Effects of foreign investment on the exporting activities of domestic firms evidence from Vietnamese manufacturing sector

Using firm-level data, this paper examines the effects of foreign firm presence on the exporting behaviour of domestic firms in the Vietnamese manufacturing sector. Applying the Heckman selection model, we find that investment by foreign firms has a negative effect on domestic firms’ decision to export.
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Effects of foreign investment on the exporting activities of domestic firms evidence from Vietnamese manufacturing sector EFFECTS OF FOREIGN INVESTMENT ON THE EXPORTING ACTIVITIES OF DOMESTIC FIRMS? EVIDENCE FROM VIETNAMESE MANUFACTURING SECTOR PhD. Ha Thi Cam Van1 Abstract: Using firm-level data, this paper examines the effects of foreign firm presence on the exporting behaviour of domestic firms in the Vietnamese manufacturing sector. Applying the Heckman selection model, we find that investment by foreign firms has a negative effect on domestic firms’ decision to export. The proportion of exports for domestic firms declines through horizontal and forward linkages, but increases through backward linkages. We also find that the presence of foreign firms has varying effects on the exporting activities of state- versus privately-owned domestic firms, and low- versus high-tech firms. Keywords: export, foreign direct investment, domestic firms, spillover, horizontal linkage, backward linkage, forward linkage. 1. INTRODUCTION In recent years, many less developed countries have experienced a significant increase in foreign investment. Given that the effect of foreign investment can manifest itself in many ways throughout the economy, it is important to gauge what the effect has been. The indirect effect of foreign investment on domestic enterprises through horizontal or vertical linkages has been confirmed in many studies (Aitken, Hanson, & Harrison, 1997; Aitken & Harrison, 1999; Greenaway, Sousa, & Wakelin, 2004; Kneller & Pisu, 2007; Sun, 2009). While most of the existing research into foreign investment spillovers in developing countries focuses on productivity effects, fewer studies have examined the effects of foreign firms on the exporting activities of local enterprises. Using a large Vietnamese firm-level dataset, we address a number of questions about the relationship between foreign investment and the exporting activities of domestic firms. In particular, does the presence of foreign firms affect the export decisions of local firms, and if so, how and to what extent? What are the channels of influence and how do they make themselves felt? In our study, we take into account both internal and external factors that drive domestic firms’ exports, and the differences in the exporting behaviour of domestic private and state-owned firms in the Vietnamese manufacturing sector. In the case of Vietnam, little research has investigated these issues. Anwar and Nguyen (2011) focuses on the influence of foreign invested firms on the export activity of domestic enterprises on both export decisions and export performance on the cross-sectional data of 2002. In contrast to Anwar and Nguyen (2011), however, we analyse a richer updated dataset comprising 200,000 firms from the Vietnamese manufacturing sector over a 6-year period. While Anwar and Nguyen (2011) find positive horizontal and backward export spillovers 1 Thuongmai University; Email: vancam2612@tmu.edu.vn 897 898 KỶ YẾU HỘI THẢO KHOA HỌC QUỐC TẾ FDI TOÀN CẦU VÀ ỨNG BIẾN CỦA DOANH NGHIỆP FDI TẠI VIỆT NAM TRONG BỐI CẢNH MỚI from foreign investment to local firms on both the export decision and export share, our results reveal that foreign investment impacts on domestic firms’ exporting activity has changed in recent years. Export spillovers from multinationals to local firms are the focus of this study. We analyse the channels through which such spillovers may occur. While the results from this research are broadly consistent with previous studies, our analysis adds key contributions to the existing literature. First, we add to a limited number of studies focusing on export spillovers in developing countries. Using Vietnam as a case study, our analysis is among the first to examine the impact of foreign firms on the exporting behaviour of domestic firms. The second innovation of our work is bringing research up to date with recent developments. Thirdly, compared with existing studies on Vietnam which are based on cross-sectional data, we use a richer panel dataset that enables us to incorporate time variation when assessing the effect of key drivers in domestic firms’ exporting activities. The paper is structured as follows. The second section discusses the relevant background literature on linkages with foreign firms. The third section sets out the Heckman-based methodological approach and Vietnamese data employed in this study. The discussion of results in the fourth section expands on our finding that foreign investment exerts a negative influence on the exporting activities of some domestic firms. The final section provides the conclusion and offers some pointers on policy. 2. LITERATURE REVIEW Aitken et al. (1997) were among the first researchers to consider the influence of foreign investment on export spillovers to domestic firms. Taking the case of Mexico, they investigate the role of geographic and multinational spillovers from foreign firms in the export decisions of domestic firms for the period 1986-1990. Using panel data for United Kingdom (UK) industries for 1992-1999, Greenaway and Kneller (2004) examined the effect of foreign investment and concluded that the decision of a domestic firm to export is positively associated with the presence of foreign firms in the same industry. Using firm-level data, Sun (2009) found significant export spillovers from foreign investment to local firms in China. Making use of the Heckman selection model on firm-level data in some manufacturing sectors in China from 2000 to 2003, Sun (2009) concludes that domestic firms located in Central China all benefit from the presence o ...