Less than expected—The minor role of foreign firms in upgrading domestic suppliers—The case of Vietnam

Special Economic Zones and Sourcing Linkages with the Local Economy: Reality or Pipedream?

“…In line with the literature (e.g. Lauridsen, 2004, Nguyen & Diez, 2019, the key challenge for local sourcing is related to the non-availability of the specific inputs required by SEZ firms. 48% of firms interviewed regarded this as the major impediment for more local purchasing.…”

“…Interviewees also suggested that given the limited size of possible Reasons for not purchasing more locally % of interviewed firms orders by the SEZ firms for very specific products, local firms did not have enough of an incentive to make the costly adjustments required in their production processes or to develop a specific variety of input in order to supply the SEZ firms. This issue has also been highlighted by Alfaro et al (2004) as well as Nguyen and Diez (2019) and represents a challenge of lack of scale rather than that SEZ firms had a too large scale to be sourcing locally, as previously suggested by some of the literature (e.g. Amendolagine et al, 2019;Görg & Ruane, 2001).…”

“…Sourcing linkages could be established without a meaningful transfer of knowledge involved between the SEZ firm and the supplier (Morrissey, 2012). Nguyen and Diez (2019), for example, show that in Vietnam, domestic suppliers of foreign firms in the Red River Delta region, on average, do not experience higher productivity growth than non-supplier firms. However, they also explore how some suppliers take advantage of the opportunities arising through the links to foreign firms in a more proactive way and reach higher productivity increases.…”

“…Finally, the literature specifically on linkage formation between foreign firms and local suppliers provides important insights. On average, the level of local sourcing tends to be lower from foreign firms than for domestic firms (Alfaro et al, 2004;Lauridsen, 2004) and foreign firms often mainly purchase low-cost, low-tech inputs, such as packaging material and services (Lauridsen, 2004;Nguyen & Diez, 2019;Kubny & Voss, 2014). Different factors have been identified to influence the level of local sourcing, including the market orientation of investors, the maturity of the investment, industrial sector and ownership structure of the FDI.…”

“…Furthermore, industries using more sophisticated technologies tend to source less locally as suppliers for specific inputs are not readily available in the host country, in particular in developing countries (Belderbos et al, 2001;Lauridsen, 2004). Product requirements in these industries are frequently very specific, so that there are only few suppliers in world to manufacture them (Nguyen & Diez, 2019). Other firm characteristics, such as the ownership structure and firm size, also influence firms' sourcing decisions .…”