B NC INternational Investment

International Business Review 20 (2011) 177193
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International Business Review

journal homepage: www.elsevier.com/locate/ibusrev
Foreign direct investment and export spillovers: Evidence from Vietnam

Sajid Anwar a,*, Lan Phi Nguyen b
a b
Faculty of Business, University of the Sunshine Coast, Maroochydore DC, QLD 4558, Australia Department of Monetary Analysis and Forecasting, State Bank of Vietnam, 49 Ly Thai To Street, Hoan Kiem District, Hanoi, Viet Nam
A R T I C L E I N F O
A B S T R A C T
Article history: Received 1 February 2009 Received in revised form 9 November 2010 Accepted 11 November 2010 Available online 15 December 2010 Keywords: Foreign direct investment Export spillovers Emerging economies
The existing IB literature suggests that the presence of foreign rms in a country can benet domestic rms through the formation of inter-rm linkages. These linkages can take various forms. By making use of rm level data from Vietnams manufacturing sector, this paper examines the impact of horizontal and vertical (backward and forward) linkages between domestic and foreign rms on (i) the decision of domestic rms to export and (ii) the export share of domestic rms. This paper considers only transactional linkages. The empirical analysis is based on Heckmans two-step estimator in selection models. It is shown that the presence of foreign rms in Vietnam, through horizontal and forward linkages, signicantly affects the decision of domestic rms to export as well as their export share. This result continues to hold when we take into account factors such as the (a) level of technology of domestic rms, (b) ownership structure of domestic rms, (c) orientation of foreign rms and (d) geographical proximity to foreign rms. 2010 Elsevier Ltd. All rights reserved.
1. Introduction Foreign direct investment (FDI) affects the economic performance of host countries through direct as well as indirect channels. The indirect effect (also known as the spillover effect) of FDI arises from a number of sources including the linkages that are formed between domestic and foreign rms and increased competition in the domestic market that leads to better allocation of resources. The linkages between domestic and foreign rms can also facilitate technology and knowledge m & Kokko, 2003; Go rg & Greenaway, 2004; Greenaway and Kneller, 2004; transfer. Recent studies (for example, Blomstro Kneller & Pisu, 2007; Wagner, 2007; Sun, 2009) have suggested that linkages between domestic and foreign rms can also affect the export performance of domestic rms, which provides yet another explanation for increased competition for FDI among host country governments.1 m, 1986; Blomstro m & Kokko, 2001; Liu & Wang, 2003; While a large number of existing studies (for example Blomstro rg & Hijzen, 2004; Wei & Liu, 2006; Duanmu & Fai, 2007; Beugelsdijk, Smeets, & Zwinkles, 2008; Grima, Go rg, & Pisu, 2008; Go Liu, 2008; Suyanto, Salim, & Bloch, 2009; Barbosa & Eiriz, 2009; and Blalock & Simon, 2009) have considered the impact of FDI and FDI-linked spillovers on productivity and technology transfer, relatively few empirical studies have considered the impact of FDI-related industrial linkages on the export performance of host countries. Furthermore, drawing on the early theoretical work of Rodriguez-Clare (1996), it is clear that FDI can also affect the export activities of domestic rms in upstream and downstream industries through vertical linkages, yet the studies that have considered the impact of FDI-
* Corresponding author. E-mail addresses: SAnwar@usc.edu.au, sajid.anwar@unisa.edu.au (S. Anwar), nplan_dbtk@sbv.gov.vn (L.P. Nguyen). 1 According to UNCTAD, in 1995 (2002), 64 (70) countries introduced changes in their investment regimes, with the total number of regulatory changes being 112 (248). Among them, 106 (235) were more favourable to FDI, accounting for approximately 95 (95)% of the total. For an excellent discussion of the determinants of FDI, see Buckley et al. (2007). 0969-5931/$ see front matter 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2010.11.002
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S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193
related industrial linkages on export performance (also known as export spillovers) have mainly focused on horizontal pez, 2008) have found the impact of linkages.2 Some empirical studies (for example Kokko, Zejan, & Tasini, 2001; Alvarez & Lo horizontal linkages on export performance to be positive and statistically signicant which suggests that the presence of foreign rms promotes the export activities of domestic rms in the same sector. On the other hand, some studies (for example Aitken & Harrison, 1999; Djankov & Hoekman, 2000; Lutz, Talavera, & Park, 2003; Greenaway, Sousa, & Wakelin, 2004) have found the impact on export performance to be zero or negative. In other words, the empirical evidence is mixed, which is not surprising since the impact of FDI related industrial linkages on export performance depends on the characteristics of domestic rms, industries and indeed the host country. Some of these characteristics are categorised as the absorptive capacity which includes variables such as the size of a countrys stock of human capital, the level of its nancial market development and the technology gap between domestic and foreign rms. Based on the existing studies, it can be argued that the presence of foreign rms in a country does not always increase the pez, 2008 probability of exporting or the export performance of domestic rms (for example, see Wagner, 2007; Alvarez & Lo pez (2008) have argued that the presence of sunk-entry costs to export markets and the references therein). Alvarez and Lo tends to diminish the overall size of the export spillover effect. In other words, the net effect on export performance will be positive only if the export spillover effects can more than compensate the sunk-entry cost. In a recent study Harris and Li (2009) have argued that absorptive capacity can lower the barriers to export market entry. The presence of mixed evidence warrants further research. The impact of FDI in any host country varies from industry to industry and hence results presented for one country cannot be applied to another. This paper focuses on Vietnam, a country that has attracted signicant FDI since the late 1980s. At the end of the War in Vietnam, the country had two economic systems, a centrally planned system in the north and a market based system in the south. However, after national reunication, from 1975 to 1989, Vietnam remained a centrally planned economy. The introduction of the reform policy known as Doi Moi in 1986 marked the beginning of the opening up of the Vietnamese economy which resulted in a signicant inow of foreign investment. FDI inows have played an important role in the rapid economic growth experienced by Vietnam. Vietnam is also an interesting case to consider because FDI in Vietnam is mainly concentrated in designated key economic regions while remote regions are unable to attract signicant FDI. This factor inuences the magnitude of horizontal as well as vertical linkages between domestic and foreign rms in different regions. Vietnam promulgated the Law of Foreign Investment in 1987. This law, which has been subsequently amended, is aimed at (a) increasing FDI inows into Vietnam, (b) promoting technology transfer through FDI inows and (c) enhancing export activities of domestic rms. Investigations of the effect of FDI on the Vietnamese economy to date are scarce, mainly due to data limitations. While some existing studies have considered the impact of FDI on productivity, economic growth and exports, none of the available studies has considered the impact of FDI-related industrial linkages on export spillovers in Vietnam.3 An analysis of the indirect effect of FDI on Vietnams export performance allows one to assess the effectiveness of government policies. This paper examines the impact of horizontal and vertical linkages between domestic and foreign rms on (i) the decision of domestic rms to export and (b) the export share of domestic rms. The empirical analysis, which is conducted by means of Heckmans two-step estimator in selection models, reveals that the presence of foreign rms in Vietnams manufacturing sector has a strong positive effect on domestic manufacturing rms decision to export and their export share, mainly through horizontal and forward linkages. We also consider the impact on the decision to export and export share after taking into account factors such as the differences in technology level of domestic rms (i.e., low versus medium and high technology rms), the ownership structure of domestic rms (i.e., private versus state ownership), whether or not foreign rms are export-oriented and the geographical proximity of domestic rms to foreign rms. The rest of this paper is organised as follows. Section 2 provides a theoretical perspective on FDI and FDI-generated linkages between domestic and foreign rms and the impact of these linkages on economic growth in host countries. Section 3 contains a review of some empirical studies that have considered the impact of transactional linkages between domestic and foreign rms on the export performance of domestic rms in host countries. Sections 4 and 5, respectively, contain data description and empirical analysis and Section 6 contains concluding remarks. 2. MNC presence and economic growth in host economies A number of existing international business and international economics studies have considered the impact of FDI and FDI-linked spillovers on host country GDP and the output of domestic rms. These studies include both theoretical and empirical studies. Empirical investigation can contribute to the development of new theories and/or renement of the existing theories. Buckley (2010), among others, has highlighted the importance of the strong interaction between theory development and empirical investigation. Buckley also argues that international business can be viewed as the interaction of
2 Rodriguez-Clare (1996) is among the rst theoretical studies to consider FDI-linked spillovers through both horizontal and vertical linkages. A review of more recent theoretical studies, including the seminal work of Melitz (2003), can be found in Barba-Navaretti and Venables (2004). 3 A review of most available studies that consider the impact of FDI on productivity and employment in Vietnam can be found in Nguyen et al. (2008). By making use of a panel dataset that covers 61 provinces of Vietnam from 1996 to 2005, Anwar and Nguyen (2010) have examined the link between foreign direct investment and economic growth in Vietnam. This study, which is based on a simultaneous equations model, reveals that in overall terms a mutually reinforcing two-way linkage between FDI and economic growth exists in Vietnam.
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industrial economics, international economics and the theory of the rm. The main purpose of this section is to provide a theoretical perspective on the impact of FDI and FDI-generated spillovers on economic growth in host countries. While this paper deals only with the impact of FDI-generated transactional linkages on the export performance of Vietnamese manufacturing rms, an understanding of the different types of linkages along with the development of the idea of investment development path (IDP) is likely to enhance the readers understanding of the broader issues.4 Globalisation has resulted in a signicant increase in FDI around the globe. While the IB literature has only recently started considering the welfare implications of FDI, the international economics literature on the other hand has already considered this issue, but in a very general way.5 Casson (1985) argues that the theory of FDI is based on three distinct theories: (i) the theory of international capital markets, (ii) the theory of international trade and (iii) the theory of the international rm. In his seminal paper, Jones (1965) considered the impact of growth in labour and capital on prices and output, which is a precondition for determining its effect on national welfare as measured by real GDP per capita. The growth of capital in a country can be attributed to foreign direct investment. Jones has shown that in the case of a small open economy, growth of capital has no effect on the price of capital and wages as long as all sectors within the economy are perfectly competitive. This implies that, in the presence of perfect competition, inow of FDI in a small open economy has no effect on national welfare as long as the income earned by foreign capital is fully repatriated. However, all sectors in real economies are not perfectly competitive and hence FDI can have a positive and in some cases negative