Luận án TS: TFP Spillovers FDI Sản xuất: Hướng thị trường, Hấp thụ, Thể chế - Huỳnh Quốc Vũ

MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY OPEN UNIVERSITY …………………………. HUYNH QUOC VU TOTAL FACTOR PRODUCTIVITY SPILLOVERS FROM FDI IN MANUFACTURING: THE ROLE OF FDI’S MARKET ORIENTATION, DOMESTIC FIRMS’ ABSORPTION AND PROVINCIAL INSTITUTION DOCTORAL DISSERTATION MAJOR: ECONOMICS HO CHI MINH CITY, 2023 MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY OPEN UNIVERSITY …………………………. HUYNH QUOC VU TOTAL FACTOR PRODUCTIVITY SPILLOVERS FROM FDI IN MANUFACTURING: THE ROLE OF FDI’S MARKET ORIENTATION, DOMESTIC FIRMS’ ABSORPTION AND PROVINCIAL INSTITUTION DOCTORAL DISSERTATION Majors: ECONOMICS Code: 9310101 Supervisors: 1. LE THAI THUONG QUAN 2.

PHAM THI BICH NGOC HO CHI MINH CITY, 2023 STATEMENT OF AUTHORSHIP The thesis entitled “Total Factor Productivity Spillovers from FDI in Manufacturing: The Role of FDI’s Market Orientation, Domestic Firms’ Absorption, and Provincial Institutions” has been submitted for the Degree of Doctor in Economics. Except for the references cited in this dissertation, I hereby declare that neither the whole nor any part of this dissertation has been published or used to obtain a degree elsewhere. No other person’s work or research has been used in this thesis without proper citation. This thesis has never been submitted for any degree at any other University or training institution.

Ho Chi Minh City, …/…/ 2023 Huynh Quoc Vu ACKNOWLEDGEMENTS The Doctoral Disertation titled “Total Factor Productivity Spillovers from FDI in Manufacturing: The Role of FDI’s Market Orientation, Domestic Firms’ Absorption, and Provincial Institutions” has been completed at Ho Chi Minh City Open University. To complete this Dissertation, I have received guidance, enthusiastic support, and encouragement from Lecturers, Family, Colleagues, Relatives, and Friends as follows: I would like to express my deep gratitude to thosse Graduate Lecturers at Ho Chi Minh City Open University for providing the foundational knowledge essential to my research activities. In particular, I would like to extend my most sincere thanks to my scientific supervisor, Dr. Pham Thi Bich Ngoc, Dr.

Le Thai Thuong Quan, and Dr. Pham Dinh Long for their unwavering guidance and enthusiastic support throughout this process. I deeply appreciate the love and the encouragement from my wife and family members, whose support has been invaluable during this journey. Last but not least, I would like to thank my classmates in the PhD training courses at Ho Chi Minh City Open University for their camaraderie and contributions towards the completion of this dissertation.

Ho Chi Minh City, … ./…/2023 TABLE OF CONTENTS LIST OF FIGURES. vii LIST OF TABLES. Subject and Scope. 13 CHAPTER 2: LITERATURE REVIEW.

Total factor productivity. Foreign direct investment and classification. Domestic firm‘s absorption. Total factor productivity spillovers from FDI enterprises to domestic enterprises.

Literature regarding FDI spillovers to domestic firms in a host country. Neoclassical growth theory. Endogenous growth theory. Product life-cycle theory.

Market imperfections theory. Production theory and technological progress. Literature review on TFP spillovers from FDI to domestic firms. The role of market orientation.

The role of domestic firms‘ absorption. The role of provincial institution. Synthesis of theoretical studies. Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation.

Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption. Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of provincial institution. 58 CHAPTER 3: RESEARCH METHODOLOGY. Total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation .1 Regression model and variables.

Total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption. Model specification and variables. Total factor productivity spillovers from FDI in manufacturing: the role of provincial institution. Model specification and variables.

