FOREIGN TRADE UNIVERSITY

FACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS

……..***……..

International Investment Report

A literature review summary of

The spillovers effect of FDI on productivity of domestic firms

Instructor: PhD Cao Thi Hong Vinh

Course: DTUE310.1

Ha Noi, 9/2021
 Table of Contents

1. Introduction ............................................................................................................ 2
2. Literature review about countries in the world .................................................. 3
2.1 Literature review about the research about the positive effect ......................... 3
2.2 Literature review about the reseach about the negative effect.......................... 7
2.3 Literature review about the reseach about the insignificant effect ................. 12
3. Literature review about Vietnam ....................................................................... 15
3.1 Literature review about the research about the positive effect ....................... 15
3.2 Literature review about the reseach about the negative effect ........................ 19
3.3 Literature review about the reseach about the insignificant effect ................. 22
4. Conclusion about the research gap .................................................................... 26
REFERENCES ............................................................................................................. 27
Group project contribution ....................................................................................... 30

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1. Introduction
Foreign direct investment (FDI) is made when a business takes controlling ownership
in a company, sector, individual, or entity in another country. Through FDI, foreign
companies are directly involved with day-to-day tasks from the other country, resulting
in a transfer of money, knowledge, skills, and technology.
In general, FDIs are made in open economies that have a skilled workforce and the
potential for growth. Foreign direct investment takes place when an investor establishes
foreign business operations or acquires foreign assets including initiating ownership or
controlling interest in a foreign company.
Despite growing concern regarding the productivity benefits of foreign direct
investment (FDI), few studies have been conducted on the impact of FDI spillovers on
domestic firms’ productivity.

This report aims to do three things. First, it examines the effect of FDI spillovers on
domestic firms’ productivity. Second, it investigates the negative and positive effects
of FDI spillovers on domestic firms’ productivity. Third, it explores the impact of FDI
spillovers on domestic firms’ productivity in Viet Nam and all around the world.

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2. Literature review about countries in the world
2.1 Literature review about the research about the positive effect
2.1.1 Horizontal linkages

As regarding Horizontal linkages (from foreign to domestic firms of the same industry),
positive productivity spillovers are expected to occur via three main channels: high-
skilled labor mobility from multinational to domestic firms, demonstration effect in
which the domestic firms imitate the advanced technologies from multinationals, and
competition that arises with the presence of FDI in the intra industry. Studies done on
this aspect overall produce varied conclusions, but show similarity in results and
methodology. Karpaty and Lundberg (2004) use Fixed effects panel estimation and
Pooled OLS and conclude the positive knowledge spillover is significant in the industry.
A similar approach is conducted by S. Barious, S. Dimelis, H. Louri and E. Strobl and
the result is that positive efficiency spillovers arising from FDI are evident.

The condition of these externalities mainly depend on 2 factors: the absorptive capacity
of the domestic firm, as well as the technology gap (the difference in labor productivity
between foreign and domestic firms). Moderate, preferably small technology gap along
with intangible-invested absorptive capacity (Marcin,2007) is a need for the positive
horizontal spillover. If the former is not reached, there are always measures. In the case
where the technology gap is too large, they can increase the benefits they reap from
foreign presence by upgrading their stock of knowledge, reaching out for (and adopting)
the fruit of other firms’ innovation effort, which is embodied in available patents,
licences, software etc. For absorptive capacity, direct subsidies and supporting policies
regarding knowledge and human capital formation need to be taken into action.

In the study made by Long, Hale, and Miura (2008), under the the spillover was also
distributed differently according to the firm ownership types. From the host country’s
perspective, compared to state ownership, the benefit of horizontal spillover in domestic
private ownership is likely more significant. The data from the study even point out that
higher share of SOEs (state-owned enterprise) in the industry reduces positive effects
of horizontal spillovers from FDI, regardless of its origin. This can be explained by the

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nature of the private firm itself. Private ownership permits more flexibility and more
profit orientation than state-owned firms in the presence of domestic firms when other
conditions remain the same.

On the other hand, Marcin (2007) approaches from the multinationals’ perspective
according to the entry mode, the extent of spillovers depends on whether foreign
investors enter the host country by setting up fully-owned subsidiaries or rather by
letting the local capital participate in the business (e.g. joint-ventures). The former is
likely more beneficial for the spillovers of FDI since multinationals may be reluctant to
transfer the most advanced technologies to their subsidiaries unless they have full
control over them

2.1.2 Vertical linkages

a. Backward spillover

From the theoretical point of view, backward spillover refers to the transfer of
intellectual assets, management skills, and technology from foreign subsidiaries to their
local suppliers of inputs. This effect occurs due to two main reasons.

One reason lies in the entry of foreign firms triggering the local producers to expand
their services to the newcomers. Using unbalanced firm-level panel data of private and
public firms in Italy with input-output matrix, Filippo Reganati and Edgardo Sica (2007)
examined the backward spillover linkages from MNEs and reached a finding of strong
and positive relationship between the share of downstream industry and the increase in
the productivity of domestic firms in the supplying industry.

Another reason is the fact that when foreign firms source their inputs from domestic
market due to expensive transportation fees from home country to the host country, they
tend to provide local suppliers with technical assistance, training and help in
management to their suppliers. Reganati ad Sica (2007) argued that significant
knowledge spillovers occur through backward linkages from foreign firms in
downstream sectors to local firms in upstream sectors. This result is consistent with the
vertical technology spillover hypothesis. Foreign firms have an incentive to facilitate

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knowledge transfer to local firms to enable them to produce intermediate inputs more
efficiently, thereby making them available to foreign firms upstream at a lower cost.
Before that, in the research of P. Karpaty and L. Lundberg (2004), a study using a panel
of firm data for Swedish manufacturing in 1990-2000, they found that the actual flow
of knowledge spillovers from FDI may depend on the characteristics of the domestic
firms. If foreign investors run their business together with local partners, interactions
with domestic agents and leakages of technology or know-how are easier. The opposite
is relevant too, when multinationals may be reluctant to transfer the most advanced
technologies to their subsidiaries unless they have full control over them.