effect on national welfare.6 Vernon (1966), through his product cycle theory, has argued that comparative advantage is not xed and, once a product is standardised, it may be produced in a developing country to take advantage of, for example, cheaper labour. In other words, once a new product is standardised, the overall cost of production can be reduced through FDI. In his subsequent work, Vernon acknowledged that, due to an increase in the geographical reach of leading multinational corporations through establishment of overseas subsidiaries, new product development can also take place in relatively less advanced industrialised countries (Vernon, 1979). Dunning (1981) has argued that the decision of a rm to expand through FDI depends on ownership (O), location (L) and internalisation (I) advantages. The OLI framework (also known as the eclectic paradigm) aims to explain the why, where and how of FDI.7 The OLI paradigm is a general framework. Based on the OLI framework, it can be argued that, in order to undertake cross border activities, a rm must possess some type of ownership advantage. Such advantages, also known as the core competencies, can include intangible assets such as, for example, patents, production technologies, marketing systems, etc. Ownership advantages allow a foreign rm to compete with domestic rms. Based on the extent of its ownership advantages, a foreign rm will choose an entry mode to safeguard its interests. Dunning has further argued that the extent of foreign activities in a host country also depends on the extent of location specic advantages that a host country offers. Location advantages can take the form of availability of natural resources, cheaper labour or government incentives that serve to lower the cost of production. Locations with good quality infrastructure are likely to be more attractive to foreign rms. Unlike ownership advantages, location advantages are external to the rm but internal to the government of the host country. Location advantages can also be categorised as economic, political or socio-cultural. The third element of the eclectic paradigm, internalisation advantages, addresses the entry mode of FDI. FDI due to market imperfections (i.e., situations where the market does not exist or functions poorly) can reduce the transactions costs of foreign rms. This involves the creation of an internal market in goods and services; that is, transferring ownership advantages to subsidiaries in foreign locations to generate revenue. Internalisation is thus a way of avoiding the dissipation of ownership advantages. Through internalisation a foreign rm can substantially increase the return on its investment (Dunning, 2000, 2001). Using the OLI framework, Dunning developed the idea of investment development path (IDP). This idea was rened and further developed by Dunning (1986), Dunning and Narula (1996) and Scott-Kennel and Enderwick (2004). The central idea behind the IDP is that a countrys economy evolves over time and, as a result, a country that used to be a recipient of FDI then becomes a net exporter of FDI (i.e., its Net Outward Investment position changes over time).8 Stages in the IDP have been identied and, in stage 1, FDI plays an important role in the economic development of a country. Economic growth makes a developing country, like China or Vietnam, more attractive for inward FDI. This occurs initially due to location advantages that contribute to the development of ownership advantages through learning-by-doing. Learning-by-doing, which occurs due to interactions between domestic and foreign rms, gives rise to outward FDI (Amighini, Sanlippo, & Rabellotti, 2009). The presence of foreign rms not only increases the supply of capital in host countries, but it can also contribute to the enhancement of the competitive advantage of domestic rms. In other words, the recent literature has highlighted the important role played by (i) linkages between local and foreign rms and (ii) spillover effects arising from the presence of foreign rms in host economies. The empirical work presented in Dunning and Narula (1996) suggests that the IDP is
A signicant proportion of the material provided in this section is based on the suggestions received from an anonymous reviewer. In a very interesting paper, Buckley (2010) has argued that the theory of international business existed well before Stephen Hymer completed his PhD thesis at MIT. An excellent discussion of early FDI theories can be found in this paper. 6 In a very interesting paper, Oetzel and Doh (2009) have argued that the welfare implications of FDI need to be recognised if MNEs are going to overcome the liabilities of foreignness. They have suggested that MNEs should pursue collaborative relationships with NGOs that make a positive, collective contribution to host country development. 7 Also see Dunning (1977). 8 The Net Outward Investment (NOI) is the gross outward investment stock minus the gross inward investment stock.
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idiosyncratic and heavily inuenced by a countrys macro organisational policy orientation. In other words, the IDP of a country depends on whether the country in question is outward looking-export-oriented (OL-EO) or inward-looking-import substituting (IL-IS) or some hybrid of the two. A hybrid regime includes features of both IL-IS and OL-EO (see Ozawa, 1992). However, given that few real life economies at present can be categorised as IL-IS, it can be argued that OL-EO is more effective in achieving faster growth and structural upgrading in developing countries. Obviously, the government policy plays a central role in determining whether a country is going to be IL-IS or OL-EO. Like China and India, Vietnam used to be IL-IS but a shift in government policy has resulted in most countries, including China, India and Vietnam, becoming OL-EO. By making use of the key elements of the IDP and OLI paradigm, Scott-Kennel (2004) has examined whether or not interrm linkages between foreign afliates and domestic rms have contributed to the development of the capability of domestic rms in New Zealand. She examined the mechanism by which inbound investment could be linked to the development of ownership specic advantages. By determining the OLI conguration of the afliates within the host economy, Scott-Kennel and Enderwick (2005) were able to assess the differences between foreign and domestic enterprises. This allowed them to determine the degree to which the unique ownership specic advantages of foreign rms might be transferred to domestic rms and also to identify the mediating effects of internalisation specic advantages. This has resulted in a clearer picture of (a) why foreign investment might exert a different impact than investment by domestic rms, (b) the mechanisms for such an impact, and (c) the impact of government policy and host country factors on the process of upgrading. Some earlier studies investigating the impact of FDI on domestic rms, mostly in developing countries, have shown that ownership specic advantages were transferred to domestic rms through linkages formed between foreign and domestic rms (UNCTAD, 2001; Giroud, 2003). However, these studies were limited to transactional linkages that involved domestic rms acting as suppliers or subcontractors (backward linkages) or occasionally as marketing/distribution agents or customers (forward linkages) for the foreign afliates. Most of these studies have tried to place a value on these transactional linkages by asking the question what is the value of local sourcing by foreign owned rms versus local rms? or what is value of intermediate goods supplied by local customers to foreign rms? A number of empirical studies have used the same approach, which essentially deals with quantitative linkages between domestic and foreign rms. The main disadvantage of this approach is that we do not see inside the workings of such relationships; we only estimate the changes to demand and supply. In addition to evaluating the quantitative side of the linkages between domestic and foreign rms, Scott-Kennel and Enderwick (2004, 2005) have extended the analysis to incorporate the qualitative aspects (developmental potential) of a wide range of linkages. These linkages include competitive pressures induced by the foreign rms on domestic competitors, which could force domestic rms to improve the quality of their products and, in some cases, might force them to exit the industry. Competitive pressures might also force domestic rms to attempt to imitate innovations introduced by foreign rms thereby improving their own competencies. The presence of such an effect is also highlighted by, among others, Dunning (1986) and Lall (2001). The backward and forward linkages between domestic and foreign rms that are the focus of the present study can also play an important role in upgrading the capabilities of domestic rms. For example, there may be potential for longer lasting relationships whereby the foreign rm works closely with domestic rms, providing assistance and training to help improve the quality of their products or services. There is evidence of such on-going relationships in many case studies of foreign rms in host economies, especially where the products or services supplied by the domestic rms were of a more specialised nature (Wong, 1992; Barrow & Hall, 1995). In addition, foreign rms may also help domestic rms to improve their capabilities through collaboration. This could include strategic alliances, technology sharing agreements, mutual development of innovative products and practices, or cooperation on marketing and distribution contracts (Scott-Kennel & Enderwick, 2004). Scott-Kennel (2007) has further investigated FDI related industry spillovers and inter-rm linkages in New Zealand. This study highlighted the importance of both the quality and the quantity of the linkages between foreign afliates and domestic rms, arguing that collaboration is more likely to result in positive spillover effects. In summary, Dunnings work, discussed above, uses the idea of Net Outward Investment (a macroeconomic concept) to explain a micro level phenomenon. Scott-Kennel and Enderwick extended Dunnings work by conducting a theoretical investigation of the black box of the IDP. Their work focuses on the mechanics through which inward FDI induces domestic rms to enhance their ownership advantages. Scott-Kennel and Enderwick have highlighted the role of the intensity of inter-rm linkages. They argue that the degree of linkage intensity at the rm level has a positive effect on the contribution of inward FDI on a countrys economic development and linkages of different intensity are associated with different stages of the IDP. Unlike most existing studies reviewed in this paper and Meyer and Sinani (2009), Scott-Kennels empirical work is based on a survey that is used to nd out from foreign rms in New Zealand the linkages that they had developed with local rms. Drawing on insights from other disciplines, Giroud and Scott-Kennel (2009) have suggested a framework that could be used for further research into FDI related linkages between domestic and foreign rms in host countries. They have argued that the intensity of inter-rm linkages depends on three factors: the scope (i.e., types and breadth), quantity (i.e., number and values) and quality (i.e., depth, duration, knowledge and resources transfer) of linkages. These three factors affect the learning and development potential of domestic and foreign rms in host countries. The learning and development potential of domestic and foreign rms affects the size of linkage-induced spillovers. Some recent studies have also considered the effect of MNC strategies and internal structures on spillover effects including technology transfer. Earlier studies have viewed FDI as an engine of economic growth. However, recent studies have taken the effect of globalisation into account, which has altered the context within which the developmental effect of IB activities has to be considered (Buckley & Ghauri, 2004). Recent IB studies have started looking at the effect of MNC strategies
S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193 Table 1 The expected direction of relationship between dependent and independent variables. Independent variables Dependent variable
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Export_intensityij/Exportij Capital_Intensity Human_Capital Scale Concentration Technology_Gap Financial_Development Horizontal_FDI Backward_FDI Forward_FDI + + + + +/ +/ +/
