Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution

Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption and provincial institution.

………

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

………

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 Dr LE THAI THUONG QUAN 2 Dr PHAM THI BICH NGOC

HO CHI MINH CITY, 2023

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

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 viii

2.1.1 Total factor productivity 14

2.1.2 Foreign direct investment and classification 17

2.1.3 Domestic firm‘s absorption 21

2.1.4 Provincial institution 22

2.1.5 Total factor productivity spillovers from FDI enterprises to domestic enterprises 23

2.2 Literature regarding FDI spillovers to domestic firms in a host country 30

2.2.1 Neoclassical growth theory 30

2.2.2 Endogenous growth theory 31

2.2.3 Eclectic theory 32

2.2.4 Product life-cycle theory 35

2.2.5 Market imperfections theory 36

2.2.6 Production theory and technological progress 37

2.3 Literature review on TFP spillovers from FDI to domestic firms 39

2.3.1 The role of market orientation 39

2.3.2 The role of domestic firms‘ absorption 41

2.3.3 The role of provincial institution 42

2.3.4 Synthesis of theoretical studies 43

2.4 Empirical studies 45

2.4.1 Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation 45

2.4.2 Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption 53

2.4.3 Empirical studies regarding total factor productivity spillovers from FDI in manufacturing: the role of provincial institution 55

4.1 Overview regarding FDI 78

4.1.1 Registered FDI in Vietnam 78

4.1.2 FDI capital in industry 79

4.1.3 FDI attraction by region 81

4.1.4 FDI contribution in GDP 82

4.1.5 FDI capital contribution in the economy 83

4.1.6 FDI contribution to exports 85

4.1.7 Labor attraction in FDI sector 86

4.1.8 Labor productivity in FDI sector 87

4.2 Overview regarding Enterprises 88

4.2.1 Enterprises in economic sectors 88

4.2.2 Geographical distribution of enterprises 89

4.2.3 Enterprise sizes by labor 91

4.2.4 Labor productivity in manufacturing 92

4.2.5 Export value of enterprises 93

CHAPTER 5: RESULTS AND DISCUSSION 95

5.1 Total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation 95

5.1.1 Descriptive statistics 95

5.1.2 Results of the model estimation 100

5.2 Total factor productivity spillovers from FDI in manufacturing: the role of domestic

5.3.2 Results of the model estimation 120

CHAPTER 6: CONCLUSIONS AND POLICY IMPLICATIONS 126

6.1 Conclusion 126

6.1.1 Total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation 126

6.1.2 Total factor productivity spillovers from FDI in manufacturing: the role of

domestic firms‘ absorption 127

6.1.3 Total factor productivity spillovers from FDI in manufacturing: the role of provincial institution 128

6.2 Policy implications 128

6.2.1 Proposals towards exporters in the manufacturing industry 128

6.2.2 Policy for enhancing regional linkages 129

6.2.3 Policy recommendations for strengthening provincial institutions 130

6.3 Limitations and future research orientation 132

6.3.1 Limitations 132

6.3.2 Future research orientation 133

REFERENCES 135

APPENDIX 156

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

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

LIST OF FIGURES

Figure 2.1 FDI spillovers to domestic firm 30

Figure 2.2 A theoretical framework of relevant theories illustrating FDI spillovers 44

Figure 2.3 Research framework 60

Figure 4.1 Registered and disbursed FDI over the years (GSO, 2022) 79

Figure 4.2 FDI capital in terms of economic sector statistics until December 31, 2021 81

Figure 4.3 Foreign direct investment licensed by locality (million USD) with project accumulation valid until December 31, 2021 82

Figure 4.4 Contribution of the FDI sector to Vietnam‘s economy from 2005 to 2021 83

Figure 4.5 Contribution of the FDI capital to Vietnam‘s capital from 2010 to 2020 84

Figure 4.6 Export value in terms of region of Vietnamese economy within 1995- 2001 86

Figure 4.7 Labor attraction in terms of economic sectors of Vietnam in the 2000-2021 period 87

Figure 4.8 Vietnamese workers‘ income from 2005 to 2020 (million VND/person) 88

Figure 4.9 The number of Vietnamese enterprises in terms of economic sectors within the 2010-2020 period 98

Figure 4.10 Distribution regarding enterprises in Vietnam by region 99

Figure 4.11 Vietnamese workers‘ productivity in the manufacturing industry within the 2005-2020 period (million VND/person) 93

Figure 4.12 Export value of enterprises 94

Figure 5.1 Numbers of FDI, Domestic, Exporting, and Non-exporting enterprises 96

Figure 5.2 Characteristics of domestic firms 97

Figure 5.3 Domestic manufacturing exporter firms by region 98

Figure 5.4 Number of FDI, Domestic and Export Firms in the Data 111

Figure 5.5 Number of FDI Firms in the Data 118

Figure 5.6 Enterprise classification in terms of their Total Factor Productivity 119

LIST OF TABLES

Table 2.1 Summary of Literature review 50

Table 3.1 Regression models 66

Table 3.2 Variables used in the study 67

Table 3.3 Regression models 70

Table 3.4 Description of variables in the models 71

Table 3.5 Description of variables in the models 75

Table 4.1 Enterprises structure in terms of industry 91

Table 4.2 Categories enterprises by size in 2020 92

Table 5.1 Descriptive Statistics of Ln TFP by Firm Type 98

Table 5.2 Presents the mean values of the variables of the model (1) with the correlation coefficient matrix 99

Table 5.3 Heterogenous FDI and TFP of domestic firms 100

Table 5.4 Heterogenous FDI and TFP of domestic firms: small/medium, big; high-tech/ low-tech 106

Table 5.5 Effect of Heterogenous FDI spillovers on Domestic exporters‘ TFP in terms of individual region 110

Table 5.6 The pairwise correlation coefficients 112

Table 5.7 Modified Wald & Wooldridge tests 113

Table 5.8 Hausman test 113

Table 5.9 Estimated results of impacts to export participation – Model 2 115

Table 5.10 Estimated results of export ability and spillover effects to TFP of domestic firms – Model 3 116

