UNIVERSITY OF ECONOMICS • INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM-NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS HORIZONTAL TEC H NOLOGY SPILLOVER - EFFECTS FROM FOREIGN DIRECT INVESMENT ON LABOUR PRODUCTIVTY IN MANUFACTURING INDUSTRY IN VIETNAM IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF ,’ MASTER OF ART IN DEVELOPMENT ECONOMICS BY THAN HOANG DUNG ACADEMIC SUPERVISOR: DR LE THI THANH LOAN Do Chi Minh, November 2011 CERTIFICATION I hereby certify that the substance of this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis Signature Than Hoang Dung ACKNOWLEDGEMENT I have been receiving a great support from many people to complete this research I am greatly grateful to the valuable guidance, encouragement and advice from numerous individuals including Vietnam-Netherlands program lecturers, friends and my family members I would like to express my sincere appreciation to my supervisor, Dr Le Thi Thanh Loan, for her continuous support, for her valuable instructions, advices, comments and immense knowledge during the completion of my thesis I am truly grateful to Professor Peter Calkins for his precious advices and comments for improving the quality of the thesis, for his lectures in research and methodology My sincere thanks also go to Associate Professor Nguyen Trong Hoai for his lectures in econometrics, Mr Phung Thanh Binh and Mr Le Van Chon, the lectures of Vietnam- Netherlands project, for his kind help and instructions in data analysis by Eviews and Stata software Finally, I would like to send my special thanks to my friends in MDE class 14, 15 and the rest of my thesis committee for their supportive friendship, encouragement and insightful comments My special gratefulness is to my family for their love, affection and for supporting me spiritually in my learning and my career TABLE OF CONTENTS • " CHAPTER 1: INTRODUCTION 1.1 Problem Statement 1.2 Research Objectives 1.3 Research Questions 10 1.4 Research scope 10 1.5 Organization of the Research 11 CHAPTER 2: LITERATURE REVIEW 12 2.1 Literature Review — The Concepts 12 2.1.1 Foreign Direct Investment (FDI) .12 2.1.2 Productivity and Labour Productivity .13 2.1.3 Spillovers Effects .13 2.2 The Economics Theory 15 2.2.1 Neoclassical Theory 15 2.2.2 Endogenous Theory 17 2.3 The Empirical Study .18 2.4 Analysis Framework 23 CHAPTER 3: RESEARCH METHODOLOGY 25 Data Collection 25 3.2 Description of Variables 26 3.2.1 Dependent variable: Labour productivity (LABPRO) 26 3.2.2 Explanatory variables .26 3.3 Model Specification 28 3.4 Estimation Strategy .29 3.5 Hypothesis statements 30 CHAPTER 4: MODEL RESULTS AND DISCUSSION .32 1, Descriptive statistics 4.2 Estimation results 34 4.2.1 Pool regression model results 34 4.2.2 Random effects model results 34 3.1 4.2.3 Fixed effects model results .35 4.3 Results discussion 39 4.3.1 The significant effect of FDI spillovers in Food processing industry .39 4.3.2 The influence of FDI spillovers in Electronics and Mechanics industry 40 • LIST OF FIGURES • Figure Foreign direct investment inflows in period 1995 - 2010 60 Figure FDI projects licensed in period 1988 — 2009 by kinds of economic activity .61 Figure Structure of investment at current prices by Foreign investment sector 62 Figure Structure of GDP at current prices by Foreign investment sector 62 Figure S Structure of GDP at current prices by Manufacturing industry 63 ABBREVIATIONS BPM6 .Balance of Payments and International Investment Position Manual h edition FEM Fixed Effects Regression Model GSO General Statistics Office IMF International Monetary Fund MNCs .Multinationa1 Corporations OECD .Organization for Economic Co-Operation and Development REM .Random Effects Regression Model VSIC Vietnam Standard Industrial Classification CHAPTER 1: INTRODUCTION 1.1 Problem Statement It has been observed that within decades recently, there are