and their internal structures on spillovers including the question of technology transfer.9 Globalisation has increased the location options for MNCs. Other developments, including technological improvement and outsourcing, have altered the spatial and organisational structure of MNC activities (Buckley & Ghauri, 2004). It has been suggested that the degree of such structural transformation within an economy can affect the volume of inward as well as outward FDI.10 Giroud (2007) has considered the impact of vertical linkages between domestic and foreign rms in Malaysia and Vietnam. His study considers foreign rms in either the electronics or textile sectors and is based mainly on data collected from interviews. Giroud nds that foreign rms do not share their skills/technologies with local suppliers. Barbosa and Eiriz (2009) have argued that FDI can also facilitate access to distribution channels. By making use of rm level data from Portugal over the 19941999 period, Barbosa and Eiriz have considered the impact of FDI on the productivity of manufacturing sector. They estimated a CobbDouglas production function, augmented by measures of foreign presence and some control variables. The empirical model is estimated by Generalised Methods of Moments. Following most existing studies, in order to reduce the severity of the endogeneity problem, lagged values are used as instruments. Based on their empirical results, Barbosa and Eiriz concluded that foreign presence in Portugals manufacturing sector has not resulted in a signicant productivity spillover effect. Jindra, Giroud, and Scott-Kennel (2009) suggest that knowledge spillovers arising from vertical supply chain linkages between foreign subsidiaries and domestic rms can contribute to the economic development of host countries. Meyer and Sinani (2009) reconsidered the link between FDI spillovers and economic growth. They argue that FDI generated spillovers affect economic growth in a curvilinear way, taking a U-shaped form. Meyer and Sinani further argue that spillovers experienced by domestic rms in developing countries arise mainly from demonstration effects. It can hence be argued that there is also a need for government support and/or sponsorship to promote linkages between highly productive foreign and relatively less productive domestic rms. An interesting survey of a large number of studies that deal with the impact of FDI generated spillovers on rm productivity can be found in Meyer and Sinani (2009); see Table 1 on pages 108283. The present study focuses exclusively on FDI linked export spillovers. Such spillovers also contribute to overall economic development of host countries. The next section contains a review of some studies that have focused on the impact of FDI on the export performance of domestic rms. 3. MNC presence and export performance The presence of MNCs in developing countries can facilitate technology transfer from developed to the developing countries. Up until the late 1980s it was implicitly assumed that all developed countries have identical technologies and hence no attention was paid to the examination of productivity spillovers from MNCs located in developed countries. Recently, studies such as Kneller and Pisu (2007) and Grima et al. (2008) have examined the possibility of productivity spillovers to domestic rms from MNCs located in the UK. rg, and Strobl This section provides a review of studies involving developing as well as developed countries. Aitken, Go (1997) were among the rst to consider the impact of FDI linked spillovers on export spillovers. Aitken et al. investigated the role of geographic and multinational spillovers on the export decision of local rms in Mexico for the period 19861990. rg and Strobl controlled for the overall industry concentration in order to focus on spillover effects specic to Aitken, Go exports. They argued that proximity to multinational activity reduces the cost of access to foreign markets, which has a positive effect on the probability that domestic rms in the same sector and region will engage in export activity. Kokko, Zejan, and Tansini (2001) found that entry of foreign rms in Uruguay after 1973 enhanced the probability that domestic rms will be involved in export activities. By making use of data on Ukrainian manufacturing rms over the period 1996 2000, Lutz, Talavera, and Park (2003) tested for the presence of FDI linked export spillover effects. However, they did not nd any evidence of export spillovers from FDI.
9 10
See Ghauri and Yamin (2009) for an interesting introduction. beda (2005) and the references therein. n and U See Dura
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Using rm level data for the period 19881992, Kraay (2002) found that both labour and total factor productivity were signicantly higher in exporters as compared to non-exporters in China. However, for new exporters the learning effects were insignicant and negative in some cases. Using a Chinese dataset that contains rm level data for the period 1993 2000, Ma (2006) examined whether exports by foreign rms increase the probability of exporting by domestic Chinese rms. Ma found that foreign rms from OECD countries positively inuence the export decision of local rms but overseas Chinese rms do not increase the probability of exporting by local rms. pez (2008) found evidence of By making use of rm level data from Chile over for the period 19901999, Alvarez and Lo signicant horizontal productivity spillover effects that can be attributed to both the presence of export-oriented foreign rms and the export activity of domestic rms. They further argue that export promotion is a particularly useful strategy if it also contributes to productivity spillovers. However, the net effect on productivity will be positive only if the sunk-entry cost to export markets is signicantly smaller than the positive spillover effect. rg, and Strobl (2001). They used rm level data from Spanish Studies involving developed countries include Barrios, Go manufacturing rms for the period 19901997. The main aim of their research was to investigate export spillovers from foreign to domestic rms. They found no evidence to suggest that domestic rms will export following the export activity of multinationals in a sector. Greenaway et al. (2004) extended the model utilised by Aitken et al. (1997) to examine the impact of FDI on the export performance of domestic rms in the UK. Greenaway et al.s work is based on rm level data for the period 19921996. By estimating a two-step Heckman type selection model, they investigate factors which affect the local rms export decisions. They found that externalities pertaining to information on the international market have an impact on a domestic rms decision to export or not but have no bearing on export share. Ruane and Sutherland (2004) focus on the effect of FDI linked spillovers on Irelands exports. Specically, they examined the effect on the export decision and intensity of domestic rms in third country export platforms. Their analysis, which is based on panel data from 1991 to 1998, suggests that the presence of foreign rms in the Irish manufacturing sector is associated with a higher probability of Irish domestic rms becoming exporters and exporting more intensively. In addition, they found that most of these spillovers can be attributed to the concentration of the US rms in Ireland. They further argue that the strong presence of US rms in Ireland since the 1990s has had a positive impact on the competitive nature of domestic rms which indirectly improved the export propensity of domestic rms. In other words, Ruane and Sutherland found strong evidence to suggest that FDI has resulted in positive spillovers in Ireland.11 Kneller and Pisu (2007) examined the impact of FDI-related horizontal and vertical linkages on export spillovers in the UK for the period 19921999. They utilised Heckmans selection model which involves two decisions: (i) whether to export or not and (ii) how much to export. They found that a domestic rms decision to export is positively associated with the presence of foreign rms in the same industry. Furthermore, export-oriented foreign rms seem to be the main source of export spillover effects. The decision concerning how much to export (i.e., the export share) is inuenced positively by foreign rms in downstream industries and by those in the same industry that do not export. In summary, unlike the existing studies, Kneller and Pisu (2007) attempted to examine the impact of FDI linked spillovers through three channels (horizontal, vertical-backward and verticalforward) on export spillovers in the UK. Grima et al. (2008) used the same dataset to examine both horizontal and vertical export spillover effects for export-oriented and domestic market-oriented rms separately. They also considered the role of absorptive capacity. They conclude that spillover benets vary considerably across domestic exporters and non-exporters. Harris and Li (2009) have shown that absorptive capacity plays a crucial role in overcoming export market entry barriers. This study is based on a merged 2000 and 2001 rm level dataset for the UK. By making use of panel data from 1988 to 1996, Blalock and Simon (2009) have found that Indonesian manufacturing rms with greater absorptive capacity gain more from downstream FDI. By making use of rm level data, Sun (2009) has shown that signicant export spillovers exist in China. Roberts and Tybout (1997) found that sunk cost plays an important role in determining the export performance of manufacturing rms in Colombia. In a more recent study, Das, Roberts, and Tybout (2007) used plant-level panel data on Colombian chemical producers. They found that, while the export market entry cost was typically large, it greatly varied across producers. Their work also highlights the role of prior export experience. It is interesting to note that in a recent empirical study, Alessandria and Choi (2007), by making use of an equilibrium business cycle model of the US economy, have argued that the sunk cost associated with exporting does not have signicant consequences for net export dynamics. However, theoretical studies have suggested that the presence of sunk cost can lead to a delayed effect on export performance (see Bernard & Jensen, 2004 and references therein). Wagner (2007), while summarising the existing research, has argued that productive rms perform better in the export market since these rms are able to keep production as well as non-production costs (for example transportation, distribution, marketing and foreign networks) down. Non-production costs can be viewed as export market-entry barriers or sunk cost, which discourage less productive rms from exporting. Wagner also highlights the role of learning by exporting which refers to the ow of knowledge from international buyers and competitors. Therefore, rms that are engaged in exporting are exposed to increased competition which can result in increased efciency. Learning effects have been investigated by Greenaway and Kneller (2007) for UK manufacturing rms
11 Prior to the global nancial crisis, the Irish economy experienced impressive growth which can be attributed to FDI, low tax, government support and investment in education funded from EU Structural Funds. However, the global nancial crisis signicantly affected the Irish economy along with a number of economies around the globe. It has been suggested that the Irish model of development was not sustainable due to various factors including corruption and unregulated nancial markets (See OToole, 2010).