Table 5.11 Estimated results of export ability and spillover effects to TFP of domestic firms - with GMM technique 117

Table 5.12 Means, standard deviation, and correlations of variables 119

Table 5.13 Regression results (Dependent variable: lnTFP) 122

Table 5.14 Regression results by firm productivity group 123

Table 5.15 Regression results in accordance with Papi components 125

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

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

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 Last but not least, this chapter underscores the importance of this research in advancing our understanding of productivity growth in Vietnamese firms and proposes valuable

policy recommendations to foster positive spillover effects from FDI 1.1 Problem statement

Trade liberalization and globalization have opened opportunities for emerging countries, Vietnam is not an exception From the fundamental institutional reforms of the Government after the Doi Moi period at the 6th National Party Congress in 1986, the Vietnamese economy has undergone significant changes The accession to the World Trade Organization (WTO) in 2007 and additional bilateral trade agreements (listed as ASEAN Free Trade Area, EU-Vietnam Free Trade Agreement and so on) in recent years have increasingly expanded our country‘s economy with a closer link and a higher position in the global economy Deeper integration can attract more resources to develop and to increase the productivity of local businesses, among which, learning new ways to operate businesses or to attract potential foreign direct investment (FDI) is one key factor

Along with trade integration, the grasp of numerous development opportunities is reflected in the fact that our nation of Vietnam has escaped from the group of emerging countries The per capita income of Vietnamese people in 2019 reached 2,700 USD; within 30 years, the poverty rate decreased from 70% to 6% (World Bank, 2020) Our country has countless favorable factors regarding human resources as the foundation for development Vietnam, with a population of 96.2 million in 2019 (from nearly 60 million in 1986), is expected to grow to 120 million by 2050, in which, the portion of 55.5% of workers under 35 years old (following the results of the Vietnam Population and Housing Census dated April 1, 2019)

implies an abundant human resource for the national development On the other hand, Vietnam is at risk of falling into the middle-income trap, which occurs when a country‘s economy slows down or becomes stagnant after reaching a GDP per capita of between $1,000 and $12,000 in accordance with World Bank‘s standards Productivity growth, currently, is identified as the driving force to avoid the middle-income growth trap Following the 2020 Report of the Asian Productivity Organization, Vietnamese labor productivity is 60, 40, and 10 years behind those of Japan, Malaysia, and Thailand, respectively From this report, in 2018, the labor productivity of Thai workers was 24% higher than that of Americans and 2.4 times higher than that of Vietnam (9.9% compared to that of American workers) Meanwhile, Vietnamese labor productivity per hour is 8.1% compared to that of Americans whereas that of Thailand is 19.7%

Enhancing productivity is pivotal for a country‘s overall well-being and the prosperity of local businesses (Dieppe, 2021) While earlier research emphasized the significant roles of capital and labor in driving productivity, the recent studies underscore the importance of total factor productivity (TFP) as a more encompassing metric TFP captures the efficiency of all inputs, beyond traditional capital and labor, in the production process This efficiency can be cultivated from a company's internal resources or absorbed from foreign direct investment enterprises with advanced technology (Le & Pomfret, 2011; Anwar & Nguyen, 2014; Kim & Xin, 2021) FDI-induced TFP spillover to domestic firms represents a key conduit for host countries to elevate productivity and spur economic growth (Amann & Virmani, 2015) For local enterprises, TFP spillover gauges the technological and knowledge transfer impact from FDI (Javorcik, 2004; Girma et al., 2008; Ni et al., 2017)

Data from the Asian Productivity Organization‘s 2020 report illuminates the prominence of TFP in national productivity narratives Between 2010 and 2018, TFP was responsible for fueling 30% of Vietnam‘s productivity surge, a figure that ascends to 58% in terms of Thailand Interestingly, a more recent snapshot from 2015 to 2018 reveals an optimistic trajectory for Vietnam, with a TFP growth rate

of 2.6% outpacing Thailand‘s 1.7% This figure accentuates the imperative for Vietnam to remain steadfast in its pursuit of augmenting national productivity

Neoclassical growth models posit that technology directly influences TFP Javorcik (2004) identified productivity spillovers from FDI firms through horizontal and vertical channels The transfer of knowledge and resources occurs through various mechanisms, including demonstration, competition, and collaboration (Vujanović et al., 2022; Bournakis et al., 2022; Spencer, 2008; Zhang et al., 2010; Javorcik et al., 2018)

On the other hand, empirical findings concerning the magnitude and the direction of TFP spillovers remain inconclusive, particularly in developed countries (Farole & Winkler, 2015) Factors listed as FDI market orientation, the absorptive capacity of domestic firms, and institutional quality can influence the extent of TFP spillovers Further investigation is warranted to better comprehend the conditions under which FDI can contribute to the productivity enhancement of domestic enterprises (Villar et al., 2020; Jude, 2016)

This dissertation explores the spillover effects of the foreign direct investment sector on domestic manufacturing enterprises and how they impact total factor productivity It adds a new perspective to this research of spillover effects in emerging countries, focusing on three key factors as follows:

(1) The market orientation of FDI enterprises, including their tendency to produce for export or the domestic market (Ngoc et al.,2022; Fan et al., 2020; Girma et al., 2008; Kneller & Pisu, 2007)

(2) The absorptive capacity of domestic firms, with a particular emphasis on export ability (Ferreras-Méndez et al., 2019; Harris & Li, 2009;Kim, 2015)

(3) The role of provincial institutions (Nguyen, 2022; Duong, 2020; Yi et al., 2015; Farole & Winkler, 2015)

By considering these three factors, this dissertation aims to provide a comprehensive understanding of the spillover effects of FDI on domestic manufacturing enterprises, focusing on how these effects contribute to changes in TFP