In this standing, the acceleration in the quality of domestic products and management
processes in local firms is expected as a clear results of the abovementioned reasons.

There are other interesting findings of backward spillover regarding IP (intellectual

property). In the study by Long, Hale, Miura (2008), for industries where intellectual
property is important (i.e high-tech industry), spillovers from backward linkages (i.e.,
from FDI presence downstream) may be limited because foreign firms (in China) are
likely to source patented products not from domestic firms from the People Republic of
China but from foreign firms located either in HMT (Hong Kong, China; Macau, China)
or other countries such as the US or Japan. This might due to the fact that the foreign
firm do not want the leakages of their specific-firm advantages and technological
secrets.

However, if the limitation on intellectual property is relaxed, high-tech industries are

more likely to gain from FDI presence upstream: first, the quality of their components
is likely to improve if they switch the sourcing from domestic to foreign firms; second,
if they were previously importing components and other intermediate goods, they may
now be able to buy them from a foreign firm operating domestically much more
cheaply. Both of these possibilities are likely to increase the potential for spillovers from
FDI for firms in industries where intellectual property is more important. (check lại)

b. Forward spillover

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With regard to forward spillover, when higher quality inputs produced by MNEs, which
employed by local firms, are supplied into the home country’s supply chain, it brings
great benefits to local customers. In another way of stating, the better quality of
intermediate goods produced by foreign firms with superior R&D in technology may
results in the increase in the local firms operating in downstream industries. The study
by Marcin (2007) illustrates more on the matter and concludes that using foreign (and
technologically superior) inputs leads to productivity gains, but may require additional
costs (e.g. investment, training for the employees, marketing of new products), which
can only be covered if the firm has some market power or is able to expand its market
share exploiting increasing returns to scale.

There are different spillover effects on the domestic firms’ output/productivity between
developing and developed countries, and between regions in developed countries.
Chengchun Li and Yun Luo (2019) collected firm-level data in West Midlands to
examine the spillover effects of FDI in West Midlands of England. Their findings are
forward linkages have a positive and significant effect, while backward linkages show
no significant effects, when the prior studies suggest the opposite. They argue that the
difference may arise from the different economic condition of the domestic firms.
Domestic firms’ absorptive capacity in downstream industries in developing countries,
to some extent, is limited by factors such as financial constraints, economic scale and
managerial skill. Therefore, forward linkages are less important than backward linkages
in developing countries. However, in the case of West Midlands (UK), this region has
already met with the quality requirements of MNEs, domestic firms in the West
Midlands already have the qualification to satisfy MNEs’ needs. The only way of
learning from MNEs is through forward linkages, where domestic firms act as MNEs’
consumers. This issue can be a relevance to the regional policy across different regions
to maximize the gains from the entry of foreign firms.

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2.2 Literature review about the reseach about the negative effect
2.2.1 Impacts on firm survival
According to the report “Exports, FDI, and Productivity of Firm: Cause and Effect” by
author Fukunari Kimura, Kozo Kiyoya (Japan,2005), this paper examines the
relationship among exports, FDI and productivity of firm. Using longitudinal data of
Japanese firms, we found that the most productive firms engaged in both exports and
FDI, relatively productive firms engaged in either exports or FDI, and the least
productive firms stayed in the domestic market. Good firms will engage in exports
and/or FDI. Furthermore, both exports and FDI improve firm's productivity once we
control for the productivity convergence effect. Firms that continue to stay in foreign
markets via exports or FDI show the highest productivity growth, which also
contributed to the aggregated productivity growth. The survey is made on all firms with
more than 50 employees and with more than capital of 30 million yen, covering both
manufacturing and non-manufacturing firms, longitudinal panel data set for years from
1994 to 2000 with using “Bernard and Jensen” model and run a simple regression of
changes in TFP, on initial export/FDI status and other firm characteristics, these results
imply , without controlling for initial TFP level, the regression might generate omitted
variable bias such that previous studies could not fully identify the gains from trade.
Once we control for the initial TFP level, or productivity convergence effect, we can
confirm that both exports and FDI do improve firm’s productivity. Productivity is an
important factor in explaining the decision to FDI as well as export. Moreover, both
exports and FDI do improve firm productivity once we control for the productivity
convergence effect. To “survive” in foreign market are likely to result in higher
productivity growth for both each firm and aggregated level. Hence, to facilitate exports
or to enhance global commitment would have some validity though we need more
discussion on its implementation and sequencing. We should also keep it in mind that
FDI possibly has negative impacts on firm survival.