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over the period 19891998. They concluded that learning effects do improve the productivity of rms that enter the export market. Greenaway and Kneller (2007) have also highlighted the role of the sunk cost. Without specically referring to the sunk cost, Greenaway and Kneller (2008) argue that entry into export markets can be very costly. They also suggest that many rms may not be large enough or productive enough to be able to meet the export market entry costs comfortably. Estrin, Meyer, Wright, and Foliano (2008) focused on the export performance of foreign-owned afliates in some emerging economies including Vietnam. By making use of Heckmans two-stage selection model, Estrin et al. have shown that the quality of host country institutional environment does not affect the export propensity of foreign owned afliates. However, they found that the export intensity of foreign owned afliates is lower in host countries where the institutional environment has a higher level of economic freedom. This study is based on data collected from 494 rms in 20012002. By making use of rm level data on business services from the US, Love and Mansury (2009) empirically examined the link between exporting and productivity. They argue that rm size matters and that more productive rms are more likely to become exporters. They further argue that an increase in rm productivity increases both exporting and exposure to international markets. Love and Mansurys work is based on data collected from 206 rms in 2004. Based on the existing literature, in overall terms, domestic rms located in developed countries tend to benet more from the presence of multinational rms because of factors such as higher absorptive capacity, better technology and superior marketing skills. While the studies reviewed above nd that the presence of foreign rms positively affects the probability that domestic rms will become involved in exporting, most of the available studies consider export spillovers through horizontal linkages only. In addition, none of the available studies has examined the case of Vietnam.12 While examining the case of Vietnam, this paper considers all possible directions through which export spillovers may occur. 4. Empirical model and data Existing studies have suggested that the presence of foreign rms can reduce domestic rms export costs through knowledge spillovers such as learning by doing, research and development, human resource movement, training courses, technical assistance and technology transfer. Hence, the presence of foreign rms can promote domestic rms export activities. In order to test for the presence of export spillover effects arising from the presence of foreign rms in Vietnam, we utilise an empirical model that is based on Aitken et al. (1997), Greenaway et al. (2004) and Kneller and Pisu (2007). This model allows one to test (i) whether or not the presence of foreign rms inuences the decision of domestic rms to export and (ii) whether or not the presence of foreign rms affects the export share of domestic rms. The model consists of two equations as follows: Exporti jt f Capital Intensityi jt ; Human Capitali jt ; Scalei jt ; Concentration jt ; Technology Gapi jt ; Financial Developmenti jt ; FDISpilloversi jt ; mi jt Export intensityi jt g Capital Intensityi jt ; Human Capitali jt ; Scalei jt ; Concentration jt ; Technology Gapi jt ; Financial Developmenti jt ; FDISpilloversi jt ; ji jt
(1)
(2)
where, exportijt is a dichotomous variable that takes the value of 1 if rm i in industry j exports during year t; 0 otherwise. Export_intensityijt is the relative share of rm is exports in industry j in year t. mijt and jijt are random variables that capture the effect of omitted variables. Eqs. (1) and (2) suggest that the decision to export and export intensity depends on certain characteristics of rms, industry and FDI linked spillovers. 4.1. Firm specic variables Capital_Intensityijt is capital stock per employee in million VND at time t; Human_Capitalijt is measured by total wages and training costs per employee in million of VND;13 Scaleijt is measured by sales of rm i relative to the average rm sales in the same sector; Technology_Gapijt is the percentage difference between the average productivity of foreign rm and that of domestic rms in the same industry; Financial_Developmentijt of rm i in industry j at time t is measured by working capital as a proportion of total assets.
12 By making use of a gravity model, Xuan and Xing (2008) considered the impact of FDI on the exports of Vietnam. In other words, Xuan and Xing considered the direct effect of FDI on exports. In addition, this study is based on industry level data. Anwar and Nguyen (2011) have extended this study to include the impact of FDI on imports and net exports before and after the Asian nancial crisis of 19971998. Unlike Xuan and Xing (2008) and Anwar and Nguyen (2011), the current paper focuses on the impact of the indirect (i.e., spillover) effect of FDI on export performance of Vietnamese rms. 13 A number of existing studies, including Romer (1986), have suggested a similar measure.
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An increase in capital intensity is expected to increase the possibility of exporting as well as the export share. The implicit assumption is that an increase in capital intensity increases the productivity of labour since more capital per worker is available. The same applies to the role of human capital. An increase in human capital increases the productivity level which is likely to have a positive effect on export activities. An increase in capital intensity or an increase in human capital increases the scale of production and increases the likelihood that domestic rms will enter the export market and that the rms that are already exporting will export more. An increase in the technology gap means that domestic rms have become relatively less productive and hence their export share is likely to decrease. Financial development is likely to have a positive effect on export activities of domestic rms. Human capital, the technology gap and the level of nancial development are wellknown measures of absorptive capacity. An increase in absorptive capacity allows domestic rms to reap greater benets from the presence of foreign rms which positively affects export activities of domestic rms (see Grima et al., 2008). 4.2. Industry variables Concentrationjt is measured by means of the Herndahl index for domestic rms. The level of concentration in industry j is dened as follows, where xijt is the sales of the rm i in industry j at time t and Xjt is the total sales of industry j. HERF jt 2 n X xi jt X jt i1 i 1; 2; . . . ; n (3)
An increase in this index indicates a higher degree of industry concentration which reects less competition. Decline in competition reduces incentives for exporting and hence the estimated coefcient is expected to be negative. It could also be argued that greater concentration means greater economies of scale, which promotes exporting. 4.3. FDI spillover variables (FDISpilloversijt) FDI spillovers can occur through both horizontal and vertical linkages between domestic and foreign rms. Vertical linkages can be divided into forward or backward categories. Based on the existing literature (for example see Liu, 2008; Grima et al., 2008), several FDI linked spillover variables are constructed and used in this paper. The degree of horizontal spillovers in industry j at time t, Horizontal_FDIjt, is measured as follows: Horizontal FDI jt
f Y jt
Y jt
(4)
An increase in Horizontal _ FDIjt indicates that the output of foreign rms in Vietnam is expanding faster than the output of domestic rms in the same industry which gives rise to an increased horizontal spillover effect (see Liu, Wang, & Wei, 2009; Grima et al., 2008). In order to take into account the regional dimension, the horizontal regional FDI in region r at time t, Horizontal_Regionrt, index is computed as the proportion of output accounted for by foreign rms in the same region. In order to assess the effect of the presence of export-oriented and domestic market oriented foreign rms in the same industry, two horizontal indices (Horizontal_Exportjt and Horizontal_Domesticjt) are calculated. Horizontal_Exportjt is the proportion of the output of foreign rms that is exported and Horizontal_Domesticjt is the proportion of the output of foreign rms that is sold in the domestic market. The vertical spillover effect can divided into two categories: vertical backward and vertical forward. The degree of backward spillovers in industry j at time t is computed as follows, where Ykj is the output of industry k supplied to industry j. X ak jt Horizontal FDIkt (5) Backward FDI jt
8 k 6 j
ak j
Yk j Yk
(6)
In other words, the greater the proportion of output provided to an industry with foreign presence and the greater the activities of the foreign rms receiving the intermediate inputs from industry k, the greater the value of the spillover effect (see Girma et al., 2008). This measure captures the extent of backward linkages between local rms in upstream sectors and foreign rms in downstream sectors. The output of some foreign rms in Vietnam is used as input by some domestic rms. An increase in FDI leads to an increase in the output of foreign rms which leads to an increase in the supply of inputs to domestic rms. The vertical forward spillover effect in industry j at time t is calculated as follows: X Forward FDI jt bh jt Horizontal FDIht (7)
8 h 6 j
bh j
Yh j Yj
(8)
where bhj represents the proportion of sector hs output supplied to industry j.
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This measure captures the extent of forward linkages between local rms in downstream sectors and foreign rms in upstream sectors. Some foreign rms in Vietnam use the output of domestic rms as input. An increase in FDI leads to an increase in demand for inputs produced by domestic rms. The existing literature views this as a forward linkage between foreign and domestic rms. The values of a and b are obtained from the Input-Output Tables of Vietnam published by the General Statistic Ofce of Vietnam (GSO, 2008) for 2000. Although GSO has conducted an annual rm level survey every year starting from 2000, the empirical analysis presented in this paper is based only on the survey for 2000. We were unable to conduct a panel data analysis because the rm level data on export turnover is not available from 2001 onwards and hence we have no choice but to conduct a cross-sectional study based on data for the year 2000.14 The dataset includes sectoral classication of rms at two digit level of Vietnamese Standard Industrial Classication (VSIC). In total there are three sectors: (1) mining and quarrying which consists of 4 industries, (2) manufacturing which consists of 23 industries and (3) electricity, gas and water supply which consists of 2 industries.15 The empirical analysis presented in this study is based on a large number of manufacturing rms. A linear version of Eqs. (1) and (2) is estimated after including appropriate dummy variables to account for regional and sectoral effects, which is common practice. The expected signs of the estimated coefcients are shown in Table 1. Table 1 indicates that capital intensity (i.e., capital-labour ratio) of rm i is expected to be positively related to rms is decision to export as well as its export intensity. For the purposes of the present study, we make use of a rm level cross-sectional dataset that covers 42,123 rms in 2000. While the data set covers both manufacturing and non manufacturing rms, only manufacturing rms were targeted. Some manufacturing rms were excluded from the sample because all the required information was not available. The results presented in this study are therefore based on a sample of 10,710 manufacturing rms. 4.4. Estimation technique The model specied above involves a two-stage decision process. In the rst stage, rms decide whether or not to export and in stage two, rms decide on the quantity that they are going to export. Export is a dicthomous variable which can only take a value of 0 or 1. On the other hand, Export Intensity can take any value within the range 01. Using simple OLS estimation in the present case is inappropriate because such estimation is likely to result in inconsistent and biased coefcient estimates (Greene, 2008). The empirical model specied above resembles Heckmans selection model. Accordingly, it is highly appropriate to make use of Heckmans two-step estimator (see Heckman, 1979). This method involves estimation of the probability of exporting in step one and the factors that affect the export share of the rm in step two. The distribution of the random variables is assumed to be bivariate normal. The two decisions (i.e., Eqs. (1) and (2)) are related if the population bivariate correlation coefcient (r) is non-zero. Since the independent variables in Eqs. (1) and (2) are identical, the estimated value of r in the present case is 1.16 The Wald test is used to test for the overall signicance of the two-equation model and likelihood-ratio test is used to validate the choice of the Heckmans selection model. Equation (1) is based on the Probit model whereas Eq. (2) is based on the Tobit model. Statistical software STATA version 10 was used to compute all the statistical results presented in this paper. 5. Empirical results and analysis The estimated results of the Heckman selection model are summarized in Table 2 where columns 1 and 2 respectively correspond to linear versions of Eqs. (1) and (2). The export decision of domestic rms is positively associated with the presence of foreign rms in the same sector. This implies that domestic rms are more likely to enter the export market if they are in a sector where the presence of foreign rms is strong. Moreover, the export share of domestic rms is greater in sectors where the presence of foreign rms is strong. Additionally, the estimated coefcients of forward linkages between foreign and domestic rms are positive and statistically signicant at the 5% level in both Eqs. (1) and (2). The estimated results show that domestic rms can gain access to new, improved, or less costly intermediate inputs produced by foreign rms. As a result, the forward linkages can encourage domestic rms to enter the export market which helps them to increase their exports. In contrast, the backward linkages from foreign rms do not encourage domestic rms to export. The estimated coefcients of backward linkages in columns (1) and (2) of Table 2 are negative and statistically signicant at the 1% level. This indicates that backward linkages are associated with a reduction in exports from domestic rms. The rm level characteristics including human capital, scale, capital intensity, technology gap, nancial development and the industry level characteristic such as concentration in column (1) and (2) of Table 2 have the expected signs which suggests that relatively large domestic rms with more skilled workers and a higher level of nancial development are more likely to be able to compete successfully in the export market.
