Horizontal technology spillover effects from foreign dirrect investment on labor producttivty in manufacturing industry in vietnam

UNIVERSITY OF ECONOMICS ====oOo==== VIETNAM-NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS HORIZONTAL TECHNOLOGY 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 Ho Chi Minh, November 2011 I' 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 Si gn at ur e Than Hoan g 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 VietnamNetherlands 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 1.4 Research scope 1.5 Organization of the Research CHAPTER 2: LITERATURE REVIEW 2.1 Literature Review- The Concepts 2.1.1 Foreign 2.1.2 Product 2.1.3 Spillove 2.2 The Economics Theory 2.2.1 Neoclas 2.2.2 Endoge 2.3 The Empirical Study 2.4 Analysis Framework CHAPTER 3: RESEARCH METHODOLOGY 3.1 Data Collection 3.2 Description ofVariables 3.2.1 Depende 3.2.2 Explana 3.3 Model Specification 3.4 Estimation Strategy 3.5 Hypothesis statements CHAPTER 4: MODEL RESULTS AND DISCUSSION 4.1 Descriptive statistics 4.2 Estimation results 4.2.1 Pool reg 4.2.2 Random 4.2.3 Fixed ef 4.3 Results discussion j 4.3.1 The sign 4.3.2 The infl 4.3.3.The effect of controllable variables on labour productivity CHAPTER 5: CONCLUSION AND IMPLICATIONS 5.1.Conclusion 5.2.Implication 5.3.Research limitation REFERENCES APPENDICES 7.1.APPENDIX A MODEL RESULTS IN FOOD 7.2 APPENDIX B MODEL RESULTS IN ELEC 7.3 APPENDIX C OVERVIEW OF FDI IN VIET LIST OF TABLES Table 1: The expected signs ofindependent variables 31 Table The descriptive statistics of data sample in Food Processing industry 32 Table The correlation coefficients of the variables in Food Processing industry 33 Table Pool regression model result in Food Processing industry 34 Table Random effects model result in Food Processing industry 34 Table Breusch-Pagan Lagrange multiplier test 35 Table Fixed effects model result in Food Processing industry 36 Table Hausman test 36 Table Fixed effects model result with time fixed effects in Food Processing industry 37 Table 10 Time-fixed effects test 37 Table 11 Modified Wald test Table 12 The result of the most appropriate model in Food Processing industry 38 Table 13 The summary ofresu1ts in the most appropriate model in Food Processing and Electronics and Mechanics 39 • 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 ofGDP at current prices by Foreign investment sector 62 Figure Structure ofGDP at current prices by Manufacturing industry 63 BPM6 Investment Position Manual h edition FEM GSO IMF MNCs OECD Development REM VSIC 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 ofFDI 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 ofFDI 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 intra-industry spillovers or horizontal spillovers 2.5 Fixed or Random: Hausman test Hausman test hausman fixed random F Test: Ho: difference chi2(4) Prob>chi2 in coefficients not systematic (b-B)'[(V_b-V_B)A(-l)](b-B) 39.57 0.0000 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 time fixed effects in Food Processing industry • xi: xt:reg lrL.ABPRO lrcAPIN SCALE SKILL i t: Fixed-effects (within) regression Group variable: R-sq:within between overall corr(u_i, xb) = F test t.hat: all 54 ( ( 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 • xt:'test:3 Modified wald "tes1: for groupwise he1:eroskedas"tici1:y in fixed effect regression model HO: signa(i)A2 = si!JIIc ' • The result from Modified Wald test shows that t heteroskedasticity that need to be eliminated ou 2.6 The most appropriate results in Electronic The result ofthe most appropriate model • Xi: ar i.t Linear ln FD • 59 • 7.3 APPENDIX C OVERVIEW OF FDI IN VIETNAM Vietnam has successfully attracted a large inflow ofFDI in recent years, and the detail ofFDI 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 Foreign direct investment inflows in period 1995- 2010 Ill :;:) iii ' I Source: General Statistics Office of Vietnam Figure Foreign direct investment inflows in period 199 - 201 • Foreign direct investment projects licensed in period 1988- 2009 by kinds of economic activity No Kind of economic ac Argiculture and forestry Fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade; Repa • vehicles, motor cycles and perso household goods 10 Hotels and restaurants Transport; storage and communi Financial intermediation 11 12 Real estate, renting business act Education and training 13 Health and social work 14 Recreational, cultural and sportin Community, social and personal 15 activities Total Source: Statistical Yearbook of Vietnam, 2009 Figure FDI projects licensed in period 1988 - 2009 by kinds of economic activity '.,' , j 61 +·~~~~~~ ~~~~ ~~~Lr -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 ~-~:~t: ·: ~·- ::•' ... examine FDI technology spillovers within industries, which are called intra -industry 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