2.2.2 Productivity spillovers: vertical and horizontal

According to the research in “Productivity spillovers from Foreign Direct Investment

in the Manufacturing sector of India” of Pooja Thakur and L.G.Burange (2015, India),

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the paper tries to assess productivity spillovers from MNEs in the manufacturing sector
of India. Its objective is to find out whether horizontal (competition and demonstration)
and vertical (backward and forward) spillovers exist in the India manufacturing sector.
In addition, an attempt has been made to check productivity spillovers across different
industries of the manufacturing sector. The primary motive is to analyze whether
spillovers vary across industries. Moreover, the role of absorptive capacity of the host
economy is recognized in the paper. Spillover effects Horizontal spillovers occur within
the industries in which MNEs operate and are also called as intra-industry spillovers.
Vertical spillovers occur when foreign firms establish linkages with domestic firms
operating in different industries in the host country. Such types of spillovers are known
as inter-industry spillovers. The panel data on these is taken from the annual financial
statements of companies for the period 2000 to 2010 in 3029 firms (2721 domestic firms
and 308 MNEs) in India. Using total factor productivity is estimated using Cobb-
Douglass production function and fixed effect estimation, the results from empirical
investigation using panel data fixed effect within model for entire manufacturing sector:
Manufacturing sector in India is witnessing positive spillovers from backward and
forward vertical spillovers for the period 2000 to 2010. The coefficient for horizontal
spillovers are negative, which means that domestic firms in the manufacturing sector
are adversely affected due to fierce competition from foreign firms in the same
industries. Therefore, it can be concluded that though industries from manufacturing
sector are recipient to spillovers in varying magnitudes, enhancing the absorptive
capacity would facilitate more benefits through horizontal and vertical spillovers. The
negative contribution of human capital to TFP. Horizontal spillovers are found to be
negative. This implies that foreign presence in the same industries is not helping
domestic firms to upgrade their production techniques through imitation and
demonstration. Estimation results point out that productivity spillovers vary across
different industries of the manufacturing sector. Spillover effects through backward
vertical linkages are more pronounced, followed by forward vertical linkages and lastly
horizontal spillovers. Spillovers from FDI can be experienced through media like
exports, labour turnover, licensing, etc. It would be helpful to consider these factors
along with horizontal and vertical spillovers to appraise the overall impact of FDI on

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domestic firms in the host country. Moreover, productivity spillovers represent benefits
from FDI to the recipient economy.

In “The spillover effects from foreign direct investment (FDI) on labour productivity:
evidence from Indonesian manufacturing sector” by author K.Riesta
(2019, Indonesian, this study suggests that, within the same industry, horizontal
spillovers are associated with domestic firms’ productivity: this relationship is negative
in the short-term. In addition, this study points out that FDI spillovers affect domestic
firms’ productivity effectively when they are capital intensive. The study's findings
point out that backward spillover has negative effect on domestic firms' productivity.
The general approach used is based on the production function. Synthesis of studies on
the effect of FDI spillovers on host countries' productivity. In the empirical analysis,
this study estimates model using three types of panel regression models: POLS (Pooled
Ordinary Least Square), REM (Random Effect Model) and FEM (Fixed Effect Model)
and using fixed effect estimation. This study aims to do three things. First, it examines
the effect of FDI spillovers on domestic firms’ productivity. Second, it investigates the
short-term and long-term effects of FDI spillovers on domestic firms’ productivity.
Third, it explores the impact of FDI spillovers on domestic firms’ productivity in
different groups of industries based on their factor intensity. Micro-level panel data
covering about 20,000 medium and large manufacturing establishments in each year
over the period 2010 and 2014 was employed. This study suggests that, within the same
industry, horizontal spillovers are associated with domestic firms’ productivity: this
relationship is negative in the short-term but positive in the long-term. This study’s
findings also demonstrate that, across industries, there are negative backward spillover
effects on domestic firms’ productivity. In addition, this study points out that FDI
spillovers affect domestic firms’ productivity effectively when they are capital-
intensive. Therefore, the results imply the importance of maintaining a long-term
perspective toward foreign-invested firms in Indonesia and the government needs to
stimulate policies that can enhance domestic firms’ capacity to supply intermediate
materials and capital to foreign firm in downstream market by truncating the technology
gap between foreign and domestic firms.

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In “The impact of FDI spillover effects on total factor productivity in the Chinese
electronic industry: a panel data analysis” by William Sheng Liu, Frank Wogbe Agbola
and Janet Ama Dzator (2016, China), they empirically investigate the impacts of FDI
inflows on total factor productivity in the Chinese Electronic Industry (CEI). This paper
makes three main contributions. First, although the CEI has received massive FDI
inflows and experienced fast economic growth in recent times, no study has examined
the impact of FDI inflows on TFP within a microeconomic theoretic framework. This
paper aims to fill gap. Second, instead of using aggregate industry data, we explore this
using firm-level data. This approach enables us to investigate the extent to which FDI
spillover channels impacts on domestic firm's TFP. Third, we extend previous studies
by examining the impact of FEP and the productivity gap, key determinants of TFP
through method: Panel least squares (PLS) estimation Estimated generalized least
squares (EGLS) estimation Two stage least squares (TSLS) estimation. An increase in
FDI is associated with an increase in TFP in the CEI. An increase in the productivity
between foreign and domestic firms decreases TFP in the CEI. Comparing the two
channels of FDI spillover, Direct effects of foreign capital and FDI-related employment
appear to have different impacts on TFP. Foreign capital has a positive effect on TFP
in the CEI. FDI-related employment has a negative effect on TFP. Given the positive
impact of human capital on TFP in the CEI, the primary focus of the Chinese
government should be on increasing investment in human capital as well as promoting
organizational change as this is pivotal in ensuring that domestic firms develop
absorptive capacity to benefit from technological spillovers from foreign firms. As well,
there is the need to implement flexible regulatory frameworks in the labour markets to
enhance knowledge-based assets such as marketing skill, organizational change and
management practices in the CEI.