14 The use of cross sectional data can result in signicant econometric problems such as endogeneity between the dependent and independent variables, sample selection bias and signicant residual heterogeneity. As a result, the estimated coefcients may be unreliable. The results presented in this paper do not suffer from these problems. Related studies such as Estrin et al. (2008) and Love and Mansury (2009) are also based on cross sectional data. 15 See Appendix A for further details. 16 It is well known that independent variables in selection models can be identical (see Kneller and Pisu, 2007).
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Table 2 Horizontal and vertical linkages and export spillover effect. Independent variables Capital_Intensity Scale Concentration Human_Capital Technology_Gap Financial_Development Horizontal_FDI Backward_FDI Forward_FDI Industry dummies Region dummies Observations 8224 Uncensored obs. Wald-x2 Sigma Log likelihood Export decision (1) 0.0000009 (0.54) 1.8494013 (4.54)* 1.298461 (5.28)* 0.0041308 (5.79)* 0.0015185 (6.01)* 0.1568261 (5.29)* 0.1533816 (1.82)*** 0.002132 (6.02)* 0.0043637 (3.03)* Yes Yes 10710 Censored Obs. 2486 3364.81 0.5 2970.509 Export intensity (2) 0.0000046 (4.83)* 6.623209 (6.41)* 2.819040 (5.86)* 0.0123169 (8.79)* 0.0034078 (6.98)* 0.4316906 (7.51)* 0.2720660 (1.91)** 0.0063872 (9.69)* 0.0120513 (4.38)*
Notes: (1) Robust t-statistics in parentheses; (2) *** signicant at 10%, ** signicant at 5%, and * signicant at 1%.
5.1. Technology level and export spillovers In order to examine the role of the level of technology, the data was divided into two subsamples: (1) low technology industries and (2) medium and high technology industries (see Appendix 2). Linear versions of Eqs. (1) and (2) were reestimated by making use of each of the two subsamples. Based on the sample size, it is clear that a larger proportion of Vietnams manufacturing rms can be categorized as low technology rms. The estimated results are summarised in Table 3. The estimated coefcients presented in Table 3 indicate that the impact of FDI linked export spillovers arising from horizontal and vertical linkages on a rms decision to export and its export share vary considerably with the level of its technology. The impact of horizontal linkages between foreign and domestic rms on the decision to export and export share is positive and signicant for both technology groups. This suggests that, irrespective of the level of technology, the presence of foreign rms encourages domestic rms in the same sector to (a) enter the export markets and (b) increase their export volume. As far as the impact of forward linkages is concerned, the estimated coefcients are positive and signicant only for the low technology group. This suggests that only low technology industries gain signicant benets from forward linkages. The results presented in Table 3 suggest that Vietnamese rms gain no benet from the presence of foreign rms through backward linkages; the estimated coefcients are negative and statistically signicant. This can be attributed to the presence of high sunk costs that discourage export activity. These ndings are consistent with the general conclusions that can be drawn from the existing literature. Based on results presented in Table 3, it can be argued that the impact of export spillovers on the decision to export and on the export share
Table 3 Technology level of domestic rms and export spillover effect. Independent variables Low technology Export decision (1) Capital_Intensity Scale Concentration Human_Capital Technology_Gap Financial_Development Horizontal_FDI Backward_FDI Forward_FDI Industry dummies Region dummies Observations Censored obs. Uncensored obs. Wald-x2 Sigma Log likelihood 0.0000038 (1.90)*** 2.2734810 (3.46)* 0.5536146 (1.19)* 0.0017494 (2.28)** 0.0014056 (4.99)* 0.213323 (6.88)* 0.343195 (3.11)* 0.0024247 (3.50)* 0.008117 (5.10)* Export intensity (2) 0.0000049 (3.06)* 14.33778 (7.12)* 0.7836603 (0.78) 0.0068176 (3.97)* 0.0037722 (5.84)* 0.6472288 (8.91)* 1.329048 (6.40)* 0.009430 (5.79)* 0.024579 (7.07)* Medium and high technology Export decision (3) 0.0000022 (0.20) 2.413318 (3.16)* 2.514365 (3.16)* 0.0107931 (4.87)* 0.0013518 (2.61)* 0.0187376 (0.26) 0.7898903 (3.20)* 0.0010981 (1.14) 0.0122217 (2.44)* Export intensity (4) 0.0000014 (0.10) 5.239148 (4.39)* 4.363257 (5.46)* 0.0285431 (10.59)* 0.0023352 (3.16)* 0.0158928 (0.16) 1.252257 (3.15)* 0.0036114 (2.79)* 0.0258886 (4.17)*
Yes Yes 6755 5286 1469 2634.26 0.4 1351.555
Yes Yes 3763 2938 825 859.81 0.7 2677.310
Notes: (i) Robust t-statistics in parentheses; (ii) *** signicant at 10%, ** signicant at 5%, and * signicant at 1%.
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varies with the level of technology. Our ndings are consistent with the fact that a signicant proportion of Vietnamese rms export mainly low technology products such as textile garments, shoes, food and furniture. In other words, the technology gap between foreign and domestic rms is high. Government policy, such as increased spending on advanced education, could help to improve the level of technology. 5.2. Export spillovers and rm ownership The purpose of this section is to examine whether the impact of export spillovers varies with ownership of rms in Vietnam. This issue was empirically examined by subdividing the sample into two groups (1) private and (2) stateowned rms. The empirical model was re-estimated for each of the two subsamples. The estimated results are summarised in Table 4. Table 4 shows that the impact of horizontal linkages on the decision to export and export share is positive for both private and state-owned rms but the effect is highly signicant only for state-owned rms. Vietnam is regarded as an economy in transition so this result is not surprising. State-owned rms are better organized and hence these rms have better access to information on export markets. These rms are also better equipped to imitate the products of foreign rms in the same sector. However, the state-owned rms do not gain any benets from vertical linkages with foreign rms (see the estimated coefcients and t-values in columns 1 and 2 of Table 4). On the other hand, private rms are relatively more innovative and hence these rms do gain signicant benets from the presence of foreign rms through vertical linkages (see the estimated coefcients and t-values in columns 3 and 4 of Table 4). This suggests that private rms have better access to good quality intermediate inputs, which helps to reduce production costs. As a result, private rms are able to increase their export share. 5.3. Export spillovers: Export-oriented versus domestic market oriented foreign rms Existing studies such as Aitken et al. (1997), Karpaty and Kneller (2005), Kneller and Pisu (2007) and Grima et al. (2008) have emphasized that FDI-linked export spillover effects can also be attributed to information or competition effects. In order to capture this effect, following the existing literature, foreign rms included in the sample were divided into two groups: rms that are export-oriented and rms that are producing primarily for the domestic market. The Heckman selection model utilized in this paper was re-estimated by splitting the horizontal spillover effect into two variables Horizontal-Export and HorizontalDomestic. The former captures the spillover effect arising from the presence of export-oriented foreign rms in Vietnams manufacturing sector and the latter captures the spillover effect arising from the presence of foreign rms that are primarily producing for the domestic market. The empirical results are summarized in Table 5. Table 5 shows that horizontal spillover effect arising from the presence of export-oriented foreign rms in Vietnams manufacturing sector has a positive and signicant effect on domestic rms decision to export and their export share. In other words, the presence of export-oriented foreign rms not only signicantly increases the probability that domestic rms in the same industry will become involved in exporting but it also leads to a signicant increase in their export intensity. The presence of domestic market oriented foreign rms in Vietnam has the opposite effect. These results suggest the presence of signicant imitation and knowledge spillovers effects among Vietnams manufacturing rms. In addition, one can argue that (a) the presence of export-oriented foreign rms in Vietnam helps domestic rms to reduce substantially
Table 4 Firm ownership and export spillover effect. Independent variables SOEs Export decision (1) Capital_Intensity Scale Concentration Human_Capital Technology_Gap Financial_Development Horizontal_FDI Backward_FDI Forward_FDI Industry dummies Region dummies Observations Censored obs. Uncensored obs. Wald-x2 Sigma Log likelihood 0.0000023 (0.80) 6.987369 (3.06)* 3.675066 (3.01)* 0.0153369 (2.30)** 0.0123865 (2.76)* 0.122673 (0.78) 1.630444 (4.26)* 0.0063897 (3.90)* 0.012042 (1.78)*** Yes Yes 1564 1071 493 337.35 0.9 1245.29 Export intensity (2) 0.0000027 (1.27) 14.56053 (6.13)* 5.792057 (5.31)* 0.0268919 (4.08)* 0.0175449 (4.20)* 0.1722184 (1.02) 2.559526 (9.30)* 0.0095481 (6.42)* 0.0197829 (3.26)* Private enterprises Export decision (3) 0.0000024 (0.15) 1.5620800 (3.78)* 1.12775 (4.49)* 0.0009708 (2.77)* 0.0013069 (5.76)* 0.1217213 (4.20)* 0.1773258 (1.90)*** 0.002187 (5.86)* 0.0065807 (4.26)* Export intensity (4) 0.0000061 (4.92) 4.786338 (3.86)* 2.21122 (3.98)* 0.0136376 (9.33)* 0.0030646 (6.29)* 0.3869783 (6.28)* 0.0683166 (0.38) 0.0084265 (11.16)* 0.0220281 (7.02)* Yes Yes 9146 7153 1993 3455.99 0.4 2353.73
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Table 5 Export-oriented versus domestic market oriented foreign rms and export spillover effect. Independent variables Capital_Intensity Scale Concentration Human_Capital Technology_Gap Financial_Development Horizontal_Export Horizontal_Domestic Backward_FDI Forward_FDI Industry dummies Region dummies Observations Censored obs. Uncensored obs. Wald-x2 Sigma Log likelihood Export decision (1) 0.0000032 (0.85) 1.760814 (4.31)* 1.297493 (5.44)* 0.0010284 (2.70)* 0.0014121 (5.75)* 0.1351666 (4.58)* 0.4592585 (5.44)* 0.9560449 (7.15)* 0.0014185 (3.96)* 0.0060968 (4.23)* Yes Yes 10,710 8224 2486 4065.80 0.5 2833.038 Export intensity (2) 0.0000047 (5.00)* 6.098204 (5.82)* 2.600951 (5.74)* 0.0137745 (9.71)* 0.0030654 (6.35)* 0.3352363 (5.80)* 1.123808 (7.62)* 3.061645 (12.87)* 0.0052418 (7.83)* 0.0174519 (6.45)*
the sunk-cost associated with export activities and (b) horizontal export spillovers mainly arise from the presence of export-oriented foreign rms. 5.4. Geographical proximity and export spillovers The existing literature suggests that the scope for FDI-linked export spillovers is greater when geographical distance between foreign and domestic rms is small. It can be argued that, in some cases, domestic rms learn from foreign rms by observing and imitating and that knowledge concerning export practices spillovers from foreign to domestic rms through labor turnover. However, such spillovers are limited by a spatial dimension, such as within the connes of a local labor market. Thus, we assess the importance of geography by making use of an index of horizontal linkages that takes into account both the regional and export orientation of foreign rms. Specically, we re-estimate Eqs. (1) and (2) by making use of an alternative variable Horizontal_Regionrt, which consists of the proportion of output accounted for by foreign rms in the same region. The estimated results are summarized in columns (1) and (2) of Table 6. The estimated coefcients of the variable Horizontal_Region are positive and highly signicant, which suggests that an increase in geographical concentration of foreign rms operating in a region increases the probability that domestic rms located in the same region will be involved in exporting. Based on the results presented in column (3) of Table 6, it is also possible to conclude that an increase in geographical concentration of foreign rms in a region leads to an increase in the export share of domestic rms located in the same region. In order to further investigate this effect, the Horizontal_Region
