Technology Spillovers from FDI in Vietnam:

Technology Spillovers from FDI in Vietnam:

How Important are Horizontal and Vertical Spillovers?

Quoc Hoi Le

National Economics University, Vietnam University of Adelaide, Australia

Outline

ƒ Motivation

ƒ What does the theory tell us?

ƒ Measuring horizontal and vertical spillovers

ƒ Empirical analysis

ƒ Conclusions and policy implications

Motivation

Inflows of FDI into Vietnam from 1994 to 2004

As % of total FDI Value (million

US$)

34.00 40.21 31.15 43.98 62.25 43.67 79.26 68.98 43.29 48.75 86.58 1176,0

2381,0 2384,9 2037,9 2200,3 856,3 1804,4 2139,1 1176,7 1439,0 3280,8 24.20

28.55 31.04 17.26 12.99 6.83 7.30 9.48 7.74 7.53 8.98 3458,8

5920,9 7655,0 4633,6 3534,6 1960,5 2276,5 3100,7 2717,8 2951,7 3789,0 1994

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

FDI into industry As % of GDP

Total FDI inflows (million US$) Year

Motivation (cont.)

ƒ Existing empirical evidence focusing on technology spillovers from FDI is inconclusive (Gorg and Greenaway, 2004)

ƒ Most studies in the literature have focused on measuring horizontal spillovers (intra-industry spillovers)

ƒ Another effect of FDI: vertical spillovers (inter-industry spillovers)

ƒ The existing empirical studies have mainly focused on the basic question of whether or not technology spillovers exist, with little evidence on which conditions and characteristics determine the existence and strength of technology spillovers.

ƒ It is usually assumed in the literature that FDI is homogeneous and therefore that the technology spillover effect is the same for all types of FDI. However, FDI is heterogeneous with respect to its

relationship with domestic firms (Moran, 2001). Thus, technology spillovers may be associated with identifiable differences across different types of FDI.

Motivation (cont.)

This study focuses on firm-level effects:

• distinguish between horizontal and vertical spillovers

• examine the importance of absorptive capability

• look at the characteristics of both domestic and foreign firms, and the conditions of industries that influence the degree of technology spillovers

What does the theory tell us?

Horizontal spillovers

Professional Innovation training

Competition effect

Employee Imitation turnover

Foreign firms

Labour pool

New technologies and products

Competitor firms (domestic firms)

What does the theory tell us?

Vertical spillovers

Professional Quality control Direct transfer training of technologies

Suppliers

(Domestic firms)

Foreign firms

Measuring horizontal spillovers

∑

∑

=

=

+

=

_{m n}

i k

ijt kjt

m

k

kjt jt

DL FL

FL

HS

_,

1 ,

1

) (

∑

∑

=

=

+

=

−

_{m n}

i k

ipjt kpjt

m

k

kpjt jpt

DL FL

FL ovince

HS

_,

1 ,

1

) (

Pr

Measuring vertical spillovers

is the proportion of sector r’s output that is supplied to sector j.

∑

=

=

^q

j r

rt jrt

jt

HS

VS

1 ,

α *

α

jrt

Example

VS-Textile = 0.4*0.5 + 0.3*0.2 + 0.2*0.4 = 0.34

Textile

Furniture 0.3

Garment 0.4 Paper 0.2

HS 0.5 HS 0.2 HS 0.4

Empirical model

Searching for horizontal and vertical spillovers:

it j

i t

jt jt

jt ijt

ijt ijt

ijt ijt ijt

ijt

VS HS

HERF TG

SCALE L LQ

K L

Y

ε α

α α

β β

β β

β β

β β

+ +

+ +

+ +

+ +

+ +

+

=

7 6

5 4

3 2

1

0 ln

ln

∑

_^









= ⁿ 

i jt

ijt

jt Sale

HERF Sale

2

ijt ijt

fjt

ijt AverageLP LP LP

TG = ( − ) /

Empirical model (cont.)

Importance of absorptive capacity:

it j

i t

jt ijt

jt ijt

jt ijt

jt ijt

jt jt

ijt ijt

ijt ijt

ijt ijt ijt

ijt

VS TG

HS TG

VS LQ

HS LQ

VS HS

TG HERF

SCALE L LQ

K L

Y

ε α

α α

β β

β β

β β

β β

β β

β β

+ +

+ +

+ +

+ +

+ +

+ +

+ +

+

=

. .