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According to “Firm-Level Productivity Spillovers from FDI in Latin American
Countries” of Henning Muhlen (2013, America), the data is taken from the Enterprise
Surveys provided by the World Bank (World Bank, 2011). The selected sample covers
ten Latin American countries (Argentina, Bolivia, Chile, Colombia, Ecuador,
Guatemala, Panama, Paraguay, Peru, and Uruguay) and provides firm-level information
for the years 2006 and 2010. Finally, the sample includes 1584 firms from different
manufacturing sectors. Using econometric model where total factor productivity (TFP)
is dependent on firm characteristics and two different spillover measures: (1) Cobb-
Douglas production function. (2) Natural logarithm function, the results indicate that
(on average) there is a small negative spillover effect from foreign presence in an
industry sector on a firm’s productivity across countries in Latin America, while there
seems to be no impact from multinational activity at the regional level. Furthermore, I
observe that the negative intra-industry spillover is caused by wholly owned foreign
affiliates. The country-specific investigation indicates that the spillover effects differ
among the considered economies whereas there is a tendency that the presence of FDI
in a sector (region) has a negative (positive) impact. Negative intra-industry spillovers
only for Peru and Uruguay and explicit positive intra-regional spillovers only for
Argentina and Colombia. For future research projects, it would be of advantage to have
a more extensive panel data set that includes more firms of each economy on the one
hand and covers more time periods on the other hand. The former aspect enables the
estimation of more reliable results for each country and thereby permitting the
differences between countries to be quantified. The latter aspect allows the use of more
sophisticated estimation techniques and thus helps in strengthening the findings overall.
Moreover, the questionnaires of surveys should also be geared towards the collection
of information that is relevant for measuring the transmission channels of FDI
spillovers, for instance, the migration of workers between firms.

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2.3 Literature review about the reseach about the insignificant effect
2.3.1 The absorptive capacity is the factor resulting in the misleading results about
spillover effects of FDI on productivity in domestic firms
The paper “FDI productivity spillovers and absorptive capacity in Brazilian firms: A
threshold regression analysis” (2020) by Herick Fernando Moralles, Rosina Moreno
adds to the existing literature by deepening the comprehension of FDI productivity
spillover effects on developing economies (especially the understudied region of Latin-
American) and of the thresholds of absorptive capacity in order to analyze to what extent
and in which cases Brazilian companies benefit from productivity spillovers from
multinational presence. The absence of official regional FDI statistics makes the
database built for this investigation unique, as this study is the first initiative to calculate
FDI at the municipal level in Brazil. Thus, the proposed FDI measure based on the
exports database yields literature-consistent results, indicating that the constructed
proxy is capable of reflecting the intensity of regional FDI and that it can be employed
in other countries where there are no official regional-level FDI statistics.
The results showed that when FDI is set as the threshold and regime-dependent
variable only, Brazilian firms may suffer from negative productivity spillovers.
However, when evaluating FDI as the threshold variable but with the ABC as the
regime-dependent variable, local firms collect positive spillovers in the presence of a
low technological gap. These results demonstrate that the nonlinearity of the process
can lead to misleading results, reinforcing the findings of Demena and van Bergeijk
(2017), who suggest that the model specification is extremely relevant for the signal
and significance of the FDI impacts and therefore for understanding the phenomena in
developing economies.
Additionally, the threshold model appears to be robust for assessing threshold effects in
developing economies, as it is able to capture different regimes, which are common in
such realities, where advanced sectors inhabit together with relatively archaic activities,
and there is a tendency of public intervention with the aim of creating market reserve
for some sectors, generating distortions in their absorptive capacity relative to their
counterparts in developed economies.

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In terms of policy implications, the results suggest that FDI attraction policies should
incentivize the establishment of FDI capital in high absorptive capacity enterprises or
in regional clusters that concentrate companies from high technology (HT), high-tech
knowledge-intensive services (HTKIS), knowledge-intensive financial services (KIFS)
and less knowledge-intensive market services (LKIMS), since a small technological gap
fosters productivity spillovers. The innovation-enhancing effect for local companies
depends not only on FDI but also on the geographic location choices, as FDI attraction
seems to be an effective way to overcome underdeveloped home institutional
environments.
2.3.2 Inward FDI has a negative short-term effect but a positive long-term effect on
total factor productivity change
In the “The impact of foreign direct investment on total factor production growth:
international evidence from the banking industry” (2009) by Sailesh Tanna, this paper
has explored the relationship between inward FDI and productivity changes in the
banking industry using a sample of 566 publicly quoted commercial banks operating in
75 countries, covering the period 2000-2004. While numerous studies can be found to
examine the impact of foreign presence or ownership on bank efficiency, there are no
precedents in bank level studies for investigating the FDI-productivity nexus that has
been studied extensively for industrial firms in the FDI literature.
This paper therefore draws on several comparable industry level studies on firm
productivity as well as studies examining the impact of FDI on economic growth, and
uniquely investigates the impact of aggregate FDI as a driver of productivity change in
the banking industry. The empirical analysis reveals that FDI has a short run adverse
effect on the productivity of banks, but this is outweighed by a positive long-run rate
effect as banks improve their productivity from knowledge and technology associated
with inward FDI. To some extent, this is consistent with the results of the preceding
Malmquist analysis, which indicated a period of technical regress before technical
progress. The regression results also point to the importance of financial development
as a means to facilitate the productivity growth of banks.
The paper contributes to our understanding of the literature by implying that technology
transfer associated with inward FDI yields bank productivity effects that are inherently