some emerging countries gaining benefits from foreign direct investment and getting significant economic growth Direct effects can be seen from capital inflow, growth of local employment, application of advanced equipment, practical usage of technology Indirect effect can be seen from technology spillover from subsidiaries of multinational corporations (MNCs) to local firms in host countries Within the period of 1960s — 1970s, the inflow of FDI has been a significant factor contributed to the rapid growth of Hong Kong, Singapore The pattern also applies to China and Vietnam in recent years as well In particular, Vietnam is considered as one of the fastest growing economies in the world with the average growth rate over percent per annum due to the successfulness in attracting a large inflow of FDI The debate of positive effect of FDI inflows on the economic growth of host countries does not gain much attention; however, there is much discussion on whether and how FDI inflows produce technology spillovers to the labour productivity of domestic firms Some studies find that FDI brings positive technology spillovers to the productivity of domestic firms by competition, demonstration and training of employees such as Caves (1974), Blomstrom and Persson (1983), Kokko (1994), and Liu (2002) Other studies, Aitken and Harrison (1999), Kathuria (2000), believe that FDI generates negative effects to the labour productivity of domestic firms by market stealing and skill stealing These studies with mixed evidences examine FDI technology spillovers within industries, which are called intraindustry spillovers or horizontal spillovers In Vietnam, the number of studies on horizontal spillover effects from MNCs to Vietnamese firms is still limited, but the mixed evidences are also found in the studies Le Thanh Thuy (2007), Nguyen Thi Tue Anh et a1 (2006), Quoc Hoi Le and Richard Pomfret (2008), Anh Ngoc Nguyen et a1 (2008) and Chuc D Nguyen et a1 (2008) Therefore, this research investigates horizontal technology spillover effects from foreign direct investment on labour productivity of domestic firms in manufacturing industry However, due to limitation of the available data, this study only focuses on two industries representative for low technology industry (Food processing in particular) and high technology industry (Electronics and Mechanics in particular), not in the whole manufacturing industry as other studies The research applies many panel regression models including pool regression, fixed effects regression model (FEM) and random regression model (REM) The interesting findings are expected to come and contribute to policymakers in the government and firms With the findings, the government as well as firms could make a set of recommendations to take the best of advantage of FDI to improve labour productivity of domestic firms in low technology industry and high technology industry 1.2 Research Objectives The overall goal of this research is to analyze horizontal technology spillover effects from FDI on labour productivity of domestic firms in low technology industry (Food processing in particular) and high technology industry (Electronics and Mechanics industry in particular) in Vietnam Specifically, the research will focus on three objectives as follows: (i) Whether horizontal technology spillovers through FDI affect the labour productivity of domestic firms in low technology industry as Food processing Sinani, Evis and Klaus Meyer (2004), "Spillovers of Technology Transfer from , FDI: The Case of Estonia", Journal of Comparative Economics, vol 32, pp 445-66 Smarzynska, Beata K (2004), "Does foreign direct investment increase the productivity of domestic firms : In search of spillovers through backward linkages", American Economic Review, vol 94, no 3, pp 605626 Tamotsu Nakamura (2002), "Foreign Investment, Technology Transfer, and