

2.11.3 The effect of regional effects and geographical distance on productivity spillovers

The geographic distribution of Foreign Direct Investment (FDI) significantly affects the extent of FDI spillover, as foreign investors assess the pros and cons of various locations Domestic firms situated in export processing or industrial zones with favorable foreign investment policies are more likely to experience technology spillover Research by Chen, Poncet, & Xiong (2017) indicates that local firms near multinational enterprises (MNEs) can benefit from export spillover due to MNEs' greater export experience Additionally, Dang (2013) notes that foreign investments are often concentrated in well-developed areas of recipient countries, where a skilled workforce and lower energy costs are available The influence of FDI on institutional development and quality has also been examined in recent studies.

& Zhang, 2015; Ran, Voon, & Li, 2007) Hence, the study obtains the hypotheses as follows:

Hypothesis H6a: FDI spillover effect on domestic firm productivity vary significantly across geographical regions and higher in more FDI-intensive regions

Hypothesis H6b: FDI spillover effect on domestic firm productivity vary significantly across economic regions and higher in more FDI-intensive regions

Geographical distance between foreign firms and local firms significantly impacts productivity spillover, with evidence suggesting that closer proximity enhances these effects Specifically, the relationship is inversely proportional; as distance increases, the potential for productivity spillover from foreign affiliates to local firms diminishes Consequently, local firms situated near multinational corporations (MNCs) are likely to experience greater benefits from these spillover effects.

Observing and imitating foreign competitors can significantly enhance the productivity and performance of domestic firms (Sourafel Girma & Wakelin, 2007) These firms gain valuable exposure to advanced technology and management practices utilized by their foreign counterparts (Havranek & Irsova, 2011), which aids in technology transfer and fosters long-term productivity improvements In light of the unavailability of data on physical distances between foreign and domestic firms in Vietnam, this study aims to address this gap by analyzing the provincial distances (within 100km) from domestic firms to the eight cities/provinces—Ha Noi, Bac Giang, Hai Phong, Thanh Hoa, Binh Duong, Dong Nai, Ba Ria – Vung Tau, and Ho Chi Minh—that host the highest concentrations of accumulated FDI capital Hence, the proposed hypothesis is established.

Hypothesis H7 suggests that local firms situated within 100 square kilometers of the most foreign direct investment (FDI)-intensive provinces or cities experience greater spillover effects compared to those located beyond this distance This indicates that proximity to high FDI areas significantly enhances the benefits for nearby local businesses.

2.11.4 The effect of horizontal spillovers on the average wage

Research on the impact of foreign direct investment (FDI) spillovers on local worker wages is limited, despite extensive studies on productivity and export spillovers Previous findings indicate that foreign firms generally offer higher wages than domestic firms, particularly in joint ventures (Nguyen, 2015; Nguyen & Ramstetter, 2017) Earle (2017) suggests that intra-industry FDI spillovers can boost local average wages due to increased labor productivity associated with foreign presence This correlation is further supported by research highlighting wage disparities between foreign-employed and domestic workers (Huang & Zhang, 2017; Stoyanov & Zubanov, 2014) FDI firms often provide higher wages to retain skilled labor and protect their intangible assets, compelling local firms to adjust their wage structures accordingly.

99 trend to compete for high-skilled workers in the host market (Driffield, 2004) Therefore, the proposed hypothesis is as follows:

Hypothesis H8: Horizontal FDI spillovers under foreign presence positively affect the average wage of local firms in the same industry with foreign firms

Wage patterns and adaptation to inward foreign direct investment (FDI) are influenced by ownership types, including state-owned enterprises (SOEs), private firms, and various forms of FDI such as wholly-owned and joint ventures Research indicates that wholly foreign-owned firms and joint ventures with MNCs and SOEs tend to offer higher wages due to skill bias, while the private sector often provides lower compensation due to less stringent working requirements and cultural factors Nonetheless, the presence of foreign firms is believed to have both direct and indirect effects on the restructuring of the labor market in the host country.

Hypothesis H9: The effects of horizontal FDI spillover on average wages vary across ownership types

The main hypotheses have been well illustrated in the figure below

100 Figure 2-7: Research model Source: author

SPILLOVER EFFECTS ON DOMESTIC FIRMS

FIRM PRODUCTIVITY (TFP) Under FDI Presence

Provincial distance from the province firm located to FDI- intensive provinces/cities (H7)

AVERAGE WAGE Under FDI Presence

Firm characteristics: firm size, total sales, capital intensity, net income, market share, export orientation, import orientation, the gender ratio

Firm and industry characteristics: firm size, industry concentration

Geographical and economic regional effects

METHODOLOGY

EMPIRICAL FINDINGS AND DISCUSSIONS

CONCLUSION AND IMPLICATIONS