76 CHAPTER 4: THE OVERVIEW REGARDING FDI AND ENTERPRISES. Overview regarding FDI. Registered FDI in Vietnam. FDI capital in industry.

FDI attraction by region. FDI contribution in GDP. FDI capital contribution in the economy. FDI contribution to exports.

Labor attraction in FDI sector. Labor productivity in FDI sector. Overview regarding Enterprises. Enterprises in economic sectors.

Geographical distribution of enterprises. Enterprise sizes by labor. Labor productivity in manufacturing. Export value of enterprises.

93 CHAPTER 5: RESULTS AND DISCUSSION. Total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation. Results of the model estimation. Total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption.

Results of the model estimation. Total factor productivity spillovers from FDI in manufacturing: the role of provincial institution. Results of the model estimation. 120 CHAPTER 6: CONCLUSIONS AND POLICY IMPLICATIONS.

Total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation. Total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption. Total factor productivity spillovers from FDI in manufacturing: the role of provincial institution. Proposals towards exporters in the manufacturing industry.

Policy for enhancing regional linkages. Policy recommendations for strengthening provincial institutions. Limitations and future research orientation. Future research orientation.

156 iv ABBREVIATION APO: ASEAN productivity Organization B&R: Belt and Road. B: Backward CPTPP: Comprehensive and Progressive Agreement for Trans-Pacific Partnership DFDI: Domestic oriented FDI enterprises EFDI: Export oriented FDI enterprises EUFTA: EU-Vietnam Free Trade Agreement F: Forward FDI: Foreign direct investment FE: Fixed Effects FTA: Free Trade Agreement GDP: Gross Domestic Product GI: Greenfield Investment GMM: Generalized Method of Moments GSO: General Statistics Office GTFP: Green total factor productivity H: Horizontal I/O: Input Output Table ILO: International Labor Organization IV GMM: Instrumental variables Generalized Method of Moments M&A: Mergers and Acquisitions MFP: Multifactor productivity MNEs: Multinational enterprises OECD: Economic Co-operation and Development OLS: Ordinary Least Square PAPI: Public Administration Performance Index Pool OLS: Pool ordinary least squares R&D: Research and Development v RE: Random Effects SME: Small and Medium Enterprise TFP: Total Factor Productivity UNCTAD: United Nations Conference on Trade and Development VES: Viet Nam Enterprises Surveys VNCI: Vietnam Competition Initiative Project VSIC: Vietnamese Standard Industrial Classification WTO: World Trade Organization vi LIST OF FIGURES Figure 2. FDI spillovers to domestic firm. A theoretical framework of relevant theories illustrating FDI spillovers.

Registered and disbursed FDI over the years (GSO, 2022). FDI capital in terms of economic sector statistics until December 31, 2021. Foreign direct investment licensed by locality (million USD) with project accumulation valid until December 31, 2021. Contribution of the FDI sector to Vietnam‘s economy from 2005 to 2021.

Contribution of the FDI capital to Vietnam‘s capital from 2010 to 2020. Export value in terms of region of Vietnamese economy within 1995- 2001. Labor attraction in terms of economic sectors of Vietnam in the 2000- 2021 period. Vietnamese workers‘ income from 2005 to 2020 (million VND/person).

The number of Vietnamese enterprises in terms of economic sectors within the 2010-2020 period. Distribution regarding enterprises in Vietnam by region. Vietnamese workers‘ productivity in the manufacturing industry within the 2005-2020 period (million VND/person). Export value of enterprises.

Numbers of FDI, Domestic, Exporting, and Non-exporting enterprises. Characteristics of domestic firms. Domestic manufacturing exporter firms by region. Number of FDI, Domestic and Export Firms in the Data.

Number of FDI Firms in the Data. Enterprise classification in terms of their Total Factor Productivity. 119 vii LIST OF TABLES Table 2. Summary of Literature review.

Variables used in the study. Description of variables in the models. Description of variables in the models. Enterprises structure in terms of industry.