This dissertation titled ―Total Factor Productivity spillovers from FDI in manufacturing: the role of FDI’s market orientation, domestic firms’ absorption, and provincial institution‖ carries an important meaning. This dissertation expands the current body of empirical research by examining three key areas within the Vietnamese context First, it explores how the total factor productivity of domestic enterprises can be enhanced through spillover effects derived from domestic-oriented foreign direct investment (FDI) enterprises (DFDI) and export-domestic-oriented FDI enterprises (EFDI) Second, it investigates the augmentation of TFP in domestic enterprises by establishing linkages and absorption effects from factors listed as the export capabilities of domestic companies Thirdly, it analyzes the influence of the local institutional environment on elevating the TFP of domestic firms By addressing these three significant aspects, this dissertation contributes to a deeper understanding of productivity growth within the Vietnamese firms

1.2 Research objectives

The dissertation concentrates on the following objectives:

(1) To investigate the total factor productivity spillovers from FDI in manufacturing, specifically examining the role of FDI‘s market orientation through horizontal, backward, and forward linkages To be presented in further details, three following sub-objectives are to be researched as follows:

1.1 To investigate the impacts of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in terms of considering their participation in exporting and/ or in industrial zone

1.2 To investigate the impacts of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in considering domestic firms‘ size (small versus medium and large) and technology level (high-tech versus low-tech)

1.3 To investigate the impacts of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in terms of considering domestic enterprises‘ location differences in six economic regions

(2) To examine the total factor productivity spillovers from FDI in manufacturing, with a focus on the role of domestic firms‘ absorption based on their exporting involvement through horizontal, backward, and forward linkages To be presented in further details, two following sub-objectives are to be researched as follows:

2.1 To examine total factor productivity spillovers from FDI to domestic firms in accordance with the differences regarding their participation in exporting (exporting versus non-exporting) through horizontal, backward, and forward linkages

2.2 To examine total factor productivity spillovers from FDI to domestic firms change by their export intensity through horizontal, backward, and forward linkages

(3) To analyze the total factor productivity spillovers from FDI in manufacturing, emphasizing the role of provincial institutions through horizontal and vertical linkages To be presented in further details, three following sub-objectives are to be researched as follows:

3.1 To analyze total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in terms of considering the cases of small and medium-sized enterprises

3.2 To analyze total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in terms of considering the level of total factor productivity

3.3 To analyze total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in considering provincial institution components (participation, transparency, accountability, corruption control)

1.3 Research questions

In order to address these research objectives, this dissertation needs to answer some related questions as follows:

Objective 1: Investigating total factor productivity spillovers from FDI in manufacturing: the role of FDI‘s market orientation

Question 1.1: How does the impact of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in considering their participation in exporting and/or in industrial zones?

Question 1.2: How does the impact of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in terms of considering the size (small versus medium and large) and the technology level (high-tech versus low-tech) of domestic enterprises?

Question 1.3: How does the impact of productivity spillovers of two types of FDI enterprises (domestic and export-oriented) of domestic enterprises through both horizontal and vertical linkages in terms of considering domestic enterprises‘ location difference in six economic regions?

Objective 2: Examining total factor productivity spillovers from FDI in manufacturing: the role of domestic firms‘ absorption in accordance with their exporting involvement through horizontal, backward, and forward linkages

Question 2.1: How does total factor productivity spillovers from FDI to domestic firms differ by their participation in exporting (exporting versus non- exporting) through horizontal, backward, and forward linkages?

Question 2.2: How does total factor productivity spillovers from FDI to domestic firms change by their export intensity through horizontal, backward, and forward linkages?

Objective 3: Analyzing total factor productivity spillovers from FDI in manufacturing: the role of provincial institution

Question 3.1: How is total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in considering the case of small and medium-sized enterprises ?

Question 3.2: How is total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in considering level of total factor productivity?

Question 3.3: How is total factor productivity spillovers from FDI to domestic firms through horizontal and vertical linkages influenced by the provincial institution in considering provincial institution components (participation, transparency, accountability, corruption control)?

1.4 Subject and Scope 1.4.1 Research subjects

This dissertation concentrates on the following subjects:

Subject 1: Total factor productivity spillovers from FDI in manufacturing: the

role of FDI‘s market orientation

Subject 2: Total factor productivity spillovers from FDI in manufacturing: the

role of domestic firms‘ absorption

Subject 3: Total factor productivity spillovers from FDI in manufacturing: the

role of provincial institution 1.4.2 Research scope

Spatial scope: This dissertation is constructed by analyzing three datasets related to enterprises

The first dataset is Vietnamese enterprise surveys (VES) collected annually by the General Statistics Office of Vietnam (GSO) The survey was first conducted in 2001, collecting the updated annual data on the production and business activities of enterprises operating until December 31, 2000 All state-owned and foreign-invested enterprises were thoroughly surveyed; however, the non-state enterprises surveyed a sample, and the territory, economic region, and economic sector determined the sampling frame The foreign direct investment category encompasses businesses with foreign direct investment, regardless of the level of foreign capital contribution Two main types of firms in this category are as follows: those foreign investors wholly own and those that are joint ventures between foreign and domestic partners (General Statistics Office of Vietnam, 2022) At the early stage, enterprises with less than ten new employees were selected for the sample group Nevertheless, the number of small-and-micro enterprises is gradually increasing The sample is extended to enterprises with over 50 employees in active economic regions listed as Hanoi Capital and Ho Chi Minh City

The second dataset is the Governance and Public Administration Performance Index (PAPI) - the largest sociological survey in Vietnam - to evaluate the development, the implementation and the monitoring regarding public policy and service delivery This is a collaborative research project between the Vietnam Chamber of Commerce and Industry and the Vietnam Competition Initiative Project (a project funded by the United States Agency for International Development) The contents are specially designed for both national and local levels in Vietnam PAPI, built on the philosophy that people are ―users‖ (or ―customers‖) of public agencies (or ―service providers‖), is capable of monitoring and evaluating the effectiveness of governance and public administration