the Technology Gap: A Note", /?eview ofDevelopment Economics, vol 6, pp 39-47 Xiaming Liu, David Parker, Kirit Vaidya and Yingqi Wei (2001), "The Impact of Foreign Direct Investment on Labor Productivity in the Chinese Electronics Industry", International Business Review, vol 10, pp 421-39 Wang, J and Blomstrom, M (1992), "Foreign investment and technology transfer: A simple model", European Economic Review, vol 36, pp 137- 155 50 APPENDICES 7.1 APPENDIX A MODEL RESULTS IN FOOD PROCESSING Descriptive statistics The descriptive statistics of data sample in Food Processing industry scans nean p50 max m1 n sk:ewness kur tosfis nLABPRO J rTCAP IN 3.455038 SZ9729 456E 53.4Gf33 8.327026 9.4S€37 —2 33.3.G6S 3€42524 OBOB3OB 0571.172 2.729331 3.157787 SCALE S&ILL 7233596 191Gb34 1.3OSB4Z O 3.6B73.OS 898273 1.9.33325 6.681.423 1.£N58Z3.3 3.Z 7812 0001.228 FDISPILL 1S6650 -O29994b •997Z355 O 1.327857 3.3S0B55 The correlation coefficients of the variables in Food Processing industry ” LABPRO CAPIN LABPRO CAPIN £XXX3 O 5458 £XXAJ SFCILL O O795 O ZO79 SCAL E O 4B£6 O ZZQ4 SCALE CXXAJ O Q369 SKILL FDISPILL OOOO , Estimation results 2.1 Pool regression model result Pool regression model result in Food Processing industry rei(j r _ l • 4tKAPZH BE S £1.L F-DZWZLL sour ce od R S da TotaJ 1nLABPRO ss i4s 5331.1403 2372 Z.Z47SZ9d4 coef ] l CAPIN SCALE SKILL 7122745 ]Z24S44 -.S05974 _cons 0198137 FDISPILL df S354627 std Err .0207361 O1S1S4 1146379 D9B5264 O869CmL c ]4.35 21.28 4.94 5.44 0.23 P›lt| Number of obs F{ 4, 2368} Prof› > r R - squared Adj R- sq« ar ed - 2373 005.3.7 O.OXXJ O S2St O 5Z83 ROOM NSE = O296 [95% Conf I:icervaJ O.OCM O O O.OOO 6716]17 2927379 -.7907751 0.820 -.ISO59#S O.OOO J43ZSS8 7529372 3521708 -.3411728 7296096 19OZ218 2.2 Random effects model result “ Random effects model result in Food Processing industry Rando«t- effeCcS GLs r egress 1on Gr oup var 1abl e : c‹›ps Number of cbs Number of gr R- sq : wi th1n Obs per gr oup : ml n - O 265O between - D-55€5 JMCAPIN SCALE SKILL FDISPILL _cons s 1gma_u coef .2923689 tX3S57632 792 max scd z r r O4511B8 OZ1772 2992742 O177837 -.1838828 378OAL[ 2373 — avq - overaJJ - O.5Z7O 1nLABPRO = ]3S9229 L49Z781 O9873O9 z 29.63 16.83 -1.3S 53 9€i P> ] z ] O.C)4X) O.CXM) D.176 O.OE] O £X33 BO244$5 2B4[188 -.45OZ8B8 O8S#BI8 o988599 3J4129'B 485878 2.3 Pool or Random: Breusch-Pagan Lagrange multiplier test Breusch-Pagan Lagrange multiplier test • Br eusch and ragan Lagr ang1 an muJ t 1p11er t esc or r andom elf ec c s l nLABPRO[ i,t] - Xb + u[i] + e[J,tJ &si1maied resuJ rs: 1nLaBP RO e Test: O var (u) - chd 2(1) - 3O8.ii Pr ob > ch12 - O €AAX3 As the result of LM test in table above, the p-value is smaller than 0.05 and this rejects the null hypothesis Therefore, random effects regression is more appropriate than pool OLS regression 2.4 Fixed effects model result • Fixed effects model result in Food Processing industry R-sq : vz1 ch1n - O 2729 Obs per gr oup : ml n between - 0.3965 avg - 1nL4 BPRO JFICAPIN 5655246 OZ79Z64 2O 25 O.£XAJ 51O7479 GZO3O13 SKILL FDISPILL 232773 —1•&LGB32 2.RZ.B425 59Z5712 1.21 —3 O7 0.225 O.CX32 —.14352 —2.97©142 G£3£X366 — 6S452Z sc»rs _cons • z+ee+x 952569 F rest that a)J u_1 -0: ozsoosz 2.609525 s 7x 5.92 F(790, 1578) - o.‹xx› O.CXAJ 11.37 zeeooss 63G8658 a‹x›zazs 2G8Z72 Pr ob > F - O £KAAJ 2.5 Fixed or Random: Hausman test Hausman test “ coeff J cJ encs (b) 14 xed andoia r (B) (h-B) DI fler ence sqrt(d) ag(v_b-V_B)) s E 1nCAPIN SCALE SKI LL FDISPILL b - cons)stenc under Ho and Ha; obtained from xtreg B - ? ncons? sterrt Under Ha , eff J c 1enz under Ho; obtaJ ned fr oni xt:r eg As the result of Hausman test in the table above, the p-value is smaller than 0.05; that means fixed effects model is more appropriate than random effects model 2.6 Including time effects in a fixed effects model Fixed effects model result with timefixed effects in Food Processing industry ] t -3 nat L a d d; bettveew - G.4456 t d avg - overaJJ - 0.4294 max - 3.O F {6, 2.576} Pr ob > r 1nLAB PRO SCALE ZS3Z7ZB _zt:_3 F tesi rhat aJJ u_d-O: oss4oSo OZSSOSO oZ79eoe F(79O, iS76) - O BO O €KAJ Z z.3 ii.a9 o o33 ZO3OD78 tx346?9:t 3OZ477B mziszi (1) _It_7 - O As the result above, p-value is smaller than 0.05 and this reject the null hypothesis; that means time fixed effects must be included a fixed effects regression 2.5 Testing for heteroskedasticity Modified Wald test ch1 {791} Prab»ch1 — 4e+OB O.