Categories enterprises by size in 2020. Descriptive Statistics of Ln TFP by Firm Type. Presents the mean values of the variables of the model (1) with the correlation coefficient matrix. Heterogenous FDI and TFP of domestic firms.

Heterogenous FDI and TFP of domestic firms: small/medium, big; high- tech/ low-tech. Effect of Heterogenous FDI spillovers on Domestic exporters‘ TFP in terms of individual region. The pairwise correlation coefficients. Modified Wald & Wooldridge tests.

Estimated results of impacts to export participation – Model 2. Estimated results of export ability and spillover effects to TFP of domestic firms – Model 3. Estimated results of export ability and spillover effects to TFP of domestic firms - with GMM technique. Means, standard deviation, and correlations of variables.

Regression results by firm productivity group. Regression results in accordance with Papi components. 125 viii ABSTRACT This dissertation investigates the spillover effects of foreign direct investment (FDI) on the total factor productivity (TFP) of domestic manufacturing enterprises in emerging countries, concentrating on the impact of market orientation, absorptive capacity, and provincial institutional environment. This dissertation aims to analyze spillover effects in emerging countries and to clarify the mixed results of the previous studies on this subject.

The theoretical framework employs the Cobb-Douglas production function model with a semi-parametric method by Levinsohn-Petrin (2003) towards TFP estimation. TFP spillover effects of FDI are measured through three channels: horizontal, backward, and forward linkages. The objectives of this research are as follows: (1) to examine the impact of domestic and export-oriented groups of FDI enterprises on TFP of domestic manufacturing enterprises, (2) to assess the spillover effects on TFP of domestic firms with FDI enterprises under the influence of absorption of domestic enterprises via export ability, and (3) to evaluate the impact of the local institutional environment on the spillover of TFP from the FDI sector to domestic firms. This dissertation reveals that domestic-oriented FDI has a negative impact on TFP through horizontal and backward linkages while export-oriented FDI has positive effects on TFP through backward linkages.

Domestic exporters are better positioned to benefit from horizontal linkages and to achieve productivity gains, with small enterprises benefiting more than medium-sized firms. The research emphasizes the role of learning and export participation in enabling domestic firms to absorb FDI spillovers and improve productivity. Additionally, it highlights the importance of provincial institutions, including transparency, accountability and corruption control, in facilitating positive vertical linkages between foreign and domestic firms and enabling local businesses to benefit from knowledge transfers. This research highlights the critical role of provincial institutions in enabling local businesses to benefit from the knowledge spillover of foreign businesses.

1 This dissertation contributes to the literature review by providing valuable insights into FDI heterogeneity in behavior upon entering an emerging country like Vietnam. The study‘s added value lies in examining domestic firms‘ export ability. This aligns with the theory by Melitz (2003) that they can excel in absorbing TFP spillovers from competing with domestic-oriented FDI competitors or supplying to export-oriented FDI enterprises. This research recommends further policies to promote the positive impact of TFP spillover on domestic enterprises through horizontal, backward, and forward linkage channels as well as suggests creating an environment for domestic enterprises to enhance their capacity and participation in the export market.

Additionally, this research proposes policies to amplify export spillovers from FDI to domestic manufacturing enterprises. In short, this dissertation provides an understanding of the TFP spillover effects of FDI on domestic manufacturing enterprises in emerging countries and suggests strategies to leverage the positive spillover effects of FDI. The research findings provide valuable insights for policymakers and business owners that have been seeking to promote economic growth and development in emerging countries through enhancing the spillover effects of FDI. This research identifies the role of institutions in FDI spillover effects in emerging economies with the purpose of highlighting the importance of provincial institutions.

2 CHAPTER 1: INTRODUCTION This chapter provides an overview of the dissertation, emphasizing the significance of enhancing total factor productivity to overcome the middle-income trap. Three crucial factors, identified as follows: FDI market orientation, domestic firms‘ absorption, and provincial institutions, play a vital role in improving TFP in domestic manufacturing enterprises. The chapter outlines the research objectives, research questions, research subjects, and research methodology employed.