The third dataset is GSO 2012 Input and Output data Table: these Tables help calculate the vertical and horizontal alignment factors These Tables present the input factors related to the production technology applied to product development, total capital formation, final consumption, exports and other indicators

Timing scope: This dissertation studied the manufacturing enterprises in Vietnam from 2009 to 2017 To address the first objective, this dissertation examines firm-level panel data collected between 2011 and 2014 For the second objective, the analysis utilizes firm-level panel data covering the period from 2009 to 2015 In order to achieve the final objective, the research incorporates firm-level panel data ranging from 2012 to 2017

1.5 Research methodology

Quality methods are applied to meet our research aim: TFP was estimated from Cobb-Douglas production function model with a semi-parametric method by Levinsohn-Petrin (2003) The variable representing FDI spillover uses three representatives: horizontal (representing spillover through horizontal linkages in the same industry), backward (representing spillover through supplying input materials to foreign partners), and forward (representing the purchase of input machinery from FDI enterprises)

Statistical classification method, in accordance with one or more criteria, is

used to divide units of the research problem into groups of enterprises with similar nature of business This study proceeds to disaggregate statistics into research

groups with different characteristics of enterprises, listed as business size, absorptive capacity, exporters, or non-exporters From this foundation, those methods are applied to evaluate and to estimate

In terms of descriptive statistics method, after performing statistical classification, calculating absolute, relative, and average numbers, indicators used to reflect the level, descriptive statistics steps are conducted to describe the scale and the variation of research phenomena by series of numbers, time index to reflect the volatility and its characteristics

In terms of econometric analysis method, in accordance with the built-in econometric model, array data analysis tools are applied to estimate and to test research hypotheses On that basis, some solutions for specific cases are proposed Advanced methods for panel data are applied, in addition to the ordinary least squares - OLS, including Fixed Effects (FE), Random Effects (RE) with Driscoll-Kraay standard errors and selecting the appropriate model by Hausman test Dynamic panel data (GMM) is conducted to check for the resulting robustness

1.6 Significance

From the data analysis, this dissertation conducts a multi-dimensional study on the TFP spillover effects of FDI on domestic manufacturing enterprises in Vietnam These new features are to be listed as follows:

In terms of Academic contributions:

Firstly, this dissertation enriches the theoretical understanding of the diverse spillover effects on the TFP of domestic enterprises, resulting from the varying behaviors of FDI enterprises The added value is attributed to the export capabilities of domestic firms, consistent with Melitz‘s (2003) Theory, which posits that these firms can excel at absorbing TFP spillovers either by competing with domestic-oriented FDI rivals or by supplying to export-domestic-oriented FDI enterprises

Secondly, the roles of small enterprises, low technology, high technology and learning by regions affecting the impact through horizontal, backward and forward linkages are included for further analysis

Thirdly, this dissertation enhances the theory of total factor productivity spillovers from the FDI sector to the domestic manufacturing sector via exports,

specifically focusing on one emerging market like Vietnam This is especially noteworthy given that the majority of previous studies have concentrated on developed nations

Fourthly, the total factor productivity of domestic firms engaged in exporting increases through horizontal and backward links whereas the forward link has a negative effect Regarding enterprises with better export ability, the backward linkage is a vital productivity spillover channel

Fifthly, this dissertation provides valuable insights into the role of institutions when investigating the spillover effects of FDI on domestic firms‘ TFPs in emerging economies In emerging countries with market-oriented institutions like Vietnam, understanding the impact of these institutions is crucial for policy development and fostering economic growth

Sixthly, this dissertation helps clarify the role of local institutions in absorbing the spillover effects from the FDI sector to the domestic sector This impact is significant for one country in the process of refining its market-oriented institutional framework like Vietnam While the previous studies focused primarily on national-level institutions, assuming uniformity at the regional national-level (Krammer, 2015), this dissertation provides the additional evidence regarding the importance of provincial-level institutions

In terms of Practical contributions:

Firstly, the findings provide empirical evidence for policymakers and business owners on FDI spillover effects, helping optimize linkages, enhance internal capacity, and facilitate technological knowledge absorption

Secondly, this dissertation reveals varying impacts of domestic-oriented and export-oriented FDI enterprises, suggesting policymakers prioritize attracting export-oriented FDI firms and enable local businesses to join supply chains

Thirdly, this dissertation offers policy suggestions to enhance positive TFP spillover effects, including fostering connections between FDI and domestic companies and developing strategies to reduce the technology gap and to share experiences in export area

Fourthly, the results indicate that provincial institutions can help businesses learn and increase TFP, emphasizing the need for transparent institutions, policy adjustments, and competitive advantages in attracting foreign investment

1.7 Dissertation structure

This dissertation is structured into six Chapters as follows:

Chapter 1 - Introduction - introduces the research issues and questions, as well as the contributions of the dissertation to both theoretical and empirical foundations Chapter 2 - Literature Review - summarizes the existing literature and other related studies to establish the hypothesis and analytical framework of the dissertation

Chapter 3 - Research Methodology - presents the research methodology through the development of models to investigate the relevant problems This chapter examines the characteristics of the research data and model estimation methods

Chapter 4 - The overview regarding FDI and enterprises in Vietnam- provides a practical statistical description and an in-depth analysis of the current contributions of FDI enterprises to the economy besides offering insights into the status of Vietnamese enterprises

Chapter 5 - Results and Discussion - primarily focuses on presenting and analyzing the estimation results derived from the two models of the two groups of research problems

Chapter 6 - Conclusion and Policy Implications - offers policy recommendations based on the quantitative research results

By refining language and organization, this revised structure provides a clearer overview of the dissertation‘s content