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dynamic, allowing short run effects to be distinguished from long run effects. More
generally, analyzing the dynamic effects of foreign presence may be important in
seeking answers to some of the pertinent questions about the effects of foreign banks
on the host country banking industry.
2.3.3 Spillover effects of FDI are not reflected in short-term in the productivity growth
of incumbents and take longer to materialize than implicitly assumed in the standard
empirical approach of the literature
The paper title: “Does FDI spur innovation, productivity and knowledge sourcing by
incumbent firms? Evidence from manufacturing industry in Estonia” (2013) by Priit
Vahter estimates the effects of FDI entry on TFP and labour productivity growth of
incumbent firms, their innovation activities and knowledge sourcing from other firms.
I endeavour to address the problem of the endogeneity of FDI inflows and I check
whether the effects are heterogeneous depending on incumbents’ distance to the
technology frontier or geographical proximity to foreign owned firms.
The main contribution of this paper compared to most of the earlier ones is studying the
various channels of spillover effects of FDI—through effects of FDI on innovation and
direct measures of knowledge transfer. For that, I can combine a rich firm level dataset
from the Business Register of Estonia with survey-based information about firms’
innovation activities and knowledge flows. Also, this study tries to account for the
endogeneity of FDI spillovers.
The FDI entry in the local industry or region has no short-term effect on local
incumbents’ TFP and labour productivity growth. However, there is a positive spillover
on process innovation. A 10 percentage points higher entry rate of foreign owned firms
is associated with 4 percentage points increase in incumbents’ probability of engaging
in process innovation. Also, FDI inflow to a sector intensifies knowledge sourcing
activities from other firms and from within the incumbent itself.
The empirical evidence presented here shows that FDI entry is associated with
knowledge flows (spillovers) to incumbent firms. But these spillovers are not reflected
short-term in the productivity growth of incumbents. Effects on productivity may take
longer to materialize than implicitly assumed in the standard empirical approach of the
literature.

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3. Literature review about Vietnam
3.1 Literature review about the research about the positive effect
3.1.1 The general mechanism of FDI spillovers positive effect
Researchers have conducted a large number of empirical studies aiming to assess the
spillover effect of the presence of FDI on Vietnam domestic firms during different
periods of time. It is noted that the analytical frameworks of the majority of researchers
are relatively similar. Spillover effects are analyzed through an overview of the impacts
of foreign presence on the output level of all measurement of productivity of domestic
enterprises. In this connection, in addition to factors that are assumed to have influence
on the productivity of domestic firms or industries, including capital intensity, labor
quality, production scales, the competitiveness of the market and technological process,
a proxy for foreign presence is normally included as an independent variable in a linear
or log-linear regression, mostly based on the Cobb - Doughlas production function
enclosing with HEF indexes as a major complement. Upon estimation, a positive
spillover is inferred following the finding of a significant positive sign for the
coefficient of the foreign presence, and vice versa. It is clearly proposed in theory that
the presence of FDI may have positive productivity spillovers, resulting from the
interaction process between foreign firms and domestic owned firms.
3.1.2 Notably positive features
In addition to the aforementioned factors, an arguable reason explaining the positive
results is the bias of estimation in data sources and estimation methods. Hoang & Pham
(2010) suggested three sources of bias for productivity spillover studies, including the
aggregation bias (for studies that use aggregated data instead of firm level data), the
endogeneity bias (caused by the endogeneity of the FDI variable), and selection bias
(caused by using only a sub-sample of domestic-owned firms where there might be
nonrandom sample selection). They concluded that cross-section data and aggregated
data potentially produce biased results (upward or downward) unless researchers have
appropriate solutions. A meta-analysis study by Hoang, Do and Trinh (2020) also
suggested the same conclusion. They emphasized that by using cross-section or sectoral
data, researchers have been faced with an endogeneity problem that may cause biased
estimation.

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a. Backward and horizontal variables
Horizontal spillover effects of FDI (intra-industry) (Horizontal variable) are defined as
beneficial effects of FDI on domestic enterprises operating in the same industry, same
field. These effects can change technology, enhance competitiveness, improve
resources or change governance skills within countries (Nguyen, T.C., 2019; Le and
Pomfret, 2010 and Ni, B., et al., 2015). Sometimes domestic enterprises compete with
multinational enterprises, due to technological disadvantages, these enterprises cannot
compete with multinational enterprises, so spillover effects cannot occur. This is
entirely possible due to the protection of knowledge, trade secrets, higher wages for
industries in which the host country is limited in its ability to imitate technology.
Backward linkages occur when FDI firms purchase goods and services from domestic
firms in upstream industries. Such spillover effects occur through direct knowledge
transfer from foreign customers to local suppliers, higher requirements for product
quality and on-time delivery of goods that other suppliers cannot afford. Domestic firms
set out to give domestic suppliers an incentive to update technology and manage
production better (Le and Pomfret, 2010 and Ni, B., et al., 2015).
Moreover, one possible explanation for the inconsistent results is estimation bias in data
sources and estimation methodologies. Thang et al. (2016) proposed three forms of bias
for productivity spillover studies: aggregation bias (for studies that use aggregated data
rather than company level data), endogeneity bias (induced by the FDI variable's
endogeneity), and selection bias (caused by using only a sub-sample of domestic-owned
firms where there might be nonrandom sample selection). They found that unless
researchers have proper answers, cross-section data and aggregated data may give
biased conclusions (upward or downward). Ni, B. (2015) reached the same conclusion
in a meta-analysis research. They underlined that by employing cross-section or sectoral
data, researchers were confronted with an endogeneity issue, which could lead to biased
estimation.
b. Positive evidence of of technological spillover effect
Hoang et al. (2020) examine the effects of FDI on the technical efficiency of local
companies, where horizontal spillovers are evaluated through imitation,
competitiveness, and labor mobility, and horizontal spillovers are evaluated through

