Productivity Gaps and Vertical Technology Spillovers from Foreign Direct Investment: Evidence from Vietnam

Author: Bin Ni, Hayato Kato
Date: 2017/7/15
No: DP2017-022
JEL Classification codes: D22,F21,F64
Language: English
[ Abstract / Highlights ]

Developing countries are eager to attract foreign direct investment (FDI) to gain positive technology spillovers for their local firms. However, which type of foreign firm is desirable for a host country looking for beneficial spillovers? At first sight, foreign firms with higher productivity may seem of more benefit by transferring their advanced knowledge; however, their technological and managerial knowledge may be too advanced for local firms to learn. To address this question, we use firm-level panel data from Vietnam to investigate whether foreign Asian investors in downstream sectors affect the productivity of local Vietnamese firms in upstream sectors according to the foreign firms' differing productivity levels. Using the method of endogenous structural breaks, we divide Asian investors into low, middle, and high productivity groups.The results suggest that the middle group has the strongest and most significant positive impact on local suppliers' productivity.