CHAPTER 2: LITERATURE REVIEW

This chapter presents literature review on TFP spillovers from foreign direct investment in manufacturing This chapter covers the theoretical foundations of TFP, the different channels through which FDI can generate the spillovers and the empirical evidence on the magnitude and the direction of these spillovers This Literature review discusses the role of FDI market orientation, domestic firms‘ absorption, and provincial institutions in influencing TFP spillovers This chapter concludes by identifying gaps in the existing literature and highlighting the research

questions that will be addressed in the dissertation 2.1 Definitions

2.1.1 Total factor productivity

TFP analysis in the economy originated from Solow‘s research (1957) with a development in both theoretical and empirical research on TFP in recent years Since the mid-1990s, the increasingly available firm-level data has allowed for firm-level estimation of TFP (Ackerberg et al., 2006; Wooldridge, 2009) Total factor productivity is an indicator to measure the productivity of both ‗labor‘ and ‗capital‘ in a particular activity or the whole economy TFP reflects the progress of science, engineering and technology; therefore, the increase in the output depends on not only the number of inputs (traditional method) but also the quality of the inputs listed as labor and capital (National Agency for Science and Technology Information, 2011)

Owyong (2000) applies the concept of TFP as a combination of all inputs, specifically the weighted average productivity of all inputs, in which the weight of each input is its contribution to the total production cost OECD (2001) utilizes the term ‗multifactor productivity‘ (MFP) to refer to the equivalent concept of TFP Multifactor productivity is related to the variation in output resulting from certain types of input The measured MFP, which manifests itself in the output change, cannot be calculated through the input coordination change MFP represents the

combined effect of some factors, including technology, production scale, management skills, and change in the production organization

From the research results of Asian Productivity Organization (2004), TFP can levitate because of a variety of reasons as follows: increased labor quality; changes in demand for goods and services, changes in the composition or quality of capital; technological progress coming from domestic research and development (R&D), borrowing from global knowledge, reallocating resources, or simply learning from the practical working experience (Barge‐ Gil et al., 2020)

Firstly, in terms of the quality of labor resources, investment in human resources helps to increase the capacity of the labor force, to improve the educational level, to strengthen the ability to absorb and to apply scientific and technological advances and to strengthen the workers‘ skills and profession High-quality labor input is essential in increasing TFP (Romer, 1990)

Secondly, in terms of changing demand for goods and services, the impact on TFP through increasing domestic and export demand for products and goods is an essential foundation for the optimal use of resources

Thirdly, in terms of the change regarding investment capital structure, investment towards developing new production technology is an indispensable requirement to improve the quality of products and services New technology will improve competitiveness and cut production costs Areas for investment should be selected with the purpose of improving the efficiency of capital use, increasing investment in advanced technology, listed as: automation; information and communications technology as well as investing in high-yield, high-value-added industries and fields, resulting in increasing TFP

Fourthly, in terms of economic structural change, economic restructuring is the transfer of resources from low-productivity and economic sectors to high-productivity and economic sectors, making good use of comparative advantages The reallocation of economic development resources listed as capital, labor, natural resources, science and technology among sectors and economic sectors to obtain

more productive economic sectors will increase the efficiency of resources and boost TFP

Fifthly, in terms of technological advance applications, these activities should be conducted as follows: to promote innovative and creative activities; to research and develop new products; to improve production processes and advanced management technology (systems, advanced management tools and so on) and to have a positive working attitude with impacts on improving productivity

A variety of methods, each with its advantages and disadvantages, has been applied to calculate the total factor productivity The yield estimation technique by OLS regression method is technically simple and makes it easy to estimate the regression coefficients OLS regression method assumes that the inputs are exogenous; nevertheless, these factors are endogenous (Olley & Pakes, 1996; Levinsohn & Petrin, 2003) Therefore, if TFP is estimated following OLS, the result will be unequal

In case of productivity measurement in accordance with the semi-parametric estimation method by Olley-Pakes (1996), the endogenous problem will appear when choosing inputs for the enterprise This method uses investment to solve the endogenous problem, and firms‘ investment in this method must be positive The assumption is that a firm will select its variables (labor) and a level of investment at the beginning of each period These two factors, together with the present value of capital, determine the amount of capital at the beginning of the next period

The solid estimation method of the production function of Levishon & Petrin (2003) combines parametric and semi-parametric techniques developed from the techniques by Olley-Pakes (1996) The method by Olley-Pakes (1996) uses investment to solve the endogenous problem, and firms‘ investment in this method must be positive Using investment for endogenous remediation may cause unequal production estimates and annual variability may not be reflected in the productivity of the estimated firms Levishon & Petrin (2003) use intermediate input for endogenous remediation to overcome this shortcoming In this dissertation, TFP

estimation results, following those by Levinsohn & Petrin (2003, 2004), are used to make comparisons of TFP among industries, types of enterprises, size of enterprises, economic regions and comparisons between the exporter and non-exporter enterprises

2.1.2 Foreign direct investment and classification

2.1.2.1 Foreign direct investment

In accordance with International Monetary Fund (1993), foreign direct investment is defined as an investment including long-lasting relationships, which reflects a long-term interest and control of a resident entity in a foreign economy or parent company to a domestic firm

World Trade Organization (1996) defines that FDI occurs when an investor from one country (host country) acquires an asset in another country (the country that attracts investment) together with the right to manage that asset Means of management are what distinguish FDI from other financial instruments In the majority, investors are often referred to as parent companies and their assets managed abroad are known as subsidiary companies or branches

Organization for Economic Co-operation and Development (OECD) presents that FDI refers to the existence of a long-term relationship between a direct investor (an economic entity in a country) and an FDI enterprise (an economic entity in another country) and with a significant impact of investor on the management to the invested enterprise Following Law on Foreign Investment (1997), FDI means the transfer of foreign investors into Vietnam with cash or any assets to conduct investment activities under the law; foreign investors are international economic organizations or individuals investing in Vietnam

United Nations Conference on Trade and Development (UNCTAD, 1999) defines FDI as an investment related to a long-lasting relationship It reflects the long-term interest and control of a legal entity in an economy (foreign direct investor or parent company) to a firm in another economy other than that of a foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate)