Table 6 Geographical proximity to foreign rms and export spillover effect. Independent variables Capital_Intensity Scale Concentration Human_Capital Technology_Gap Financial_Development Horizontal_Region Horizontal_Reg_Exp Horizontal_Reg_Dom Backward_FDI Forward_FDI Industry dummies Region dummies Observations Censored obs. Uncensored obs. Wald-x2 Sigma Log likelihood Export decision (1) 0.0000095 (0.07) 1.53397 (5.01)* 1.011194 (5.66)* 0.000766 (2.73)* 0.0011882 (6.37)* 0.0960326 (4.39)* 1.438696 (11.31)* Export intensity (2) 0.0000047 (4.94)* 6.396632 (6.19)* 2.893500 (6.10)* 0.0119050 (8.47)* 0.0035120 (7.25)* 0.3519516 (6.18)* 1.329048 (6.40)* Export decision (3) 0.0000042 (0.04) 1.341503 (4.71)* 0.905554 (5.54)* 0.006642 (2.62)* 0.0010331 (5.78)* 0.0831739 (4.17)* 2.353917 (5.66)* 0.024175 (0.04) 0.018392 (7.02)* 0.0055857 (8.04)* Export intensity (4) 0.0000046 (4.90)* 6.473427 (6.25)* 2.867600 (6.05)* 0.0119036 (8.47)* 0.0035113 (7.25)* 0.3506576 (6.16)* 0.5704931 (0.39) 6.787053 (4.78)* 0.0089525 (14.62)* 0.0217489 (11.74)* Yes Yes 10710 8224 2486 5905.83 0.3 1431.905
0.0021234 (8.42)* 0.0064101 (9.72)*
0.0089175 (14.57)* 0.0216143 (11.67)*
Yes Yes 10710 8224 2486 4901.69 0.4 2106.611
189
variable was split into two parts, one to take into account the export-oriented foreign rms and the other to take into account the domestic market oriented rms in the same region. The estimated results are reported in columns (3) and (4) of Table 6. The estimated results suggest that the presence of export-oriented foreign rms signicantly increases the probability that domestic rms in the same region will enter the export market. However the effect on export share is insignicant. Surprisingly, it appears that the presence of domestic market oriented foreign rms in the same region contributes to a signicant increase in export intensity of domestic rms. In summary, based on the empirical analysis presented in this paper it can be argued that horizontal and forward linkages between foreign and domestic rms are the main channels of export spillovers from FDI in Vietnam. The negative and statistically insignicant spillover effects can be attributed to the high sunk costs of exporting. 6. Conclusion and policy implications This paper contributes to the existing literature that deals with the impact of spillovers that arise from FDI-generated linkages between domestic and foreign rms on productivity and exports. FDI is regarded as a vehicle for the development of new technologies and technology transfer. Technology transfer can boost productivity and hence contribute to a larger increase in production. It has been suggested that the presence of foreign rms can also affect the decision of domestic rms to export as well as their export share. Most existing empirical studies have focused only on the impact of horizontal linkages between domestic and foreign rms on the export performance of domestic rms. Recent studies, such as Kneller and Pisu (2007), have suggested that the export performance of domestic rms can also be affected by vertical (forward and backward) linkages between domestic and foreign rms. This paper focuses on Vietnam, a country that has attracted signicant FDI since the late 1980s, yet none of the existing studies has considered the impact of the presence of foreign rms on export performance of the Vietnamese rms. An analysis of export spillovers in Vietnam is also useful in that the lessons learned from Vietnams experience can be of considerable value to other regional and transitional economies. In order to examine the impact of the horizontal and vertical linkages between domestic and foreign rms on export performance of domestic rms in Vietnam, this paper makes use of a Heckman type selection model. The model is estimated by means of Heckmans two-step estimator in selection models. The empirical analysis, which is based on rm level data from the Vietnamese manufacturing sector, reveals that the presence of foreign rms in Vietnam has a positive and signicant effect on (i) the decision of domestic rms to export and (ii) the export share of domestic rms only through horizontal and forward linkages. In other words, export spillovers experienced by Vietnams manufacturing rms can be mainly attributed to FDI-related horizontal and forward linkages. Our empirical analysis suggests that backward linkages have contributed to a signicant reduction in exports of domestic rms. The existing theoretical literature suggests that the entry of foreign rms can increase domestic rms sunk-entry cost of export activities. Based on the empirical evidence provided in this paper, it can therefore be argued that the presence of foreign rms in Vietnam has contributed to an increase in the sunk-entry costs for a signicant number of domestic rms and hence the overall effect on export activity through backward linkages with foreign rms is negative Further empirical analysis shows that horizontal linkages have resulted in a positive and signicant export spillover effect to both low and medium/high technology domestic rms. However, forward linkages have resulted in a positive and signicant export spillover effect only to low technology domestic rms. We also consider the export spillovers by splitting the sample into state-owned and private sector rms. The empirical analysis suggests that horizontal linkages with foreign rms lead to a signicant positive export spillover effects to state-owned rms, whereas forward linkages with foreign rms lead to a signicant positive spillover effect to private rms. In an attempt to improve the competitiveness of the stateowned enterprises (SOEs) and to attract additional FDI, Vietnam has undertaken a program to semi-privatise some SOEs that are not involved in the provision of public goods and services. However, so far only a very small number of small and medium-sized SOEs have been semi- privatised and these SOEs remain under government control. By 2005, more than 3000 SOEs were partially privatised (See Sjoholm, 2006). It has been suggested that export spillovers are stronger if foreign rms located in host countries are export-oriented (see Grima et al., 2008). Our empirical investigation suggests that horizontal linkages with export-oriented foreign rms do lead to signicant positive export spillovers to Vietnamese rms. Finally, we consider the impact of the geographical location of foreign rms on export spillovers to Vietnamese manufacturing rms. The empirical analysis shows that an increase in the geographical concentration of foreign rms operating in a region increases (a) the probability that domestic rms located in the same region will be involved in exporting and (b) the export share of domestic rms located in the same region. We also found that the presence of export-oriented foreign rms in Vietnam signicantly increases the probability that domestic rms in the same region will start exporting. The empirical results presented in this paper are consistent with the theory that linkages with foreign rms can have a signicant impact on export activities of domestic rms. However, given the structure of the Vietnamese economy, its stock of human capital and government policies, not all linkages have a positive effect on the export activities of domestic rms. In other words, the empirical results presented in this paper are dependent upon the state of the economy and government policies. The empirical results presented in this paper suggest that, among other things, there is a need for improved export promotion programs in Vietnam. Firms that enter an industry face competition from existing rms. The level of competition is higher when foreign rms are present. New rms not only face stiff competition but they have to also incur signicant sunk costs which can discourage export activities. For example, the cost of product promotion, the cost of establishing contacts
190
with potential clients and, of course, the cost of product development. The presence of negative and statistically insignicant spillover effects appears to suggest that the sunk cost of exporting is too high and the quality of linkages with foreign rms is relatively poor. A decrease in sunk costs could make Vietnamese rms more competitive at the international level. By making rg, Henry, and Strobl (2008) have shown that government support in the form of use of Irish manufacturing sector data, Go capital grants, training grants, R&D grants, rent subsidies, technology acquisition grants and loan guarantees can improve the performance of exporters. It can therefore be argued that there is a need for government support in Vietnam. Such support can serve to indirectly reduce the sunk cost associated with exporting. Government support may be lowered over time since new rms can learn from the experiences of the pioneering rms. In other words, government action can help to create, among other things, information externalities which can help to reduce the cost of nding a new market and/or to reduce the cost of export growth in existing markets. FDI has contributed to signicant GDP growth in Vietnam but this is mainly due to increased employment and wages growth. An increase in net exports can also make signicant contribution to the overall GDP growth. While FDI has contributed to export growth in Vietnam, Anwar and Nguyen (2011) have shown that FDI has also led to a signicant increase in imports since a number of foreign rms located in Vietnam utilise imported inputs. Hence the positive effect of export growth is signicantly offset by the negative effect of import growth. Government steps to reduce the sunk cost of exporting can help increase Vietnams net exports and this is likely to enhance the overall rate of economic growth. Based on the results presented in this paper, it can also be argued that there is a need for increased spending on advanced education and training in Vietnam. A recent World Bank report indicates that the share of GDP spent on education in Vietnam increased from 3.5% in 1997 to 4.6% in 2004 and that the education sector is now given a higher priority. Spending on education as a percentage of total public spending has increased from 14% in 1997 to 18.6% in 2005. Despite an increase in spending on education, Vietnams higher education sector still faces mismatches in fullling the needs for industrialisation (World Bank, 2008). A further increase in spending on education along with education sector reform is likely to increase the stock of human capital that will help not only to decrease the technology gap between domestic and foreign rms but also help Vietnamese rms increase their competitive advantage in the production of high technology products over time. An increase in the stock of human capital can also contribute to a decrease in reliance on imported inputs. From a business management point of view, Vietnamese rms need to budget for sunk cost associated with exporting since the long-term benets will more than offset the short-term cost. Domestic rms need to be proactive in establishing and exploiting their contacts with MNCs. Such contacts can improve the quality of technological spillovers. In addition, government can also facilitate collaboration between domestic and foreign rms, thereby enhancing the quality of both forward and backward linkages. This is particularly important for private sector rms. An important implication for Vietnamese rms that are contemplating entry into the manufacturing sector is that they should consider their location decision very carefully; location in a region where foreign rms are concentrated can result in signicant spillover effects. In addition, being export-oriented from the start can be very helpful. Due to the unavailability of data, this study is based only on cross sectional data. The limitations of studies based on cross sectional data are well known. It will be useful to repeat this exercise when panel data becomes available. This research can be further extended in several directions. For example, it may also be useful to examine the impact of FDI-generated spillovers on capital structure of domestic rms empirically. Entry of new foreign rms in a country can affect the R&D spending of domestic rms as well as the spending of existing foreign rms. The level of R&D spending affects among other things new product development and hence it will be interesting to examine the impact of spillovers on R&D spending empirically. Acknowledgements This paper has greatly benetted from extremely useful and detailed comments and suggestions received from two anonymous reviewers. The authors are also thankful to Dr Robert Alexander and Professor Pervez Ghauri for helpful suggestions. However, the authors are responsible for all remaining errors and imperfections. The views expressed in this paper do not necessarily reect the views of the State Bank of Vietnam.
Appendix A List of industries considered.