. .

ln ln

11 10

9 8

7 6

5 4

3 2

1 0

Data and Methodology

ƒ Source: The General Statistical Office of Vietnam

ƒ Firm level panel data for the period 2000-2004

ƒ 29 industries and 8601 foreign and domestic firms

ƒ Input – Output Table

ƒ Pooled OLS and Fixed Effects Model

Table 1: Horizontal and Vertical Spillovers

-1.64 (1.01)*

1.01 (0.33)***

0.64 (0.01)***

8.19 (0.29)***

3.52 (0.42)***

-0.88 (0.14)***

-0.90 (0.07)***

Yes Yes Yes 27241

0.25 -0.42

(0.14)***

1.03 (0.29)***

0.50 (0.009)***

7.49 (0.26)***

3.15 (0.32)***

-0.60 (0.08)***

-0.87 (0.05)***

Yes Yes

- 34536

0.22 -1.19

(0.58)**

1.09 (0.29)***

0.50 (0.009)***

7.49 (0.26)***

3.18 (0.32)***

-0.61 (0.08)***

-0.87 (0.05)***

Yes Yes Yes 34536

0.22 HS

HS Province VS

Lagged HS Lagged VS

Capital-labour ratio Labour Quality Scale

Competition Technology Gap Time dummies Industry dummies Region dummies No. of observations R-squared

Table 2: The importance of absorptive capacity

-2.08 (0.01)***

0.35 (3.04)

2.67 (0.41)***

-0.88 (0.05)***

0.07 (0.01)***

0.59 (0.04)***

Yes Yes Yes 34536

0.23

-0.92 (0.58)

1.02 (0.29)***

7.40 (0.26)***

-0.26 (0.08)***

-0.05 (0.005)***

0.006 (0.01) Yes Yes Yes 34536

0.23 HS

VS

Labour Quality Technology Gap

HS*Labour Quality VS*Labour Quality HS*Technology Gap VS*Technology Gap Time dummies

Industry dummies Region dummies No. of observations R-squared

Table 3: The effects of ownership structure and type of industry

-0.61 (0.65)

-1.36 (0.58)**

-1.11 (0.69)

0.72 (0.31)**

1.19 (0.29)***

1.02 (0.31)***

0.22

-1.40 (0.69)**

3.01 (2.58)

-0.53 (1.36)

-0.32 (0.52)

1.38 (0.43)***

2.00 (0.57)***

0.22 HS - State Firms

HS - Private Firms HS - Collective Firms VS - State Firms

VS - Private Firms VS - Collective Firms HS - Low Technology HS - Medium Technology HS - High Technology VS - Low Technology VS - Medium Technology VS - High Technology R-squared

Table 4: The impacts of R&D activity and trade orientation

-1.05 (1.59)

-1.58 (0.6)***

1.29 (0.30)***

1.02 (0.29)***

yes yes yes 34536

0.23

-0.57 (0.62)

-1.41 (0.58)**

0.91 (0.30)***

1.17 (0.29)***

yes yes yes 34536

0.22 HS - Trade oriented firms

HS - Domestic oriented firms VS - Trade oriented firms VS - Domestic oriented firms

HS - R&D performing firms

HS - Non R&D performing firms VS - R&D performing firms

VS - Non R&D performing firms Time dummies

Industry dummies Region dummies No. of observations R-squared

Table 5: The effects of ownership structure and export activity of foreign firms on technology spillovers

-1.37 (0.69)**

-0.72 (1.28)

0.92 (0.32)***

1.54 (0.47)***

Yes Yes Yes 34536

0.22

-0.89 (1.28)

-1.33 (0.69)**

0.92 (0.30)***

1.79 (0.45)***

Yes Yes Yes 34536

0.23 HS – Foreign firms with fully foreign

ownership

HS – Foreign firms with partially foreign ownership

VS – Foreign firms with fully foreign ownership

VS – Foreign firms with partially foreign ownership

HS – Foreign firms with export orientation

HS – Foreign firms with domestic orientation

VS – Foreign firms with export orientation

VS – Foreign firms with domestic orientation

Time dummies Industry dummies Region dummies No. of observations R-squared

Conclusions

• Vertical linkage is the most important mechanism of technology spillovers from foreign firms to domestic ones.

• The effect of horizontal presence of foreign firms on the productivity of domestic firms depends on the type of

firms and the characteristics of industries.

• The characteristics of domestic and foreign firms play an

important role in the success of technology spillovers.

Policy implications

• FDI promotion should focus not only on the quantity of FDI but also on its quality.

• Setting up linkages between foreign firms and domestic ones is highly relevant to the encouragement of technology

spillovers from FDI.

• The capabilities of domestic firms are the most important determinants of technology spillovers. The increase of

spending on education and training, and the enhancement co-

operation between local training centers and foreign firms are

likely to be keys to facilitating technology spillovers.