In accordance with Law on Investment (2014), business investment is the investment by investors to carry out business activities through the establishment of economic organizations: capital contribution, shares purchase, investment in the form of contracts or project implementation Foreign investor is an individual with foreign nationality, or an organization established under foreign law that makes business investment in Vietnam Foreign-invested economic organization comprises the foreign investors as members or shareholders

a) Investment in the establishment of an economic organization:

With this form, a foreign investor, before establishing an economic organization, must obtain an Investment Registration Certificate and satisfy the following conditions:

Regarding the percentage of charter capital ownership: Foreign investors are allowed to own unlimited charter capital in economic organizations, except in the following cases: (1) The percentage of foreign investors‘ ownership in listed companies, public companies, organizations trading in securities and securities investment funds following the securities law; (2) The percentage of foreign investors‘ ownership in state-owned enterprises that are equitized or converted to another form must be by the law on equitization and transformation of state-owned enterprises

Regarding the investemt form and the activities scope: In terms of the investment form and the activity scope, Vietnamese partners implement investment activities and other conditions following the provisions of international conventions to which the Socialist Republic of Vietnam is a signatory

b) Investment in the form of capital contribution, purchases of shares or capital contribution to economic organizations:

This is a form of investment to contribute capital, to purchase shares or capital contributions to an economic organization in order to make a capital contribution, purchase shares or contributed capital to an economic organization On the other hand, the following conditions must be satisfied: the ownership of

charter capital as well as the form of investment and scope of activities as mentioned above

With this form, foreign investors are allowed to contribute capital, to purchase shares or capital contributions to economic organizations in the following forms: (1) Buying shares for the first time or issuing more shares of a joint stock company; (2) Contributing capital to limited liability companies and partnerships; (3) Foreign organizations can contribute capital to other economic organizations

c) Investment in the form of a Public-private partnership (PPP) contract: Investment in the form of a PPP contract is an investment form made on the foundation that investors and project enterprises sign contracts with competent state agencies to implement, manage and operate structural projects regarding infrastructure and the provision of public services

07 types of contracts in the form of public-private partnerships are comprised of: Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) Contract, Build-Operate-Transfer contract - Transfer (BT), Build - Own - Operate (BOO) Contract, Build - Transfer - Lease (BTL) Contract, Build - Lease - Transfer (BTL) Contract and Business-Management (O&M) Contracts

d) Investment in the form of Business Cooperation Contract (BCC) contract:

Investment in the form of a BCC contract is the form of a contract signed between domestic investors and foreign investors or between domestic investors or between foreign investors following the procedures for issuance of investment certificates for business cooperation, profit sharing, and product distribution without establishing economic organizations

2.1.2.2 Foreign direct investment market orientation

Dunning (2015) suggests that the various motives for FDI can largely be

grouped into four main categories: (1) market seeking, (2) resource seeking, (3) efficiency-seeking, and (4) strategic asset seeking

(1) Market seeking FDI: corresponding to FDI that aims at supplying the local market or markets in adjacent territories It may represent a deeper involvement of the firm following the success of exports or the firm‘s expansion to a new market

Factors affecting are large and growing domestic markets adjacent regions (for example: ASEAN, EU and so on), availability and price of skilled and professional labor, presence and competitiveness of related firms and leading industrial suppliers, quality of national and local infrastructure, and institutional competence

(2) Resources seeking FDI: These companies‘ sources like cheap minerals, raw materials, natural resources, and agricultural products which tend to be geographically concentrated are mainly from the most industrialized countries to the least developed region‘s development In addition, the investors are interested in upgrading the quality of their resources, processing and shipping of their outputs as well as the availability of local partners to promote knowledge together

(3) Efficiency seeking: FDI is comprised of two main forms First of all, firms often seek to increase their cost efficiency by transferring production, totally or in part, to low-labor-cost locations This is especially likely to happen in industries where unskilled or semi-skilled labor represents an important part of the production costs The second type of efficiency-seeking FDI corresponds to an investment aimed at rationalizing the operations of existing ones The target may be exploiting comparative advantages in adjacent territories or exploiting economies of scale and scope across borders

(4) Strategic asset-seeking FDI: Firms increasingly use this to obtain strategic assets (whether tangible or intangible) that may be critical to their long-term strategy FDI may be a vehicle for the firm to build ownership advantages supporting its long-term expansion at home and abroad Alternatively, the strategic asset-seeking investment may not strengthen the firm‘s position but weaken its competitors‘ competitive position Besides, it refers to the opportunities to exchange

localized knowledge, idea and interactive learning as well as to access to different cultures, institutions, and consumer demands

This dissertation focuses on foreign direct investment (FDI) that targets the domestic market, which falls under the market-seeking category of FDI in accordance with Dunning‘s classification In contrast, FDI that falls under the resource-seeking, efficiency-seeking, and strategic asset-seeking categories: Forms (2), (3), and (4) are often directed towards the export market, as noted in the previous research by Girma & Pisu (2008) and Kim (2015)

2.1.3 Domestic firm’s absorption

The spillover effects from FDI enterprises to domestic firms have yielded different results resulting from the impact of absorptive capacity (Meyer & Sinani, 2009, Kokko, 1996; Keller, 1996) Absorptive capacity is a firm‘s ability to recognize the value of new information from external sources and to assimilate and to apply it to trade (Cohen & Levinthal, 1990) Another definition presents that absorptive capacity is one specific function of the organization, especially in organizational structure and combinative capabilities (Van de Bosch et al., 1999) Zahra & George (2002) propose separating the potential absorptive capacity (reflecting absorptive capacity and assimilation of knowledge) from the actual absorptive capacity (reflecting change and use of knowledge) Private enterprises have to invest in R&D and staff training besides simultaneously adjusting organizational structures to apply the knowledge acquired through cooperation with foreign investors

Furthermore, enterprises must have the appropriate absorptive capacity to select, to acquire and to synthesize knowledge from other sources Another factor that can determine the absorptive capacity of the host country is the business and the investment environment (Kokko & Blomström, 1995) Absorptive capacity can be either R&D potential (Kinosita, 2001) or the initial size of the technology gap of leaders (Girma, 2005)