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backward and forward linkages on technical efficiency. The article indicates that FDI
presence evaluated in terms of output aided indigenous manufacturing businesses in
improving production efficiency. In this regard, the research demonstrates that
increased access to novel, improved, or less expensive intermediate inputs supplied by
foreign-invested enterprises improves domestic firms' production efficiency. The report
also shows that the production efficiency of local manufacturing enterprises has been
increasing over time.
For a high-tech industry such as the electronics industry, capital has proven to be the
most important factor for the industry's exports. The fact that most of the exporting
enterprises are FDI enterprises, the participation of Vietnamese enterprises in the export
of the industry is almost non-existent, so the spillover effect from FDI to the export of
enterprises in the domestic market is very low (Nguyen, 2015).
Empirical results show that there is a strong connection between the spillovers of FDI
and the differences in technology, capital intensity and skill intensity between FDI and
domestic firms (Ari and Tran, 2014). Overall, the presence of foreign multinationals is
substantially positive for the domestic sector, contributing to improved productivity of
local firms. Advantages in the capital 242 intensity of foreign firms compared to the
local ones have contributed to improving the productivity of the latter. It is noted that,
however, technology gaps remain obstacles to FDI spillovers, restricting local firms
from improving their productivity. Furthermore, Hoang, et al. (2020) pointed out that
some large-scale FDI enterprises have transferred modern technology in Vietnam; the
quality of technology according to FDI into Vietnam has been improved; through FDI
into hi-tech zones, technology transfer centers have been formed with spillover effects.
FDI into Vietnam has significant effects on technological innovation of Vietnamese
enterprises such as: FDI has partly become the main source of technology for
Vietnamese enterprises; many new and updated technologies are also transferred
through FDI into Vietnam; FDI has created a strong incentive to change technology for
domestic enterprises; linkages and cooperation to form technology relations between
FDI and domestic enterprises are acceptable. However, FDI with the formation of a
contingent of highly qualified specialists and workers are expected to meet higher

17
expectations, when FDI has not contributed much to the development of the Q4 Science
and technology market in Vietnam.
c. Other positive signs
Nguyen (2015) also discovered some key findings related. For low-tech industries such
as textiles, food, beverages, printing, paper, etc., the factor of the number of employees
is the most significant, showing that this industry uses a lot of labor and the number of
workers is weak. dynamic is the factor attracting FDI of the industry. In addition, FDI
has spillover effects in the same industry and for other industries only the opposite effect
(Pham, 2009); This means that firms in the low-tech industry receive spillover effects
from FDI on their exports when providing inputs to FDI firms in the industry. For low-
medium technology industries such as rubber, metallurgy, refining and petrochemicals,
etc., in addition to the number of employees, factors such as labor quality, capital,
percentage of FDI contribution, concentration level. The culture of the industry also
affects the exports of firms in the industry and of the industry. However, for this group
of industries, the spillover effects from FDI to exports in the industry only have vertical
and reverse spillovers.

18
3.2 Literature review about the reseach about the negative effect

3.2.1 Backward spillovers

Research on spillover effects from FDI on export of manufacturing industry in Vietnam

(BN Nguyen, 2015). The authors propose a test estimation model with the assumption
of factors affecting the price of the manufacturing industry. Given that the spillover
effect from FDI is that other enterprises in the processing and manufacturing industry
focus their resources on supplying inputs to FDI enterprises in the industry, the spillover
effects from FDI on their exports will be. The industry is declining. Indirect impact, not
directly affecting the export of the industry, but it affects through the transmission
channels of such impact and in order to enhance the spillover effect from FDI on the
export of the industry, it is necessary to improve the export capacity (BN Nguyen,
2015). Of enterprises in the manufacturing industry, adjust the characteristics of FDI
enterprises and improve the business environment. The equation of Cobb-Douglas
production function is used and Fixed effect estimation is used to analyze the influence
of FDI to local enterprises (T. L. Duong, 2018). The result also shows some evidence
of the negative effect of backward linkage on a firm's productivity while the forward
effect is insignificant. It can be explained by the fact that domestic enterprises have
difficulties in absorbing high technology due to the growing expenses of local providers.
When comparing the effects of FDI on firms in different regions, including the North
and the South of Vietnam, these firms also get backward linkages because most of the
investment projects here focus on real estate, finance, and banking (T. L. Duong, 2018).

3.2.2 Forward Spillovers

The authors develop an estimation model based on the Spatial Durbin model (SDM)
and run the model using firm-level panel data from Vietnam shows that over a short
distance, the presence of foreign companies creates negative effects on companies in
the same industry (horizontal spillover effects) (Thang, T.T., Pham, T.S.H. and Barnes,
B.R, 2016). The coefficient of forward spillovers from FDI to local productivity is
significantly negative. This means that Vietnamese buyers are unable to benefit from
FDI spillovers from foreign firms as there is a low possibility that foreign suppliers are

19
willing to transfer their technology to domestic firms via this interaction (P. V. Nguyen,
T. K. Tran, T. T. N. Le, AND X. D. H. Trieu, 2020). Negative effects are also mentioned
when the author compares the effects of FDI on firms in different regions, North and
the South of Vietnam (T. L. Duong, 2018).

3.2.3 Horizontal Spillovers

The authors find that horizontal spillover can be negative or positive depending on the
distance between domestic and foreign firms. Our results confirm the role of actual
proximity to FDI when spillover effects decrease rapidly with the widening gap between
foreign enterprises and domestic enterprises. Intra-regional spillover is much larger than
inter-regional spillover. Over short distances, the presence of foreign companies creates
negative effects on companies in the client sector (forward spillover effects) (Thang,
T.T., Pham, T.S.H. and Barnes, B.R, 2016). Based on the results of the fixed effects
model, the horizontal spillover is negatively correlated with firm productivity. They
argue that this can be explained by stiff competition from abroad, which reduces the
position of domestic firms in the market and means that they cannot compete with
strong competitors who possess strong knowledge. superior knowledge and technology.
Our results show that domestic firms suffer greatly from the market stealing effect. In
general, the fierce competition brought about by the entry of foreign countries worsened
the performance of domestic enterprises in Vietnam (P. V. Nguyen, T. K. Tran, T. T.
N. Le, AND X. D. H. Trieu, 2020). There is the same situation in the non-manufacturing
sector. In state-owned firms, the results express evidence of the negative effect on
productivity. For example, if investment increases by 1%, the horizontal effect will
decrease 1.06%. It explains the mission to turn state-owned enterprises to joint stock
companies under the direction of the Vietnam government in order to make the firms
more dynamic and competitive (T. L. Duong, 2018).