Group 1: Mining and quarrying C10: Mining of coal and lignite; extraction of peat C11: Extraction of crude petroleum and natural gas C12: Mining of metal ores C13: Other mining and quarrying Group 2: Manufacturing D15: Food and beverages D16: Cigarettes and tobacco D17: Textile products
191
Appendix A (Continued )
D18: Wearing apparel, dressing and dying of fur D19: Leather and products of leather; leather substitutes; footwear. D20: Wood and wood products, excluding furniture D21: Paper and paper products D22: Printing, publishing, and reproduction of recorded media D23: Coke and rened petroleum products and nuclear fuel D24: Chemicals and chemical products D25: Ruber and plastic products D26: Other non-metallic mineral products D27: Iron, steel and non-ferrous metal basic industries D28: Fabricated metal products, except machinery and equipment D29: Machinery and equipment D30: Computer and ofce equipment D31: Electrical machinery apparatus, appliances and supplies D32: Radios, television and telecommunication devices D33: Medical equipment, optical instruments D34: Motor vehicles and trailers D35: Other transport equipment D36: Furniture and other products not classied elsewhere D37: Recycles products Group 3: Electricity, gas and water supply E40: Electricity, gas, steam and hot water supply E41: Collection, purication and distribution of water
Appendix B List of the industries in terms of the level of technology.