Another approach is the firms‘ absorptive capacity, represented by their export ability (Harris & Li, 2009) The export activities of firms are manifested through their decision to participate in exports as well as the export volume of the firms represents their absorptive capacity (Kim, 2015) In accordance with Melitz (2003), only firms with productivity that exceeds the sunk costs (listed as: transportation costs, trade barriers, distribution access, market research and product promotion costs) will participate in production for export To participate in the international market, firms require the capacity to absorb new knowledge of specific markets and clients as well as institutional elements like local laws, governments, and cultures to be able to compete in foreign markets (Eriksson et al., 1997) Firms needing these capacities will serve the domestic market, which will gradually shrink and potentially lead to their exit from the industry (Melitz, 2003)

The ability of one firm to participate in exports is closely linked to its absorptive capacity, which refers to its capacity to absorb new knowledge and skills to enhance productivity The prior research by Harris & Li (2009) and Kim (2015) highlighted the importance of the absorptive capacity for firms participating in exports In this dissertation, the approach by Kim (2015) is adopted to measure the absorptive capacity of domestic firms besides the variables that represent export participation and the proportion of exports by the firm are used By employing these measures, the target is to shed light on how absorptive capacity contributes to the spillover effects of FDI on the productivity of domestic firms

2.1.4 Provincial institution

North (1990), one eminent representative of the ‗new institutional economics‘ theory, defines institutions as rules of the game, which are man-made constraints to regulate and shape operations Nelson & Sampat (2001) classify institutions as ‗rules of the game‘ and ‗quality of governance‘; each institutional aspect has a different effect on growth On the other hand, Williamson (2000) considers that governance institutions through laws, policy, market institutions or micro-level institutions create different impacts on economic growth Institutions influence

input selection by reducing alternative institutions‘ switching cushions (Meyer & Nguyen, 2005; Peng et al., 2008; Kramer, 2015)

Institutions create both barriers and opportunities for FDI resulting from the institutional differences between the host country and the registered country of investment firms, which greatly influences micro-economic decision-making; for example, market entry modes, payroll and alliance among firms (Xu & Shenkar, 2002) Institutional aspects strongly predict the intensity and the type of international business activities in a country (Henisz & Swaminathan, 2008) Consequently, the potential benefits from spillovers through international trade and FDI can be determined That economic growth is intrinsically related to institutions encourages the application of new technology to promote economic efficiency (Tebaldi & Elmslie, 2008; White et al., 2022) These results reveal the importance of institutions‘ direct and indirect effects on both productivity and economic growth The Provincial institutions are represented through Provincial Governance and Public Administration Performance Index (PAPI) in Vietnam (Giang et al., 2017; Nguyen et al., 2017; Kim, 2019; Pham et al., 2022, Nguyen, 2022) which will clarify the additional impact of institutional environment and productivity spillovers in this dissertation

2.1.5 Total factor productivity spillovers from FDI enterprises to domestic enterprises

Total factor productivity spillover effects are external effects resulting from intentional or unintentional interactions among economic actors over time Technological spillover, considered as an indirect effect of FDI enterprises on domestic firms, has been studied worldwide (Blomström & Kokko, 1996; Girma, 2005; Meyer & Sinani, 2009; Barge‐ Gil et al., 2020) FDI enterprises actively share information and transfer technology with domestic enterprises as their customers or suppliers (Görg & Greenaway, 2004) The spillover effects from FDI can occur when a foreign-invested enterprise FDI can share as personnel move to domestic enterprises with know-how; for example: technological know-how,

advanced production techniques, know-how management, marketing skills, as well as customer and market information (Caves, 1999) Through this ability to share information passively and actively, FDI enterprises can indirectly affect local enterprises‘ production capacity, technological level, and export capacity through interaction and learning

The measurement of FDI presence has necessary implications, affecting the results of analysis and testing of spillover effects from FDI to domestic firms (Meyer & Sinani, 2009; Sun, 2009) Therefore, it is necessary to consider research results with different scales to assess spillover effects from FDI comprehensively The previous studies on spillover effects often use one of three variables representing FDI: (i) revenue proportion; (ii) the proportion of employees; and (iii) the proportion of assets of FDI enterprises in the industry Among 131 empirical studies using scales measuring FDI presence, the revenue proportion scale is the most commonly used (45.8%), followed by the asset proportion (35.9%), and the least commonly used is the share of labor (18.3%) (Wooster & Diebel, 2010)

These methods of measurement have the following advantages and disadvantages:

In terms of FDI revenue proportion in the industry, the advantage points out the investment results and contributions to GDP of FDI enterprises in the receiving country, showing the level of market penetration of FDI enterprises with a direct impact on the performance adjustment of domestic enterprises Nevertheless, this method has the disadvantage of inaccurate revenue declaration in order to reduce the taxable income of FDI enterprises (a form of transfer pricing), causing the scale to be skewed and reducing the actual role of FDI (Le & Pomfret, 2011; Anwar & Nguyen, 2014)

Regarding the labor share of FDI in the industry, the advantage indicates that the contribution of FDI enterprises to employment refers to the ability to create an important spillover channel through labor mobility (Jude, 2016) On the other hand, this way has the disadvantage that FDI tends to focus on industries with high

capitalization rates; therefore, the role of FDI may be underestimated compared to that in reality (Sun, 2009)

In terms of FDI asset proportion in the industry, the advantage clearly shows the financial potential and ability to invest in production technology and enter new markets of FDI enterprises Nevertheless, some disadvantages are distorted by the ownership provisions of the law in the host countries (Liu et al., 2011)

In this dissertation, the impacts account for the proportion of FDI revenue in the industry, following the foundation of the analysis of the optimal choice In short, FDI enterprises have diverse mechanisms to boost productivity spillovers to domestic firms