€XXX3 The result from Modified Wald test shows that there is the presence of heteroskedasticity that need to be eliminated out of the model 2.6 The most appropriate results in Food processing industry The result of the most appropriate model ni : arejj no L 1near 4rì:ìrãxìi P E at £ joint.L i • 1:, a£is r egr es s 1on , absor b1ng 1nd1 cat or s Number of obs F( d, iº roto > F 5745) - 2373 43•Z9 - O.OOOO - -4B5Ob R -squared 0.9304 Adj R— squared - O 8953 ROOE J•!SE r1L ABP RO 1TTCAP I N SCALE • SSZi8dB zsaz7zs D#M66S1 22.09 O.OOO AdZdL6i zazoao3 azsaosa ozseees z o« o ‹xx› d#2T576 SKI LL F DI SPIL L - asoe«s zse«oss 3319€4 1.OB O.Z8O -.Z92732 JL.OD9543 _I&_3 0584056 D3JA3 2.75 O.OBL -.OD7 693 2Z39BO5 absor bed {79:± c ac eqor es ) 7.2 APPENDIX B MODEL RESULTS IN ELECTRONICS AND , MECHANICS Descriptive statistics The descriptive statistics of data sample for Electronics and Mechanics stats lnLABPRO J n€APIN SCALE sxzLL rozsPILL mean 3.832423 5.08959 0721¶O9 J476#49 3798122 pS0 3.72d02] S.018574 11&2498 2d6ddfi7 433d413 max lO.s$784 9.i22S63 iS.45183 i 98S66L2 -.78328aa l.o68 CJ[ 97€3 D O skewness 5635478 3.B2657 4.1.47038 885:185€› 3.52£X374 kurtos1 s 4.497478 71.98fi1 2#.77043 772O3.7 GO6944 The correlation coefficients of the variables in Electronics and Mechanics industry E bs1 LABPRO LABPRO CAPIN - SCALE SKILL FDISPILL 1.€XAX3 O O3Z€› —O £X379 O 0349 O £XX3Z L CAPIN tXAAJ O 23B4 O 0872 O 12O3 SCALE QXx3 O OZ73 —O 1631 SKILL FDI5PILL €XXX3 O O€7 1.€XXX3 56 Estimation results , 2.1 Random effects model result Random effects model result in Electronics and Mechanics ini:lustry Randoi»-effects cLs croup var 1abJ e : j regress1 on NUober of obs Number of gr oups obs per gr oup : ml n between - O 3448 over at J - O 2.736 waJd cha 2(4) Random effeczs u_1 - Gauss1ari corr{url , xJ {assumed} J:CAPIN SCALE SKILL coef .5! O551G8 9B338S 0374829 [5.96 1]S75Z9 -1.02 1BO7BGG _cons 733.89:k1 .18b8O5S s J gma_u 175©t899 -.11769 O:1669Z1Z [9s% conf znterval ] sz d Er r O242945 •1Z3.35G'5 FDISPILL Pr ob > ch12 - o J nLABPRO avg max - 2.27 1.49 f?2 0.OOD O.O23 O.1.36 0.309 O tXlO 524873# CQ75516 —.0570572 -.J44]8]2 365759t 6718036 1027844 418E511 ].]O92O1 Z O98O23 (fract on of var ance due i:o ur4 ) 2.2 Fixed effects model result Fixed effects model result in Electronics and Mechanics industry F 1xed -effect:s {w1t: h± n} r egr ess 1on Number of obs R - sq : wd c h1n - O o76e obs per gr o« p : ml n - Gr oup var ± abl e : 1rtLABPRO 1FJCAPIN SCALE SKILL FDISPILL - coef .S9716Z3 3B€ 5366 3.985979 -].2S2J48 N tJmber of gr oups st:d Er r O996699 11£366Z6 3£36Z12 .2010737 i.mssoiz 5.99 3.47 3.05 -4.8O O.£XXJ O.£J€J1 O.CX32 O.OOO 4O15SZ9 7927326 [956 Conf znz er va1] Z.6739B7 6O16744 42Z958 -].7B4621 6.549 -.7400744 s J gma_u s 1gma_e F test ihat aJJ u_1-0: F(537, lO7Z) - 1.12 Pr ob > F - O £167s 57 2.3 Fixed or Random: Hausman test Hausman test fJ xed TTCAP1N — 0O11.7GZ 3293GB5 BOS2.B2 random SCALE SKILL FDISPILL 0923533 Z.O79€›Z.8 obca1 r1ed fr oin xci eg obtafi ned frors xt:r eg Prob>ch4 = OltD As the result of Hausman test in the table above, the p-value is smaller than 0.05; that means fixed effects model is more appropriate than random effects model 2.4 Including time effects in a fixed effects model Fixed effects model result with timefixed effects in Electronics and Mechanics nj • Mj•£t(j Ip _ fIG• I UPPEhl BE 4C£1 F-D1SPZ1 L i • Efé FI Kéd - effects Number of obs - i614 obs per group: md n = avg max - 3.O NUi»ber of gr oups cor r (u_1 , xb} P N ILL LL I I - - 538 F {b, 2.O7O} - O 7308 AL E - PP ob > F - - - - 7 Pr ob > F - O tAx38 58 Prb> As the result above, p-value is smaller than 0.05 and this reject the null hypothesis; that means time fixed effects must be included a fixed effects regression 2.5 Testing for heteroskedasticity Modified Wald test chfi {538} Prob>ch12 - Se+05 O-€XXAJ The result from Modified Wald test shows that there is the presence of heteroskedasticity that need to be eliminated out of the model 2.6 The most appropriate results in Electronics and Mechanics industry The result of the most appropriate model ¶¿ I 8_, G 1T _ -• F4 BE 1£.L F- O£E L.£ ] € YOS£ " I3Q] ) P' coded ; _ii omitted) Linear regression, absorbing indicators NU rrber of obs - :i.62.4 F{ 6, 3.O7O} Prob > F 4O.O9 — O.O£AAJ ROOt MSE - R —squared - O 5474 Adj R-squared = O 32.77 Coef 1FCAPZN SCALE SKILL FDISPILL _I£_2 _It._ _COrtS 5674303 • 444448 3•B€/€#D72 — 1730BO5 9M3S2.87 2.Z'€5SZ —•9B3SO3Z absorbed RObMSt Sid Err 1.2427 t P>|r l [9S¾ conf Interva)] O9Z6429 1O6QZ7Z 6.12 4.19 O.€AAJ O.£AAJ 385648 2364228 341895Z 089476 OBQQ383 758Z.3.31 O 51 11 O7 38 -2 3O O G2Z O.£AAJ O.2.6b O Z.95 —.B44S417 B149SO3 — O5Z.0245 —Z 47Z.CJ€› 1.693777 2.ZS 0.025 48347OZ 74922.Z6 652473Z E3O475 4971BO7 1.166OB7 3O1.O265 SO4O537 { 38 cat: egor 1es} 59 • 7.3 APPENDIX C OVERVIEW OF FDI IN VIETNAM Vietnam has successfully attracted a large inflow of FDI in recent years, and the detail of FDI inflows in period 1995 — 2010 is shown in Figure In which, the projects licensed and registered capital by kinds of economic activity are displayed in Figure Moreover, the structures of investment and GDP at current prices by foreign investment sector are respectively expressed in Figure and Figure Besides, the structure of GDP at current prices by manufacturing industry (mentioned in this research) is shown in Figure 80 70 60 50 Registered capital N Implementation capital 40 Source: General Statistics Office of Vietnam Figure Foreign direct investment inflows in period 1995 - 2010 60 Kind of economic activity Argiculture and forestry Fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade; Repair of motor vehicles, motor cycles and personal and household goods Hotels and restaurants Transport; storage and communications Financial intermediation Real estate, renting business activities Education and training Health and social work 14 Number of projects Total registered capital (*) (Mill USD) 575 163 130 7475 72 521 3,837.7 541.4 , , 79 , 31 7, 1,041.6 379 554 69 19,402.5 8,435.3 1,103.7 45,505.7 275.8 1,033.3 73 Recreational, cultural and sporting activities Community, social and personal service activities 129 6SB.3 Total 12,575 Source: Statistical Yearbook of Vietnam, 2009 Figure FDI projects licensed in period 1988 — 2009 by kinds of economic activity 61 , 1,800,000 1,600,000 1,400,000 16.5°X• 17.7% 15.0% , , , Total gross domestic at current prices Gross domestic product at current prices by Manufacturing industry Structure of gross domestic product at current prices by Manufacturing industry Source: General Statistics Office of Vietnam Figure S Structure of GDP at current prices by manufacturing industry ... examine FDI technology spillovers within industries, which are called intraindustry spillovers or horizontal spillovers In Vietnam, the number of studies on horizontal spillover effects from. .. focuses on investigating horizontal technology spillover effects on labour productivity of domestic firms in low technology industry (Food processing in particular) and high technology industry. .. Questions The research questions in this research mainly focus on investigating the effects of horizontal technology spillovers on labour productivity of domestic firms in low technology industry