3.2.4 Technical gap

The technology gap also strengthens the negative impacts of FDI horizontal and forward
spillovers. The coefficient for this variable is significantly negative, meaning that the
higher the gap, the lower the productivity spillover that firms can enjoy. Which

20
concluded that if the gap is too large, the recipient firms may be unable to absorb the
advanced technology from foreign firms (P. V. Nguyen, T. K. Tran, T. T. N. Le, AND
X. D. H. Trieu, 2020). Applying the generalized method of moments (GMM) and fixed
effect model (FEM) authors find the difference is the significantly negative effect of the
technology gap on domestic productivity. It shows that in the industries where foreign
firms have a higher technological level, domestic productivity is lower (P. V. Nguyen,
T. K. Tran, T. T. N. Le, AND X. D. H. Trieu, 2020). One of the most common
explanations for the contradictory results in the above papers is the technology gap. Due
to the constraint of labor capability and technology, the gap between foreign and local
firms is too large so that domestic enterprises cannot benefit from the transition of the
new technology from foreign firms. Another reason is the situation of losing market
share of domestic firms because foreign corporations have advantages of capital and
technology. As a result, local enterprises cannot be able to achieve productive scale and
therefore reduce their productivity (T. L. Duong, 2018).

21
3.3 Literature review about the reseach about the insignificant effect
3.3.1 Domestic firms gain technology spillovers through vertical linkages with foreign
firms, but the effect of the horizontal presence of foreign firms on the productivity of
domestic firms is negative
Externalities connected with the presence or entry of multinational corporations are
technological spillovers from FDI. Spillovers arise when multinational enterprises'
entry or presence influences the productivity of domestic firms, and multinationals are
unable to fully internalize this effect.
There are two forms of FDI-related technological spillovers: horizontal and vertical.
First, horizontal or intra-industry spillovers refer to the effects of multinational
enterprises on domestic firms in the same industry. Multinational corporations
introduce new, superior technologies that can spread to domestic corporations and boost
their production (the so-called "demonstration impact"). Domestic enterprises can see
these innovations and reproduce them in their own businesses; alternatively, they can
hire individuals trained and formerly employed by multinationals who carry with them
some superior knowledge, so increasing domestic firms' productivity. Moreover,
international enterprises may enhance competitiveness in the market and make local
businesses more efficient use of current resources or seek new technologies. However,
increasing competition might lead to a loss of market share and a hike in average costs
for local companies. The net impact of FDI on local businesses within the same industry
(horizontal spillovers) might turn negative when the competitive effect compensates for
the effects of the demonstration. There are therefore two ambiguous conclusions from
earlier empirical studies on the subject.
Second, foreign affiliates may create vertical (inter-industry) spillovers to domestic
suppliers in upstream sectors (through backward connections) or to local customers in
downstream sectors (spillovers through forward linkages). Spillovers arise through
forward linkages when local customers boost their productivity as a result of contacts
with foreign supplier enterprises that provide newer, higher-quality intermediate inputs
or inputs accompanied by complimentary services. Backward linkages are spread
through the direct transfer of knowledge from multinational companies to local
suppliers or through the tougher product quality and on-time delivery standards of

22
multinationals, which compel domestic suppliers to modernize their production. While
there are very few empirical indications of spillovers through forward links, the most
important canal for vertical spillovers is backward connections. In this work, we,
therefore, focus on vertical discharges through backward connections, while also taking
into account horizontal discharges.
Despite the considerable literature on technology spillovers from FDI, only a few
studies have been conducted to investigate the extent to which the origin of FDI
influences the degree of technological spillovers to local enterprises.

3.3.2 Marginal effect is smaller for firms with higher technological capacity and have
got the minimum absorptive capacity threshold from which the FDI spillover effects are
not positive

The paper title: “Absorptive Capacity and Foreign Direct Investment Spillover Effects:
The Case of Vietnam” (01/01/2017) by Phan Thi Van proved that several researchers
can find the positive impact of FDI on domestic firms via vertical linkages. When FDI
enterprises choose domestic firms as their suppliers for input and distributors for output,
these linkages assist local firms in upgrading the quality of intermediate products to
meet TNC standards and, as a result, improve technology, as well as provide sufficient
guidance for customers to use their product effectively. (Javorcik, 2004) research is
well-known for demonstrating a positive backward linkage spillover impact from FDI
firm to domestic firm. This vertical linkage is measured at the industry level because of
the limitation of available data at the firm level. This follows the approach of Javorcik
to measure vertical linkages between FDI and domestic firms.