2.1.5.1 Horizontal spillovers

Horizontal spillover refers to the spillover effects from a firm‘s exports to firms operating in the same industry Exporting enterprises must innovate continuously to survive in the international competitive environment Exporters must adopt the most modern technologies because they cannot survive without them in the highly competitive market (Villar et al., 2020) When firms engage in continuous innovation, it leads to technological progress and, ultimately, increased firm productivity (Blomström & Kokko, 1996; Blalock, 2008 Meyer & Sinani, 2009; Iršová & Havránek, 2013; He et al., 2019) Besides, enterprises that are not involved in exporting but operating in the industry are forced to follow the race in this market if they desire to develop This horizontal spillover effect is a fundamental and vital form of spillover, primarily through the competitive channel when FDI enterprises create competitive pressure on domestic enterprises operating in the same industry (Kneller & Pisu, 2007; Anwar & Nguyen, 2014; Benli, 2016)

Horizontal spillovers can take place in a number of ways as follows:

Firstly, through the process of understanding and observing production and business activities of the international competitive environment, domestic enterprises participating in exporting can learn and imitate to approach and to apply similar new techniques and production technology to gradually improve production

efficiency and capacity (Blomström & Kokko, 1996) When firms engage in export activities, they can access knowledge from their export partners Domestic enterprises supplying the domestic market and producing the same industry can learn from the above exporting enterprises This learning will help businesses improve production capacity This spillover channel requires domestic enterprises to have a specific ‗absorption‘ ability It means that domestic enterprises must not be too lagging behind foreign enterprises If domestic enterprises are not motivated to learn and to imitate FDI enterprises, the competition will increase from FDI enterprises (Greenaway, 2005; Kim & Xin, 2021)

Secondly, upon participating in the competition in the international market, exporting enterprises must constantly learn and adapt if they are not eliminated, promoting productivity improvement The spillover effects through the competitive channel can produce different short- and long-term effects In the short term, increased competition from exporting enterprises, with various outstanding advantages, may cause some enterprises that only produce domestically for the same industry to be forced to downsize production, to cut decrease in market share and sales, even bankruptcy (Aitken & Harrison, 1999; Jude, 2016; Bournakis et al., 2022; Ha et al., 2020) This competitive pressure can negatively impact businesses that serve domestic demand However, in the long term, competitive pressure from enterprises participating in exporting can bring positive effects when it implements a mechanism to screen and to remove from the market the enterprises supplying the domestic market that is weak and slow to adapt If these enterprises desire to survive, they must be dynamic so as to adapt to the environment and constantly learn and improve their production capacity to increase their competitiveness (Villar et al., 2020)

Thirdly, the migration of workers trained by the enterprises engaged in exporting is transferred to the enterprises serving only the domestic market Firms engaged in exporting often train and retrain local workers through a range of policies listed as on-the-job training or sending them abroad for training These

workers can change and move to work for domestic supply enterprises or set up their own companies The skills learned from training and working at enterprises participating in exporting will automatically be expanded and applied to domestic suppliers These can be knowledge of production technology, management skills, ability to connect and source of customers (Görg & Greenaway, 2004; Meyer & Sinani, 2009; Girma et al., 2019)

2.1.5.2 Vertical spillovers

Vertical spillovers are knowledge and technology transfer between foreign direct investment (FDI) enterprises and domestic firms operating in different industries with commercial relationships (Javorcik, 2004; Meyer & Sinani, 2009) These spillovers can take the form of either backward linkages which occur when FDI customers source inputs from local suppliers and transfer knowledge and technology to these suppliers or forward linkages which occur when FDI suppliers provide inputs to domestic firms and transfer knowledge and technology to these firms (Glass & Saggi, 2002; Havranek & Irsova, 2011;Ni et al., 2017) Both types of linkages have positive impacts on the productivity and the competitiveness of domestic firms (Le & Pomfret, 2011)

2.1.5.3 Backward spillovers

From the studies by Javorcik (2004); Le & Pomfret (2011); Bournakis et al (2022) and Camino-Mogro et al (2023), this knowledge is withdrawn as follows:

First, FDI enterprises, with backward linkages, can transfer technology directly to local suppliers through training or technology support to increase product quality (Fan et al.,2020; Bajgar & Javorcik, 2020)

Second, the close relationship between FDI enterprises and local suppliers may create employee movement from FDI enterprises to local suppliers; therefore, technology spillovers from FDI enterprises occur (Meyer & Sinani, 2009)

Third, the higher requirements for product quality and on-time delivery designed by FDI enterprises provide positive incentives for local suppliers to improve production processes or technology (Le & Pomfret, 2011)

In terms of the spillover effects through backward linkage, FDI can contribute to the technological improvement of the local or potential suppliers by providing technical assistance and support to these enterprises With an increase in size, the presence of FDI enterprises can benefit domestic suppliers if it increases the demand for local inputs

The positive impacts through the following effects are as follows:

Firstly, more effective spillover effects can work through the relationship between FDI enterprises and local subcontractors Enterprises involved in exporting can directly transfer technology or support technical solutions to suppliers in the receiving country to promote innovation and to improve the quality of their finished products (Kim & Xin, 2021) FDI enterprises can bring benefits to domestic suppliers: providing technical support for improving the quality of goods or for introducing innovations, training staff, providing infrastructure production layer support and for the acquisition of raw materials as well as support at the organizational and managerial levels (Javorcik, 2004)

Secondly, domestic enterprises are forced to meet the requirements concerning product quality of the International Standards Organization and delivery time, following the standards of multinational companies, encouraging domestic suppliers to improve the production process, technology and delivery methods (Javorcik, 2004; Villar et al., 2020) Enterprises involved in exporting may require higher quality standards or on-time delivery, leading to creating incentives for domestic suppliers to improve their technology and production management skills (Le & Pomfret, 2011; Bajgar & Javorcik, 2020)

Thirdly, FDI enterprises can provide other non-technical support listed as training and management support, finding customers and increasing economies of scale through expanding and securing markets for domestic firms‘ outputs (Javorcik, 2004)