Group 1: Low technology D15: Food and beverages D16: Cigarettes and tobacco D17: Textile products D18: Wearing apparel, dressing and dying of fur D19: Leather and products of leather; leather substitutes; footwear. D20: Wood and wood products, excluding furniture D21: Paper and paper products D22: Printing, publishing, and reproduction of recorded media D23: Coke and rened petroleum products and nuclear fuel D36: Furniture and other products not classied elsewhere D37: Recycles products Group 2: Medium technology D24: Chemicals and chemical products D25: Rubber and plastic products D26: Other non-metallic mineral products D27: Iron, steel and non-ferrous metal basic industries D28: Fabricated metal products, except machinery and equipment Group 3: High technology D29: Machinery and equipment D30: Computer and ofce equipment D31: Electrical machinery apparatus, appliances and supplies D32: Radios, television and telecommunication devices D33: Medical equipment, optical instruments D34: Motor vehicles and trailers D35: Other transport equipment
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International Business Review

Foreign direct investment and export spillovers: Evidence from Vietnam

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

where bhj represents the proportion of sector hs output supplied to industry j.

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

Yes Yes 6755 5286 1469 2634.26 0.4 1351.555

Yes Yes 3763 2938 825 859.81 0.7 2677.310

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

0.0021234 (8.42)* 0.0064101 (9.72)*

0.0089175 (14.57)* 0.0216143 (11.67)*

Yes Yes 10710 8224 2486 4901.69 0.4 2106.611

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

Appendix A List of industries considered.

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

Appendix B List of the industries in terms of the level of technology.

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

S. Anwar, L.P. Nguyen / International Business Review 20 (2011) 177193

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