Not only technology gaps, geographical proximity or development levels of host and
home nations are the reasons for conflicting findings of FDI spillover effects, but
the method used in such research is not always sufficient. In the event of endogenous
difficulties in regressions, several writers are using the instrument variable to solve
these problems.
Jordaan (2011) provided an innovative instrument for estimating the general FDI
intensity of manufacturing industries in Mexico, implying that the OLS estimation

23
for FDI spillover effects using cross-sectional data has an endogenous fault with the
Hausman specification test. Furthermore, he discovered robust evidence of much
greater positive FDI spillover effects using IV estimates rather than the OLS
technique. He chooses an instrument variable that fits two criteria: it is uncorrelated
with the error term of the OLS function and it is sufficiently correlated with the
variable FOR. FOR denotes the presence of intra-industry FDI spillovers, as
assessed by the employment share of foreign-owned enterprises in each industry.
The US variable is utilized as an FDI proxy that is based on the ratio between
employees working in international enterprises and the total number of employees
employed by the industry in the US industry. The second is the US-VA, which
during the period 1988-1995 has a mean value-added for the US manufacturing
industry. Research findings demonstrate that FDI influxes move into the low
productivity and IV processes show more complex tendencies in the context of FDI
flows that both FDI spillovers may be sub-estimated or overestimated by OLS. In
the instance of Vietnam, the current article uses the typical IV variables of Thailand's
FDI inflows.
3.3.3 The measures of FDI forward linkages (both the contemporaneous and the
lagged) are found to be statistically significant and negatively related to the output
performance of domestic firms
The “Study on the Impact of Institutions on the Labor Productivity of Private
Enterprises in Vietnam through the Spillover Effect from State-Owned Enterprises”
(Hong-Nham Nguyen Thi, Hong-Thuy Le Thi, and The-Dong Phung) states that
- The measures of FDI backward linkages are found to be statistically significant
and positively related to the output of firms.
- Domestic service firms can learn from their competitor FDI firms. The coefficient
for horizontal output measure of FDI presence is positive and statistically
significant.
- The emerging picture of FDI spillover effects for Vietnamese domestic industries
are mixed.
At the macro level, Thuy (2007) used industry-level data from 1995 to 2002 in
Vietnam to examine if FDI’s linkage with domestic firms has a positive impact on

24
the latter’s labor productivity. Since the Vietnamese Enterprise Survey became
available, there has been an increasing number of studies on the analysis of spillover
impact from the micro-level. Nguyen (2008) examined both FDI’s horizontal and
vertical spillover effect on total factor productivity (TFP) in several regions in
Vietnam. He found a positive effect for both horizontal and vertical spillover for
Vietnamese manufacturing industries, but that the effect varies across regions and
types of firms. Anwar and Nguyen (2013) supported his claim by testing FDI’s
spillover effect in eight regions of Vietnam. They found a strong positive impact of
FDI on TFP through backward linkages in some regions but a negative impact in
other regions.

25
4. Conclusion about the research gap
Horizontal spillover effects arise when foreign businesses form partnerships with
domestic enterprises in the host country's various industries. Horizontal spillovers have
a negative coefficient, indicating that domestic companies are harmed by intense rivalry
from foreign firms in the same industry. To "survive" in a foreign market, firms are
likely to increase their productivity at both the individual and aggregate levels. FDI may
have a detrimental influence on a company's ability to survive.
When domestic businesses' technical level is moderately lower than that of international
competitors, productivity spillover benefits them considerably. When the recipient is
close to the source of information, productivity spillovers are more effective. There
appears to be no link between FDI entrance into a particular geographical region and
lagging productivity development among incumbents in the same region. The lack of
horizontal spillover is in line with previous research from CEE transition economies.
Then that doesn't explain why FDI frequently has positive spillover effects in affluent
nations but has less impact in developing countries.
During various periods of time, Vietnamese scholars have performed a significant
number of empirical studies aimed at assessing the spillover effect of FDI on indigenous
companies in Vietnam. When FDI firms purchase goods and services from domestic
firms, backward linkages emerge. Results from cross-sectional and aggregated data may
be skewed (upward or downward). Increased access to novel, improved, or less
expensive intermediate inputs from FDI improves domestic firms' productivity.
Other enterprises in the processing and manufacturing industries spend their efforts on
supplying inputs to FDI enterprises in the industry as a result of the spillover effect.
Indirect impact, which does not directly affect the industry's export, impacts the
industry's transmission channels. Forward spillovers from FDI to local productivity
have a substantial negative effect. As a result, Vietnamese customers will be unable to
profit from any FDI spillovers since foreign suppliers are unlikely to pass their
technologies to domestic companies.

26
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29

No. Full name
1 Phạm Đàm Hương Ly
2 Phạm An Miên
3 Lê Đỗ Tuấn Minh
4 Trần Lê Minh (Leader)
Group project contribution
General Contribution by
Student ID Tasks covered
assessment percentage
- Research and analyze reports
- Synthesize and write part
“Literature review about the
1911150044 Good 14%
research about the positive effect
about countries in the world”
- Research and analyze reports
- Synthesize and write parts
1911150047 “Introduction” and “Conclusion Good 13%
about the research gap”
- Research and analyze reports
- Summarize and classify Vietnam
reports
- Synthesize and write part
1911150048 Excellent 15%
“Literature review about the
research about the negative effect
about countries in Vietnam”
- Research and analyze reports
- Synthesize and write part
1911150548 “Literature review about the Good 15%
research about the positive effect
about countries in Vietnam”
30
 - Keep track of group project, ensure
the rate of progress and completion

- Research and analyze reports

- Summarize and classify
international reports
- Synthesize and write part
5 Trần Trà My 1911150724 Good 14%
“Literature review about the
research about the negative effect
about countries in the world”

- Research and analyze reports

- Synthesize and write part
“Literature review about the
6 Trần Nhật Mỹ 1814450056 Excellent 15%
research about the insignificant
effect about countries in the world”

- Research and analyze reports

- Synthesize and write part
“Literature review about the
7 Nguyễn Trọng Nhân 1814450059 Good 14%
research about the insignificant
effect about countries in Vietnam”

31