Absorptive capacity, foreign direct investment-linked spillovers and economic growth in Vietnam

Abstract

Before the introduction of the economic reform process in the late 1980s, the Vietnamese economy was operating under a centrally planned system. The reform process resulted in the integration of Vietnam into the world economy, which led to significant increase in foreign investment. By making use of panel data on 22 manufacturing industries over the period 1995-2005, this article examines the impact of foreign direct investment (FDI)-generated spillovers on manufacturing sector growth in Vietnam. Unlike most existing studies, which are limited to considering the effect of FDI on economic growth, this article focuses on the impact of FDI-linked spillovers that take place through both horizontal and vertical linkages between domestic and foreign firms. The empirical results presented here suggest that FDIgenerated spillovers have made a significant contribution to manufacturing sector growth in Vietnam through vertical-backward linkages. The positive impact of vertical-backward linkages on manufacturing sector growth is strengthened by the stock of human capital. Specifically, manufacturing industries with a larger stock of human capital have experienced a higher level of technological advancement and hence stronger economic growth.

The Patterns of Korea’s Foreign Direct Investment in Vietnam

“…Many sectors benefitting from FDI inflows were related to medium-and high-technology manufacturing and were also positively dependent on the sector's absorptive capacity and larger amount of human capital [23]. The Korean FIEs inter alia appear to have benefitted Vietnam in the sense that Korean OFDI is mostly centered on the garment, footwear, metal and electronics industries, in which technology transfer occurs at a high level [18].…”

“…The Korean FIEs inter alia appear to have benefitted Vietnam in the sense that Korean OFDI is mostly centered on the garment, footwear, metal and electronics industries, in which technology transfer occurs at a high level [18]. However, impediments to the technology spillover effect of FDI remain, such as the market-stealing effect of foreign firms [23].…”

FDI Spill-Overs, Absorptive Capacity and Domestic Firms' Technical Efficiency in Vietnamese Wearing Apparel Industry

“…Wang also examines the role of absorptive capacity, considering it as stocks of R&D. Consequently, these positive effects will be increased if industry's absorptive capacity is enhanced. Anwar & Nguyen (2010) take advantage of panel data of Vietnamese manufacturing industries 1995-2005 to identify impact of FDI spill-over effects on industrial growth. The conclusion is that FDI generates only positive backward linkage and this impact will be facilitated by the stock of human capital.…”

“…It means that FDI firms in other industries could bring positive affect to efficiency of the domestic firms in the wearing apparel sector. This is equivalent to Anwar & Nguyen (2010) and Le & Pomfret (2008) with positive backward linkage in the Vietnamese manufacturing sector. However, these previous studies are unable to find positive forward linkage which is resulted in this study.…”

“…Absorptive capacity is firstly defined by Cohen and Levinthal in 1989 and exploited in the consecutive studies. Most of papers find the significant impact of absorptive capacity in the link between FDI spill-overs and domestic firms' performance (Blalock 2002;Girma 2005;Anwar & Nguyen 2010). However, proxies for absorptive capacity across these papers are heterogonous and there is a wide range of absorptive capacity measurement such as R&D expenditures and intensity, human capital or technology gap (Girma 2005;Blalock 2002;Ferragina & Mazzotta 2014).…”